Mobile Mini's (MINI) CEO Erik Olsson on Q2 2016 Results - Earnings Call Transcript

| About: Mobile Mini, (MINI)

Mobile Mini, Inc. (NASDAQ:MINI)

Q2 2016 Earnings Conference Call

July 28, 2016 12:00 PM ET

Executives

Erik Olsson - President and Chief Executive Officer

Mark Funk - Executive Vice President and Chief Financial Officer

Analysts

Joe Box - KeyBanc Capital Markets

Scott Schneeberger - Oppenheimer

Justin Hauke - Robert W. Baird

Doug Mewhirter - SunTrust

Marc Riddick - Sidoti

Sean Hannan - Needham & Company

Sean Wondrack - Deutsche Bank

Operator

Good day, everyone, and welcome to the Mobile Mini 2016 Second Quarter Conference Call. At this time, I would like to inform you that this conference is being recorded and that all participants are currently in a listen-only mode. There is also a presentation that accompanies this conference call, which you can access at Mobile Mini's website at www.mobilemini.com. It is on the Investors page.

Before turning the call over to Erik Olsson, Mobile Mini's President and Chief Executive Officer, I will read the Safe Harbor statement. Before the presentation and the comments begin, Mobile Mini would like to remind you that some of the statements and responses to your questions in this conference call may include forward-looking statements. As such, they are subject to future events and uncertainties that could cause our actual results to differ materially from these statements.

Any forward-looking statements should be considered in conjunction with the cautionary statements in our press release and the risk factors included in our filings with the SEC, which Mobile Mini encourages you to read. In addition, please refer to the Investors section of Mobile Mini's website to find additional disclosures and reconciliations of non-GAAP financial measures that will be used on today's call.

Now, I will turn the call over to Erik Olsson.

Erik Olsson

Good morning everyone, and welcome to Mobile Mini's second quarter 2016 conference call. I am Erik Olsson, Mobile Mini's President and CEO, and with me is, Mark Funk, our Executive Vice President and CFO. As usual for this call, I'm going to review the summary of the quarter and some operational highlights. Mark will review the financials, and then we will open up the call to questions.

I will start on Slide number 3, financial highlights. I'm very pleased with how we continue to advance and make progress on our strategic plan. The strong delivery trends we started in second quarter of 2015 have continued through the second quarter of this year and into July as well. Our end markets and demand have remained solid and we're looking forward to continued growth for the balance of 2016 across both our business segments.

The second quarter also marked the go-live date for our SAP platform. We now operate the entire Company from one platform and this means all transactions across both portable storage and specialty containment are now conducted on the new centralized platform, including rental contracts, deliveries, asset management and billing. While it is early days, we can already start to appreciate the benefits this will provide for us over time. The SAP project has been a great success, but there's no doubt that the second quarter was impacted by productivity issues and distractions as the entire Company switched from three different platforms into one.

Let me start out with some key stats and highlights of the most recent quarter. Total rental revenues increased 2.7% year-over-year when adjusted for unfavorable exchange rates and the divestment of the mobile office business in mid May 2015. Looking at our two segments, and for portable storage first. Again, adjusted for the sale of mobile offices, June 2016 was the highest month of core portable storage activation in our Company's history. We have great momentum going into Q3. Our go-to-market strategy with sophisticated territory management and growth in sales reps is clearly paying off.

Rental revenues increased 6.2% year-over-year adjusted for exchange rates and this strong increase was driven by increases in activation, units on rent and rental rates. And in fact, our North American units on rent were up a solid 3.1% year-over-year at June 30, 2016.

Second quarter rental rates also increased 1.6% year-over-year on total units on rent with rates for new units going on rent increasing 2.6% year-over-year. Importantly, sequential rates were up 0.7% over Q1, which is at the higher pace than sequential rates in the first quarter and rates are up further in the month of July. On the specialty containment side, while rental revenues were down 10% year-over-year, it is a very mixed bag when considering the different end markets and some timing issues.

In our largest segment, the downstream business was up sequentially from Q1 levels and we continue to maintain a strong outlook for the balance of 2016. We had a strong downstream market presence and we're making good progress on expanding the business geographically. We picked up two additional large accounts in Q2 that will assist in driving revenue growth in the second half of 2016. A few large customers postponed maintenance and turnaround projects as they continue to run at high capacity while taking advantage of low oil prices in their day-to-day production. This resulted in overall downstream revenues being down 3% year-over-year. However, we believe this project will materialize within the next few quarters.

The smaller upstream and diversified segments had a tough quarter due to continued headwinds in upstream oil and gas, and mining. We achieved total adjusted EBITDA of $43.4 million with margins of 35.1% and this has all resulted in Q2 adjusted diluted earnings per share of $0.25. Q2 was also our 34th consecutive quarter of positive free cash flow. So overall, a quarter with lots going on and great progress on our core strategies, good momentum in the portable storage business, good progress in the downstream segment and expansion, and on the other hand, some largely commodity-driven headwinds in the smaller upstream and diversified segments. And on top of this, a successful implementation of our new ERP platform and a successful refinancing of our senior notes, resulting in lower interest rates and extension of our debt profile.

Turning to Slide number 4 and this slide highlights our diverse geographies and customer base. We have three divisions in North America and one in the U.K., which each is responsible for marketing, renting and providing superior customer service. As you can see from the first pie chart on the right, we have a very balanced end market mix. Our largest segment is construction and we saw high-single digit year-over-year growth in this segment of our business. Construction markets are good and are forecasted for continued growth over the next several years.

Our second largest segment is industrial and commercial, where demand for our downstream specialty demand business remains strong. In fact, we recently added two large accounts to our downstream business and we expect to benefit from turnaround maintenance projects that have been postponed as our customers are running at high capacity in order to take advantage of lower oil prices. We continue to be excited about future growth in the industrial segment as we now have great cross-selling opportunities between portable storage and specialty containment, both geographically as well as to existing customers. Oil and gas drilling or upstream is now only 2% of our revenues with the majority of this business located in the low-cost Permian Basin.

As you can see from the pie chart on the far right, 63% of our trailing 12-month rental revenues are North American portable storage, 17% are UK portable storage, and the balance or 20% is ETS specialty containment. So all in all, we maintain a broad, diverse customer base with ample opportunities for continued growth. The Net Promoter Score, which measures our customer loyalty, on the lower right graph, shows that we have high marks from our customer base. Our second quarter NPS of over 84%, which is our highest quarterly score ever, is up over 500 basis points year-over-year. Our NPS scores validate that our highest value provider strategy is working and we continue to leverage this best-in-class NPS score to drive rental rates growth.

We also have a diverse geographic footprint, with 159 locations, of which 127 are portable storage locations, 19 are specialty containment locations and 13 are shared between the two businesses. With the ETS acquisition, we will continue to combine some overlapping locations but, more importantly, leverage our larger portable storage footprint with our recently expanded specialty containment product line.

Moving on to Slide number 5 and this slide shows our utilization by segment and the number of units we have in the rental fleet. We had a strong activation quarter and with our aligned sales and operational teams, we increased average portable storage utilization for the quarter to 68%, which is up both sequentially and year-over-year. This increase in utilization was driven by second quarter activations being up 4% year-over-year, and with this given our confidence in the business, we've recently expanded to 221 sales territories covered by ISRs or 10% more than at the beginning of the year. I'm also pleased to report that we reached 200 ISRs towards the end of the quarter, which is up 8% from the last quarter. We plan to continue to expand the number of sales territories over time.

In our specialty containment business, utilization for the quarter was down 6 percentage points year-over-year to 63%, and this was driven by the well-known market headwinds in the upstream oil and gas business, where our second quarter utilization was down 10 percentage points year-over-year. Utilization for our diversified specialty containment operations, which is driven by pumps and filtration, was down 3 percentage points year-over-year due to headwinds in mining activity as well as fewer infrastructure projects in the quarter.

Utilization in our downstream business was down 6% year-over-year, but units on rent were up 1% year-over-year and 4% sequentially. Strategically, on the specialty containment side, we're currently expanding geographically with openings and now have specialty containment units on rent in Dallas, Philadelphia, Shreveport and we're in the process of expanding into Southern California.

And turning to Slide number 6 and this slide illustrates the power of our differentiated products and execution on our sales strategy as demonstrated in our year-over-year rate and yield increase. As mentioned, our second quarter rental rates were up by 1.6% year-over-year and up sequentially 0.7% from Q1 levels. For new units going out on rent in the quarter, the rate increase was 2.6% year-over-year, even as we anniversaried our twelfth quarter in a row of driving higher rates on new units. So our strategy continues to work, albeit at somewhat more moderate pace against more difficult comps.

Our second quarter year-over-year yield for portable storage is up by 1.8% to $663 per unit. Adjusting for favorable exchange rates, our yield increased 3.2% year-over-year and this improvement was primarily driven by strong rental rates and delivery revenue increases. We were able to achieve these industry-leading or premium rental rates by focusing on a differentiated product and superior fleet and a strong sales and service culture, resulting in our being the highest-value provider to our customers. As we move forward, we will continue to balance rate increases with a strong focus on units on rent and believe that as we sell value, we can achieve average annual rate increases for approximately 2% to 3% over the cycle.

I will now hand over the call to Mark, who will cover the financials.

Mark Funk

Great. Thanks very much, Erik. So turning to Slide 8, in revenue highlights, you'll find second quarter rental revenues, excluding our divested mobile offices, increased 2.7% year-over-year when adjusted for FX. This FX difference is due to the pound sterling weakening versus the U.S. dollar on a year-over-year basis. Q2 portable storage rental revenues, excluding mobile offices, were up 4.7% year-over-year or 6.2% when adjusted for FX. Our increase in portable storage rental revenues was driven by both increases in units on rent and our rental rates.

Specialty containment rental revenues were down 10% year-over-year, driven primarily by upstream headwinds as well as less mining and other large infrastructure projects in our diversified pump and filtration business. Downstream revenues, which make up the vast majority of specialty containment, decreased 3% due to the fulfillment of maintenance projects in the quarter. As Erik noted, downstream rental revenue was up sequentially and we also have added a couple additional large accounts to downstream in the quarter to add momentum in the second half of the year. And the second quarter marks our 22nd consecutive quarter of year-over-year growth in rental revenues.

Turning to Slide 9 and profitability, we achieved total adjusted EBITDA of $43.4 million and a margin of 35.1% for the quarter. For portable storage, we generated adjusted EBITDA of $35.1 million with a margin of 35.3%, which was down 50 basis points year-over-year as a result of higher ERP operating costs with SAP as well as the sale of our mobile office business, which is also covering fixed cost in Q2 of 2015. For our specialty containment business, we achieved adjusted EBITDA of $8.3 million and a margin of 34.5%, which was down 170 basis points year-over-year primarily due to headwinds in the upstream market as well as lower diversified revenues.

Continuing to Slide 10, you can see the Company's second quarter adjusted rental SG&A level was $78 million, which was approximately $2 million less year-over-year. This decrease was driven primarily by lower operating costs related to our mobile office business that we sold in mid-May 2015. In Q2, SG&A is $1.7 million higher than sequential Q1 levels and this was driven by higher ERP operating costs with SAP as well as seasonally higher levels of repairs and maintenance.

On the next slide, you'll see Q2 North American portable storage rental revenues were down less than 1% year-over-year even with the sale of the mobile office business in mid-May of 2015. When you exclude the mobile office sale, North American portable storage Q2 rental revenues actually increased 6.7% year-over-year. North American portable storage Q2 adjusted EBITDA margins were down 1.6 percentage points year-over-year due to higher ERP costs as well as some fixed cost the divested mobile office covered in Q2 of 2015.

The UK's portable storage rental revenues decreased 2%, but this was due to FX. The UK's rental revenues were actually up 4.7% in local currency. And the UK's Q2 adjusted EBITDA margins were 39.1%, which was up 360 basis points year-over-year and this was driven by leveraging higher rental revenues. And finally, our ETS specialty containment business had rental revenues of $22.7 million with adjusted EBITDA margins of 34.5% for the second quarter.

Turning to the free cash flow slide on Page 12, our free cash flow was $5 million for Q2 and this was our 34th consecutive quarter of positive free cash flow. Q2's free cash flow was negatively impacted by approximately $7 million of higher working capital level as a result of our recent SAP implementation, and we expect a reduction in working capital to then benefit free cash flow in the third quarter. We also returned $9.1 million in dividends in the quarter to our shareholders.

The chart on the right highlights our CapEx spend. Q2 net CapEx, plus equipment added under capital leases, totaled $32.8 million. Of this, we invested $14 million in growth CapEx for our lease fleet, $7 million of which is growth CapEx for our downstream specialty containment business and $7 million in high-demand portable storage market in the UK and Eastern U.S. We also invested approximately $13 million in delivery equipment and $6 million in our SAP ERP platform. We continue to forecast total net CapEx of $80 million to $85 million for the full-year of 2016.

Turning to the next slide, we have a very flexible capital structure with a high level of liquidity over the last two quarters. We reset our entire debt structure by extending maturities, reducing interest cost and increasing flexibility. In May, we refinanced our $200 million, 7.875% notes with $250 million of senior notes. We reduced the interest rate 200 basis points to 5.875% and extended maturity from 2020 to 2024.

In December, we also refinanced our $1 billion ABL revolver, extending its maturity to December 2020 and reducing the interest rate grid 50 basis points. We have a high level of liquidity on this ABL revolver and as of June 30, we had approximately $350 million of excess availability. We only have one financial covenant in our entire capital structure and it's only tested if we fall below $100 million of excess availability. Thus, we have a lot of room above this level. So overall, we're very pleased with these refinancings and believe they position us well for future growth.

Looking to the right and our debt levels, we ended the quarter with total debt-to-adjusted EBITDA at 4.8 times. You may note, leverage increased slightly from the prior quarter, but this is primarily a result of our call provisions and fees associated with our recent senior notes refinancing. And we expect to utilize free cash flow to de-lever in the next 12 months.

So to summarize, we're very pleased with the quarter as we continue to execute and deliver on our strategic plan for both our portable storage and specialty containment businesses. Portable storage rental revenues were up over 6% year-over-year on an FX-adjusted basis. Both our Q2 units on rent and rental rates were up nicely year-over-year. In June, we hit our highest level of monthly core portable storage activations in our Company's history. We delivered a consolidated adjusted EBITDA margin of over 35%. And most importantly, given the confidence in our business, we are significantly adding territories and sales reps for accelerated growth and profitability.

So with that, I will turn the call over to the operator for questions. Thanks very much.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Joe Box with KeyBanc Capital Markets. Please proceed with your question.

Joe Box

Yes. Hey, guys.

Erik Olsson

Hey, Joe.

Joe Box

So it looks like you guys have basically hit your target for salesmen growth through 2Q. I guess, can you maybe just help us understand the number of leads that you're getting per salesman throughout each month? Just to give us a sense of how that's maybe trending relative to last year this time?

Erik Olsson

If we look at the activations per sales rep, it's been trending up. The real growth in our – in the sales force didn't come until towards the end of the quarter. On an average basis, we were essentially flat with Q1. But the vast majority of that increase came really in the last two weeks of June.

Joe Box

Just to be clear, then, Erik. Is that activations that were flat largely on the quarter, and then accelerated at the end? Or productivity that –

Erik Olsson

No. Sorry, I'm talking about productivity and I'm talking about the number of sales reps that, on an average basis, essentially flat versus Q1. And as I said, the increase to 200, most of that actually happened in the last two weeks or so of June.

Mark Funk

I would say the activations on a year-over-year basis were consistent April-over-April, May-over-May and June-over-June. The only thing I would add to that is the momentum has continued. And actually, if you look at units on rent at the end of the period versus where we are today, they're up about 0.5%. So, we're continuing to, if you want to call it, ramp as far as activations and units on rent.

Joe Box

Okay. So then just to be clear, the sales count is up year-over-year. Activations were relatively consistent on a year-over-year basis. They ramped at the end of the quarter, and you would probably attribute that productivity decline to the SAP implementation?

Erik Olsson

Well, both – yes, the SAP certainly has had an impact. But the bigger impact is the fact that we brought in a bunch of 15-or-so new sales reps during the – towards the end the quarter. And of course, they don't come in and perform on an average or above level from day one. So I think if we exclude those, we saw an improvement also in productivity.

Mark Funk

Yes. So, we – if you look at the average reps in Q2 of last year versus the average reps of Q2 this year, it's 15 incremental and that's the average over the period. If you strip out that incremental 15, because those were recently hired, productivity was actually up slightly year-over-year and that's with implementing SAP.

Joe Box

Got it, got it, okay. And then I guess, in that same vein, if you start to look at comps, it looks like they get a bit tougher on the portable storage utilization side and relative to units on rent in 3Q. I'm just trying to figure out how those incremental sales guys and the expected productivity could translate into maybe volume growth in 3Q and 4Q?

Erik Olsson

Well, we certainly expect them to contribute to volume growth in the quarter even though, as you recall, our Q3 last year was very, very strong in terms of activations. But we expect to continue to trend well above that actually here. And even though a new sales rep does not perform at an average level, let's say, of an ISR, they still contribute, they still put – they still have activations and so on. So every incremental head we bring in, bring – adds growth to the overall number.

Mark Funk

And I think going back to the data point where the July to-date units on rent – and this includes the UK versus at 06/30 is up 0.5% sequentially for a one-month period. I think that bodes well for, if you want to call it, utilization and units on rent. It's still in the quarter but --

Joe Box

Right, right. Erik, I think you said earlier that rates were up in July about 0.5%. Can you maybe just talk about where you see yourself being position relative to the broader market now and where you see rates kind of trending from some of your peers?

Erik Olsson

I did not say they were up 0.5% in July. I just said that they're up and notably so. But I think we can continue at this pace month-over-month, quarter-over-quarter on a sequential basis. Sequentially, we were up 0.7% in Q2 which roughly would translate into 2.8%, 3% annualized rate. And I think that's what we're striving towards and I think we can manage that.

Mark Funk

And just to add, as far as progress in the current quarter, our composite for Q2 was 1.6%. We did this mid-month and that 1.6% expanded to 2% as of the middle of July. And new rates were 2.6% for all – new rates, compared to Q2 of last year, were up 2.6%, which we've reported. And if you look at kind of the month-to-date, it's 3.7%. So we're getting a lift on the new unit pricing. And it's moving the composite from the 1.6% Q2 to, if you want to call it, quarter-to-date, which it's still early in the quarter, up 2%.

Erik Olsson

So very encouraging results early on here.

Joe Box

Got it. Thank you guys.

Erik Olsson

Thank you.

Operator

Our next question comes from the line of Scott Schneeberger with Oppenheimer. Please proceed with your question.

Scott Schneeberger

Thanks. Hi guys.

Erik Olsson

Hi, Scott.

Scott Schneeberger

Could you address on the maintenance projects at downstream, the push-out? Just want to get a sense of your conviction of when this – when you expect this to come and your conviction level, and just a little bit more clarity on the push-out itself.

Erik Olsson

Yes, so it's – we're basically talking about the three customers here, three large customers. I think if they had gone ahead and done their maintenance projects as was originally planned, we would be up significantly in the downstream segment. They chose to keep going and run their plants and taking advantage of the low input cost they have from the oil prices. Essentially, of course, they will have to do these turnarounds and these maintenance projects. We have contracts with them, so if and when they do so, we will get the – I shouldn't say if, when they do so, we will get that business. But at this point, if that's end of Q3, Q4 or even Q1 next year activity, we can't really say. I mean, it's their decision and they have not indicated anything yet.

Mark Funk

And all those customers are our customers under long-term contracts. And the only thing I would say is if they had done that work, we'd probably go from the minus 3% in that quarter to mid-to-high single-digits on a year-over-year basis if those projects occurred like they did previously.

Scott Schneeberger

Thanks for that color. Upstream and – well actually, just still in ETS, oil and gas down to only 2% for upstream. But you're citing mining now. And I don't think you've talked about that a lot in the past. Could you just address some of the mining end market and your exposure and the business environment? Thanks.

Erik Olsson

It's really a – it's one large mine that was serviced by our pump and filtration business and with the current commodity prices of copper, specifically, they pulled back significantly in Q2, which impacted our pump business quite a bit. Again, early, early days here but we have actually started to add back units on rent in that mine here in July. We'll see what that means, but that's really what happened.

Scott Schneeberger

Okay. Just a couple more from me. The co-location looks like you added a couple more in the quarter. Just – if you could address the progress over the past few months and kind of re-address geographies of what you've done thus far and where you're looking to go?

Erik Olsson

Yes. So we've mentioned the different – Dallas, Philadelphia and Shreveport, where we have units on rent now. And I think we're really gearing up in Philadelphia, in particular, for a strong end of the year here. We have lots of business lined up. We're working on our – on Southern California to establish ourselves there. We have units there now as well. And then, we're doing very well in Chicago, which – ETS had a small presence there in the past, but we really geared that up and we're also looking forward to lots of opportunities in that market.

Mark Funk

Yes. And one of the new ones is San Antonio, for example, where we've migrated some products into that market to take advantage of, I would say, the diversified and the downstream market there.

Erik Olsson

I was going to say so, overall, we're very pleased with the progress we're making on the downstream side, both from the expansion point of view as well as the regular core business. We have not lost any business in the quarter. We picked up two large accounts in the quarter. And if hadn't been for these postponed maintenance projects, we would have had a really stellar quarter here.

Scott Schneeberger

All right. Thanks. And the last one from me, you've mentioned high single-digit construction, that sounds great. We're over in portable now. I was curious about retail demand though. Just anecdotally, what are you seeing here from customers and on a looking-forward kind of basis?

Mark Funk

Yes, so with that – one thing that I would say, it remains solid. We're up units on rent on a year-to-year basis, not at the same levels as the construction side. Actually, it made really good progress, I would say, on national accounts which a lot of that is kind of retail oriented as well. So, I think we feel good about our prospects there. I think we think the upcoming, if you want to call it, Christmas holiday that we'll be able to kind of execute at similar levels as far as the prior two years. So, I don't think we're seeing kind of a pushback from a demand perspective there and, in general, I think we're executing against it even with people concerned about online retail environment.

Erik Olsson

Just to add to that. We're obviously in talks with the large – very large retailers for the upcoming seasonal activities. And all indications are that they will look for as many or more units than previous year.

Scott Schneeberger

Great. Thanks very much.

Erik Olsson

Thank you.

Operator

Our next question comes from the line of Justin Hauke with Robert W. Baird. Please proceed with your question.

Justin Hauke

Good morning guys.

Erik Olsson

Hello, morning.

Justin Hauke

I just – maybe I wanted to ask a little bit more about just the EBITDA margin for the quarter and the extent to which there were kind of one-time cost associated with the sales force additions that you really just added at the end of the quarter that didn't contribute as much in the revenue. And also, just with the SAP, I know that you'd mentioned there are some permanent system costs, but I'm just curious if there is anything in the quarter that was associated with the start-up?

Mark Funk

Yes. So what we highlighted in the last quarter call, we expected service agreements that are tied to any SAP platform that increase SG&A approximately $1.2 million sequentially, and that obviously would be year-over-year as well. So, we have a higher running cost of the platform, but obviously we expect to be more productive with the team and obviously offset more than that cost with productivity gains. But we don't – what I did say, we didn't expect them immediately. So we still expect that – those savings to be had starting later this year.

I would say, the only other thing is, repairs and maintenance is slightly higher on a sequential basis, which – lot has to do with kind of the seasonality of our business. So that was something that I highlighted last quarter call as well. Maybe insurance claims up a little bit but that's kind of it goes up and it goes down type of thing. So I would say, not any – other than the SAP kind of step-up would be if you want to call it, incremental and that's something that we'll address as productivity on a go-forward basis.

Obviously, a lot has to do just with the revenues being lower on the ETS side from both our diversified pump and filtration business as well as downstream and the year-over-year upstream. So, some of it is obviously just revenue driven where we're not able to take some of the fixed costs out but what we're focused on is hitting both pricing, both units on rent up to get obviously our margins back to historic levels if not higher.

Justin Hauke

Okay, that's helpful and actually segues to my next question, which is on the specialty containment business. I mean you've had these difficult comps for a while. It's getting to the point where it's anniversarying the Permian. The rig counts are actually higher there now and are moving in the right direction, I guess. Last quarter, you mentioned that you thought that by the end of the year, we can get the utilization rate there back into the positive on a year-over-year basis. With a little hiccup here in downstream, is that still kind of the outlook that you're looking for? And is stability enough to drive that?

Mark Funk

Right. Going to the upstream, I would say that if you look at the sequential, it was pretty flat. Obviously, we had headwinds from a year-over-year basis. But to your point, as far as rig count, and now upstream is only 2% of our revenue but it's fairly flat Q2-versus-Q1. The issue will be just on our, what we call, Water Movers, our diversified business, pump and filtration. Obviously we'll have to make-up for the headwinds on the mining side, and then obviously we've got to land some large infrastructure projects.

I think on the downstream, we do feel good about our prospects there as we've shared. We'll get benefit from when the downstream customers do these turnarounds. We've added two incremental customers. I think we're executing well in that segment. The demand is there. So I do expect utilization on the downstream side to continue to increase. And like I said, upstream feels like it should be sequentially stable. And then, obviously, we're working to increase the diversified business.

Justin Hauke

And I guess, just my last question. Just because you do have a sizable UK business, obviously we can do the math on the FX impact of Brexit, but is there anything that's happened just on a near-term basis that changes the outlook for that business given that it has been one of your stronger verticals? Thanks.

Erik Olsson

No. We are obviously closely following developments over there. June was a very strong month and they've continued very strong in July as well. So there's no immediate or near-term impact of the Brexit decision. We have, as a precaution, put the brakes on CapEx for the UK until things are more clear or so, but they have continued at very high margins and, like I said, good trends in June and July month-to-date.

Operator

Okay. Our next question comes from the line of Doug Mewhirter with SunTrust. Please proceed with your question.

Doug Mewhirter

Hi, good afternoon. Good morning.

Erik Olsson

Good morning.

Doug Mewhirter

Most of my questions have been answered. I guess, the one question I had out there was you talked about getting two new large contracts. And I know it's hard to size and – because I'm sure it's based on demand. But can you give me an idea in round numbers what kind of unit potential there is on those contracts? Just trying to get an idea of order of magnitude, this would be on ETS.

Erik Olsson

Yes, we wouldn't call it large contracts if they weren't large. And we're talking about $1 million plus opportunities for each one of them potentially more as we reach a run rate, which obviously takes a little bit of time. But we got revenue in Q2 from them and we'll get more here in Q3 and Q4.

Mark Funk

And this is all ETS downstream business. So – and then we do have the idle capacity or utilization to basically get that revenue with the existing fleet size.

DougMewhirter

And just may be going a little too much in the weeds, but just help me understand. So, the nature of the contracts is it's basically a – up to X units depending on demand, but maybe with a minimum sort of retainer. Is that sort of how they're structured?

Erik Olsson

No, no. These are more contracts that we are the sole provider for their needs within these product areas. It has pricing, a fixed price negotiated, but there's no minimum volume defined. So it's really just as much as they need and when they need it.

Mark Funk

It's tied to the day-to-day maintenance of the facility. So they need it, right, they need a certain base level of it, of activity.

Doug Mewhirter

Okay, thanks. That’s helpful. It’s all my questions.

Mark Funk

Thank you.

Operator

Our next question comes from the line of Marc Riddick with Sidoti. Please proceed with your question.

Marc Riddick

Hello there.

Mark Funk

Hi, Marc.

Marc Riddick

I wanted to touch on the – going back to the three large customers who have delayed maintenance. It seems as though the ramping up of capacity to take advantage of opportunity might actually seemingly accelerate, you would think the need for some maintenance going forward. So I wanted to get a sense of – I mean, you touched on this a little bit earlier, but is this something that could be delayed maybe more than once? Or what – is this something that could theoretically change the timing of when their general maintenance needs would arise going forward?

Erik Olsson

Yes. So let's be clear here, that this is not general maintenance. This is not day-to-day maintenance activities that we're talking about. We do that for these customers and help them. So what we're talking about is large turnaround projects where the facility or the site basically shuts down for a period of time and some significant maintenance work is done. So, I don't have the answer how long they would be – they're comfortable in keep delaying this or keep running their plants at these levels. I do know that, eventually, they will have to do it. And I think it's sooner rather than later but to have a time estimate at this point is not possible.

Marc Riddick

That’s clear. One of the things – I did want to touch on, I'm not sure if you've mentioned this, but I was wondering if you've given the utilization rate for the UK?

Mark Funk

It's in the mid-80s.

Marc Riddick

Okay. So it continues to be pretty similar to where it was?

Mark Funk

Right and Erik talked about the July month-to-date data. It's increasing in similar levels. I think it's up, as far as units on rent, 0.6% from June 30. So we continue to feel good about that market.

Marc Riddick

One thing that sort of caught my eyes and I wanted to get a sense of maybe if you could give an idea of what the contribution of this was, but you – mentioning of the NPS scores and your fairly significant increase in a short period of time over 84%. I think it had been at 80% or so. And so I was wondering if you could spend a little bit of time touching on that, and maybe what the efforts are that led to that large of an increase in a short period of time?

Erik Olsson

Well, I think it's something that we have focused on and built over a long period of time, and eventually, if the customers appreciate it or see it or – and so on. But the focus is for us to be, basically a one service call, that if you call us, we should resolve whatever issue you have or take your order immediately. The quality of products that we deliver now is much higher than years ago. So I think this is – it's all just coming together and really being appreciated by our customers.

Mark Funk

And it probably ties into the high-repeat business obviously we have and then our ability to keep pushing rates, right? So if you look at since Q3 of 2013, our rates are up – the whole portfolio is up 15%, continues to go up. And then, we look at the new rates, they're up almost 20% since that point in time. And a big part of that is obviously servicing them well from a Net Promoter Score perspective.

Marc Riddick

You touched a little bit on the retail, being in touch with your retail customers and some of the planning going into the holiday season. I was wondering if you could touch a little bit on your strategy as far as inventory, if you were looking at something fairly similar to what we saw last year or if that – or if a different strategy on your end has been sort of put together or what we should be looking for there?

Erik Olsson

No. I think it's a similar strategy for us. I think volume-wise, we expect a similar result or a similar number and they're very much the same.

Mark Funk

Yes. I mean, if you look at the last few years, for 2015, we kind of peaked at 15,300, last year 15,800, so we expect similar levels. Obviously, we'll reserve our fleet for what we would call core customers, longer-term rentals but we're really focused on obviously markets where the utilization has – we have the right opportunity to actually put as much on rent as possible. So --

Operator

Our next question comes from the line of Sean Hannan with Needham & Company. Please proceed with your question.

Sean Hannan

Yes. Thanks for taking my question here, a few of them. So first four weeks into the quarter, can you give me a number of where we are roughly in terms of the units out on rent now, what that difference is versus a year ago within your pieces of business?

Mark Funk

That would be – I have obviously, this year is up – we're up 700, call it, 750 units since 06/30 to where we sit today. I don't know if I have the same period last year. I don't think I have that handy, but that represents like 0.5%.

Sean Hannan

Okay, all right. And then, it sounds like Brexit isn't a problem at least yet and more to see there. But I would think that we should still, at least, expect that we're going to have some incremental downdraft from FX that would probably flow through a little bit more so in the third quarter here, correct? I mean, should we be making sure to consider that?

Mark Funk

Yes, I think that's fair. I mean, if rates – if you look at last year's Q3, the exchange rate was $1.55. If you say it's $1.3 or $1.33, that's about a $3.5 million headwind on a year-over-year basis to rental – I'm sorry, to total revenue, which is primarily rental revenue and somewhere about $1.5 million of EBITDA headwinds on a reported basis.

Sean Hannan

Yes, okay.

Mark Funk

And that's just for Q3 and we'll probably have similar levels as far as Q4.

Sean Hannan

Yes, okay. All right. And then, on the specialty side, again coming back to the turnarounds and I think that – I mean, the crack spreads have been very favorable. We've had a lot of delayed turnarounds within the industry for a while. So, just trying to better understand how that ended up being, I guess, a little bit more of a surprise for you guys in the quarter because, again, I think that, that's been a dynamic that's been in place with turnaround pushes. And then if we didn't have those, I heard commentary, I think from Erik, that instead of being down 3% year-over-year, we would have been up a good deal. I don't know if that was a comment on a relative basis or should we interpret that the downstream piece of the business actually would have been up as a customer subgroup maybe a few percentage points or arguably maybe even enough to offset having all of ETS even flat year-over-year. So, just trying to get some better context around that.

Erik Olsson

So what I said was if these turnaround projects had gone – had happened as was originally planned, the downstream business would have been up high-single digits on a year-over-year basis. These turnarounds were originally scheduled for the second quarter, and then the delay – the word of the delay got to us late Q1 or early Q2, et cetera. So I wouldn't say that it's a surprise that it happened. But we do – we are in talks with them. We are making plans for turnarounds with them. They decided, no, we're not going to do it at this time.

Sean Hannan

Yes, okay. All right.

Mark Funk

And then, I guess, the only thing I would add to that, if we did that math, you would be probably just down 2% to 3% across all segments on a year-over-year basis. But really, that's driven – I mean, if you look at our upstream business, it's down on a year-over-year basis, $1 million or 32%. And then, sequentially, it's been flat. So it wouldn't make up for most of, if you want to call it, the year-over-year decline, that 10%. If we had those turnaround projects, and that's fighting off the year-over-year comparison, like I said, on the upstream side.

Operator

Our next question comes from the line of Sean Wondrack with Deutsche Bank. Please proceed with your question.

Sean Wondrack

Hi, Erik and Mark. I apologize if I missed this, but could you please quantify how much revenue related to your divested wood mobile office platform that we should not expect to repeat in the second half of 2016?

Mark Funk

So it was – the run rate was around $46 million a year. So that's $11.5 million a quarter or about $23 million for six months.

Sean Wondrack

Okay. And there's no seasonality in those numbers? It's all pretty flat Q-to-Q?

Mark Funk

Yes. And if you look at – you could model it that way. We also did break it down in our prior call, so I can get you the split between Q3 and Q4.

Sean Wondrack

Thank you for that. I appreciate it. And then, my second question is, it's just regarding – how was the competitive environment on the specialty rental side? Given the fragmentation in that market, have you seen any competitors exit the market? Or are you seeing any businesses with excess capacity migrating into your verticals, please?

Erik Olsson

Yes. So we haven't – I can't say that we've seen anybody of any size exit the market. I think we have the prime player in the space. What attracted us to ETS in the first place is their geographic concentration to the Gulf and the large portion that was, and still is of course, the downstream business which is doing very well. And as I said, we haven't lost any business in the quarter and the two accounts that we mentioned earlier that we picked up in the quarter came from very large competitor of ours in the space. So far, we haven't seen much migration from upstream to downstream if you like. I think what's happening is that there's a lot of idle equipment sitting in the upstream markets. We have moved out upstream product and migrated into downstream demand. So for us, utilization is actually quite high in the upstream segment, but prices there of course are much, much lower than previously.

Sean Wondrack

Fair enough and thank you for the color there.

Mark Funk

Sean, are you still there?

Sean Wondrack

Yes.

Mark Funk

I just want to clarify something. The run rate of the mobile is $46 million. We sold the mobiles in May of last year. So if you look at Q3, Q4, that's already out of our numbers. So I think – and just so we're on the same page. So $11.5 million per quarter, but that's with 2014 and then through May of 2015. So Q3 and Q4 would be clean of last year. Yes, sorry about that.

Sean Wondrack

And then, just my last question. How much – on the co-locating your equipment hubs, how much do you save per location from co-locating?

Mark Funk

We would probably save somewhere around, I'd say, anywhere from $200,000 to maybe $0.5 million. I mean, you're getting the benefit of the management at the local location and then the second part would be the real estate if there are synergies on the real estate side, and there'll be some synergies on the driver and yard as well. But it's mostly the management/physical yard.

Sean Wondrack

Great. And are there situations where it makes sense, even if you have them close to keep them separate? Or do you think, over time, it'll migrate to more of this model throughout your entire footprint?

Erik Olsson

Well, I think if they are close, it will always make sense to consolidate into one location for the reasons Mark just mentioned, the savings in overhead costs. So there are a number of markets where I would not expect us to co-locate because we're very far apart or are servicing different segments or geographies.

Mark Funk

Yes. I mean, if I – another issue too is scale too. I mean, at some point – we're huge in Houston, both on the specialty containment and portable storage, so finding a property that could basically handle both businesses and just the scale of that business, you're probably losing some on the synergy side there. It'd be hard to find a real estate and then you're probably going to have a similar management team to drive that huge business. So that would be the exception.

Sean Wondrack

Okay. Thank you very much for the information. Good luck next quarter.

Mark Funk

Thank you.

Operator

[Operator Instructions] Our next question is a follow-up question from Joe Box with KeyBanc Capital Markets. Please proceed with your question.

Joe Box

Yes, thanks for squeezing me in. Just a couple of quick ones. I'm curious, are you seeing any implications from your largest customers centralizing or regionalizing their portable storage procurement? I'm just trying to understand if this is an opportunity at Wal-Mart since you guys are really the biggest national player? Or if it's really just them trying to push down price?

Erik Olsson

No. I mean, I think we see this as, if anything, opportunities for us. We've done very well, I should say, in the first half of the year in terms of national accounts and signing up new national accounts, primarily in the retail/industrial segment. So it's undoubtedly a benefit for us and I think these large customers, they may rattle and try to drive rates down. But on the other hand, they also know that we are the only ones who can service them on a national basis. So, I think we have a very good position, very good arguments and we've managed actually to raise rates on these accounts, every year I've been here and I think there's no reason to think we would go any other way.

Joe Box

Great. That's good color. And then, Mark, on the D&A front, is the $16.3 million a fully baked number for SAP? Or should we think about a little bit more depreciation coming in, in 3Q?

Mark Funk

I would say a little bit, but maybe you're looking somewhere around maybe $16.5 million. I mean, it's not going to be materially different. I mean, we've – $16.2 million, Q1; $16.3 million, Q2; maybe I'd say somewhere around $16.5 million.

Joe Box

Got it. All right. Thanks guys.

Mark Funk

Thank you.

Operator

Our final question is a follow-up question from Sean Hannan with Needham & Company. Please proceed with your question.

Sean Hannan

Yes, thanks. Sorry, something happened, I got a little bit cut off. Mark, that last question, as you were answering, talking about the specialty side, we didn't have those turnarounds that we only would have been down maybe a few percentage points instead of the 10%, were you talking just about ETS?

Mark Funk

I was talking about ETS. Yes, with specialty containment. So I was basically saying, if we had that number with largely – obviously, downstream would be up mid-to-high single-digits, it would offset even the headwinds that we have on upstream and on the diversified for the most part, we'd be down 2% or 3% on a year-over-year basis.

Sean Hannan

Perfect. That's what I thought and what I had hoped. So that's – thanks for clarifying. Last question here, pricing; so if I go back a number of quarters ago and we've talked about this, I think over the course of last many calls as well, we were I think looking for a 3% to 5% kind of normalized range. I think more recently that's kind of moved down to a 3% and today, I heard 2% to 3%. I don't remember if that was the range last call. I thought it was more of a 3% number. It's obviously not moved in the direction we would want to see. So just want to see if we can get a little bit of color from you folks around; A, your confidence in being able to keep that type of a level as a goal? And then, I guess kind of part B to that answer, I mean, to what extent has either an intensified pressure among competitors driven that up? Any more color around why we've had to really ratchet that back and why we shouldn't be getting a better number?

Erik Olsson

I think, we believe that the 3% or so is a good number. I think – I don't know that we've ever said that we would get 5% year in and year out. That would be a stretch because we do not. So I think the 2% to 3% is more a reflection of, okay, we're at 1.6% at the moment and we want to get to – although our sequential pricing was up 0.7% as I said. If you annualize that, that's 2.8%, 3% or so.

Mark Funk

And the portfolio as of today is 2%. So it's gone from 1.6% to 2%.

Erik Olsson

So I wouldn't read in anything baked into it. Our ambition is still 3% and maybe we're just hedging it by saying 2% to 3%.

Sean Hannan

Okay. Thanks very much.

Operator

There are no further questions at this time. I would like to turn the call back over to Mr. Erik Olsson for any closing comments.

Erik Olsson

Thank you operator, and thank you everyone for listening in on our second quarter call. We look forward to speaking with you again when we report our third quarter. Thank you.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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