General Finance Corporation
Q2 2021 Earnings Call Transcript

Published: 8 Feb 2021

[Operator:]

Welcome to General Finance Corporation's Earnings Conference Call for its Second Fiscal Quarter ended December 31, 2020. Hosting the call today are Mr. Jody Miller, President and Chief Executive Officer; and Mr. Charles Barrantes, Executive Vice President and Chief Financial Officer. Today's call is being recorded and will be available for replay beginning at 2

[Chris Wilson:]

Thank you, operator. Before we begin today, I would like to remind you that this conference call may contain certain forward-looking statements. Such forward-looking statements include, but are not limited to, our views with respect to future financial and operating results; competitive pressures; increases in interest rates for our variable interest rate indebtedness; our ability to raise capital or borrow additional funds; the availability of sufficiently qualified employees to staff our businesses; changes in the Australian, New Zealand or Canadian dollar relative to the U.S. dollar; regulatory changes; customer defaults or insolvencies; litigation; acquisition of businesses that do not perform as we expect or that are difficult for us to integrate or control; our ability to secure adequate levels of products to meet customer demand; our ability to procure adequate supplies for our manufacturing operations; labor disruptions; adverse resolution of any contract or other disputes of customers; declines in demand for our products and services from key industries such as the Australian construction and transportation industries or the U.S. construction and oil and gas industries; the disruption of operations from catastrophic or extraordinary events, including viral pandemics such as the COVID-19 coronavirus; or a write-off of all or a part of our goodwill and intangible assets. These risks and uncertainties could cause actual outcomes or results to differ materially from those described in our forward-looking statements. We believe that the expectations represented by our forward-looking statements are reasonable. But there can be no assurance that such expectations will prove to be correct. For more details regarding these risks, please see the Risk Factors section of our periodic reports filed with the SEC and posted at our at www.generalfinance.com. These forward-looking statements represent the judgment of the company at this time, and General Finance Corporation disclaims any intent or obligation to update forward-looking statements. In this conference call, we will also discuss certain non-U.S. GAAP financial measures, such as adjusted EBITDA. A reconciliation of how we define and arrive at adjusted EBITDA is in our earnings release and will be included in our quarterly report on Form 10-Q. And now I turn the call over to Jody Miller, President and Chief Executive Officer. Jody, please go ahead.

[Jody Miller:]

Thank you, Chris. Good morning and we appreciate you joining us today for our second quarter 2021 conference call. I will begin with a brief discussion of our operations, then our CFO, Chuck Barrantes, will provide a financial overview and our outlook for the remainder of the fiscal year. Following his remarks, we'll open the call up for questions.

[Chuck Barrantes:]

Thank you, Jody. We will be filing our quarterly report on Form 10-Q shortly, at which time this document will be available on both the SEC's EDGAR filing system and on our website. And I encourage investors and interested parties to read it as that contains some substantial amount of information about our company, some of which we will discuss today. Turning to our second quarter financial results. Total revenues were $89.1 million for the second quarter of fiscal year 2021 compared to $92.1 million for the second quarter of the prior year. Leasing revenues were $58.4 million, down from $60.8 million and comprised 66% of total nonmanufacturing revenues for the quarter, down 67% from the prior year. Leasing revenues, excluding the oil and gas sector increased by approximately 5% in North America and by 4% in the Asia-Pacific area. Non-manufacturing sales revenues were $30.2 million in the quarter, up from $29.7 million in the prior year. In our North American leasing operations, total revenues for the second quarter totaled $59.4 million, a decrease of 2% from the second quarter of fiscal year 2020. Leasing revenues decreased by 7%, primarily in the oil and gas sector and substantially all attributable to Lone Star. This decrease was partially offset by increases in the commercial construction, government and mining sectors. Sales revenues increased by 11% between the periods.

[Operator:]

Our first question comes from the line of Scott Schneeberger of Oppenheimer.

[Scott Schneeberger:]

I guess my first question would be just around the quarter, really nice performance. Could you guys discuss a little bit relative to your internal expectations? What drove the outperformance in the quarter? Specifically, maybe if you could rank the top 2 or 3 items that you saw versus your internal expectations? And then obviously, with the thought to guidance going forward, that increase, is it the same

[Jody Miller:]

Thanks, Scott. I'll take the first part of the question. And let Chuck jump in. But yes, as we mentioned on the call, I think Pac-Van well exceeded our expectations. We had a good quarter, really across the board. If you look at all the different segments, I think the team has done a good job on execution, on maybe gaining a little market share. No doubt, there's some COVID-related business within that, that's offset maybe some of the construction of sector and other areas. But I think just our product being out on the street and people seeing it. And then again, execution, I think, has been very, very good. Retail was strong, kind of similar in revenue numbers as last year. We had a few more units on rent this year, but the big retailers did a little better job managing their rental fleets. So revenues were pretty close to last year's numbers, but that's how I characterize Pac-Van. I'll show we had a great quarter, all things considered. They had a couple of large sales that got pushed a bit. And as I mentioned on the call, we had a couple of really large sales in the transportation sector last year. If you take that out of account, they were up about 7% so -- across the Board and our core products, really what drove it. Lone Star is starting to see increased activity. And as I mentioned, we're cautiously optimistic that, that will continue. But Lone Star and Southern Frac were a small part of it, it was mainly due to the core push.

[Chuck Barrantes:]

And then, Scott, let me add this with respect to the outlook from Springboarding from our second quarter and 6 months results, we forecast that into Q3 and Q4, but we're also forecasting some nice sales increase in the Asia-Pacific in the next two quarters and a favorable translation effect.

[Scott Schneeberger:]

Great. That's good color guys. Two follow-ups. One on Lone Star. Just curious, I mean, you guys are -- sound cautiously optimistic and I understand visibility is not great. But could you share maybe a level deeper on some customer interactions. I think I heard that rates were up sequentially first quarter to second quarter. So that's great to see. And interesting to see. I would think that, that would lag, though, that wouldn't lead. So just curious what is occurring and what is developing as we're a month into this quarter?

[Jody Miller:]

Yes, Scott. I mean, I think from our perspective, we're coming out of the trough. There's no question. We were in the trough and if you look at the rig activity, again, we don't do a tremendous amount with the rigs themselves. We're more around the production completion, which is the fracing and completion wells. And what we're hearing from our customer is increases and would already probably be picked up more than they have. But some of the permitting and the federal ground and the Permian out in the New Mexico area has had to shift some people. So there is speculation that the whole thing will actually help us because we're right in the heart of the Permian. So does that mean increased activity in the months to come due to some of those changes coming out? It's hard to stay. But I think what we're hearing from our customers right now is steady increases as long as things don't change. So we're, again, cautiously optimistic that we'll continue to see the trends we've seen in the last couple of months.

[Scott Schneeberger:]

And my last one is probably a multi-part question, but it's impacting really nice quarter. Just -- one is, here's the parts to it. I'm curious if you're seeing -- obviously, GLOs were strong. Is that continuing to accelerate? Meaning, is this something that you think is going to be even stronger in the back half of the fiscal year than in the first half? And is that -- are GLOs tied to the COVID-related activity you're seeing? And then on the COVID-related activity you're seeing, is that more sales, more rental? I'm just curious if there is a meaningful difference because I thought I heard that there were some sales involved there where I would think it would be more rental type activity. So I'll cut it off there.

[Jody Miller:]

Yes. So your GLO -- the first part of the question is we just continue to see that product be more and more accepted across all industries. So yes, there's no question. We have units going out for testing facilities, now vaccine facilities. There's lots of different applications related to the pandemic. But I will also tell you, normally, through this time, we really start to pick up on events, right? So when the economy does start to get back to normal and events happen, that's a big application for the GLOs as well. So across the board, I think, again, the product is getting more accepted. No question. There's COVID-related activity, and we continue to get new opportunities every day related to the COVID changes in businesses. And I mentioned on the last call, from maybe pickups from grocery or product. People don't have facilities outside. So I think it's going to change the way businesses do business going forward. So we're hoping that, that's very sustainable. And then event business, when it comes back, would offset any decline that we have, including construction to offset any decline we have from COVID returns. So we are seeing good, steady growth and we don't look forward to change -- to answer your question on the GLO side. We're very optimistic.

[Scott Schneeberger:]

Great. That's an excellent . Just a quick follow-up on that. Is the COVID-related activity mostly in GLOs? Or would you say equally in your other offerings? And then just -- I'm curious, I assume it's mostly rental, but is there a high level of sales activity cuts?

[Jody Miller:]

Yes. So yes, I mean, most of the activity is related to GLO, but I would say we still have a lot of containers going out for different storage applications and things related to COVID, too, but not to the extent of the GLOs. So that definitely is the strongest product, COVID-related. And then to answer your sales question that you mentioned earlier, it's a unique environment because containers are a little harder to come by. So we've been able to see margin and expansion. I think we'll continue to see some margin expansion. There are certain companies that are doing modifications to the containers for certain application around COVID, so we are seeing some sales through those channels. But just our normal sales channels, we're seeing expanded margins just because there's less units out there for sale, and therefore, driving a price. So the long-term effect of that, may be also a boost in leasing, right, as people may not invest as much, it couldn't boost the leasing business as well. But right now, the sales business has been very steady. We were cautious about it. If you remember a couple of calls ago, we said, we don't know what this is going to do with the pandemic, but we've seen no drop off.

[Operator:]

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

[Brent Thielman:]

Congrats on a great quarter.

[Jody Miller:]

Thank you.

[Chuck Barrantes:]

Thanks, Brian.

[Brent Thielman:]

Jody, there's been reports out there about shipping container storages. I just want to get your input, whether that's having any implications to the industry right now?

[Jody Miller:]

I think it will. Definitely on the sales side, it's impacting it. I mentioned earlier, we are seeing less units available second-hand right now for sale. But again, we've been able to offset the volume by margin, which is nice. But I think we've seen this a couple of times in the past, but not probably to the extent we have now and new unit prices are really jumping up right now, simply supply and demand. So we had units already ordered prior to our lease fleet in great shape. It gave us a chance to clean up anything that's older and not as desirable. So there's been some pros in that process as well. But there's no question that the availability is tighter right now than we've seen it quite some time, but it is driving up margins.

[Brent Thielman:]

Yes. Okay. Maybe the Asia-Pacific leasing revenue on a local currency basis was under, I guess, a little more pressure than we've seen in preceding quarters. It'd just be great to get your latest views on the business environment there, the opportunities you see right now? Is there any concern? We see some further deceleration here. Just love to get your perspective there.

[Jody Miller:]

I would characterize it as they were much more of the government. I'm referring to, was much more aggressive with the shutdowns. So their business is really across the Board. You couldn't hardly get out of the house for a while unless there was something, groceries, medical, that type of thing. So I mean, it was a little more severe and drastic than it was here and cause probably further delay for a time period, but the things are getting back to normal and released there now. The whole Asia-Pacific region is reporting good activity and economic growth. So I think we're pretty optimistic about the Australia and New Zealand market. Our management team, which is very close to the customers there are giving a good outlook as well. So we feel like the shutdown really kind of stalled out any kind of growth that we were having just because there wasn't any business going on. New construction sites were not getting released. Now that has changed, and we're hoping to see the lifts in the quarters going forward.

[Brent Thielman:]

Okay. And back on Pac-Van, it seems like one of the uncertainties out there, Jody, is just what happens or doesn't happen with non-res construction. Any perspective you can share from the branch network and what you're seeing around customer inquiries, orders, particularly as we get into the busier kind of spring and summer months for construction. Is there the greater hesitation? Is there more confidence? Just to be great to get some read-throughs from boots on the ground, I guess, around that particular market sector.

[Jody Miller:]

Yes. So you guys get the ABIs as well. We watch it very closely. We have systems that feed the leads from dodge and construction projects. We've kind of been waiting to see if there's going to be a big drop. And so far, we haven't seen it. Although -- through the COVID, we maintained our business level in those sectors very nicely. And -- so now we're hoping that we see some projects that have been delayed, kind of restart here in the spring. But I would tell you that that's one sector that we're watching the closest. But right now, everything seems okay. And hopefully, with the stimulus and the delays that have happened over the last year, there's some suppressed starts that will happen. I'm sure there'll be some drops in hotels and restaurants and some of those have been used. But we're hopeful that, that will be offset by some other construction-related projects. But definitely, a sector we're watching very closely.

[Brent Thielman:]

Okay. And then in advance of the 10-Q coming out, and I know there'll be more detail there. What -- of all the different asset classes, where are you seeing the most rate momentum? Is it still in GLOs? Where are you seeing the momentum right now on the rate side?

[Jody Miller:]

Yes. It's -- we had great rate improvement across the Board, but our actual biggest increase came from the mobile modular side. We were actually double-digit rate growth in the mobile modular side and closer to that 5% where we've been on the containerize. So rates are still doing extremely well, still going up. And mobile modular kind of still leads the way.

[Operator:]

You have a follow-up question from Brent Thielman of D.A. Davidson.

[Brent Thielman:]

I'm back. Thanks for taking my follow-up. Just on the guidance, a clarification on the commentary. Does the increase from what you were expecting previously contemplate a better kind of oil and gas and liquid containment environment? Or should we look at this as really an improvement for the rest of the business?

[Jody Miller:]

Yes. I think we're looking at improvements in both areas. Our oil and gas, as I mentioned on the call, we've seen nice trends the last couple of months with some increased activity. So we're hopeful that we'll continue to see some uptick there. But our core business is very strong. And -- so I would say it's really all the above. Our core business as well as oil and gas, but oil and gas is less than 9% of our business. So even if it has an uptick, it doesn't have as much impact. But, our core business, we feel like it's just going to continue to be strong.

[Operator:]

Your next question comes from Luis Hernandez.

[Unidentified Analyst:]

Okay. I got a question on the guidance. You're guiding for around $90 million for the fiscal year '21, around $90 million. And your current quarterly was 20 -- almost 27. And the 6 months is like 48. So are you expecting the next two quarters to be like lower, much lower?

[Chuck Barrantes:]

Don't expect to be much lower? No. But we are expecting it to be a little lower. Yes.

[Jody Miller:]

Yes. Luis, our biggest quarter is second quarter fiscal with the retail season, typically the winter months, which is the quarter we're in now. We typically have some drop off and then build back up in the spring.

[Chuck Barrantes:]

And Luis, the big reason for why it would be lower is primarily with the Lone Star gas. I mean, Q3 of last year, Lone Star had adjusted EBITDA of $2.3 million. We're not forecasting anything near that, so.

[Unidentified Analyst:]

Right. Okay. Then the other thing, do you expect -- for the full year, I mean, do you expect working capital to produce cash or consume cash?

[Jody Miller:]

Well, Luis, working capital is always -- goes back and forth. But I would say, generally, I would expect it to produce cash.

[Operator:]

That was our final question. I will now turn the call to Jody Miller for any closing comments.

[Jody Miller:]

Thank you, operator. I would like to thank you for joining our call today. We appreciate your continued interest in General Finance Corporation and hope everybody remains healthy and safe. Have a great day, and we look forward to speaking to you again next quarter. Thank you.

[Operator:]

Thank you for participating in the General Finance Corporation's earnings conference call. You may now disconnect.