Mcgrath Rentcorp 2026 Q3 Earnings Call

Go ahead, sir. Thank you, Leslie, and thank you for joining us today.

McGrath RentCorp's third 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 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 two 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 mid-year 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 sustain 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 mid-year 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 Hawkins 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 to one. 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.