WillScot Holdings Corporation (WSC) Q1 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the WillScot Corporation First Quarter 2020 Conference Call. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Matt Jacobsen, Vice President of Finance. Thank you, and please go ahead, sir.

Thank you, and good morning. Before we begin, I'd like to remind you that we will discuss forward-looking statements 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 2019 Form 10-K and other various SEC filings. 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 this morning 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've included reconciliations to the comparable GAAP information. Please refer to the tables and slide presentation accompanying today's earnings release. Over the next several days, we'll also be filing our 10-Q with the SEC for the first quarter of 2020. 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 and our first quarter results and provide an update on recent key developments in our business and in our markets. Tim will then provide some historical perspective on how our business operates across market cycles and give a bit more detail on our outlook for the rest of 2020 before we open up the call for questions. With that, I will turn the call over to Brad.

Thank you, Matt. Good morning, everyone. I'd like to welcome everyone to WillScot's First Quarter 2020 Conference Call. Please turn to Slide 7 of our Investor Relations presentation, which highlights our outstanding Q1 financial results as well as our revised 2020 outlook. Both our Q1 results and our strong outlook are particularly pleasing given the unprecedented and unexpected impact of the COVID-19 pandemic. I'm humbled by the compassion, grit and perseverance of the WillScot team, who've taken immediate necessary steps to protect each other, while actively deploying our temporary modular Space solutions in every major metropolitan area in North America in order to help our customers and our communities persevere through this pandemic and continue to thrive into the future. First, our Q1 revenue of $256 million is up 1% over the same period in 2019. This was driven by continued outperformance in our U.S. Modular segment, in which leasing and service-related revenue was up 6% year-over-year on a 14% improvement in rate. This is the tenth consecutive quarter of double-digit rate growth, and we expect this momentum to continue as we look ahead. While we'll delve deeper into this in a few minutes, I'd remind you that 40% of the rate improvement is driven by increased penetration of our value-added products and services, or VAPS, and the remaining 60% by our price optimization tools and processes. Next, our Q1 adjusted EBITDA of $90 million is up 7% versus the prior year. The continued revenue mix shift favoring leasing, combined with our ongoing cost reductions, result in a 210 basis points improvement in EBITDA margins, which were 35% for the quarter. And finally, our Q1 free cash flow of $8 million represents a $34 million year-over-year improvement, and is our fourth consecutive quarter of positive free cash flow. Finally, as we turn to our revised 2020 outlook. While the COVID-19 pandemic did not impact our first quarter financial results significantly, it has certainly introduced uncertainty in our 2020 outlook related to the severity and the duration of any related demand disruption. Despite this uncertainty, we have a high degree of forward visibility, given 90% of our adjusted gross profits are associated with the recurring leasing of long-lived assets of average lease durations of nearly 3 years. We've already reacted quickly to the dynamic market conditions, reducing both variable costs and CapEx. Our revised 2020 outlook contemplates demand reductions ranging from 10% to 30% versus those of 2019 levels, with durations ranging from just through the second quarter to through the balance of the year. The midpoint of our revised EBITDA guidance range of $350 million to $400 million EBITDA prior to any contributions from the pending Mobile Mini transaction does represent a $45 million or 11% reduction from our original guidance, which was issued prior to the COVID shock, yet still growth of about 5% over prior year. The midpoint of our revised net CapEx guidance range of $100 million to $150 million is $45 million lower, respectively. Accordingly, adjusted EBITDA minus net CapEx is expected to be between $240 million and $260 million this year. This represents an approximate 25% improvement over 2019, and is in line with our original 2020 guidance as we were able to offset reduced revenues and adjusted EBITDA driven by these lower-end market activity levels, with lower capital spending to manage free cash flows. I'm confident we have the right team and the right playbook to respond in the short term, while maintaining our enthusiasm and commitment to the future strategic growth, and specifically, the truly transformative combination with Mobile Mini. Now I'd ask you to turn to Slide 10, and take you a bit under the hood in order to provide some additional context as to what we are seeing with respect to the COVID-19 pandemic shock. While the leading indicators of demand across our diverse end markets were very strong throughout Q1, they have decelerated into April. The delivery dates associated with new orders have also extended further out into the future than typical, reflecting some customers' uncertainty with respect to when new projects start. Starting with the graphic at the bottom left, the green bars represent our monthly order rates for the U.S. Modular business. The gray shadow bars behind the green bars represent the order rates for the same period in 2019. You'll note that through the first quarter, our monthly order rates have been accelerating and were 10% above those of the prior year. Since the end of March, order rates have dropped 30% sequentially and are down 20% versus those of the prior year. The chart on the bottom right depicts our current book of pending orders as compared to the same point in the prior year. The green portion of the bar reflects the portion of orders, which have delivery dates over the next 4 weeks, while the gray reflects those scheduled later. You'll note that while our overall pending order book is up 11% over prior year, pending orders that have scheduled delivery dates over the next 4 weeks are down 25% versus what was pending over the next 4 weeks, the same time last year. While demand for new projects is less certain, it's important to note that we've not experienced unusual reductions in pricing, VAPS penetration or collections. We've not experienced increases in early returns, and we continue to service our customers as an essential service provider from our fully operational branch network. Now turning to Slide 11. VAPS growth has consistently been driving 40% of our overall rate growth. Based upon the VAPS penetration we achieved on new units delivered over the last 12 months, we expect another $125 million of annualized revenue growth. In the first quarter, the average rate of VAPS value per month across all units delivered prior 12 months was $276, which is up 6% over LTM levels of the prior year, and $121 above the average level of the 88,000 units currently on rent. The associated growth in revenue will occur over the next 3 years as the units currently on rent are returned once their current projects end and are redeployed at current level of VAPS penetration. While the VAPS growth drove 40% of our overall 14% rate increase, the other 60% was driven by modular office rate optimization. Although we do not disclose specific rates achieved on new deliveries of offices, they are approximately 20% higher than the average across the on-rent portfolio, and represent a similar convergence opportunity. Combined, these 2 idiosyncratic and foundational growth levers provide confidence that the demonstrated double-digit rate growth achieved over the last 2 years can extend into the future. Now please turn to Slide 12, and I'll expand a bit on our demand outlook across our diverse end markets at a more granular level than normal. First, the stack bars on the left represent the relative size of our diverse group of end markets, with those most corresponding to nonresidential construction, grouped at the top and dark green and those corresponding to commercial industrial in black. Starting with nonresidential construction markets. We started out the year very strong with deliveries up 4% to 5% year-over-year. While some active projects have been temporarily impacted, we expect it will continue, albeit at a slower pace. We expect new project starts to be down 25% to 50% through at least the second quarter. While infrastructure-related stimulus could be a catalyst in the medium term, we expect both active and new projects will require additional space in order to accommodate appropriate social density and project site screening, which could provide more immediate opportunities. Shifting to commercial industrial markets, which similarly started the year strong with deliveries up 4% to 5%. Short-term events, represent only 2% of our revenue, were immediately impacted and are not expected to materially recover this year. While retail was also immediately impacted, we expect offsets from warehousing and distribution. Manufacturing and professional services remained stable, and as with construction projects, we expect both active and new customers will require additional space in order to accommodate appropriate social distancing and will also provide some more immediate opportunities. Energy markets, overall, are largely stable, with declines limited to upstream energy, which represents less than 5% of our revenue. Education markets have remained stable and could also potentially provide some catalysts as schools make requisite adjustments in order to accommodate social distancing norms. And finally, government and health care markets were normally contributing a very small portion of our revenues, have been quite robust in the most impacted communities as we reacted immediately to help combat the COVID-19 pandemic. We'll continue to monitor demand across our various geographies end markets, and have a disciplined process through which we control and allocate our capital. Given the dynamic nature of our end markets, we've increased the frequency of these planning and control cycles. One of the key strengths of our business model is the discretion and flexibility that we have over capital spending in the short term, coupled with our long average lease term, long-lived assets, which allow us to reallocate or reduce capital spending and drive free cash flow to the extent markets do not present growth. Again, as noted, I expect the idiosyncratic growth levers inherent in our business, such as our unparalleled scale, embedded M&A-related synergies and our commercial strategy to drive lease revenue growth organically through rate optimization and penetration of VAPS to our Ready to Work solution will provide continued growth, largely independent of market cycles and will unfold predictably looking ahead. Turning to Slide 13. In this environment, we all have a heightened sensitivity around liquidity. And WillScot's overall liquidity position, I think, highlights the value and resilience of our business model. We are fortunate to have a business that gives us great flexibility to manage our discretionary free cash flow. We've generated positive free cash flow for the past 4 quarters, all while completing the major integration and growing our lease operations organically in 2019. Our business will be more cash-generative heading into Q2 and Q3. So in the near term, our primary source of liquidity will simply be the internally generated free cash flow. As such, we repaid about $10 million on our revolver balance in Q1 rather than drawing down the facility like as many companies have. In the top chart, you'll see that we continue to delever in Q1 by both growing adjusted EBITDA and reducing debt, which we'll continue to do in Q2. If needed, of course, we have the ability to draw on the ABL and have no concerns regarding covenant compliance, even in our most severe modeling scenarios. The bottom chart illustrates that we had approximately $500 million of additional availability on our ABL revolver as of March 31. So altogether, we believe we have ample liquidity, with which to execute all realistic demand scenarios. Finally, turning to Slide 14. While our overall liquidity position is strong, we nevertheless have taken aggressive action to reduce variable cost heading into Q2 in order to align them with the demand environment and maximize our results. The right-hand chart illustrates how there are significant variable elements of our cost structure that we can flex in the short-term to preserve margins and free cash flow. There are also semi-fixed elements in cost of leasing and SG&A that are faced the protracted demand downturn we can action and drive decremental margins down to or below 50%. To date, given the uncertainty around the duration of the downturn, we've actioned the variable components aggressively as listed on the left-hand side of the page, and we have the playbook ready to face with more draconian scenarios. Tim will touch on this more later, but capital expenditures are -- Tim will touch on this later, but capital expenditures are more -- are almost entirely variable in the short term. Our organic guidance implied an increase in net CapEx of 2020 given our plans to support volume growth. Now likely faced with the reduced volume environment, we've cut our net CapEx guidance by at least $50 million and expect Q2 net CapEx to be down approximately 20% year-over-year. As always, we'll let order delivery data that we see from the field real-time drive our decision-making. We are reassessing capital allocation biweekly to respond to these dynamic market conditions, and relatively wide net CapEx guidance range reflects the different demand scenarios that could unfold in the second half of the year. With that, Tim is going to take you through some of the historical data from the last recession, which we think will be helpful for investors, before hitting a few of the additional highlights from Q1. Tim?

Thank you, Brad, and good morning. Turning to Slide 16, given the macroeconomic backdrop, we wanted to revisit some of the pages we provided back when we went public, give our perspective on how WillScot performed in the last recession. It also highlights some fundamental differences that we think work to our advantage looking ahead. The bar chart in the middle of the page shows our leasing, delivery and sale revenue for the last 16 years. So a couple of observations. First, due to our long lease durations, unit on rent volume slowly declined post-GFC, bottoming in 2011. We can forecast pretty easily the churn of our installed base, which did not change following the GFC. There simply weren't enough new projects starting to replace those that naturally ended due to the prolonged drop in nonres construction starts. Secondly, during the post-GFC period, we harvested cash from the business for almost 7 years. Total fleet size contracted as we increased rental unit sales with no major fleet reinvestment until 2015. So we clearly lagged the nonres recovery due to our captive ownership structure. As a stand-alone public company today, we will be aggressive in leading the recovery. Third, at the bottom of the page, you see our revenue mix has changed dramatically. Over 90% of revenue today comes from our leasing operations versus only 64% in 2007. As we've discussed, sales revenue is more volatile, and we've deemphasized it strategically. So we have greater forward visibility into our revenue streams. I'll also point out that we had a high concentration in the education market, which accounted for roughly half of the volume decline post-GFC, as state and local budgets tightened. We have no such outsized end market exposures in the portfolio today. Lastly, heading into the remainder of 2020 and 2021, we've transformed the scale of the business and have a much more rational industry structure, which we believe results in a healthier balance of supply and demand. Turning to Page 17. This chart illustrates how our capital investments are almost entirely discretionary, even over extended periods of time, given the longevity of our assets, which gives us significant flexibility to manage free cash flow depending on market conditions. The green bars show our unlevered operating free cash flow, and the gray line shows our net CapEx, exclusive of acquisitions. Both due to the sharp drop in non-res as well as our former parent company strategy, you see that net CapEx actually went negative for 2 years, meaning that we sold more fleet than we reinvested, and net CapEx was a source of cash to the company. There was no material reinvestment in the U.S. fleet until 2015, which is possible given that Modular units have 20- to 30-year useful lives and have no real technological or mechanical elements to maintain. The business generated approximately $900 million of unlevered operating free cash flow in the 7 years following the GFC, and our leasing and services revenues today are roughly double what they were back in 2007. Obviously, this extreme example shows the business focused primarily on cash generation for an extended period, and at the expense of market opportunity, which is not how we would operate today. Instead, we would have the flexibility to delever rapidly, reinvest in organic growth earlier in the cycle, further consolidate our markets and return capital to shareholders, with a great deal of flexibility and opportunism. Since 2017, investors are familiar with our approach, allocating capital to value-added products, fleet refurbishment, strategic acquisitions and deleveraging, while expanding our overall value proposition to the market. History illustrates how a lower-demand environment will allow us to redeploy capital and drive shareholder value. Turning to Slide 18. Let's spend a few minutes on the mechanics of portfolio churn and the implications for average rental rate, as this is instructive in thinking about where our portfolio KPIs go from here. Based on the current spread between prices on our most recent contracts versus the portfolio average in the U.S., we see average rental rate growth well into 2021, irrespective of current market conditions, and we've seen this play out historically. The left-hand chart shows our average rental rate in dotted gray, and our spot rate on new deliveries in dark green. During the GFC, delivered spot rates peaked at the end of 2007, and were about 10% above the average rental rate across the whole portfolio. Spot rates then plateaued for 12 months before declining approximately 20% to trough levels in 2011. Importantly, due to our long lease durations, average rental rates take a long time to catch up to spot rates, and average rental rate peaked in Q4 2009, roughly 15 months after the spot rate peak. Lease duration also moderates the amplitude of the average rental rate cycle, which only dropped 7% from the peak to trough. So the mechanics of portfolio churn are fundamentally important, and we've made some improvements to them. We've put in place our centrally managed algorithm-based pricing tools in 2015, whereas pricing was manual and decentralized previously. We manage pricing on units beyond their contractual term today strategically, whereas there were only inflationary adjustments historically. And we have a much more rational industry structure today, each of these factors improve our ability to manage spot rates and average rental rates relative to 2007. Furthermore, average lease duration across our portfolio of 34 months is 17% longer than it was back in 2007, which extends the lag you see between changes in spot rates and changes in the portfolio average. As of Q1 2020, our spot rates were still increasing. And when you include value-added products, our combined spot rate is over 30% higher than the average rate across our U.S. portfolio. So that's more than triple the spread we saw back in 2007. These are the mechanics that allow us to look into the portfolio with some confidence, and believe we have embedded average rental rate growth well into 2021, irrespective of current market conditions. And as the market leader, we will be laser-focused on realizing rate performance in this market. Now let's briefly turn to Slide 20 and the more recent past of Q1, although it does feel like a long time ago. Year-over-year revenue growth was basically flat, but with another strong mix shift favoring leasing over sales. Core leasing and service revenue increased by 5.4%, offsetting the decline in sales revenue. Q1 of 2019 was really the last quarter when we saw any meaningful contribution from the runoff of the ModSpace sales business, and you can see this mix improvements clearly in the left-hand chart. Adjusted EBITDA increased by $6.1 million on flat revenues, and margins were up 210 basis points year-over-year as a result of cost reductions. I'll note in Q1, our cost reductions were partly offset by approximately $3 million of expense related to our biannual sales meeting, which is onetime and nonrecurring for purposes of our SG&A run rate heading into Q2. In the top right chart, as we saw in Q4, free cash flow continues to inflect positively, up $34 million on a year-over-year basis. I'll note, we did have roughly $5 million of real estate sales slipped from Q1, and we did accelerate payments to many of our smaller vendors in late March, so there was approximately a $15 million headwind to free cash flow on Q1 that is simply timing related. Jumping ahead to Slide 25, and a bit more on the free cash flow inflection that we started back in Q4. You will recall that net cash provided by operating activities more than tripled year-over-year in Q4, and Q1 was up about 2.5x versus prior year. Starting in Q4, we had multiple levers aligned to drive cash from operating activities. Top line leasing revenues have been growing with EBITDA margins expanding, another 210 basis points in Q1. Interest expense was down 9.2% in Q1, and working capital, which had been a headwind in the first half of 2019, has stabilized. We expect these trends to continue into Q2, although we will start to incur some cash costs related to integration work in the Mobile Mini transaction as we progress towards closing. At the bottom of the page, you are seeing a similar favorable trend in net cash from our investing activities. Net cash used in investing was down in Q4 of 2019 and Q1 of this year by 29% and 27%, respectively, on a year-over-year basis. These reductions resulted from our ability to manage the combined fleet more efficiently following completion of the ModSpace integration. Heading into Q2, as brad mentioned, we expect delivery volumes to be down 20% versus prior year, which means that delivery volumes will be similar to our Q4 and Q1 seasonal lows. So I expect net CapEx to be comparable to those levels and down approximately 20% from Q2 last year. With this volume trend, we will have invested below maintenance levels since Q4 of 2019, but with incremental growth capital allocated to value-added products. Given how dynamic the market environment has been, we have shifted to approximately a 2-week allocation cycle for fleet CapEx, so we will reevaluate capital allocations for Q3 based on the data that we see in June. Given the dynamic environment, on Slide 26, we provided a framework to try and help think about potential different financial outcomes in 2020. This is obviously an unprecedented economic disruption, but our business is such that we do have enough visibility to revise our financial outlook for the year, albeit down and with wider ranges than normal. Nevertheless, the punchline here is that, in pretty much every scenario, 2020 should be a year of modest EBITDA growth, and margins should be comparable and free cash flow is stronger than we assumed in our original outlook. Sitting here right now, we're planning for a 20% reduction of demand for unit deliveries in Q2 versus prior year. As Brad mentioned, total pending orders are up year-over-year, but due to market uncertainty, we expect many delivery and initial billing dates to slip into Q3. On the other hand, we don't see any near-term adverse impact on pricing, value-added products or lease duration, so this is primarily a sensitivity of delivery volumes and of variable costs. Brad already touched on the fixed versus variable cost structure, which gives us great flexibility to maintain margins in a declining volume environment. The sensitivity chart suggests a 60% decremental margin if we only flex our variable costs, and we believe decrementals dropped to at least 50% if we consider more structural cost reductions that we would implement if the demand outlook remains depressed in the second half of the year. So those structural reductions would support our run rate into 2021, if and when they are implemented, and we'll do it in a way that insurers were still in a position to lead the recovery. At the midpoint of our revised guidance range, we see revenues basically flat to prior year due to pricing and value-added products, offsetting the volume headwind. And adjusted EBITDA growth of approximately 5%, driven primarily by cost reductions and margins up modestly as a result. Most importantly, in the bottom right chart, EBITDA less net CapEx, which are the 2 biggest building blocks of unlevered free cash flow, is in line or above our original guidance for the year. This highlights the resilience of our business model and the value of long lease duration, coupled with flexibility in the cost and CapEx structure. And I'm proud of and grateful for the execution by our team in these unprecedented circumstances. With that, I'll hand it back to Brad for a quick update on the Mobile Mini merger, any closing comments and Q&A.

Thanks, Tim. So to sum up, I'm proud of our Q1 accomplishments and extremely confident in our revised outlook. Most importantly, I'm humbled by the compassion, grit and perseverance of the WillScot team in the face of the COVID-19 pandemic. We have the right strategy and the right team to continue to increase our long-term shareholder value, and I'm looking forward to the transformational combination with Mobile Mini. As we spent time with the Mobile Mini management team, it's continued to be reinforced how much we are alike, more than different, and the very similar strong cultures of the 2 companies. Together, WillScot's Modular Space solution and Mobile Mini's Portable Storage solutions will enhance the scope and reach of the value proposition that we bring to our collective customers. Equally as important, each company has very predictable lease revenues, long-lived assets and attractive unit economics, all of which drive long-term growth and value creation for our stockholders. These 2 great companies will certainly be even stronger together. With that, I'd like to thank you for taking the time to join us today. This concludes our prepared remarks. And operator, would you please open the line?

[Operator Instructions]. Our first question comes from Scott Schneeberger of Oppenheimer.

Glad to hear you're doing well. The -- I guess I'd like to start -- looking at Slide 12, thank you for the very detailed presentation deck, by the way. I'm just curious, could you elaborate a little bit on additional workspace for social distancing? Are you seeing anecdotally any orders for that at this point across end markets besides government health care? And then also this offset of warehousing and distribution in the commercial and industrial category, could you please elaborate on that as well?

Scott, it's Brad. Thanks for joining us. Yes, we're absolutely seeing more than anecdotal evidence and the need for additional space on project sites, office sites, schools, et cetera, as everyone contemplates the reality of the new social distancing norm. So that's something we're working actively with customers on, in some cases, it's reconfiguring furniture in the office they have. In many cases, there's going to be a requirement for more space. In addition to just, let's say, this social distancing within an office, at a job site, we're also seeing the likely need for additional buildings to screen folks as they're coming on to job sites, especially in this kind of a restart phase, if you will, as these economies come back online.

And just staying on this slide, a real quick follow-up, on the energy category, down not too bad in the first quarter. I don't know how much you want to discuss about what you've seen in April, but just curious because we've certainly seen a lag down, and thoughts on how you're managing that business.

Yes. The upstream portion is such a small percentage of what we do. It's largely been stable for the long term, certainly, since 2017. So I don't expect significant further declines just given the mix of services we're providing that customer group.

All right. And then, Tim, I guess, bringing you into the mix. Thank you for the discussion on decremental margins. And just curious to hear your thoughts on what the EBITDA cadence may be over the balance of the year. I know it's very difficult to predict, but just kind of consideration for second quarter impact, adverse impact? And then various scenarios of how it may look in the back half depending on duration of social distancing?

Yes. We clearly didn't give any sequential EBITDA guidance for a reason, just given the -- really the inability to predict how long the demand disruption lasts. I'd expect Q2 to be impacted probably the least relative to each of the quarters, just given that more of our current installed base will be generating lease revenue. And the churn of the portfolio is very slow, but if demand is depressed through the end of the year, that EBITDA run rate would decline through the end of the year. So it really all comes down to what is your view of the severity and the duration of the disruption. I think we've got a very good view of Q2 at this point, and the installed base is performing exactly as we would expect.

And just one more quick one, if I can sneak it in. Just a thought on the pricing and the mix on what was the contribution from rate and what's the contribution from VAPS. You gave the current update and you're still investing in that. So I'm just wondering if that contribution mix would change over the balance of the year on what you're looking at right now? Or should that stay fairly consistent?

Sitting here right now, we have not changed our rate strategy, and we're continuing to drive value-added products right now. So sitting here right now, I don't expect the mix to change. We did provide kind of the historical view of what happened during the financial crisis. We have not seen a change in delivered spot rate trajectory. It did happen historically. But I think the beauty of that chart and the beauty of lease duration in this business is that 15-month lag that you saw between the change in DSR and the change in ARR. So again, depending on how severe and how long this goes, I mean, there are scenarios where pricing just continues to pop right through demand disruption over time. Because, again, the lease duration in the business today is 17% longer than it was back then, which logically extends that period of time between a DSR change and an average rental rate change.

Our next question comes from Kevin McVeigh of Crédit Suisse.

Great, and hope you all are staying safe. Brad or Tim, did you see the average lease duration to 34 months? If so, that -- I think that's up from 28 months, is that right?

Yes It's been up over 30 for some time -- this is Tim, Kevin. Going back to the financial crisis in 2007, it was in like that 27-or-so month range. And what you've seen consistently over the last 12, 13 years, is that lease duration has ticked up by a little less than 1 month per year over that entire period. It's been a very long-term consistent trend, and that's what provides the fundamental stability of the lease portfolio. You saw that trick move, Kevin, like when we acquired the Acton portfolio. It dropped down a bit, Acton at a higher mix of smaller, single wide mobile offices. Then you saw it pop back up a bit when we integrated ModSpace. They had more complexes that tend to stay on rent for longer durations. So really, the only changes in that metric over the last 2 years have been fleet mix driven by acquisition. But if you just take a longer-term historical perspective, it's been a steady march upwards.

That's helpful. And then the chart where you looked at kind of the order versus kind of the delivery scheduled, is there any way to frame how much of kind of the delay in the scheduling is, the physical shutdown versus just hesitancy? Or is it all physical shutdown?

It's more weighted, Kevin, to uncertainty with new starts, right? So the projects -- the few that have been impacted, again, as noted, are largely starting to come back online. They've just remained on rent. So yes, that shift is largely attributed to new orders, with less uncertainty as to when specifically they'll start.

Great. And then just one quick one, and I'll jump back in. On the -- well, many congrats. I was surprised the timing didn't get pushed out a little bit just given with the government shutdown. Any thoughts around that? Or just any updates on synergy targets? Obviously, given what's going on, there's a pretty fluid situation.

The only thing I'd like to add, I mean, we've been working very closely, we probably have close to 100 colleagues from both sides, very organized process, developing the integration plans, that's going extremely well. And that's all just providing confidence in the $50 million cost synergies we've articulated before. And we've said that we're confident in closing this in the third quarter, which we are. Look forward to that.

Our next question comes from Courtney Yakavonis of Morgan Stanley.

If you can just comment, maybe first, I just want to confirm, all the units that you guys have on rent right now are collecting lease revenues, or have there been any changes with certain customer groups? And then maybe secondly, can you also just address kind of the range of CapEx outcomes for this year? You've kind of outlined the range of potential revenue scenarios that you're looking at from either down $10 million to down $30 million just in 2Q or for the balance of the year. But Tim, you mentioned how, in prior cycles, CapEx has gone net negative. So how bad would revenues have to be for that to really be a scenario this time around?

Yes. This is Tim, Courtney. Let's first start with the installed base. And I commented, it's performing exactly as we would expect. We have not seen any changes in pricing, return activity, rental duration or payment activity. So clearly, there's risk there going into Q2. But if you look at total receipts per week or number or percentage of the portfolio that's paying per week or the average payments per week, there have been no changes through the end of April. So the portfolio is performing as we would expect, and there have been no kind of unusual discussions around changes in rental terms. But we always work with our customers on a regular basis. In terms of the CapEx range, if you look at Page 26 of the presentation, we've provided, I think, a realistic range sitting here right now for the scenarios that we see. So based on the $30-ish million of the net investment in Q1, that's kind of in the books, I'd expect something similar to that in Q2, just simply to support the demand that we see right now. So that's a pretty good run rate that we've been on since Q4, and we'd need to see a material further reduction in demand to take CapEx down significantly lower. So in the sensitivity charts, if you go to the extreme example of maybe it's a 30% demand decline through the end of the year, sustained going into 2021, that's a very severe scenario in our mind. That would take CapEx down to the $100 million-or-so level, and that's after having already invested $30 million or so in Q1. So that's -- you're beginning to see some very material cuts in that scenario. And we'd be obviously taking a hard look at 2021 at that point as well, but way premature to make that type of extrapolation.

Okay. That's helpful. And then you also, I think, broken down on Slide 12, just the different end markets and what you're seeing there. Can you also just comment on portable storage? And if there's any big discrepancies between what modular office has seen and what portable storage has seen? And I also appreciate, Brad, your comments about looking for the deal to conclude in 3Q. But is there any scenario, if it becomes obvious, that we're going into a more prolonged downturn or anything that would cause you at this point to think that this isn't the right time for that deal?

No. I think it's a perfectly complementary business. Again, our storage position is relatively small. But if you look at order activities by end markets, it's a very similar behavior. So it's kind of the same impacts, if you will.

Our next question comes from Phil Ng of Jefferies.

Within your guidance, it looks like the midpoint, if I'm understanding this sensitivity table correctly, it's assuming about a 10% decline in demand for the rest of the year. Can you help us understand what that translates to on units on rent, and what you're assuming from an AMR and spot rate standpoint from 1Q levels?

Phil, this is Tim. So if you think about our original guidance outlook for the year, we really haven't assumed much change in terms of the pricing or value-added products trajectory. So we're really talking about a demand and variable cost sensitivity right here. The range of potential outcomes, if you focus on either a 10% demand decline for a quarter or a 30% demand decline for the rest of the year are just way too broad to try and give you kind of unit on rent guidance. But in kind of the bottom right-hand corner of those sensitivity charts, the unit on rent erosion is significant, and that will be the primary headwind for the year. In that bottom right hand quadrant, though, you're still basically flat from an EBITDA standpoint. So the way to think of that is volume is roughly offsetting all of the tailwinds that we have on pricing and value-added products. We're still executing ModSpace cost synergies, but there is also then going to be a headwind from sale activity as well as some delivery and installation. So you mix all that together, and it's a flat year under the kind of extreme scenario that we think is reasonably possible sitting here right now. It's certainly not the base case, but we don't see scenarios worse than that at this point.

Yes. The only thing I'd add, Phil, is if we were in that bottom right quadrant, we'd be aggressively adjusting fixed cost structures and such, as we look into the second half of the year.

Got it. Okay. That's really helpful. And were deliveries weaker or stronger in any particular end market for April? And then, I guess, did you see any impact from some of these markets, like New York and Boston, where construction was halted? And how that's going to impact the shape of the year?

Yes. Just a couple. I mean, I mentioned the very small special events, obviously, were immediately impacted. Retail is also a smaller piece of our business, more immediately impacted. New York is a geography, and Boston, let's say, all of the end markets were impacted a bit quicker than others. But it's also where we saw some of the initial spike in demand for the COVID response. So other than that, there's really nothing notable across the various end markets or geographies.

Okay. And then, I guess, from a historical perspective there in the global financial crisis, were you able to pick up some market share? Because a lot of your competitors are still regional mom-and-pop operators.

I think the point, looking back at that cycle chart, is that this industry construct today is a lot different. WillScot and ModSpace were pretty formidable competitors back then. And you also saw that the reinvestment in the WillScot business lagged in the recovery simply because of our ownership structure at the time. And the beauty here today is that we've got complete flexibility to lead that recovery and capture the share, both organically or through further consolidation, I think, for obvious reasons. So I wouldn't look back there and say, "Hey, that's a case study in how we captured share." I'd say I'd look back at it, and say, "here's what's different today and how we plan to execute the business, going forward."

Our next question comes from Manav Patnaik of Barclays.

Thank you for all the details and sensitivities, and I guess a lot of the near-term questions have been asked. I have a little bit of a longer-term question, which is, clearly, I think in the medium term, you'll see a lot of maybe sectors that you didn't traditionally do a lot of volume, with asking for the space and social distancing and so forth. But as you think through this, I was just curious if you have put any thought to longer term, if you need to change or tweak or add to the strategy and the business model, if you see anything there, because it doesn't seem as clear to me.

Yes. I would -- this is Brad, I'll talk on the social distancing one, and I'll just use our own internal offices as a good case study, right? So we've set every employee that's not absolutely required to be in a branch to deliver our essential services to work remotely from home. As economies are opening, we're now looking at transitioning back, and you take every office layout, and you look at the density of people, you have to assure, at least for the medium term, there's the 5- to 6-foot social distancing when they're in their workspace. You hallways need to be wider. Your bathroom facilities might require some modification, et cetera. So we're looking at that in our headquarters and all of our shared offices. And without naming specific customers, we're seeing many of those doing the same. So it's too early to put numbers out there, but certainly, social distancing requires more space. So if there's a silver lining on the demand side of this on the recovery side, that's it. I would say one thing we learned again from the global financial crisis is not to have bespoke assets, which we did have in the case of the education market. So as we look ahead and we see new opportunities, we'll seek to take advantage of them using common assets. And then the other catalysts, obviously, that I touched on is the infrastructure stimulus. Fairly optimistic about that. Candidly, it won't be a short-term catalyst, but in the medium to long term, that could significantly lift and underpin all of our end markets, frankly.

Got it. And then just one follow-up. The Mobile Mini Transaction, obviously, it makes a lot of strategic financial sense for you guys. Do you think that it kind of -- the diversification of the portfolio is probably even better timing with what's going on now? Or probably it wouldn't change your mind either way?

No, I'm even more excited about it now. We see how these 2 portfolios perform in uncertain market environments. Definitely 2 great companies that will be stronger together.

Manav, this is Tim. You've got the common long-lived assets, you've got the common lease duration, which causes the portfolios to churn in very similar ways. You've got significant customer overlap, but not perfect overlap, which provides cross-selling opportunity as well as diversification. From a capital allocation perspective, you've got tuck-in acquisitions across multiple asset classes as well as just a tremendous free cash flow profile on a combined basis, which gives you a lot of optionality: deleveraging, consolidation, organic growth, return of capital. So I think no matter how you slice that one up, the 2 companies are stronger together and more powerful together.

Our next question comes from Sean Wondrack of Deutsche Bank.

Brad and Tim, I hope all is well and everyone's safe. Thank you for the great degree of information here. This is really helpful. When we think about the business, just given your longer lease durations and your better visibility, is that what makes it able for you to sort of make these structural costs down the line as opposed to taking them now? So that if the market doesn't fall as much as you think, you can recover faster? Or what's the rationale sort of behind not taking those deeper structural cuts now?

It's not really a wait and see, Sean. It's more of the fact that the significant amount of our cost structure, which is already variable, right? So we've actioned all of that. That was -- let's say, it's adequate to address what we see right now. As Tim said, we always want to be in a position to support a recovery. So it's more just the nature of our cost structure as depicted on the graph on the top of that slide. Whereas -- the other thing I would note is, we have quite a degree of seasonal variability, which is one of the reasons we retain such a variable cost structure. And we're accustomed to flexing that, typically in the fourth quarter and first quarter, we're flexing that in any case. And while demand net is down sequentially right now, it's still not at levels that are overly concerning. These are more in line with levels that we operate kind of in that December, January, February time frame as a normal course. So it's how we construct the cost structure.

Right. Okay, that's helpful. And then Slide 26 is great. Is there a way to think about sort of working capital if demand were reduced? Would we see working capital benefits there further, too?

Yes. I think in the short run, I think one thing we've been happy with is the stabilization of working capital. Clearly had a headwind in the first half of last year, and as that stabilized after completing the ModSpace integration at end of Q2 last year, that's allowed us, in part, to deliver the free cash flow inflection that we had planned. So I wouldn't think of it, going forward, as a huge opportunity if demand is going down. Certainly, I think the ARR side of the portfolio will provide a benefit in that type of environment. We do take customer deposits, however, at the front, which is a bit of an offset. And then payables, we're just going to pay our vendors on time as we would. So I don't view that as a factoring into our thinking a lot when we're doing our different scenario planning.

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

Great. The pending orders metric you provided, that seems pretty encouraging. I'm just wondering what or if you can handicap the conversion historically to actual orders? Just trying to, again, handicap that.

Yes. So these are actual pending orders. Of course, there's always a few orders that are canceled. We've seen no change in cancellation rates. So the only thing we've seen are the dates associated with the actual physical delivery of the unit is pushed out longer into the future. So if we were sitting here a year ago, we would have expected more of the current pending order book to be scheduled for delivery within the next 4 weeks. It's kind of this rolling week window by which we manage the business. We've just seen that -- those orders shift further out.

Okay. And then I guess my follow-up. From your perspective, does this environment sort of changed the VAPS value proposition? I'm curious, did your catalog sort of expand to include health and safety products? And if so, is that potentially incremental to any expectations to any material degree?

It's a great observation. I think what we have seen through this is continued interest in providing -- our customers, having us provide full turnkey solutions, above and beyond just offices and furniture: hand sanitation, bathroom facilities, et cetera. Much of that we do through third-party relationships today. So for me, it just reinforces the fact that, as we continue to expand the value proposition we can bring to each one of these customers' projects, the easier we can make it for them, the more productive they can be, the safer they'll be, and frankly, the bigger opportunity for our shareholders. So I think this unfortunate COVID pandemic has kind of reinforced and validated an assumption we've always held.

I would now like to turn the call back to Brad Soultz with any further remarks.

All right. I just want to thank everyone and wish everyone safe and health as we continue to navigate these uncertain periods. So thanks, everyone. Have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.