Q3 2020 Willscot Mobile Mini Holdings Corp Earnings Call
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Just because presentation there will be a question and answer session to ask a question during the session do we need to press star one on your telephone I would now like to hand, the conference over to your speaker today.
At Jacobsen Vice President Finance. Please go ahead.
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 questions may contain forward looking statements as defined under the private Securities Litigation Reform Act of 1995.
Our business and 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 these forward looking statements.
The 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 SEC filings, including our quarterly reports on form 10-Q you.
You can access these filings on the FCC website, we're on our Investor Relations website. Please note lets 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 expectations, you 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 and todays call include references to certain financial information expressed on a non-GAAP basis. We've included reconciliations to the comparable GAAP information. Please refer to the tables and slide presentation accompanying todays earnings release.
The press release, we issued last night presentation for todays call are posted on the IR section of our website.
Through the release was also included an 8-K submitted to the SEC will make a replay of this conference call available via webcast on the company's website.
Later today, we'll be filing our 10-Q with the SEC for the third quarter of 2020, 10-Q will be available through the SEC or on the Investor Relations section of our website.
Today's discussion of results of operations for Q3 2020 for what's got mobile mini is presented on a historical basis as of ore for the three months ended September Thirtyth 2020 for prior periods. Our reported results only include mobile mini for the period subsequent to the merger our pro forma results are presented and include mobile Minis historical results as if the merger.
And financing transactions that occurred on January one 2019, and is a better representation of how the combined companies performed over time.
Now with me today, I've got Brasil CEO of Wolfcamp Mobile Mini Kelly Williams, President and Chief operating Officer, and Tim Boswell, our CFO with that I will turn the call over to Brad.
Thanks, Matt Good morning, everyone on bread sold CEO of will Scott Mobile mini holdings and I'd like to welcome everyone to the company's third quarter 2020 earnings call.
Phenomenal third quarter consolidated results, yet again demonstrates the growth and value creation potential of the WSE platform.
Before I turn the call over to Kelly and Tim for additional third quarter context, I'd like to take a moment to step back at a higher level and outline key attributes that underpin this highly differentiated and truly unique platform.
Please turn to slide five of the Investor presentation deck.
First and foremost we are the undisputed market leader this clear market leadership and our unparalleled network of 275 branches allows us to better serve our customers' needs, especially in the train times experience over the last two quarters, what are critical turn key space and storage solutions are perfect.
Productivity is all our customers see.
Our return on capital continues to expand underpinned by a vast fleet with useful lives spanning decades targeted deployment of growth capital yields greater than 25% Unlevered IR ours.
We leased these assets along with additional value added products and services or Vaps for average lease durations of greater than 30 months, which provides for a very stable and predictable recurring lease revenue.
We serve 15 discreet and diverse end markets over 70 per over 70% of our leads are from repeat customers and our top customers top 50 represent less than 15% of our revenues. This diversification and our flexible go to market strategy allows us to quickly reposition and capture New me.
Market opportunities as we've done for social distancing and screening needs in 2020, which provides for portfolio of units on rent is very stable and predictable as evidenced in the stability we've experienced in the third quarter.
Significant us infrastructure investments materialize, we will capitalize on these with the same rigor and agility.
We have several powerful idiosyncratic growth levers theres, a multiyear high margin organic revenue growth tailwind of over $150 million associated with our unique value proposition in.
In order to realize this growth we simply need to maintain the same penetration levels that we've already achieved over the last 12 months as we continue to increase fast penetration towards our stated target of 80% and extend our offerings. We would further increase in extend this growth.
This growth lever has been driving about 40% of the 12th consecutive quarter of double digit expansion and our us modular rates.
Our yield management and rate optimization tools are driving the balance of that growth, which provides an incremental substantial revenue growth tailwind.
Now the merger with mobile many presents two additional revenue growth levers the first via cross selling well, we estimate 80% of our diverse end markets require both storage and turnkey modular space solutions. We currently have only a 40% customer overlap Kelly.
Kelly and the team are already harvesting early wins as we begin to bridge that gap by pulling storage demand through modular orders and vice versa.
Second we intend to deploy our proven yield management and rate optimization tools and devops offering across the North American storage segment of the business.
We have absolutely proven platform for accretive M&A.
We've realized over 55 million of cost synergies over the last three years as we've safely and swiftly integrated 10 acquisitions looking forward, we will realize more than $65 million in incremental cost synergies associated with the remaining synergies of these prior transactions now reloaded with an incremental $50 million related to the mobile mini merger.
Our scalable technology continues to both enable growth and to drive significant operating efficiencies. The third quarter 2020, adjusted EBITDA margins of 39%, our 660 bips above prior year, the aforementioned top and bottom line embedded drivers will yield further expansion over time.
Now this unique combination of these highly differentiated attributes results in a robust and expanding free cash flow, which affords us full optionality with respect to capital allocation upon.
Upon completion of the integration with mobile mini we expect to generate approximately $500 million of annual free cash flow.
We're extremely confident in our ability to achieve this level given our free cash flow generation of $91 million in the third quarter, excluding merger related transaction costs and the multitude of embedded top and bottom line growth levers.
Along the way we remain committed to rapid deleveraging to achieve a target leverage ratio range of 3.0 to three and a half turns by the end of 2021.
While funding all organic growth opportunities and return in incremental value to shareholders through WSE share repurchases now as I turn the call over to Kelly and then Tim I would like to note that while the merger with mobile mini is truly transformational. This is not our destination. Please recall that just three years ago WSE delivered approx.
Only $125 million of adjusted EBITDA, our revised full year 2020 guidance represents a fivex increase an expansion of adjusted EBITDA margins from 28% to 39%.
The merger with mobile many simply head volumes. The next new exciting chapter and the WSE growth story, which will further compound returns driving shareholder value creation for years to come up.
With that I'm pleased to turn the call over to Kelly.
Thanks, Brad Good morning, everyone I'm, Kelly Williams will Scott mobile Minis, President and Chief operating Officer.
I want to begin by thanking our employees for making health and safety our number one priority it will Scott level many.
Keeping our employees safe and healthy has always been paramount to our organization, but our teams have continued to service our customers as an essential provider and have done so while achieving record best safety performance.
I am pleased to report the integration continues to progress nicely at the team's officially completed their first quarter together.
While we will see tremendous operating efficiencies by aligning on a single operating platform. During the first half of 2021 that will Scott mobile mini team remains focused on integration and execution. In addition to driving the business forward as evidenced in our strong Q3 financial performance.
In addition to the strong sales and operating performance in Q3, we also kicked off the first of our pilot programs in the quarter. We are seeing opportunities created through lead sharing and team selling that are clear indicators of why the two companies are stronger together.
Today, I will discuss third quarter capabilities as well as provide an update to our demand trends and the current market outlook.
Following the merger we've expanded our reporting segments from two segments to four reporting segments. The North American modular segment aligns with the wells got legacy business prior to the merger and the North America's storage, UK storage and tank and pump segments aligned with the mobile many segments prior to the merger.
Tim will touch on the reporting segments in more detail later.
The third quarter financial results further demonstrate the resiliency of the combined business model.
North America modular in North America storage of stabilized demand in spite of the nonresidential construction headwinds.
We continue to raise rates across both business segments as customers recognize our meaningful product and service advantages.
Customers are also benefiting from our combined 275 branch network in North America, allowing us to be closer to where they need us.
This scale leverages, our tremendous logistics competitive advantage, allowing us to greater capacity and capabilities and a challenging environment.
Looking at Slide 12, as mentioned earlier as the pandemic transitions through the year. Our top priority has remained a health and safety of our employees customers and vendors, while executing on our business model.
As a combined company, we're helping customers to fight the pandemic across our full platform of complimentary products.
Our ability to flex space for customers to CDC guidelines has enabled both business segments diversified our customer base and sustained demand during the pandemic.
We are utilizing offices this drive thru cobot testing facilities temperature checkpoints for businesses and additional storage for supplies related to testing and screening.
We further assist customers buy often bundling our managed services through offices in storage.
We are also providing temporary classrooms in storage for education as the need for additional space is evident with students returning to school.
Turning to slide 13, you will see the demand improvement in Q3.
The demand indicators for North America modular.
Top charts on this page.
Starting with the top left the green bars represent monthly order rates for the US operations of the North America modular business in 2020.
Similarly below the North America modular graph the blue bars represent monthly net new orders, excluding seasonal units at North America storage in 2020.
The Gray bar, the great Shadow bars behind both of them represent the order rates for the same period in 2019.
North America, Modulars Q3, new orders in the US were down only 7% versus prior year, which compares to new orders being down approximately 20% year over year during the second quarter.
The gap to prior year continues to shrink as our commercial teams prioritize other end market segments outside construction to create volume.
North America storage is net new orders, excluding seasonal units in Q3 were down only 2% 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 new orders improving significantly on a sequential basis from Q2 to Q3.
This trend continues into Q4 with North America modular new orders in the us within 1% of prior year over the past four weeks as of October 30 Onest.
As discussed on the Q2 earnings call, our North America storage business experiences a routine increase in seasonal demand every year in Q4 due to holiday related demand from big box retailers we.
We refer to these as seasonal units, which are ordered nationwide in large volume for storage of additional holiday shopping inventory on site.
North America storage has completed a majority of the seasonal deliveries as of the end of October and as expected the business remains virtually flat in terms of activations to prior years seasonal activity.
Now turning to slide 14.
In both business segments, the insulin read it behaved as expected, though we have seen delivery growth slowed a prior year. During the COVID-19 pandemic project completions and unit returns have continued to lag relative to last year and we have observed no no change in customer payment behavior.
North America modular segment units on rent decreased just slightly on average from Q2.
Additionally units on rent increase sequentially within Q3 and September ended with more units on rent than the average for the quarter.
North America storage segment saw average units on rent increased 4% sequentially from Q2 and as of the end of October had 3000 more units on rent than prior year or up 2.3%.
The charts on this slide further to pick the complimentary seasonality of the core segments volume.
This low churn proves the resiliency of our business model, which is based on recurring leasing of long lived assets with an average lease duration of over 30 months.
Now on to slide 15.
Both American North American business segments continue to see impressive rate growth in lieu of the pandemic further illustrating the competitive differentiation in terms of product service and scale. We believe the gap to the competition only widens with our scale advantage and challenging financial times such as these.
North America modular achieved another great quarter in which modular space average monthly rental rates also known as AMR increased 10% year over year to $693.
No. We also saw sequential increases in AMR from Q2 to Q3, so the pricing tailwinds in the modular portfolio continued to increase and drive sequential increases in modular leasing revenues.
The late legacy Wells got Us modular segment am our increased 11.2%, marking the twelveth consecutive quarter of double digit rate growth and we expect this momentum to continue as we look ahead.
Delivered rates on Vaps over the last 12 months increased by 4% sequentially over Q2 to $286 in our average monthly rates for Vaps per unit on rent in this segment were up 16% year over year and up 7% sequentially in the third quarter.
Thats continue to represent both in organic revenue growth stream for existing North America modular fleet and also a great cross selling opportunity to bundle with mobile minis steel ground level offices.
North America storage also achieved an increase in year over year rental rates of 3% for Q3 2020.
Q3 marked at 30 onest consecutive quarter of year over year rate increases for this segment our ability to increase rates annually is based on our servicing our is based on servicing our customers with high quality products high levels of customer service large salesforce and the use of technology, including mobile mini connect our customer portal.
Lastly.
There was significant amount of our efficiency and optimization of the merger will come from alignment of the same operating platform. We continue to focus on managing expenses and creating efficiencies through the cross application of best practice sharing.
We're honing in on logistics opportunities, leveraging our combined buying power and capitalizing on each segment's expertise on rental processes to increase margins in the interim.
Identifying a few of these actions assistant and driving adjusted EBITDA margin expansion of 660 basis points for the combined company highlighting the potential financial growth opportunities that exist prior to recognizing many of the revenue cost or technology benefits that we expect to come in the very near future.
With that I will turn the call over to Tim.
Thank you Kelly, let's jump into the financial review section for a bit more on the Q3 results and our updated 2020 guidance slide.
Slide 17 summarizes the financial highlights from the quarter, which demonstrate the earnings trajectory and potential we have with our combined scale.
I'll get into the details momentarily, though it's clear our financial metrics are strong and improving across the board and the increased mid point of our revised EBITDA guidance will put us on a solid foundation and accelerating run rate heading into 2021 from which we will continue to build.
Now quickly before jumping into the details page 18 gives you a snapshot of the new reporting segments that we will use going forward.
Historically will Scott reported two segments modular U.S. and modular other North America we.
We consolidated these into the new North American modular segment, which simply represents the consolidated results of the legacy will Scott business.
We then added the three segments that mobile mini reported historically, North America storage, United Kingdom storage and tank and pump and Weve provided additional unit on rent and average rental rate detail for those segments. As an example, you will note in the chart that the North America storage segment is heavily weighted to storage units.
But does have over 16000 office is on rent. These represent mobile minis legacy ground level office fleet. Similarly, the modular segment contains 15000 legacy will Scott storage units, we've presented it this way so that the results align as closely as possible to the historical reported results of both companies.
It reflects how we are operating the business and it is a very logical way for investors to analyze our results.
Those quarterly results for 2019 and 2020, our available both in the appendix here and in the 10-Q.
With that background page 19 shows a bit more detail regarding our Q2 Q3 results on a pro forma basis.
Total revenues increased 7% sequentially from Q2 as leasing fundamentals improved and revenues were basically flat versus prior year.
Relative to 2019 delivery revenues and tank and pump revenues were down, but mostly offset by the solid 1.5% lease revenue growth in our modular and storage segments in North America.
Profitability and margins can continue to improve versus prior year adjusted EBITDA increased by $14.6 million on a pro forma basis and margins expanded by 400 basis points year over year, both due to variable cost reductions and synergy realization.
Margins were down 20 basis points sequentially from Q2 as variable costs increased to support strong sequential delivery growth across all segments.
As we look into Q4, our guidance implies that revenue should be flat sequentially as we lease revenues continue to build and delivering sale revenues taper into the end of the year.
We should get some modest sequential margin expansion in that scenario, which aligns pretty well to the midpoint of our guidance and it also implies the sale revenues in particular will be down year over year, representing roughly a $5 million EBITDA headwind in Q4.
You can visualize this in the bottom left chart with tank and pump revenue stabilizing in Q2 and Q3, you can see how our lease revenues are building in the other segments. It would be normal for delivery revenues to taper in Q4 before ramping up again in Q1, and Q2 and I'd expect sale revenues to decline sequentially.
Rather than increase in Q4 like they did last year.
Lastly in the top right chart.
Free cash flow was up 140% year over year on a pro forma basis, excluding transaction costs.
400 basis points of margin expansion reduced interest costs reduced capex and stabilized working capital together bridge the growth from 2019.
Slide 20 reviews, our cash flow trends on an as reported basis cash provided by operating activities is surging due to the addition of mobile minis operations and 490 basis points of margin expansion within the modular segment.
We've shown the impact here of $63 million of cash transaction costs in Q3.
Since those are clearly discrete and onetime in nature.
But we have not adjusted for integration or restructuring charges in Q3. Since we will continue to incur 10 million to $15 million per quarter of these costs well into 2021.
At the bottom of the page, we're continuing to operate at reduced capex levels, both due to the demand environment as well as fleet efficiencies, we had experienced in the second half of 2019 upon completion of the mob space integration.
Net cash used in investing has been down year over year for five consecutive quarters and thats with the inclusion of mobile mini on an as reported basis in Q3 I'd.
I do not see us reducing capex much beyond these levels based on the demand we see I can see Q4 coming in above Q3 levels based on the demand picture, though clearly we would need to see a significant increase in delivery and volumes to approach the top half of the revised range.
As a reminder, we run a zero based quarterly capital allocation process with short lead times. So we can react react quickly to changes in end market activity.
Moving to slide 21, Q3 was a bit noisy due to the merger and refinancing activity and I'll call out a few of the more significant adjustments in our EBITDA reconciliation.
The $42 million loss on debt extinguishment is simply the write off of unamortized deferred financing fees and redemption costs related to our prior debt structure. That's.
Thats, obviously nonrecurring and we're very pleased with the new debt structure, which we further improved in Q3.
The $67 million income tax benefit is a noncash GAAP adjustments to the valuation allowance on our deferred tax assets.
Well, Scott had approximately $900 million of us federal and noel's heading into the merger with.
With the addition of mobile many we have new sources of income against which we can apply our and our wells. So we released the valuation allowance and it shows up as a onetime tax benefit.
As a reminder, we have over $1 billion now have combined and a wells plus the ability to apply other deductions in the future such as bonus depreciation, which together represent at least a 4% to five year shield from any meaningful federal cash income taxes under current policy.
In the Middle of the chart, you see $52 million of transaction costs, which were mostly professional fees, both expensed and paid upon closing on July onest.
In Q2, we had already accrued approximately approximately $11 million of transaction costs that were also paid in cash in Q3.
Lastly, we are beginning to incur some integration costs as expected with approximately $12 million of restructuring charges and integration costs incurred in the quarter.
As we've discussed previously these should run between $10 million and $15 million per quarter before tapering off in the second half of 2021.
So the punch line here is that aside from the integration costs I just mentioned transaction fees are behind US we will be in a strong pretax income position going forward, we expect to migrate to a more normalized effective tax rate in the 25% to 27% range for GAAP purposes in 2020.
One and we do not expect to be a meaningful payer of U.S federal cash taxes for four to five years.
I talked about our new debt structure on page 22 last quarter. So I'll just highlight some changes in August we refinanced our 2023 notes through the issuance of our 2028 notes that brings our annual cash interest expense going forward to approximately $105 million excluding amortization.
None of deferred financing costs and our weighted average cost of debt is approximately 4%.
After closing the merger on July 1st we paid down nearly $117 million of our ABL balance using all of our internally generated free cash flow as well as some surplus cash across our business units.
This leaves us with over $1 billion of availability in our ABL facility and brings leverage down to 3.9 times, our pro forma trailing 12 month, adjusted EBITDA was $633 million.
So leverage is declining and liquidity is expanding rapidly as we generate cash.
We've updated our financial outlook on page 23 to reflect our strong execution in our better visibility into the demand environment for Q4.
Given the high degree of forward visibility in our business, we've maintained guidance throughout the pandemic with as much transparency as possible after.
After adjusting our outlook in Q1 for the sudden recessionary environment, we've incrementally increased our outlook for pro forma adjusted EBITDA as market conditions have stabilized.
On the left hand chart, we've reduced the top end of our revenue guidance and expect to end up between 1.6 and $1.65 billion of pro forma revenue for the year.
Given the uncertainty in August we had left open the possibility of a strong V shaped rebound, which could have taken delivery in sale revenues in particular into the into the top half of the prior revenue range. So expectations for those revenues in Q4 should come down even though we expect to see steady sequential growth in our leasing.
Revenues.
We are simply ruling out an extreme upside scenario for Q4, and we've reflected that with a $10 million reduction to our capex range as well.
Conversely, we have removed the bottom end of our prior range for pro forma adjusted EBITDA.
Based on the strong Q3 performance and a stabilized market environment.
We expect to deliver solid 6% adjusted EBITDA growth and $475 million of adjusted EBITDA less net capex at the midpoint of our new guidance ranges.
You can think of the midpoint is approximately $390 million of EBITDA contribution from will Scott and approximately $245 million for mobile mini.
And we continue we continue to see strong adjusted EBITDA growth versus prior year, and our modular and storage segments and tank and pump is showing signs of sequential improvement.
This is truly extraordinary performance in 2020 through the course of a pandemic a merger as well as our integration activities. Our team is looking past all of that with confidence into 2021 and 2022, given the visibility in our business, our superior competitive position and the powerful internal levers available to grow the top.
In the bottom line.
Brad.
Thank you Tim. Thank you Kelly for the Great recap of an outstanding third quarter, which was again packed with continued outperformance. These two companies are clearly stronger together now turning to slide 24.
Our fundamentals today are strong the resilience of our business model built on recurring rental revenues, increasing rates and slow churn in the portfolio is evident in our results.
As we continue this exciting new chapter and will Scott growth story, the headline merger with mobile mini introduces substantial new idiosyncratic revenue and earnings growth.
The powerful levers highlighted on this page, we will continue to compound and drive shareholder value creation for years to come notably these are fully within management's control than our solely dependent upon our continued execution.
The resulting platform, which embodies the unique combination of highly differentiated attributes outlined in my opening comments yield robust and expanding free cash flow affording us full optionality with respect to capital allocation.
As a case in point upon completion of the integration with mobile mini we expect to generate approximately $500 million of free cash flow year, along the way we remain committed to rapid deleveraging achieving a target leverage ratio of three to three and a half turns by the end of 2021, while funding all organic growth opportunities.
And returning incremental value to shareholders through WSE share repurchases.
I'd like to conclude.
By offering a sincere thank you to our will Scott and mobile mini teams, who are going above and beyond to serve our company and our loyal customer base during both the merger and the ongoing pandemic I also wish all of you listening today continued safety and good health with that thank you for taking the time to join US today. This concludes.
In our prepared remarks.
Operator would you please open the line.
As a reminder to have a question. Please press star one and your telephone keypad.
And your first question comes from the line of Andrew Wittmann from Baird.
Great. Thanks for taking my questions here, just a couple I guess today and.
The order trends were quite encouraging and while its circulated here on the slides I previously talked about some of the delays that you'd seen the order book at started snapping back already and actually remarkably strong even during the kind of the really tough times. So.
Summer I was just wondering.
If you could talk about.
The the level of of delays in delivering those orders that you are still seeing today.
Just give us some context as to how that stands versus.
The period this summer.
Sure Andrew This is Kelly hope you're well.
So yes, I think we do see we do see somewhat increase in in postponements in cancellations are up slightly I would say on the wheel Skus side, you you see somewhere in the range of high single digit typically 678% net might be up closer to 12 or 14% I'd say, it's it's not too far off from the from the many side as well.
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You've also got contractors at times that are rebidding projects that were.
Originally going out and maybe in May or June.
The remodel side for example, I think we're very optimistic in the first quarter that.
That those will happen, but they are going through a re bidding process. So there are certainly some of those that are postponed I think the key point here is when you look at our ability to diversify and as we made mention of on the first slide there reposition our our focus we've really seen some pickup in areas like health care government.
Education, certainly has been a big piece energy has picked up a little bit.
And so I think overall, we continue to Reprioritize, our leads and we're really able to close that gap and sustain a significant amount of that demand, but I think there is some optimism in some of the pickup I don't know that I would go too far past.
Q4, right now, but I think in the early half of next year, There's you know.
Assuming a vaccine and.
And as such that we would we would see that pickup in.
Got it okay.
Thanks Thats helpful.
I just thought it would also be given that I think the margin performance in the quarter is another area of focus is really good here biggest pro forma 400 basis points of margin expansion year over year, Tim can you help us.
Understand or maybe bridge.
Some of the bigger buckets in there that contributed to that you mentioned synergy capture it mentioned that obviously you took some cost reduction this summer that clearly benefited you here.
Can you help us bridge some of the pieces that contributed to that 400 basis points, just to give us a little bit flavor about which which is the actions are really impactful.
Im happy to and I guess, what I'm really encouraged by here from a margin standpoint is that it's coming from a lot of different areas and we've got multiple levers here. Some some quite permanent in nature and some more temporary related to the variable cost structure in volumes.
Relative to prior year. So yes, there is clearly a $4 million of kind of the mob space since.
Synergy realization that took place.
In the quarter.
You saw healthy expansion on the delivery and installation.
Margin, Andy and that's an area, where I think we've got room to run and I view those as more permanent improvements as we've improved asset utilization on the mobile mini side of the business and we've kind of tactically continued in sourcing more activity on the modular side of the business. So thats an area, where I think in the medium.
Term logistics will continue to be a focus of this organization and then going back to Q2, I mean based on the delivery volumes you had a significant pullback in variable costs. We gave some of that back in Q3, as we should to drive the pickup in activity levels that Kelly talked about.
But there were some adjustments to the fixed cost structure as well.
On on both the mobile mini and will Scott side of the organization, which we did carry into Q3 and is contributing to that year over year performance. So there are at least four different buckets of of cost there Andy that we're managing actively actively in addition to the capex.
Got it great and then just.
It's my last question for now is just around that we'll sensitive end market in construction I was just wondering if you could just give a little bit more detail on what you're seeing there it looks like boxes that have been on rent or staying on.
On rents and maybe even a little bit longer.
Some commentary here in the slide deck, saying that some of the new boxes are going a little slower.
I don't know just maybe a little bit more detail on that key end market would be helpful as well.
Yes, I mean I think.
Dodger our construction starts are down probably in the mid Twentys, Andy I think if you look at I think we pointed to Q2 and Q3 being a very similar number there I don't think that.
We have a whole lot optimism beyond where we are today that is not in that in a very similar fashion again I think the key point is a the projects are.
Our lasting a little bit longer here weve seen as noted on that slide a significant deceleration and returns.
Both sides of the business.
And we've also picked up that demand in other in in market segments, So but to point to construction. It's it's still consistently down I would say starts in that mid twentys ranges as far as we can see.
Thank you guys have a good day, yes, Hey, Andy This is Brad I would just add to that I mean that is Kelly outline the beauty and the diversity of this group of end markets is the fact that net new orders are effectively now flat to prior year with that portion of our demand being down 20% to 30%. So I think.
This this platform's ability to pivot to new markets like social distancing and screening needs.
As well as like manufacturing in other markets being quite robust right now so.
I think thats pretty pleasing to tell and to your earlier comment new orders are flat and delivery rates are starting to come back in line with it.
I would say on the office side.
More akin to 10% down prior to year.
Which.
Again, given the magnitude of the.
Of the shock here that we experienced in March is quite pleased so.
I think we're in a great spot with Nonresi just as it is.
It will come back we can all pick our date and time is to win but frankly, if other markets hold as they are that provides upside so.
Very very pleased with the performance of the team here.
Okay that makes sense. Thanks.
Your next question comes from the line of Ross Gilardi Bank of America.
Yes, good morning, Brad maybe you could just expand on your comments on on office and Im really wondering how just.
This.
Potential movement from.
From urban to suburban office office space in a in a post pandemic world.
We'll.
Play out and are you are you getting a real.
Glimpse of that yet in your business with anything that you're seeing.
Okay.
Circle back.
Just the point that on the office side net new orders across all of these diverse end markets are back in line with the prior year right and the transition and marketplace like this and the ability for our folks to pivot from what had been what to 24 quarters of very robust nonres.
The construction activity right and to pivot and capitalize the social distancing.
It is absolutely lifting across the markets.
And you're absolutely seeing the fact that while.
Commercial real estate in the very dense populations.
Our are still depressed it is driving an expansion in the suburbs. So we're not going to try to be too cute to.
To predict precisely how much by end market we.
We're seeing the same phenomenon schools, although as mentioned on the last quarter call you've got several the schools and these hybrid models.
But at the point that they bring kids back.
That will be another demand driver here so.
I am just.
Delighted with the resilience in the model I mean this is what we had expected should we ever experience a shock such as this and.
Feel feel quite good about it.
That's great and then I want to ask you about utilization I mean, the numbers in your active actually utilizations naturally down a little bit year year to year on year, but it seems like it's been very resilient I mean are you willing to call a bottom and utilization.
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Given just the.
The site, we just talked about that the risk of weaker nonresidential and.
If that's the case the it feel like the pricing environment is going to remain pretty underpinned.
And I'm talking about the non vast portion of the pricing environment for the next 12 months.
So we focus more on the units on rent growth the volume in the portfolio and we believe we've certainly seen stability there I mean as Kelly mentioned, even on the office side, we left the third quarter with unit on rent levels that were above the average for the quarter.
So, yes, I think we've.
Absent another massive shock we've seen.
The bottom if you will with respect to.
The volumes other than that and kind of normal seasonality that we would experience from here.
Okay and then just my last question on the balance sheet you made some progress it seemed very confident on your your free cash flow into next year.
Unlike yet you left the door open a little bit there for.
Further M&A I mean are there other large.
Modular office or storage businesses that you can buy from a regulatory perspective and why.
Would you guys ever consider diversifying into equipment rental and then your stock trades at a much higher multiple and would give you certainly would be cross selling opportunity, but would just love to get your general thoughts on that and then I'm done.
Yes.
And I would also touched on your last question, we're absolutely seeing resilience in rates.
This is a very well structured marketplace right now and as Kelly mentioned, we continued to drive the rates.
First question I personally am very interested in diversifying into gen equipment rental.
That's a well supplied space completely different business model short lease durations et cetera.
Within the markets. We are leading of there are absolutely further acquisition opportunities there are none as transformational as a combination of mobile mini and will Scott.
Estimate were five to six times.
The next largest competitor and we don't see any regulatory limits with respect to that.
That continued aspect of our strategy.
Thanks, so much.
Thank you. Your next question comes from the line of Stanley Elliott Stifel.
Good morning, guys. Thank you all for taking the question.
With that kind of the pandemic and you mentioned some other opportunities to help you units on rent.
Is it possible to think that the vaps piece of the business could actually accelerate into next year with things like.
Cubicles or plexiglass barriers things of that nature.
Yes, absolutely Kelly mentioned the sequential improvement in the Vaps delivered rates over the last 12 months.
If you do the math under the Hood Youve definitely seen an acceleration in the last quarter.
And we're continuing to drive towards we've stated for three years now $400 a month.
Value, which would represent 80% penetration of the furniture offering we have now so as we introduce new aspects of the furniture, such as the cubicles, new data services et cetera.
That certainly provides for upside further than that.
And could you also talk a little bit about expectations from kind of.
Moving everybody on the same technology system into next year sounds like you're having some success with cross selling but love to dig into that a little bit more if we could.
Yes, Dan this is Tom so ill.
Kelly mentioned, the first big milestone here in the technical integration of the two businesses is the movement of will Scott onto mobile Minis state of the art SAP ERP platform, and we're targeting kind of middle of first half of <unk>.
Next year for that for that migration.
So the teams are working very diligently on that and we're making great progress.
That will enable better real time visibility into kind of daily transaction volumes pricing utilization et cetera across the will Scott business there.
There are some better tools at mobile many to enable better route management and logistics, which I think the modular side of the business can benefit from and similarly, Similarly, you'll recall, we've got pricing tools on the.
Modular side of the business that have been in place since 2015, and really driven some more sophisticated segmentation and price performance and enable be the value capture from the value added products and services platform. So we talked about the cross application of best practices and technology is a is a big example of that.
In the meantime, the lead sharing and team selling that were talked about is kind of happening the old fashioned way caller.
Call your staff.
Sales were up in the adjacent branch at either the modular storage location and tackle those projects together jointly and you really don't need.
Technology in place to do that day, one so thats kind of how we're thinking about this from a from a phasing standpoint, yes.
Yes Stanley. This is Kelly one thing I might add just to piggyback on Tim here is one example that we're really excited about getting will Scott on in terms of technology is.
Our sales territory optimization tool, which really helps our sales teams prioritized sales leads and so as we started to see a slowdown in the on the construction side of things and started to identify opportunities in terms of health care and everything else related to social distancing those leads become priority and our fed to the sales.
Reps in that way, where the clothes opportunity is much higher and so I think thats been a huge advantage to us and clearly as a competitive advantage today for mobile mini and just an example of when we are able to align on the same platform, where theres a theres a real technical advantage that comes with that and again more ability.
For us to continue to optimize between the two companies.
Perfect guys. Thanks for the color best of luck.
Okay. Your next question comes the line of Scott Schneeberger.
Oppenheimer.
Hi, guys. Thank you I got dropped for a moment. So forgive me if any of this has been asked but.
But curious how are you how are you stacking up in the competitively.
You can just give us a taste for modular office classroom story to NGL closed what are you seeing out there where do you think the industry is versus you and and years and you're obviously smaller competitors and if you can just provide some anecdotes about about your relative positioning.
Thank you.
Yeah, I'll start with the modular side and.
Kelly can.
Shifting over to the storage I mean, youre well aware of the journey there will scouted teamed up with the mob space Dyson enacted.
We represented.
About 40, 45% market share.
If you combine mobile minis deal flows were safely in that kind of 45, maybe a little bit north of market share.
There are a handful of competitors that are regional folks they're typically in just to have particular us geography, and oftentimes a more concentrated towards one or two end markets.
And then beyond that handful.
There as we've said before 60 65 smaller independent.
Typically family owned competitors that will operate in just one or two cities. So this.
This is a very well organized market.
You know I think through this pandemic, we've seen the benefits of that consolidation right.
As well as our ability to to pivot that into real value for customers right. As we've kept all of these operations running continual through the pandemic. We've done it will send everyone home and maintain high levels of sales productivity.
Which in the end takes care of our customers and their essential needs through this uncertain time Kelly you want to talk about story I think to follow up on that I think it's I made mention of this in the opening remarks and that is just that that the scale that the two organizations have today are Lynn.
Able to leverage through logistics and quite frankly, just agility reaction time as Brad made mention of we have resources that in a situation like this Scott I think we probably separate ourselves at a far greater pace.
Pace than what to the competition than at any other time and I think.
Just an example, when you had situations of that immediate reaction to needing offices or storage and when it is a complex type deal will Scott is so far ahead of the competition in terms of resources available product and logistics and many on the same side when when there was a need for 40 or 50 stores containers.
Or 15 ground level offices were really about the only company that can can get that done and so I think it's really important to note and I may have mentioned this in the opening remarks that we're very confident that the spread widens between ourselves and the competition in a in a situation like this and logistics is a huge part of that and scale the 275 locations.
Yes.
Great. Thank you both for that and then on a follow up Tim bringing you in on edge.
The the slide I think it's 13, sorry, I lost it step it's Steve the vast revenue growth opportunity greater than a 160 million over the next three years that.
Compares to our previously saying 128 back on the first quarter now I know that it's it has to do with convergence predominantly but getting some some inquiries I know vaps.
As we said earlier has accelerated and is really is really going very well, but Tim could you just explain the changing numbers there I think it would be helpful.
Carl Thank you.
Yes, there are some moving pieces here and frankly this is kind of the this is kind of the base case opportunity is the way I think about it because all we are doing here is we're quantifying.
The opportunity on the will Scott modular fleet.
If there are no further improvements based on the levels. We've achieved in the last 12 months and you see a $286 number.
Number that's up a bit sequentially.
And year over year relative to the numbers that you referenced.
So relative to Q1, we consume some of that growth as the portfolio turnover, but if we just hold that $286 per unit per month that we've already achieved let our 86000 modular units turnover just naturally churn over three years thats.
$116 million of organic revenue that flows flows through between 75 and 80% to EBITDA.
Now to other two other things we've said before that mobile mini has over 16000.
Ground level offices, those are very good candidates for furniture packages and value added products, we quantified that opportunity is being north of $30 million of EBITDA again over three years as that portfolio churns. The next lever. We have is as we've talked about we've passed our salesforce.
So weve got entire geography is within the company today that are delivering over $400 per unit per month.
You added products. So if we can get the entire salesforce to operate at that level.
That is further upside on this number right. So as we've said for a long time value added products is going to continue to be one of the primary commercial strategies for the combined company and we've got three or four different levers to pull to continue to drive it.
Great. Thanks, that's helpful. Appreciate it.
Your next question comes from the line Ashish Sabadra Deutsche Bank.
Sorry, Thanks for taking my question.
Just a quick clarification.
On the 10%.
In our growth.
In the modular space do you provide details on how much was that pricing was flat.
Yes, so as we've said over time so the primary driver for that has been the UES rate performance, which was up a little over 11%.
Thats consistently been driven 40% by Vaps and 60% Bye bye.
Base rate on the boxes.
That's great and as.
As you.
Think about it.
Practices.
Being implemented at the North American storage units as well.
And obviously, we've talked about that but you need debt how should we think about the disease or am I going forward a bunch Andy for the amount of growth going forward.
Well like what we this is Tim I hope you're well.
We have seen in recent months and quarters the rates on newly activated storage units began to ramp up significantly and I think that.
The Best example of that right now is in some of the UK results that we published its probably one of the unspoken.
Hi performers in our portfolio right now, but they're doing just fantastic from a rate performance perspective, and I think we'll have opportunities across.
The broader portable storage fleet overtime, just from a pure pricing standpoint, and we pointed to some of the.
Yield optimization tools that we've had in place at will Scott as an example of how we might approach that and then the second opportunity that you alluded to is the potential to introduce value added products for storage containers themselves. That's something that both companies have dabbled with historically, but not necessarily put the full.
Paul.
Half of the organization behind but Thats definitely something that's on the roadmap to look at in 2021 and beyond and Kelly I don't if you've got anything to add from a.
Storage pricing perspective, no I mean, I think that when you think about the cross application of best practices, it's very obvious that.
I say this internally in a joking way, but the 3% rate growth that mobile minis had now for 31 consecutive quarters of something we're extremely proud of its or organically done and and and it's something I think that shows a lot of operational discipline within the organization. However, when you have the opportunity to peek behind the curtain and you see what.
Well Scott's been able to do.
And knowing the service levels and customer loyalty that we've had on the on the storage side I think it's really uncovered a significant opportunity for us.
We as Tim pointed to have got new rates really in the UK that are near 16% in the look forward here and we've also got much stronger pricing on new units on the storage side as well I think some of that is is just that.
Ability to understand it we do have a lot of the logistics power scale is so significant I think will Scott.
As we look behind the curtain that became very evident theres centralized.
Facing tools certainly has helped will Scott and I think thats something that's that's going to help us as well, but just it's probably the best example, as you get a chance to kind of look at each other.
See what's what's going well.
That's been very evident to many that we've got some opportunity to continue to raise rates.
That's great and congrats once again on Sunday.
Thank you.
Thank you.
Next question comes from the line of Kevin Mcveigh from Credit Suisse.
Great. Thanks, so much hey.
Congrats on just really really fantastic outcome.
In the segment disclosures.
Going back to slide 18 Super helpful, But there's obviously a pretty big Delta between.
American stores versus UK, and then kind of the tank and pump.
Any thoughts as to the UK in particular can you get to North America in tank and pump in particular.
You know just state again within the context of the portfolio overall do you look at the kind of boost those more ginger or just.
From an asset optimization perspective, how are you thinking about the segments, particularly.
So relatively early but just.
As you think about just.
Asset optimization.
I'll start.
Kevin This is Kelly I'll start with the UK just given the historical nature of I've had with them, but the UK was running EBITDA margins in the low fortys back pre Brexit I think so we're going to have to go back.
Four or five years ago, but I think.
And we've talked about this here in the last couple of days, it's probably the best performing business unit today.
And a lot of that is just exactly what you've talked about and we've got utilization that's in the high Eightys and low Ninetys, we've got rates that are significantly better than than what they've been.
And we've got great leadership over there.
The there is a certainly a lean in there on terms of the CDC requirements with social distancing that the groups taking advantage of but it's we've seen significant margin enhancement with that segment now over the course of the entire year and I do I am confident I'm not sure that they can get to North America storage.
Margins here in the next six or eight months, but it's moving very very quickly that way with all the right directional signs the tank and pump business I think Tim pointed out earlier, we are seeing a lot more movement there.
See utilizations about 10 points higher.
As we exited the quarter than it was.
To start the quarter we.
We certainly still struggling a little bit in terms of rates, they're very competitive, but really excited in terms of the progress being made there because we've won a very large MSC that we will see.
Late late Q4, and mostly to run full run rate into into 2021 again weve taken out some costs. There that will continue to allow us to increase margins. So we've got a lot of momentum in those two segments.
Clearly North America storage in terms of the legacy mobile mini was was the pure play there and where most of our focus is that I'm excited about the momentum on the other two sides of the of the business, yes, Kevin spread the only thing I would add is UK storage and taken pump together is about 10% of revenue and 10% of EBITDA.
Both are great assets, performing very well our real focus for optimization here is leveraging the North America modular and storage segment together, but that's that's where the meat of the opportunities here.
Got it and then just a quick follow up and this is more.
Qualitative.
Between brain, Tim and Kelly neat in particularly you've done sometime that will Scott commodity doubling the business and managed to really really transformational transaction in mobile many.
Without any really integration hiccups.
Just a phenomenal outcome on that anything to call out was it just the preparation because again you typically don't see that.
Anything was it just the separation or just knowledge of the assets anything to call out because it's it's really been seamless and it's just a great complement to you folks.
Kevin This is Tim and what I'll point out first is with the mob space transaction that was a business that was nearly identical to will Scott in terms of fleet branch footprints operations go to market.
So we knew that asset extremely extremely well.
And really theirs.
Perfect to perf perfectly logical combination and one of the most synergistic I've ever I've ever seen.
You contrast that a little bit with.
The mobile mini merger.
These are two adjacent in highly complementary businesses there are some operational differences.
In best practices, which I think presents opportunity, but when you step back and you look at how the portfolios actually behaved with long lived assets long lease durations slow churn.
No customer concentration very predictable and for a good forward visibility in the portfolios they behave so similarly.
That is very logical to see them come together from an operational standpoint, and also from the customer standpoint. So.
So when you have this.
Level of just strategic.
Overlap.
I think that really that really facilitates the integration process.
And it really helps the teams come together as well as we execute those integrations.
Thank you.
Your next question comes the line of Courtney Yeah.
From Morgan Stanley.
Hi, Thanks for squeezing me in guys.
Maybe just going back to some of the detail you gave on on monthly orders.
It sounds very much like.
Construction.
Is not coming back and really this order growth has not been so much pent up demand, but from a shift towards social distancing and some new opportunities and in manufacturing.
It is first is that the right characterization and second is that the case for both North America storage in North America modular or.
It's it's storage really just pent up.
Hi, Justin.
Test and see opportunities to apply it to.
Yes, I think Courtney if you just separate a little bit the seasonal shipments that Kelly mentioned, but the peripheral portfolios are performing nearly the same so what you're saying is.
Across all of their end markets, excluding that nonresi construction.
Outperformance, if you will and part of that is driven by the need for additional space for social distancing screening et cetera.
So you're seeing that right.
You know as I look forward.
It's always been a good indicator for return of Nonresi construction.
We're in a great place were stable and we can be patient.
When it comes back that will will accrete I'd say, even more interesting opportunities.
Okay, great. So when you characterize.
Obviously both segments.
Acting very similar right now and I think units on rent are both down about.
3.5% to 4%.
Back on rent per boat part.
Portable storage and my just pays to trends similarly, going forward into 2020 line or anything else that we should be.
Kind of.
That could try that discrepancy between how units on rent return between the two.
According to this is Dan I'll take a crack at it what you've seen is order activities across both kind of rebound in converge to prior year levels over the course of the last few quarters and that's that's very comparable across the two you've also seen the volume of returning equipment.
Declined significantly versus prior year, it's down almost 20% year over year across both storage and modular so both in terms of new Activations and.
Returns you got very similar trends mobile mini historically has had a seasonal build of unit on rent volumes in Q4 and that is specific to some of the the seasonal retail activity that Kelly spoke about so you should expect to see that go up in Q4, and you will recall the historically on the modular side you actually had to.
Reverse trend there are fewer new project starts in.
Our core end markets there in Q4, so you'd normally see a.
Unit on rent taper a bit in Q4, and then start to rebuild towards the end of Q1 and going into Q2. So the businesses are actually fairly complementary from a seasonality standpoint, as you think about Q4, but there is a little bit of nuance I think youre going to see a stronger volume trend in the mini business in Q4.
As they've always demonstrated.
I'd expect to see some normal seasonality in the.
Modular business and probably too soon to talk about what we expect for Q2.
Next year.
Okay got it Thats helpful. And then just a quick clarification could you comment on what.
What you're back penetration is looking like right now I think you mentioned, you're still trending towards 80%, but if you just had that rough percentage.
Yes, we were at 280 $286 of Vaps value per month.
Which would put us.
Let's see well north of 50% penetration as we get towards right around 50% penetration as we drive towards that 400 level.
Yes, primarily driven by the furniture growth.
Great. Thanks.
Your next question comes the line of Brent Thielman D.A. Davidson.
Okay, great. Thank you Hey, Tim in terms of the variables impacting actual free cash flow for the full.
Fourth quarter, and maybe even on a go forward basis into 2021, I think the transaction costs are effectively behind you with the only major component b that $10 million to $15 million and integration costs anything else, we need to think about there.
I think Thats I think Thats really right. When you talk about the transaction cost. These are really professional fees that are specific to advisory work and things like that that.
Facilitated the transaction. So it's what we have going forward, our integration and restructuring costs will relocate some locations.
And things like that very similar to what you saw after the my space.
After the mob space integration.
So really if you start with EBITDA, we've given you that guidance Weve given you the capex guidance.
About 105 million of cash interest.
Call. It 10 to 15 of quarterly integration related costs could be some fluctuations in working capital, but historically there has not been.
Terribly material material.
Material.
Limited cash taxes and.
Than anything else, we do would kind of be debt repayment or stock repurchase after that.
Yes, okay.
And then maybe as a follow up you talked a bit about the you know the.
The rate initiatives, its pretty clear what's going on in the modular business Kelly I'd be curious if there's any more.
Metrics or anything you can share that gives us some feel for.
Customer, except except in success in the storage businesses, you've been pushing rate harder and harder.
Win rate down or up just curious how there is a clearing through.
We keep a very close eye on really I'd say the feedback from our sales reps is very important although I think it's.
It's easy to say as a former sales rep that you have limiting beliefs, sometimes and so until it happens you're never sure whether it can stick and I think thats. It goes right back to the.
Mobile minis ability to deliver on time mobile minis quality of product all the differentiators in terms of security our sales reps should have the utmost confidence and I think a lot of times like I said, it's just the ability to see that there's more opportunity, especially as we start to see we truly become a logistics company and and the combined organization.
It is going to certainly be.
Very much focused in on logistics in mobile mini is so well so far ahead of the competition.
For example to rent 20000 seasonal units in the course of about four months.
In addition to having peaked core volume speaks to that.
Real scale advantage and sometimes we got to do a better job of messaging that to the sales reps and I think we're excited to see the progress thats being made and.
We do have to back it up and we've got to make sure. We're still staying close to the customers, but it's also supply demand and like I said, if you look at the volume turn on the many sites.
Units on rent or up about 3% right now to prior year lot of that's that's not seasonal seasonal about flat a lot of that core stickiness and and again, probably our ability from a scale standpoint, and logistics to take advantage of the situation, where we can continue to help customers during the pandemic and so I think a lot of it just comes down to the fab.
But we've got to go prove it out and I think we're doing that but I'm. The MPS has always been something weve followed very closely in the customer feedback will will stay very close to.
That's great color one more if I could Tim that's where you are right that the delivery in duration margin called in and around 20%. That's that that's a reasonable level to assume on a go forward basis with mobile many tucked into the numbers.
We've seen some permanent improvements it can fluctuate depending on the mix of delivery and returns and major projects and some of the seasonal activity, but it's up with about 300 basis points year over year on a pro forma basis.
And we have been really really encouraged by those results as we step back and we think about okay, where are we going to prioritize our time and allocate resources as Kelly, what you're talking about logistics is a big it's a big number you're talking about pro forma revenues.
On the DNA side.
Well over $300 million right. So we are a logistics company at the end of the day and that is a competitive advantage for the company. So it only makes sense for us to invest further behind it in margin is one of the areas, where youre, where you'll see that hopefully manifest itself.
Okay, great. Thank you.
Your next question comes from Lima, Phil Ng from Jefferies.
Hey, good morning, guys orders.
Orders have progressed pretty nicely in both here in North America modular and storage business.
How should we think about unit on rent in fourth quarter, and then as we kind of look out to 2021 on a year over year basis, just trying to gauge with net new orders essentially being flat now how quickly will that translate to your units on rent.
Yes, Phil this is similar to Fortys question, I always think about the business a bit sequentially in terms of where do we go from here because the movements are really not that not that dramatic quarter to quarter as you've seen right. So.
So on the modular side of the business it would be normal to have a seasonal tapering of units on rent in Q4 and on the portable storage side of the business. It would be normal to have actually pretty strong seasonal growth into Q4.
In support of those.
Large big box.
Retailers.
So based on the activity, we see right now we are going to see both of those playing.
Playing out and really to the punch line from my perspective.
In terms of the order data is that just the deficit. We saw in Q2 is all that converged to prior year levels right and so that to me says, we're we're probably back more in line with normal seasonal patterns.
Okay. So we should see that.
Uptick in your orders come through fairly quickly in a quarter or two give or take is that the right would think about or actually even quicker.
No that's right deliveries follow orders within several several weeks typically on the the modular side and maybe even faster than that on the on the storage side.
And again, so I just think about that sequentially.
From what you saw in Q2, and Q3, then going into Q4.
Okay. That's helpful. Any mix nuances, we should be mindful of when you pivot from construction to send these other end markets are doing better when it's health care government, whether on the margin side or from AMR standpoint.
Look I mean, one of the beauties of the.
Revenue management tools that we use is that we do segment by industry group.
And we do segment based on other transaction characteristics and you will see some fluctuations, but I can't point to the.
The delivery mix right now and highlight any real meaningful change in mix other than the events business, which we had talked about is still quite slow those tend to be short term higher priced rentals, but a relatively low percentage of our overall revenue mix and then really the broad based trend that that Brad talked about previously as Joe.
Just.
The impact of social distancing really across all of the end markets and Thats in the in the near term probably continues to be an area of focus.
That's helpful and just one more for me on the cash flow side Tim.
Just given your new mix of portfolio with combination with many how seasonal is free cash flow generation on a quarter to quarter basis, just because when we look at your free cash flow for the quarter, certainly very strong if we kind of flesh out some of the merger costs and then you start seeing the synergy flow through a little bit more interest savings as well seems.
Like your potential ahead of your 500 million free cash flow target run rate, so any thoughts and color around that thanks.
Yes, if you think about EBITDA is not not very not very seasonal right because it's driven by the lease revenue at the end of the day, which is slow and steady and very predictable.
So you historically, you've seen a bit of margin pick up across both businesses frankly in Q4.
In part due to variable costs on the modular side and in part due to the retail seasonal retail on the mobile mini side.
Capex.
Can tend to be a little bit more weighted towards Q2 and Q3 in a normal year 2020 has been anything but normal obviously.
But that there is some modest seasonality there potentially.
And then interest cost you know just be careful about the timing of our bond payments because both the cost and the sizing there is a little bit different.
But aside from that there's really nothing else I would call out from a cash flow seasonality standpoint, and if you think about 2021.
The second half of the year, that's really what I would expect the integration cost headwinds that we're incurring right now to start to taper taper off and hopefully be negligible by the time, we get to 2022.
Okay Super Thanks, a lot I appreciate the color.
Your next question comes from line, Sam England from Korean Burke.
Thanks for taking the questions. Firstly could you talk a bit about any early success that you've had to cross selling to launch a national customers and maybe what the reception been like from national customers to make any doubt with one of the businesses in the past.
Sure Sam I think a couple of things I think as you start thinking about cross selling one is that mobile mini had success really pre merger.
At at securing mobile through the managed services offerings. So I think theres a personal there's a lot of competence within the the sales group in terms of cross selling there and I think.
Today, we're seeing that continue to improve and I think we actually look at the close rate of the leads that are passed from many to over to the module side. It will Scott closing at a very similar rate of of a typically that will SCADA, saying, which is really exciting there. So it's a more qualified lead there is less than 20% overlap from what we've seen so far.
Think it's it's certainly exciting for us to see that on the national account level, we're still in the early phases of kind of bringing that group together.
I can tell you that Brad and I have been out and seen a couple of very large customers that are excited about the opportunities see the partnership. It's I go back to the fact that the customer is certainly evolving from over the last five years and they're looking for for us to make their job easier and that's evident from the standpoint of the Vaps penetration that will Scotts had success with the managed service.
As offering that mobile minis grown too, which now has over 4000 rerun items on rent. That's all those are signs that the customer is looking for us to make it easier and the two of us coming together knowing the overlap on these job sites is certainly going to make it.
[music].
He is here for the customer to do business and I think in Brad Nice initial touch points with some of our big customers. We're we're seeing a lot of excitement.
Okay, Great and then the next one on the back side of the business, you're obviously seeing great momentum I just wondered how you are thinking about expanding range of SK huge and down sticky thinking about within equipment outside at the units that was up mid eights managed service offerings.
Yes. This is Brad I think first just as a reminder, we can achieve this 400 dollar level without introduction of any additional skews. So that's a well organised good better best 40 to 50, Skus or that we have Stockton currently all the will Scott branches and the soon to be in them.
Mobile mini branches. So we can achieve this a $150 million of.
Of of a tailwind if you will.
Associated with vast but just doing what we've already done.
And as Tim mentioned, we've already got.
A pretty significant portion of our reps uneven full areas that are already achieving that 400 level. So.
There is no roads here no new products required there are absolutely new products that are interesting we.
We have introduced.
Panels, if you will to create more separation between desolate cubicles, new data services as we look outside the box.
And outside the storage units.
Items like.
Panelized fence, we've piloted in the past.
As as a good example mean hard assets that we deliver at the beginning of the job that would pick up three years later are absolutely up our wheelhouse and things that potentially will look at putting our balance sheet behind in the future. So.
Theres I think theres, a very interesting runway here when you look at the whole job site.
What's been key to our success is doing a few things really well.
So that you know us well you as youve.
Followed us over time, we'll keep talking about let's get to $400 with of EPS offering we have we're making great progress and all the while we'll look for the next opportunities to expand that.
Great. Thanks, very much guys.
Your next question comes from the line of Sean Wondrack Deutsche Bank.
Hey, Brad Kelly at Tim and team and thanks for taking my questions.
Okay. If it relatively quick workroom been answered, but just on the working capital front should we expect the same started.
Seasonal drag in the first half of the year.
Turning to working capital back ended here going forward for the combined business.
Yeah, Sean as I think from my perspective, it's a little premature to give kind of detailed seasonal working capital guidance.
Guidance as the two businesses come together. They are just a lot of a lot of moving pieces I'll give you. Some examples mobile mini has done a great job on kind of Dsos and receivables for example, so thats an area, where I think overtime, we should see improvement on the modular side.
Conversely on the well Scott side over time, you've seen kind of our.
Deferred revenue and customer deposit line grow.
Grow pretty significantly thats, the practice of taking upfront deposits from customers on standard lease agreements, which we were able to scale for example across the mob space volume, so they're going to be some puts and takes here as well as just kind of the natural noise that comes along with the integration. So I'm I'm not going to get too precise today on working capital seasonality.
Yeah.
Okay fair enough that's helpful.
And then just.
Last question for me can you just remind that you have a three to three and a half turn net leverage target at about two and a half billion of debt right now.
Do you anticipate achieving your net leverage target through EBITDA growth. There also you can incorporate some some debt repayment in that.
Thank you.
Yes, clearly if you use the post merger July 1st NPL balances the starting point, we paid down nearly $117 million of debt.
In Q3, using internally generated free cash flow. So we intend to grow EBITDA and we intend to reduce gross debt and we've got a high degree of capital allocation flexibility as you get into 2021.
Thats great. Thank you very much and great job this quarter good luck going forward.
Thank you.
I think with that we can wrap up the call. So thanks, everyone for your interest in our exciting growth journey wish all of you continued safe safety and good health.
Talk to you next quarter.
This concludes today's conference you may now disconnect.
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