Mcgrath Rentcorp Q3 FY2025 Earnings Call

Ladies and gentlemen, thank you for standing by. Welcome to the McGrath RentCorp Third Quarter 2025 Earnings Call. This conference call is being recorded today, Thursday, October 23, 2025. Before we begin, note 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 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 September 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. Go ahead, sir.

Thank you, Dave. Good afternoon, everyone. We appreciate your attendance on McGrath RentCorp's Third Quarter Earnings Call for 2025. It's a pleasure to be here today, and we're eager to share further insights into our performance. I'll begin with an overview of our third quarter results before Keith shares the financial details, and then we will open up the call for questions. For the third quarter, total company rental operations revenues rose by 4% with growth from all three of our rental businesses. Project activity remains steady despite ongoing market uncertainties. Mobile Modular rental revenues increased by 2%. The rental revenue growth we experienced in the quarter was primarily due to commercial activity centered around larger infrastructure projects across all our geographies. Smaller projects have been less prevalent, which is consistent with the trend we have experienced year-to-date. We had a busy education season with a good level of new shipment activity. Funding for the education business remains solid as the need for classroom modernization and growth in select areas remains consistent. With higher shipment volumes for the quarter, we faced higher inventory center costs to prepare equipment for delivery. We used off-rent inventory rather than investing in new products, continuing to manage the fleet with a sharp focus on deploying capital efficiently. Despite challenges in the demand environment, our booked orders increased during the third quarter. This was encouraging and positive for our momentum entering the fourth quarter. Our ongoing efforts with Mobile Modular Plus and site-related services continue to go well. Both experienced healthy growth during the quarter. We continue to be pleased with our year-to-date progress. At Portable Storage, rental revenues increased by 1% year-over-year and by 2% sequentially from the prior quarter. Shipments grew and pricing remained stable. Opportunities in energy, data centers, and seasonal retail offset the flat construction market. Overall, we are encouraged by these positive signs that suggest the market may be stabilizing after a challenging demand contraction in 2024. TRS-RenTelco rental revenue grew by a strong 9%. Both our general-purpose and communications rental revenues saw strong growth maintaining positive momentum from the first half of the year. Utilization at a healthy 65% improved year-over-year and remained steady sequentially versus the second quarter. Rental demand pipelines remain solid as we enter the fourth quarter, indicating that the business is well positioned to continue its growth trajectory. Turning my comments to the whole company. We do not believe McGrath is currently facing any immediate headwinds due to the ongoing federal government shutdown and any potential impacts from a long shutdown are unclear at this time. With regard to the dynamic tariff environment, the impact of tariffs has been managed appropriately by our teams and has had minimal impact on our results. Looking ahead to the rest of the year, uncertain market conditions persist. Nonresidential construction indicators such as the Architectural Billing Index, or ABI remains soft. We remain focused on our strategic growth priorities dedicated to expanding our modular and portable storage businesses. Over the course of this year, we have taken steps to enter new regions, grow our Mobile Modular Plus and site-related services initiatives, and increase our coverage through tuck-in acquisitions. All of these items support our efforts to become a true national modular solutions provider capable of serving our customers with storage units, single-wide units, large multi-floor and multi-story facilities, and services to meet all their space needs. I want to thank all our team members for your third quarter accomplishments and steadfast commitment to delivering the highest quality service to our customers. Our culture at McGrath is a driving force behind our growth as we introduce more customers to the exceptional experience we offer. I am pleased with our progress thus far in 2025, and we remain dedicated to providing value to our customers and shareholders as we finish the year. 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. Looking at the overall corporate results for the third quarter, total revenues decreased 4% to $256 million, with rental operations increasing 4% and sales revenues decreasing 18% during the quarter. Adjusted EBITDA decreased 7% to $96.5 million. Excluding prior year items related to the terminated WillScot merger process, net income for the third quarter decreased $3.6 million or 8% to $42.3 million and diluted earnings per share decreased $0.15 to $1.72. Reviewing Mobile Modular's operating performance compared to the third quarter of 2024, Mobile Modular total revenues decreased 5% to $181.5 million. The business saw 2% higher rental revenues and 5% higher rental-related services revenues, which were offset by 21% lower sales revenues. The sales revenues decrease was primarily due to lower new equipment sales as we discussed in July, while 2024 sales were more concentrated in the third quarter. This year, we expect a more balanced contribution from sales and related gross profit across the third and fourth quarters. This quarter had higher inventory center expenses to prepare available fleet for new shipment demand, which allowed us to minimize rental equipment capital spending. We also operated with higher selling and administrative expenses to support broader sales coverage. As a result, adjusted EBITDA decreased 10% to $64.6 million. Conditions saw a lower average fleet utilization of 72.6% compared to 77.1% a year earlier. Despite the softer market demand, third quarter monthly revenue per unit on rent increased 6% year-over-year to $865. For new shipments over the last 12 months, the average monthly revenue per unit increased 3% to $1,192. As Joe highlighted, we continue to make progress with our modular services offerings. Global Modular Plus revenues increased to $9.7 million from $7.9 million a year earlier, and site-related services increased to $15.6 million up from $12.7 million. Overall, Mobile Modular had a solid quarter as we continue to make progress with our modular business growth strategy despite some challenging demand conditions. Turning to the review of portable storage, rental revenues for the quarter increased 1% to $17.3 million, which is the first year-over-year growth since the first quarter of last year. We have begun to feel encouraged that market conditions for Portable Storage are showing signs of stabilization despite soft commercial construction project activity. Average utilization for the quarter was 61.4% compared to 62.8% a year ago. Adjusted EBITDA was $9.2 million, a decrease of 14% compared to the prior year. Turning now to the review of TRS-RenTelco, TRS had a strong quarter with total revenues up 6% to $36.9 million, driven by higher rental revenues. Rental revenues increased 9% as the industry continued to experience improved demand across markets. Average utilization for the quarter was 64.8%, up from 57.3% a year ago. Rental margins improved 43% from 37% a year ago. Adjusted EBITDA was $20.2 million, an increase of 7% compared to last year. The remainder of my comments will be on a total company basis. Third quarter selling and administrative expenses increased $3.2 million to $52.5 million as we operated with broader sales coverage to support long-term business growth and invested in information technology projects. Interest expense was $8.2 million, a decrease of $4.5 million as a result of lower average interest rates and lower average debt levels during the quarter. The third quarter provision for income taxes was based on an effective tax rate of 27.7% compared to 26.4% a year earlier. Turning to our year-to-date cash flow highlights, net cash provided by operating activities was $175 million. Rental equipment purchases were $92 million, down from $167 million last year, consistent with lower fleet utilization and our plans to use available fleet to satisfy customer orders. At quarter end, we had net borrowings of $552 million, and the ratio of funded debt to the last 12 months actual adjusted EBITDA was 1.58:1. Wrapping up the financial review, while there is still uncertainty in the demand environment, we are pleased with our year-to-date results, and we have seen some encouraging positive trends as we enter the fourth quarter. As a result, we have upwardly revised our full year financial outlook, and we currently expect total revenue between $935 million and $955 million, adjusted EBITDA between $350 million and $357 million, and gross rental equipment capital expenditures between $120 million and $125 million. We are proud of McGrath's third quarter performance, and we are fully focused on solid execution for the remainder of the year. That concludes our prepared remarks. Dave, you may open the lines for questions.

We'll take our first question from Scott Schneeberger with Oppenheimer.

Could you discuss the sales activity and the run rate in the business? Keith highlighted that last year's third quarter was significant, and this year seems to be more consistent throughout. It looks like there will be growth in 2025 compared to 2024. Is that correct? How should we approach this going forward, considering the annual fluctuations?

Yes, Scott, I can answer that. You're right, we did have a big sales quarter in Q3 of last year, and we did telegraph that it would be more balanced this year. So things are turning out the way that we thought they would. Our sales backlog is strong. We had a number of projects in this particular quarter that didn't close by the end of the quarter that will move into the fourth quarter. We did not lose any of those projects; none of those projects were canceled. So overall, we're very positive on our sales outlook for the year. And as you can see from our guidance adjustment, we think that the business is going to perform well, and sales is a big part of that. So we're confident that we'll be able to hit those numbers.

Is this business on an upward trajectory? I'm not asking for 2026 guidance, but I believe this year is likely to be better than last year. Should we expect that trend to continue, or would it be safer to view it as a stable business and take it as it comes?

No. We anticipate that it's going to continue to grow. It's an important part of the market. We're well positioned with resources out in the field to take advantage of these projects. And keep in mind that when we go to a customer, they may have a rental need in one year that may very well turn into a sales need in the following year. And so we want to be positioned to be able to take advantage of that customer need, no matter what they need. Our folks are out there looking for those opportunities, and we feel it's an important part of the business, and it's going to grow.

Sounds good, Joe. Could you speak to the education sector and its funding? I've heard your message clearly, and it aligns with what another larger rental company mentioned earlier today regarding the strong demand at the upper end of the market for larger projects. How do you see this as we look to the next year?

Sure. We had a decent Q3 in education. We shipped more than we did last year. We also got a number of returns this particular year that is part of the normal cadence, but muted our results there a little bit. Now having said that, the thing that makes me sleep well at night, and I've been doing this for a long time. What we realize is that each year with education is always a little bit different. Sometimes districts place orders earlier in the year. Sometimes they place orders later in the year. If there's some kind of economic uncertainty, which there was with the administration and the Department of Education and all the things that were going on there, it just makes districts a little bit nervous. Are we going to have the money for the programs? Programs equal teachers, which equals classrooms. And so in this particular year, orders were placed a little bit later in the season, but we're getting orders all the way into Q4 here and we're getting orders for next year. But what really makes me sleep well at night is the fact that the funding is very, very good. California passed a $10 billion facility bond. Texas passed another $8 billion in facilities bond. It was later in the year, so we won't see that until 2026. And then there's literally billions of dollars that have been passed at a local level that are waiting to be dispersed and used on projects. So I feel very, very good about the status and the solid nature of our education business and think that it's going to be a tailwind for us in the quarters to come.

Good, Joe. Thanks for that clarity. Across both modular and portable storage, obviously, the lower end of the market remains challenged. No big surprise there. Could you speak to the rate environment, the spot rate environment across both, please?

Sure. I would say for both businesses, our rates are performing well. We are still addressing the difference between our fleet average pricing and the rates for new contracts. This situation is providing us a favorable boost, which we anticipate will continue as we refresh our fleet. In portable storage, rates are stable. We have made significant efforts to avoid reducing our unit rents. While we have had to adjust some transportation costs to maintain competitiveness, we prefer that over sacrificing our rental rates. Unlike past trends in the industry, this indicates a positive direction, and I believe we are on solid ground.

I have one more point about storage and a couple of other topics before I hand it off. I found it interesting that you mentioned energy data centers along with seasonal retail and storage. This isn't a typical area of competition for you, yet we've recently heard from one of your competitors that some of the major industry players are altering their strategies. Will you be moving into this space, or is it just a one-time occurrence? Could you provide more details specifically regarding seasonal retail?

This is not a big part of our portable storage business. I don't anticipate that it is going to be a big part of our business, but we're happy to pick up orders, and we were well positioned with some of the large retailers to get orders if they're available. We have people out there that look for them, but it's not a strategic initiative in the business for us to really try to grow that because just for the reason, it is seasonal. Those units go out, they come back. We much rather have a much longer-term relationship with other types of customers. But any seasonal business we can pick up, we're happy to do it, and we did some this year.

Okay. And then over in TRS, how is your visibility in the next year? 2025 has been a pretty good year for you in that business. How do you feel about heading into next year? Maybe with some discussion across the end markets?

It's difficult to predict what next year will look like as we're currently developing our plan. However, the positive news is that our bookings and rental order volume have been robust, and we've managed our inventory effectively. As we approach Q4, things appear promising for October, and I believe this momentum will help us as we move into next year. We're not seeing any significant changes in the landscape that would suggest a drastic shift for the upcoming year, but we do have positive momentum. It's important to note that our business is primarily short-term rental, making it challenging to forecast long-term trends. Nevertheless, we're feeling optimistic and will provide more information in the Q4 call.

Great. And last for me, you called out technology spend or investments in projects and technology. Could you elaborate on what you're doing? And is that to a sizable magnitude and what type of returns you're seeking in that investment?

Sure. The bright spot, I'm assuming you're still talking about TRS. The bright spot in that business this year is along the wired communications part of the business and the business that we're getting at data centers. That's been a real strong point for us. And that's very technology-oriented. We're well positioned to serve that market. There's a ton of testing that needs to be done when you put in a data center, and we're on it, and that's been good for us this year, and I think it's going to continue.

I appreciate that. However, that's not quite what I was inquiring about, Joe, but it aligns with what I was suggesting.

I am sorry, what did I miss there? What do you?

I'm glad you added that in there because that was well worth hearing. I was just asking general for the total corporation, it sounded like you've been making some technology investments in McGrath itself. So that's what I was asking. I like your last answer, but if we could touch on that as well too, please.

Sorry about that, Scott. I completely missed that. I should have asked for clarification. Yes, the technology investments that we're making are normal course. We always need to update our systems; systems come out of support in years. We need to move things to the cloud. There's just all kinds of work that we need to do to keep our systems relevant and keep them customer-friendly and customer-facing. So that's pretty much what I meant by the technology enhancements.

We'll take our next question from Daniel Moore with CJS Securities.

Joe and Keith, I’ll start by asking you to discuss the encouraging trends you mentioned. Can you speak to the cadence of inquiries and order rates over the last 1, 3, and 6 months for Mobile Modular? Is there a sequential improvement and increased stability? How would you describe it? Additionally, I’d like the same information for Portable Storage.

Sure. Yes, I'll start with Mobile Modular. Our quote volumes have been healthy, and our booked order levels have been healthy too, and they were healthy for this particular quarter, up double digits. That was fairly consistent with the second quarter and up from the first quarter. I would say we're seeing a similar trend in Portable Storage. I wouldn't say that the third quarter, we're not seeing any marked increase over the second quarter, but we're seeing a consistent level of inquiries and booked order flow sequentially.

Really helpful. Something that you've described in detail and laid out again this quarter, the shift from CapEx to OpEx over the last few quarters as you refurbish units rather than purchase new ones dampens your GAAP margins a little, but not necessarily your cash flow. Is that something you expect to continue into next year? And what would cause you to shift back into a little bit more of a CapEx mode?

Yes, Dan, I can help with that. I think, it all goes to fleet utilization. So if you look at the modular fleet, there are more markets where we have equipment available to meet new orders. If you go back 18 months, 2 years ago, utilization was higher. It was more common that when a new order came in, we were already highly utilized, and we would look to invest capital to meet the orders. So that's the dynamic at play. So I think to answer your question, look at where utilization is when we're entering next year. And for businesses where it's low, which is currently the case of portable storage and in many of our modular regions, we've got available equipment and that's how we'll meet demand. There will be a trade-off there. It may mean those expenses continue to be more elevated. But from a cash flow point of view, it's the right thing to do. So that's how it's looking. I would say at TRS, where we've seen good recovery, particularly over the last three quarters, and where utilization in the mid-60s is actually very good utilization for that business. That's an area where already, we're looking at selectively spending the capital and adding to the fleet again, to meet demand and we're very happy to do that.

Really helpful. Clearly, we still have a couple of months to go here, and we'll be looking to guide for a couple of months after that. I just wonder if you could maybe contrast the environment today compared to where we were, say, this time last year and whether or not you expect to get back to a more kind of normalized long-term growth in EBITDA as we look out '26, '27?

Yes, Dan, I'll throw in a couple of comments. I'm sure Joe can add to it. I'd characterize the environment as still mixed. We've talked already about things like the Architectural Billings Index which has really bounced along below 50 for all this year and some months a little better, some months a little worse, but consistently below 50. That's a headwind for parts of the business. Smaller projects and portable storage have definitely suffered as well due to interest rates being high and really a slow journey of seeing interest rates start to come down. And then at various points in the year, a lot of it is related to just the policy and governmental topics; there's that era of uncertainty. That probably means some customers have either moved with a little bit more deliberation or a little bit more caution. And we've seen examples of projects just take longer to get executed. So that's really the backdrop of how we've managed through this year. It hasn't been an easy year for us. If you then look into next year, the question is, how many of those headwinds start to ease. Do we see interest rates come down enough that people start to act more quickly on starting up new projects? And do we see some of the broader macro indicators like ABI start to move into positive territory and indicate that people are planning to execute a larger number of projects going forward? I think it's too early to tell. I think as we said in our prepared remarks, we've done a pretty good job this year of counterbalancing some of those headwinds with all of our growth initiatives, the services side of modulars getting good revenue per rental unit, which we're continuing to get and grow and in some of the regional expansion where we have been hiring and we're beginning to fund equipment purchases to support growth in some regions, but for us are relatively undeveloped and where we see longer-term opportunity. Those are the things you've got to lay on the scales as you look at the pluses and minuses that will influence next year.

I'd like to just click on that just a minute too, and what Keith said about the regional expansion. I mean, we hired a number of folks this year, and we're putting them into new markets and also markets that are adjacent to operating areas that we are already in. We definitely are anticipating that to be a nice contributor to next year's results. So we're really trying to add that horsepower in there to continue to grow the business despite what the market is doing.

That's really helpful. Last one, and I'll jump out. Maybe just talk a little about the two smaller acquisitions you made last quarter. I know it's still early days, but one in Mobile Modular and Portable Storage. How are they progressing? And more importantly, what does the pipeline of opportunities look like over the next few quarters?

Yes, those were relatively small acquisitions that we closed in Q2. One was a modular business and the other was a Portable Storage business in the Southeast. They have been integrated, and we are pleased to have them on board as they are currently contributing. It's still early to provide a detailed assessment of their performance, but there are no concerns at this stage.

And then maybe the pipeline comment. I think we can say that we're very active in our normal process. We have work going on in the field. We know markets that we have a high level of interest in. I think the pipeline is active and encouraging and it's going to be part of our growth strategy.

We'll take our next question from Marc Riddick with Sidoti.

So I just wanted to sort of maybe piggyback on the prior question and line of questioning. Maybe give a bit of an update as far as kind of usage prioritization that you're sort of looking into next year and particularly around the acquisition sort of pipeline. Can you maybe talk a little bit about the valuation that you're seeing now, whether that's changed much over maybe over the last 6 months or so? And then I have a follow-up on the personnel side.

Okay. Marc, I'll take a crack at that. In terms of usage of cash, first high-level comment I would make is this has been a very good year from a free cash flow point of view. If you look at us year-to-date, we've reduced our debt. We actually had slightly lower leverage than when we started the year. We've managed to pay our dividends, and we've completed two small acquisitions. One of the factors that has allowed us to do that in addition to just good operating performance from the business, it's that lower CapEx that I referenced in the prepared remarks. We spent a lot less on new equipment this year than we did a year ago. So if we look into next year, and I touched on this earlier, based on fleet utilization, we're probably going to be in a position where we can meet a lot of demand from the existing fleet. That's a good thing. That may be a positive, again, from a CapEx point of view. That gives us a lot more flexibility with things like M&A. And that's why the pipeline is active. It's an important part of the strategy. Briefly on valuations, it's very situationally specific what you're looking at, what there is on offer from a business that's for sale. We try to be very measured in how we look at things. Fleet quality matters to us a lot and the ability to generate future cash from any business that we acquire. There are opportunities out there. We'll always pay a fair price for a good quality business. But we'll also know what our walkaway is where it doesn't make sense for us and we'll simply approach the market from other angles.

Great. And then maybe just a little bit of a follow-up on the commentary around adding folks and tech spend for some opportunities that you see. Are those kind of just sort of a short focus as far as things you're going to be executing on in the short term? Or is this something that you see opportunity sets going into next year? And are there some areas there geographically or otherwise that you're kind of targeting for the potential for new additions, both on the assuming capital side as well as the technology side?

Yes. Marc, the hires that we've made this year are definitely long term. We hope to have them be long-term resources in the company; no short-term plans there. We want those salespeople to get out into the market and really start generating some business over the next several years. Most of the hires that we made were in the Midwest area and Northeast, but we will continue to add salespeople in places that we need them, where we see business potential and in places that we have resources already that we can leverage to be able to serve the market. So very much a long-term strategy, very carefully thought out and implemented, and we're anticipating that's going to be very nice to help our growth.

Excellent. In your prepared remarks, and perhaps in response to one of the questions, you provided a great overview of how education funding has progressed throughout the year. Are there any key initiatives that you are currently monitoring or that we should be considering in the upcoming month? Are there any particular ones that stand out to you, or do you feel that we have most of the important initiatives already secured?

Yes. There's no particular valid issues that I'm aware of right now that we're concerned about concerning facilities funding at this point. So I mean I'm very pleased with the amount of funding that's in place in the markets that we operate in. It's very healthy. That funding typically doesn't grow cobwebs. That stuff gets implemented and put out into the market as soon as districts can get themselves organized and get the projects underway, and we'll be right there with them when they do it. So we're very, very happy about that and think that it's a good positive.

We can pause for a moment to allow any further questions to queue. It seems that was our last question. Now, I'll turn the call back to Mr. Hanna for any 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 February to review our fourth quarter results.

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