Q1 2020 Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to the will Scott Corporation first quarter 2020 conference call. At this time, all participants are in a listen only mode.
After the speaker presentation, there will be a question answer session to ask a question. During this session. You want me to press Star one on your telephone. Please be advised that today's conference maybe recorded if you require any further assistance. Please press star and zero I would now like to hand the conference.
Over to your speaker today that Jacobson, Vice President Finance. Thank you and please go ahead Sir.
Thank you and good morning, before we begin I'd like to remind you that we will discuss forward looking statements as defined under the private Securities Litigation Reform Act of 1995.
Actual results may differ materially from those forward looking statements and there was no the various factors, including those discussed in our press release and the risk factors identified in our 2019 form 10-K, and other various FCC filings well, we may update forward looking statements in the future. We disclaim any obligation to do so you should not place undue real.
Alliance on these forward looking statements all of which speak only as of today.
We'd like to remind you that some of the statements in response to your questions. At this conference call May include forward looking statements as such they are subject to put future events and uncertainties that could cause our actual results to differ materially from these statements well Scott assumes no obligation and does not intend to update any such forward looking statements.
The press release, we issued this morning and the presentation for today's call are posted on the Investor Relations section of our website. The copy. The release has also been included an 8-K that we submitted to the FCC, who will make a replay of this conference call available via webcast from the company website.
For financial information that is that expressed on a non-GAAP basis. We've included reconciliations to the comparable GAAP information. Please refer to the tables in slide presentation accompanying today's earnings release over.
Over the next several days will also be filing our 10-Q, if the FCC for the first quarter of 2020, the 10-Q will be available through the FCC or on the Investor Relations section of website.
Now with me today, I have Brussels, our president and CEO and Tim Boswell our CFO.
Pick off today's call to brief overview ago, Scott and our first quarter results and provide an update on recent key developments in our business and in our markets. Tim will then provide some historical perspective on how our business operates across market cycles, they get a bit more detail on our outlook for the rest of 2020 before we open up the call for questions with that I will turn the call over to Brad. Thank you.
Matt Good morning, everyone.
I'd like to welcome everyone to will Scott's first quarter 2020 conference call. Please turn to slide seven of our Investor Relations presentation, which highlights our outstanding Q1 financial results as well as our revised 2020 outlook.
Well for Q1 results in our strong outlook are particularly pleasing given the unprecedented unexpected impact for the cobot 19 endemic.
Im humbled by the compassion grit and perseverance or the will Scott team, who have taken immediate necessary steps to protect each other while actively deploying our temporary modular space solutions in every major metropolitan area in North America in order to help our customers in our communities persevere through this pandemic.
And continue to thrive into the future.
First our Q1 revenue of $256 million is up 1% over the same period. In 2019. This was driven by continued outperformance in our US modular segment in which leasing and service related revenue was up 6% year over year on a 14% improvement in rate. This is a 10th consecutive quarter of double digit rate growth.
And we expect this momentum to continue as we look ahead.
But we will delve deeper into this in a few minutes I would remind you that 40% of the rate improvement is driven by increased penetration of our value added products and services or vaps and the remaining 60% by a price optimization tools and processes.
Next our Q1 adjusted EBITDA of $90 million is up 7% versus the prior year. The continued revenue mix shift favoring leasing combined with our ongoing cost reductions, resulting a 210 basis points improvement in EBITDA margins, which were 35% for the quarter.
And finally, our Q1 free cash flow of 8 million represents a 34 million year over year improvement and it's our fourth consecutive quarter of positive free cash flow.
Finally, as we turn to our revised 2020 outlook, while the cobot 19 pandemic did not impact our first quarter financial results significantly is certainly introduced uncertainty in our 2020 outlook related to the severity in the duration of any related demand disruption.
Despite this uncertainty we have a high degree of forward visibility given 90% of our adjusted gross profits are associated with the recurring leasing of long life assets of average lease durations of nearly three years, we've already reacted quickly to the dynamic market conditions, reducing both variable cost and capex.
Our revised 2020 outlook contemplates demand reductions ranging from 10% to 30% versus those of 2019 levels with durations ranging from just through the second quarter to through the balance of the year.
The midpoint of our revised EBITDA guidance range of 350 million to 400 million EBITDA prior to any contributions from the pending mobile mini transaction does represent a $45 million or 11% reduction from our original guidance, which was issued prior to the cobot shock, yes still growth of about five.
Percent over prior year, the midpoint of our revised net Capex guidance range of 100 million 250 million is 45 million lower respectively. Accordingly, adjusted EBITDA minus net capex is expected to be between 240 in 260 million. This year. This represents an approximate 25.
Percent improvement over 2019 and is in line with our original 2020 guidance as we were able to offset reduced revenues and adjusted EBITDA driven by these lower end market activity levels with lower capital spending to manage free cash flows.
I'm confident we have the right team and the right playbook to respond in the short term, while maintaining our enthusiasm and commitment to the future strategic growth and specifically the truly transfer more transformative combination with mobile mini.
Now I'd ask you to turn to slide 10, and take a bit under the hood in order to provide some additional context as to what we're seeing with respect to the cobot 19 pandemic shock.
While the leading indicators of demand across our diverse end markets were very strong throughout Q1. They had the accelerated into April to delivery dates associated with new orders have also extended further out into the future than typical reflecting some customers uncertainty with respect to win new projects start.
Starting with the graphic at the bottom left the green bars represent our monthly order rates for the us modular business the great Shadow bars behind the green bars represent the order rates for the same period in 2019, you'll note that through the first quarter. Our monthly order rates had been accelerating and were 10% above those of the prior year.
Since the end of March order Raiders order rates have dropped to 30% sequentially and are down 20% versus those of the prior year.
The chart on the bottom right.
Depicts our current book of pending orders as compared to the same point in the prior year. The green portion of the bar reflects the portion of orders, which have delivery dates over the next four weeks, while the grey reflects those scheduled later.
You'll note that while overall pending order book is up 11% over prior year pending orders that have scheduled delivery dates over the next four weeks are down 25% versus what was pending over the next four weeks the same time last year.
While demand for new projects is less certain it's important to note that we've not experience unusual reductions in pricing vast penetration or collections. We've not experienced increases in early returns and we continue to service our customers as an essential service provider.
From our fully operational branch network.
Now turning to slide 11.
Fast growth has consistently been drive and 40% of our overall rate growth based upon the vaps penetration we achieved on new units deliberative last 12 months, we expect another 125 million of annualized revenue growth.
In the first quarter, the average rate of apps value per month across all units delivered prior 12 months was $276, which is up 6% of our LTM levels of the prior year and $121 above the average level, but the 88000 units currently on rent the associated growth in raw.
Revenue will occur over the next three years as units currently on rent or return once our current projects and our redeployed at current level of apps penetration.
While the Vaps growth drove 40% of our overall, 14% rate increase the other 60% was driven by modular office REIT optimization, although we do not disclose specific rates achieved on new deliveries of offices. They are approximately 20% higher than the average across the on rent portfolio and represent a sims.
Convergence opportunity.
Combined these two idiosyncratic and foundational growth levers provide confidence to demonstrate a double digit rate growth achieved over the last two years can extend into the future.
Please turn to slide 12, and all expand a bit on our demand outlook across our diverse end markets that are more granular level than normal first the stack bars on the left represent the relative size of our diverse group of end markets with those most corresponding to nonresidential construction group at the top in dark Green.
And those corresponding to commercial industrial and black.
Starting with nonresidential construction markets the started out the year very strong with deliveries up 45% year over year, while some active projects have been temporarily impacted we expect they will continue albeit at a slower pace. We expect new project starts to be down 25% to 50% through at least the second quarter.
While infrastructure related stimulus could be a catalyst in the medium term, we expect both active and new projects will require additional space in order to accommodate appropriate social density and project site screening, which could provide more immediate opportunities.
Shifting to commercial industrial markets, which similarly started the year strong with deliveries up 4% to 5%.
Short term or events represent only 2% of our revenue were immediately impacted are not expected to materially recover. This year. While retail was also immediately impacted we expect offsets from warehousing and distribution manufacturing and professional services remained stable and as with construction projects, we expose expect both.
Active and new customers will require additional space in order to accommodate appropriate social distancing.
And we'll also provide some more immediate opportunities.
Energy markets overall are largely stable with declines limited to upstream energy, which represents less than 5% of revenue education markets have remained stable and could also potentially provide some catalyst of schools make requisite adjustments in order to accommodate social distancing norms.
And finally government healthcare markets when normally contributing a very small portion of our revenues have been quite robust in the most impacted communities as we reacted immediately to help come back to cope with 19 pandemic.
We will continue to monitor demand across our various geographies in markets and have a disciplined process through which we control and allocate our capital given the dynamic nature of our end markets. We've increased the frequency of these planning control cycles, one of the key strengths to our business model is the discretion and flexibility that we have over cap.
Total spending in the short term coupled with our long average lease term long lived assets, which allow us to reallocate a reduced capital spending and drive free cash flow to the extent markets to not present growth.
Again as noted I expect you to some credit growth levers inherit in our business such as our unparalleled scale embedded M&A related synergies and our commercial strategy to drive lease revenue growth organically through rate optimization and penetration of apps are ready to work solution will provide continued growth largely independent of market size.
Sales and will unfold predictably looking ahead.
Turning to slide 13 in this environment, we all have a heightened sensitivity around liquidity and we'll Scott's overall liquidity position I think highlights the value and resolute resilience of our business model.
We are fortunate to have a business that gives us great flexibility to manage our discretionary free cash flow, we've generated positive free cash flow for the past four quarters, all while completing a major integration and growing our lease operations organically in 2019.
Our business will be more cash generative heading into Q2 in Q3. So in the near term our primary source of liquidity will simply be the internally generated free cash flow.
As such we repaid about 10 million on our revolver balance in Q1, rather than drawing down the facility like as many companies have.
In the top chart, you'll see that we continued to de lever in Q1 by both growing adjusted EBITDA and reducing debt, which will continue to do in Q2.
If needed of course, we have the ability to draw on the appeal and have no concerns regarding covenant compliance even in our most severe modeling scenarios. The bottom chart illustrates that we had approximately 500 million of additional availability on our ABL revolver as of March 30, Onest. So altogether, we believe we have ample liquidity with which.
To execute all realistic demand scenarios.
Finally, turning to slide 14, while overall liquidity position is strong we know nevertheless have taken aggressive action to reduce variable cost heading into Q true in order to align them with the demand environment and maximize our results.
The right hand chart illustrates how there are significant variable elements of our cost structure that we can flex in the short term to preserve margins free cash flow. There also semi fixed elements in cost of leasing and SGN a that have faced with a protracted demand downturn, we can action and drive decremental margins down two or below.
50%.
Today, given the uncertainty around the duration of the downturn, we've action the variable components aggressively as listed on the left hand side of the page and we have the playbook ready to face with more draconian scenarios.
Tim will touch on this more later the cap capital expenditures.
Our.
Thanks.
Tim will touch on this later, but capital expenditures are more.
Our almost entirely variable in the short term our organic guidance implied an increase in net capex of 2020, given our plans to support volume growth now likely faced with the reduced volume environment. We've cut our net capex guidance by at least 50 million and expect Q2, net capex to be down approximately 20% year over year.
As always we'll let order delivery data that we see from the field real time driver decision, making we are reassessing capital allocation biweekly to respond to these dynamic market conditions and relatively wide net capex guidance range reflects the different demand scenarios that could unfold in the second half.
For the year with that Tim is going to take you through some of the historical data from the last recession, which we think will be helpful for investors before hitting a few of the additional highlights from Q1 Tim.
Thank you, Brad and good morning, and turning to slide 16, given the macroeconomic backdrop, we wanted to revisit some of the pages. We provided back when we went public give our perspective on how well Scott performed in the last recession. It also highlight some fundamental differences that we think work to our advantage looking ahead.
The bar chart in the middle of the page shows our leasing delivery and the sale revenue for the last 16 years. So a couple of observations first to due to our long lease durations unit on rent volume slowly declined post GFC bottoming in 2011, we can forecast pretty easily the churn of our installed base.
Which did not change following the GFC, they're simply weren't enough new projects starting to replace that naturally ended due to the prolonged drop and nonres construction starts.
Secondly, during the post GFC period, we harvested cash from the business for almost seven years total fleet size contracted as we increased rental unit sales with no major fleet reinvestment until 2015, so we clearly lag the nonres recovery due to our captive ownership structure as a standalone public company today, we will be agree.
Yes, it have been leading the recovery.
Third at the bottom of the page you see our revenue mix has changed dramatically over 90% of revenue today comes from our leasing operations versus only 64% in 2000 set.
As we've discussed sales revenue is more volatile and weve emphasized it strategically so we have greater forward visibility into our revenue streams.
I'll also point out that we had a high concentration in the education market, which accounted for roughly roughly half of the volume decline post GFC.
As state and local budgets tightened.
We have no such outsized end market exposures in the portfolio today.
Lastly, heading into the remainder of 2020 in 2021, we've transformed the scale of the business and have a much more rational industry structure, which we believe results in a healthier balance of supply and demand.
Turning to page 17. This chart illustrates how our capital investments are almost entirely discretionary even over extended periods of time, given the longevity of our assets, which gives us significant flexibility to managed free cash flow depending on market conditions.
The Green Bar show, our Unlevered operating free cash flow into Gray line shows our net capex exclusive of acquisitions.
Both due to the sharp drop in non res as well as our former parent company strategy you see that net capex actually went negative for two years, meaning that we sold more fleet than we reinvested and net Capex was a source of cash to the company. There was no material reinvestment in the US fleet until 2015, which is possible given that.
Modular units have 20 to 30 year useful lives and have no real technological or mechanical elements to maintain.
The business generated approximately $900 million of Unlevered operating free cash flow in the seven years following the GFC and our leasing and services revenues today are roughly double what they were back in 2007.
Obviously this extreme example shows the business focused primarily on cash generation for an extended period and that the expensive market opportunity, which is not how we would operate today.
Instead, we would have the flexibility to de lever rapidly reinvest in organic growth earlier in the cycle further consolidate our markets and return capital to shareholders with a great deal of flexibility and opportunism.
Since 2017 investors are familiar with our approach allocating capital to value added products suite refurbishment strategic acquisitions and deleveraging, while expanding our overall value proposition to the market.
History illustrates how a lower demand environment will allow us to redeploy capital and drive shareholder value.
Turning to slide 18, let's spend a few minutes on the mechanics of portfolio churn and the implications for average rental rate as this is instructive in thinking about where portfolio Capesize go from here.
Based on the current spread between prices on our most recent contracts versus the portfolio average in the U.S., we see average rental rate growth well into 2021 irrespective of current market conditions and we've seen this play out historically.
The left hand chart shows our average rental rate indicted gray and our spot rate on new deliveries in dark green.
During the GFC delivered spot rates peaked at the end of 2007 and were about 10% above the average rental rate across the whole portfolio.
Spot rates been plateaued for 12 months before declining approximately 20% to trough levels in 2011.
Importantly, due to our long lease durations average rental rates take a long time to catch up to spot rates and average rental rate peaked in Q4 2009, roughly 15 months after the spot rate Pete.
Lease duration also moderates the amplitude of the average rental rate cycle, which only dropped 7% from the peak to trough.
So the mechanics of portfolio churn are fundamentally important and we've made some improvements to them.
We put in place or essentially managed algorithm based pricing tools in 2015, whereas pricing was manual and de centralized previously.
We manage pricing on units beyond their contractual term today strategically, whereas there were only inflationary adjustments historically.
And we have a much more rational industry structure today each of these factors improve our ability to manage spot rates and average rental rates relative to 2007.
Furthermore, average lease duration across our portfolio of 34 months is 17% longer than it was back in 2007, which extends the lag you see between changes in spot rates and changes in the portfolio average.
As of Q1 2020 are spots rate our spot rates were still increasing and when you include value added products. Our combined spot rate is over 30% higher than the average rate across our us portfolio. So that's more than tripled the spread we saw back in 2007.
These are the mechanics that allow us to look into the portfolio with some confidence and believe we have embedded average rental rate growth well into 2021 irrespective of current market conditions and as the market leader, we will be laser focused on realizing rate performance in this market.
Now, let's briefly turn to slide 20, and the more recent past of Q1, although it does feel like a long time ago.
Year over year revenue growth was basically flat, but with another strong mix shift favoring leasing over sales quarter leasing in service revenue increased by 5.4% offsetting the decline in sales revenue.
Q1 of 2019 was really the last quarter. When we saw any meaningful contribution from the run off of Demod space sales business.
And you can see this mix improvements clearly in the left hand chart.
Adjusted EBITDA increased by 6.1 million on flat revenues and margins were up 210 basis points year over year as a result of cost reductions I'll note in Q1, our cost reductions were partly offset by approximately $3 million of expense related to our bi annual sales meeting, which is onetime and nonres.
During for purposes of our SGN, a run rate heading into Q2.
In the top right chart as we saw in Q4 free cash flow continues to inflect positively up $34 million on a year over year basis.
No. We did have roughly $5 million of real estate sales slip from Q1, and we did accelerate payments to many of our smaller vendors in late March. So there was approximately a $15 million headwind to free cash flow in Q1 that is simply timing related.
Jumping ahead to slide 25.
In a bit more on the free cash flow inflection that we started back in Q4, you'll you'll recall that net net cash provided by operating activities more than tripled year over year in Q4, and Q1 was up about 2.5 times versus prior year.
Starting in Q4, we had multiple levers aligned to drive cash from operating activities.
Topline leasing revenues have been growing with EBITDA margins, expanding another 210 basis points in Q1.
Interest expense was down 9.2% in Q1, and working capital, which had been a headwind in the first half of 2019 has stabilized.
We expect these trends to continue into Q2, although we will start to incur incur some cash costs related to integration work in the mobile mini transaction as we progress towards closing.
At the bottom of the page you were seeing a similar favorable trend and net cash from our investing activities net cash used in investing with down in Q4 of 2019, and Q1 of this year by 29% and 27% respectively on a year over year basis.
These reductions resulted from our ability to manage the combined fleet more efficiently following completion of the months' base integration.
Heading into Q2, as Brad mentioned, we expect delivery volumes to be down 20% versus prior year, which means that delivery volumes will be similar to our Q4 in Q1, the seasonal lows. So I expect net capex to be comparable to those levels and down approximately 20% from Q2 last year.
With this volume trend, we will have invested below maintenance level since Q4 of 2019, but with incremental growth capital allocated to value added products.
Given how dynamic the market environment has been we have shifted to approximately a two week allocation cycle for fleet Capex. So we will reevaluate capital allocations for Q3 based on the data that we see in June.
Given the dynamic environment on slide 26, we provided a framework to try and help think about potential different financial outcomes in 2020.
This is obviously an unprecedented economic disruption, but our business is such that we do have enough visibility to revise our financial outlook for the year, albeit down in with wider ranges the normal.
Nevertheless, the punch line here is that in pretty much every scenario 2020 should be a year of modest EBITDA growth.
And margins should be comparable and free cash flow stronger than we assumed in our original outlook.
Sitting here right now we're planning for a 20% reduction of demand for unit deliveries in Q2 versus prior year.
As Brad mentioned total pending orders are up year over year, but due to market uncertainty, we expect to many delivery and initial billing dates to slip into Q3.
On the other hand, we don't see any near term adverse impact on pricing value added products or lease duration. So this is primarily a sensitivity of delivery volumes and variable costs.
Brett already touched on the fixed versus variable cost structure, which gives us great flexibility to maintain margins in a declining volume environment.
The sensitivity chart suggests a 60% decremental margin if we only flex our variable costs and we believe decrementals drop to at least 50%. If we consider more structural cost reductions that we would implement if the demand outlook remains depressed in the second half of the year.
So those structural reductions would support our run rate into 2021, if and when they are implemented and we'll do in a way that ensures we're still in a position to lead the recovery.
At the midpoint of our revised guidance range, we see revenues basically flat to prior year due to pricing and value added products offsetting the volume headwind.
And the adjusted and adjusted EBITDA growth of approximately 5% driven primarily by cost reductions and margins up modestly as a result.
Most importantly in the bottom right chart EBITDA less net capex, which are the two biggest building blocks of Unlevered free cash flow is in line or above our original guidance for the year.
This highlights the resilience of our business model and the value of long lease duration, coupled with flexibility and the cost and capex structure and I'm proud of and grateful for the execution by our team in these unprecedented circumstances.
With that I'll hand, it back to Brad for a quick update on the mobile mini merger any closing comments and QNX.
Thanks, Tim.
So some of Im proud of our Q1 accomplishments in extremely confident in our revised outlook. Most importantly, im humbled by the compassion grit and purser billions of the will Scott team in face of the coated 19 pandemic.
We have the right strategy in the right team to continue to increase our long term shareholder value and Im looking forward to the transformational combination with mobile mini as we spent time with the mobile mini management team, which continued to be reinforce how much we are alike more than different and the very similar strong call.
In terms of the two companies together will Scott's modular space solution than mobile minis portable storage solutions will enhance the scope and reach for the value proposition that we bring to our collective customers equally as important each company has very predictable lease revenues long lived assets and attractive unit economics.
All of which drive long term growth and value creation for stockholders. These two great companies will certainly be even stronger together.
With that I'd like to thank you for taking the time to join US today. This concludes our prepared remarks as operator would you. Please open the line.
Certainly.
Hi, Andrew to ask a question you will need to press star one on your telephone.
Your question press the pound key again to ask a question you want me to press Star one please stand by well, we compiled the Q and a roster.
Our first question comes from Scott Schneeberger of Oppenheimer.
Thanks, very much good morning, everyone.
Doing well the I guess I'd like to start.
Looking at Slide 12, Thank you for the for the very detailed.
In addition deck by the way.
I just curious.
Could you elaborate a little bit on.
Additional work space for social distancing on are you seeing anecdotally any orders for that at this point across end markets. Besides government healthcare and and then also this offset of warehousing and distribution in the commercial industrial category could you. Please elaborate on that as well. Thanks.
Yes, Hey, Skus Brad.
Thanks for joining us we're absolutely seeing more than anecdotal evidence and then the need for additional space on project sites office sites schools et cetera.
As everyone conference contemplates the reality of the new social distancing norm.
So that's something we're working actively with customers on.
In some cases its reconfiguring furniture in the in the office they have.
Many cases, there is theres going to be a requirement for more space.
In addition to just let's say the social distancing within an office at a job site. We're also seeing.
The likely need for additional buildings to screen folks as they are coming onto job sites.
Especially in this kind of.
Restart phase if you will as these economies come back online.
Thanks, and just staying on this slide a real quick follow up in the energy category.
Not down not too bad in the first quarter.
I don't know how much you want to discuss about what you've seen in April but just curious because we've certainly seen a leg down add Dell and thoughts on how you're managing that business. Thanks.
Yes, the upstream portion such a small percentage of what we do and it's largely been stable.
For for the long term.
Certainly since 2017, so I don't expect significant further declines just given the mix of services were providing from that customer group.
Hi, Thanks, and then.
I guess bring you into the mix.
Thank you for the discussion on decremental margins.
And just curious to hear your thoughts on what the EBITDA cadence maybe over the balance of the year I know, it's very difficult to predict but just kind of consideration for for second quarter impact adverse impact and then.
And then various scenarios of how it may look in the back half depending on duration are involved.
Social distant thing thanks.
Yes, and new we clearly didn't give any sequential EBITDA guidance for a reason just given the really the inability to predict.
How long the demand disruption lasts.
Expect Q2 to be impacted probably the least.
Relative to each of the quarters just given.
That Moreover, our current installed base will be generating lease revenue and the churn of the portfolio is very slow.
But if demand is depressed through the ended the year.
EBITDA run rate would would decline through the end of year.
So it really all comes down to what is your view of the severity in the duration of this disruption I think we've got very good view of Q2 at this point.
In the installed base is performing exactly as we would expect.
And just one more quick if I can sneak it in just a follow on on.
On the pricing in the mix.
On what was the contribution from rate and what's the contribution from Vaps you gave the current update and you're still investing in Vaps I'm, just wondering if that that.
Contribution mix would change over the balance of the year on what you're looking at right now or should that stay fairly consistent.
Sitting here right now we have not changed our rate strategy and we're continuing to drive value added products right now so.
The here right now I don't expect the mix to change we did provide kind of the historical view of what happened during the financial crisis.
I've not seen a change in delivered spot rate trajectory. It did happen historically, but I think the beauty of that chart in the beauty of lease duration. In this business is that 15 month lag that you saw between the change in DSR in the change in a are so again, depending on how severe and how long. This goes I mean, there scenarios where bryce.
Just continues to operate through.
Demand disruption over time, because again the lease duration in the business today, 17% longer than it was back then which logically extends that period of time between DSR change and an average average rental rate change.
Great. Thanks, guys I'll turn it over you out.
You to pickup.
Our next question comes from Kevin Mcveigh.
Our next week.
Great. Thanks, and hope you all are staying safe.
Great opportunity you see the average lease duration 34 months, if so that I think thats up from 28 months is that right.
It's been up over 30 for some time.
This is Dan Hi, Kevin.
Just going back to the financial.
Crisis in 2007, it was in like that 27, or so month range.
And what you've seen consistently over the last.
12, 13 years is that lease duration has ticked up by a little less than one month per year over that entire period. It's been a very long term consistent trend and thats what provides the fundamental stability of the lease portfolio.
Got you saw that trick move cabin like when we acquired the act in portfolio at dropped down a bit acting at a higher mix of smaller single wide mobile offices than you saw it caught back up a bit when we integrated mods space. They add more complexes that tend to stem the stay on rent for longer durations.
So really the only changes in that metric over the last two years have been fleet mix driven by acquisition.
But if you just take a longer term historical.
Perspective, it's been a steady March upwards.
That's helpful. And then the chart, we looked at kind of at the order versus kind of the delivery schedule here in a way to frame how much have come to that delay in the scheduling is the physical shutdown versus just.
Hesitancy or is it does it all physical shutdown.
It's more weighted Kevin too.
Certainty with new starts.
So I got it projects the few that have been impacted.
Again as noted are largely starting to come back online.
They've just remained on rent.
So yes that shift is largely attributed to new orders.
With less uncertainty as to when specifically they'll start.
Great and then just one quick one I'll jump back in.
No more many congrats.
I was surprised the Tommy didn't get pushed out a little bit just given with the government shutdown any thoughts around that or just any updates on synergy targets, obviously, given what's going on that theres, a pretty fluid situation.
The only thing I'd add I mean, we've been working very closely we probably have close to 100 colleagues from both sides very organized process developing integration plans, that's going extremely well.
Than that so just providing confidence in the 50 million of cost synergies we've articulated before.
We've said we're confident in closing this in the third quarter, which we are look forward to.
Awesome. Thank you.
Our next question comes from Courtney.
Of Morgan Stanley.
Great Good morning, guys.
If you comment.
Maybe first I just want to confirm all the units that you guys have on right right now.
Collecting lease revenues are has had there been any.
Yes changes with certain customer group.
And then maybe secondly can you can you also just it drops and if the range of Capex outcomes for this year, you kind of outline the range.
Actual revenue scenario gas matter can tend to down 30, just in Twoq work and the balance of the year.
But can you mentioned how.
Prior cycles have access on.
Net negative so.
How bad with Romney has to be for that really be.
Area this time around.
Yes. This is Tim high Courtney into let's first start with the installed base and I commented, it's performing exactly as we would expect we have not seen any changes in in pricing return activity rental duration or payment activity.
So clearly there is risk there going into Q2.
But if you look at total receipts per week or number or percentage of the portfolio thats paying for weaker the average payments per week there've been no changes through the end of April so the portfolio is.
Performing as we would expect.
And there have been no kind of unusual discussions.
Around change due to changes in rental terms.
But we always worked with our customers.
On a on a regular regular basis.
In terms of the Capex range, if you look at page 26.
Of the presentation we've provided.
I think a realistic range sitting here right now for the scenarios that that we see.
So based on the.
$30 million of net investment in Q1, Thats kind of in the books.
I'd expect something similar to that in Q2, just simply to support the demand that we see right now so that's a pretty good run rate that that we've been on since Q4, and we'd need to see immaterial.
Further reduction in demand to take cut capex down significantly lower so in the sensitivity charts.
You go to the extreme example of maybe to 30% demand decline through the end of the year sustained going into 2021, that's a very severe scenario in our mind.
That would take capex down to the 100 million or so level and thats after having already invested 30 or so in Q1.
So thats you are beginning to see some very material cuts.
In that in that scenario and we'd be up obviously, taking a hard look at 2021 at that point as well, but way premature to make that that type of extrapolation.
Okay. Thanks, that's helpful.
And then you also had I think broken down by topped it's a different end markets and what you're seeing there.
Can you also just comment on portable storage and if there's any big discrepancies between what modular office sustainable portable storage as seen on and auto appreciate your comments about looking for for the for the deal to conclude in Threeq, but is there any scenario.
Becomes obvious that we're going into a more prolonged downturn or anything that would cause you at this point to think that this isn't the right time for that deal.
Not so perfectly complementary business.
In our storage position is relatively small, but if you look at order activities by end markets very similar.
Behavior. So it's kind of the same impacts if you will.
Okay, great. Thank you.
Our next question comes from Phil Ng of Jefferies.
Hey, guys good morning.
Within your within your guidance it looks like the midpoint, if I'm understanding this sensitivity table correctly, assuming about a 10% decline in demand for the rest of the year can you help us understand what that translates to on a units on rent and what you're assuming from at AMR in spot rate standpoint from one key levels.
I feel as this this is Tim so.
If you think about our original guidance outlook for the year, we really have an assumed much change in terms of the pricing or value added products trajectory. So we're really talking about a demand in variable cost.
Sensitivity.
Right here the range of potential outcomes.
If you focus on either a 10% demand decline for a quarter or a 30% demand declined for the rest of the year are just way too broad to try and give you kind of unit on rent.
Guidance, but in kind of the bottom right hand corner of those sensitivity charts. The unit on rent erosion is significant and that'll be the primary headwind.
For the year.
In that bottom right hand corner quadrant, though you are still basically flat from an EBITDA standpoint, so the way to think of that is.
Volume is roughly offsetting all of the Tailwinds that we have on.
Pricing in value added products, we're still executing months' based cost synergies, but there is also then going to be a headwind from sale activity as well as some delivery and installation so.
The mix all that together and it's a flat year under the kind of.
Extreme scenario that we.
I think is.
Yeah.
Reasonably possible sitting here right now, it's certainly not the base case.
But we don't we don't see scenarios worse than that at this point.
Guys only thing I'd add Phil is if we were in that bottom right quadrant.
We'd be aggressively adjusted fixed cost structures and such.
As we look into the second for the year.
Got it okay, that's really helpful and or deliveries weaker or stronger any particular end market for April.
And then I guess did you see any impact from some of these markets like New York or Boston, where construction was halted and how that's going to impact the shape of the year.
Yes, just a couple I mean I mentioned.
The very small special events.
Obviously were immediately impacted retails also smaller piece of our business more immediately impacted.
New York is a geography.
In Boston.
Let's say all of the end markets were impacted a bit quicker than others, but it's also where we saw some of the initial spike in demand.
For the Cobot response so.
No other than that Theres really nothing notable.
Across the various end markets or geographies.
Okay, and then I guess just from a historical perspective during the global financial crisis.
Were you able to pick up some market share because lot of your competitors are still reached all my mom and pop operators.
I think the point looking back at that.
Cycle chart is that this industry construct today as a lot different will sky in my space were pretty formidable.
Competitors back then and you also saw that the reinvestment in the well Scott business.
Lagged the recovery.
Simply because of our ownership structure at the time and the beauty here today is that we've got complete flexibility to lead that recovery and capture the share both organically or through further consolidation I.
I think for obvious obvious reasons I wouldn't look back there and say hey, that's the case study and how we captured share I'd say I look back at it and say here's what's different today and how we plan to execute the business going forward.
Okay Super helpful guys. Thanks, a lot.
Our next question comes from Matt No.
Of Barclays.
Thank you good morning, gentlemen.
Thank you for all the details the sensitivities and I guess a lot of the units impressions in the last I have a little bit longer term question, which is.
And the I think in the medium term, you'll see a lot of.
Maybe sectors that you didn't traditionally do lot of volume is asking for that space and social distinct and they get so for that as you think to this I was just curious if you have put any taught to longer term that you need to change our tweak or add to the strategy in the business model. If you see anything that has been seen.
It's clear to me.
Yes.
I would be Alpha August is about I'll focus on the.
Social distancing when it all just use our own internal offices as is a good case study right. So we've said every employee that's not absolutely required to be in a branch.
To deliver are essential services to work remotely from home.
As economies are opening.
We're now looking at transitioning back when you take every office layout and you look at the density of people.
Up to.
Sure at least for the medium term theres, the five to six foot social distancing when they're in their workspace, Gary you're always need to be wider.
Bathroom facilities might require.
Some modification et cetera. So we were looking at that in our headquarters and all of our share of offices.
And without naming specific customers.
We're seeing so many of those doing the same so it's too early to put numbers out there but.
Certainly social distancing requires more space, so theres, a silver lining on on the demand side of this on the on the recovery side.
That's it.
I would say.
One thing we learned again from the global financial crisis is.
Not to have the spoke assets.
Which we did have in that the cases education market. So.
As we look ahead, and we see new opportunities, we will seek to take advantage of.
Using common assets.
And then.
The other catalysts, obviously that I touched on is infrastructure stimulus.
Fairly optimistic about that.
Candidly it won't be a short term catalyst.
But in the medium to long term.
That that could could significantly lift and underpin Oliver end markets frankly.
Got it and then just one follow up the mobile mini transaction, obviously makes a lot of strategic financial sacks, you guys do you think.
That it kind of the diversification of the portfolio is probably even better timing that that's going on now I'll, probably didnt it wouldn't change your mind that away.
No I'm, even more excited about now you see all these two portfolios performed.
In an uncertain market environments.
Definitely two great companies will be stronger together Manav. This is Tim you've got the common long lived assets you've got the common lease duration.
Which causes the portfolios to churn.
In very similar ways, you've got significant customer overlap, but not perfect overlap, which provides for cross selling opportunity as well as diversification from a capital allocation perspective, you've got tuck in acquisitions across multiple asset classes as well as just a tremendous free cash flow profile on a combined base.
This which gives you a lot of Optionality deleveraging consolidation organic growth return of capital. So I think no matter, how you slice that went up two companies.
Our stronger together and more more powerful together.
Okay. Thank you guys.
Thanks.
Our next question comes from Sean Wondrack of Deutsche Bank.
Hey, Brad can hope, all as well and already safe.
Thank you for that great degree of information here, that's really helpful.
When we think about the business just given your longer lease duration and you're better visibility.
Is that what makes it able for you to sort it makes the structural cost down the line as opposed to taking them now.
So that if the market doesn't fall as much as you think you can recover faster or what's the rationale base.
You know sort of behind not taking those deeper structural cuts now.
Thank you.
It's not really a wait and see Sean it's more of the fact that the significant amount of our cost structure, which has already variable.
Right. So we've action to all of that that was let's say, it's adequate to address what we see right now.
Loan.
As Tim said, we always want to be in a position to support a recovery. So.
No. It's more just the the nature of our cost structure as depicted on the graph on the top of that slide.
Whereas.
The other thing I would note is.
We have quite a degree of seasonal variability, which is one of the reasons.
We retain such a variable cost structure.
And we're accustomed to flexing that typically in the fourth quarter and first quarter, reflecting that in any case and while demand that is down.
Sequentially right now it's still.
Not it.
Levels that are overly concerning these are more in line with levels that we operate kind of in that December January February timeframe as a normal course so.
It is it's how we constructed the cost structure.
Right.
Okay. Thank you that's helpful and then on slide 26 is great.
Is there a way to think about sort of working capital.
Demand were reduced but we see working capital benefits there further tail.
Yes, I think in the in the short run I think one thing we've been happy with is a stabilization of working capital goods clearly had a headwind in the first half of last year and has that stabilized after completing the.
Space integration at end of Q2 last year, that's been allow us that's allowed us in part two.
Deliver the free cash flow inflection that we had had planned so I wouldn't think of it.
Going forward as as a.
Huge opportunity if demand is going down.
Certainly I think they are side of the portfolio.
We'll we'll provide a benefit and that type of environment, we do take customer deposits. However, at the front, which is a bit of an offset and then payables were just compare bare vendors on time as we would so I don't view that as a.
Factoring into our thinking a lot when we're doing our different scenario planning.
Right.
Okay Thats it from me thank you very much.
Our next question comes from Brent.
Okay.
<unk> Davidson.
Great. Thank you good morning, Brad.
Hey, Brett.
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The pending orders metric you provided that.
Pretty encouraging I'm just wondering wider.
We'll be kept the.
Version historically, the actual orders just trying to.
Again handicap that.
Yes. So these are actual pending orders.
But of course, there's always a few orders that are canceled we've seen no change and cancellation rates. So the only thing we've seen that are the dates.
Associated with the actual physical delivery of the unit.
Is pushed out longer into the future. So if we were sitting here a year ago, but we would have expected to more of the current pending order book to be scheduled for delivery within the next four weeks.
It's kind of this rolling mill.
Rolling week window by which we manage the business. We've just seen that those orders shipped further out.
Okay, and then I guess my follow up.
From your perspective does this environment.
The team that.
Value proposition I'm curious does your to do catalog sort of expand include health and safety products and if so is that.
Potentially incremental to any expectations any material degree.
It's a great observation I think what we have seen through this is.
Continued interest in providing our customers, having us provide full turnkey solutions above and beyond just offices in furniture and sensation.
Bathroom facilities et cetera.
Much of that we do through third party relationships today. So for me. It just reinforces the fact that as we continue to expand the value proposition, we can bring to each one of these customers projects.
The the easier we can make it for them to more productive that can be the safer they'll be.
And frankly, the bigger opportunity for our shareholders. So.
I just.
Unfortunate cope with pandemic is kind of reinforce and validated.
Assumption Weve always settle.
Okay. Thank you best of luck.
I would now like to turn the call back to Brad sold with any further remarks.
All right, Hey, I, just want I want to thank everyone and wish everyone.
Safe and and health as we continue to navigate these incidents uncertain period. So thanks, everyone have a great debt.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.
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