WillScot [WSC] Conference call transcript for 2023 q1
2023-04-29 08:41:07
Fiscal: 2023 q1
Operator: Welcome to the First Quarter 2023 WillScot Mobile Mini Earnings Conference Call. My name is Amy, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I would now like to 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 First 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 2 contains our safe harbor statement. We will be making forward-looking statements during the presentation and our Q&A session. Our business and operations are subject to a variety of risks and uncertainties, many of which are beyond our control. As a result, our actual results may differ materially from today's comments. For a more complete description of the factors that could cause actual results to differ and other possible risks, please refer to the safe harbor statement in our presentation and our filings with the SEC. With that, I'll turn the call over to Brad Soultz.
Brad Soultz: Thanks, Nick. Good morning, everyone, and thank you for joining us today. I'm Brad Soultz, CEO of WillScot Mobile Mini. WillScot Mobile Mini is a North American leader in innovative and flexible total space solutions. In Q1 of 2023, we continued to execute our idiosyncratic growth levers combined with capital discipline and outstanding operational efficiency, which support our improved 2023 outlook of over $1 billion of adjusted EBITDA. During the quarter, we grew revenue by 25% and adjusted EBITDA by 47%, driven by strong VAPS penetration and rate optimization. And with a company record of 17% return on invested capital over the last 12 months and a free cash flow margin of 18% in the quarter, we pursued our strategy with smart capital discipline, including acquisitions of up to $80 million and $216 million of share repurchases. Turning to Slide 16, I'll share a quick growth lever update. Our value-added products initiatives represent over $500 million of $1 billion of idiosyncratic growth levers, and we made great progress across both segments. Our track record in Modular is proven, as well as over the last 10 years, we've delivered over an 18% compound annual growth in our VAPS average monthly rates. We're also beginning to see benefits from VAPS in our Storage Solutions segment. VAPS revenue in this segment in the first quarter was $22 million, up 60% year-over-year, and we believe that this is just the beginning of a differentiated, long in duration and high-growth value driver that is entirely in our control. Tim will unpack this a bit later in his section. Otherwise, the engineer in me could consume the entire call with my exuberance associated with our basic offering of lights, shelving and pipe racks for portable storage units, as well as many new products under development. Those of you who visited us at CONEXPO in March saw our new premium storage offering, which will take this to a whole new level. Based upon robust testing and early customer feedback, we're on track for our planned launch of this premium offering, beginning in test markets this summer. We're following an established playbook that we've developed over the last decade in Modular with exciting results, and our turnkey value proposition is obviously continuing to resonate with our customers. Now pricing, supported by VAPS, continued to contribute meaningfully to our Q1 2023 results. Our Modular products continue to drive an approximate 30% spread between the delivered rates on units over the last 12 months and the average of the portfolio. And our Storage segment continues to leverage our unique and expansive product offering, our in-house logistics capability, our price management tools and processes, and while still relatively small, a VAPS offering that will drive growth for years to come. Our confidence in delivering double-digit rate growth across both segments is not grounded in hope. Rather, it's largely embedded in the current spreads we enjoy between spot rates of recently delivered units and our portfolio average, and the spot markets continue to trend favorably. We're a very small spend for our customers, and we've transformed our value proposition to provide more value to them. We've been delivering double-digit rate growth in Modular for well over five years. And while input and equipment costs have increased meaningfully over the last couple of years, they're not the driver for this trajectory, rather they will provide support for a continuation. And as discussed in our 2021 Investor Day, an important milestone in our strategy to improve organic market penetration with the optimization of our two disparate customer relationship management, or CRM, systems. I'm excited to confirm that we achieved that milestone in early February. Our entire team, including 500 sales reps and many more customer service professionals, now have clear visibility into the activity of our more than 85,000 unique customers. The combined CRM system will serve to further enhance sales productivity and cross-selling with better digital marketing and predictive analytics, which will allow us to accelerate cross-selling, and most importantly, provide a seamless and efficient customer experience. Our team has clearly made demonstrate-able progress in the first quarter across each of the five aspects of our portfolio of the $1 billion of idiosyncratic growth levers, as evident in the continued VAPS price momentum, the successful CRM harmonization, Q1 logistics margins, EBITDA expansion and continued disciplined M&A activity. This team's execution, underpinned by long lease durations, is the basis for our confidence in our ability to continue to drive growth for years to come, which is certainly not dependent on end market expansions. Turning back to Slide 10. We provide our turnkey solutions across 15 diverse end markets across all of North America. It is critical to appreciate that units on rent do not move fast in our business, as units on rent are ultimately governed by three-year lease durations, which correspond to product duration. End market demand for the actual number of new units and storage units we deploy each month is the only aspect of our portfolio which we do not have full control over. We do operate a robust zero-based capital allocation process, through which, we systematically and routinely adjust fleet and people investments across our diverse end markets and geographies based on actual demand from new activations every 90 days. It's not a new playbook. Rather, it's what we do, and we are very good at it. You recall that we took a more cautious approach to our original 2023 volume outlook, citing uncertainty with respect to tightening finance conditions, our customers' labor constraints, ABI indicators, uncertainty with respect to the number of larger retail store remodels and continued softness in Canada. In short, not a lot has changed. While our consolidated units on rent in the first quarter were up year-over-year, and there's certainly no new concerns, we now have better visibility in the demand through the next couple of quarters, and it's apparent that our initial caution was both prudent and balanced. We'll stay focused on the top-line and bottom-line levers that are within our control and which are substantial. I would offer the following update considering the underlying macroeconomic factors that influence our demand, as well as relative leading indicators, the most important of which is feedback from our customers. First, the ABI Index recently turned positive following five months below 50. The ABI, as a reminder, has been a good indication of modular activation nine to 18 months out. Second, our larger [indiscernible] contractor's customer backlogs remain robust, although many are facing labor constraints, which may slightly impact their ability to complete ongoing projects and start new projects according to original timelines. And third, consistent with our concerns earlier in the quarter, many of the retail store remodels have been deferred to 2024, such that we expect an approximate 10,000 portable storage unit owner headwind and across the retail sector in Q2 and Q3 of this year versus prior year, as well as a corresponding tailwind in 2024. So while we continue to maintain our balanced outlook with respect to end market demand through the balance of 2023, we're excited about the potential tailwinds associated with onshoring and reshoring infrastructure projects that we expect to further accelerate heading into 2024 and persist for several years to come. Large-scale reshoring projects have already been breaking ground across North America, which represent material and long-duration opportunities to deploy our expansive services. We are actively participating and bidding on multi -- multiple billion-dollar projects in sectors such as advanced materials, chemicals, power gen, renewables, electric vehicles and semiconductors to name a few. We're already positioned -- we are uniquely positioned to provide complex value-added total space solutions to our customers with our unrivaled scale, product offering and capabilities. Now given this demand outlook, our long lease durations, our differentiated value prop and the $1 billion of idiosyncratic growth levers that are largely under our control, we'll easily eclipse our $1 billion adjusted EBITDA milestone in 2023, and we're on track to achieve all of the long-term financial goals that we established just 18 months ago. With that, I'll turn the call over to Tim for more detail on the Q1 results and our updated outlook.
Tim Boswell: Thank you, Brad, and good morning, everyone. Page 21 shows a high-level summary of the quarter. Before I jump in, I will remind everyone that the results from the divested Tank and Pump and UK Storage segments are reported as discontinued operations in all periods. I will also point out that in Q1, we transferred approximately 6,000 ground level offices, or GLOs, from our Modular Solutions segment to our Storage Solutions segment. We have consolidated all of our containerized products within the legacy Mobile Mini branch infrastructure, which makes perfect sense, both operationally and commercially. We updated all historical segment financials and KPIs to reflect this integration. So you'll see some changes in the segment metrics, but the year-over-year comparisons are all meaningful, and it does not change the trajectory of either segment materially and obviously doesn't impact consolidated financial results. With that said, Q1 2023 was a great quarter. We saw consistent contributions from pricing, value-added products and volumes and frankly had superb results across all financial metrics. Modular unit average monthly rate increased 20% year-over-year and portable storage unit average monthly rate was up 30% on a consolidated basis. Rate is one of the areas where we see upside in the remainder of this year, which in turn creates multiyear tailwinds into 2024 and beyond. Value-added products support our ability to capture rate, differentiate us from our competitors and are an example of the powerful organic growth strategies that we are executing with clear and tangible results. We updated Page 13 to show the VAPS revenue opportunity across both our Modular segment and our ground level office fleets, which is new disclosure, and details $400 million of highly credible growth across these products. And growth from our recently introduced value-added products for containers will be incremental, bringing us closer to a $500 million prospective opportunity. If we just look at margin dollars from value-added products in our Storage segment back in 2020, at the time of acquisition, we were generating approximately $22 million annually. That doubled to $47 million in 2022 and will triple to over $65 million in 2023 in our guidance. As Brad mentioned, our Q1 VAPS revenue in the Storage segment of $22 million was up 66% year-over-year. So the rate of change is both impressive and undeniable. This is a clear multiyear growth lever in our Storage segment. It is a clear example of how we add value to our acquisitions. And we are clearly creating incremental value for our new customers in the process. Back to the financial metrics on Page 20. They're all incredibly strong. Leasing revenue was up 25% for all of the reasons I just mentioned. Adjusted EBITDA margins were up 650 basis points year-over-year. Free cash flow margins expanding into the high teens, and return on invested capital is expanding to record levels, hitting 17% for the quarter, up 570 basis points versus prior year. We've deleveraged to 3.0x net debt to adjusted EBITDA, and we bought back nearly 10% of our stock in the last 12 months given our confidence in both our short- and long-term outlooks. These results showcase the value of our predictable sequentially compounding reoccurring revenues, our idiosyncratic growth strategy, our cost discipline and our value-accretive capital allocation framework. Page 22 lays out revenue and adjusted EBITDA for the quarter. We've already talked about the commercial KPIs which drove revenue up 25% to $565 million. In the bottom-right chart, you can see the normal seasonal decline sequentially from Q4 into Q1, driven by our seasonal retail business. Leasing revenues will grow sequentially into Q2 and increased sequentially each quarter thereafter, in line with our guidance. Cost management and margin performance have been outstanding and better than we expected to start the year, and we're seeing favorability in four key areas that are causing margins to go up both in Q1 and in our guidance. First, now that we've been in SAP for almost two years, we've gotten much better visibility into the work orders and maintenance costs on our modular fleet. We're being more efficient with our spend and more consistent with that spend across our branch network. This is helping both gross margins and CapEx. Second, input inflation is easing on our maintenance materials. We have not yet seen input deflation, but inflation appears to have peaked in the second half of 2022. I said a year ago that we were incurring significant cost inflation and that the inflationary benefits from our rental rates would roll through the portfolio in time and that is exactly what's happening. Third, logistics margins have continued to improve and were up 1,200 basis points year-over-year in Q1. The gains are primarily driven by the value-based pricing strategies that we began in 2022 and we still have opportunities on the cost side, such as in-sourcing and route optimization, which we're actively working on and will have benefits in future periods. And lastly, SG&A is down 270 basis points as a percentage of revenue. So we're getting good operating leverage there. And looking forward, we have opportunity for further efficiencies now that we've consolidated both our ERP and our CRM systems. Altogether, flow-through of revenue growth to EBITDA was 67% in the quarter, which is great. And most encouragingly, we can see quantifiable impact of our internal initiatives across every line in the P&L, all of which are within our control and give us a clear road map to deliver the guidance for 2023 and our run rate into 2024. Turning to Page 23. Net cash provided by operating activities increased by 2% year-over-year to $149 million. These numbers are not adjusted for our two divestitures. So, on a pro forma basis, cash from operating activities is growing significantly faster than 2% and should expand sequentially through the remainder of the year. Said another way, organic growth and acquisitions in our core segments have already replaced the prior year operating cash flows from our divested segments. I said on our Q3 call last year that capital expenditures would be down through at least Q1, just given the record investment levels in 2022 and the flexibility in our supply chain. At $46 million of net CapEx in Q1, we are basically operating at maintenance levels. Capital expenditures will, of course, go up into Q2 and Q3, though will be below both prior year levels and our original guidance given both the maintenance efficiencies I mentioned earlier and available capacity in the storage fleet resulting from the deferral of retail store remodels. The implication, of course, is that this is going to be an outstanding year for free cash flow. Free cash flow of $103 million in Q1 was up 88% year-over-year. And again, that is not adjusted for the divestitures. So the Modular and Storage segments, our cash flowing extremely well heading into the remainder of the year. And in the current outlook, free cash flow should be north of $500 million. Turning to Page 24. We reduced leverage to 3.0x last 12 months adjusted EBITDA from continuing operations in Q1. As we said last quarter, we used the $418 million of UK divestiture proceeds to repay our ABL, creating capacity for other capital allocation opportunities. While the divestitures were one-time events, the bottom left chart illustrates the ability of our business to delever rapidly when we so choose. Between free cash generation and predictable growth, we can reduce leverage by approximately a full turn in 12 months, which is one of the reasons we maintain the 3.0x to 3.5x target range. We're obviously at the very low end of that range. We're perfectly comfortable with the debt structure, and we have highly productive areas to deploy capital. Our weighted average pre-tax cost of debt is 5.7%. So, increased cost of capital has not changed our capital allocation priorities at all. Our debt structure is 60% fixed rate, accounting for the swap that we executed in January 2023, which got us back to our targeted fixed and floating mix. And our annualized cash interest run rate is approximately $168 million as of Q1 2023. So, we're at the bottom of our target leverage range. We have $1.1 billion of available liquidity in the ABL plus our internally generated cash flow, which is accelerating, and we have complete flexibility and appetite to pursue our capital allocation priorities. Page 25 shows our capital allocation framework and our performance over the last 12 months. In the right-hand chart, our LTM capital deployment is very much in line with our framework with the divestitures driving additional deleveraging in the short term. I expect our results will revert back closer to the framework through the course of the year with no further deleveraging and likely stronger tuck-in acquisition volume. During Q1, we closed two acquisitions for $80 million and expect to maintain or exceed that rate of reinvestment for the remainder of 2023. We also repurchased $216 million of our common stock, reducing our economic share count by 9.6% over the last 12 months, representing an extraordinary return to shareholders. Given the embedded earnings and cash flow growth in our portfolio, we are confident that the allocation of this capital will be significantly accretive to our long-term shareholders. And Page 26 shows our updated guidance. Relative to prior expectations, we tightened our revenue outlook and are still centered on $2.4 billion of revenue for the year, which means that the business is compounding sequentially exactly as we expected it would. Most importantly, the guidance still implies a lease revenue run rate that is up 10% to 15% heading into 2024, which is what we primarily care about. We increased our adjusted EBITDA midpoint by $25 million to $1.025 billion to $1.075 billion, which is a function of our revenue performing as expected, combined with the cost and margin initiatives that I spoke about earlier. And we do see margins running ahead of our original expectations through the remainder of the year, which gives us another strong tailwind for 2024. We reduced our net CapEx range to $250 million to $300 million based on deferral of the Storage segment retail remodels and the maintenance efficiencies in the Modular segment. We have not assumed any further acquisitions in our outlook. So M&A beyond that, which we closed in Q1, would be incremental. Sequentially, I'd expect EBITDA to be relatively flat into Q2 and then accelerate into Q3 and Q4. Leasing costs will increase sequentially as delivery volumes increase into Q2, which should compress leasing margins. And delivery and installation margins could compress sequentially as we get a higher mix of delivery relative to return transportation revenue. Overall, the midpoint of the EBITDA range implies 19% growth year-over-year and approximately 250 basis points of margin expansion, which is on top of the 250 basis points of expansion that we delivered in 2022. And we'll deliver free cash flow in excess of the long-term milestone that we established three years ago when we underwrote the Mobile Mini acquisition, before COVID, before Ukraine and before this most recent round of recession fears. Most importantly, the guidance sets us up with a leasing revenue run rate that is up 10% to 15% heading into 2024 and with better margins given the forward visibility in our model. The business is compounding as expected. The fundamental drivers of this compounding are intentionally designed and within our control, and we will continue to execute our strategy to drive growth, expand return on invested capital and create value for our long-term shareholders. With that, Brad, I'll hand it back to you.
Brad Soultz: Thanks, Tim. I would like to take a moment to thank our team for safely and frugally delivering yet another outstanding quarter and progressing each of our growth levers, all while successfully navigating our CRM system harmonization. We will easily eclipse our $1 billion adjusted EBITDA milestone in 2023, and we are on track to achieve all of the long-term financial targets that we established just 18 months ago. I wish all of you listening today continued safety and good health. That concludes our prepared remarks. Operator, would you open the line for questions?
Operator: [Operator Instructions] And our first question is from Andy Wittmann with Baird. Your line is open.
Operator: Thank you. [Operator Instructions] And our next question comes from Tim Mulrooney with William Blair.
Operator: Thank you. [Operator Instructions] And our next question is from Kevin McVeigh with Credit Suisse. Your line is open.
Operator: Thank you. [Operator Instructions] And our next question is from Dillon Cumming with Morgan Stanley. Your line is open.
Operator: Thank you. [Operator Instructions] And our next question is from Scott Schneeberger with Oppenheimer. Your line is open.
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Operator: Thank you. [Operator Instructions] And our next question is from Steven Ramsey with Thompson Research. Your line is open.
Operator: Thank you. [Operator Instructions] And our final question comes from Phil Ng with Jefferies. Your line is open.
Operator: We have now reached the end of today's call. I will now turn the call back over to Nick.
Nick Girardi: Thank you, Amy. Thank you all for your interest in WillScot Mobile Mini. If you have additional questions after today's call, please contact me. Thanks.
Operator: Thank you, Ladies and gentlemen, this concludes today's conference. You may now disconnect.
