Welcome to the Fourth Quarter 2022 WillScot Mobile Mini Earnings Conference Call. My name is Michelle, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Nick Girardi, Senior Director of Treasury and Investor Relations. Nick, you may begin.

Good morning, and welcome to the WillScot Mobile Mini Fourth Quarter 2022 Earnings Call. Participants on today's call include Brad Soultz, Chief Executive Officer; and Tim Boswell, President and Chief Financial Officer. Today's presentation material may be found on the Investor Relations section of the WillScot Mobile Mini website. Slide 2 contains our safe harbor statement. We will be making forward-looking statements during the presentation and our Q&A session. Our business and operations are subject to a variety of risks and uncertainties, many of which are beyond our control. As a result, our actual results may differ materially from today's comments. For a more complete description of the factors that could cause actual results to differ and other possible risks, please refer to the safe harbor statement in our presentation and our filings with the SEC. With that, I'll turn the call over to Brad Soultz.

Thanks, Nick. Good morning, everyone, and thank you for joining us today. I'm Brad Soultz, CEO of WillScot Mobile Mini. First, a quick reminder that we've completed the divestiture of the Tank and Pump and the U.K. segments. Together, these discontinued operations had been contributing about $100 million of adjusted annual EBITDA. We are now focusing our human and financial capital with laser precision on further amplifying our pure-play position as the undisputed leader providing innovative modular space and storage solutions in North America. We are excited to kick off 2023 with a streamlined focus, and we continue to get a lot of new interest in our company. Our strategy is simple and unchanged. We safely and frugally grow lease revenues by driving units on rent, rate optimization and value-added products and services, all to delight our customers, support our employees and deliver outstanding returns to our shareholders. For those of you on the call who have followed us for some time know that we say what we do, we do what we say, and we reference our goals as milestones. That's because milestones are intended to be surpassed. In 2022, we achieved several key milestones that we had identified just over a year ago at our Investor Day. Outperformance from continuing operations resulted in full year 2022 return on invested capital of 15% as well as revenue of $2.14 billion, up 28%; net income of $276 million, up 141%; and adjusted EBITDA of $884 million, up 36% year-over-year, respectively. All of these are company records, and we'll continue to raise the bar. Given the trajectory on which we exited 2022, we will achieve the $1 billion adjusted EBITDA milestone already in 2023 based exclusively on our continuing operations. Now beginning on Page 14, we're executing a portfolio of largely…

Thank you, Brad, and good morning, everyone. I'm going to flip through a few pages, starting with Page 20 in the financial section, which shows a high-level summary of the quarter. Before I jump in, I will remind everyone that the results from the divested U.K. Storage segment are reported as discontinued operations in Q4 and all prior periods. And the results of the divested Tank and Pump segment are reported as discontinued operations in Q3 and all prior periods. In certain analyses, we've added back U.K. Storage and Tank and Pump results for comparability purposes and footnoted those adjustments. As always, our goal is to be as transparent as possible about the run rate of our business, and we continue to be very excited about our trajectory. In Q4, total revenues of $591 million were up 28%, driven by our trifecta of rate, value-added products and volume across both segments and supplemented by acquisitions. Adjusted EBITDA was up 43% to $268 million and adjusted EBITDA margin expanded by 480 basis points to over 45%, which is a company record and driven by very strong performance in our logistics function. For the full year 2022, adjusted EBITDA margin of 41.3%, expanded by 250 basis points, which is exactly the midpoint of what we presented to you at Investor Day about 16 months ago while significantly exceeding those revenue and EBITDA targets. Free cash flow accelerated as expected, generating $123 million in Q4 at a 20% margin and a 14% margin for the full year. Return on invested capital increased to over 15% for the year, which is also a company record and up 370 basis points year-over-year. Net debt to EBITDA has dropped to 3.1x pro forma for the U.K. divestiture, which is at the low end of our target…

Great. Thanks, Tim. And as Tim, I want to thank our team, our customers and our shareholders for their continued commitment to the WillScot team. We are extremely excited about our growth in 2023 and beyond given the trajectory at which we exited 2022. I do wish all of you listening today continued safety and good health. This concludes our prepared remarks. Michelle, would you please open the line for questions?

[Operator Instructions] Our first question comes from Manav Patnaik with Barclays.

This is Ronan Kennedy on for Manav. May I just ask if you could kind of further elaborate with regards to demand? I know the commentary alluded to not seeing the same consistent levels of demand, contemplating a recession to start the year, being at the lower end of the guide. But what does that imply for the pace of compounding you saw the order book, the conversations you're having and the leading indicators you have with regards to demand, if you could please just expand on that?

Yes, this is Brad. I'll start, and Tim will certainly jump in. First of all, we should remind ourselves the extremely robust environment we were experiencing a year ago. So there's nothing in the current demand outlook that gives me pause. We have moderated our growth expectations for the year. We still expect growth. And it's reflected in our capital guidance as well. So a fair bit more uncertainty, to be clear. The only leading indicator that's, let's say, of note that might be in the negative territory is the ABI, which we've now had only 4 months of below 50. The inquiry index has remained very robust throughout that process. I do think there's still significant backlogs. The commentary from our end customers is still extremely robust expectations for the year. So -- and underpin all of that with certain tailwinds that we'll experience with respect to onshore and reshoring without regard and then further lifted by whatever materializes in terms of infrastructure, albeit that's going to be a second half '23 and '24 play.

Our next question comes from Tim Mulrooney with William Blair.

Yes. It looks like you're expecting about 150 basis points EBITDA margin expansion in '23 on top of the significant expansion we've seen over the last few years. Can you just talk about how much of that you expect to come from the gross margin side versus getting leverage on fixed SG&A and how you're thinking about that gross margin between Modular and Storage?

Yes, Tim. This is Tim. And I would say it's going to be roughly half and half between SG&A, leverage. And as I said in my prepared remarks, I'm not assuming further expansion of delivery and installation margins. That would be upside. We certainly delivered a great result in 2022 on that line item. And I also said that leasing revenues are likely to grow faster than delivery and installation and sales. So you get some mix benefit to the margin -- the gross margin line in terms of the relative profitability of leasing revenues as compared to the other revenue streams. So I think that's the best way to think about it. And it's really just predicated on a continuing predictable compounding of the portfolio. You've got very strong pricing and value-added products tailwinds that naturally drive gross margin expansion as well as the top line growth of the business, which then in turn delivers the operating leverage. So it's really just a continuation of the formula that's been working for some time now. And we haven't really assumed any heroic initiatives into -- in terms of delivering yet another year of pretty attractive margin expansion.

Understood. Are we doing two questions? Or should I hop back in queue?

Yes. I think we unfortunately cut off our friend on the prior question. So please feel free to do a follow-up.

I just want to follow up on that prior -- on the prior question. I thought it was a good one. Brad, you said you expect robust demand, but you've moderated your growth expectations a little for this year as a lot of us have given the uncertainty. Is your moderation -- when I think about -- when you say something like what we've moderated, is that more on the pricing side based on what you're seeing with spot rates? Or is it you just kind of expanded the range of volume possibilities? How do I think about when you say you've moderated your growth expectations a little bit?

I think the only moderation, if you will, is reflected in our capital guide. We're expecting to invest more in organic growth this year. But I will stress the word expecting. We don't know what the end markets will present in the end. If they accelerate and are as robust as we experienced last year, we'll be investing at the high end of our range. And if they're extremely robust, we'll invest ahead of that and reap the benefits in 2024 and beyond. So this is the time of year where we will continue to see increased clarity with respect to the Modular, let's say, second and third quarter demand reality. We'll see the retail remodels become more apparent, if you will, throughout the year. So just early in the game. There's nothing that causes me any concern. And as always, we'll moderate our capital investments and our labor accordingly to whatever the markets present.

This is Tim. I'll just elaborate a little bit. And if you look at the CapEx range, the top end of the range is above what we invested this year in our core Modular and Storage segments. So that would be a very robust market investment if we're -- market scenario if we're investing at that level. But there's clearly more uncertainty going into the second half of the year than maybe we felt there was last year. So we are assuming low single-digit volume growth in the Modular business, 3%, 4-ish percent volume growth in the Storage business. But remember, that's coming off of a year when we added 15,000 containers organically, right, and grew the Storage business organically in the 8% to 9% volume range on top of the pricing performance that we saw on Storage and on top of the rollout of value-added products. So we're just moderating off of a result that was pretty darn strong in the case of our Storage segment.

Our next question comes from Scott Schneeberger with Oppenheimer.

I have one on price and one on CapEx. So on pricing guys, it's been, I think, 8 consecutive quarters of accelerating price in North American Storage, up to 35% year-over-year, quite robust. Can you talk about how that occurred in the fourth quarter? Was it the base rentals or seasonal that had that impact? And how should we think about that metric looking in 2023?

Yes, there's certainly a strong seasonal impact to the year-over-year result that we delivered in Q4 in the Storage segment. We had some very meaningful rate adjustments across some of the national accounts and the major retailers that were probably just frankly a little bit overdue if we think back as to how those were handled historically. Sequentially, in the Storage business, I would expect that to come off a bit as we move from Q4 into Q1. And I think we alluded to that possibility last quarter when we were talking about the performance of the seasonal business.

Scott, I would just add, if you go further afield in Storage rates kind of reflect on what's developed on the Modular side. So think of longer term, we can achieve double-digit rate growth. We're not going to achieve 35% year-over-year growth in core rate alone forever. But even if that moderates to low to mid-single digits, at the same time, we're bringing the VAPS portfolio into play there. So between rate and VAPS, I'm highly confident we can sustain double-digit rate growth for several years there.

And Scott, to be a little more specific in terms of the sequential potential contraction, you could be in the $10 to $15 range as you go from Q4 into Q1 as that seasonal volume comes off of rent.

Appreciate all that color. That follow-up I mentioned in CapEx, just curious, Tim, you mentioned it is a very wide range of the guidance for 2023. What are the asset classes that you're targeting? Just some color around that and some color around maintenance versus growth in 2023 after what was a very active CapEx here in 2022.

Yes. We've got a rule of thumb here that tends to be pretty consistent. If you look at our CapEx spend in a given -- over a given 12-month period, about half of it is going to be going into Modular refurbishment. About 1/4 of it is going to be going into new fleet, and about 1/4 of it's going into Value-Added Products and Services. And that's a pretty good assumption for this year. That implies that Modular refurbishment is coming down a bit year-over-year in this case. And that's due to roughly comparable work order volumes but also with 5% to 10% efficiency on the cost per work order, which we are seeing. We are seeing some interesting opportunities there coming out of the transition into SAP. On the new Storage fleet side of things, as I mentioned a minute ago, we added about 15,000 containers organically last year. Our base case would assume roughly half of that. And then value-added products is going to be up meaningfully year-over-year in terms of -- just because of the growth in that revenue stream. At the midpoint of the guidance of like $340 million, you're almost right in line with depreciation and amortization in the P&L, which is about $335 million going into next year. So that would mean you're pretty much balance sheet-neutral in terms of the midpoint of that guidance range. At the high end, as I mentioned, that would be above last year. So a pretty robust demand environment. And we did introduce a lower range as well, recognizing that there's uncertainty in the second half of the year, and we have a demand-driven model. So if the demand isn't there, we have a very countercyclical cash flow model. And part of that is because we would pull down CapEx in that environment.

Our next question comes from Faiza Alwy with Deutsche Bank.

This is Avi [ph] filling in for Faiza today. A quick question on some of the things that you had laid down back in your Investor Day. It looks like you're already there, especially looking from an EBITDA perspective. So as I look at -- forward, like what are the new sort of -- I'd just say, what's the next leg of growth for WillScot from here? Are there any adjacent sectors you could target? Just expand upon that, please.

This is Tim. Look, the Investor Day, $1 billion is one of those milestones among many that were in the Investor Day materials. And yes, we will be there in 2023. We also presented a bridge to $650 million of free cash flow and free cash flow per share between $2 and $4 as the business compounds predictably over time. So this is just one step on what was always going to be a pretty long and exciting journey from our perspective. In Brad's prepared remarks, he referenced kind of the 5 major growth drivers in the business. We still have $500 million of growth opportunity in Value-Added Products and Services. Just by holding rates where they are today, we've got about $200 million of growth embedded in pricing. We continue to be acquisitive and acquisitive smartly in a very disciplined way in realizing cost and revenue synergies from those acquisitions at attractive valuations. We've delivered on the logistics opportunity, and we think there's upside there over time. And we also see other scale efficiencies as the business grows. So that's not a rule to take other growth initiatives off the table, but let's also stay focused on the fact that there's still a tremendous amount of gas in the tank in terms of just executing the initiatives that have been propelling the business now for some time.

And just a quick question on M&A. How does M&A look like to you in 2023, especially if there's a recession? And if there's not a recession, could we see sort of an upside to your revenue guidance?

If there is not a recession and we have a stronger demand environment throughout the year than our base case, then yes, that would be one of the factors that takes us to the higher end of the range. I think we said in our remarks that the acquisition pipeline, as we sit here today, certainly supports investing at the levels that we did in 2022, and that was over $220 million of enterprise value invested. And we -- again, we won't miss a quality deal, and quality deal to us is quality fleet, quality people and quality customer portfolio. And we see a pretty attractive pipeline ahead of us.

Our next question comes from Andrew Wittmann with Baird.

I guess I had a question on the logistics, the delivery and installation margins, I guess. Obviously, 2022 was a very strong year. You talked about some of the initiatives, and I am asking you to talk a little bit more about some of the things you've done on the cost side. I think you've also tried to price more for the value on that side as well that's helping that margin. So I guess if you could just give a little bit more detail about what kind of happened in 2022. Brad, in your opening remarks, you also talked about that there's still some opportunity here on the delivery and installation, yet it sounds like your guidance is not expecting too much more contribution from that. So I was wondering if you could kind of -- maybe I heard that incorrectly, but I was wondering if you could kind of square that one off as to why that's the approach you've taken with the guidance.

Yes, I'm happy to. I mean the majority of the $50 million incremental we realized last year was rate-driven. The team did an outstanding job not only driving the value that we're delivering but also overcoming all the inflationary pressures in that front. So basically, the initiatives that we had in mind when we put the Investor Day material together, which in-sourcing more Modular route optimization, more fuel-efficient vehicles, et cetera, that's all still yet to be harvested, if you will. And that's why I did say in my prepared remarks, I think with those initiatives alone, there's still another $50 million of potential out there that we'll just continue to work on.

So I guess, why was that not included in the guidance for '23 then if there's that much opportunity?

Those are heavier lifts, if you will, right? As Tim said, we've kind of assume kind of moderation throughout the year. But to bring more in-house, you've got to source trucks, which have been hard to acquire. You've got to source drivers. We just undertook a massive integration on the CRM side. So looking forward, we've got to integrate and harmonize the logistics platforms, et cetera. So there will be a lot of work, if you will, next year, Andy, but those results are probably going to be materializing 2024 and beyond.

Okay. That's helpful. And then, I guess, just for my follow-up question here. With the rate approach that you've taken and have been taking in '22 on your Storage business, I was just wondering what the competitive response has been. We heard your confidence, Brad, in the outlook for double-digit growth for some time, certainly, VAPS being a contributor to that but just the raw price as well. Has there been a competitive response that's either trying to obviously be underpriced? Or is the market coming your way and others are seeing the rising tide potential here and lifting all boats? So I'm just curious as to what your business is experiencing in that marketplace.

Andy, this is Tim. And as you know, we've been quite acquisitive on the Storage side of the business. And we do get feedback that our rate strategy is noted, and competitors are following, as you would expect them to. It's still a difficult environment out there for smaller competitors in terms of sourcing fleet and also the cost of capital, which, I think, is net supportive of the acquisition pipeline going forward. But in the meantime, yes, we do see competitors raising rates, which is healthy for everybody and healthy for the industry. And meanwhile, it hasn't been an impediment to us growing our Storage volumes quite strongly in 2022 on an organic basis, again, up 8% or 9% in addition to the rate performance, which was pushing 30% in Q3 and Q4 year-over-year.

Our next question comes from Phil Ng with Jefferies. Our next question comes from Sherif El-Sabbahy with Bank of America.

I just wanted to come back to the capital allocation framework. And just see -- just given the framework you have, is there any appetite for larger acquisitions or M&A activity? Or just given the CRM rollout, some of the additional headcount that's been brought in, is that something that you're not really looking to do right now or wouldn't have an appetite for in the coming years?

Sherif, it's Tim. We've had the appetite in the past, and we would certainly have it in the future. It's just always more difficult to predict the timing and probability of those types of transactions. So our approach since the Investor Day is to be -- talk about that, which is within our control. We think the programmatic tuck-in pipeline is absolutely within our control and something we intend to continue to execute. But to your point, at 3.1x of leverage, we've got plenty of capacity on the balance sheet for transactions really of any size as well as supporting our other capital allocations, like the share repurchase, which we still think is a very attractive capital deployment alternative. So appetite is there. It's just harder to predict timing and probability on the larger stuff.

Our next question comes from Stanley Elliott with Stifel.

Quick question on the CapEx piece. Are you all seeing any deflation, be it lumber or steel prices kind of embedded in kind of your buys expected for the rest of the year?

Stanley, this is Tim. I would say not yet deflation. Certainly, in specific categories, yes. We track a basket of goods that is common in our Modular refurbishments. And what we've seen there is stabilization, which is a good first step. You have things like HVAC, which are still up significantly and other categories that are down. The basket that we track is stabilized over the last two or three quarters, which is a really good first step. In our Modular refurbishments, I also noted in our remarks that on a per work order basis, we expect that spend to be down about 5% to 10% this year, and that's more just driven by our own -- using less material on a work order and being more efficient with that type of activity. And that is more a result of some of the benefits and visibility we have after moving the Modular business into SAP, but there's some work to do there. So we have not assumed deflationary benefits in the CapEx guidance, but there are some signs pointing in that direction.

Yes. No, it just would seem like if -- down 7% probably is not really down 7%. It's probably down maybe low single digits and kind of more flattish would be my guess. But switching gears on the VAPS Storage piece. You mentioned the security lighting options, the premium offering. I think it's very exciting and especially when you think about maybe it was more shelving kind of the way I had originally conceptualized all this. How quickly can you move this premium offering into the VAPS kind of offering as you're looking at now for the Storage side? I would love to get any color there.

Yes. This is Brad. I'll take that. First of all, the premium offering is just kind of further enhancement and upside. We're already offering lighting solutions. We're already offering shelving solutions, security solutions, et cetera. We do -- and we have referred to that as our basic offering. So -- and that was just rolled out last year and is just getting started. So I think the basic offering, if you will, is pretty comprehensive. We'll satisfy most of our customers' needs. The premium just takes it to another play.

Our next question comes from Phil Ng with Jefferies.

Sorry about that. Well, congrats on another strong quarter. I appreciate all the color you provided, Tim. Just to make sure I heard you correctly, Tim. Your guidance to the low end of the sales range, but EBITDA, where do you think we're going to shake out, close to the low end or you have the ability to kind of get to the midpoint? And implicit in that, are you assuming low single-digit and mid-single-digit units on rent for Modular and Storage, if I heard you correctly? If that's the case, that's still pretty solid in the potential recession backdrop in the second half.

I think you got it mostly right there, Phil. I think to start -- given the uncertainties in the second half of the year, we were pointing to the lower end of the revenue and EBITDA ranges. But the entire range is in play, right? I said in my prepared remarks, even if we have a macroeconomic disruption this year, we can deliver the low ends. And if things are more favorable than maybe we're assuming right now, then the top end is definitely in play as well. So I think this is just more of a function of where we are in the year. And the obvious uncertainties that are out there relative to maybe prior approaches to guidance, where we would have been to say, "Hey, just go straight to the midpoint and keep it simple." In terms of the volume assumptions, yes, low single digit for Modular and a bit higher in the Storage segment. But again, 3% or 4% organic growth in Storage is not quite the 8% or 9% that we delivered last year organically. So it is a slight moderation.

Got you. That's really helpful color. And Brad, you talked about your confidence in kind of sustaining that double-digit AMR growth, I believe, on both businesses. Can you kind of remind us where spot and AMR prices are, what that spread is? And assuming we do head into recession, if that takes a step back, just given your long lease nature, I think you still have a pretty good runway. But just kind of help us think through that dynamic potentially going forward.

Yes. This is Tim. We still have very favorable spreads between spot and in the overall portfolio, average north of 30% in Modular and close to 30% across the ground-level office fleet. And given the massive increase that we just saw in the second half of the year, it's a little bit tighter, kind of low teens in the Storage business right now, and we'll see where that kind of stabilizes as the seasonal volume comes off rent, and we move into the busier quarters here. But the spreads are still very powerful tailwinds, which, to your point, allow us to deliver kind of the guidance ranges with confidence.

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

Brad, Tim, congrats, great year. Brad, in the past, you've talked about your Modular order book typically accelerating around February. And I guess, I'm just wondering how that's evolving relative to what you've seen over the past few years as we're sort of two third through the month. Are you encouraged by what you're seeing in any underlying trends as you've seen that seasonal uptick in Modular?

Yes. In February, it's early in the play, right? We'll see more as we navigate March, April and May into that peak season. I will say there's nothing about it that's discouraging. And as I said before, it's not as robust as it was, let's say, 1 year ago when we'd actually been investing in the fourth quarter of the prior year at very high levels, right, as we were ramping into what we knew was very, very robust, if not record, demand levels. So nothing I'm seeing is of concern. But as Tim and I have both said, we don't know in the end where the macro environment lands. We're highly confident we'll grow through it. We'll work within our ranges of guidance. And it's basically executing the playbook we've been executing for 5 to 10 years now.

Yes. Okay. And then maybe just a question on the underlying trend you're seeing in VAPS. I mean, obviously, customers still very much prefer that total solution here, given the traction, penetration you're seeing. But are you finding customers seeking more ways to sort of minimize their all-in cost just given this macro inflationary environment? Are you having to pivot some of your offerings to support that? Just curious what you're seeing under the coverage there.

Yes, the inflationary environment and cost is definitely supportive. I still think the prevailing driver here is convenience, right? And I mentioned in the prepared remarks that we had eclipsed the $400 VAPS value per month. That was actually $447, so almost $450, which was just phenomenal. And it was not too long ago, we were at $100, if you will, and thought $400 was extremely aspirational. So we're $447. We see upside. We're driving that side of the portfolio towards $600. And as you guys know, if we're saying $600 to you, we're driving north of that. And we're just like probably in the bullpen, if you will, warming up on the Storage play.

Our next question comes from Manav Patnaik with Barclays.

It's Ronan again on for Manav. If I may, please confirm for the 13 acquisitions completed, the $220 million ABI, I think it was. Could you please recap the units acquired by segment? And if there's any further insight you can offer on, say, financial contributions or impact for '22 and then anticipated for '23? And then also on the topic of M&A, and it was discussed, competitive behavior in relation to Andy's question. But given recent acquisition in the space by comps, just your high-level thoughts on broader industry dynamics and your outlook for further consolidation, please?

Ronan, this is Tim. I'm not going to try to add up the acquired units during the course of last year. But we have said in the past that we're acquiring at or below kind of roughly 8x valuation multiples, and that's absolutely been consistent. And we haven't really seen much change in that department. And when we're acquiring at that level, it's with confidence that we're going to be able to exploit other types of synergies over time, whether it's cost or commercial upside. Nobody else has a value-added products revenue stream, for example, like we do, and that creates visibility into predictable growth as those acquired portfolios churn. And we really haven't seen anything materially different in terms of the competitive landscape and the deals that we're looking at. I think it's safe to say that we know everybody and all the industry participants, and we take care in developing those relationships. So we'll stick to the programmatic strategy that we've had for the last 18 months now. And like I said, the pipeline supports continued reinvestment at these levels.

Yes. The only thing I would add to that is we often say, inside, when things go well, it looks easy. It's not, but we're damn good at this, right? Since the ERP cutover, we've done over 20 acquisitions. And we quickly and seamlessly integrate them. So as Tim said, we're buying them at a great value, arbitrage where we are. We'll take cost and commercial synergies out, and the pipeline looking forward looks the same. So it's a great play, and it's a big thanks to the team that's able to pull this off. So I think it's a pretty unique aspect of the portfolio.

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

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

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