Ladies and gentlemen, thank you for standing by. Welcome to the McGrath RentCorp Second Quarter 2025 Earnings Call. This conference call is being recorded today, Thursday, July 24, 2025. Before we begin, note that the matters that the company management will be discussing today that are not statements of historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements relating to the company's expectations, strategies, prospects, backlog or targets. These forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties that could cause our actual results to differ materially from those projected. Important factors that could cause actual results to differ materially from the company's expectations are disclosed under Risk Factors in the company's Form 10-K and other SEC filings. Forward-looking statements that are made only as of the date hereof. Except as otherwise required by law, we assume no obligation to update any forward-looking statements. In addition to the press release issued today, the company also filed with the SEC the earnings release on Form 8-K and its Form 10-Q for the quarter ended June 30, 2025. Speaking today will be Joe Hanna, Chief Executive Officer; and Keith Pratt, Chief Financial Officer. I will now turn the call over to Mr. Hanna. Please go ahead, sir.

Thank you, Jess. Good afternoon, everyone, and thank you for joining us today for McGrath RentCorp's Second Quarter 2025 Earnings Call. We are pleased to be together today and look forward to providing additional perspective on our results. I will start with some overall comments on the quarter, and Keith will provide additional detail in his financial review before we open the call up for questions. The company delivered solid second quarter results. Rental operations grew by 5% and adjusted EBITDA grew by 3%. We continue to execute well across all our business units with our overall strategy of being a modular solutions provider at the core of our efforts. I would like to thank all of our team members for their steadfast attention to our customers and their consistent focus on excellent project execution during the quarter. Our Mobile Modular division continued to perform well with total revenues increasing by 8%. We realized rental revenue growth in both our commercial and education sectors. With uncertainty in the macro environment, we have seen some customers move more cautiously in starting planned projects. While some of our customers were slow to initiate projects, quote activity was healthy, and our June rental revenue backlog was up year-over-year. We continue to have strong customer interest in our product and service offerings despite ongoing softness in indicators like the Architecture Billings Index, or ABI. Commercial wins continue to be centered around larger infrastructure projects across all our geographies. We also saw more activity in the general construction market with several different market verticals growing in the quarter. Funding for the education business remains solid as the need for classroom modernization and growth in select areas remains consistent. We had good order flow during the quarter for education rental projects and are now busy completing deliveries for our customers. Modular sales revenues were higher for the quarter, up 13%. Our new modular sales growth initiative continued to be on a positive trajectory from increasing interest in modular solutions for construction projects across many market segments. Mobile Modular Plus and site-related services performed well and saw healthy increases in the quarter, helping to offset lower units on rent. Enviroplex, our classroom manufacturing business in California had a good quarter. Sales revenues and margins were strong for the quarter, and the team executed well to efficiently complete projects for our customers. At Portable Storage, rental revenues decreased 5% year-over-year, but sequentially improved 5% from the first quarter of this year. Recent shipment trends have been encouraging. All our market verticals showed improvement in the quarter, and we are encouraged by the levels of quote activity we are seeing. Close ratios and rental rates are holding steady, and we are maintaining our discipline on winning new orders. Turning to TRS-RenTelco. Rental revenues grew by 7%. Both our general purpose and communications rental revenues increased and the positive start to the year continued through the second quarter. Utilization improved both sequentially and year-over-year, and we ended the quarter at 65%. Our rental pipeline is stronger than a year ago, giving us further confidence that this rebound appears sustainable. On the M&A front, we have an active pipeline to support our modular growth strategy. During the quarter, we closed two tuck-in acquisitions: one, a modular company in the Midwest and the other a portable storage company in the Southeast. These acquisitions provide additional fleet, team members and customer relationships which help accelerate our pace of growth. We have a capable team and are working to close more opportunities. Tuck-ins help us achieve scale and improve margins more quickly in markets where we do not have a footprint or where we are small and have growth potential. We are also able to leverage Mobile Modular Plus and site-related services with these new additions as smaller operators typically don't provide such services. I will now turn from second quarter performance highlights to provide some additional insight into our outlook for the remainder of 2025. Now that we have completed half of the year, we are encouraged that the uncertain market conditions earlier in the year have not deteriorated significantly. And currently, we are seeing slight improvements. The ABI has improved somewhat. Construction backlogs also grew slightly in June. At present, we have good activity levels in the field related to current projects. This gives us more confidence going into the second half of 2025, and therefore, we are upwardly adjusting our outlook. We have been clear in the past quarters that our strategic focus is on the modular business and expanding the value of our modular solutions capabilities. Geographic expansion allows us to bring these solutions to customers in metro areas where we don't currently have rental fleet or a dedicated sales presence. In the first half of this year, we added new sales representatives in several markets. The hires were completed ahead of schedule, and we now have more horsepower in the field. This larger team will yield results in future quarters and years, and we have been very pleased with the quality and capabilities of the people we have brought on board. We also continue to enhance our capabilities for larger and more complex modular building rentals and sales. This allows us to engage with the customer early in the project life cycle and deliver value in more areas from project design through installation. We believe this is an expanding part of the market, and we have the ability to meet customer demand across the full spectrum of modular building needs from single-wide units to large multi-floor and multistory facilities for a wide swath of market verticals. In closing, we are successfully navigating an uncertain economic environment as we continue to deliver value to our customers this year. We are in our summer months, and this is our most active time of the year. Our teams in the office and in the field are fully engaged and working hard to complete projects safely, on time and with great customer service. We are cautiously optimistic that economic conditions will improve as we move through the next two quarters. As always, we will be working diligently to maximize opportunities to keep the business strong and deliver results for our shareholders. With that, I will turn the call over to Keith, who will take you through the financial details of our quarter and our updated outlook for the full year.

Thank you, Joe, and good afternoon, everyone. As Joe highlighted, we delivered solid results in the second quarter. Total revenues increased 11% to $235.6 million, and adjusted EBITDA increased 3% to $86.5 million. Reviewing Mobile Modular's operating performance as compared to the second quarter of 2024, Mobile Modular total revenues increased 8% to $156 million. All operational revenue streams grew with 5% higher rental revenues, 11% higher rental-related services revenues and 13% higher sales revenues. The quarter included higher inventory center expenses to prepare available fleet for new shipment demand, which allowed us to minimize rental equipment capital spending. We also incurred higher SG&A expenses as we completed strategic hiring for broader sales coverage and long-term growth, as Joe described earlier. As a result, adjusted EBITDA decreased 1% to $53.1 million despite the revenue growth. With softer demand conditions, we saw lower average fleet utilization of 73.7% compared to 78.4% a year earlier. Despite the softer market demand, second quarter monthly revenue per unit on rent increased 6% year-over-year to $840. For new shipments over the last 12 months, the average monthly revenue per unit increased 4% to $1,168. We continue to make progress with our modular services offerings. Mobile Modular Plus revenues increased to $9.2 million from $7.5 million a year earlier and site-related services increased to $6.5 million, up from $5.8 million. Turning to the review of Portable Storage. Adjusted EBITDA for Portable Storage was $9.8 million, a decrease of 11% compared to the prior year, but an increase of 15% sequentially from the first quarter of this year. During the quarter, we saw lower rental and rental-related services revenues compared to a year ago. Lower commercial construction project activity continued to make demand conditions challenging. Higher sales revenues partly offset rental weakness, resulting in a total revenue decrease of 3% to $23.3 million. Rental revenues for the quarter decreased 5% to $16.9 million, but grew 5% sequentially from the first quarter. Rental margins were 83% compared to 86% a year earlier, and average utilization for the quarter was 61.1% compared to 66.1% a year ago. Turning now to the review of TRS-RenTelco. TRS had a strong quarter with adjusted EBITDA of $19.3 million, an increase of 7% compared to last year. Total revenues increased $3.7 million or 11% to $36.4 million, primarily driven by higher sales revenues and higher rental revenues. Rental revenues for the quarter increased by 7% as the industry experienced improved demand conditions from end markets. Average utilization for the quarter was 64.8% compared to 56.5% a year ago, and rental margins improved to 44% from 36% a year ago. The remainder of my comments will be on a total company basis. Second quarter selling and administrative expenses increased $4.5 million to $53.5 million as we completed planned strategic hiring for long-term business growth and invested in information technology projects. Interest expense was $7.8 million, a decrease of $5.2 million as the result of lower average interest rates and lower average debt levels during the quarter. The second quarter provision for income taxes was based on an effective tax rate of 27.3% compared to 28.8% a year earlier. Turning to our year-to-date cash flow highlights. Net cash provided by operating activities was $110 million compared to $139 million in the prior year as higher net income was offset by working capital changes. Rental equipment purchases were $50 million, down from $145 million last year, consistent with lower fleet utilization and our plans to use available fleet to satisfy customer orders. We paid $22 million during the second quarter for the two tuck-in acquisitions Joe discussed. These small acquisitions will support the long-term growth of our modular and portable storage businesses. At quarter end, we had net borrowings of $573 million, and the ratio of funded debt to the last 12 months actual adjusted EBITDA was 1.6:1. Wrapping up the financial review, while there is still uncertainty in the demand environment, we are pleased with the results for the first half of the year, and we have seen some encouraging positive trends as we enter the second half. As a result, we have upwardly revised our full year financial outlook, and we currently expect total revenue between $925 million and $960 million, adjusted EBITDA between $347 million and $356 million and gross rental equipment capital expenditures between $115 million and $125 million. For the remainder of this year, we expect adjusted EBITDA to be at a similar level in the third and fourth quarters. This outlook is largely driven by the expected timing of sales revenues and related gross profit in the second half of this year. We are proud of McGrath's second quarter performance, and we are fully focused on solid execution for the remainder of the year. That concludes our prepared remarks. Jess, you may now open the lines for questions.

We will go first to Scott Schneeberger with Oppenheimer.

I've got a few questions, guys. First off, just on the last thing you said there, Keith, about the balance, the third and fourth quarter and the EBITDA. It sounds like you have a little bit more to share there on sale timing. Could you just take us a little bit deeper on what you're alluding to?

Sure. Scott, if you look at last year, we had a big third quarter. If you look at the primary driver of that, we had a lot of sales gross profit in the third quarter. And then we sort of saw a drop off when we went to Q4 of last year. When we look at this year, I think it's going to be more balanced and that contribution of sales gross profit is going to be somewhat similar in the third and fourth quarter. So it's just a sort of timing issue. The other thing I'd point out is we've actually had very good sales contributions already in the first half of the year. But specifically, the comment was, when you look at Q3 and Q4 adjusted EBITDA, we expect will be broadly similar in each of those two quarters.

And then you're speaking specifically in the Mobile Modular segment. And how far out do you have visibility? Do you, at this point, have visibility through year-end? Or is it a little bit fluid at this point?

It's a bit fluid. This is one of the areas we've mentioned with the current demand environment, there can be delays, there can be uncertainty. We spend a lot of time accessing the pipeline and assessing what we think will get realized before the end of the year. And that's all part of our normal forecasting process.

And then that was the question on sales, which is I think how you answered it and clarify if not. But switching over real quick, just on rentals, I think with classrooms, now you have full visibility to what this year is going to look like. Could you speak to that? And then any other relevant comments on commercial modular effects.

Sure. I think our education year is going to be good. We received orders a little later in the year because districts sometimes take longer. Each year is different, and this year we received orders later, but we are pleased with the volume of orders we received. I believe we will finish the year in a strong position. Regarding the commercial business, we are seeing increases across various market sectors. There are significant projects like data centers and industrial initiatives, along with some petrochemical business, government, and healthcare. All these sectors were quite active during the quarter, and I don't anticipate changes for the rest of the year.

Thank you, Joe. I have more to share, but I will leave some time for others. I want to mention that the outperformance in EBITDA for the quarter was significant. However, the increase in adjusted EBITDA guidance is less so. I believe you were quite cautious with your guidance back in the first quarter, perhaps overly cautious in hindsight, primarily due to tariff uncertainties. Can you discuss what factors would place you at the high or low end of this current guidance range and how you arrived at it?

Yes. A lot of moving parts, Scott. I think, first of all, the sales piece of the business can always move around a lot more than the rental revenue piece. That tends to move a little bit more steadily. So that's the first comment. You can have some positive or negative impact from sales activity in the second half of any year, and that's always a given. If you look really across the lines of business, we've had a really encouraging start with TRS. It looked pretty good in the first quarter of the year. We were feeling good as we exited the first quarter. That has really continued through the second quarter. I would say we're not being aggressive in what we're assuming for the second half of the year there. So if things go well, we might do better than we're currently expecting and sort of factoring into our outlook. Similarly, I would say with portable storage, it had a very tough year last year. First quarter, it was hard to really get any conclusive signs of a recovery. I feel in the second quarter, as Joe mentioned, we felt more encouraged. There's still a long way to go, and it's still a tricky environment, but that's another area where I think we're realistic in what we've got in the guide. If things break a little bit more in our favor, we might do better there. And then modular, which, as you know, has the characteristic of the longest rental terms, that tends to move more gradually. We've had a good first half given the backdrop of the demand environment. I think we'll see rental revenue growing in the second half of the year. And I think we've, at this point, got a realistic view around that based on what we know today. But we try to think it through carefully. You've sort of seen all the moving parts there. We're trying to manage expenses prudently. But at the same time, as Joe highlighted, we're investing for growth for beyond this year as we look at building the company's presence, particularly in more geographic regions over time and also using opportunities for tuck-in M&A and other initiatives to help bring that to fruition. So that's sort of a long-winded way to say, I think we've got the right outlook at this point in the year. We always try to do better, but we have to be cognizant of the environment, which is still mixed in some areas.

That was really comprehensive, Keith, and I think very helpful as well. My last question for now is regarding the new federal tax legislation. I imagine it will positively affect your free cash flow. Have you all analyzed it and come up with any quantification that you can share with us at this moment?

Yes, very preliminary. But let me start by saying, as you know, Scott, at the beginning of the year, we highlighted for everyone in this environment where fleet utilization is a bit lower at modulars and portable storage. We're not spending as much money on new capital for new rental equipment. So it's a lower year in that regard. So some of the benefits with the new treatment on the rental equipment depreciation for tax purposes, some of that benefit is less pronounced this year. We have run some numbers, the benefit to free cash flow for us this year is probably somewhere in the $10 million to $15 million range. So it is a positive, but it's not a massive needle mover for us this year.

And just a follow-on on that. Probably another full two years after this current year. There's a need to step up the CapEx that a similar type of tax benefit will be in place. Is that fair?

Should be or perhaps greater if we're spending more heavily.

We'll go next to Dan Moore with CJS Securities.

This is Will on for Dan. Can you provide an update on the pricing gap between current spot rates for new modular rentals versus the average rate on existing contracts? Is it still 40% or more? Does it begin to narrow? And how spot rates been trending more generally thus far year-to-date?

Sure. And I highlighted some of those metrics as we went through the presentation. I'll try and cover all your topics and do a follow-up if I don't hit them all. I think for modular spot rates are generally fairly stable overall. Again, with all the variety of regional branches that we have, the different types of product offering in certain regions, there's a lot of moving parts and a lot of impact from mix. So when I make that overall blanket statement, it is a generality, but that's based on the data that we review and sort of trends that we see in the market. If you look at the gap between the dollars per unit on rent that we quoted, and that would be $840 up 6% from the same quarter a year ago. That is still about 39% lower than the LTM rate on new shipments that was $1,168. So the gap is slightly different. I think it was 41% when we looked at the same statistics a quarter ago, but order of magnitude still similar.

That is super helpful. And then just one more. Could you add some more color to portable storage, would you describe demand is bouncing along the bottom? Or are you seeing really meaningful signs of improvement?

Yes, we are definitely observing signs of improvement. Although rents were down 5% compared to the previous year, they increased sequentially, and quote volumes are on the rise. We shipped the highest number of units in June since January 24. Therefore, we are seeing positive developments in the business. I believe we are on an upward trajectory, and we are very pleased with this progress.

We'll go next to Steven Ramsey with Thompson Research.

On modular, good to hear that you're adding sales folks. Can you maybe talk about some of the geographical focus of the new hires or if it's more project or vertical focus kind of what you're trying to achieve? And if this is a focal point for you guys through the rest of this year?

Sure. This is a very important initiative for the company. Through the acquisitions we've made over the past several years, we have opened locations where we previously had a small presence. In those locations, as well as in some new adjacent areas, we want to enhance our sales capacity. These sales resources will focus on either our commercial or education business, or potentially both, depending on our priorities in those markets. We are keen on boosting our sales capability and expanding our geographic reach. Additionally, we have been investing in our fleet to support this growth, which is essential to the company.

And then maybe somewhat related, Modular Plus continues to show very strong growth. Can you talk about what's driving that if this type of 20% year-over-year growth is embedded in the second half or something lower is embedded? And maybe on the people side of this equation, how are you training folks and the adoption of your own sales team pushing the Modular Plus solution to customers?

Yes. That's also an important initiative for us and training is a key part of that. We've been consistently doing that over time to get the sales force comfortable with selling those products to our customers. We've been adding to the available list of products that we can provide to our customers. And so we're glad to see that the year-over-year growth that we realized was up 22%. As you had mentioned, it was healthy growth. So we anticipate being able to keep up that pace. We've got a lot of ground to cover still. We've got a lot of customers that appreciate those services, and we're working in earnest to keep that momentum up.

Okay. That's helpful. And then maybe going back to the guidance, this has been brought up a couple of times. But when you think about the stabilization and growth now in TRS, some firming up in storage, modular being consistent and due backlogs, Enviroplex doing well. I put that all together, the guide raise seems pretty modest. Maybe what I'm thinking about is, does some of this support 2026, and it's just a timing issue of when some of the pipelines convert to rental starts?

Yes. I think that's a good observation. And I would just remind you, as we commented at the start of the year, two investment areas. One is in that direct cost of rental operations, particularly for the modular business, where we expect to spend more readying existing fleet that's available to meet rental orders and not really using as much new fleet, and that's reflected in a substantial drop in the new equipment capital spending for the year. So that's an expense increase for the year that does hurt EBITDA, but it's absolutely the right thing to do for running the business. And then in parallel with that, we do have more elevated SG&A. You'll see that in the current run rate. That will continue and edge up slightly in the second half of the year. That's running with a bigger team where we've made some of these strategic hires that support long-term growth and support initiatives in the company like some of our IT projects. These are all things that we planned on doing. They're important. They're going to pay dividends beyond 2025, but there are things that we have to absorb in terms of the cost structure, and it pressures the EBITDA just a little in a year like this where the demand environment is, as we've said, a little mixed in some areas. But overall, I think we're doing well, and we're always striving to deliver the absolute most that we can in future quarters.

Understood. And then last one for me. I know it's a small part of the business, but Enviroplex continues to show very strong growth on top of strong growth and the EBITDA margin profile in the quarter was very strong. Can you talk about the operating leverage in that business? Are you operating at max capacity when you're performing at this type of run rate? And is this something that is embedded in the guidance, the success of it? Or are you trying to be conservative on that segment?

Yes. I would say it's included in the guidance. We're pleased to see that our margins are in a good position in that business and have improved over time. Much of this improvement is due to the mix of projects. Certain projects in a quarter may have additional requested customer features that allow us to increase our pricing and margins. Moreover, our plant is operating at full capacity, enabling us to process a significant amount of product efficiently. This efficiency reflects in our current performance, and we are very satisfied with how that business has been doing so far this year.

And Steven, if I could give just add, I think you're spot on by observing that Enviroplex was a good contributor to the quarter and its metrics look very positive. That's a business where, just as Joe said, when we're very busy, we're actually in a position where the picking of deliveries is more balanced by quarter. And so if you look at the first half of this year, we had two good quarters of contribution from Enviroplex and I would think that the second half of the year in a similar way, more balanced across the quarters. In the past, in certain years, it's been a big spike in the third quarter and much softer demand levels or activity levels in the other quarters. Here, we're very busy. The business is having a good year, and we're seeing it as a smoother contribution by quarter. It sort of relates to some of my comments earlier about the outlook for the second half.

We'll go next to Marc Riddick with Sidoti.

I wanted to discuss the commentary regarding the technology investments you've mentioned. You talked about some of the hiring, but could you elaborate on the focus areas you have and what that might entail?

Sure. Technology is constantly evolving, and we strive to be a supplier that is easy to work with, which requires us to stay current with our IT systems. These systems need upgrades and a transition from on-premise solutions to cloud-based platforms. Last year, we implemented a new CRM system, and we are also focused on integrating important AI technologies into our operations. All these factors contribute to necessary expenses, but they are essential for us to remain competitive in the industry. To achieve this, we must invest in modern IT systems, and we will continue to do so each quarter.

Okay. Great. I was wondering if you could discuss some of the tuck-in opportunities. Could you provide an update on the overall pipeline and whether it has changed much over the last six months?

Sure. We have an active pipeline. It's something that we're paying close attention to. And whether these businesses come up for sale typically depends on whether there's a seller that has a life-changing event or they want to monetize their business or something, and you can't always plan those things to take place on a regular cadence. But what we try to do is to be in front of these folks and have relationships with them. And so when those businesses come up for sale and come on the market, we want to be at the table. And we've got a nice pipeline of opportunities, a lot of conversations going on and we're looking forward to being able to close more of these in future quarters.

Okay. So only a couple of more from me. One, I was sort of curious about the commentary around Portable Storage. Maybe you talk a little bit about sort of the pacing there, is that something that sort of improved through the quarter? Or how should we think about it from a monthly basis perspective?

Yes. I think, Mark, I tried to touch on this earlier. Encouraging signs in the second quarter, we don't want to get ahead of ourselves. It's still an environment where commercial construction is softer than a year ago. And so even though we've seen a few positive signs, we're sort of measured in our enthusiasm. I think things will progress a little better from here, and we'd be delighted if it was even stronger than that. But that's sort of the way we're looking at the outlook, and I think it's appropriate because, one, pretty good quarter after everything we've been through over the last five or six quarters, it's appropriate to be measured and see further evidence of a build and an improvement in utilization, demand and overall revenue and profitability. That's what we're working hard to achieve, but it's going to be gradual.

Okay. And then the last for me. I'm not sure, but I think the interest expense was a little lower than I expected for the quarter. Could you provide some insights on what you're anticipating for a run rate for the rest of the year and your debt reduction efforts? That would be helpful.

Sure. Yes, we benefited from lower rates. Rates a year ago were about 6.6%, this year more like 5.6%, and we had $232 million of less debt in the quarter. So both those things were a substantial benefit, and it led the interest expense to come in just below $8 million for the quarter, and that's down from $13 million a year ago. So that was definitely a good easing of the burden. I think if you look at the current run rate, that's a pretty good indicator of what we're seeing. Obviously, it depends on any investments in the business in the second half where the debt level ends up at the end of the year. But the current run rate is indicative of the neighbor we expect to be in.

Ladies and gentlemen, that appears to be our last question. Let me now turn the call back over to Mr. Hanna for any additional or closing remarks.

I'd like to thank everyone for joining us on the call today and for your continuing interest in our company. We look forward to speaking with you again in late October to review our third quarter results.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.