McGrath RentCorp (MGRC) Earnings Call Transcript

Ladies and gentlemen, thank you for standing by. Welcome to the McGrath RentCorp Third Quarter 2026 Earnings Call. [Operator Instructions] This conference is being recorded today, Wednesday, October 28, 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 this 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, 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, Leslie, and thank you for joining us today for McGrath RentCorp's Third Quarter 2026 Earnings Call. I'm glad to be here to report on our performance over the past quarter and to provide an update on our outlook for the remainder of this year. I will discuss market demand conditions, review the progress we made during the quarter and share how our increased rental fleet investments are helping us pursue our strategic growth opportunities. Focusing first on our quarterly results. We were pleased to see rental operation 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. Overall, total company revenues increased 7% and Adjusted EBITDA increased 10%. At Mobile Modular, we saw sustained momentum in our rental operations. Rental revenues grew 4% in the quarter and both rental bookings and backlog were higher than a year ago. I was pleased with the wins we secured on larger commercial projects and across our geographic expansion markets. These successes allowed us to deploy standard fleet at attractive rates on long-term rental contracts. The strength and quality of our rental pipeline and confidence in demand levels supported our decision to increase investment in new rental fleet. Sales of new modular equipment were lower for the quarter. Despite having a healthy midyear backlog of secured projects, we experienced longer lead times for project completions. Turning to Portable Storage. Rental revenues were down 3%. Challenging demand conditions continued in smaller local commercial construction projects, which are a large component of the mix for this business. Our team remained focused on improving utilization by both selling equipment and redeploying existing fleet to new markets. While we continue to work hard on these efforts, progress is likely to be gradual until market demand improves. Lastly, turning to TRS. Rental revenues continued their impressive growth trajectory and were up 26% with strong demand across several key end markets. The AI infrastructure and data center investment cycle is generating new business opportunities for TRS. Scope of the opportunity extends across the supply chain. It ranges from semiconductor R&D supporting next-generation chip development to field testing and verification work as equipment is installed in new data centers. Based on what we're seeing in our business and what we're hearing from customers and OEM partners, we increasingly view this as an attractive multiyear opportunity. Consistent with this view, we've increased our capital investment in TRS. Summing up, we believe McGrath has multiple avenues to create shareholder value. While this isn't an easy operating environment, we made meaningful progress against our most compelling growth opportunities during the quarter. At Mobile Modular, we grew in our geographic expansion markets. We also applied our large commercial project capabilities to win data center, manufacturing and infrastructure projects. At TRS, we successfully executed against the evolving opportunities created by AI infrastructure and data center build-outs. Looking ahead, we will continue to invest capital behind these opportunities to support our customers and position the company for sustained long-term growth. Our capital allocation priorities start with organic investments. And this year, we are having attractive opportunities to invest across multiple rental equipment categories. Our strong balance sheet gives us flexibility to fund this organic growth, support a steadily increasing dividend and retain capacity for strategic M&A and share repurchases. I will close by recognizing our team for your focus, passion and commitment to delivering value for our customers. You are McGrath's greatest competitive advantage. I also want to thank our customers and shareholders for your continued partnership, 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, our third quarter results reflected continued growth in rental operations revenue. Total revenues increased 7% to $275 million and adjusted EBITDA increased 10% to $106 million. Reviewing Mobile Modular's operating performance as compared to the third quarter of 2025. Total revenues for Mobile Modular decreased 1% to $180 million, and adjusted EBITDA decreased 3% to $63 million. Rental revenue increased 4%, driven by growth from our commercial customer base and geographic expansion initiative. Inventory center costs increased by $2.3 million as we incurred higher expenses to prepare equipment to support shipments from our existing fleet. As a result, rental margins declined to 56% from 58% a year ago. Average fleet utilization was 70.2% compared to 72.6% a year ago and improved from 70.1% in the second quarter. The sequential improvement reflected stabilizing overall utilization, consistent with our ongoing efforts to return units on rent to sustained growth. Revenue per unit trends were favorable. Third quarter monthly revenue per unit on rent increased 8% to $932. For new shipments over the last 12 months, the average monthly revenue per unit increased 7% to $1,271. There is a positive pricing tailwind opportunity as our fleet churns. Sales revenues decreased $5.3 million to $47.1 million. Despite a healthy midyear sales backlog, projects took longer than expected to reach completion. Turning to the review of Portable Storage. Total revenues for Portable Storage decreased 3% to $24 million, and adjusted EBITDA decreased 20% to $7 million compared to the prior year. Rental revenues were $17 million, down 3% and rental margins were 80%, down from 81% a year ago. Demand conditions for smaller local commercial construction projects remain challenging. Adjusted EBITDA was also impacted by pressure on rental-related services margins and investments in sales coverage to support future growth. Average utilization for the quarter was 59.1% compared to 61.4% a year ago and up sequentially from 58.3% in the second quarter. Turning now to the review of TRS-RenTelco. TRS delivered another strong quarter with total revenues up 23% to $45 million and adjusted EBITDA up 27% to $26 million. Rental revenues increased 26% to $35 million, benefiting from improved demand conditions, including projects supporting data center build-outs. Rental margins improved to 48% from 43% a year ago. Average utilization for the quarter was 69.9%, up from 64.8% a year ago and ended the quarter at 71.9%, the highest level in the past 20 years. Given the strong demand environment and record high utilization level, as Phil discussed, we continue to invest in additional fleet to support growth. Sales revenues increased 7% to $8 million, and gross margins were 56%, consistent with last year. Lastly, on Enviroplex. Enviroplex delivered a very strong third quarter. Sales revenue increased to $25.7 million from $13.7 million and adjusted EBITDA increased to $10.7 million from $2.5 million. High gross margins strengthened performance in the quarter. The remainder of my comments will be on a total company basis. Third quarter selling and administrative expenses increased $4.4 million to $56.9 million, primarily due to investments to support our modular geographic expansion initiative. Interest expense was $8 million, a decrease of $0.2 million, reflecting lower effective interest rates during the quarter, partly offset by higher debt levels. The third quarter provision for income taxes was based on an effective tax rate of 26% compared to 27.7% a year earlier. Turning to our year-to-date cash flow highlights. Net cash provided by operating activities was $178 million compared to $175 million in the prior year. Rental equipment purchases were $219 million compared to $92 million in the prior year as we increased investment to support geographic expansion and large commercial project wins at Mobile Modular and higher demand at TRS. In addition to investments in new fleet, healthy cash generation allowed us to pay $37 million in shareholder dividends and to complete $34 million of share repurchases. At quarter end, we had net borrowings of $618 million, and the ratio of funded debt to the last 12 months actual adjusted EBITDA was 1.68:1. Lastly, we are updating our outlook for 2026. Demand for our rental businesses remains strong, and we are investing in growth opportunities across Mobile Modular and TRS. As a result, we are narrowing our adjusted EBITDA range with no change to midpoint expectations and increasing our gross rental equipment capital expenditure outlook. While lower-than-expected modular new equipment sales activity is reducing our revenue outlook for the year, the strength of our rental operations continues to support our EBITDA outlook. We now expect total revenue between $945 million and $960 million, adjusted EBITDA between $365 million and $373 million, and gross rental equipment capital expenditures between $270 million and $290 million. We are pleased with McGrath's third quarter performance, and we are fully focused on solid execution for the remainder of the year. That concludes our prepared remarks. Leslie, you may now open the lines for questions.

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

This is Ronan Kennedy on for Manav. If I may start with stepping back, I think the demand environment still seems fairly bifurcated, healthy activity across larger projects but continued pressure in the smaller local commercial construction. Are you seeing any signs -- early signs of an inflection in broader nonresi activity and specifically in that smaller local project?

This is Phil. I think the macro theme has been really consistent like we've been sharing in the last few quarters, those smaller local projects that environment is stable, but they aren't increasing significantly, while we continue to see ample opportunities for the large commercial projects. So we aren't seeing any strong indications -- haven't seen any strong indications of that shift happen this year.

Got it. And then the new modular unit sales came in below the expectations, I think, embedded in the prior outlook. How are you thinking about that level of sales activity in 4Q? And as you look further out, is there anything else you're seeing today that changes how we should think about the opportunity for new unit sales even into '27?

Yes. I'll take one step at a time, Ronan. I think with the updated outlook, it reflects two things. Sales came in a little lower than we had expected for the third quarter, and we've sort of reduced our outlook for the fourth quarter on the new modular equipment sales. As we mentioned in some of the remarks, we had a healthy backlog at the midyear point. We went through our normal process. And what we actually experienced was it's taking longer to see those projects that are under contract get completed. And that's really the root cause of us taking the numbers down in that area. These are really issues with the customer. There's nothing on our side. We're ready to serve. We have access to the product as planned. We do know customers can run into issues, and we discussed that last quarter as well. But the overall experience we've had is everything is taking longer than we would have expected to complete, and that's the root cause for taking that part of the business outlook a little lower.

Got it. And then on the rental equipment CapEx, the guide raise, I believe, about $70 million at the midpoint. Can you please help us to -- help us understand how much of that is Mobile Modular versus TRS within each, what specifically are you investing behind?

Yes. Ronan, let me give a couple of comments on that. If you go way back to the February initial outlook for CapEx, the midpoint at that time was $190 million. With our October update, we're now up to $280 million. What we've seen over the course of the year, and Phil alluded to this in his comments, good strength in the demand environment for certain product categories at the modular side and at TRS. But if we look at the overall shift in our outlook, really TRS has performed extremely strongly at the middle of the opportunity to step up the capital spend in that part of the business more substantially than we really expected. So in both businesses, there is an uptick, but the majority of that change from the beginning of year view to sort of the view we have today, the majority of that increase is occurring at TRS. And just to frame that for you a little bit, if you look into the details in the Q, we ended the third quarter at TRS with essentially utilization of 72% on a fleet that were the size of $380 million of OAC. So we've got very high utilization on the largest fleet we've had all year at September 30 and continue to see good demand and good opportunity in the business. So TRS is really getting the more significant adjustment overall for the year. And then in terms of where that capital is going, just starting with TRS, the whole AI/data center opportunity that Phil described that has assets that range from work done in the R&D lab all the way through to people who are turning up equipment in a data center, multiple product categories, probably tilts more towards what we call the communications side. And then on the modular side, again, as Phil indicated, we have opportunities for geographic expansion and opportunities for more of those larger mega projects, which tend to use more of the complex floors where we're adding equipment where our existing utilization is already very high. So that gives you the overview. Again, it all speaks to the rental operations opportunity.

I would just add, Ronan, that over 80% of that modular year-to-date CapEx has gone out on contracts with initial average terms over 30 months. So these are long-term deals for standard rental equipment with solid returns.

Very good. If I may, just one more on Modular. Can you talk about how would you frame the building blocks Mobile Modular growth between backlog conversion, the geographic expansion, pricing services, even underlying market demand, those dynamics from a demand standpoint, the visibility into them and kind of building blocks for 4Q into '27, please?

Sure, Ronan. I can take that. It starts with the opportunity we have in geographic expansion and the visibility we see out into the market for these larger commercial projects. And again, customer feedback and factory feedback that these -- there's a sustained backlog there. So we have our own internal backlog and there's a backlog of those projects out in the market. And so having that demand opportunity out there, then we look internally at our booking activity and our existing backlog. Our bookings were up over 20% in the quarter on the modular side. So that gives us strong confidence that we're going to have many opportunities to continue to participate fully in these large commercial projects. So it starts with the high-level demand picture for -- on the commercial side and our ability in Q3 and beyond to perform in that. And we, as we talked about before, check a lot of the boxes to make us highly successful in that type of project category.

Our next question comes from Scott Schneeberger with Oppenheimer.

This is a modular sales question. I mean just we're seeing such strength in rental, strong demand. You're still getting very nice pricing. That's high single-digit improvement there. So everything sounds great. The -- you all cited just delays in the sales of large projects. And with sales, it's always lumpy, I understand. Could you just elaborate a little bit more on what type of projects these are and what the holdups typically are because it's kind of meaningful. Just kind of curious, is it going to impact how you're thinking about next year as well when you -- I know you're not going to guide on this call, but on the fourth quarter call for next year's sales. Just how does it affect how you're thinking about sales next year?

Scott, we still believe that the ability to support and deliver these new modular equipment sales projects is a competitive advantage and adds value for the customers. So these customers have needs for both rental and sale solutions. And sometimes the sale request starts -- request that starts as a sale ends up being a rental or even a used sale versus new. The slower overall nonresidential construction market is having an impact. I think the higher interest rate environment has likely depressed this opportunity over the last 2 years. And specifically, the projects that we've had tend to be the larger commercial projects where we've experienced difficulty -- the customers experience difficulty in permitting, getting their site ready, challenges getting all the other subcontractors in place, the things that we typically see on large construction projects I think have been magnified in this environment with so many mega projects happening. But we still believe that this is a solid opportunity for us over time long term. We completed a significant number of projects this year. We continue to have a healthy backlog of awarded contracts, and we have good engagement with customers that are planning future projects.

Scott, I think you asked us well, looking ahead to 2027, and I would agree with you, it is much too early to really say anything there. I will say we've experienced this part of the business is harder to forecast. We spend a lot of time on it. We're experiencing that things take longer from contract signing to completion and our opportunity to see the revenue come to McGrath. And so I think we'll be careful when we look next year at where we set the initial goalposts for what might be accomplished there. There's also a good slide in our IR presentation that just acknowledges sales were a little lower last year, and they're lower again this year. And I think as Phil said, that may say something about this general backdrop of the strength of the overall nonresi construction market, and that may be also something that's becoming reflected in that part of the business for us. The last comment I'll make, I know your question was initially about the new sales side, where we've seen more of a challenge this year. The used sales side of the business is actually up year-to-date. And I think that reflects the fact that we continue to look for opportunities to de-fleet in certain categories where we can. And when we do that, we're getting sales, we're getting good gross margins. So that part of the overall sales mix, the used piece, still healthy, actually up year-to-date. So those are just some other comments on that part of the business.

Great follow-up, Keith. That's helpful. What I take away from both is maybe some issue from the smaller projects. But I feel like, Phil, from your commentary, maybe some of these large projects that are originally considering new sales are opting to rent. Is that a meaningful part of the answer here or not as much?

I think we've seen examples where that's happened, Scott. I wouldn't say it's a meaningful driver of what we're seeing. But in a high interest rate environment, you do typically see some shift towards lease from the buy side. Again, I wouldn't attribute most of this to items around specific projects and not a market shift away from sales.

Got it. Shifting gears a little bit. Just with -- you've hit this a little bit already, but with TRS-RenTelco, really ripping. Can you just elaborate, is this -- I know you can't track it down exactly to end market, but it's predominantly data centers and large projects that's driving this. Are you seeing -- are there any other aspects of TRS that are -- is that the only driver, I guess, is what I'm asking versus are there other areas that are pushing it as well?

I think there's a few areas. One, I would not just -- we talked about the AI supply chain, not just data centers. So we have equipment that's supplying R&D in the labs all the way through to that final data center build-out. So there are several types of equipment and types of customers in that ecosystem that we're seeing demand from. And then another area that we called out in the prepared remarks, aerospace and defense is an opportunity, particularly with space, you see everything going on with satellites in particular, is driving demand as well. So it's the data center piece and that ecosystem is material, but not the only place that we're seeing demand.

Appreciate that. Following up on Ronan's question on CapEx. It sounds like the majority is going to TRS and you also elaborated well on the drivers of modular, and it sounds very logical and very good in both situations. I'm curious, how much of this -- how is this going to affect next year's CapEx? Is this a pull forward from next year? Or is this just, wow, we're doing so much business, we just have to fund this now. And it did sound good. You're saying that a lot of the modular you had on 3-year-ish contracts going right out the door. But just kind of curious, is this going to affect the way you think about CapEx next year?

Yes. It's a reasonable question, Scott. It's also just a little bit early, and that's the kind of work we do over the next couple of months as we get our plans lined up for next year. I think TRS, you've heard the dynamic. I mean, we've seen this momentum building over a number of quarters. And really, as you rightly said, accelerated in the last quarter. And the more we look to get verification from what OEMs are saying, from what we hear from some customers and other -- even in our own data, we think there's a multiyear opportunity here, and it's one that we want to fund. So we should end 2026 owning a lot of equipment. Hopefully, it's highly utilized, and that gives us a very good starting point for next year. Then it's all going to be a matter of where do we go from here? Is there incrementally more business, different opportunity areas? That's all stuff we're going to assess in the months ahead and in the early part of next year. The modulars, we certainly added more CapEx to the overall budget for the year. It's not as much that we added there. We had a pretty healthy budget for the year. We knew we were going to do the things that Phil described. I would say they've gone incrementally more positively than we expected, and we believe those are worthwhile things to fund.

Our next question comes from Daniel Moore, CJS Securities.

Last quarter, shipments exceeded returns for the first time in quite a while. Just provide a little bit more color on what you saw on that front in Q3. And obviously, that trend enhances your pricing tailwind. What are the expectations for Q4 and into '27?

Yes, Daniel. Our utilization improved slightly, as you saw, another 10 basis points. So it's good to see that trend continue a little bit. The units on rent were relatively flat in Q3, that shipments versus returns kind of balanced out, and we expect to see -- to be positioned well to continue those incremental utilization improvements as we go into 2027. But as we said before, month-to-month, quarter-to-quarter, it's not always going to be up into the right trajectory, but we're still seeing the trends in the bookings and backlog that we've already talked about that should give us confidence we've got -- we're headed in the right direction.

I think the other part is a little bit on the pricing side. I mean, I think overall, for the modular side of the business, similar to our comments last quarter, for individual product categories in particular regions, there are some areas it's a little stronger, some areas a little weaker. But overall, I would characterize it as base pricing being relatively stable. And then the MM+, the services side of attachments to a rental contract, continuing to make steady progress there, and that continued right through the third quarter. So there's still a gap you'll see between the average unit on rent, the revenue we get for it and then the new shipments over the last 12 months, that gap is still 36%, which is a significant gap. And if trends that we've seen over the last 12 months continue, I think there's an opportunity for those numbers over time to continue to increase. Again, mix factors can be very important here, everything from what the product is, which region it's in, the length of the contract, all those things can impact the revenue per month opportunity, but we've made good progress, and we're trying to price very thoughtfully as we continue to try and grow the business.