General Finance Corporation
Q2 2020 Earnings Call Transcript

Published: 10 Feb 2020

[Operator:]

Welcome to General Finance Corporation's Earnings Conference Call for the Second Fiscal Quarter ended December 31, 2019.Hosting the call today from the company's corporate offices in Pasadena, California, 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 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 with 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; 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 to our Web site at www.generalfinance.com. These forward-looking statements represent the judgment of the company at this time. General Finance Corporation disclaims any intent or obligation to update forward-looking statements.In this conference call, we will also discuss certain non-US 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 fiscal year 2020 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 will open the call up for questions.Before I turn to our results, I want to comment about the recent bushfires in Australia, where Royal Wolf operates. Our heartfelt support goes out to the people of Australia in these difficult times. We were fortunate that none of our staff or property has been significantly impacted by the bushfires. A number of our team members at Royal Wolf have been involved with the relief efforts, and will continue to help those in the communities who have been impacted as they look to recover and rebuild.Now turning to our results, our core North American leasing operation again delivered strong quarterly performance. Pac-Van continues to generate exceptional results, delivering 11% year-over-year increase in leasing revenues, driven by strength across nearly all sectors. Our containerized fleet led the way with 15% growth in rental revenues, driven by a combination of higher units on lease and moderate price increases. Year-to-date containerized rental revenue growth is 18%. Our team at Pac-Van is doing an excellent job executing on its strategy. Our national accounts program continues to win business, and had a very strong quarter. Our recently introduced PV3 Safety Container is gaining acceptance with customers. At quarter end, 9% of Pac-Van portable containers worked with the PV3 Safety locking system. We plan to increase the penetration of this exceptional value-added product.Pac-Van remains highly recommended by our customer base once again achieving world-class net promoter score of 85 for the most recent quarter, and 86 for the trailing 12-months. Offsetting strong growth of Pac-Van was the ongoing softness in the liquid container business at Lone Star, which recorded lower results for the quarter due to a decrease in oil and gas activity in Texas. As we've indicated on past calls, the vast majority of our work in the sector involves completion and production work, and not with the initial drilling of the well.In the back-half of the calendar year 2019, many of our customers scale back on their completion work, as they exercised restraint on their capital spending in order to generate higher cash flows. Given the large number of wells in both basins that have already been drilled, and now awaiting completion, and given the indications we're hearing from a number of customers about their plans to increase completions in 2020, we believe that we will see improved activity down the road, and therefore remain cautiously optimistic about this business. Our North American manufacturing operations posted a slight EBITDA loss during the quarter. Sales to external customers are lower due to reduced sales in liquid containment tanks and chassis. The inter-company sales to Pac-Van remain healthy, driven by higher demand for the ground level offices.Now turning to the Asia-Pacific region, our second quarter results in Asia-Pacific region were impacted by slightly lower revenues and declining Australian dollar relative to the U.S. dollar. However, leasing revenues increased in local currency for the 13th of the last 14 quarters, and was up 5% in the second quarter with higher leasing revenues across most sectors; notably in education, government, consumer and moving in transportation. Leasing revenues growth was primarily driven by higher year-over-year average lease rates.Our Royal Wolf team remains focused on building upon this leading market position across both Australia and New Zealand through a combination of organic growth, Greenfield openings, and to the extent they become available, accretive acquisitions. During the quarter, we opened one Greenfield location in Australia.To conclude, we continue to have both organic growth and expansion opportunities in North America as well as ability to strengthen our market leadership in Asia-Pacific region. Our second quarter performance was generally in line with our expectations, but not without the challenges in our liquid containment business. We are proud of the success that we're seeing in the Pac-Van and Royal Wolf, and working hard towards improving the results in Lone Star, all of which should lay the groundwork for strong performance in the years ahead.I'll now turn over the call to Chuck Barrantes for his financial review and our outlook for the remainder of the fiscal year.

[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 Web site, and I encourage investors and other interested parties to read it as it contains a substantial amount of information about our company, some of which we will discuss today.Now turning to our financial results, total revenues are $92.1 million in the second quarter of fiscal year 2020 compared to $98 million for the second quarter of fiscal year 2019. Leasing revenues were $60.8 million, down from $63.5 million in the prior year's quarter and comprise 67% of total non-manufacturing revenues for both periods. Leasing revenues, excluding the oil and gas sector and foreign exchange rates increased by 9%. Non-manufacturing sales were $29.7 million in the quarter, compared to $31.8 million in the prior year period, and our North American leasing operations revenues for the second quarter of fiscal year 2020 totaled $60.6 million, compared with $63.9 million for the second quarter fiscal year 2019, a decrease of 5%.Leasing revenues decreased by 6% on a year-over-year basis. The decline in deep leasing revenues was primarily in the oil and gas sector, substantially all attributed to Lone Star, while being partially offset by increases in the construction, commercial, retail, and industrial sectors. Sales revenues decreased by 3% primarily in the industrial, education, and services sectors, while being partially offset by increases in the construction and commercial sectors.Revenues at our North American manufacturing operations for the second quarter were $3.1 million, including inter-company sales of $1.5 million from product sold to our North American leasing operations, and our manufacturing operation saw reduced demand for frac tanks and chassis, offset by increased demand for ground level losses built for Pac-Van.In our Asia-Pacific leasing operations, revenues for the second quarter totaled $29.9 million, as compared to $31.4 million for the second quarter fiscal year 2019, a decrease of 5%. However, on a local currency basis, total revenues are relatively flat. Leasing revenues were up by less than 1% on a year-over-year basis, but as Jody mentioned previously, increased by 5% on a local currency basis.Consolidated adjusted EBITDA was $26.4 million in the second quarter of 2020, compared to $29.7 million in the prior year's quarter, and adjusted EBITDA margin as a percentage of total revenues was 29% for the second quarter fiscal 20, down from 30% from the second quarter fiscal year '19. In North America, adjusted EBITDA for our leasing operations was $19.9 million in the second quarter, compared to $22 million for the year ago quarter. Adjusted EBITDA Pac-Van increased by 14% to $17.6 million from $15.4 million in the second quarter of fiscal year 2019, and adjusted EBITDA Lone Star decreased to $2.3 million from $6.6 million in the year ago quarter.For our manufacturing operations on a standalone basis, adjusted EBITDA was a loss of 97,000 for the quarter, compared to last year's second quarter adjusted EBITDA of 228,000. Asia-Pacific's adjusted EBITDA for the quarter was $7.9 million, compared to $8.6 million in the second quarter fiscal '19, a decrease of 8%. On a local currency basis, adjusted EBITDA decreased by approximately 4%.Interest expense for the second quarter of 2020 was $6.9 million, down $2 million from $8.9 million in second quarter of last year. The decrease was comprised of a reduction of $1.2 million in North America and 800,000 in the Asia-Pacific. In North America, the lower interest is mainly due to lower weighted average interest rate of 5.8 versus 7.2 in the year ago period. In the Asia-Pacific, the lower interest expense was due to lower average borrowings, a lower weighted average interest rate -- a lower average weighted interest rate of 7.7, compared to 8.9 in the prior year's quarter, and by a weaker Australian dollar between the periods.Net income attributable to common stock flows in the second quarter was $9.5 million, or $0.30 per diluted share, compared to a net loss of $5.1 million or $0.17 per share in the year ago quarter. Including these results were a non-cash benefit of $3.9 million and a non-cash charge of $9.3 million in fiscal years 2020 and '19 respectively, for the change in valuation of standalone bifurcated derivatives. Both periods include 922,000 for the dividends paid on our preferred stock.For the first six months of fiscal year 2020, we generated net cash from operating activities of $37.5 million, up from $19.4 million in the prior year period, and mainly the result of improved profitability and working capital management.Now turning to our balance sheet, at December 31, the company had a net leverage ratio of 3.8 times for the trailing 12 months, which is comparable with the net leverage ratios at both September 30 and June 30, 2019. We've reduced our cost of capital, and enhanced our financing flexibility over the past couple of years, and will continue doing so over the remainder of this calendar year.Turning to our companywide outlook for the remainder of fiscal year 2020, on our first quarter earnings call we stated that consolidated revenues for fiscal 2020 were expected to be in the range of $370 million to $390 million, and the consolidated adjusted EBITDA was expected to be in the range of plus or minus 4% in the fiscal year 2020 from fiscal year 2019. Based on our year-to-date results, we now expect that consolidated revenues for the fiscal year 2020 will be in the range of $365 million to $375 million, and the consolidated adjusted EBITDA will be in the range of minus 2% to minus 8% in fiscal year 2020 from fiscal year 2019. This outlook does not take into account the impact of any acquisitions that may occur in fiscal year 2020.This now concludes our prepared comments. I would like to turn the call back to the Operator for the question-and-answer session.

[Operator:]

[Operator Instructions] Your first question comes from Scott Schneeberger with Oppenheimer.

[Scott Schneeberger:]

Thanks very much. Good morning, guys.

[Jody Miller:]

Hi, Scott. Good morning.

[Chuck Barrantes:]

Good morning.

[Scott Schneeberger:]

Hi, I want to go through a few of your segments. I'm going to start with Pac-Van, another really good looking quarter, could you address -- you cited in the press release some of the end markets that drove strength, could you speak specifically to retail and the others, but retail with seasonal activity included in the commentary? Thanks.

[Jody Miller:]

Sure. Thanks, Scott. This is Jody. Our retail season was good. One of our largest customers were up around 1,500 units, national count business picked up, which obviously some of those are retail. So, we did have a strong retail season, but just overall demand in general is really good with Pac-Van with -- again growing 18% year-to-date, so very happy with the performance of Pac-Van.

[Scott Schneeberger:]

Excellent, thanks. Can you speak a little bit to the pricing environment of Pac-Van given the strong demand environment?

[Jody Miller:]

Yes, we've been pretty stable in our price increases and there was a slight uptick even from previous quarter, so we're very happy with the trends, and don't really see any reason that will change going forward, a very robust pricing.

[Scott Schneeberger:]

Excellent, Jody, and then ground level offices have been very much in demand recently, and it looks like that'll persist, just I'd love to get your comments on that and what's the Pac-Van strategies surrounding that asset?

[Jody Miller:]

Yes, it's a great product. Again, there're just so many advantages to the ground level offices versus the wheeled mobile offices. So, we look for that demand to continue, and we're actually pretty excited. We're introducing a new ground level office with restroom recently too. So, that will be a new product coming out, and we're excited about the ground level offices. GLOs are doing well, and we see them to continue. Our year-over-year price increase on GLOs was just a little over 8%, so again, very robust.

[Scott Schneeberger:]

Excellent, and switching up, Asia-Pacific, obviously you mentioned fortunately your employees and property base were relatively unscathed by the wildfires. So, that's quite fortunate. They were so profound though as far as what we were seeing in the news. Was there much influence on -- or will there be much influence in the upcoming quarter or quarters from the fires?

[Jody Miller:]

Yes, so it's kind of a pro and a con, we had a large sale to get pushed because of the bushfires the roads and site were damaged. So that was a con, but obviously, anytime there is this type of damage, there's a tremendous [deed] [ph] for our type of product to store goods and offices and things like that. So, we do have business happening as we speak for the bushfires. We got to hurdle a little bit on certain things, and gained a little bit, but net-net, it will be a positive for business.

[Scott Schneeberger:]

Thanks, and then on leasing over in Asia-Participate, 5% growth on local currency basis, and there was -- you shed it across all sectors except for one or two. How was your seasonal activity in that geography?

[Jody Miller:]

Yes, they really don't have the type of seasonal activity that we do. There is some, but not near the impact that we have here with the retailers. So, most of theirs is through many different sectors, really had nothing to do with retail directly. It is a small part of their business.

[Scott Schneeberger:]

Thanks. And then lastly, maybe we will bring Chuck in on this, to the -- in Lone Star obviously we understand the dynamic in the end market there. How is the visibility for volumes, and how is that factored into the guidance for the balance of the fiscal year? Thanks.

[Chuck Barrantes:]

Yes. So I mean, we had said on the last call that we looked for things to pick up, but the first year, we stay in very close contact with our customers, because they need our product from day one when they're either fracking or completing a site or drilling. So, we obviously stay very close to those customers, and they've always said that, we're going to ramp up after the first year. I'm happy to report January was an uptick for us. We had one of the best months we've had in several months. So, going back to late-summer, early-fall level, so we're hoping that will continue, and we're cautiously optimistic that it will.

[Scott Schneeberger:]

It sounds good. I'll turn it over. Thanks very much.

[Jody Miller:]

Thanks, Scott.

[Operator:]

Your next question is from Zane Karimi with D.A. Davidson.

[Zane Karimi:]

Hey, good morning gentlemen.

[Jody Miller:]

Hey, Zane. Good morning.

[Chuck Barrantes:]

Good morning.

[Zane Karimi:]

Just a follow-up on Scott's earlier question, can you talk about the quoted rates with regards to Lone Star, and if they're kind of stabilizing through this January uptick?

[Jody Miller:]

Yes, they seem to be. Again, we were cautiously optimistic that this was going to happen based on the feedback we'd received from our customers, and it kind of fell right into place in January, and may be even slightly above where we were hoping it would be. So again, we're just hoping that will continue the pricing, definitely it stabilized, and there seems to be a loosening of CapEx to start the New Year. So I think they just naturally -- as I mentioned earlier on the prepared comments, the downturn was just preserving capital and increasing cash flow, they got a new budget, New Year and things are -- seem to be picking up a bit.

[Zane Karimi:]

Got you, and then for asset classes outside of liquid containment, can you provide us the growth rates for this last quarter, excellent, in particular?

[Jody Miller:]

So, in North America - so what I'll do Zane is - if I give you the average rates, would that be appropriate? That's what we usually disclose in the Q?

[Zane Karimi:]

Sure. Yes.

[Jody Miller:]

So, in the second quarter, storage containers were 79% average for Q2, office containers 80%, mobile offices were 84%, modular units were 82%, and the frac tank containers are 64%.

[Zane Karimi:]

Okay, thank you. And then one last one, with regards to the situation currently going on in China, presenting any headwinds for you in terms of like your sourcing new units or any sort of indirect impact to your Asia-Pacific businesses that you were seeing this last quarter or this current quarter, I guess?

[Jody Miller:]

It's too early to tell. We haven't seen any impact yet, but talking to some of the suppliers, some of the factory production is down. A lot of factories haven't ramped back up. So, if that continues for several months, it could impact a little bit on the supply and drive up pricing on containers a bit, but we've had containers on order. They're already coming in for spring and we have a normal flow, so it really is not a factor until we get into probably the May timeframe, and then if supply is limited then that could start to probably push up pricing, but less on new CapEx coming in, but it's too early to say.

[Zane Karimi:]

Yes. Thank you.

[Operator:]

[Operator Instructions] Your next question is from Evan Dreyfuss with RMB Capital Management.

[Evan Dreyfuss:]

Good morning. I just have a quick capital structure question for Chuck. You have two pieces in your cap structure, 9% preferred and then eight and one-eight baby bond that's going to be due in 18 months, and your credit story is improving, your leverage is down, the 10 year treasuries at 155. So, we're curious as to the delay and trying to refinance these, these are both callable, and with your debt structure in Asia-Pacific and in North America at the OpCo, we think you could probably issue a bond, and it's a really, really -- I mean rates are quite low, and high yield market is open, so we're just looking for an update on what you're trying to do?

[Chuck Barrantes:]

So, that is pretty much on point. We are looking at the refinancing of our senior notes with the intent, I'm not the last call, and this obviously has to go through the board, but of calling the preferred stock through the senior offering, we do have the capacity to theoretically pay the preferred stock for the North American facility, but it is an ABL, and we want to keep the capacity for our continued growth into our core business at Pac-Van, right? So, whether it's organic fleet or whether it's acquisitions, which we have not done the first six months, but the pipeline looks very good for the next six months. So, we prefer to pay out preferred stock through the refinancing of the senior notes, which we are looking at.

[Evan Dreyfuss:]

Okay, and is it your intention to keep the structure as is each division will have its own, the credit line in North America and a credit line down in the Asia-Pacific, or is it better…

[Jody Miller:]

That is the intent, because the practicality is it would be very difficult to have a worldwide ABL or credit facility. We've looked at that. So, as it is, that is the way we're going to do it. Going forward to the Asia-Pacific, we intend as the leverage gets lower in Australia to ultimately refinance into a more traditional senior facility, our facility and their excellent partners, which led by Deutsche Bank [in Sydney, which includes High Bridge] [ph] are a little higher in the normal senior facility, because of the leverage, which is about 3.8 in Australia. We need to get…

[Evan Dreyfuss:]

Well, thank you, and good luck.

[Jody Miller:]

Sure, thank you.

[Operator:]

[Operator Instructions] And there are no further questions at this time.

[Jody Miller:]

All right. Thank you, Operator. I'd like to thank you for joining our call today. We appreciate your continued interest in General Finance Corporation, and look forward to speaking to you next quarter.

[Operator:]

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