Q3 2019 Earnings Call
Good morning, ladies and gentlemen, and welcome to the was called third quarter 2019 Conference call. At this time all participants are in listen only mode. Later, we'll conduct a question and answer session and instructions will follow at that time.
Anyone should be quarter assistance during the conference to spread to start than zero on your touched on telephone.
I would like to turn the conference over to your host Mr., Matthew Gibson Vice President Finance. Please go ahead Sir.
Thank you and good morning.
Before we begin I'd like to remind you we will discuss forward looking statements as defined under the private Securities Litigation Reform Act at 1995 actual results may differ materially from those forward looking statements as it was all the various factors, including those discussed in our press release and then the risk factors identified in our 2018 Form 10-K filed with the FCC.
And our Form 10-Q that will be filed today.
Well, we may update forward looking statements in the future we disclaim any obligation to do so you should not place undue reliance on these forward looking statements all of which speak only as of today.
We'd like to remind you that some of the statements and responsive to your questions and this conference call May include forward looking statements as such they are subject to future events and uncertainties that could cause our actual results to differ materially from these statements.
Got it assumes no obligation and does not intend to update any such forward looking statements.
Press release, we issued last night and the presentation for Dave today's call are posted on the Investor Relations website.
A copy of the release has also been included an 8-K that we submitted to the FCC, we will make a replay of this conference call available via webcast on the company website.
For financial information that is done expressed on a non-GAAP basis. We have included reconciliations to the comparable GAAP information. Please refer to tables and slide presentation accompanying today's earnings release.
Lastly, this morning, we're filing our 10-Q at the FCC for the third quarter of 29 to 10-Q will be available through the FCC, where on the Investor Relations section of our website now.
Now with me today, I've got Brad So, our president and CEO and Tim Boswell, our CFO pro kick off today's call with a brief overview of the company summarize our third quarter results and provide an update on some of our key performance indicators.
Tim will then provide additional detail in the financial results for the third quarter and discuss our outlook for the rest of the year before we open up the call for questions with that I'll turn the call over to Brian .
Thank you, Matt I'd like to welcome everyone to will discuss third quarter 2019.
Please turn to slide six of our Investor presentation.
First like to highlight four key aspects of our financial performance indicative of the transformation, we've undertaken and the strong momentum which will be entering 2020.
First we generated $272 million revenue, which is up 24%.
Same period 2080.
Well as expected on a pro forma basis, our consolidated revenue was down 9% from U.S. monitor leasing revenue was up 8% versus prior year as we continue to transition the acquired portfolios deemphasizing sales and in turn emphasizing and expanding the higher value we've seen ready to work asked.
Thanks.
Importantly, Q3 market one year anniversary of our acquisition of mob space and in turn to final quarter, and which we expect to see meaningful year over year change in mix of sales leasing revenue.
The evidence of our success and the strategic shift is apparent in the us modular space average rental rates, which were up 15.1% year over year on a pro forma basis, driven 40% by increased value added products and services or bass penetration and 60%, but pricing on new contract.
Next is the acquired portfolios continue to return and our redeployed.
This is the eighth consecutive quarter of double digit rate growth and we expect this momentum to continue for years to comp.
Second we generated 88 million of adjusted EBITDA, which is up 37% over the prior year.
Pro forma basis, adjusted EBITDA was up 11% on the aforementioned 9% reduction in revenue this impressive flow through highlights the inherent leverage in our platform as well as further validates our strategic decision to focus the acquired portfolios more exclusively on the higher quality leasing aspects of the business.
The must face integration is substantially complete as such 70% of the months. These related cost synergies have been action and included in our results as we exited the quarter. These cost synergies along with those prior acquisitions contributed 12 million of savings in the quarter on a cumulative basis.
I would also note, we're making very good progress scoping and developing execution plans targeting other potential synergies, which were not otherwise included in initial 70 million.
A few examples of the incremental potential opportunities include logistics optimization, right scale efficiencies sourcing and procurement and further fleet optimization.
Finally, the combination of the organic lease revenue growth the revenue mix shift and cost synergy realization resulted in 600 basis points of year over year adjusted EBITDA margin expansion on a pro forma basis. We've clearly established proven track record of continued organic growth along was.
With an effective integration of acquisitions.
Net income, but free cash flow inflected and is accelerating.
System with our plan second half 2019 transitioned to net profitability and cash generation both were positive in the quarter with net income of 37 million and free cash flow up $43 million year over year basis for in summary, we're very pleased with third quarter results and the trajectory of one way.
We're entering 2020.
We believe accelerating growth levers driving our business are largely in our control and our year to date results provide confidence to achieve an annualized run rate of 400 million adjusted EBITDA 200 million of discretionary free cash flow as we exit 2019 and to de leveraged platform to Fourx net.
Net EBITDA by the second quarter 20.
Now if you'll turn to slide seven as noted we're realizing a greater than 100% flow through incremental revenues on a pro forma basis, starting to far less you'll note that our third quarter 2018. Adjusted EBITDA was 65 million. This would have included Tyson enacted acquisitions as well as one of the half ones.
For the month space actuals, given that acquisition closed on August 15.
Adding in the month based pre acquisition contributions brings the total pro forma adjusted EBITDA 80 million.
Next the acquisition related acquisition related cost synergies contributed 12 million of cost savings in the quarter on a cumulative basis 2.4 million of which were realized in our third quarter 2018 results.
We then realized 9.2 million of organic growth in the quarter, primarily drive driven by rate optimization and increased fast penetration offsetting 10.4 million associated reductions and non recurring sales margins. The majority of which was concentrated in one month.
Based hurricane export project the contributed approximately 7 million of the 10.4.
All of these build to our third quarter. Adjusted EBITDA result of 88 million, which was as noted to 600 basis points improvement and EBITDA margins a year over year on pro forma basis.
Finally, turning to slide eight I'll provide a snapshot of the U.S. pro forma leasing capesize realized in the third quarter since they provide the primary foundation for the run rate in which we entered the fourth quarter.
As reflected in the top left chart modular space average monthly lease rate of 632 was up 15.1% year over year. This is the eighth consecutive quarter of double digit rate growth and we expect this momentum to continue as we look ahead I'll expand upon this important point a bit further in a more.
Uh huh.
As expected we saw unit on rent stabilized in the quarter, we're particularly pleased with the strong sequential improvements and delivery volumes in Q3 with total deliveries up 8% versus the prior quarter.
Our sales rep productivity was approximately 50% over prior year as we exited the quarter, providing us confidence in the positioning of our Salesforce and again validating our commercial strategy as we head into 2020.
Given the confidence in our demand outlook and particularly the continued expansion of the ready to work solutions, we're selectively expanding our sales team by about 10%.
The net result was a very robust 8% year over year growth in us pro forma modular leasing revenues, which is in line with our original expectations of a run rate heading into 2020.
Turning to slide nine.
As previously mentioned Vaps growth has consistently been driving 40% of our overall rate growth.
Based on maps penetration, we have achieved on new units delivered over the last 12 months, we expect another greater than 140 million of annualized revenue growth.
In the second quarter, the average rate of Vaps value per month across all business units delivered in the 12 months increased to $284. This rate is up 20% over LTM levels achieved prior year. This continued outperformance is particularly pleasing given the last 12 months incorporate.
And the integration of the three acquired portfolios, we have been very successful and combining the sales teams themselves have been successful introducing this unique value prop to many new customers. This performance is a key driver behind the aforementioned 50% increase in sales rep productivity and is certainly above our original expectation.
Ones.
The associated growth in revenue will occur as previously mentioned over the next three years as units on rent our return once their current projects in our redeployed that our current level of apps penetration as.
As we continued increase vast penetration towards our long term stated goal the associated revenue growth expands and extends in duration.
I would note that approximately one third of our on rent portfolio was deployed by from prior to our acquisition of tights and acted in mob space. These respective acquired portfolios were deployed without the benefit of World Cup comprehensive vaps offering as well as our sophisticated rate and yield management tools.
While vaps drove 40% of the overall, 15.1% rate increase the other 60% was driven primarily by modular office pricing on new rental contracts.
Although we're not disclosing specific rates achieved on new deliveries of offices, there obviously much higher than the average across the on rent portfolio. One can visualize charts very similar to those on this page depicting the convergence between modular office delivered rates, we've achieved over the last 12 months and the on rent.
Average is the acquired portfolios continue to return to be redeployed stated simply if the vast related convergence is driving 40% of our rate growth and is expected to yield greater than 140 million of revenue growth over the next three years potential benefit associated with great optimization, which is driving the other sixth.
Steve is at least that amount again.
Combined these two idiosyncratic and foundational growth drivers provide confidence to demonstrate a double digit rate growth achieved over the last few years can extend for years to come up again. This realization is simply paced by our long average lease durations.
Before turning it over to 10 I'd ask you to turn your attention to slide slide 10.
In order to expand upon our demand outlook across our diverse end markets first I'd like to direct you to the Pie chart at the bottom left to the slide which breaks down our end markets. In addition to the very diverse group of end markets customer base is highly fragmented with no individual customer representing more than 3% of our revenue and then.
Top 50 customers representing less than 15%.
At an aggregate level, we've not seen any material shift in the end market activity.
Our best indicator for demand is quote activity generated by the field, which has remained at or above targets and drives our order book for deliveries to new projects. So why there's clearly been some disruption both internally and externally in the first half the year or volumes have stabilized in the third quarter, but our overall demand outlook remains positive as.
Well, our Capex outlook reflects an expectation of continued reinvestment in the business going forward.
We continue to monitor demand across various geographies and end markets and have a disciplined process through which we control allocate our capital one key strengths of our business model at the discretion and flexibility that we have over capital spending in the short term coupled with our long term average lease our long average lease terms and long life assets.
These together allows us to reallocate reduced capital spending and drive free cash flow to the extent markets do not support growth.
Im, particularly pleased with the idiosyncratic top and bottom line growth drivers aren't inherent in our business.
Our unparalleled scale embedded M&A related synergies and our commercial strategy to drive lease revenue growth organically through rate optimization and penetration of our ready to work solutions will provide continued growth largely independent of market cycles and will unfold predictably over the next several years as we acquired portfolios.
Return and redeployed.
With that I'll hand, it over to Tim will provide additional context.
Thank you Brad and good morning, Please turn to slide 12.
Q3 saw another good quarter of execution in line with our expectations for the year.
The continuation of strong pricing and value added products trends as well as cost synergy execution are all similar to prior quarters with nearly 8% sequential increase in quarterly delivery activity being the only notable operational change impacting our Q3 results.
Let's drop straight to the bottom chart, which show revenue and adjusted EBITDA year over year on a pro forma basis.
As we've highlighted previously much space executed a very large exports sale related to secure hurricane or leave that generated 26 million of revenue and $7 million adjusted EBITDA in Q3 last year.
On the left hand side to be chart, we've isolated the impact of nonrecurring sales in the quarter to show the performance of our leasing operation operations, which is the best indicator of how the current portfolio is performing organically.
This is the last quarter, where we expect this year over year revenue mix shift to have a meaningful impact and I'll elaborate on that in a minute.
Similar to prior quarters modular leasing revenue was up 7.9% year over year on a pro forma basis, driven by pricing and value added products in the U.S segment.
Adjusting for the approximately $41 million of revenue and $10 million of EBITDA contribution last year derived from noncore sales activity, we generated approximately $19 million of EBITDA growth from the 14 million dollar increase in modular leasing revenue.
This implies over 130% flow through in our leasing operations. This organic growth in cost synergy realization drove 600 basis points of margin expansion year over year on a pro forma basis.
Sequentially from Q2, EBITDA margins contract, an 80 basis points, which was driven by a $4 million sequential increase in variable leasing costs as well as the contraction of delivery and installation margins that we had expected.
As we talked about last quarter, the leaders seasonal ramp up of delivery activity effectively pushed variable leasing costs from the first half of the year into Q3, and a higher mix of deliveries relative to returns tends to result in a lower margin in the period.
Sequentially heading into Q4, we expect the topline to continue to build modestly variable costs in delivery margins should revert to Q2 levels.
And with continued synergy execution margins should push back towards the 35% area.
Stepping back this is essentially the same plan in Q4 run rate expectation that we laid out in January and we're excited about the path it puts us on for 2020.
Slide 13 is new.
And we added it to illustrate the long term shift our revenue mix favoring our leasing operations given the year over year impact the noncore sales had in Q3 2018.
The bottom dark green portion of the charges, our modular leasing revenue and accounts for 70% of total revenue year to date, there was essentially no variability here due to our 32 month average lease duration and this gives us very good forward visibility into our results, particularly given the multiyear opportunity to improve price.
Thing and value added products penetration in our acquired portfolios.
Next the dark Gray section is our delivery and installation representing 21% of our revenue year to date. This revenue is driven by the movement of leased equipment to and from customer sites. This revenue clearly has consistent seasonality in margin movement based on customer activity levels, but it is linked to our modular leasing revenue.
Invest quite predictable over longer periods.
Lastly, the top of the charted to see our sale revenue, which historically has been harder to predict and curious different execution risks mob space had more than doubled the mix of sale revenue relative to will Scott at the time of acquisition and maintained three in house manufacturing facilities, which we have closed.
Strategically we've repositioned the portfolio to focus on the long duration low volatility lease revenue, which has increased over a 10% compound annual growth rates since 2017 and sits at record levels as of Q3.
This obviously, obviously supports our view of the run rate heading into 2020, and we believe makes this a truly unique rental platform.
I'm going to skip ahead to slide 17 plays.
The outside of the year, we indicated that we would transition to consistent net profits and cash generation as we head into the second half of the year, we saw that transition beginning in Q3 with a modest profit from continuing operations.
Overall net income of $800000 was up $37.5 million from prior year.
As integration restructuring and transaction costs have moderating.
In total we incurred 8.4 million of these acquisition related items in Q3.
I'll also note the interest expense declined 5% sequentially from Q2, as a result of our refinancing and the floating portion of our ABL balance.
With the topline and acquisition synergies building and restructuring and interest costs coming down we expect net income and cash generation to ramp substantially heading into Q4 and 2020.
Slide 18 shows where we stand to overall on synergy realization integration and restructuring costs and real estate actions.
On the left our Q3 results now includes 70% of the $71 million of total annual cost synergies that we originally identified.
We remain on track to deliver 80% of the total synergy value in Q4, this year, which has been our target since announcing the acquisition in June of 2018.
In the Middle chart integration costs are winding down although higher than our original estimate as we shared in may.
And in the right hand chart, we generated an additional $4 million of net proceeds from real estate sales in Q3, bringing the year to date total to $13 million of the total $40 million that we intend to monetize.
We expect that generated approximately $4 million of additional net proceeds in Q4 and expect to monetize the majority of the remainder in 2020.
As I indicated last quarter, we've been pleased with the real estate valuations that we're seeing in Q3, we finalized the third party review of all of the real estate that we acquired in the months based transaction and we increased the value of mott's based real estate by $28 million to reflect the fair market value at the time of acquisition that brings.
The total market value of real estate acquired from Mont space to $96 million, which will overtime benefit will Scott shareholders as we optimized balance sheet.
Moving to slide 19, as we've explained previously well Scott is cash flow profile is inflecting significantly as we've executed our operating plan in 2019, we're pleased to be free cash flow positive in both Q2, and Q3 and see this ramping significantly into Q4 in 2020 consistent with our pro.
Higher expectations.
In the top chart year to date cash flow from operations is up $83.5 million versus prior year, you can see the burden of transaction and integration costs was most significant in Q3 in Q4 last year as well as Q1 of 2019.
As we head into Q4 in 2020, we expect five fundamental levers to drive sequential and year over year improvement in operating cash flows which include our continued topline lease revenue growth cost synergies executed on schedule and growing into 2020.
Integration cost winding down interest costs have come down and have room to come down further and working capital is stabilizing heading into Q4.
In the bottom chart you can see that net cash used in investing activities has averaged $40 million per quarter, which aligns to the high end of our Capex guidance range for the year, we see net capex moderating as we head into Q4 in Q1, both due to normal seasonal factors as well as some of the integration related capex that we've incurred.
And spoke about in Q2.
Together these trends point toward a significant and sustained free cash generation heading into 2020.
Moving to slide 20, our debt structure is unchanged relative to at June Thirtyth and interest cost decline, 5% sequentially from Q2 due to the refinancing we have approximately $490 million of availability in our ABL revolver leverage has reduced sequentially every quarter since closing the mob space.
Acquisition, and we expect this pace of deleveraging to accelerate towards our four times target by Q2, 2020 as free cash flow inflect positively.
And lastly, we'll beacons and continue to be opportunistic and looking for ways to improve our financing costs in maturity profile as we head into 2020.
On slide 20 wide, we're maintaining the annual guidance that we had updated in August at the midpoint of the ranges, we see $1.075 billion of revenue $360 million, adjusted EBITDA and $155 million net capex.
Based on our expectations for Q4, we expect to carry roughly a 400 million dollar adjusted EBITDA run rate and 35% adjusted EBITDA margin into 2020, which is consistent with what we communicated in January .
Lastly, I'd encourage you to take a look at slide 22 to understand some compliance and reporting changes coming up in Q4.
As we've mentioned, we'll Scott will become a large accelerated filer for purposes of our 10-K due to our growth.
The practical implications of this our will pull up our 10-K filing date.
Earlier than prior years with a deadline of March 2nd Ernst and young is performing our first controls audit for Sox purposes, and will be adopting several accounting standards. The most notable of which is the 842 lease accounting standard.
The standard was effective January onest this year for existing large accelerated filers. So we will adopt that retroactively in Q4 and you'll notice a couple of changes.
First of all the real estate that will Scott has on operating leases will be added as assets and lease liabilities to our balance sheet. This will be roughly a $140 million increase to both our assets and liabilities, including the roughly $38 million of finance leases that we currently include as long term debt and then second year to date, we've incurred.
Heard $7 million restructuring expense related to leased properties that we are exiting.
Under the new guidance. These restructuring expenses will be recast asset impairments and the timing of the expense recognition will change, which will impact 2019, GAAP net income and GPS, but not our adjusted EBITDA.
None of this impacts the cash flows are economics of the business, but I wanted to let you know it's coming and also thank our team the effort that goes into these critical compliance activities is often under appreciated but it's been a central in our transformation over the past two years.
So with that I'll hand, it back that Brad on slide 23 for closing comments and QNX.
Thanks, Tim first I'd like to thank our customers and our investors for their trust in us and the entire will Scott organization for their continued performance. We have certainly established a proven track record continued organic growth along with Swift and effective integration of companies of all sizes I remain convinced.
But in my view and we have the right strategy and the right team to continue to increase long term shareholder value.
We're extremely proud of all we've accomplished in third quarter of 2019 of the momentum, which we expect to enter 2020.
We're very confident and our ability to achieve the adjusted EBITDA run rate of 400 million with discretionary free cash flow generation of 200 million as we head into 2020 and deleverage in the platform to Fourx net debt to adjusted EBITDA by the second quarter 2020.
We appreciate you taking the time to join US today and for your interest in the company. We look forward to speaking with many of you very soon.
Concludes our prepared remarks, now would be happy to take your questions. Operator, Please open up the line.
Ladies and gentlemen, if you have a question at this time. Please press Star then the number one on your Touchtone phone.
Again does it start once asked a question.
Your first question comes from the line of Kevin Mclean from Credit Suisse. Sir Your line is open.
Yeah.
Excuse me Mr. Murphy Your line is open.
Greg can you hear me.
Yes, now again.
Okay.
Sorry about that pace.
Really really nice job guys, Brad you talked about some incremental synergies beyond what you've framed out with much space.
Is there in a way to think about what that could be and would that be applied to.
Accelerating accelerating the de leveraging or just any way to think about that.
You know just within the context of that I think one of the really understated parts of the stories, how you've been able to integrate.
Huge assets really really seamlessly without any hiccups. So just kudos to you on that but just as we think about kind of potential next leg synergies is there any way you get a little bit further into the year, we can take about a range on that.
Yeah, I think is as we close up the fourth quarter, we'll be talking about ranges. Once we have very specific can detailed execution plans.
But we don't expect any significant investments required to support these opportunities so.
I think the impact of leverage would just be further growth in EBITDA in in earnings.
We did mention the last couple of calls Kevin that the delivery and installation cost alone is about a 200 million dollar annual spend.
And that certainly than our primary focus we see opportunities both on the cost side of that news and Tim mentioned in his commentary on the on the price side as well. So so that's our focus we're not ready to provide a number until we really have detailed plans to execute.
I expect we'll be doing that as we talked about fourth quarter results.
Got it NIM will more back end of Q.
Operationally really across the two organizations together in a seamless fashion.
Feels like you're in a position too.
Continue to scale do you have any thoughts around what the organic versus inorganic opportunities are and what the approach would be you think about.
Time, given given kind of where we are in the evolution of the company.
Yes.
Well, we don't comment on any specific.
Strategy I.
I would make a couple of points for one we clearly have been an acquisitive company.
And as I noted, we've certainly established proven track record of continued organic growth along with swiftly and effectively integrating companies of all sizes.
Created tremendous shareholder value through this strategy in the past and expect to as well in the future. We have big small medium acquisitions would make we're confident each of them what could be a good fit for our company and shareholders, but I want to be clear, we will not jeopardize our plan to be below Fourx Levered and Q2 of next year.
And anything we do will be substantially accretive right. The beauty of our platform right now as free cash flow really starts to accelerate next quarter, and we're well positioned to use that cash flow to drive shareholder value with many options.
Awesome really great job. Thank you.
Yes.
Your next question comes from the line to coordinate capital is from Morgan Stanley . Your line is open.
Hi, Thanks for the question guys I'm just to talk a little bit about your units on rent trends I think you made some comments about has seen a stabilization and I think just the numbers that I'm looking at.
Looks like we still saw the units average units on rent.
Decline quarter over quarter. So just when you talked about the 8% deliveries increased what that more weighted towards the end of the quarter or just help us understand I'm kind of the thoughts on units on rent and then especially.
Given that it's down about five.
Percentyear over year.
How we should be thinking about had a year over year rate.
Heading into next year.
So I think.
First of all state largely in line with what we discussed over the last quarter's call.
I would point out when I when I know the stability of units on rent.
We were still experiencing declines in the second quarter. The third quarter units on rent was pretty stable from where we entered two where we exited.
And that was that was a very pleasing.
So I still expect we said.
4% to 5% down as the ended the year nights I still think we're on range to achieve that.
Yes. According to the this is Tim I'd, just say Westwood matters from our perspective. The most is what is the lease revenue run rate at any point in time units on rent is a piece of that equation right. So lease revenue was up 2% sequentially, 8% year over year and is on a 10% CAGR since 2017.
So there will always be some puts and takes in terms of the recipe to deliver that but we're very confident in the lease revenue.
Run rate.
In the year over year comparison at this point kind of is what it is ami will be down for the next for the next quarter were to what matters is where do we go from here sequentially with volume and pricing and we're just happy to see that pickup and delivery volumes in Q3, which gives us more confidence now going into Q4 in the budget for 22.
Morning.
Okay Gotcha.
Also I'm just on the other North America side, I think you guys have been kind of talking down rental rates I think there was a big contract that you guys had in the second quarter, but obviously those I'm surprised.
I have a roughly in line with up 5% similar to till last quarter. So just wanted to understand for any other.
One time impacts there and kind of how we should be thinking about great growth from that.
Hi, There North America side.
Yeah. This is Tim you did see that you're probably referring to the $618 average monthly rental rate in Q3.
Did tick up a bit from Q2, I'd expect that as we've said last quarter to moderate a bit.
Back down to the the levels to you you would've seen towards the end of last year.
There there has been some kind of unique project activity in Western Canada and Alaska.
And there are shorter duration, so I'd still say that.
Hey, we're off by a period, there, but I would expect those.
Rates to moderate a bit overall, though the other North America segment I mean, if you look at the volume side. Since you asked about volume He's got a couple of quarters of sequential volume growth you've got some tightening in.
Utilization still far below where it can go to it.
But I would say the leading indicators in the other North America segment are all.
As a bit of albeit on a smaller part of the business. So I'd say good good signs north of the border in particular as well as in Mexico.
Great and then just lastly, I think you made comments about expanding the sales team can you just help us understand where there any consolidation efforts on the sales teams.
During the acquisitions and kind of where.
Increase will be dedicated towards.
So there we did make some.
Reductions in and certainly the what would have been the combined sales team of months Basin Scotsman.
There were pretty modest right in that we endeavor to maintain relationships.
The various sales reps brought to the run to the the team.
I would think of it simply as with each engagement with the customer right you acquire the lease you priced the box and then you get into the more consultant treat type sale associated with apps that takes more time.
We're realizing more success than we expected. So we're simply add in a bit of capacity largely to fund that continued growth in babs.
Okay, great and if I get to squeeze in one more on just on the portable storage side.
Just curious your thoughts on that business, obviously, it seems like it's pretty consistent utilization rate.
And and the and the rental rate.
Yeah, just just curious what's your thoughts there and if that's the right skills for your business right now.
Yeah, we have talked about this and number tons in the past I think it's a great business.
Great unit economics, very similar to fully Bath offices.
I think.
The majority of our customers actually are utilizing offices and storage.
We've got over 90000 offices on rent less than 20000 storage containers. So obviously there is a potential to bring those scale.
More in balance if you will so it's one overtime, we're really excited about we've got a number of.
Options, including organically to scale that overtime.
Great. Thanks.
Your next question comes from the line of Scott Schneeberger from Oppenheimer. Your line is open.
Thanks.
Good morning, this is Daniel on for Scott.
Can you believe please discuss the swing factors into fourth quarter two to achieve the high end all the between 19 guidance potentially.
This is Tim I, Daniel the two biggest factors from my perspective is one any unforeseen sale activity that can be the one piece of that business that I think in this case could surprise.
Favorably on having data pointing to that but.
Please.
That is one area and then the interesting thing as you know in this business as you saw in Q3.
We have.
Delivery volumes in particular move either favorably or unfavorably relative to our expectation you incur that direct variable cost in the period in which the unit moves. So perversely if delivery volumes are way ahead of our expectations in Q4 that would actually put pressure on the cost side.
Yeah.
And the reverse would be true after the revalued moderated more than expectation, so thats kind of onetime in period to us.
Probably have them most potential to move.
The EBITDA result, obviously at this point the lease revenue resulted largely bank.
Got it. Thank you how far out do you feel you have visibility into a demand conditions across the core markets.
Yeah I think.
Obviously, we have orders in hand that represent a month plus and strong quotes that would take us out at least a quarter.
We look at this quarter over quarter, the macro indicators, if you will I think still would support.
One 2% growth next year, perhaps more.
So from our perspective, what we see in the order book quite strong, but we're seeing quote activity quite strong own beyond that we just keep an eye on the macro markets and flex our capital between regions in areas if needed to and we will pull back.
In total at a consolidated level, if we need to we're just not seen any indicators right now that we need to do that.
Daniel I'd say that commentary applies to new product deliveries in terms of the overall lease portfolio. As you know we're looking out several years in terms of the installed base. The contractual revenue stream. That's in place you as well as the expected duration, which obviously extends typically well beyond the contracted duration.
Got it thank you.
No one from me I mean, the Devops rates is growing at a 20% repair how would you categorize to potential for sustaining that type of growth and what would I mean for the long term vaps opportunity in terms of incremental revenue.
Well.
Slide deck.
Weve articulated that if we just hold the delivered rates we've.
Demonstrated over the last 12 months over the next three years will realise 140 million over 140 million of revenue growth.
About 80% of that falls through to EBITDA.
So that's that's clearly.
Let's say in our lives sites and it's simply assumes we performance current level of vast delivery. Our Laura long term goal is to achieve $400 per one the value of apps for delivery.
That compares to the 284, we're at now so.
Kind of do the same math between 284 and 400.
You get will over another hundred million to potential revenue.
Again that will be paced by how quickly we can get to 400.
And then to harvest as three years thereafter, as the portfolio churns as Tim mentioned before so.
Yes, that's one of those idiosyncratic levers that.
Is quite excited about this platform I was just highlight Daniela on that slide nine we provided some new information in what you see for five years prior to any of our acquisitions value added products revenue per unit is growing at a 20% cagar.
After the acquisitions, it's now accelerated at 25% that's driven by continued penetration across the legacy will Scott platform as well as the acquired portfolios, which are largely under penetrated. So we're quite excited about that acceleration of the revenue growth on a larger base.
Got it. Thank you good luck guys.
Thanks.
Your next question comes from done I have met that Pat.
From Barclays. Your line is open.
Hi, This is actually a Greg calling and I just wanted to ask about.
Net Capex I think you typically talk about 100 million of maintenance Capex.
But obviously with the growth.
Investing more this year.
I guess without looking too far ahead, and a status quo backdrop is expectation that you'd continue to spend there and is that 160 million type number kind of a high end.
What you could possibly do just given the timing on the leases coming back in.
Hi, Patrick this is Tim so our original guidance for the year.
Was 100 million of net maintenance Capex, we define maintenance capex as the investment level required to maintain constant units on rent so volume neutral.
We are investing round numbers, another 30 million of value added products capex given the growth.
But I just talked about.
And there has been some additional fleet refurbishment in 2019, along with about $15 million of acquisition related.
Capex that includes.
Some vats inventory branch expansions in some new fleet that much space had committed to.
At the outset of the year. So those factors together take us to the high end of the 160.
Looking into next year, I think it'd be very much very similar formula our views of.
Net maintenance capex have not changed.
We will absolutely continue to invest into value added products program.
And then incremental.
Fleet investments will be market depended I'll remind you that there are no long term purchasing commitments in this business.
The were on basically a 90 day capital planning cycle.
And every quarter, we're looking at a forward demand outlook from our branch network and doing a zero based capital budget and re doing it every quarter. So we will be nimble as market conditions change favorably or unfavorably, but sitting here right now.
I'd budget at very similar capital outlook to what we had guided towards the beginning of 2019.
Yeah that makes sense.
Then.
Maybe quickly and what's the smaller part of the business but.
Wondering what you're seeing from your upstream oil and gas part of your business given the volatility that market is shown.
With virtually no exposure to screen upstream is would be less than 4% of our total revenues.
We haven't really seen any significant shifts in that.
And most of the majority of that would be related to Alaska.
Little bit of southern Mexico and western.
Canada, all of which have been at least stable.
So it's a little piece will have.
Yeah that makes sense. Thank you.
Your next question comes from the nine appeal Nang from Jefferies. Your line is open.
Hey, guys.
Tamar was up nicely again in the quarter, how much of the unit rate growth is driven by acquired leases rolling into.
The price optimization platform versus price increases on lease revenues and do you expect this lift to moderate in 2020 after a very strong year.
I feel it's Tim we haven't this aggregated the C.
Pricing growth in that way. It is a good question what Brad said in his remarks was about 60% of the year over year growth was driven by core rental rates with the remainder coming from value added products.
If you just aggregated the core rental rate movements. There are three different levers within that there is the year over year change in delivered spot rates on new contracts. There is the dynamic you mentioned with acquired units now being re priced under our segmentation model.
And then there is the ability to manage rental rates on the installed base when units go beyond their minimum contractual term. So when we talk about pricing ratchet that were actually managing multiple levers to drive that result, which is one of the nice attributes of the business.
Got it as we got about mid Twentys warning book, you're moving off of a larger base. So.
Yes, I would expect that percentage year over year growth to moderate.
But.
We've been positively surprised through the course this year in terms of the magnitude of the growth that we were running 10% organic growth double digit organically, Greg we certainly have seen some acceleration as we absorbed these acquired portfolios. So as I mentioned before double digits for multiple years to come October .
We're comfortable with.
I'm, not saying that we will continue at 15%.
That's great.
And then can you provide a little more color on how quoting and delivery SRAC inter quarter and how that's progressing in October and early November and when you think about 2020, how do you think about unit on rent growth appreciating.
Well, Scott had a clear preference for price mix over volume.
Yes. This is Tim in terms of what to expect this is similar to court. These question, which is where do we go from here sequentially in a normal year you would typically expect some seasonal papering of unit on rent in Q4 into the first part of Q1.
With the kind of normal busier deliveries season picking up in the March April may timeframe. So sitting here today I think a realistic expectation is let's talk about meaningful.
Sequential unit on rent growth.
In Seneca March 2nd quarter timeframe, and Thats, just a function of the natural seasonality in the business.
And that really in no way changes our view of the runway run rate going into next year or the range of potential outcomes for 2020, which.
We will talk about in Q4.
Okay, but would you expect a a better growth here in 2020, just because this year is been obviously noisy with the integration of much space I'm just want to understand because you did provide some color in terms of how you think about the market, but as it relates to well Scott would be helpful.
Yes.
Stable I mean, as we've said before it was certainly stabled up a percent or too.
Again, our kind of track record organically.
Clearly had some disruption in the first part of the year, we've seen things stabilize so I feel quite good about that.
Gotcha and one just one last one for me now that mob space is fully integrated curious, what's your appetite and bandwidth to engage many larger deal and any color on your M&A pipeline and nuances between how youre thinking about module leasing versus portable storage in terms of opportunity set. Thank you.
No as I mentioned before I think both modular often in office and portable storage are interesting to us.
As I mentioned in my comments before we've demonstrated to vary.
Solid track record of both continued organic growth and acquiring and integrating companies of all size.
Most basis largely behind us, we have the capability and capacity to do another.
There are many opportunities out there pipelines quite robust.
I would just reinforce again, we will not do anything that would inhibit our ability to get to the forex net debt to EBITDA leverage by the second quarter of 2020, which.
Is frankly right around the corner.
It's actually felt really appreciate it.
Your next question comes from the line Ross Gilardi from Bank of America. Your line is open.
Yes. Thanks, guys just on that note I mean I'm just curious about once you get to the four times in the second quarter, what's your willingness to re lever the balance sheet and.
Bob that for temporary talk period of time, if you thought you could get back to that level on a year or two and you're just your overall willing to use equity upon many I'll be transaction.
Hi, Ross this is Tim that question so situation specific right.
I'll use the box based acquisition as an example.
Any did any of this financing decision would be in the context of the market at that point in time, whatever it may be but from my space Avenue with a unique asset we knew it really well.
We understood the lease revenue dynamics in that business and what we could what we could add to that in terms of value added products in pricing.
Thoroughly diligence to cost synergies so had a very high degree of confidence in that execution, which I think you've seen and all of those factors played into our willingness to take leverage above our stated target of three to four times. So.
It's hard to give you a specific answered we have done it before in a unique circumstances, where we were highly confident in the expected future cash flows of business.
Got it thanks and.
Just on a separate question I apologize if you've already covered this but.
You guys.
Got you target again equally to GAAP EPS.
Okay, So positive number and that third quarter and you suggested that that would continue to improve their spend a lot of noise below the operating profit line pipe Demod space.
There are one off costs can you help us at all in understanding the.
The puts and takes into 2020 on the stock below the line in terms of restructuring costs and.
Integration costs and some of the other lines that problem you already covered that.
No not in detail Ross, so happy to happy to give it to shop first I'd start with interest expense you saw that come down 5% sequentially in the quarter I think theres some room to improve their overtime with various.
Refinancing alternatives. So we'll see what we can accomplish there in 2020 in terms of the integration restructuring costs, you've seen that paper down to an 8 million dollar quarterly level and that will taper further to zero.
As we get into kind of Q2 of of next year is our expectation were very close very close to it so that noise, absolutely should moderate significantly which has been our our goal and expectation all along here taxes of benefit a bit quirky, but.
As we go into next year with consistent net income.
Pre tax income.
Hi, guys you toward a mid twentys effective tax rate, which would be typical.
Obviously, our cash tax profile is very attractive.
With a five to seven year us federal income tax shield, thanks to our wells.
Well pause there and if you have a follow up questions feel free.
Okay. So $88 million quarter was that start was that interact integration and restructuring or was that.
One versus the other that includes both.
Okay.
Okay, great. Thank you.
Your next question comes from the line up Brent Tillman from D.A. Davidson Your line is open.
Great. Thank you.
Maybe one more line item for you you done a great job driving down the cdna any guideposts you could give us what do you think that could land and for Q.
In Fourq you, so let's see when we adjust out the nonrecurring items that Ross was just asking about we'd expect to kind of modest reduction.
Into Q4.
From here.
So a couple couple of couple of million dollars.
Okay, Great and then I guess my follow up question. It it's a little hard to tell because I know you're transitioning these older units out from the transactions, but with that with the hard push on rate have you seen any fluctuations in market share at a local or regional level and I guess I'm curious if they even improved a little because you're at.
Actually offering this sort of broader portfolio the customers that they didnt years ago.
Yes.
But just a couple of points I mean, we're always testing the price volume elasticity.
Not been our strategy to trade one for the other nor do I believe we have I certainly believe this vaps offering has changed the game Raymond we're delivering a critical service to get a projects started and were there until the end so the easier we make that for our customers.
The more value they realize in where we can extract and rate so I think.
If I looked back a year ago and looked across our geographies I would have said a year ago. The list in the central planes.
The other segment as Tim mentioned is really in line with our expectation.
The Gulf Coast States are ahead of where I would have expected one year ago and the mid Atlantic in northeast is a little bit liner right now so overall portfolio portfolio looks great I am just share in that colors. I mean, that's what we're looking at every quarter as Tim mentioned.
Adjusting accordingly.
Okay quick follow up I think in the past and I know, it's relatively incremental but sometimes these sort of disasters ariens presented.
Got been units out Im just curious if the wildfires that helped in the west coast heading impacting your business.
I mean, they those all do locally we typically benefit it's just it's such a large portfolio now each one of those individually is a very small percentage.
Okay Harvey was what we've talked about in the past.
That would have been like.
Oh present in half to 3% of our total unit on on rent portfolio.
Larger now less than or smaller amount now given we scaled the company. So the other meaningful the local level. They are usually supportive of rate for for a period.
In that local market and it is one that we given our unparalleled scale, we're uniquely positioned to respond and react right when when we suffer.
In our communities suffer shock like that.
We can bring fleet from effectively all over the country all over North America, if we need to.
To provide immediate relief.
Okay. Thank you.
Your next question comes from the line Ashish Sabadra from Deutsche Bank. Your line is open.
Hi, Thanks for taking my question. So just couple of quick clarifying a follow up questions.
Just one identiv anything but since sequential improvement that was pretty strong how visits compared to historic seasonality and also to any that's mystic.
The.
UNICEF coming back how has that compact and your expectations that affected normal seasonality.
Yes, the delivery side of the equation the only significant difference this year as we would have expected that pick up earlier in the year Marceau like Q2.
In terms of the sequential pick up so when I say the delivery volumes materialized later in the year, it's that dynamic where you're getting that sequential quarter to quarter increase in Q3, rather than in Q2 and that then has implications for the variable cost timing, which I've I've tried to try to highlight on the returns side of the equity.
Asian, frankly, we haven't seen any surprises there that's something that we model at the portfolio level based on the contracted duration, we see in the portfolio as well as our historical experience with how long units typically stay out.
Okay, That's fair and then.
On the month to month price optimization, you with lending to the rollout more sophisticated price optimization on that front I was wondering.
If you've been able to make any update on that spent.
Not yet is be is the answer we have recently completed a what I call an annual refinement of our pricing model as it relates to upfront rental rate pricing.
And I would think that it's just a recalibration now that we've got nine months of data from the combined delivery activity across the portfolio, but to your point there is a pricing roadmap that we have in the business applying the segmentation tool to out of term rental rates isn't.
Opportunity being more sophisticated on delivering installation pricing is an opportunity Brad mentioned that in one lever that should support deny margins over time, so pricing continues to be a very interesting lender in the business.
That's good that's great and then maybe last one on the logistics optimization I know there were things that you're planning to bill in terms of maybe in sourcing some upside and plus some of the technology that we've implemented a downside I was just wondering has that been any update on tax right not so much on quantifying it but more importantly, the process that you've made on on.
Optimizing the whole logistics.
Yes.
Oh go logistics piece of bread spoke about this a bit earlier, we've got a team of internal and external resources actively working on it we've got to 200 million dollar annual cost base that we will be tackling.
Think of this.
As largely a.
Insourcing versus.
Outsourcing question and what is the right mix of that for our business now that it's roughly doubled the size. It once was.
I don't see any significant upfront capital costs to tackle this problem, rather a substitution of resources over time.
Should support our.
Cost structure.
That's going well talk more about that specifically I expect in Q4.
Very helpful. Thanks again.
Your next question comes from the line, Sean Wondrack from Deutsche Bank. Your line is open.
Hey, guys.
So just as you made some comments about SGN a earlier on and you also kind of noted that you've made some hires there.
Should we expect to continue to see improvement on the CNN lines. I think you did around 25% of sales this quarter, which is pretty good results here higher volume quarter.
How should we expect that to sort of trend over the next couple of years.
Well certainly going into Q4, we expect it to reduce further bye now.
A couple of million dollars and as a result, it will continue to reduce as a percentage of sales.
I'd say the SG nay related cost synergies are largely executed at this point.
There will be some occupancy cost in 2020 that continue to taper off but you would also have some normal inflationary things at least properties.
Merit increases across the headcount so I think we're getting to a.
Pretty reasonable foundation in Q4.
Certainly wouldn't be worried about percentage basis, we're adding sales people to drive incremental revenue.
Great. So these are kind of them Rainer investments.
And they're kind of doesn't have us when you look at the Grand scheme of things and some of that's already into Q3 is no second so I don't view the sales head count commentary as a meaningful SG nine move one way or the other.
Okay and.
Typically when you add headcount late this is there a little bit of a lag before you're able to realize the revenue from training employees et cetera.
We have a pretty large sales team right. So this is a very modest.
Actually began in June and July .
This year so.
Now there is certainly a small lag from when you bring someone in the door to win there.
Producing but.
That's our primary focus of our commercial excellence team.
To bring those folks up to speed as quickly as possible, we've got great tools at their disposal to be productive quickly. So.
Scott is that it's a smart as.
That's helpful. And then you've obviously been pretty disciplined about M&A and as you can see in the numbers and your ability to gain operating leverage here.
You've sort of stated that for the right opportunity consider going over the four turns threshold at a certain point.
For the right opportunity would you be when these equity is currency or how do you. How do you think about sort of a ceiling and where you.
Things to go for a short period of time.
We said is we did go above once we clear line of sight visibility, we looked at that deal in 2016 in detail.
We knew exactly what to expect.
And I think our results.
Proven proven that out.
I've also said, we're not going to go.
In the anything that would jeopardize us getting into the high side of our three to four leverage rain by second quarter of next year and as Tim said every deal is a bit situational.
We'll look at it and certainly.
Equity is something we could use to finance the REIT transaction.
It's just situation.
That makes sense and then just just lastly.
As you look at your capital structure now.
Obviously, you have some callable debt coming due you also have a decent being drawn on your revolver.
Would you consider terming out some of that revolver debt overtime.
As you get into more of a permanent capital structure there.
Well again this is another.
Opportunistic and market dependent decision sitting here today, you've got $490 million availability on our revolver in a business that is reflecting significantly cash flow positive. So theres no immediate.
Liquidity need in the business that would require you to turn that out I mean, the cost of financing on the revolver is actually quite attractive in kind of the mid 4%.
Range at the moment I think we've got opportunities to improve on that so what I can say is we're still a relatively new public company.
I think every quarter that goes by we have established track record of performance, both organically and with.
The acquisitions that we've done I think thats reflected in the our bonds trading above par for example on every time, we invented the market we've been able to improve on the overall cost of capital and we expect as we continue this track record metal continued to be the case.
Right.
I would agree with that great job and thank you for answering my question.
Thanks.
I'm showing no further questions at this time I would like to turn the conference back to Mr., Brad Holt. Please continue.
All right, well, Hey, again I'd like to thank all our customers investors and the will Scott team for continued performance and look forward to speaking with all of you very soon.
If not when we announce our fourth quarter results. Thanks have a granite.
Ladies and gentlemen, decent did studies conference call. Thank you for your participation you may now disconnect.