Q2 2022 Willscot Mobile Mini Holdings Corp Earnings Call
Welcome to the second quarter 2022 we'll start mobile mini earnings conference call.
My name is Polly and I will be your operator for today's call.
At this time, all participants are in listen only mode.
Later, we will conduct a question and answer session.
Please note that this conference is being recorded.
I 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 Wolfcamp Mobile Mini's second 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 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 today's comments.
For a more complete description of the factors that could cause actual results to differ and other possible risks. Please refer to the safe Harbor statement in our presentation and our filings with the SEC with that I'll turn the call over to Brad Salt. Thanks, Nick Good morning, everyone and thank you for joining us today, I'm bread salt CEO of Scott mobile mini.
We continue to execute our idiosyncratic growth strategy across multiple organic and inorganic levers irrespective of end markets and this quarter was no exception before we dive into our performance in Q2, I'd like to start with our capital allocation.
Capital allocation is fundamental to our strategy from the board to our executive leadership team to our branches. Our jobs are to identify opportunities, where we can drive the greatest value and returns across our portfolio. This.
This is not just financial capital. It is human capital we have to Orient over 5000 colleagues in our supply chain partners across 300 locations towards the projects that have the biggest bang for their buck.
It is an extreme luxury to have a plethora of opportunities in front of us that if reliably executed will continue to drive sustainable growth and returns irrespective of market conditions.
First and based on strong demand we are fully funding organic capex that means we're investing in new portable storage units modular refurbishments and our innovative flex product and value added products and services to keep pace with our demand we anticipate landing about 13000, new storage containers in 'twenty.
22, and has increased modular production to support the increased module deliveries, which were up 10% year over year.
And following a successful rollout during the first half of the year all of our storage branches can now offer wraps furniture for a ground level office fleet.
Second we're fully funding our tuck in organic acquisition strategy enter our tuck in acquisition strategy over the last 12 months, we've acquired approximately 21000 portable storage units and approximately 4500 modular units, which demonstrates the scalability of our business, we expect that our tuck in acquisitions.
From the last 12 months will contribute approximately 25 million of adjusted EBITDA year over year in 2022.
So these are compounding powerfully with our organic growth initiatives and bring a host of other strategic operational and financial benefits.
Finally, we've employed our share repurchase authorization to great effect over the last 12 months, we've repurchased $481 million of our common stock and stock equivalents as of June 30th 2022 that represents almost 7% of our market cap.
Recognizing our compounding free cash flow our board of directors proactively replenished our share repurchase authorization back up to $1 billion in July of 2022.
We often talk about the trifecta as it relates to operations.
Specifically pricing value added products and volumes, while Theres also a trifecta for capital allocation and over the last 12 months, we're right in line with that framework that we laid out at our Investor day in November of 2021 with over 1.1 billion of capital generated an allocated net capex M&A and return.
To shareholders. Thank you for trusting us as stewards of your capital.
Now focusing on Q2 quotes and delivery levels were above prior year throughout the quarter for N a modular and N. A storage modular volumes in N. A modular were up two 1% year over year and two 4% year to date from the beginning of the year.
About half of the year to date volume increases organic and the other half is from M&A.
Portable storage units combined across North America modular in North America storage were up 24% year over year.
In market strength continues to be broad based the architectural billing index has now expanded for 17 months in a row, giving us confidence in the nonresidential markets well into 2023.
We won multiple projects across our diverse end markets. Both continued expansion with existing customers and orders from new customers for facility examples such as chip production health care and education.
Retail Remodels continue and we are supporting incremental inventory storage needs to accommodate the unpredictable.
<unk> lines between receipt and consumption of inventory.
Manufacturing also remained strong as we alluded to in last quarter, partially driven by reissuing projects in the U S.
Combined with the immediate strength, we're seeing in our year over year delivery volumes in all of our objective market indicators suggest end markets will remain supportive as we wrap up 22 and positioned for 'twenty three.
And the multi trillion dollar U S infrastructure bills would certainly further extend and provide additional tailwind across our end markets starting in 2023.
Again, regardless of end market performance, we're taking practical steps to engage our customers with combined strength of will Scott and mobile mini brands, we recently implemented strategies and tools to leverage our industry, leading data warehouse and transaction history to target cross selling opportunities from our M&A transactions.
And although we will continue to improve the automation and lead sharing when we combine our two instances of self force dot com in 'twenty 'twenty three we're already seeing tangible results from our organic market penetration initiatives as evidenced in the 24% growth in volumes and portable storage units in North America.
Value added products penetration is also expanding in North America modular and continues to rollout as planned under our mobile mini brand in aggregate, representing a 500 million organic revenue opportunity that is entirely within our control.
Tim is going to spend some time unpacking our rate performance during the quarter, but suffice it to say modular is progressing in line with historical performance and our team continues to exceed our high expectations in storage given the predictability and lease duration in our portfolio, we will enjoy the benefits from today's rate trajectory in our results.
For years to come.
Finally, given our performance throughout the first half of 2022 we're raising our guidance by 40 million to adjusted EBITDA of 900 million to $940 million for 2022 at the midpoint the new guidance represents a 24% increase relative to 2021.
I'm thrilled with our team's performance and excited about our outlook for the remainder of the year and beyond with that I'll turn the call back to Tim.
Thank you Brad and good morning, everyone.
Page 20 shows a high level summary of the quarter, our commercial momentum continues to accelerate driven by a strong leasing fundamentals and execution across all operating segments.
Leasing revenue was up 25% year over year, driven by pricing value added products and volume growth supported by a steady cadence of acquisitions.
Adjusted EBITDA was up 33% year over year, and adjusted EBITDA margins expanded approximately 200 basis points, both sequentially and year over year as we had indicated they would.
Our updated adjusted EBITDA guidance of $900 million to $940 million implies increases between 22, and 27% versus 2021 and.
And we continue to expect adjusted EBITDA margins to be up about 200 basis points for the full year as leased leasing revenues compound predictably and SG&A continues to stabilize.
Return on invested capital in the quarter of 14, 6% was up 430 basis points year over year. So our strategy to drive sustainable growth and returns is clearly working.
And because we have a high degree of visibility into continued growth and ROIC expansion, we love our stock.
We repurchased $250 million of shares equivalents in the second quarter and over the last 12 months, we repurchased $481 million of shares in equivalents, representing a five 6% reduction of our economic share count.
Overall, our business continues to perform ahead of expectations, we have a clear formula to drive sustainable growth and returns and we are reinvesting Lee accordingly in our business and in our stock.
Page 21 lays out revenue and adjusted EBITDA for the quarter year over year, we delivered 26% increase to $582 million of revenue and a 33% increase to $233 million of adjusted EBITDA.
Adjusted EBITDA margins expanded 200 basis points year over year, and 240 basis points sequentially and.
And we saw strong margin expansion, both at the gross margin and EBITDA margin level across all of our segments as well as at the consolidated net income level driven by the steady compounding of pricing value added products and volumes at rates well in excess of cost inflation.
As we've said for the past few quarters, we expect EBITDA margins will be up approximately 200 basis points for the full year and based on the acceleration in our lease revenue run rate, we're confident that margins will be up meaningfully again in 2023.
Pricing in particular will provide powerful revenue tailwind for the next 18 to 24 months based on our forward visibility.
In Q2 rental rates continued to progress predictably in the inflationary environment is supporting highly attractive spot rates that we will enjoy in future periods, given our long lease durations.
Average rental rate increased by 16% year over year inclusive of value added products for modular units in North America modular and by 23% year over year for portable storage units in North America storage.
Delivered spot rates over the last 12 months are roughly 30% higher than average rates across the portfolio in the North American modular segment, and we have an approximately 25% spread in North America storage on our most recently delivered units relative to the portfolio average.
Together in North America modular in North America storage, the natural convergence from average rates to recently delivered rates over our three year lease duration represents about a $200 million predictable organic revenue growth opportunity irrespective of market conditions.
While we are capitalizing on the inflationary pressures and supply chain constraints impacting our industry. It takes time for these benefits to compound in our lease revenues due to our long lease durations, which is why we are incrementally more confident today in our ability to deliver future pricing growth.
In the immediate term, we are still experiencing significant cost inflation on inputs, such as building materials, and labor, which continue to be up over 15% versus prior year and fuel prices remain up approximately 60% versus 2021.
That said our margins are up in all segments and on all revenue streams in Q2, despite the natural lag in our lease revenues it.
It is therefore reasonable to expect that our input cost inflation will begin to slow while our lease revenue continues to compound which is why we're confident in our revenue growth and margin expansion outlook heading into 2023.
Turning to page 22, we generated $188 million of cash from operations up 34% year over year.
Net capital expenditures totaled $119 million, representing a $60 million increase year over year as we invest for growth.
This increase was demand driven as volumes continue to ramp and on a year over year basis and relative to our original expectations. We are seeing at least a 15% increase to our capex, which is attributable to input inflation.
Modular refurbishment of approximately $50 $50 million in Q2, effectively doubled versus Q2 of 2021 supporting over 1000 units of organic volume growth year to date as well as inventory readiness in.
And the three three months ended July so our most recent data modular work orders were up approximately 28% year over year and modular deliveries were up approximately 10% versus the same period in 2021, So we're seeing elevated activity levels well into the third quarter and while we are continuing to prioritize production in.
Our branches to stay ahead of demand these investments are entirely discretionary and within our control.
On the storage side of the business, we invested approximately $27 million for additional portable storage units in Q2.
As our utilization exceeds 85%.
We originally planned to purchase 8000, new containers in 2022, all 8000 units landed and were deployed in the first half of the year utilization remains elevated and rental rates are accelerating so we're landing an additional 5000 units primarily in Q3 to support both core and seasonal demand.
So in total that represents approximately $70 million of growth capital and into our storage segment in 2022, which is a record level for the legacy mobile mini business.
We invested approximately $20 million in value added products to support continued growth in the modular segment and continued <unk> rollouts in our storage segment.
We invested another $10 million across both the tank and pump and U K segments.
And we invested approximately $10 million in infrastructure, which includes our branch network in the early phases of our CRM consolidation, which is planned for the first half of 2023.
Overall, it was a strong quarter for organic reinvestment and these investments are supporting our lease revenue run rate heading into 2023 that is roughly 10% ahead of where we originally planned for 2022.
Even with these record reinvestment levels of free cash flow is inflicting positively up 25% sequentially from the first quarter and.
And based on the continued growth of operating cash flows and the tapering of capital expenditures in the second half of 2022, which I expect will be more in line with the second half of 2021, we have a clear line of sight to achieving $500 million of free cash flow run rate heading into 2023.
Okay.
Turning to page 23, we maintain constant leverage in the quarter given the continued favorable operating environment.
In addition to net Capex, we invested $46 million and four acquisitions, we also repurchased $250 million of common stock and warrants retiring seven 2 million shares and share equivalents.
Over the last 12 months, we reduced our economic share count by five 6%.
And in July our board replenished, our share repurchase authorization to $1 billion, giving us flexibility to continue returning substantial value to shareholders.
On June 30, we closed the fourth amendment to our asset backed credit facility. We increased the facility size from $2 4 billion to $3 $7 billion to.
<unk> the growth of our business.
And we have approximately $1 billion of liquidity currently available under the facility and in addition to our own internally generated cash flow.
We extended the term of the credit facility for five years now maturing in June 2027, and we reduced the interest rate spread by by about 50 basis points, which partly offset broader benchmark rate increases.
At current rates, our annual cash interest expense is approximately $130 million.
We are incredibly grateful to our lenders for your support and I think the process was an incredible vote of confidence in our team our strategy and our execution and the outcome is an incredibly flexible and cost effective source of financing that supports our long term growth plans.
Turning to page 24 is still my favorite page in the deck.
As Brad discussed our capital allocation over the last 12 months is consistent with our long term framework.
Our outlook suggests that our capacity to deploy capital will continue to grow with continued compelling opportunities in organic capex acquisitions, and the repurchases of our own stock.
In the last 12 months on a leverage neutral basis, we generated and allocated over $1 $1 billion of capital.
<unk>, 31% or $358 million went to organic capital expenditures, 22% or $251 million has gone towards tuck in acquisitions.
And we used $481 million or 42% to repurchase approximately five 6% of our economic share count.
Executing our growth strategy driving return on invested capital and smart capital allocation together will allow us to continue compounding shareholder returns predictably overtime.
And to illustrate this predictable compounding our updated outlook is on page 25.
Our leasing fundamentals of pricing value added products and volumes continue to exceed expectations.
As such we raised our adjusted EBITDA guidance by $40 million to $900 million to $940 million of adjusted EBITDA.
At the midpoint of our guidance it still implies about 200 basis points of margin expansion relative to relative to 2021.
Sequentially, we expect margins will expand modestly into Q3 as work order activity levels remain elevated and margins should then expand significantly into Q4 of this year as modular work order activity slows down and we get the full contribution of seasonal retail revenues in our storage.
Segment.
As I mentioned earlier, we expect capital expenditures to taper in the second half of the year and be more in line with the second half of 2021.
But obviously this is a significant year for growth investment and above our original expectations.
As I think about the midpoint of the Capex range of $350 million approximately.
$150 million of the total represents growth investments and approximately $175 million represents maintenance capex and there is another $25 million or so of integration related capex that should taper off in 2023.
So our investments this year roughly balanced between growth and maintenance and we have a very high degree of discretion over even the maintenance components, given the long life nature of our assets.
Looking into the second half of the year as margins expand into Q4, and Capex tapers, we expect our free cash flow run rate to accelerate to a $500 million run rate as we enter 2023.
And then that that run rate will grow through the course of 2023.
And our rental revenue and EBITDA run rate for Q4 heading into 2023 is running approximately 10% ahead of where we expected at the outset of the year.
So we're capitalizing upon a favorable operating environment accelerating growth expanding ROIC.
Repurchasing our stock and establishing a stronger foundation from which we will build heading into 2023.
With that Brad I'll hand, it back to you. Thanks, Tim.
We will continue to be thoughtful and diligent as we invest in our uniquely durable and resilient business and it's powerful idiosyncratic growth levers I am pleased with our progress in the first half of 2022 and I am excited that the outlook for the remainder of the year and beyond thank.
Thank you to all of our stakeholders for their continued support and 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 at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad and we will pause for just a moment to compile the Q&A roster.
Your first question comes from the line of Faiza <unk> from Deutsche Bank. Your line is open.
Yes, hi, good morning, and thank you Joe.
You had great results so far.
Curious as you know the macro uncertainty and recession risks heading into 2023.
So could you give us a little bit more color in terms of how we should think about the resiliency of your business in a downside scenario the flexibility that I think is inherent in our business and what the downturn model might look like for you.
Sure <unk>. This is Tim Thanks for the question and it's clearly one that's been top of mind for many investors over the past couple of months and frankly, I think it's a scenario, where we'll scott's likely performance is not well understood.
First I think you can assume from today's commentary that we do not see anything in our leading indicators that would be consistent with an imminent recession and we'll enter 2023 with the lease revenue run rate that is roughly 10% higher than we originally expected as I mentioned in my prepared remarks.
We think we've put in place growth initiatives that would grow through any reasonable recession scenario just like we did through the pandemic the pace of compounding could slow in a recession, but we believe we have a formula to deliver sustainable growth and returns irrespective of market conditions. So the best thing we can do to prepare for a recession is exactly what.
We are doing today in our is evident in our Q2 results, we're growing our lease revenue run rate by driving pricing volumes and value added products.
We're consolidating our markets and revisiting capital allocation using our regular quarterly process. So as I think about recession scenarios and the possibilities for 2023. There are basically five levers that were that were managing actively the first is pricing. So the current spread between delivered spot rates.
And average monthly rates creates massive installation and visibility into future growth.
If we just hold spot rates flat, where they are today, we have a $200 million organic lease revenue opportunity.
And based on that favorable spread our pricing power and the impact of lease duration. It is difficult to conceive a recession scenario, where pricing detracts from our lease revenue run rate. So it is going to be a tailwind in all of our scenarios.
The second lever is value added products, we continue to grow value added products penetration on our modular storage and storage volumes, regardless of whether we're in a recession or an expansion.
Still taking over a massive inconvenience in the supply chain for our customers and offering a highly differentiated value proposition.
So our targets to drive apps revenue per delivered unit to $600 per unit per month in modular would not change in a recession, nor would our rollout plans for storage Fabs. So this is a $500 million organic growth opportunity it would be unchanged in a recession and it represents another very powerful.
Aylwin.
The third lever that everybody worries about is volume in recessions deliveries correlate with economic activity and would likely slow.
But units on rent lag based on three year lease duration, so deliveries might decline in line with GDP, our nonresidential construction starts but units on rent with customers remain on rent for their planned project duration such that any unit on rent decline will lag. The contraction. This is why our lease revenues are so stable and predictable.
<unk>, we saw this play out repeatedly including the global financial crisis peak oil in 2014 and through the pandemic and.
And more importantly, we are better positioned than ever to capture market share organically through cross selling and to defend our market position with acquisitions.
The fourth lever that you alluded to is our cost structure, which is roughly 50% variable.
While we're currently structured for growth we can pivot very quickly as you saw during the pandemic youll recall in 2020, our adjusted EBITDA margins expanded by 350 basis points year over year on a pro forma basis, because we took variable cost out of the P&L, while continuing to grow our lease revenues.
In contrast, we're incurring variable cost headwinds today impacting both our gross margin and our SG&A. However, we can reverse those in a recession scenario.
And then the last lever that we've talked a lot about today is capital allocation. Our business has a strong countercyclical free cash flow profile. So as deliveries slow in a recessionary environment Capex and variable cost come down through our 90 days Euro based capital allocation process and this opens up more capacity for deleveraging.
Acquisitions and share repurchases.
In our most recent experience free cash flow margin during the peak of the pandemic was approximately 20% versus 12% currently and we have clear line of sight to returning to that level, even in a growth environment.
So those are the levers we're managing we've managed them all before and its a normal part of our operating cadence here it well Scott mobile mini.
We will enter any recession with more market share is stronger value proposition greater scale and better management tools relative to any prior cycle and as we discussed today, our leading indicators like the architectural billings index prospects for infrastructure spending near term re shoring and manufacturing as well as our own sales.
<unk> have us quite confident in the volume component of our model well into 2023.
So thats a long long response, thanks for your patience, but it is very important that investors understand the levers that we have to drive growth and returns even in a macroeconomic contraction.
Great. Thank you Dan that was very helpful.
Thank you. Your next question comes from the line of Andy Wittmann from Baird. Your line is open.
Oh, great. Thanks for taking my question guys. Good morning, I guess I wanted to just kind of ask on the storage segment. In particular here is a 23% <unk> growth really stood out.
Obviously over the last couple of quarters <unk> been ramping it but 20.
20% number.
Almost seems like an outlier so Brad I was hoping you could talk a little bit about the market dynamics that are affording this and the sustainability of those.
<unk>.
Talk about any level of pushback.
That you're getting on that.
Tiffany.
Yes.
Thanks, Andy.
Yes, I think you have to start with the fact that.
Up to the merger container pricing had been flat for years. So there was certainly let's say pent up opportunity.
Why wouldn't represent 20% can't continue forever.
I am starting to get more comfortable with double digit for a long time.
We're not receiving a lot of pushback.
<unk>.
The rates at which we're delivering.
Basically secure warehouse solutions to our customers.
Location.
Our still very affordable versus any alternative.
Indeed utilization is relatively high.
That is supportive of continuation new container prices right are up 40% to 50%.
Versus a couple years ago, that's very supportive of.
Continued pricing so.
I think it was a little bit of an untapped opportunity of the product.
<unk> is another important one Andy if you think back relative to the pre merger mobile mini we were offering only a premium product with a patented try cam doors are differentiated and very unique.
Torridge delivery and logistics capability.
The majority of the balance of the industry was offering basically ISO containers often delivered through third parties. So we're we're offering both products.
As we as we go forward we will continue.
Can you expand and scale our logistics capability.
To make sure whether a customer takes the standard product or our premium product they'll get the same white glove service. If you will so I feel quite good I.
I think I get.
Increased confidence every time I look at this every quarter. The team is laser focused on it Tim mentioned are 90 days sales and operating process, we talked a lot about the financial capital allocation.
<unk>.
It's a fully integrated also sales pricing in <unk>.
Well as human capital allocation, keeping everyone focused on the right levers so I feel quite good about it and I'm very proud of the team and all they've accomplished thus far.
Got it. Thank you I guess for my follow up question maybe for Tim.
You made some comments in the prepared remarks about orders and work orders being higher than deliveries I guess that implies or suggest that.
Repair maintenance expenses are running ahead of the deliveries that obviously shows that you've got some baked in demand that you are trying to cater but it also has.
Has the effect I guess of.
Weighing on margins in the near term can you talk about.
How different today's level of repair and maintenance expense is compared to maybe historical averages. So we can maybe get a better sense of how that is affecting the margins that you reported here in the quarter.
Yes, Im happy too and this gets to the inherent flexibility that we have in the cost structure of the business, which I don't think is well well understood. So on the storage side of the business, we're running north of 85%.
Utilization and it is all hands on deck to get every viable container.
In rent ready condition.
And delivered to customers right. So we're incurring frankly as much of that repair and maintenance expense as we can as we can support through.
<unk> of labor and materials.
It's running out to the tune of about 10% of revenue in the storage business, you could easily see that dropping and half to 5% of revenue in a slower.
Volume environment and.
If you think about the quantity of fleet that is actually unavailable, we're going to be pushing those levels I think below 5% of the total fleet by the end of the year.
Which is an extremely low level in extremely high fleet quality in the storage segment, you had a similar dynamic in modular and Thats, where my prepared remarks, we're really really focused with modular work orders up 28% year over year in.
In the three months period ended July and to your point that means we're building rent ready inventory and that is a headwind in our Q2 results.
For leasing gross margin and the overall EBITDA margin in the business, which itself was up 200 basis points year over year. So as I mentioned in my remarks, we're delivering these results we are delivering margin expansion, despite kind of a volume driven variable cost headwind and despite 15% input inflation in.
Materials and labor so all of that together. It makes me a lot more confident about margin expansion heading into future periods. Because we're only we're only beginning to see the real pricing benefits.
That we're seeing in this environment.
That makes a lot of sense, if afforded a follow up to my follow up.
Does the in the modular side of the business.
Does the work orders of the repair and maintenance expense that you're investing today.
Does that start to subside at all into <unk> or <unk> or do you feel like the year setting up where you're going to continue to have to work at elevated levels and maybe thats more of a 'twenty three dynamic where you get all the revenue of the rental revenue from that and maybe a bit of a tailwind if the work orders were to drop off.
Yes, so I expect to work order activity remains elevated in Q3.
Work order activity in the modular business would typically.
Come down a bit in Q4, just in terms of the nuance in our business. That's why Q4 tends to be a seasonally stronger EBITDA margin quarter.
Seasonal factor Thats not a commentary on our macroeconomic outlook and then 2023 it'll be what it'll be from a macro standpoint, and a volume standpoint. So.
The backdrop supports.
Delivery levels at today's level, then no you wouldn't get that that.
Margin expansion yet.
If delivery levels were to come down and absolutely you would get a variable cost tailwind in the business, which.
Again provides us a lot of installation and then contributes to the counter cyclicality of the free cash flow in the business.
Thank you.
Okay.
Thank you. Your next question comes from the line of Manav Patnaik from Barclays Capital. Your line is open.
Thank you.
You've answered all of the key questions here, but maybe just.
The guidance raise on the revenue and I guess EBITDA side can you just break that down by how much was the incremental M&A that you've done in.
Yes, just maybe parse that out a bit.
Yes, I mean August is Tam so the incremental M&A is actually not a huge contributor so in our original guidance for the year.
I think we had about $17 million of EBITDA in the original guidance of what was it about $850 million of EBITDA at the midpoint of the original guide.
And as Brad mentioned, we got about $25 million of EBITDA.
For the year in the current guide now some of those transactions have taken place through the course of the year. So that $25 million is not a full annualized run rate of those acquisitions, but order of magnitude youre only talking about eight or so million dollars of incremental EBITDA in the revised guidance coming from.
Acquisitions, and the rest is organic and quite strong at that.
Got it and then just maybe to follow up just on <unk>.
You mentioned, a few times a strong acquisition pipeline going through that can you just talk about how you would.
Yes.
In the event that the slowdown I does that volatility in the cloud today.
Look we've said repeatedly that we will not miss a quality tuck in acquisition in quality to us means quality fleet quality.
People and quality customers and Thats what were looking at when we're evaluating M&A transactions the cadence of those.
<unk> is often dictated by the sellers these tend to be smaller private family owned businesses, maybe they have a state planning considerations things of that nature.
And we just want to make sure that we've got the right relationships so that we're ready to.
To partner with them when the time is right for the seller. So our appetite is there currently our appetite would certainly be there.
In a recessionary environment.
And we won't Miss a Michigan deal out there.
Fair enough. Thank you guys.
Okay.
Thank you. Your next question comes from the line of Scott Schneeberger from Oppenheimer. Your line is open.
Thanks, very much good morning, I was hoping to speak a little bit on that to kind of on a fundamental level.
D C. We can we can see we report in the deck, but just curious how penetration is looking and how you think about it I know you don't necessarily share numbers on this but in the second quarter of the modulators that went out.
Roughly what percent had at least one item of the apps.
And how does that compare to years past.
And how many of two items the vast three items in <unk>.
Some anecdotes about how you think about that and how you're progressing there and if multiple items of apps and going up the menu level could potentially.
Push you ultimately higher.
And numbers that you provided from Investor day. Thanks.
Yes got it.
Brad and Tim Tim that could can jump in here for needed.
<unk>.
The reality is almost every unit going out has some level of apps.
Steps and ramps right to get into building they've got insurance, what's really been driving the growth as furniture.
We tend not to talk about penetration by number of chairs and tables, because it gets a bit nonsensical and remember we have a good better and best tiered offering right across that portfolio. So if you back up to when we IPO Ed we identified a target of achieving $400 of.
<unk> value per month, and we said based upon the portfolio of furniture, we had at the time that would represent about 80% of our units going out with apps.
We're now at 430.
We're probably not quite at 80%, we're probably more than 60% to 70%.
I would say balanced penetration of units going out with furniture like a full accompany of furniture, but we've also seen pricing improvement and probably a shift across the tiers. So the 430 would imply okay. We've clearly achieved the 400 target, we're probably in that 60% to 70% of delivered opportunity.
<unk> for the penetration on the modular units and as Tim referenced we've set the target now from 400 up to 600, we've already got reps and in fact.
<unk> <unk>.
Cities and Msas that are writing at that level. So we know it's achievable again, it's the same same game. If you contrast that to kind of the average of the portfolio right now which is at $2 66 in North America modular right. It's that that's the spread that we've articulated.
Been evident over the frankly, the course of the last five years and what we will expect over time is the 430 delivered right in modular converges the $2 60 up to the 430 right now across.
About 87000 units on rent so you can watch that charge.
It was one of my favorite charts as well.
<unk> 12 in our <unk>.
Investor deck, and it's been very consistent every quarter.
And the exciting part now as Youre going to see the same playbook executed on the storage side.
Excellent. Thanks, Brad appreciate that for my follow up.
<unk> mentioned.
A little bit the incremental I think five more storage containers for core and seasonal curious if you can just share what youre seeing in seasonal this year, how it compares to last year.
And what it may mean for future years. Thank you.
As Scott This is Tim I think if you recall our commentary maybe 12 months ago based on the strength in all of our core markets. We actually acknowledged at the time that we were going to Miss some of the seasonal demand and that will continue to be the case. This year, although we're capturing more of it because of the.
The driving fleet readiness like I talked about in because we're adding adding fleet to the storage branch network. So year over year I would expect contribution from seasonal could be $10 million or so.
EBITDA higher than last year and that will be spread between Q3 and Q4. One thing we are seeing from the retailers as they are taking equipment earlier, some some delivering even here at the end of Q2.
Than in years past and holding onto it longer and we have also pushed through meaningful.
And appropriate rental rate increases for those customers. The other thing I would just highlight because most of the seasonal focuses on our retail customers.
As we have deeper and more thoughtful discussions with the likes of Walmart and target and home depot, and Lowe's et cetera, we're finding more opportunities for both our storage and our modular value proposition.
They're kind of separate and distinct than traditional seasonal in store renovation.
<unk> so.
Seasonal will be up this year as we look into 2023.
Im actually equally excited about.
Deepening the relationships with some of those national accounts.
Excellent. Thanks, so much I'll turn it over.
Thank you. Your next question comes from the line of filling from Jefferies. Your line is open.
Hey, guys Maggie on for Phil.
I guess first going back to storage pricing.
I know you've been doing a lot of good things there getting the units on share price optimization platform.
Doing some segmentation tools.
See the next few quarters.
A one time step up as you reset base rates and then getting back to that mid single digit cadence.
You talked about at your Investor day or is.
Double digit growth rate sustainable.
And then kind of adding on to that I know the storage that rollout started this quarter. So maybe if you could talk about what the customer response has been in and take care seeing relative to modular.
Maggie. This is this is Tim I'll start by addressing.
Providing a bit more detail on your storage pricing.
A question and then Brad maybe you can provide some color around storage value added products given it's so early.
As far as storage pricing goes.
There are a lot of internal operational initiatives that you alluded to that are in place today centralized quarterly pricing reviews as part of the sales and operating planning process that we do quarterly.
Brad alluded to product positioning again, we've got basically a good better best tiered offering now within the storage fleet and we are driving price differentiation with our mobile mini branded.
<unk> and specialty products and.
And Thats really whats been driving results.
Since the merger through the end of Q2, we are not yet on a technology enabled segmentation platform as we consolidate our CRM.
Adding into the first part of 2023, we will also be combining our quoting tools.
And our pricing technology tools, so I do think that as a potential opportunity as we look into 2023.
In terms of.
Pricing guidance for the rest of the year on on storage I'm always a little bit careful here, but I do think we should see some sequential gains as we go into Q3 and Q4.
And that's going to be at least driven by the seasonal volume that will be flowing through the results.
We will have to think about then how we how we set expectations for kind of Q1 and Q2 of 2023 as that seasonal volume.
Volume likely rolls off.
I would expect there could be some sequential stabilization there of pricing as seasonal volume comes off in the first half of 2023, but fully expect it will be up meaningfully year over year.
So that's probably the best we can do on storage pricing for now ready maybe you want to talk about storage vats, yes.
I think we mentioned in the prepared commentary all the branches now.
For the furniture for the ground level offices.
We're seeing that take off I would say in line with our expectations.
The $50 million of opportunity, we had attributed to furniture and glows feels very attainable.
And then probably more exciting from my perspective, as we begin to roll out the <unk> offering if you will for storage we've introduced our basic package that's just been.
Implemented through the network. If you will so we're just really beginning to build the inventory required for that and then as we've mentioned in prior calls we will follow that next year with the proprietary shelf and racking system. So.
We mentioned in the Investor Day, we thought there was another $50 million of apps opportunity associated with Fabs and containers themselves again, I think that's very attainable just keeping in mind you. It takes several years to achieve it on a leading edge or a spot rate.
And then the kind of 30 months, if you will for the fleets rollover on itself. So all these together.
The underpinning if you will of that $500 million of organic growth.
Opportunity I mentioned in the prepared comments.
That is completely within our control.
Okay.
Great.
Super helpful.
And then Tim on the Capex guide, thanks for giving the color between.
Maintenance and growth, but I guess, just the incremental increase for the full year can you kind of size up which categories, you're stepping up investments and then looking out to next year.
Is there any pull forward this year, we should be mindful of or how should we be thinking about.
On Capex in the next few years compared to the guide this year.
Yes, there is certainly no pull forward.
We're basically investing and growing and maintaining utilization levels in the storage and really the bulk of the modular investments going to refurbishment, which I talked about on.
In my prepared remarks, and in some of the Q&A. So the biggest increases our modular refurbishment and buying storage containers.
That is entirely demand driven and entirely volume driven.
And the guidance for next year is going to be dependent on what is the what is the demand equation that we think that were.
Facing so I mentioned that $70 million for example of container purchases this year as a company record for the legacy mobile mini business.
If the environment stay as they are right now we will absolutely be expanding the fleet organically in 2023.
So I think the current guidance for this year is reflective of the macroeconomic and demand backdrop for this year and we've given some different goalposts right. I mean, you saw where capex was back during 2020 during the height of the pandemic and that was a pretty meaningful reduction from current levels.
And we've also given you guide guideposts around approximately 25% of our available capital as the company grows we think we can deploy to.
Organic capex. So we've tried to give you and investors kind of some some goalposts and we'll operate within those goalposts, depending on the demand backdrop.
Alright. Thanks.
Okay.
Thank you. Your next question comes from the line of Brent Thielman from D. A Davidson your line is open.
Okay, great. Thank you good morning.
Hey, Ken you seem to this earlier in your comments about the retailers wanting to get the product sooner.
Sooner I'm just wondering if you've seen any indications more broadly in terms of change in your new lease duration for either your major product categories. It seems like you have <unk>.
Supply chain labor disruptions or extending timeframes to get things done. So just wondering if that's having a knock on effect on keeping the assets in the field longer.
Okay.
Hi, Brent this is Tim I can't say I can point to anything in our immediate results. I mean, there has been a long a decades long trend and our modular business towards a lengthening of effective duration.
I think that is driven by a lot of factors and markets that we serve.
Lengthening of construction projects.
Some of the incentives in our own and our own structure in terms of duration based pricing and compensation of our sales reps, but.
Other than maybe the order activity from the retailers, which is kind of a unique segment. That's primarily served by our storage business currently.
Can't point to anything else from a duration standpoint Brent.
Okay Fair enough and then.
The dynamics in the.
U K I think you talked before about the mix shift in favor of containers had some previous COVID-19 demand on modular.
Yes, I just look at the quarter over quarter comparison.
Not quite as strong as what Youre seeing here in the U S. Just curious maybe the dynamics youre seeing in that market recognizing smaller.
Yes, it's smaller and actually I'm quite quite pleased with the UK results and remember there is a pretty meaningful year over year foreign currency impact if youre looking at the UK results in U S dollars.
If I look at UK results in British pounds.
We have revenue that was up about four 4% year over year EBITDA is up 10% year over year EBITDA margins are up 250 basis points year over year. So actually ahead of the company average.
To your point container utilization is pushing 90% so very highly utilized and we are getting.
Our pricing again in British pounds.
The one area of softness is the the modular utilization in the U K that did taper off primarily around the Q4 and Q1.
Timeframe.
But that's that's.
Thats the only.
Weaker weaker metric in the U K business overall, it's doing extremely well in.
Very pleased for Heather navigating a challenging market in the UK right now.
Okay, great. Thank you.
Thank you.
Your next question comes from the line of Steven Ramsey from Thompson Research. Your line is open.
Good morning.
In May you talked about the strongest order book that you've ever seen maybe can you clarify if it's done incrementally stronger since then and within that order book have you seen any pickup in cancellations.
Yes, this is where I would characterize the order book is.
Still very.
Very high levels.
Probably record levels, if we could actually go back and pro forma it's been more stable as we would've expected from second and third quarter rate Tim mentioned before there is a little bit of a seasonality aspect of the modular business.
I'm, commenting primarily and initially on the modular side of the house.
The third quarters progressed, as we would've expected order rates continue to be in line with our expectations. So again, that's that's the basis upon which we say we feel good about demand on the module side for the balance of the year and heading into next year I think tim's covered off kind of the nuances.
As if you will with respect to storage, particularly as retail is kind of on the opposite cycle there heading into the fourth quarter. So.
Very solid order books, as we said before.
Sure.
Certainly in line with our expectations and the basis for our outlook as we head into 2023.
Okay helpful. And then second thing on leverage currently over the high end.
In a modest way, but EBITDA and free cash flow rising into the second half.
Leverage level, you're at now does it mean, you will slow acquisitions or share repurchases or keep the foot on the gas.
We'll keep the foot on the gas to the extent there is we've got visibility into where we're headed right and.
And we absolutely feel that way right now the way to think about leverages in any given quarter. If we wanted to be below three and a half we could be there right. So.
Whether or not we do that is going to be a function of what acquisition opportunities do we have in front of US are already said, we won't Miss one that we like what.
What organic opportunities do we have in front of us and we see a lot of that right now.
And frankly.
Q2 represented a pretty pretty attractive.
Opportunity to accelerate the share repurchases right. So we'll be looking at all of those things as we decide okay. Do we want to stay at three seven should we let it tick down to three six.
Or lower but.
No that that decision is 100% at our discretion, we've got a very high degree of control over Capex, the M&A pipeline and obviously the share repurchase.
Appetite and if any period, we want to be within that three and three five times leverage range, we can be there.
Makes sense.
Thank you.
Your next question comes from the line of dealing coming from Morgan Stanley . Your line is open.
Great. Good morning. Thanks for the question if I can just ask one on the guidance I think the midpoint kind of implies that the rate of year on year margin expansion kind of only improved slightly into H. Considering you already did about 200 bps from Q.
Really going back to November on that point.
The reality is Q1 was down a bit right and so now we've recouped too.
200 basis points or 240 sequentially in Q2.
I expect that remains kind of margins remained flattish going into Q3, and thats predicated on modular refurbishments in particular, staying at a pretty elevated level.
If modular refurbishments were to actually come down.
That would be a margin opportunity.
And if Marc modular refurbishments were to accelerate from here that could actually pressure the Q3.
Our margin, but our base case is for modest EBITDA margin expansion going into Q3, and then pretty strong expansion going into Q4, and Thats again predicated on modular furbished shipments slowing down seasonally in Q4.
And executing on the retail.
Business in the.
Storage segment, which we've talked a lot about today, it's still overall retail and wholesale trade is only like 11% of revenue. So I don't want to blow it out of proportion but.
It is going well this year.
Okay. That's helpful. Thanks, Tim and then maybe just a longer term question I guess on the infrastructure side you guys mentioned in the prepared remarks that you were pretty bullish kind of going into next year, just kind of curious where youre seeing the nearest term opportunities on that front in terms of your end market mix and whether youre expecting that kind of activity on the <unk> side that kind of stuff, but more significantly in <unk> and next year from a time.
Perspective.
I'm sorry.
As Tim so on the infrastructure side, we're having.
Planning discussions with our larger national general contact contractor clientele. They are booked through the end of 2022.
We're beginning to have planning discussions around infrastructure related projects, but they are not in our results in 2022, and we don't expect them to start in 2022.
So at best I think we're looking at mid 2023.
Project starts, which then translate into volume tailwind for both sides of our business and as you think about our end market exposure, it's roughly 40% by customer S. ICD code will be construction related clearly.
Those customers will be pulled into infrastructure related projects and then they will pull us into those projects, but if you look across commercial and industrial manufacturing clearly is.
A strong end market right now expect that continues in 2023, we've talked a lot about retail wholesale trade and distribution.
Energy and natural resources, obviously there is.
U S investment directed in that area the larger utilities.
And even some of the green infrastructure players would be among our clientele. So as I look top to bottom across our end markets I think it's easy to pick out key customers that will benefit from that type of spending in 2023 is just a little bit hard sitting here to date to pinpoint when the projects are going to start.
Okay, great. Thank you.
Thank you.
Your next question comes from the line of Sean <unk> from Deutsche Bank. Your line is open.
Thank you all my questions have been answered.
Great well, it's nice to hear anyway, Sean.
We have now reached the end of today's call I will now turn the call back over to Nick.
Thank you very much for your interest in <unk>. If you have any questions. Please contact me. Thank you.
Yes.
Thank you ladies and gentlemen. This concludes today's conference you may now disconnect.
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Okay.
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