Seats here still in the front if you want to find a seat. I am Andy Wittmann. I am the Senior Research Analyst that covers industrial and facility services here at Baird, and you are in the session for WillScot. I am joined by the company's CEO, Tim Boswell, and the company's CFO, Matt Jacobsen.
Great.
We have got this one set up as a fireside chat. We will be able to raise hands, or you can email session1@rwbaird.com if you want to send in some questions. I will be monitoring the iPad here. I like to just start off by having Tim kind of just give two or three minutes overview of the company in general for people who maybe are not familiar with it. I got plenty of questions and lots to talk about. We just had a pretty interesting quarter, I thought, that showed some good things that we will dig into. We are also just going to talk generally about the strategy and the returns of this business for any of you who might not be familiar with it.
We are going to spend the early part just kind of doing some 101 stuff, because I think it is an interesting company with an interesting model that is worth knowing of. Tim, why do not you take us through kind of high level on the company first?
Happy to do it, and always a pleasure to be here, Andy. Thanks for hosting us, to the Baird team. You always do a nice job. WillScot is the leading provider of temporary space solutions in North America. We have been the leader in this space for roughly the last 80 years and seen a ton of evolution over that time period. In terms of our footprint today, we will do approximately $2.4 billion of revenue, operating from about 260 operating locations across North America, covering Mexico up to the north slope of Alaska and all points in between. About 95% of our revenue is driven by reoccurring leasing operations. We are managing a big lease portfolio at the end of the day, providing temporary space to our clientele. We manage approximately 100 million square feet of relocatable space.
That could be as simple as a single storage container going to a construction site, or it could be as complicated as over 100,000 sq ft of temporary space that we are piecing together for a major mega project in today's environment out there in the industrial economy. In terms of our lease portfolio, we do not have any customer that is more than about 1.5% of revenue, and we serve basically every industrial end market in the U.S. economy. You can think of the top line as a slowly churning lease portfolio. We will put a unit out today, lease it for three years, it will come back, and we will do it all over again. That is fundamentally how we operate.
The business is underpinned by phenomenal unit economics and generating a very healthy return on invested capital, and I am sure we will talk a little bit more today about where we see opportunities for reinvestment in today's market, which is pretty exciting. Fundamentally, that is who we are and what we do.
Great. Let us talk a little bit about the unit economics a little bit more.
Yeah.
I always, when I talk about the company, I talk about payback periods because it is so tangible.
Yep.
But you might want to refer to it in IRR. Why don't you just talk about buy a unit, lease rent, average duration, and how that works out at scale?
Yeah. You want to take that one, Matt?
Yeah. When we are purchasing fleet, we're obviously evaluating that fleet and the investments over a long life. Our assets last 20- 30 years. As you're looking at that, we're able to generate 25+% IRRs over the life. What we've been seeing a lot recently too is a lot of our investments are more tied to the first lease that has longer duration. So that only helps overall the IRRs in this. Lately, our investments have been focused on our large complex projects to support a lot of our enterprise customers, which has been a good source of growth for the company. That was up about 15% year-over-year here in the third quarter. We continue to see opportunities there to expand with those customers and invest with really good returns.
We're excited with how the mix of the fleet is kind of continuing to shift to some of these higher value products over time.
This is a really big change. The last few years have really been underpinned by this mega projects. Tim, why don't you talk about how big was it, how big is it today, and how you've changed your go-to-market strategy, frankly, in the last couple years to attack this?
Yeah, it's been a really significant transformation of how we go to market. If we had been talking five years ago, I would have told you that 80% of our customers are operating with us only in a single branch, usually taking just one or two units. So a very highly local, highly transactional business model. Fast-forward to today, in part given the surge of mega projects across both the U.S. and the Canadian economy, and in part due to our focus on our enterprise accounts strategy, which we can come back to, our enterprise accounts, and this is defined as roughly our top 200+ customers who are doing business across multiple regions and multiple product lines, that's 30% of our revenue today and growing at a double-digit pace.
Part of it has been this shift in market activity in terms of a trend favoring larger industrial project starts. But as we've scaled our business and also diversified our product line, we found ways that we can add more value to these enterprise-level customers who are looking for a consistent service experience across their operational footprint. And to the extent we can provide more services that help them mobilize their sites more efficiently so they can focus on what they do for their end customer, that's a significant value add. So I think you've got two levers driving that shift in the business. And some of the most exciting things that we're investing behind today, as Matt alluded to, are two, three, five-year projects with our best customers on some of the most exciting project starts that are happening in the U.S. economy.
Yeah. I want to dig into that a little bit more, but I think one of the things that's notable here is, can you talk about the competitive environment for those large customers? Are there regional providers that can serve in a region? Obviously, there's big companies here at this conference also that are in this business in smaller ways. Maybe just talk about how you're uniquely positioned, what the competition's offering versus what you can do here.
Happy to. On a regional basis, there are regional and local competitors across each of our product lines, and there are examples where you'll find a regional competitor that wants to try to compete on a mega project in that particular market where they're well-positioned. Then it comes down to execution capability. As you can imagine, if you're on a billion-plus dollar project, the end customer really cares about hitting timelines, defect-free, customer service, and reliability issues, which we have seen examples where regionals have difficulty meeting those expectations, and we've got examples where those major projects have actually come back to us because of operational issues with the regional competitive set. You also have the dynamic, I was with one of our enterprise accounts yesterday, and they've got supply chain constraints, labor constraints.
They're looking at managing projects, dozens across a U.S.-wide footprint, and if they're using a local supplier in each of those areas, it makes it very cumbersome for them to manage the performance of those suppliers. A direct quote from yesterday is, "We love the fact that when we have an issue, WillScot listens." And we pride ourselves on getting that feedback from our largest customers. We've got an operational improvement roadmap, which I've alluded to a number of times on our earnings calls, and we're basically prioritizing those enhancements based on the feedback that we're getting from customers. It's helping us execute better at the local level on these projects and keep these customers coming back.
This seems like one of the big things that since you took over as CEO a few years ago now, this is one area that you really focused on. I think your board said, "Hey, we can do better operationally." What are the NPS scores saying since you've made some of these investments? What kind of tangible evidence do you have that you can share with us?
Yeah, I like to give a little grace to those of us, our predecessors, right? Because our business went through a very heavy cadence of acquisition and transformation over the last 10 years.
Definitely.
When we went public, we were doing $400 million of revenue, and we'll do $2.4 billion this year. There was a lot of hard work taking place over the last decade to put in place the systems and the operating platform that we have today. From my perspective, it was always a matter of when, not if, that pendulum swung back to a little bit of a healthier organic execution in terms of how we're going to market, and that's exactly what you're seeing today. I inherited that platform to move forward. It has been a very significant focus. There is no major systems transformation or anything that's going on under the hood today. It's all about operational improvement and optimization and refinement. We have talked about our field service and dispatch platform that we just rolled out through the course of Q3, for example.
That is based on customer feedback that said, "Hey, we can do better in terms of our communication around service and delivery events." We've implemented that, so we've got automated communications and things like that with our customers. NPS is above kind of the averages you would see for the engineering construction space. We're in kind of the low 50s today as a company. I don't worry too much about the score. I really do worry a lot about the feedback we're getting from customers and what are we doing about it.
Okay. Just in terms of, we were talking about mega projects, I think this is an issue that's going to be coming up in a lot of presentations. People, you saw the market sell off after the election, worrying about data centers slowing down, things like this. It's way too early, I think, to say tangibly, like, oh, three days later, here we are, something's canceled. How should investors think about the risk, and when you talk about your order book and your outlook over the next couple years, that these things that you're talking about, so enthusiastic about, actually do materialize the way you expect?
Why don't I give some color into the market environment, and Matt, you can talk about the 2027 outlook. We work in long cycles in this business. We don't react a lot to week-to-week changes in the capital markets, and we haven't seen those changes trickle down into the real economy that we're dealing in. The momentum in the business today has been built on now four quarters of year-over-year activation growth in our modular business, so it's been a steady build throughout the course of this year. I look at our pending order book, which are signed customer contracts that have not yet delivered. So they've committed for some point in the future. And that book is up over 20% today in our modular business and has been building steadily through the course of the year. This has not been an overnight trend by any means.
It's been a steady build, and that is what has caused our modular units on rent volumes to inflect year- over- year in Q3, which is a big deal.
That's a really big move.
I can talk about the tailwind that that then gives us going into future periods, which speaks to the 2027 guidance.
Probably worth noting also that that inflected probably at least two quarters, if not three or four quarters, even what you guys were thinking six months ago.
I think that's fair, and I think that speaks to the fact that our activation assumptions have kind of steadily outperformed our expectations through the course of the year. In terms of what's driving it, obviously there's the mega project trend out there. About 18% of our order book today would be linked to data center activity, so that is absolutely happening. Our order book generally converts in the next 60 days is how to think about it, so that have a very high degree of confidence in the conversion of that order book, given their signed orders. Then one of the things that we're looking at as we think about the outlook for 2027 is just the pipeline of projects that are on kind of the planning horizon for our major customers, that fall into the first half of the year.
While they might not be signed orders today, there's a high enough volume of those opportunities that gives us a high degree of confidence.
Yeah.
That we're going to see them flowing through at roughly the same pace that we've been experiencing.
Okay.
Yeah, that really kind of underpins our initial outlook that we gave a little bit earlier than we normally would, here for 2027. We anticipate that that level of activity, based on the order book, will continue into the first half of the year. We don't yet know around the second half, so a little bit of cautiousness as we look at the second half of the year and kind of that activation activity. But all that has us very confident in low single-digit revenue growth going into next year. The tailwind that Tim mentioned, you've got volume, rate, and our value-added products and services all positive at a total portfolio level exiting the year, which hasn't been the case for us in several years.
Yeah, when I think about the last couple years, maybe three years, there's been a quarter or two or here where the order book or the activations, one quarter's like, "Wow, that's really good." Stock kind of goes up, sniffs it out, says, "This is going to be good. We're off to the races." Then next quarter, maybe a little softer, been kind of one step forward, two steps back in the high interest rate environment. But if y ou guys really talked about not only units on rent going positive this quarter, but you think it is going to be even more positive next quarter based on what you are seeing.
Yeah, we finished the quarter up 1.2% units on rent for modular. We do expect that to expand, so maybe 1.5% as a good base there. We did increase going through our last forecast process based on the order book and the continued progress there. We did increase our activation assumptions for the fourth quarter by high single digits. Good activity. The commercial team is continuing to capitalize that, and we do feel good about how we are going to end the year.
I chuckle a little bit when I hear that, because 1.2% is a celebration, but it actually really is meaningful if you get low single-digit volume growth. This is a very healthy p ricing environment out in the market. Value-added products are growing at 4%, and when you get these things compounding, even at small percentage growth rates, that is a really healthy place for the business to be, and you can drive nice compounding of earnings with a lot of operating leverage in the model in that environment.
Yeah. It is hard to appreciate unless you have been around the model for some time how long the cycles are because of that three-year rental duration. We look at AMR, average monthly rental rate. I think last quarter in the modular business, the biggest business was what, + 2%?
It was about 2%.
Yeah.
Yep.
It kind of feels like it is not a lot, but why do you talk about what you are getting in terms of real time in the spot market for some of the newer rents that are going up so that people can see where this could potentially be heading, assuming this continues?
Yeah, when you think about what lease duration does for the business, it gives you a lot of visibility. It also means that as you start activating new contracts at higher rates, it takes a little bit of time for those higher rates to work their way into the portfolio average. We were up 2%, as you said, in modular in the second quarter. But the order rates in the third quarter on some of our complexes were up over 10% on newly activated rates. We are seeing kind of mid-single digits on our smaller single units. There is still a little bit of pressure on our ground level offices, but when you take all that into account and you think about that three-year lease duration, as that turns, you are going to see an acceleration to the AMR, we expect over the next few quarters.
Yeah, then maybe it is probably just worth talking about the cost structure side of this one as well. Obviously, fuel is an input for you guys, and so diesel. You have a lot of big trucks that are running on that. That's the one thing that's maybe obvious. Maybe put some boundaries around that, but with kind of broad-based inflation being the topic of conversation again, I think over these next three days, probably worth talking about other factors, including the unit prices. We're going to talk about the whole CapEx budget in a little bit, but there's probably an effect there as well. Matt, maybe just talk us through some of the puts and takes on the cost structure right now.
Yeah, as you think about inflation, it shows its head in a couple different ways. I'll hit fuel first. I mean, fuel, you see it from a cost perspective, but we do have some natural hedges in our contracts with customers where we actually FLEX the delivery pricing based on wherever diesel's at. So we're pretty well insulated from that perspective. Now, it might gross revenue up a little bit and could be slightly dilutive to margin as you think about that, but from a dollar perspective-
Percentage, yeah.
We're pretty well insulated there. The bigger one we've seen over, if I expand back a few years, when you look at the cost of new fleet, that's absolutely increased, gosh, probably 40% in the last four or five years. All that's been supportive of pricing. As you think about new fleet coming into the market today, higher rates need to support the returns in that business, and that is good for the overall pricing environment in the industry. Internally, we think about materials, those types of things. We're typically seeing kind of 5%, 6%, 7% inflation per year. That can ebb and flow depending on the year. This year has been a little bit less actually, but if I step back and look over a three or four-year period, that's about what we're seeing.
All of those are supportive and require continued push on rates to continue to generate the returns that we have. We have seen increase return on invested capital here year- over- year, and continue to do that going forward.
Also worth noting that it was almost a year ago that you announced, I guess you call it restructuring plan, where you went through the fleet, took out, what, $25 million-$30 million of cost in land lease, I think was the number.
Yeah, that's right.
You had some actions that you took also to address some of the costs there too.
Yeah, we are in good progress on that. I mean, we have exited about 30% of the locations that we were targeting, and we will continue to do that here as we go forward. It really is compressing the growth rate in our real estate costs, which has been good.
Yeah. The next thing we should probably talk about is the CapEx budget. Maybe, Tim, you can talk about this. You just, in the earnings that you reported last week, went up to $400 million of net CapEx. That is a level we have not seen for quite some time, almost a record, actually.
Yeah.
Obviously, this has been driven by the fleet that you need for these mega projects. It is a positive leading indicator to invest that much, but maybe just put that in the context of what is going on, because you have got a lot of other fleet that is not being used, and yet you are buying the fleet that needs to be used with good IRRs. Maybe just talk about that dynamic and what investors should think about all of that.
Yeah. I'm incredibly excited about it. I haven't seen an environment as attractive for organic CapEx in this business in my 15 years at the company. It is a little counterintuitive if you're at 70% utilization across the modular fleet. Well, you've got about 10 different major product categories in there. You've got some that are more like our containers, a little bit more transactional in nature. If you remember, five years ago, a lot of our business was purely local, single box going to a single customer site. Then you've got portions that are more conducive to larger spaces, supporting larger workforces, and that's obviously where the mega project dynamic in the market has kind of shifted the overall mix of market activity, as well as our focus on growth with enterprise accounts.
Yeah.
We are very well utilized in those categories that are conducive to larger spaces. So our complex product, our FLEX product in particular, are areas where we've been allocating capital. As project size goes up, duration tends to correlate positively.
Yeah.
That's why we're able to look at this project pipeline and say, "Yes, we're a bit underutilized in the transactional product lines." We've got strategies where we think we can drive that, both to penetrate mega projects better, and it's also got a ton of operating leverage if and when local market construction activity recovers. But in the meantime, you've got highly attractive major project activity with some of our best customers, where you've got good duration visibility and pricing that supports the IRRs that Matt's talking about.
If I'm not mistaken, you said that the average leases that you're getting in some of the new units is two years?
Yes.
It's always been one. I've covered you guys for a long time. It's been one-year average duration for a new lease. Now you're getting two at a better rate.
Right. On the complex side of our fleet, it always would have been a higher minimum contractual duration.
Okay. Yeah.
What you're referring to is, historically, we would have said, on average, in the modular business, a customer would sign a 12-month minimum contractual term.
Yeah.
Customers habitually stay in the units longer than they expect, such that we had a three-year average duration across the modular portfolio.
Yeah.
What we're seeing in these new investments that we're putting out is minimum duration more than double that historical 12-month average.
Yeah.
We expect that the effective duration will again kind of exceed that 2.5-year minimum, and in some cases, exceed meaningfully.
Yeah.
So that again makes this one of the more attractive environments I've seen for organic CapEx deployment.
It feels like a lot of the data centers are starting with phase I and want to put a phase II right there. I mean, if that's the case, your units could stand out here for a decade.
In some cases, that's absolutely the case, and we've got a customer that approached us for a buyback recently because they think they're going to be out there for 15 years.
Okay.
Right? Those are examples, right?
Yeah.
I do think it's indicative of the environment that we're in. If you just think about the $400 million of CapEx, just kind of zoom out a little bit historically.
Sure.
Historically, there would have been a higher allocation to consolidation and tuck-in acquisitions, right? I think that prioritization of capital has maybe switched a little bit.
You're making the distinction that some tuck-in acquisition is effectively a CapEx purchase in an economic way.
If you go back to the 2022 timeframe I think there's some merit to that. If you think about maintenance CapEx levels in the business, you are probably in that circa $250 million range in a volume-neutral environment.
Yeah.
So you can infer that about 150 of that CapEx is growth-oriented in the categories that we are talking about, and I cannot think of a better use of shareholder capital in this environment than supporting that long-term growth of the business.
Great. The thing I want to talk about next is value-added products and services. I will be honest, this is an area of the company that I have not asked a lot about in the last couple years.
I feel like it was a huge investor focus for your first seven years out of the box from the coming public. Hasn't been recently. Which questions do I want to ask? I want to ask about what is the penetration rate? How has the penetration of value-added products and services been in the last couple years? How much attachment is there on some of these larger complex product, which is driving your growth?
Is there more or less than what you've seen historically? You've got some big targets for what value-added products and services should be in the next couple of years. I'm just kind of curious as to if you think if those are still achievable targets. There's a lot in that question. Not to mention the fact that value-added products and services are renting the stuff inside the units. This is furniture, this is insurance policies. This is a lot of different things to attach to the unit rental.
Yeah.
Now that I've talked about what it is, can you just talk about what the strategies are to kind of build that up as a percentage of your whole?
Yeah. I'll start, and maybe you can help quantify some of the metrics here. But value-added products are many of the things you see in the room, basic appliances, basic furnishings. It's still a core part of how we go to market with our customers in terms of offering a turnkey, ready-to-work- solution our customer can be safe, comfortable, and productive on the job site the day they show up, not worrying about where they're going to get their folding chairs or their coffee makers and things like that. Customer adoption is still very, very healthy there.
As we have transformed how we've gone to market over the last couple of years, it's an area where we kind of slowed down in terms of our performance of penetration on the modular side specifically, and we're getting back to a point where, we're not quite back to historical peak penetration levels, but that is kind of the mission going into next year.
And we have introduced a handful of new product offerings, the perimeter solutions offering which is outside kind of security perimeter around job site, which is doubling year- over- year in terms of its growth rate. And overall, the VAPS portfolio is growing at a 4% revenue growth rate year- over- year. Again, if you get low single-digit volumes, a decent price appreciation, and maybe mid-singles in VAPS, that's a pretty powerful combination as we look forward. But you maybe want to talk about the longer-term percent of revenue targets and kind of where we're at today.
Yeah. We're in the mid-17s today, and our longer-term target is to get into that 20%-25% range, and that'll ebb and flow, I think, as we move forward. You do have some mix impacts here in the current year with our D&I revenues, which have been obviously up pretty considerably year- over- year. But to Tim's point, we were up 4% year- over- year in the third quarter. If I kind of strip that back, about half of that is kind of coming from the perimeter solutions, as Tim said.
The other half is growing in line with modular leasing revenue. So, it's still continuing to grow in line with our leasing revenue, and our job as a team is to accelerate that. Some of the differences you mentioned around different projects, I mean, the large complexes typically are a little bit less penetrated than the singles. So, there is a bit of where the demand is that's driving some of that difference. As you get some of the more local market activity over time, those tend to be more highly penetrated. My easy example is every unit will have steps and maybe a ramp on it where you don't have that on every single unit for a complex. So, definitely opportunity for us. We continue to drive it. But as Tim said, perimeter and some of those things are also hopefully contributing.
I want to talk more about the local transactional market in our breakout session, which is going to happen in about three minutes. But we had a question come in three times here from the audience about the competitive environment. So, certainly we've seen some investment by the general rental companies into the modular sector, Sunbelt most recently. We saw United Rentals buy General Finance a few years ago.
Yep.
There's a view here that these guys might be coming for where you guys play. Just kind of your thoughts about how a real competitor they are. Do you feel like they're coming more, and what are you seeing, experiencing in your markets where you do compete against them?
Yeah. Our assumption is that they absolutely will come towards our space because it's the most attractive space in the construction and industrial sector from an equipment standpoint. It's not about just a transactional relationship with the customer. Fundamentally, we're helping customers mobilize their job site, and they can't do the rest of their work unless that is done well and their people have a safe, comfortable, and productive space to work from. Every sophisticated customer in the construction sector right now is hypersensitive to the on-site worker experience, and fundamentally, that is what we're providing at the end of the day.
That's a little bit of a different animal than others that are maybe transacting across a very broad range of services, and we hear that directly from our customers. To be able to take that consistent customer experience across all of North America and help customers mobilize is a really big deal, and we'll continue to go to market as a specialist in what we do and see a very high degree of value in that relative to others that are either maybe trying to transact across a very broad product offering or maybe specialized in a region, like we were talking about earlier. We think there's a pretty healthy space between those where we can be successful, not just in construction and industrial, but in professional services and events, in federal government, in retail, in some of the other verticals that are part of our enterprise accounts strategy.
One of the reasons we put that in place is a lot of the value proposition that resonates in the construction world also resonates at a major soccer event, like we had this past summer, and you needed to mobilize those teams over 16 sites from Mexico City up to Vancouver over Toronto. There is nobody else better placed than WillScot to provide that type of service.
Great. All right. We are out of time. Thank you all for joining us for this session. There is a breakout session here. We will be heading to Salon C right here now. We will hope to see you there. Thank you. Join me in thanking the team for the presentation.