Q3 2023 WillScot Mobile Mini Holdings Corp Earnings Call

Okay.

Welcome to the third quarter 2023, well Scott Mobile Mini earnings Conference call. My name is Tanya 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'll now turn the call over to Nick Gerardi Senior director of Treasury and Investor Relations you may begin.

Good morning, and welcome to the World Scott Mobile Mini third quarter 23 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.

Yeah.

Slide two contains our safe Harbor statement, we will be making forward looking statements during the presentation and our Q&A session Christmas 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.

<unk> 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.

Thanks, Nick and good morning, everyone. Thank you for joining US today, My bread soldier, Chief Executive Officer, Scott most of my life.

Starting on Slide 16, our company is delivering record financial performance revenue adjusted EBITA margins free cash flow and return on invested capital, Eric our highest levels in our history.

Our strong return profile and cash flow generation are driven by consistent execution by our team as well as the many idiosyncratic levers that we built into our portfolio. We have multiple ways to win in any macro environment, which makes our financial performance very predictable.

Over the last 12 months, we've generated almost $3 of free cash flow per share.

And our share repurchase authorization, we have reduced our economic share count by nine 2% over the last 12 months and by nearly 20% over the last three years, we believe the combination of capital allocation and our continued operational execution represents a reliable formula to deliver consistent compound returns.

Our long term shareholders over time.

Now when I'm thinking about investing in our company by thesis comes down to three main points first.

Our $1 billion of idiosyncratic and very predictable growth levels are largely within our control keep in mind that we initially defined this $1 billion growth lever portfolio in late 2021, and it is still a $1 billion portfolio. Meanwhile, we've been consistently harvesting and reloading it whilst we have.

Grown EBITDA by over $300 million.

And you'll recall that our ever expanding perhaps portfolio represents 500 million or about half of this portfolio. Among other points that Tim will highlight later I was pleased to see our most recent modular wraps deliver rates.

Flex strongly following the CRM changes we implemented in August.

Second our disciplined approach to capital allocation drives returns with accretive organic and inorganic investments, which we can execute while returning excess capital to shareholders and third given our visibility into free cash flow. We're confident that we will surpass our next milestone of $4 of free cash flow in the coming years.

Speaking of investments in the future, we extended our offering of space solutions with several exciting acquisitions in the recent months in Q3, we built out our cold storage leasing platform and are now the North American leader in that business and in October we acquired a provider of premium large Claire spend structures, which will allow us.

To offer even larger and more flexible spaces to customers across almost all of our end markets for.

These capabilities are simply extensions of the spectrum of space solutions that we can provide our customers. Both businesses are rapidly growing in high value segments of the supply chain and expand our total addressable market, creating even more opportunities to serve our customers our current customers and new customers.

As the only total space solution provider in North America.

We expect to grow both businesses meaningful by leveraging our core competencies and pricing value added products operational excellence and M&A.

In addition to these capabilities highlights the scalability of our platform given our significant technology investments over the past few years. It goes without saying, we're very excited that these platforms with the potential. These platforms will provide for additional growth levers above and beyond the $1 billion of idiosyncratic.

Credit growth levers, which are already in flight and.

And we look forward to talking about these in greater detail in our upcoming Investor day.

To that end I'm excited to share that we'll be holding our second investor day in March of 2024, our company has outperformed or is accelerating towards all of the milestones. We set in our last Investor day, we have high confidence in our $1 billion of aforementioned growth levers in March will describe next milestones on our growth trajectory.

It's pretty obvious who have upside in many of our key metrics. For example, the mid point of our guidance. This year suggests 44, 5% adjusted EBITDA margin, which is at the high end of our 40% to 45% of.

Operating target range. Similarly return on invested capital is at 18% over the last 12 months well above the 10% to 15% operating range that we thought was reasonable in late 2021 <unk>.

Coinciding with this Investor day, we will also plan on issuing our inaugural sustainability report.

Now touching briefly on end markets. The market environment is largely unchanged from our Q2 expectations. The modular segment is performing a bit better relative to our assumptions while the storage segment is just a bit worse.

Modular segment quoting has remained up 9% year over year, although conversion acts Activations has remained a bit slower the modular segment added modular units on rent through Q3.

Storage units on rent dropped by approximately 2% during the quarter before beginning to increase in October altogether. This paints a stable picture as we look into 2024 and the mix shift in nonresidential starts activity favoring larger scale industrial project.

To our strengths from a competitive standpoint.

Finally, let me reiterate how excited I am for 2024 and beyond we're closing out 2023 on a strong foundation and we spent the last 18 months thinking about the next horizon of our growth trajectory. That's a fun job. When there are so many opportunities for value generation as their R&R business made it even more so by the <unk>.

Quality creativity and diligence of our team we look forward to sharing those details with you in New York in March with that I'll hand, it over to Tim.

Thank you Brad and good morning, everyone.

Page 21 shows a high level summary of the quarter.

All of our financial Kpis are performing at record levels as we approach 2024, and the business continues to perform as expected in this environment, our strong financial performance. During the quarter was driven by continued pricing discipline growing <unk> penetration excellent margin performance across all revenue streams and continued cost discipline.

Adjusted EBITDA margin was up 250 basis points year over year. So our longer term margin expansion trend remains on track and supported by our cost management initiatives and technology investments we.

We generated $148 million of free cash flow in Q3 with $533 million of free cash flow over the last 12 months.

As of October 27th that represents approximately $2 80, a free cash flow per share, which has more than doubled over the last two years and we remain on track to eclipse the longer term $4 of free cash flow per share milestone that we committed at our last investor day and within the timeframe that we committed.

<unk>.

We closed 11 tuck in acquisitions over the last 12 months, representing almost $500 million of capital invested and the tuck in pipeline looks consistent heading into 2024.

Return on invested capital was 18% over the last 12 months, we see further upside to this metric and more.

We are discovering new ways to reinvest in our business as you've seen with some of the recent extensions of our space offering.

And we continue to return capital to shareholders at rates well above any benchmark with our economic share count down nine 2% over the last 12 months. We believe the repurchases are highly accretive for our long term shareholders a group, which includes our leadership team here.

Yeah.

Page 22 lays out revenue and adjusted EBITDA for the quarter.

Revenue was up 5% in Q3 with leasing revenues up nine 1% driven by increased pricing and <unk> penetration and partly offset by lower transportation and sales revenues.

Of the roughly $38 million increase in leasing revenues year over year, approximately 60% of the growth was organic driven by pricing and value added products.

Offset by some volume and 40% is from acquisitions over the last 12 months. So the growth algorithm remains quite balanced.

Pricing in Q3 was slightly better than than what we expected the.

The runway on modular units is unchanged with average rates up 16% year over year in the quarter.

And our average monthly rates on portable storage units were up 25% year over year. So we haven't seen any pricing weakness across either segment. Despite the softer demand backdrop, and we're being quite disciplined about that.

Just focusing on the spot spreads we see in unit pricing there is approximately a $200 million mark to market tailwind across the portfolio, which we will realize in the form of incremental revenue from rate convergence over the next three years.

So this remains a very powerful lever for us heading into 2024.

And our modular segment the spread between units delivered over the last 12 months and the average of the portfolio remains over 30% including value added products.

And the spread for storage units, excluding seasonal deliveries is over 10%. So we're quite comfortable with the spot rate environment and the implications for 2024.

Value added products continues to be another powerful tailwind with absolute growth across all space categories and strong penetration increases in ground level offices and storage containers in the quarter.

Similar to pricing there was approximately a $200 million mark to market tailwind across the portfolio and value added products with a total of $500 million opportunity.

When we converged at the longer term milestones that we established for both modular and storage and Theres been no change in those targets.

Volumes on rent were slightly better than we expected and modular and slightly weaker for storage. The overall the leasing revenue trajectory is in line with what we expected to end the year.

Shifting to margins Q3 was our strongest quarter of the year, so far for delivery volumes. So leasing costs increased by $6 million sequentially from Q2 to Q3, driving slight sequential margin compression as we anticipated last quarter.

That said gross margins were up year over year across all revenue streams. So we continue to see a favorable divergence of increasing pricing relative to stabilized input costs, which we expect to continue into 2020 for supporting margins and the bottom line.

Overall, adjusted EBITDA margins were up 250 basis points year over year and are up over 300 basis points year over year at the mid points of our guidance and our margin on net income from continuing operations increased 160 basis points to 15, 1%. Despite higher interest costs. So I expect that margins will remain a bright spot for the <unk>.

Business as we head into 2024.

Yeah.

Moving on to page 23, we continue could continue to see very healthy net cash flows from operating activities and expect the cash flow will steadily build into 2024 based on our embedded growth drivers.

Net capital expenditures remain at maintenance levels down 66% year over year as we balanced fleet investments with demand and continued to benefit from work order efficiencies and moderating inflation that I discussed in detail on the Q2 call.

I will note, we expect net capex to increase sequentially in Q4, which is a bit atypical from a seasonality standpoint and related to growth investments to support some of our more recent product expansions.

Free cash flow increased approximately 80% year over year to $148 million in Q3 with free cash flow margin increasing to 22% over the last 12 months inside our target operating range of 20% to 30%.

Turning to page 24, we.

We finished Q3 at three three times net debt to last 12 months adjusted EBITDA, which is comfortably inside our operating range for leverage of 3.0 to three five times.

Leverage increased sequentially to fund a higher level of tuck in acquisitions, while maintaining a steady share repurchase cadence to take advantage of lower valuations. We can easily deleveraged by approximately one turn per year. When we so choose so we'll decide whether or not we deleverage from here based on the opportunity set that we see as well.

As the operating environment.

During the quarter, we completed a $500 million offering of senior secured notes at 7% and three 8%, which we used to pay down our asset backed revolver and financed the tuck in acquisitions.

We are incredibly grateful for the strength of our bank group and our repeat customers in the bond market, we value our relationships. Appreciate your support and know that you are getting an outstanding risk adjusted return.

As of September 30th our pretax weighted average interest rate is approximately six 1% our annualized cash interest is approximately $214 million.

And our debt structure is approximately 65% fixed and 35% floating which approximates our to our target mix.

We have approximately $1 $3 billion of liquidity and our ABL revolver, which gives us ample flexibility to fund our capital allocation priorities, regardless of macroeconomic conditions.

We have capacity in the ABL to refinance the 2025 notes at any time of our choosing and we will do so to optimize interest costs and depending on our capital requirements.

The balance sheet is in a great position strong flexible and with abundant liquidity.

Yes.

Page 25 shows our capital allocation framework and our performance over the last 12 months.

We generated $1 $7 billion of capital on a leverage neutral basis over the last 12 months inclusive of divestitures.

As I alluded last quarter, we allocated more capital to acquisitions in Q3 with $333 million invested in our cold storage platform as well as a modular modular leasing and manufacturing business in the Pacific Northwest and.

And in October we closed another transaction, adding 616 global clear spanned to our portfolio, which we're super excited about these are compelling businesses with great economics in our existing customer base are scratching their head searching for partners that can work with them at scale in these categories.

We are that partner and we are excited to scale. These new solutions across our network and apply our core competencies and value added products pricing operations excellence and bolt on M&A to make them, even better and we're excited to welcome. These new team members to the well Scott mobile mini family.

This is how we create value for our customers and our shareholders as well as our new team members scale is the name of the game and I expect these platforms will scale exponentially and quite profitably with the support of our financial and human capital and will of course deferred the specifics to our upcoming Investor day.

Sure.

Lastly, before turning it to Brad page 26 shows our current guidance.

We increased the midpoint of our adjusted EBITDA range for 2023 to account for the acquisitions that closed in Q3, and we tightened the revenue and adjusted EBITDA ranges given that we're three quarters through the year.

Our business is performing to the prior EBITDA midpoint with slightly stronger margins as we mentioned in Q2.

Our assumptions around operating Kpis are effectively unchanged from the Q2 call.

Modular volumes are slightly better than expected storage volumes slightly weaker storage pricing a bit better so all within our normal margin of error for our quarterly forecasting process.

Together the midpoint suggests approximately 300 basis points of margin expansion for the year and free cash flow of approximately $550 million in 2023, both of which would reflect record profitability levels heading into 2024.

As we progress from Q3 to Q4 I expect total revenue to continue its steady sequential increases with sequential growth in leasing revenues, partly offset by normal sequential declines in delivery and installation revenues.

Adjusted EBITDA will also increase with margins expanding sequentially, although perhaps not to prior year levels, just given the elongated timing of seasonal storage rentals last year.

And Thats sequential progression in the core business plus recent acquisition contribution gets us to the midpoint of the EBITDA guidance.

Okay.

Looking ahead to 2020 for our run rate as we close out 2023 is supportive of another strong growth year for <unk> and rate convergence together will provide approximately 10 percentage points of support to leasing revenue growth as we head into next year irrespective of market conditions.

And we have a longer term margin <unk>, which are obvious in our results and suggest that we are headed for record profitability levels again in 2024.

We have high confidence in our $1 billion of idiosyncratic growth levers as well as the incremental opportunities that we see in cold storage and clear span.

And we're excited to discuss these opportunities and our outlook for long term value creation at our next Investor Day in March 2024.

So with that Brad I'll hand, it back to you. Thank.

Thank you Tim and as always thank you to our customers for your continued support thank you to our shareholders for their continued trust with their capital and thank you to our employees for their hard work to deliver on our team's commitments I wish all of you listening today continued safety and good health. This concludes our prepared remarks op.

Operator would you please open the line for questions.

Certainly as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby, while we compile the Q&A roster.

And one moment for your first question.

Our first question will come from Andy Wittman of Baird. Your line is open.

And again, our first question will come from Andy Wittman of Baird. Your line is open.

Andy We can't hear you if you're on and.

Why don't we just go on to the next.

Question, Please I'm removing Andy now.

Okay.

One moment.

And our next question will come from Seth Weber of Wells Youre line is open.

Hi, Good morning, Hi, Good morning, guys. Thanks for taking my question.

Tim I just wanted to go back to your one of your last comments there about fourth quarter margin.

It sounds like kind of flattish, maybe maybe flat to down for the quarter on a year over year basis can you just give a little bit more detail on what's going on there and then why that would.

<unk> margin expansion would reaccelerate again next year.

Yes, I think the only.

A significant difference versus Q4 of 2022 would be the seasonal retail storage volumes in transportation that would have been flowing into last year and the seasonal volumes on rent and storage are.

Down circa 6000 units year over year and the transportation timing also plays into that so it's really nothing more.

<unk> been that we're seeing a nice sequential build in storage volumes from Q3 into Q4 as you would expect not to the same degree we had last year, but that's the primary.

Contributor there.

Okay. Thanks, and then maybe just sticking on the retail angle.

Can you just talk about your confidence in some of the projects that have gotten pushed this year that they will all happen next year are you hearing anything about that or just how we should be thinking about that 2024 versus 23 for that segment in particular thanks.

Yes, the starting point is I don't see how it can get any worse than it was this year and I'm not saying that.

I'm, not saying that flipping I, just don't see it as a risk going into 2024 and it is the type of business that can recover quite quite quickly.

<unk> seen some.

Cap store capex announcements from larger retailers going into next year. Its a little soon to kind of know exactly the timing and magnitude of the demand implications for us.

But I kind of view that as a as a positive and an opportunity going into next year. This was.

Very soft from a remodel standpoint in that business will be.

In some cases direct with the retailers SaaS and in other cases direct with <unk>.

Local contractors, who then.

Work with us on a recurring basis. So we have to kind of aggregate the demand across both of those channels.

To get a clear picture of where that shapes out for 2024.

Got it okay. Thank you guys I appreciate it.

And one moment for our next question.

And our next question will come from Scott Schneeberger of Oppenheimer <unk> Company. Your line is open.

Thanks, very much guys I think I'll focus my first question on the <unk> LTE.

<unk> delivered rate.

If you can just recap.

EUR kind of bundled and then our cart seemingly back to bundled in August what trends have you seen since August we saw.

The number for the quarter.

I just wanted to get a sense of how we should expect that to trend going forward. Since you made the switch back. Thanks.

Yes, Scott as I mentioned in my prepared remarks, it's inflicted pretty positively and strongly post those changes that we implemented really in mid August.

We alluded to or spoke about on our last call. So quite pleased with that and as you can do the math for the LTM to roll through Youre, probably looking into next year before you see it.

Inflect on an LTM basis, but early signs are encouraging.

Alright, thanks for that appreciate that for my follow up.

These these new acquisitions.

Certainly sizable the largest that we've seen since the big merger back in 2020.

And they sound interesting and look forward to hearing about that at Investor day, and what they do for your target addressable market and how those can grow so it sounds great and certainly the reason that the EBITDA increase.

But I think there might be some.

Some some.

No.

The concern out there of just hey, acquisitive growth versus organic just wanted to get a sense. It looks like you are still delivering solid organic growth and the business is running well, but because the acquisitions are in their clouds. It a bit I was wondering if you could speak a bit to how you're thinking about organic growth.

Here and beyond thanks.

Yes, Scott this is Tim and I mentioned this in my prepared remarks, if we kind of dissect lease revenue and you've got to strip out transportation and strip out sales right. Because when you are acquiring businesses. We're typically focused on the lease revenue line and the delivery and installation will fluctuate period to period based on other other drivers.

But if we just look at the $38 million year over year increase in lease revenue approximately 60% of that increase is organic and thats, primarily driven by pricing and value added products offset offset by some organic volume loss Thats no surprise right and then if you think about.

The acquisitions that we made leading up to Q3 and assume kind of like a four five times multiple on lease revenue you can start to back into what I think that.

In organic lease revenue contribution is.

And then those Q3 acquisitions, while larger we got maybe a month of contribution from those in Q3, So I'm actually really happy with the organic inorganic.

Mix in the quarter and based on the magnitude of the tuck in acquisitions that we're doing if we stay in this.

This range in terms of enterprise value deployed.

That organic inorganic mix really shouldn't change very much.

Okay. Thanks, I appreciate the color Ken I'll turn it over.

And one moment for our next question.

And our next question will be coming from Tim Mulrooney of William Blair. Your line is open.

Okay.

Hey, Tim that was that was helpful. I just want to build on that last question, a little bit and ask it more directly how much do you expect acquisitions completed in the last 12 months to contribute to revenue and EBITDA in the fourth quarter.

In the last 12 months in the fourth quarter.

Let's see Tim.

Just curious how much you think M&A.

Just so that we can figure out okay. How much of that guidance range was due to M&A how much of it was due to organic just trying to hold in well.

That's an easy one Tim if we just do it from an EBITDA standpoint, I said in the prepared prepared remarks the <unk>.

Core business is performing to the prior midpoint of about $1 50, and so that would say the entire guidance increase at the midpoint of about $7 5 million of EBITDA.

Is driven by.

The acquisitions in Q3.

Perfect. Okay. Thank you and then.

The modular the average rental rates, we saw decelerate a little bit from.

From 17% in the second quarter to 14% in the third quarter just.

Just curious how much of that is due to a slowdown in spot rate increases and how much that might be due to other factors like perhaps or other things.

It's been roughly roughly flat in terms of the mix between the unit pricing trajectory Tim and.

The value added products contribution at least on on that metric side frankly.

Changes of that magnitude a percentage point here or there I don't really consider that to be meaningful.

Okay. Thank you.

And one moment for our next question.

Okay.

Our next question will be coming from Steven Ramsey of Thompson Research Group. Your line is open.

Hey, good morning, and thank you Brian Biros on for Steven Thank you for taking my questions.

First on the acquired companies recently seem to be an attractive adjacencies can you just touch on how much investment is needed to get up to par with your core and maybe just reach their full potential and any timeline for that.

I'm going to add this is Tim I'm going to answer it a little bit differently than what we can quantify.

More precisely the timing and magnitude of an of investments at the Investor Day, that's one of the intents.

You can assume the unit economics are as good or better than any other fleet category in the portfolio right and as such we're more than happy to invest organically.

Find both of these categories and there are inorganic opportunities as well through bolt on M&A that we can use to.

Supplement that.

I think in terms of overall capital expenditure expectations going into next year, I still think centering on that $275 million number with.

A relatively broad range around that is a good place to center right sitting here right now we won't have to invest.

Probably in the first half of the year organic capex into storage fleet as that utilization recovers.

We will be investing in value added products and will certainly be investing behind these categories as well as modular refurbishments and again, we'll get more precise as we get into March of next year as some of these growth plans are still coming together, but I think you can assume that each of these categories has the potential to be at least as large as our ground level office.

<unk> just as a data point that's out there.

And as such we believe they are quite meaningful and quite quite attractive.

So the teams are putting together those growth plans as we speak and we fully intend to invest behind them.

Understood and second I guess is on storage can you expand on how the maybe the retail season is shaping up here you answer it.

At around 70% utilization versus mid $80 a year ago. I think you mentioned with separate later on the call, but just how does that change the pricing conversations if at all.

Pricing conversation Hasnt changed a lot this is Brad.

Tim mentioned.

We'll stop the number of units we have on rent for seasonal storage is down from last year and you'll also recall last year. They went out quite early.

Starting in June, which is a full quarter earlier than normal so.

As I mentioned in the last quarters call. It started out shaped up kind of in line with in terms of rate and timing.

From a more normal perspective, but it is certainly below prior year and as we sit here today, we're roughly 6000 units on rent behind where we were one year ago in that category.

Okay. Thank you.

And one moment for our next question.

Our next question will come from free is that.

Your line is open.

Yes, hi, thanks, and good morning.

I wanted to ask about.

Some of the macro trends.

That youre seeing and how you think that's impacting the business in storage versus modular because it feels like youre not really seeing a slowdown activity seems to be picking up in modular.

Relative to storage. So just help us help us understand some of the dynamics there.

Hi, Faiza as Tim I'll start Brad provide any additional color I mean, just think about that.

The end market exposures to the two businesses. They are more alike than different I think we've beat the retail exposure to death at this point in the storage segment and that is the number one.

The difference between.

The volume performance of the two of the two segments and if you think about nonresidential square footage starts there'll be down double digits. This year as measured in square footage right, which is the way to look at it that will correlate most closely with the volume of equipment or acquire.

And we see that impact.

Rough roughly evenly distributed across the two segments.

Sitting here right now if you look at the modular business.

And actually the storage business as well if you look at net new orders I mean, the year over year improvements are actually quite quite exciting for us I mean, the modular business quoting activity is up about 9% year over year.

We are seeing pretty strong net new order increases year over year on the storage business, although I'll caveat the storage business was effectively sold out last year. So it was harder to generate net new orders.

So the leading indicators in our business right now actually.

Pretty encouraging going into the end of the year and as you look at it like different end market.

Indicators going into next year quoting activity in our business probably being the most interesting you're still a contractor backlogs that are north of nine months, that's a very healthy level.

Associated builders and contractors confidence survey, you know you've got contractors projecting growth and employment growth.

Over the next six months. So there are no objective indicators there.

That have us.

I'm kind of concerned about the end market outlook going into next year and then my comment earlier to SaaS. The retail is not going to get any worse I can only really get better in 2024.

If all of that has us.

Our base case going into next year as this is a pretty stable outlook.

With some upside on the storage volumes.

Yes. This is Brett the only thing I would add to that is while non resi starts are down double digits as Tim mentioned, the absolute levels are still extremely robust by any historical metric right. So we are working against tough comps in 2022.

But these absolute levels are still extremely robust.

It's a great platform to build on our leading into 2024.

Great. Thank you so much.

I wanted to follow up on capital allocation. So you have devoted more capital to acquisitions and Dan some of these interesting deal.

Should we anticipate more acquisitions of the size sort of what does lay out some of your priorities again as it relates to capital allocation at this point.

The priority is in the mix have not changed its just very difficult as you know to pinpoint the timing and magnitude of any one transaction and really the only large larger transaction that we did was the A&M cold storage platform.

In August or September right. So everything else that we've done has been in that sub $100 million enterprise value range, which is exactly where we've been transacting.

Over the course of the last three years and as we think about the 200 plus targets that are in our tuck in pipeline. That's the right. The right magnitude to expect and if we're doing between two and four of those per quarter.

That's pretty much the cadence we've been on for the last three years and I don't see any real change in in <unk>.

Mix in terms of the composition of the tuck in pipeline.

In terms of overall capital allocation I would just.

Refer back to the.

Okay.

Okay page.

<unk> 25 in the deck the target as we think we can deploy about 25% of our capital into those tuck ins as I just described.

The organic capex will be about another 25% that'll be demand driven it will fluctuate period to period based on.

They need to add fleet in advance and Refurbishments.

And we still see ample surplus capital and a leverage neutral framework.

Which is why.

Shareholders have seen a 9% reduction in the share count over the last 12 months and sitting here today Thats, a superb use of our capital and highly accretive long term and we're going to continue to do it.

Thank you.

One moment for our next question.

And our next question comes from Andy Wittman of Baird. Your line is open.

Again, Andy Your line is open you may be muted.

Okay moving forward.

One moment.

Our next question.

Will be coming from Phillip Huang of <unk>.

Jefferies Philip your line is open.

Hey, guys. This is Maggie on for Phil Thanks for.

Taking my question.

All right.

I wanted to start out Brad I think you mentioned in the prepared remarks quoting activity for modular with show up in that kind of 9% range year over year, but conversions have been a little softer can you talk about what's driving that is that pricing decision.

The customer is that just on timing and you expect that.

<unk> flow through at a greater lag can you just talk about what's going on there.

Yes conversions have been just slower and I think is primarily driven by labor constraints backlogs at the general contractors.

Okay.

And then digging in a little more to this cold storage solutions category.

Just curious what the strategy is there how much overlap is there with your existing customer base or end markets.

And is this.

A category, where there is going to be chunkier sized M&A deals in the space or still on that kind of tuck in sized range that you see in modular and storage.

Hi, Matt This is Tim I'll start with your second question and I think the nature of the bolt ons are actually quite similar to those that we've been executing in the.

Other modular and the storage categories. This kind of fits squarely within our strategy, we have the best platform in the.

In North America, and there are opportunities to.

To build at.

Both organically and Inorganically, it's a very interesting category in terms of the complementary nature of both.

Commercially and operationally I'll start operationally, because maintaining delivering picking up and dropping off this equipment is really no different requires no different capabilities than we already have in both the modular in the storage segment. So this is very easy for us to execute just leveraging.

The existing.

Branch network that we have I will note that at one point in time, we were actually Aam's largest customer because we were renting some of this equipment and then re renting it to our existing customer base and you can think about the relevant sectors as being largely outside the construction end market you can think about any of the retail custom.

<unk> that we have.

Any customers in pharmaceutical and certain manufacturing categories, certainly many nodes within the.

Foodservice supply chain and distribution supply chain, we're not just talking about food things like cosmetics and materials that go into manufacturing processes that need to be kept at a certain temperature. There are a lot of different applications for this.

Within our current customer base, it's a category that we've been releasing historically over the years.

Although not with the full full force of our sales resources behind it so incredibly excited about.

How this complements the existing existing platform.

Multiple organic and inorganic opportunities, there's a pricing opportunity there will definitely be a value added products opportunity.

Overtime and.

We're really pleased with how the team has come together so far.

Okay, Great Super helpful.

And one moment for our next question.

And our next question will come from Manav Patnaik of Gabon.

Please your line is open.

Hi, Good morning. This is running Kennedy on for <unk>. Thank you for taking my question can I ask you guys. Please for an update on the latest on what you're seeing in terms of demand from Mega projects and manufacturing trends such as re shoring renewable investment.

The infrastructure program or the the physical programs as a whole and infrastructure what youre seeing from that in terms of demand. If you are starting to potentially comp over new starts there.

And then how that Wisconsin played in your guidance and kind of the assumptions are for for volume.

Hi, Robin this is Tim I'd say, it's kind of embedded in our.

Outlook for nonresidential construction activity generally speaking.

We don't.

Put a lot of credence into the forecasts that are out there, but if you look at prevailing non res square footage forecast for next year, they are flattish and that implies a pretty meaningful mix shift.

Between kind of smaller.

Non res projects think about warehousing and commercial office has obviously been.

Being down.

And we're seeing a mix shift towards the larger more complex situations that you alluded to.

Here, we can't really track every single project and the ultimate funding source, but we can say based on magnitude of opportunities that we see and the prevalence of larger square footage opportunities that that mix shift is absolutely happening.

And from a competitive standpoint, thats, probably our sweet spot in the area, where we're best positioned so.

Overall, we're not assuming a.

A major increase in nonresidential construction activity in 2024, but as Brad mentioned, if we stay stable at 2023 levels, that's a very very healthy environment.

23 should be up about in terms of non res square footage starts up about 12% versus 2019, just to give you some calibration of where we where we sit right now.

If we have that type of backdrop going into 2024, combined with combined with the pricing tailwind that.

Are just outstanding the value added products <unk>, we talked about.

Value added products and modular briefly and how that penetration is recovering value added products revenue in the storage segment is going to exceed $90 million this year.

Up up over.

40% right year over year. So we're seeing very good traction across all space categories and value added products margins are are performing well and we always have the tuck in tuck in M&A pipeline in our back pocket.

That's very helpful. Thank you and then a follow up to a question on margins that I think was more specific to four core <unk>, but looking forward can you talk about I think you had previously alluded to.

Kind of a new level of margins can you talk about kind of the puts and takes there the drivers.

Whether its logistic mark margins, the ability to leverage and improve SGA back office workflow et cetera.

The great thing here is it's really all of the above and if you start we're aware of the lease revenue growth is coming from on the organic side.

Pricing and value added products youre going to be naturally accretive to margins. If your organic revenue growth is coming from those those two variables.

As you know.

Tuck ins are also accretive to margins over time.

And that comes from a couple of different.

Levers not even so much cost reductions. These days just given the size of these but the price and value added products convergence as those portfolios churn over time.

If you just look at rental gross margin.

I've said for sure.

Almost a year now that we're enjoying a divergence of favorable growth rates on rental pricing that's obvious and.

And a stabilization of material input costs, we track a basket of goods.

That go into our modular refurbishments in that basket has been flat now for about 12 months.

So thats going to be supportive of margins.

I am not really assuming any further improvements in transportation margins they've been a highlight for the last two years.

I do think there is opportunity there over time as we rollout the field service Lightning platform next year and subsequently route optimization capabilities, but I wouldn't even embed that in my assumption for 2024 at this point.

And now that we're in the single CRM. This allows for things like quoting all modular and storage products on a single quote, which ultimately can lead to single invoicing and consolidation of some of those back office.

Processes. So I can almost go to any cost line or margin line in the P&L Ronan and find an argument to for market margin expansion.

Excellent. Thank you very much.

One moment for our next question.

Our next question will be coming from Sean <unk> of Deutsche Bank. Your line is open.

Sean Your line is open.

Hi, good morning, and nice quarter.

I take a look at your sort of aggregate.

Sort of maybe on a percentage basis.

What portion of that fleet, it's fungible across both traditional rental and these mega projects.

Sure John It's all of it it's all eight Mega project.

The core of that project is likely to be a large modular complex or in many cases multiple large modular complexes and that often.

We will be the.

The core for their primary general contractor Thats, leading the project, but the nice thing about these mega projects as Youre going to have sub contractors and other trades on and off of the project.

Over the course of multiple years, and we're talking three plus year projects when you get into the larger scale.

Opportunities in those sub contractors could be taken containers that could be taking single Wides. There's really no. There's no no limit to the fungibility of the fleet for those types of opportunities.

Okay interesting.

And what percentage of your fleet would you say is that flex offering at this point is that migrated over time.

It is migrating.

Ballpark just off the top of my head I think we're circa 8000 units of total fleet there.

There and it is the only fleet category, where were buying stock fleet and I do expect the fleet mix does migrate more in that direction very slowly over time.

Right.

I know in the most recent quarter I think the flex units were.

Accounting for just over 10% of our deliveries on the modular side. So it is a growing mix of.

The modular fleet and very conducive.

To those those larger projects.

Great. Thank you that's very helpful.

Also just kind of on another note all along the same lines, we've been hearing that only a marginal amount of the infrastructure bonds really had been released.

Is that what youre seeing out there in your markets.

Do you expect that to sort of ramp up a bit more next year.

Yes, and that's consistent with our outlook throughout the year I mean, we've seen these mega projects without regard to chip backs without regard to federal infrastructure stimulus, it's happening because it's good business.

And we are uniquely positioned to capitalize on those so.

When federal stimulus really starts to flow.

That's 2024 event likely I think it's just further longer term tailwind.

With respect to those megaproject.

Okay, Great and then I have one last question for you Tim.

Feel free to answer this to any degree you want to but.

When would you expect to repay the 2025 notes would you be waiting for the step down to par or would you be willing to let these bonds. The current before repaying them prior to any charity or refining them.

Alright, like I said in my prepared remarks, we've got $1 3 billion of capacity in the ABL.

And.

Right now the ABL is actually priced a bit higher than the 2020 fives. So from just a pure.

Interest cost optimization standpoint, I lean towards leaving the 2020 five's outstanding and we can refinance them into the ABL at anytime if now the other variable is what other uses of capital that we have.

And we reassess that as opportunities present themselves, but there is absolutely no urgency in my mind as long as benchmark rates stay.

They are above 5%.

All right that's very clear thank you very much.

We have now reached the end of today's call I will now turn the call back over to Nick.

Thanks, Tanya. Thank you all for your interest in Wolfcamp mobile. Many if you have additional questions. After today's call. Please contact me. Thank you.

Thank you ladies and gentlemen. This concludes today's conference you may now disconnect.

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