Earnings Call Transcript - WSC Q4 2025

Operator, Operator

Welcome to the Fourth Quarter 2025 WillScot Earnings Conference Call. My name is Sherry, 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.

Charles Wohlhuter, Executive Chairman

All right. Thank you, Sherry, and good afternoon, everyone, and welcome to our fourth quarter and year-end 2025 earnings call. With me in the room today are Worthing Jackman, Executive Chairman; Tim Boswell, President and Chief Executive Officer; and Matt Jacobsen, Chief Financial Officer. Today's presentation materials may be found in 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 comprehensive review 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. And now it's my pleasure to turn the call over to our President and new Chief Executive Officer, Tim Boswell.

Timothy Boswell, CEO

Thank you, Charlie, and good afternoon, everybody. We appreciate you joining us on today's call for a discussion of the operating environment, our strategic priorities, our fourth quarter 2025 results, and our outlook for 2026. I'd like to begin by saying that I'm grateful for and humbled by the opportunity to lead and support this remarkable company and its people on our next chapter of evolution. After spending considerable time across our operations in 2025 and as I approach my 14th anniversary with the company, I'm very excited about how we're positioned in the market, our talent level, the alignment of our team around priorities, and our culture and values that define how we show up every day for our customers and for one another. Today, our business is emerging from a period of rapid transformation with an opportunity to set a new standard of performance in our industry through focused execution of our strategy. As we will discuss today, we are beginning to see momentum from our commercial initiatives to improve local market execution, develop our enterprise accounts and industry verticals, and expand our more differentiated value-added offerings. We're backing this up with the strongest operational capabilities in the industry. Dependable execution is at the core of our 'right from the start' value proposition, and we are executing a multi-year continuous improvement roadmap to further improve both our customer experience and our margins. This is a simple formula that builds upon the already outstanding financial characteristics of our business that include industry-leading free cash flow conversion and strong returns on capital. And while we have not assumed any turnaround for purposes of our guidance, we do see encouraging signs of progress across the business and the entire organization is aligned to drive a return to growth and shareholder value creation. This obviously starts with stabilizing the top line. Matt will cover the details of our Q4 results. The total revenue was down 2% year-over-year in the quarter, excluding write-offs, with the decline nearly all attributable to lower seasonal storage demand from one customer. Revenue from modular products was effectively flat year-over-year. So the lease portfolio is stabilizing as a result of our initiatives despite the continued contraction of nonresidential square footage starts in Q4. Adjusted EBITDA of $250 million in the quarter was right on top of our guidance, although the 44% margin was a bit lower driven by the revenue mix and some SG&A items. Cash generation remains strong with $91 million of adjusted free cash flow in the quarter, and we returned $30 million to shareholders through share repurchases and our quarterly cash dividend while reducing $41 million of debt balances. Capital allocation was balanced as we manage leverage prudently and prioritize opportunities with the strongest returns. Overall, there were no surprises in the quarter from my perspective, which is important as our team focuses on getting back to more consistent and dependable execution for shareholders. Looking ahead to 2026, our initial guidance is intentionally conservative consistent with the approach that we articulated after the third quarter and does not assume any improvement in business trends. Our internal plans and compensation targets comfortably exceed this outlook, although the market backdrop remains mixed, and we think the conservatism is prudent given our recent trends. That said, our top priority is returning the business to steady organic growth, and we believe there is a path to deliver positive organic revenue growth inflection in the second half of the year. We're seeing early results from our initiatives that, if sustained, would get us there. First, entering 2026, sales staffing is up 13% year-over-year and with greater tenure, stronger sentiment, and lower turnover across the sales organization. In Q4, we strengthened our regional sales management layer so that we have consistent oversight and accountability at the local level, clearly aligned incentives, and improved sales enablement systems. We absolutely have a productivity tailwind from this team, and I'm very happy with the changes that we've implemented. Second, enterprise accounts are accelerating with our focus on developing existing accounts and underpenetrated industry verticals. Enterprise account revenue was up 7% year-over-year for the full year in 2025 and up 10% year-over-year in Q4 excluding one large seasonal container customer. We expect to carry this momentum through 2026, delivering mid- to high-single-digit revenue growth from the enterprise portfolio. Third, our expanded offering and focus on the customer experience absolutely complement these efforts, giving us more ways to win on every opportunity and, in some cases, opening new opportunities that we may not have pursued historically. This is all consistent with what we shared in Q3, although we are a bit further along with the implementation and with clear visibility into the impact on our leading indicators. From an order perspective, our modular pending order book is up 17% year-over-year, with a significant impact from large RFP wins in the enterprise accounts portfolio, which are often tied to large project demand such as data centers, power generation, and large-scale manufacturing. This excludes demand related to the upcoming World Cup, which we expect will be an additional 2,000 units of demand in Q2 and Q3, albeit on short duration. If we exclude all enterprise account activity, modular pending orders are up 5% year-over-year, so we are seeing increasing order volumes across customer segments and across all product lines within our modular offering. This is on the heels of 3% year-over-year activation growth in the fourth quarter on our modular products and with strong order growth continuing into January and February. We've also seen order rates on our portable storage product lines, up 11% year-over-year over the last 13 weeks, with that growth all coming from RFP wins within enterprise accounts, including some shorter-duration retail store remodels. It is good to see growth in the storage order rates, but it is not yet as broad-based as we are seeing in modular. It is early in the year, though our commercial team is well organized, and with the significant order backlog, we are increasingly focused on operational readiness to support demand and have 3 key initiatives in flight across our field and centralized operations. First, as Matt will discuss, we are advancing our network optimization plan, following approval by the Board of Directors in December. This will allow us to exit surplus real estate positions and idle fleet while maintaining full service and coverage capabilities in all markets that we serve. Second, heading into Q2, we will be rolling out our enhanced scheduling and route optimization platform, which we expect will improve our dispatch function and transportation margins as well as customer service. Third, we're continuing to make improvements across our support center operations, resulting in accelerated cash collections, reduced days sales outstanding, and significant improvements in Net Promoter Scores related to our invoicing and customer service functions. We prioritized each of these initiatives to improve efficiency and the customer experience. These will be sources of operating leverage when activity levels pick up across the network and reasons we're confident in our longer-term target range for EBITDA margins. Before I turn the floor over to Matt, I'd like to thank the entire WillScot team again for their support through our recent leadership transition. Over the last several months, we have worked hard and collaboratively to align on our strategic priorities, and we have a shared understanding that our success will be defined by disciplined execution that delivers consistent, repeatable results across the organization. The initiatives we have in motion, from strengthening our go-to-market strategy to continuous improvement of our operations, create a pathway back to sustainable organic growth and shareholder value creation, which is our focus.

Matthew Jacobsen, CFO

Thanks, Tim. I'll get into the details shortly, but overall, results at the end of the year were in line or better than we had guided. In the fourth quarter, total revenue was $566 million, and adjusted EBITDA was $250 million, representing a margin of 44.2%. Revenues in the quarter came in a bit better than we had expected, but were down $38 million or 6% versus the prior year quarter. Excluding the cleanup of out-of-period AR that we discussed last quarter, revenues were down approximately $12 million or 2% year-over-year, the majority of which was driven by the reduction in our seasonal retail container volumes with one customer. While higher sales and delivery and return activity supported revenue performance above our guide, the shift in revenue mix weighed on consolidated margins by about 50 basis points versus our expectations. We also incurred elevated levels of health insurance costs in the fourth quarter, which compressed margins by another 60 basis points and reduced the favorability to our guide from an EBITDA perspective. For the full year 2025, total revenue was $2.28 billion, and adjusted EBITDA was $971 million at a margin of 42.6%. Overall, we ended up the year a little better than we had guided and are focused on operational discipline and cost control as we position the business to support a growing order book in early 2026. If we look a little bit closer at our leasing revenue on Slide 5, we can see the underlying stability in our leasing revenues. Here, you can see our performance with and without write-off activity. Write-off activity within leasing revenue was flat sequentially at approximately $25 million, but up approximately $19 million versus the prior year quarter. However, our modular space leasing revenues in the quarter were essentially flat to prior year, which, when combined with improved activity levels and the growing order book, as Tim highlighted, indicates lease revenue stabilization in our largest product class and the opportunity to drive revenue inflection in the second half of 2026. Portable storage leasing revenue was down approximately $10 million from the prior year as expected, driven by lower volumes and end-of-year seasonal storage business, partially offset by a modest sequential increase driven by our climate-controlled storage offering. VAPS revenue in the quarter was essentially flat in absolute dollars, both year-over-year and sequentially, with increasing VAPS penetration, which was up by 100 basis points year-over-year to 17.8% of total revenue or 17.4% for fiscal year 2025. Turning to Slide 6. In the fourth quarter, adjusted free cash flow was $91 million, representing a 16.1% margin and $0.50 per share. For the full year 2025, adjusted free cash flow totaled $489 million and exceeded our guidance of $475 million, representing a 21.4% margin and $2.70 per share. Consistent free cash flow conversion continues to be a unique strength of our business and has demonstrated remarkable resilience as the lease portfolio positions for inflection. As shown on Slide 7, for the full year, net CapEx totaled $273 million, up 17% compared to fiscal year 2024. While we estimate approximately $200 million of our CapEx is for maintenance CapEx, we've been investing above maintenance levels to service large project demand with our FLEX product, additional complexes, and also in our newer product categories to support growth where customer demand is strong. We will continue to prioritize demand-driven investments in the more differentiated, higher-value products. We also opportunistically allocated $145 million towards acquisitions, paid down $146 million in borrowings, and returned $151 million to shareholders through both repurchases and our quarterly dividend distribution program in 2025. We will continue to take a balanced approach to allocating capital by managing leverage while being opportunistic with share repurchases and potential acquisitions. Moving to Slide 8. We ended 2025 with total debt of under $3.6 billion with a leverage ratio of 3.6x. During the quarter, we amended and extended the maturity of our ABL credit facility to October 2030 and used some of our availability to redeem $50 million of our 2031 notes, which carry the highest interest rate in our debt stack. Our next maturity is not for another 2.5 years, and we have sufficient flexibility and liquidity to fund our capital allocation priorities. Slide 9 is new and provides an overview of our network optimization plan, which was approved by the Board of Directors on December 18. As leases expire over the next 4 years, and we exit approximately 25% of our leased acreage, we expect to realize between $25 million and $30 million of annual real estate cost savings. Said another way, the annual growth rate of our occupancy costs should decline to a mid-single-digit average growth rate over the period versus the 10% plus that we've been seeing over the last several years, helping support achievement of our EBITDA margin target range. As part of this plan, we recognized a noncash restructuring charge of $302 million from accelerated depreciation on our rental equipment in the fourth quarter that reduced the net book value on approximately 53,000 units to salvage value, which is approximately $10 million. The move aligns with our strategy of shifting the portfolio towards higher-value offerings as presented at our Investor Day last March. In turn, stronger unit economics of our overall portfolio will support improved margins and ROIC, while still preserving sufficient capital to meet demand in all product categories. With regards to the optics of our utilization rates, the average size of our entire fleet over the quarter does not fully reflect the network optimization plan since we recognized the accelerated depreciation on the units in December. Therefore, you will not see the entire impact on our utilization until the first quarter of 2026, but we have provided a pro forma view in the appendix, which shows that our utilization for both modular space and portable storage products increases by over 700 basis points after removing these units from the fleet. As we ramp up our network optimization initiative, we will also begin to incur cash costs related to rental equipment disposals and fleet relocation costs totaling about $60 million over the next several years with an estimated $35 million in 2026. From a presentation perspective, fleet disposal costs will be included in restructuring expense, and both fleet disposal costs and fleet relocation expenses will be added back as we present adjusted EBITDA, adjusted net income, and adjusted free cash flow. The related salvage value for recycling containers and estimated real estate proceeds in future years will partially offset these cash implementation costs but will have limited impact on earnings. Finally, on Slide 10 is our 2026 outlook for revenue of approximately $2.175 billion and adjusted EBITDA of $900 million. As we spoke about in the third quarter, relative to the $971 million of adjusted EBITDA in 2025, we're entering the year with an approximately $50 million headwind in our traditional storage business. Our outlook of $900 million is a conservative view relative to our current run rate beginning the year and does not include benefits from ongoing internal initiatives that, if sustained, could drive year-over-year leasing revenue growth at some point in the second half of the year and place us on a growth trajectory into 2027. As Tim mentioned, we're driving internal plans and compensation targets that would inflect revenue in the second half of the year and comfortably exceed the revenue and EBITDA guidance. For modeling purposes, the first quarter is the slowest period of the year for activations, and we will incur increased variable rental costs for the spring activation period as seen in the sequential progression of our adjusted EBITDA margins. Based on where we're starting the year, we would guide to approximately $515 million of revenue for the first quarter and adjusted EBITDA of approximately $200 million. Beyond the first quarter, we anticipate revenue to increase sequentially by 7% or 8% into Q2 as we support our highest logistics activity quarter, including the beginning of the World Cup. For net CapEx, we expect to invest about $275 million in 2026. Our net CapEx plan maintains the same strategic approach, prioritizing high-value and differentiated product categories and will be slightly front-half weighted to support demand. Approximately 70% of our net CapEx will be split evenly between normal modular refurbishments and new fleet purchases of differentiated product categories such as FLEX and complexes to support large project requirements. 25% directed towards continued VAPS investment and the remaining 5% towards infrastructure. Clearly, the $275 million net CapEx guide implies that we're investing into growth opportunities that are not fully reflected in our revenue and EBITDA guidance. As we progress through the year, we will adjust investment levels to reflect the demand environment. Though based on what we're seeing right now, we expect to invest at this annualized level in the first half of the year. Further down the P&L, we expect total depreciation and amortization to be approximately $400 million for 2026 or approximately $100 million per quarter. About $310 million related to rental equipment and the remaining $90 million includes approximately $40 million of amortization expense and $50 million of other depreciation related to infrastructure. Based on current debt balances, we would expect interest expense to be approximately $215 million for 2026, including approximately $9 million of noncash expense. Just as a reminder, the cash timing of bond interest payments is concentrated more in Q2 and Q4. Our effective tax rate remains approximately 26%, but cash taxes will remain isolated to state and local levels as they were in 2025, as we do expect our NOLs to shield any federal taxes in 2026. Based on current projections, we expect to become a full federal cash taxpayer in 2027. In summary, the end of 2025 finished up as expected, and our outlook for '26 as we sit here today is a conservative view relative to our run rate entering the year. If the positive commercial momentum that we're seeing today continues, we believe we could see year-over-year leasing revenue growth at some point in the second half of the year, which would drive us comfortably above our current outlook.

Timothy Boswell, CEO

Thank you, Matt, and thanks again to our entire team who are aligned and focused on delivering results and delivering them in the right way, consistent with our values. WillScot is uniquely positioned in the marketplace with opportunities for growth that only we can execute, given our differentiated capabilities and without constraints given our outstanding financial profile. I'm incredibly excited about our prospects in 2026 and beyond. I see clear alignment between the strength of our culture, the execution of our strategy, the growth of our business, and long-term shareholder value creation. This concludes our prepared remarks. I will now turn it back to the operator to open the line for Q&A.

Operator, Operator

Our first question will come from Andrew Wittmann with Baird.

Andrew J. Wittmann, Analyst

So I guess I just wanted to check in on the order book. I mean, Tim, you gave some pretty decent stats here about orders kind of returning. You kind of hedged the comment that it's kind of early here. You got to see if this holds. Are you seeing anything seasonally that maybe accelerated some of the orders that maybe they're running above trend? Or what are some of the other factors, I guess, that would lead you to believe that maybe this is good, but maybe it's not sustainable here because obviously, the guidance is much lower. So I thought maybe you could just elaborate on that, please.

Timothy Boswell, CEO

Yes. As you know, Andy, good to talk to you, the seasonal activity usually picks up as we move deeper into Q1 and early Q2. So in a normal year, we still wouldn't have seen the typical impact of that seasonal increase in construction activity in the lower 48 states in particular. What I did call out is a number of larger RFP wins in our enterprise accounts portfolio. That is a very big driver here of the momentum we're seeing in the business. As you will recall, we reorganized that team back in Q2 of last year, added some leadership depth across the team, and organized it across 5 key industry verticals, and we're seeing traction really across all of those with construction being the greatest. If I unpack what's going on in the construction vertical, data centers, not surprisingly, are popping up all over the United States, and we are present on many of those. As we look at data center activity, specifically in contractual written revenue, we expect that subvertical could be up 50% year-over-year in 2026. So we don't see that slowing down. Overall, the modular book is building earlier in the year than we would typically see and with a strong bias towards enterprise accounts. We do have the World Cup coming up. We try to keep that separate from the stats that we gave you just because that will be kind of a one-and-done deal at least this year until we get to the Olympics, but I'm really encouraged by what we're seeing through the enterprise account team. The other important commercial strategy has been on dialing in our local market execution. We made a number of structural changes through the second half of last year that I'm very pleased with. I think we're getting good momentum across the local sales organization as well. We're seeing that in some of the more transactional product lines within Modular, which are also up from an order standpoint, not so much yet in storage, but those changes are fairly recent, and the early trends are encouraging. So it’s a little too soon to extrapolate all of that across the rest of the year, especially not knowing how the typical construction season is going to build, but I'm happy with the progress year-to-date.

Andrew J. Wittmann, Analyst

Got it. That's helpful. For my follow-up, I wanted to ask about VAPS as well. To me, I mean you've talked about kind of trying to go to market a little bit differently there that maybe the last year or 2 wasn't totally up to your standards. It looks like there's a little bit better momentum coming out here. I guess my question is, is that true? Have you made changes? And do you believe that they're benefiting on the VAPS? Or obviously, you're still not to your target levels, but just starting to get a little momentum there. So I just wanted to give you an opportunity to talk about that and let us know what you're doing there and seeing there on that initiative?

Timothy Boswell, CEO

You're right that the penetration levels, as measured in terms of percentage of revenue of the lease revenue book, are slightly increasing. I'd say that's more of a function of the mix shift and the traction that we're seeing in the modular portfolio than it is improvement in terms of penetration on a per-unit basis, which, as you'll recall, is how we used to look at it. I still think we have some opportunities and work to do there. And as I think about our commercial initiatives in the first half of 2026, we made some changes to the regional sales leadership structure at the local level across the network, and modular VAPS penetration in furniture, in particular, is a very high priority for that team as we kind of get back to the best practices that we know were working a couple of years ago. I still put that in the opportunity column, Andy, and the only other thing I'd add there is that the offering is continuing to expand. Fencing and perimeter solutions is set for a nationwide rollout this year. We are going to have a tailwind across that solution set in addition to the traditional offerings, where we've got a further penetration opportunity just across all the volume that we're delivering.

Operator, Operator

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

Angel Castillo Malpica, Analyst

Tim, I appreciate the insights. I want to ensure I understand this correctly. As we look towards a potential inflection point in the second half of the year, I'm confused about why modular orders on the non-enterprise side are up 5% year-over-year. You also mentioned a backlog that might be developing earlier or later than usual. Why aren't we seeing this reflected in the second quarter with a more significant ramp-up? Is it due to the presence of more large projects compared to local ones? Why isn't that non-enterprise segment showing up earlier?

Timothy Boswell, CEO

As you look at the pending order book that we have today, we do expect a sizable portion of that to convert in the first half of the year. What we're not doing is extrapolating these activity levels deep into Q2 and the second half of the year, just given it's early in that traditional construction season when activity would typically build. The early signs are indeed encouraging. The majority of that order book activity should deliver in the first half. Lead times have not changed dramatically as I look across the portfolio. There is a heavy mix of mega project activity, as I mentioned; data center, power generation, manufacturing, really across all geographies. But we're just not prepared today to extrapolate that into the second half of the year.

Angel Castillo Malpica, Analyst

Understood. Sorry if I missed this, but did you mention your 2026 free cash flow guidance? If not, could you share what it is and what the free cash flow margin implies? This would help us understand the factors as we consider this year's free cash flow compared to last year.

Matthew Jacobsen, CFO

Yes, Angel, I can address that. We've included most of the components in our calculations, which suggest an adjusted free cash flow of around $415 million. It's important to note that we anticipate spending approximately $35 million on our network optimization plan, which will be excluded from that $415 million. Consider that an adjustment to arrive at the adjusted free cash flow. Given the interest and various elements involved, that's our projected outcome. Overall, the performance has shown resilience, especially when looking at how the business has fared during the macro decline in recent years. As we reach an inflection point, our free cash flow remains strong.

Timothy Boswell, CEO

The only thing I'd add to that is just the CapEx guide. Given the activity levels that we're seeing right now in the first half of the year, we do expect to be investing at that $275 million net CapEx annualized level. We'll, of course, revisit that weekly, which is kind of our practice based on the demand that we're seeing. If we see these levels continuing, I expect we hit that $275 level for the year. If things slow down, we'll obviously pull it back and you'd see that free cash flow margin pop back up north of 20% versus where it sits in the current guidance. We'll continue to take a demand-driven approach to the net CapEx.

Operator, Operator

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

Steven Ramsey, Analyst

I wanted to see if you could parse out the enterprise forecast of the mid-single to high-single-digit growth for 2026. And if the pricing contribution in enterprise is similar to the modular segment displayed in 2025, that points to volume being an equal contributor to the enterprise revenue growth. So maybe you can parse just the drivers of enterprise revenue.

Timothy Boswell, CEO

Steven, I think this is an easy one. It's really volume driven, right? We don't see significant pricing differences as we segment across enterprise and other customers. We take a dynamic approach to pricing. We look at customer characteristics and project characteristics and all those good things. But at the end of the day, you don't see significant price or VAPS penetration differences between the enterprise accounts, especially in modular, versus other customer segments. So the growth in that segment is volume-driven, and that's a function of going deeper with customers where we already have relationships, but maybe didn't have as robust of an account strategy as well as the vertical business development strategy. We touch every sector within the North American economy. Historically, we've been very organized around construction, and we're taking that same focused approach and applying it to 4 or 5 other key industry verticals that we talked about at the Investor Day, where we know we've got great marquee accounts, a great value proposition, and opportunities to grow with our existing offering.

Steven Ramsey, Analyst

That's helpful color. I wanted to think about the sales staffing and the measurements you gave on numbers of better tenure, maturation, et cetera, and how that connects to the better order and activation trends coming in on a lag. How much of the activation in order growth is the maturing staffing and seeing more and capturing more opportunities versus the mega projects being better?

Timothy Boswell, CEO

I think it's still early to assess the impact of our field sales organization. Some changes we implemented at the end of 2025 are just now beginning to take effect. We wrapped up our first month of the year in terms of commissions and surpassed the targets we set for the field sales team. This is a positive start for the year and indicates strong earning potential for our sales organization. Looking at the key metrics, we've increased staffing by 13%, and voluntary turnover is significantly lower than it was in mid-2024 when we faced major disruptions due to the field reorganization. We evaluate employee sentiment quarterly across all categories, and this influences performance, whether in sales or other positions, and we're noticing improvements there. These indicators, both quantitative and qualitative, suggest we have favorable conditions for that team. We've also made systematic enhancements to our sales enablement processes at sales HQ. This involves a more structured approach to prioritizing opportunities and determining the next best actions for sales representatives via our CRM system, along with phone routing and similar strategies. We don't anticipate any further changes to our field sales organization; that work is complete. The team is established, leadership is aligned, and incentives are uniformly applied across all sales roles, which has been a significant achievement. I’m pleased with our current position, and it’s time for the team to move forward.

Operator, Operator

One moment for our next question, and that will come from the line of Kyle Menges with Citigroup.

Kyle Menges, Analyst

I was hoping if you could just talk about the positive rate you're seeing in portable storage. So and just maybe what's driving some of that? And talk a little bit about how you're balancing rate versus market share within portable storage?

Timothy Boswell, CEO

Okay, I'll start. Matt, I'll probably miss some details, so you can jump in. If you look at the as-reported average rate, it's up 9% year-over-year that we report in the investor presentation that is almost entirely mix-driven by rapid growth within our cold storage offering. If I think about traditional storage, those spot rates have bottomed over the last couple of quarters, it feels like, and are off significantly from where they would have been back at the peak in the middle of 2023. We’ve digested that headwind, and that's included in the $50 million revenue headwind that Matt referenced for the traditional storage business. That is behind us at this point. The favorable mix shift is driving that growth in AMR. Our order book related to cold storage sitting here right now is up 105% year-over-year. So that's performing quite well and has an added benefit of taking us into sectors and customers where we really didn't have a hook previously. A good example of that would be third-party logistics, warehousing, and distribution. We've had customers in that sector forever, but not with a targeted strategy. The flexible cold storage offering is really attractive across those 3PLs, warehousing, distribution, and retail. It's allowing us to pull other more traditional parts of our offering into those types of customers. I'm really happy with how that's performing. It's a good example of how we're repositioning the portfolio towards higher value-added solutions. Higher value-added solutions allow us to capture that value and pricing, and that's what you're seeing in the storage AMR.

Matthew Jacobsen, CFO

Not much to add there other than the containers are up about 1% year-over-year. We are continuing to see the impact of all the different pricing strategies we have, but it has been very stable, which is not a bad thing, but makes it challenging to contribute to the overall increase.

Kyle Menges, Analyst

Helpful. And then a follow-up question on AI and just how you're leveraging AI internally. In your prepared remarks, I think you said that efforts you're making around minimizing logistics costs, I think, some efforts around collections as well. I mean you seem like areas that would be ripe for AI implementation. So curious what you're doing today and if you're exploring just any use cases for AI internally in the future?

Timothy Boswell, CEO

We are indeed, first and foremost. We hope everybody just keeps spending on AI and building data centers. It's probably the most impactful thing that we see in the business right now. We've been stepping into this area for a couple of years now. We started with AI tools in our branches and video monitoring of movements within our branches for safety purposes. Our pricing optimization platform is AI-based. Internally, we have developed a sales call coaching model that is AI-enabled. Just to dig in on that one a little bit, this is a tool that can review all of our sales call transcripts. It's got a scoring rubric, whereby it can identify sales calls that could have been improved in some way. It helps our sales coaches diagnose very quickly, which reps need coaching on what topics and be a lot more efficient with how we spend that sales manager's resources' time. There are a host of ways that we can deploy these tools in the back office. That said, we don't need to jump straight to being cutting edge on all things, right? There's still a lot of basic blocking and tackling in the back office, where we're seeing traction on collections and customer service, the old-fashioned way, which I think can drive real margin improvement in the business. But I completely agree with you. There are aspects of our sales model and aspects of our customer service model, employee training, where AI is very relevant, and we are very open to those opportunities.

Operator, Operator

And one moment for our next question. That will come from the line of Tim Mulrooney with William Blair.

Benjamin Luke McFadden, Analyst

This is Luke McFadden on for Tim. Can you provide some insight into how conversations with your local customer set have been trending recently? I know things like interest rates, tariffs, building costs were headwinds for that customer cohort this past year is sentiment or confidence in the outlook for 2026 improving at all with that customer set?

Timothy Boswell, CEO

The best barometer there is the feedback that we're getting from our local general managers and our local sales team. Going back to November when we had those teams in for budgeting, I've been out on the road recently, meeting with the teams for early updates in 2026. That sentiment and that energy level is notably improved relative to where we would have been last year. I can't say that's all customer or market driven. A lot of that is being better organized internally and with better structure and accountability in place relative to how we entered last year. So I think that's probably the bigger driver of the two.

Benjamin Luke McFadden, Analyst

That's helpful color. And as my follow-up, I know one of your ongoing commercial priorities has been to improve and do a better job winning subcontracted business. And the large projects where you work closely with the prime general contractor. Can you provide an update on your progress there around winning that subcontractor work?

Timothy Boswell, CEO

Yes. This is pretty exciting. Early in the fourth quarter, we launched a rewards and referral program aimed at our larger general contractors. This initiative is designed to collaborate with our biggest contractors and encourage our customers to bundle more subcontractor activities with us. The program offers significant advantages to the main general contractors by giving them greater control, visibility, and consistency with all the subcontractors present at the job site. From our standpoint, it acts as an indirect sales channel, enabling us to capture that activity more effectively than if we targeted each subcontractor individually. We are very encouraged by the initial outcomes of this program. Additionally, in our efforts to improve local market execution, we realized that we had drifted away from true account ownership at the local level over the past few years. To address this, we have ensured that every territory in North America is managed by our territory sales representatives, each responsible for specific ZIP codes and accountable for top accounts within those areas. We’ve historically done a good job targeting construction project activity through our various systems. What we got away from was just that ongoing account management and relationship development at the local level. We’ve absolutely reemphasized that later in Q4 and going into 2026. I think that's a really important ingredient for the effectiveness of the local sales organization. It mimics that account focus in that account strategy that we've put in place at the enterprise level. We're trying to do it at both ends of the spectrum.

Operator, Operator

One moment for our next question. And that will come from the line of Manav Patnaik with Barclays.

John Ronan Kennedy, Analyst

This is Ronan Kennedy on for Manav. Are you helping with the underlying volume and price assumptions for the respective segments for 1Q and/or full year '26? And can you comment on if and how conservatism such as I think what was discussed in Andy and others' questions as to not extrapolating order book conversion or not including any impact of commercial initiatives is specifically impacting those assumptions and the opportunity for upside there?

Matthew Jacobsen, CFO

Ronan, thanks for the question. I'll try and capture that here. I think as we look at our pricing and volume assumptions and kind of what's in our guide and what we think is opportunity kind of above our guide if the trends continue. Is that kind of what you were trying to get after?

John Ronan Kennedy, Analyst

Yes, yes. And if you're able to help with how to think fundamentally about volume and price, where that's been taken back, respectively, by conservatism and the potential upside?

Matthew Jacobsen, CFO

Yes. As we review our guidance and consider volume and price, the guidance reflects a continuation of recent trends. We are facing some volume pressures on the storage side of the business, starting the year with about a $50 million headwind, and we don't anticipate a quick reversal in that. On the modular side, the situation is more stable, with modular leasing revenues remaining flat year-over-year, which serves as our revenue starting point for the year moving forward. If the recent trends hold for a few quarters, we may approach a possible volume inflection, although that won't occur within two quarters. Our focus remains on driving internal volume growth intelligently, ensuring we do not sacrifice pricing while maintaining consistency. We are taking a conservative approach with our guidance because we are only 1.5 months into the year. This reflects our current understanding, which may evolve, and we will monitor the situation closely and provide updates in a few months.

John Ronan Kennedy, Analyst

Got it. As a follow-up, can I ask if you're providing guidance on how to approach the situation? I know you mentioned it's early in the year, but reflecting on last March and the strategic initiatives and targets set for the 3- to 5-year horizon, it seems things haven't unfolded as expected, particularly regarding market demand. Additionally, there have been new strategic initiatives and a shift towards a more conservative forecasting approach. Can you offer any insights on how to interpret the 3- to 5-year targets in this context? Or should we consider that there is still ample time given the 3 to 5-year timeframe? I'd appreciate your thoughts on this.

Timothy Boswell, CEO

Ronan, I'll handle this one. You wrapped up pretty much accurately. Clearly, we did not end 2025 on the high note we hoped for back in March of that year. The starting point for reaching our long-term revenue and EBITDA goals is lower, which means it may take us more time to get there. Thus, we should consider the longer end of that timeline. Regarding our strategic initiatives, the only new element since March is the network optimization initiative. This stems from our observation that the market is stabilizing at a lower point than we expected, presenting an opportunity to enhance both our fleet and real estate. This initiative is new compared to where we stood nearly a year ago, but our emphasis on executing in local markets has been consistent with the plans I had outlined approximately a year back. The focus on enterprise accounts and a value-added offering remains unchanged. I also highlighted our operational emphasis on route optimization and scheduling in my prepared comments. We discussed these strategies in March last year, as well as the optimization of back-office processes, and we are seeing progress in these areas. However, the advantages of these margin-focused initiatives are currently being offset in 2025 by the inherent negative operating leverage in this business environment. I mentioned that these are structural enhancements to our business, our margin profile, and the margin potential we believe will become evident once we see increased volume flowing back through our branches. I am encouraged by what I'm observing in mid-February regarding volume, but for that impact to be realized, it must be consistent, which is why we are adopting a cautious stance with our guidance.

Operator, Operator

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

Faiza Alwy, Analyst

I wanted to follow up on the comments about conservatism. I just want to make sure I'm understanding correctly. When you're discussing revenue inflection in the latter half of the year, is that included in the current guidance? Or are you suggesting that if current trends continue, that's where we will end up?

Matthew Jacobsen, CFO

It's more the latter there, Faiza. Thanks for the question. I think we're seeing some good commercial indicators right now. But we don’t know that those will sustain themselves to get us to a point where we would see second half inflection for sure. Our conservative guide is based on the run rate coming out of last year based on kind of where that would play out. If we do see a sustained consistent year-over-year improvement in the commercial activity, that would be above our current guide. That's where we see potential for inflection in the second half of the year, but that's not included in our guidance.

Faiza Alwy, Analyst

Perfect. And then I have to ask about data centers since we've been sounding so positive on that for good reason, I'm sure. Maybe help us think through what percentage of the business is that vertical at this point. I suspect it's small, but maybe you can give us some background on how that RFP process is like as you think about those RFPs, what has been your win rates there? Essentially, I'm trying to figure out what the competitive dynamics are there? A lot of us believe that activity will continue, so any additional perspective there would be helpful.

Timothy Boswell, CEO

I'm not going to have a precise quantification of this for you, Faiza, but I'll give you a way to think about it. From our perspective, this activity is picking up, not slowing down, at least that's been our experience here from Q4 coming into Q1. As I said in response to an earlier question, we measure the new contractual revenue that we write in any given period. This is the number of units multiplied by the price multiplied by the duration is the total project value. We think the data center sub-vertical could increase by 50% or so on that metric in 2026. That's a meaningful increase, but you're talking about less than 5% of our overall revenue at the end of the day. It’s a very important change in the demand environment. We are taking advantage of it. There are situations like Micron, not a data center but related to that supply chain where we'll have hundreds of units, but actually can't supply the entire demand across that project, and it’s fundamentally changing the nature of the Boise market for the next 10 years probably. This is a change as I reflect back to other changes in the business, like when it was bottoming coming out of the GFC. We've had a very significant increase in oil and gas activity in 2011, '12, '13, which really led the reinflection of the nonres market. This feels similar to that, but I haven't seen anything quite like this since that time.

Operator, Operator

One moment for our next question. And that will come from the line of Philip Ng with Jefferies.

Philip Ng, Analyst

I think in your prepared remarks, you talked about nonres square footage starts were down about 6% in '25 and about 12% for the quarter. Is there a good way to think about the typical lag of that number to your units on rent? Because you're calling out pretty encouraging orders. I know it's very early to start the year. So just curious what kind of end market assumptions are you kind of baking into your outlook for this year?

Timothy Boswell, CEO

It's a good question, Phil. And our activation volumes typically align with project starts. The encouraging thing from my perspective is we're seeing meaningful activation and order growth in a declining starts environment. That's a bit unusual in our business. To me, that means 2 things. We're outperforming that metric as an organization. I think that's got a couple of pieces to it. One, the local sales organization is better organized today than it would have been a year ago. Two, the enterprise efforts and the mix of that activity are working in our favor because we are disproportionately well-positioned to serve the needs of these larger industrial projects. In the case of some of these things, like the large soccer tournament coming up, I'm not sure anybody could do exactly what we're doing for the customer. That’s just a function of our unique capabilities and our unique value proposition. Currently, we’re better positioned to take advantage of that.

Philip Ng, Analyst

That's helpful, Tim. I guess, kind of dig a little deeper on that. Can you remind us what percent of your business is actually tied to backlogs? I'm not as clear how good of a leading indicator that is in terms of leasing revenue overall. It would just be helpful to get a little more color on that. Have you seen your units on rent, I guess, inflect like your order book, at least through early February?

Timothy Boswell, CEO

Yes. On that latter point, we had a modest increase in modular units on rent in January, which is seasonally unusual. We haven't seen that in storage. It is activations lead to orders or orders lead to activations. It's the basic sales funnel, and the order book we see right now supports activation growth leading into Q2. If that's sustained for a couple of quarters, you get unit on rent inflection, and that's been the goal here for some time. We’re not making that assumption in the guidance, but if sustained, these activation levels and order levels would support it later in the year.

Operator, Operator

We have now reached the end of today's Q&A. I would now like to turn the call back over to Mr. Tim Boswell for any closing remarks.

Timothy Boswell, CEO

Thanks, Sherry, and thanks again to the entire WillScot team for your focus and dedication. Thanks to everyone on the phone for attending and for your interest in WillScot. We look forward to following up with many of you here in the coming days and weeks and providing another update after we conclude the first quarter. Thanks very much.

Operator, Operator

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