WillScot Holdings Corp Q1 FY2023 Earnings Call

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. 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.

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.

Thank you, Nick. Good morning, everyone, and thank you for being here today. I'm Brad Soultz, CEO of WillScot Mobile Mini. We are a leader in providing innovative and flexible space solutions across North America. In the first quarter of 2023, we successfully implemented our unique growth strategies alongside disciplined capital management and remarkable operational efficiency, leading to an improved outlook for over $1 billion in adjusted EBITDA this year. During this quarter, we achieved a 25% increase in revenue and a 47% increase in adjusted EBITDA, fueled by strong penetration of our value-added products and effective rate optimization. With a record return on invested capital of 17% over the past year and an 18% free cash flow margin for the quarter, we have strategically pursued smart capital opportunities including acquisitions of up to $80 million and $216 million in share repurchases. Now, let’s talk about our growth initiatives. Our value-added products initiatives account for over $500 million of the $1 billion we expect from our unique growth strategies, and we have made significant advancements in both segments. Our Modular division has a strong track record, showing over 18% compound annual growth in our value-added products’ average monthly rates over the last decade. We're also beginning to see the positive impacts of our value-added products in our Storage Solutions segment, with VAPS revenue reaching $22 million in the first quarter—up 60% year-over-year—which we believe is just the start of a significant growth driver under our control. Tim will go into more detail on this later. I could talk about our basic offerings like lights, shelving, and pipe racks for portable storage units, along with many new products we are developing, but I want to highlight our new premium storage solution that we showcased at CONEXPO in March. Based on extensive testing and initial customer reactions, we are on schedule to launch this premium offering in select markets this summer. We are following a successful strategy we’ve built over the past decade in Modular that has produced exciting outcomes, and our complete value proposition is resonating well with customers. Regarding pricing, supported by our value-added products, it significantly contributed to our results in the first quarter of 2023. Our Modular products continue to maintain about a 30% spread between the rates of delivered units and the average of our portfolio over the last year. The Storage segment is leveraging our broad product range, logistics capabilities, and pricing tools to support growth. Our confidence in achieving double-digit rate growth in both segments is grounded in the favorable rates we see from newly delivered units compared to our portfolio average. We're a small expense for our customers, and we have revamped our value offering to provide enhanced benefits. We've consistently seen double-digit growth in Modular for over five years. While input costs have risen in the past few years, they are not the primary driver of this growth but rather a factor that supports it. As we mentioned in our 2021 Investor Day, we reached a major milestone in February by optimizing our customer management systems, giving our sales team over 500 representatives and additional customer service staff clear visibility into our more than 85,000 unique customers. This unified CRM system will boost sales productivity, cross-selling, and enhance the customer experience through improved digital marketing and predictive analytics. Our team's progress in the first quarter is visible across all five aspects of our growth strategies, including VAPS price momentum, CRM unification, logistics margins, EBITDA growth, and disciplined M&A activity. Our execution, supported by long lease terms, gives us confidence in sustained growth in the years ahead regardless of market fluctuations. Turning back to our service areas, we offer our solutions across 15 diverse end markets throughout North America. It’s important to note that units in rental do not transition quickly because they are generally tied to three-year lease terms. The number of new storage units we deploy each month is the only factor we can’t fully control. We do run an effective capital allocation process that allows us to adjust our investments based on real demand every three months. While we initially adopted a cautious approach for our 2023 volume outlook due to uncertainties regarding finance conditions, labor challenges, ABI indicators, and retail store remodels, we can now assess demand more clearly for the next few quarters. We are reassured that our original caution was sensible. We'll remain focused on the controllable levers for both top-line and bottom-line growth. Regarding underlying economic factors impacting demand, feedback from our customers is crucial. Recently, the ABI Index turned positive after five months below 50, which typically indicates modular activation nine to 18 months ahead. Additionally, our larger contractor customers have strong backlogs, although some are experiencing labor constraints that may slightly delay project timelines. Some retail store remodels have also been pushed to 2024, which will create an approximate headwind of 10,000 portable storage units in Q2 and Q3 this year compared to last year, but we expect a corresponding boost in 2024. While we continue to maintain a balanced view of market demand throughout 2023, we are enthusiastic about potential tailwinds from onshoring and reshoring infrastructure projects that are set to accelerate as we move into 2024. Significant reshoring projects are already underway across North America, presenting substantial long-term opportunities for us. We are currently engaging in bidding for several billion-dollar projects in industries like advanced materials, chemicals, power generation, renewables, electric vehicles, and semiconductors. Our unique position enables us to offer complex, value-added space solutions unmatched in scale, product range, and expertise. Given this outlook for demand, our long lease terms, our distinctive value proposition, and our $1 billion worth of growth opportunities largely within our control, we anticipate surpassing the $1 billion adjusted EBITDA milestone in 2023, and we remain on track to meet the long-term financial goals set 18 months ago. Now, I’ll turn the call over to Tim for more details regarding our Q1 results and our updated outlook.

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 recurring 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 the 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 impacts 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.

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?

And our first question is from Andy Wittmann with Baird. Your line is open.

Great. Good morning. Thank you for taking my questions. I guess I would just start with trying to get a better sense of some of your leading indicators, in particular the order book, Brad. Obviously, the revenue line doesn't move very quickly at all in response to economic changes, but the order book is probably the best, I guess, derivative in terms of what you're seeing. So I was hoping you could talk about what you're seeing? And if you could break it down a little bit, what you're seeing in Modular versus what you're seeing in Storage, and talk about some of the key cyclical end markets, including your construction-related customers?

Yes. As I said in my prepared comments, there's not a lot changed versus Q1. Our order book remains robust. Looking forward, we expect work order production, as an example in Modular, to be in line with our expectations three or four months ago. We are comping, as you mentioned, against record levels of 2022. The most notable change, if you will, Andy, is that attributed to the retail sector, primarily the store remodels. And if you take the balance of the portfolio across Modular and Storage, non-residential construction in the commercial-industrial sectors, we've been cautious. I would not expect growth across the board in those sectors yet this year. Again, this is what we don't expect. We remain cautious. We've been very prudent here. We could see a bit, but we're well positioned irrespective of what these end markets present.

Got it. As a follow-up, could you elaborate more on the comments regarding the EBITDA run rate trending up by 10% to 15% in 2024? This seems to be implied in your guidance. Can you discuss what some of the factors are influencing that? I heard something about rate upside in Tim's comments, and I'm curious how that plays into your guidance for this year and if it's included in your outlook for 2024 at this early stage.

Hey, Andy, this is Tim. It's a great question. And this is what we really spend our time managing, is how do we drive that sequential run rate into any future period? And to be clear, my comment was around the leasing revenue run rate. So price times, volume times, value-added products across the combined business. As we get into Q4 going into next year, we see 10% to 15% growth going into 2024. And there aren't many businesses out there that I'm aware of that can say that with confidence. That's just a function of the lease duration and the predictability in our business model. As Brad mentioned, the only really notable change in the guidance is the deferral of the retail store remodels in the Storage segment, for a variety of reasons, are pushing into 2024. And what we have seen in the Storage segment is offsetting benefits in pricing and value-added products, such that the midpoint of our revenue range on a consolidated basis has not changed. Our delivery and work order expectations in the Modular segment are not materially different than in our original guidance. And of course, that original guidance had some conservatism in the back half of the year, which we maintain. So as you think about what could change in terms of where you end up in that 10% to 15% range, if pricing continues to progress ahead of our expectations, that could take you higher. If volumes improved materially from where they are today, that's not going to impact the 2023 results significantly, but it impacts the run rate for 2024, which is great, and then value-added products as well. We've baked in some growth on the Storage side of the segment and kind of a continuation of the trends we've had on the Modular side of the segment. So I think those assumptions are balanced. But upside or downside, either way, it takes you to the 10% or the 15% side of the range. And as I mentioned in the prepared remarks, M&A would be incremental.

Great. Thanks a lot, guys.

And our next question comes from Tim Mulrooney with William Blair.

Brad, Tim, good morning.

Good morning, Tim.

Good morning, Tim.

Thanks for taking my question. As I'm thinking about your end market exposure to commercial real estate, more broadly, non-residential construction, can you just talk about how much your business is tied to non-residential construction, that's all in, like with contractors, subcontractors, architects, whatever, like all in? And how do you think about that piece of the business being impacted looking forward with tightening credit conditions, particularly with regional banks? Thank you.

Tim, it's a good question. We break it out in our deck by customer SIC code, and you see it's roughly 35% is going to be tied to non-res construction, and that's all the general contractors, big and small, that you just referred to. There's another component that's around 5%-ish that's residential. We work with the larger homebuilders there. And then the other 60% of our business are basically every other sector of the U.S. and Canadian economies. And that is one of the, I think, misconceptions in our business, is there is a segment approximately 40% that's directly tied to construction customers, and then there's another 60% that use our services as the most cost-effective and flexible alternative to construction. And we see that playing pretty well in this environment. Within the non-res sector itself, we see all the same forecasts that everybody else does. Non-residential starts should probably be down this year. We focus more on the square footage starts, and we factored that into our guidance as we always would. Within that non-res mix, though, there are a lot of puts and takes, right? We are absolutely benefiting from the megaproject, onshoring and manufacturing trends that everybody is talking about. It seems like every week, I'm getting a new multimillion-dollar long-duration customer contract that would fit that type of description. And we clearly have infrastructure spending picking up in the United States. And we've always maintained that, that's likely a second half of 2023 and 2024 tailwind for the business. Your question around the impacts of tightening financial conditions is a good one. And this is something that we have seen in the business going back into the second half of last year. Especially up in Canada, for example, I can think of a number of larger project opportunities that were not canceled because of tightening financial conditions, but budgets are being recalibrated based on elevated input prices, labor constraints, and then capital costs. We're actually seeing Canada now, a lot of that backlog start to flow back through the pipeline, which is pretty encouraging. So going back into our budget process, we were already assuming some impacts in our non-resi markets related to tightening financial conditions. And I think some of the reactions to events in the last couple of months are probably overblown because that was happening for the last 12 or 18 months.

Right. And recalibration sounds very different than cancellation, right?

Absolutely, it is. And remember, disruption and lengthening of project duration helps us. That's one of the mitigating factors in the churn of our portfolio, and we are seeing that in terms of return volumes that are lower than we would have forecasted to start the year.

Yes. The only thing I'd add, for everyone, this is not a cyclic profile. I mean, Tim just talked to Andrew through the 10% to 15% revenue growth, so we're highly confident in that next year. If volumes change 1% or 2%, it's not meaningful, right? So the end markets are going to be what they are. We've shared our outlook. But irrespective of what they present, we're extremely bullish and will continue to be.

Thank you for the clarification there and for all the clarity on that answer. I'm just going to sneak my follow-up in real quick. Free cash flow, it's expected to be strong this year. So just curious how you're thinking about deployment of that extra capital that you'll now have. If share repurchases are a priority right now, particularly given the pullback in the stock price over the last month or so, I'm wondering how you think about defending the stock at this valuation? Thank you.

Tim, yes, we love the stock, even at prior higher valuations. So yes, we do calibrate our repurchase activity in part based on valuation. But we've also said that we won't miss a good tuck-in acquisition that comes our way. So, we do maintain a waterfall here. We've given you what our organic investment plan is for the year. We've told you that, based on current pipeline, the tuck-in volume is likely a bit above 2022 levels. And you can infer that given the fact that we're at the low end of our leverage range, everything else is going to go to the repurchase, and we'll calibrate that based on valuation.

Got it. Thank you so much.

Thank you. Our next question is from Kevin McVeigh with Credit Suisse. Your line is open.

Great. Thank you very much. Tim or Brad, you mentioned a VAPS of $400 million, which is highly credible, and an additional $100 million in containers. I want to ensure I fully understand that comment, as it seems significant.

Yes. And just in round numbers, right, we traditionally talked about what was our Modular focus over the last 10 years, being that $300 million to $350 million. At the time of the merger, we talked about a $50 million incremental opportunity by putting furniture in the GLOs. That together now is about the $400 million, right? And there's another $100 million of opportunity we're very comfortable with on the Storage side.

And remember, that's on top of the growth that's been delivered over the course of the last two years. So, we've grown the business, we've grown value-added products and we've continued to extend both the magnitude and the duration of that growth opportunity through new product introduction and better penetration of the volume that we have. The original estimates for our container VAPS back in Investor Day were approximately $50 million, and that's conservative. And we're comfortable rounding up from there to get to that $500 million prospective opportunity on top of everything we've already delivered.

Makes sense. And then the 10,000 units that were pushed out, I mean, obviously, implicitly implies you increased the guidance. Can you maybe dimensionalize what the impact of the revenue on that would have been? And again, was that just timing of some store remodels? Or what drove that, the push-out of those 10,000 units?

I want to clarify, Kevin, that we had already considered that in our initial guidance. I mentioned earlier that there was some uncertainty. So within the guidance range, we had factored it in. Now, it is certain.

Yes, some of the challenges facing the retail sector are well-known. Companies like Target have indicated they are pausing certain activities this year to cut costs, and they are also evaluating store formats. The question is not if these changes will happen, but when. Historically, this has been a reliable source of business for us. In terms of the impact on rental revenues for this year, it’s likely in the range of about $12 million, along with some costs for transportation related to these changes.

Awesome. Thank you.

Thank you. Our next question comes from Dillon Cumming with Morgan Stanley. Your line is open.

Great. Good morning, guys. Thanks for the question. Just wanted to see if you could talk through again the EBITDA opportunities you called out on Slide 15. I think the market still probably is not giving you full credit for achievement of those in the long term. Even I think most investors are still confident in that longer term as well. Just curious if you can kind of talk through how resilient those are in a more choppier macro environment and a potential non-res recession? How confident do you feel kind of around hitting that $1 billion growth figure over the long term in such an environment?

I’ll begin by discussing the value growth slide. Tim mentioned our value-added products and services, which we estimated at $500 million during our Investor Day in November 2021. We have seen benefits from this, and we're maintaining that figure. There's significant potential for reloading here. We also expect lease rate optimization to contribute $200 million, without accounting for any increase in volume. We've already addressed the disparity between the units delivered in the past year and the average across our portfolio, and we feel very confident about that. The value-added products and services are anticipated to contribute about 75% to EBITDA, while lease rate optimization should contribute over 90% after accounting for commissions. As for market penetration, we've been waiting for the CRM project to wrap up to start making significant progress. We are pleased to have successfully integrated the two systems, which we believe will enhance operational efficiencies and improve customer satisfaction, leading to increased cross-selling and market penetration over time. Regarding logistics, Tim pointed out that this was estimated at $50 million back in November 2021. We've achieved over $50 million since then, and we're forecasting the same moving forward. This is primarily based on our ongoing efforts to integrate the Mobile Mini platform with WillScot, which will improve route optimization and continue our in-sourcing efforts. The M&A and scale efficiencies include known acquisitions, and we are seeing tangible scale efficiencies reflected in approximately 650 basis points of year-over-year EBITDA margin expansion.

Got it. That's very clear. Thanks, Brad. And if I can just ask a second one on the leverage range. So I think you've demonstrated clearly in terms of the free cash flow profile that you're comfortable and able to operate, in that 3.0x to 3.5x range pretty comfortably. If there does become a bigger second point for the market, would you consider maybe reducing it by 0.5x turns, 1x turn or so if that would kind of open yourselves up to new investor classes? Or are you kind of, I think, more religious or just willing to stand fast on that 3x to 3.5x range?

I believe investors are quite knowledgeable about our leasing revenue stability and the predictability of our business. We consistently evaluate our capital allocation comprehensively. However, in response to a previous question, we definitely prefer to repurchase stock at this price rather than pay down our pre-tax debt, which is at 5.7%. In my discussions with investors, this issue has not been a concern for more than two years. Our business has a significant capacity to reduce debt. As I mentioned earlier, if we choose to, we can decrease our leverage within 12 months. This is a substantial advantage we have, and we are quite comfortable operating at the current 3x level.

Very clear. Thanks. And I'm going to sneak in one last quick clarification. The change in the milestone rate on Slide 13 for the Modular VAPS from $600 million to $650 million, does that just reflect the movement of the GLOs out of the segment, or is that more of a conscious change on your part?

That is a very astute observation. That's really just the mix of pulling out smaller square footage, ground-level offices from the Modular segment, moving them into the Storage segment where they belong, which implies the remaining larger square footage modular equipment in the Modular segment has a higher capacity for value-added products.

Appreciate the time. Thank you.

Thank you. And our next question is from Scott Schneeberger with Oppenheimer. Your line is open.

Thanks very much. Good morning. Covered a bit on the smaller customers, the financing concerns, and then the quantifying on Kevin's question of retail, and appreciate that. Brad or Tim, could you guys address the megaprojects? I know you're not too open to sizing it as a percent of units or revenue, but could you provide some anecdotes, or maybe give us a feel for how powerful these projects are? Tim, I heard you say earlier, it feels like every week, there's another one. So it sounds like these remain consistent. How competitive is this? Are you the only one that gets a look, or are there others? The tale sounds good, but can you just speak about how powerful this is as an offset to concerns that are out there in the market? Thanks.

It's extremely powerful. As we've mentioned in our prepared comments, our scale, our total value proposition, etc., puts us in a very unique position to respond to these. I mean, a simple way of thinking about it, roughly a third of our net book value is associated with large complexes. Most of those, if not all of those big projects will have those assets deployed. So that is a space we're uniquely positioned. I mean, we've got an in-house construction services team. I mean, if you're setting up 10,000, 20,000, 30,000 square foot, which many of those will require, sometimes, you need to stack two or three high; we're uniquely positioned to deliver on that aspect of the still relatively small percentage of total project spend.

Scott, I think the opportunity for us prospectively on these, these are multiyear engagements, say, three, five, seven years in some cases. In an area where we can, I think, have a very significant advantage is owning that project over the life cycle, not only winning the national general contractor with whom we've clearly got the best relationships, but then all of the other subcontractors and trades that are coming on and off of that project over the course of its life cycle with the full suite of our offering. And if there's one area where we're spending some time as a team, we're already confident we're going to get the main general contractor and the main project; it's owning everything else over the course of that multiyear cycle, which is the real opportunity here.

Thanks. I appreciate that, guys. On the CapEx, can you take us a level deeper on the initiatives focused on work order efficiency to improve vendor administration and material consumption? Maybe quantification of that in savings, how meaningful is that on your pullback on the guidance? And then you did provide a little bit more color in the deck and in this discussion about reining in the CapEx this year. But maybe what you're doing with the decrease in container purchases and a little bit more color there to let us know where you are in the CapEx cycle? Thank you.

Yes, Scott, this is Tim. I'm very excited about this development. It has taken some time, particularly with the Mobile Mini integration. We've achieved a $65 million reduction in the midpoint of our CapEx guidance. Approximately $40 million of this is due to the decision to forgo retail store remodels and storage, resulting in not needing to purchase 7,000 containers. That's the largest portion of the savings. On the Modular side, we're realizing about a $20 million benefit from roughly a 10% efficiency improvement in our refurbishment costs. Looking back at the integration from two years ago into SAP, we've gained significantly better visibility, analytics, and reporting, especially regarding the average materials used and labor—both in-house and subcontracted—per refurbishment. Previously, there was a considerable variance in these metrics across our branch network. Our first step has been to reduce that variability and ensure our quality standards are clear for the units being deployed. By achieving this, we saw substantial CapEx savings in modular refurbishments during the second half of last year, which are continuing as we move into Q2 and Q3. This is particularly encouraging given the cost inflation we've experienced over the past couple of years. Additionally, we are still integrating the branch network, where we expect some proceeds from property sales that will further enhance our CapEx opportunities. While these property sales can't occur every year, we will continue to capitalize on these proceeds as we streamline our real estate footprint.

Thanks, Tim. Thanks, Brad. Nice work.

Thank you. And our next question comes from Manav Patnaik with Barclays. Your line is open.

Hi, good morning. This is Ronan Kennedy on for Manav. Thank you for taking my question. Tim, could I just ask for your assessment of, and thoughts on, at a high level kind of pricing dynamics over the last few years through COVID with supply chain and inflationary dynamics, and what you're seeing now? We've got a lot of questions on what people are seeing with regards to surveys of storage prices, pricing on shipping containers, etc. So how that plays into versus your initiatives around pricing and you acting like a pricing leader within the industry? And your outlook for how you think that will play out, and the assumptions around pricing for the remainder of the year and forward?

Yes. Ronan, this is Tim. I'll start, and Brad, you can jump in. This is an area where we're both quite passionate, so we could spend the rest of the call talking about it. As you know, the double-digit rate growth in our Modular business has been going on since Q4 of 2017, right? That's before we had less than 20% market share. Value-added products have been a great contributor there. Dynamic price segmentation and technology has been a great contributor. Sure, we went through this period of supply constraint. But remember, COVID was a negative demand shock across our business, and we continued to drive price through that period. I do think that driving pricing was incrementally easier during the peak inflation periods. And you saw that through some of the expansion in our delivery and installation margins. But the real momentum there is coming from things like our pricing process in the Storage business, product positioning, where we're charging for patented premium features on certain products and offering a different price point for customers that just want a standard shipping container. That's one of the reasons we're moving the ground-level office product into the Mobile Mini branch network. We've got other products that meet that need for a smaller square footage footprint, like our HQ product and our 8-foot wide mobile offices. So introducing structured products positioning with price differentiation, and pushing those everywhere we see opportunity in the market as a price leader. This is what we do. This is what we love doing as the leader in the marketplace. So, I'm not the least bit concerned about changes in maritime container pricing. It's one thing to have a container in the Port of Los Angeles. It's quite another to have containers populated in Milwaukee, Wisconsin, Lexington, Kentucky, and everywhere they need to be in order to service our captive customer base.

That's very helpful. Thank you. And then if I may, a follow-up on kind of competitive dynamics within the industry given some M&A by a competitor, some sizable M&A and entry, I don't know, a focus on storage, also some portfolio moves, I think replicating along the lines that you have done with divestitures of the UK, Tank, and Pump, etc. So broader industry competitive dynamics and your outlook for M&A, if that changes your stance or approach on M&A? Or does the current macro outlook change M&A priorities?

Now we've said for a long time that we won't miss a good tuck-in that we like. And I think you can infer that we see everything that goes on in the industry. Very excited about the tuck-ins that we've executed over the course of the last 24 months. We are the acquirer of choice in the market. I don't think anybody else offers a stronger value proposition to a prospective seller than we do. We can be very targeted in our due diligence. We know the assets that we're dealing with. We can diligence, close all cash in a very short window of time because we know what we're doing. And we know how to integrate efficiently, even with smaller portfolios, right? So, no change in our appetite for M&A. It's always been there. We're more confident from an integration standpoint, just given all of the efficiencies that we're seeing in our business, the progress on pricing, value-added products, as well as the margin expansion that we're seeing across our portfolio as all of these acquisitions are integrated into our network. And we're also improving the talent level of the organization in so doing. So it really checks the boxes across all aspects of our strategy.

Thank you. Appreciate it.

Thank you. Our next question is from Faiza Alwy with Deutsche Bank. Your line is open.

Yes, hi. Good morning. Thank you. I wanted to touch on Storage pricing again. What are the implications of the deferment of retail remodel into 2024 on pricing? And I think you mentioned that there was still a 30-point gap between realized pricing and spot pricing on Modular, but curious how you're seeing spot pricing trend on the Storage side of the business.

Hey, Faiza, it's Tim. The remodels won't impact Storage pricing at all. We were getting much higher rates on seasonal storage capacity with retailers, and that's because it's short duration, right? That's typically just a September to January type rental contract, and it should have a much higher rate, which is why you saw very modest sequential AMR decline from Q4 into Q1. The retail remodels are more like core business from a pricing standpoint. So there's no change to our pricing expectations. And I would expect that we see continued sequential improvements on storage pricing. Yes, we hadn't talked about the DSR, the spot spreads in the business. But they're as strong as they've ever been. In Modular, the spreads on most recent contracts are about 35% above the portfolio average. It's just under 30% on the ground level office product and pushing 20% on our most recent contracts on the Storage product. So pricing is extremely healthy. And to the question earlier, we're going to continue to do our part there as the market leader.

Great. Thanks for that. And then just bringing it all together, sort of what's really changed over the last few months? When you first gave the fiscal '23 guidance, it sounds like 1Q came in better than how you had thought it might. And maybe these retail deferments are something new and that led to the CapEx decline. But what's really changed from your perspective?

This is Brad, I'll go first. From my viewpoint, the standout factors were the strong EBITDA margins as well as the free cash flow margins in the first quarter. As I mentioned earlier, the store remodels were anticipated before, and they are now confirmed. As Tim noted regarding revenue, these remodels are relatively minor when considering over $2 billion in revenue.

Yes, Faiza, the beauty of this business is not much changes quickly. The strategy has been very consistent. The execution has been, I think, phenomenal. I agree with Brad, the margin performance across the board is really exciting. And I think whether it's in logistics or SG&A, as I talked about, there continue to be opportunities there. We're not doing any cost cutting or anything like that. That's not what we're talking about. We're talking about just managing the business more efficiently. And there's a lot of flexibility we have in the overall cost structure. So, very pleased with that. And based on what we've seen, it's sustainable well into 2024. So I think we're set up for another year of consistent margin expansion, which we've been doing ever since we went public. So not much has changed there. And again, appetite for M&A is still there. And the growth opportunities that Brad ticked through very thoroughly are all, frankly, bigger and longer in duration than we would have expected certainly back at Investor Day.

Great. Thank you.

Thank you. Our final question comes from Steven Ramsey with Thompson Research. Your line is open.

This is actually Kathryn Thompson with TRG. Thank you for taking my question today. Just a follow-up on megaprojects. Just bigger picture, how much of megaprojects are embedded in your Investor Day long-term guidance? And does this meaningfully improve your leasing revenue outlook for '23 and '24? I know you touched on going after megaprojects earlier in the call. But maybe a little bit more color on just what specific steps are being taken to take advantage of this? And do you prefer this type of business versus some of the legacy day-to-day work? Thank you.

Hi, Kathryn, this is Tim. I'm going to start by just talking about what has kind of been in versus not in our long-term outlook. I think that's a very interesting question. And then Brad, you can maybe follow up on the question around how we go to market and the unique advantages we have on these types of projects. But if you go back to November of 2021, the only thing we knew about back then was the infrastructure bill, right? And that was relatively new news at the time. So we didn't really include any market-based expansion in our Investor Day targets. The whole point of that presentation was that we're talking about the things that are within our control. And now what we have is better visibility into that, projects directly funded from the infrastructure stimulus, and that's great. And we've always said that those will start to ramp up in the second half of this year going into 2024, and we maintain that perspective. We certainly did not anticipate the magnitude of the reshoring that's happening in the United States, manufacturing expansion, renewable energy investment. We're seeing opportunities across all of these things, right? And the confidence in our ability to win is one of the reasons that the revenue guidance isn't changing in light of maybe a net greater concern around the impact of tightening in the financial system here, right? So this is the nature of the business. There are always puts and takes in terms of the end markets that we serve. Our job is to be there. And I think we've got a disproportionately strong competitive footing on these bigger, more complex projects.

Yes. And I think, Kathryn, Tim characterized this extremely well. If we just use a couple of cases, a specific example. So, we've done a large project near Austin. It's a chip plant well before the CHIPS Act was actually in place. We'll typically supply anywhere from 10,000 to 20,000 square foot of, we'll call it, anchor turnkey space solutions. Oftentimes, that will be half for the general contractor that's building the new facility, right? And then half for the customer themselves that are bringing their early engineers on site, etc., that will run the facility once it's up and running. These are three- to five-year duration projects. And it's not just our fleet that puts us in a very unique position to supply those. It's our capability to set that size of a building up, right, maintain it over the course of the three- to five-year project duration, and bring it back and redeploy it. I think what's also quite interesting, Tim referred to in one of the earlier responses, is we've been very good and very unique in our capability to win that anchor tenant, if you will. We have a massive opportunity to make sure we win every subcontractor, every single-wide unit, every storage unit, again, in a full turnkey scenario as we go forward. So I couldn't be more bullish with respect to the next three to five years here. And I think it's a very unique scenario, both in our position as well as the market setup here.

Yes. I assume that you're referencing the Samsung build-out in the Austin market?

Exactly.

We had a major materials producer at our private company conference mention that a single project is expected to create approximately 45,000 jobs. This will be a multi-year construction effort. How do you plan to secure subcontractors? Samsung is the primary producer, but what is your approach to attracting the subcontractors? Additionally, can you apply this strategy to other U.S. markets?

For sure. And the CRM harmonization was a key enabler for that. If you use the Samsung project as an example that's large enough in scale. Everyone on our team's mobilized and aware, right, and talking to each other. That was quite manual prior to the CRM cutover. So whether it's that Samsung project, data center projects that have been of similar magnitude kind of all over the U.S. over the last several years, we're moving that from a phone a friend to our team being fully enabled. I talked about the marketing and analytics that we're capable of leveraging now with the new CRM harmonization to make sure, over the life of the three- to five-year project, we're potentially touching every person that comes on and off of that job site.

Okay. Great. Thanks very much.

Thanks.

Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect.