Q1 2021 Willscot Mobile Mini Holdings Corp Earnings Call
[music].
Okay.
Welcome to the first quarter 2021, well Scott Mobile Mini earnings Conference call. My name is Christy and I'll be your operator for today's call.
At this time, all participants are in listen only mode.
Later, we will conduct a question and answer session.
Please note that this conference is being recorded.
I will now turn the call over to Nick Gerardi director of Treasury and Investor Relations. Nick you may begin.
Good morning, and welcome to the Wolf Scott Mobile mini first quarter earnings call participants on today's call include Brad salts, Chief Executive Officer, and Tim Boswell Chief Financial Officer, today's presentation materials may be found on the Investor Relations section of the well Scott and mobile mini website.
Slide two contains our safe Harbor statement, we will be making forward looking statements during the presentation and our Q&A session, our business and operations are subject to a variety of risks and uncertainties many of which are beyond our control as a result, our actual results may differ materially from today's comments.
For a more complete description of the factors that could cause actual results to differ and other possible risks. Please refer to the safe Harbor statement and our presentation and our filings with the SEC with that I'll turn the call over to Brad salts.
Thanks, Nick Thanks, Nick greeting to everyone and thank you for joining us today on bread Salt CEO, Scott mobile mini.
First of all I'd like to thank the entire will Scott mobile mini team for yet again, delivering another outstanding quarter, while at the same time, making significant progress towards the key integration milestones that will unlock the full potential of the merger driving shareholder value for years to come.
Due to our strong performance and the first quarter and strengthening commercial Kpis, we're raising our full year 2021 guidance midpoint for revenue adjusted EBITDA and net Capex, while Tim and I will go into further detail during our call suffice it to say that we're extremely excited about the future as demand is increasing across our diverse.
<unk> and markets and our team continues to rise to the challenge to deliver ever increasing and exceptional value to our customers.
Turning to page five of our presentation I would like to highlight the eight unique characteristics inherent in our platform and the associated to simplification apparent and our Q1 performance.
First as a reminder, we are a fast growing leading business services provider specializing and innovative flexible workspace and portable storage solutions. We are the number one provider within the sector and our five X our next largest competitor.
Our position is underpinned by a vast fleet position across 275 branches, and North America, and UK, which yields compelling unit economics of greater than 25% Unlevered IRR.
Q1 leasing revenues and our North American modular and storage segments were up 6% compared to this time last year on a pro forma basis, which provides great forward visibility based upon this foundation of steady and predictable reoccurring lease revenues given average lease durations of nearly three years our demand.
And as robust and accelerating with North American unit on rent and deliveries accelerating and March headed into the second quarter, where we serve 15 sectors across a diverse group of end markets and geography.
Our team continues to deliver unique and expanding value to our customers as we expand best practices across our portfolio, we benefit from tailwind associated with powerful idiosyncratic organic revenue growth levers three of which are worth taking a moment to highlight both given their magnitude and our Q1 progress.
First rental rates average monthly rental rates and our North American modular segment were up 13% year over year, marking our 14th consecutive quarter of double digit growth. We also realized notable pricing traction and north American storage and the U K with Avalere average monthly rates up 5% and 26% year over.
Year, respectively.
North America storage is 5% increase marks the 30 <unk> consecutive quarter of year over year rental rate increases for this segment and has the highest increase and the last 13 quarters, we expect our unique value proposition contract harmonization and migration to technology enabled pricing more broadly across the portfolio will support these.
<unk> for years to come.
The second is vast North America modular vast penetration continued to accelerate driving nearly half of the aforementioned 13% average monthly rental rate growth. The team achieved an average monthly rental rate of $337 on units delivered over the last 12 months, which is a 22% year on.
For year increase and an 8% sequential increase simply holding this LTM penetration level for the next three years represents a $145 million tailwind.
As we continue our trajectory towards achieving and eclipsing our long term goal of $400. This tailwind bans and expense.
Im also pleased to confirm that we began extending the vas offering to our mobile mini ground level office customers, which once fully deployed represents an incremental $50 million opportunity. We believe there is a third meaningful vas opportunity associated with the storage containers, which were just beginning to size and utilizing our proven playbook.
And third is cross sell, albeit a bit manual and process until our systems are fully integrated our teams and begin to cross sell storage along with modular leads and vice versa, while 80% of our customers require both storage and office. We currently have only a 40% customer overlap.
We delivered $65 million of cost synergies from <unk> acquisition over the last 10 10 years based upon this track record we are extremely confident and delivering an incremental $55 million has been identified and stage for execution.
Our unique scale and technology and tandem continues to drive efficiencies. Our first quarter 2021, adjusted EBITDA was 164 million, which represents a 350 basis points expansion relative to the first quarter of 2020.
Core pricing <unk> penetration and synergy execution continued to drive our profitability and growth beyond the identified cost synergies, we have a growing list of operational improvement opportunities, which will contribute to continued margin expansion and years to come.
And finally, we're thoughtful and deliberate as we consider our capital allocation and we will continue to prioritize growth deleveraging and share repurchases.
We generated $91 million and free cash flow and a 21% free cash flow margin and the quarter by fully funding all organic growth onetime integration costs and repurchasing $82 million of securities, we reduce leverage to three seven turns well on our way towards achieving our long term target of three to three five turns by the end of 2021.
This trajectory is expected to yield $500 million annual free cash flow run rate by the second half of 2022.
Turning to page eight we profile, our 15 discrete end markets, which we bucket into construction and commercial industrial energy natural resources and government and institutions.
While there have not been any material shifts and our end markets profile. We would note that architectural billing index or Abi was release of 55 and March which is the second straight month with a measurement above 50, which have continued could be expected to support growth and 2022 and beyond we're also monitoring the composition of the infra.
Structure legislation that could further underpin and extend this momentum.
Page 11 reflects our multiyear portfolio of growth opportunities, while I've touched on the majority of these previously I would like to expand upon the cross selling opportunity as well as highlight our progress with system integration as an enabler for acceleration of value creation more broadly.
As mentioned before our teams have begun to cross sell modular storage and vice versa for context and announcement of the merger between well Scott and mobile mini and we believe that we had a 45% market share and modular and and 25% market share and storage, while we believe 80% of our customers actually require a boat.
All in almost 3000 units of gone on and as a result of our cross selling efforts that started with our merger and Q3 of 2020 and while that's not a large number when compared to the 220000 units on rent and North America, It's easy to see how we will continue to get some volume uplift over time as we further automate and on these.
That takes on.
And our cross selling efforts among other growth levers will be accelerated by our ERP migration, which is on track to occur and the second quarter of 2021 with.
We've completed all testing there and the final stages of data preparation before moving on North American modular segment on to the legacy mobile Mini's best in class SAP.
While no ERP integration is easy on incredibly proud and grateful for the team for their great efforts and long hours to support this critical value enabler.
Once the migration is complete we will begin to accelerate the execution of the $50 million and cost synergies premised in the merger between <unk> and mobile mini.
Moving to slide 14, which depicts examples of the varied uses of our standardized fleet across our diverse end markets as I discussed earlier demand is improving across our end markets and north American modular our deliveries increased 4% year over year and the first quarter. It's important to note that March 'twenty.
March 2021 deliveries increased 8% relative to the March 2020, and 4% relative to March 2019.
Although average units on rent decreased slightly sequentially as expected period and units and March increased modestly relative to December which contributed positively to our lease run rate.
And then North America storage segment, we saw a small decrease of 1% year over year deliveries.
The same timing dynamic realized and modular however existed and storage.
March 2021 was our strongest core delivery months since June of 2019.
Average, although average units on rent came down relative to their seasonal peak in Q4 as expected they are up 1% year over year.
These positive trending commercial kpis and both of our major segments are a bit earlier than we expected and as one of the fundamental drivers for the increase and our 2021 guidance with that I'll hand, it over to Tim.
Thank you Brad and good morning, everyone page 19 summarizes some of the financial highlights from the first quarter, which overall was a good start to the year and positions us well for the remainder of 2021.
Leasing revenues increased 6% year over year on a pro forma basis, driven by continued pricing performance and all of our segments.
<unk> penetration and our North American modular segment and the overall resilience of our lease portfolio through the course of the pandemic.
We generated $164 million of adjusted EBITDA at a 38, 5% margin and our flow through of revenue growth to adjusted EBITDA was over 75%, which is reflective of the operating leverage we have and the business heading into what could be a pretty interesting growth environment.
We generated $91 million of free cash flow and a 21% free cash flow margin, which is consistent with the $350 million free cash flow run rate, we spoke about last quarter and well on our way to achieving our milestone of $500 million of run rate free cash flow by the second half of 2022.
We reduced leverage to three seven times, mostly through EBITDA growth this quarter, as we opportunistically repurchased $82 million of common stock and warrants.
Average would have been below three six times without the repurchases. So we're clearly comfortable hitting our three to three five times target leverage range by the end of the year and can be flexible to fund opportunities as they present themselves.
As Brad discussed we progressed, our ERP migration with cutover scheduled to occur this quarter it.
It has been absolutely humbling to watch the organization coalesce around this project, whether legacy mobile mini or legacy will Scott and our branch locations are and our shared service centers literally everyone is working together to make this cutover successful and that gets me incredibly excited about what we can all accomplish when we get past this milestone.
And <unk> refocused all of this organizational horsepower on growing our business.
Page 20 highlights the strong financial metrics that we achieved in the quarter, we generated $425 million of revenue and increase of $19 million year over year on a pro forma basis.
Sequentially revenue declined by $13 million, which simply reflects the normal seasonality, primarily and our storage segment.
You can see this and the bottom left chart and I would just highlight there that you really don't see any impact of the pandemic on our lease revenues over the last 12 months, our lease revenues were up year over year every quarter last year and again in Q1 and there aren't many leasing companies that can say that this.
This is just further evidence that we have and incredibly resilient and differentiated reoccurring revenue model, which is on a solid growth trajectory heading into the remainder of the year and 2022 as markets recover.
And the top right chart adjusted EBITDA was $164 million with a 38, 5% margin again, 75% of revenue growth flowed through to adjusted EBITDA, which resulted in 170 basis points of margin expansion year over year on a pro forma basis.
Our Q1 EBITDA margin was in line with what we discussed on our last call and I would expect it to be flat or slightly down sequentially and also down year over year and Q2 as activity levels increase.
And then margins should expand sequentially through the remainder of the year.
So really no change and the margin trajectory, we expect this year relative to what we discussed on our last call rather as we exited March heading into Q2 volumes pricing and value added products were all contributing to and accelerating lease revenue run rate, which is really what gives us confidence and the increased guidance ranges for the year.
Our cash flow metrics on page 21 have been very consistent since the merger closed and.
As Brad discussed previously the fundamentals of organic lease revenue growth margin expansion from price increases and <unk> penetration as well as synergy realization all continue to contribute to strong cash flow.
Net cash from investing activities was $31 million and Q1 with the majority of Capex going to Refurbishments and conversions as we drew capacity from our existing fleet.
And we continued contracting are flat our fleet net book value slightly in Q1. So we are being very disciplined with the balance sheet, even heading into this growth market given the capacity we have available.
Free cash flow margin remains strong at 21%, while this metric can fluctuate due to timing of capital expenditures, especially and busier quarters. We believe that it is sustainable at this level of long term and has upside, especially heading into 2022, and 2023 with greater synergy capture and reduced integration costs.
And integration costs totaled $14 million and the quarter. So it's easy to see our free cash flow run rate pushing north of $400 million as those costs subside.
Turning to page 22, and what was and otherwise straightforward quarter operationally. The SEC came out with a statement on April 12th right. After the quarter ended.
Which introduced new interpretations of the accounting guidance for warrant structures that are common and special purpose acquisition corporations.
Ccs perspective is that most <unk> warrants should be presented as liabilities on the balance sheet and mark to market. Each period. So we are restating our prior audited financial statements in order to conform retroactively with the SEC statement.
The preliminary earnings release that we provided as a range for this non cash mark to market impact on net income, which is valued using black sholes and primarily a function of our stock price movement.
It falls below operating income and it has nothing to do with our actual business operations.
This change does not impact any of our key operating metrics any of our GAAP metrics above operating income or any of our non-GAAP metrics.
It also does not impact our capital structure and any way such as our net debt or leverage the covenants and our debt facilities or our economic share count.
Both the earnings release, and the 8-K that we published yesterday provide further details and we will file the amended 10-K, and our 10-Q and a week or so and I think the punch line here is that this doesn't change the way, we think about the business and any way and we will continue to be as transparent as possible about how the business is performing as a reminder, all of our.
Warrants expire in November 2022.
Getting back to the business on page 23, we made some tactical adjustments to our debt structure this quarter and redeemed $65 million of our six and one eight senior notes due 2025.
And principal outstanding down from $650 million to $585 million and refinancing debt balance to our APL at a rate of about 2% or.
Our weighted average cost of debt is now 4% with approximately $100 million of annual cash interest.
Additionally, we opportunistically repurchased $2 75 million common shares for $74 million and a secondary offering by <unk> capital and separately repurchased $8 million of warrants and other common stock returning a total of $82 million to our shareholders and the quarter.
Confidence and our outlook allows us to be opportunistic with these types of transactions leverage declined to three seven times, our pro forma last 12 months adjusted EBITDA of $660 million we're quite.
Comfortable that we'll be at or below our 335 times leverage range by year, and we have ample liquidity no near term maturities and plenty of flexibility with which to operate the business.
Our updated outlook is on page 24 based on our strong first quarter results progress with our integration and the improving macroeconomic outlook, we're increasing our guidance ranges for the year slightly.
Our new revenue midpoint of $1 79 billion and adjusted EBITDA and mid point of $705 million or increases of two three and one 4% respectively from the mid points of our prior ranges.
And relative to our 2020 results the new ranges suggest 6% to 11% revenue growth and 7% to 11% EBITDA growth for the year.
The only meaningful change relative to our initial forecast is that demand is accelerating a bit earlier than we expected on our last call.
And we're seeing that dynamic across all four segments. The improvement is coming from a balanced mix of volumes pricing and value added products. These compound nicely together. So this is exactly what we want to see.
And specific to our modular segment, we continue to see a 30% spread between the total rental rate inclusive of apps on our new contracts relative to the overall portfolio, which is a very powerful tailwind the compounds quite nicely with volume growth and gives us confidence and the next several years.
Similar to what we discussed in Q4 the margin expansion at the midpoint of our ranges relative to last year will appear a bit muted.
And is entirely driven by variable costs to activate units and a higher mix of delivery and installation revenues, which are obviously both volume driven.
This means that our run rate is building through the course of this year.
And while there is no change to our cost synergy assumptions, which will continue to build and the second half of the year based on our progress with the integration.
And we will expect that year over year margin expansion will be strongest in Q4 and up 100 to 200 basis points heading into 2022.
This margin progression is very consistent with our original guidance, but with stronger lease revenues across all segments driving the higher ranges.
Net capex of course will be demand driven and since demand is trending higher we've increased the capex range to a midpoint of $210 million.
Even at these higher ranges Capex would still be below our annual depreciation and so we're being quite disciplined with the fleet.
Overall, we think we're on track for a great year and a strengthening macro environment gives gets us pretty excited about what we can achieve and 2022 and 2023, which in turn has implications for capital allocation.
Our capital allocation framework on page 25 is unchanged. However, based on the current trajectory of the business and our confidence looking out into 2022 and 2023. The board is proactively expanded our share repurchase authorization to $500 million of.
Of which approximately $370 million remain available.
And we're still on track and committed to our three to three five times leverage range by year end and will of course continue to be acquisitive. However, given the forward visibility into our free cash flow and clear organic growth levers. We are confident we can fund all of the above priorities, while accelerating repurchases as we grow.
Before I turn it back to Brad.
And to extend a thank you to our entire team again for a successful quarter and the incredible organization organization wide effort that is ongoing to execute our migration to SAP.
And I know that many of you are working both day and night shifts to ensure the success of this project and I sincerely appreciate your hard work energy and dedication.
Brad.
Thanks, Tim Boswell and extremely proud of our Q1 accomplishment the Wills Scott mobile mini team is unparalleled and continues to raise the bar, which further compounded returns and driving shareholder value creation for years to come.
So wish all of you listening today continued safety and good health and this concludes our prepared remarks, operator would you. Please open the line for questions.
Yes.
Certainly and as a reminder, if you would like to ask a question Press Star then the number one on your telephone keypad and.
And your first question is from Kevin Mcveigh of Credit Suisse.
Great. Thanks, so much and congratulations on the results.
Greg and Kevin it looks like and increase to that the market opportunity for the vaccine.
And then that's great it looks like the <unk>.
Increased the amount per unit and is that the number of units.
And maybe help us understand that a little bit and then within the context of that is just want to make sure.
I know that that is the $145 million.
<unk> CLO opportunity to 35 and <unk>.
And to the 145.
In total.
And maybe understand that a little bit.
Yes, Kevin This is Tim and page 10 ways out.
Current state of the state of affairs as it relates to have apps and we're incredibly excited frankly about the trajectory.
That we're on and mind you. This is through a pandemic and through a pretty complex integration and.
And the organization has continued to drive both core pricing and value added products I think it was a year ago, and we talked about having approximately a 30% spread between our rates and <unk> that were achieving on new contracts relative to the overall portfolio. We've continued to drive.
The average rental rate through the course of every quarter last year and we've maintained that spreads. So you can assume that pricing on new contracts as well as the pricing or the penetration of value added products has kept pace or more than kept pace in the case and the case of value added products, but on page and you see the.
Rate achieved on our most recent contract is up 22% year over year, So incredible progress there and.
And the overall average monthly rate on all units is up 25% year on year. So you see pretty good parity between the growth rate on new contracts and the overall portfolio and that's all just on the North America modular segment to your point there is another $35 million of EBITDA opportunity we believe.
<unk> over time on the globe, which fall within the North America storage segment and as Brad mentioned, there is a third opportunity that we're exploring which would be the introduction of value added products on storage containers. So look this is going to be a multi year.
Long term strategic driver for this business and.
There are probably opportunities to expand it beyond what we know today.
Great and then just real quick obviously the storage pricing just continues to really really encouraging there and improve.
Is that did that.
And the capacity ERP.
As we're thinking about the application wonderful outcome.
Yes, Kevin and Theres really no <unk> included and that.
And the improvement it's driven by again that continued progress with the Geo low pricing.
And then early work on the pricing of core containers themselves.
And I'd just highlight in the United Kingdom for example, and we're getting just tremendous price performance and that.
And that business.
Under our leadership team there utilization levels are pushing close to 90% and the.
Price improvement just in the last three quarters across that business is really remarkable and I think it is sustainable and based on.
And when we see results like that we also allocate capital and Thats an area, where we're happy to continue expanding our fleet.
Awesome. Thank you. Thank you Kevin.
Thank you. Your next question is from Andy Wittman of Baird.
And.
Great.
Friday good morning, everyone.
I wanted to just talk a little bit about some of the business trend and.
In March and coming out of March and.
And I was hoping that you could frame the discussion of that in terms of you mentioned some of the order book on the modular side I don't think he gave the mark the March.
Deliveries over the 2019 level and storage so I'd be curious to see how that trended and then I guess more generally Brian if you could talk about kind of how the order book and delivery book, if that's converging to more normalized levels during the depths of.
COVID-19 is we all probably recall orders were great, but some of the deliveries were slowing is that that GAAP and timing or the difference between order and delivery starting to narrow here March April.
Yes and <unk>.
Kevin.
And I am sorry, Andrew this is Brad.
Very little and my commentary if any related to the order book.
Our reference unit on rent and delivery.
So the March deliveries and storage were at the highest level since I think June of 2019.
So extremely strong.
The order books in general are very robust and yes, indeed, the timing with respect to win orders materialize as deliveries are starting to improve.
And then that's in both segments.
Got it Okay. That's helpful and then I was hoping.
You can just talk a little bit more and maybe this one's for Tim on the SAP.
Cutover.
Just if.
And if you could talk a little bit about the testing that you've done so far.
The more specific timing that youre looking at what are some of the key things that you're trying to mitigate and terms of risks in terms of your operations I think just having a little bit more detail. So we all go into the second quarter cut over a little bit more eyes wide open would be helpful for everyone's edification.
Sure.
Uh huh.
Happy to and this is probably the biggest operational initiatives that we have ongoing and the company and it's been ongoing even since before the merger closed a year ago. So the planning and the foundation for that.
As we started putting in place.
Before the merger closed.
We have got a very deep cross functional leadership team from both the will Scott and mobile mini legacy organizations working.
Very well.
And together and Thats, both at the corporate level and this extends all the way down into the well Scott branch network. So if you can think about the employee population north of 4000 people.
That will be trained and.
On the reporting that's in place and and all of this is.
And then.
Really our primary focus over the course of the last nine months.
We've had a very structured integration management office and project management structure in place.
No.
That team core team meets daily.
To monitor the progress of all key work streams, we meet weekly every Friday morning, except and we're doing earnings calls.
And with the steering committee to monitor the progress of key milestones and that's been ongoing again now for almost a year and we're to a point today, where we're ready to execute the execute the cutover. So we are and the final.
Stages of data testing and as Brad mentioned, there is a and organizational wide training.
Effort going on right now and.
And we're incredibly excited about some of the operational benefits.
That will extend into the.
Legacy will Scott organization. After this cutover, if I reflect on some of the things that the mobile mini organization does really well and has for some time now some of the operational efficiencies that <unk> been able to draw are directly related to the insight they've they've been able to get from SAP and so we'll have better real time data visibility.
Better reporting.
Better long term process in place for things like inventory management of <unk>.
So really it's I can't I can't overstate the amount of organizational effort that's gone into this.
But I'm incredibly excited about the operational benefits that will extend once we complete the cutover and Q2 and as I mentioned in my remarks.
I get incredibly excited about what else can we execute now that we've demonstrated the ability of these teams to work together.
If we refocus all of that energy on value added products for portable storage containers.
As an example, or going deeper into all of our different end markets. So it's a big deal. We've got a lot of employees on the phone listening. So thank you once again and.
Let's stay focused and execute.
And extremely high level as we have over the course of the last 12 months.
Great. That's all I have for today have a good day and good weekend.
Thanks, Tim.
Thank you. Your next question is from Scott Schneeberger Oppenheimer.
Thanks, very much good morning.
Curious if you could just speak on core spot rates and.
And from the modular assets here heading into the scene.
Seasonal upswing, what are you seeing and how it sort of argue with pricing at 12, 9%, obviously very strong again and you said that something you can sustain for.
A few years, hence so just curious what what.
A little bit more on what youre, seeing with the seasonal uptick and and openness and customers to take price.
Yes, Scott this is Brad as I mentioned, we've achieved double digit rate growth on the North American modular now for.
Basically three years.
And we think we can extend that double digit rate growth, both with the combination of core pricing and <unk>.
As we've said on prior calls <unk> will drive.
40% to 50% of that mix with core pricing driving the balance as Tim mentioned Corp.
Spot delivered rates for both including <unk> and core pricing are up 30% above the average.
We've disclosed the absolute values associated with apps.
And again, we don't we don't get too deep and core pricing growth.
Theres been no back off and that was one of the probably questions with respect to the platform heading into and extra central stopped shock, if we would see pullback or pressure on core pricing, we've not right. We went into the pandemic with a 30% spread.
We come out of the pandemic with a 30% spread Meanwhile, we've been harvesting.
And.
Aspects of that spread every quarter.
As we move through this so we feel quite good and I think the other pleasing.
Attribute to our Q1 performance was we.
We saw the U K really start to move pricing actually a quarter or two ago and.
And now we begin to see that that same acceleration and North America storage and storage, albeit still manual right. This is before we've really harmonize contracts and deployed the algorithmic based pricing tools that we have in place across the north American modular inverse aspects of the revenues.
Thanks, Brad I appreciate that.
Tim I guess for you.
Free cash flow very very strong and the first quarter I did notice there was some benefit on on proceeds of sale of property plant and equipment.
And I'm, assuming that some real estate sales redundant real estate sales leftover from the Mod space transaction could you just speak to the contribution you expect.
And from incremental sales over the course of 2021 and 2022 and if it extends out long and just how we think about that.
In accordance with your ambitious yet seemingly achievable free cash flow targets. Thanks.
And it's certainly longer term selling real estate is not going to be a core core driver of our $500 million of free cash flow and that's a milestone that is intended to be eclipsed I would just remind.
Folks. So again it was about $11 million of core real estate sales in Q1, and that's a little higher than normal. If you went back to probably what 2019 and early 2020, you would've seen some elevated levels and that magnitude on the legacy will Scott business.
On stemming from our integration with Mod space, you may recall that Mod space had over $100 million of net book value held and real estate assets into the extent those locations were redundant we were executed exiting those through the course of 2019 and 2020.
Mobile mini and.
Well, Scott legacy as a general rule of thumb or not and the business of owning real estate. So to the extent, we evaluate a market or and MSA.
And we've got and known to property.
And we can consolidate operations, we of course try to free up that capital and redeploy it and fleet or more productive uses so 11 million is a little higher it will fluctuate.
But.
And this case Youre also offsetting $14 million of integration costs. So net net I think 90 million is a very good number.
And again confident and our ability to drive that going into next year.
Great. Thanks keep up the good work.
Thank you. Your next question is from Ross Gilardi of Bank of America.
Good morning, guys.
Good morning.
Well Scott's been very vocal about.
Interest and ongoing M&A and I'm wondering if with boost and your share repurchase authorization and any way was meant to signal a shift and prioritization away from M&A towards shareholder returns.
Absolutely not it's just given the.
The free cash flow profile, frankly that we've already demonstrated and our confidence in achieving this $500 million and eclipsing.
It's kind of and all of the above first priority as always take advantage of organic growth and.
And accretive M&A.
We don't comment per se on the strategy of others, but we know what we do very well.
Very happy with the geographies we're in.
And we will continue to fund growth both in office and storage.
Primarily through M&A beyond the organic levers the I've already mentioned.
This is Tim I, just think about the timing we introduced the original authorization and the middle of a pandemic before even starting our integration and with a fair amount of uncertainty.
Because we think we've got a very predictable cash flow profile. So what's changed macro environment changed we're further along and the integration and we're able to look out several years and this business model. So it is and all of the above we've got plenty of capacity for continued tuck in and regional M&A larger scale M&A.
And as well as supporting the repurchase authorization.
And you guys comment at all about <unk>.
Bidding for General Finance, how do you feel about your IP.
Further and to your business with general finance, even fit with your portfolio, given the Australia and <unk>.
Zealand footprint.
Anything you.
Care to comment there.
No.
And I was at EUR is a valued customer and vendor and we would welcome them as a competitor I don't really have any angst with respect to that.
And as I just mentioned before we know what we do very well we have.
And abundance of leverage inherent in the platform we have already.
And we will always stay focused on doing what we do well where we do it.
We have a great position and the U K and North America, and I've said consistently.
Over the last three years little interest to expand geography beyond that.
Can you comment at all about this strength and the UK and whats really driving that.
I'm sorry can you repeat the question and I know U K related.
Can you can you just comment a little bit more on what's driving the positive developments and the UK.
I think it's great leadership and a very.
And sort of <unk>.
Commercial posture by that team.
And on overall tight market environment, and you look at GDP forecast for the U K coming out of the Brexit and the Lockdowns for both.
Both 2021, and 2022, Youre and what the $5 to 6% range.
Pretty tight market from both a container as well as accommodation units, we're looking at expanding our presence there and some cases and those are coming at a higher price point, so theres a bit of a mix element there but.
But really it comes down to leadership and our commercial posture and really supportive set of end markets there.
Thank you.
Thank you. Your next question is from Stanley Elliott of Stifel.
Good morning, everybody. Thank you all for taking the question.
It's a pretty interesting about.
Talking about and interesting growth environment, and when we think about all of the stimulus discussions I mean, we're looking at potentially several years of pretty substantial.
<unk> spending.
Does the industry have enough fleet out there ready to capitalize on debt.
And is it reasonable to think that we're looking at I mean, you guys have long duration contracts to begin with but.
And just being able to layer that in at a much higher level.
Yes.
The industry is well supplied.
Look at our North American modular segment, we've got a lease.
10% of expansion opportunity with the fleet we have.
And storage is a bit tighter, but it's easily to acquire storage units.
As we've looked at competitors.
Through the various M&A opportunities over time, we've tended to find that it will be two to 300 basis points above the competition. So I'm not really worried about supply constraints as these markets expand and I think your read is right.
The Abi is a positive indicator with respect to what we could expect from non resi, especially six 912 months out.
And the infrastructure, depending on how and when it materializes would just further underpin and extend that so I think.
Those are things, we're watching more for 2022, and then for 2021 bullet there.
Exciting staying agile and this is Tim I would just add if you think about what that means for our financial profile going into the next several years I mentioned in my remarks that even as we elevate cash.
Capital spending this year potentially we're actually slightly contracting the fleet net book value and we're able to do this because of the scale and our branch network, we execute in house and our branch network, thousands and thousands of Refurbishments.
And every year and and.
And we do it very cost effectively we can refurbish three existing units for less and the cost of one new.
So that's one of the reasons, we liked buying other companies and use fleet because we have the core competency to maintain that equipment at scale over a 20 or 30 year life and that is.
A significant competitive advantage and the modular business, specifically and one that if we are faced with the macroeconomic tailwind. The suggest we will be able to execute that again at scale and house.
Maintain kind of the balance sheet.
Around where it is today and we can do that for a couple of years before we have to start thinking about how to introduce new supply into this market.
Great and then in terms of the VAT piece when you're talking about.
Rolling out the storage or other other applications I'm, assuming you guys are incubating test cases and various markets.
Would love to give a little context around that and in particular, how quickly you could roll that out on a national level. Once you find a couple of products that you feel really good about.
Yes.
I would just think of the <unk> opportunity with respect to mobile mini and two tranches. The first is kind of that $50 million of revenue opportunity or 35 of EBITDA that simply applying the furniture that we already have and that will Scott.
Systems.
To the mobile mini ground level offices, so thats straightforward.
And that's being piloted in the U S is deployed in multiple branches right now and.
We will accelerate through this year.
I wouldn't think of it as driving rates per se to top level in 2021, well what we're really looking at is where can we be as we head into 2022 and.
And begin to harvest that opportunity the second opportunity is to implement of apps portfolio. If you will for storage containers themselves.
If you look at how customers use these containers over the 30 month average lease duration. They are building wooden shelves plywood often.
Workbenches stringing lights et cetera.
We think there is a pretty exciting opportunity to just basically replay the <unk> playbook that was initially focused on office to storage, that's going to take a bit more time right. So we're sizing that up as I mentioned in my prepared comments and I think.
We are doing some fabs, if you will force storage today, but it's very tactical and fragmented I think we can get more organized and.
And really begin to.
Progress on that journey in 2022.
Great guys. Thank you best of luck.
Thank you. Your next question is from Phil <unk> of Jefferies.
Hey, guys.
Hey storage business first flush it out has been a great fit on a from a core standpoint, just given the lack of synergies, but the business is obviously, putting up really strong results and you're putting capital behind it.
Do you see it as a better long longer term fit now that you've owned it for a little bit now under well Scott.
So I'd answer it this way I mean, it's.
Exactly what we do here in North America right. It's the same business and when we look at the portfolio. We think about okay, where can we add value as owners and that's one where I think we're just beginning to scratch the surface in terms of the performance that can come out of that entity. So we love what we see where we see results we will reinvest.
And that's what we're doing and the U K right now.
Excellent and then Tim the free cash flow generation and certainly it was really strong and <unk>, even accounting for some of that real estate sales typically it builds over the course of the year I think last quarter, you were kind of implying maybe three 350 million and free cash flow. This year. How are you thinking about that now for 2021 and does that give you confidence to kind of.
Have a bigger appetite for buybacks this year.
Let me put it this way so I think the free cash flow profile as a rule of thumb kind of mirrors. Some of the same margin fluctuation that you would see and the business because it is volume driven and so it wouldn't surprise me if capex ticked up in Q2 and Q3 for example, and then you would expect Q4 to be a higher both margin and free.
Cash flow quarter. So there is some nuance as you as you progress through the year sequentially, and yes, very comfortable with that $350 million run rate and whether its this year heading into next year. There is certainly upside and this is consistent with our progression towards that $500 million.
Free cash flow run rate that we expect towards the end of next year.
What about on the buyback.
On the buyback, yes, while we expanded it right and its for the reasons I mentioned when we introduced the original buyback. It was we just closed the merger we are and the middle of the pandemic. So there were some elements of uncertainty. Even then and we're further along I think we've got a very good view of where the macro backdrop is headed for the next couple of years.
We've seen three quarters now of the prolific and cash generation and the portfolio.
And we're.
Poised to execute our SAP cutover. So all these things factor into our thinking from a capital allocation standpoint.
Okay, great. Thanks, a lot guys I appreciate it.
Thank you. Your next question is from Kathryn Thompson of Thompson Research.
Hi, Thank you for taking my questions today.
Supply chain has been a big focus.
And on the construction value chain and with so many businesses and the U S.
And you potentially could be a pretty significant beneficiary, how have you sized the opportunity and.
Terms of puts and takes and how the.
This impacts your business not only now but structurally as we look forward.
Catherine This is Tim I'll start.
At the simplest level I break down our top line its volume price and value added products and services and I think we've got a playbook in place for the latter two.
Debt have been demonstrating very consistent and very strong results and we've got visit we've got unique visibility and those to look out several years. So if we're faced with.
And the type of increases and non resi activity that you are alluding to it's only supportive of those trends and in the case of value added products and services there are opportunities to expand the scope of that offering what gets me really excited is what we can do with volumes potentially in that and.
Environment.
Always kind of targeted debt low single digit volume growth range, because it compounds very nicely with what we're doing on the pricing and value added products side of things and we think we're in an environment right now where we can deliver that if it accelerates and of course, we can participate and that growth and to Stanleys question. If we're participating in that growth.
Well I don't think we see the same supply chain constraints that may be you see and other sectors of the economy, because we have 10 points of Utah.
Utilization available and the fleet that we own today and we've got the in house refurbishment capability to put those assets to work so.
And look we will see what happens here from a legislative standpoint, but even absent that the backdrop that we see right now is quite robust.
We're excited with where we are as a business to take advantage of it and.
And we think will even be even better positioned once we get through the SAP cutover.
But over here.
Thanks helpful. One clarification, and IP addresses policies and domestic.
Pat did the Texas fees.
And Pat to you guys.
Yes, as we've talked about in the.
And the.
Talking about the operating environment.
And in February from a delivery standpoint.
A little choppy or it was really once we got into March I think you've probably had some impact from the Texas.
<unk> for example.
But it was really the March activity levels that picked up heading here into April.
As well as our ongoing re forecast process that we go through as a business down to the branch level.
That gave us confidence and the change and change and outlook. So yes, there was definitely some disruption early in the quarter.
And as you would expect typically things at least on the non resi side of the equation tend to pick up.
And half of Q1 heading into Q2 and Q3 and.
The interesting thing about this portfolio and I think back to Hurricane Harvey for example, as an example, the impacted Texas specifically.
A very big deal for that market in terms of the supply and demand implications, but it was like less than 1% or is like 1% of our unit on rent portfolio. So.
While these are significant events and the scope of our portfolio. They are not they're not all that material.
Okay. That's helpful and a final clarification on Capex, how much of the Capex is for refurbishment.
Units.
Yes, as a general rule of thumb Katherine I think you can assume about half of the Capex budget is going to go into reverse refurbishment and conversion of existing assets and then.
25% would be going into value added products and the remaining 25% would be going into new assets and these are targeted purchases.
For very specific product and market combinations, where we don't see other.
Alternatives to supply that market and then if you step back as I said in Q1, we are we did slightly contracted fleet net book value. So even when we're buying a new asset it's probably just replacing another asset that reached the end of its life. So we're not expanding the fleet.
Managing that fleet composition, and overall, we're tightening things up a little bit.
Okay, So no real change and the next.
That's correct that's correct.
Okay, great. Thank you so much.
Thank you. Your next question is from Sam England of Bahrenburg.
Hey, guys. Thanks for taking my questions on the first one I just wondered if youll seeing an opportunity to use more third party rental to complement the BACS offering going forward, especially as you look to expand on the storage Sean.
Yes.
And there's an aspect of the modular.
<unk> that is absolutely third party services, and example would be fencing.
Vincent Panelized fencing toilets, and some generators here and there so it's been kind of a steady part of that portfolio.
And just focused all of our leverage management horsepower on growing the owned assets aspect of that Mark.
And many Youll recall also had a managed service aspect of their business, which was the same kind of lease and release of services. So we think it's a very interesting complement to what we do we are laser focused on providing turnkey fully that modular storage and <unk>.
Modular office and storage to all customers and I view that managed services is an incremental service opportunity.
And so yes.
It's an interesting aspect of our business.
Just laser focused on making sure. The first thing we do is deliver office and storage to every job site and we fully furnished low.
Sure.
Great. Thanks, and then the follow up I was just wondering if you're seeing any attractive markets outside the construction space at the moment and why you could expand over the next year or two particularly thinking around things by education health care even more.
And so pandemic affected so effective.
Yeah, and I think the answer is yes, and it's across almost everything you mentioned right, we mentioned and the last call.
And we're achieving these delivery rates.
And this unit on rent stability, despite what's been a pretty significant nonresidential headwind.
In North America.
And we've seen gains across across the sectors and it.
And Tim did mentioned about 25% of our.
Capital goes into a new fleet.
That's very focused on new specific assets a great example of those that are on the front page of our Investor day.
And these products can help us serve dense markets. We can stack. These three high.
And they are panelized, so you can stack them into and inside decided as much as you would like Thats a significant focus on.
Although it's a modest aspect of our new capital. So we think we can expand the products.
And both are core assets themselves and the <unk>.
And can take us into two new aspects of all of those markets.
Great. Thanks very much.
Thank you. Our final question today comes from Sameer <unk> of Deutsche Bank.
Hi, Thanks for taking my question.
Just a quick one so on the.
Perhaps for and do you have talked about and internal target of 400 and just.
Let me one of the lowest to get there and.
No.
What would be the.
Sure.
The way to take it even higher I don't know if you have like higher number in mind.
We do have higher and higher numbers in mind.
In simple terms and think of the $337 average rate over the deliveries and the last 12 months that's across <unk>.
A vast set of territories and the U S and Canada and Mexico.
Territories, and even full cities that are already operating at 400, and so you've got a distribution where several of the reps, 2030% or more are already above that 400. So we know it's achievable, it's the social proof.
And as in our house, if you will.
And so what we're always doing is kind of lifting the tail if you will.
And Meanwhile.
When we set the $400 target it was based upon the portfolio, we had at that time, achieving and 80% penetration. If you will making sure we're delivering 80% of our units fully furnished with the offering we had at the time that's been the primary driver as we've increased to $3 37 and mind you. This.
Sequential lift was 8%. So you can you can do the math and understand our our actual delivered rates or even north of that so we've got reps to do it consistently we've got full areas that do it consistently.
We are on.
Also excited about eclipsing that if you will as we've extended the vast portfolio to include.
I would say social distance friendly cubicles with higher walls as an example, more data packages et cetera. So.
We're always striking that balance of make sure. We finish what we started which is get furniture penetration to 80% that will yield the 400.
And then as we add more <unk>.
<unk> to the portfolio if you will.
That needs to provide incremental incremental value.
Great.
Thank you.
Alright.
I want to thank everyone for joining us today and again, a big thanks to the well Scott mobile mini team.
And a tremendous set of accomplishments in Q1, we look forward to talking to you folks.
And about 90 days.
Thank you all for your interest and well Scott Mall and any if you have any additional questions. After today's call. Please contact me. Thank you operator, you may now and the call.
Thank you ladies and gentlemen. This concludes today's conference you may now disconnect.
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