Welcome to the third quarter 2022 WillScot Mobile Mini Earnings Conference Call. My name is Michelle, and I will be your operator for this call. 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.

Good morning, and welcome to the WillScot Mobile Mini Third Quarter 2022 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.

Thanks, Nick. Good morning, everyone. Thank you for joining us today. I'm Brad Soultz, CEO of WillScot Mobile Mini. First, I'd like to take a second to thank our colleagues that supported the successful divestiture of the Tank & Pump segment during this quarter. Following the divestiture, we are a unique pure-play Modular and Storage solutions provider of unparalleled scale with a higher quality revenue mix. The consistent compounding growth of our core segments and the successful divestiture of the Tank & Pump segment during the quarter, together, reduced leverage from 3.7x in Q2 to 3.4x in Q3 and comfortably within our target leverage range of 3 to 3.5x net debt to EBITDA. The capital from the divestiture is already being redeployed, consistent with our capital allocation framework, including reinvestment to Modular and Storage segments, continued M&A, and returns to shareholders. Shifting to our third quarter 2022 performance, which was again stellar and demonstrates our team's commitment to delivering value to our customers and our shareholders. Our strong commercial performance continued as volumes, pricing, and value-added products, or VAPS, were all up year-over-year. To that end, the value-added products' average monthly rate in our North America Modular segment increased by 24%. Modular units on rent in the North America Modular segment increased by 4%, and prices were up 19%, inclusive of VAPS, and storage units on rent in the North America segment increased by 28% with prices up 27%. We offer a differentiated value proposition which has continued to drive our rate performance and capture volume in 2022 and will continue to do so going forward. Given the resulting 31% year-over-year revenue growth and the sequential stabilization in SG&A, we generated $251 million of adjusted EBITDA from continuing operations in Q3. Adjusted EBITDA margin was 41.6%, which expanded 270 basis points year-over-year and 140 bps sequentially. As such, we're tracking towards about 200 basis points of margin expansion for the full year 2022 relative to the prior year. We remain convicted as ever in our ability to continue to compound growth and deliver outsized returns. Switching gears to demand, which continues to be broad-based and robust across our end markets other than some softening in Canada as well as U.S. residential builders and developers, both of which were discussed during our Q2 call. Other aspects of the diverse portfolio are effectively mitigating these two more minor contributors. The Architectural Billing Index has remained positive since February of '21, which, combined with our customer sentiment, supports our confidence in continued robust nonresidential demand well into 2023. We are already actively servicing major reshoring and onshoring mega projects. These are large, complex, long-duration projects that require correspondingly complex Modular and Storage solutions. With our scale and sophistication, we're uniquely positioned to compete for these projects, which began even before the Chips or Inflation Reduction Acts were passed. Infrastructure spending will also continue to be a tailwind. We're just now beginning to see project activity that we can trace back to federal investment. For example, we're supporting offshore wind projects along the Atlantic Coast, partnering with our customers to provide office, break room, storage, and operational space as they develop wind turbines. We are uniquely positioned to support these projects, which typically have a broader geographical requirement for ready-to-work Modular and Storage solutions. Internally, we'll be focused on improving our cross-selling capabilities to drive volumes into 2023. Our CRM harmonization, which upgrades our two existing instances of Salesforce.com into a single instance, is on track to be completed in Q1 of 2023. This project will enable automated lead sharing, enhanced digital marketing, customer targeting, and improved sales rep productivity, taking our industry-leading data and technology advantage one step further and giving us yet another lever to drive volumes irrespective of end market conditions. We continued to progress the deployment of value-added products across our Mobile Mini branded fleet. Our commercial and product management team is actively transforming how we go to market in the storage business. Transitioning our mindset from just delivering a box to supplying portable secure workspace and warehouse solutions. As a point of reference, our current North America storage average rental rates equate to less than $1 per square foot per month for a portable secure workspace or warehouse that drives where you want when you need it with our best-in-class logistics capabilities. Our ground-level office in the third quarter already delivered over $100 of average VAPS value per month with customer adoption increasing towards that, which we see in comparably sized units in the Modular segment. Early feedback regarding our VAPS initiative for portable storage units is extremely encouraging with locks, lighting, and basic shelving all beginning to increase in penetration. Given our scale, every $1 of VAPS value per month on portable storage units represents approximately $2 million of incremental annual revenue. Based upon this unique storage value proposition, which is further enhanced as we extend and expand VAPS penetration, we're confident in continued storage rate growth for years to come, as we've been experiencing in our Modular business. So all in all, we're confident in the trajectory upon which we enter 2023, and we continue to invest aggressively as we do. First, we see objective sources of strength in our end markets, as evidenced by the ABI, customer sentiment, onshoring, reshoring of industrial manufacturing, and tailwinds from infrastructure spending. Second, we have the strongest leasing run rate in our history with rapidly accelerating free cash flow. Third, we're demonstrating undeniable progress executing across our $1 billion of idiosyncratic growth levers and finally, we are methodically executing our programming tuck-in acquisition strategy to further compound growth. Now, while our current outlook demand remains robust, as Tim discussed during the Q&A during our Q2 call, we have an established playbook to grow our resilient portfolio through any macroeconomic environment. We effectively execute that playbook every 90 days across all geographies and major products as per our zero-based CapEx and operations planning process. Finally, I'll touch on guidance before Tim takes over. The midpoint of our prior adjusted EBITDA full-year guidance range was $920 million, including the expected contributions from the recently divested Tank & Pump division. The midpoint of our revised full-year guidance for adjusted EBITDA from continuing operations is still $920 million. In other words, two quarters of outperformance in our Modular and Storage segments are offsetting the full year of earnings from our former Tank & Pump division. As such, implied Q4 adjusted EBITDA from continuing operations is $257 million to $277 million, which, along with the $251 million of adjusted EBITDA from continuing operations in Q3, indicates that we're already at the $1 billion adjusted EBITDA run rate that we set in our November 2022 Investor Day with a superior revenue mix and a laser-like focus by our team on the Modular and Storage operations. With that, I'll turn the call over to Tim.

Thank you, Brad, and good morning, everyone. Page 20 shows a high-level summary of the quarter. Before I jump in, I'll remind everyone that the results from the divested Tank & Pump segment are reported as discontinued operations in Q3 and all prior periods. Where appropriate for the purposes of comparability, we added back Tank & Pump results for certain non-GAAP metrics and footnoted those adjustments accordingly. But our goal is to be as transparent as possible about the run rate of our continuing operations, and we're incredibly excited about where we're headed. The business is compounding predictably and ahead of our expectations. We are achieving strong growth across all of our leasing KPIs of volume, rate, and value-added products and supplementing that organic growth with accretive high-value, high-volume tuck-in acquisitions to drive leasing revenue up 31% year-over-year. The powerful compounding of lease revenue growth, coupled with sequential stabilization of selling, general, and administrative expenses is creating sustainable upward pressure on margins with adjusted EBITDA margin of 42%, up 270 basis points year-over-year, and rapidly accelerating profitability at the net income and EPS levels. This is translating into predictable cash flow growth with free cash flow of $83 million in Q3, up 20% sequentially from Q2, while supporting a record level of organic reinvestment. We closed four acquisitions during the quarter, continuing our programmatic tuck-in strategy while building our pipeline for 2023. We are using our balance sheet to support our strategy, reducing leverage to 3.4x net debt to adjusted EBITDA, while reducing our economic share count by 6.4% over the last 12 months. All of our initiatives are working in concert to drive growth, return on invested capital, and free cash flow per share. Return on invested capital increased 360 basis points to 16% in Q3 and 14% over the last 12 months. Given the undeniable progress executing our $1 billion of growth levers as well as our programmatic tuck-in strategy, we see multiple pathways to more than triple free cash flow per share over the next 2 to 4 years. We are a serial compounder; we are compounding at scale, and our pace of compounding is accelerating into 2023. Page 21 lays out revenue and adjusted EBITDA for the quarter. From continuing operations, revenue increased 31% to $604 million, and adjusted EBITDA increased 40% to $251 million, with margins expanding 270 basis points. A few points quickly on the margin expansion, as I think Q3 sets the stage for what we can expect in the near term. First, Q3 was our strongest quarter for modular deliveries since 2019, which, combined with inflationary pressures created a variable cost headwind in the business at the gross margin level. That said, variable leasing costs were more than offset by very strong execution across our logistics function with delivery and installation margins up 870 basis points year-over-year, driven by our ability to pass through transportation costs, in-source more transport activity, and optimize costs. At Investor Day, we talked about our logistics value driver, and you are seeing those results in real time. And lastly, we stabilized selling, general, and administrative expenses in the third quarter as we said we would. We front-loaded certain SG&A investments in Q4 2021 and the first quarter of 2022 to support a strong growth year, which we have delivered. And now with our ERP reporting and analytics all in place and with a full year of tuck-in acquisition activity under our belt, we're in a place now where SG&A from continuing operations, excluding stock comp and other discrete expenses actually declined sequentially from approximately $140 million in Q2 to $135 million in Q3. I would expect just normal inflationary increases from here. So while our results have been largely top line driven since the merger, heading into 2023, we are seeing opportunities to be more efficient with our variable costs and our capital expenditures. We see opportunity to build upon or at least sustain the gains in our logistics function, and we see SG&A efficiencies, all of which will support margin and free cash flow expansion in 2023 and in which we are quite confident. Turning to Page 22. Net cash provided by operating activities grew by 61% year-over-year, grew by 12% sequentially from Q2, and are compounding predictably. Organic capital expenditures remained elevated, driven primarily by modular refurbishments and additional portable storage units that we landed and rented in Q3. While higher than we forecasted, these investments are demand-driven, supporting the strongest modular delivery volumes since 2019 and nearly 15,000 new storage units this year that are all being absorbed immediately by our customer base, and we're operating nearly 90% utilization in that product class. That said, capital spending is tapering rapidly as we head into Q4; the vast majority of our seasonal storage volume has been delivered, and this is a seasonally slower time for modular deliveries. So I expect net capital expenditures will drop meaningfully into Q4 and then remain at lower levels into Q1 until we assess the seasonal ramp-up of our nonresidential construction markets in 2023. This isn't a commentary on our demand expectation for next year. Rather, it simply reflects the fact that we have the fleet we need to operate for the next six months or so. Free cash flow and free cash flow margin have increased steadily each quarter since Q4 2021 despite the elevated demand environment this year. I expect these metrics will inflect towards our $500 million free cash flow run rate as capital expenditures normalize entering 2023. And while it's premature to give guidance, we will reassess the demand outlook as we enter 2023. Our base case is that capital expenditures will likely revert from approximately 30% of available capital in the last 12 months back closer to our longer-term target of 25% for purposes of 2023, which would suggest a meaningful reduction next year in dollar terms. Turning to Page 23. The continued compounding of our cash flows and the proceeds from the Tank & Pump divestiture combined to reduce leverage to 3.4x net debt to adjusted EBITDA, comfortably within our target range of 3 to 3.5x. I will note, this is the lowest leverage with which we have ever operated our company; with the predictability and forward visibility into our recurring cash flows and over $1 billion of capacity available in our ABL revolver, we are operating from an exceptional position of strength to execute our strategy, and we can invest aggressively wherever we see compelling opportunities in our business. In Q3, we invested $127 million in net CapEx, $105 million in acquisitions, and $197 million of repurchases of our common stock. As of September 30, our weighted average interest rate was 4.75%, and our annual cash interest run rate was approximately $142 million. Interest costs will obviously be a headwind through the course of 2023, though are manageable. And while our weighted cost of capital and hurdle rates are higher, they have not changed our view of relative capital allocation priorities given the rates of return that we can achieve in our business. Page 24 lays out those priorities and our performance over the last 12 months. We generated $1.4 billion of capital to deploy on a leverage-neutral basis over the last 12 months and inclusive of the divestiture proceeds. We continue to allocate that capital consistent with the framework we laid out at our 2021 Investor Day. In the right-hand chart, organic capital expenditures are running at 31% of total capital, so higher than target given the strong demand environment this year. As I mentioned earlier, it's easy to see CapEx reverting back to target in 2023, and we can, of course, go lower than that target if demand moderates. We have invested $300 million on regional modular and storage tuck-in acquisitions, which is in line with target and aligns neatly with the $323 million in proceeds that we received from the Tank & Pump divestiture. We effectively reinvested all of those divestiture proceeds at a comparable blended multiple back into our North America Modular and Storage segments where we have superior lease durations, better unit economics, more diversified industry exposures, and greater opportunities for growth. We utilized our $1 billion repurchase authorization to deploy the remaining $562 million of surplus capital, which reduced our economic share count by 6.4% over the last 12 months. This is exactly the right formula to drive sustainable growth and compound returns over time. Turning to Page 25. We have raised our full-year 2022 guidance for our continuing operations to $2.22 billion to $2.27 billion of revenue and $910 million to $930 million of adjusted EBITDA. If we hadn't divested the Tank & Pump segment, adjusted EBITDA guidance would be $955 million to $980 million, which would be approximately a 5% increase to our prior guidance at the midpoint. This represents a $40 million to $55 million raise to our adjusted EBITDA for our continuing operations, and it is attributable to outperformance just in the second half of the year. So it's really a $100 million increase to our expected run rate. This obviously more than offsets the divested Tank & Pump EBITDA and suggests that the pace of compounding in North America Modular and Storage has accelerated significantly. The midpoints of our range imply an adjusted EBITDA margin of 41% for the year, which would be up approximately 200 basis points for the full year, consistent with what we have said since February. This implies a margin in excess of 43% in the fourth quarter, which makes sense and is driven by the normal seasonal slowdown of modular work order activity and the normal seasonal increase of storage demand in our retail end market. Finally, turning to Page 26. Heading into 2023, our run rate is accelerating, and we have a superior revenue mix in a streamlined portfolio. For purposes of Q4, total revenue is likely up just modestly on a sequential basis as steady compounding of rental revenues is offset by seasonally slower transportation revenues. As I mentioned, net CapEx and variable costs will moderate with the seasonal slowing of modular deliveries, which will result in sequential margin expansion with EBITDA margins up approximately 200 basis points for the year, achieving a $500 million free cash flow run rate as we enter 2023. All of this is consistent with what we discussed a year ago at our Investor Day. Given the track record of execution by our team, I believe that we have upside across all of the key value drivers. We're growing the business, we're driving margins and return on invested capital, and we are deploying capital productively, all of which will drive consistent compounding returns over time. With that, Brad, I'll hand it back to you.

Thanks, Tim. Our team is dedicated and excited to finish 2022 on strong footing as we shift our focus to 2023. I wish all of you listening today continued safety and good health. This concludes our prepared remarks. Michelle, would you please open the line for questions.

Our first question will come from Andrew Wittmann with Baird.

Great. I was just wondering if we could get the latest sense that you guys are having out of the order book. It's either at the end of the quarter or maybe at the end of October, what you're seeing there just in terms of some of your more cyclical end markets, recognizing that spring season is kind of where the better information is, but not having some intel about what you're seeing kind of real-time on the order book would be helpful.

Yes, Andy, this is Brad. I’m pleased to start with that. Storage is basically sold out. As Tim mentioned, we’re operating at 90% utilization in that segment as we enter the busy season. We’ve received all the orders we can manage. The limitation there is really our fleet. On the Modular side, the order book is currently consistent with last year’s, which is worth noting, as we experienced strong demand leading into what has been a very productive 2022. So, that aligns with last year’s performance. However, as you pointed out, we expect to see the Modular order book begin to increase in February of next year, returning to more typical seasonal patterns.

Our next question will come from Scott Schneeberger with Oppenheimer.

Regarding capital expenditures, I recognize the seasonal slowdown and appreciate your efforts this year to support demand. I'm interested in your overall approach, particularly concerning containers. You mentioned having sold out due to the seasonal increase. How do you plan to manage capacity moving forward? Although having excess capacity isn't necessarily detrimental, even if some portable storage containers remain unused, I'm curious about your activity levels as we head into 2023. Will your strategy be flexible, and will you determine your approach as we reach February? It seems you've increased your container stock significantly this year. Is your strategy simply to acquire as many as possible? Additionally, are you sourcing from China or from ports?

Yes, this is Brad, and Tim will jump in. We're at 90%. We're a little higher in utilization than we've been historically this time of year. It's okay, heading into the seasonal peak, we can push ourselves towards 100% for that short duration. We'll see those units start to come back right after the New Year. My expectation is demand is robust and will continue, and we'll be expanding the storage fleet next year accordingly. We just are in a place where we don't have to do it in the next month or two. As a reminder, we've expanded the fleet through all the legacy WillScot containers that have rolled over, all the acquisitions, and then significant purchases at record levels this year of fleet, which has primarily been from China, Scott.

Great. Appreciate that. And just as a follow-up, the delivery and installation margin was quite impressive in the quarter. Just harkening back to Investor Day, you talked about the logistics optimization as a, I think, $25 million to $50 million long-term EBITDA opportunity. Where are you along that journey? And just I think you mentioned earlier, you're seeing upside to a lot of your objectives. Just on that one specifically, if you could address where you are.

Yes, Scott, this is Tim. I think one of the things I'm most proud about the team as it relates to the delivery and installation margins is it's not like we're in a stable cost environment. I mean our cost per move across both the Storage and Modular businesses is up almost 30%, and that's consistent across both of those. So we're doing a couple of things on the cost side. We are definitely in-sourcing more of that activity on the Modular side. We're still north of 50% of our moves in Modular are third party, but it is gradually coming down as we can in-source more trucks and drivers. We've also executed a couple of different acquisitions of transportation and setup crews with whom we already did a significant amount of business. So that is another manner in which we are in-sourcing activity. We have consolidated fuel cards and other initiatives coming out of the merger. But obviously, fuel costs are up and costs in general are up. That said, we are clearly passing that through a more standardized approach to delivering installation pricing. This is something that we're looking at religiously, week by week across every branch in the network. You can tell by the margin expansion that revenue side of the equation is up much more than the cost side of the equation. So it's really a multifaceted effort, and I would just say that we've got more attention on that revenue stream.

Our next question comes from Manav Patnaik with Barclays.

Obviously, strong results in some have expectations when you're at exceeded the $1 million laid out a year ago today. What is context maybe everything, what we drivers of that? And was it a function of an element of conservation or not having the visibility that you typically have at the half year into the order book and the remainder of the year? If you can just comment on those drivers. And any changes to the other targets from the Investor Day.

Ronan, this is Tim, and you're a bit muffled in terms of your question, but I think you were generally getting at where we are kind of in line with our expectations at the start of the year versus where we may be quite clearly ahead. So I'll just start with the fundamental leasing KPIs of volume, price, and value-added products. So in Modular, volume is very much in line, low single-digit organic growth for the year, supplemented with some tuck-in acquisitions with a comparable order but going into next year. So we kind of check the box. We're at expectation there. Ahead of expectations, certainly on pricing and value-added products and services. I am extremely excited by the product management organization that we have today, and the pipeline of opportunity that we see in value-added products not just for 2023, but we are phasing product introductions into 2024. So I'd say ahead of expectations there in modular VAPS and ahead of expectations across the board in the storage segment. Certainly, organic and acquisition-based volume growth in storage is ahead of where we thought we would be. Pricing, I think we're still trying to figure out where the ceiling is in storage. We have a comparable performance in our VAPS rollout expectations for storage and are seeing very encouraging results there in ground-level offices. Brad mentioned, we're already delivering those units north of $100 per unit per month that could double as we roll forward into 2023 and 2024. We are starting to move the needle a bit in storage container value-added products as well. So really, if you look at our 3- to 5-year operating ranges, we are running well ahead of the revenue CAGR that we put forth. As we go into Q4, we'll be at the upper end of the EBITDA margin range that we talked about. We've eclipsed the return on invested capital range at least in the most recent quarter. We're comfortably within the leverage range, we're growing into the free cash flow range as we get to that $500 million free cash flow run rate. The free cash flow margin is down, right? That's just a function of a heavy investment year this year, but no concerns about getting back into that range over time. And as I said in my prepared remarks, multiple pathways to triple free cash flow per share in 2 to 4 years. So I'd say across the board, we're feeling quite good. I talked about the logistics value driver; we're on our way to eclipsing that one as well. All of this means that the business is compounding at a pace that's faster than we thought a year ago, and our run rate going into 2023 is well ahead of where we thought we would be.

That's very helpful and apologies for the bad connection here. You've previously articulated a clear articulation of the recession and the levers that form a very strong downturn playbook. It sounds like a set from the softening in Canada, U.S. residential builders and you're not really seeing much weakness. But can you just remind us what happens in terms of pricing and other key metrics downturn or weakness materialize and what they would look like in varying recession?

We have been maintaining a position where our spot rates, including VAPS in our Modular business, are more than 30% above the portfolio average for over a year now. This 30% spread has been stable since the first quarter of 2020 when we first reported it publicly. We have increased the absolute average rental rate reflected in our financial statements while keeping that 30% spread. This means we only need to sustain the current spot rates we have set. If we do so, the average rental rate in the Modular portfolio is expected to rise by about 10% each year towards that plus 30% level. We see a similar pricing trend in the Storage segment, which provides substantial protection for the portfolio. The volume aspect of our business tends to remain stable due to the 34-month lease term in Modular and 30-month term in Storage, which means fluctuations in demand happen slowly. When demand softens, the business can generate substantial cash flow. Looking back at 2021, we were operating with a conservative growth strategy as we were recovering from COVID, and our capital expenditures were around $250 million compared to nearly $375 million to $400 million according to our current guidance. Our business has the capacity to adjust capital spending, which is entirely influenced by demand, and we reassess capital allocation every 90 days. This process allows for greater flexibility in allocating capital to reduce debt, pursue acquisitions, or buy back stock, and we evaluate these options on a quarterly basis.

Our next question comes from Faiza Alwy with Deutsche Bank.

Great. I wanted to talk about the new sort of commercial approach to storage that you talked about. And sort of what's the early result to that? And maybe how your cross-selling initiatives are part of playing into that new approach?

Yes, it's very clear in the performance of both the rate and volume in the storage segment. Year-over-year volume growth shows that about half comes from mergers and acquisitions, while the other half is from substantial organic growth, exceeding market expansion. We have been gaining market share through cross-selling and modular successes in storage. We've seen effective rate improvements in storage without any value-added services yet, aside from the global performance previously mentioned. The pricing is very strong thanks to the practices we've consistently applied in Modular, particularly our unique logistics capability and value proposition. Additionally, we have redefined our product positioning from good, better, and best. Moving forward, we intend to enhance this by offering complete turnkey storage solutions that include lights, locks, shelving, and other necessary items. This demonstrates that what we provide on the Modular side is a fully equipped solution ready for the customer. We are making significant progress, as evidenced by rates in Storage driven entirely by core DSR. Looking ahead three to five years, we are excited about the potential for further growth with the introduction and expansion of value-added services.

Great. Tim, regarding SG&A, this metric as a percentage of sales has shown significant improvement, and there was also sequential improvement. What should we expect in dollar terms as we look toward 2023? This performance has been impressive, and I'm interested in how sustainable this level is.

Right. I think there's always going to be what I'd call a normal level of inflation impacting SG&A. I think that's probably the best assumption using today's base as a starting point. We obviously had more significant SG&A additions in Q4 and Q1 in particular, Q4 of last year and Q1 of 2022. I don't expect those types of step changes in the future. I think we're at a good base right now. The sequential gains or reductions in SG&A from Q2 to Q3 were kind of the expected runoff of largely third-party expenses. As you can imagine, coming out of the integration, we've had some consultants, we've had contractors, and we've also had duplicative third-party spending in the business, which, over time, we shed naturally. That's really what drove the sequential change in Q3. I do think we have additional variable cost opportunities, both in leasing's cost side of the business as well as in SG&A as we go into 2023. There are definitely some opportunities there to mitigate inflationary pressures, but I don't expect anywhere near the increase that we put in place intentionally to start 2022, just given that we were positioning the business for a much more substantial growth trajectory than we had previously.

Our next question comes from Steven Ramsey with Thompson Research.

Maybe to think about North America units on rent and utilization there. How many of those units that are not on rent are project ready and are prepared to go on projects with the value-enhancing features from previously done CapEx this year?

Steven, this is Tim. Generally, we try to keep about 10% of our idle fleet ready for rent. This isn’t a strict requirement, but during our 90-day capital allocation process, we believe this buffer is necessary in modular to meet immediate demand. We assess our branches' anticipated demand for the next 90 days and, based on that, we seek the most cost-effective way to satisfy that demand using our supply. In general, we allocate capital to maintain this 10% buffer. The remainder of the fleet is in good condition; however, we do not see the need to invest in it until utilization increases to the point where we need to access it. This is the routine we follow every 90 days, which informs our modular refurbishment capital in the business. As we have been growing organically this year, our refurbishment spending has also risen.

Okay. Helpful. And then the follow-on CapEx line of thought with the run rate free cash flow hitting $500 million in the midst of elevated CapEx this year. Can you maybe clarify the CapEx dollar commentary moderating next year, and with the excess free cash flow, do you expect more buybacks or are the pipeline still sizable enough for both?

In dollar terms, guidance is set between $370 million and $410 million for this year. It's worth noting that 2021 saw levels below $250 million. There are two benchmarks to consider: first, 2022 was a year of significant growth, while 2021 experienced moderate growth as we emerged from COVID. As we approach Q4 and Q1, these are typically slower seasons for the modular business. Referring back to the previous comment about the 90-day process, there is reduced necessity for refurbishment investment during Q4 and Q1. As we evaluate the order backlog and demand outlook moving into the second half of January and the first half of February, we will begin to allocate refurbishment capital in the modular sector in anticipation of the stronger seasons in Q2 and Q3. This aligns well with the projected $500 million free cash flow run rate for next year. We have already surpassed a $1 billion EBITDA run rate, as mentioned by Brad. With a decrease in CapEx over the upcoming two quarters and expectations for moderation in 2023, I believe we will be well positioned in that region.

Our next question comes from Philip Ng with Jefferies.

Brad, I guess, volumes have been really strong in storage. Part of the pitch, I think, when you made the merger with Mini, there was an opportunity to kind of really cross-sell and gain share and to kind of get there. Just given how you're constrained from a capacity standpoint, you had to do M&A. Just give us an update on how to think about the progress you're making on that front and the opportunity going forward?

Yes. Thanks, Phil. Yes, as I mentioned on a prior question, if you look at the year-over-year volume growth in storage, that's about half underpinned by M&A, which is just smart on all dimensions. The other half is organic. That's certainly been supported by what I've kind of referred to as the manual phone of friend cross-selling. It's literally the Mobile Mini storage rep and the WillScot rep collaborating within each territory that they operate. Again, that's certainly been effective, but it's only most effective with the largest customers and largest projects. What we're excited about as we look into next year is we'll harmonize the two Salesforce.com CRM instances into one, and we'll be able to automate all of that. So at a transactional level, if we receive an immediate inbound request for a modular unit or storage, our general assumption is whatever that lead is, we will need both products. We kind of use that one to three ratio that we mentioned in our Investor Day. If there's one modular unit, there are probably three storage units around it. We look through in 2023, in the first quarter we'll get the combination behind us, and then we'll really leverage the power of the tool to automate all of that lead generation. I think that will really begin to pay further dividends later in 2023, and as I mentioned in my commentary, it's another lever to grow share irrespective of the end market environment we find ourselves in.

And have supply chains loosened enough where you're able to get units to meet that demand if you need to?

Sure. Yes, we've been able to source containers throughout and it costs us a little more money to acquire them and move them, but we've had no issues with that. As Tim mentioned, we've got adequate idle fleet on the Modular side to grow for several years coming.

Got you. And then from a capital deployment standpoint, I mean, it's great the balance sheet is in a great spot today, cash flow coming through. But the macro backdrop is actually getting a little murkier here. So Brad, Tim, how are you guys thinking about capital deployment? I mean your comfort level in doing more deals in this backdrop, how you're thinking about paying down debt versus returning cash to shareholders? Any color would be helpful.

Yes. It's really not an either/or, right? With this cash flow, it's all of the above. If you think of the framework, I think of it as a clock dial; you start at 12:00. The first thing we'll do is fund all the organic CapEx the business needs and the markets present. You move on around. When you're acquiring these tuck-in storage and modular businesses at the levels we are, you've got an immediate spread to where we're trading. You take out a turn or two of cost synergies, then you've got significant commercial synergies beyond that. You'll do that all day long. That pipeline looks robust. We've done 15 to 20 deals since the ERP cut over, we'll keep doing that. The balance of that other half goes back to shareholders. So again, no change in that regard and certainly no change with respect to our outlook.

Our next question comes from Brent Thielman with D.A. Davidson.

Great. Brad or Tim, just wondering how dilutive all the acquisition activity you've done here over the last 12 months is on the reported rental rate increases you're showing today?

Brent, this is Tim. It's hard to estimate. In the grand scheme of the portfolio, the acquisitions aren't contributing a lot. If you think about just the guidance increase since Q2, maybe $5 million of that EBITDA increase is coming from our recent M&A and the rest is just organic compounding of the core businesses. I wouldn't point to a significant embedded increase from the tuck-in acquisition. You certainly have an embedded increase just by virtue of where spot rates are today across the entire portfolio. That's really the powerful tailwind that's in the business today. Thinking back to Q4 and Q1, you did have some margin dilution in the business attributable to M&A and some of the resources we put in place to support that, but we've been at it for a year now. So we've eclipsed that, and we have no such margin pressure resulting from M&A going forward. I think that supports kind of our margin expansion thesis going into 2023 and beyond.

Okay. And then just the second question back on storage. I don't want to take anything away from you in terms of the initiatives you're putting in place to take the business to new levels. But look, I mean, the KPIs this quarter are just extraordinary. I'm just wondering if you can comment on any sort of specific supply-side or demand-side dynamics, in particular, in that asset class that sort of amplify the returns you've been able to achieve here?

Probably the one aspect I'd point to, Brent, is the effect of the seasonal container pricing that you're starting to see late in the quarter, which historically has been dilutive and it's really no longer so. In fact, it's shifting to the other side of the ledger. Other than that, it's a continuation of what started almost 3 or 4 quarters ago.

Our next question comes from Stanley Elliott with Stifel.

A quick question on the storage. I mean you mentioned seasonally kind of slowing down after the holiday period. Do you think we're in a different dynamic heading into '23 to where utilization could still be as strong as it is and not really seeing a seasonal drop-off given some of the inventory challenges that you're seeing at some of the retailers?

Yes, Stanley, this is Tim. We are definitely considering that scenario. We began receiving seasonal orders in the middle of Q2 this year and noticed those deliveries occurring much earlier than historically usual. It wouldn't be surprising if these orders stayed on rent for a longer period. We are having discussions with our customers about this, showing that the retail sector shouldn't necessarily operate on a seasonal basis. There is consistent demand throughout the year, especially in the store renovation segment. Retailers require space solutions from the moment goods arrive at the port until they reach the store and ultimately the consumer. Our national accounts team is engaging with larger non-mall-based retailers to strengthen these relationships and establish this as a core recurring annual business instead of a seasonal one. I anticipate this will be an intriguing transition over the next couple of years.

Shifting focus, you haven't mentioned the U.K. business much. It seems to be performing well, but there are ongoing concerns regarding Europe and market conditions there. Has the successful sale of Tank & Pump changed your perspective on this asset within the portfolio, or how you view it, and what are your expectations for its operations moving forward?

Yes. This is Tim. Operationally, look at the KPIs stated in local currency terms, and the business is performing extremely well. I've been very happy with delivery activity in the division; units on rent are up mid-single digits. Pricing on the container product has been pretty consistent this year. I think we've got meaningful growth opportunities in that business, both in the storage and accommodations fleet going into 2023, recognizing the macroeconomic backdrop is tougher in Europe and certainly we have here. We're keeping that in mind in terms of not getting too far over our skis from a CapEx standpoint, but fundamentally, it's an incredible business – number one competitor in the Storage business over there, and with room to grow.

Our next question comes from Sean Wondrack with Deutsche Bank.

It's great to see that your net leverage has decreased this quarter to 3.4x. To start off, could you please share the pro forma revenue and EBITDA for Q4 '21?

Sean, let’s see if we can pull that up for you. Pro forma, excluding Tank & Pump for 2021 was approximately $488 million of revenue, and EBITDA was $199.5 million of revenue.

I appreciate that. And then can you just remind us again, what is maintenance CapEx now pro forma the divestiture of the Tank & Pump segment?

Well, remember, we reinvested those proceeds in the core business. I still stick to that $175 million range. To the extent maintenance CapEx related to Tank & Pump has been divested, we've certainly replaced that in the Modular and the Storage fleet.

Right. You're certainly getting the returns to support that. Just my next question has to do with the infrastructure bill itself. It also kind of rolls into the recent Inflation Reduction Act. But what is the company doing commercially to best position itself to capitalize on the infrastructure spending?

I'd just point to the example I mentioned in my prepared commentary, Sean, with respect to that specific chips – chip manufacturing facility where we're supporting with a very unique capability, both the construction of the chip plant as well as the early engineering team from the manufacturer itself. You can take that same example and apply it to data centers, which we've been servicing for three to five years in a row. Solar, wind turbine, power, etc. So I mean those projects were already materializing. The way I think about the CHIPS Act, the Inflationary Reduction Bill, and any further stimulus is that all it really will do is extend the robust demand we're already seeing.

So Sean, keep in mind, if you look at Page 10, our industry exposures, we're already doing business with all of the customers that are going to benefit from those types of spending bills. Therefore, any general contractor in North America is already a customer. We don't have to do anything differently. When they get pulled into an infrastructure project, we're going to get pulled into that project. Manufacturing, we've talked about for the last several quarters; we’re already being pulled into those types of projects, either directly from the owner of the project like a Samsung or the general contractor who's working on that project on behalf of the project owner. Think about energy and natural resources; any utility in the U.S. or Canada is already a customer. We're seeing wind farm and solar projects across the country. Therefore, we're getting pulled in there. Certainly, anything on the institutional side, education, government, health care, those could be sectors that are benefitting from the spending as well. We don't really have to do anything differently other than be in constant contact with our largest customers, which we're already doing.

Great. That's helpful. And then it's actually funny to point out. Just on that same slide, it shows exposure to homebuilders and developers at about 9%. I know that's a broad term. It could be single-family and multifamily. I was just curious if you could comment on how that segment has been going and what your outlook is there?

Yes, it's down moderately. Our exposure there is more to multifamily and large track homebuilders. Again, it's a very small percentage of what we do. It's already baked into our outlook and not expecting any recovery and acceleration soon, nor do we need it.

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

Thank you, Michelle. Thank you all for your interest in WillScot Mobile Mini. If you have additional questions after today's call, please contact me. Thank you.

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