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WillScot Corporation (NASDAQ: WSC)
2020 first quarter earnings call
May 1, 2020, 10:00 a.m. ET
Content:
- Prepared observations
- Questions and answers
- Call participants
Prepared observations:
Operator
Ladies and gentlemen, thank you for waiting and welcome to the Willscot Corporation First Quarter 2020 Conference Call. [Operator Instructions] Please note that today’s conference can be recorded. [Operator Instructions]
Now I would like to deliver the conference to your speaker today, Matt Jacobsen, Vice President of Finance. Thank you and please go ahead, sir.
Matt Jacobsen – Vice president of finance
Thank you and good morning. Before we begin, I would like to remind you that we will discuss forward-looking statements as defined in 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 release. Release and the risk factors identified in our 2019 Form 10-K and other 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 would like to remind you that some of the statements in the answers 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 such forward-looking statements. The press release we issued this morning and today’s call presentation are published in the Investor Relations section of our website. A copy of the statement was also included in an 8-K that we sent to the SEC. We will make a replay of this conference call available via webcast on the company’s website. For financial information that has been expressed on a non-GAAP basis, we have included reconciliations with comparable GAAP information. Check out the charts in the slide show accompanying today’s earnings release. In the coming days we will also file our 10-Q with the SEC for the first quarter of 2020.
The 10-Q will be available through the SEC or in the Investor Relations section of our website. Now, with me today, I have Brad Soultz, our President and CEO; and Tim Boswell, our chief financial officer. 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 a historical perspective on how our business operates through market cycles and provide a little more detail on our perspective for the rest of 2020 before opening the call for questions.
That will pass the call to Brad.
Bradley L. Soultz – President and CEO
Thanks Matt. Good morning to everybody. I would like to welcome everyone to the WillScot First Quarter 2020 conference call. Please turn to slide 7 of our Investor Relations presentation, which highlights our excellent first quarter financial results as well as our revised outlook for 2020. Both our first quarter results and our strong outlook are particularly welcome given the unexpected impact and unprecedented from the COVID-19 pandemic. I am honored by the compassion, determination, and perseverance of the WillScot team who have taken the immediate steps necessary to protect each other while actively implementing our temporary modular space solutions in every major metropolitan area of North America to assist our clients and our customers. Communities persevere in this pandemic and continue to prosper in the future. First, our first-quarter revenue of $ 256 million increased 1% over the same period in 2019.
This was driven by continued superior performance in our modular EE segment. USA In which the income related to leasing and service increased 6% year-over-year with a 14% improvement in the rate. This is the 10th consecutive quarter of double-digit rate growth and we expect this momentum to continue as we look to the future. This is the 10th consecutive quarter of double-digit rate growth and we expect this momentum to continue as we look to the future. While we will go into this in a few minutes, I will remind you that 40% of the rate improvement is due to greater penetration of our value-added products and services that are VAPS and the remaining 60% are price optimization tools and processes. Thereafter, our Q1 adjusted EBITDA of $ 90 million has increased 7% compared to the prior year.
The continued change in the revenue mix that favors leasing combined with our continued cost reductions results in a 210 basis point improvement in EBITDA margins, which were 35% for the quarter. And finally, our first-quarter free cash flow of $ 8 million represents an annual improvement of $ 34 million and is our fourth consecutive quarter of positive free cash flow. Finally, as we move to our revised 2020 outlook, while the COVID-19 pandemic did not significantly affect our first quarter financial results, it certainly has introduced uncertainty into our outlook for 2020 related to the severity and duration of any outages of related demand. Despite this uncertainty, we have a high degree of forward visibility given that 90% of our adjusted gross earnings are associated with the recurring lease of long-lived assets, with an average lease duration of nearly three years.
We have already reacted quickly to dynamic market conditions, reducing both variable cost and capital spending. I will review the 2020 outlook to see demand reductions ranging from 10% to 30% compared to 2019 levels with durations ranging from the second quarter to the rest of the year. The midpoint of our revised EBITDA guidance range of $ 350 million to $ 400 million EBITDA before any contribution from the pending Mobile Mini transaction represents a reduction of $ 45 million or 11% from our original guidance, which was issued before the COVID shock, still Still growth of around 5% over the previous year. The midpoint of our revised net capital spending guidance range of $ 100 million to $ 150 million is $ 45 million lower, respectively. Consequently, adjusted EBITDA less net capital expenditure 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 guidance for 2020 as we were able to offset the reduced revenue and adjusted EBITDA driven by these low-end market activity levels with lower spending of capital to manage free cash flows. I am confident that we have the right equipment and playbook to respond in the short term, while maintaining our enthusiasm and commitment to future strategic growth and specifically the truly transformative combination with Mobile Mini. Now, I ask you to go to slide 10 and take it a little under the hood to provide additional context on what we are seeing regarding the COVID-19 pandemic crash. Although the main demand indicators in our various end markets were very strong during the first quarter, they have accelerated until April.
Delivery dates associated with new orders have also been extended beyond the typical in the future, reflecting the uncertainty of some customers regarding when new projects begin. Starting with the chart at the bottom left, the green bars represent our monthly order rates for the US Modular business. USA The gray shadow bars behind the green bars represent order rates for the same period in 2019. You will notice that during the first quarter, our monthly order rates have accelerated and were 10% higher than the previous year. Since the end of March, order rates have dropped 30% sequentially and are down 20% compared to the previous year. The box at the bottom right shows our current backorder book compared to the same point in the previous year. The green part of the bar reflects the part of the orders that have delivery dates in the next four weeks, while the gray part reflects those scheduled later.
You will notice that while our overall backlog has increased 11% from the previous year, backorders with scheduled delivery dates for the next four weeks are down 25% compared to what was pending for the next four weeks, the same period last year. While demand for new projects is less secure, it is important to note that we have not experienced unusual reductions in prices, VAPS penetration, or collections. We have not experienced increases in early returns and we continue to serve our customers as an essential service provider from our fully operational branch network. Now, moving to slide 11, VAPS growth has been consistently driving 40% of our overall rate growth. Based on the VAPS penetration we achieved in new units delivered in the last 12 months, we expect another $ 125 million in annualized revenue growth.
In the first quarter, the average rate of VAPS value per month on all units delivered before 12 months was $ 276, which is 6% more than the prior year LTM levels and $ 121 above the average level. of the 88,000 units currently for rent. The associated growth in revenue will occur over the next three years as the units currently for rent are returned once their current projects are completed and redeployed at the current level of VAPS penetration. While VAPS growth fueled 40% of our overall rate increase of 14%, the other 60% was driven by modular office rate optimization. Although we do not disclose specific rates achieved on new office deliveries, they are approximately 20% higher than average in the rental portfolio and represent a similar convergence opportunity. Combined, these two fundamental and idiosyncratic growth levers provide confidence that the double-digit growth rate growth achieved in the past two years can be extended into the future.
Now, go to slide 12, and I’ll expand our demand outlook on our various end markets a little bit more granularly than normal. First, the bars on the stack to the left represent the relative size of our diverse group of end markets, with those for non-residential construction clustered at the top in dark green and those for commercial, industrial in black. Starting with the non-residential construction markets, we started the year very strong with deliveries of 4% to 5% year over year. While some active projects have been temporarily affected, we expect them to continue, albeit at a slower rate. We expect new projects to start dropping 25% to 50% for at least the second quarter.
While the infrastructure-related stimulus could be a catalyst in the medium term, we hope that both active and new projects will require additional space to accommodate appropriate social distancing and project site detection that could provide more immediate opportunities. Moving on to the commercial and industrial markets, which also started the year solidly with deliveries of 4% to 5%, short-term events account for only 2% of our revenues that were impacted immediately and are not expected to recover materially this year. While retail was also immediately affected, we expect compensation for storage and distribution. Manufacturing and professional services remain stable and, as with construction projects, we expect both new and active clients to require additional space to accommodate appropriate social distancing, and we will also provide some more immediate opportunities.
Overall energy markets are largely stable, with limited declines in upstream energy, which represents less than 5% of our revenues. Education markets have remained stable and could also provide some catalyst as schools make the necessary adjustments to accommodate norms of social distancing. And finally, government and healthcare markets typically contributed a very small portion of our revenues that have been quite robust in the hardest hit communities as we reacted immediately to help combat the COVID-19 pandemic. We will continue to monitor demand in our various geographies and markets and have a disciplined process through which we will control and allocate our capital. Given the dynamic nature of our end markets, we have increased the frequency of these planning and control cycles.
One of the key strengths of our business model is the discretion and flexibility we have over short-term capital spending, along with our long-term average lease, long-term assets that allow us to reallocate or reduce capital spending and generate free cash flow to the extent that the markets do not show growth. Again, as noted, I hope that the idiosyncratic growth levers inherent in our business, such as our unmatched scale, integrated merger and acquisition related synergies, and our business strategy to drive growth in lease revenues organically through optimization of VAPS rate and penetration in our Ready to Work solution will provide continued growth largely independent of market cycles and will develop predictively forward-looking.
Regarding slide 13, in this environment we all have a greater sensitivity to liquidity and WillScot’s overall liquidity position, I think it 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 have generated positive free cash flow for the past four quarters, at the same time that we completed the main integration and increased our leasing operations organically in 2019. Our business will be more cash generating by the second and third quarters. So, in the short term, our main source of liquidity will simply be internally generated free cash flow. As such, we paid around $ 10 million on our revolver balance in the first quarter instead of withdrawing the installation as many companies have.
In the chart above, you will see that we continued to decline in the first quarter as Adjusted EBITDA increased and debt decreased, which we will continue to do in the second quarter. If necessary, of course, we have the ability to turn to ABL and we have no concerns about covenant compliance, even in our most severe modeling scenarios. The chart below illustrates that we had approximately $ 500 million of additional availability in our ABL revolver as of March 31. Overall, then, we believe we have ample liquidity with which to run all realistic demand scenarios. Finally, we move to slide 14, although our overall liquidity position is strong, however, we have taken aggressive measures to reduce variable cost for the second quarter in order to align them with the demand environment and maximize our results.
The chart on the right 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 the cost of leasing and selling, general and administrative expenses that face the prolonged slowdown in demand that we can take and reduce declining margins to 50% or less. To date, given the uncertainty about the duration of the recession, we have aggressively acted on the variable components as listed on the left side of the page. And we have the playbook ready to face more draconian scenarios. Tim will touch this later, capital expenditures – Tim will touch this later, but capital expenditures are more – they are almost completely variable in the short term. Our organic orientation implied an increase in net capital spending until 2020, given our plans to support volume growth.
Now, probably in the face of a low volume environment, we have reduced our net capital spending guidance by at least $ 50 million and we expect second quarter net capital spending to drop approximately 20% year-over-year. As always, we’ll let the order delivery data we see from the field in real time drive our decision-making. We are re-evaluating capital allocation every two weeks to respond to these dynamic market conditions, and a relatively broad range of net capital expenditure guidance reflects the different demand scenarios that could unfold in the second half of the year. With that, Tim will take you through some of the historical data from the latest recession, which we think will be useful to investors before getting to some additional highlights from the first quarter. Tim?
Timothy D. Boswell – CFO
Thanks Brad and good morning. Moving on to slide 16, given the macroeconomic context, we wanted to revisit some of the pages that we provided when we went public and give our perspective on how WillScot performed in the last recession and also highlight some fundamental differences that we think work to our advantage . ahead. The bar graph in the middle of the page shows our rental, delivery and sale income for the past 16 years, so a couple of observations. First, due to our long lease duration, the volume of rental units decreased slowly after the GFC fund in 2011. We can fairly easily forecast our installed base turnover that did not change after the GFC. There simply were not enough new projects to begin replacing those that naturally ended due to the prolonged drop in construction starts without resolution.
Second, during the post-GFC period we harvested cash from the business for almost seven years. Total fleet size contracted as rental unit sales increased without a significant reinvestment of the fleet through 2015. Therefore, we clearly lagged behind the unsolvable recovery due to our captive ownership structure. As an independent public company today, we will be aggressive in leading the recovery. Third, at the bottom of the page, you will see that our income mix has changed dramatically. Over 90% of current revenue comes from our leasing operations compared to just 64% in 2007. As we have discussed, sales revenue is more volatile and we have strategically emphasized this. Therefore, we have greater forward visibility in our revenue streams. I will also point out that we had a high concentration in the education market, which accounted for about half of the decrease in volume after GFC as state and local budgets tightened. Today we have no such huge end-market exposures in the portfolio.
Finally, towards the rest of 2020 and 2021, we have transformed the scale of the business and have a much more rational industrial structure, which we believe results in a healthier balance of supply and demand. Turning to page 17, this chart illustrates how our equity investments are almost entirely discretionary, even over extended periods, given the longevity of our assets, giving us significant flexibility to manage free cash flow depending on the conditions of the market. The green bar shows our undischarged free operating cash flow and the gray line shows our exclusive net acquisition tax. Due to the sharp drop in non-resolution, as well as the strategy of our former parent company, we see that net capital spending was actually negative for two years, meaning that we sold more fleet than we reinvested and net capital spending was a source of cash for the company. .
There was no reinvestment of material in the US fleet. USA Until 2015, which is possible since the modular units have a useful life of 20 to 30 years and have no real technological or mechanical elements to maintain. The business generated approximately $ 900 million of free operating cash flow not released in the seven years after the GFC, and our service and leasing income today is approximately double what it was in 2007. Obviously, this extreme example shows that the business It focused primarily on generating cash 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 pull back quickly, reinvest in organic growth earlier in the cycle, further consolidate our markets, and return capital to shareholders with great flexibility and opportunism.
Since 2017, investors have been familiar with our approach to capital allocation to value-added products, fleet overhaul, strategic acquisitions, and deleveraging as they extend our overall value proposition to the market. History illustrates how a lower demand environment will allow us to redistribute capital and drive shareholder value. Turning to slide 18, let’s spend a few minutes on the mechanics of portfolio turnover and the implications for the average rental rate. As this is instructive to think about where our portfolio KPIs go from here. Based on the current spread between the prices of our most recent contracts and the average portfolio in the US. In the US, we see average rental rate growth through 2021 regardless of current market conditions and have seen this unfold historically. The graph on the left shows our average rental rate in dotted gray and our spot rate for new deliveries in dark green.
During the GFC, spot rates delivered peaked in late 2007 and we are approximately 10% above the average rental rate across the portfolio. Spot rates then stabilized for 12 months before dropping approximately 20% to minimum levels in 2011. It is important because of our long lease duration, average rental rates take a long time to reach spot rates, and the rate Average rent peaked in the fourth quarter of 2009, approximately 15 months after the spot rate peaked. The length of the lease also moderates the breadth of the average rental rate cycle, which only fell 7% from the peak to the minimum.
So the mechanics of portfolio rotation is fundamentally important, and we’ve made some improvements to them. We implemented our centrally managed algorithm-based pricing tools in 2015, while pricing was previously decentralized and manual. We managed unit prices beyond their contractual term today strategically, while historically there were only inflationary adjustments. And today we have a much more rational industry structure, each of these factors enhances our ability to manage spot rates and average rental rates relative to 2007.
In addition, the average lease duration in our 34-month portfolio is 17% longer than in 2007, extending the delay you see between changes in spot rates and changes in the average portfolio. As of the first quarter of 2020, our spot rates were still increasing. And when it includes value-added products, our combined spot rate is more than 30% higher than the average rate in our US portfolio. USA So that is more than triple the differential we saw in 2007. These are the mechanics that allow us to look at the portfolio with some confidence, and we believe that we have incorporated an average growth in the rental rate until 2021, regardless of the current conditions of the market. And as the market leader, we will be focused on achieving rate performance in this market.
Now, let’s briefly move on to slide 20 and the more recent past of Q1, although it seems like it was a long time ago. Year-over-year revenue growth was basically flat, but with another sharp change in mix that favored leasing over sales. Basic income from leasing and services increased by 5.4%, offsetting the decrease in sales income. The first quarter of 2019 was actually the last quarter when we saw a significant contribution from runoff from the ModSpace sales business, and you can see the improvements to this mix clearly in the graph on the left. Adjusted EBITDA increased by $ 6.1 million in fixed income, and margins increased 210 basis points year-over-year as a result of cost reductions. I will note in the first quarter that our cost reductions were partially offset by approximately $ 3 million of expenses related to our semi-annual sales meeting, which is one-time and non-recurring for purposes of our general and administrative expense execution rate in the second trimester.
In the upper right graph, as we saw in the fourth quarter, free cash flow continues to reflect positively, an increase of $ 34 million year-over-year. I will note that we had approximately $ 5 million in falling real estate sales in the first quarter, and we accelerated payments to many of our smaller providers in late March, so there was approximately $ 15 million against free cash flow in the first trimester. simply related to time. Moving on to slide 25, and a little more about the free cash flow tipping we started in the fourth quarter, you will recall that the net cash provided by operating activities tripled year-over-year in the fourth quarter, and the first quarter went up. approximately 2.5 times versus previous year. Starting in the fourth quarter, we had several levers aligned to draw cash from operating activities. Front-line lease revenue has been growing with the expansion of EBITDA margins, another 210 basis points in the first quarter. Interest expenses fell 9.2% in the first quarter, and working capital, which had been an obstacle in the first half of 2019, has stabilized. We expect these trends to continue in the second quarter, although we will begin to incur some cash costs related to the integration work on the Mobile Mini transaction as we move towards closing.
At the bottom of the page, see a similar favorable trend in net cash from our investing activities. Net cash used in investment decreased in the fourth quarter of 2019 and the first quarter of this year by 29% and 27%, respectively, compared to the previous year. These reductions were the result of our ability to manage the combined fleet more efficiently after completing the ModSpace integration. Looking ahead to the second quarter, as Brad mentioned, we expect delivery volumes to drop 20% compared to the prior year, meaning delivery volumes will be similar to our seasonal fourth and fourth quarter lows. Por lo tanto, espero que el CapEx neto sea comparable a esos niveles y disminuya aproximadamente un 20% desde el segundo trimestre del año pasado. Con esta tendencia de volumen, habremos invertido por debajo de los niveles de mantenimiento desde el cuarto trimestre de 2019, pero con un capital de crecimiento incremental asignado a productos de valor agregado. Dado lo dinámico que ha sido el entorno del mercado, hemos pasado a un ciclo de asignación de aproximadamente dos semanas para el gasto de capital de la flota, por lo que reevaluaremos las asignaciones de capital para el tercer trimestre en función de los datos que vemos en junio.
Dado el entorno dinámico, en la diapositiva 26, proporcionamos un marco para tratar de ayudar a pensar sobre posibles resultados financieros diferentes en 2020. Obviamente, esta es una interrupción económica sin precedentes, pero nuestro negocio es tal que tenemos suficiente visibilidad para revisar nuestra perspectiva financiera. para el año, aunque en baja y con rangos más amplios de lo normal. Sin embargo, el punto clave aquí es que, en casi todos los escenarios, 2020 debería ser un año de moderado crecimiento del EBITDA, y los márgenes deberían ser comparables y el flujo de caja libre es más fuerte de lo que asumimos en nuestra perspectiva original. Sentados aquí en este momento, estamos planeando una reducción del 20% de la demanda de entregas de unidades en el segundo trimestre en comparación con el año anterior. Como mencionó Brad, el total de pedidos pendientes aumentó año tras año, pero debido a la incertidumbre del mercado, esperamos que muchas fechas de entrega y facturación iniciales se deslicen en el tercer trimestre.
Por otro lado, no vemos ningún impacto adverso a corto plazo en los precios, los productos de valor agregado o la duración del arrendamiento, por lo que esto es principalmente una sensibilidad de los volúmenes de entrega y los costos variables. Brad ya mencionó la estructura de costos fijos versus variables, lo que nos brinda una gran flexibilidad para mantener los márgenes en un entorno de volumen decreciente. El gráfico de sensibilidad sugiere un margen decreciente del 60% si solo flexionamos nuestros costos variables, y creemos que los decrementos cayeron al menos al 50% si consideramos más reducciones de costos estructurales que implementaríamos si la perspectiva de la demanda sigue deprimida en la segunda mitad del período. año. Por lo tanto, esas reducciones estructurales respaldarían nuestra tasa de ejecución hasta 2021, si se implementan, y cuando lo hagamos, y lo haremos de una manera que las aseguradoras aún estén en condiciones de liderar la recuperación.
En el punto medio de nuestro rango de orientación revisado, vemos ingresos básicamente estables al año anterior debido a los precios y los productos de valor agregado, compensando el volumen de contrapeso y el crecimiento ajustado del EBITDA de aproximadamente 5%, impulsado principalmente por reducciones de costos y márgenes modestamente resultado. Lo que es más importante, en el gráfico inferior derecho, el EBITDA menos el gasto neto de capital, que son los dos componentes básicos del flujo de caja libre sin apalancamiento, está en línea o por encima de nuestra guía original para el año. Esto resalta la resistencia de nuestro modelo de negocio y el valor de la larga duración del arrendamiento, junto con la flexibilidad en el costo y la estructura de gasto de capital. Y estoy orgulloso y agradecido por la ejecución de nuestro equipo en estas circunstancias sin precedentes.
Con eso, se lo devolveré a Brad para una actualización rápida sobre la fusión de Mobile Mini, cualquier comentario de cierre y preguntas y respuestas.
Bradley L. Soultz – Presidente y Director Ejecutivo
Gracias Tim. En resumen, estoy orgulloso de nuestros logros del primer trimestre y extremadamente confiado en nuestra perspectiva revisada. Lo que es más importante, estoy humillado por la compasión, la determinación y la perseverancia del equipo WillScot ante la pandemia de COVID-19. Tenemos la estrategia correcta y el equipo adecuado para continuar aumentando nuestro valor para los accionistas a largo plazo, y espero con ansias la combinación transformadora con Mobile Mini. A medida que pasamos tiempo con el equipo de administración de Mobile Mini, se continuó reforzando cuánto nos parecemos, más que diferentes, y las fuertes culturas muy similares de las dos compañías. Juntos, la solución Modular Space de WillScot y las soluciones de almacenamiento portátil de Mobile Mini mejorarán el alcance y el alcance de la propuesta de valor que brindamos a nuestros clientes colectivos. Igualmente importante, cada compañía tiene ingresos por arrendamiento muy predecibles, activos de larga duración y una economía de unidad atractiva, todo lo cual impulsa el crecimiento a largo plazo y la creación de valor para nuestros accionistas. Estas dos grandes compañías sin duda serán aún más fuertes juntas.
Con eso, me gustaría agradecerle por tomarse el tiempo para unirse a nosotros hoy. Esto concluye nuestros comentarios preparados. Y operador, ¿podría abrir la línea?
Preguntas y respuestas:
Operador
[Operator Instructions] Nuestra primera pregunta proviene de Scott Schneeberger de Oppenheimer.Scott Schneeberger – Oppenheimer & Co. – Analista
Thank you. Buenos días a todos. Me alegra saber que te está yendo bien. El, supongo que me gustaría comenzar, mirando la diapositiva 12, gracias por la presentación muy detallada, por cierto. Por curiosidad, ¿podría elaborar un poco más sobre el espacio de trabajo adicional para el distanciamiento social? ¿Está viendo anecdóticamente algún pedido para eso en este momento en los mercados finales además de la atención médica del gobierno? Y luego también este desplazamiento del almacenamiento y la distribución en la categoría comercial e industrial, ¿podría explicarlo también? Gracias.
Bradley L. Soultz – Presidente y Director Ejecutivo
Si. Hola Scott, soy Brad. Gracias por unirte a nosotros. Sí, estamos viendo absolutamente más que evidencia anecdótica y la necesidad de espacio adicional en sitios de proyectos, oficinas, escuelas, etc., ya que todos contemplan la realidad de la nueva norma de distanciamiento social. Así que es algo en lo que estamos trabajando activamente con los clientes. En algunos casos, se trata de reconfigurar los muebles en la oficina que tienen. En muchos casos, se requerirá más espacio. Además de, digamos, este distanciamiento social dentro de una oficina, en un lugar de trabajo, también estamos viendo la probable necesidad de edificios adicionales para proteger a las personas a medida que ingresan a los sitios de trabajo, especialmente en este tipo de reinicie la fase, si lo desea, a medida que estas economías vuelvan a estar en línea.
Scott Schneeberger – Oppenheimer & Co. – Analista
Gracias. Just staying on this side, 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? Gracias.
Bradley L. Soultz – President and Chief Executive Officer
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.
Scott Schneeberger – Oppenheimer & Co. — Analyst
All right. Gracias. 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? Gracias.
Timothy D. Boswell – Chief Financial Officer
Yeah, 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 very good view of Q2 at this point and the installed base is performing exactly as we would expect.
Scott Schneeberger – Oppenheimer & Co. — Analyst
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?
Timothy D. Boswell – Chief Financial Officer
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.
Scott Schneeberger – Oppenheimer & Co. — Analyst
Excelente. Thanks guys. I’ll turn it over. Be well.
Timothy D. Boswell – Chief Financial Officer
Igualmente.
Bradley L. Soultz – President and Chief Executive Officer
Thanks, Scott.
Operator
Our next question comes from Kevin McVeigh of Credit Suisse.
Kevin McVeigh – Credit Suisse — Analyst
Great, thanks. and hope you all are staying safe. Hey, 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?
Timothy D. Boswell – Chief Financial Officer
Yeah, it’s been up over 30 for some time — this is Tim, hi 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 one 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 two 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.
Kevin McVeigh – Credit Suisse — Analyst
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?
Bradley L. Soultz – President and Chief Executive Officer
It’s more weighted, Kevin, to uncertainty with new starts, right?
Kevin McVeigh – Credit Suisse — Analyst
Entendido.
Bradley L. Soultz – President and Chief Executive Officer
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 yeah, that shift is largely attributed to new orders, with less uncertainty as to when specifically they’ll start.
Kevin McVeigh – Credit Suisse — Analyst
Excelente. 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.
Bradley L. Soultz – President and Chief Executive Officer
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.
Kevin McVeigh – Credit Suisse — Analyst
Awesome. Gracias.
Operator
Our next question comes from Courtney Yakavonis of Morgan Stanley.
Courtney Yakavonis – Morgan Stanley — Analyst
Excelente. Good morning guys. 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. 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?
Timothy D. Boswell – Chief Financial Officer
Yes. This is Tim, hi, 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-million-ish 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.
Courtney Yakavonis – Morgan Stanley — Analyst
Bueno. Gracias. 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 this isn’t the right time for that deal?
Bradley L. Soultz – President and Chief Executive Officer
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.
Courtney Yakavonis – Morgan Stanley — Analyst
Okay great, thank you.
Operator
Our next question comes from Phil Ng of Jefferies.
Philip Ng – Jefferies — Analyst
Hey, guys. Good morning.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 a units on rent, and what you’re assuming from an AMR and spot rate standpoint from 1Q levels?
Timothy D. Boswell – Chief Financial Officer
Hi 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.
Bradley L. Soultz – President and Chief Executive Officer
Si. 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.
Philip Ng – Jefferies — Analyst
Entendido. Bueno. 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?
Bradley L. Soultz – President and Chief Executive Officer
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.
Philip Ng – Jefferies — Analyst
Bueno. 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?
Timothy D. Boswell – Chief Financial Officer
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.
Philip Ng – Jefferies — Analyst
Bueno. Super helpful, guys. Thanks a lot.
Operator
Our next question comes from Manav Patnaik of Barclays.
Manav Patnaik – Barclays — Analyst
Thank you and good morning gentlemen. 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.
Bradley L. Soultz – President and Chief Executive Officer
Yeah, I would — this is Brad, I’ll poke 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, etc. 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.
Manav Patnaik – Barclays — Analyst
Entendido. 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?
Bradley L. Soultz – President and Chief Executive Officer
No, I’m even more excited about it now. You see how these two portfolios perform in uncertain market environments, definitely two great companies that will be stronger together.
Timothy D. Boswell — Chief Financial Officer
Yeah, 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
Timothy D. Boswell – Chief Financial Officer
So I think no matter how you slice that one up, the two companies are stronger together and more powerful together.
Manav Patnaik – Barclays — Analyst
That’s all I’ve got. Gracias chicos.
Bradley L. Soultz – President and Chief Executive Officer
Gracias.
Operator
Our next question comes from Sean Wondrack of Deutsche Bank.
Sean Wondrack – Deutsche Bank — Analyst
Hey, 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?
Bradley L. Soultz – President and Chief Executive Officer
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.
Sean Wondrack – Deutsche Bank — Analyst
Derecha. Okay, thank you, 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?
Timothy D. Boswell – Chief Financial Officer
Si. 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.
Sean Wondrack – Deutsche Bank — Analyst
Right, OK. That’s it for me. Thank you very much.
Operator
Our next question comes from Brent Thielman of D.A. Davidson.
Brent Thielman – D.A. Davidson — Analyst
Great, thank you. Good morning, Brad and Tim.
Bradley L. Soultz – President and Chief Executive Officer
Hey, Brent.
Brent Thielman – D.A. Davidson — Analyst
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.
Bradley L. Soultz – President and Chief Executive Officer
Yeah, 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 four 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.
Brent Thielman – D.A. Davidson — Analyst
Bueno. 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?
Bradley L. Soultz – President and Chief Executive Officer
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.
Brent Thielman – D.A. Davidson — Analyst
Bueno. Gracias. Best of luck.
Operator
I would now like to turn the call back to Brad Soultz with any further remarks.
Bradley L. Soultz – President and Chief Executive Officer
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.
Operator
[Operator Closing Remarks]Duration: 58 minutes
Call participants:
Matt Jacobsen – Vice President, Finance
Bradley L. Soultz – President and Chief Executive Officer
Timothy D. Boswell – Chief Financial Officer
Scott Schneeberger – Oppenheimer & Co. — Analyst
Kevin McVeigh – Credit Suisse — Analyst
Courtney Yakavonis – Morgan Stanley — Analyst
Philip Ng – Jefferies — Analyst
Manav Patnaik – Barclays — Analyst
Sean Wondrack – Deutsche Bank — Analyst
Brent Thielman – D.A. Davidson — Analyst
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