WillScot Mobile Mini - Q1 2023

Transcript

Operator (participant)

Welcome to the first quarter 2023 WillScot Mobile Mini earnings conference call. My name is Amy. I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I would now like to turn the call over to Nick Girardi, Senior Director of Treasury and Investor Relations. Nick, you may begin.

Nick Girardi (Senior Director of Treasury and Investor Relations)

Good morning, and welcome to the WillScot Mobile Mini first quarter 2023 earnings call. Participants on today's call include Brad Soultz, Chief Executive Officer; and Tim Boswell, President and Chief Financial Officer. Today's presentation material may be found on the investor relations section of the WillScot Mobile Mini website. Slide 2 contains our safe harbor statement. We will be making forward-looking statements during the presentation and our Q&A session. Our business and operations are subject to a variety of risks and uncertainties, many of which are beyond our control. As a result, our actual results may differ materially from today's comments. For a more complete description of the factors that could cause actual results to differ and other possible risks, please refer to the safe harbor statement in our presentation and our filings with the SEC. With that, I'll turn the call over to Brad Soultz.

Brad Soultz (CEO)

Thanks, Nick. Good morning, everyone, and thank you for joining us today. I'm Brad Soultz, CEO of WillScot Mobile Mini. WillScot Mobile Mini is a North American leader in innovative and flexible total space solutions. In Q1 of 2023, we continued to execute our idiosyncratic growth levers combined with capital discipline and outstanding operational efficiency, which support our improved 2023 outlook of over $1 billion of Adjusted EBITDA. During the quarter, we grew revenue by 25% and Adjusted EBITDA by 47%, driven by strong VAPS penetration and rate optimization. With a company record of 17% return on invested capital over the last 12 months and a free cash flow margin of 18% in the quarter, we pursued our strategy with smart capital discipline, including acquisitions of up to $80 million and $216 million of share repurchases.

Turning to Slide 16, I'll share a quick growth lever update. Our value-added products initiatives represent over $500 million of $1 billion of idiosyncratic growth levers, and we made great progress across both segments. Our track record in modular is proven, as well as over the last 10 years, we've delivered over an 18% compound annual growth in our VAPS average monthly rates. We're also beginning to see benefits from VAPS in our storage solution segment. VAPS revenue in this segment in the first quarter was $22 million, up 60% year-over-year. We believe that this is just the beginning of a differentiated long in duration and high growth value driver that is entirely in our control. Tim will unpack this a bit later in his section.

Otherwise, the engineer in me could consume the entire call with my exuberance associated with our basic offering of lights, shelving, and pipe racks for portable storage units, as well as many new products under development. Those of you that visited us at CONEXPO in March saw our new premium storage offering, which will take this to a whole new level. Based upon robust testing and early customer feedback, we're on track for our planned launch of this premium offering beginning in test markets this summer. We're following an established playbook that we've developed over the last decade in modular with exciting results, and our turnkey value proposition is obviously continuing to resonate with our customers. Now, pricing, supported by VAPS, continued to contribute meaningfully to our Q1 2023 results.

Our modular products continue to drive an approximate 30% spread between the delivered rates on units over the last 12 months and the average of the portfolio. Our storage segment continues to leverage our unique and expansive product offering, our in-house logistics capability, our price management tools and processes, and while still relatively small, a VAPS offering that will drive growth for years to come. Our confidence in delivering double-digit rate growth across both segments is not grounded in hope. It's largely embedded in the current spreads we enjoy between spot rates of recently delivered units and our portfolio average, and the spot markets continue to trend favorably. We're a very small spend for our customers, and we've transformed our value proposition to provide more value to them.

We've been delivering double-digit rate growth in modular for well over five years, and while input and equipment costs have increased meaningfully over the last couple years, they're not the driver for this trajectory. Rather, they will provide support for a continuation. As discussed in our 2021 Investor Day, an important milestone in our strategy to improve organic market penetration was the optimization of our two disparate customer relationship management or CRM systems. I'm excited to confirm that we achieved that milestone in early February. Our entire team, including 500 sales reps and many more customer service professionals, now have clear visibility into the activity of our more than 85,000 unique customers.

The combined CRM system will serve to further enhance sales productivity and cross-selling with better digital marketing and predictive analytics, which will allow us to accelerate cross-selling and most importantly, provide a seamless and efficient customer experience. Our team has clearly made demonstrable progress in the first quarter across each of the five aspects of our portfolio of the $1 billion of idiosyncratic growth levers, as evident in the continued VAPS price momentum, the successful CRM harmonization, Q1 logistics margins, EBITDA expansion, and continued discipline M&A activity. This team's execution underpinned by long lease durations is the basis for our confidence in our ability to continue to drive growth for years to come, which is certainly not dependent on end market expansions. Turning back to Slide 10.

We provide our turnkey solutions across 15 diverse end markets across all of North America. It is critical to appreciate that units on rent do not move fast in our business, as units on rent are ultimately governed by three-year lease durations, which correspond to product duration. In-market demand for the actual number of new units and storage units we deploy each month is the only aspect of our portfolio which we do not have full control over. We do operate a robust zero-based capital allocation process through which we systematically and routinely adjust fleet and people investments across our diverse end markets and geographies based on actual demand for new activations every 90 days. It's not a new playbook. Rather, it's what we do, and we are very good at it.

You recall that we took a more cautious approach to our original 2023 volume outlook, citing uncertainty with respect to tightening finance conditions, our customers' labor constraints, ABI indicators, uncertainty with respect to the number of larger retail store remodels, and continued softness in Canada. In short, not a lot's changed. While our consolidated units on rent in the first quarter were up year-over-year, and there's certainly no new concerns, we now have better visibility in the demand through the next couple quarters, and it's apparent that our initial caution was both prudent and balanced. We'll stay focused on the top line and bottom line levers that are with our control and which are substantial. I would offer the following update considering the underlying macroeconomic factors that influence our demand as well as relative leading indicators, the most important of which is feedback from our customers.

First, the ABI index recently turned positive, following 5 months below 50. The ABI, as a reminder, has been a good indication of modular activation 9-18 months out. Second, our larger joint contractors customer backlogs remain robust, although many are facing labor constraints, which may slightly impact their ability to complete ongoing projects and start new projects according to original timelines. Third, consistent with our concerns earlier in the quarter, many of the retail store remodels have been deferred to 2024, such that we expect an approximate 10,000 portable storage unit on rent headwind across the retail sector in Q2 and Q3 of this year versus prior year, as well as a corresponding tailwind in 2024.

While we continue to maintain our balanced outlook with respect to end market demand through the balance of 2023, we're excited about the potential tailwinds associated with onshoring and reshoring infrastructure projects that we expect could further accelerate heading into 2024 and persist for several years to come. Large-scale reshoring projects have already been breaking ground across North America, which represent material and long-duration opportunities to deploy our expansive services. We are actively participating in bidding on multiple billion-dollar projects in sectors such as advanced materials, chemicals, power gen, renewables, electric vehicles, and semiconductors, to name a few. We are uniquely positioned to provide complex, value-added total space solutions to our customers with our unrivaled scale, product offering, and capabilities.

Now given this demand outlook, our long lease durations, our differentiated value prop, and the $1 billion of idiosyncratic growth levers that are largely under our control will easily eclipse our $1 billion Adjusted EBITDA milestone in 2023. We're on track to achieve all of the long-term financial goals that we established just 18 months ago. With that, I'll turn the call over to Tim for more detail on the Q1 results and our updated outlook.

Tim Boswell (President and CFO)

Thank you, Brad. Good morning, everyone. Page 21 shows a high-level summary of the quarter. Before I jump in, I will remind everyone that the results from the divested tank and pump and U.K. storage segments are reported as discontinued operations in all periods. I will also point out that in Q1, we transferred approximately 6,000 Ground Level Offices or GLOs from our modular solutions segment to our storage solutions segment. We have consolidated all of our containerized products within the legacy Mobile Mini branch infrastructure, which makes perfect sense both operationally and commercially. We updated all historical segment financials and KPIs to reflect this integration. You'll see some changes in the segment metrics, but the year-over-year comparisons are all meaningful and it does not change the trajectory of either segment materially and obviously doesn't impact consolidated financial results.

With that said, Q1 2023 was a great quarter. We saw consistent contributions from pricing, value-added products, and volumes. Frankly, had superb results across all financial metrics. Modular unit average monthly rate increased 20% year-over-year. Portable storage unit average monthly rate was up 30% on a consolidated basis. Rate is one of the areas where we see upside in the remainder of this year, which in turn creates multiyear tailwinds into 2024 and beyond. Value-added products support our ability to capture rate, differentiate us from our competitors. Are an example of the powerful organic growth strategies that we are executing with clear and tangible results.

We updated Page 13 to show the VAPS revenue opportunity across both our modular segment and our Ground Level Office fleets, which is new disclosure, and details $400 million of highly credible growth across these products. Growth from our recently introduced value-added products for containers will be incremental, bringing us closer to a $500 million prospective opportunity. If we just look at margin dollars from value-added products in our storage segment back in 2020 at the time of acquisition, we were generating approximately $22 million annually. That doubled to $47 million in 2022 and will triple to over $65 million in 2023 in our guidance. As Brad mentioned, our Q1 VAPS revenue in the storage segment of $22 million was up 66% year-over-year. The rate of change is both impressive and undeniable.

This is a clear multi-year growth lever in our storage segment. It is a clear example of how we add value to our acquisitions, and we are clearly creating incremental value for our new customers in the process. Back to the financial metrics on Page 20. They're all incredibly strong. Leasing revenue was up 25% for all of the reasons I just mentioned. Adjusted EBITDA margins were up 650 basis points year-over-year. Free cash flow margins expanding into the high teens. Return on invested capital is expanding to record levels, hitting 17% for the quarter, up 570 basis points versus prior year. We've deleveraged to 3.0 times net debt to Adjusted EBITDA, and we bought back nearly 10% of our stock in the last 12 months, given our confidence in both our short and long-term outlooks.

These results showcase the value of our predictable, sequentially compounding recurring revenues, our idiosyncratic growth strategy, our cost discipline, and our value accretive capital allocation framework. Page 22 lays out revenue and Adjusted EBITDA for the quarter. We've already talked about the commercial KPIs, which drove revenue up 25% to $565 million. In the bottom right chart, you can see the normal seasonal decline sequentially from Q4 into Q1, driven by our seasonal retail business. Leasing revenues will grow sequentially into Q2 and increase sequentially each quarter thereafter in line with our guidance. Cost management and margin performance have been outstanding and better than we expected to start the year, and we're seeing favorability in four key areas that are causing margins to go up, both in Q1 and in our guidance.

First, now that we've been in SAP for almost two years, we've gotten much better visibility into the work orders and maintenance costs on our modular fleet. We're being more efficient with our spend and more consistent with that spend across our branch network. This is helping both gross margins and CapEx. Second, input inflation is easing on our maintenance materials. We have not yet seen input deflation, but inflation appears to have peaked in the second half of 2022. I said a year ago that we were incurring significant cost inflation and that the inflationary benefits from our rental rates would roll through the portfolio in time, and that is exactly what's happening. Third, logistics margins have continued to improve, and we're up 1,200 basis points year-over-year in Q1.

The gains are primarily driven by the value-based pricing strategies that we began in 2022. We still have opportunities on the cost side, such as insourcing and route optimization, which we're actively working on and will have benefits in future periods. Lastly, SG&A is down 270 basis points as a percentage of revenue. We're getting good operating leverage there. Looking forward, we have opportunity for further efficiencies now that we've consolidated both our ERP and our CRM systems. Altogether, flow-through of revenue growth to EBITDA was 67% in the quarter, which is great. Most encouragingly, we can see quantifiable impact of our internal initiatives across every line in the P&L, all of which are within our control and give us a clear roadmap to deliver the guidance for 2023 and our run rate into 2024.

Turning to Page 23, net cash provided by operating activities increased by 2% year-over-year to $149 million. These numbers are not adjusted for our two divestitures. On a pro forma basis, cash from operating activities is growing significantly faster than 2% and should expand sequentially through the remainder of the year. Said another way, organic growth and acquisitions in our core segments have already replaced the prior year operating cash flows from our divested segments. I said in our Q3 call last year that capital expenditures would be down through at least Q1, just given the record investment levels in 2022 and the flexibility in our supply chain. At $46 million of net CapEx in Q1, we are basically operating at maintenance levels.

Capital expenditures will of course go up into Q2 and Q3, though will be below both prior year levels and our original guidance, given both the maintenance efficiencies I mentioned earlier and available capacity in the storage fleet resulting from the deferral of retail store remodels. The implication, of course, is that this is going to be an outstanding year for free cash flow. Free cash flow of $103 million in Q1 was up 88% year-over-year. Again, that is not adjusted for the divestitures. The modular and storage segments are cash flowing extremely well heading into the remainder of the year. In the current outlook, free cash flow should be north of $500 million. Turning to Page 24. We reduced leverage to 3.0x last twelve months Adjusted EBITDA from continuing operations in Q1.

As we said last quarter, we used the $418 million of U.K. divestiture proceeds to repay our ABL, creating capacity for other capital allocation opportunities. While the divestitures were one-time events, the bottom left chart illustrates the ability of our business to delever rapidly when we so choose. Between free cash generation and predictable growth, we can reduce leverage by approximately a full turn in 12 months, which is one of the reasons we maintain the 3.0-3.5x target range. We're obviously at the very low end of that range. We're perfectly comfortable with the debt structure, we have highly productive areas to deploy capital. Our weighted average pre-tax cost of debt is 5.7%, Increased cost of capital has not changed our capital allocation priorities at all.

Our debt structure is 60% fixed rate, accounting for the swap that we executed in January 2023, which got us back to our targeted fixed and floating mix. Our annualized cash interest run rate is approximately $168 million as of Q1 2023. We're at the bottom of our target leverage range. We have $1.1 billion of available liquidity in the ABL, plus our internally generated cash flow, which is accelerating, and we have complete flexibility and appetite to pursue our capital allocation priorities. Page 25 shows our capital allocation framework and our performance over the last 12 months. In the right-hand chart, our LTM capital deployment is very much in line with our framework, with the divestitures driving additional deleveraging in the short term.

I expect our results will revert back closer to the framework through the course of the year, with no further deleveraging and likely stronger tuck-in acquisition volume. During Q1, we closed two acquisitions for $80 million and expect to maintain or exceed that rate of reinvestment for the remainder of 2023. We also repurchased $216 million of our common stock, reducing our economic share count by 9.6% over the last 12 months, representing an extraordinary return to shareholders. Page 26 shows our updated guidance.

Relative to prior expectations, we tightened our revenue outlook and are still centered on $2.4 billion of revenue for the year, which means that the business is compounding sequentially exactly as we expected it would. Most importantly, the guidance still implies a lease revenue run rate that is up 10%-15% heading into 2024, which is what we primarily care about. We increased our Adjusted EBITDA midpoint by $25 million to $1.025 billion-$1.075 billion, which is a function of our revenue performing as expected, combined with the cost and margin initiatives that I spoke about earlier. We do see margins running ahead of our original expectations through the remainder of the year, which gives us another strong tailwind for 2024.

We reduced our net CapEx range to $250 million-$300 million based on deferral of the storage segment retail remodels and the maintenance efficiencies in the modular segment. We have not assumed any further acquisitions in our outlook. M&A beyond that which we closed in Q1 would be incremental. Sequentially, I'd expect EBITDA to be relatively flat into Q2 and accelerate into Q3 and Q4. Leasing costs will increase sequentially as delivery volumes increase into Q2, which should compress leasing margins. Delivery and installation margins could compress sequentially as we get a higher mix of delivery relative to return transportation revenue.

Overall, the midpoint of the EBITDA range implies 19% growth year-over-year and approximately 250 basis points of margin expansion, which is on top of the 250 basis points of expansion that we delivered in 2022. We'll deliver free cash flow in excess of the long-term milestone that we established three years ago when we underwrote the Mobile Mini acquisition before COVID, before Ukraine, and before this most recent round of recession fears. Most importantly, the guidance sets us up with a leasing revenue run rate that is up 10%-15% heading into 2024 and with better margins given the forward visibility in our model. The business is compounding as expected.

The fundamental drivers of this compounding are intentionally designed and within our control. We will continue to execute our strategy to drive growth, expand return on invested capital, and create value for our long-term shareholders. With that, Brad, I'll hand it back to you.

Brad Soultz (CEO)

Thanks, Tim. I would like to take a moment to thank our team for safely and frugally delivering yet another outstanding quarter and progressing each of our growth levers, all while successfully navigating our CRM system harmonization. We will easily eclipse our $1 billion Adjusted EBITDA milestone in 2023, and we are on track to achieve all of the long-term financial targets that we established just 18 months ago. Excuse me. I wish all of you listening today continued safety and good health. That concludes our prepared remarks. Operator, would you open the line for questions?

Operator (participant)

As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question is from Andy Wittmann with Baird. Your line is open.

Andrew Wittmann (Senior Research Analyst)

Great. Good morning. Thank you for taking my questions. I guess I would just start with trying to get a better sense of some of your leading indicators, in particular, the order book, Brad. Obviously the revenue line doesn't move very quickly at all in response to economic changes, but the order book is probably the best, I guess derivative in terms of what you're seeing. I was hoping you could talk about what you're seeing, and if you could break it down a little bit, you know, what you're seeing in modular versus what you're seeing in storage, and talk about some of the key cyclical end markets, including your construction-related customers.

Brad Soultz (CEO)

Yeah. As I said in, on my prepared comments, there's not a lot changed versus Q1. Our order book remains robust. I mean, looking forward, we expect work order production, as example, in modular to be in line with our expectations, you know, three or four months ago. We are comping, as you mentioned, against record levels of 2022. The most notable change, if you will, Andy, is that attributed to the retail sector, primarily the store remodels. And if you take the balance of the portfolio across modular and storage and, you know, non-resi construction and the commercial industrial sectors, you know, we've been cautious. I would not expect growth across the board in those sectors yet this year. Again, this is what we don't expect. We remain cautious. We've been very prudent here.

We could see a bit, but we're well positioned, irrespective of what these end markets present.

Andrew Wittmann (Senior Research Analyst)

Got it. Maybe just as a follow-up, I'd have you elaborate a little bit more on the comment about the EBITDA run rate turning up 10%-15% in 2024. I mean, that's almost implicit in your guidance. You can kind of get there that that's what's included. Could you talk a little bit about what some of the puts and takes are regarding that? One of the things I heard, I think it was in Tim's comments, was that there was some rate upside that you're seeing. I was just wondering, like, how does that factor into your guidance, the rate upside for this year, and is that included in how you're looking at 2024 at this early stage?

Tim Boswell (President and CFO)

Hey, Andy, this is Tim. It's a great question, this is what we really spend our time managing, is how do we drive that sequential run rate into any future period. To be clear, my comment was around the leasing revenue run rate. Price times volume times value-added products across the combined business as we get into Q4 going into next year, we see 10%-15% growth going into 2024. There aren't many businesses out there that I'm aware of that can say that with confidence, that's just a function of the lease duration and the predictability in our business model.

As Brad mentioned, the only real notable change in the guidance is the deferral of the retail store remodels in the storage segment, for a variety of reasons, are pushing into 2024. What we have seen in the storage segment is offsetting benefits in pricing and value-added products, such that the midpoint of our revenue range on a consolidated basis has not changed. Our delivery and work order expectations in the modular segment are not materially different than in our original guidance. Of course, that original guidance had some conservatism in the back half of the year, which we maintain. As you think about what could change in terms of where you end up in that 10%-15% range, if pricing continues to progress ahead of our expectations, that could take you higher.

If, you know, volumes improve materially from where they are today, that's not gonna impact the 2023 results significantly, but it impacts the run rate for 2024, which is great. And then value-added products as well. We've baked in some growth on the storage side of the segment and kind of a continuation of the trends we've had on the modular side of the segment. So I think those assumptions are balanced, but upside or downside either way takes you to the 10% or the 15% side of the range. As I mentioned in the prepared remarks, M&A would be incremental.

Andrew Wittmann (Senior Research Analyst)

Great. Thanks a lot, guys.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from Tim Mulrooney with William Blair. Your line is open.

Tim Mulrooney (Group Head, Global Services Sector, and Equity Research Analyst)

Brad, Tim, good morning.

Brad Soultz (CEO)

Morning, Tim.

Tim Boswell (President and CFO)

Morning, Tim.

Tim Mulrooney (Group Head, Global Services Sector, and Equity Research Analyst)

Thanks for taking my question. You know, as I'm thinking about your, end market exposure to commercial real estate, more broadly, non-residential construction, can you just talk about how much your business is tied to non-residential construction? That's all in, like the contractors, subcontractors, architects, whatever, like all in. You know, how do you think about that piece of the business being impacted looking forward with tightening credit conditions, particularly with regional banks? Thank you.

Tim Boswell (President and CFO)

Yeah, Tim, it's a good question. We break it out in our deck by customer SIC code, and you see it's roughly 35% is gonna be tied to non-res construction, and that's all the general contractors, big and small, that you just referred to. There's another component that's around 5% that's residential. We work with the larger home builders there. Then the other 60% of our business are basically every other sector of the U.S. and Canadian economies. That is one of the, I think, misconceptions in our business is, there is a segment, approximately 40%, that's directly tied to construction customers. Then there's another 60% that use our services as the most cost-effective and flexible alternative to construction. We see that playing pretty well in this environment.

Within the non-res sector itself, you know, we see all the same forecasts that everybody else does. Non-residential starts should probably be down this year. We focus more on the square footage starts, and we've factored that into our guidance as we always would. Within that non-res mix, though, there are a lot of puts and takes, right? We are absolutely benefiting from the mega project onshoring and manufacturing trends that everybody's talking about. It seems like every week I'm getting a new multimillion-dollar, long-duration customer contract that would, that would fit that type of description. We clearly have infrastructure spending picking up in the United States, and we've always maintained that that's likely a second half of 2023 and 2024 tailwind for the business.

Your question around the impacts of tightening of financial conditions is a good one. This is something that we've seen in the business going back into the second half of last year, especially up in Canada, for example. I can think of a number of larger project opportunities that were not canceled because of tightening financial conditions, but budgets are being recalibrated based on elevated input prices, labor constraints, and then capital costs. We're actually seeing Canada now, a lot of that backlog start to flow back through the pipeline, which is pretty encouraging. you know, going back into our budget process, we were already assuming some impacts in our non-resy markets related to tightening financial conditions.

I think some of the reactions to events in the last couple of months are probably overblown because that was happening for, you know, the last 12 or 18 months.

Tim Mulrooney (Group Head, Global Services Sector, and Equity Research Analyst)

Right. Recalibration sounds very different than cancellation, right?

Tim Boswell (President and CFO)

Absolutely, it is. remember-

Tim Mulrooney (Group Head, Global Services Sector, and Equity Research Analyst)

Okay

Tim Boswell (President and CFO)

... disruption and lengthening of project duration helps us. That's one of the mitigating factors in the churn of our portfolio. We are seeing that in terms of return volumes that are lower than we would've forecasted to start the year.

Brad Soultz (CEO)

Yeah. The only thing I'd add, for everyone, this is not a cyclic profile. I mean, Tim just talked to Andrew through the 10%-15% revenue growth. We're highly confident next year. If volumes change 1 or 2%, it's not meaningful, right? The end markets are gonna be what they are. We've shared our outlook, irrespective of what they present, we're extremely bullish and will continue to be.

Tim Mulrooney (Group Head, Global Services Sector, and Equity Research Analyst)

Thank you for the clarification there and for all the clarity on that answer. I'm just gonna sneak my follow-up in real quick is on, you know, free cash flow. It's expected to be strong this year. Just curious how you're thinking about deployment of that extra capital that you'll now have, you know, if share repurchases are a priority right now, particularly given the pullback in the stock price over the last month or so. I'm wondering how you think about defending the stock at this valuation. Thank you.

Tim Boswell (President and CFO)

Tim, yeah, we love the stock and even at prior, higher, valuations. Yes, we do calibrate our repurchase activity in part based on valuation, but we've also said that we won't miss a good tuck-in acquisition that comes our way. We do maintain a waterfall here. We've given you what our organic investment plan is for the year. We've told you that based on current pipeline, the tuck-in volume is likely a bit above 2022 levels. You can infer that given the fact that we're at the low end of our leverage range, everything else is gonna go to the repurchase, and we'll calibrate that based on valuation.

Tim Mulrooney (Group Head, Global Services Sector, and Equity Research Analyst)

Got it. Thank you so much.

Operator (participant)

Thank you. One moment for our next question. Our next question is from Kevin McVeigh with Credit Suisse. Your line is open.

Kevin McVeigh (Managing Director)

Great. Thanks so much. Hey, I guess, Tim or Brad, you said it, I just, I think I missed it. You talked about VAPS of $400 million of highly credible and then an incremental $100 million in containers. I'm just, I wanna make sure I understand that comment 'cause I think it's important.

Brad Soultz (CEO)

Yeah. Just in round numbers, right? We traditionally talked about what was our modular focus over the last 10 years being that $300 million-$350 million. At the time of the merger, we talked about a $50 million incremental opportunity by putting furniture in the GLOs. That together now is about the $400 million, right? There's another $100 million of opportunity, we're very comfortable with on the storage side.

Tim Boswell (President and CFO)

Remember, that's on top of the growth that's been delivered over the course of the last two years. We've grown the business, we've grown value-added products, and we've continued to extend both the magnitude and the duration of that growth opportunity through new product introduction and better penetration of the volume that we have. You know, the original estimates for container VAPS back in Investor Day were approximately $50 million. That's conservative.

Kevin McVeigh (Managing Director)

Yep.

Tim Boswell (President and CFO)

We're comfortable rounding up from there to get to that $500 million prospective opportunity on top of everything we've already delivered.

Kevin McVeigh (Managing Director)

Makes sense. Then the 10,000 units that were pushed out, I mean, obviously implicitly implies you increased the guidance. Can you maybe dimensionalize what the impact of the revenue on that would've been? Was that just timing of some store remodels or what drove that, the push out of those 10,000 units?

Brad Soultz (CEO)

Well, Tim can jump in here, but I would qualify, Kevin, that we were contemplating that in our original guidance, right? I mentioned in my commentary that there was uncertainty. Within the range of guidance, before it was contemplated, now it's just not. It's sort of.

Tim Boswell (President and CFO)

Yeah. That's some of the challenges facing the retail sector are not, this is not a secret, right? You do have companies like Target saying, "Hey, we're not doing that activity this year to save on cost." There's also some store format considerations that they're going through. This is not a matter of if it happens, it's just a matter of when. That's historically been a good reoccurring source of business for us. In terms of in-year impact to rental revenues, you're probably talking about something in the $12-ish million range, plus some transportation to and from on those.

Kevin McVeigh (Managing Director)

Awesome. Thank you.

Operator (participant)

Thank you. One moment for our next question. Our next question is from Dillon Cumming with Morgan Stanley. Your line is open.

Dillon Cumming (VP, Head of North American Machinery, and Construction)

Great. Good morning, guys. Thanks for the question. Just wanted to see if you could talk through again the, you know, EBITDA opportunities you called out on Slide 15. I think the market's still probably not giving you full credit for achievement of those over the long term, even though I think most investors are still confident in it longer term as well. Just curious if you can kind of talk through how resilient those are in a more choppier macro environment, you know, in a potential non-res recession. How confident do you feel kind of around hitting that billion-dollar growth figure, over the long term in such an environment?

Brad Soultz (CEO)

Yeah, I'll start, just working down the list on the value growth slide. Tim just talked about value-added products and service. You know, we'd pegged that at $500 million back in November of 2021 Investor Day. We've been harvesting from that. It's apparent in our results. We're saying it's still $500 million. There's a fair bit of reloading here. Lease rate optimization of $200 million, that doesn't assume any volume expansion. You know, we've already talked about the spread between the units we've delivered in the last 12 months and the average of the portfolio. Highly confident in that. The VAPS are gonna fall through call it 75% to EBITDA and the lease rate optimization, you know, well over 90% once we pay commissions and such.

Market penetration, you know, that's one we've been waiting for the CRM project to conclude to really start to make traction there. So again, we're excited that we've successfully harmonized those two systems. And I think it's gonna create operating efficiencies as well as customer satisfaction that'll drive cross-selling and market penetration over time. That's logistics. Tim mentioned that was $50 million back in November 2021. We've harvested over $50 million since then. It's still $50 million looking forward, and that's primarily based upon the fact that we're just starting to get to work combining the two systems between the Mobile Mini platform and WillScot in logistics, which will really help with route optimization, continued insourcing in the sort.

The M&A and scale efficiencies, this includes the M&A that we know about, and then the scale efficiencies, again, are apparent in, if nothing else, 650 basis points of EBITDA margin expansion year-over-year.

Dillon Cumming (VP, Head of North American Machinery, and Construction)

Got it. That's very clear. Thanks, Brad. If I could just ask the second one, the leverage range. I think you've demonstrated clearly in terms of the free cash flow profile that you're comfortable and able to operate in that 3 to 3.5x range pretty, you know, comfortably. You know, if that does become a bigger sticking point for the market, would you consider maybe reducing it by half a turn or so if that would kind of open yourselves up to new investor classes? You know, are you kind of, I think, more religious or just willing to stand pat in that 3 to 3.5x range?

Tim Boswell (President and CFO)

Look, I think investors are very well educated on this point, at this point, just given the stability of our leasing revenues and the predictability of the business and the churn in our top line. Yeah, we always look at capital allocation holistically. To one of the questions earlier, strongly prefer to buy the stock at this level than to pay off pre-tax cost of debt at 5.7%. All right. That's in my investor discussions, this is not a sticking point that's come up for over two years, really. The business does have a very significant deleveraging capacity. I mentioned in my remarks, you know, if we want to, we can take a turn out of a leverage in 12 months.

That is just a really profound luxury that we have in this business, and we're perfectly comfortable at the three times level that we're currently operating at.

Dillon Cumming (VP, Head of North American Machinery, and Construction)

Very clear. Thanks, Tim. I'm gonna sneak in one last quick clarification. The change in the milestone rate on Slide 13 for the modular VAPS from $600-$650, does that just reflect the movement of the GLOs out of the segment, or is that more of a conscious change on your part?

Tim Boswell (President and CFO)

That is a very astute observation. That's really just the mix of pulling out smaller square footage, ground level offices from the modular segment, moving them into the storage segment where they belong, which implies the remaining larger square footage modular equipment in the modular segment, has a higher capacity for value-added products.

Dillon Cumming (VP, Head of North American Machinery, and Construction)

Appreciate the time. Thank you.

Operator (participant)

Thank you. One moment for our next question. Our next question is from Scott Schneeberger with Oppenheimer. Your line is open.

Scott Schneeberger (Managing Director and Senior Analyst)

Thanks very much. Good morning. Covered a bit on the smaller customers, the financing concerns, and then the quantifying on Kevin's question of retail. Appreciate that. Brad or Tim, could you guys address the mega projects? I know you're not too open to sizing it as a percent of units or revenue, but could you provide some anecdotes or maybe give us a feel for how powerful these projects are? Tim, I heard you say earlier it feels like every week there's another one. It sounds like these remain consistent. How competitive is this? Are you the only one that gets a look or are others?

The tale sounds good, can you just speak about how powerful this is as an offset to concerns that are out there in the market? Thanks.

Brad Soultz (CEO)

It's extremely powerful, right? As, you know, we've mentioned our prepared comments, our scale, our total value prop, et cetera, puts us in a very unique position to respond to these. I mean, a simple way of thinking about it, and roughly a third of our net book value is associated with large complexes. Most of those, if not all of those big projects, will have those assets deployed. You know, that is a space we're uniquely positioned. I mean, we've got in-house construction services team. I mean, if you're setting up 10,000, 20,000, 30,000 sq ft, which many of those will require, sometimes you need to stack two or three high, we're uniquely positioned to deliver on that aspect of the still relatively small percentage of total project spend.

Tim Boswell (President and CFO)

Scott, I think the opportunity for us, you know, prospectively on these is these are multi-year engagements, say three, five, seven years in some cases, in an area where we can, I think, have a very significant advantage, is owning that project over the life cycle. Not only winning the national general contractor with whom we've clearly got the best relationships, but then all of the other subcontractors and trades that are coming on and off of that project, over the course of its life cycle, with the full suite of our offering. If there's one area where we're spending some time as a team, we're already confident we're gonna get the main general contractor and the main project.

It's owning everything else over the course of that multi-year cycle, which is the real opportunity here.

Scott Schneeberger (Managing Director and Senior Analyst)

Thanks. Appreciate that, guys. On the CapEx, can you take us a level deeper on the initiatives focused on work order efficiency to improve vendor administration and material consumption? Maybe quantification of that in savings, how, you know, how meaningful is that on your pullback on the guidance? You did provide a little bit more color in the deck and in this discussion about reining in the CapEx this year, but maybe what you're doing with the decreasing container purchases and a little bit more color there to let us know where you are in the CapEx cycle. Thank you.

Tim Boswell (President and CFO)

Yeah, Scott, this is Tim. I'm super excited about this. This has been a bit of a long time coming through the Mobile Mini integration. We've basically got a $65 million reduction in the midpoint of the CapEx guidance. About 40 of that is coming from the fact that because we're not doing the retail store remodels and storage, we don't need to buy 7,000 containers, right? That's the biggest chunk right there. On the modular side, we're getting about a $20 million benefit from roughly a 10% efficiency savings in our cost per refurbishment.

As you go back to the integration now two years ago with into SAP, one of the areas where we've gotten a lot better visibility, analytics, and reporting is around how much material is going on average into a certain type of refurb. How much labor? Are we using in-house labor or subcontractor labor? Looking at variances on these types of metrics across the entire branch network, you see, or you used to see extraordinary variability.

Brad Soultz (CEO)

Right.

Tim Boswell (President and CFO)

Step number one is tighten that variability, reinforce those standards, from a quality standpoint around what is our expectation for the quality of unit that's going out into the field. Just by tightening that variability, we began to see significant CapEx savings in modular refurbs in the second half of last year, and those are being sustained in our bottoms-up reforecast, heading into Q2 and Q3, which is really encouraging. As you know, there's been cost inflation in the business over the last two years, and this is really a really nice tailwind that's starting to offset that in a meaningful way. The only other thing I'd call out is we are still integrating, like the branch network.

There, we do expect some proceeds from property sales, in the forecast as well, which is gonna be a further net CapEx opportunity. You can't do those every year, but we will still continue to see those types of, proceeds as we optimize our real estate footprint.

Scott Schneeberger (Managing Director and Senior Analyst)

Thanks, Tim. Thanks, Brad. Nice work.

Brad Soultz (CEO)

Thanks.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from Manav Patnaik with Barclays. Your line is open.

Ronan Kennedy (VP)

Hi, good morning. This is Ronan Kennedy on for Manav. Thank you for taking my question. Tim, could I just ask for your assessment of and thoughts on, at a high level, kind of pricing dynamics over the last few years through COVID with supply chain and inflationary dynamics, and what you're seeing now? You know, we've gotten a lot of questions on what people are seeing with regards to surveys of storage prices, pricing on shipping containers, et cetera. How that plays into versus your initiatives around pricing and you acting like a pricing leader within industry? You know, your outlook for how you think that will play out and the assumptions around pricing for the remainder of the year and forward.

Tim Boswell (President and CFO)

Yeah, Ronan, this is Tim. I'll start, and Brad, you can jump in. This is an area where we're both quite passionate, so we could spend the rest of the call talking about it. As you know, the double-digit rate growth in our modular business has been going on since Q4 of 2017, right? That's before we had, you know, we had less than 20% market share. Value-added products have been a great contributor there. Dynamic price segmentation and technology has been a great contributor. Sure, we went through this period of supply constraint, but remember, COVID was a negative demand shock across our business, and we continued to drive price through that period. I do think that driving pricing was incrementally easier during the peak inflation periods.

You saw that through some of the expansion in our delivery and installation margins. The real momentum there is coming from things like our pricing process in the storage business, product positioning, where we're charging for patented premium features on certain products, and offering a different price point for customers that just want a standard shipping container. That's one of the reasons we're moving the Ground Level Office product into the Mobile Mini branch network. We've got other products that meet that need for a smaller square footage footprint, like our HQ product and our eight-wide mobile offices.

Introducing structured product positioning with price differentiation and pushing those everywhere we see opportunity in the market as a price leader, this is what we do, this is what we love doing as the leader in the marketplace. I'm not the least bit concerned about changes in maritime container pricing. It's one thing to have a container in the Port of Los Angeles, it's quite another to have containers populated in Milwaukee, Wisconsin, and Lexington, Kentucky, and everywhere they need to be in order to service our captive customer base.

Ronan Kennedy (VP)

That's very helpful. Thank you. If I may follow up on kind of competitive dynamics within the industry, given some M&A by a competitor, some sizable M&A and entry and a focus on storage. Also some portfolio moves, I think replicating along the lines of what you had done with the investors of U.K. Tank and Pump, et cetera. Broader industry competitive dynamics and your outlook for M&A, you know, if that changes your stance or approach on M&A, or does the current macro outlook change M&A priorities?

Tim Boswell (President and CFO)

Now, we've said for a long time that we won't miss a good tuck-in that we like. I think you can infer that we see everything that goes on in the industry. Very excited about the tuck-ins that we've executed over the course of the last 24 months. We are the acquirer of choice in the market. I don't think anybody else offers a stronger value proposition to a prospective seller than we do. We can be very targeted in our due diligence. We know the assets that we're dealing with. We can diligence close all cash in a very short window of time because we know what we're doing, and we know how to integrate efficiently, even with smaller portfolios, right? No change in our appetite for M&A.

It's always been there. We're more confident from an integration standpoint, just given all of the efficiencies that we're seeing in our business, the progress on pricing on value-added products, as well as the margin expansion that we're seeing across our portfolio as all of these acquisitions are integrated into our network. We're also improving the talent level of the organization in so doing. It really checks the boxes across all aspects of our strategy.

Ronan Kennedy (VP)

Thank you. Appreciate it.

Operator (participant)

Thank you. One moment for our next question. Our next question is from Faiza Alwy with Deutsche Bank. Your line is open.

Faiza Alwy (Managing Director and US Company Research)

Yes. Hi, good morning. Thank you. Wanted to touch on storage pricing again. You know, what are the implications of the deferment of retail remodels into 2024 on pricing? You know, I think you mentioned that there was still a 30-point gap between realized pricing and spot pricing on modular, but curious how you're seeing spot pricing trend on the storage side of the business.

Tim Boswell (President and CFO)

Hey, Faiza, it's Tim. The remodels won't impact storage pricing at all. We were getting much higher rates on seasonal storage capacity with retail, with retailers. That's because it's short duration, right? That's typically just a, you know, September to January type rental contract. It should have a much higher rate, which is why you saw a very modest sequential AMR decline from Q4 into Q1. The retail remodels are more like core business from a pricing standpoint. There's no change to our pricing expectations. I would expect that we see continued sequential improvements on storage pricing. We hadn't talked about the DSR, the spot spreads in the business. They're as strong as they've ever been.

In modular, the spreads on most recent contracts are about 35% above the portfolio average. It's just under 30% on the ground level office product and pushing 20% on our most recent contracts on the storage product. Pricing is extremely healthy. To the question earlier, we're gonna continue to do our part there as the market leader.

Faiza Alwy (Managing Director and US Company Research)

Great. Thanks for that. Then just, you know, bringing it all together, you know, sort of what's really changed over the last two months, you know, when you first gave the fiscal 2023 guidance? It sounds like Q1 came in, you know, better than, better than how you had thought it might. Maybe, you know, these retail deferments is something new and that's led to the CapEx decline. What's really changed from your, from your perspective?

Brad Soultz (CEO)

This is Brad. I'll go first. From my perspective, it was the outstanding margin, both EBITDA margins, the flow-through, as well as, the free cash flow margins in the first quarter. As I mentioned before, the store remodels, you know, were contemplated in the range before. They're kind of certain now, and then that's, as Tim characterized in revenue terms, it's relatively insignificant, when you're talking about over $2 billion in revenue.

Tim Boswell (President and CFO)

Yeah. Faiza, the beauty of this business is, not much changes quickly. The strategy's been very consistent. The execution has been, I think phenomenal. I agree with Brad, the margin performance across the board is really exciting. I think whether it's in logistics or SG&A, as I talked about, there continue to be opportunities there. We're not doing any cost cutting or anything like that. That's not what we're talking about. We're talking about just managing the business more efficiently. There's a lot of flexibility we have in the overall cost structure. Very pleased with that. Based on what we've seen, it's sustainable, well into 2024. I think we're set up for another year of consistent margin expansion, which we've been doing ever since we went public.

Not much has changed there. Again, appetite for M&A is still there, and the growth opportunities that Brad ticked through, very thoroughly are all, frankly, bigger and longer in duration than we would've expected, you know, certainly back at Investor Day.

Operator (participant)

Great. Thank you.

Thank you. One moment for our next question. Our next question is from Steven Ramsey with Thompson Research Group. Your line is open.

Kathryn Thompson (Founding Partner, CEO, and Director of Research)

Hi, this is actually Kathryn Thompson with TRG. Thank you for taking my question today. Just a follow-up on mega projects. Just bigger picture, how much of mega projects are embedded in your Investor Day long-term guidance? Does this meaningfully improve your leasing revenue outlook for 2023 and 2024? I know you touched on going after mega projects earlier in the call, but maybe a little bit more color on just what specific steps are being taken to take advantage of this. Do you prefer this type of business versus some of the legacy day-to-day work? Thank you.

Tim Boswell (President and CFO)

Hi, Kathryn. This is Tim. I'm gonna start by just talking about what has kind of been in versus not in our long-term outlook, 'cause I think that's a very interesting question. Brad, you can maybe follow up on the question around how we go to market and the unique advantages we have on these types of projects. If you go back to November of 2021, the only thing we knew about back then was the infrastructure build, right? That was relatively new news at the time. We didn't really include any market-based expansion in our Investor Day targets. The whole point of that presentation was that we're talking about the things that are within our control.

Now what we have is better visibility into that, projects directly funded from the infrastructure stimulus, that's great, we've always said that those will start to ramp up in the second half of this year, going into 2024, we maintain that perspective. We certainly did not anticipate the magnitude of the reshoring that's happening in the United States, manufacturing expansion, renewable energy investment. We're seeing opportunities across all of these things, right? The confidence in our ability to win is one of the reasons that the revenue guidance isn't changing in light of maybe a net greater concern around the impacts of tightening in the financial system here, right? This is the nature of the business. There are always puts and takes in terms of the end markets that we serve.

Our job is to be there, I think we've got a disproportionately strong competitive footing on these bigger, more complex projects.

Brad Soultz (CEO)

I think Kathryn, Tim characterized this extremely well. If we just use a couple cases as specific example. We've done a large project near Austin, it's a chip plant well before the CHIPS Act was actually in place. We'll typically supply, you know, anywhere from 10 to 20,000 sq ft of, we'll call it anchor, turnkey space solutions. Oftentimes, that'll be half for the general contractor that's building the new facility, right? Half for the customer themselves that are bringing their early engineers on site, et cetera, that'll run the facility once it's up and running. These are three to four year duration projects. It's not just our fleet that puts us in a very unique position to supply those.

It's our capability to set that size of a building up, right? Maintain it over the course of the three to five year project duration and bring it back and redeploy it. I think what's also quite interesting, Tim referred to in one of the earlier responses, is we've been very good and very unique in our capability to win that anchor, tenant, if you will. We have a massive opportunity to make sure we win every subcontractor, you know, every single wide unit, every storage unit, again, in a full turnkey scenario as we go forward. I couldn't be more bullish with respect to the next three to five years here.

I think it's a very unique scenario, both in our position as well as the market setup here.

Kathryn Thompson (Founding Partner, CEO, and Director of Research)

Yeah. I assume that you're re-referencing the Samsung build-out in the Austin market.

Brad Soultz (CEO)

Yeah. Exactly.

Kathryn Thompson (Founding Partner, CEO, and Director of Research)

Yeah, we had a heavy material producer at our private company conference say that it's essentially bringing 45,000 jobs just for that one project eventually. So it, you know, this is like a, you know, a multiple year, construction project. How are you? Just to wrap it up, how do you get the subs? Because you have the main, the main producer, Samsung. What is your strategy for getting the subs, and can you scale that to other markets in the U.S.?

Brad Soultz (CEO)

For sure. The CRM harmonization was a key enabler for that. If you use the Samsung project as an example, that's large enough in scale. Everyone on our team's mobilized and aware, right? Talking to each other, that was quite manual prior to the CRM cut over. Whether it's that Samsung project, data center projects that have been of similar magnitude kinda all over the U.S., over the last several years, we're moving that from a phone a friend, to, you know, our team being fully enabled.

I talked about the marketing and analytics that we're capable of leveraging now with the new CRM harmonization to make sure, you know, over the life of the three to five-year project, we're potentially touching every person that comes on and off of that job site.

Kathryn Thompson (Founding Partner, CEO, and Director of Research)

Okay, great. Thanks very much.

Brad Soultz (CEO)

Thanks.

Operator (participant)

Thank you. One moment please for our next question. Our final question comes from Philip Ng with Jefferies. Your line is open.

Maggie Miller (VP Equity Research Analyst)

Hey, good morning, guys. It's Maggie on for Phil. I guess first starting on the lower CapEx guide, I mean, all the areas you're pulling back makes sense. Tim, I think you mentioned 1Q CapEx levels were kinda maintenance level for the business. The $250-$300 guide for the year, is that how we should think of maintenance levels for the current fleet? You know, that should be a nice tailwind for free cash flow this year. Can you just kinda remind us how you think about free cash flow and maybe a softer macro backdrop?

Brad Soultz (CEO)

Yeah, Maggie, this is Tim. We talked about this a bit, I think it was on the Q2 call last year and kinda pegged maintenance in that $175 million-$200 million of net CapEx range. I'd say that $200 million level is a very good proxy for just a unit on rent neutral investment level. You know what takes us into the kinda midpoint of our current range is a fair amount of growth CapEx going into value-added products and services, right? We're continuing to see no slowdown in penetration in our modular business. Growth in the storage segment is, as I said, undeniable and starting to ramp up. We will continue to fund that initiative wherever we see opportunity.

It is arguably the fastest growing and arguably the most profitable part of the business from an ROIC standpoint. It's really that simple. Investing around $200 million on maintenance, the majority of that's going into modular refurbishment in a given year. As we ramp up growth, we're either buying containers, increasing modular refurbishments to put more units on rent or investing in value-added products and services. That's the formula we've been running for a long time, and we reassess it using a zero-based process every 90 days. Having just gone through that process, that's the foundation for the guidance and the forecast that we give you every quarter.

Maggie Miller (VP Equity Research Analyst)

Okay. Okay, got it. On the CRM integration, maybe if you could just kinda dig in a little deeper to the both near term opportunities you're seeing there and what you're thinking long term? You know, is that more on pricing, volumes, logistics, new customer groups? You know, maybe just walk through how you're thinking about the opportunities there.

Brad Soultz (CEO)

It's really all of the above, and I'll use a couple quick analogies. Tim mentioned we went live with the ERP back in May of 2021. It took us about a year to really get fully optimized reporting in place to really leverage the power of that, and you're seeing it in the margins and the free cash flow margins. I'll put that out there as kind of a time expectation. We're just live with the CRM. We're gonna follow the same process. We'll put advanced analytics in place for our team. We're gonna leverage Marketing Cloud and all the tools of the Salesforce platform. Going back to the discussion we're having with Kathryn with respect to that Samsung project, it doesn't have to be a person that calls every potential customer, right?

Says, "You know, do you need a storage container? And by the way, do you need lights, ramps, and shelves with that?" Right? That can be highly automated, still leveraging the core team we have. Something we're super excited about. I think, you know, this year, the successful cut over, give us the year to really build out all of the reporting and analytics, leverage all the automation. That's, it's not rocket science, it's in place, but it needs to be tuned and customized to all of our end market segments. This is a clear accelerant in 2024, 2025 and beyond.

Maggie Miller (VP Equity Research Analyst)

Okay, great. Thanks, guys.

Operator (participant)

We have now reached the end of today's call. I will now turn the call back over to Nick.

Brad Soultz (CEO)

Thank you, Amy. Thank you all for your interest in WillScot Mobile Mini. If you have additional questions after today's call, please contact me. Thanks.

Operator (participant)

Thank you, ladies and gentlemen. This concludes today's conference. You may now disconnect.