WillScot Holdings Corp Q3 FY2025 Earnings Call

Welcome to the Third Quarter 2025 WillScot Earnings Conference Call. My name is Gary, and I will be your operator for today's call. Please note that this conference is being recorded. I will now turn the call over to Charlie Wohlhuter. Charlie, you may begin.

All right. Thank you, Gary. Good afternoon, everyone, and welcome to the WillScot Third Quarter 2025 Earnings Call. Participants on today's call include Brad, Chief Executive Officer; Tim Boswell, President and Chief Operating Officer; Matt Jacobsen, Chief Financial Officer; and Worthing Jackman, Executive Chairman. Today's presentation material may be found on our Investor Relations website at investors.willscot.com. Before we begin, I'd like to direct your attention to Slide 2 containing 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 comments made on today's call. 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, it's my pleasure to turn the call over to our Executive Chairman, Worthing Jackman.

Thank you, Charlie. Good afternoon. We appreciate you joining us for today's call, where we will discuss the current operating environment and strategic priorities, third quarter results and our updated outlook for 2025. As many of you know, I joined the WillScot Board about a year ago, became Chairman this past June and was named Executive Chairman in early September upon our announcement that Tim will be succeeding Brad as CEO, effective January 1. My expanded role has been designed both to assist Tim and the senior leadership team in achieving our strategic plan, returning to growth and driving shareholder value creation. With ongoing cyclical headwinds and an intense competitive environment, we must compete differently and execute better to drive growth. With a focus on returning to growth, we expect that a mix shift in revenue to more differentiated, higher-value offerings should create more consistent and predictable results while also reducing variability from more commoditized or transactional lines of business such as dry storage. When revenue inflects back to positive growth, adjusted EBITDA growth should outpace top line growth. We see the ability to drive adjusted EBITDA margins above 45% as units on rent trends begin to improve given the associated high incremental flow-through. That is in addition to initiatives underway to optimize our platform outlined at our Investor Day in March. There are multiple aspects of our optimization plan, a new component of which is evaluating our branch network and fleet storage acreage needs following the integration last year of WillScot and Mobile Mini's field sales and operations teams. We see opportunity to reduce our real estate footprint and related expenses, along with eliminating excess fleet, which Matt will review in his remarks. Together with continuing efforts to streamline corporate support functions and drive a more decentralized operating model, we see a pathway to help accelerate margin improvement. We believe we have the right strategy and team in place. But to earn credibility and build momentum, we must increase accountability across the organization and deliver on our commitments. The company has fallen short over the last 2 years to deliver against expectations that it set and takes full responsibility. Guidance is a key focus for me. Management's previous approach relative to expectations exposed the company if activations did materialize when expected, end market demand was less than anticipated, competition increased on more transactional lines of business or sales effectiveness and execution issues arose. I believe that expectations should be set against outcomes under our control, providing cushion to either exceed guidance or absorb the unknowns and, more importantly, to minimize the risk of surprising investors. Going forward, we'll be taking a more conservative approach to guidance to minimize the risk of negative surprises versus communicated expectations. It's important to emphasize, however, that our internal plan and incentive compensation targets will always hold us accountable to deliver results above this more conservative guidance approach. With that, I'd like to pass the call over to Brad for some brief remarks on this, his final earnings call. Matt and Tim will then review our current operating environment, third quarter results, our updated outlook and strategic priorities before heading into Q&A. Brad?

Great. Thanks, Worthing. I'd like to underscore Worthing's comments and emphasize that we are fully aligned to deliver on our commitments and to drive profitability and returns higher. Accountability is paramount, and I firmly believe we've aligned the organization and the team is well prepared to execute on our strategy. Tim has been by my side throughout the evolution of the company, and he knows this company and this industry through and through. I have immense trust in his leadership and excitement for what is to come. With the leadership we have in place and a well-defined strategic plan, I'm more confident than ever in our ability to achieve our top line growth, operational excellence and profitability goals. With that, I'll turn it over to Matt for a review of our third quarter financial performance.

Thanks, Brad. Before I jump in, I just wanted to thank you for your leadership over the last 10 years and for all you've done for the company and for me, both professionally and personally. On behalf of the finance team, we wish you the best in your future endeavors. As noted in our earnings release, third quarter 2025 financial results were mixed. We delivered strong cash flow and leasing revenues were stable sequentially from Q2 to Q3 across both our modular and storage portfolio with favorable rate and mix offsetting volume headwinds. Looking at the results, revenue for the quarter was $567 million, down $34 million year-over-year, driven primarily by increased accounts receivable cleanup of approximately $20 million in the quarter as we continue to accelerate improvements in our order-to-cash process and lower delivery and installation revenues related to our large project with the LA Rams in the prior year that we discussed in the Q2 call. This accounts receivable cleanup overshadowed what would otherwise have been a sequential quarter stability in our leasing revenues, which I'll jump into here shortly. Sales in new and rental units increased 10% year-over-year. Our ability to take out variable costs in the business supported a 42.9% margin on adjusted EBITDA of $243 million for the quarter, which was up 60 basis points sequentially from the second quarter. Slide 5 is a new slide that takes a deeper look at leasing revenue trends with and without the impact of write-offs related to our order-to-cash improvement initiatives. In total, leasing revenues were $434 million in the quarter, a 5% year-over-year decline. However, Q3 year-over-year leasing revenues, excluding write-offs, were only down 1.3% year-over-year. So this cleanup is driving a bit of noise in the top line results. The key takeaway here, however, is that the underlying product leasing revenue across each of our modular, portable storage and value-added products portfolios were stable sequentially. On a year-over-year basis, the 1.3% decline, excluding write-offs, is a result of favorable rate and mix, largely offsetting volume declines. Value-added product revenues were flat year-over-year despite volume headwinds. Within the storage portfolio, rate and mix improvements of 10% partially mitigated a 14% volume headwind. And within the modular portfolio, average monthly rates improved 5%, largely offsetting a 6% decline in volume. As you know, the sequential stability in leasing revenues is important since our revenue growth in this business is a factor of sequential trends that compound over time. We expect the year-over-year impact of the cleanup efforts around accounts receivable to decrease as we get into 2026. Importantly, the cleanup work we've completed this year of aged receivables has largely already been reserved through the provision for credit losses and SG&A in prior years, and we're beginning to see real improvements in our collections experience, such as the net impact to EBITDA of write-offs and our bad debt within SG&A is a $4.3 million positive impact to adjusted EBITDA year-over-year. Adjusted free cash flow in the quarter was $122 million, representing a 22% margin or $0.67 per share. Year-to-date, adjusted free cash flow was $397 million at a 23% margin. Free cash flow has remained stable through the recent revenue contraction, providing continued flexibility to reinvest in our business, further strengthen our balance sheet and pursue M&A opportunities as they present themselves. We have invested about $206 million in net CapEx year-to-date, or about a 16% increase over the prior year. This mainly reflects investments in high-demand categories such as FLEX, complexes, and continued fleet refurbishment, along with investment in our newer product categories. During the quarter, we paid down $84 million in borrowings and returned $21 million to shareholders through both repurchases and our dividend distribution program. On October 16, we amended and extended our ABL credit facility, reducing our estimated annual cash borrowing costs by approximately $5 million based on current debt levels and extending the maturity through October 16, 2030. The new agreement reflects the quality of our borrowing base, enhances our financial flexibility, locks in more favorable rates and terms and positions us to continue funding organic investments and targeted M&A opportunities. Once again, I'd like to thank our lending group for their long-standing commitment, support, and outsized commitments, which facilitated a successful process. After the amendment, we have no debt maturities until 2028 and ample optionality to fund our capital allocation priorities. Before I move on to our updated outlook, as Worthing mentioned, earlier this year, we began reviewing several of our real estate positions on a property-by-property basis as leases have expired with the intention of reducing our real estate footprint while maintaining market coverage. Over the past several years, our real estate costs have increased by 10% or more per year as long-term leases renewed at current market rates and as we've added additional properties through M&A and through store idle fleet. To facilitate these exits, we've identified certain surplus fleet for disposal. For the 9 months ended September 30, 2025, we had identified fleet with a net book value of $27 million for disposal and accelerated the depreciation on these units, essentially reducing that book value to 0 or to a nominal scrap value. You would have seen this in our increased depreciation in the second and third quarter primarily. Over the past few months, we've expanded these efforts into a multiyear network optimization plan, aimed at enhancing operational efficiency and reducing structural costs. This effort builds on the integration of our field sales and operations teams last year and includes a strategic review of our network, including our total real estate footprint. As part of this initiative, we expect to continue to identify fleet for disposal to facilitate real estate exits while ensuring we maintain sufficient supply to meet future demand. And we estimate the net book value of rental fleet units that could be disposed of as part of this optimization plan to be in the range of $250 million to $350 million. This plan could reduce leased acreage by more than 20% and avoid between $20 million to $30 million of annual real estate and facility cost increases over the next 3 to 5 years, reducing our annual real estate cost increases from over 10% per year to mid-single digits. To the extent we finalize a multiyear network optimization plan by the end of 2025 and that plan is approved by our Board of Directors, we may accelerate the recognition of the $250 million to $350 million of incremental depreciation expense into 2025 as a noncash restructuring charge. Now turning to our updated outlook for 2025. We have revised full year guidance to reflect the current operating environment and our updated more conservative approach as Worthing laid out in his opening comments. This outlook includes expectations on near-term demand and unit-on-rent levels, factoring in the absence of a typical seasonal uplift as well as further progress on order-to-cash improvement initiatives and a slower-than-expected ramp within clearspan and perimeter solutions. For Q4 2025, we expect revenue of approximately $545 million and adjusted EBITDA of approximately $250 million. We believe this outlook is conservative and provides sufficient cushion to meet or exceed those levels while establishing an initial baseline for 2026. For the full year 2025, this results in revenue of approximately $2.26 billion, adjusted EBITDA of roughly $970 million and adjusted free cash flow of approximately $475 million, inclusive of about $275 million of net CapEx. With that, I'd like to pass it over to Tim to discuss our areas of focus looking ahead.

Thanks, Matt, and good afternoon, everyone. Before opening the call for Q&A, I would like to elaborate more on WillScot's strategic priorities to better position us for growth, increase margins and returns and ultimately drive shareholder value as we transition into 2026. First is reestablishing organic growth in the business through our local market initiatives, enterprise accounts and our adjacency offerings. Historically, approximately 80% of our revenue is derived locally and improving performance starts with ensuring consistent sales coverage across the network, then driving productivity. Following last year's sales reorganization, we have implemented best-in-class sales enablement tools and consistent sales coverage and sales leadership such that we have a simplified structure with clear accountability for performance heading into 2026. Our focus on enterprise accounts and new industry verticals continues to show great traction. We rebuilt and strengthened this team in Q2 and expect that enterprise accounts revenue in the second half will be up approximately 5% year-over-year despite the seasonal storage headwind that Matt described. Data center and power generation infrastructure are very active subsectors for us right now across the United States. With expansion of existing relationships and more intentional focus on our non-construction verticals, we expect that our enterprise portfolio will carry a mid- to high single-digit growth rate into 2026. Value-added products and our newer product line additions remain compelling organic growth levers for us. Value-added product revenues are up 5% year-over-year on a per unit basis on modular units and approximately 22% on storage units. Climate-controlled storage units on rent were up 44% year-over-year at the end of October. FLEX units were up 30% year-over-year, and we expect our perimeter and clearspan offerings will continue ramping into 2026. So as Worthing mentioned, there are some positive signs in a favorable mix shift within the portfolio and a significant amount of operating leverage in our traditional offerings and local markets when those stabilize and recover. This leads to our second area of focus, which is operational excellence and improving the customer experience. Continuous improvement is central to our culture, and we collect extensive customer feedback that tells us where we can improve service levels. Billing and collections have been great examples that we introduced at the March Investor Day. Through the course of the year, our shared services team has made meaningful gains through enhanced quality control and faster response times. These efforts have resulted in a roughly 10% year-over-year decline in days sales outstanding to the low 70s, very strong cash flow performance, and meaningfully improved customer satisfaction scores. We expect further improvements in the order-to-cash process, resulting in continued working capital reductions and reduced bad debt and write-off expenses heading into 2026. Our network optimization initiative that Matt described is another example where we see an opportunity to reduce operating costs and increase efficiency in our network and fleet and move towards our 45% to 50% EBITDA margin range. Importantly, both of these opportunities were contingent on completing our integration of field operations last year. Combined with our ongoing focus on improvements to our transportation and logistics function, I expect that we will continue to find these types of synergies as we work to optimize the platform and focus on the customer experience. Developing human capital is a third pillar, which transcends every part of our operations. I've spent a significant portion of my time this year getting to know our talent at all levels in the organization. I am incredibly humbled and impressed by the quality of our team. But we need more depth and stronger development pathways for our people, and we have been inserting external talent strategically in the areas where we need to operate differently. The structure to scale is in place and driving this talent evolution over the next several years is a personal passion of mine and a critical ingredient for sustainable growth as well as our employee experience and culture. And as we all know, sustainable growth and returns correlate with shareholder value creation. We're strengthening our Return on Invested Capital focus across the organization and see multiple balance sheet and asset optimization opportunities across working capital, our fleet and our real estate footprint to name a few. And we will continue to focus on reducing leverage into our updated leverage range over time. As Matt mentioned, that will include an increased allocation of capital to absolute debt reduction as we reinflect towards growth, but we do not feel constrained from pursuing high-return investments in the business given the strength of our cash flows. Together, these initiatives represent our path to strengthen our financial position and deliver sustainable higher returns. The platform that we have built under Brad's leadership is stronger and better positioned to compete in the market today than at any point in our history. We intend to execute with a high degree of urgency and accountability, and I believe we have the team to deliver on our growth ambitions and drive shareholder value. Lastly, I'd like to take a moment to thank Brad for his partnership over the nearly 12 years that we have worked together. It has truly been a pleasure working alongside you and learning from your leadership. Your guidance, your integrity, your collaborative spirit and your unwavering commitment to excellence have made a lasting impact on me, the broader team and the company. I'm honored and humbled to lead our team in pursuit of the highest standards that you've set and that inspire us all to be better every day. And I know that I and so many others in the company will continue to draw upon your leadership lessons as we chart the path forward for WillScot. Thank you, Brad. And on behalf of the company, the best wishes to you and your family. This concludes our prepared remarks. Operator, would you please open the line for questions?

Our first question today comes from Tim Mulrooney with William Blair.

First, I just want to say farewell to Brad. It's been a pleasure working with you these last few years, Brad, and best wishes on your next chapter.

Thank you.

So on the revenue outlook, I just wanted to ask about the lowered top line outlook this year. If we set aside the seasonal retail headwind that you telegraphed earlier in the quarter, what other parts of the business underperformed relative to your revised guidance that you gave on the second quarter call? Were there any other end markets or regions that you'd characterize as being a bit surprising on the softer side relative to where you were sitting a few months ago?

Tim, this is Tim Boswell. I'll take that one. Certainly, the seasonal storage component is one of the biggest contributors, circa $20 million or so of revenue relative to our original expectations. There's about another $20 million across the write-off activity that Matt talked about. And that's important because those are all out-of-period adjustments to kind of aged accounts. And on that Page 5 in the presentation, which we can go back to, when you strip that impact out, you actually see very solid sequential stability of those lease revenue streams. So those are the 2 biggest components. The only other pieces I'd call out relative to the guidance coming out of Q2 would be the Canadian market. That's roughly $130 million of total revenue for us. That economy has been hit hard since Q2, I think, for obvious reasons related to the trade posture here in the U.S. So we have seen a slowing in our Canadian market. And then the ramping of our clearspan and perimeter businesses are still quite attractive in terms of the market opportunities that we see but ramping slower into Q4 than we anticipated. And as Worthing mentioned, we have built in some conservatism into this outlook so that we're exceeding these expectations going forward. So that's not an insignificant part of the overall message here. But certainly, the write-off activity accelerated. I'm really happy with where the portfolio is from a cleanup standpoint. And while it does create some noise in the top line, the customer experience side of that is really important for us.

Okay. That's a lot of helpful additional color with the write-offs. And I hadn't given enough consideration to the Canada dynamic as well that I probably should have. So that's good color. Maybe sticking on this policy point. I wanted to ask about any potential impacts that you're seeing on your business from the federal government shutdowns. I know it's a smaller piece of your overall revenue stream, but I thought I'd ask because I know you've talked about government and other verticals tied to government like military, maybe education as being a growth vertical for your business moving forward.

Yes. There is good news and bad news. The positive aspect is that government opportunities at the federal, state, and local levels in the U.S. and Canada represent growth verticals for us moving forward. The good news is that this segment is not a significant part of our business at the moment, so we have experienced very little disruption in both our rental portfolio and payment processes. Therefore, there has been no material impact so far, and we remain optimistic about our ability to better penetrate those sectors in the future.

The next question is from Andy Wittmann with Baird.

I wanted to ask about the fleet review that is ongoing here and sounds at least possible, if not likely to be more explicitly defined by the end of the fourth quarter. But this $250 million to $350 million of fleet basically write-down or impairment or scrap here, do you think that this is actual scrap like it's going to the junkyard because you mentioned in the press release kind of tired old, been sitting? Or do these get sold off and maybe wind up in your same markets as discounted units? I'm just kind of curious as to what the final disposition of this is going to be. And you talked about the book value here. I did some quick math. It looks like that's about 4% of your net book value. Is it fair to think that this would be then probably less than 4% of your fleet because these are kind of below average unit price? Maybe you could just comment on some of that, please.

Yes, of course, Andy. This is Matt, and I will address your questions. We do sell our fleet as part of our regular business activities through rental unit sales. However, we consider this as excess fleet that we intend to dispose of and scrap. Regarding the percentages, it’s actually more than the 4% you mentioned; it’s closer to about 10% of the total, but it is excess fleet. The main point is that we have enough fleet to meet our customers' needs and support future growth. Currently, we are incurring costs to store this excess fleet on additional land, along with other indirect costs that we can optimize. We are taking steps to review this with the Board, and as you mentioned, we will provide more updates as the process continues. However, it is likely around 10% at that midpoint. This is significant, but we believe it is necessary, and we recognize the cost savings that can result from this in the future.

Andy, this is Tim. The only thing I'd add is if you look at that chart in the deck that looks at non-residential starts and the cycle that we've been through here, we're sitting here today in a position where non-residential square footage starts are off about 30% from the peak and appear to be stabilizing in line with 2017 or 2018 levels. So if you can think about the ramp of the company up through 2022 and 2023, we've got enough idle fleet in the business to support growth prospectively over the next couple of years. And we can do that; we can eliminate some of this excess, reduce the related real estate, still have adequate market coverage, and still have adequate idle inventory to drive the business more efficiently. So this is about tightening things up, moving back towards the 45% to 50% EBITDA margin range and allowing our team in the field to operate more efficiently.

Yes, that's clear. And I remember, obviously, Mobile Mini had a similar type of scale write-down when they did a kind of cleanup like this, and that was a very good thing probably a decade ago. So okay. Just for my follow-up question, I wanted to kind of ask about the fundamental trends in the business. And it's often asked how your order book and your activations have evolved during the course of the quarter. Maybe, Tim or Matt, you could talk about that, just to maybe give us a flavor of where we are in this kind of bottoming process. It's been elusive. And so I thought just getting kind of your latest thoughts on it would be helpful.

Yes, Andy, this is Tim. It has been elusive. If you look at the modular order book sitting here today, it's actually now down about 1% year-over-year relative to the pending order book in early November last year. We actually converted a fair amount of it over the last 1.5 months or 2 months such that activations in modular have been up low single digits over the last month, and I'm optimistic that we'll see growth of similar magnitude in November. So I view that as stable. It's good to see the order book converting, but I certainly wouldn't call that a victory or overall change in the trajectory of the business. I think that's the conversion of the order book that we've been hoping to see through the course of the year. Storage is still quite weak, right? So no real change in the trajectory of the traditional storage business. On the climate-controlled storage business, all signs are flashing green with orders and activations up circa 60% year-over-year. So that initiative continues to show great traction. Modular is stable and consistent with what we've been seeing all year, and continued weakness across the traditional storage business.

The next question is from Angel Castillo with Morgan Stanley.

Brad, I guess, first, just to start out, it's been a pleasure working with you and wish you all the best in a new chapter. And Worthing, welcome and looking forward to working with you in your new role. I actually had a question for you. I guess I wanted to go back to your opening remarks. It just wasn't entirely clear to me, I guess, as you commented on the operational strategy or some of the changes that you're talking about here, whether this was indicative of kind of continuation of the initiatives the company laid out at Investor Day or whether, based on what you've seen so far since taking over as Chairman, understanding that it's only been a couple of months, but just whether you believe that there's anything kind of incremental or more meaningful changes required, whether it's at a portfolio level or operational strategy than what's maybe already been laid out at Investor Day.

Sure. My comments supported the initiatives that the company presented at the Investor Day, and I expanded that portfolio to include asset and network optimization mentioned by Matt and Tim in the press release. Since the Investor Day, the company has made structural changes within the sales organization to promote more decentralization and accountability. The energy level across the organization has been fantastic. While we have discussed early signs of improvement before, I know the term can be frustrating. However, today you heard about many positive developments regarding activations and rates. A challenge I've noticed is the negative effect of declining traditional storage on the business, which tends to overshadow the positive progress being made. Over the past three years, the company has likely experienced a $150 million decline in EBITDA due to the more commoditized or transactional aspect of the business, but it has managed to recover about half of that through growth in other areas. The shift in the portfolio towards more differentiated, higher value-added products and the success with enterprise accounts is significant and will strengthen our business as we move past the decline in traditional storage. We are likely in the later stages of that decline, around 70% to 80% through it. Once this phase is complete, the underlying positive developments will become more evident.

That's very helpful. And maybe just related to the disposals. Tim, you talked about, I think, 10% of the fleet essentially being reviewed here for potential disposal. At the Investor Day, I think you had identified $600 million of kind of potential revenue growth that you could achieve, I think, at 20% of kind of new fleet cost, thanks to kind of your refurbishment capabilities overall. Is that still the right number? Or do these disposals imply a smaller opportunity kind of at that lower 20% of cost and kind of future growth? Just kind of any implications of that to CapEx? Is there a requirement then if we grow? How does that change, I guess, the algorithm around the required CapEx to grow beyond this point? If you could touch on that, that would be helpful.

Good question, Angel. And no, we would not dispose of any fleet that we thought would constrain us and constrain our ability to grow in the future. So we view this disposal as purely targeting surplus that we do not need over the next several years, that allows us to tighten up both the branch network and the fleet without compromising the ability to service customers either with product or with proximity to customer in our real estate footprint. No, I don't think this materially changes that concept at all. We still absolutely have the lowest marginal cost in the industry. If we want to activate older fleet through our refurbishment process, we've got the capability to do so. I think that capability is differentiated. To the extent we're adding new fleet, which we are in certain pockets today, tends to be allocated more towards our complexes and FLEX, which are performing great. We obviously did a small regional acquisition in climate-controlled storage this year and got some excess capacity through that acquisition, which we are deploying. So that's how we're thinking about fleet investments going forward, and I don't see the disposal here as changing that narrative whatsoever.

The next question is from Kyle Menges with Citigroup.

It'd be helpful to hear just trends you're seeing with local and regional customers, especially as you're looking into 2026. And in your view, what do you think you need to see really in the markets to see some recovery within those local and regional accounts?

Kyle, this is Tim. I'll begin, and anyone else can join in. It's good to meet you. We haven't observed any changes in market trends at the local level. As I previously mentioned, our enterprise portfolio is projected to increase by around 5% in total revenue year-over-year for the second half of the year. This indicates that local and regional markets remain sluggish. Currently, I don't have any signs, whether from the Architectural Billings Index or other third-party sources, suggesting that the market trend is shifting at the local level. What is evolving is the stability of our field-based sales organization. Worthing noted some structural adjustments we've made in our sales leadership function. We've also expanded our field sales organization by over 10% this year, which does require some ramp-up time to see those resources in action. I am optimistic that we will achieve greater productivity from these resources as we move into 2026. Our team is in Scottsdale this week for budget meetings, and the message is that regardless of changes in local market conditions, we acknowledge that our performance over the past 18 months has not been optimal and we have the opportunity to exceed our own expectations at the local level. That is the challenge we are putting forth to our local market teams as we approach 2026, and we are not simply waiting for the market to recover.

Got it. That's helpful. And then on the enterprise customer side, good to hear that you're expecting those customers to grow mid- to high single digits next year. I'm curious what your sense is. Is that growth in line with the market, maybe a little bit below or above? Would love to hear that. And then my understanding is enterprise customers would have greater value-added products penetration. I am curious, though, it seems like maybe competition is heating up with others coming out with offerings that are comparable to your value-added products offerings. Just your confidence in maintaining market share with value-added products as well with the enterprise customers?

This is another area where I think outperforming ourselves is step number one. This is a function that looking back over the last 5 years, just given the relative size of our company had been relatively immature. And going into really Q2 of this year, we took a step back, put some of our best field-based leadership into this function, reorganized the team by industry vertical across 5 or 6 high-potential verticals, construction being the largest today. But historically, we've never intentionally gone into federal government, which I talked about earlier. Retail, we've had some presence but not with a lot of intentionality. Professional services, energy, and industrial are other sectors where we see opportunities to grow our penetration in those markets. So step one is let's outperform our historical baseline, and we're absolutely doing that. Your comment around value-added products and propensity to consume those at the enterprise level, I would just broaden and make a more general statement that when we're having enterprise-level RFPs, the ability to bundle not just value-added products, but climate-controlled clearspan, parameters, and all aspects of this broader space solution offering that we're putting together is pretty attractive. So I think it's cross-selling those products within the enterprise, not just value-added products, is a big part of the opportunity that we see going forward.

The next question is from Phil Ng with Jefferies.

Well, Brad, thank you. I appreciate your partnership over the years. Tim, congratulations to the new role. Looking forward to working with you. I guess from a high level, you guys talked about how you want to shift your portfolio away from more commodity products to differentiated offerings, driving more of a decentralized model. Does that require a meaningful step-up in CapEx and SG&A? There was an element of holding management more accountable and you're kind of rebuilding the field-based structural changes. Are you realigning the KPI and incentive compensation and having a higher portion of your comp tied to variable, especially on the sales side of things?

Okay. I'll start, and anybody else who would like to jump in, please do so. So we had a question a minute ago about, hey, does this fleet disposal fundamentally change the capital requirements in the business going forward? No, I don't think it does. I think the mix of that CapEx has absolutely changed. And that process started probably a year, 1.5 years ago. So I don't see a significant change in the overall magnitude of CapEx requirements in the business. I think the mix of where that capital is going is likely to be very different than it would have been over the last 5 years in some of the categories that I mentioned. I actually see an SG&A opportunity in the business, not an incremental add, especially as we look across our corporate functions. And some of that efficiency, I think, is supported by the fact that we've completed a lot of the integration activities that were related to the Mobile Mini acquisition, now almost 5 years ago. So I don't really see any fundamental changes to the cost structure or the CapEx requirements in the business based on those comments.

Okay. You mentioned in your prepared remarks about reestablishing organic growth. What are one or two key factors that will help speed that up? Is there a significant change in your go-to-market strategy? I also heard you mention a shift toward different end markets. How do you plan to approach that? Historically, there's been a strong emphasis on mergers and acquisitions and AMR growth. Are you now focusing more on organic growth in terms of volume and changing the markets you will target?

Absolutely more of an emphasis on the organic volume side across all product lines. And in some cases, as Worthing alluded to, I think we need to compete a little bit differently, leveraging our service infrastructure and customer service capabilities in some of those more commoditized product lines where maybe the product itself isn't as differentiated. But through our scale and capabilities, we can actually offer a differentiated experience to the customer. So that's absolutely a big focus within the company right now in terms of ease of doing business, speed of delivery and consistency of execution across all our product lines. But I think it becomes even more important in some of those legacy more commoditized lines. Meanwhile, we are allocating capital and resources to grow in some of those more differentiated product lines like complexes, FLEX, climate-controlled, et cetera, all the stuff that we've been talking about. So that's one of the 3 kind of commercial go-to-market pillars. A second would be everything that we've done in the field-based sales organization. I mentioned we've added over 10% to that population through the course of the year. That population is ramping up from a productivity standpoint in many cases, and we would expect to see benefits from that going into 2026. And then the enterprise portfolio is the place where I'd say, we are tapping into new verticals with more intentionality than we have in the past and also being more strategic with existing relationships and growing wallet share and deepening partnerships with existing contractors, especially in the construction vertical. So we've got 3 pillars to that go-to-market strategy across adjacencies, the field sales force, and enterprise, and we're pushing hard across all 3.

The next question is from Manav Patnaik with Barclays.

This is Ronan Kennedy on for Manav. As far as the rental footprint and fleet optimization and the ongoing evaluation as to whether you will do the further acceleration of the recognition of depreciation expense. I know we've talked about potential impacts on CapEx structure requirements and mix. But is there any potential change and lessons learned around capacity and utilization management into this initiative and out of it going forward?

Ronan, thanks, this is Matt. Thanks for the question here. I think for us, it's kind of a kind of where we're at right now with the acreage that we've got and the fleet that we have. I mean, I think we're always trying to manage the fleet, and we spend a lot of time planning the amount of CapEx and maintenance that needs to go into the fleet. And none of that has changed because of this. As we're just at a point where, as Tim spoke about, we're off about 30% from peak levels, and we have excess fleet that we need to get cleaned up right now, and now it's time to do it. So I think markets are going to ebb and flow over time. You always have to keep an eye on these things, but just kind of a point of where we are right now.

Okay. And then just if you could shed some further light with regards to the changed approach and guiding. Obviously, there's an element if you are going to have that less transactional subject to the volatility around activations, et cetera. But was there anything else from philosophy or process or perhaps even anchoring to leading indicators that had good historical correlation but has changed given the length and severity of the decline in non-residential or intensifying competition? How should we think about that?

No, I think it's just a change in approach. We want to make sure that we're setting guidance that has a bit of cushion so that we can exceed it. That's really what it is. We've had some instances where we haven't met those expectations, quite a few in the last couple of years, and we want to turn that around. That's it.

Yes. I'd like to add that the historical approach created various expectations that could emerge based on execution, competition, or market recovery. The focus now is on controlling what we can, allowing for potential upside without making risky bets. The company has spent recent months refining its business forecasts, and if you look at the October results, we met or exceeded every metric we aimed for. It's encouraging to see the team's efforts to improve forecasting while remaining cautious about changes outside our control.

The next question is from Scott Schneeberger with Oppenheimer.

Brad, I really enjoyed working with you, best wishes. I guess for the first question, it's going to play off of Ronan's discussion there on guidance. I know you're not going to provide 2026 guidance right now. We're not going to get that until probably February. However, with the trends you're seeing here into the end of the year across the primary asset classes, how should we think about volume and price on modulars and storage as we enter next year? And what type of influence would that have just kind of starting out next year as an endpoint of '25 into '26?

Scott, it's Tim. Right now, I don't see anything in the third-party leading indicators that suggests we've reached stability. The ABI, which you track closely, recently stood at about 43%, signaling continued softness over three years. We've noticed a slowdown in the decline of non-residential square footage starts, which is a positive sign and could indicate we're nearing a bottom, but it's too soon to say definitively. Looking at our portfolio, spot rates for most of our modular products are performing well. The only category where we've adjusted our pricing strategy is ground-level offices. Generally, I see stability and potential across much of our modular portfolio as we approach 2026. In storage, if we exclude seasonal orders, our order book is down roughly 6%, indicating a mid- to high single-digit volume decrease as we move into 2026. The rate environment for traditional storage continues to soften, which is a trend seen industry-wide. There are mixed trends in leasing KPIs for our older product lines. However, climate-controlled storage is showing strong performance in volumes, rates, and value-added products, presenting opportunities as we enter 2026. Overall, our business is experiencing a year-over-year decline in volume for traditional modular products and storage. If we expect a turning point, it might occur in the second half of the year, but this depends on market conditions. As you know, we usually provide our full-year guidance during the Q4 call because, by then, we have better indicators and visibility regarding the U.S. construction cycle, which typically gains momentum from March and April into Q2. We'll continue with this approach for our formal guidance. This is Tim. I appreciate all that information; it's helpful and leads to a few follow-up questions, which I'll save for later. I wanted to ask another question regarding the optimization of the footprint and assets. Specifically about the assets, will we see more in modular or traditional storage? I know it encompasses a bit of both, but can you clarify where your main focus will be? This seems like it could be an initial step. Is the $250 million, $350 million just the beginning, or could it grow further as you have potential for utilization over the next few years? It seems like there might be more to this. What assets are involved, and what influenced your decision on this size at this time? Tim here, and I'll let Matt jump in. We've primarily focused on the real estate aspect. Our top priority is to reduce operating costs and inefficiencies in the system. As we accumulate surplus fleet, we encounter drop lots, and industrial real estate can be costly. We've been identifying real estate opportunities over the next few years that will allow us to reduce these costs effectively. Specifically, we see chances to cut costs where we have surplus fleet at those locations that we can dispose of to realize savings. That's the perspective we've taken. We will monitor changes in overall market activity; if markets increase, we might choose to dispose of less, even though our utilization levels are currently low. If markets decline, we may take a different approach. However, our main focus in this initiative is actionable real estate cost reduction.

Yes, Scott, this is Matt. I want to add that we began this analysis at the start of the year, looking at properties individually, and you’ve seen us conduct similar assessments throughout the year. Given our observations, we recognized an opportunity to evaluate everything together for the next three to four years, aiming to create a comprehensive multiyear plan. That’s what you are witnessing now. Regarding assets, this is closely linked to anticipated demand. Our complexes, FLEX, and newer offerings are in high demand. However, the focus is more on the transactional items where we have observed a significant drop in demand over the past few years as non-residential projects declined, alongside smaller local projects. This includes some storage containers and typically single, smaller units. We have ample supply of these items and are confident in our ability to meet the necessary demand with our remaining fleet.

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

This is Brad. I'll take the closing here. First, I'd just like to say I'm proud of and humbled to have been part of this fantastic team as we've navigated the initial chapters of this young and great company. In closing, I'd like to thank my family, our customers, shareholders, all of you on this phone and most importantly, this team for the support over the years. And I'll remain an invested and exciting supporter of this company for the long future. Thanks.

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