Q4 2021 Willscot Mobile Mini Holdings Corp Earnings Call
Yeah.
Welcome to the fourth quarter 2021 wheel Scott marble. Many earnings conference call. My name is real well and I will be your operator for today's call.
At this time all participants are in a listen only mode.
Later, we will conduct a question and answer session.
Please note that this conference is being recorded.
Now I would like to turn over the call to Nick Gerardi senior.
Senior director of Treasury and Investor Relations.
You may begin.
Good morning, and welcome to the World got mobile mini fourth quarter 2021 earnings call participants on today's call include Brad salts, Chief Executive Officer, and Tim Boswell, President and 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 complete description of the 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.
One other item to note before I pass the mic to Brad going forward and based on feedback from the investment and analyst community, we will be moving our press release dates to Wednesday afternoon. After market close and our conference call to Thursday mornings. The following day, we typically target our earnings released 30 days after our quarter closed 60.
Days after our year end close and will continue to notify you of these dates approximately two weeks in advance via press release with that I'll turn the call over to Brad Salt.
Thanks, Nick Good morning, everyone and thank you for joining us today.
<unk> CEO will Scott mobile mini.
Turning to slide five we are a category of one and we proved it yet again this year with excellent operating and financial results consistent with our ready to work value proposition, we extended our market leadership by executing on idiosyncratic growth initiatives with our two industry, leading brands generating $1 nine.
$9 billion of revenue $740 million of adjusted EBITDA and over $300 million of free cash flow in 2021.
This strong performance gave us full optionality for capital allocation.
We returned 364 million to our shareholders via our 1 billion share repurchase authorization, reducing our economic share count by about 4% relative to the end of 2021 2020.
We acquired seven leading regional and local modular and storage companies for $147 million and we invested in our organic operations with 237 million of net Capex proportionately, we allocated our capital spending about 50% to share repurchases, 20% to M&A and 30%.
Sent to net Capex, which is in line with the framework, we presented at our inaugural Investor Day in November .
In support of our financial metrics, we achieved several key strategic initiatives. This year as well in May we migrated the legacy will Scott operations on the legacy mobile Mini's World Class ERP system. It was a labor of many nights and weekends to make this transition a success both before and <unk>.
After implementation.
Combined ERP is enabling the $50 million of cost synergies from the Wills, Scott mobile mini merger, which we are now harvesting.
It opened the door to better inventory management harmonization of our CRM platforms and deployment of stronger business intelligence and data science capabilities, all of which are priorities in 2022 and present the next phase of optimization for our unique operating platform and.
And finally, we can even more seamlessly integrate acquisitions, which furthers our strategy to compound robust organic growth with accretive M&A.
Now about 10 months. After go live I am pleased to repeat my comments from our second quarter call. We're one of the few companies to use the terms on time successful in SAP in the same sentence.
Speaking of M&A, we were busy in the second half of the year with seven tuck in acquisitions. We added 15700 storage units and about 5800 modular units to our North America fleet as well as over 100 employees to a high performing organization primarily in the field.
Tim will spend more time here in his remarks, but suffice to say the window. We are the best owner and operator of modular and storage assets in the markets. We serve and are delighted with how immediately our new colleagues are embracing and extending our value proposition to the benefit of both new and existing customers.
In addition to the new employees, who joined our team via acquisitions, we expanded our team within our existing footprint. We are investing in our human capital across our organizational operationally. We are focused on career development, particularly for skilled trades in commercial truck drivers and our branch locations as well as our diversity and.
The inclusion initiatives at all levels from a corporate perspective, we are targeting expert expertise in operations sales marketing data analytics and M&A to support our strategic growth initiatives.
Our ESG program, which we deployed over the course of 2021 supports all of these efforts our products are inherently sustainable and we're focused on reducing emissions in ways, we promote safety and inclusion and diversity because it's the right thing to do and for the benefit of our employees our customers and the <unk>.
Entities within which we work our.
Our governance efforts are focused on risk management, and improving board diversity, and we engaged with owners of over 30% of our shares outstanding in 2021 on ESG matters and we are committed to continue this engagement going forward.
In 2022 will remain tactically focused on leveraging the growth initiatives that we highlighted in our Investor day in November in order to drive substantial value creation for all stakeholders for years to come.
Value added products or services or <unk> will continue to anchor our unique value proposition, we will continue to expand our offering in a modular and we will rollout our initial offering for portable storage units.
As always our offering is based on robust customer research and demand are.
Entire team is laser focused on rate optimization, which youll see in our Q4 results across all segments in 2022.
I see particular opportunities as we harmonize crm's leverage our unrivaled transaction database and build out our account management and vertical strategies.
Complementing these changes our data analytics are becoming ever more sophisticated, allowing us to target opportunities relentlessly and surgically the local level, while leveraging our national footprint and scale and supporting our market penetration objectives.
Our M&A pipeline remains robust so look for us to stay active in that space.
And we are continuing to experience robust demand across the diverse end markets that we serve.
Earlier this month, we gathered over 250 of our top storage and modular leaders for a business update and to a certain that our human capital remains laser focused on the highest priority growth initiatives their enthusiasm for both the commercial and operating momentum with which we have entered 2022 and the long.
<unk> growth was flat out infectious I continue to be humbled by the caliber of the team we've assembled and have full confidence in their ability to continue to execute at the highest levels.
2022 will be yet another transformative year for <unk> mobile mini, but frankly, we're kind of used to that by now we are progressing towards our 500 million free cash flow run rate milestone in the second half of the year and leading into 2023 as Tim characterize it as a matter of when not if we eclipsed the 1 billion EBITDA.
Milestone and our aspirations are far greater than that.
We want to thank you again for another great quarter, we thank our employees and thank our customers for their continued support.
Now turning to slide 13.
Our organic portfolio of largely idiosyncratic growth levers altogether represent $1 billion of potential revenue growth.
The anchor to that revenue growth stems from the continuation and expansion of the <unk> playbook, which we've been executing for decades and flow through to EBITDA at 75% to 80%.
Over the last 12 months, our North American modular segment achieved <unk> delivered rate of 393 up 26% year over year <unk> has been a differentiator for our customers and relative to our competition and there is not an end in sight the.
The convergence of the entire North American portfolio to this rate represents a $150 million of organic revenue growth opportunity over three years further achievement of the $600 per unit per month milestone as laid out in November represents yet another $200 million of revenue and a very predictable and durable.
Growth opportunity, we see a clear path to this milestone via thoughtful introduction of new products increased penetration rate optimization and inventory management.
As I mentioned were also in the process of rolling out the App store storage branches by the end of 2022 every storage branch, we will have a VAT soffer for ground level office, representing another $50 million of revenue opportunity and I am extremely excited about the initial customer interest in our <unk> offering for portable storage units, which represent.
Another $50 million of incremental revenue, which will be piloted in launched in 2022 altogether. That's alone represent the half a billion of revenue growth our.
Our rate optimizations and other key growth lever that goes hand in hand with apps for the third consecutive quarter North American modular average monthly rental rates increased by about 20% year over year consistent with our prior quarters roughly 40% of that increase came from the continued <unk> penetration with the remainder from core price.
This represents a 12% CAGR since 2017.
In North America storage average monthly rental rates for portable storage units increased 9% year over year, which is the largest increase on record we were focusing on rates with new activations product positioning and aligning commercial best practices across the organization.
We see continued opportunities for rate optimization across the portfolio of legacy acquired assets as we extend the deployment of our technology and tools and we are extremely well positioned to benefit from the current macroeconomic backdrop of strong end markets, coupled with continued supply chain constraints and our.
<unk> market leadership position.
We're equally confident in the additional growth associated with expanded market penetration logistics in M&A. This portfolio of growth is real largely in our control and we are investing financial and human capital with purpose accordingly with that I'll pass the call over to Tim.
Thank you Brad and good morning, everyone and page 21 presents a high level summary of the quarter Q.
Q4 capped off an exciting year and Reconfirms all of the near term and longer term expectations for this business that we shared on November eight.
We reinvest where we see opportunities to compound returns our business is demonstrating extraordinary commercial momentum and we are reinvesting aggressively both organically and in acquisitions.
At $1 $9 billion of revenue and $740 million of adjusted EBITDA, We exceeded our original guidance ranges by about 8% and 6% respectively for the year for revenue and adjusted EBITDA in our run rate exiting Q4 gives us a high degree of confidence in our 2022 outlook and we are.
Generating great returns.
We delivered a 12% return on invested capital for 2021 and returns are accelerating while we're growing the business. So the combination of predictable growth and cash flows and consistent high returns strengthens our reinvestment appetite and we're reinvesting in four key ways.
First as Brad mentioned, we completed seven acquisitions in the second half of 2021, representing $147 million of enterprise value.
Combined these acquisitions contributed approximately $8 million of revenue in 2021, and we're modestly dilutive to our margins in the fourth quarter.
Based on the rapid and seamless integrations and our focus on acquiring standardized modular and storage fleet. These are extremely low risk high return investments and we will continue to pursue these types of transactions.
Secondly, organic capital capital investment totaled $237 million for the year, which was at the high end of our range and weighted towards Q4, which is a bit unusual from a seasonality standpoint, but reflects elevated demand and utilization levels in many segments extraordinary <unk> growth and some proactive purchases.
Navigate any potential supply chain constraints constraints heading into 2022, and which are not a concern given that we already own and operate the largest fleet asset base in the industry.
Thirdly, we reinvested heavily in our people and we will continue to do so.
We've implemented three broad compensation increases in the last 12 months.
<unk> compensation was up $7 million in Q4 relative to our prior expectation.
We launched several career development programs and we're hiring specific skills in key areas that are directly aligned with our growth initiatives.
Together this represents a best in class holistic human capital strategy focused on recruiting retaining and developing top talent, which will be the number one determinant of our success over the next three to five years.
These investments are about adding new skills and capabilities that will help us grow the business.
Evaluating this focus the caliber of talent that we are tracking to the company has never been higher.
And lastly, we reinvested in our own stock repurchasing $364 million worth of shares over the last 12 months, representing approximately a 4% reduction of well Scotts economic shares outstanding and it's an incredible value based on where the portfolio is headed.
So overall the theme coming out of Q4 is that we love the portfolio of growth opportunities. We talked to you about in November we're reinvesting behind those opportunities aggressively in with confidence and the results are compounding predictably and powerfully.
Page 22 provides a bit more detail on the fourth quarter at the segment level.
Both revenue and adjusted EBITDA increased 18% year over year, and we saw strong growth and execution in all four segments.
Importantly in the bottom right chart total revenues are also 18% above 2019 levels. So you can see the extraordinary resilience of the portfolio through the pandemic shock the improved revenue mix with over 75% of revenue now coming from reoccurring leasing as well as the obvious upward trajectory.
Q4 is typically the strongest quarter from both an EBITDA and a margin standpoint, as direct variable cost slowdown in the modular business and seasonal retail demand picks up in the storage business and this year was no different.
Margins expanded 200 basis points sequentially from Q3, and our full year margin of 39, 1%.
We're slightly above what we showed you at Investor day.
EBITDA margins have expanded every year since we went public and we expect that trend to continue in 2022.
EBITDA margin for the fourth quarter of 48% was down 30 basis points year over year, primarily due to temporary acquisition dilution and the related execution resources as well as the human capital investments that I mentioned.
Variable compensation in particular in Q4 was approximately $7 million higher than our prior estimates for the quarter simply driven by the fact that we outperformed our targets for revenue EBITDA and new contractual lease revenue.
Because our lease revenue is so stable margins can fluctuate in a given period when we make discrete investment decisions to drive growth like we did in Q4.
And while we're not immune from inflationary pressures like labor costs or fuel for example, our adjusted gross profit percentage expanded by 70 basis points for the year EBITDA margins expanded by 30 basis points net income increased by 113% and return on invested capital was up 180 basis points in the quarter.
And over 200 basis points for the year.
So profitability expanded at all levels consistent with our long term trend and we expect this trend to continue in 2022 and beyond given the nature of our growth portfolio and our ability to drive rate.
Overall these are great results the entire team is aligned and benefiting through our reward structure and we're carrying this commercial momentum into 2022.
Turning to page 23, this momentum is translating into record cash generation in the upper left chart cash from operations was up 14% both year over year and sequentially and despite some working capital headwinds in the year related to the SAP cutover.
As I mentioned earlier, we are reinvesting organically at the top end of our capital guidance range for the year. So it is a bit unusual for us to ramp capex in the fourth quarter as you see in the bottom left chart.
That said the investments are purely demand driven supporting deliveries in the quarter and positioning for a robust market in 2022.
We experienced some timing disruptions in the year such that investments planned for Q2 and Q3 in some cases arrived in Q4 and as we experienced those delays we pulled forward some investment for 2022.
And we're also rolling out our value added products inventory in the storage branches as Brad mentioned, all of which made Q4 look a little higher than normal.
Importantly, even at this investment level net book value for rental equipment, excluding acquisitions was flat year over year. So we are being disciplined with the fleet that we have and we're obviously driving higher returns from that employed capital.
In the bottom right chart free cash flow margin was 16% over the last 12 months. This metric will fluctuate from quarter to quarter based on Capex timing, we should trend back to 20% in 2022, as we track through our $500 million free cash flow run rate milestone in the second half of the year heading into 2023.
Quickly on page 24 in Q4, we reduced leverage to three six times, while supporting $97 million of capital investments $91 million invested in for acquisitions in the quarter and $43 million of share repurchases.
We have over $700 million of capacity on our ABL revolver, we will continue to balance the timing to reach our three to three five times leverage range with compelling opportunities for acquisitions, including our own stock as well as the visibility we have into our free cash flow growth.
Reinforcing our approach to capital allocation I will turn to page 25 as.
As we talked about in November and as illustrated in the left hand chart over the long term. It is reasonable to expect about 25% of our available capital to be allocated to net capital expenditures.
Similarly, we can realistically invest 25% of available capital through our tuck in acquisition pipeline. These.
These amounts can fluctuate in a given quarter like we saw in Q4, given capex is highly discretionary and the timing of acquisitions is unpredictable by its nature.
But these are realistic targets over overtime, which together imply approximately 50% of our capital over time as available for share repurchases again, assuming our three to three five times leverage range.
The right hand Pie chart shows this recipe for 2021, we.
We generated almost $900 million of capital at constant leverage using the same framework, we introduced at Investor day.
Given that we were above our target leverage range, we deployed $150 million towards deleveraging or about 15% of our available capital to bring leverage down to three six times.
We invested $237 million or about 25% in organic net capex.
We invested $147 million or about 15% and seven acquisitions.
And we allocated the remainder of $364 million or about 40% to share repurchases.
So relative to our long term capital allocation framework 2021 was right in line and with some incremental capital dedicated towards deleveraging.
This may fluctuate a bit in any given quarter. However, we will continue to use this view to show how we are deploying your capital.
Turning to page 26.
No changes to the 2022 outlook that we presented at Investor day other than just a higher degree of confidence knowing now how we finished up the year.
While we're not changing the guidance yet based on how we finished 2021 and entered 2022, we are likely tracking towards the higher end of our revenue range of $1 95 billion to $2 <unk> 5 billion.
And more towards the midpoint of our adjusted EBITDA range of $810 million to $850 million.
That combination would imply adjusted EBITDA margins expanding to the lower end of our original range, but still up approximately 200 basis points year over year.
Similar to how we entered last year and are based on our historical seasonality I would expect margins to contract sequentially by approximately 200 basis points in Q1 as our business begins to ramp and then margin should expand sequentially and steadily each quarter thereafter, such that we are up approximately 200 basis.
Points for the year.
That's our base case right now for how the year could unfold.
With revenue trending to the higher end of our range I would also expect net capital expenditures to trend to the higher end of our 225 million to 220 $275 million range.
And similar to 2021, even at the top half of this range, we're not expanding the rental net book value, so driving growth margin expansion and returns without expanding the balance sheet.
Lastly, this guidance is purely organic any acquisition activity would be incremental and will update the guidance accordingly, as those transactions become known <unk>.
The acquisition pipeline is very active and operationally we've demonstrated the ability to integrate multiple transactions per quarter seamlessly. So this has been and will always be part of our growth strategy.
Finally on page 27, before handing it back to Brad I'm incredibly excited about 2022 and advancing all of the key growth initiatives that we discussed in November our.
Our organic growth compounded by acquisitions creates clear line of sight towards the milestones we introduced.
Whether it's $1 billion of adjusted EBITDA or $650 million of free cash flow, it's simply a matter of when not if we achieve those objectives.
And we will continue to leverage our capital allocation framework to maximize value creation as we grow.
Across the company in 2021.
Our team achieved what we refer to as our trifecta of unit on rent growth <unk> growth and rate growth.
These are all now compounding together as we enter 2022.
We're planning for each of them to grow meaningfully and achieved the tri sector again, this year, which means our run rate is accelerating.
And as such we're setting our sights on 2023 and beyond as we considered the value creation potential from this unique and powerful business.
Brad back to you.
Thanks, Tim 2021 was a great year, but I expect 2022 to be even better.
We have the strategy of the team the assets and the solutions in place to delight, our customers and drive substantial value creation for all stakeholders for 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.
Thank you, Sir and ladies and gentlemen, we will now begin the question and answer session. As a reminder, if you wish to ask a question simply press Star then the number one on your telephone keypad.
First question is from the line of Andy Wittmann from Baird. Your line is now open.
Great. Thanks for taking my questions guys. Good morning.
I don't have a lot here today, but I just thought maybe Brad you could talk about some of the investments that youre, making to support the growth and how.
I guess, you kind of talked about how it was one of the factors for for the margin performance in the quarter, but can you just talk about.
What's maybe different about the ones youre, making today.
Normally done in the past.
And what's the outlook for these types of investments is as the year progresses.
Yes, I think.
And as we mentioned.
Part of the margin pressure. If you will was rewarding appropriately team just delivered outstanding results, but as I mentioned in the Investor Day. If there was one concern we had with respect to how fast we continue to accelerate the growth, it's our ability to scale human capital commensurate with what we've experienced in <unk>.
Nearly one.
A $1 billion of incremental opportunity, we see so as I mentioned earlier comments.
Significant investments in our team our M&A team.
It's been thus far integrated seven acquisitions over the course of effectively a quarter, our ESG platform with a particular focus on diversity and inclusion recruiting the right talent.
<unk> analytics to harvest was effectively half of the historical transactions in this market space and be even more surgical in specific in targeting local initiatives sales and marketing.
Sophistication and capacity.
It's really all put in place too.
To facilitate and accelerate that growth that we talked about in the Investor day.
Got it and then I guess I would just for.
For a follow up question here I wanted to ask about.
Some of the dynamics on orders and returns you mentioned in your press release that the return rates are actually down pretty significantly.
So the average unit I guess is staying out a little bit longer can you talk about what you had seen.
On the return rates in which you expect to see here.
Implicit in your 'twenty two guidance and also how the order book is trending here for the quarter and as we move into <unk>.
Yes, Andy this is Tim So I think the comment that we made in the press release and again in the presentation was specific to modular return rates.
They are down substantially about 11%.
Relative to 2019 levels. So if you think about just the cadence of portfolio churn, especially in the modular business, where you've got that 35 month average lease duration. The portfolio of units on rent has obviously come down a bit over the past couple of years and with that the return rate comes down a bit.
Delivery rates on the other hand, we're up 4% year over year.
Throughout 2021, and we're expecting increases of at least that level through.
Through the course of 2022.
So this is just the function of natural predictable portfolio churn, which points us to a unit on rent inflection here in the first half of 2022, and then on the storage side of the business I mean, our unit on rent portfolio to unit at the end of the year was up over 30% year over year. So it's all systems go there.
<unk> organic delivery rates are up about 6% as we called out in the presentation.
And we're adding to that portfolio through acquisition.
Pricing is trending.
Stronger than frankly, it ever has in the storage business. So both the organic and inorganic trajectory storage is really exciting.
Great I think I'll leave it there have a good day gentlemen, thanks.
Yes.
Your next question is from the line of Greg <unk> from Morgan Stanley . Your line is now open.
Hi, Good morning, guys. Thanks for the question.
If we could maybe just go back to the comments on the dilutive impact of the acquisitions that you did in the second half I think you said it was about $8 million and sales of $147 million enterprise value can you just give us a sense of how dilutive.
Those were in the fourth quarter or in the second half and.
Just help us understand the $8 million of sales when you're integrating.
Your new systems.
And better pricing, what should that grow to in 2022 and are there any synergies associated with it that should be showing up fairly quickly.
Just trying to pair the comments about sales.
Being at the high end of your guidance versus EBITDA at the midpoint and how quickly those margins can come up.
To the system.
Hey, Courtney this is Tim it's a good question and we didn't quite get a full quarter of revenue from those acquisitions through the course of Q4 based on how they were.
Timed, but in terms of the dilutive impact we ballpark it around about 100 basis points in the quarter.
And then the other kind of margin contributor in Q4 was the $7 million of variable compensation expense that I called out in my remarks, there are other.
Head count category adds like Brad was articulating that are more kind of longer term and strategic in nature, but if I had to call out two items in Q4, specifically it would be about 100 bps from acquisitions and about that same amount.
Above that amount about 130 basis points from the variable compensation expense relative to what we would've been expecting back in the Q3 timeframe.
I think the best way to think about the.
Contribution.
The acquisitions in 2022 is to go back to the Investor Day, I mean, the four that we had highlighted in November .
Were acquired at around eight times multiples.
And in some cases, there is a bit of an upfront diligence and integration effort that goes into that and we did staff up in Q4 and Q3 to accommodate the volume that we expect to.
Acquire at a regular cadence, but I think that multiple range is reasonably indicative of what we see in the tuck in pipeline, both in Q4 and prospectively.
Great. Thanks, and if I could just follow up on the comments about.
The additional head count I think you said some of this some within the M&A team are the other investments in human capital, you're making how should we be thinking about the run rate for SG&A I think stock based comp is included in that so some of that should be resetting next year, but how should we be thinking about that line item for.
For 2022.
Yes, I'd say, if you think about.
The puts and takes for 2022.
SG&A is one where we're going to be very very careful going forward and you have got a couple of different factors going on we are realizing synergies from the mobile mini transaction. Those are those are on track with the timing and targets that we had established that said we are reinvesting in other new area.
As a new capabilities as you point out so I can.
That'll off a couple of marketing and data analytics is one where it's a kind of a new capability that neither will Scott mobile mini had the same level of sophistication historically product management. If you think about the extraordinary growth that we're seeing in value added products and services and now some product differentiation that were introduce.
<unk> in the storage business, bringing in kind of a more sophisticated product management view is absolutely necessary to achieve our objectives operations excellence partition predict, especially in the storage business. If you think about units on rent growing 30% year over year and the pace of acquisitions that we expect we can X.
And that business Thats another function corporate development is helping to drive.
That.
Cadence as well and then the ESG.
Platform so.
Those are a couple of I'd say functional areas, where we're making fairly discrete investments and then we're in a pretty robust market environment now as well so with sales head count is probably going to be one of the bigger variables that we can throttle up or down through the course of the year strictly depending on demand. So those are the type.
Are things that that we're looking at.
And.
As we continue to demonstrate the ability to drive the organic.
Our organic growth.
It does open up some latitude to.
Put in the infrastructure to support further growth.
Great. Thanks.
Okay.
Your next question is from the line of Manav Patnaik from Barclays. Your line is now open.
Hi, This is actually running Kennedy on for Manav.
Good morning, and thank you for taking my questions. If I may just unpack.
And as a follow up on the M&A question from coordinate.
The plan is to continue to stay active being acquisitive.
Acquiring quickly integrating accretive tuck ins any change the expected adjusted EBITDA contribution from M&A as part of the portfolio of five levers to achieve that $1 billion and EBITDA growth.
And then I think around the time of Investor day at a more specific level.
Leveraging the CRM for the ZIP code level analysis of growth opportunities.
What opportunities you see for unit acquisitions, respectively, both in modular and storage I think in modular if I'm not mistaken it was maybe 1% to 3% above market.
Volume growth there.
Much larger opportunity in storage given the current size our current market share you could just talk about that please.
Yes, this is Tim and actually both of your questions around.
Acquisition contribution and.
Surgical local market targeting are related to the $200 million market penetration opportunity that.
That we quantified for for folks at Investor day, and that opportunity was more weighted towards the storage business because it includes.
Some potential around tuck in acquisitions.
That's exactly what you saw us do in the second half of 2021 and also as I called out.
The percentage of overall available capital that we're allocating to acquisition is in line with what we quantified at Investor Day, and based on the pipeline that we see today I think that's a realistic and supportable range. So no I wouldn't change the expectations that we set around acquisition contribution I would just.
Reiterate that some of that tuck in <unk> activity.
It does assume that included.
In the market penetration assumptions your second question around.
Data and analytics as it relates to.
Sales and marketing and territory planning.
Brad mentioned the company wide meeting, we just <unk>.
<unk> for our top 250 leaders that was exactly the purpose of the meeting is to start to rollout those analytics to push them out to our local sales and marketing teams and to begin to leverage that data advantage here in 2022, but it's early stages and we are moving through the course of 2022.
Implementing a new CRM for the combined company, which will build upon this combined dataset and facilitate those market penetration objectives, but I think that kind of low single digit volume growth assumption that you articulated for modular is a good starting point for 2022.
Okay. Thank you and a follow up if I may.
Would likely areas I think it had been discussed potentially fencing and sanitation as adjacencies that you could see yourselves potentially being all requiring in the space.
Would that still be potentially likely and what is it about the economics there that's appealing.
Yes. This is bret.
I put that in the category of we're participating in all of those segments today kind of everyday.
It is kind of a portfolio of opportunities beyond modular turnkey modular turnkey storage so.
Yes.
We're active as a participant in those adjacent markets today and it does provide longer term opportunities for us to look at whether it's adding to our <unk> portfolio.
Extending to other hard assets that are long life in nature et cetera, So it's a place where participating today and certainly presents some longer term potential.
Opportunities for further growth, having said all that the $1 billion of incremental.
Revenue opportunities that we talked about in the Investor day doesn't really include any of that so we will remain laser focused on delivering what we've already got teed up as I mentioned with that leadership meeting.
It was a little bit to celebrate.
It was a lot of excitement enthusiasm around the current momentum.
In the long term growth and so we want to make sure we're laser focused with the human capital on the highest priority growth levers.
Your comment around sanitation is actually a fantastic example of how a new perspective around product positioning can help drive the business.
Over 15% of our modular you didn't already have toilet facilities and so we are one of the larger providers of sanitation services.
On temporary.
Excites nation.
Nationwide, we haven't necessarily positioned ourselves in that way historically or captured the full value of the service that we're actually providing already providing to the customer. So this is a perfect example of where more of a product management lens on top of.
The services that we're providing can be can be very very impactful.
Very good thank you I appreciate it.
Your next question is from the line of Scott.
Schneeberger from Oppenheimer. Your line is now open.
Thank you very much good morning.
To kind of change my questions first one.
Yes.
Storage, it's kind of a two parter, obviously you guys had been quite assertive across the business.
The entire business in pricing, but we saw a fourth quarter of accelerating pricing in North American storage just curious.
If you could touch that market versus company specific drivers. Obviously, we have some inflation, but you also have fairly high utilization there so able to command, but just if you could take us a level deeper into where that can go where you expect that to go. Thank you.
Yes, it's Scott I'll start and Tim can jump in.
As you know.
Notice before prior to the merger the storage pricing for containers themselves have been relatively flat.
Even before we were beginning to see the more aggressive levels of inflation, we started moving rates there and that was simply.
The application of best practices and policies that were tried and proven on modular.
Blade over on to the storage platform. So we were gaining traction well ahead of and that was in all geographies in the U K as well as in the U S. So we're.
We're very pleased with the 9% we achieved in the last quarter.
And we think there's years of incremental potential.
I think you can look across the line to the modular.
Kind of historic performance in.
And have a fair degree of confidence in that.
Scott. This is another one where do you think about the product management capability that we're layering in we have a totally differentiated product and capability under our mobile mini brand, so with our logistics infrastructure and our fleet really anytime any quantity anywhere in the United States.
Mobile mini can deliver deliver you a container right. We also have multiple tiers of product within the fleet. We've got a standard standard container just like every other competitor and.
The market. We also have patented <unk>. So we've got other premium features on our products and the ability to roll out value added products within the storage fleet. So this is another very good example of.
How taking a more sophisticated product management lens to services that have been provided for a long time can allow the business to capture rate and then longer term as we get into the new CRM then we're in a position to introduce more sophisticated segmentation and technology.
Which obviously, we've seen the ability for that to help contribute to rate performance on the modular business. That's in the next phase of opportunity as we are.
Wrap up 2022 and head into 2023, so just like in modular. It's a combination of factors that are allowing us to demonstrate rate performance in storage and I think thats sustainable.
Thanks, guys.
A quick follow up on stories I couldn't and then one of the top of the possible, but on slide nine you mentioned under commercial industrial retail and wholesale trade down year over year, but up sequentially, reflecting intentional mix shift away from seasonal given broad based end market strength I assume that speaking storage and for those of us who who tracks mobile mini along.
Time, they do a very large seasonal business.
Just curious how are you are you are.
Are you moving away from that and moving those containers into longer term just what was the what's behind that statement.
We certainly shifted a bit of way Scott.
And that was purposeful.
We were experiencing higher utilization looking into the year. So we did do a bit fewer than 5% to 10% I would say less fewer seasonal.
Containers. So we can follow up offline with a little bit more precision.
Just given.
We'd prefer to have those containers on rent for longer duration.
In other segments of the market.
I don't want you to characterize that as we're moving away from it is an important aspect of the portfolio. They are important customers. We will continue to serve well Matt.
Matt just clarified we were down actually about 15% on the seasonal specific aspect of storage containers.
Understood and logical and again, if I could squeeze one more in just.
This is <unk> Capex now I think the first question did a great job covering opex, but specifically on modular refurbishments.
That seemed to be a sizable spend how much of that is pull forward as opposed to next year and.
You have very low utilization in north American modular and you've done a great job managing the refurb. So you don't have to buy new could.
Could you just speak a little bit behind what was occurring there the elevated level specifically on refurb. Thank you.
Yes.
Yes, Scott this is Tim.
Refurbishment activity typically follows delivery activity in Q4, historically is a slower season.
Because of the market environment that we're in and heading into 2022, we did kind of maintain the refurbishment and production activity within our branches through the course.
Q4 at a more elevated level and what this means is we actually refurbished more more equipment than we ended up delivering such that we've got.
Over a 20% increase in available ready inventory heading into 2022 and similar to some of the other capex pull forward. This was more of a proactive step to say Hey, we think 2022 is going to be.
A pretty robust market environment, given our fleet size and our.
Lower utilization level around 70%, we're not dependent on any supply chain. This year to deliver our outlook, we control the supply chain, we control the refurbishment activity within the house labor and materials, we've got the idle inventory.
So this was really just a decision to say hey.
It is a bit of an uncertain supply chain environment environment, we have an advantage with the largest fleet in the market. We're the largest marginal supplier of both modular <unk> and.
In storage equipment everywhere, we operate so thats a little bit of what you saw in modular capex spend in Q4.
That said there were.
Fleet additions in our storage segments and in tank and pump in Q4, just given the elevated utilization levels and then I mentioned value added products as well I mean the <unk>.
Trajectory there is.
Tremendous and we're rolling that offering out in the mobile mini branch network as well at least for ground level offices, initially and I would expect as we get into the second half of the year, we're talking about storage value added products inventory getting out into the mobile mini branch networks. So overall capex spend for the year.
Right at the top end of our guidance range and 25% of our available capital So actually in line in many respects.
Flat fleet net book value as I indicated excluding acquisitions, so again youre seeing gross margin expansion.
From a from a stable asset base, which is a good formula.
I appreciate that thanks, guys.
Your next question is from the line of Kevin Mcveigh from Credit Suisse. Your line is now open.
So much.
Congrats.
Tim or Brad.
On the 2022 outlook can you remind us just what the impact of fuel and labor is as you're thinking about that.
The margin impact on the business and then Tim can you remind us if there is an ability to maybe capture some fuel surcharge just given the recent spike in energy.
Hey, Kevin It's a great question, and we will start with fuel and this impacts our delivery and installation.
Revenue cost and margin rate, that's where we've got.
Exposure to fuel prices and we're seeing it absolutely those costs are up in 2021.
I would expect they actually.
Stay elevated or perhaps even accelerate here in 2022, and we are spending lots of time on delivery and installation pricing and on the revenue side of the equation.
To ensure that that margin is rock solid in 2022. This historically has been a pass through to our customers and it's up to us to continue to manage it.
In a more sophisticated manner. So we've got the exposure, but I actually don't see it as a big margin risk in the year and frankly, we've never been in an environment that it's easier to justify deliver.
Delivery and installation rate increases and Thats really where the team is.
Very very focused at the moment, but it is it is one of those exposure areas.
Outside of our control on the cost side, although I don't really have a margin concern at the end of the day and then labor I mean, we've talked a lot a lot about it on this call. There is labor inflation impacting every operator in North America.
I think we have a couple of advantages in that we do have other efficiency offsets in the form of the mobile mini synergies and I would expect that those.
Expand as we get deeper into SAP and deeper into our CRM project later this year.
And we are making some strategic human capital investments like I talked about but nothing that gives me concern about our bottom line EBITDA expansion for the year and our guidance too.
200 basis points or so is a reasonable expectation based on what I know right now.
And that just continues a pretty long term trend of margin expansion since 2017, when we first started talking.
Now listen I think the fact that.
You folks were able to source the candidates and maintain them tells you what youre able to do internally and then I guess.
Yeah.
Haven't really talked about tank and pump for the European business much any thoughts it sounds like there's been some expansion in terms of capacity on the tank side, but.
Any thoughts on the expansion in Europe .
Ukraine. Unfortunately, the edge there notwithstanding but just any thoughts strategically on those two assets.
Yes, I'll take the UK when quickly Tim and I were just over an.
An outstanding business is hitting on all cylinders there are opportunities to expand their via M&A as well, it's interesting the portfolio of products and services over there are primarily storage containers and ground level offices to use North America language.
We have very few of the kind of more traditional modular panelized products. So the.
Great team outstanding performance by almost any financial and operating Kpis.
Certainly opportunities to grow that book.
Both organically and Inorganically, if we chose to do so and then I am thanking Bob Kevin.
Revenues in the quarter up 18% year over year, adjusted EBITDA is up 27% year over year. So the performance of that team and the momentum in that business is outstanding.
They are far far exceeding any of the competition and to which we've got performance insights. So I couldnt be happier with the trajectory of that business and if you think about end market exposures there.
With oil North of 100, 100, Bucks, a barrel and probably not coming down anytime soon we don't have a big upstream exposure in that business, it's probably less than 5% of our overall end market exposure.
It's certainly a supportive end market environment in that business for the foreseeable future.
And look we're on or near maximum OECD utilization in that business. So we are going to.
B investing growth capital in the tank and pump business. This year and the team is doing the exact right thing with it they are putting it to work.
As long as that's the case and the results are there we will continue to support the business.
That makes sense. Thank you.
Your next question is from the line of Brent Thielman from Davidson. Your line is now open.
Great Hey, Brad.
That's on the tray pack that by the way.
Thanks.
Could you could you I'm sorry, if I missed this in the commentary, but did you comment on your expectations for units on rent for.
North American modular and storage for 2022, just implicit in that the revenue guidance you've given.
Yes, yes, we have this is Tim.
We called out that we expect.
Year over year modular units on rent to inflect positively in the first half of the year and it'd be targeting kind of low single digit.
Average unit on rent growth for the year. So one 2% range is probably a reasonable place to start but look we haven't given you specific guidance guidance on every leasing kpis for the year. The fact of the matter is youre always ended up being a little bit different but we are unique in that we have the ability to manage volte.
<unk> pricing and value added products and services and now we've got all of those levers across all of our segments, which gives us great optionality and different ways to win and that's really one of the key takeaways from our meeting in November .
Yes, okay.
And then the results in preceding quarters.
At least partially impacted by this kind of rebound in short term kind of events driven rental which I think helped the rate comparisons to some degree was that not as much a factor this quarter or can we kind of look at the year on year comparisons and rainy days more apples to apples Bryan I was also thinking about that.
I guess, the lower contributions from seasonal as well say, if theres any way to unpack that that would be helpful.
Yes on the on the storage business I would say not so much in in Q4 first of all Q4 of 2020 delivery volumes were actually getting back closer to normal levels. So that quarter was less disruptive certainly in our Canadian business Theres, Some Q4 seasonal event.
Activity, but I wouldn't call out seasonal as a big mix driver in Q4 on on either side of the business not like it was in Q2 and Q3 three of last year versus the <unk>.
Prior year.
Okay.
And then just last one for me.
Maybe just to comment on working capital expectations through 'twenty two that's embedded in the cash flow guidance just given the headwinds you saw here in 'twenty one.
Yes, I think more or less neutral is the right expectation for 2022.
We have experienced in each of our larger transactions when you're cutting a $1 billion of revenue from <unk>.
J D Edwards over to SAP theyre going to be different.
Areas of disruption Fortunately, none that really impacted our overall.
Results in guidance for the year.
So I think that all things considered it was an extremely successful cutover there was a little bit of accounts payable disruption sequentially between a few of the quarters.
Such that there was some catch up in Q4 on accounts payable.
And then for the year accounts receivable you saw a bit of a build in Q2 and Q3 and AAR.
<unk> was flat from Q3 to Q4 as revenue grew so dsos are implicitly came down a bit in Q4, which is great suggesting those are stabilizing.
But for the year, probably <unk> one.
Minor headwind that we had from a working capital standpoint related to the SAP movement and I don't I don't expect that to continue in 2022.
Yeah.
Okay, great. Thank you.
Your next question is from the line of Steven Ramsey from Samsung Research Group. Your line is now open.
Hey, good morning, I wanted to think a little longer term on the long term revenue CAGR outlook of 5% to 10% ended FY 'twenty, one at 6% and the high side.
FY 'twenty two at seven ish percent I guess, what is your confidence at this juncture you moved to the high end of that long term guidance growth range is primarily driven by M&A.
Or the <unk> factors, working, especially well or the internal drivers on slide 13 that really need to come through strongly to move that growth rate up.
Yes, David it's Tim.
I'll say right now is that we're tracking towards the higher end of what we expected originally for 2022.
And that is based on everything that you just mentioned the leasing fundamentals the rollout of value added what really the expansion of value added products and modular.
The initial rollout of value added products and storage, that's all consistent with our expectations that we talked about back in November .
The M&A pipeline has been active obviously in 2021 and I am pretty encouraged by what I see in the first half of 2022.
And all of those things together are taken us to the higher end of the original revenue guidance range.
And if you start at the higher end of that range. This business is a compounded rate. So the run rate that you exit 'twenty two with.
It means that you are on stronger footing heading into 2023.
So I do think theres, an opportunity to move to that higher end of the range, but it's only been three months since we gave you the range.
We're we're still within the original revenue guidance range at this point.
Sure right. Okay, and then what did you just confirm some of the cash flow dynamics operating cash flow conversion of EBITDA much higher in 'twenty, one than 'twenty can you share a little bit more how this looks in 'twenty two what are the key building blocks.
That conversion moving up from the low 70% range to an even higher range this year or next year.
Yes, I mean, I think the building blocks are basically EBITDA growing a lot faster than capex and interest costs.
Flat to down is there going to be the three biggest.
Drivers of.
Kind of operating leverage and our free cash flow. If you will as you look into 2022 and frankly every period beyond that I think we will have probably a similar dynamic and we tried to show how capital accumulates in free cash flow builds in.
And that dynamic over a multiyear period when we were together in November So I think it's really just.
Those three building blocks, we've given you the EBITDA range.
We've given you the Capex range, which obviously is not growing at the same pace.
As as EBITDA.
And interest cost should be slightly down I think we had cash interest of.
Kind of a 102 to 103 and our expectation for this year and also the integration headwinds from the second half of 2020 and really throughout the course of 2021, the integration and restructuring.
Cost, which we include outside of adjusted EBITDA, We will start to taper off significantly through the course of 2022, So thats a fourth lever I think between those four items.
Youll see some leverage out of free cash flow.
Yeah.
Excellent. Thank you.
Your last question is from the line of seal in from Jefferies. Your line is now open.
Hey, guys. Thanks for squeezing me in a clarification question for you Tim.
Great you are on track to hit your 500 million in free cash flow target by back half of this year, but looking at slide 11, if I take the numbers you have there it looks like you're implying.
Around 1 million free cash flow number for 2022, but you also mentioned a 20% free cash flow margin target. This year, which is close to a 401 million number can you kind of flushed out I just want to make sure we're thinking about free cash flow this year.
Yes, I think we're looking at.
Yes.
Two slightly different definitions here so the definition of operating free cash flow on that page.
Is simply EBITDA less net capex. So this is going to be a bit a bit confusing right. So that is not cash flow from operations right. So.
Apologies for that that confusion, but.
Because we couldnt have we didn't have clean true free cash flow numbers historically for mobile mini over this 13 year period, we just use the simplistic EBITDA less net capex definition, there and then we're showing that Capex again, which is repetitive.
My comments around $500 million of run rate free cash flow in the second half of the year is true cash flow from operations, you saw that up 14% year over year in Q4, so thats trending.
In a very encouraging direction.
Cash flow from investing excluding acquisition. So I appreciate that definition on that page is a little bit different.
No no change to our second half expectations in terms of the targets we put out there.
Got it so the 20% free cash flow margin number that you called out earlier in the Q&A is probably a better way to think about it is that right. Tim correct correct. Okay, Great and then organic units on rent were quite strong in North American storage I think it was up about 10%.
Driving that strength and appreciating it's a seasonally busy quarter.
In the fourth quarter for North American storage utilization rates were actually quite high. So I just wanted to get some color on how much bandwidth do you still have to grow this year and what's a good way to think about units on rent.
Yes.
As we mentioned part of that.
Growth was the return as our store Remodels.
We talked about on the second and third quarter call.
And then as we.
Let's put it this way I don't see constraints with respect to the storage fleet.
The growth opportunities and as we noted before of the seven acquisitions that we've made we added about 16000 containers to the mobile made platform. That's on top of the Wil Scott legacy units that we rolled over in and as we've characterized the pipeline remains robust.
We'd expect to see similar mix. So we think of these acquisitions is accretive and kind of all dimensions.
Not to mention the fact, they're a great source of fleet to fund the continued growth.
And sorry, one last one for you Brad.
Now that you have your ERP implementation behind you any update on how to think about synergies as it relates to many whether it's on the cost side or any commercial initiatives.
Yes.
It was absolute enabler, we are already harvesting the $50 million of cost synergies that we had identified.
Back when we announced the merger great.
And that was.
Almost two years ago, we announced the merger that's when we also identified the 500 million free cash flow target.
And I sit here today with a high degree of confidence of achieving both of those despite the pandemic in the middle of that process. So.
Well on track to 50, I mean, the more exciting part or all of the operating commercial synergies.
Beyond the 50, if you will and Thats everything from logistics efficiency.
Capital efficiency inventory optimization.
And as we're focused right now we're converging the CRM platform. So you'll recall, many and we will Scott both had <unk>.
Very mature salesforce dot com CRM platforms.
Well Scott platform had the pricing technology connected to it so our it resources. If you will are laser focused now on <unk>.
Converging those to CRM and all the ancillary capabilities. So what we're seeing now is pretty interesting market convergence just happening we've characterizes phone a friend in the field when we get the CRM converged that combined with the analytics that we're already deploying <unk>.
The historical transaction data, you'll just see that further accelerate.
I think it's important for everyone to note that these investments and incremental capital human capital here.
<unk> been.
In flight if you will throughout the course of the year, we've talked about adding ESG and we've talked about adding data analytics capability.
They are fully contemplated in our forward guidance and absolutely accelerants towards the new 1 billion milestone of EBITDA that we put forth and sustained 20% to 30% free cash flow target. So.
Couldnt be happier with where we are and where we're headed.
Alright, Thanks, a lot guys I appreciate it.
We have now reached the end of today's call I will now turn the call back over to Nick.
Thank you Rob thank.
Thank you all for your interest in Wolfcamp mobile many if you have additional questions. After today's call. Please contact me. Thank you.
Thank you ladies and gentlemen. This concludes today's conference you may now disconnect.
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