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WillScot Mobile Mini Holdings Corp. (NASDAQ:WSC) Q1 2024 Earnings Call Transcript

WillScot Mobile Mini Holdings Corp. (NASDAQ:WSC) Q1 2024 Earnings Call Transcript May 2, 2024

WillScot Mobile Mini Holdings Corp. beats earnings expectations. Reported EPS is $0.44, expectations were $0.32. WillScot Mobile Mini Holdings Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to the first quarter 2024 WillScot Mobile Mini Earnings Conference Call. My name is Sherry, 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 afternoon, and welcome to the WillScot Mobile Mini first quarter 2024 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. Slides 2 and 3 contain 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 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 statements in our presentation and our filings with the SEC. With that, I'll turn the call over to Brad Soultz.

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Brad Soultz: Thanks, Nick. Good afternoon, everyone, and thank you for joining us today. I'm Brad Soultz, CEO of WillScot Mobile Mini. Starting on Slide 6, our Q1 results were solid and in line with our expectation and support our 2024 outlook. Tim will cover these in more detail in a few minutes. I'd first like to highlight several significant strategic milestones the team also accomplished in the quarter as well as provide a brief status update regarding the McGrath transaction. First in January, we combined our legacy WillScot and Mobile Mini sales and operations teams under a single leadership structure organized by geography. This allows us to go to market locally with a single team that can service our customers across our full offering of turnkey space solutions.

Our team is now empowered to present our full suite of capabilities to every customer at every opportunity and my colleagues are equally excited for their own career development and for their own career development and growth opportunities inherent in this structure. Next and to support this field integration, in March we consolidated and upgraded our field service and dispatch systems which allow us to better utilize our logistic resources across all product lines while improving execution, safety, and customer communication. As a result, our team can now leverage all available trucks, drivers, and service crews across the market. As we progress through the remainder of 2024, we'll be deploying the latest available route optimization and logistics management tools.

With these tools in place, we can in turn accelerate the in-sourcing of these crucial services, which further differentiates us from competitors and improves both customer service and profitability. Our drivers and service teams are consistently recognized by our NPS promoters and we're putting in place the systems to build upon that advantage. This is just one example of how we're advancing our digital roadmap using customer feedback to enhance nearly every aspect of the customer experience. We're also focusing on improving our external technology interfaces. By Q3, we'll consolidate our six websites into one supported by the latest technology to promote awareness and drive demand across our full offering of turnkey space solutions. This will include an enhanced customer portal with expanded customer self-service capabilities which will simplify key customer touch points and improve our back office efficiency.

These enhancements are also in direct response to feedback we get from our customers. And finally, in support of sales force effectiveness, I'm particularly excited about our recently launched proprietary sales tool we call Project 1. Project 1 leverages multiple third-party and internally generated data sources to identify developing project opportunities well ahead of initial bidding across our largest customer segments. These opportunities are profiled by algorithms informed by our vast transaction history. We then estimate the full turnkey space solution requirements for each project which are then automatically assigned to the most appropriate local sales expert based upon size and geography. This gives us a platform to optimize selling time, improve cross-sell and conversion, and to be more prescriptive and recommended bundled solutions that are tailored by project type.

Taking a step back over the past three years, our team has diligently and painstakingly worked to harmonize our business processes and underlying systems, while dramatically growing the business and expanding profitability. With this foundation in place, we've now harmonized our teams and are in a position to even more seamlessly integrate new businesses and deploy technology more offensively, enhancing every aspect of the customer experience and further differentiating our unrivaled customer value proposition. I'd like to thank the team for their safe and flawless execution during these complex initiatives which will further accelerate our growth as we continue to execute the $1 billion of idiosyncratic growth levers to the benefit of all stakeholders for years to come.

Now turning to Slide 26, consistent with our history of execution and value creation, we announced a definitive agreement to acquire McGrath in January that we expect to close in the second half of 2024. We see tremendous opportunities to drive incremental value for our collective customers, communities, employees, and shareholders. Our assets, our geographical footprints, and customer segments are each unique but fit well together resulting in broader turnkey space solutions, enhanced customer service capability, and additional career opportunities for our colleagues. I'd like to highlight several examples of value drivers associated with combining these 2 unique platforms. First, we'll cross-sell the comprehensive WillScot VAPS portfolio as we've successfully done in all past acquisitions.

McGrath has already begun this journey through their plus offering and we believe we can accelerate this growth while improving overall customer satisfaction. Second, McGrath customers will benefit from access to WillScot's innovative Flex, ClearSpan, and Climate Control solution. WillScot customers will in turn benefit from McGrath's Kitchens-To-Go, Enviroplex, and custom modular sales capability. We'll benefit from McGrath's expertise in serving the education sector, which is but one great example of how we can grow in new industry verticals. McGrath's inventory centers have clear efficiency benefits, which WillScot can pass on to our customers. We'll leverage our in-house WillScot transportation and service crews to better service the McGrath customers.

We'll share fleet across the combined network realizing capital synergies. We'll optimize the combined real estate footprint over time. We'll integrate the best in class safety, learning and development, community engagement programs, all building on our Great Place to Work certification. And finally, WillScot's technology platform can support all of this with seamless integration thanks to our prior investments. To the right on this slide, we've highlighted how these drivers check all the boxes with respect to value creation. The list of potential benefits goes on and on with advantages for all stakeholders which makes us excited about the combined future. Most importantly, these are underpinned by two outstanding teams. While our interactions are appropriately limited until we close, everyone we've had the opportunity to collaborate with thus far has been fantastic.

We've been particularly impressed by McGrath's team's customer focus, pragmatic approach to problem-solving, and strong work ethic. I believe that the McGrath culture is truly complementary to ours with both built on a customer-first common drive to excellence and focus on unlocking value for all stakeholders. Finally, I'll touch on the progress supporting the FTC's review of this transaction. I know there's been a lot of noise and speculation around this process as there is with virtually all M&A transaction these days. We don't engage in speculation or hypotheticals. We put our heads down and go to work. We have excellent advisors who are experienced in the process and are intimately familiar with our facts and circumstances. We're engaged in a productive dialogue with the FTC which has been both collaborative and professional.

We expect that we'll have complied with all of the FTC's information requests in the second quarter and based upon our progress working with the FTC expect that we'll be in a position to close the transaction in the second half of 2024. Further, we anticipate that McGrath will be in a position to hold its shareholder vote in early Q3 and as we progress the year, we'll remain opportunistic as to how and when we replace the bridge financing. We clearly have a proven formula to drive sustainable growth and value creation. Our acquisition of McGrath has clear benefits for all stakeholders and will both accelerate our growth and proportionately increase the $1 billion of idiosyncratic growth levers fully in our control We continue to see $700 million of free cash flow and $4 of free cash flow per share is important milestone that will surpass in due course.

And I'm incredibly proud of the tireless and expert execution by our teams to deliver the transaction, transform how we do business and execute every day in the field on behalf of our customers. With that, I'll hand it over to Tim to discuss our Q1 results and highlight how these strategic initiatives support our outlook for 2024 and well beyond.

Tim Boswell: Thank you, Brad, and good afternoon and good evening, everyone. Page 32 shows a high-level summary of the quarter. Our Q1 results were in line with our overall expectations for the year, so we're off to a good start and on track to deliver yet another year of record financial performance. I'll start with some commentary on market conditions to provide some context for the results. Non-residential square foot starts continued to decline to start the year, but appear to be stabilizing in line with 2019 levels. We still see the mix of non-residential projects skewing larger and view that as a multiyear tailwind supported both by the various federal spending programs as well as reshoring trends favoring North America.

Aerial shot of a modular space surrounded by poratable storage units.
Aerial shot of a modular space surrounded by poratable storage units.

In the short-term, smaller, more transactional, and interest rate-sensitive projects remain challenged, and we can see this mix shift in the mix of our modular and storage activity. Modular activations are building sequentially and year-over-year with a very strong order backlog heading into Q2. Modular activations were up almost 5% year-over-year in the 13-week period ending in April. So heading into Q2, modular product is performing on track with our original plans for the year. Storage volumes, on the other hand, continue to lag modular, which we expected. And while monthly activation rates have increased sequentially into April consistent with normal seasonality, those increases are below our original plans. So we continue to have some risk from storage volumes but also haven't yet seen the benefits of the various organization and system enhancements that Brad referenced, and there are plenty of opportunities to improve performance here.

Pricing remains very strong across all product lines with average monthly rate growth of 11% year-over-year in modular and 22% year-over-year in storage. Value-added products are inflecting well across both major product categories and are another area where we have opportunity in the remainder of the year. As you can see on Page 14, value-added products on our modular activations of $3.93 per unit per month over the last 12 months is 30% over the average of the portfolio and inflected positively year-over-year in Q1 as expected. And value-added products on storage activations in the last 12 months of $32 per unit per month are up 62% year-over-year, so we continue to be quite excited about both of these revenue streams. So overall, we had a healthy mix of leasing KPIs that drove 5% lease revenue growth in the quarter, with storage volumes being the obvious red flag and overall macro conditions heading into the second half being the biggest question mark.

Nonetheless, we generated $587 million of revenue, $461 million of leasing revenue, and $248 million of adjusted EBITDA, all of which was right in line with our plan for the quarter. Adjusted EBITDA margin of 42% contracted both sequentially and year-over-year, but was slightly better than we had expected for the quarter, and I expect margins will expand meaningfully in the second half of the year as lease revenues build and we realize efficiencies from our recent system enhancements. And cash flow and returns continue to be outstanding. Free cash flow was up 40% year-over-year in the quarter at a 25% free cash flow margin. Return on invested capital over the last 12 months is 17%, which is also in the middle of our operating range. And we've generated $618 million of free cash flow over the last 12 months, which represents $3.24 of free cash flow per share and is compounding predictably towards our longer term.

Obviously, with the recent pullback in the stock largely on transaction and macroeconomic concerns, we think our cash flows are significantly undervalued on this trailing metric, let alone prospectively, so we resumed our share repurchases in April accordingly. Overall, it was a good start to the year, and I echo all of Brad's appreciation for the execution by our team across multiple fronts. Page 33 lays out revenue and adjusted EBITDA for the quarter. Total revenue was up 4% with 5% growth in our leasing revenues, partly offset by a 6% decline in our transportation revenues, which was driven by lower volumes of storage activations and returns. Adjusted EBITDA margin of 42% was down both sequentially and year-over-year, although slightly ahead of what we anticipated heading into the quarter.

This sequential contraction was expected and driven by two factors that should reverse as we progress through the year. First, storage unit movements, we expect were at their low point for the year in Q1. So as the overall volume of movements increases through the course of the year, we'll get better leverage out of our truck and fleet in more opportunities to in source transportation. Secondly, repair and maintenance activity for modular products is ramping as we head into Q2, supporting year-over-year increases in work order activity and delivery volumes. We expect leasing margins to reflate naturally as lease revenue compounds and maintenance expenses stabilize through the year. And lastly, with our system enhancements in Q1, we are beginning to see efficiency gains that we believe will begin building in Q3 and into 2025.

So we continue to anticipate margin expansion in 2024, albeit weighted to the second half of this year and sustained into 2025 given those drivers. Lastly, before shifting to cash flow, I do want to flag approximately $15 million of integration and transaction-related costs in the quarter related to the signing of the McGrath transaction and support for the regulatory review process. This cost us approximately $0.06 per share in the quarter, and I expect will continue at roughly $10 million per quarter for the rest of the year. So overall, Q1 results were consistent opportunities when we get to the guidance. Moving to Page 34, cash flow continues to be a strength. We generated $209 million from operating activities in Q1, up 40% year-over-year, driven by our predictable recurring lease revenues.

Net CapEx increased 41% year-over-year to $65 million due to investments in work orders to support modular activations, as well as new climate-controlled storage units, as we build out that offering organically. All in, we generated $144 million of free cash flow during the quarter, which was up 40% year-over-year and at a 26% margin over the last 12 months, which is in the middle of our target operating range. Free cash flow per share of $0.75 in the quarter was up over 80% year-over-year and continues to compound towards our longer-term milestones. We are quite comfortable eclipsing $4 of free cash flow per share in the next two years and before incorporating the impact of McGrath and believe this predictability and best-in-class cash flow profile are key differentiating features of our business.

Turning to Page 35. We maintained leverage sequentially from Q4 to Q1 at 3.3 times net debt to last 12 months' adjusted EBITDA, which is comfortably inside our leverage target of 3.0 times to 3.5 times. Leverage is on a downward trend heading into Q2. And as I've said previously, we can easily deleverage by approximately one turn per year when we so choose. So we are comfortable at this level and intend to flex leverage upwards upon closing the McGrath acquisition and then deleverage again back into our target range within 12 months post-closing. In January 2024, we executed a floating to fixed SOFR swap for $500 million of notional value at a fixed rate of 3.7% for one month-term SOFR. As of March 31, 2024, our weighted average pretax cost of debt is approximately 5.9% with annualized cash interest of approximately $207 million or $220 million inclusive of noncash deferred financing fees.

Our debt structure is approximately 80% fixed and 20% floating. We have ample liquidity to refinance our 2025 notes at any time to optimize interest costs. And as we discussed upon announcing the McGrath transaction, we have committed financing and ABL capacity available for 100% of the cash consideration, and we'll refinance those commitments opportunistically as we progress towards closing. Page 36 shows our capital allocation framework and our performance over the last 12 months. We invested approximately $200 million over the last 12 months in organic fleet investments, which has been on the lower end of historical norms given the demand environment. We invested over $500 million in acquisitions over the last 12 months, the majority of which went towards our new cold storage and ClearSpan platforms.

While we did not repurchase any shares in Q1 2024, we've repurchased over $600 million or 13.9 million shares over the last 12 months, resulting in a 6.4% reduction in our outstanding share count. One silver lining from the delay in closing McGrath is that it actually gives us more near-term flexibility to allocate capital. So we resumed share repurchases opportunistically in April as valuations dropped. We'll continue to be opportunistic with repurchases while ensuring that we maintain the target post-closing leverage that we structured for the McGrath transaction. Before turning it back to Brad, Page 37 shows our outlook for 2024, which is unchanged. We are maintaining the outlook that we issued during the Q4 2023 call given that Q1 was in line with our internal plans.

We continue to take a cautious view of the macro and our storage volumes are an obvious headwind as we've discussed. Relative to our original guidance, we see some potential offsetting upside from modular products, value-added products, and margins. In terms of the sequential cadence for the next few quarters, we continue to see a steady mid-single-digit sequential revenue growth each quarter as we progress through the year, which is consistent with our original outlook. However, with more of that revenue growth coming from modular and with the lower volume of storage movements impacting trucking, I expect margins could be sequentially flat into Q2 with more of the margin expansion materializing in Q3 and Q4. So that margin cadence is slightly different than our original outlook, though perfectly logical given the mix of activity as well as the cost efficiencies that we are identifying.

Capital expenditure plans for the year are unchanged. Given the performance of modular volumes and value-added products, we are investing in refurbishments, flex units, and value-added products for both the modular and the storage fleet. Our organic plans for cold storage are on track, so we are adding fleet there organically. And we never planned any CapEx for the dry storage business based on where utilization levels were entering the year. So obviously, no change to that plan based on where we sit right now. Lastly, for modeling purposes, I will flag the roughly $10 million per quarter of expenses going forward related to the McGrath regulatory and integration processes, which will impact EPS and cash flow. So like any year, 2024 is playing out a bit differently than we originally planned, but the beauty of our business is that we have a lot of different levers with which to drive results on top of the inherent predictability of our cash flows.

Anywhere within the guidance range will represent another record year for the company across almost every financial metric and implies a growing run rate into 2025. And by the end of the year, we expect to have the McGrath team onboard, and together, we will begin unlocking all of those value levers that Brad articulated and which will compound powerfully across our platform and predictably over time. So we have some work to do in the remainder of the year to set that stage, but that outlook is extremely energizing for our team here, and we're up to the challenge. With that, Brad, I'll hand it back to you.

Brad Soultz: Thanks, Tim. Thank you to our customers for their continued business. Thank you to our team for their focus on safety and customer satisfaction and thank you to our shareholders for your trust with your capital. 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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