Q3 2024 WillScot Holdings Corp Earnings Call
and Wanton.
Welcome to the third quarter, 2020-4, we'll Scott Ernie's Conference call. My name is Sherry and I'll be your operator for today's call.
At this time, all participants are an illicit only mode.
Speaker Change: Later we will conduct the question and answer session. Please note that this conference is being reported. I would now wait to turn the call over to Nick Girardi. Vice President, FP and A, Nick, you may begin.
Good evening and welcome to the Will Scott 3rd quarter 2021 earnings call. Participants on today's call include Brad Soultz, 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 Will Scott website.
Slide two contains our safe harbor statements.
We will be making forward-looking statements during the presentation and our Q&A session.
Our business and operations are subject to a variety of risks and uncertainties.
Many of which are beyond our control. As a result, our actual results made different material from today's comments. For a more complete description of the factors that could cause actual results to differ and other possible risks, please refer to the safe harbor statements in our presentation and our findings with the SEC.
with that. I'll turn the call over to Brad Soultz. Thanks, Nick. Good afternoon, everyone. And thank you for joining us today. I'm Brad Soultz, Chief Executive Officer of Will Scott.
Speaker Change: Hi, I'm Lyd 16, our team executed well in Q3, despite a market environment, the continues to be worse than we anticipated.
On the positive side of the ledger, adjusted EBITDA margins were record levels at 44.4%. And adjusted pre-cache flow and return on invested capital were also near record levels.
and we continue to advance several key enterprise-wide initiatives that position us well for 2025 and beyond.
On the negative side, non-residential construction start square footage was a 14% year-over-year in the quarter, and are now tracking 15% below 2019 levels.
Speaker Change: Consistent with that contraction, we saw delays and a lot of the encouraging order activity in our pipeline in Q2, which both impacted the quarter and makes us more cautious towards the end of the year.
However, we continue to see steady demand from larger projects and both back clogged and customer sentiment remains strong among our larger national accounts and contractors.
System-loader prior quarters, smaller, more rate-sensitive commercial construction projects made up the block of the decline.
Speaker Change: and we increasingly heard customers point to the election as factoring into their timing decisions for project starts. So we do believe that's their portion of this demand that's simply pushing to the right.
Speaker Change: Given the flexibility in our model, reacted quickly to the lower activity levels and reduced variable cost by over 20 million relative to our forecasts for the quarter.
which is on top of the approximately 40 million of annualized indirect cost takeout that we execute head and into the court. This contributed to the sequential and year over year margin expansion that we delivered in the quarter and positions us well from margin expansion in 2025 and beyond.
So while volume related headwinds remain in the media term, the team is executing well through those. And those volume headwinds do continue to moderate as we head into next year, although not to the extent we had anticipated when we spoke to Cordura Go.
Speaker Change: Many investors have asked separately to me what comes after the termination of the earth transaction.
Speaker Change: and it's very straightforward.
We're continuing to execute the proven playbook that has allowed us to have already achieved and in many cases exceeded the ambitious 3-5 year margin and return milestones that we established just three years to go.
Speaker Change: had an end to 2025, where 100% focus on operating and optimizing our business delivering for our customers and driving growth across the portfolio.
As depicted on slide 10, we do continue to move full speed ahead with ongoing investments in operational efficiency and customer-focused initiatives, which will allow us to further differentiate our unique and expanding or folio space solutions.
You'll recall in Q1 we combined the legacy, mobile many and will Scott field sales and operating team. In Q2, we completed our final major systems integration along with the consolidation of our field service and dispatch platform and teams.
and Q3, we consolidated into the Will Scott brand and launched a combined website, introduced new powerful digital marketing customer service and sales tools.
and as we head into 2025 we'll continue to further optimize and leverage all of these while also turning our focus to streamline in our order to cash process from a customer service and back office efficiency standpoint.
Optimization of our ordered cash processes represents a meaningful opportunity to improve both our customer and employee satisfaction.
Speaker Change: These are the right organic investments to drive sustainable growth and enhance the customer experience. And we believe that represents significant points of operating leverage at an end of 2025.
Additionally, is depicted back on slide four. We continue to expand our portfolio of space solutions, including climate control storage, clear span structures, and sanitation among others that are in incubation.
Speaker Change: Collectively, when combined with our core offering, these new adjacencies offer further opportunities to extend our differentiated value proposition to existing customers.
individually, they also expose a diverse set of new customers and in markets to which we can in turn offer our full, entire portfolio space solutions.
and we're approaching all of these with the balance combination of organic investment, acquisitions, and new product innovation.
Well, the contributions from these adjacencies were modest in 2024. They're run rate doubled throughout the course of the year, and we expect they can double again in 2025. These represent new levers to expand our total addressable market and grow our business.
We're going to head to 2025, we think we're set up for a return to modest growth, and Tim will take you through our preliminary views on that as we head into our budgeting process.
To taking a longer term view, we remain extremely optimistic with respect to continue growth and hair in this platform.
To that end, we anticipate hosting our next investor day during the first half of next year. And expect we will announce those logistics before the end of this year.
Theeems for our 2025 investor day will center on strong organic growth.
The Expansion of adjacent solutions, developments of verticals, our advancements in technology, investments in human capital, new 3-5-year financial targets, and any applicable updates to our capital allocation framework.
Meanwhile, we'll continue to execute our discipline capital allocation strategy, which is resulted in more than 2.1 billion of capital delivered to our shareholders, and a 21% reduction in our economic share count since 2021.
As always, organic cat-acts will leave you in man-driven, driven apart by market conditions, but also by value-edged products, new markets, and categories that we're already pursuing.
will continue to execute tough-in acquisitions in both our core and adjacent markets, including a few smaller transactions that we've already executed in Q3 and Q4 as we reprimand that pipeline.
and we'll continue to return the Ville Surplus Capitol of our shareholders through our share-reurchased authorization, which our Board of Directors recently increased to one billion.
In the meantime, we'll remain laser-focused on flawless execution as we progress towards our $4 the free cash flow per share milestone. With that, I'll hand it over to Tim to discuss Q3 and our outlook in a bit more detail.
Thanks Brad and good evening everyone. Page 23 is a high level summary of the quarter.
Clearly, the quarter in the revised outlook did not play out as we expected coming out of Q2, although we see plenty of bright spots to give this confidence or model is working and positioned for the recovery when market stabilizes.
Speaker Change: For context, in the last two years we've seen the largest contraction of non-residential construction square footage since the global financial crisis.
Second track has been longer and deeper than we expected and has impacted volumes. However, those volumes headwinds are moderating as we progress into 2025.
Meanwhile, margins are improving as expected as we progress through the year, given both the flexibility in our cost structure and structural improvements we've implemented leveraging our technology platform.
Free cash flow remains stable and predictable with best in class free cash flow conversion and free cash flow margin. And with adjusted free cash flow per share increasing by 13% to $3.12 so for the last 12 months.
Our OIC remains stable and supports economic value creation, and we are back to allocating capital across organic opportunities, tuck ins, and shareholder returns, which has been quite a quite effective formula historically, and gives us a familiar playbook heading into 2025.
So we remain quite confident in our strategy, our unique platform and capabilities and the strength of the Wolf Scott team.
Turning to page 24, revenue of $601 million declined 1% year over year, driven primarily by volume headwinds, impacting both storage leasing revenues and delivery installation revenues, which were down 13% and 1% respectively.
These were offset by modular leasing revenues in VAPs which were up 4% and 1% respectively, as well as sales revenue. So overall, no real change to the recent trend of solid modular results offsetting storage.
Value-edged product penetration from modular units and reflected positively this quarter, which we've been expecting for some time with average rates up to 3% year over year, and delivered rates in the third quarter up 1% versus prior year.
Storage Value-Edit Products continue to grow rapidly with average rates up 28% and delivered rates over the last 12 months up 16%.
Growth of these penetration rates in a challenging market and competitive environment is a testament to the underlying customer value proposition. And I'm excited about other systemic improvements we're putting in place heading into next year to present our turn key offering more effectively.
Speaker Change: There are no real changes to pricing trends in the quarter. Average monthly rental rates were stable across the portfolio with storage average monthly rental rates up to 9.5%. And modular average monthly rates up to 6%.
In terms of profitability, we generated $260 million of adjusted EBITDA up 1% year over year at a margin of 44.4%.
Speaker Change: which itself was up approximately 50 basis points for his last year and up 80 basis points sequentially. We always expected margins to expand in the second half of the year so we continue to be pleased with our margin trajectory heading into 2025.
That said, revenues came in light in the quarter, relative to our expectations. So we offset that with over $20 million of variable cost reductions that were executed during the quarter.
Speaker Change: That variable cost reduction built on the approximately $40 million of annualized indirect cost takeout that we executed in Q2.
So based on that, we expect continued sequential margin expansion into Q4. In another year of modest expansion for the full year next year, based on initiatives we have in place heading into 2025.
As we disclose back in September in Q3, we incurred approximately $203 million of broken deal costs, including the McGrath termination fee. And we have backed these out of the adjusted financial metrics to isolate our operating performance.
This resulted in a justice EBITDA of $267 million, adjusted income from continuing operations of $72 million.
Speaker Change: adjusted diluted earnings per share of 38 cents, and adjusted free cash flow per share of 77 cents for the quarter and $3.12 over the last 12 months.
Speaker Change: Moving to page 25, cash provided by operating activities continues to be quite strong and would have total $22 million in the quarter, or up 6% year over year excluding broken deal costs.
Net Capital expenditures were up $16 million year over year to $59 million. Primarily due to a large property sale last year, and accelerating organic run rates in our newer product lines.
Again, excluding broken deal costs adjusted free cash flow for Q3 was $143 million with a 24% margin. So we continue to feel very good about our free cash flow trajectory heading into 2025. And the overall cash conversion efficiency of our business model.
Over the last 12 months adjusted free cash flow totaled $583 million at a 24% margin, which represents $3.12 of adjusted free cash flow per share on our September 30th share count.
That's up over 13% versus the prior year LTM period and represents an 8% free cash flow yield on today's market capitalization.
Cash Club, Flow Visibility, remains an incredible strength of the business. Free Cash Flow Per shares compounding at mid-teens rates in a down market. And we remain on track towards a $4 free cash flow per share milestone, and our longer term $700 million dollars free cash flow milestone.
Turning to page 26, leverage ticked up one tenth of a turn in the quarter to 3.4 times net debt to last 12 months of justice to divot. Due to payment of deal breakage costs and resumption of shared purchases.
We remain inside our target leverage range of 3.0 to 3.5 times, and we have the capacity to deliverage by approximately one turn per year when we so choose. So our unconstrained from a capital allocation standpoint.
Between our internally generated cash flow and our $1.7 billion of revolver availability, we have a significant excess liquidity.
Speaker Change: Taking into account our interest rate swaps, our debt structure is approximately 89% fixed and 11% floating rate.
Speaker Change: So we have limited immediate interest rate exposure and have opportunities to refinance higher coupon bonds opportunistically if interest rates continue to moderate.
Speaker Change: As of September 30, 2024, our weighted average pre-tax cost of that stands at 5.8%.
Speaker Change: I'll note our 2025 Senior Secured Notes mature in June next year.
Speaker Change: We have ample liquidity available to simply draw on our ABL revolver and repay the 2025 notes.
So between internally generated cash flow, available AVL capacity in the bond market, or some combination thereof, we have multiple options to refinance the 2025s at a time of our choosing and to optimize our cost to cabo.
Page 28 shows our capital allocation over the last 12 months, which remains largely consistent with the framework we can see we outlined at our 2021 investor day.
In the right-hand chart over the last 12 months, net capex of $231 million is very much in line with our framework target and likely increases into our guidance range of $250 to $280 million by the end of the year.
Speaker Change: Over the last 12 months, we allocated $164 million to tuck in acquisitions, which were primarily in the Cold Storage and ClearSpan product line during this period.
And over the last 12 months, we have reduced our share count by approximately 3.3% and returned to $286 million to shareholders.
We've highlighted the $212 million of broken deal costs over the LTM period, the majority of which were in Q3 this year.
Speaker Change: However, those are behind us and it's easy to see how that capital will be reallocated to shareholder returns in our framework as we move forward. Just as an example, the 13% free cash flow per share growth that we delivered over the past year would have been in the high teams, had we allocated that capital to the repurchase.
So based on the strong returns of our cash flow visibility, our board of directors increased our sharing purchase authority again in September to $1 billion.
and overall we continue to see between $800 million and $1 billion of capital available annually to allocate, which is critical to how we compound returns.
Speaker Change: Heading into 2025, our capital allocation framework is consistent with how we've operated for the last several years. And to the extent we make adjustments, we will discuss that rationale with you in detail at our next investor day.
Speaker Change: and
Before turning it back to Brad, Phage 28 shows our outlook for 2024.
Based on our performance here today in our visibility into Q4, we revised our outlook to a midpoint of $1 billion, $60 million of adjusted EBITDA.
which reflects the reality that non-residential construction markets are likely to continue bottoming into the first half of 2025. As customers get more certainty around the political and interest rate landscape.
That is longer and deeper than we expected and we've reduced our revenue assumptions primarily for Q3 and Q4 relative to our prior outlook.
That said, volume headwinds do continue to moderate as we progress into 2025, although not to the full degree we expected in July. But this still represents a meaningful improvement relative to our run rate entering 2024.
Also on the positive side, we were absolutely seeing the margin expansion that we expected in the second half, even despite meeting falloperating leverage headwinds from lower volumes.
Speaker Change: So while we are disappointed with the short-term result, our longer-term trajectory towards stronger margins, free cash flow, and return on invested capital, our all-clear, and would respond powerfully when markets stabilize.
which is what we still anticipate in our base case for 2025. So we at least want to share our current framework for thinking about that here.
Our base case sitting here today assumes non-res starts with Latin in 2025, in contrast to the double digit declines we've incurred all year.
The support moderating volume headwinds as we progress through the year, which we are beginning to see. And we do see opportunities for improved commercial execution in certain areas, and we have very tangible growth across some of the new our product lines.
That combination supports modest organic revenue growth for the year and continued margin expansion in 2025, which we think is a balanced acknowledgement of both the recent deceleration and the underlying longer term opportunities.
Obviously, we'll be prepared for all scenarios and we'll be actively developing upside opportunities. The sitting here today, this is generally the organic framework we are using to set our internal targets for the year.
As always, we strive for transparency with our operating assumptions, welcome insights from our shareholders, have high expectations for our team, and appreciate the ongoing partnership with our over 85,000 customers.
We'll look forward to meeting with many of you before the holidays and welcome you to our second investor day in the first half of next year, most likely in Phoenix with details coming soon.
So with that Brad, any closing thoughts? No, just quickly I'd like to thank our shareholders for continued trust.
with their capital employees for continuously raising the bar, while caring for each other and our customers. And most importantly, this Tim said, thank you to the 85,000 customers, the partner with us to meet their critical space solution needs.
Operator, would you please open the line for Q&A?
Thank you to ask a question, please press star one one on your telephone and wait for your name to be announced. So, a joy your question, please press star one one again. One moment while we compile the Q&A roster.
Speaker Change: And our first question will come from the line of Scott Schneeberger with Oppenheimer, your line is open.
Thanks very much for that for new guys. Let's start off with a volume question and then I'll follow after with a praising question.
For you guys repeatedly reference volume, the volume headwind moderating and just shared a little glimpse of what you were thinking about for 2025.
Could you put some substantial change behind why you volume, volume head when moderating and maybe break it out between the module and the storage segment section.
Yes, this is Tim O'Hallstard. I mean, if you look at the...
Abroad Unit on rent deficit versus prior year in Q3, you're down about 3% you know entering
Speaker Change: 2020 for that would have been closer to 5%. We see that continuing to slowly converge, although not to the degree we expected in QQ coming out of Q2.
And you see a similar dynamic in the story. You know, sitting here today heading into the end of October, you know, I'd expect units on Renner actually pushing.
Speaker Change: towards 130,000 units on rent, so we are seeing that sequential build.
in the storage business, which if it continues again, puts a smaller volume deficit heading into 2025.
Then we had coming into 2020.
for although again, not to the degree we expected in.
Speaker Change: Q2. So that's the dynamic that we're referring to. It just means that relative headwind in the business is not as forceful as it would have been entering this year, which means we can lean on those other levers that we talked about to drive least revenue growth.
Okay, great, understood, thanks Tim.
on the pricing perspective.
You guys have referenced that there's a slide in this deck with regard to Vap's, modular deliver rates up 1% year-rear storage up 16% year-rear. I'm curious, could you share that with the metric would be for the core rate and then kind of the bigger picture is how is is pricing integrity for both the modular and the storage categories right now. Thanks.
Okay, well, let me start just in, I'm not sure I understood the question around for rate as it meant as you related to Vats. Scott, to me, we come back to that when if I don't.
Speaker Change: if I don't cover it.
Speaker Change: We saw a storage average monthly rental rate up to 9.5% year over year. And you saw that increase modestly sequentially from Q2 to Q3, which is exactly what we expected coming out of the Q2 call.
Speaker Change: If you break that down and take the climate control storage out of that
Traditional Storage AMR was up about 1% year over year.
and then you have the VATS contribution on top of that. So we continue to see stability in traditional storage rates.
Although that is an area where spot rates have not moved to the degree we would have budgeted this time last year, sequentially through the course of the year. But overall, the average billing rate remains up 1% year over year for storage, excluding vaps.
Speaker Change: Old Storage is going to become a bigger mix of the portfolio. That's more of a volume story right now with you do on rent up about 15% year of year versus where it would have been in September last year.
Not a ton of AMR changed through the course of this year, but we are seeing spot rates move up meaningfully and cold, which is pretty encouraging going into.
Speaker Change: in 2020 25.
And then modular, it's kind of a continuation of the story. Unit rental rates, excluding vaps, were up about 7% year over year in the quarter, average value added products per unit on rent, up about 3% year over year. And yes, you correctly called out that that delivered rate in modular also increased about 1% year over year in the quarter. It was a little stronger than that if you exclude some of the third party services which were expensive.
Yeah, thanks to me. You kind of got it on. I was really looking to get into spot rate pricing on the two categories. That's the way I confused it with the vast.
mentioned, but it was looking forward to poor isolation as opposed to vaps for the trail in 13 weeks to get the spot. So, yeah, you covered it a bit, there's just one to get a sense of directionally how we spot trending in each of the two categories. Module or in particular, and anything you'd like to add, or if it's you feel you covered it, that's fine.
Yeah, and modular is trending sequentially flat, right? We haven't seen a ton of movement.
Speaker Change: There, through the course of the year, there are some puts in takes as you kind of break it down by product category, not surprisingly it'll a little stronger in the complex fleet as you might expect a little weaker in ground level offices, just as an example. But overall, the mix of the portfolio is sequentially flat going into next year from a spot standpoint.
got a great thanks appreciate the color.
Thank you one moment for our next question.
Speaker Change: And that will come from the line of Tim Mulverny with William Blair, your line is open.
Volume equation in our business, especially among the more transactional product lines in it.
It's just black and white when you look at the relative performance of the different product lines within modular were actually up slightly.
Speaker Change: Slightly year over year.
In terms of complex unit on rent and a lot of that's coming from the flex product as we as we populate the market with that.
And then it's just tougher on the transactional single Wides in Anglos that contrast is been pretty black and white all year long.
Understood. That's helpful. And then maybe one just kind of on the storage side of the business I think last quarter you had outlined.
Speaker Change: Expectations for sequential step up of around 10000 storage units from <unk> to <unk>, just based on kind of more normalized trends in retail and seasonal but it seems like maybe from some of the commentary in the slide deck.
Seeing a bit more pressure on the on the retail side versus previous expectations. So just curious how we should think about any seasonal retail dynamics on the storage side of the business heading into the fourth quarter. Thanks, So much.
Neither the retail side is <unk>.
Speaker Change: Shaping up very much like we expected coming out of Q2, so as I said.
A minute ago I expect we will probably end of October with near 130000.
<unk> units on rent relative to the.
122700 that you see on average on rent for the quarter. So we're absolutely absolutely seen that build.
Across both modular and storage. If you just contrast kind of our outlook today to where it where it was back in Q2, we reduced our overall delivery expectations by about 10% across across all product lines, but the retail component is actually performing.
Speaker Change: Pretty much inline with what we expected coming out of Q2.
Understood. Thank you very much.
Thank you one moment for our next question.
And that will come from the line of Steven Ramsey with Thompson Research Group. Your line is open.
Speaker Change: Yeah.
Good evening, we're thinking about 2022 being a great year of non red activity.
We're entering this timeframe if you look at the average three year lease duration, where more of those units start coming back to you against the slow starts environment. I guess do you look at this as a double headwind or.
Do you see it differently just thinking about that.
Work units were in 2022 correct.
David This is Tim it's a good question and its really the reverse is true to an extent as the unit on rent portfolio comes down in size.
Speaker Change: Volume of returns tends to come down.
Proportionally and just to give you some round numbers.
Speaker Change: Total returns and modular if I look back to 2022 would have been just north of 70000 units on rent and forecast for this year is probably just over 60000 units on rent. So we've seen the return side of the equation come down.
Even more pronounced actually on the storage side of the business I think we talked about this a little bit last quarter that tends to be.
Speaker Change: A kind of a.
Dynamic in the portfolio that actually mitigate some of the.
New demand headwinds, because we get a little bit of benefit from that return volume.
Speaker Change: Simply because the unit on rent portfolio is a bit smaller.
Okay. That's helpful and then.
Speaker Change: To think about.
Speaker Change: With.
Volume environment, because it starts bottoming more slowly than you thought but then your commercial.
Progress to improve cross selling with the wider portfolio that you have I'm curious, how you think about that playing out.
And what benefits come first as you roll through these initiatives.
Speaker Change: Yes. This is Brad I'll start and I've mentioned in my prepared remarks.
Speaker Change: For the year behind the scenes, we combined the two legacy ops and sales teams and <unk>.
Speaker Change: Build a complete portfolio of digital demand optimization sales effectiveness tools customer portals et cetera, So I think everything's in place now.
As basic as we don't need two different people sell into different products, we've got one team selling everything.
And now they have all the tools in place and the majority of those digital.
Speaker Change: Tools really went into effect in the third quarter. So it gives us.
Again more excitement as we look further afield into 2025 and beyond that we can really gain some traction with the cross sell not only of modular in storage, but into these adjacencies and then from the Adjacencies back into core.
Speaker Change: Great. Thank you guys.
Speaker Change: Thank you one moment our next question.
And that will come from the line of Andrew Wittmann with Baird. Your line is open.
Great Good afternoon, and thanks for taking my questions.
Yes, I wanted to I guess dig into the volumes a little bit different way.
I guess looking at the activation.
Last quarter.
I guess you guys were saying that Youre Activations were I think you were saying that were relatively flat on a year over year basis in this quarter, but your modular activations in the slide or down 7% in storage they were down 10%.
Speaker Change: So.
Activations last quarter were flat.
And you saw the volumes weaker or little bit kind of stabilizing sequentially.
But activations this quarter were softer.
Why arent why isn't it that volumes are going to be even weaker next quarter I guess im not understanding I thought maybe you could help clarify that.
Speaker Change: Okay.
Yes, Andrew this is Brian.
Speaker Change: Let Tim.
Jumping a bit the you're correct through the first quarter in the second quarter. Despite non res the square foots being down year over year modular activations were trending basically flat to prior year that was basically a tale of two worlds you had mega projects draw.
Driving outsized demand primarily for our larger complex fleet.
It was fully mitigating the drag if you will.
With the smaller construction projects in the third quarter, we still continue to see that effect. We just didn't have full litigation.
Speaker Change: Okay, and we touched on.
Number of drivers with respect to that.
Yes, Im not sure I have a lot more to add Andy other than in the modular business I think we have pulled back their return volume assumption slightly but certainly relative to the last the last outlook our end of year unit on rent expectation as lower across both modular and storage.
Speaker Change: I said when I was talking about 2025 and kind of when this bottoming plays out it's definitely pushed to the right relative to where we.
Speaker Change: We were forecasting back in July.
Got it maybe the better way to ask this question a different way to ask the question is do you think that the 3% decline in average units on rent in the third quarter.
Improves in the fourth quarter or does it.
Maybe declined a little bit more in the fourth quarter.
Speaker Change: On modular.
Certainly on storage I think there is.
Potential for that deficit to continue.
To close and we're probably around that 3% deficit in modular andi anywhere.
Speaker Change: Al.
Okay. So stabilizing there and then I just wanted to clarification on some of the cost actions spread that you talked about last quarter, you talked about a $40 million of annualized run rate, so something like $10 million a quarter was the $20 million that you guys are talking about relative to this quarter was that in the quarter $20 million.
Speaker Change: Or is that also an annualized number so we should think of it as 40, plus 20 equaled 60 on an annualized basis, sorry, I just wanted a clarification on that one.
Yes, it was $20 million lower variable cost relative to what we would have planned in the July timeframe and so that's and that is demand driven right. So it is probably not appropriate to annualize that and say hey, we've got to $80 million variable cost tailwind going into 2025, we would gladly.
Put that put that back into play to support volumes in the business, but if we pulled.
<unk> percent of our volume our activation volume out of the forecast as we progressed through the quarter.
Speaker Change: $20 million of.
Speaker Change: Variable cost that goes with that in the quarter right and that's one of the reasons you actually see margins going up despite an operating leverage headwind in the business.
We absolutely saw.
Speaker Change: The flow through of $40 million annualized takeout that we did in.
Speaker Change: In.
Q2, and you see that impact in kind of the SG&A line primarily.
At least the SG&A that flows into our adjusted EBITDA calc, the $20 million of variable cost is coming out of cost of leasing.
And supporting the gross profit margin in the business.
Okay that makes a lot of sense.
We're only clarifications for Tonight. Thanks, Scott.
Scott Schneeberger: Thanks, Jamie.
Thank you one moment for our next question.
And that will come from the line of Faiza <unk> with Deutsche Bank. Your line is open.
Yeah, Hi, Thank you so I wanted to clarify on pricing.
Can you confirm what the gap is between sort of spot pricing or LTM pricing, both for storage and modular.
Relative to the reported pricing.
Speaker Change: Yes.
Modular, it's about a 12% favorable spread.
Speaker Change: And on storage, it's about flat.
Flat, but with a growing spread on the cold storage side of the business.
Speaker Change: Okay understood.
Speaker Change: I'm curious how should we think about.
Speaker Change: Our pricing strategies.
<unk> ahead into into 2025.
Just in light of in light of those gaps and in light of inflation.
Speaker Change: <unk>.
Yes, I wouldn't say that there's any change to our strategy per say sitting here right now.
Speaker Change: We are actively.
Speaker Change:
Speaker Change: We've kind of re implementing a new pricing technology platform as we go into next year, which I'm very very excited about and that will.
Speaker Change: Having some kind of AI informed price recommendations that we'll be able to then populate into our quoting system were also concurrently building out a new quote configuration.
Our system and the goal there is to again further automate the bundling of not just value added products, but complementary fleet products as sales reps are building out proposals for customers. We continue to see the biggest.
Challenge and opportunity as it relates to cross selling and value added products as our own our own behavior.
So providing the right technology tools to help that is I think a pretty interesting solution, which we're actively working on and I think both of those.
Programs, probably go go live in the first half of next year some time.
Speaker Change: We're actively doing <unk> testing on <unk>.
In different parts of the business. One example is in the out of term.
Rate increases, which youll recall on average the vast majority of our customers retain units.
Longer than they contract them for that's one of the reasons, we're actually seeing the.
Speaker Change: Strength and stability of Anr in the storage business is the out of term portion of that.
But we're actively testing different inflationary escalators in the out of term process just as one of many different examples we're looking at as we go into next year.
Great. That's really good color and then just if I can ask one on volume.
Speaker Change: Just sitting from the outside we've been looking at.
The construction data Lake how quickly do you think your whether it's the activation volumes are.
Generally units on rent Nick how quickly do you think that can recover because I know typically we've talked about 12 to 18 month lag from Abi Abi is still under 50, so give us a sense of when do you.
What do you think of as sort of normal and what do we need to see from a macro perspective to get there.
This is Brad and Tim can jump in.
If you think about just the core underlying markets for both modular in storage. We are in the slowest part of the year seasonally basically November December January February you'll see slower activity. So March is when we.
Speaker Change: We would expect to see any sequential improvements really.
And that also coincides with probably the earliest we really start to see benefits from the improvement in rates et cetera.
Speaker Change: And I expect we will have.
We will have clarity in terms of who's in the White house.
Speaker Change: Joke aside there.
It is also as a reminder, second quarter of next year would be when we would start to see retail remodels start to kick back in which could be <unk>.
Volume driver if you will on top of those core markets.
Speaker Change: Great. Thank you.
Thank you one moment for our next question.
And that will come from the line of Angel Castillo with Morgan Stanley. Your line is open.
Alright, Thanks for taking my question.
Angel Castillo: Just wanted to circle back on that.
Speaker Change: Our spot.
Answer and I apologize if.
Sorry, if I Miss understood there, but.
Speaker Change: I would just say I guess, 12% spread between <unk> and the latest spot on modular and if I'm not mistaken that was kind of 15% to 20% last quarter.
Again lots of earnings today, So I apologize if I misheard you the numbers, but just.
Speaker Change: That is correct it seems to imply that the spot maybe it's come down on the modular side can you just clarify that if that is what is going on and maybe what's kind of driving that and the confidence in kind of that reflecting.
Yes, I think we were at 15% last last quarter on modular and that had been down from 20% I think.
Speaker Change: Last year.
Forget the exact periods for that so there definitely was a contraction of the spread that's more from.
Speaker Change: Older units going back and going out at today's spot.
Then it is any compression that we've seen in spot rates themselves I said earlier on the call that modular spot has been sequentially flat through the through the course of the year with some product mix variation, but.
Speaker Change: Extremely stable there.
Youre just returning units that were rented 2345 years ago and the volume Thats going out is going out at today's spot, which has been which has been flat sequentially through the course of the year.
Speaker Change: Very helpful. Thank you and then I just wanted to follow up on maybe some of your commentary around 2025, I think I heard you say that maybe there is non resi will be bottoming into the first half of 'twenty five and as we think about that combined with maybe some of your.
Speaker Change: Conversation is around 2025 improvements on demand can you just maybe talk about the cadence of that is it is the first half going to continue to do you kind of expect that to be below kind of the second half dynamic that we're seeing right now and therefore, some continued contraction if things are still bottoming and it's more of a second half year or just what kind of cadence should we kind of.
Envisioned from a margin expansion as well as growth perspective.
Yes, it's probably a little early to give you.
Crystal clear sequential guidance for the year, we are going through our own planning process kind of kind of as we speak.
On a year over year basis, I think it's probably appropriate to assume that the first half of the year is flatter from a revenue growth standpoint.
Because you have lost some momentum, finishing the year here.
But between a stabilization of markets the commercial initiatives Brad talked about.
Some very real progress on our newer product lines.
Speaker Change: And then pricing and margin. It is I think we've got a couple of different recipes.
With levers that are in our control.
And that can drive kind of a modest.
Speaker Change: Growth year for the year with margin expansion and we're working on.
Speaker Change: The different scenarios and the different kind of recipes as we speak.
I appreciate the color. Thank you.
Thank you one moment our next question.
And that will come from the line of Manav Patnaik with Barclays. Your line is open.
Speaker Change: Hi, how are you. This is roni Kennedy on for Manav. Thank you for taking my question and talking about capital allocation you referenced consistency in a typical approach if I may please have a multi faceted question there could I. Please confirm for capex the expected spend from a percentage standpoint, a refurb organic investment in flex cold storage in <unk>.
Speaker Change: <unk> spent in Adjacencies.
Speaker Change: And then also from an end market standpoint, a big entry into education with key commercial benefit of Mcgrath for diversification and stability of that type of thing a possibility on the M&A front I think it was $164 million in cold storage and clear stance is this primarily where we should expect M&A to occur.
Has the ability to do larger acquisitions in your legacy assets been somewhat potentially impaired as a result of the FTC review and then on buybacks how should we think about the cadence on a quarterly basis is there a possibility for some catch up activity.
Well Theres a lot in there I'll knock one off and then Tim jump in.
From a tuck in pipeline perspective.
Looking back is the right way to think about looking forward, we've deployed a little over $1 billion over the last several years into acquisitions.
A quarter of that has been modular.
Everything else has been storage with a large majority clear span and cold storage, so new adjacencies. So.
Speaker Change: We are repricing that pipeline a bit as.
As I mentioned during my prepared remarks, but I think going forward assume we put 25% of the capital back to work to fund maintenance and growth that will include growth in <unk> and these new adjacencies.
We expect to still see an ample pipeline for continued deployment into tuck in M&A.
And don't feel there are any undue constraints coming out of the Mcgrath transaction.
Speaker Change: Yes.
Speaker Change: If you look at page 27 in the deck.
The right hand Pie chart shows the last 12 months of capital allocation I would expect the $231 million of net capex.
To go up a bit as we finish out the year I think Q4, Capex will be higher this year than it was last year, mostly because of.
The adjacencies that are growing organically.
Speaker Change: I think the.
$164 million of tuck in volume.
<unk> is a bit as we close out the year, just because there was a larger.
Platform acquisition in Q4 of last year, which will fall off but overall the framework is very much.
At the same and you can see on LTM basis.
Adding back the deal costs.
Speaker Change: <unk> got $500 million.
Would have been allocated to the repurchase under that scenario and in terms of the timing and magnitude of repurchases, yes, we take valuation.
Speaker Change: To account, but we also believe that that is a steady lever that should be deployed consistently over time to.
Speaker Change: To compound returns.
Thank you very much. Thank you both for the insight. That's that's helpful and I appreciate it on the I think Brad had mentioned election is factoring into timing decisions.
Joe can clarification on the White house, who will be in the warehouse are you hearing from your customers or have you assess potential.
Political risks from the implications of our respective red or blue sweep or Trump or Harriss administration.
Essentially impacting onshoring right shoring the energy demand that you have seen I think more so for the modular business.
Do you assess kind of political risk there.
Brian This is Tim I have been on the road a fair amount recently and what I've heard is more about certainty than it is about a preference one way or the other you got too heavy heavy spenders I think on the ticket.
So I don't see a huge change there one way or the other maybe the mix of type type of government support shifts and markets end market, but we don't really care about that.
That much if you get more manufacturing with one and a little less green energy well.
Speaker Change: Our services don't really change that much depending on.
Speaker Change: Where the end market activity is we just need the activity to be there.
So we're not losing it.
Sleep over either outcome, but I think it's been pretty clear and consistent that.
Customers want to know what paradigm, they're operating in when they kicked off a major.
Speaker Change: Project.
Retrospect I think we may have heard that later then so I'm just given the sales cycle for us tends to be a little bit shorter given we're such a small spend items on many of these projects sites.
It has been a pretty consistent drumbeat that built during the quarter.
Speaker Change: Sure.
Got it thank you I appreciate it.
Speaker Change: Thank you one moment our next question.
And that will come from the line of Philip <unk> with Jefferies. Your line is open.
Hey, guys, Tim appreciate your giving us at least early framework for 2025, you're calling out modest growth and margin expansion. So that's great.
Philip: But can you help us unpack, how you think about units on rent versus Amr's growth for next year based on your comments it sounds like unit on rent will likely be down next year, but just wanted to get a little more perspective and kind of how do you.
<unk> Paul on how you think about units on rent just because it's been pretty tough to predict.
Yes, it will be down to start the year, although again not to the same degree it was down to start this year. So a moderating headwind there is still what we see.
Can't really predict the exact mix of the Kpis that are going to play out through the course of this year.
Like I said earlier I think we've got a couple of different pathways to deliver.
The very high level framework that we're talking about.
Still have a very powerful tailwind in modular AMR.
We have good traction across storage of apps.
Signs of life in modular of apps, which we expected to began inflicting around inflicting around this time we have.
Speaker Change: Have new.
Product offerings and Miss Brad said in his remarks, we see the run rates there potentially doubling as we progress through next year and that's primarily a volume gain.
AME across some of the new newer additions we've introduced to the portfolio and then you've got margins, where I think the track record has been pretty clear and as we kind of optimize a lot of the commercial and operational processes here leveraging all the technology investments that have put in place I think we've got multiple ways to win on the margin front as we.
Speaker Change: Go through 2025.
So those are the different levers that we're looking at sitting here today.
The mix of leasing Kpis always ends up being different.
When do you expect in our budgeting process. So our job is to make sure we've got different ways to deliver the results.
Speaker Change: And then Tim I know the demand that looks a little different when you thought but I think last quarter based on the cadence you're seeing the spread I think you mentioned youre pretty confident that you can deliver.
Call It high single digit <unk>.
Our growth in modular is that algo load looking different today than storage just given the spread.
Does that look more flattish or you could actually see some growth on hey, Mark looking next year for storage.
Yes, we need to see the spot rates on traditional containers pick up from where they are now.
To begin pulling up the AMR youre going to get a absolutely get a mix benefit from the growing cold.
Speaker Change: Cold storage.
Population and value added products are up I believe it was 60% year over year and the traditional storage category in Q3.
Speaker Change: So that's that.
Speaker Change: It's probably the setup for storage and with a 12% spread currently in modular with no further spot rate improvement that probably brings you down into the low mid single digits. If you just divide that spread by three but with upside across value added products and services. So sitting here right now I think that's that's.
Speaker Change: The best visibility we've got.
Speaker Change: Okay I appreciate the color. Thank you.
Speaker Change: Thank you I'm showing no further questions in the queue. At this time I would now like to turn the call back over to Mr. Nick <unk> for any closing remarks.
Thank you Sherry. Thank you all for your interest in Wells Scott If you have additional questions. After today's call. Please contact me.
Speaker Change: Yes.
Speaker Change: This concludes today's program. Thank you all for participating you may now disconnect.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: [music].
Speaker Change: Yes.
Speaker Change: Yeah.