WillScot Holdings Corporation (WSC) Q3 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the WillScot Third Quarter 2018 Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded. I would now like to turn the call over to Matt Jacobsen, Vice President of Finance. Sir, you may begin.

Thank you, and good morning. Before we begin, I'd like to remind you that we will discuss forward-looking information as defined under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those forward-looking statements as a result of various factors, including those discussed in our press release and the risk factors identified in our Form 10-K filed with the SEC and our Form 10-Q filed today. While we may update forward-looking statements in the future, we disclaim any obligation to do so. You should not place undue reliance on these forward-looking statements, all of which speak only as of today. We'd like to remind you that some of the statements and responses to your questions in this conference call may include forward-looking statements. As such, they are subject to future events and uncertainties that could cause our actual results to differ materially from these statements. WillScot assumes no obligation and does not intend to update any such forward-looking statements. The press release we issued last night, and the presentation for today's call are posted on the Investor Relations section of our website. A copy of the release has also been included in an 8-K that we submitted to the SEC. We will make a replay of this conference call available via webcast on the company website. For financial information that has been expressed on a non-GAAP basis, we have included reconciliations to the comparable GAAP information. Please refer to the tables and slide presentation accompanying today's earnings release. Lastly, this morning, we are filing our 10-Q with the SEC for the period ended September 30, 2018. The 10-Q will be available through the SEC or on the Investor Relations section of our website. Now with me today, I have Brad Soultz, our President and CEO; and Tim Boswell, our CFO. Brad will kick off today's call with a brief overview of WillScot's strategy, summarize our third quarter results and provide an update on our progress related to mergers and acquisitions among other things. Tim will then provide additional detail on the financial results for the quarter and provide an update on our recent activities in the capital markets before we open up the call for questions. With that, I'll turn the call over to Brad.

Thanks, Matt, and welcome, everyone, to WillScot's Third Quarter 2018 Earnings Conference Call. Turning to Slide 3, I'll provide a brief overview of the company given that we have several new investors and new analysts joining us today. As the specialty rental service market leader, our mission is to provide innovative modular space and portable storage solutions. We focus on providing these solutions Ready to Work so that our customers can forget about the space, focus on what they do best, which is working the project, being productive and meeting their goals. We now provide these solutions to more than 50,000 customers with a fleet of approximately 160,000 units, representing together over 80 million square foot of temporary space positioned across The United States, Canada and Mexico. When we deliver an immediately functional space solution, productivity is all our customer sees. This value proposition is unique in the industry, our customers are embracing it, and it's driving our growth. Turning to Slide 4. I'd highlight no other company has the scope, scale, turnkey capability and service commitment to deliver like we do. Our revenues for the 12 months ending September 30, 2018, were now over $1 billion on a pro forma basis. This is inclusive of our 3 acquisitions, Acton, Tyson and ModSpace, as if we own them for the entire period. We now operate an unparalleled branch network in the Modular Space sector of over 120 locations, serving our customers with diverse fleet which has an original equipment cost of approximately $2.8 billion. I'd highlight there are 3 key attributes that differentiate WillScot. The first is Ready to Work. We've repositioned the business strategically with its unique value proposition through the expansion of our offering of value-added products and services or VAPS, our customers value it, it's driving our growth with highly accretive returns. Second, our differentiated and scalable operating platform. Over the past several years, we've invested in our people, processes and technology and have created a highly scalable and differentiated operating platform capable of asserting market leadership. The operating platform includes sophisticated price management and capital allocation characteristics, and we are leveraging this platform to swiftly and efficiently integrate acquired companies. Finally, the third attribute is our unit economics, which provide a high degree of visibility into future performance. Remember, over 90% of our adjusted gross profit is derived from recurring leasing business. This is underpinned by long-lived assets, typically 20-plus years life, coupled with average 3-year lease durations. Turning to Slide 5. We'll touch on the performance and progress with our strategy. Our strategy has been to accelerate our already strong organic growth with accretive M&A. Specifically, we committed to doubling without overpaying or overleveraging, and we're delivering on that commitment. While Tim and I will provide additional context later in the presentation, I'd like to point out 2 significant accomplishments. First, we've delivered outstanding third quarter financial results. Third quarter 2018 adjusted EBITDA of $64.6 million is up 106% (sic) [ 100.6% ] versus the same period the prior year and up 54.2% over the prior quarter. Our EBITDA has continued to accelerate since late November of last year when we recapitalized the company and returned it to the public markets. Secondly, the average monthly modular rental rates on a pro forma basis increased 13.4% year-over-year in our core U.S. Modular segment. This includes the results of WillScot, Acton, Tyson and ModSpace for all periods presented. This is the fourth consecutive quarter of double-digit rate growth, which is a great indicator of the continued strong organic growth which is underpinning our performance. Secondly, I'd like to point out the significant progress we've made on the acquisition integration front. As of the beginning of November, we achieved key milestones with respect to the integration of ModSpace. You may recall that we closed that transaction less than 3 months ago on August 15, 2018. First, we're now writing all new contracts with our combined sales organization using WillScot's operating platform and information technology. We are also offering Ready to Work solutions to all former ModSpace customers. Secondly, we've now consolidated production, that's the preparation, delivery and return of units, into about 120 locations, which is down from over 200 locations that were previously supporting the legacy Williams Scotsman, Tyson, Acton and ModSpace businesses. We will continue to relocate idle fleet and further consolidate and liquidate real estate positions over the next 24 months, all of which are consistent with our integration plans. And finally, we implemented a plan to migrate all remaining back-office activities such as billing, accounts receivable, accounts payable to WillScot's information technology platform in the first quarter of 2019. These milestones were critical to begin to further unlock the significant earnings growth embedded in this portfolio through the realization of the cost synergies, further penetration of value-added products and services and price optimization. Over the past year, we've doubled the size of this company. And as a part of that journey, we have combined forces with some outstanding peer companies and hundreds of talented people that are all now committed to bringing our customers and expanded fleet of Ready to Work solution. Tremendous effort has gone into safely and efficiently integrating these companies. And although we still have much work to do, I'm extremely proud of the team and their accomplishments thus far. Turning to Slide 6. I'd like to highlight our run rate performance. You'll recall that in October, we increased our 2018 EBITDA estimate to $210 million to $220 million due to our continued strong organic performance as well as the closing of ModSpace in mid-August. We remain confident in this estimate, given our third quarter adjusted EBITDA results of $64.6 million. Including the full year effect of the entire portfolio and the associated embedded cost synergies, our pro forma LTM bank adjusted EBITDA is now over $350 million. We believe this is a useful indicator as to what the portfolio could achieve over the next 24 months as cost synergies are realized without including any further organic growth or anticipated revenue synergies associated with VAPS or further price optimization. On prior occasions, I referred to the ModSpace acquisition as the right deal at the right time. I'm even more convicted in this position given our learnings and accomplishments in the last few months. This transformational acquisition effectively doubled the company and as planned, has temporarily increased our pro forma leverage to 4.6x, which is slightly above our target range of 3 to 4 net debt to EBITDA. We remain committed to the 3 to 4 target range and expect to be at or below 4x in about 18 months. We will remain laser focused on completing these integrations and unlocking the significant earnings growth embedded in the portfolio through the realization of the aforementioned cost synergies, further penetration of value-added products, price optimization; all of these are in our control. Turning to Slide 7, we'll go a bit deeper into this embedded growth opportunity. Our 350 pro forma LTM bank adjusted EBITDA does not include any revenue growth from VAPS and price optimization, both of which we expect to be significant. There is $138 million of annualized revenue growth opportunity over the next 3 to 4 years if we simply continue to deliver VAPS at the rate and penetration Williams Scotsman achieved on new units delivered in the LTM period leading up to March of 2018 across the portfolio, including all the acquired units. We, in fact, continue to increase the VAPS rate and penetration, and it will remain a key focus of this business. Any improvement above the actual rate of $226 VAPS per unit per month level achieved last March as well as revenue growth associated with further price optimization or harmonization provide further upside to this $138. The $350 million pro forma bank adjusted LTM EBITDA does not include -- or does include, I'm sorry, $70 million of cost-related synergies, $60 million of which are driven by the ModSpace integration. These are identified, actionable and within our control. The savings will build over the next 24 months with 80% expected to be included in our fourth quarter 2019 run rate. 60% of these are derived from redundant headcount with the balance split between real estate consolidation and non-headcount-related SG&A. There are additional potential cost synergies as we further optimize sourcing, logistics, fleet and branch efficiencies. With that, I ask you to turn to Slide 7, and we'll focus and provide some additional context as to the significant integration accomplishments. You'll recall that we migrated the relative smaller Acton and Tyson acquisition over to the WillScot platform within 3 months and 3 weeks of acquisition close, respectively. In early November, about 2.5 months past the closing of the ModSpace transaction, we achieved critical milestones in that integration as well. As previously mentioned, we are now writing all new contracts with our combined sales organization, using the Williams Scotsman operating in information technology platform and offering Ready to Work solution to all new customers. We've also consolidated production, which is the preparation, delivery and return of units. Key enablers listed down the left in green have included data migration, all fleet and commercial systems have been moved to the Williams Scotsman operating platform, on the people front, all new field sales operation roles were filled, selecting the best talent from all the companies. Alignment and training was achieved as we held an integration and training meeting with over 500 sales and operating personnel a few weeks ago. On the branch consolidation front, production is now consolidated into the 120 best-fit branches. As mentioned, we'll continue to relocate the auto fleet, further consolidate disposition over the next 24 months. And finally, on the customer front, most importantly, territories and accounts have been remapped and assigned. We'll continue to focus on protecting the customer and have navigated these significant milestones with minimal disruptions. Turning to Slide 9. While M&A is certainly the catalyst for the acceleration in our EBITDA growth, the organic engine continues to perform well as evident in our third quarter core leasing fundamentals in the U.S. In the U.S. Modular segment, rates, utilization and units on rent are all up year-over-year on a pro forma basis. First, average monthly rental rates increased 13.4% year-over-year. As mentioned before, this is the fourth consecutive quarter of double-digit rate growth. Utilization improved 310 basis points to 74.9%, and unit on rent, while up only 0.1%, was in line with our expectations, given the significant integration activities undertaken thus far. While in-market demand has remained robust, we have and will remain primarily focused on improving rates and safely completing these integrations. Turning to Slide 10. Before I hand it over to Tim, I'd like to provide a bit of additional context as to our end markets. Our demand outlook remains positive, and we continue to see strength across the majority of the diverse end markets we serve. Looking forward at various forecasts and indicators, The American Rental Association forecast was recently revised up to 7% annual revenue growth through 2019; the AIA consensus forecast is still generally in the 4% to 5% range; ABI, which has been a good leading indicator for nonres construction activity, has been positive for 23 of the last 24 months, including the September 51, nonres construction starts on a square-foot basis continue to remain below long-term averages and 30% below the highest levels. Based upon this, combined with our current demand, we believe there's plenty of headroom left in this cycle. We would expect any substantial U.S. infrastructure spending bills once approved and implemented to further underpin and strengthen many of our end markets. And finally, Canada GDP and stable-to-improve oil prices are both supportive of our business in the Other North America segment. So while we continue to expect underlying demand for temporary space to remain solid, aside from acquisitions, the fastest growing part of our portfolio is the expansion of our Ready to Work value proposition. This value proposition provides turnkey space solutions to our customers, affording them the ability to focus on immediately getting to work for their project. We expect the demand for this value proposition will continue to increase over the next several years as we both expand our offering and increase penetration to our legacy customers as well as those with the newly acquired businesses. With that, I'll hand it over to Tim, who will provide additional context.

Thank you, Brad. Please turn to Slide 12, and we'll go through the financial results in a bit more detail. We had no shortage of excitement in Q3, with continued strong organic growth, substantial completion of the Acton Mobile integration other than real estate consolidation and the financing activities associated with the closing of the ModSpace acquisition. As Brad mentioned, our increased guidance on October 1 reflects our enthusiasm regarding the trajectory of the business. In the top-left chart, total revenues were up 88% year-over-year, with growth in both segments driven by 3 factors: first, organic growth in the legacy WillScot U.S. segment; the acquisition of Acton Mobile at the end of 2017; and 1 and 1.5 months of contribution from ModSpace after closing that acquisition in the middle of the quarter on August 15, 2018. On the bottom chart, we present a pro forma revenue bridge to capture the organic performance of the combined portfolio. Revenues were up $31 million or 11.6% year-over-year as if we had owned ModSpace, Acton and Tyson in the prior year and with the majority of the growth coming from average rental rates in the U.S. across the combined portfolio. In the top-right chart, adjusted EBITDA of $64.6 million in the quarter was up 100.6% versus prior year, and our adjusted EBITDA margin percentage expanded by 185 basis points to 29.5%. As you will recall, with the Acton acquisition, we operated the business in parallel to WillScot with a duplicative cost structure for the first full quarter post closing until integration actions began to flow through our financial results, which we saw in Q2 this year, and having closed ModSpace on August 15, we expect this same phenomenon through late Q4 this year or early 2019 with further margin expansion as cost and revenue synergies build throughout 2019. Obviously, the $65 million of adjusted EBITDA in Q3 only includes 1 and 1.5 months contribution from ModSpace, so we are confident our reported results will accelerate significantly again in Q4, delivering the guidance range for 2018 that Brad articulated earlier and setting up our run rate for 2019. Turning to Slide 13. Key trends in our U.S. Modular leasing business continue to be extremely favorable. As was the case in prior quarters due to our acquisition activity, we've included our units on rent and average monthly rental rate on the left-hand side as they appear in our financial statements. On the right, we've presented the same metrics as if we had owned Tyson, Acton and now ModSpace for all periods. I'm going to focus on the right-hand pro forma charts because they better illustrate the trends we see heading into the remainder of the year. On the top-right chart, average modular space units on rent increased to 87,000 in Q3 2018, with utilization up 310 basis points across the combined WillScot fleet. While the year-over-year pro forma unit on rent growth is below our 1% to 3% target range, the as-reported volume growth of 88% year-over-year on the top-left side of the page as well as Brad's comments on the integration progress are a good reminder of the transformation underway in the business. The bottom charts look at average monthly rental rates, both as reported and pro forma for our acquisition activity, and we continue to show tremendous traction with rate growth again accelerating in Q3. On the bottom-right chart, average monthly rental rate increased 13.4% year-over-year and 4% sequentially to $549 per modular spacing on rent in Q3 2018. Of the 13.4% year-over-year increase, approximately 60% was driven by unit rates and the other 40% related to vast rate and penetration. This has been one pleasant surprise as we've gotten deeper into the integration. The ModSpace team had been doing a great job accelerating rate growth in their business, and we believe the application of our rate optimization tools, which ModSpace was actually beginning to implement themselves, will continue to capture revenue leakage across the acquired portfolios. We have previously quantified the embedded vast revenue opportunity, which is north of $125 million and plays out over the next 3 to 5 years organically, irrespective of market conditions. And this Q3 result, combined with the 4 consecutive quarters of accelerating double-digit rate growth, gives us further confidence on these points. Slide 14 shows our quarterly revenue and adjusted EBITDA from the U.S. Modular segment. In the top-left chart, same as last quarter, our reported revenue is shown in green and the pro forma revenue contribution from Tyson, Acton and ModSpace is in the white boxes. Third quarter revenue in the top-left chart grew 90.5% to $197.6 million versus Q3 2017. The quarter is also up 13.7% versus prior year on a pro forma basis due to aforementioned traction on average rental rates and value-added products as well as a significant ModSpace sale project that completed in the quarter. Adjusted EBITDA for the U.S. Modular segment increased 99% to $58 million in the quarter, with adjusted EBITDA margins up 2 percentage points year-over-year but down slightly sequentially from Q2 due in part to the higher contribution of lower-margin sale revenue as well as the duplicative infrastructure discussed earlier. Moving to Slide 15, we'll look at the other North America segment, which includes operations in Canada, Alaska and Mexico. In contrast to prior quarters, we are now showing pro forma metrics in Q3 for this segment since ModSpace had a significant presence in Canada. Before jumping into the charts, I'll remind everyone that, in Q2, we highlighted the stability and frankly, modest improvements in average units on rent and rental rate in this segment, which had begun to show sustainable adjusted EBITDA growth and margin expansion in our leasing operations. ModSpace's Canadian operations had exposure to upstream oil and gas projects in Western Canada, similar to that of Williams Scotsman. Our ModSpace is the last project -- major project recently terminated over the past several quarters, whereas Williams Scotsman's legacy business bottomed over 12 months ago and has since enjoyed a modest recovery. Average units on rent in the bottom right-hand chart here best illustrates this dynamic. You can see WillScot legacy units on rent, in green, bottoming in Q1 2017, followed by sixth consecutive quarters of sequential growth. ModSpace's units on rent, in white, totaled 3,615 units in Q3, which was down 710 units or 16% versus Q3 2017. When combined with WillScot, pro forma units on rent are down 3.6% year-over-year but stable sequentially. And you can see average rental rates in the top-right chart are also trending favorably, both sequentially and year-over-year. Including the contribution from ModSpace for 1.5 of the quarter, overall segment revenue increased 68% to $21.3 million, and adjusted EBITDA increased to 114% to $6.2 million in Q3, with 4 percentage points of margin expansion sequentially from Q2. Revenue and adjusted EBITDA will obviously increase again in Q4 as the full contribution of ModSpace flows through in that quarter. Turning to Slide 16. This is our usual reconciliation of net income to adjusted EBITDA. As we have discussed in prior quarters, our ambitious consolidation activity does come with onetime transaction in integration costs, which totaled approximately $45 million in Q3, and it's useful to understand the drivers of these costs. First, please note that interest expense of $43.4 million, as reported in our financial statements, includes $20.5 million of onetime commitment fees related to the financing of the ModSpace acquisition that were expensed in the period and are not recurring in nature. Similarly, there were $10.7 million of other onetime transaction costs expensed in the period related to the ModSpace acquisition. As discussed in prior quarters, we are incurring restructuring and integration costs, which totaled $6.1 million and $7.5 million, respectively, in Q3, related to the operational execution of the Acton and ModSpace integrations. We have incurred approximately $22 million year-to-date of the approximately $60 million that we estimated for the combined Acton and ModSpace integrations, and we expect to incur the remainder over the course of the next 4 to 5 quarters. Together, that totals $31.2 million of transaction-related expenses and $13.6 million of integration-related expenses that are outside the normal course of our operations. Obviously, we expect this reconciliation to simplify and the net income picture to improve significantly as transaction and integration costs subside and synergies are realized in coming quarters. Turning to Slide 17, we'll look at capital spending and operating free cash flow. In the top chart, we had gross CapEx in the quarter of $48 million, which is up approximately 85% year-over-year. As a reminder, that spend is supporting modular units on rent that are up 88% year-over-year in our U.S. business as well as continued expansion of value-added products and services. So the increase is roughly proportional to the increased scale of our portfolio prior to any synergy realization, given the limited ownership period of ModSpace in Q3. Even with the limited opportunity for synergy realization, adjusted EBITDA less CapEx more than doubled to $22 million year-over-year, and we expect to improve upon this operational free cash flow in coming quarters. As a reminder with the spend, we are not expanding the fleet. Excluding acquisitions, total unit count was down 2%, and rental equipment net book value was essentially flat versus Q1 2018 on a pro forma basis. So strategically, we're allocating this spend to grow units on rent and tighten utilization through refurbishments of assets we already own, supplemented with targeted new fleet purchases as well as growing value-added products and services. The WillScot spend in Q3 reflects the strategy with approximately 50% of gross CapEx going to refurbishments and the remainder evenly split between value-added products and new fleet purchases. We believe this is the most capital-efficient way to grow the business when coupled with our M&A strategy. As we've said before, we'll continue to assess our capital deployment on a quarterly basis. And in the short term, given our business model, our capital investments are almost entirely discretionary. Moving to Slide 18. As mentioned previously, we executed quite a lot of debt and equity financing activity in Q3, all in relation to our $1.2 billion acquisition of ModSpace. We issued $300 million of new 2023 senior secured notes at 6.875%, we issued $200 million of new 2023 senior unsecured notes, and we extended our ABL to $1.425 billion into approximately $470 million to fund the remaining cash consideration for the ModSpace acquisition. Note, the ABL bears interest at LIBOR plus 250, and we had a weighted average interest rate of 4.65% in Q3. On November 6, we entered into an interest rate swap, whereby we will pay a fixed rate of 3.06% and receive 1-month LIBOR on $400 million of notional value through the maturity of the ABL in May 2022. Based on our September 30 debt balances and including the swap, our debt is approximately 70% fixed rate and 30% floating, and our weighted average cost of debt inclusive of the swap is approximately 6.5%. As Brad mentioned, our total net leverage ratio is 4.6x pursuant to the definitions in our credit agreement, which provides for the pro forma inclusion of ModSpace and Acton, inclusive of cost synergies and other actions to be taken in the coming months. To -- while we've flexed above our target leverage range for the purposes of consummating the ModSpace deal, we are very comfortable, given the embedded growth in the portfolio, with our ability to delever back to 4x in the next 18 months. While not directly related to our debt structure, I will mention, as a reminder, we issued 9.2 million new Class A common shares, raising $139 million net of underwriters discount to fund a portion of the cash consideration in the ModSpace transaction and issued 6.5 million Class A common shares as well as ones to purchase 10 million common shares to former ModSpace shareholders, as noncash consideration is part of the purchase. Please see Page 27 in the appendix of -- for a share breakdown, as of September 30, post these issuances. And lastly, before I hand it back to Brad, yesterday, we launched an exchange offer, which gives holders of certain of our warrants the opportunity to exchange their warrants into common stock on a cashless basis at a ratio of 0.18182 shares per warrant. The warrants eligible for the offer are the public and private warrants issued at the IPO of Double Eagle Acquisition Corporation in 2015, which have an effective exercise price of $11.50 per full underlying share. There are approximately 69.5 million of such warrants outstanding, each exercisable for 1/2 of 1 share. This provides an opportunity for warrant holders to realize value and increase liquidity by moving over to WillScot common stock, and we expect that exchange offer will expire on December 6. Given it's a ongoing securities offering, we're not going to comment much more on that topic today. With that, I'll hand it back to Brad for closing comments and then Q&A. Brad?

Super. Thanks, Tim. So, obviously, we're delighted with our third quarter results and the progress we've made transforming WillScot in the last year since returning to the public markets, where there are lot of outstanding results and key indicators packed into our prior commentary, I'd like to circle back to 3: first, the third quarter adjusted EBITDA was up 100.6% year-over-year and continues to accelerate; second, third quarter U.S. Modular rates up 13.4% year-over-year on a pro forma basis, the fourth consecutive quarter of double-digit growth; and third, we achieved critical milestones in the integration of our transformational acquisition of ModSpace, which certainly further unlocks the significant earnings growth embedded in this portfolio through the realization of cost synergies, further penetration of value-added products and services and price optimization. All of these are in our control. Our strategy is working, and it's apparent in our results. Now we appreciate the time you've taken today with us, and thank you for your interest in our company. We look forward to speaking to many of you very soon. This concludes our prepared remarks. And now, we'd like to open it up to take your questions. Operator, please open the line.

[Operator Instructions] And our first question comes from Courtney Yakavonis from Morgan Stanley.

Can you guys just separate out, first, just how much of the rate growth the 13.4% pro forma this quarter came from, kind of core rate growth versus your VAPS strategy in increasing penetration?

Yes, Courtney. This is Tim. This focus on the U.S. gets where most of the action was, it was up 13.4% on a pro forma basis, about 60% of that was coming from kind of core modular rates, and the remainder was coming from value-added products, price and penetration. And as we think about like the ModSpace impact there, very good traction on the core unit rates and actually focused on driving value-added products in recent quarters as well. So I think in prior quarters, we had said about half of the rate growth was coming from units, and the other half was coming from VAPS, as you bring the ModSpace, that shifted a little bit to 60-40.

Okay. But do you expect it to switch, kind of going forward, back to more VAPS driven?

I think the way I would think about it is we've quantified the VAPS opportunity, which is north of $125 million, and that's across the combined portfolio. And we see that playing out mostly in linear fashion over the next 3 to 4 years. And then on top of that, it will be whatever kind of modular unit rate growth we can deliver.

Okay. Great. And then just going back to your guidance again, I think you reiterated that you're expecting to have these duplicative cost structures for ModSpace similar to how you did with Acton. I'm just trying to pair that with some of the comments that you guys made on consolidating to 120 locations this quarter. So the assumption is still that costs will be associated with some of those stores that are being planned to consolidate?

Yes. That's like -- the progress on the integration has been tremendous. The first step is kind of picking your operating locations and concentrating -- organizing your personnel around them. We've not exited all of those lake locations that Brad described as idle. So we still incur that cost, and that real estate liquidation or consolidation strategy will play out, really, throughout the course of 2019 and into 2020.

Okay. Got you. And then just lastly on modular space units on rent, I think that only increased about 0.1% pro forma versus close to 2% in prior quarters. So is the right way to be thinking about it, really, that you guys are going to be pretty flattish pro forma growth kind of as you digest this acquired fleet for the next several quarters? Or would you expect that to reaccelerate?

Yes. Tim and I have said, I think, these markets are going to present probably a 2% to 3% growth opportunity. As we roll forward, just given the indicators I mentioned before, we are also quite frugal with our capital and very focused on driving rate, the VAPS expansion as well as the rate optimization. So we've kind of -- so we'd be comfortable with a 0% to 1% increase. I do think we've had some significant, let's say, distractions the last quarter as we navigated, and the fact that we ended the quarter with a -- basically a flat unit on rent is actually quite pleasing than it was in line with my expectation. So at this 0% to 1% as we complete this integration.

And our next question comes from Phil Ng from Jefferies.

Based on the momentum you're seeing in 3Q, your implied 4 key guidance seem somewhat conservative. Are there any dynamics such as seasonality we should think of? And it was helpful that you kind of called out some of the initial drag you may see from the duplicative costs. But can you kind of size it up, from a margin impact at least, for the next few quarters [ what ] that headwind could be?

Yes, Phil. I'll start and Brad, you can supplement here. Obviously, we took about a month or so post closing the ModSpace acquisition to issue the most recent guidance so that we had a clear understanding of the revenue outlook as well as more detailed progress on the integration plan and timeline, and we're confident in the range we put forth. With any major acquisition, there are a lot of moving pieces, some known and some inevitably unknown. One example I'll point out that was obviously known, you'll recall that ModSpace historically had a higher contribution of sales of new units in the revenue than WillScot. And in Q3, we completed a major project for hurricane recovery in the U.S. Virgin Islands that contributed approximately $27 million of revenue in the quarter on a pro forma basis, and that's probably about $1.5 million of gross margin in our reported Q3 results and -- with most of the revenue booked preclose. So that's just one example of something that's in Q3 but probably wouldn't be in Q4 so much. And there are opportunities and risks on both sides of the ledger. So if we have continuing acceleration in pricing, pull-forward synergies, that would obviously help Q4. But if there is disruption on the volume side or fleet transfers or other disruptions, that could be a temporary headwind. So we take all that into account when putting together the guidance.

The only other bid I would add is, just to remind folks, that while idling and consolidating production to 120 branches is a significant enabler, right, the real estate is only about 20% of the cost synergies we talk about. So it is a very important step, right, which then allows us to get along with particularly some of the people reduction and the other associated cost savings so significant milestone that, in and of itself, real estate consolidations less than 20% of these cost synergies.

That's really helpful color and that's my follow-up, Brad. The integration of ModSpace seems to be coming along quite well. What are some of the other major hurdles that we should be mindful of in next few quarters that could be something that could be a negative if execution was formed but obviously, the upside potential from a synergy standpoint ramping up a little further?

My view, this is Tim, is the next major milestone is the systems cutover for the remainder of mostly the back office is the way to think about it, so our accounts receivable, accounts payable, financial systems, et cetera. So in terms of how we've planned the cadence of the integration, I think, for very good reason, we focused on the field network first and in particular the sales and operations teams in the field, getting those stabilized and organized as quickly as possible. Brad mentioned a gathering of over 500 of our colleagues in Phoenix for a sales orientation and training, which took place a couple of weeks ago and then getting the commercial team organized and working out of the same system as of November 1 is a huge deal. That means territories are organized. We've got a single method of pricing. We've got value-added products being quoted. That's a big deal, and that'll drive top line momentum we expect going into 2019. The next thing we have to do is get the rest of the systems cutover complete, and that's a early mid-Q1 event.

That's right.

Perfect. And just one last one for me. Price mix has, obviously, been very strong, tracking the double-digit range on a pro forma basis. You provided some great color how to think about the VAPS piece. But how should we be thinking about some of the runway you have on the like-for-like pricing piece? Obviously, capacity utilization is picking up positively, and you've talked about how the outlook from demand is firming up as well. And obviously, the industry's gotten a little more consolidated as well. So can you kind of help size up that opportunity for us?

I think, first, I would say, there's still some more work to do for us in that regard. I mean, we now have all the historical transactions from Acton and the ModSpace as of closing hours. So we're running that through the price optimization, the third-party provider that we use to really make sure we understand that at the appropriate level by end-market segment, by customer type, et cetera. So there's absolutely opportunities. I mentioned before the $138 million of revenue upside is just assuming we deliver VAPS at the rate we were. It does not include further price harmonization, et cetera. So, I mean, one other way I would think about it is if we've been delivering 10%, 11%, 12% year-over-year rate growth and about half of that have been from rate, I would say, sustaining that in the 3%, 4%, 5% range is not a concern for me at this point.

And our next question comes from Scott Schneeberger from Oppenheimer.

A fine-looking quarter for sure. The guidance maintained, you touched on a little earlier. But could you guys address the swing factors, what would put you at the high end and the low end of the 2018 guidance? And maybe, Tim, what you mentioned about ModSpace Canadian operations and how that fits in.

Yes. I mean, we've touched on it a bit. Obviously, there's potentially rate upside based on the momentum that we've seen heading into the quarter. To the extent, cost synergies can be pulled forward, that could move the needle quickly. There have been -- as Brad mentioned, there's been a lot going on in the branches. So any disruption that impacts volumes, either in the U.S. or Canada, could be to the detriment. If you think about Canada, specifically, I wouldn't point to kind of integration disruption up there as like a cause for the year-over-year decline, I kind of went into the mix, the different dynamics coming from the ModSpace portfolio relative to the WillScot portfolio. And it's neither good nor bad. It's just that, that portfolio tends to have more concentration in it project-by-project. So depending on what project you're serving, your units may go on or off rent at different points in time. So I don't have any fundamental concern up there, and as you look at the Canadian metrics, you do have several sequential quarters of stability up there, which is, I think, my expectation going into the remainder of the year for that segment.

Tim is right. I mean, what we do in rate, in volume, in the remaining month and a half of the quarter is interesting more for the next quarter than for this. It's really about the realization of cost synergies if we are able to attain those quicker than we expect or not, or we realize any delay in that.

Yes. The only other thing I'd add is the sales business.

Yes.

That's the one piece of the business that's less easy for us to predict. And if you recall Q2, we reported kind of flat pro forma revenue in Q2, despite some really good traction in the leasing operations. That was just driven by the timing year-over-year of sale projects. And then I mentioned, ModSpace in Q3 had a single project that generated $27 million. So you do have some variability there potentially, and that is why, over the years, we've really concentrated on optimizing the leasing operations and focusing the types of sale projects that we pursue.

All right. This may be a premature question, but any greater visibility into the non-quantified incremental synergy that, beyond the $60 million that you mentioned, I recall efficiency synergies that were in the pitch, that when you announced the deal, things like efficiencies from a consolidated footprint, procurement, repair and maintenance. Any early work on that would be appreciated if you could share.

No, I think it's quite early to get into that. I think we've indicated our focus is combine this business safely and efficiently, right, focus on those items that are most actionable and that we can most easily control. I'd say, as we get into early next year, we will start to look at quantifying each of those, whether it's optimization of logistics or leverage with our supply partners, efficiencies as we scale these branches up. Suffice it to say, they are legitimate. And while they're not another $70 million, there's certainly some need in that -- in those opportunities. But we need a little more time. Let's stay focused on what we're doing, safely integrate these 2, get the $70 million of cost synergies behind us, get the $138 million of VAPS potential that we mentioned underway, right? And then as a normal course of business, of course, we'll always look at doing things more efficiently and cost-effectively, and we'll get into that as we look forward next year.

And our next question comes from Ashish Sabadra from Deutsche Bank.

Congrats on the solid quarter, congrats on some great progress on the integration front as well as launching that exchange offer. So my question was more on the pricing. If I look at the U.S. Modular unit, the average pricing is $549. But as we think about what's the pricing for the units which are rented out now -- because your average is still being cracked down by units which are already in rent. So is there a way for us to think about where -- like where can this pricing go when we include all the box and pricing optimization on a unit basis? Where can that $549 go?

Yes. So I'll start, and then Tim can [ apine ]. I'd ask -- I'd refer you back to some material we published late September of last year, it was the last time we published delivered rate information for the box itself and the VAPS. The -- if you refer back to that, I do think that's a reasonable indication as to where Williams Scotsman had been performing as a stand-alone. It's probably something you could use modeling forward. So I don't want to try to recall those numbers off the top of my head. We can take that as an off-line with you. But the $549 is inclusive of the base box itself and probably something like $140 of VAPS inside of that. The delivered rates as of September of last year on an LTM basis were substantially higher than that, and we continue to drive improvement from those levels. So we can take a look at that presentation and take this off-line.

Another way to think about it, Ashish, is we've said of the 13.4% growth, 60% is coming from the modules. And so that's a 8% clip, right, which is pretty healthy in our business, and then the remainder is coming from value-added products, which you think about separately in model, that $125 million, $138 million opportunity. And what we can do with that 8% year-over-year growth rate is a function of a lot of things. It's a function of the price optimization tool, it's a function of the starting point of the portfolios we've acquired and other market factors as well. So that's the variable that will be focused on heading into next year.

And that's helpful. And maybe a question on utilization. So we saw some pretty strong utilization, particularly in the U.S. It went up to 74.9% now. Can you continue to drive utilization? And does the consolidation, the integration helps you drive further utilization?

Absolutely. So I think, as Tim's mentioned on prior calls, our focus is not to increase the size of the fleet other than through M&A. It's to put more of the units we have on rent. Given the pulled effect of the Acton, Tyson, ModSpace and Scotsman fleet, I would say, we have more of the right type of units in the right places. As a historical reference, this business ran from 82%, I believe, back in '07, '08 when it was last public as well as, I think, I've mentioned before, we drive kind of our internal by end market, by product-type utilization towards an 85% target. So it's absolutely upside above the 75%. The business has operated there before. And I think that's absolutely a capital efficiency advantage, if you will, associated with the larger combined fleet.

That's very helpful. And maybe one final question on the ModSpace. Again, you've owned it for a very short period of time, and the sales integration just happened as of 1st November. But I was just wondering if you can share any feedback that you've received either from existing ModSpace customers, or what kind of traction have you seen on trying to sell VAPS into the ModSpace customer base?

Yes. I'd say, it's quite early to say. We just started offering the value proposition to the new ModSpace customers about a week ago. I can say, based upon the Acton experience, it was received quite well, but we'll need a few more months to let that play out. I would say -- it's fair to say, more than half of the customers were already customers of Williams Scotsman, right? So it's not like we're dealing with an entirely new customer group that's never had the experience of the Ready to Work offering. So I'm quite confident that we'll be able to -- we'll be successful on offering that, but it's early to say. We're just a week into it.

And our next question comes from Kevin McVeign (sic) [ Kevin McVeigh ] from Crédit Suisse.

Just one follow-up on the energy business. You did see some nice step-up. I guess, 2 things, Tim. Where do you think the monthly rental rate can go? And could you give us just a little bit of context of where that peaked in the last cycle?

Okay. So we're talking about -- are you referring specifically to the other North America pricing?

Yes.

Yes. So that's a -- it's a good question, and I'll first give you an example of about a standard size unit that would have run it in the Edmondson market back in 2013 or 2014, back when we had peak oil. That unit today in the U.S., Brad, is what, $600 a unit?

Yes.

A 12/60 standard unit. At peak oil up in Edmondson, given you're servicing the Fort Mac market from there, that could have been pushing $2,000 per month, per unit. So that's kind of the order of magnitude that we saw back during that cycle. Who knows if you get back there, our business is less than 60% utilized across the entire segment, and I think that's probably representative of where the competition is well. So I think it'll take some time for that to tighten up, but what we have seen in, really, I mean, the last 4, 5, 6 quarters, it looks like stabilization of average pro forma rates across that business. So any resurgence in major oil and gas activity in Western Canada and Alaska, specifically, would begin to drive that metric.

Got it.

Yes. The only thing I would add, Kevin, is these pro forma rates, right, include, obviously, all of Canada. So you should really think of Canada as kind of 2 halves. Eastern Canada performs much like the U.S. So the rental rates we're experiencing there are very similar opportunity in VAPS, very similar utilization in Eastern Canada. So you kind of -- you can almost bifurcate that Canadian business from a unit-on-rent perspective into the 2 halves, and the rate opportunity, if you will, other than the organic and VAPS we're talking about in the U.S., is really the western half in Alaska, that which would be driven both -- mostly by continued oil price improvement.

Got it. And can you just remind us what's the split at that business between the Eastern and Western?

I'd say, about [ half/half ] on the unit on rent. We can give you a better figure. It's a pretty simple way to think about it.

All right. Awesome. And then just you've always given great detail, but with the warrants, can you just remind us what the share count will be when this is all cleaned up? And what happens if you don't get 100% participation?

The -- I'd say, the second question it's -- we're not going to provide much more context here. But it's a voluntary offer. So really, the warrants are outstanding today. If somebody doesn't participate, they'll be outstanding in the future. If you think about the warrants that are eligible, there are 69.5 million of them, each equivalent to 1/2 a share, and all of those are included, if you look at the last page of our presentation, in the 153 million fully diluted share count. If all of those -- as we say in the filings, if all of those 69.5 million were exchanged at the exchange ratio, the underlying 34.75 million shares would become 12.6 million. So there would be that reduction of approximately 12 million shares relative to what we've presented on Slide 27.

[Operator Instructions] And our next question comes from Sean Wondrack from Deutsche Bank.

When we think about sort of your pro forma EBITDA of about $352 million, can you kind of frame for us what is maintenance CapEx on this size of a business at this point in time?

We've said that maintenance CapEx, inclusive of ModSpace, will be between $90 million and $100 million of net capital.

All right. And have you had any preliminary thoughts about CapEx as we enter kind of 2019? And where do you think that will shake out?

We think about it often. It's -- I think that's the best guidance we'll give you for now.

Yes. The only thing I would add is, above and beyond that, we will continue to fund the VAPS growth, right? So you can think of $20 million, $25 million as a proxy there to continue the acceleration of VAPS. The maintenance capital, if you will, covers VAPS at its current level. So as we continue to expand, that will -- I mean, that's such a compelling investment, and we'll make that one.

Yes. And just so we're heading into the budget cycle for the first time with the combined business and early in the integration. So looking at capital allocation across all the branches, all the fleet that we own, is a absolutely critical part of the integration process as we head into next year, and we're in the early stages of that.

All right. That makes a lot of sense. And just because you mentioned it, when you think about VAPS and sort of the strengthening of VAPS, right, to your organization, what's been the response sort of from the sales force? Do they feel empowered? Is it making their job easier because they have sort of more to offer customers? Can you talk about that for a second, please?

Yes. I can just give some anecdotal, but first, I would start with the fact that, as Tim mentioned before, ModSpace had been both engaged with third-party provider, driving rate optimization as well as driving VAPS. They were primarily using third-party arrangements for their furniture supply, but they were headed down the journey. So that's actually given us a very encouraging base to build upon. And then when we had everyone together, that was the 15th of October for that 500-person training and integration session, I would say, the reception was extremely bullish. Folks are excited about it. It does give them a very compelling value proposition, right, to take to their customers. And by the fact that we own that furniture, right, it's located in all of our 120 depots, it absolutely makes their job easier versus trying to arrange a third-party lease releases opportunity. So it's compelling value proposition for the customer. It's a lot easier for them because the furniture is already stocked in all the branches. All they have to do is lease it, right, and that drives highly accretive returns for us. So kind of a win, win, win, if you will.

All right. That's good to hear. And then just the last one out of me. I appreciate all the Q&A on the call. When you think about sort of the industrial outlook for next year and some of your major end markets, obviously, we've had a bit of a pause and some of the momentum, at least to the stock market, et cetera. Is there anything that gives you pause as you're moving into next year, as you're talking to customers? Or have you -- do you still see a pretty relatively robust demand buy [ form ] here?

Very robust. Yes. There's nothing I see or feel from customers that would give me cause. Frankly, the indicators I mentioned before, there's nothing that gives us concern. The one wild part is this geopolitical black swan event, which we can't control, we don't predict. I don't expect there'd be one, but I do absolutely know what we would do if we ever experience one of those. We've got the best operating platform in the industry. We can control and cut off capital as and if needed, and we'll continue to harvest rate growth. So -- but as far as the end markets, I found the last few weeks have been interesting because there's nothing I see in any of our indicators that would support things substantially slowing or certainly turning.

And I'm showing no further questions at this time. I would now like to turn the call back over to Brad Soultz for closing remarks.

All right. I think we've covered off all the bases. We appreciate everyone's interest in the company and look forward to speaking to many of you soon. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a wonderful day.