Q3 2021 Willscot Mobile Mini Holdings Corp Earnings Call
Well, it's got mobile mini earnings Conference call. My name is Sarah and I'll be your operator for today's call. At this time, all participants I'm Gonna St. Only mode. Later, we will conduct a question and answer session at the snow that this conference is being recorded I will now turn the call over to Nick Gerard that director of Treasury and Investor.
Our nations Nick you may begin.
Good morning, and welcome to the Wills, Scott Mobile mini third quarter earnings call participants on today's call include Brad's salts, Chief Executive Officer, and Tim Boswell Chief Financial Officer, today's presentation material may be found on the Investor Relations section of the well Scott 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 todays comments for a more.
A complete description of factors that could cause actual results to differ and other possible risks. Please refer to the safe Harbor statement in our presentation and our filings with the SEC with that I'll turn the call over to Brad salts.
Thanks, Nick Good morning, everyone and thank you for joining us today before I get into this quarter's results I'd like to remind everyone that we'll be hosting an investor day next Monday November eight at NASDAQ in times square, we are delighted with the number of attendees and look forward to seeing so many of you there.
Now turning to slide five our third quarter results demonstrate continued acceleration across our diversified portfolio with corresponding exceptional outcomes.
Delivering this solid operational and financial performance, we also acquired and fully integrated three companies late in the third quarter altogether, adding approximately 11000 storage assets and several new team members as expected following our successful SAP harmonization in the second quarter, we're even more able to seamlessly integrate <unk>.
These acquisitions, we've closed a fourth acquisition already in the fourth quarter and going forward. We are uniquely positioned to continue our strategy to compound robust organic growth with highly accretive M&A.
Operationally, our delivery volumes and rates improved across all of our segments underpinned by increased demand across all of our major end markets are special note <unk> penetration in North American modular segment achieved a rate of 384 <unk> value per unit per month, an all new units delivered in the last 12 months.
Now you may recall that when we took the company public in late 2017, we set several ambitious goals, one of which was achieving 80% furniture penetration, which correlated to $400 of appetite you per month.
Needless to say the 400 milestone is one of many that will be resetting and raising because we see significant further upside potential as we continue to expand our offering increased penetration and further optimize rates.
In turn we're pleased to raise guidance again this quarter strong free cash flow margins of 19% over the last 12 months supports continued execution of our capital deployment strategy.
In addition to funding all organic growth one time merger related integration costs, and three acquisitions, we've repurchased $350 million of our shares and warrants over the last 12 months.
Given our track record of smart and balanced capital deployment, our board of directors has increased our share repurchase authorization to $1 billion.
I want to extend my gratitude to our entire team for the strong performance in yet another quarter and extend a warm welcome to many of our new colleagues I also want to thank our customers for their continued support so we appreciate and value your business and take pride in delivering on our commitments to you.
Turning to slide 10, the vast penetration mentioned before achieved our north.
Led by our North American modular segment, while new units delivered in the last 12 months is up 34% on a year over year basis and represents approximately $150 million.
Very predictable revenue growth over the next three years this embedded growth potential simply and conservatively assumes we hold backs penetration levels flat at the levels. We have already achieved we will continue to do better than this.
We've also continued to rollout the same fab strategy across the mobile mini branches to further enhance our ready to work ground level office solution set.
Once fully deployed this represents an incremental $50 million of potential revenue growth over the next five years. This growth driver was identified at the time of the merger with mobile mini and simply assumes we can achieve the same level of penetration we've already achieved on lifesize units in our North American modular segment.
Turning to slide 12.
Our ESG journey will further differentiate will Scott with our customers employees and will certainly serve as an accelerant to grow our human capital commensurate with our growth trajectory.
From our 275 branches up to the board level, we have begun to launch ESG initiatives building upon our inherently sustainable circular economy model with an emphasis on human capital inclusion diversity in development.
<unk> roadmap will build upon our core values and we're committed to continue to enhance governance and ESG disclosure, including continued shareholder outreach the launch of our ESG microsite and issued our first sustainability report by the end of 2023.
Turning back to slide 15 operationally the demand as mentioned before continues to remain robust across all of our segments modular.
Modular space unit deliveries in our North American modular segment increased in the quarter at a rate of 8% generally in line with our expectations given robust end market demand.
The only minor mix change is associated with the continued return of short term events mitigating declines in COVID-19 unique demand.
Deliveries in our North America storage segment increased 13% year over year. This was driven by both strong demand across all of our end markets as well as the effect of North America storage now handling logistics services for both legacy mobile mental mobile mini portable storage as it previously had as well as now the legacy.
Well, Scott portable storage in most of our geographical markets.
In our North American modular segment the increased deliveries resulted in an increase on unit on rent of 700 units over the course of the third quarter.
On average across the third quarter units on rent were down two 5% year over year, given the long lease durations unit on rent growth will continue to lag as volumes increase.
Average portable storage units.
In our North America storage segment increased 30% year over year, and 21% sequentially from the second quarter.
While the increases include approximately 12000 units on rent that were transferred from a north American modular segment. The combined North American fleet storage units on rent was still up 14% year over year, reflecting strong demand across all end markets in particular, the retail store remodels.
Our U K segment utilization is 88% and our tank <unk> pump segment OSV utilization is up in the mid seventies, which is now above 19 levels.
<unk> been allocating growth capital to both segments to maintain a healthy but tight supply and demand balance and both segments are driving significant revenue and EBITDA growth on a year over year basis.
Shifting gears to pricing on slide 17, North American modular average monthly rental rates increased 20% year over year.
40% of the 141 year over year increase was driven by continued <unk> penetration the remainder of the increase came from core pricing.
And while there continues to be a favorable mix effect from the return of the shorter duration events as we saw in Q2, the overall price environment remains extremely robust.
Looking further back the North American modular segment has now achieved an impressive rate expansion of 11, 4% CAGR since 2017.
North America storage segment rates were also up 7% year over year in the third quarter. Our team is very focused on optimizing rates for new storage Activations and the focus is evident in the results at our Investor Day, We'll also start to quantify some of the benefits we expect associated with the deployment of apps across the <unk>.
With American storage portfolio as well as benefits associated with enhanced product positioning technology expansion et cetera, with that I'll pass the call over to Tim.
Thank you Brad and good morning, everyone.
Page 19 presents a high level summary of the quarter with.
With the ERP migration completed last quarter. The team is firing on all cylinders and focusing on the commercial and operational value drivers that will drive this business into 2022 and beyond.
Leasing and services revenue increased by 20% year over year with acceleration across all leasing kpis and in all segments.
Unit on rent volumes stabilized sequentially in our modular business such that volumes are neutral to our run rate and will inflect positively year over year in late Q4, Q1, which will be a tremendous benefit relative to recent periods.
Consolidated storage units on rents are up 14% year over year prior to the full impact of acquisitions, which closed at the end of September the.
The pricing environment is extremely robust and showing no signs of tapering and value added products revenue in the P&L was up 30% year over year in Q3 and is accelerating.
So the leasing fundamentals are outstanding to close out 2021.
Adjusted EBITDA increased 16% year over year to $190 million adjusted EBITDA margin increased 70 basis points sequentially to 38, 8%, which is consistent with the progression we discussed on our last three quarterly calls.
Our leasing revenues increased six 5% sequentially from Q2, so the effect of steadily compounding revenue growth even with these elevated delivery volumes in variable costs should drive meaningful margin expansion, both in Q4 and throughout 2022.
We generated $79 million of free cash flow during the quarter and we generated $339 million of free cash flow over the last 12 months at a 19% margin despite nearly $50 million of cash integration and restructuring costs in that period.
These costs are coming down and we are clearly gaining traction with our commercial and operational initiatives, which is giving us confidence to reinvest aggressively.
We're updating our 2021 EBITDA outlook to between $720 million and $740 million for the year up between 11% and 14% versus 2020, which will put us on a strong growth trajectory heading into 2022.
We closed four acquisitions since we last spoke adding approximately 11500 storage units and 1200 modular units to the fleet.
Three of these transactions closed at the end of September and one in October so they did not impact the Q3 results at all but they will contribute to Q4 modestly and then bolster our 2022 run rates. We are very excited about these transactions as well as our growing pipeline of quality deals.
We repurchased $106 million worth of shares and equivalents in Q3 and have repurchased approximately $350 million of shares equivalents in the last 12 months, which is roughly four 5% of our current market capitalization and a much higher percentage. If we were to look at an average market capitalization over that period.
Should.
These are very meaningful returns to our shareholders.
Importantly, we facilitated a third and final secondary offering by <unk> capital in September which saw the full liquidation of their nearly 60 million shares over only a six month period.
We now have over 98% float in our stock, which has allowed us to welcome new investors as well as new diverse talent to our board of directors.
Given the magnitude of <unk> position. This seamless transition is a testament to the broad investor interest in and enthusiasm for our outlook. So we thank you for that support.
We maintain leverage at three seven times this quarter as we prioritize capital allocation for organic growth acquisitions and share repurchases.
We continue to see attractive opportunities in each of these areas. So we will continue to balance the pace of inevitable deleveraging with a more attractive investments that compound our growth and returns.
As such our board increased our share repurchase authorization to $1 billion. So we have the appropriate flexibility.
Altogether it was a great quarter, and we are a fundamentally attractive outlook.
Turning to page 20, I won't repeat everything on the page, but we'll call out a few items.
First I would like to highlight our colleagues and our United Kingdom, and our tank <unk> pump segments.
Adjusted EBITDA in the U K was up 60% year over year and EBITDA at tank and pump was up 30% year over year.
Both segments have incredible momentum heading into 2022, which is a reflection of the hard work on numerous commercial and operational initiatives that are now coming together to drive outstanding results.
In both cases, our results simply blow away the competition. So while we may not be the biggest where clearly the market leaders in these two segments. So congratulations to the U K in the tank and pump teams.
North American modular in North America storage EBITDA together was up 13% year over year, which is a strong result in its own right.
I will call out that we transferred approximately 12000 storage units on rent from North America modular to North America storage in Q3.
So approximately $5 million of revenue and EBITDA moved from North America modular in Q2 to North America storage in Q3 of 2021.
This is perfectly logical as Brad mentioned, because we're now using the mobile mini branch network and logistics capability to manage the entirety of the North American storage fleet, but the movement does inflate the year over year results for the North America storage segment and depresses the year over year result for North American modular a bit by about.
$5 million of revenue and EBITDA in each case.
As we talked about last quarter consolidated EBITDA margin remained down year over year, but expanded 70 basis points sequentially, which was a bit better than we expected.
Relative to Q3 of 2020, we incurred almost $10 million of incremental variable leasing costs associated with fleet maintenance to support higher deliveries and bonuses and sales commissions were also up almost $7 million year over year in line with our financial results and new business generation you can see.
That steady build of core revenue streams in the bottom left chart over the last six quarters.
On page 21 cash from operations has been steady and predictable moving in line with our lease revenue and EBITDA trends.
Net capex in the bottom left chart is showing a normal seasonal pattern tracking in line with our guidance range.
And in the bottom right you can see some modest counter cyclicality in our free cash flow margin, which has averaged 19% over the last 12 months.
This margin should expand as we progress towards our $500 million free cash flow milestone in late 2022, given the numerous initiatives in place to drive growth and profitability.
Turning to page 22, we maintained leverage at three seven times, while investing $56 million and three storage acquisitions, and repurchasing $106 million of share equivalents.
We've got over $800 million of capacity available in our ABL revolver and are quite comfortable with the balance sheet given our growth trajectory.
The macroeconomic backdrop appears to be supportive of organic growth, we have a growing pipeline of accretive acquisitions, and we find our own stock to be compelling as evidenced by our $1 billion repurchase authorization. So.
So we will continue to balance the pace at which we delever below three five times net debt to EBITDA with the other more attractive investments the compound our growth and returns.
Page 23 shows the revised outlook for 2021, and it really just reflects a continuation of the strong trends that we are developing in Q2.
We now expect revenue between $1 85, and $1 $88 billion with adjusted EBITDA between 720 and $740 million. This.
This is a somewhat wider EBITDA range than we would typically provide going into the last quarter of the year.
We're focused on the mid point and Theres, probably more upside than downside in this range stronger.
The stronger than expected delivery activity could potentially pressure margins in the short term the stronger than expected acquisition contribution could move us higher in the range.
Either way it will be a great year and at this point, we're more focused on the trajectory for 2022, and 2023, which we're excited to take you through on Monday.
Lastly, before turning it back to Brad on page 24, our capital allocation framework is unchanged and it's serving us well.
In many respects Q3 serves as a great case study for how we can allocate capital going forward.
We have excellent forward visibility in our business given the predictability of the lease portfolio and the numerous organic growth levers we're pulling we.
We generated $130 million of cash from operations in Q3, but by growing the business and maintaining leverage at three seven times, we created approximately $210 million of total capital for investment.
Of that $210 million, roughly 25% went to organic capital expenditures another 25% went to tuck in acquisitions and the remaining 50% went to share repurchases.
While that formula was a bit coincidental in the quarter and will fluctuate it aligns very well with our longer term vision for how we can reinvest in our business and we plan to take you through that detail on Monday.
We are super excited to see many of you in person at NASDAQ to talk in depth about our longer term outlook.
And to introduce you to some of the broader team members, who were responsible for the terrific results that we get to talk about.
Brad back to you.
Thanks, Tim turning to slide 25, our ESG journey is launching from a solid foundation and will serve as the key accelerant as we expand empower and fully unlock the potential of each member of our great team.
We have the best team assets turnkey solutions systems and customers in our business, we're frugal and smart with capital. We employ we can transact quickly on M&A integrating these businesses into our platform with ever increasing efficiency I expect our continued execution to support shareholder value creation.
<unk> for many years to come.
I wish all of you listening today continued safety and good health. This concludes our prepared remarks, operator would you. Please open the line for questions.
Sure.
Ladies and gentlemen, if you have a question at this time please press the star and the number one key on your Touchtone telephone.
Quick question has been answered or you wish to remove yourself from the queue press the pound key.
Your first question comes from the line of Kevin Mcveigh from Credit Suisse. Your line is open.
Great. Thanks, so much and congratulations just super Super outcome.
At Cymric, Brad it seems like you're being a little bit more aggressive with capital deployment, which is great to see.
Any thoughts as to that is it a little bit more confidence in the free cash flow outlook, maybe sense of where the business is.
Because again from a buyback perspective.
Purchases of incremental units it seems like Theres, a lot of incremental that optionality and value.
Okay.
Has it really been to some of the larger deals.
Hey, Kevin This is Tim good morning.
Yes.
Theres certainly confidence in the free cash flow outlook coming out of the business, but I think what Youre also seeing is just a high degree of confidence coming out of the integration with a very broad portfolio of organic growth levers that we have in the business and these are both topline and nature of value added products, obviously as no surprise.
But there are a host of.
Synergy and operating efficiencies that we see in the business as well and these are the nature. This is a business where youre looking out multiple years typically in terms of our planning horizon, given the predictability of the top line lease revenue streams. In these type of types of organic levers, we see playing out not just in 2022, but in <unk>.
'twenty three 'twenty four 'twenty five and in some cases, we really do have multi year three five plus year visibility into into these growth levers. So we're absolutely taking that into account when we think about the appropriate leverage levels for the business in my commentary I would say that deleveraging is inevitable. It is based on the growth trajectory and then that.
Just opens up flexibility for these other alternatives I mentioned the acquisition pipeline is is quite interesting right now we love the transactions that we've executed to date.
We're hopeful there are more to come and the share repurchase authorization is just part of that that long term capital allocation mix.
That's helpful and then I feel like ask this every quarter, so I apologize, but I'm going to ask it again.
That's on slide number 10, it looks like Youre really able to take up the future revenue potential.
Tim or Brad It doesn't look like it includes those 11000 units that you just acquired is that right and journey. When you think about those 11000 was it at the full potential probably had a little bit more revenue opportunity given the fact that there's no uptake on it already.
Thoughts on that and then the ready to work it looks like you just add up from $50 million up from 35, as well I just want to make sure.
Understanding that right.
Yes, Kevin This is Brad the 11000 that we acquired at the end of the quarter were primarily all storage containers.
So.
It's something we'll talk about in the Investor day in November as we do see.
Meaningful kind of medium and long term upside as we deploy a apps portfolio. If you will for the storage containers.
So now what we're showing on slide 10, that's the $150 million of growth.
If we just hold rates, we've already achieved across the North American modular segment, and then I mentioned, there is an incremental $50 million of revenue potential over say the next five years as we deploy that same strategy across the legacy mobile mini ground level office fleet.
That $50 million in the same 50 million and we mentioned in March of 2012, when we launched the deal.
We are along the path of getting that rolled out into the branches.
Okay against really really exceptional.
Thanks, Kevin.
The next question comes from the line of Andy Wittmann from Baird. Your line is open.
Oh, great. Thanks for taking my question guys and good morning I.
I guess, Tim I, just wanted to understand a little bit more on the guidance here the midpoint of the revenue guidance.
Sequentially it seems like deliveries improved.
Largest business as the quarter went on.
Just trying to understand was there something in the third quarter revenues made it, particularly the highest within sales volumes or delivery costs or other things.
It just seems like the revenue guidance should be a little bit higher and maybe you mentioned some of the stuff on the flow through in terms of.
Kind of installation costs pressured margins a little bit in the fourth quarter, but maybe if you could talk a little bit more about about that EBITDA guide to that would be helpful for all of us.
Andy Sure thing good morning, and what we're really seeing as we head into Q4 is a business. That's on a very solid long term growth trajectory, coupled with kind of normal seasonality of a typical slower Q4 period and this may be a little different for those legacy mobile mini investors that may be out there.
Q4 is always the peak the peak revenue period, it's a little bit of the opposite in the modular business. Just because you don't have as much delivery and return activity going on so as you think about sequentially. How the business is going to move from Q3 into Q4.
You will continue to see a build of those core leasing revenues, but the delivery and installation revenues will taper off a bit going into the fourth quarter. They will remain down probably in Q1, and then a typical seasonal pattern would see those delivery and installation revenues pick up in in Q2.
In Q3, and you can see that reflected in that.
Longer term revenue trend chart on the bottom left of page 20.
What will also happen in Q4 is the.
The variable costs that had been supporting those delivery volumes in Q2, and Q3, they will start to taper off a bit as well so the combination of stable and predictable and frankly growing lease revenues in Q4.
The drop in the lower margin delivery and installation revenues and then the beginning the tapering of the variable cost to support deliveries all of that will.
Allow margins in Q4 to expand both sequentially and year over year, and that's a very normal seasonal trend in our business and it gives us clear line of sight into continued expansion in 2022 as we those year over year delivery volume swings probably are not as dramatic as they were especially.
Q2 and Q3.
We do see a very healthy margin expansion year as we as we set up 2022.
That's really helpful answer. Thank you for that could you just digging a little bit more on <unk>.
Like some of the $10 million in the quarter.
I mean, it sounded like they were kind of like repair and maintenance kind of stuff to put all the units out that you put out I guess.
The pace of new units has been improving obviously in the modular business.
Is that level of.
Kind of work on the units that gets expense a normal amount in the quarter given the volumes or.
Are you having to go kind of deeper down the bench and put out having to put up more units, maybe need a little bit more TLC before they go out and what's the trend like in that just kind of curious as how the mechanism was working in the quarter and what that implies for the future. Thank you.
Sure Andy it's just normal normal volume driven.
The best place to start for this discussion is actually back in 2020 right. So in Q2 of 2020, our delivery volumes were down about 20% year over year.
And then they started to claw back up in Q3, a bit faster than we expected so.
So fast forward to 2021, what did we talk about in Q2, we talked about almost $20 million of incremental variable cost year over year.
And that incremental variable cost dropped roughly in half in Q3.
Because delivery volumes were picking up.
Back in 2020 and that year over year delivery growth was around 8%.
A little bit from the growth rate, we saw in Q2.
Sequentially those variable costs were only up a couple of million dollars from Q2 into Q3 lease revenue grew six 5% from Q2 into Q3, which is why you got the 70 basis points of.
Sequential margin progression. So again this is playing out.
Very much as we expected when we started the year and we're really not seeing anything anomalous in the cost structure that would give us concerns going into 2022, we've got.
Probably the same inflationary pressures that every industrial business is talking about but just with much greater ability to pass that through in the top line.
That's what we're seeing right now from a volume and a cost of activation standpoint.
Very helpful last question, Andy Sorry go ahead sorry.
Brett I was just wanted to add I think Tim makes a great point.
We saw in the second quarter of 2020, right that was unexpected shock our thesis going into building up this platform was the.
We could create installation that allow us to grow through such so not only was the the cash flow counter cyclic.
As expected, but to be able to pull up $20 million of costs in the quarter, Greg when we found out I found out about the impact if you will basically heading into the quarter is phenomenal and as Tim said. This is just a return to normal. So I think this is kind of the beauty of the model the long lease revenues.
And our ability to react quickly not only with capital, but also with the cost structure.
That makes sense and then just quick follow up maybe Brad for you.
Volumes in storage or obviously, you had picked up a lot here in the quarter is there any implication of what that means for your modular business.
Seems like that storage to this tends to be a little bit more cyclical or more pro cyclical a bit more higher amplitude on the on the on the swings.
Does does that mean is this like a leading indicator or is there anything to read in to what the storage volumes mean for the future of the <unk>.
Modular business or am I reading too much into that but I think there was a correlation of some application there.
I don't think Youre reading too much into it Andy I think.
Did did call out there is the unique aspect of store remodels.
Primarily a storage play and then as you know the the normal year end seasonality, which which we expect to be normal again, so but no. It is as projects that were already underway have been able to accelerate and return to more normal pace.
You follow construction put in place, which will tend to support.
Additional storage activation. So as we look ahead, we think what we're seeing in storage as well as the kind of steady increase in momentum in modular sets us up for what will be a pretty interesting year next year.
Okay. Thanks, a lot guys.
Sure.
The next question comes from the line of Scott Schneeberger from Oppenheimer. Your line is open.
Thanks, very much good morning, yes, congratulations on another strong quarter at <unk>.
I want to focus this is going to be a long question, but the overriding theme as supply constraints. We've heard from some of your some of your competitors in modular.
And containers already in this earnings season that that it's an issue.
To varying degrees for various reasons so.
And modular as you guys are running a relatively low continue to run at relatively low utilization in the high 60, I'm guessing not a problem yet.
And then the North American storage.
70, so could be common issue.
And then I notice.
Gmos.
Units on rent in the quarter was flattish.
So just.
And finally U K on this 90% utilized.
How are you handling the supply chain I know the Capex guidance didn't change if you could just rehash, where youre focusing the capex dollars and how concerned should we be as compliant supply chain constraints were main heading into 2022 that you might be missing opportunities in it.
Particularly in storage tanks.
Yes, Scott.
Not too concerned about missing opportunities. So the markets are tight and as noted we've got years of growth. We can fund on the modular side with the fleet we have.
Storage side, we're seeing tighter as we mentioned before tank and pump.
75% OE see utilization is.
The levels that we're certainly investing carefully to manage that balance as well as in the UK, but.
Sure.
Largest domestic player if you will with respect to containers were still able to land containers.
Sure the cost a bit more of them before but.
With the right momentum we've mentioned throughout the call that's not a cause of concern in fact, it's probably a net positive for us.
Just following on that Brad It seems I mean looking at these pricing numbers youre doing a great job there so.
Should we feel comfortable youre easily covering the cost on a go forward basis with this with the pricing increases.
Yes, we feel comfortable with that Scott.
Got it excellent.
It's not all about fleet volume right too it's like we've got value added products revenue streams across all product categories now going into 2022 and 2023, so even with that.
The fleet that we have in place now by the way that fleet is getting more valuable every day it looks like.
We also have the opportunity to grow within the assets and drive more revenue per asset, whether it's price or value added products services and products and services and thats across most of our most of our asset classes, obviously no constraint on the modular side one of the strengths of this platform is that we handle the maintenance and refurbishment of that equipment in <unk>.
<unk> at scale in all of our big branches, and that's really different than anybody else with whom we compete.
In the U S and Canada on the modular side.
So actually feeling pretty good about the overall supply demand setup for the next 12 to 18 months.
Hi, Thanks, guys I appreciate that and just as a follow up.
On the <unk> North American storage units on rent had been growing low mid single digits for a while and its flattish now just any comment on implications or thoughts there and also the 12000 storage units moved from one segment to the other you mentioned $5 million Rev.
And $5 million EBIT.
Sure.
Just.
There was a little surprised that it's 80% to 100% margin on those so just if you could comment on each thanks ill turn it over.
Yes, Scott on the transfer of the storage units those are all steel boxes that are out on rent with customers right. So one of the beauties of this business is once you drop it off there really is no incremental cost associated with servicing the unit. So if we take 12000 units that are out rent.
Paying our bills in Q2, and just move them from one segment to the next.
There really isn't an associated cost movement with that so it truly was close to.
100% flow through if you will on those 12000, those 12000 units net does.
Impact of year over year comparisons.
A bit but at the end of the day, it's also probably immaterial and not worth changing historically in terms of the ground level office.
<unk>.
Sequential unit on rent progression that is one category, where especially last year, we did have.
More COVID-19 related applications. So we can point to vaccination and testing and uses.
That are churning off in that category still it's an area that we're going to be investing in we've got.
Another strong year of conversions planned for 2022, so no fundamental concerns whatsoever about that category. It's just one of the categories, where mobile mini was a little ahead of the curve.
Last year I would say in 2020.
In terms of being out in front of the Covid opportunities.
Yes, Scott the only thing I would add to that is.
So imagine the benefit of the combined fleet right. So, we'll Scott had container office space through a ground level offices.
Pretty decent similar size modular fleet. So we've got the flexibility to serve that same customer need if you will across both platforms. So that we're certainly not missing anything here.
Excellent. Thanks, guys Real Testament to the business model on that $5 million on the flow through.
Turn it over thank you.
Okay.
Your next question comes from the line of <unk> from Morgan Stanley. Your line is open.
Hi, Good morning, guys. Thanks for the question.
If we could maybe just go back to the comments on the fourth quarter EBITDA margin expansion I think you mentioned a couple of times.
You know that you are expecting a step up in margins in the fourth quarter I think when we look at your guidance at the midpoint. It implies EBITDA margins are roughly flat quarter or.
Year over year. So can you just confirm that you are expecting year over year margin expansion and if there's anything specifically that we can think about that still variable at this point.
It would impact that more positively and negatively.
Yes, probably the biggest variable that can impact Q4, we'd be just the delivery volumes themselves. So as I said in my commentary I, probably see more upside than downside in that overall overall guidance range relative to the midpoint.
But the things that can surprise, you would be stronger than expected market conditions and delivery volumes, primarily in the modular business in Q4 that would be a good thing as it relates to our 2022 run rate.
But we would happily incur that cost in Q4 to set up a stronger run rate going into 2022.
Sitting here in early November we haven't really been surprised so again I would point to.
The mid point with some upside.
And then I mentioned the acquisitions that we closed in.
September we really didn't get any contribution from those in Q3.
There are some.
Modest integration cost associated with those as you bring in.
New smaller tuck ins, but if we get those stabilized faster than maybe expected that could cause some upside in the range as well.
No real fundamental change to our view of the margin trajectory going into into next year.
Okay, Great. That's helpful and then if you.
Could also just comment on.
The update on the synergy.
Targets I think you had been saying that once you got this ERP and accretion.
We could see a large step up if you can just comment on the trajectory for that and.
I think you had commented there might be some additional.
Synergy potential once you do the CRM integration.
Yes, and we will get into this in some detail on Monday, corny, but I think on a trailing basis in the P&L, we've reflected approximately $6 million or so of the mobile mini synergies on a run rate basis, we're well well above that level.
Tracking very much in line with 30% of synergies having been executed in our run rate by the end of Q3.
You'll start to see that run rate impact as we go into 2022, we're also reinvesting in the front lines we've introduced.
Some out of period.
Wage increases for frontline skilled trades and drivers and things of that nature.
So that we are making some other investments in the team to go along.
With the original synergy plan.
And as we'll talk about on Monday, there's going to be I think a fair amount of effort on the top line as well in topline related opportunities that maybe we didn't fully contemplate when we.
We're framing the cost synergy opportunity in the mobile mini transaction. So that's all that's all good stuff that we'll be talking about for purposes of 2022 and 2023.
Okay understood and then just lastly, I know there was some conversation about supply chain constraints that we're seeing also have also seen significant logistics constraints.
Have you.
It sounds like you feel very confident you were able to deliver what you needed to deliver this quarter, but are you seeing any issues on the logistics side and any thoughts on.
I know you move some of that storage.
Over to that.
Storage.
Division, but.
Anything for how Youre thinking about the Buildout of your.
Internal logistics.
Drivers yeah coordinated we can't point to examples where we are unable to service a customer because of logistics constraints.
When we do look at the business just take North America storage the delivery volumes are up dramatically year over year, which means we're using a higher mix of third party outside hauling and as a result between that and rising fuel costs, our cost per move on the storage side is up almost 20% year over year now we're able to pass that through.
Due to.
To the customer in many cases.
But we're absolutely seeing the.
The same impacts in the supply chain that everybody else is seeing so our job is to make sure that we're able to maintain those margin and pass it onto the customer. The other thing I would say is that we do have a longer term in sourcing initiative as it relates to our modular business. You know the majority of our transportation is actually third party on the modular side.
Of the business.
Over time, given our scale, we really should be in sourcing that but to do so you got to recruit drivers you got to buy trucks and all of that is more challenging today than it was 12 months ago right.
So we're not immune to any of those pressures, but the business model.
Has demonstrated the ability to pass at least the cost side through and over time, if we are able to successfully able to drive some of these initiatives.
See ways to expand the margin.
Great. Thanks.
Your next question comes from the line of Stanley Elliott from Stifel. Your line is open.
Hey, good morning, everyone and thank you for taking the question.
Quick question on the acquisition you mentioned nice pipeline there on the same token you have.
You've called out some supply chain issues.
Whats the thought process about pivoting some of your capex spend for new modular or these storage fleet rather than really stepping on the gas in terms of M&A since you basically.
Basically did for deals that are already kind of work them into the mix.
Yes Stanley This is Brad yes, as we can.
Go through the.
The priorities of capital expenditures by end use fleet is always more interesting to buy a new just like refurbishing idle fleet we have.
As more interesting so.
The M&A pipeline is robust as Tim mentioned.
It is highly accretive and we will continue to invest on that front.
And certainly before we would say organically by new assets and add supply to markets that are generally still so while supply well balanced Stanley. If you just look at our rental equipment net book value and kind of trend that through the course of the year, we added about $50 million in Q3 to that rental equipment net book value.
<unk>.
Related to acquisitions, if you take that out that means the legacy fleet actually is contracting slightly.
And that is consistent with what we've been doing it well Scott now for four years consolidate more of the market.
Heighten up that overall.
Balance.
Balance in the market and as Brad said, the economics of used are often quite interesting relative to adding new supply into the market.
Great and then maybe a little bit of a longer term question youll potentially we'll see what happens, but maybe we'll get some good news on infrastructure later today.
<unk> dollars would probably start to flow through to 18 months out when would you all expect to see that impacts your business since you're generally earlier or one of the earliest sort of rental applications on a job site.
Yes.
<unk> nine to 12 months out.
I would think more along the 12 months to 18 months as you have said.
These projects are typically shovel ready if you will.
But even without the infrastructure at the Abi has been positive since February.
With some some pretty robust numbers so.
Yes.
One of the questions raised earlier, that's really historically been a great indicator of inflection in modular deliveries for projects starting to say nine to 12 months after.
The Abi flips positive. So so we feel like we've got a pretty interesting demand outlook for a number of years here with or without infrastructure.
Thanks, So much best of luck.
Thanks.
Your next question comes from the line of Steven Ramsey from Thompson Research Group. Your line is open.
Hi, Good morning, a quick question on Mod North American modular portable.
Will that be phased out.
Lately by transferring over.
Or do you expect.
The units on rent to average around 400, or so going forward or 500, or so going forward.
Stephen This is Tim I think maintaining that four or 500 assumption for now is the right is the right assumption.
The reason those are remaining in this segment is because we've got certain geographies, where the legacy will Scott branch network has a branch presence and legacy mobile mini did not so think about Mexico. We think about why do you think about Canada.
Just keep that storage fleet embedded in those legacy modular branches until such time as works.
Able to expand maybe the storage presence into new geographies, which is something we can talk about.
In the future, but for now I think your assumption is correct.
Okay, Great and then thinking about the UK.
Performance is very strong is there an opportunity to accelerate.
Growth, there and drive side drive besides upwards through capex or M&A.
And follow on how much of that strength is a favorable backdrop versus internal initiatives.
Yes, there is definitely an opportunity to continue growing that business that run rate has done nothing but accelerate over the last 18 months and we are allocating growth capital in the UK as Brad alluded to and we will probably frontload some of our capital spending based on these market conditions and.
In the first half of 2022, so we love the love the business there we love the economics.
And.
Expect to continue to reinvest accordingly.
Okay, Great and then one more quick one thinking about the acquisitions that have recently been completed what kind of rate and utilization do these have trying to think about how they impact I guess, mostly north American storage in the next couple of quarters.
Yes, I would say most of what we're seeing in the market is pretty highly utilized right and that's just an indicator of where the market is generally we do see commercial opportunities in most of our acquisitions when we take a look at them.
Do have a pretty sophisticated yield management process thats in place on the modular side of the business and we're applying some of those learnings in the storage side of the business. So.
You do sometimes find potential for recapturing revenue leakage and acquired portfolios and then value added products is also just a unique revenue stream thats.
Fundamental to how we operate our asset classes and very few others out in the marketplace do typically those commercial synergies tend to be a little bit longer term in nature because in order to realize them you need to let the acquired portfolio churn units that have been out for 234 years come back to the branch.
Maybe we convert them or refurbish them clean them up and then we turn them out to customers.
The way, we manage the rest of our fleet. So absolutely that's part of the value creation Formula and we're looking at M&A.
Excellent. Thank you.
Your next question comes from the line of Philip <unk> from Jefferies. Your line is open.
Hey, guys I know some of these short term advances help the AMR growth for modular, but this is a pretty meaningful step function increase the last few quarters anything in particular that stands out that's driving perhaps some of the acceleration we've seen.
This is Brad yes, certainly continued to <unk> <unk>.
Acceleration vats penetration acceleration, but yes, <unk> got also two quarters here that are against lets say relatively weak comps the.
The prior two years, great because you had the second quarter of last year and third quarter, most impacted by Covid. So.
I think.
To that 11, 4% CAGR since 2017.
Is it pretty pretty interesting bellwether for this and we will.
As we always do we will continue to push that penetration and rate optimization, making sure that we're never trading rate for volume.
Is the right piece of a bigger component lately or it's more of the <unk> penetration piece, it's been like.
Mayson Lee steady at like a 40% of apps, maybe 45 with a balance rate since we started this in 2017.
Okay. That's great and then deliveries have been trending positive for modular since the fourth quarter.
But units on rent still down year over year and sequentially. So im little surprised it hasn't been reflected yet.
I guess bigger picture, how confident are you.
That is going to actually grow low single digits next year on units on rent for a modular and then provide some color why just given the long lead nature of both modular and storage.
Why the storage pieces bounce back a little quicker on units on rent side.
Yes. This is Brent I'll start with the modular bitten. The short answer is we're pretty comfortable with that low single digit increase next year.
Yes.
We talked a lot about deliveries right the balance with unit on rent is are the returns.
So you had average through your lease durations the units on average that are turning right now are from late 2018 heading into 2019.
At that point, you had Williams, Scotsman and Mod space running independently.
And pretty hot markets right and as we've talked a number of times the friction of combining will Scott and Mod space. We combined 200 locations down to 120 entirely duplicative sales teams yada yada.
We really encountered that friction throughout 2019, so you just got returns.
At a higher clip, it's we've expected it.
And.
It will.
Over time, you'll see those returns subside a bit is what we would expect.
Given as we move will be kind of slide in that three year window. If you will.
So I think that pretty much covers it all.
Yes, thats, great color and just one last one maybe for Tim.
That utilization for your storage business is actually quite high and certainly youre excited about some of the batch offering you got wrong in that.
That business as well how should we think about capex as we look out to 2022.
Longer term because thats obviously.
Essentially an offset on the cash flow conversion, which you kind of highlighted which could pick up.
So any color around that would be helpful.
Yes, the incremental growth capex in the storage business is a high class problem. There just given the attractiveness of the unit economics.
Again like one of the other analysts to ask act.
Acquisitions will be part of that so one of the things I like about the storage business as you've got multiple different ways to kind of grow grow volumes and capture market penetration.
And smaller tuck in M&A is going to be part of that formula oftentimes since a lot more efficient to acquire existing assets that are in market rather than by one trip containers from China transferred into the middle of the country and maybe converted into.
<unk> right. So we're going to be looking at both of those things.
Just break down our capital spend roughly this year call it little over $200 million of net Capex to 200 to 230 about half of that will go into modular refurbishment.
As Brad mentioned, we can take older units refurbish them we.
Can do shoot for those for less than the cost of a new unit typically which is one of the reasons, we like older fleet.
Another 25% of the Capex is going to go into value added products at the rate that is growing we're happy to have our first marginal capex dollar go there and then the remainder is going to be feathered across the storage segments. The tank <unk> pump segment and targeted new fleet in the modular segment, so I think that mix.
There's going to be.
Pretty consistent going into 2022.
We may have a higher allocation to either tuck in M&A or new fleet purchases on the container side.
Next year, but again, we're only going to be doing that if it is purely demand driven.
Creative and the economics are attractive.
But Tim we Shouldnt expect a big step up next year effect of what I am trying to get a better handle on if you could provide some color there.
Not a big step up and fill and even to your question longer term of absence storage as an example, using <unk> and modular <unk>.
As our cash on cash payback in 12 months. So as we look further afield and we'll talk about this on Monday right. If we're able to accelerate growth quicker than expected with apps and storage containers, there may be a marginal increase in capital.
But youre going to see a corresponding improvement in revenues within that 12 month period. So as Tim said these are all high class problems.
And largely they're noise around the edges here.
That's great color looking forward to seeing you guys Monday.
Our last question comes from the line of Ross Gilardi from Bank of America. Your line is open.
Oh, Thanks for squeezing me in guys how are you.
All right Ross how are you.
I'm doing great. Thanks.
Tim are you able to provide run rate.
Annualized revenue and EBITDA for the four acquisitions, we made.
We will talk about it on on.
Monday Ross.
So.
What I will say about these as we invested.
What $53 million.
Sure.
Transactions that closed in Q3, and the valuations that we're acquiring at our fair and attractive from our perspective, but let's do just safety.
Details for Monday, just from a disclosure standpoint.
Okay Gotcha.
<unk> had a lot of discussion on.
How the companies manage.
The balancing act between utilization and rate and so forth and clearly.
You've done a fantastic job.
Driving rate off of your existing fleet.
I take it you're going to continue deemphasizing fleet growth in favor of rate. Despite the fact that your markets are accelerating is that.
Generally pretty fair statement, and then just given that what's the likelihood that you actually hit this $500 million run rate free cash flow number earlier than EBIT Zhang.
Well first I'd say, we fully expect based on what we see right now to be growing modular volumes in 2022 and storage volumes in 'twenty. Two so there is no. There is no trade off being contemplated as we go into the next couple of years. The fact is we're in an extremely supportive.
Pricing environment, we don't see any signs that that's changing and we fully intend to layer in new value added products revenue streams on top of that so the relative mix.
Of growth drivers impacting lease revenue, yes, it will be more heavily weighted towards rate and value added products.
But we love it when there is a volume component.
And we expect to deliver that next year.
Yes, that's the only bit I'd asked with respect to the 500 run rate keep in mind getting there assumes and we will achieve the decline in integration related costs as well as beginning to realize the cost synergies both of which were highly confident in.
So hard to accelerate so I think achieving $500 million as we exit the year is a great outcome thats a milestone we set.
In March of 'twenty, when we announced the merger before we even knew really what Covid was.
So, let's let's just stay focused on achieving the $500 million. Obviously, we will get there as quickly as we can but there are a couple of the drivers there that.
Well in play, but they have to to continue the completion of the execution.
Okay, great if I could just squeeze one last one in just I wanted to ask you about tank and pump at one point it seemed like maybe it was.
A noncore asset, but you just had a fantastic quarter.
Yes.
How are you seeing it fitting in the portfolio.
Going forward.
Would you actually add to it.
As I mentioned as Tim mentioned.
We're certainly investing.
<unk>.
<unk> continue to grow that business with a keen eye on managing.
Maintaining the appropriate supply demand balance there.
Effectively we have seen almost every kpis inflect positive there, we're just starting to see rates inflect.
So it's.
At the same kind of quarterly C model as we're operating across modular and storage.
We're extremely pleased with the progress of the divisions, making as well as the the outlook in the coming year or two so.
We're very impressed with how that team is executing and you can stack it up against their other peers the published public information in there.
I think they are lapping the competition, maybe the second time now.
Got it thanks, so much guys.
We have now reached the end of today's call I will now turn the call back over to Nick.
Thank you Sarah Thank you all for your interest and we'll Scott mobile mini if you have additional questions. After today's call. Please contact me and looking forward to seeing you all in New York on Monday. Thank you.
Thank you ladies and gentlemen. This concludes today's conference you may now disconnect.
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