McGrath RentCorp (MGRC) Earnings Call Transcript

Ladies and gentlemen, thank you for standing by. Welcome to the McGrath RentCorp Second Quarter 2026 Earnings Call. [Operator Instructions] This conference call is being recorded today, Wednesday, July 29th, 2026. Before we begin, note that the matters 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 June 30th, 2026. Speaking today will be Phil Hawkins, Chief Executive Officer; and Keith Pratt, Chief Financial Officer. I will now turn the call over to Mr. Hawkins. Go ahead, sir.

Thank you, Cloy. Good afternoon, everyone, and thank you for joining us today for McGrath RentCorp's Second Quarter 2026 Earnings Call. I am glad to be here to report on our performance over the past quarter and to provide an update on our outlook for this year. I will discuss current market demand conditions and share our progress on strategic growth initiatives. First, our quarterly results. We were pleased to see rental operations revenues up 6% year-over-year, driven by continued momentum in our 2 largest rental businesses. Both Mobile Modular and TRS-RenTelco grew rental revenues and improved utilization sequentially during the quarter. Offsetting these positive rental operations results were lower new equipment sales at Enviroplex and Mobile Modular as several projects pushed to the second half of the year. As a result, total company revenues decreased 6% and adjusted EBITDA decreased 4%. Focusing first on Mobile Modular. We saw growing momentum in our rental operations. Rental revenues grew 2% in the quarter and bookings increased 11% compared to a year ago. While demand conditions remain mixed, our larger commercial project opportunities continue to be strong and activity in smaller local markets has been more stable. We are also having success in the geographic expansion markets, where we added sales coverage and deployed capital. I'm particularly encouraged by the positive operational trends in the modular business. Utilization improved sequentially for the first time since 2022. Units on rent have increased the last 4 months in a row, and we ended the quarter with more units on rent than at the beginning of the year. With this inflection and higher year-over-year bookings in the first half of 2026, I feel positive about the outlook for the second half of this year. Our services expansion initiatives also had solid momentum. Mobile Modular Plus revenues were up 15% year-over-year. Site-related services revenues, while down slightly for the quarter, were higher for the first half. Looking at the market for new modular sales, overall demand and pipeline activity remained stable and similar to last year. Turning to our portable storage business, rental revenues were flat. We continue to see challenging demand conditions in local commercial construction markets, which are a larger component of the mix for this business. Our team remains focused on getting more units out on rent through expanding sales coverage and targeting adjacent geographic markets. Lastly, turning to TRS, rental revenues continued their impressive growth trajectory and were up 17%. Demand remained healthy across several key end markets, including data centers, aerospace and defense and semiconductors. Our team is executing well in a strong market environment and is entering the second half of the year with solid momentum in the business. Summing up, across the McGrath businesses, we delivered rental operations revenue growth in a mixed demand environment. I am pleased with our momentum going into the second half of the year. Our modular geographic and services expansion initiatives are providing us with several growth opportunities that are not dependent on recovery in the nonresidential construction market. And our strong balance sheet gives us the flexibility to fund organic growth, support a steadily increasing dividend and retain capacity for strategic M&A and share repurchases. I would like to thank our team for your dedication, deep expertise and customer engagement that are truly competitive differentiators and our customers and shareholders for your trust and investment in our company. 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, Phil, and good afternoon, everyone. As Phil highlighted, second quarter results reflected continuing growth in rental operations revenue, offset by lower sales revenue at Enviroplex and Mobile Modular. Total revenues decreased 6% to $221 million and adjusted EBITDA decreased 4% to $83 million. Reviewing Mobile Modular's operating performance as compared to the second quarter of 2025, total revenues for Mobile Modular decreased 4% to $150 million and adjusted EBITDA decreased 4% to $51 million. Rental operations showed steady progress and saw 2% higher rental revenues, driven by growth from our commercial customer base and 8% higher rental-related services revenues. Inventory center costs increased by $2.1 million as we invested to prepare equipment to meet stronger demand and higher shipment levels in the second half. This expense compressed rental margins to 55%, down from 58% a year ago. Sales revenues decreased $9.3 million to $31.2 million, primarily due to lower new sales projects during the quarter as several projects shifted to the second half of the year. Average fleet utilization was 70.1% compared to 73.7% a year ago. Utilization modestly improved from 70% in the first quarter and ended the second quarter at 70.6% as shipments exceeded returns during the quarter. While these were small incremental changes, we view them as positive indicators as we return to growth in units on rent. Revenue per unit trends were favorable. Second quarter monthly revenue per unit on rent increased 7% to $902. For new shipments over the last 12 months, the average monthly revenue per unit increased 7% to $1,252. There is still a positive pricing tailwind opportunity as our fleet churns. We continue to make progress with our modular services offerings. Mobile Modular Plus revenues increased to $10.5 million from $9.2 million a year earlier. Site-related services revenues were $6 million compared to $6.5 million in the prior year, but remained above 2025 on a year-to-date basis. Turning to the review of Portable Storage. Total revenues for Portable Storage increased 1% to $24 million, and adjusted EBITDA was $8 million, a decrease of 23% compared to the prior year. Rental revenues were $17 million, flat compared to last year, and rental margins were 80%, down from 83% a year earlier. As Phil mentioned, demand conditions in small local commercial construction markets remain challenging. Adjusted EBITDA was impacted by higher fleet preparation costs, pressure on rental-related services margins in a competitive environment and investments in sales coverage to support future growth. Average utilization for the quarter was 58.3% compared to 61.1% a year ago. Turning now to the review of TRS-RenTelco. TRS delivered another strong quarter with total revenues up 17% to $43 million and adjusted EBITDA up 29% to $25 million. Rental revenues increased 17% to $32 million, benefiting from improved demand conditions, including projects supporting data center build-outs. Rental margins improved to 48% from 44% a year ago. Average utilization for the quarter was 68.1%, up from 64.8% a year ago. TRS utilization ended the quarter at 68.9%, our highest utilization level since the first quarter of 2021. Sales revenues increased 13% to $8.7 million, and gross margins were 66% compared to 47% a year ago. Lastly, on Enviroplex, compared to a very strong second quarter in 2025, Enviroplex total sales revenue decreased to $4.6 million from $19.9 million and adjusted EBITDA declined to a loss of $0.5 million from a profit of $4.3 million. The decline was primarily driven by project timing with several project completions shifting to the second half of the year. The remainder of my comments will be on a total company basis. Second quarter selling and administrative expenses increased $2.9 million to $56.4 million, primarily due to investments to support our modular geographic expansion. Interest expense was $7.1 million, a decrease of $0.7 million as a result of lower interest rates during the quarter. The second quarter provision for income taxes was based on an effective tax rate of 27% compared to 27.3% a year earlier. Turning to our year-to-date cash flow highlights, net cash provided by operating activities was $106 million compared to $110 million last year. Rental equipment purchases were $124 million compared to $50 million last year as we increased investment in modular geographic expansion opportunities and to support higher demand at TRS. In addition to investments in new fleet, healthy cash generation allowed us to pay $25 million in shareholder dividends and to complete $27 million of share repurchases. At quarter end, we had net borrowings of $590 million, and the ratio of funded debt to the last 12 months actual adjusted EBITDA was 1.65:1. Lastly, we are updating our outlook for 2026. The midpoints for our revenue and adjusted EBITDA ranges are unchanged, while we tightened up the ranges now that we are halfway through the year. We have also increased our gross rental equipment CapEx to support incremental investment in TRS. Relative to our original outlook, we continue to expect strength in the Modular business. Stronger-than-expected performance at TRS should offset weaker performance at Portable Storage. And at Enviroplex, we continue to expect performance to be similar to 2024. We now expect total revenue between $955 million and $985 million, adjusted EBITDA between $363 million and $375 million and gross rental equipment capital expenditures between $200 million and $220 million. As we enter the second half of the year, our focus remains on disciplined execution, prudent capital allocation and delivering long-term shareholder value. That concludes our prepared remarks. Chloe, you may now open the lines for questions.

[Operator Instructions] Our first question is coming from Manav Patnaik with Barclays.

This is Ronan Kennedy on for Manav. You noted shipments exceeded returns in each month of the quarter. Could you provide some color on the extent to which that was driven primarily by large commercial projects and specific end markets versus the regional expansion efforts or a broader improvement across the customer base? Also interested in your comments as to whether that trend has continued into July. And the final part to the question, if I may, if not mistaken, I think Phil had mentioned inflection. So curious as to how you would characterize it. Is this the long-awaited inflection in utilization? Are we in the recovery and your thoughts there?

Sure, Ron, I'll start there, and then Keith can weigh in a little bit. Starting with the utilization trend, I'm excited about the sequential utilization improvement that we've had in modular here in the second quarter. As we mentioned, that's the first time in 4 years. It's really being driven by more mega project wins, as you mentioned, commercial and a combination of that with our geographic expansion initiatives. So that's getting a nice lift to our commercial utilization and partially offsetting some net returns in the education side. And kind of jumping to your inflection, I think we feel good kind of the trend change. We may not see this move up every single quarter consistently, but we do believe we've turned the corner on the trend on the modular side and have strong momentum entering the second half of the year. Keith, anything you'd like to add there?

Yes. Again, we'd emphasize these are very encouraging signs, but they're just the beginning of a turn. I think Phil is spot on with saying we want to build on this, but it's small shifts, and we hope to build on that as we go forward. I don't think it will necessarily be linear every single month, but it's definitely a shift in the trend that we've seen over a number of quarters and over a number of years.

And then obviously, continued weakness within Portable Storage. I mean, what is it beyond the end market weakness and the bifurcation in the market that is consistently being spoken to by your peers and reflected in the industry data. Is there anything else beyond end market weakness? Is there certain things happening in certain geographies or exposures, competitive dynamics? And then are there leading indicators we can look to, to suggest perhaps it improves in '27 versus remaining stuck in the current demand dynamics?

Sure. Ron, I can take that. I think the consistent themes for Portable Storage are all around that smaller local market project dynamic that we've been talking about for several quarters and combined with industry utilization being lower, so a highly competitive market, lots of people trying to get units out on rent. So nothing's changed there. There's not any regional dynamics or differences that I would call out as material. It's really those 2 macro themes. And I think you're really talking about needing improvement in the nonresidential construction, those small local project markets before we see any kind of meaningful move there. That would be a nice accelerator for portable storage and modular when it happens. We're not expecting that to take place this year.

Got it. And then can you remind us if you have either characterized or provided color around your exposure to those large long-duration projects, whether it be mega and also data center specific?

We haven't quantified that, Ron. I think what I would say there is we're -- they're a meaningful part of our new business volume and the bookings there, as we've talked about, have remained strong. Thing I'd like to highlight is those projects really play directly to our strengths, the deep experience of our team, capabilities of our operating infrastructure and the scale of our modular solutions offerings. There's really very few competitors that can bring all that together in the way we can. The other opportunity with those mega projects, data centers, in particular, the opportunity to bring all of our rental products to that site. So got everything from modular buildings, modular kitchens, dormitories and electronic test equipment in the case of data centers. So it's important, meaningful part of the new business, small and the scale of the overall fleet and revenue mix. Keith, anything you want to add there?

Yes. I think that's a good summary. And Ronan, as we track the data, you'll see in our IR pack, we've got a good view of the different end markets that we serve. We just don't have mega projects or even data centers as an identified item. Sometimes it's captured in our systems as another project with a large contractor that we have a relationship with and frequently do projects with. So again, I think Bill has characterized it appropriately. It's a strong part of the new business flow, but we have a big fleet, and so it takes a lot to move the needle on that big fleet.

And if I may, I'll just [ pick and choose ] a question with a multiparter on the sales decline. Are you helping with how to think how much of that was the Enviroplex versus the Mobile Modular? And then I think you indicated it was primarily due to lower used sales several modular sales transactions that were expected in the year shifted into the second half. So any further color or context on the drivers there? And then what gives you confidence in that timing shift? Is there anything to read through with regards to broader demand? Is it sales activity tends to be more sensitive to project timing and customer CapEx decisions and rental? Anything you have to be mindful of give further context to that sales decline?

Sure. Absolutely. I'll jump in and sort of get the topic started. Really, what we ran into are things that we often see in this part of the business. And these are new sales projects adding Enviroplex or on the modular side of the business. And frequently, we'll run into site readiness issues. This could be the customer has to get a permit -- it could be they're dealing with issues that have to be completed before we start like foundation work, things like that. And then at the end of the project, there are also other things that have to be done before we can complete the project. An example would be the local utility putting a power hookup at the site. So these are things we run into. I would say when we look at this quarter, we had several of those that impacted projects that were a little larger and caused them to shift. In some cases, the shift is just a matter of weeks. In others, it's several months. But these are all projects that we have under contract. We're going to complete them. And I think the cadence by quarter was maybe a little different from what we've seen in the past and a little bit different maybe from what we expected, but nothing highly unusual in terms of the factors that caused the delays. That would be the sort of overall comment. Phil, I don't know if there's anything you'd like to add.

I think you described it well. Maybe I'll just add, these aren't projects canceling and falling out of the pipeline, just completion date shifting from when we originally expected it. There's really nothing in the underlying market demand that we're worried about. We really see that as being solid, consistent with where it was a year ago. It's really just the size and scope of these sale projects that sometimes are difficult to predict given things outside of our scope on the site.

Yes. We did foreshadow Ronan, that Enviroplex would have a lower sales year. We commented on that back in February. And again, just to calibrate things, Enviroplex had a very strong revenue year in 2025, they did $57 million in revenue. We commented we thought this year would be much closer to 2024 when they did $46 million. We've still got that same view. If you look year-to-date, we just haven't recognized a lot of those sales. For Enviroplex, we recognized $8 million year-to-date. A year ago, it was $27 million year-to-date. So a big part of the difference this year is the timing around those Enviroplex sales. There will be less of them for the full year, and they're definitely more weighted to the second half. And then with modulars, sort of similar comments, but not as big of a shift in the numbers.

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

I think I'll start in Mobile Modular in rental, your Slide 33, always one of attention for pricing. It looks like you have a spread of 39% from total portfolio on rent versus trailing 12 months of modulars on rent. So still very, very strong on that spread. Could you speak to that and to the spot pricing and maybe differentiate large and small projects in that?

Yes. Scott, I'll jump in and take a crack at it. I think you're correct with the observations. There's still a good spread between the average revenue per unit on rent and then what we're seeing with shipments over the last 12 months. And that's -- we view that as a good thing for the business, a sort of positive tailwind over time. A couple of things at play. I would say spot pricing, it kind of varies around the country. It varies by type of product. It varies by length of contract. All those things go into the mix. It's a fairly complicated algorithm when you look at understanding pricing at a very granular level. But the way we would characterize pricing that we've been experiencing is overall fairly stable. There are some pluses and minuses in different categories in different regions, and that's typical in the business. But overall, relatively stable. And then the services piece is really something we've been working to grow over the last few years, and that's giving us more revenue opportunity per unit. We're being successful in achieving that with the new shipments. and it's gradually working its way into the installed base of rental units. So all those trends are things we've seen for many quarters. They continue to be healthy, and we're very pleased about that. I don't think there's anything unusual regarding mega project or small local markets. There are dynamics around term, size of project that can influence how we view the pricing that's appropriate, but those are all normal things we and I think others take into consideration when they look at new business.

Appreciate that. I'm going to crack at TRS -- I'm sorry, Phil, were you saying something?

No, go ahead, Scott.

Yes. I want to go over and dig into TRS because I think we saw acceleration from low teens now into high teens year-over-year, and that's against a tough comp revenue growth. So very impressive to see. I think if you could just elaborate on the trends there, the sustainability of the trends and a little bit of extra CapEx in that business. If there's a lot of sustainability, yes, I think it certainly justifies that CapEx and then some. So if you could just speak on that decision-making process and how hot that market is for you.

Yes, I'm happy to answer that, Scott. We really see that demand remaining strong across several end markets, and there's no immediate sign of slowing. Data centers remain a meaningful contributor to that growth. It feels like we're still in the early to mid-innings of that data center build-out. We ended utilization higher, but our equipment levels are still lower than they've been over the last several years. So there's opportunity to add CapEx and participate in that growth. We don't have a crystal ball for any of this, but our teams are very familiar in managing these technology cycles. We know the things to watch for, and they manage them well. So we believe we've got good runway, feel good about the place in the cycle we're in. And maybe the thing I'll just add specific to TRS and data centers is we still don't have a good feel for what the ongoing maintenance requirements will be for electronic test equipment as these things are installed and there's some type of maintenance and refresh process over time. So nothing there that gives us any concern.

Yes. Good last point there, and certainly a nice opportunity for you long term. I'll just do one more. You've been buying back stock first quarter, second quarter at a decent clip. Just curious the rationale of buybacks and in consideration for M&A, obviously, you're doing geographical build-out with investment, which can impact margins. You can kind of bypass that on successful acquisitions. So just kind of curious on the strategy of the continued geographic expansion, organic versus M&A. And then just a little comment on buybacks.

Keith, you want to start with [indiscernible] and then I'll talk about geographic expansion and M&A.

Okay. Yes. Scott, it's an important topic and one that we're frequently reviewing, which is capital allocation opportunities and which we should fund. I think the good news is leverage at 1.65 at the end of June. We have a lot of flexibility, and we still want to be prudent. You're seeing the focus on organic investment. We have good opportunities at Modular and TRS, and we're funding them. And at the same time, trying to manage utilization very carefully, but still in light of market conditions, it's obviously a different story in each line of business. So that's the first comment. We did one small tuck-in. You may recall, we commented on it on the April call. That deal was closed back on April 1st. We're going to continue to work the pipeline. Phil can elaborate on that. And then we look at the buyback as another tool in the toolkit. We don't telegraph by how much and when, but we've not purchased shares both in the first and second quarter. We've purchased a total of 250,000 shares year-to-date, and we're in a position to do more. Our authorization, which was put in place in September of '24 was for 2 million shares. We still got 1.75 million shares available under that authorization for repurchase. So clearly, another tool in the toolkit. The dividend, we've got a good track record of a healthy dividend and an ability to increase it steadily as the business continues to grow and be profitable.