WillScot Mobile Mini Holdings Corp. (NASDAQ:WSC) Q3 2023 Earnings Call Transcript

WillScot Mobile Mini Holdings Corp. (NASDAQ:WSC) Q3 2023 Earnings Call Transcript November 4, 2023

Operator: Welcome to the Third Quarter 2023 WillScot 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 will now turn the call over to Nick Girardi, Senior Director of Treasury and Investor Relations. Nick, you may begin.

Nick Girardi: Good morning. And welcome to the WillScot Mobile Mini third quarter 2023 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 WillScot Mobile Mini website. Slide two contains our Safe Harbor statement. We will be making forward-looking statements during the presentation and our Q&A session. Business and operations are subject to a variety of risks and uncertainties, many of which are beyond our control. As a result, our actual results may differ materially from today’s comments. For a more complete description of the factors that could cause actual results to differ and other possible risks, please refer to the Safe Harbor statement in our presentation and our filings with the SEC. With that, I will turn the call over to Brad Soultz.

Brad Soultz: Thanks, Nick. Good morning to everyone. Thank you for joining us today. I am Brad Soultz, Chief Executive Officer of WillScot Mobile Mini. Now starting on slide 16, our company is delivering record financial performance. revenue, adjusted EBITDA, margins, free cash flow and return on invested capital are at 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 have 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 have generated almost $3 of free cash flow per share and using our share repurchase authorization, we have reduced our economic share count by 9.2% 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 to our long-term shareholders over time. Now when I think about investing on a company, my 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 have been consistently harvesting and reloading it, whilst we have grown EBITDA by over $300 million. And you will recall that our ever-expanding VAPS 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 VAPS delivery rates inflect strongly following the CRM changes we implemented in all of it. 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 are 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 clearspan structures, which will allow us to offer even larger and more flexible spaces to customers across almost all of our end markets. While 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 supply chain and expand our total addressable market, creating even more opportunities to serve our customers, our current customers and our — 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. And the addition of these capabilities highlights the scalability of our platform, given our significant technology investments over the past few years.

It goes without saying, we are very excited that these platforms will — the potential of these platforms will provide for additional growth levers above and beyond the $1 billion videosyncratic — idiosyncratic growth levers, which are already in flight and we look forward to talking about these in greater detail in our upcoming Investor Day. To that end, I am excited to share that we will 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, we will describe next milestones on our growth trajectory. It’s pretty obvious, we have upside in many of our key metrics.

For example, the midpoint of our guidance this year suggests 44.5% adjusted EBITDA margin. which is at the high end of our 40% to 45% 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. Coinciding with this Investor Day, we will also plan on issuing our inaugural sustainability report. Now touching briefly on the 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 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 non-residential starts activity favoring larger scale industrial project plays to our strengths from a competitive standpoint. Finally, let me reiterate how excited I am for 2024 and beyond. We are 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 they are in our business made even more so by the quality, creativity and diligence of our team.

We look forward to sharing those details with you in New York in March. With that, I will hand it over to Tim.

Tim Boswell: 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. The business continues to perform as expected in this environment. Our strong financial performance during the quarter was driven by continued pricing discipline, growing VAPS 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 generated $148 million of free cash flow in Q3, with $533 million of free cash flow over the last 12 months.

As of October 27, that represents approximately $2.80 of 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. 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 importantly, we are discovering new ways to reinvest in our business, as you have 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 9.2% 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. Page 22 lays out revenue and adjusted EBITDA for the quarter. Revenue was up 5% in Q3, with leasing revenues up 9.1%, driven by increased pricing and VAPS 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 in 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 what we expected.

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 demanded backdrop, and we are being quite disciplined about that. Just focusing on the spot spreads we see in unit pricing. There’s 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. In 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 are 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 is approximately a $200 million mark-to-market tailwind across the portfolio in value-added products, with a total of $500 million opportunity if we — when we converge to the longer term milestones that we established for both Modular and Storage, and there’s been no change in those targets. Volumes on rent were slightly better than we expected in Modular and slightly weaker for Storage.

So, 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 2024, supporting margins in the bottomline. Overall, adjusted EBITDA margins were up 250 basis points year-over-year and are up over 300 basis points year-over-year at the midpoint 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 business as we head into 2024. Moving on to page 23. We continue to see very healthy net cash flows from operating activities and expect that 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 balance fleet investments with demand and continue 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 finished Q3 at 3.3 times net debt to last 12 months adjusted EBITDA which is comfortably inside our operating range for leverage of 3.0 times to 3.5 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 deleverage by approximately 1 turn per year when we so choose. So we will 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 7.380% (sic) [7.375%], which we used to pay down our asset-backed revolver and finance 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 6.1%. Our annualized cash interest is approximately $214 million and our debt structure is approximately 65% fixed and 35% floating, which approximates our target mix. We have approximately $1.3 billion of liquidity in 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. 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 Leasing and Manufacturing business in the Pacific Northwest. And in October, we closed another transaction adding 616 global clearspan to our portfolio, which we are super excited about. These are compelling businesses with great economics and our existing customer base are scratching their heads 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 are excited to welcome these new team members to the WillScot 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 we will, of course, defer the specifics to our upcoming Investor Day. 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 are 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, though all within a 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 that sequential progression in the core business plus recent acquisition contribution gets us to the midpoint of the EBITDA guidance. Looking ahead to 2024, our run rate as we close out 2023 is supportive of another strong growth year. VAPS 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 longer-term margin tailwinds, 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 clearspan, and we are 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 will hand it back to you.

Brad Soultz: 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 our 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. Operator, would you please open the line for questions.

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Q&A Session

Operator: Certainly. [Operator Instructions] Our first question will come from Andy Wittmann of Baird. Your line is open. And again, our first question will come from Andy Wittmann of Baird. Your line is open.

Brad Soultz: Andy, we can’t hear you if you are on and why don’t we just go on to the next question, please.

Operator: I am removing Andy now. And our next question will come from Seth Weber of Wells. Your line is open.

Seth Weber: Hi. Good morning. 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 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 — why margin expansion would reaccelerate again next year? Thanks.

Tim Boswell: Yeah. Seth, I think, the only significant difference versus Q4 of 2022 would be the seasonal retail Storage volumes and transportation that would have been flowing into last year. And the seasonal volumes on rent and Storage are down circa 6,000 units year-over-year and the transportation timing also plays into that. So it’s really nothing more than that. We are 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. That’s the primary contributor there.

Seth Weber: 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 happen next year? Are you hearing anything about that or just how we should be thinking about that 2024 versus 2023 for that segment in particular? Thanks.

Tim Boswell: Yeah. The starting point is I don’t see how it could get any worse than it was this year. I am not saying that…

Seth Weber: Yeah.

Tim Boswell: I am not saying that flippantly. I just don’t see it as a risk going into 2024 and it is the type of business that can recover quite quickly. You have seen some store CapEx announcements from larger retailers going into next year. It’s 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 positive and an opportunity going into next year. This was very soft from a remodel standpoint and that business will be in some cases, direct with the retailers, Seth, and in other cases, direct with 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 up for 2024.

Seth Weber: Got it. Okay. Thank you, guys. I appreciate it.

Operator: And one moment for our next question. And our next question will come from Scott Schneeberger of Oppenheimer & Co. Your line is open.

Scott Schneeberger: Thanks very much. Brad, I think, I will focus my first question on the VAPS LTM delivered rate. If you can just recap you were kind of bundled and then à la carte seemingly back to bundled in August. What trends have you seen since August, we saw the number for the quarter? I just want to get a sense of how we should expect that to trend going forward since you made the switch back? Thanks.

Brad Soultz: Yeah. Scott, as I mentioned in my prepared remarks, it’s inflected pretty positively and strongly post those changes that we implemented really in mid-August that 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, you are probably looking into next year before you see it inflect on an LTM basis, but early signs are encouraging.

Scott Schneeberger: Okay. Thanks, Brad. Appreciate that. For my follow-up, these new acquisitions, certainly sizable with the largest that we have seen since the big merger back in 2020 and they sound interesting look forward to hearing about them 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 increased, but I think there might be some concern out there of just hey, acquisitive growth versus organic? Just want 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 closet a bit, I was wondering if you could speak a bit to how you are thinking about organic growth, I mean, here and beyond? Thanks.

Tim Boswell: Yeah. Scott, this is Tim. And I mentioned this in my prepared remarks. If we kind of dissect lease revenue and you got to strip out transportation and strip out sales, right, because when we are acquiring businesses, we are typically focused on the lease revenue line and the delivery and installation will fluctuate period-to-period based on 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 that’s primarily driven by pricing in value-added products, offset by some organic volume loss. That’s no surprise, right? And then if you think about the acquisitions that we made leading up to Q3 and assume kind of like a 4.5 times multiple on lease revenue, you can start to back into what I think that inorganic lease revenue contribution is and then those Q3 acquisitions, while larger, we got maybe a month of contribution from those in Q3.

So I am actually really happy with the organic, inorganic mix in the quarter. And based on the magnitude of the tuck-in acquisitions that we are doing, if we stay in this range in terms of enterprise value deployed, that organic/inorganic mix really shouldn’t change very much.

Scott Schneeberger: Great. Thanks. I appreciate the color, Tim. I will turn over.

Operator: And one moment for our next question. And our next question will be coming from Tim Mulrooney of William Blair. Your line is open.

Tim Mulrooney: Hey, Tim. 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?