Q2 2023 WillScot Mobile Mini Holdings Corp Earnings Call
Yeah.
Welcome to the second quarter 2023, well Scott Mobile Mini earnings Conference call. My name is Amy and I will be your operator for today's call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session. Please note that this conference is being recorded.
I will now turn the call over to Nick Jordi Senior director of Treasury and Investor Relations. Nick you may begin.
Good morning, and welcome to the World Scott Mobile Mini's second quarter 2023 earnings call participants on today's call include Brad salts, 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 mold many website.
Slide two contains our safe Harbor statement, we will be making forward looking statements today.
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.
Her to the Safe Harbor statement in our presentation and our filings with the SEC with that I'll turn the call over to Brad socks. Thanks, Nick and good morning, everyone and thank you for joining us today I'm, Brad Salt CEO will Scott mobile mini let's start on slide 16 of our <unk> investor deck.
<unk> 2023, it was another terrific quarter for our company and showcases the predictable compounding returns and cash generation that are clearly accelerating as we scale the business as shown on this page we are already exceeding or on track to outpace all of the performance metrics that we laid out in our Investor day in November of 2021.
Revenue increased 11% year over year due to the compounding effect of rate optimization and Baptist penetration adjusted EBITDA increased 25% to $261 million in it.
EBITDA margin expanded 500 basis points, a function of both the high flow through of ratings apps as well as the margin enhancement initiatives on which we've been focused since we began operating on the SAP platform about two years ago at 45% adjusted EBITDA margin were at the top end of the milestone range that we laid out in our Investor day cash.
Generation in our business is just outstanding we achieved a company record of $160 million of free cash flow and 27% free cash flow margin during the quarter year to date, we've delivered 263 million of free cash flow and expect to generate well in excess of 500 million of free cash flow in 2023, clearly where we're on our own.
Wait towards our next free cash flow milestone of $650 million.
With leverage at three turns net debt to adjusted EBITDA and at the bottom end of our target range of three to three and a half turns our approach to capital allocation remains unchanged and unconstrained during the quarter. We allocated 43 million of net Capex, we invested $70 million and M&A and we repurchased five 4 million shares or common.
Stock for $239 million over the last 12 months, we've now returned $891 million to shareholders and reduce economic share count by nine 1%.
All in our financial performance was outstanding and our results this quarter demonstrate the powerful and predictable compounding of our portfolio.
Commercially I am excited to announce that our team successfully launched our premium storage of apps offering or pro rack, which you can see a picture of on the cover this investor deck on our website.
Pro rack is a proprietary space management solution that fits inside storage containers, it's safe durable easy to install easy to use and solve customer problems with flexible configurations to function as deaths material storage pipe-rack tool crib shelves or any of their bus pro rack is modular in nature and that we can connect.
Up to four correct modules on each side of a 40 foot container building flexible configurations for our customers.
Pro rack is a perfect example of the type of innovation that differentiates us in the market and helps our customers operate more safely comfortably and efficiently during their projects.
I'm incredibly proud of the product development commercial and operational teams and the collaboration that drove this innovation as well as many others in the pipeline.
As a reminder, baps across the portfolio represent $500 million of our $1 billion of idiosyncratic growth levers modular, including the ground level offices, representing $370 million of the $500 million based on the portfolio currently in place in order to realize the balance of the $130 million from storage we.
Extremely confident in reaching and likely eclipsing this milestone in the next three to five years as a point of reference our last 12 month delivered rate and storage is already over $20 per unit and that's with only one year since the rollout of our basic offering and before any contribution from pro rack.
Flipping back to slide 10, and short not much has changed from our Q1 2023 earnings call with respect to end market demand, we're continuing to experience robust demand across commercial industrial end markets, particularly in manufacturing and professional services.
As expected retail demand was down in the quarter driven by deferral of storage Remodels at major non mall based retailers, which is impacting storage volumes in Q2, and Q3 that said, we've now started to receive orders for seasonal storage needs and while we're early in both the timing and quantity of these are consistent with our expectations.
Also as noted unexpected nonresidential construction starts both on a dollar in square foot basis has been below the record levels in 2022.
The architectural billing index, which has been a good forward indicator of nonresidential construction starts of nine to 12 months is now stabilized at neutral to positive ranges in the second quarter following modest contracting levels throughout the prior two quarters.
Further of note our second quarter quoting activity in the in a modular segment was up modestly in the second quarter again against extremely robust levels realized in 2022.
Geographically strength in the U S South east from Carolinas down to Florida, the Midwest in the Desert States have been countering relatively weaker demand in the U S Northeast U S West Coast States in Canada.
We continue to maintain a prudent outlook with respect to end market demand through the balance of 2023, we're extremely excited about the potential tailwind associated with onshoring and reassuring and infrastructure projects that we expected further accelerate in 2024 and persist for years to come large scale reassuring projects have already been breaking ground in the.
With America, which represent material and long duration opportunities to deploy our services, we're actively participating in bidding and winning multiple billion dollar projects in sectors, such as chemicals power Gen renewables electric vehicles, semiconductors et cetera, and with our recently combined CRM our storage modular field.
Sales teams now have uniform visibility into all projects and we were even further disproportionately well position to provide complex value added total space solutions to our customers with our unrivaled scale product offering capabilities, particularly as the product size and complexity increase.
And quickly on slide 18, our rates continued to compound powerfully and predictably across the portfolio and our storage segment portable storage average monthly rates increased 27% as we continued to execute our price management roadmap leverage our best in class tools and technology investments and the new product positioning.
Storage of apps, while still in the very early innings will begin to contribute more meaningfully in 'twenty 'twenty four and provide a recipe for years of sustained double digit rate growth as we've experienced over the last five years in the modular segment.
Our modular segment rental rates increased 19% versus prior year, and a robust 6% sequentially driven by both increased rate in vast penetration spreads between modular delivered spot rates in the last 12 months have averaged the last over the last 12 months and the average of the portfolio continue to remain.
Above 30%.
Now before I turn the call over to Tim I'd like to take a moment to thank our team for safely and frugally delivering yet another outstanding quarter and progressing each of our $1 billion of idiosyncratic growth levers along the way. The team has exceeded or is on track on track to eclipse all seven of the ambitious multiyear growth and.
Metrics, we committed to at our Investor day in late 2021 with that I'll hand, the call over to Tim for additional context.
Thank you Brad and good morning, everyone.
Page 21 shows a high level summary of the quarter.
Similar to Q1, we saw exceptionally strong financial performance across both segments driven by continued strong pricing and value added products penetration.
And outstanding margin performance across all revenue streams, resulting in record profitability and free cash flow.
As Brad pointed out we are approaching or exceeding every key financial metric in our operating ranges that we set forth at our Investor day back in 2021.
We still see over $1 billion of opportunity across our five growth levers. So as we look ahead into 2020 for Italy.
It's a logical to expect that we'll find upside across many of these ranges.
In the immediate term the business is performing exactly as we would expect in this environment.
Leasing revenues are compounding powerfully up 16% year over year, driven by pricing and value added products, which given our three year lease durations are in very healthy spot rate spreads will drive our run rate well into 2024 and 2025.
In Q2, adjusted EBITDA margin free cash flow margin and return on invested capital all expanded to record levels.
I'll go into more detail on profitability drivers in a minute, but we see multiple levers that will support margins well into 2024, which in turn is allowing us to allocate capital with confidence.
We executed $70 million of tuck in acquisitions in Q2, and expect that pace will increase through end of the year.
And we are using our growing surplus capital to repurchase shares with $891 million returned to shareholders in the last 12 months and that represents over 9% of our outstanding share count over that period.
Overall, our expectations for the year unchanged with revenue and EBITDA up, 12% and 19% respectively year over year at the mid points.
And as we approach the top end of our Investor day operating ranges in 2023, our belief in the longer term earnings potential and our platform is getting stronger.
Slide 22 lays out revenue and adjusted EBITDA for the quarter.
The commercial Kpis that Brad detailed drove revenue up 11% year over year to $582 million, obviously that growth was strongest in our leasing revenues and down slightly in sales.
Adjusted EBITDA increased 25% year over year to $261 million and we saw a normal sequential seasonal increase in our quarterly revenue and in line with our prior guidance.
And in the bottom right chart, you can see that 97% of our revenue is coming from our reoccurring leasing and services revenues.
Sales revenue down about $5 million year over year in the quarter. This is an extremely high quality and predictable revenue mix.
It's worth spending a minute on our margin trajectory because it continues to be a source of upside in our performance and margins are benefiting from a combination of both short and longer term drivers.
First and as we've discussed in the last couple of calls in the immediate term work order activity is down relative to 2022 levels and as a result, our variable rental costs are up only $5 million year over year.
That increase is entirely due to inflation and that inflationary impact will reduce as we progress through the year, which means leasing gross margins will have a natural tailwind as we head into 2024.
Second and again as I mentioned last quarter, we are realizing very meaningful efficiencies in our modular refurbishment spend having now operated in SAP for over two years.
Our average cost per modular refurbishment was down approximately 20% year over year year over year in Q2 and that is despite inflationary pressures.
This is driving refurbishment capex down and free cash flow margin up to a record 27% in Q2.
We believe these work order spend efficiencies are sustainable and we expect further relief from inflationary pressures as we progress into 2024, resulting in improved capital efficiency and cash conversion relative to the last few years.
Third we continue to see benefits of the improvements we made in 2022 to our logistics margins, which increased 230 basis points year over year. This.
This has been driven primarily by pricing, which we expect to continue.
But we also see opportunity for cost efficiency as we consolidate our operations onto a field service lightning within our Salesforce Dot Com platform later, this year, which will enable improved route management and then ultimately optimization.
The market for sourcing drivers and trucks is also improving which should allow us to in source more transportation volume in our module modular segment, which has been a challenge since 2020.
So overall, we have multiple levers supporting gross profit margins, which expanded 370 basis points year over year and were up across all revenue lines and in both segments.
And lastly, we are now getting very good leverage out of SG&A, which was down 260 basis points year over year to 23% of revenue.
In absolute dollars SG&A was down sequentially and flat year over year, driven primarily by reduced variable compensation again relative to 2022, which was an unusually strong year for bonuses and commissions.
Forward as we stabilize and our new consolidated CRM, we see significant opportunities to improve back office and workflow efficiency and expect this will be another source of operating leverage heading into 2024.
All of this combined to drive adjusted EBITDA margin up 500 basis points year over year to 44, 9% for the quarter, which is the top end of our Investor day operating range.
Flow through of revenue growth to adjusted EBITDA of 88% and free cash flow margin of 27% are both outstanding and we can look across all of the underlying key drivers and see benefits into 2024 and beyond so margins are clearly an area, where we see upside relative to our prior long term guidance.
Page 23 provides more detail on cash flow, which is a highlight.
Net cash provided by operating activities increased 7% year over year to $202 million keep in mind that these cash metrics are not adjusted for discontinued operations. So cash flows from our current operations are growing faster than 7% on a pro forma basis, and we expect that they will continue to expand in the second half of 2023.
Net capex was $43 million, which is effectively at maintenance levels for the second quarter in a row as I mentioned moderating inflation combined with improved work order efficiency are driving sustainable improvements in capital spend whereas new fleet purchases are purely demand driven and won't be necessary given the fleet additions of lag.
Year.
Steady top line growth margin expansion and moderated Capex resulted in company record quarterly free cash flow of $160 million and a 27% free cash flow margin.
If annualized this represents a $640 million free cash flow run rate.
Which gives us direct line of sight to the $650 million of free cash flow target that we established at our 2021 Investor day and over $3 of free cash flow per share based on today's run rate and share count of approximately 197 million shares.
For the purposes of 2023, we see quarterly free cash flows in line with Q2 levels through the remainder of the year, which implies free cash flow for the year, well in excess of $500 million and with a stronger run rate heading into 2024.
Yes.
Turning to page 24, consistent with Q1, we are operating very comfortably at 3.0 times net debt to adjusted EBITDA, which is at the bottom end of our target leverage range of 3.0 to three five times.
We have over $1 billion of liquidity on our asset backed revolver, so no near term maturities of debt.
And a weighted average pretax interest rate of approximately five 8%.
So with these factors accelerating free cash flow and record return on invested capital we are unconstrained from a capital allocation standpoint.
And page 25 shows how our capital allocation framework and how we've allocated that capital over the last 12 months.
Our capital allocation approach continues to be consistent with the framework that we shared at our 2021 Investor day, which is shown on the left.
As shown in the Middle chart, we generated $1 $6 billion of capital on a leverage neutral basis over the last 12 months inclusive of divestitures.
That still leaves substantial surplus capital generated by the business, which we are returning to shareholders via our share repurchase authorization, having reduced our economic share count by 91, 1% over the last 12 months.
Given the long term earnings growth potential in our business share repurchases are the right way to return capital and.
And reinvesting in our business consistent with this framework as yet another lever within our control to deliver consistent compound returns over time.
Lastly, before turning it back to Brad and opening Q&A.
Page 26 shows our current guidance, which is unchanged from the prior quarter.
All else equal I would expect margins to continue trending stronger than we originally expected and with continued work order efficiencies also benefiting capex.
But the underlying mix of price volume and value added products is largely unchanged, which means our run rate expectations heading into 2024 are also unchanged.
Again at the mid points revenue would be up 12% and EBITDA would be up 19% for the year with 250 basis points of margin expansion.
And free cash flow should be well north of $500 million up over 60% year over year, all of which sets up a strong trajectory for 2024.
As we progress from Q2 to Q3, I expect adjusted EBITDA to be flat or slightly down sequentially in Q3 with margins compressing sequentially, assuming variable rental costs continue to build through the seasonally stronger months.
And then I would expect margins to expand again sequentially into Q4, which is almost always our most profitable seasonal quarter.
Acquisitions seasonal retail demand variable leasing costs and delivery and installation of our sales revenues are really the only variables at this point that could take us higher or lower in those ranges as our leasing revenues are largely booked at this point in the year.
That's the beauty of the predictability in our portfolio.
We have a very high degree of confidence that will deliver the guidance and an outstanding year, and one which keeps us on track to achieve or exceed all of our longer term operating targets.
We've got a proven formula to drive sustainable growth and returns we've got the best team in the business with a track record of consistent execution and we've got a $1 billion portfolio of growth opportunities that will drive the business well beyond 2024, which is where we're focused with that Brad I'll hand, it back to you. Thanks, Tim as.
Thank you to our team and our customers for their continued support and thank you to our shareholders for your continued trust with your capital and thanks again to the team for the hard work to deliver not just the quarter, but as Tim referenced continuing to drive towards 2024 and beyond I wish all of you listening today.
Safety and good health. This concludes our prepared remarks, operator would you. Please open the line for questions.
Yes.
As a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby will be compile the Q&A roster.
Our first question comes from Tim Mulrooney with William Blair. Your line is open.
Yes, thanks for taking my questions.
My questions are on portable storage volumes down I think 6%.
Primarily I think due to a pause on retail refurbishments, but I was curious if you're seeing softness anywhere else in any other markets as well or if that was the overwhelming primary driver of the decline was from the retail side.
Yes, and that was the primary driver, but we are seeing the same kind of underlying core softening that you see in modular.
<unk>.
To storage as well.
Okay.
Got you so are you expecting a similar.
Again for Carnival surge volumes, a similar volume decline in the third and fourth quarters as well.
No. This is similar as we characterize in last earnings call.
First look at core demand, we expect to be down at the end of the year, 2% to 3% Youll see that most prevalent and modular and then we had the compounding effect in the second and third quarter of the store Remodels, which was <unk>.
15000 containers on a year over year decline.
Okay and with these volumes coming down is that also an indication that spot rates are softening up right now as well I'm just curious if after.
After two years of inflation and supply chain constraints. If you could just interesting spot rates moving lower on a year.
We're not we're not.
No really not seen pressure on spot rates I mean, the market is very well organized.
We're continuing to be.
Frugal in terms of driving the incremental value with the product positioning and the logistics capability and the differentiated premium offering so really not seeing any pressure on delivered spot rates.
And as I mentioned in my prepared remarks, we're really not seeing much contribution from <unk>, yet and storage, which will become more meaningful in 2024 and give us kind of that recipe that we've had in place for modular for five years driving double digit rate growth.
Playing out in storage as well.
Got it and keep that in mind. Thanks, Brett.
One moment for our next question.
Our next question comes from Kevin Mcveigh with Credit Suisse. Your line is open.
Thanks, so much.
Jim.
Framed really nicely kind of the variables on the full year guide.
When you think about the dollar amount associated with them and then just.
Quick follow up.
Lot of money like right I mean, 650 times a lot of cash.
Any thoughts I know traditional capital allocation, but just any thoughts around maybe dividend or just a forged a lot of opportunity, particularly given.
Where the balance sheet balance sheet sits today.
Hey, Kevin This is Tim I'll start with the guidance and variables that could move us around within there, but the punch line is as I said in my remarks is the mix of volume price and value added products really isn't any different than we anticipated coming out of the Q1 call.
Which indicates relatively relative stability across all of those key leasing kpis.
To Brad's point, we always from the outset of the year projected some year over year delivery declines from our core modular standpoint, but that's more a function of 2022 being extremely robust rather than anything.
Particularly different about 2023, and then you add the retail component on to that which I think we've talked about at length right now.
That retail piece is a source of potential upside as we go into Q4 as you know we.
<unk> always service seasonal storage capacity for the big non mall based retailers going into the second half of Q3, and then into Q4 and we've obviously got more idle capacity this year with which to respond to that demand and we are actively pursuing it.
Acquisitions as always in our guidance are incremental.
Variable cost progression.
Is a factor which should.
Drive a temporary sequential decline of EBITDA from Q2 to Q3, that's normal as volume activity picks up in the business.
And then I would expect those margins to pop back up.
I'm, probably north of Q2 levels when we get into Q4. So that's the sequential progression network that we're expecting.
Then the last variable that can move.
Quickly is delivery and installation and sales revenues sales revenue is not a particular focus for us we're 100% concentrated on driving that lease revenue run rate at.
At any point in time, and we still see a very attractive.
Run rate growth heading into 2024, which again is our primary focus in and unchanged from the prior quarter as it relates to your questions around capital allocation, we havent changed our framework and frankly, we're very happy right now to deploy that surplus capital into the share repurchase as we look out 234 years in terms of.
Where the business is going.
Absolutely and accretive.
Source of return for our long term shareholders over time, and we consider ourselves to be among those.
Your question around dividend is a good one the stability of our cash flow streams, absolutely support that type of capital allocation. So I think it's more a question of <unk>.
When not if we start having that discussion with the board, but sitting here today, obviously the share repurchases is the right place to be putting our dollars.
It makes a ton of sense. Thank you.
One moment for our next question.
Yes.
Morning, I wanted to follow up on portable storage spot pricing based on the gap that you mentioned around 10% it looks like based on the deterioration from <unk> into <unk>.
But then I heard you say that there hasn't been deterioration for can you just maybe clarify that for us.
Yes.
I think historically Tim.
You've talked about.
Advisory This is Tim I think that this inflation narrative is exactly that it's a narrative not necessarily the reality, especially what you see a cross.
Construction markets.
Thank you and talk to a contractor out there thats.
Talking about kind of disinflation across there their business. So this is still an extremely healthy.
The environment for both modular and container pricing.
And then you add on some of the other tactical and.
In strategic.
Techniques that we use to drive product positioning price segmentation.
The value added products and services offering and then also benefiting from our differentiated logistics capabilities, especially on the storage side of the business, where that's a differentiator.
Pricing continues to be a highlight and.
We don't see anything changing in that regard as we progressed through the year.
Great. Thank you.
One moment for our next question.
Our next question comes from Andrew Wittmann with Baird. Your line is open.
Okay, Great I just wanted to clarify a response to a prior question I think Brad you mentioned that.
Core demand is down two or three was kind of the expectation for the year I just want to make sure was that comment specific to the storage segment or was that for the company overall and could you comment on your updated expectations, if Eddie for core demand on the modular side of the business this year.
So modular and let's wrap in the commercial nonresident market are separating retail as we've said on the last call we expected to be down 2%, 2% range at the end of the year that same effect.
It will impact the storage as well the layover in storage is retail and its really theres a bifurcated.
Effect and storage you've got the remodels in the middle of the year. They largely didn't occur and then you have your normal seasonal opportunity at the end of the year. The remodels didn't occur this seasonal demand as I mentioned in my prepared comments has just started in terms of order flow. It's in line with our expectation and demand and time.
But it's very early and so I guess.
That's the bigger moving part if you will Andy and storage as you look at year end.
Rejections.
Got it and then Tim I just thought just given that this has come up a couple of times. This morning in some conversations.
<unk> came in a little bit better than expected and just talk about how.
That did or did not affect.
The way you approached guidance the updated guidance here, which is I guess the same as last quarter.
Yes, like you said, a little bit up a little bit better than expected, but we're not going to get <unk> trying to manage guidance plus or minus 1% here very happy with the results in the quarter and encouraged by the margin trends in particular core leasing kpis very much in line with what we expected.
Last quarter, but this is a business, where we're looking out two or three years in most of our time is spent.
Focused on driving run rates and things like that that will push us over that type of time horizon. So very happy with the trajectory of the business implied run rate going into next year.
Is set up a very good 2024, and frankly I can't find any real.
Red flags across our core Kpis that would cause me concern about executing any of those long term targets.
Okay. Thank you.
One moment for our next question.
Yeah.
Our next question comes from Scott Schneeberger with Oppenheimer. Your line is open.
Thanks, very much good morning all.
A lot of questions are with regard to just consideration for demand across the two main segments could you. All please elaborate on it sounds like just in general this core demand of about down 2% to 3% for the year slightly softer than where you were looking at the year at the beginning could you talk about non res res.
<unk> chips and <unk> infrastructure Bill.
<unk> reduction acts.
What youre seeing across all of these.
That would pose any risk or upside to that down 2% to 3% in the back half and going into 2024. Thanks.
Yes again. This is a reminder, these are three year lease duration. So you don't own.
<unk> move slowly I would recall my comments in the prepared remarks, our second quarter North American modular quote rates were modestly up over prior year and prior year was at record levels. So theres no crisis or issue here now objectively construction nonresident starts in the first half whether you look at dollars or square.
Great Abi and went through a soft period has now stabilized so theres no new news here. This is what we alluded to when we issued guidance, we kind of reaffirmed in the first quarter and Thats really where were sitting here today. So.
I think as we look forward.
Into the second half of the year and certainly into 2024, we're extremely excited about the potential of the onshoring re shoring infrastructure stimulus and such and it is not.
We're bidding we're winning these projects.
They're super exciting.
We are extremely uniquely positioned to.
To take advantage of the opportunity and service the customers needs in these cases.
Great. Thanks, Thanks, Brad and then my second question is it harder with regard to <unk>.
Your European peer talks about its apps penetration.
That's.
Round.
Later, then 60% where would you say this is specifically about modular your <unk> penetration is the first part of the question the second parties in.
In the quarter the vast average monthly rental rate was up 13% year over year, but the LTM delivered rate was down 1% year over year.
Are you are you tapping out on that story is where I'm going with this.
If you could just describe that dynamic in the quarter and is there is there any concern that maybe modular is getting long in the tooth and the vast story you've maintained the 650 is that going to come from portable now or are we still feeling comfortable on modular. Thanks.
Hey, Scott it's Tim.
Attempt to answer.
At least the first part regarding our European peer, but I think the best way to look at the penetration is <unk> revenue relative to kind of the core unit leasing revenue and if you look at our delivered rate of call. It $4 71.
Over the last 12 months and a spot rate that's north of a 1000 per unit for modular.
Easily approaching that 50%.
Range, if you wanted to look at.
Penetration just in terms of the relative dollar contribution I think thats, probably the best way to do it. So we're really just focused on that dollar contribution at the end of the day.
There is some.
The LTM Thats delivered right has flattened out I think you also saw a commensurate.
Pickup in core unit lease pricing in modular.
And Thats there is some fungibility is the wrong word between those two but in the core unit pricing standpoint. For example, we're getting served surcharges now for things like <unk>.
<unk> and sanitation.
Which are value added in their own right, although not going to be impacting the LTM delivered.
Metric and as we look at just the core <unk> offering across the sales force there is still a very wide.
Dispersion of performance around that with top performers well in excess of the numbers that we're reporting here today, that's been the case forever and Thats, the best practice sharing and coaching that we used to drive this.
Over over time, and this has been going on now for well over 10 years.
And no change in terms of our expectations of pushing the sales force to 650 per unit over time.
Great. Thanks, Tim I appreciate that color.
One moment for our next question.
Our next question comes from Steven Ramsey with Thompson Research Your line is open.
Stephen This is Tim that's a good question because as we go back to think about the Investor day frame.
Framework that we laid out we presented a bridge to $650 million of free cash flow and the Capex assumption in that bridge was circa $275 million that 275, probably wouldn't have had an assumption.
Around the inflation that we incurred through the course of 2022.
<unk>.
Point to too much.
Change there other than it is definitely an improvement over the 2022 run rate that we're on and gives me confidence that we can keep it.
And the range that we had advertised as we head into 2024 and beyond.
Okay interesting that's great and then on storage that I realize it's not a small tiny part of.
The reality for current financial results, but is this part of conversations with retail customers.
Q4, and is this part of conversations with customers on quoting activity for projects that are set to start over the next 12 months.
Frankly, better than we expected back at Investor Day, and the other thing just to follow up on Scott's question. As you just think about what does all this mean, if we just hold value added products penetration, where it is today across all of these products you are talking about a $200 million revenue convergence opportune.
<unk> that is yet to flow through our P&L yellow pricing, where it is today. There is about another $200 million of convergence opportunity that has yet to flow through the P&L.
So these are things, we're very excited about we're continuing to push the spot rate side of things.
We absolutely have a value added products penetration opportunity.
On storage that we're seeing which is becoming part of the customer conversation and to Scotts question a minute ago.
No concerns about getting back to that 600 per unit trajectory on modular.
That's excellent color. Thank you.
One moment for our next question.
Our next question comes from Philip <unk> with Jefferies. Your line is open.
Hey, guys congrats on a strong quarter.
The market's obviously nervous about new non res activity slowing down and you called out API as well.
But you also highlighted a shrink on the infrastructure side and some of these mega projects. So when you think about these cross currents looking.
Looking out to 2024, how should we think about what that translates to volumes next year and any color on how youre bidding.
Yes, as I referenced our quoting activity in the second quarter in a modular was up modestly over prior year, that's phenomenal, especially considering how strong 2022 was as far as like crosscurrents. The fact that the Abi has stabilized into neutral positive territory right. Following two quarters of.
Contracting territory, that's very supportive of a 2024 outlook so I think.
With <unk>.
<unk>, probably seen if the Abi continues to remain strong we see kind of core market stable and recovering and you basically for jet fuel and with infrastructure onshoring reassuring and everything else that's already beginning to play out today.
So it sounds like Brad at this juncture I. Appreciate your business is pretty short cycle youre not expecting volumes to be down next year. It sounds like it might have some upside next year, so that's pretty encouraging.
And I guess, what your gears.
A question for Tim I think you went out of the way to kind of highlight.
All the good stuff you guys are doing on the cost and execution side, and then inflation coming at coming down and then still pretty good momentum on pricing.
What kind of volumes decline would you need to see for margins not to be up next year. So I guess it sounds like you've got a lot of runway on the margin side of things for 2024.
Yes, I mean, I haven't done that exact math.
Matt.
So that would be hard to get too.
Given I, just said that <unk> got almost $400 million of revenue convergence opportunity across pricing and value added products.
In rough math is you get roughly a third of that flowing flowing through a year.
And the cost efficiency opportunities on top of that I feel very good about.
Margins going into 2024, and I think around this time last year I said I felt very good about margins going into 2023, and we just passed 500 basis points.
Don't know make me very very happy about the margin trajectory.
Great color really appreciate it.
One moment for our next question.
Enhancement economic return profile et cetera, and on the return profile of the unit level accumulative cash flow I don't think those have changed in the slides. The presentation have there been changes to the acquisition cost the maintenance as a result of efficiencies et cetera.
Hi, Robin this is Tim I'll start with your questions around acquisition contribution and I think the best way to think we called out that there is roughly $17 million of revenue flowing into the Q2 numbers from acquisitions in the last 12 months.
See I assume that that annualized run rate is a little bit higher than the $17 million.
And you've got an idea of the annualized EBITDA Thats been acquired and then if you compare that to the LTM acquisitions of $266 million in the last 12 months Youll get about an eight five times implied enterprise multiple at which we purchase those those business is fair to assume over.
12 month period that we get some synergy uplift.
Primarily from cost and just operating those assets and branches.
Consistent with the rest of our our branch network.
<unk> weekly.
To manage a pretty exhaustive pipeline of opportunities both early stage and recently recently integrated so it is a repeatable process and core competency that we've developed.
Our investments there are probably pick up a little bit as we close out.
$40 48 month cash on cash payback on modular and 36 month cash on cash payback on containers.
And then accelerate those returns with value added products and services conceptually that's still the right way to think about the unit economics in our business.
Thank you I appreciate it and then as a follow up to a prior question that was asked on the Capex efficiencies and the refurb.
Can I just.
<unk> for the remainder of the year the expected sequential progression on Capex and free cash flow and then when do you expect.
Capex to kind of.
Reflect or inflect to more to bring back some of the growth I know, it's a function of the 90 day capital planning, but what are the.
Expectations for for that.
Yes, I would expect that capex increases sequentially, along with our other variable costs in the P&L into Q3.
And then a little more.
Haven't baked Q4, yet because we don't have a very long.
Based on demand, but I do expect Capex to increase sequentially as we go from Q2 into Q3 and then in terms of.
Sure.
Kind of more substantial fleet investment there may be some kind of niche categories that we have in mind that could come to play in Q4, as we head into into 2024.
Investor Day bridges that bridges that took us to the $650 million free cash flow arrangement.
Roughly in line with where we last coming out of Q2, maybe a depth a bit based on increased capital spend.
Going into Q3, there is also going to be some offsetting growth. There and then typically capex would go down a bit and margins would go up a bit in Q4 and free cash flow historically has been highest in Q4, so that would be.
Probably a good base case to think about.
It will be <unk>.
Land, driven and largely based on any capex fluctuation.
Thank you very much appreciate it.
One moment for our next question.
Our next question comes from Brent Thielman with D. A Davidson your line is open.
Okay, great great. Thank you good morning, Hey, Tim.
Just the consideration for margin expansion into the fourth quarter, hoping just to clarify to what degree.
<unk> uptick in storage critical to that versus the other variables and drivers in other words.
Would you still see that margin enhancement, even if the seasonal activity in storage is possibly less than what you anticipate today.
Yes, Brian it's absolutely the latter the seasonal doesn't really impact my thinking at all as I gave that guidance.
Really driven by.
The fact that repair and maintenance activity typically slows down in Q4, but as you know our lease revenues just don't don't change very much right.
So what I would expect sequentially coming out of Q2 is maybe we get up to 200 basis points of margin contraction as we go into Q3 that will be driven by variable costs.
Ramping up in the visit business and then you could get maybe 400 points of sequential expansion going from Q3 into Q4, and that's again, just driven by variable cost fluctuation in the business.
Yes give me some latitude on the magnitude of those changes of course.
Order order of magnitude that's I think how we finished the year and that puts you at kind of record margin heading into 2024.
Which again is why it's got a high degree of confidence on that and it's not driven really at all by the seasonal business.
Got it okay I appreciate that Tim and then just could you guys speak to the supply dynamics in the industry for both modular in storage I recall that E.
Constrained.
In recent years I presume, you've always been prioritized among your vendors.
What degree.
Do you see available availability today for the industry versus a few years ago as the greater circulation out there in terms of assets.
If you could comment on that that would be helpful.
Brian It's Tim I haven't really seen any material change I'll start on the modular side of the business and to the extent, we're sourcing traditional product domestically, which is why virtually all of our competitors would be doing.
We'd be sourcing from a network of 20 plus.
Much local manufacturers of modular buildings.
At most maybe 10% of our manufacturers business will be focused on rental fleet. The primary focus would be permanent modular construction projects, which is not an area, where we care to participate.
So it is a fairly limited domestic supply base and I think because of that you haven't seen procurement costs really come down at all.
Over the course of.
The last 12 months, which again to one of the earlier questions around deflation I think thats more narrative than it is a reality in our business right any new capacity coming into the market today, especially on modular is at a much higher cost basis than the industry would have been.
Managing historically and frankly, we have some prospective sellers in our acquisition pipeline.
We're talking to us precisely because of that reason acquisition costs procurement costs are up capital costs are up which makes it more difficult for a smaller competitor.
To grow their business and enhances our competitive position in the market given our available capacity a little bit different on the storage side those container prices can fluctuate.
To an extent with the.
Capacity in the maritime shipping World.
But it's quite another question to have that capacity filtered its way into all of our diverse 300 local markets, where we're competing every day. So we just don't see that happening or impacting <unk>.
Supply availability to a material degree or frankly pricing to a material degree.
Okay. Thank you.
One moment for our next question.
Our next question comes from Sean <unk> with Deutsche Bank. Your line is open.
Good morning, and great job on progressing on your goals from Investor Day, It was great to see.
Thanks, Sean when do you think.
And when you think about some of these larger projects the mega projects.
<unk> asserted dominate the headlines.
When you think about the profile on that project is that going to have a different mix element than what you've typically seen given that they're starting to becoming a bigger maybe.
Maybe part of the mix there.
Could you maybe talk about.
Yes, Sean it's a good question I think.
Mix shift in the overall balance of nonresidential construction activity moving towards these types of projects and I think it's still very early innings.
When we look at over 100 of these mega projects kind of in our CRM today. The vast majority haven't even started yet right and we do have a disproportionately high win rate on those projects.
And that is in part because they are larger longer duration more employees on site more likely to need more sophisticated complex higher square footage turnkey solutions, which is our sweet spot, that's where we've got the strongest competitive positioning.
In the market and we're the only pure play space provider that can cross sell across all of our different capabilities into those opportunities. If you look at projects that have been announced are awarded related to the infrastructure build the vast majority of those haven't started yet either so.
Brad talked about non res square footage down in the first half of the year, that's really before the impact I believe of the majority of these.
Re shoring and interest infrastructure related projects, which is one of the reasons, we feel pretty good about the future in 2024 on the volume side and are disproportionately strong.
Competitive positioning given that mix change.
Right and.
A little bit lower margin, just kind of curious at all sort of looks from a high level.
I wouldn't characterize a three year project is being lower margin because you got very little variable cost associated with that contract over the course of three years. So absolutely. These all else equal should skew.
So, yes, I would expect longer contract duration.
It tends to correlate with project size.
And.
Yes.
Very helpful and then if I could sneak one more in.
I was curious.
Considering doing something with them and then also do you have the flexibility to repay them with your revolver should you desire to do that.
Yes, 100%, that's what the revolver is therefore, we could refinance them into the Rover tomorrow, if we if we so choose.
And then as you know we've been a repeat issuer in the high yield market Theres no urgency to.
Frankly, do anything about the six seven and eight notes right now just given where short term benchmark rates have have moved so we're quite happy with them.
We've always got the availability to refinance them into the ABL.
And we can be opportunistic as it relates to.
Activity in the high yield market, you'll be aware well aware, we got upgraded recently.
By S&P, So I think we're now.
To not just closer to the United States credit profile.
So very happy with.
Progression of our credit metrics and frankly, the flexibility in our debt structure.
Alright, Thank you very much really great job I appreciate your help.
We have now reached the end of today's call I will now turn the call back over to Nick.
Thanks, Amy Thank you all for your interest and we'll Scott mobile. Many if you have additional questions. After today's call. Please contact me.
Thank you ladies and gentlemen. This concludes today's conference you may now disconnect.
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