Q1 2022 Willscot Mobile Mini Holdings Corp Earnings Call
Yeah.
Welcome to the first quarter 2022, well Scott Mobile Mini earnings Conference call. My name is Vanessa and I will be your operator for today 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 I will now turn the call over to.
Nick Gerardi senior director of Treasury, and Investor Relations, Nick you may begin.
Good morning, and welcome to the World Scott Mall in any first quarter 2022 earnings call participants on today's call include Brad Salt, Chief Executive Officer, and Tim Boswell, President and Chief Financial Officer. Today's presentation materials 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 with that I'll turn the call over to Brad sills. Thanks, Nick Good morning, everyone. Thank you for joining us today on bread salts CFO CEO of will Scott mobile money. This quarter is an excellent example of how growth compound.
Across our platform.
Recently laid out a portfolio of largely idiosyncratic growth levers, which collectively represent about $1 billion of topline growth.
And on page 13, I'll talk.
Through how each of these growth levers contributed to our strong performance in Q1 in which we delivered $509 million of revenue and $192 million of adjusted EBITDA, both up 20% and 17% respectively year over year.
Starting with the largest growth lever at the top value added products and services or <unk> represents approximately a half a billion dollars of the 1 billion topline growth potential.
We continue to deliver ever more value to our customers with our differentiated and compelling offering as we take care of the supply chain.
It's an inconvenience for our customers.
In North America modular, we achieved average <unk> rate per month or $407 up 21% year over year on all units delivered over the last 12 months. When we went public in late 2017, we set an ambitious target.
A 400 million <unk> per unit per month, we eclipsed that milestone this quarter. If we simply hold these already achieved penetration levels for three years, while the owner at fleet Rolls from its average through your lease durations realized $160 million of annual top line growth or approximately one third of the half a billion related to potential.
We are incrementally introducing new offerings that will help even more of our customers be ready to work day, one we're leveraging our proven processes and tools to optimize rates, we're continuously enhancing our training and market collateral to improve the performance of the lower quartile of our sales reps and to accelerate the onboarding of new reps and customer.
Like all of which makes us confident that we'll achieve our next two milestone of $600 of apps per unit per month, which would yield approximately another $200 million of additional annualized growth.
In North America storage now, 80% of our ground level office fleet can be delivered with our vas offering and penetrating our mobile mini ground level office fleet at the same levels already achieve on Lifesize units in the modular segment would yield another $50 million of incremental that's related to topline growth. In addition, we are piloting our new store.
<unk> program to select branches, starting in May with a full assortment of lock sliding and basic shelving, we expect our premium offering to follow in early 2000 early.
Early 2023. This is a differentiator relative to peers and is based on an established playbook that we developed and have been executing for years and modular while we don't expect a significant financial contribution until 2023. We're excited by initial discussions with customers and confident that this initiative will be very well.
We received.
We have identified up to $200 million of topline growth potential associated with further lease rate optimization Q1 lease rates accelerated across all segments driven by our processes team and technology further underpinned by the current inflationary backdrop I was particularly pleased with our continued progress in North America storage.
Our rates on portable storage units were up 12% year over year, marking our first quarter with a double digit rate increase.
North American modular who has now sustained double digit.
Modular rate growth inclusive of apps for over four years now such that rates on new modular deliveries are greater than 30% above the average of all units currently on rent.
As Ive emphasized previously we are a net inflation winter and this quarter was no exception.
Our cross functional quarterly reviews help us stay disciplined and focused on further rate optimization, given four years of history in North America, modular where and Thats penetration has delivered just over half of the sustained double digit rate growth and lease rate optimization has driven the balance there is certainly further potential upside in this powerful <unk>.
Moving lever.
One last note on rates. Please recall that our solutions provide a relatively high value low cost first on last off critical service for our customers representing only about 50 basis points as our average total project costs as additional context, our average modular rental rate is equivalent to 1% to $2 per square.
Our foot, which per month, which compares quite favorably to the national average of about three to $5 per square foot per month for lease commercial office space to the extent, it's even available directly adjacent to project. These are comparative and furnished rates are fully furnished ready to work solutions <unk>.
<unk> installed directly on the customer site, and then taken away and redeploy into another customer whenever their project in further widens the relative value spread.
Market penetration initiatives are also progressing well as units on rent in Q1 were up sequentially across all segments looking across both North America storage and modular segment's average portable storage units on rent increased by about 32000 units driven equally by organic growth and acquisitions.
As expected our North American modular segment average units on rent inflected positive as the end of the quarter unit on rent increase increased sequentially from December 31, 2021 by approximately 800 units or 2% again, driven by organic volume increases and acquisitions in North America.
Storage, our strong volume growth of about 47000 units per year.
47000 units year over year was supported by organic growth acquisitions, and the transfer of the legacy well Scott containers from North American modular while I'll expand further on the robust end market demand that we're experiencing in a moment suffice it to say, we expect further sequential improvement through at least Q.
Three.
Our efforts in logistics are another example of how we are a net inflation where winter logistics services are where we are most immediately exposed with respect to inflation.
Our delivery and installation margins actually expanded by about 300 bps year over year, which is indicative of our ability to manage through inflationary pressures. Our team vigilantly focuses on rates fuel surcharges, where appropriate as well as operating efficiencies both north American modular in North America storage realized.
<unk> margin expansion in the quarter.
And we've now closed three more M&A transactions in 2022 for a total of 10 tuck in acquisitions over the last eight months. All of these are fully integrated onto our operating platform, but for the one we announced this week, which is in process and expected to be fully integrated by the end of the day.
The M&A pipeline is robust you should expect us to continue our momentum with smart disciplined acquisitions, followed by seamless integrations we.
We deliver more value more efficiently than anyone else in our space and we're thrilled to have the opportunity to provide that value proposition to our new and existing customers.
While we do not expect meaningful additional cost synergies with respect to these tuck in acquisitions, they certainly compound through our <unk> lease rate and market penetration growth levers.
This portfolio of idiosyncratic growth levers underpinned by ambitious, but achievable milestones laid out at our Investor day in November , notably achieving $1 billion of EBITDA milestone within three years and along the way achieving $500 million of free cash flow annualized run rate as we exit 2022.
Given our significant progress in Q1, we're raising our guidance by $50 million to $860 million to $900 million of adjusted EBITDA for 2020 to the.
The predictable and recurring nature of the portfolio supported by our long duration leases in our current commercial momentum will translate into growth for years to come.
Circling back to our end market outlook on page nine.
While the macroeconomic uncertainties exist, we are experienced extremely robust and broad based end market demand and we are investing accordingly.
Current order book is the largest we've ever experience the relative strength of the order book affords us great visibility into the demand for new units over the next 90 days non.
Nonresidential construction, leading indicators remain bullish in the near and medium term as indicated by the 14th consecutive month of Abi holding above 50.
As an objectively strong leading indicator for core markets heading into 2023.
Your customer and field leadership feedback has been supportive with some of our largest general contractors already booked out through the end of the year.
And the strength largely extends across all end markets and geographies just a few examples in Texas, we have a customer thats building a $17 billion semi conductor facility that were supporting by providing 225 floors totaling over 100000 square foot of ready to work modular storage solutions on their prop.
<unk> side. This is a long duration lease with additional opportunities to supply subcontractors over the course of the project all enabled by the heavy involvement of our construction services team. We are unique in our capability of delivering such a large complex solution set to customers with such high standards.
Data centers continue to be a source of ongoing strength typically requiring 20000 square foot or more modular storage place for solution set and we see that across the Midwest.
Regions of the U S and many cities such as des Moines, and Fargo's. Examples are benefiting from population shifts away from larger metropolitan centers, creating demand from customers in construction schools retail warehouses, frankly across all of our end markets.
And across most geographies infrastructure spending on roads and bridges continues to remain robust keep in mind. All of this is before any tangible benefit associated with the potential multi trillion dollar infrastructure Bill currently under consideration while end market demand is the one element of the gross recipe, we do not control the current demand.
<unk> is as robust as I've ever experience certainly over the last 10 years with all leading indicators sporting towards sustained strength into 2023, and the potential of significant incremental infrastructure spending to further extend that robust demand well beyond that with that I will turn the call over to Tim.
Thank you Brad and to everyone on the call. Good morning, good afternoon.
Page 20 reflects a high level summary of the quarter. We're very excited about the outstanding commercial performance in all of our businesses and the implications for our guidance.
Our team is exceeding our own high expectations, we're investing accordingly to support demand across all product lines and markets and geographies as Brad mentioned and I think the implications for our trajectory into 2023, and 2024 are quite compelling irrespective of recession concerns of which we're perfectly cognizant and to which we can easily adjust.
But we simply don't see any areas of concern in our leading indicators.
On the contrary, we operate a highly predictable and slow churning portfolio with powerful idiosyncratic growth drivers in both the lagging results on this page and the leading indicators in Q1.
Tell us that we need to prepare to scale up and scale up meaningfully.
Page 21 breaks out revenue and EBITDA performance by segment for the quarter.
Our commercial Kpis performance drove a 20% increase year over year, and total revenues to $509 million and.
And a 17% increase year over year, and adjusted EBITDA to $192 million.
Through our normal quarterly re forecasting process, we're getting a very good feel for how inflationary impacts in both our revenue streams and cost structure are rolling through the portfolio and this is one of the key factors, causing us to increase our guidance meaningfully which I'll come back to.
Overall gross profit margin expanded year over year by 227 basis points, which is the first indicator that our pricing is already outpacing cost pressures.
Delivery and installation margins in particular expanded 270 basis points across our portfolio.
These margins are interesting because transportation as the portion of our business, where both our spot price increases and our cost increases impact the P&L immediately.
And the net result of these increases is 270 basis points of margin expansion.
Rental rate increases on the other hand build gradually in our P&L as the portfolio churns average rental rates in North America modular have already increased significantly and we continue to see powerful spot rate increases for unit rental rates exclusive of value added products up 20% to 30% year over year in both North America modular and north.
<unk> storage.
As these are sustained those increases will roll through the lease portfolio in future periods very predictably.
So expansion of our leasing margin will lag due to the duration of our leases and yet overall gross profit margin still expanded by 227 basis points, despite increased maintenance and labor costs as well as elevated activity levels, especially in our modular segment, where work order completions were up 11% year over year in Q1 to support.
Our growing order backlog in Q2.
So in our guidance, we are quite confident in continued year over year gross margin expansion given the continued acceleration of rental spot rates and the predictable lag with which they roll through the portfolio combined with unit on rent volume is tracking ahead or in line with our expectations in all segments.
Below gross profit selling general and administrative expenses were up both sequentially and year over year.
Similar to what we discussed in Q4. This is partly due to the inflationary environment and partly due to conscious resource additions to support growth that is ahead of our expectations.
On the inflationary side of the Ledger, we pulled forward our annual merit increases from Q2 into Q1, along with other benefits to support our employees. This is the right thing to do and for obvious reasons.
And we're seeing inflation in other areas like travel and real estate.
More impactful on the growth side of the Ledger, we've increased sales head count by 14% year over year, we've executed and integrated 10 acquisitions in September that are not yet fully optimized.
And we have resource numerous functional initiatives across the company and the areas of inventory management product management branch network optimization national accounts, and marketing and information technology.
All of which will allow us to scale efficiently in 2023, and 2024 based on the obvious growth that we need to support in those years.
I recognize that's more detail on cost than I would normally share, but I think it is appropriate given the macroeconomic backdrop and I would stress two points.
First the growth related additions I've referenced for the past two quarters can be removed to just as easily as they were added if we don't see the growth and don't see the results that we expect so I see no particular risk with those although we are building ahead.
Second we're not forecasting significant SG&A additions after Q1, and our SG&A forecast is pretty much flat sequentially for the remainder of the year.
This means that we are quite confident expecting significant leverage of our SG&A as revenue builds predictably through the course of the year.
Together with the gross margin trends I discussed, we expect adjusted EBITDA margins could expand 500 to 600 basis points linearly from Q1 to Q4 this year.
And our guidance Reconfirms, our expectation for approximately 200 basis points of adjusted EBITDA margin expansion in 2022 for the year relative to 2021.
So while the macroeconomic backdrop evolves rapidly we've taken a hard look at our revenue and our cost drivers as we always do in our forecast process, we're calling up our top line revenue and EBITDA significantly we're reconfirming our margin expansion expectations. Our run rate heading into 2023 is likely to continue increasing as long as this inflow.
<unk> environment persists, and we expect that the spot pricing environment that we're in today will materialize predictably in our reported average rental rate in future periods as it always has.
These are clearly unfortunate times geopolitically interesting times from a macroeconomic standpoint, and exciting times, if you own a piece of well Scott mobile Mini's earnings run rate.
Turning to page 22.
Cash from operations increased 20% year over year to $146 million in line with our revenue growth rate.
Given the order backlog, we invested to meet expected demand in the coming months with $91 million of net capital expenditures focused on modular refurbishments organic container purchases and value added products.
Those discretionary investments left $55 million of free cash flow during the quarter as we discussed in prior calls we expect free cash flow generation to be back half loaded such that we achieve our $500 million run rate free cash flow milestone in the second half of this year.
We shared that expectation with you over two years ago before we all contemplated a global pandemic or the Russian attack on Ukraine, where an upward interest rate cycle.
How recessions work both in the economy and in our business our guidance is up and our longer term milestones are unchanged.
Turning to page 23, we used our free cash flow to close three transactions year to date as Brad mentioned and I expect a consistent cadence of acquisitions through the remainder of 2022.
And we repurchased $2 1 million shares of our common stock at highly attractive valuations relative to our prospective earnings growth irrespective of near term macroeconomic conditions.
We have ample liquidity to execute on our strategic initiatives, we're effectively at the top end of our three to three five times leverage range and growing EBITDA rapidly and we have compelling investment opportunities both in M&A and in our own stock and we're investing with confidence in our outlook.
Turning to page 24, perhaps my favorite page in the deck.
Our capital allocation framework is clear and unchanged our investment behavior over the last 12 months is consistent with this framework.
Our outlook implies that our capacity for capital deployment will increase significantly having deployed nearly $1 billion of capital in the last 12 months.
And we see highly attractive opportunities to continue reinvesting organically in acquisitions and in our common stock.
Our updated outlook is on page 26.
I already talked about most of the underlying mechanics here, but these are important.
Our revenue run rate is well ahead of our expectations from just five months ago. This was driven by increases to price volume and delivery and installation revenues in all segments.
Value added products and modular continues to perform outstanding.
And while we've kicked off various value added initiatives in storage, they're incredibly exciting that's not really a contributor yet to the guidance raise and is a tailwind more for 2023 and beyond.
And on pricing, it's important to understand that the current rental spot rate increases that we're realizing today will flow through the P&L well into 2023 and 2024.
So the pricing tailwind that we discussed back in November are larger today.
We expect that adjusted EBITDA will grow between 16 and 22% this year with margins expanding by approximately 200 basis points.
Remember those margins are lagging both due to the timing of inflation impacts in our P&L as well as discrete SG&A investments that we've made and we've made those investments because we have a higher confidence in our growth outlook.
Our capex guidance is up for all the same reasons and approximately 10% of the increase is based purely on material and labor inflation.
Okay. These investments are demand driven we have internal initiatives underway to improve capex efficiency and we have an extraordinary capital advantage in our markets relative to any competitor. This is an area where scale matters tremendously.
Lastly included in this guidance is about $25 million of EBITDA from acquisitions that closed in the second half of 2021 and the first four months of 2022.
About $17 million of that contribution was included in the prior outlook and approximately $8 million of contribution is incremental based on acquisitions that have recently closed.
All of this is consistent with a $500 million free cash flow run rate in the second half of this year and exciting run rate headed into 2023 and the realization of the longer term milestones that we shared in November .
I think all of the commitments on page 26, we have discussed before and are unchanged, so with that Brad I'll hand, it back to you. Thanks.
Thanks, Tim I would like to express appreciation to both our team for their contributions and our customers for their trust as we continue generating undeniable and accelerating commercial.
Commercial momentum and financial returns 2022 is off to a great start and I speak for the entire team when I say, we're excited to continue to deliver on our commitments to all stakeholders 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.
We will now begin our question and answer session. If you have a question. Please press zero then one on your Touchtone phone.
I wish to be removed from the queue plus you can press zero, then too if youre using a speakerphone you may need to pick up the handset first before pressing the numbers once again with your question you can enter the queue by pressing zero than one.
And we have our first question from Manav Patnaik with Barclays.
Thank you good morning.
Just wanted to do.
Hopefully have you elaborate on that.
In the press release, you talked about the order backlog and I just wanted to.
I understand.
Hi.
Sticky that or the backlog is andy than.
<unk> guidance I'm just trying to appreciate.
The resiliency in that comment and also I think you mentioned in the National account conversations.
Splits youre hearing day.
Yes, Manav this is Brad it's quite sticky.
Our firm orders allow.
Lined with projects that.
Our well into the initiation stages, so no risk, we're not seeing any deviation.
And the behavior of the orders once they are booked and as I mentioned, it's the strongest we've seen certainly looking back 10 years, even though.
Attempted pro forma basis.
And the way Manav. This is Tim it's a run rate business right. So what we're seeing today is if you just take North America modular for example, continual continued sequential unit on rent gains into April .
A very significant order backlog and as Brad said in his comments that gives us very high degree of confidence that volume continues to build sequentially into Q3, which means along with the pricing trends and value added product trends that leasing run rate is going to continue to compound and meaningfully over those periods and that order backlog you can think of it as looking about one.
One quarter ahead in terms of the hard orders that are that are in the pipeline and it tends to replenish through the course of the subsea subsequent quarter. So it doesn't go out 12 months necessarily for the most part, but it's highly reliable for the upcoming 90 days and Thats why we have the zero based 90 day capital.
Planning cycle.
That we that we redo every every forecast period.
Okay got it that's helpful and Tim maybe just on the M&A front I mean these.
Have you been doing I mean, the pieces quite impressive.
And you said it should continue so just wondering.
Is it the new kind of insights you mean technology systems.
This pace really continue for multi years.
I believe it can right I think we'll continue this cadence.
Through the remainder of the year is my my expectation, we're tracking a universe of potential targets that would support a multi year consolidation strategy of this nature.
The nature of M&A is it is difficult to predict the timing and the probability of certain transactions, but the volume that we're tracking today certainly supports this cadence through the end of 2022.
Alright, Thank you guys.
We have our next question from Scott Schneeberger with Oppenheimer.
Thanks, very much good morning.
I wanted to think about North American portable storage containers segment, and just the strong acceleration in pricing.
Could you speak to the kind of the components of that.
A lot of the inflationary Brent based pricing improvement or is it just a little bit of <unk> penetration rate.
Rate increase and kind of.
What I'm looking for is where is that going to go to are we going to continue to see this accelerate or are you kind of pushing the limits here. Thanks.
There is no <unk> penetration effectively in that.
And you've seen that build Scott well ahead over the last several quarters before we've really experienced this current inflationary environment I.
I would think of that more as sustaining that position on a go forward basis and as we mentioned over the course of 2023, we should start to see some benefits from <unk>.
We will continue to deploy the processes and eventually some of the tools. We have on the modular side to continue to optimize low lease rates as well. So no. It's been building well ahead of the inflationary environment.
Backstops, if you will the progress and gives us potential further upside.
Scott It is Tim I'd, just add there are numerous reasons to be I think enthusiastic here of apps is an obvious one we talked a little bit last quarter about product positioning within the storage portfolio.
As you know under our mobile mini brand, we've got a truly differentiated try cam product specialty product that doesn't exist anywhere else in the north American market through.
<unk> and some of our organic purchases, we are building out a larger kind of standard container fleet with which we can compete very effectively given our customer service and logistics capabilities, but we also have a significant opportunity to realize a premium then in the segment of the market that truly values all the other highly differentiated mobile mini capabilities.
And that is a new thought process for the business here and it's working extremely well.
And then as you look into 2023 once we consolidate our CRM systems, we've talked about the application of pricing technology, and further customer segmentation and storage, that's not happening yet and underlying all of that you do have the underlying inflation of container assets themselves and the cost basis by which new supply is going to come into the <unk>.
<unk> is going to further support.
Pricing increases over the medium and frankly, the long term.
Excellent. Thanks I appreciate the color from both Tim My follow up it's kind of a two parter on the <unk>.
Spence side.
You did a nice job in prepared remarks discussing kind of logistics, how youre covering inflationary pressures and.
You all have alluded to.
A lot of optimization internal optimization and logistics could you give us a progress report on on how that's going and then the second part of this is just an update on mobile maybe synergies.
Talk about that much anymore, but I know that is a powerful driver of margin. This year. So if you could just talk about how thats progressing thank you.
And logistics side, I'd say the area, where we're seeing the most.
Most immediate traction right now is on the revenue side of that equation actually.
On the modular side of our business, we have gone through a pretty thoughtful exercise over the last six months or so to standardize.
A lot of our delivery and setup activities across the network. So that we can more consistently predict the margin that's going to come out of those.
Our services as well as the pricing that we're charging we've implemented fuel surcharges across really all of our divisions and thats contributing to the margin expansion that we're seeing in that area and yes. We do also have more operationally.
Oriented initiatives underway.
Some technology based route optimization and things of that nature that I think will be supportive in future periods, but not not a cause of the underlying strength that youre seeing in the margin right now thats more revenue.
And.
Pricing process, driven I would say.
In terms of mobile mini synergies. This is an interesting one because.
Adding SG&A at the moment and we've just added SG&A in Q4, and Q1 and I think about this as a.
Redeployment of some of the duplicative redundancies that were obvious win well Scott.
Mobile mini came together.
We're redeploying those resources into places like sales and then it's a new functional capabilities that frankly, neither company had before I do think there is a significant opportunity in insulation. If this business were to go into.
More contractionary GDP environment to realize substantial efficiencies based on the platform that we have today.
But.
This is really more about positioning the portfolio for growth to support our topline expectation thats well in excess of.
What we would have contemplated.
Two years ago.
<unk>.
Okay. Thanks, Tim just to clarify that.
We're not really going to speak in terms of many cost synergies anymore, because a lot of the benefit is being redeployed into into topline initiatives and the strong demand environment.
And most importantly underlying you've talked about this potential over 200 basis points of margin expansion. So just curious how we're thinking about that going forward and how we should approach Scott it's going to it's going to be difficult to dissect prospectively, what I can say with confidence is SG&A is not going to grow sequentially from where it is today and that mean.
Is that the base that we have in place at the moment is highly scalable going into the remainder of the year and into 2023, there is absolutely an opportunity to continue.
Realizing efficiencies from our back office functions in particular, as we get onto a single CRM, but it is going to be difficult to dissect. Okay. This cost reduction is related to the mobile mini merger per se.
We're over two years out from from Windows, where all formulated.
Given the pace of tuck ins, it's almost not subsequently alright.
Okay.
Got it great. Thanks, that's helpful guys makes sense I appreciate I'll turn it over.
Thank you we have our next question from Kevin Mcveigh with credit Suisse.
Great. Thanks, so much and congrats.
You folks are.
Not seeing any slowdown we keep getting the question if things slow.
Tim or Brad it might be helpful. Just.
Brought so much more flexibility of the cost structure of the capital structure of the business.
We talk about it relative to kind of the taper tantrum, and then COVID-19 a little bit because to fundamentally different company. So maybe just higher level some of the puts and takes whether its capital structure just.
There's clearly a much better position to the extent there is any.
Macro air pockets, if you would maybe just talk to that for a minute if you would.
Hey, Kevin This is Tim I'll start and I'm sure.
Brad Brad can talk at length on this on this topic most important thing to say initially as we don't see any concerns in the leading indicators. We do watch all the same headlines everybody else does so we'll be prepared if and when there is an air pocket as you suggest the number one thing we can do in this business to prepare for.
And economic contraction is to continue to drive our leasing revenue run rate and it is going to compound.
<unk> through the remainder of this year such that the run rate we carry into any contraction is going to be substantially higher than it was two three years ago.
And that means that the cash generation in the business going into a period where to your point, we can take costs both out of.
The variable cost structure.
Some of the SG&A that I was just referencing can easily be.
Pared back where necessary and then also the capital spending in the business is highly discretionary.
Such that if and when we see a period like that the countercyclical free cash generation in this business will be profound and give us an awful lot of capital allocation.
Flexibility and just to help kind of give you order of magnitude an idea of how to understand the acceleration of the lease revenue run rate. If we look at contracts and modular delivered in the last 12 months inclusive of pricing in <unk>.
We're tracking over 30% above the average rental rate in the portfolio right. So all we have to do is hold that level of performance that we've achieved in the last 12 months and mind you spot rates continue to continue to accelerate.
And you have got 10% plus pricing and value added products installation in the portfolio already today that you would carry into any macroeconomic contraction. So just like you saw in Covid, that's exactly the dynamic that allowed us to grow lease revenue year over year every quarter through 2020.
Despite a 20% contraction in our delivery volumes in Q2 and Q3. These are very powerful topline tailwind and that's the best thing we can do to position this business for a contraction.
That's super Super helpful and then it sounds like.
Good progress on.
Transportation margins 300 basis points is there any way to frame what the headwind was was it if not for fuel and kind of.
Labor.
Was that 200 basis points, maybe clearly power through it but any sense as to kind of frame what labor and fuel was I guess across the organization in the quarter from a headwind perspective.
Yes, I can give you that in all I'll tell you what our cost per move was and it was up about 14% year over year in Q1, and thats across the entire business.
It's going to be a blend of our fuel costs.
As well as drivers and trucks and third party trucking that we use but on a blended basis. If you take all those costs divided by the number of movements that we're making trucks.
Trucking was up about 14% year over year, and obviously, our pricing was up over over 20% to more than compensate for that.
Thanks, so much.
Our next question is from Stanley Elliott with Stifel.
Hey, good morning, everyone. Thank you all for taking the question pardon me.
With the demand backdrop that you are seeing in the inflationary environment for new units do you think we could get into a situation where utilization rates are running higher than they would normally run historically, so maybe low seventy's on the modular may be mid seventy's on storage.
This is Brian .
Hi, <unk> now in modular we know we can run this fleet as tight as 82%. So no concerns with respect to utilization being a constraint.
On the modular side and as you mentioned, it's all all net net quite supportive of continued rate progress.
The storage fleet, obviously runs about.
10% tighter than that.
We are still lending containers.
8000 containers were dropping into the fleet in addition to all the.
A very attractive M&A.
Purchases if you will.
Jamie This is Tim this is a critical critical point, because our utilization level in modular is actually a huge advantage now heading into the next several periods because we have all of the idle capacity that we need in order to grow that grow that business organically and we control the supply chain around.
Direct labor and materials, if youre trying to source a modular unit new today into our market youre going to be paying 40% more than you would have paid just two years ago.
Container prices, if you're sourcing them today have.
We have roughly doubled versus where we were in 2017 and 2018 for example, so any new supply coming into this market is going to be at a much higher basis.
And going to require higher pricing and frankly, we probably see.
Today, So I think this business and this portfolio is extremely well positioned both to grow volumes more competitively than anybody else in the market and also to drive incrementally higher ROIC.
As the pricing that we're seeing today flows through the portfolio.
Yes, it certainly sets up well from all of those standpoints.
Kind of.
Piggybacking off of that.
All.
Kind of retrofit or refurbished unit.
Have you thought anymore about pushing up into some of the higher price or like a level versus b versus C.
In an attempt to capture even more rate than what you would historically just because the units available for rent or fairly tight amongst your peers.
Yes, I would note on the modular side.
The new fleet, we are acquiring is almost exclusively this premium.
Products like you'd see on the cover of our Investor deck, we refer to as our flex product.
Very.
Suitable particularly in dense environments, you can stack it up to three Storeys high network come together and create tens of thousands of square foot sort of ready to work solutions for our customers. Those are at a pretty significant premium even to the rates I quoted on a per dollar per square foot basis.
But we are still very attractive and compelling versus commercial real estate alternatives.
Perfect guys. Thanks, so much congratulations and best of luck.
Thanks.
We have our next question from Steven Ramsey with Thompson Research group.
Good morning, I wanted to start with the run rate free cash flow hitting $500 million in the next few months, even with the higher capex levels.
An incremental $150 million to reach the three to five year target. This now seems just more and more conservative with such robust demand and it infrastructure bill laid on top of that and then the acquisition. So I guess.
Do you do you view this as fairly conservative at this point or if not why.
Stephen This is Sam.
<unk>.
The way we operate as we put together plans that we believe we can execute we quantify those plans and we give you the best sense of the targets that we think we're going to hit I think the only question here is timing rather than whether or not the ranges that we've put out there are achievable. So that's probably the.
The bigger variable here to consider.
Okay helpful. And then thinking about kind of the change in guidance just a couple of months away were a quarter ago, you were saying the high end of revenue and the midpoint of the EBITDA range.
It appears this dynamic is now not in play yet the midpoint of the new guidance implies margin that are about 100 bps below.
Maybe the old guidance.
How much of that is SG&A, how much of that is.
New acquisitions.
Adding lower margins or any other inputs to consider there.
Well the change in the guidance from late February I guess, when we last spoke was a combination of us knowing at the time that the leading indicators for demand were very strong.
In our normal seasonal patterns Q2 delivery period is really the critical seasonal build in our modular business. So that's why we typically wait till this point in the year or two.
Really formulate our our views for the remainder of the year and Thats, we had a sense for it back in February we've got a very very clear sense for that sitting here today, hence the increase in the revenue range.
I think back to our discussion in November .
My my thought at the time was maybe 300 basis points of margin expansion at the midpoint of our guidance.
We think thats more like 200 basis points today, I'd say, that's almost entirely SG&A driven based on some of the build as we went into Q1 and certainly the acquisition component will normalize over the course of this year and get back.
Two kind of profitability levels that are.
Consistent with the rest of our portfolio.
But I think that's really the bigger change relative to where we were in November .
Okay helpful. Thank you.
We have our next question from Brian <unk> Ali.
Yes, hi, good morning.
I, just I wanted to zoom out a little bit and just.
Follow up on the $1 billion of adjusted EBITDA that you've talked about in three to five years.
And it looks like Youre going to get at least close to the 900 million this year.
And I guess.
Curious like how do you think about the business as you reach that $1 billion of EBITDA, because it sounds like youre going to get there a lot earlier than three to five years.
Yes, we do.
I'd characterize the $1 billion even back in November is a it's not an if it's when.
It's a.
Milestone that we actually felt we could achieve within three years.
And then the framework of kind of the seven other longer term targets that we set out we continue to track well towards.
In fact, the implications of that are really in the areas of capital accumulation and deployment.
It was a key theme of our discussion back in November so to the extent we accelerate.
The growth of the business and achieve that cash generation target sooner.
The capital available for redeployment, then grows as well and the business just compounds faster in that scenario.
Youre looking at free cash flow per share whatever other earnings metric.
Deem appropriate so that's really the fundamental implication we've already deployed $1 billion when you consider a leverage neutral Felipe.
Philosophy and balance sheet in the last 12 months and those numbers will grow as the business grows.
Great. Thank you so much.
We have our next question from Phil <unk> with Jefferies.
Hey, guys. Congrats on a really strong quarter I guess for you for a question for you Tim you raised the topline guide and certainly makes sense just given the momentum youre seeing in EMR growth, but embedded in that what are you assuming.
And it's on rent shaking out for a modular and storage and just given the momentum youre seeing in this business heading into 2023 is there a good way to think about it more on a medium term basis, I've always kind of thought of it as a low single digit volume growth, but certainly the mentioned we're seeing a storage is quite impressive and you've seen that inflection in modular as well.
Yes, we've seen the inflection in modular I think that low single digit rate is still a good place to be just given the three year lease duration in the portfolio and we're very pleased to see.
The inflection in Q1, and the momentum going into Q2, so im still comfortable at that level as Brad mentioned.
We intend to add approximately 8000 units organically this year in the storage business. So you can do the percentage growth math, assuming all of that is deployed.
Average utilization levels and then.
Tuck in a cadence I think it will continue probably a bit more weighted towards the storage side of the business, although we see opportunities across all asset classes and.
If you consider our capex investment even at the midpoint of the ranges that we've given you it's still basically in line with rental fleet.
Depreciation and PP&E depreciation just as a proxy so we're not really expanding the fleet organically. So some of that inorganic tuck in activity is in lieu of.
Introducing fleet organically into our markets.
Okay. That's helpful and then.
Tim a question for you again on the free cash flow side.
Certainly some puts and takes <unk> looks good capex a little higher.
But how should we think about free cash flow. This year I think in the past you talked about a free cash flow margin, probably get to like $4 30, and free cash flow is that it was still a good way to think about it this year and can you remind us how much firepower you have this year for buybacks M&A certainly it.
It seems like you've got good runway on the M&A side.
Yes, it's a good question so I mean are.
View of run rate free cash flow in the second half of the year.
Hasnt really changed now if we execute the plan that we're talking about today, we'd enter 2023 with a much higher revenue run rate than we expected maybe six months ago.
That will have higher EBITDA generation this year higher capex generation this year, such that second half free cash flow.
It has not materially changed based on on this forecast so we're still.
And that would actually imply a lower free cash flow margin in the second half of the year, but it's a heavier growth scenario and that's kind of the beauty of how this business works you can hit targets like that both in growth cycles like we're in right now and frankly, we could blow that below that target away in a contractionary cycle, where youre pulling back on <unk>.
So thats easy to do we're not going to do that as long as we've got organic growth opportunities in the business.
And I would just direct you back to page 24 on the Investor deck. It shows you how we've allocated our capital over the course of the last year I will say given we're at the top end of our leverage target. There is no need to continue paying down our ABL at LIBOR, plus 225% or two 1%.
<unk> at the moment.
So.
That gives us frankly, a lot of flexibility.
For both M&A and repurchases.
Thanks, a lot I appreciate it.
Okay.
We have our next question from Andy Wittmann with Baird.
Okay, great. Thanks.
Essentially all of my questions have been asked and answered, but I thought Tim I would give you an opportunity to talk about interest expense in a rising rate environment.
What are you thinking for that line for guidance. This year just help us understand how you are.
<unk> is adjusting to this because it looks like.
Besides that everything else is sixth.
Yes, that's correct.
<unk> price currently at LIBOR plus two five.
We typically.
Manage around a one month LIBOR, which is north of 50 basis points now.
And likely to increase.
We do have a swap of about $400 million for a portion of the ABL balance.
Actually at 3% so that is going to unwind here in the next couple of months such that we're going to get an immediate interest savings on that portion of the ABL drawn balance however that doesn't mean that more of the ABL balance will be floating so that is something we're actively working on and thinking about.
The immediate implication is we're going to get a little bit of an interest.
Cash interest reduction how.
How we structure the ABL and the debt balance for a longer term rising rate environment is something else that we're that we're working on.
But in terms of.
Cash interest expectations at current leverage levels for the year I think we're around about $115 million.
Great. Thank.
Thank you.
Thank you we have our next question from Courtney <unk> with Morgan Stanley .
Hi, good morning, guys.
So I just wanted to go back again to the conversation about the Capex increase.
Obviously.
Great.
Sales and EBITDA guidance because of the stronger environment.
But it seems like the Capex increases it's pretty one for one for the increase in EBIT growth so should.
Should we be expecting if you do continue to.
Have a stronger environment and see additional.
Upside to EBITDA should we be expecting more of that to be flowing down into capex or was that just kind of a coincidence this quarter.
And then I also just wanted to fully understand Tim I think you mentioned earlier that the Capex is primarily replacement capex not growth capex, but it is going to be spent on that on that flex product.
Just trying to.
Understand.
How what the impact of that Capex increase can be on the fleet I think that flex products command a much higher.
Great and then.
C product.
It's a student observation coordinated because the capex that we're deploying today is more capital efficient than that which was deployed 510 years ago, which tends to drive the depreciation in the business. So when I draw a parallel.
Between the two I am saying that we are replacing our netbook value of effectively on an organic basis, those investments, whether it's flex or value added products.
Our targeted refurbishments across our network. They are very capital efficient investment. So a portion of that is going to drive growth and a portion of that is replacement I can't give you a precise.
Breakdown.
The other thing I would just remind you of in the Capex number itself.
There is an inflation component there if you think about traditional building materials and direct labor that are used in the refurbishment of modular asset I mentioned that container prices have roughly doubled since 2017 to 2018 periods. So there's an inflation component there that's above frankly that we would have talked about in November .
I think those are the types of inputs, however that can stabilize and in some cases come down with building materials. So I don't see that as necessarily a permanent change in the overall <unk>.
Capital requirements of the business.
Okay Gotcha.
And then Brad you alluded to the plans to pilot the stories Fabs in May.
Your customers. So I'm very excited about it from your initial discussions I think you guys rolled out the CLO product.
End of last year. So can you just help us any early reads just based on the rollout of that product for how quickly you would.
In fact, the uptake at the storage product.
Yes.
First of all back to the ground level office rollout so you're right.
Again rolling that out late last year.
<unk>.
Pilot branches, if you will as I mentioned in my prepared commentary, we now have about 80% of the ground level office volume capable of being supplied with the kind of ready to work furniture solution. We've got on the modular side.
The uptake there is tracking along with our expectations and frankly, it takes a bit faster than we saw in the same transition several years back on the on the modular side.
We're super excited as I mentioned with respect to the storage.
Container side of the <unk> opportunity.
We're not expecting much in terms of contribution this year, but think of kind of two phases in may we will rollout kind of abate.
Bundled offering if you will light basic shelving.
Ramps to get in et cetera locked locking systems and then we'll follow that.
With the kind of the premium proprietary racking system.
An offering that I mentioned actually in the prior call in 2023.
Okay. Thank you.
Thank you. Our next question is from Brent Thielman with D. A Davidson.
Okay. Thank you.
My question has been asked as well I guess, just a couple of one.
Your fleet sales, both new and used were down pretty considerably this quarter from last year and I recognize that the strategic focus but is there anything more to it I guess in this first quarter, whether its association certain markets or customers Youre deemphasizing anything like that.
No Brent sales by their nature can be a bit lumpy period to period to your point, it's not a core <unk>.
Focused commercially for us and given the utilization levels that we're running at in storage and in the U K, we've effectively said don't sell anything.
For example, just given how well that business is performing the same thing in tank and pump, we're running at 77% OSV utilization as of this morning, which is record levels business is performing great and on the modular side, where obviously heading into a period of unit on rent billed.
Where were much less likely to want to sell in Idaho, a viable modular building. So I would expect it to remain at fairly depressed levels for the foreseeable future.
Perfect. Thanks, Tim and then just a follow up in the U K.
Inside the different trends or kpis, you're seeing in modular.
Storage I guess, specifically units on rent.
Thing at all about the economy, just a nuance and specific to your business.
That's a good observation because theres been a unit on rent mix shift in favor of containers and a little bit of a runoff in the the ground level office modular fleet there there was.
Covid related demand on the modular side of the business.
That began tapering in Q4 of last year, we've actually seen that start to rebuild a bit here to start.
2022, albeit in other end markets that was really the only notable change in the UK business was a little bit of Covid related runoff in the modular unit on rent offset frankly more than offset by by core demand in the container side of the business and frankly, both asset assets are performing quite well.
As we enter 2022.
Okay, great. Thank you.
Thank you we have now reached the end of today's call I will now turn the call back over to Nick.
Thank you Vanessa Thank you all for your interest and well Scott 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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