Q2 2020 Willscot Mobile Mini Holdings Corp Earnings Call
Welcome to double Scott Mobile Media Holdings Corporation second quarter Twentytwenty Conference call.
This time all participants are in a recent only amount.
Peter will conduct question answer session and instructions will follow a decline.
And he wants you to play assistance during the conference. Please press Star then zero on your Touchstone telephone as a reminder, this conference call either being recorded.
I would now like to turn the conference over to your host Speaker and many predominantly the record of Treasury and Investor Relations. Please go ahead.
[music]. Thank you and good morning, before we begin I'd like to remind you that our press release comments made on today's call and responses to your question may contain forward looking statement.
This is an operations are subject to a variety of risks and uncertainties many of which are beyond our control and consequently actual results may differ materially from be forward looking statement.
A summary of these uncertainties is included in the Safe Harbor statement contained in our press release.
For a more complete description of these and other possible risks. Please refer to our 2019 form 10-K, and our other various FCC filings, including our quarterly reports on form 10-Q.
Please note Wolf got mobile mini assumes no obligation and makes no commitment to update or publicly release any revisions to forward looking statements in order to reflect new information or subsequent events circumstances or changes in expectation.
Should not place undue reliance on these forward looking statements all of which speak only as of today.
You should also note that our press release in today's call include references to certain financial information expressed on a non-GAAP basis.
We have included reconciliations to the comparable GAAP information. Please refer to the tables, a slide presentation accompanying todays earnings release.
The press release, we issued this morning and the presentation for today's call are posted on the Investor Relations section of our website.
A copy of the release will also be included an 8-K submitted to the FCC, we will make a replay of this conference call available via webcast on the company website.
Mobile mini Inc. Standalone earnings presentation for the second quarter 2020 can be found on the Wolfcamp mobile mini holdings Corp. Investor Relations website.
Later today, we will also be filing our 10-Q, what the FCC for the second quarter 2020.
Quarterly information and the related management's discussion and analysis of financial condition and results of operations of mobile mini Inc. for the quarterly period ended June 30, 2020 will also be filed by the company and an 8-K with the FCC all documents that I just referenced will be available in the Investor Relations section for web site the documents.
Files with the FCC will also be available through the FCC as well today's discussion of results of operations. In Q2 2020 is intended to cover historical results for both got Corporation and mobile mini individually for the three months ended June 30, 2020 or prior period on July 120, 20, well Scott grid subsidy.
Married close the merger with mobile mini Inc. and changed its name to Wolfcamp Mobile Mini Holdings Corp, unless the content otherwise required the terms company and Wolfcamp mobile mini referred to the combined company.
Now with me today, I have Brasil CEO of well Scott mobile many Kelly Williams, President and Chief operating Officer, and 10, Boswell, our CFO with that I'll turn the call over to Brad.
Thank you Emily and good morning, everyone I'm bread sold CEO of will Scott Mobile mini holdings and I'd like to welcome everyone under a company's second quarter 2020 earnings call.
Please turn to slide four of our Investor presentation.
As a quick reminder, we completed the transformational merger between will Scott mobile many one July 1st establishing the North American market leader, the book turnkey modular space and portable storage solutions with pro forma LTM revenues and adjusted EBITDA of 1.65 billion and 619 million.
In respectively.
As we work hand in hand, Kelly in the mobile mini team to prioritize our integration and execution efforts. Both companies individually delivered Q2 operating and financial results that I can simply classified as broad outperformance this execution and why did the unexpected an unprecedented pandemic.
Confirms the resilience of these two great business, which will be even stronger together.
I want to extend our sincerest, thanks to all will Scott and mobile many employees for their commitment to employee and customer safety and well be all while maintaining their focus on execution.
Moving to slide six.
This merger was rooted in compelling strategic and financial rationale importantly, it's worth reiterating well Scott and mobile many are truly complementary businesses.
These two companies business models are both based on strong recurring revenues from long duration leases and similar asset characteristics, such as long life low maintenance high margin short payback periods and strong cash flow generation.
By combining our fleets totaling over 365000 units or offering becomes more strategic invaluable to customers.
Diversity of our portfolio improves and we enhance the scale and profitability of the business.
We've identified 50 million of clearly actionable annual cost synergies related to this merger, which is in addition to the 20 million of remaining cost synergies, which are associated with little Scott's prior acquisitions.
We'll continue to increase penetration of turnkey solution or vaps across the combined portfolio that further we estimate up to 80% of our combined and markets use both modular office and storage you had only 40% of our customers are currently running from both Wills gotten mobile mini resulting in significant.
Kennedy's for cross sell and customer pull through for modular space to portable storage and vice versa.
Adding it all together, we believe the combined company will produce approximately half a billion dollars and in your free cash flow once fully integrated largely independent of market cycles.
Now please turn to slide eight for snapshot of our Q2 results than our updated 2020 outlook, which reinforces the resilience of the business model.
As previously noted both Standalone business is broadly outperformed in an extremely challenging period.
Kelly and Tim will provide additional context later I would like to highlight Q2, adjusted EBITDA margin expansion year over year, a 480 basis points and 470 basis points for will Scott and mobile mini respectively, and pro forma free cash flow generation of 70 million driven by 39 million from where.
Scott and 31 million from mobile mini both of which included some onetime merger and integration related cash expenditures.
Both companies remained extremely disciplined with respect to pricing with will Scott delivering its 11th consecutive quarter of double digit rate growth across to choose modular division and mobile mini increasing North America storage rates by over 3% with our combined scale expansion of our price optimization tools and increasing.
Got you added products and services penetration, we are confident and continuing to drive rate improvement as we look ahead.
This brought outperformance executed during the crisis provides us with great confidence and updating our full year 2020 guidance, which at the midpoint would result in pro forma adjusted EBITDA growth of 5% on flat revenues and a reduction in capital expenditures of 25% versus the prior year.
Now turning to slide nine I'd like to highlight our unique unit level economics.
I remind approximately 90% of the pro forma adjusted gross profits are derived from very predictable recurring leases of long lived assets with long average lease durations of greater than 30 months across our core asset classes.
Still storage containers, which represent just over half of our assets by count and 21% of our net book value yield IR ours, a 30% over a 30 year useful life.
Modular office, which represents about a third of our assets by count and 62% of our net book value yield I ours, a 25% for over a 20 year useful life.
We believe these already great returns across these assets can be even further improved as we integrate leverage or combined scale expand price optimization process has continued to drive apps and we relentlessly pursue operating efficiencies.
Slide 10 provides a historical perspective as to the free cash flow resilience of the two standalone companies following the last global financial crisis.
Well, we did not anticipate this pandemic, we expected to experience a cycle at some point and had our playbooks ready to execute.
Both companies reacted immediately to the associated net decrease in demand for new lease activations by reducing capital and variable cost our respective to Q2 thousand 20 outperformance reaffirms the resilience of these two standalone platforms.
Now please turn to slide 11, who will provide a high level update of our demand outlook across our diverse end markets.
As a combined company, we have approximately 85000 customers with the top 50 customers accounting for only 15% of the total revenues demonstrating how little customer concentration. We have we also estimate that 75% of our revenue our from recurring customers.
Obviously, all end markets are still adjusting following the cobot shock with some offsets from incremental social distancing needs and screening.
What we've seen stabilization and some sequential improvements headed into August we remain extremely cautious on the volume outlook and are curtailing capital spending accordingly.
Turning to slide 12.
While the one aspect of our multi level lever profitable growth equation that would do not control as demand for new Activations together will Scott and mobile many has a myriad of idiosyncratic top and bottom line levers and an extremely agile capital allocation process all of which are fully in our control.
Working down the page I'll highlight several of these powerful growth levers first book well, Scott and mobile many have proven track records of price leadership, which is only further enhanced as we integrate the business and leverage our collective scale. This provides for multi year revenue growth Tailwinds, which we intend to further bolster.
We have another multi year organic revenue growth tailwind of 150 million across the combined business associated with simply maintaining the vaps penetration on new Activations that we've already achieved over the last 12 months.
As we continue to further increase that penetration towards our long term stated target of 80%, we further increase and extend this growth.
We have as mentioned over 70 million of identified an actual cost synergies you have to be realized from this merger in prior acquisitions.
Following the close of the transaction, Tim and Kelly and I have been able to spend some time in the field and we're now even more excited about the further upside associated with cross selling opportunities across the combined customer base.
We're also deploying technology for real time operational decision, making business optimization and enhance customer service.
Well, we're confident in our ability to execute this plan all in the foundation of a robust balance sheet over 950 million of liquidity and immediate robust free cash flow generation, which we plan to deploy towards the long term multifaceted capital allocation strategy the strategy prioritizes rapid deleveraging.
Into the three to three and a half turns by the end of 2021 continued organic growth, while achieving the cost and commercial synergies associated with the merger as well as returning further value to shareholders in the form of share repurchases.
With that I'm pleased to turn the call over to Kelly.
Thanks, Brad Good morning, everyone I Am Kelly Williams will Scott mobile Minis, President and Chief operating Officer.
To begin like Brad I want to thank all of our will Scott mobile mini employees for their commitment and dedication in these uncertain times their safety and health is most important to us I'm happy to report that our integration is progressing as planned the will Scott mobile mini team is focused on integration and execution. In addition to driving the business forward the strength of the team.
Team aligned around these priority priorities positions the company to operate with better efficiency and achieve greater profitability, then, we'll Scott and mobile mini each did as standalone companies.
Today, I will discuss the second quarter KP eyes, as well as provide an update to our demand trends during the cobot 19 pandemic.
The strong Q2 results of Wills gotten mobile mini demonstrate the resilience of our business model the installed base or units that were at customer sites pre cobot 19 has behaved as expected as a result of project completions and unit returns slowing relative to last year.
We continue to see this today in the second quarter Wills got units on rent were only down 2% sequentially from the first quarter mobile Minis North America storage core units on rent were essentially flat sequentially from the first quarter.
Slide 14 lays out the demand trends in Q2 and in July the demand indicators for both businesses have been improving on a sequential monthly basis. Since April 2020, and you can see from the top charts on this page.
Starting with the top left the green bars represent monthly order rates for the U.S. modular business in 2020. Similarly on the top right. The blue bars represent monthly net new orders, excluding seasonally units at North America storage in 2020, the great Shadow bars behind both of them represent the order rates for the same period in 2019.
Well, the leading indicators of demand across our diverse end markets has decelerated in April.
We are steadily narrowing the gap from prior year on both core segments.
The U.S. modulus July order rates, it will Scott were down 5% versus prior year, which compares to order rates being down approximately 20% year over year during the second quarter.
North America storage is net new orders, excluding seasonal units at mobile mini in July were down 4% versus prior year, which compares to order rates being down greater than 20% year over year during the second quarter.
These two charts show that the new order trend is moving in the right direction with the new orders improving on a second sequential monthly basis since the end of April 2020.
The bottom chart show a snapshot of the pending deliveries the green and blue portions of the bars, respectively reflect a portion of orders at U.S. modular and North America storage, which have delivery dates scheduled over the next four weeks, while the grey reflects those scheduled for delivery beyond the next four weeks.
Pending orders were scheduled delivery dates for the next four weeks for both businesses are down compared to the same time last year, but compared to the pending orders in April 2020, both businesses have experienced a meaningful improvement in scheduling and customer certainty to project start dates over the past three months.
Yes, modulus pending orders as of August one 2020 for modular units scheduled for delivery over the next four weeks are down approximately 8% to prior year versus having been down 25% year over year as of April 26, 2020.
North American stores solutions pending orders, excluding seasonal units as of August one 2020 scheduled to deliver over the next four weeks are down approximately 11% to prior year versus having been down greater than 25% year over year as of May one 2020.
Mobile Minis, North America storage business experienced as a routine increase in seasonal demand every year in Q4 due to holiday related demand for big box retailers.
We refer to these a seasonal units, which are ordered nationwide in large volume for storage of additional holiday shopping inventory on site.
Heading into the pre holiday season, now we are anticipating seasonal demand from big Big box retailers in Q4 to be similar to prior year.
Q4 seasonal performance for 2018 in 2019 were record years for mobile many mobile may seasonal business has a nice complement to will Scott seasonal slowdown in Q4 and Q1.
Now turning to slide 15.
The majority of the combined companies installed base has behaved as expected they remain on rent today with no change to customer collections will Scott's use modular had a total average units on rent of approximately 103000 for the three months ended June Thirtyth 2020, a decrease of 1.3% sequentially from Q1.
Mobile Minis, North America storage solution set a total average units on rent for the same period of approximately 117000, which was 3.1% decrease sequentially from Q1, However, mobile minis core units on rent was essentially flat on a sequential quarterly basis.
This low churn proves the resilience of our business model, which is based on recurring leasing of long lived assets with an average lease duration of nearly three years.
With regard to the installed base, we have not seen an acceleration of units returning to our branches in either of our two core segments us modular and North America storage in fact, the cadence of unit returns has actually slowed slightly during the cold period.
Charts on this slide further depict the complimentary seasonality of the core segments volume.
Now on to slide 16, both businesses strong rate performance during the past few months in the face of cobot related headwinds demonstrates the beauty of the business model.
Well Scott achieved another great quarter in which modular space average monthly rental rates also known as a Omar.
Increased 9.5% year over year to $669.
The U.S. modular segment, they amar increased 11.3% year over year to $681 Q2, Mark the 11th consecutive quarter of double digit rate growth for this segment and we expect a momentum to continue as we look ahead.
You asked Modulars am our increase of 11.3% year over year was driven by a combination of our price optimization tools and processes as well as continued growth in our ready to work solutions and deepened value added products and services, where vaps penetration across will Scott customer base.
We also saw sequential increases in AMR from Q1 into Q2, so the pricing tailwinds in the modular portfolio continue to increase and drive sequential increases in modular leasing revenues.
As of the end of the second quarter of the average monthly rate for Vaps units increased 13.3% year over year.
Thats continues to represent both in organic revenue growth stream for existing will Scott fleet and also a great cross selling opportunity to bundle with mobile mini steel ground level offices or glows.
Mobile Minis North America storage also achieved an increase in year over year rental rates of 3.2% for Q2 2023 months ended June Thirtyth 2020, mark to thirtyth consecutive quarter of year over year rental rate increases for this segment.
Our ability to increase rates annually is based on servicing our customers with high quality products high levels of customer service, a large salesforce and the use of technology, including mobile mini connect our customer portal.
Looking at slide 17.
Throughout the second quarter, our top priority was the health and safety of our employees customers and vendors, while executing on our business model.
All of our branches remained operational throughout the quarter with limited disruption.
We continued and will continue for as long as the pandemic persists our safety protocols at all locations.
As a combined company, we're helping customers to fight the pandemic across our full platform of complimentary products that include additional space on project sites office sites schools hospitals and more to facilitate the new social distancing norm.
Temporary testing facilities and screening sites screening checkpoints at the front interests of job sites additional storage for supplies related to testing and screening and managed services handwashing stations bundled with our office and storage solutions.
Finally, please turn to slide 18.
In Q2, both businesses closely managed costs in order to offset the impact of current revenue trends in the market conditions. We also proactively address semi variable expenses and overhead optimization.
These actions drove adjusted EBITDA margin expansion 470, bips or more for each business highlighting the potential flexibility. It will Scott mobile many to adjust both the cost structure and capital expenditures based on market conditions in order to preserve margins and free cash flow.
To date, given the uncertainty around the duration of the downturn, we've auctioned action the variable components aggressively as always we'll let order delivery data that we see from the field on a real time basis driver decision, making on any further necessary cost adjustments.
Our demand driven model allows us to proactively respond to this current economic situation.
The majority of net Capex spend is discretionary and we can flex capital expenditures fairly quickly if necessary Tim will touch on this later and provide updated capex guidance.
While customers remain uncertain about projects start dates it's important to note. We continued to experience increases in pricing and vaps penetration and no material change and customer payment behavior.
Return of units to our yards has not accelerated and we remain focused on continuing to service our customers as an essential service provider from are fully operational branch network.
With that I'll turn the call over to Tim.
Thanks, Kelly, let's jump into the financial review section for a bit more on the Q2 results are improved post merger capital structure and our updated 2020 guidance.
Slide 21 captures the will Scott Q2 highlights and we're extremely proud of the results given the unprecedented operating environment and the completion of another transformational merger with mobile many.
Revenues proved to be extremely resilient, reflecting both the end market diversification as well as the long lease durations that lend stability and predictability to our topline.
While total revenue was down slightly versus prior year, our modular leasing revenue increased 2.3% from 2019.
Modular leasing revenue also increased sequentially from Q1, demonstrating that our tailwinds in pricing and value added products persisted through the worst months of the pandemic and our lease revenue run rate continues to increase heading into Q3.
Profitability in margins continued to improve both versus prior year and sequentially.
Adjusted EBITDA increased by $10 million, despite the 7 million dollar decline in revenue.
The revenue decline was confined to our lower margin sales and delivery and installation revenues, partly offset by growth in our modular leasing revenues.
So while revenue mix contributed to the margin expansion modular leasing revenues themselves expanded by 430 basis points year over year due to variable cost reductions.
We realized another approximately 5 million dollar benefit.
For mob space acquisition synergies and executed targeted reductions in other areas due to lower demand.
Together these factors drove the 11.4% increase in adjusted EBITDA, and 480 basis points of margin expansion versus prior year, taking adjusted EBITDA margin to 38%.
GAAP net income also increased by $24 million to 12.8 million in Q2, So we delivered strong and expanding profitability across all metrics, which is exactly what we expected in this environment.
In the top right chart free cash flow continues to inflect positively totaling $39 million in Q2, and representing our fifth consecutive consecutive quarter of free cash generation.
Slide 22 highlights these accelerating free cash flow trends.
Cash provided by operating activities doubled sequentially from Q1, and it was up 65% versus prior year. The formula is pretty simple adjusted EBITDA is up due to modular leasing revenue growth and cost reductions interest expense is down 10% year over year and working capital was a modest source of cash in the quarter with.
Stabilized accounts receivable and increases in cash from customer deposits.
At the bottom of the page, we're continuing to operate a reduced capex levels due to the demand environment.
Net cash used in investing has been down year over year in each of the past three quarters and was down 15% in Q2 versus prior year, which is roughly in line with the year over year delivery volume declines.
Our cash used in investing over the last 12 months is approximately $135 million and I expect we'll stay at about this run rate on the modular side of the business for the foreseeable future unless the demand environment changes materially one way or the other.
Overall, we expect operating free cash flows from the modular business to remain on this trajectory in the second half of the year, we will have approximately $51 million of remaining transaction costs, which will be expensed and paid in cash in Q3, and another $25 million of merger related cost that had been accrued previously.
And were paid at closing.
Again, most of these onetime costs were paid at closing and are in our July 1st debt balance, but I wanted to flag. This since they will appear as a headwind in both our Q3 income statement and cash from operating activities.
Turning to slide 24, I had the privilege of sharing another quarter of solid financial results for mobile many.
In many is Q2 results, we see a similar story of portfolio resilience supported by long lease durations and pricing power extraordinary profitability driven by flexibility in both the cost structure and capital expenditures and consistent free cash generation with this being mobile mini his fiftyth consecutive quarter of positive free cash flow that's over 12.
Five years.
Remarkably adjusted EBITDA of $56.3 million was essentially flat to prior year, Despite an $18 million decline in revenue and margins expanded 470 basis points to 42.6%.
Mobile Minis team did an outstanding job rightsizing the cost structure to align with the Q2 demand environment, taking out approximately $6 million of cost in the quarter.
Over half of the revenue decline was driven by mobile minis tank in pumps segment with the remainder driven by trucking revenues due to lower delivery and return activity.
Similar to rental revenue trends into will Scott business mobile minis storage solutions business was remarkably resilient due to diversification and long lease duration in the portfolio and increases in pricing and managed services managed services generated $3.1 million of net revenue in the quarter and was up nearly 82%.
Q2 of 2019.
GAAP net income increased by 22% to $17.2 million and free cash flow increased 38% sequentially from Q1 to $31 million in Q2 and would have totaled $44 million, if we exclude merger related costs.
Similar to the will Scott results mobile mini delivered solid profitability and expanded margins at all levels.
Page 25 breaks down mobile minis cash flows further in the top chart operating free cash flows of $39 million increased sequentially by 6 million.
The decline relative to prior years, a bit misleading, we incurred $13 million of cash costs in Q2 2020 related to the merger and in 2019 mobile mini drove sharp improvement in accounts receivable with days sales outstanding dropping by approximately 10 days into the low sixtys most of that improvement incurred occurred in the first.
Half of 2019, representing a $21 million source of cash last year and mobile mini has done a great job maintaining those dsos into low sixtys.
In the bottom chart net capex dropped by 65% to $8 million in Q2 with most of that investment going toward ground level office conversions, which has continued to grow units on rent in the market and achieved a 7.2% rental rate increase year over year in Q2.
This highlights the extreme flexibility we have to manage discretionary capex in these businesses. This flexibility is even greater across the storage asset class altogether. The mobile mini team delivered an outstanding outstanding second quarter.
Shifting quickly to our debt structure on page 26, given the merger closed on July Onest, the right hand column showing the July 1st debt structure is more relevant than our June thirtyth balance sheet because it shows the net result of the merger related financing activity and represents our debt structure heading heading into the third quarter.
As reported previously we put in place a new 2.4 billion dollar ABL credit facility secured by the combined asset base of will Scott mobile many.
Merger close we had over $915 million availability, so combined with our accelerating free cash flows we have significant excess liquidity available to support any potential operating requirements.
The ABL credit facility has a variable interest rate of LIBOR, plus 1.75%, which is a lower spread than in will Scott prior facility and there is no LIBOR floor. So we are benefiting fully from the exceptionally low interest rate environment.
Concurrent with closing the merger, we refinanced our old 2022 notes by issuing the new 2025 notes.
We issued the 2025 notes in June contingent on closing the merger. So they show up on the June balance sheet, along with $655 million of restricted cash and you see the 2020 to two notes are gone as of early July.
Overall in the pro forma financial statements that we'll file today, you'll see that pro forma interest expense for the combined company is down approximately $32 million or 20% on an annualized basis relative to the combined reported 2019 results.
Our annual cash interest expense going forward is approximately $115 million, excluding amortization of deferred financing costs at our weighted average cost of debt is approximately 4.4% representing significant value accretion to shareholders, resulting from the recapitalization of the company.
We subsequently announced the redemption of 10% of our 2023 notes, which will close tomorrow, and we will continue to optimize the debt structure opportunistically.
Overall, we've put in place a simple debt structure that gives us all of the liquidity and covenant flexibility necessary to operate this business over the long term.
Quickly shifting to our equity structure on page 27, similar to the debt discussion the merger related acute equity issuance took place on July Onest. So you see the June Thirtyth common share count increase by 106 million shares on July 1st to approximately $228 million.
228 million shares outstanding currently.
Importantly on June Thirtyth TDR capital exchanged its minority interest in our subsidiary will Scott holding Corp. for 10.6 million common shares which allowed us to collapse. The prior class a and class b structure into a single common share class. You'll note. This also eliminates the minority in.
Interest on our June Thirtyth balance sheet and will eliminate the minority interest in our income statement going forward.
We remain committed to simplifying our equity structure over time and moving to a single share class is an important milestone on that journey.
Our revised 2020 guidance on page 28 is the best way to wrap up the financial review and give you a sense for where we're headed.
While this has already been an extraordinary year due to the pandemic and the merger will Scott mobile mini expects to deliver solid 5% adjusted EBITDA growth and approximately $460 million of adjusted EBITDA less net capex at the midpoint of our updated guidance ranges on a pro forma basis as if we had been together.
Other since 2019.
You can think of the midpoint of the guidance is approximately $390 million of EBITDA contribution from will Scott and approximately $240 million for mobile many.
There is limited synergy realization until we can consolidate ERP is in the first half of 2021.
So thats, a clean kind of year over year comparison versus 2019.
The topline will be flat on a pro forma basis with growth in core modular and storage rental revenues being offset by lower sales and transportation revenues due to the lower demand environment as well as declines in our tank and pump business.
We expect adjusted EBITDA will be up 5% for the year at the midpoint of our guidance with margins expanding 240 basis points to 38% on a combined pro forma basis.
And under the Hood, we think adjusted EBITDA will be up year over year in every operating segment with the exception of tank and pump.
This is truly extraordinary performance in this market.
And perhaps more importantly, sitting here in August we can look confidently into 2021, given the visibility provided by lease duration, our superior competitive position and the powerful value drivers inherent in this merger that we're only beginning to execute.
That I'll hand, it back Brett.
Thanks, Tim Kelly now as we've stepped back and reflect upon where we are today, we remain convicted in our ability to deliver on our commitments.
All while creating an exciting future for our customers business partners and colleagues the resilience of our business model Bill on recurring rental revenues long lived assets, increasing rates and slow churn of the portfolio. In addition to the new idiosyncratic revenue and earnings growth levers associated with the merger all to.
Together, we'll continue to provide substantial shareholder value creation for years to come.
Turning to slide 29, I would like to outline our capital allocation priorities.
Above all we're committed to rapidly rapid deleveraging to achieve a target leverage ratio range of 3.0 to three point fivex by the end of 2021, while funding all organic growth opportunities.
And what we're prioritizing integration will Scott and mobile many in the next 12 months, we'll continue to Opportunistically consider smart accretive acquisitions and further portfolio optimization.
We're also introducing a 250 million share repurchase program as an initial step to further supplement shareholder returns using our robust free cash flow. This authorization program as multi year with no expiration date and offers us flexibility in the amount and timing of repurchases, we're not paying a dividend.
This time, although the board of directors will continue to review capital allocation priorities on an ongoing basis.
In closing please turn to slide 30, I'd like to finish by extending a sincere. Thank you to the collective will Scott mobile mini team, who is going above and beyond to serve our company and our loyal customer base during both the merger and the ongoing pandemic.
Importantly, the two teams have collaborated to establish a harmonized vision and values for the new combined company and these principles will guide how we operate as both the team in the marketplace and in our communities.
Well, we're proud of our respective will Scott in mobile mini cultures, we've reaffirmed our belief that were more liked in different and are extremely excited about our future we will absolutely be stronger together.
I wish all of you listening today continued safety in good health. Thank you for taking the time to join US today. This concludes our prepared remarks, operator would you. Please open the line.
Ladies and gentlemen, if you have a question at this time. Please press the star and then the number one key on your Touchstone telephone question has been answered all your wish to remove vessel from the Q. Please press taski.
First question is from the line of Scott Schneeberger at Oppenheimer.
Line is open.
Again, Scott Schneeberger of Oppenheimer. Your line is open.
Thanks, very much an operator good morning, everyone.
The Brad I think I'll pick up where where you just left off with with your prioritization going forward and use of capital just could you elaborate a little bit more on the board's decision.
No dividend that size.
Share repurchase and then and then obviously the prioritization of debt reduction in use of cash process.
Is it because we've talked on prior calls this is not an either or platform right with the nearly half a billion dollars of free cash flow will be generating it can be in all of the above.
As mentioned first and foremost first and foremost we're prioritizing de leveraging into that three to three and a half.
Ratio range by the end of 2021.
We think we have ample cash flow to pursue all the organic.
Any opportunistic M&A that might come along such that will be.
Realizing the opportunity return incremental value to shareholders good healthy debate.
As well as al site advice with respect to preference for dividends versus share repurchases and the board landed unanimously on share repurchases as the preferred preferred path. If you will at this point in time.
The sizing Scott simply to some multi year.
Approval as we've mentioned before Theres no indie film and provides us ample flexibility if you will over the next several years.
Thanks, Brad appreciate it just just two more from the if I could.
Curious on the primary drivers and the guidance increase.
Just gave an update on on on where would have been where would the contribution from some WSE and maybe standalone just curious what.
What from each company, where the puts and takes as far as looking at the guidance increase overall for the rest of your thanks.
Scott. This is this is Tim so on the well Scott side of that business, you'll recall the kind of the grid. We gave you back in Q1, and we're tracking solidly in that kind of 15 ish percent.
Down volume assumption.
And likely through the ended the year, so I think that aligns pretty well with the 390 million of EBITDA guide at the midpoint and we've done what we've needed to do in terms of managing the cost structure in order to deliver that as evidenced by the.
Margin expansion on the will Scott platform. So I view that is.
Certainly a net positive to where we were sitting at the end of April in our last call and I think we're confident in that that outlook on the mobile mini side of the business.
There are there positioned to look deliver a basically a flat EBITDA year.
At about 240, which is the midpoint of the guidance I, just think thats a tremendous outcome given you've got a pretty substantial year over year headwind in the tank in pump business being offset by growth in the core storage solutions business ill offer Kelly if you want to elaborate anymore on the outlook, but I think we feel very good about about the updated range.
Yes, I would agree I think Scott I think the business trends are are certainly more stable as we made mentioned in the prepared remarks.
There's certainly a nonresi construction is is as a headwind, but we continue to.
To remain very assertive in terms of our Salesforce, we see all the productivity measurements are up and and so I think we're.
We're fairly optimistic here about managing the business kind of at this new norm and we've certainly been able to see increases in flow through across both companies and brand remain ops optimistic the remainder of the year.
Thanks, I appreciate all really job well done and then the final question I alluded to.
Could you address at the.
The bottom mobile slide for all slide 14.
The order book is up substantially for mobile mini and down a bit year over year for will Scott could you just speak to what that says going forward and maybe a little bit of the difference between the two did you operating units just curious about that thanks.
Yeah, It's a good if you recall back in.
April and then even in June we had been showing an order book that on the will Scott side that was up call. It tenish percent year over year.
Don't get too hung up in exact these will fluctuate a bit.
Depending on the point in time, you're looking at it was encouraging on the well Scott side is you've got a much stronger percentage of that order book scheduled and if you just look at the top charts.
The order rates relative to prior year, they're actually remarkably similar across the two businesses.
As of July trending down mid single digits year over year, So I wouldn't get to Austin just at the overall magnitude of the order book I think the takeaway here is that the order deficit to prior year has converged every month sequentially. Since April when we started reporting this and I think that.
There was order rate trends are very comparable across the two businesses, yes, I would just add I think that's spot on and Scott. If you look at that overall order book at mobile mini up 26% I think I'd really hone in on the 30 day outlook, which is very similar in terms of the orders that are scheduled to next four weeks being so high.
Hi single digits down high single digits for both Theres.
The National account program at mold. Many certainly allows us to book these orders earlier, but some of that business is more forward looking into late Q4, and even early Q1 and 2021, so very similar new order rates actually consistently across both brands.
Excellent Thanks, I'll turn it over.
Your next question comes from the line of Kevin Mcveigh. Your please go ahead, Sir your line is open.
Great. Thanks.
Congratulations.
You folks.
On the transaction is great you'd made a comment.
80% of your clients use FERC modular in storage, but only 40% you so mobile mini indices, which will Scott.
Is there any sense of with the opportunity can be.
You are able to step up that.
The rate to kind of that 80% or how you're thinking about that opportunity.
Yes, I think.
We've got some more work to do there, but as I mentioned getting into the field looking a bit under the hood a bit more we're quite excited what we believe is 80% of our end markets. If you just look at those stack on slide 11 used both office in storage.
Well, we know factually is about 40% of our customers combined customers are pulling from both will Scott and mobile mini so implies a significant.
Upside if you will cross sell one across the other.
We need a little little bit of time to continue to put our plans together to talk longer term about this and what I would say to very.
Top strategic levels, we have the combined about 45% share of the office market and about 25% share of portable storage and we think the opportunity over time to converge. Those two if you will is the right way to think about that but in the multiyear lows.
Let us take the time to put together proper plans and we'll talk about more in the future.
So some and then is there anyway to frame.
The call that impact, obviously, I think you're seeing some step up in revenue terms that demand on that but just how you're thinking about the revenue impact until they get more normalized environment and then.
From an expense perspective received maybe incremental opportunity to optimize expense that you wouldnt otherwise.
This is Tim Kevin I'll start and I would just go back at the order the order data that we've presented to you and what you saw through the course of Q2 was order rates at both companies down solidly 20% year over year. So.
I'd say the bulk of that is coming from disruption in the core end markets of construction and commercial and industrial but we are seeing some mitigating increases in demand related to social distancing. Obviously, the net result is down so far.
But those order rates are improve.
Really.
It really has no impact.
No measurable impact on pricing or value added products and services you continues to see great.
Rental rate traction across the core modular business and solid 3% year over year increases on the core storage business. So no change there and no change in terms of inflows from customers.
So that's that's what we see sitting here today.
Awesome Congrats again.
Your next question comes from the line of Brent Thielman of D.A. Davidson. Your line is open.
Great. Thank you good morning, congratulations on that reached in the merger.
I guess at a question on the tank business for the legacy mobile many just wanted to get a feel for your confidence in and managing that about breakeven or cash breakeven.
Through this tough environment.
Sure Ventas Kelly.
It's a challenging environment I don't think theres any doubt I think.
I talked about this on the last call I mean, we really.
Uptake has been very proactive and taking cost out of business and managing it in line with revenue.
I think there's a there's a couple of things first of all I think the industrial softening in the second half of 19 was exacerbated in the first half of 2020 by an oversupply of oil.
No.
Lower oil prices reduced refinery capacity utilization those types of things that cobot 19 has an assisted with at all so I think this we have stabilized at this new norm and I think it's probably going to take something at the.
As it relates to the virus for to change substantially so that said this kind of new.
Model that we're running under I think we ran nearly 30% EBITDA margins in Q2 and I made mention of this on on the Q1 call, which was that we'll we'll manage the business appropriately I think the the key here is again, we're aligned over 50% of our customers are blue chip downstream customers in this volatility that's occurring in the downstream is really on per.
Precedented, so we're well positioned for any sort of response here in terms of the macro to be able to get back to.
Really getting that that revenue source back to that's been loss there, but I think in the meantime, we're managing that business very effectively and I still would tell you.
To guide towards that 30% plus EBITDA range and.
And no material change in the in the outlook from what we can see.
Okay and then my second question. My guess is more of a clarification, Tim the comment that every operating segment, except tank and would be up.
Year over year for adjusted EBITDA that was related to full year 2020 or is that second half 2020 over prior year or both.
For full year.
Full year, so this segment segments being.
Well, Scott US, we'll Scott other North America.
North America storage UK intent can pump.
Yes, okay, great. Thanks, Tim.
Your next question is from the line to feel none of Jefferies. Your line is open.
Hey, good morning, everyone. Congrats on a really solid quarter in a tough environment.
Right. If I heard you correctly, the 50 million of synergies from the combination you not expected to realize much of it until the ERP system is implemented I think by the first half can you give us a little more color in terms of how we should think about the ramp.
Then.
Until you implement that ERP system does that limit your ability to cross sell and perhaps optimized pricing between both platforms.
Yes brick and just a reminder, the $50 million in addition to the $20 million.
Cost synergies that are many fremont space and indeed.
We will not start substantial realization of that until we kept the Europeans over early next year.
Such that we expect 80% of those to be in a run rate year after that.
I would say the ability to cross sell.
Is not hindered if you will by not having the systems combine nor is it fully optimized so think of us a little bit more like a phone a friend right now getting to know each other.
But the branches across the street.
Ben post cut over that will be well automated.
Got it Okay and then.
Yes, Im just just to maybe elaborate on the timing of the cost synergies. So the 50.
Assuming we're successful with the ARPU migration in the first half next year, we expect about 30% of that 50 to be in our run rate in Q3 of next year and we expect 80% of the 50 to be in our run rate in Q3 of 2022. So two years post closing and that's a fairly similar cadence that we would have seen.
If you think back to that might space.
My space integration.
Got it thanks for the color and then.
Brad and Kelly you guys had that little time to kind of look under the hood for each of the businesses.
No on the well Scott side, you guys have done great things on the price optimization was on the tools that you have how does how do love both companies kind of stack up is there an opportunity to optimize both platforms in less than they are on the many side is there an opportunity there or pricing is actually pretty solid to begin list.
This is kelly ill jump in yeah, I mean first of all I.
I couldn't be more impressed with what we've seen from will Scott and I mean.
Made reference to this and the last call that we had I think culture means a lot. It means a lot to both companies Brad referenced the creation of the values between both organizations I think that I think both companies are certainly.
Getting to know when another but I think are our we're certainly very excited about what we've seen I touch on technology. Its technology is a huge differentiation differentiator for mobile many we operate we believe much more efficiently since we've implemented Sep we use real time data down to the branch level to make decisions on asset management I think when you think about the two coming.
Together thats, the increasing footprint is going to allow us to to increase utilization by sharing assets being closer to the customer.
The rate optimization technology will Scott's actually ahead of many on that and I think you can see that's that's going to be a big opportunity for us really what the pricing on the many side has been more around just the.
Discipline of of setting expectations and more governance at the at the company level.
Of setting 2% to 3% expectations were will Scott certainly exceeded that.
So I think there's some real opportunity there I think again, what will come from you know aligning on the platform or.
Mobile and digital apps that many is using to reduce.
Time in the yard our drivers transact quickly with customers with a mobile app.
That allows us to be more efficient and delivery and pick up and there's a lot of things from a technology standpoint that will occur once we're aligned on the platform that many has really been able to take advantage of that I think I can see in the early stages will Scott will be able to take advantage of some of those.
Those tools as well and create efficiencies and optimization that that may be many as has been a couple of years ahead because of the the ERP transitioned back in 2016.
Okay, Great seems like a lot of lessons learned on both sides you guys. Good fully optimized and then a question that buyback program has announced.
You need to see senior leverage target hit that three to three times leverage target before you step in for a buyback or just more of a line of sight dynamic and then longer term. Your philosophy on buybacks is this going to be more opportunistic or you're planning to use.
Cash flow systematically for buybacks. Thanks, a lot and good luck in course.
Hey, Phil This is Tim Thanks, you understand the forward visibility that we have in this this business in its across both the storage and the modular platforms. So we're sitting here today.
Nine months out talking about a leverage target at the end of next year.
We think that we think we can deliver so it is very much a line of sight.
Type think.
Type.
Buyback authorization.
And I think you can assume it will be kind of more opportunistic at higher leverage levels and then.
Perhaps more of a consistent deployment of.
Free cash flow as we get closer and closer to that target leverage range.
Got it Super helpful guys. Thanks, a lot.
Your next question comes from the line of course me a couple aneurysm Morgan Stanley. Your line is open.
Hi, good morning, guys.
Now, let's make you go back to the order sequential order rate comments that Tim I think you cut out that.
Can you just clarify being an improvement kind of in your core business sequentially or has most of the order improvement really come from.
Those opportunities as a result.
Since seen and co op Ed.
And then can you also comment on whether we started to see that order rate improvement reflected in units on rent or if that's still on the come I think you commented that.
Improved sequentially and.
Modular up in North America.
I don't think this may not much of the last.
Yes, Cornell start the answers, it's both we're seeing stabilization and some sequential gains across the various end markets.
We look at order rates heading into August.
Theres also certainly some.
Further mitigation, if you will associated with social distancing probably across all end markets.
And certainly early screening.
For coated side. So I think you you've got both playing out there.
And your.
Assumption is right. We did highlight kind of sequential unit on rent growth in other North America, but we haven't seen it yet in.
The U.S. segment, although as Kelly mentioned USA segment was was down about 1% sequentially. So.
Certainly not catastrophic in.
Obviously have improving order levels.
Okay Gotcha.
And then I think historically you guys provided.
Your LTM Daps delivered great I think you updated the opportunity of 150 million, but just wondering makes that does include on.
Many modular office space and just any comments in kind of share on what you're seeing on.
That's right.
Yes, it was effectively flat for the quarter versus the prior quarter.
We've continued to realize significant improvements.
With penetration, especially over the last.
One or two months.
There was certainly an impact associated with the events.
In the second quarter second quarters.
Kind of that high volume, if you will have very short term leases, which come with high rates.
As well as high Babs.
So there was certainly a bit of the mix influence on that but we're pleased with the we're pleased with where we are and we're certainly pleased with where we're headed as we track into the latter part of the year.
Okay, Great and then just lastly, I think you've historically highlighted that.
When your deliveries or lower.
Tend to see a benefit to margins. So just as we see these order rates improve and theoretically.
Deliveries improving can you just help us think through the impact that should have to margins and then also obviously since.
Many has some of their own delivery network.
Any thoughts.
Longer term on.
How you're thinking about delivery.
Business.
This is Tim ill start on kind of the will Scott side of the business and then maybe Kelly you can talk a little bit about how trucking works on the mobile mini side, but certainly on the will Scott side, Yes, all else equal if you've got more returns than deliveries you tend to have a bit of a margin.
Impact that said we're showing.
Liver and installation margins in the 15% range and we've got other kind of actions in place a little bit more in sourcing across the will Scott legacy platform that we believe can support.
Delivery installation margins in that kind of 13% to 15% range.
So I don't see significant contraction there may be 200 basis points over Q3 in Q4, if delivery volumes pick up.
In excess.
Of returns.
Just understand there are some other levers that we're trying to action internally to.
Sustain those margins up in the mid teens. So maybe Kelly can talk about trusted on the yes, I think quarterly very similar to what Tim's mentioned on the wells got side. It's you. The trucking margin is dilutive it had many to the overall rental margin as well however.
Trucking margin to steadily gotten better certainly over the last three or four years and I believe trucking margins on the North America storage side, we're close to 40% in Q2 so.
It's a it's a real opportunity and just give you little bit of data behind many many runs.
About 85% of its trucking in house really that it's the peak seasonal volume in Q4, which needs to be outsource there. So.
We certainly look to to optimize our our trucking through through route management about 40% of the units that we deliver actually get.
What we call flipped ordered or move from one location the the pickup location onto the next customer without actually coming back.
So simple sweep out that needs to be done as long as the product quality goes out.
In in Great a condition. So I think the trucking piece is something we continue to utilize and I think that to Tim's point bigger picture here logistics is a huge opportunity for for both companies.
To to improve margins and I think theres, a big customer relationship piece here. It's the drivers typically the first and last touch point with the customer and into something that is certainly had many we've taken advantage of in terms of enhancing the customer experience and I think we're looking very deeply into the opportunity between both organizations to optimize.
Logistics, and it's certainly a big focal point.
Thanks, that's helpful.
Your next question comes from the line of Ross Gilardi of Bank of America. Your line is open.
Good morning.
Thanks for squeezing me in and I apologize in advance if you've already covered this I had to hop on and off the call.
Momentarily, but could you elaborate little bit more on the road map to the $500 million in free cash flow that the timing for kind of getting to that that full run rate and just help us on the kind of that bridge between.
This year on a pro forma basis in future years and just.
Addressed the transition and restructuring costs and whatnot and how they impact the phasing that will be really helpful. Thanks.
Yeah Ross this is Tim I'll get it started and so.
When we first kind of introduced the 500 million dollar free cash expectation. It was a pretty simple formula to get there. So it was predicated upon executing the $50 million of cost synergies and again, 80% of those will be in the run rate two years from now so I kind of view this as a second half of 2022 or 2000.
23.
Aspiration.
And so over that period, how do you get there you deliver the cost synergies the integration costs that we're incurring now and we'll incur through the end of next year.
Will subside naturally and over that period, if we can generate kind of topline growth and kind of the mid single digit range with the flow through to EBITDA that both platforms.
Historically have generated.
Those factors plus some debt and interest reduction over that time kind of gets you to the 500.
Million dollar.
Level and I don't think you have have to get to creative to get there. If you just look at kind of the combined Q2 free cash flow of $70 million theres easily $15 million.
Merger costs in there.
We've highlighted pro forma interest savings of.
$30 million annually, so let's call it call it seven and a half million per quarter.
Added another 12, and a half million per quarter of cost synergies and you're already at 105 million.
Just basing based on Q twos results alone. So you need to generate another call it 20 million a quarter or $80 million year in order to get there and thats.
You know mid single digit revenue CAGR between now and 2023 in order to get to that get to that level.
Okay. That's that's helpful Tim and.
The.
The roadmap to the leverage target of three to three and outsides by year end, Scott 21, again, sorry, if you did go over this already but.
First of all should we consider that three to three and a half times to be or.
Your leverage target through the cycle or just next year curious your thoughts on that and then.
Do you get there mostly from higher EBITDA or.
Lower lower data I'm trying to just get a sense as to what you're you're baking in.
I'm assuming for for free cash flow.
Next year to get there.
Yes.
We haven't give you have given you a free cash flow number for next year, but rest assured it's a combination of EBITDA growth and gross debt.
Reduction and I wouldnt necessarily call. It a long term target that's our that's our 18 month target that we think is very achievable based on where we are right now both in terms of the macroeconomic environment as well as the the operating levers that we have within our control.
To kind of deliver that deliver that number over the next.
18 months, so as we complete the integration we reassess the operating environment 18 months from now.
You would appropriately reconsider leverage levels.
But based on what we know sitting here right right right now today, we believe that's achievable again with.
Growth levers within our control.
The ability to manage discretionary free cash flow as you know we can we can flex the capex, both up and down.
Which gives us some some.
Flexibility in terms of how we get to that.
Three to three and a half times range.
Okay, and then just lastly.
The growth opportunity to really go after it and kind of a post cobot 19 world for extra classrooms and space for health monitoring.
At factories in offices and you touched on this.
Your formal comments are are you really going after that right now I mean is that.
I understand how major of an opportunity are minor if an opportunity that really is and the resources that you are dedicating to kind of.
Exploit that and just get your general feel on whether or not that can be.
Major incremental growth driver or or just something more around the.
The adjacent Ses.
Yes. This is Brad I'll start and then Kelly Tim jump in we're absolutely going after it.
An opportunity that we think transcends most of our end markets.
No as we've said before Theres, just a fair degree of uncertainty.
As we look ahead so.
Whatever opportunity the markets present.
There's no one better positioned to capture it than than us and.
And we'll certainly do that you can take a look at social media or web pro web preference Red web presence Kim can't speak there.
Well, we're absolutely going after and I don't think as I mentioned on the last call theirs.
Maybe there's some mitigation if you will as work from home comes a little more prolonged.
So we're not trying to get ahead of our skis here, we're going to go after and get whatever we can.
We will keep our eye on the end markets.
With our scale.
Frankly, we should be able to outpace anyone in the industry. So so we're going to go get it.
We just are not in a position yet to be too precise.
With respect to net net net what this all looks like.
You know a year from them.
Yeah Ross this is.
Sure I just real quickly I would just add I think Brad spot on its difficult for us to.
Right now to identify it but we do have.
Software that is available for so many is utilizing it today that.
Really drives sales territory optimization to prioritize these leads and I think right now.
We do win on a fairly regular basis, and I think Brad and I sit back and and look at the Nonresi construction and look at our delivery declines and feel like we're we're grabbing market share and there's certainly a portion of that it's that's more than likely related to.
To the pandemic, but at the same time I think this lead optimization tool allows us to more readily identify.
Schools for example, right now where we've seen a lot of success.
Winning through even on the storage side, the removal of desks at the CDC complaints of six feet within some of these schools brings on fairly large demanded once we've identified that we've been able to share those similar or look alike leads across the rest of the organization. This is another.
Opportunity from the software standpoint post Sep that will Scott will be able to take advantage of as well.
Do you think you'll quantify the opportunity at some point in the next six to 12 months for.
For investors.
You have like dedicated.
Sales and marketing resources that are going after this or is it just more if you get incoming leads that obviously, you'll try to service them. The best Sicad I would say, it's the latter right now although we certainly have a strategy to go to go about it a lot of this can be driven through the national account program as well, which.
Which we think is another low hanging fruit here that we really haven't touched on that maybe an early opportunity for us to to address the we certainly want to quantify it and depending on whether Theres a.
Some sort of a cure at some point here or vaccine I think will will determine kind of how this goes but we're certainly looking to assertively address what is.
An opportunity for us right now certainly.
In this environment.
Okay. Thanks very much.
Your next question comes from the line from the Elliot Stifel. Your line is open.
Hey, good morning, everybody. Thank you guys for fit me and.
Can you talk a little bit about the M&A environment I know you mentioned selective.
The deal opportunities here in the coming year, but.
Balancing kind of what's happening with Cove, it and did the much larger platform.
What are some of the puts and takes to maybe being a little more aggressive, especially if some of the more regional smaller pierce or are struggling a bit under the pressures.
Yes, I think I'd characterize it this is Brad is opportunistic.
We're.
Integrate position, where we're not compelled to do anything.
Theres really nothing else lets say that's transformational in any single transaction.
Within the modular space for portable storage so.
We'll keep our year to the ground in and see what's out there I think we're in a position where we wouldn't have to miss anything per se.
But we'll just.
We'll be smart about what we do and we'll be opportunistic.
Great Thats only makes Tim I just to get a put some of those opportunities in the context of the organic opportunities that we now have within the platform whether it's the the cost synergies are pretty straight forward I think the commercial synergies that Brad and Kelly of identified are extremely compelling the ability to deploy technology.
Yes, the platform is extremely compelling the logistics opportunity that we haven't fully quantified is very compelling so.
We're always trying to look to deploy resources wherever we think we get the biggest bank for the Buck and obviously getting the integration right here in the near term is a huge value driver for us.
Perfect guys. Thanks, so much.
All right.
With that well thanks, everyone for taking the time to join US and we look forward to speak into some of you soon shortly after and certainly in our third quarter call. Thanks, everyone.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful. Thank you may now disconnect.
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