WillScot Holdings Corp Q3 FY2024 Earnings Call

Welcome to the Third Quarter 2024 WillScot Earnings Conference Call. My name is Sherry, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded. I would now like to turn the call over to Nick Girardi, Vice President, FP&A. Nick, you may begin.

Good evening, and welcome to WillScot third quarter 2024 earnings call. Participants on today's call include Brad Soultz, Chief Executive Officer; and Tim Boswell, President and Chief Financial Officer. Today's presentation material may be found on the Investor Relations section of the WillScot website. Slide 2 contains our safe harbor statements. We will be making forward-looking statements during the presentation and our Q&A session. Our business and operations are subject to a variety of risks and uncertainties, many of which are beyond our control. As a result, our actual results may differ materially from today's comments. For a more complete description of the factors that could cause actual results to differ and other possible risks, please refer to the safe harbor statements in our presentation and our filings with the SEC. With that, I'll turn the call over to Brad Soultz.

Thanks, Nick. Good afternoon, everyone, and thank you for joining us today. I'm Brad Soultz, Chief Executive Officer of WillScot. As highlighted on Slide 16, our team executed well in Q3 despite a market environment that continues to be worse than we anticipated. On the positive side of the ledger, adjusted EBITDA margins were at record levels at 44.4% and adjusted free cash flow and return on invested capital were also near record levels. And we've continued to advance several key enterprise-wide initiatives that position us well for 2025 and beyond. On the negative side, non-residential construction start square footage was up 14% year-over-year in the quarter and is now tracking 15% below 2019 levels. Consistent with that contraction, we saw delays in a lot of the encouraging order activity in our pipeline in Q2, which both impacted the quarter and makes us more cautious towards the end of the year. However, we continue to see steady demand from larger projects and both backlogs and customer sentiment remain strong among our larger national accounts and contractors. Similar to prior quarters, smaller, more rate-sensitive commercial construction projects made up the bulk of the decline, and we increasingly heard customers point to the election as factoring into their timing decisions for project starts. So we do believe that a portion of this demand is simply being pushed to the right. Given the flexibility in our model, we reacted quickly to the lower activity levels and reduced variable costs by over $20 million relative to our forecast for the quarter, which is on top of the approximately $40 million of annualized indirect cost takeout that we executed heading into the quarter. This contributed to the sequential and year-over-year margin expansion that we delivered in the quarter and positions us well for margin expansion in 2025 and beyond. So while volume-related headwinds remain in the immediate term, the team is executing well through those. And those volume headwinds do continue to moderate as we head into next year, although not to the extent we had anticipated when we spoke a quarter ago. Many investors have asked separately to me what comes after the termination of the McGrath transaction, and it's very straightforward. We're continuing to execute the proven playbook that has allowed us to have already achieved and in many cases, exceeded the ambitious 3 to 5-year margin and return milestones that we established just 3 years ago. Heading into 2025, we're 100% focused on operating and optimizing our business, delivering for our customers and driving growth across the portfolio. As depicted on Slide 10, we do continue to move full speed ahead with ongoing investments in operational efficiency and customer-focused initiatives, which will allow us to further differentiate our unique and expanding portfolio of space solutions. You will recall in Q1, we combined the legacy Mobile Mini and WillScot field sales and operating team. In Q2, we completed our final major systems integration, along with the consolidation of our field service and dispatch platform and teams. In Q3, we consolidated under the WillScot brand and launched a combined website, introduced new powerful digital marketing, customer service, and sales tools. And as we head into 2025, we'll continue to further optimize and leverage all of these, while also turning our focus to streamlining our order-to-cash process from a customer service and back-office efficiency standpoint. Optimization of our order-to-cash processes represents a meaningful opportunity to improve both our customer and employee satisfaction. These are the right organic investments to drive sustainable growth and enhance the customer experience, and we believe they represent significant points of operating leverage heading into 2025. Additionally, as depicted back on Slide 4, we continue to expand our portfolio of space solutions, including climate control storage, clear span structures, and sanitation among others, that are in incubation. Collectively, when combined with our core offering, these new adjacencies offer further opportunities to extend our differentiated value proposition to existing customers. Individually, they also expose a diverse set of new customers and end markets to which we can, in turn, offer our full entire portfolio of space solutions. And we're approaching all of these with a balanced combination of organic investment, acquisitions, and new product innovation. While the contributions from these adjacencies were modest in 2024, their run rate doubled throughout the course of the year, and we expect they can double again in 2025. These represent new levers to expand our total addressable market and grow our business. Looking ahead to 2025, we think we're set up for a return to modest growth, and Tim will take you through our preliminary views on that as we head into our budgeting process. Taking a longer-term view, we remain extremely optimistic with respect to continued growth inherent in this platform. To that end, we anticipate hosting our next Investor Day during the first half of next year and expect we will announce those logistics before the end of this year. Themes for our 2025 Investor Day will center on strong organic growth, the expansion of adjacent solutions, developments of verticals, our advancements in technology, investments in human capital, new 3- to 5-year financial targets and any applicable updates to our capital allocation framework. Meanwhile, we'll continue to execute our disciplined capital allocation strategy, which has resulted in more than $2.1 billion of capital delivered to our shareholders and a 21% reduction in our economic share count since 2021. As always, organic CapEx will be demand-driven, driven in part by market conditions, but also by value-added products, new markets, and categories that we're already pursuing. We'll continue to execute tuck-in acquisitions in both our core and adjacent markets, including a few smaller transactions that we've already executed in Q3 and Q4 as we reprime that pipeline. And we'll continue to return available surplus capital to our shareholders through our share repurchase authorization, which our Board of Directors recently increased to $1 billion. In the meantime, we'll remain laser-focused on flawless execution as we progress towards our $4 of free cash flow per share milestone. With that, I'll hand it over to Tim to discuss Q3 and our outlook in a bit more detail.

Thanks, Brad, and good evening, everyone. Page 23 shows a high-level summary of the quarter. Clearly, the quarter and the revised outlook did not play out as we expected coming out of Q2, although we see plenty of bright spots that give us confidence our model is working and positioned for the recovery when markets stabilize. For context, in the last two years, we've seen the largest contraction of nonresidential construction square footage since the global financial crisis. That contraction has been longer and deeper than we expected and has impacted volumes. However, those volume headwinds are moderating as we progress into 2025. Meanwhile, margins are improving as expected as we progress through the year, given both the flexibility in our cost structure and structural improvements we've implemented leveraging our technology platform. Free cash flow remains stable and predictable with best-in-class free cash flow conversion and free cash flow margin and with adjusted free cash flow per share increasing by 13% to $3.12 over the last 12 months. ROIC remains stable and supports economic value creation, and we are back to allocating capital across organic opportunities, tuck-ins, and shareholder returns, which has been a quite effective formula historically and gives us a familiar playbook heading into 2025. So we remain quite confident in our strategy, our unique platform and capabilities, and the strength of the WillScot team. Turning to page 24. Revenue of $601 million declined 1% year-over-year, driven primarily by volume headwinds impacting both storage leasing revenues and delivery and installation revenues, which were down 13% and 1%, respectively. These were offset by modular leasing revenues in VAPS, which were up 4% and 1%, respectively, as well as sales revenue. So overall, no real change to the recent trend of solid modular results offsetting storage. Value-added products penetration for modular units inflected positively this quarter, which we've been expecting for some time with average rates up 3% year-over-year and delivered rates in the third quarter up 1% versus prior year. Storage value-added products continue to grow rapidly with average rates up 28% and delivered rates over the last 12 months up 16%. Growth of these penetration rates in a challenging market and competitive environment is a testament to the underlying customer value proposition, and I'm excited about other systemic improvements we're putting in place heading into next year to present our turnkey offering more effectively. There were no real changes to pricing trends in the quarter. Average monthly rental rates were stable across the portfolio with storage average monthly rental rates up 9.5% and modular average monthly rates up 6%. In terms of profitability, we generated $260 million of adjusted EBITDA, up 1% year-over-year at a margin of 44.4%, which itself was up approximately 50 basis points versus last year and up 80 basis points sequentially. We always expected margins to expand in the second half of the year, so we continue to be pleased with our margin trajectory heading into 2025. That said, revenues came in light in the quarter relative to our expectations. So we offset that with over $20 million of variable cost reductions that were executed during the quarter. That variable cost reduction built on the approximately $40 million of annualized indirect cost takeout that we executed in Q2. So based on that, we expect continued sequential margin expansion into Q4 and another year of modest expansion for the full year next year based on initiatives we have in place heading into 2025. As we disclosed back in September, in Q3, we incurred approximately $203 million of broken deal costs, including the McGrath termination fee, and we have backed these out of the adjusted financial metrics to isolate our operating performance. This resulted in adjusted EBITDA of $267 million, adjusted income from continuing operations of $72 million, adjusted diluted earnings per share of $0.38 and adjusted free cash flow per share of $0.77 for the quarter and $3.12 over the last 12 months. Moving to Page 25. Cash provided by operating activities continues to be quite strong and would have totaled $202 million in the quarter or up 6% year-over-year, excluding broken deal costs. Net capital expenditures were up $16 million year-over-year to $59 million, primarily due to a large property sale last year and accelerating organic run rates in our newer product lines. Again, excluding broken deal costs, adjusted free cash flow for Q3 was $143 million with a 24% margin. So we continue to feel very good about our free cash flow trajectory heading into 2025 and the overall cash conversion efficiency of our business model. Over the last 12 months, adjusted free cash flow totaled $583 million at a 24% margin, which represents $3.12 of adjusted free cash flow per share on our September 30 share count. That's up over 13% versus the prior year LTM period and represents an 8% free cash flow yield on today's market capitalization. So cash flow visibility remains an incredible strength of the business. Free cash flow per share is compounding at mid-teens rates in a down market, and we remain on track towards our $4 free cash flow per share milestone and our longer-term $700 million free cash flow milestone. Turning to Page 26. Leverage ticked up one cent of a turn in the quarter to 3.4 times net debt to last 12 months adjusted EBITDA due to payment of deal breakage costs and resumption of share repurchases. We remain inside our target leverage range of 3.0 to 3.5 times, and we have the capacity to deleverage by approximately one turn per year when we so choose. So we are unconstrained from a capital allocation standpoint. Between our internally generated cash flow and our $1.7 billion of revolver availability, we have significant excess liquidity. Taking into account our interest rate swaps, our debt structure is approximately 89% fixed and 11% floating rate. So we have limited immediate interest rate exposure and have opportunities to refinance higher coupon bonds opportunistically if interest rates continue to moderate. As of September 30, 2024, our weighted average pre-tax cost of debt stands at 5.8%. I'll note our 2025 senior secured notes mature in June next year. We have ample liquidity available to simply draw on our ABL revolver and repay the 2025 notes. So between internally generated cash flow, available ABL capacity in the bond market, or some combination thereof, we have multiple options to refinance the 2025s at a time of our choosing and to optimize our cost of capital. Page 28 shows our capital allocation over the last 12 months, which remains largely consistent with the framework we outlined at our 2021 Investor Day. In the right-hand chart, over the last 12 months, net CapEx of $231 million is very much in line with our framework target and likely increases into our guidance range of $250 million to $280 million by the end of the year. Over the last 12 months, we allocated $164 million to tuck-in acquisitions, which were primarily in the cold storage and Clearspan product lines during this period. And over the last 12 months, we have reduced our share count by approximately 3.3% and returned $286 million to shareholders. We've highlighted the $212 million of broken deal costs over the LTM period, the majority of which were in Q3 this year. However, those are behind us, and it's easy to see how that capital will be reallocated to shareholder returns in our framework as we move forward. Just as an example, the 13% free cash flow per share growth that we delivered over the past year would have been in the high teens had we allocated that capital to the repurchase. So based on the strong returns and our cash flow visibility, our Board of Directors increased our share repurchase authority again in September to $1 billion. And overall, we continue to see between $800 million and $1 billion of capital available annually to allocate, which is critical to how we compound returns. Heading into 2025, our capital allocation framework is consistent with how we've operated for the last several years. And to the extent we make adjustments, we will discuss that rationale with you in detail at our next Investor Day. Before turning it back to Brad, page 28 shows our outlook for 2024. Based on our performance year-to-date and our visibility into Q4, we revised our outlook to a midpoint of $1.60 billion of adjusted EBITDA, which reflects the reality that nonresidential construction markets are likely to continue bottoming into the first half of 2025 as customers get more certainty around the political and interest rate landscape. That is longer and deeper than we expected, and we've reduced our revenue assumptions primarily for Q3 and Q4 relative to our prior outlook. That said, volume headwinds do continue to moderate as we progress into 2025, although not to the full degree we expected in July. But this still represents a meaningful improvement relative to our run rate entering 2024. Also on the positive side, we are absolutely seeing the margin expansion that we expected in the second half even despite meaningful operating leverage headwinds from lower volumes. So while we are disappointed with the short-term result, our longer-term trajectory towards stronger margins, free cash flow, and return on invested capital are all clear and would respond powerfully when markets stabilize, which we still anticipate in our base case for 2025. So we at least want to share our current framework for thinking about that year. Our base case sitting here today assumes non-res starts will flatten in 2025 in contrast to the double-digit declines we've incurred all year. This supports moderating volume headwinds as we progress through the year, which we are beginning to see. And we do see opportunities for improved commercial execution in certain areas, and we have very tangible growth across some of the newer product lines. That combination supports modest organic revenue growth for the year and continued margin expansion in 2025, which we think is a balanced acknowledgment of both the recent deceleration and the underlying longer-term opportunities. Obviously, we'll be prepared for all scenarios, and we'll be actively developing upside opportunities. So sitting here today, this is generally the organic framework we are using to set our internal targets for the year. As always, we strive for transparency with our operating assumptions, welcome insights from our shareholders, have high expectations for our team and appreciate the ongoing partnership with our over 85,000 customers. We look forward to meeting with many of you before the holidays and welcoming you to our second Investor Day in the first half of next year, most likely in Phoenix with details coming soon. So with that, Brad, any closing thoughts?

No. Just quickly, I'd like to thank our shareholders for their continued trust in our capital, employees for continuously raising the bar while caring for each other and our customers. And most importantly, as Tim said, thank you to the 85,000 customers that partner with us to meet their critical space solution needs. Operator, would you please open the line for Q&A.

Thank you very much. Good afternoon, everyone. I’d like to start with a question about volume and then follow up with a question about pricing. You have mentioned that the volume headwind is moderating and provided a brief insight into your expectations for 2025. Could you elaborate on why you believe the volume headwind is moderating and possibly break it down between the modular and storage segments?

Yes, Scott, this is Tim. I'll begin. If you examine the average unit on rent deficit compared to the prior year in Q3, it shows a decline of about 3%. As we move into 2024, that figure would have been closer to 5%. We observe a gradual convergence, though not to the extent we anticipated following Q2, and a similar trend is evident in storage. As of today, approaching the end of October, I would estimate that units on rent are nearing 130,000. We are witnessing a sequential increase in the storage sector, which, if it persists, will likely result in a smaller volume deficit as we head into 2025 compared to what we faced at the start of 2024, although still not to the degree we expected in Q2. This indicates that the relative headwind affecting the business is not as strong as it could have been at the beginning of this year, allowing us to rely on other strategies we've discussed to enhance lease revenue growth.

Thank you, Tim. Regarding pricing, I noticed a slide in the presentation showing that VAPS and modular delivered rates have increased by 1% year-over-year, while storage has risen by 16% year-over-year. Can you provide the core rate metric? Additionally, how is the pricing integrity for both the modular and storage categories currently?

Okay, let me start by addressing the question regarding the core rate in relation to VAPS. If I miss anything, we can revisit it. We observed that the average monthly rental rate for storage increased by 9.5% year-over-year, with a modest sequential rise from Q2 to Q3, consistent with our expectations from the Q2 call. When we exclude climate-controlled storage, the traditional storage average monthly rental rate rose by about 1% year-over-year, with additional contributions from VAPS. Traditional storage rates remain stable, though spot rates have not fluctuated as anticipated since last year. Overall, the average billing rate for storage, excluding VAPS, has increased by 1% year-over-year. Cold storage is becoming a larger part of our portfolio, primarily driven by volume, as units rented are up about 15% year-over-year compared to last September. While there hasn't been significant change in average monthly rental rates this year, we're seeing meaningful increases in spot rates for cold storage, which is promising as we approach 2025. Regarding modular storage, the unit rental rates, excluding VAPS, increased by about 7% year-over-year this quarter. Additionally, the average value-added products per unit on rent rose by roughly 3% year-over-year. You also pointed out correctly that the delivered rate in modular increased about 1% year-over-year for the quarter. It was even stronger if we exclude some third-party services, which we are currently deemphasizing.

Yes. Thanks. You kind of got it on. I was really looking to get into spot rate pricing on the two categories. That's the way I confused it with the VAPS mention. But I was looking for just core in isolation as opposed to VAPS for the trailing 13 weeks to get the spot. So, yes, you covered it a bit there. Just wanted to get a sense of directionally, how is spot trending in each of the two categories, modular in particular, was it? And anything you'd like to add or if you feel you covered it, that's fine.

Yes. In modular, it's trending sequentially flat, right? We haven't seen a ton of movement there through the course of the year. There are some puts and takes as you kind of break it down by product category, not surprisingly, a little stronger in the complex fleet, as you might expect, a little weaker in ground-level offices, just as an example. But overall, the mix of the portfolio is sequentially flat going into next year from a spot standpoint.

Thank you. One moment for our next question, and that will come from the line of Tim Mulrooney with William Blair. Your line is open.

This is Tim Mulrooney. Thank you for taking our questions today. To begin, I would like to discuss the modular side of the business. With interest rates decreasing, how are you approaching the more transactional units in that area? Do you expect to see a recovery in this aspect next year, or will we need to wait for several more rate cuts before we notice any significant improvement? I'm interested in understanding the lag effect as we anticipate further rate reductions.

This is Tim. I'll start, and Brad, you can add your perspective. I think certainty is as important as the magnitude of the cuts. So, cuts maybe stimulate projects that otherwise didn't meet certain economic hurdles. Certainty simply allows the commercial real estate market to adjust, which maybe takes a bit longer. But either way, it can only be a net benefit to the volume equation in our business, especially among the more transactional product lines. And it's just black and white when you look at the relative performance of the different product lines within modular. We're actually up slightly year-over-year in terms of complex unit on rent and a lot of that's coming from the FLEX product, as we populate the market with that. And then it's just tougher on the transactional single-wides and gloves. And that contrast has been pretty black and white all year long.

Understood. That's helpful. And then maybe one just kind of on the storage side of the business. I think last quarter you had outlined an expectation for a sequential step-up of around 10,000 storage units from Q3 to Q4, just based on kind of more normalized trends in retail and seasonal. But it seems like maybe from some of the commentary in the slide deck, seeing a bit more pressure on the retail side versus previous expectations. So just curious, how we should think about any seasonal retail dynamics on the storage side of the business heading into the fourth quarter. Thanks so much.

Yeah. The retail side is shaping up very much like we expected coming out of Q2. So as I said a minute ago, I expect we'll probably end October with near 130,000 storage units on rent, relative to the 122,700 that you see on average on rent for the quarter. So we're absolutely seeing that build across both modular and storage, if you just contrast kind of our outlook today to where it was back in Q2, we reduced our overall delivery expectations by about 10% across all product lines. But the retail component is actually performing pretty much in line with what we expected coming out of Q2.

Understood. Thanks very much.

Thank you. One moment for our next question. And that will come from the line of Steven Ramsey with Thompson Research Group. Your line is open.

Good evening. I was reflecting on 2022 as a strong year for non-residential activity, and as we enter this period, if you consider the average three-year lease duration, more of those units are beginning to return to you amidst this slow start environment. Do you view this as a dual challenge, or do you perceive it differently when considering where units were in 2022 for correction?

Steve, this is Tim. It's a good question. And it's really the reverse is true to an extent as the unit on rent portfolio comes down in size, the volume of returns tends to come down proportionately. And just to give you some round numbers, total returns in Modular, if I look back to 2022, would have been just north of 70,000 units on rent. Forecast for this year is probably just over 60,000 units on rent. So we've seen the return side of the equation come down. And it's even more pronounced actually on the storage side of the business. And I think we talked about this a little bit last quarter. That tends to be a kind of a dynamic in the portfolio that actually mitigates some of the new demand headwinds because you get a little bit of benefit from that return volume just simply because the unit on rent portfolio is a bit smaller.

Okay. That's helpful. And then I wanted to think about with volume environment because of starts bottoming more slowly than you thought, but then your commercial progress to improve cross-selling with the wider portfolio that you have. I'm curious, how you think about that playing out and what benefits come first as you roll through these initiatives?

Yes. This is Brad. I'll start. And I mentioned in my prepared remarks, the year behind the scenes, we combined the two legacy ops and sales teams and unveiled a complete portfolio of digital demand optimization, sales effectiveness tools, customer portals, etc. So I think everything is in place now. And it's as basic as we don't need two different people selling two different products. We've got one team selling everything. And now they have all the tools in place. And the majority of those digital tools really went into effect in the third quarter. So it gives us, again, more excitement as we look further afield into 2025 and beyond that we can really gain some traction with the cross-sell, not only of modular and storage, but into these adjacencies and then from the adjacencies back into core.

Great. Thanks, again.

Thank you. One moment for our next question. And that will come from the line of Andrew Wittmann with Baird. Your line is open.

Great. Good afternoon and thanks for taking my question. I wanted to explore the volumes in a different way. Last quarter, you mentioned that your activations were relatively flat year-over-year. However, this quarter, your modular activations in the slide were down 7% in storage and down 10%. Since activations last quarter were flat but you experienced weaker volumes, which seemed to stabilize sequentially, I'm curious why activations this quarter were softer. Why shouldn't we expect even weaker volumes next quarter? I guess I'm not fully grasping that, and maybe you could help clarify.

Yes, Andy, this is Brad. I'll let Tim jump in a bit. But you are correct, through the first quarter and the second quarter, despite non-residential square footage being down year-over-year, modular activations were trending basically flat to prior year. That was basically a tale of two worlds. You had mega projects driving outsized demand primarily for our larger complex fleet, which was fully mitigating the drag, if you will, coming from the smaller construction projects. In the third quarter, we still continued to see that effect. We just didn't have full mitigation, right? And we touched on a number of drivers with respect to that.

Yes. I'm not sure I have a lot more to add, Andy, other than in the modular business. I think we have pulled back the return volume assumption slightly. But certainly, relative to the last outlook, our end of year unit on rent expectation is lower across both modular and storage. So I think I said, when I was talking about 2025 and kind of when this bottoming plays out, it's definitely pushed to the right relative to where we were forecasting back in July.

Got it. Maybe the better way to ask this question or a different way to ask the question is, do you think that the 3% decline in average units on rent in the third quarter improves in the fourth quarter? Or does it maybe decline a little bit more in the fourth quarter?

On modular, certainly on storage, I think there's the potential for that deficit to continue to close. And we're probably around that 3% deficit in modular, sitting where we are right now.

Okay. So, stabilizing. And then I just wanted a clarification on some of the cost actions, Brad that you talked about. So last quarter, you talked about $40 million of annualized run rate, so something like $10 million a quarter. Was the $20 million that you guys are talking about relative to this quarter, was that in the quarter, $20 million? Or is that also an annualized number so we should think of it as $40 million plus $20 million equals $60 million on an annualized basis? Sorry, I just wanted a clarification on that one.

Yes. The variable cost was $20 million lower than what we had planned for in July. This change was driven by demand, so it wouldn’t be accurate to annualize this and assume that we have an $80 million variable cost advantage going into 2025. We would be willing to reinvest that amount to support business volumes. However, if we reduced our forecasted volume by around 10 percent as we move through the quarter, the $20 million in variable costs would be affected accordingly. This is one reason why we see margins increasing even with operating leverage challenges in the business. We certainly experienced the benefits from the $40 million in annualized reductions we implemented in the second quarter, which is reflected mainly in the SG&A line that contributes to our adjusted EBITDA calculations. The $20 million in variable costs is related to leasing expenses and supports the gross profit margin of the business.

Okay. That makes a lot of sense. Those are my only clarifications for tonight. Thanks guys.

Great, Andy.

Thank you. One moment for our next question. And that will come from the line of Faiza Alwy with Deutsche Bank. Your line is open.

Yes. Hi. Thank you. So I wanted to clarify on pricing. Can you confirm what the gap is between sort of spot pricing or LTM pricing, both for storage and modular relative to the reported pricing?

Yes. Faiza, on modular, it's about a 12% favorable spread. And on storage, it's about flat, but with a growing spread on the cold storage side of the business.

Okay. Understood. And I guess I'm curious, how should we think about your pricing strategies looking ahead into 2025, just in light of those gaps and in light of inflation decelerating?

I wouldn’t say that there’s any change to our strategy at this moment. We are actively reimplementing a new pricing technology platform as we head into next year, which I am very excited about. This platform will feature AI-informed price recommendations that we can integrate into our quoting system. Additionally, we are concurrently developing a new quote configuration system aimed at further automating the bundling of both value-added and complementary fleet products as our sales representatives create proposals for customers. We continue to identify our own behavior as the biggest challenge and opportunity concerning cross-selling and value-added products. Providing the right technological tools to address this is an intriguing solution we are currently pursuing. I believe both initiatives will likely launch in the first half of next year. We are also conducting A/B testing across different areas of the business. One example is in the out-of-term rate increases, where, on average, most of our customers hold onto units longer than their contracts specify. This retention contributes to the ongoing strength and stability of AMR in the storage business linked to the out-of-term segment. We are testing various inflationary escalators in the out-of-term process among other examples we are exploring as we approach next year.

Great. That's really good information. If I may ask about volumes, we've been observing ABI and the construction data. How quickly do you think your activation volumes or generally units on rent can recover? I understand that there's typically a 12- to 18-month lag to ABI, which is still under 50. Could you give us an idea of what you consider normal and what macro conditions we need to see to reach that point?

Hi, Faiza, this is Brad and Tim can jump in. If you think about just the core underlying markets for both modular and storage, we are in the slowest part of the year seasonally. It's basically November, December, January, and February, you'll see slower activity. So March is when we would expect to see any sequential improvements really. And that also coincides with probably the earliest we really start to see benefits from the improvement in rates, etc. And certainly, I expect we'll have clarity in terms of who's in the White House, a little joke aside there. It is also, as a reminder, second quarter of next year would be when we would start to see retail remodels start to kick back in, which could be a volume driver, if you will, on top of those core markets.

Great. Thank you.

Thank you. One moment for our next question. And that will come from the line of Angel Castillo with Morgan Stanley. Your line is open.

Hi. Thanks for taking my question. Just wanted to circle back on the AMR spot answer, and I apologize if I misunderstood there. But I thought I heard you say, I guess, 12% spread between AMR and the latest spot on modular. And if I'm not mistaken, that was kind of 15% to 20% last quarter. Again, lots of earnings today, so I apologize if I misheard the numbers. But just if that is correct, it seems to imply that the spot maybe has come down on the modular side. Can you just clarify that, if that is what is going on and maybe what's kind of driving that and the confidence in kind of that inflecting?

Yes. I think we were at 15% last quarter on modular, and that had been down from 20%, I think, last year, I forget the exact periods for that. So there definitely was a contraction of the spread. That's more from older units going back and going out at today's spot than it is any compression that we've seen in spot rates themselves. I said earlier on the call that modular spot has been sequentially flat through the course of the year with some product mix variation, but extremely stable there. And you're just returning units that were rented two, three, four, five years ago, and the volume that's going out is going out at today's spot, which has been flat sequentially through the course of the year.

Thank you for your insights. I would like to follow up on your comments regarding 2025. I believe you mentioned that the non-residential sector might hit its lowest point in the first half of 2025. Considering this and your discussions about expected improvements in demand for that year, could you elaborate on the expected progression? Should we anticipate the first half of 2025 to remain weaker compared to the second half? Would there still be some contraction as we approach that turning point, possibly indicating more growth in the latter half of the year? What should we expect in terms of margin expansion and overall growth during that period?

It's a bit early to provide clear sequential guidance for the year since we're currently in our planning phase. Year-over-year, it's reasonable to expect that the first half will show minimal revenue growth due to some loss of momentum at the end of last year. However, with the stabilization of markets, the commercial initiatives mentioned by Brad, and progress on our newer product lines, combined with our pricing and margin strategies, we believe we have several options within our control that can lead to modest growth for the year along with margin expansion. We're actively exploring various scenarios and strategies.

Appreciate the color. Thank you.

Thank you. One moment for our next question. And that will come from the line of Manav Patnaik with Barclays. Your line is open.

Hi, this is Ronan Kennedy filling in for Manav. Thank you for taking my question. In terms of capital allocation, you mentioned a consistent approach. I have a multifaceted question on that. Could you clarify the expected percentage of CapEx allocated to refurbishments, organic investments in Flex Cold storage and ClearSpan, as well as adjacencies? From an end market perspective, I believe the entry into education provided a significant commercial advantage for McGrath in terms of diversification and stability. Is this type of opportunity likely to be pursued? Regarding M&A, with the $164 million spent in cold storage and ClearSpan, should we anticipate this as the primary area for future acquisitions? Have larger acquisitions in your legacy assets faced challenges due to the FTC review? Lastly, regarding buybacks, how should we approach the timing on a quarterly basis? Is there a chance for catch-up activities?

There's a lot to discuss. I'll start, and then Tim can add his insights. When considering our tuck-in pipeline, I believe looking back can help inform our future. Over the past few years, we've invested just over $1 billion in acquisitions, with about 25% of that allocated to modular projects. The remaining portion has primarily been in storage, particularly ClearSpan and cold storage, which represent new opportunities for us. We are refining that pipeline, as I mentioned earlier. Moving forward, we expect to reinvest 25% of our capital for maintenance and growth, which will include expanding in VAPS and other new areas. We anticipate a strong pipeline for further tuck-in M&A and do not see any significant limitations resulting from the McGrath transaction.

Yes, Ronan. If you look at page 27 in the deck, the right-hand pie chart shows the last 12 months of capital allocation. I'd expect the $231 million of net CapEx to go up a bit as we finish out the year. I think Q4 CapEx will be higher this year than it was last year, mostly because of the adjacencies that are growing organically. I think the $164 million of tuck-in volume compresses a bit as we close out the year just because there was a larger platform acquisition in Q4 last year, which will fall off. But overall, the framework is very much the same. And you can see on LTM basis, adding back the deal costs, you've got $500 million that would have been allocated to the repurchase under that scenario. And in terms of the timing and magnitude of repurchases, yes, we take valuation into account. But we also believe that that is a steady lever that should be deployed consistently over time to compound returns.

Thank you very much for the insight, I appreciate it. Regarding the election and its impact on timing decisions, have you heard from your customers about potential political risks? Have you evaluated how the outcomes of the elections, such as a red or blue sweep or a Trump or Harris administration, might affect on-shoring or right-shoring operations, particularly in the modular business?

Ronan, this is Tim. I've been on the road a fair amount recently. And what I've heard is more about certainty than it is about a preference one way or the other. You've got two heavy spenders, I think, on the ticket. So I don't see a huge change there one way or the other. Maybe the mix of type of government support shifts end market to end market, but we don't really care about that much. If you get more manufacturing with one and a little less green energy, well, our services don't really change that much depending on where the end market activity is. We just need the activity to be there. So we're not losing sleep over either outcome, but I think it's been pretty clear and consistent that customers want to know what paradigm they're operating in when they kick off a major project. And in retrospect, I think we may have heard that later than some, just given the sales cycle for us tends to be a little bit shorter, given we're such a small spend item on many of these project sites. But it has been a pretty consistent drumbeat that built during the quarter.

Got it. Thank you. Appreciate it.

Thank you. One moment for our next question. And that will come from the line of Philip Ng with Jefferies. Your line is open.

Hey, guys. Tim, I appreciate you giving us at least an early framework for 2025. You're calling out modest growth and margin expansion. So that's great. But can you help us unpack how you think about units on rent versus AMR growth for next year? Based on your comments, it sounds like unit on rent will likely be down next year, but I just want to get a little more perspective and kind of how do you get comfortable on how you're thinking about units on rent just because it's been pretty tough to predict.

Yes, it has. It will be down to start the year, although, again, not to the same degree it was down to start this year. So a moderating headwind there is still what we see. I can't really predict the exact mix of the KPIs that are going to play out through the course of this year, Phil. And like I said earlier, I think we've got a couple of different pathways to deliver the very high-level framework that we're talking about. We still have a very powerful tailwind in modular AMR. We have good traction across storage VAPS and signs of life in modular VAPS, which we expected to begin around inflecting around this time. We have new product offerings. And as Brad said in his remarks, we see the run rates there potentially doubling as we progress through next year, and that's primarily a volume game across some of the newer additions we've introduced to the portfolio. And then you've got margins where I think the track record has been pretty clear. And as we optimize a lot of the commercial and operational processes here, leveraging all the technology investments that have been put in place, I think we've got multiple ways to win on the margin front as we go through 2025. So those are the different levers that we're looking at sitting here today. And the mix of leasing KPIs always ends up being different than you expect in a budgeting process. So our job is to make sure we've got different ways to deliver the result.

And then, Tim, I know the demand outlook is a little different than you thought, but I think last quarter, based on the cadence you're seeing in the spread, I think you mentioned you're pretty confident that you could deliver, call it, high single-digit AMR growth in modular. Is that algo looking different today? And then storage, just given the spread, does that look more flattish? Or you could actually see some growth on AMR looking next year for storage?

We need to see an increase in spot rates for traditional containers to start raising the AMR. There will definitely be a mix benefit from the expanding cold storage market. Value-added products have improved by 16% year-over-year in the traditional storage category for Q3. This sets us up for storage with a 12% spread currently in modular, and without any further improvement in spot rates, it could bring the growth down to the low to mid-single digits if you calculate that spread by three, but there is potential for growth in value-added products and services. At this moment, I believe that's the clearest outlook we have.

Okay. Appreciate the color. Thank you.

Thank you. I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Nick Girardi for any closing remarks.

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

This concludes today's program. Thank you all for participating. You may now disconnect.