WillScot Holdings Corporation (WSC) Q3 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the WillScot Mobile Mini Holdings Corp. Third Quarter 2020 Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Matt Jacobsen, Vice President of Finance. Please go ahead.

Thank you, and good morning. Before we begin, I’d like to remind you that our press release, comments made on today’s call and responses to your questions may contain forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. Our business and operations are subject to a variety of risks and uncertainties, many of which are beyond our control. And consequently, actual results may differ materially from these forward-looking statements. A summary of these uncertainties is included in the Safe Harbor statement contained in our press release. For a more complete description of these and other possible risks, please refer to our 2019 Form 10-K and our other various SEC filings, including our quarterly reports on Form 10-Q. You can access these filings on the SEC website or on our Investor Relations website. Please note that WillScot Mobile Mini assumes no obligation and makes no commitment to update or publicly release any revisions to forward-looking statements in order to reflect new information or subsequent events, circumstances or changes in expectations. You should not place undue reliance on these forward-looking statements, all of which speak only as of today. You should also note that our press release and today’s call include references to certain financial information 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. The press release we issued last night, the presentation for today’s call are posted on the IR section of our website. A copy of the release is also included in an 8-K submitted to the SEC. We’ll make a replay of this conference call available via webcast on the company website. Later today, we’ll be filing our 10-Q with the SEC for the third quarter of 2020. 10-Q will be available through the SEC or on the Investor Relations section of our website. Today’s discussion of results of operations for Q3 2020 for WillScot Mobile Mini is presented on a historical basis, as of or for the three months ended September 30, 2020, or prior periods. Our reported results only include Mobile Mini for the period subsequent to the merger. Our pro forma results are presented and include Mobile Mini’s historical results as if the merger and financing transactions had occurred on January 1, 2019, and is a better representation of how the combined companies performed over time. Now with me today, I’ve got Brad Soultz, CEO of WillScot Mobile Mini; Kelly Williams, President and Chief Operating Officer; and Tim Boswell, our CFO. With that, I will turn the call over to Brad.

Thanks, Matt. Good morning, everyone. I’m Brad Soultz, CEO of WillScot Mobile Mini Holdings, and I’d like to welcome everyone to the company’s third quarter 2020 earnings call. The phenomenal third quarter consolidated results yet again demonstrate the growth and value creation potential of the WSC platform. Before I turn the call over to Kelly and Tim for additional third quarter context, I’d like to take a moment to step back at a higher level and outline key attributes that underpin this highly differentiated and truly unique platform. Please turn to Slide 5 of the investor presentation deck. First and foremost, we are the undisputed market leader. This clear market leadership and our unparalleled network of 275 branches allows us to better serve our customers’ needs, especially in the trying times experienced over the last two quarters. When our critical turnkey space and storage solutions are perfect, productivity is all our customers see. Our return on capital continues to expand, underpinned by a vast fleet with useful lives spanning decades. Targeted deployment of growth capital yields greater than 25% unlevered IRRs. We lease these assets along with additional value-added products and services or VAPS for average lease durations of greater than 30 months, which provides for a very stable and predictable recurring lease revenue. We serve 15 discrete and diverse end markets. Over 70% of our leads are from repeat customers and our top customers, top 50 represent less than 15% of our revenues. This diversification and our flexible go-to-market strategy allows us to quickly reposition and capture new market opportunities as we’ve done for social distancing and screening needs in 2020, which provides for a portfolio of units on rent that is very stable and predictable, as evident in the stability we’ve experienced in the third quarter. As significant U.S. infrastructure investments materialize, we will capitalize on these with the same rigor and agility. We have several powerful idiosyncratic growth levers. There’s a multiyear high-margin organic revenue growth tailwind of over $150 million associated with our unique VAPS value proposition. In order to realize this growth, we simply need to maintain the same penetration levels that we’ve already achieved over the last 12 months. As we continue to increase VAPS penetration towards our stated target of 80% and extend our offerings, we would further increase and extend this growth. This growth lever has been driving about 40% of the 12th consecutive quarter of double-digit expansion in our U.S. Modular rates. Our yield management and rate optimization tools are driving the balance of that growth, which provides an incremental substantial revenue growth tailwind. Now the merger with Mobile Mini presents two additional revenue growth levers. The first via cross-selling. While we estimate 80% of our diverse end markets require both storage and turnkey modular space solutions, we currently have only a 40% customer overlap. Kelly and the team are already harvesting early wins as we begin to bridge that gap by pulling storage demand through modular orders and vice versa. Second, we intend to deploy our proven yield management, rate optimization tools and the VAPS offering across the North American storage segment of the business. We have absolutely proven platform for accretive M&A. We’ve realized over $55 million of cost synergies over the last three years as we’ve safely and swiftly integrated 10 acquisitions. Looking forward, we realized more than $65 million in incremental cost synergies associated with the remaining synergies of these prior transactions now reloaded with an incremental $50 million related to the Mobile Mini merger. Our scalable technology continues to both enable growth and to drive significant operating efficiencies. The third quarter 2020 adjusted EBITDA margins of 39% or 660 bps above prior year. The aforementioned top and bottom line embedded drivers will yield further expansion over time. Now this unique combination of these highly differentiated attributes results in robust and expanding free cash flow, which affords us full optionality with respect to capital allocation. Upon completion of the integration with Mobile Mini, we expect to generate approximately $500 million of annual free cash flow. We’re extremely confident in our ability to achieve this level given our free cash flow generation of $91 million in the third quarter, excluding merger-related transaction costs and the multitude of embedded top and bottom line growth levers. Along the way, we remain committed to rapid deleveraging to achieve a target leverage ratio range of 3.0 to 3.5 turns by the end of 2021, while funding all organic growth opportunities and returning incremental value to shareholders through WSC share repurchases. Now as I turn the call over to Kelly and then Tim, I would like to note that while the merger with Mobile Mini is truly transformational, this is not our destination. Please recall that just three years ago, WSC delivered approximately $125 million of adjusted EBITDA. Our revised full year 2020 guidance represents a 5x increase and the expansion of adjusted EBITDA margins from 28% to 39%. The merger with Mobile Mini simply headlines the next new exciting chapter in the WSC growth story, which will further compound returns, driving shareholder value creation for years to come. With that, I’m pleased to turn the call over to Kelly.

Thanks, Brad. Good morning, everyone. I’m Kelly Williams, WillScot Mobile Mini’s President and Chief Operating Officer. I want to begin by thanking our employees for making health and safety our number one priority at WillScot Mobile Mini. Keeping our employees safe and healthy has always been paramount to our organization, but our teams have continued to service our customers as an essential provider and have done so while achieving record best safety performance. I am pleased to report the integration continues to progress nicely as the teams officially completed their first quarter together. While we will see tremendous operating efficiencies by aligning on a single operating platform during the first half of 2021, the WillScot Mobile Mini team remains focused on integration and execution in addition to driving the business forward as evidenced in our strong Q3 financial performance. In addition to the strong sales and operating performance in Q3, we also kicked off the first of our pilot programs in the quarter. We are seeing opportunities created through lead sharing and team selling that are clear indicators of why the two companies are stronger together. Today, I will discuss the third quarter KPIs as well as provide an update to our demand trends and the current market outlook. Following the merger, we’ve expanded our reporting segments from two segments to four reporting segments. The North America Modular segment aligns with the WillScot legacy business prior to the merger and the North America Storage, UK Storage and Tank & Pump segments align with the Mobile Mini segments prior to the merger. Tim will touch on the reporting segments in more detail later. The third quarter financial results further demonstrate the resiliency of the combined business model. Both North America Modular and North America Storage have stabilized demand in spite of the non-residential construction headwinds. We continue to raise rates across both business segments as customers recognize our meaningful product and service advantages. Customers are also benefiting from our combined 275 branch network in North America, allowing us to be closer to where they need us. This scale leverages our tremendous logistics competitive advantage, allowing us the greater capacity and capabilities in a challenging environment. Looking at Slide 12, as mentioned earlier, as the pandemic transitions through the year, our top priority has remained the health and safety of our employees, customers and vendors while executing on our business model. As a combined company, we are helping customers to fight the pandemic across our full platform of complementary products. Our ability to flex space for customers, the CDC guidelines has enabled both business segments to diversify their customer base and sustain demand during the pandemic. We are utilizing offices as drive-through COVID testing facilities, temperature checkpoints for businesses and additional storage for supplies related to testing and screening. We further assist customers by often bundling our managed services through offices and storage. We are also providing temporary classrooms and storage for education as the need for additional space is evident with students returning to school. Turning to Slide 13, you will see the demand improvement in Q3. The demand indicators for North America Modular and North America Storage have been improving on a sequential monthly basis since April 2020, and you can see from the top charts on this page. Starting with the top left, the green bars represent monthly order rates for the U.S. operations of the North America Modular business in 2020. Similarly, below the North America Modular graph, the blue bars represent monthly net new orders, excluding seasonal units at North America Storage in 2020. The gray shadow bars behind both of them represent the order rates for the same period in 2019. North America Modular’s Q3 new orders in the U.S. were down only 7% versus prior year, which compares to new orders being down approximately 20% year-over-year during the second quarter. The gap to prior year continues to shrink as our commercial teams prioritize other end market segments outside construction to create volume. North America Storage’s net new orders excluding seasonal units in Q3, were down only 2% versus prior year, which compares to order rates being down greater than 20% year-over-year during the second quarter. These two charts show that the new order trend is moving in the right direction, with new orders improving significantly on a sequential basis from Q2 to Q3. This trend continues into Q4 with North America Modular new orders in the U.S. within 1% of prior year over the past four weeks as of October 31. As discussed on the Q2 earnings call, our North America Storage business experiences a routine increase in seasonal demand every year in Q4 due to holiday-related demand from big-box retailers. We refer to these as seasonal units, which are ordered nationwide in large volume for storage of additional holiday shopping inventory on site. North America Storage has completed a majority of the seasonal deliveries as of the end of October. And as expected, the business remains virtually flat in terms of activations to prior year’s seasonal activity. Now turning to Slide 14, in both business segments, the units on rent have behaved as expected. Though we have seen delivery growth slow to prior year during the COVID-19 pandemic, project completions and unit returns have continued to lag relative to last year, and we have observed no change in customer payment behavior. North America Modular segment units on rent decreased just slightly on average from Q2. Additionally, units on rent increased sequentially within Q3 and September ended with more units on rent than the average for the quarter. North America Storage segment saw average units on rent increase 4% sequentially from Q2, and as of the end of October had 3,000 more units on rent than prior year or up 2.3%. The charts on this slide further depict the complementary seasonality of the core segment’s volume. This slow churn proves the resiliency of our business model, which is based on recurring leasing of long-lived assets with an average lease duration of over 30 months. Now on to Slide 15, both American – North American business segments continue to see impressive rate growth in lieu of the pandemic, further illustrating the competitive differentiation in terms of product, service and scale. We believe the gap to the competition only widens with our scale advantage in challenging financial times such as these. North America Modular achieved another great quarter in which modular space average monthly rental rates, also known as AMR, increased 10% year-over-year to $693. Note, we also saw sequential increases in AMR from Q2 to Q3, so the pricing tailwinds in the modular portfolio continued to increase and drive sequential increases in modular leasing revenues. The legacy WillScot U.S. Modular segment AMR increased to 11.2%, marking the 12th consecutive quarter of double-digit rate growth. And we expect this momentum to continue as we look ahead. Delivered rates on VAPS over the last 12 months increased by 4% sequentially over Q2 to $286, and our average monthly rates per VAPS per unit on rent in this segment were up 16% year-over-year and up 7% sequentially in the third quarter. VAPS continue to represent both an organic revenue growth stream for existing North America Modular fleet and also a great cross-selling opportunity to bundle with Mobile Mini’s steel ground level offices. North America Storage also achieved an increase in year-over-year rental rates of 3% for Q3 2020. Q3 marked the 31st consecutive quarter of year-over-year rate increases for this segment. Our ability to increase rates annually is based on servicing our customers with high-quality products, high levels of customer service, a large sales force and the use of technology, including Mobile Mini Connect, our customer portal. Lastly, though a significant amount of our efficiency and optimization of the merger will come from alignment of the same operating platform, we continue to focus on managing expenses and creating efficiencies through the cross application of best practice sharing. We are honing in on logistics opportunities, leveraging our combined buying power and capitalizing on each segment’s expertise on rental processes to increase margins in the interim. Identifying a few of these actions assisted in driving adjusted EBITDA margin expansion of 660 basis points for the combined company, highlighting the potential financial growth opportunities that exist prior to recognizing many of the revenue, cost or technology benefits that we expect to come in the very near future. With that, I’ll turn the call over to Tim.

Thank you, Kelly. Let’s jump into the financial review section for a bit more on the Q3 results and our updated 2020 guidance. Slide 17 summarizes the financial highlights from the quarter, which demonstrates the earnings trajectory and potential we have with our combined scale. I’ll get into the details momentarily, though it’s clear, our financial metrics are strong and improving across the board. And the increased midpoint of our revised EBITDA guidance will put us on a solid foundation and accelerating run rate heading into 2021 from which we will continue to build. Now quickly before jumping into the details. Page 18 gives you a snapshot of the new reporting segments that we will use going forward. Historically, WillScot reported two segments: Modular U.S. and Modular Other North America. We consolidated these into the new North America Modular segment, which simply represents the consolidated results of the legacy WillScot business. We’ve then added the three segments that Mobile Mini reported historically. North America Storage, United Kingdom Storage and Tank and Pump, and we’ve provided additional unit on rent and average rental rate detail for those segments. As an example, you’ll note in the chart that the North America Storage segment is heavily weighted to storage units but does have over 16,000 offices on rent. These represent Mobile Mini’s legacy ground level office fleet. Similarly, the modular segment contains 15,000 legacy WillScot storage units. We’ve presented it this way so that the results align as closely as possible to the historical reported results of both companies. It reflects how we are operating the business and it is a very logical way for investors to analyze our results. Those quarterly results for 2019 and 2020 are available both in the appendix here and in the 10-Q. With that background, Page 19 shows a bit more detail regarding our Q3 results on a pro forma basis. Total revenues increased 7% sequentially from Q2 as leasing fundamentals improved and revenues were basically flat versus prior year. Relative to 2019, delivery revenues and Tank & Pump revenues were down, but mostly offset by the solid 1.5% lease revenue growth in our Modular and Storage segments in North America. Profitability and margins continue to improve versus prior year, adjusted EBITDA increased by $14.6 million on a pro forma basis and margins expanded by 400 basis points year-over-year both due to variable cost reductions and synergy realization. Margins were down 20 basis points sequentially from Q2 as variable costs increased to support strong sequential delivery growth across all segments. As we look into Q4, our guidance implies that revenue should be flat sequentially as lease revenues continue to build and delivery and sale revenues taper into the end of the year. We should get some modest sequential margin expansion in that scenario, which aligns pretty well to the midpoint of our guidance, and it also implies that sale revenues, in particular, will be down year-over-year, representing roughly a $5 million EBITDA headwind in Q4. You can visualize this in the bottom left chart, with Tank and Pump revenues stabilizing in Q2 and Q3. You can see how our lease revenues are building in the other segments. It would be normal for delivery revenues to taper in Q4 before ramping up again in Q1 and Q2, and I’d expect sale revenues to decline sequentially rather than increase in Q4 like they did last year. Lastly, in the top right chart, free cash flow is up 140% year-over-year on a pro forma basis, excluding transaction costs. 400 basis points of margin expansion, reduced interest costs, reduced CapEx and stabilized working capital together bridge the growth from 2019. Slide 20 reviews our cash flow trends on an as-reported basis. Cash provided by operating activities is surging due to the addition of Mobile Mini’s operations and 490 basis points of margin expansion within the Modular segment. We’ve shown the impact here of $63 million of cash transaction costs in Q3, since those are clearly discrete and onetime in nature. But we have not adjusted for integration or restructuring charges in Q3 since we will continue to incur $10 million to $15 million per quarter of these costs well into 2021. At the bottom of the page, we’re continuing to operate at reduced CapEx levels, both due to the demand environment as well as fleet efficiencies we had experienced in the second half of 2019 upon completion of the ModSpace integration. Net cash used in investing has been down year-over-year for five consecutive quarters, and that’s with the inclusion of Mobile Mini on an as-reported basis in Q3. I do not see us reducing CapEx much beyond these levels based on the demand we see. I can see Q4 coming in above Q3 levels based on the demand picture, though clearly, we would need to see a significant increase in delivery volumes to approach the top half of the revised range. As a reminder, we run a zero-based quarterly capital allocation process with short lead times, so we can react quickly to changes in end market activity. Moving to Slide 21. Q3 was a bit noisy due to the merger and refinancing activity, and I’ll call out a few of the more significant adjustments in our EBITDA reconciliation. The $42 million loss on debt extinguishment is simply the write-off of unamortized deferred financing fees and redemption costs related to our prior debt structure. That’s obviously non-recurring, and we’re very pleased with the new debt structure, which we further improved in Q3. The $67 million income tax benefit is a non-cash GAAP adjustment to the valuation allowance on our deferred tax assets. WillScot had approximately $900 million of U.S. Federal NOLs heading into the merger. With the addition of Mobile Mini, we have new sources of income against which we can apply our NOLs. So we released the valuation allowance, and it shows up as a onetime tax benefit. As a reminder, we have over $1 billion now of combined NOLs plus the ability to apply other deductions in the future, such as bonus depreciation, which together represent at least a four to five year shield from any meaningful federal cash income taxes under current policy. In the middle of the chart, you see $52 million of transaction costs, which were mostly professional fees, both expensed and paid upon closing on July 1. In Q2, we had already accrued approximately $11 million of transaction costs that were also paid in cash in Q3. Lastly, we are beginning to incur some integration costs as expected, with approximately $12 million of restructuring charges and integration costs incurred in the quarter. As we’ve discussed previously, these should run between $10 million and $15 million per quarter before tapering off in the second half of 2021. So the punch line here is that aside from the integration costs I just mentioned, transaction fees are behind us. We will be in a strong pre-tax income position going forward. We expect to migrate to a more normalized effective tax rate in the 25% to 27% range for GAAP purposes in 2021 and we do not expect to be a meaningful payer of U.S. federal cash taxes for four to five years. I talked about our new debt structure on Page 22 last quarter, so I’ll just highlight some changes. In August, we refinanced our 2023 notes through the issuance of our 2028 notes. That brings our annual cash interest expense going forward to approximately $105 million excluding amortization of deferred financing costs, and our weighted average cost of debt is approximately 4%. After closing the merger on July 1, we paid down nearly $117 million of our ABL balance using all of our internally generated free cash flow as well as some surplus cash across our business units. This leaves us with over $1 billion of availability in our ABL facility and brings leverage down to 3.9 times our pro forma trailing 12-month adjusted EBITDA of $633 million. So leverage is declining and liquidity is expanding rapidly as we generate cash. We’ve updated our financial outlook on Page 23 to reflect our strong execution and our better visibility into the demand environment for Q4. Given the high degree of forward visibility in our business, we’ve maintained guidance throughout the pandemic with as much transparency as possible. After adjusting our outlook in Q1 for the sudden recessionary environment, we’ve incrementally increased our outlook for pro forma adjusted EBITDA as market conditions have stabilized. On the left-hand chart, we’ve reduced the top end of our revenue guidance and expect to end up between $1.6 billion and $1.65 billion of pro forma revenue for the year. Given the uncertainty in August, we left open the possibility of a strong V-shaped rebound, which could have taken delivery and sale revenues, in particular, into the top half of the prior revenue range. So expectations for those revenues in Q4 should come down even though we expect to see steady sequential growth in our leasing revenues. We’re simply ruling out an extreme upside scenario for Q4, and we’ve reflected that with a $10 million reduction to our CapEx range as well. Conversely, we’ve removed the bottom end of our prior range for a pro forma adjusted EBITDA based on the strong Q3 performance and the stabilized market environment. We expect to deliver solid 6% adjusted EBITDA growth and $475 million of adjusted EBITDA less net CapEx at the midpoint of our new guidance ranges. You can think of the midpoint is approximately $390 million of EBITDA contribution from WillScot and approximately $245 million for Mobile Mini. And we continue to see strong adjusted EBITDA growth versus prior year in our Modular and Storage segments and Tank & Pump is showing signs of sequential improvement. This is truly extraordinary performance in 2020 through the course of a pandemic, a merger as well as our integration activities. Our team is looking past all of that with confidence into 2021 and 2022 given the visibility in our business, our superior competitive position and the powerful internal levers available to grow the top and the bottom line. Brad?

Thank you, Tim. Thank you, Kelly for the great recap of an outstanding third quarter, which was again packed with continued outperformance. These two companies are clearly stronger together. Now turning to Slide 24. Our fundamentals today are strong. The resilience of our business model built on recurring rental revenues, increasing rates and slow churn in the portfolio is evident in our results. As we continue this exciting new chapter in WillScot growth story, the headline merger with Mobile Mini introduces substantial new idiosyncratic revenue and earnings growth. The powerful levers highlighted on this page will continue to compound and drive shareholder value creation for years to come. Notably, these are fully within management’s control and are solely dependent on our continued execution. The resulting platform which embodies the unique combination of highly differentiated attributes outlined in my opening comments, yield robust and expanding free cash flow, affording us full optionality with respect to capital allocation. As a case in point, upon completion of the integration with Mobile Mini, we expect to generate approximately $500 million of free cash flow a year. Along the way, we remain committed to rapid deleveraging, achieving a target leverage ratio of three to 3.5 turns by the end of 2021, while funding all organic growth opportunities and returning incremental value to shareholders through WSC share repurchases. I’d like to conclude by offering a sincere thank you to our WillScot and Mobile Mini teams who are going above and beyond to serve our company and our loyal customer base during both the merger and the ongoing pandemic. I also wish all of you listening today continued safety and good health. With that, thank you for taking the time to join us today. This concludes our prepared remarks. Operator, would you please open the line?

[Operator Instructions] And your first question comes from the line of Andrew Whitman from Baird.

Okay. Thanks for taking my questions. Just a couple, I guess, today. The order trends were quite encouraging and well-articulated here on the slides. I previously talked about some of the delays that you’ve seen. The order book had started snapping back already and actually, it was remarkably strong even during the kind of the really tough times of this past summer. I was just wondering if you could talk about the level of delays in delivering those orders that you’re still seeing today? And just give us some context as to how that stands versus the period this summer.

Sure. Andrew, this is Kelly. I hope you’re well. So yes, I think we do see a somewhat increase in postponements and cancellations are up slightly, I would say, on the WillScot side. You see somewhere in the range of high single digits, typically, 6%, 7%, 8%, that might be up closer to 12% or 14%. I’d say it’s not too far off from the Mini side as well. You’ve also got contractors at times that are rebidding projects that were originally going out in maybe in May or June. The remodel side, for example, I think we’re very optimistic in the first quarter that those will happen, but they are going through a rebidding process. So there are certainly some of those that are postponed. But I think the key point here is when you look at our ability to diversify, and as we mentioned that on the first slide there, reposition our focus. We’ve really seen some pickup in areas like healthcare, government, education, certainly has been a big piece. Energy has picked up a little bit. And so I think, overall, we continue to reprioritize our leads, and we’re really able to close that gap and sustain a significant amount of that demand. But I think there is some optimism and some of the pickup. I don’t know that I would go too far past Q4 right now. But I think in the early half of next year, there’s, assuming a vaccine and as such that we would see that pick up then.

Got it. Okay. Thanks for that. That’s helpful. And just I would also be, given that, I think the margin performance in the quarter is another area of focus is really good here. I guess pro forma 400 basis points of margin expansion year-over-year. Tim, can you help us understand or maybe bridge some of the bigger buckets in there that contributed to that. You mentioned synergy capture. You mentioned that obviously, you took some cost actions this summer that clearly benefited you here. Can you help us bridge some of the pieces that contributed to that 400 basis points? Just to give us a little bit of flavor about which actions were really impactful?

Andy, I’m happy to. And what I’m really encouraged by here from a margin standpoint is that it’s coming from a lot of different areas, and we’ve got multiple levers here. Some quite permanent in nature and then some more temporary related to the variable cost structure and volumes relative to prior year. So yes, there was clearly $4 million of kind of the ModSpace synergy realization that took place in the quarter. You saw a healthy expansion on the delivery and installation margin, Andy. And that’s an area where I think we’ve got room to run. And I view those as more permanent improvements as we’ve improved asset utilization on the Mobile Mini side of the business. And we’ve kind of tactically continued in-sourcing more activity on the modular side of the business. So that’s an area where I think in the medium-term logistics will continue to be a focus of this organization. And then going back to Q2, I mean, based on the delivery volumes, you had a significant pullback in variable costs. We gave some of that back in Q3 as we should to drive the pickup in activity levels that Kelly talked about. But there were some adjustments to the fixed cost structure as well on both the Mobile Mini and WillScot side of the organization, which we did carry into Q3 and is contributing to that year-over-year performance. So there are at least four different buckets of costs there, Andy, that we’re managing actively in addition to the CapEx.

Got it. Great. And then just I guess my last question, for now, is just around that more sensitive end market and construction. I was just wondering if you could just give a little bit more detail on what you’re seeing there. It looks like boxes that have been on rent are staying on rent and maybe even a little bit longer. There’s some commentary here in the slide deck saying that some of the new boxes are going out a little slower. I don’t know, just maybe a little bit more detail on that key end market would be helpful as well.

Yes. I mean I think Dodge or construction starts are down probably in the mid-20s, Andy. I think if you look at – I think we pointed to Q2 and Q3 being a very similar number there. I don’t think that we have a whole lot of optimism beyond where we are today that it’s not that – in a very similar fashion. Again, I think the key point is, a, the projects are lasting a little bit longer here. We’ve seen, as noted on that slide, a significant deceleration in returns on both sides of the business. And we’ve also picked up that demand in other end market segment. So – but to point to construction, it’s still consistently down, I would say, starts in that mid- 20s ranges as far as we can see.

Thank you, guys.

Andy, this is Brad. I would just add to that. I mean as Kelly outlined, – I mean, the beauty and the diversity of this group of end markets is the fact that net new orders are effectively now flat to prior year with that portion of our demand being down 20% to 30%. So I think this platform’s ability to pivot to new markets like social distancing and screening needs as well as like manufacturing in other markets being quite robust right now. So I think that’s pretty pleasing to tell. And to your earlier comment, new orders are flat and delivery rates are starting to come back in line with it. I would say on the office side, more 10% down prior to year, which, again, given the magnitude of the shock here that we experienced in March is quite pleasing. So I think we’re in a great spot with non-resi just as it is. It will come back. We can all pick our date and time as to win. But frankly, if other markets hold as they are that provides upside. So very, very pleased with the performance of the team here.

Okay. Thanks, guys.

Our next question comes from the line of Ross Gilardi, Bank of America.

Good morning. Hey, Brad. Maybe you could just expand on your comments on office. And I’m really wondering how just this potential movement from urban to suburban office space in a post-pandemic world will play out? And are you getting a real glimpse of that yet in your business with anything that you’re seeing?

I would circle back to just the point that on the office side, net new orders across all of these diverse end markets are back in line with the prior year, right? And a transition in marketplace like this and the ability for our folks to pivot from what had been, what, 24 quarters of very robust non-resi construction activity, right, and to pivot and capitalize. The social distancing is absolutely lifting across the markets. And you’re absolutely seeing the fact that while commercial real estate in the very dense populations are still depressed, it is driving expansion in the suburbs. So we’re not going to try to be 2Q to predict precisely how much by end market. We’re seeing the same phenomenon in schools. Although as mentioned on the last quarter call, you’ve got still several of the schools in these hybrid models. But at the point that they bring kids back, that will be another demand driver here. So I’m just delighted with the resilience in the model. I mean this is what we had expected should we ever experience a shock such as this, and feel quite good about it.

That’s great. And then I want to ask you about utilization. I mean the numbers in your deck utilization is naturally down a little bit year to – year-on-year, but it seems like it’s been very resilient. I mean, are you willing to call a bottom in utilization given just the – despite what you just talked about, the risk of weaker non-residential? And if that’s the case, do you feel like the pricing environment is going to remain pretty underpinned? I’m talking about the non-VAPS portion of the pricing environment for the next 12 months.

So we focus more on the units on rent, right, the volume, and the portfolio, and we believe we’ve certainly seen stability there. I mean, as Kelly mentioned, even on the office side, we left the third quarter with unit on rent levels that were above the average of the quarter. So yes, I think we’ve – absent another massive shock, we’ve seen the bottom, if you will, with respect to the volumes other than kind of normal seasonality that we’d experience from here forward.

Okay. And then just my last question. On the balance sheet, you’ve made some progress, you seem very confident on your free cash flow into next year. And it seemed like you left the door open a little bit there for further M&A. I mean, are there other large modular office or storage businesses that you can buy from a regulatory perspective? And would you guys ever consider diversifying into equipment rental? I mean, your stock trades at a much higher multiple and would give you, there certainly would be cross-selling opportunities. But I would just love to get your general thoughts on that, though, and then I’m done.

Yes. And I would also touch on your last question, we’re absolutely seeing resilience in rates. This is a very well-structured marketplace right now. And as Kelly mentioned, we’ve continued to drive the rates. First question, I personally not very interested in diversifying into gen equipment rental. That’s a well-supplied space, completely different business model, short lease durations, et cetera. Within the markets we are leading, there are absolutely further acquisition opportunities. There are none as transformational as the combination of Mobile Mini and WillScot. We’d estimate we’re five to six times the next largest competitor. And we don’t see any regulatory limits with respect to that continued aspect of our strategy.

Thanks so much.

Our next question comes from the line of Stanley Elliott, Stifel.

Good morning, guys. Thank you, all, for taking my question. With kind of the pandemic, and you’ve mentioned some other opportunities to help the units on rent, is it possible to think that the VAPS piece of the business could actually accelerate into next year with things like cubicles or plexiglass barriers, things of that nature?

Yes, absolutely. And Kelly mentioned the sequential improvement in VAPS delivered rates over the last 12 months. If you do the math under the hood, you’ve definitely seen an acceleration in the last quarter. And we’re continuing to drive toward, we’ve stated for three years now, $400 a month value, which would represent 80% penetration of the furniture offering we have now. So as we introduce new aspects of the furniture, such as the cubicles, new data services, et cetera, that certainly provides for upside further than that.

Could you also talk a little bit about expectations from kind of moving everybody into the same technology system into next year? It sounds like you’re having some success with cross-selling but would love to dig into that a little bit more if we could.

Stan, this is Tim. So I think Kelly mentioned, the first big milestone here in the technical integration of the two businesses is the movement of WillScot onto Mobile Mini’s state of the art SAP platform, and we’re targeting kind of middle of first half of next year for that migration. So the teams are working very diligently on that and we’re making great progress. That will enable better real-time visibility into kind of daily transaction volumes, pricing, utilization, et cetera, across the WillScot business. There are some better tools at Mobile Mini to enable better route management in logistics, which I think the modular side of the business can benefit from. And similarly, you’ll recall, we’ve got pricing tools on the modular side of the business that have been in place since 2015, and really driven some more sophisticated segmentation and price-performance and enabled the value capture from the value-added products and services platform. So we talked about the cross-application of best practices and technology is a big example of that. In the meantime, the lead sharing and team selling that we’ve talked about is kind of happening in the old-fashioned way. Call your sales rep and the adjacent branch at either the modular or storage location and tackle those projects together jointly. And you really don’t need technology in place to do that day one. So that’s kind of how we’re thinking about this from a phasing standpoint.

Yes. Stanley, this is Kelly. One thing I might add just to piggyback on Tim here is, one example that we’re really excited about getting WillScot on in terms of technology is our sales territory optimization tool, which really helps our sales teams prioritize sales leads. And so as we started to see a slowdown on the construction side of things and started to identify opportunities in terms of healthcare and everything else related to social distancing. Those leads become priority and our fed to the sales reps in that way where the close opportunity is much higher. And so I think that’s been a huge advantage to us, and clearly is a competitive advantage today for Mobile Mini. And just an example of when we are able to align on the same platform, where there’s a real technical advantage that comes with that. And again, more ability for us to continue to optimize between the two companies.

Perfect, guys. Thanks for the color. Thanks a lot.

Your next question comes from the line of Scott Schneeberger, Oppenheimer.

Hi, guys. Thank you. I got dropped for a moment, so forgive me if any of this has been asked. But curious, how are you stacking up in the – competitively? If you could just give us a taste for modular office, classroom storage, and GLOs. What are you seeing out there? Where do you think the industry is versus you and your, obviously, smaller competitors. And if you could just provide some anecdotes about your relative positioning? Thank you.

Yes. I’ll start, Scott, with the modular side, and then Kelly and I can shift it over to the storage. I mean, you’re well aware of the journey there WillScot had teamed up with ModSpace, Tyson, and Acton. We represented about a 40% to 45% market share. If you combine Mobile Mini’s GLOs, we’re safely in that kind of 45%, maybe a little bit north market share. There are a handful of competitors that are regional folks. They’re typically in just a particular U.S. geography and oftentimes are more concentrated toward one or two end markets. And then beyond that handful, there’s – we’ve said before, 60, 65 smaller independent typically family owned competitors that all operate in just one or two cities. So this is a very well organized market. I think through this pandemic, we’ve seen the benefits of that consolidation, right, as well as our ability to pivot that into real value for customers, right, as we’ve kept all these operations running continual through the pandemic. We’ve been able to send everyone home and maintain high levels of sales productivity. Which, in the end, takes care of our customers and their essential needs through this uncertain time. Kelly, you want to talk about storage?

Yes. And I think to follow-up on that, I think it’s – I made mention of this in the opening remarks, and that’s just that the scale that the two organizations have today are – we’re able to leverage through logistics. And quite frankly, just agility, reaction time, as Brad made mention of. We have resources that in a situation like this, Scott, I think we probably separate ourselves at a far greater pace than what – to the competition than at any other time. And I think, just an example, when you had situations of that immediate reaction to needing offices or storage. And it’s a complex type deal, WillScot is so far ahead of the competition in terms of resources and available product and logistics and Mini on the same side when there was a need for 40 or 50 storage containers or 15 ground level offices, we’re really about the only company that can get that done. So I think it’s really important to note. And I made mention of this in the opening remarks that we’re very confident that the spread widens between ourselves and the competition in a situation like this. And logistics is a huge part of that and scale, the 275 locations.

All right. Great. Thank you both for that. And then on a follow-up, Tim, bringing you in on this. The slide, I think it’s 13 – sorry, I lost it. It’s the VAPS revenue growth opportunity greater than $116 million over the next three years. That compares to previously saying 128 back on the first quarter. Now I know that it has to do with convergence predominantly, but getting some inquiries. I know VAPS as was said earlier, has accelerated and is really going very well. But Tim, could you just explain the change in numbers there? I think it would be helpful for all. Thank you.

Yes. There are some moving pieces here. And frankly, this is kind of the – this is kind of the base case opportunity is the way I think about it. Because all we’re doing here is we’re quantifying the opportunity on the WillScot modular fleet. If there are no further improvements based on the levels we’ve achieved in the last 12 months. And you see a $286 number that’s up a bit sequentially and year-over-year relative to the numbers that you referenced. So relative to Q1, we consumed some of that growth as the portfolio turned over. But if we just hold that $286 per unit per month that we’ve already achieved, let our 86,000 modular units turn over just naturally churn over three years, that’s $116 million of organic revenue that flows through between 75% and 80% to EBITDA. Now two other things. We’ve said before that Mobile Mini has over 16,000 ground level offices. Those are very good candidates for furniture packages and value-added products. We’ve quantified that opportunity as being north of $30 million of EBITDA, again, over three years, as that portfolio churns. The next lever we have is, as we’ve talked about, we’ve tasked our sales force, and we’ve got entire geographies within the company today that are delivering over $400 per unit per month of value-added products. So if we can get the entire sales force to operate at that level, that is further upside on this number, right? So as we’ve said for a long time, value-added products is going to continue to be one of the primary commercial strategies for the combined company. And we’ve got three or four different levers to pull to continue to drive it.

Okay. Thanks. That’s helpful. Appreciate it.

Your next question comes from the line of Ashish Sabadra, Deutsche Bank.

Sorry. Thanks for taking my question. Just a quick clarification. On the 10% AMR growth in the modular space, did you provide the details on how much was driven by pricing versus VAPS?

Yes, Ashish, we’ve said over time. So the primary driver for that has been the U.S. rate performance, which was up a little over 11%. And that’s consistently been driven 40% by VAPS and 60% by base rate on the boxes.

That’s great. And as you think about the best practices being implemented at the North American Storage units as well. And obviously, you’ve talked about VAPS opportunity there. How should we think about the rental rate or AMR going forward, opportunity for AMR growth going forward there?

Well, look, this is Tim, Ashish. I hope you’re well. We have seen in recent months and quarters, the rates on newly activated storage units begin to ramp up significantly. And I think the best example of that right now is in some of the UK results that we’ve published. It’s probably one of the unspoken high performers in our portfolio right now, but they’re doing just fantastic from a rate performance perspective. And I think we’ll have opportunities across the broader portable storage fleet over time just from a pure pricing standpoint. And we’ve pointed to some of the yield optimization tools that we’ve had in place at WillScot as an example of how we might approach that. And then the second opportunity that you alluded to is the potential to introduce value-added products for storage containers themselves. That’s something that both companies have dabbled with historically, but not necessarily put the full heft of the organization behind. But that’s definitely something that’s on the road map to look at in 2021 and beyond. And Kelly, I don’t know if you’ve got anything to add from a storage pricing perspective?

No. I mean, I think that when you think about the cross-application of best practices, it’s very obvious that, I say this internally in a joking way, but the 3% rate growth that Mobile Mini has had now for 31 consecutive quarters is something we’re extremely proud of. It’s organically done. And it’s something I think that shows a lot of operational discipline within the organization. However, when you have the opportunity to speak behind the curtain and you see what WillScot’s been able to do and knowing the service levels and customer loyalty that we’ve had on the storage side, I think it’s really uncovered a significant opportunity for us. As Tim pointed to, we’ve got new rates really in the UK that are near 16% and I look forward here, and we’ve also got much stronger pricing on new units on the storage side as well. I think some of that is just that the ability to understand it. We do have a lot of logistics power. Scale is so significant. I think WillScot, as we look behind the curtain that became very evident. Their centralized pricing tool certainly has helped WillScot and I think that’s something that’s going to help us as well. But just – it’s probably the best example as you get a chance to kind of look at each other and see what’s going well. That’s been very evident to many that we’ve got some opportunity to continue to raise rates.

That’s great. And congrats once again on solid results. Thank you.

Thank you.

Your next question comes from the line of Kevin McVeigh from Credit Suisse.

Great. Thanks so much. And congrats on just a really, really fantastic outcome. And the segment disclosures, going back to Slide 18, super helpful, but there’s obviously a pretty big delta between North American Storage versus UK, and then kind of the Tank and Pump. Any thoughts as to the UK in particular. Can you get it to North America in Tank and Pump, in particular, just again, within the context of the portfolio overall, do you look to kind of boost those margins? Or just from an asset optimization perspective, how are you thinking about the segments, particularly it’s still relatively early, but just as you think about just asset optimization?

I’ll start. Kevin, this is Kelly. I’ll start with the UK, just given the historical nature I’ve had with them. But the UK was running EBITDA margins in the low 40s back pre-Brexit. I mean so we’re going to have to go back four, five years ago. But I think – and we’ve talked about this here in the last couple of days, it’s probably the best-performing business unit today. And a lot of that is just exactly what you’ve talked about. I mean we’ve got utilization that’s in the high 80s and low 90s. We’ve got rates that are significantly better than what they’ve been. And we’ve got great leadership over there. There’s certainly a lean in there in terms of the CDC requirements with social distancing that the group has taken advantage of. But it’s a – we’ve seen a significant margin enhancement with that segment now over the course of the entire year. And I do – I am confident, I’m not sure that they can get to North America Storage margins here in the next six or eight months, but it’s moving very, very quickly that way with all the right directional signs. The Tank and Pump business, I think Tim pointed out earlier, we’re seeing a lot more movement there. OEC utilization is about 10 points higher as we exited the quarter than it was to start the quarter. We certainly still struggling a little bit in terms of rates there very competitive, but really excited in terms of the progress being made there, because we’ve won a very large MSA that we’ll see in late Q4 and mostly the full run-rate into 2021. Again, we’ve taken out some costs there that will continue to allow us to increase margins. So we’ve got a lot of momentum in those two segments. But clearly, North America Storage in terms of the legacy Mobile Mini was the pure-play there and where most of our focus is, but I’m excited about the momentum on the other two sides of the business.

Yes, Kevin, it’s Brad. The only thing I would add is UK Storage and Tank and Pump together is about 10% of the revenue and 10% of the EBITDA, both our great assets performing very well. Our real focus for optimization here is leveraging the North America Modular and Storage segment together. I mean that’s where the meat of the opportunity is here.

Got it. And then just a quick follow-up and this is more, I think, kind of qualitative, but between Brad, Tim, and Kelly, in particular, you’ve gone from kind of WillScot to ModSpace, doubling the business and now just a really, really transformational transaction in Mobile Mini. Without any really integration hiccups, and just a phenomenal outcome on that. Anything to call out? Was it just a preparation? Because again, you typically don’t see that. Anything, was it just the preparation or just knowledge of the assets? Anything to call out because it’s really been seamless and it’s just a great complement to you folks.

Kevin, this is Tim. And what I’ll point out first is with the ModSpace transaction, that was a business that was nearly identical to WillScot in terms of fleet, branch footprint, operations, go-to-market. So we knew that asset extremely, extremely well. And really, there’s – it’s a perfectly logical combination and one of the most synergistic I’ve ever seen. You contrast that a little bit with the Mobile Mini merger. These are two adjacent and highly complementary businesses. There are some operational differences in best practices, which I think presents opportunity. But when you step back and you look at how the portfolio has actually behaved with long-lived assets, long lease durations, slow churn, no customer concentration, very predictable and good forward visibility in the portfolios, they behave so similarly that it’s very logical to see them come together from an operational standpoint and also from the customer standpoint. So when you have this level of just strategic overlap, I think that really facilitates the integration process. And it really helps the teams come together as well as we execute those integrations.

Thank you.

Our next question comes from the line of Courtney Yakavonis from Morgan Stanley.

Hi, thanks for squeezing me in, guys. Maybe just going back to some of the detail you gave on monthly orders. It sounded very much like construction is not coming back and really this order growth has not been so much from pent-up demand, but from a shift towards social distancing and some new opportunities in manufacturing. Is first, is that the right characterization? And second, is that the case for both North America Storage and North America Modular or is storage really just pent-up back because I imagine some of these social distancing opportunities to apply as much to them?

Yes. I think, Courtney, if you just separate a little bit the seasonal shipments that Kelly mentioned, but the portfolios are performing nearly the same. So yes, what you’re seeing is across all other end markets excluding that non-resi construction outperformance, if you will. And part of that is driven by the need for additional space for social distancing, screening, et cetera. So yes, you’re seeing that right. As I look forward, ABI has always been a good indicator for return of non-resi construction. We’re in a great place. We’re stable, and we can be patient. And when it comes back, that will create, I would say, even more interesting opportunities.

Okay, great. So when you characterize, obviously, both segments acting very similar right now. And I think units on rent are both down about 3.5% to 4%. Would you expect unit on rent for both portable storage and modular space to trend similarly going forward into 2021? Or is there anything else that we should be kind of sort of effective drive the discrepancy between how units on rent return between the two segments?

Yes. Courtney, this is Tim. I’ll take a crack at it. What you’ve seen is order activities across both kind of rebound and converge to prior-year levels over the course of the last two quarters. And that’s very comparable across the two. You’ve also seen the volume of returning equipment decline significantly versus prior-year. It’s down almost 20% year-over-year across both storage and modular. So both in terms of new activations and returns, you’ve got very similar trends. Mobile Mini historically has had a seasonal build of unit on rent volumes in Q4, and that is specific to some of the seasonal retail activity that Kelly spoke about. So you should expect to see that go up in Q4. And you’ll recall that historically, on the modular side, you actually had the reverse trend. There were fewer new project starts in our core end markets there in Q4. So you normally see a unit on rent taper a bit in Q4 and then start to rebuild toward the end of Q1 and going into Q2. So the businesses are actually fairly complementary from a seasonality standpoint as you think about Q4. But there is a little bit of nuance. I think you’re going to see a stronger volume trend in the Mini business in Q4 as they’ve always demonstrated. And I’d expect to see some normal seasonality in the modular business, and probably too soon to talk about what we expect for Q2 next year.

Okay, got you. That’s helpful. And then just a quick clarification. Did you comment on what your VAPS penetration is looking like right now? I think you had mentioned you’re still trending towards 80%, but if you just have that rough percentage?

Yes. We’re at $286 of VAPS value per month, which would put us, let’s say, well north of 50% penetration as we get towards – right around 50% penetration as we drive towards that $400 level. And that’s primarily driven by the furniture growth.

Great, thanks.

Your next question comes from the line of Brent Thielman, D.A. Davidson.

Great. Thank you. Hey Tim, in terms of the variables impacting actual free cash flow for the fourth quarter and maybe even on a go-forward basis into 2021, I think the transaction costs are effectively behind you. But the only major component be that $10 million to $15 million in integration costs. Anything else we need to think about there?

I think that’s really right. When we talk about the transaction costs, these are really professional fees that are specific to advisory work and things like that, that facilitated the transaction. So what we have going forward are integration and restructuring costs, will relocate some locations and things like that, very similar to what you saw after the ModSpace integration. So really, if you start with EBITDA, we’ve given you that guidance. We’ve given you the CapEx guidance, about $105 million of cash interest. Call it, $10 million to $15 million of quarterly integration-related costs, could be some fluctuations in working capital, but historically, those have not been terribly material limited cash taxes. And then anything else we do with kind of would-be debt repayment or stock repurchase after that.

Yes, okay. And then maybe a follow-up. You talked a bit about the rate initiatives. It’s pretty clear what’s going on in the modular business. But Kelly, I’d be curious if there’s any metrics or anything you can share that gives us some feel for customer acceptance success in the storage business as you’ve been pushing rate harder and harder. I don’t know if that’s win rates down or up, just curious how those are flowing through.

We keep a very close eye on, really, I’d say the feedback from our sales reps is very important, although I think it’s easy to say, as a former sales rep that you have limiting beliefs sometimes. And so until it happens, you’re never sure whether it can stick. And I think that’s – this goes right back to the Mobile Mini’s ability to deliver on time, Mobile Mini’s quality of product, all the differentiators in terms of security. Our sales reps should have the utmost confidence. And I think a lot of times, like I said, is just the ability to see that there’s more opportunity, especially as we start to – we truly become a logistics company. And the combined organization is going to certainly be very much focused in on logistics. And Mobile Mini is so well – so far ahead of the competition. For example, to rent 20,000 seasonal units in the course of about four months, in addition to having peak core volume, speaks to that. It’s a real scale advantage. And sometimes, we’ve got to do a better job of messaging that to the sales reps. And I think we’re excited to see the progress that’s being made. And we do have to back it up, and we’ve got to make sure we’re still staying close to the customers, but it’s also supply demand. And like I said, if you look at the volume turn on the Mini side, it’s – units on rent are up about 3% right now to prior year. A lot of that’s not seasonal. Seasonal is about flat. A lot of it’s that core stickiness and again, probably our ability from a scale standpoint in logistics to take advantage of this situation where we can continue to help customers during the pandemic. And so I think a lot of it just comes down to the fact that we’ve got to go prove it out, and I think we’re doing that. The NPS has always been something we’ve followed very closely, and the customer feedback, we’ll stay very close to.

That’s great color. One more, if I could, Tim, did I hear you right that the delivery installation margin, call it in around 20%? That’s a reasonable level to assume on a go-forward basis with Mobile Mini tucked into the numbers?

Look, we’ve seen some permanent improvements. It can fluctuate depending on the mix of delivery and returns and major projects and some of the seasonal activity, but it’s up with about 300 basis points year-over-year on a pro forma basis. And we’ve been really, really encouraged by those results. As we step back and we think about, okay, where are we going to prioritize our time and allocate resources. As Kelly was just talking about, logistics is a big number. You’re talking about pro forma revenues on the D&I side, well over $300 million, right. So we are a logistics company at the end of the day. And that is a competitive advantage for the company. So it only makes sense for us to invest further behind it. And margin is one of the areas where you’ll see that hopefully manifest itself.

Okay, great. Thank you, all. Best of luck.

Your next question comes from the line of Phil Ng from Jefferies.

Hey, good morning, guys. Orders have progressed pretty nicely in both your North America Modular and Storage business. How should we think about unit on rent in fourth quarter? And then as we kind of lookout to 2021 on a year-over-year basis, just trying to gauge with net new orders essentially being flat now, how quickly will that translate to your units on rent?

Yes. Phil, this is similar to Courtney’s question. I always think about the business a bit sequentially in terms of where do we go from here because the movements are really not that dramatic quarter-to-quarter as you’ve seen, right. So on the modular side of the business, it would be normal to have a seasonal tapering of units on rent in Q4. And on the portable storage side of the business, it would be normal to have actually pretty strong seasonal growth into Q4 in support of those large big-box retailers. So based on the activity we see right now, we kind of see both of those playing out. And really the punchline from my perspective, in terms of the order data is that just the deficit we saw in Q2 has all but converged to prior-year levels, right. And so that, to me, says we’re probably back more in line with a normal seasonal pattern.

Okay. So we should see that uptick in your orders come through fairly quickly in a quarter or two, give or take. Is that the right way to think about it or you’re actually even quicker?

That’s right. Deliveries follow orders within several weeks typically on the modular side and maybe even faster than that on the storage side. And again, so I just think about that sequentially from what you saw in Q2 and Q3 then going into Q4.

Okay. That’s helpful. Any mix nuances we should be mindful of when you pivot from construction to some of these other end markets that are doing better, whether it’s healthcare and government, whether on the margin side or from an AMR standpoint?

Look, I mean, one of the beauties of the revenue management tools that we use is that we do segment by industry group, and we do segment based on other transaction characteristics. And you will see some fluctuations, but I can’t point to the delivery mix right now and highlight any real meaningful change in mix other than the events business, which we had talked about, is still quite slow. Those tend to be short-term, higher-priced rentals, but a relatively low percentage of our overall revenue mix. And then really the broad-based trend that Brad talked about previously is just the impact of social distancing really across all of the end markets. And that’s in the near-term, probably continues to be an area of focus.

Okay. That’s helpful. And just one more for me. On the cash flow side, Tim, just given your new mix of portfolio with combination with Mini, how seasonal is free cash flow generation on a quarter-to-quarter basis just because when we look at your free cash flow for the quarter, it’s certainly very strong if we kind of flush out some of the merger costs? And then you start seeing the synergies flow through a little bit more and interest savings as well. It seems like you’re potentially a little ahead of your $500 million free cash flow target run rate. So any thoughts and color around that? Thanks.

Yes. If you think about – EBITDA is not very seasonal, right, because it’s driven by the lease revenue at the end of the day, which is slow and steady and very predictable. So historically, you’ve seen a bit of margin pickup across both businesses, frankly, in Q4, in part due to variable costs on the modular side and in part due to the retail – seasonal retail on the Mobile Mini side. CapEx can tend to be a little bit more weighted towards Q2 and Q3 in a normal year. 2020 has been anything but normal, obviously, but that – there is some modest seasonality there potentially. And then interest cost, just be careful about the timing of our bond payments because both the cost and the sizing there is a little bit different. But aside from that, there’s really nothing else I would call out from a cash flow seasonality standpoint. And as you think about 2021, the second half of the year, that’s really what I would expect the integration cost headwinds that we’re incurring right now to start to taper off and hopefully be negligible by the time we get to 2022.

Okay, super. Thanks a lot. Appreciate the color.

And your next question comes from the line of Sam England from Berenberg.

Thanks for taking the questions. Firstly, could you talk a bit about any early successes you’ve had cross-selling into larger national customers? And maybe what the reception’s been like from national customers who maybe only dealt with one of the businesses in the past?

Sure, Sam. I think a couple of things. I think as you start thinking about cross-selling, one is that Mobile Mini had success really pre-merger at securing mobiles through the managed services offering. So I think there’s – first of all, there’s a lot of confidence within the sales group in terms of cross-selling there. And I think today, we’re seeing that continue to improve. And I think we actually look at the close rate of the leads that are passed from Mini to – over to the modular side of WillScot closing at a very similar rate of a typical lead that WillScot is seeing, which is really exciting there. So it’s more qualified lead. There’s less than 20% overlap from what we’ve seen. So I think it’s certainly exciting for us to see that. On a national account level, we’re still in the early phases of kind of bringing that group together. I can tell you that Brad and I have been out and seeing a couple of very large customers that are excited about the opportunity, see the partnership. It’s – I go back to the fact that the customer is certainly evolving from over the last five years, and they’re looking for us to make their job easier. And that’s evident from the standpoint of the vast penetration that WillScot had success with. The managed services offering that Mobile Mini has grown to, which now has over 4,000 rerun items on rent. That’s – all those are signs that the customer is looking for us to make it easier. And the two of us coming together, knowing the overlap on these job site is certainly going to make it easier for the customer to do business. And I think Brad and I had initial touch points with some of our big customers, we’re seeing a lot of excitement.

Okay, great. And then the next one, on the backside of the business, you’re obviously seeing great momentum. I just wondered how you’re thinking about expanding the range of SKUs? There I’m particularly thinking about within equipment outside of the units that was part of Mini’s managed service offering?

Yes, this is Brad. I think, first, just as a reminder, we can achieve this $400 level without introduction of any additional SKUs. So that’s a well organized, good, better, best, 40 to 50 SKUs, that we have stocked in currently all the WillScot branches and soon to be in the Mobile Mini branches. So we can achieve this $150 million of tailwind, if you will, associated with VAPS by just doing what we’ve already done. And as Tim mentioned, we’ve already got a pretty significant portion of our reps and even full areas that are already achieving that $400 levels. So there’s no heroics here, no new products required. There are absolutely new products that are interesting. We have introduced panels, if you will, to create more separation between desk like cubicles, new data services. As we look outside the box, and outside the storage units, items like panelized fence we’ve piloted in the past as a good example. I mean, hard assets that we delivered at the beginning of the job and we pick up three years later are absolutely up our wheelhouse and things that potentially will look at putting our balance sheet behind in the future. So there’s a – I think there’s a very interesting runway here when you look at the whole job site. What’s been key to our success is doing a few things really well. So that’s why – as you’ve followed us over time, we’ll keep talking about let’s get to $400 with the VAPS offering we have. We’re making great progress and all the while, we’ll look for the next opportunities to expand that.

Great. Thanks very much, guys.

Next question comes from the line of Sean Wondrack, Deutsche Bank.

Hey, Brad, Kelly, Tim, and team, and thanks for taking my questions. I’ll keep it relatively quick. Most of them have been answered. But just on the working capital front, should we expect the same sort of seasonal drag in the first half of the year and a little bit of a return of working capital in the back end of the year going forward to the combined business?

Yes, Sean, I think from my perspective, it’s a little premature to give kind of detailed seasonal working capital guidance as the two businesses come together. There are just a lot of moving pieces. I’ll give you some examples. Mobile Mini has done a great job on kind of DSOs and receivables, for example. So that’s an area where I think, over time, we should see improvement on the modular side. Conversely, on the WillScot side, over time, you’ve seen kind of our deferred revenue and customer deposit line grow pretty significantly. That’s the practice of taking upfront deposits from customers on standard lease agreements, which we were able to scale, for example, across the ModSpace volume. So there are going to be some puts and takes here, as well as just kind of the natural noise that comes along with the integration. So I’m not going to get too precise today on working capital seasonality.

Okay, fair enough. That’s helpful. And then just as a last question for me. Can you just remind us, you have a 3 to 3.5 turn net leverage target? You’re at about $2.5 billion of debt right now. Do you anticipate achieving your net leverage target through EBITDA growth? Or also, you’re going to incorporate some debt repayment in that? Thank you.

Yes. Clearly, if you use the post-merger July 1, ABL balance as the starting point, we paid down nearly $117 million of debt in Q3 using internally generated free cash flow. So we intend to grow EBITDA, and we intend to reduce gross debt. And we’ve got a high degree of capital allocation flexibility as we get into 2021.

That’s great. Thank you very much. And great job this quarter. Good luck on new quarter.

Thank you. I think with that, we can wrap up the call. So thanks, everyone, for your interest in our exciting growth journey. I wish all of you continued safety and good health. Talk to you next quarter.

This concludes today’s conference. You may now disconnect.