Q2 2021 Willscot Mobile Mini Holdings Corp Earnings Call
[music].
Welcome to the second quarter tiny tiny ones they'll Scott Mobile Mini earnings Conference call. My name is Kathleen and I will 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'll now turn the call over to Nick Gerardi director of Treasury and Investor Relations you may begin.
Good morning, and welcome to the Wolfcamp mobile Mini's second quarter 2021 earnings call participants on today's call and included Brad's Salt Chief Executive Officer, and Tim Boswell Chief Financial Officer, today's presentation material may be found on the Investor Relations section of the World, Scott and mobile mini website slide.
Slide 2 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 todays comments for a more complete disk.
<unk> of 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 Salt.
Thanks, Nick Good morning, everyone and thank you for joining us today.
<unk> sold CEO will Scott mobile mini I wanted to start by extending my gratitude to our entire team for their strong performance and yet another quarter.
And so want to thank our customers for their continued support and we appreciate and value your business and take pride in delivering on our commitments to you before.
Before I get into this quarter's outstanding results I'm excited to announce that we'll be holding an investor day on November 8 and NASDAQ and times square and we look forward to seeing many of you there and.
And our second quarter results demonstrate accelerating trends across our diversified portfolio and corresponding superb outcomes delivery volumes improved and all of our segments while rates improved at record pace. We also achieved a major step and well Scott mobile mini's maturation process by successfully migrating the <unk>.
Legacy will Scott business onto mobile Mini's SAP platform and Mei.
And turn I'm pleased to raise guidance again this quarter after our increase last quarter, our latest outlook indicates a 9% to 12% revenue growth and a 10% to 13% adjusted EBITDA growth relative to 2020 on a pro forma basis, which again is a function of accelerating kpis across our business and implies a stronger run rate for 2022.
Our strong free cash flow continued with a margin of 20% over the last 12 months and supports continued execution of continued execution of our capital deployment strategy as we repurchased $251 million of our shares over the last 3 quarters.
Starting on page 8 the progress that we saw in March for deliveries continued throughout the second quarter, we increased deliveries across all 4 products and across most of our end markets on a year over year basis, and construction strong architectural billing index or Abi of greater than 50, which began in February and has continued.
And each month.
Confirm a significant rebound and activity since March of 2020 and indicate growth and nonresidential starts.
This is a 9 to 12 month positive leading indicator and we expect this trend to continue and the near and medium term I'll note that where we go our customers go and our customers are building everything from warehouses to data centers to the Virgin hyper loop and Las Vegas.
Commercial and industrial had the largest increase and deliveries this quarter of 49% year over year, there's certainly more opportunity and risk and this segment the biggest mover and the bucket was arts media hotels, and entertainment, which we increased deliveries to by over 40 or 80%.
Retail store Remodels returned to more normal levels is evident and the storage deliveries. This activity is augmented by the return of special events as Covid restrictions relax you can see great. Examples of these contracts on page 14 with units for media at a major League baseball All Star game, and Denver and temporary complex is for production.
And upcoming mini series and HBO other customers include Facebook, where we're helping to build data centers and Amazon, where we provide flexible warehousing for inventory distribution infrastructure.
Energy and natural resources, which is a smaller component of our customer base also saw rising deliveries. This segment correlates with both GDP and energy prices, both of which were strong throughout the quarter.
And we will continue to monitor and the passage of infrastructure building United States. However for our 2020 outlook, we do not assume any significant impact from incremental spending by Congress.
As I stated previously the current draft of infrastructure Bill would provide tailwind across almost all of our end markets and keep in mind. It will take roughly 12 to 18 months following passage before shovels hit the ground on entities infrastructure related projects. So we would expect any associated tailwind to occur in 2022 and beyond.
Regardless with or without further stimulus, we expect a continuation of strong market demand.
Page 15 breaks out deliveries by segment.
Modular space deliveries and our North America modular segment increased and the quarter at a rate of 12%.
As we expected and our outlook beginning earlier this year deliveries accelerated and the second quarter as the economy improved and what are typically stronger seasonal months for project starts. We expect this trend to continue and the third quarter.
Deliveries and our North America storage segment increased 42% year over year and now exceeded 2019 levels. This rebound reflects strong demand across all of our end markets that are previously discussed and the second quarter. Following our successful ERP migration, the North America storage segue.
Segment begin delivering all container deliveries so the North America storage segment is manage and both legacy mobile mini portable storage as it previously had as well as the legacy will Scott portable storage units and most of our geographic markets consolidating all of our container rental activity and to the legacy mobile Mini branch network will have.
Numerous benefits and the form of improved customer service operating efficiencies logistics and utilization among others.
Turning to slide 16, and our North America modular segment, the increase and deliveries resulted in stable modular space units on rent sequentially from the first quarter is a function of our long duration leases, which averaged 34 months and North America modular unit on rent growth will lag delivery volume. So stabilization is the first step.
And the path towards volume growth and I'm highly encouraged by the order and delivery activity and this segment and at 68% utilization, we have ample inventory with which to grow without thinking of any near term fleet expansion.
Portable storage and modular units on the bottom left and the North America segment increased 6% sequentially from the first quarter, 10% year over year and compared to 2019 average unit on rent increased 6.5% a testament to the strength, we're seeing across end markets North America storage recovered faster than North America modular.
Thanks in part to the return of the store renovation and our retail wholesale and trade and market <unk>.
An example of these types of Remodels on page back and page 14, where we delivered 17 storage containers for a major retail remodel which is represented of the services. We provide the most major non mall based retailers.
Shifting gears to rates on slide 17, North America modular average monthly rental rates increased nearly 20% year over year and the second quarter smashing the previous record of 15% roughly half of the $132 year over year increase was driven by continued <unk> penetration on newly delivered.
Units and the last 12 months the remainder of the increase came from core pricing with larger than normal impact from the return of shorter duration events relative to Q2.2020.
Looking back on the last 18 months, our markets and pricing were expanded rapidly heading into the pandemic as discussed in prior quarters the growth trajectory for both pricing and vas on new deliveries slowed a bit and Q2 and Q3 of last year largely mix related.
And now seeing a continuation and further acceleration of the pre pandemic trajectories as price and value performance has been phenomenal.
<unk> monthly rate on unit, new units delivered and the last 12 months as.
As depicted on page 10 is up 31% to $360 per unit per month. So we are now setting our sights higher and this area.
And rates also increased dramatically and our North America storage segment up 10% year over year and the second quarter. Our team is very focused on optimizing rate for new storage activation and the focus is evident and our results in parallel we're starting to provide value added products and our ground level office fleet and we've identified of apps offering for containers, which is now under development.
Our U K segment continued its brilliant progress with another tremendous quarter rates are up 40% units on rent are up 13% and adjusted EBITDA was up nearly 80% year over year, we're thrilled with our progress and our tank and pump segment is also inflicted strongly as end markets recovered, however, clearly outperforming the market and cash.
<unk> share here.
Our OCC utilization is into the mid Seventy's, which is now above 2019 levels revenue and EBITDA are up year over year and Q2, so while outperforming our peers and in 2020 Q2.2020, our tank and pump business is now also contributing to our increased run rate which is fantastic.
And very exciting technology roadmap coming together, which will further underpin and support these results and all segments for coming years.
And before I pass the call over to Tim I want to spend some time on our ERP migration as I mentioned previously we migrated the legacy <unk> business onto mobile Mini's World Class SAP platform on time earlier this quarter, we went live and SAP across the entire company. The first week of May and so we've now been operating on a single ERP platform for 3 months.
A year of planning several months of intensive training change management led up to that successful cutover. Many of our colleagues work days and nights and weekends to make this transition and success and for that whoever you are where you have our internal gratitude and appreciation no ERP transition as easy, but our teams.
Patient particular attention to detail and collaboration across the various segments resulted in a minimally disruptive implementation, there's really been no change for the local legacy mobile mini branch is we've been operating SAP there for years, but it's been a massive change for our legacy well Scott branches and while we're still learning.
How to efficiently navigate the new system refinery and our reporting and analytics. It hasnt distracted us from serving our customers as you can see from our delivery pricing and value added product trends.
This successful system migration is a critical enabler on 4 fronts first it enables the 50 million and cost synergy premise and the merger between well Scott and mobile mini but frankly this is pretty straightforward.
It enables us to mark upon the next phase of our technology roadmap, which and the near term will include refinement of inventory management harmonization of our CRM platform development and stronger business intelligence and data science capabilities.
Third now that the migration is complete and I'm excited to redirect the team to our host of multi year growth levers to continue to expand price optimization and value added products cross selling operation efficiencies, each and together represent opportunities and all 4 of our operating segments and fourth we will be able to eat.
Even more seamlessly integrate any acquisitions going forward, continuing our strategy to compounded robust organic growth with highly accretive M&A.
We executed the cutover flawlessly and I'm humbled to be associated with such an outstanding team. We are 1 of the very few small group of great companies that can use the terms on time success and SAP and the same sentence with that I'll hand, it over to Tim.
Thank you Brad and good morning, everyone.
Jumping to page 19, and presents a high level summary of the quarter.
While it is last on the page our top priority and the quarter as Brad mentioned was to successfully migrate the legacy well Scott operations and the mobile Mini's SAP platform.
We accomplished that consistent with the timeline, we established about 17 months ago, when we announced the merger.
And I won't repeat brad's observations other than to say, thank you again to the team.
And this was the highest risk undertaking related to the merger so to have it largely behind us clearly increases our confidence and the outlook.
More importantly, the ability to execute a project of this complexity across all functions both in the field and in our shared service centers.
<unk> the capability of this organization when we collaborate.
And frankly, it creates a huge competitive advantage as we redeploy these resources to other commercial and operational value drivers.
While all of that was going on our operating results were outstanding.
Leasing revenues increased 18% year over year with acceleration across all leasing kpis and in all segments and I'll remind everyone that this is on top of growing our lease revenues every quarter last year on a pro forma basis.
So our platform is not simply recovering from the pandemic.
We are compounding growth through the pandemic and not many companies and our space can say that.
On a pro forma basis, adjusted EBITDA increased 14% over the prior year to $176 million and.
Adjusted EBITDA margin contracted 130 basis points to 38, 1% versus prior year on a pro forma basis as we expected and discussed on the prior 2 quarterly calls.
Accelerating deliveries drove a higher mix of lower margin transportation revenues and increased variable maintenance costs, which is playing out pretty much as as we expected and.
And we still expect margins will expand approximately 200 basis points year over year, as we get to Q4 and head into 2022.
We generated $82 million of free cash flow during the quarter and the 12 months since the merger we've generated a 20% free cash flow margin. Despite the integration cost headwinds.
The completion of our ERP migration will bring integration costs down and allow us to start realizing other cost savings. So our free cash flow trajectory is very much on track.
We maintained the leverage at 3.7 times this quarter as we repurchased $135 million of common stock and warrants mostly in conjunction with the secondary offering from TD our capital.
Our confidence and the outlook as well as the ERP migration, obviously impact our view of capital allocation.
Since closing the merger last year, we've reduced our economic share count by 2%, including the elimination of the 2015 warrants, which we announced and May simplifying our capital structure.
And the outlook itself continues to improve both as the markets pick up and as we gain traction from all of the organic initiatives that we've been organizing over the past 12 months.
EBITDA will be between $710 million and $730 million for the year up 10% to 13% versus 2020, and putting us on and exciting trajectory heading into 2022.
Altogether it was a fantastic quarter with a lot of reasons to be excited about the future.
Page 20 details some of the other financial metrics from the quarter, we delivered $461 million of revenue up 18% on a pro forma basis again revenues were up and all segments. So the run rates across the board heading into the second half of the year are quite strong.
We generated $176 million of adjusted EBITDA, which is a 14% year over year increase again with growth and all segments. We ended up with approximately a $23 million increase and our variable leasing costs impacting gross margin this quarter relative to prior year due to the increase and delivery volumes.
About half of that increase was and the modular segment, but we saw the same dynamic and all segments and its a normal mechanics of the business and periods with significant volume fluctuations and we of course benefited from this variability and our cost structure last year when volumes were down.
Normalizing for these cost fluctuations flow through to EBITDA would have been north of 60%. So it's easy to see that the long term margin expansion trend is on track.
And this dynamic will continue in Q3, adjusted EBITDA margins should be down year over year and flat sequentially as delivery volumes accelerate into Q3 and then.
And then as delivery is normalized in Q4, we still expect 150 to 200 basis points of margin expansion in the fourth quarter headed into 2022, which is consistent with our commentary for the past 6 months.
So the business performed exactly as we expected actually a little better relative to our original outlook with continued acceleration of commercial kpis and strong cash generation, which you can see on page 21.
Cash from operations grew both year over year and sequentially in line with our lease revenue and EBITDA trends I think this was a company record actually.
Net capex increased sequentially to support the normal seasonal increase and delivery activity you can see free cash flow margin and the bottom right has been and a predictable range for the last 12 months and average 20% over that period.
So while the metric will fluctuate a bit mostly due to capex timing, we have long term upside here through growth synergy realization and the completion of the integration.
Turning to page 22, we maintained leverage at 3.7 times, while repurchasing $135 million of share equivalents.
The largest driver of the repurchase activity was the secondary offering by <unk> capital over.
Over the last 12 months, we've reduced our economic share count by about 2% to just over 230 million shares as of June 30th using the Treasury stock method.
I'll note that had we redirected funds used for share repurchases in Q2 towards deleveraging our leverage ratio would've been 3.5 times, which is consistent with our leverage target for year end and readily achievable.
As a reminder, we have $249 million remaining and our share repurchase authorization.
We also executed some tactical refinancing and the quarter, which reduced our weighted average interest rate to 3.8% and our annualized cash interest to $98 million.
Given our predictable growth trajectory the balance sheet is in great shape, and I don't see any constraints from a capital allocation standpoint.
Speaking of the strong growth trajectory page 23 shows the revised outlook for 2021.
We now expect revenue between 1.8 and $1.85 billion with adjusted EBITDA between 710 and $730 million. This is a 2% increase at the mid points relative to our previous outlook driven simply by the improving leasing fundamentals.
And again margins are on track to expand 150 to 200 basis points and Q4 as variable costs normalize and should expand again meaningfully in 2022, so no change to those expectations.
Our capex range increased slightly to reflect the strong market environment and our fleet constraints in certain markets. We are planning to increase the spend sequentially into Q3, and our guidance assumes that Q4 will be above prior year levels.
And lastly, ill point out that tax expense in Q2 implied a 54% effective tax rate compared to the 25% to 27% range that we would typically expect.
And this was driven by an $8 million non cash expense due to the statutory rate increase and the United Kingdom, which went from 19% to 25%. So we had to revalue, our deferred tax liability and the U K and recognized an additional $8 million of noncash expense.
And again no material cash impact from that over the next couple of years for the 2021 and fiscal year, we expect our effective GAAP tax rate will normalize to the 27% and 28% range. So this had no material change to our long term cash tax outlook, although created some noise in Q2.
As I stated on previous calls on slide 24, our capital allocation framework is unchanged, we have excellent visibility and our business and numerous organic growth levers, which we are completely focused on now that the ERP migration is complete.
We are on track to Delever to less than 3.5 times by the end of 2021 and could have easily achieve that target ahead of schedule and Q2.
Completion of the ERP integration de risks, our outlook and unlock synergy opportunities, bringing us and important step closer to the $500 million free cash flow milestone, which we envisioned and 17 months ago.
And that in turn gives us more confidence to use the balance sheet for M&A and repurchases.
On the 1 year anniversary of our merger I am more excited than ever about the progress that we've made as well as the portfolio of commercial and operational value drivers that we are beginning to execute.
And our team look forward to see and you all at our Investor Day, and New York on November 8 and discuss and all of that and more detail.
Brad back to you.
Thanks, Tim we're frugal and smart with the capital we employ we can transact quickly on M&A and now that the ERP system is up and running we can add other businesses to our platform with ever increasing efficiency.
Our continued execution to support share shareholder value creation for years to come I 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.
And as a reminder to ask a question you will need to press star 1 on your telephone.
And your commentary right.
Please standby, while we compile the Q&A roster.
Your first question comes from the line of Scott Schneeberger from Oppenheimer.
Your line is open Sir.
Thanks, very much and good morning, everyone.
Guys I noticed a big step up and North American portable storage container price.
And the pricing and.
And just curious.
<unk> now and the road map for that going forward.
And if you could speak to the core containers versus gmos and that category. Thanks.
Yes, Scott this is Brad what Youre seeing there is if you remember historically mobile mini has been driving 3 to 3.5% rate CAGR as we've discussed before that was almost exclusively exclusively driven by jello's. So what youre seeing now is continuation of that jello performance with the step up.
And also and now continued improvement and new rates on <unk>.
Raul containers themselves so.
We're simply deploying the playbook.
And we've used for years.
As far as the roadmap.
As noted before we've still yet to deploy all the right optimization tools that we have on the modular and bath side to that portfolio.
<unk>, nor have we really significantly begin to see traction from <unk>.
With either ground level offices or the storage units as I mentioned in my remarks, we have now started to deliver the closed the ground level offices with the furniture bundling.
Well, Scott had in place and Thats, starting quite well as well as we've architected. If you will of <unk> portfolio for storage containers themselves, which is now under development and I expect we'll be rolling out in 2022.
Excellent. Thanks, and then I'm just going to stay from my follow up on the pricing theme and swing it over to north.
Erika modular.
And 19, 7 and obviously the biggest increase we've seen and a while and then Tim mentioned earlier on and maybe in a different context, but.
And this wasn't necessarily against an easy comp that was a very robust number so.
And just.
And.
I think you've said in the past Brad Hey, we can go out a few more years with the double digit.
Increases with regard to rate and Bob's contribution, but we seem to have achieved a new tier here. So just.
And if we could speak to what would be reasonable expectations for the coming quarters in this category. Thank you.
And as Scott This is Tim I'll give that a shot.
Not sure I would extrapolate 20%.
Too far out into the future, but we're extremely pleased with how.
Rates and value added products are progressing and North America modular and and the UK as well I think they are actually leading the charge from a year over year rate growth per.
<unk>.
In value added products and services I don't know if we called it out but on page 10, our delivered rate so that the contracts and the last 12 months.
The value added products reoccurring revenue was up 31% year over year. So we have clearly seen.
And acceleration of adoption, both with our sales force and our customers.
And we've maintained that $130 million plus.
Organic revenue growth opportunity that we've been talking about for some time now.
Meanwhile, growing those delivered right. So that's a big contributor it's driving about 45% of the year over year increase in AMR and North America modular.
And the remainder of the AMR and increase in North America modular is coming from core.
Core rate increases, which we continue to which we continue to push there is a mix element last year.
Virtually zero short term special events and our.
And our portfolio just due to Covid and we are seeing some of those start to come back. So I think there is a bit of a mixed component this year that's <unk>.
Contributing to that 19, 7% number but fundamentally under the Hood, we've got very good underlying trends and we expect to continue pushing it.
Thanks, Tim just a quick follow up on the short term is that is that anything thats going to disrupt your 34 month average.
Could that pull it down or our debt.
It's just a little above normal trend and nothing to get concerned about there thanks and.
It's not that it's an above normal trend that they didnt happened last year right. This is normal reoccurring business that we would service every year, mostly in Q2, and Q3 and think about PGA golf tournaments at anywhere in the country NASCAR races music festivals community fairs, those types of things, it's a normal part.
Out of our business, just typically shorter duration and we do have a duration based pricing at least and the modular side of the business that is a technique that we may have opportunity to test.
Test and pilot and other segments just as 1 example of the kind of cross pollination of commercial best practices that we're looking at.
Understood Great job I'll turn it over thanks.
Your next question comes from the line of Kevin Mcveigh credit sales.
And as Nelson.
Great. Thanks, so much.
Congratulations as well, Brian can you spend a lot of time on.
Its share incremental.
Potential synergies as you work through that process and then mark.
Quickly just as it relates to <unk>.
And the <unk>.
And this would keep you more opportunity on the M&A side.
And the M&A strategy Kevin.
So relationship.
And as well.
Yes, I mean, we've been pretty successful with M&A over the last 4 years and seamlessly integrating acquisitions and this will just make it quicker and easier right now of the SAP platform.
A lot of the.
Companies that we would be interest and we will have both storage and office.
So it really allows us to.
B, even more Swift if you will.
That front.
The ERP as far as cost synergies, yes, we definitely expect incremental operating efficiencies.
Hinted out on previous calls mobile mini had been expanding EBITDA margins.
With not a lot of growth frankly, and that was largely due to the synergies that we're realizing efficiencies as they really refine their model with SAP. So we expect the continuation of that as.
We will refine our reporting and analytics as I mentioned in our prepared remarks Tim.
And the only other thing I would add this is Tim is that the completion of the SAP migration is really and an enabler that then allows us to get on with the rest of our technology roadmap, which is really the most exciting part of this journey I think from the perspective of our team and call out 2 big ones the harmonization of.
Our CRM.
And the harmonization of our customer data all of our transaction data historically, we've got the biggest repository of transaction data and North America for the markets that we serve and that is a huge competitive advantage and we are actively recruiting.
Business intelligence capabilities data science capabilities capabilities.
Pricing and capabilities on our team to take advantage of that.
And the other thing I'm very excited about is virtually overnight by virtue of moving into SAP.
We've started our journey down the path of a more sophisticated perpetual inventory management system for the modular side of the business. If you think about cost containment and being more efficient with our inventory being more efficient with our value added products. That's something that we're going to be spending a fair amount of time on going into 2022. So those are just 2.
Thank very tangible examples about where we can now focus our time with the SAP migration.
Migration complete.
And just following up on that does that give you an opportunity and maybe increase.
<unk> overall.
We still expect other.
Net.
Hi.
I think both of those.
Projects are opportunities for us to drive returns, whether it's utilization or pricing or.
And being more efficient with the balance sheet.
We're focused on driving growth and returns.
Got it and then just 1 quick follow up if I could.
Seems like the seasonal businesses and flexible.
How about some of them more COVID-19 related demand.
Is that.
As expected and the add a little bit or any thoughts on that because it seems like last year.
Thanks, Sean.
As Kevin Bradley.
And seasonal is coming back and Covid related work.
And a fair about it.
Yes, it's fair I think as we've mentioned on previous calls as demand for Covid testing and vaccine dissemination ebbs and we're just seeing recovery across the other end markets.
Thanks, so much.
Your next question comes from the line of Justin Hauke from Baird. Your line is open.
Just and we can't hear you if you have question.
I'm sorry can you hear me now.
Yes, alright, great. So there was a question earlier on.
Pricing and portable storage I guess I just wanted to just drill into that a little bit more because you guys talked about how the.
And the apps from the <unk>, driven a lot of that but.
And you strip that out of and the 10, 3 and portable storage here it looks like on the base units that they were up.
5.6% as well and that had been kind of flattish. So is there anything thats changed and the way that you're pricing.
The core units without the apps on the <unk>.
Or just.
How should we think that pricing there.
Yes, and I apologize if I confused in my prior response. This 10, 3% exclusively core pricing we've started to implement the apps for the ground level office.
But you are just beginning to see that and the numbers.
The you've got the 3.5% CAGR that many has been.
Delivering for years that was almost exclusively driven by ground level offices, that's continued and accelerated and now youre seeing new rates for containers also start to pull that up so.
And I Shouldnt say exclusively core pricing, but this is predominantly a core pricing play the spar.
And as simply doing what we've been doing and what we always do and thats optimized rates on new deliveries and what.
What excites us going forward is we will over time see further benefits from expanding penetration of apps and ground level offices and.
And then as I mentioned before we've engineered <unk> portfolio. If you will for containers, which is just under initial development and as I mentioned before I think of that as a 2022 benefit and this is an opportunity I think we will talk about more when we're together at the Investor day and.
In November.
Okay I appreciate the clarification on that.
I guess my second question is just on the margins and modular space.
Areas, specifically I know you guys had talked about.
Decent pressure from.
Putting more deliveries out here in Q2, and 3 Q, but the volumes were actually kind of flattish.
And you've got so much pricing.
Yes were there a lot and returns 2 or other things that were kind of variable cost increases that weighed on the margins. There is an offset.
And anything that we should think about the <unk> and <unk> on the margin trajectory.
From modular space as well.
Hey, Jeff and it's Tim so.
Units on rent and North America modular were sequentially flat from Q1 to Q2, so by definition delivery volume equal return volume for the most part.
Deliveries did accelerated 12% year over year, although not to 2019 levels and we expect them to sequentially increase again going into Q3. So you always have to think of unit on rent is very much a lagging indicator.
And our original guidance for the year, we expected modest.
Modular volume growth by the end of the year and that requires several quarters of year over year delivery growth in order to then have the entire portfolio turnover to.
And to drive unit on rent growth. So that's all yours, all youre seeing here is the impact of a 3 year lease duration.
On the portfolio and it turns over very predictably. So there really were no surprises in Q2.
From our perspective.
<unk> volume has picked up it's the delivery volume that will drive the variable maintenance cost and some selling costs. We saw that margin compression as we expected on a pro forma basis in Q2.
And I would expect EBITDA margins to stay sequentially flat into Q3, which will still be down year over year, and then when you get to Q4 or Q.
Q4 delivery volumes last year, we're getting pretty close to normal and so if were at normal again. This year that means there is no year over year north.
Noise.
And you'll see that margin expansion again in the range of 150 to 200 basis points. So this is a very predictable portfolio. It's rolling forward really as we predicted with a little more pricing upside than we originally forecasted for North America modular.
Operator, perhaps.
Progress yet.
Your next question comes from the line of Ross Gilardi from Bank of America. Your line is open Sir.
Hey, good morning, guys.
Good morning Ross.
Tim you just answered the question so.
And if theres any more nuance to my question, but I'm still scratching my head on this too I mean, you just got 20% pricing and.
And your core business material acceleration and demand is picking up and your margins are down year on year.
Yes.
I don't know if it's still not totally get.
And these buckets of costs that are coming back into the business I mean volume is improving why.
And yet that there's variable costs associated with that but.
And Ross are keeping in line and less.
Keep in mind last year, we took massive costs variable costs out of the business post COVID-19.
And we stripped almost all of the variable cost out and the second quarter, both on the mini platform and the legacy well Scott platform. So we've been foreshadowing and talking about and expecting those costs to come back and so you had kind of a resumption to normal cost plus this kind of incremental demand. So.
Hum.
Tim.
As expected and pretty straightforward and Alistair Ross in terms of the process that we run we're talking about direct labor and the branch network and we're talking about materials that are used and maintaining not just modular equipment, but also storage equipment right. So we saw this in every segment.
And we assumed at the outset of the year that delivery volumes were going to pick up meaningfully across the business, which is what we what we saw and in our guidance for the year going back to.
Q4, we talked about how margins will contract sequentially and year over year for Q2.
Start to stabilize in Q3, and then pop again heading into 2022 as we get to Q4 and this is this is again as I described and my remarks kind of the normal mechanics of how the business.
It turns over and it's usually not this pronounced and thats just a function of what Brad mentioned, a lot of cost coming out in Q2 last year, and what was a bit of and an anomaly and and that coming back pretty strongly here in Q2 this year.
Okay.
Maybe I'll follow up afterwards can you talk a little bit more about that.
Relationship between fleet utilization and.
The rate improvement I mean, it's great to see that the rates up so much but at least in the modular space side of the business rates been sorry utilization has been.
And then just kind of range bound and 67% and 68%.
For the last 3 or 4 quarters, if I'm interpreting your slides.
Correctly.
I guess I would expect.
And utilization and be gone up sharply along with the rate acceleration, but I am clearly missing something so.
Can you talk about that a little bit.
Remember 40, or 45% of the AMR increase year over year is coming from value added products.
So regardless of whether utilization is moving up or down we're going to get ahmar growth just as units that were rented years ago come back to our branches and then turnover and rented to new customers with $360 per unit per month of reoccurring rental revenue from value added products and services so and.
The volume neutral environment Youll look at that and you know you've got over $130 million of revenue growth just from the value added products component and we do test price volume elasticity, all the time and it's not as pronounced as.
You might think.
So utilization is interesting to look at but it's not the only only variable we're looking at when we're deciding what to do with rates.
Yes.
The only thing I would add to that is I mean.
If you look at delivery and rates together and the quarter right you saw significant improvements and delivery rates on both modular and storage as well as rates and as Tim pointed out the big step between modular and storage is really a apps.
Now that the costs are coming back into the business and things kind of normalize from here I guess, what sort of incremental EBITDA margin. However, you want it.
Should we expect on that.
<unk> related pricing versus core pricing.
Well, so I think and Q3 are off as I said in my remarks, we probably have the same.
A similar dynamic maybe not as pronounced just because volumes were starting to come back.
Last year.
And then I think we get to that north of 60% flow through in Q4.
Heading into 2022, and as you kind of break it down and a normal.
Environment, if volumes are not fluctuating as much as they are currently.
And you get kind of 90% flow through from pricing.
<unk> 5 ish percent flow through from value added products and services.
And then kind of 60 ish percent from from <unk>.
Volume at least and the modular side of the business those can be a bit higher on the storage side of the business.
Okay. Thanks, Scott.
Yes.
Your next question comes from the line of Steven Ramsey from Thompson Research. Your line is open.
Hi, good morning.
Maybe just maybe what's been discussed but to clarify further on modular stabilization.
I guess, how long do you expect this period to last at stabilization.
And this lag.
To getting better volumes and to getting to the growth stage again.
Is this taking longer than normal or is this something you would expect in this environment.
No I think.
As we.
<unk> looked into this year initially rate, we had expected to see modular volumes recover at the end of the year and Thats just the simple function of long lease duration. So as you increase deliveries it takes time to get there so.
And keep in mind.
Lease revenues as I mentioned.
Our prepared remarks are slightly ahead of our expectation right now and that combination simple combination of volume rate and vamps puts us into a pretty interesting position, where we are today and where we expect to head into 2022. So.
It takes time to turn.
A large portfolio that's on rent for 34 months.
Okay and to follow up on that given the dynamics of that.
Labor and material shortages on the residential side thats driving a longer time, but starting a project to finishing hold or are you seeing that dynamic at all in in commercial projects trying to get a sense of <unk>.
Going forward, there could be longer lease timeframes.
Over the next 1 to 3 years as these factors continue to impact the market.
I don't expect anything material there I mean, we will we will keep our eye on this and we were.
Across our diversified portfolio, we're not seeing any significant impacts now so.
Whether that means and the future some projects start earlier and some later, we'll see how it plays out but.
These lease durations have been pretty stable over time.
Mentioned before where kind of the critical first on last off these projects very small percentage of the project costs.
50 basis points of any 1 of these large projects.
And so I think.
It's been stable over time and will.
And I expect anything significant or material here.
Great. Thank you.
Your next question comes from the line of Tim Tim.
Kevin Your line is open.
Hey, guys. Thanks for taking the questions and the first 1 and I was just wondering what timeline AIDS and your minds on delivery on the revenue synergies from the many Dale now the ERP integrations done and.
And I'm thinking, particularly around national account value the lap and some of the cross selling you talked about and the path given that you've already touched on on box value and Nicole.
Yes, I think this is another and we'll talk about more when we're together in November but if you remember at the time of the merger the only revenue synergy we quantified was that associated with putting that will Scott furniture portfolio and mobile Mini's ground level office fleet.
We've started that that's happening and.
More than a dozen and branches already and expanding pretty rapidly.
So that is beginning.
$50 million revenue opportunity.
<unk>.
And frankly, both North America, and the UK ground level office fleet that falls through it like $35 million of EBITDA as we've characterized before so that's well under our way and.
And we're going to do our work now is as we've mentioned we've had massive human capital and focus only on the ERP cutover and Thats whats most exciting now and we can turn all of that towards our expanding ESG opportunities and.
<unk> and all of this.
<unk> in terms of cross selling lifting the storage market share along with storage rate optimization across the portfolio that's into storage containers et cetera. So we'll do some work and I think thats something we really look forward to sharing and a bit more detail and we're together in November.
Okay, great. Thanks, and then you're getting quite place now and so that and tunnel $400 a unit.
Target he talked about and the pascua on an LTM basis as of late.
$400 still the longer term target is that moving up and your mines.
And do you think can and do you plan to sort of talk to another target at some point in time.
Yes, it's moving up.
I think when we were marketing the company back in 2017, we set our sights on the $400 level and.
Clearly at 360, we're kissing that with many areas.
And so.
Sustaining that 400 level. So that's another and I'm sure, we'll talk about and November but.
We usually set these milestones with intentions to and clips from.
Okay, Great and then maybe just just 1 more I just wanted to what you're seeing and transit.
And unit cost and inflation at the moment and is it something youre biology, just delaying and caring by signing buying unit and so.
While the dynamics going on that.
Certainly on the container side of the business. There has been some what we think is temporary.
Sure on new and used container pricing, whether it's 1 trip are coming from China or.
Our unit, we're buying from the ports.
Shipping costs and shipping timelines are.
Certainly up there.
And there are some modular units that we bring and flat Pat from China, but other than that we're really not buying any other modular right now given where utilization is we're just going to refurbish the equipment that we've already got.
And that is a real luxury and looking out.
Through the rest of this year heading into next year Theres plenty of capacity there and the modular fleet, that's totally within our control and we handle all of that refurbishment.
In house at scale, and our larger branches, which is another point of competitive differentiation I think out and the market. So yes, there is supply constraint and constraints ever.
Everywhere, but I think we have the luxury of controlling our destiny a bit more than perhaps others and the market.
Okay, great. Thanks, very much all day today.
Thanks.
Your next question comes from the line of Phil from Jeffrey Your line is open.
Hey, guys. Congrats on another great quarter I hop off the Q&A portion early for a little bit so I apologize if you've answered his question.
M&A has always been a very big part of your strategy for growth strategy, there's been a few deals and the space for both modular and portable Tim.
So and you seem a little more competition on the M&A front and how our multiple is kind of shaking out and any color on the pipeline would be super helpful.
Yes, I think as we've characterized before the pipeline's robust.
And while we've been laser focused on the ERP. We've also said we're.
And we weren't going to Miss and a smart deals nor we compelled to do anything that we.
And we didn't think was the right play for our shareholders. So I don't think we missed anything we should pipeline is robust.
Been a core part of our strategy right and continue.
Continue to compound just outstanding organic opportunities with accretive M&A. So.
It's been part of our DNA and I expect it will continue to be.
And how does the valuation is the competition for assets.
Business, so what's the valuation profile these days.
It's hard to say I can point to maybe 1 or 2 transactions that they are out there. So I do want to draw.
Any conclusions from from those and market valuations generally.
It had been up over the last 12 months. So we're still seeing very interesting very accretive.
Opportunities out there and I expect we will be active here in the next 6 to 12 months got it and then.
And Brad and Tim you guys just from your background and you've always kind of really hunkered down on core businesses and maybe.
<unk> seen less value of having international presence.
And portable business has been a home run for you guys really strong growth. This is a business you want to get behind more and invest more capital, whether it's organic or inorganic just because it seems to fit pretty nicely for you guys.
Yeah, and I would comment that it's more than storage, although that's labeled right. So it's really a nice blend of what we'd call modular and storage and the U S. So.
<unk> alignment with what we do.
Outstanding performance by the team there so.
And quite pleased with that and we are deploying capital to support there.
<unk>.
And so we're quite pleased with the business.
And we said before is I wouldn't go buy a business and another geography.
Is this kind of a standalone business.
Prior to this merger, but now that we have that business.
<unk>.
Okay Super Thank you.
Your next question comes from the line of Stanley Elliott from Stifel. Your line is open.
Hey, good morning, everyone. Thank you all for taking the question.
Question on <unk> as it relates to some of the opportunity you have on some of the legacy many products.
The valves business has historically grown at a pretty decent but consistent clip.
As you are moving into that market as it is that the opportunity. So it's on rent on a go forward basis.
Items can get get rented or is there a chance to go out to the existing field just curious to try to see how quickly. This can ramp and maybe this is kind of what you want to talk about in November.
Yes.
Our expectation and Stanley. This is Tim is that we begin to penetrate both the ground level offices and eventually the containers.
And new deliveries, there's very limited opportunity to go out to a unit that is already in the field.
And try to sell the customer on furniture. After a few days, they've probably already figured out where to sit.
And shelving and Workbenches inside the containers for example.
Already solve that problem on their own so the opportunity here is really upfront and.
And making that transaction simple for the customer so that they can be ready to work day, 1 when our assets arrive on the job site. So it will I expect that will continue to build.
That consistent 20%.
Our CAGR that you saw.
North America modular over the last 9 years or so.
Great and then when you're talking about Incrementals, you'd mentioned kind of a 60% flow through for kind of the core business.
Looking at I think it was 23 million and variable cost here, probably something similar.
And when you look into next year is there a reason why the incrementals wouldn't be better than 60%.
And kind of a more normalized operating environment, plus lower diesel costs, and maybe better logistics.
And certainly north of 60% seems like the right ZIP code and I, absolutely see margins expanding.
<unk> into 2022.
What the exact flow through will be in any given quarter thats not really how we look at it just because of the variable cost fluctuation.
But it sure feels like we're having a pretty.
Solid delivery season heading into Q3, the seasonality and the business.
It seems like it's taking shape as it would and a normal year.