General Finance Corporation
Q2 2019 Earnings Call Transcript

Published: 11 Feb 2019

[Operator:]

Welcome to the General Finance Corporation's Earnings Conference Call for the Second Quarter Ended December 31, 2018. Hosting the call today for 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

[Christopher 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 US 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 and 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 US 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 website 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-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'd like to 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 2019 conference call. I will begin with a brief discussion of our operations, and 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. We continue to be extremely pleased with our solid operational and financial performance. The strong momentum we experienced in first quarter is continued into the second quarter where we delivered our highest quarterly level of revenues and adjusted EBITDA in the company's history. We also reached a company milestone with opening our 100 branch during the quarter. To put this in perspective, we've grown our branch network compound annual growth rate of 11% in the past five years. This is the result of a long term strategy of expanding our geographic footprint with a combination of accretive container based acquisitions and greenfield openings. We're also closing on our 100,000 units in our rental fleet, which has grown at a similar rate over the last five years. Now, turning to our geographic venues, our North American leasing operations continued to see strong demand across all of its end markets with the total revenue in second quarter increasing by 25% year-over-year, driven by both higher sales and leasing revenues. Sales revenues were up 27% in the quarter, mostly due to two large sales in industrial and education sector which contribute approximately 2 million of the 3.6 million increase. The remaining increase was spread evenly across all sectors. Leasing revenues increased by 24%, driven by an increase in unit growth average least rate and higher fleet utilization across all of our product lines during the quarter. We're very proud of these outstanding results. Our core portable storage also continued to perform at the high end of our expectations driven by consistent execution and broad based demand across the majority of our end markets. Demand for our ground level storage continued to show very high demand as these two products generate a combination year-over-year rental revenue increase of 30%, of which over half was organic growth. Taking into account all of Pac-Van's product lines, organic rental revenue growth was 17% for the quarter and 80% year-to-date. Our team continues to do a great job executing on our business plan including gaining traction on number initiatives such as our national account program, our online ordering capabilities and our recent introduction of PV3 Safety Containers. We are particularly excited about this new innovative product, which offers the industry's only emergency exit feature as well as an upgraded option to include interior solar powered lighting. Pac-Van continues to be a highly regarded by its customer base and once again posts the world class net promoter score of 84 for the last 12 months. In addition to organic growth we remain focused on building the Pac-Van brand throughout North America by geographically expanding our portable storage container business particularly into adjacent markets. During the second quarter, we completed one acquisition in New Hampshire, increasing our presence in the New England region. We also opened the greenfield location in Tampa, Florida, adding our fourth branch in Florida. We continue to serve just over half of the top 100 MSAs in the US and our acquisition pipeline remains healthy. Our liquid containment business in North America once again delivered a very strong quarter, generating year-over-year leasing revenues and adjusted EBITDA growth of 37% and 57% respectively. While oil and gas production activity in both Permian and Eagle Ford basins remained healthy, the increase in volatility in oil prices during the quarter created caution among some of our customers. As a result, we had a small decline in fleet utilization. Our North American manufacturing operations posted 29% year-over-year increase in sales to external customers and delivered its fifth quarter in a row of positive standalone EBITDA. This ongoing improvement as really increased demand, especially tanks and other steel related products. Now, turning to our Asia Pacific region, our Asia Pacific region continued its positive momentum posting second quarter growth in leasing revenues of 9% in local currency basis marking its ninth year-over-year increase out of the last 10 quarter. Sales revenues were down year-over-year due to two large sales that occurred last year in second quarter that were not repeated this year. Excluding the impact of those two transactions, sales revenues would have increased by 30% in local currency. Total reported revenues for the quarter in US dollars were adversely impacted by the approximate 7% decline in average Australian dollar exchange rate between periods. The increase overall leasing revenue spread across almost all of its markets with noticeable increases in construction, consumer and industrial sectors. The growth has mainly been driven by increase in average units on lease combined with higher average lease rates. Our team remains focused on building upon its leading market position across the region through a combination of organic growth, greenfield openings and to the extent they become available of accretive acquisitions. During the quarter we opened one additional location in the state of Victoria, increasing our branch count in Asia Pacific to 37. To conclude, we continue to see both organic growth and expansion opportunities in North America and the ability to strengthen our market leadership in the Asia Pacific region. As always, we remain disciplined in our capital allocation. Our performance year-to-date positions us well to exceed our goals for this year, while also providing us with optimism about the future. Our hardworking employees continue to execute on our proven business strategy and their dedication to the company has lead our outstanding and record breaking financial performance. I'll now turn on the call over to Chuck Barrantes for his financial review and our outlook for the remainder of the fiscal year.

[Charles Barrantes:]

Thanks, Jody. We'll be filing our annual report on Form 10-Q shortly, at which time the document will be available on both the SEC's EDGAR filing system and our website and I encourage investors and other interested parties to read it as it contains substantial amount of information about our company, some of which we will discuss today. Turning to our fiscal second quarter financial results. Total revenues were 98 million in the second quarter of fiscal year 2019, compared to 92.1 million for the second quarter of fiscal year 2018, an increase of 6%. Leasing revenues were 63.5 million, an increase of approximate 18% over the prior year's quarter and comprised 67% of total non-manufacturing revenues for the quarter versus 60% in the second quarter of fiscal year 2018. Non-manufacturing sales revenues were 34.5 million in the quarter down from 38.1 million in the second quarter of the prior year. In our North American leasing operations, revenues for the second quarter totaled 63.9 million compared with 55.1 [ph] million for the year ago period, an increase of 25%. Increases occurred across all sectors, but primarily in the oil and gas, commercial and construction sectors. Revenues in our North American manufacturing operations for the second quarter were 3.6 million, including intercompany sales of 946,000 for our North American leasing operation. This compares to 3.5 million of total sales for the year ago period, including intercompany sales of 1.4 million. As Jody mentioned, our manufacturing operation saw increased demand for specialty tanks and other steel related products, particularly chassis. In our Asia Pacific leasing operations, revenues for the second quarter totaled 31.4 million compared to 38.9 million for the year ago period, a decrease of 19%. The decrease in revenues was driven primarily in the utilities and transportation sectors as two large sales totaling 10.5 million which occurred in the second quarter fiscal year 2018 were not repeated this year. Excluding the impact of these two large sales, revenues would have increased by 18%, mostly driven by increases in the moving and storage, constructions and industrial sectors. As Jody mentioned, total revenues are adversely impacted by the approximate 7% decline in the Australian dollar compared to the US dollars between the periods. Leasing revenues increased by 2% on a year-over-year basis and 9% on a local currency basis driven mainly by increases in the construction, consumer and industrial sectors. Consolidated adjusted EBITDA was 29.7 million in the quarter compared to 25.2 million in the prior year's quarter, an increase of 18%. And adjusted EBITDA margin as a percentage of total revenues was 30%, up from 27% in the second quarter fiscal year 2018. This was the eighth consecutive quarter of year-over-year adjusted EBITDA growth and marks the first time in the company's history that we have surpassed the $100 million adjusted EBITDA mark on a trailing 12 month basis. In North America, adjusted EBITDA for our leasing operations was 22 million in the second quarter compared to 60 million for the year ago quarter, an increase of 38%. Adjusted EBITDA at Pac-Van was 15.4 million up 32% year-over-year and Lone Star's adjusted EBITDA was 6.6 million, up 57 from the prior year. For our manufacturing operations on a stand-alone basis, adjusted EBITDA was 228,000 for the quarter compared to 73,000 in last year's second quarter. Asia Pacific's adjusted EBITDA for the second quarter was 8.6 million compared to 10.2 million in the year ago period. On a local currency basis adjusted EBITDA decreased by approximately 9%, driven by the absence of the two large sales that occurred in last year's second quarter. Interest expense for the second quarter was 8.9 million, a decrease of $0.5 million from the year ago period. The decrease was primarily driven by lower interest expense of 1.5 million between the periods in the Asia Pacific area due to lower average borrowings, overall weighted average interest rate of 8.9% for the second quarter of fiscal year '19 versus 9.9 in the year ago period and a weaker Australian dollar. In North America, interest expense increased by $1 million from the second quarter of 2018, mostly due to a higher weighted average interest rate of 7.2% versus 5.9% last year, offset somewhat by lower average borrowings between the periods. Net loss attributable to common shareholders in the second quarter was 5.1 million or $0.17 per diluted share, compared to a net loss of 2.1 or $0.08 per share in the year of ago quarter. Included in these results were non-cash charges of 9.3 million and 1.7 million in fiscal years 2019 and '18 respectively for the change in valuation of the standalone bifurcated derivatives in our Asia Pacific convertible note. Both periods include 922,000 for the dividends paid on our preferred stock. For the first six months of fiscal 2019, we generated free cash flow before fleet activity of 30.1 million, compared to 18 million in the prior year quarter, an increase of 67%. Now, turning to our balance sheet, at December 31, the company had a net leverage ratio of four times for the trailing 12 months, our lowest level in four years. The reduction in leverage is due to a combination of factors including the force conversion of the convertible note at Royal Wolf and of course our strong financial performance. Also during the quarter, we paid off the entire final portion of our North American credit facility. We replaced this higher cost debt with lower cost revolver borrowings in the credit facility, which we also submitted in expanding freeing up additional boring base capacity. Now turning to our company wide outlook for the remainder of fiscal year 2019, based on our excellent operating results in the second quarter and our ongoing positive outlook, we're increasing our guidance for fiscal year 2019. Assuming the exchange rates for the Australian dollar versus the US dollar averages $0.71 during the rest of the fiscal year, we now expect the consolidated revenues for fiscal year 2019 will be in the range of 270 million to 290 million and then consolidated adjusted EBITDA will increase between 20% and 25% in fiscal year 2019 from fiscal year 2018. This outlook does not take into account the impact of any additional acquisitions that may occur for the remainder of the fiscal year. This now concludes our prepared comments. I would like to turn the call back to the operator for the question-and-answer session.

[Operator:]

Thank you. [Operator Instructions] Your first question comes from the line of Brent Thielman with D. A. Davidson.

[Brent Thielman:]

Thanks, good morning.

[Jody Miller:]

Good morning.

[Charles Barrantes:]

Good morning.

[Brent Thielman:]

Hey, Jody, it seems like the liquid containment business is pretty immune to the commodity price swings in the quarter that you did talk about some impact utilization rates. Is that deep end or is it stabilized since quarter-end, maybe just an update on where the market is now?

[Jody Miller:]

Yeah, I think it's stabilized. To be honest, a lot of the change that we saw, we had some consolidation of our customer base. It took a couple months to get that kind of sorted out. And there's typically always a little bit of a seasonal downturn after Thanksgiving, kind of going into the first calendar quarter where things kind of get caught up. But if you look at the rig count and activity, I think it's pretty stable and our levels are gradually kind of coming back.

[Brent Thielman:]

Okay. And then, I guess outside of oil and gas, I mean, it seems like most of the engines that are humming here in Pac-Van, can you just talk about maybe some of the best markets for you around the country and where you're seeing particular pockets of strength?

[Jody Miller:]

Yeah, I would say to be honest, it's pretty much universal across the board. I think the team has done a great job with the strategy and carrying out the business plan. And we've really seen good trends across the US, there's not really real high down spots, real high spots as well. It's been very consistent and the team's done a good job executing and we continue to see a very positive outlook on portable storage and off the side. I think some of our new products also raised in some of the increase.

[Brent Thielman:]

Okay, and then I guess my last question Jody, just in the Asia Pacific, I guess if you think about the outlook and the guidance, how confident are you that you can kind of maintain that leasing revenue growth, call it local currency because it seems like the Australian economy could feel the brunt of a slower China economy here?

[Jody Miller:]

Yeah, we haven't seen much and there's some huge infrastructure bills that should help in the coming quarters as well, that key driver around those markets, there's tower cranes and just tremendous amount of construction activity. Containers are very accepted in that market, so there's a very high demand for the use of containers across the board and almost all sectors. So we feel like it's going to be pretty consistent. We feel like there's upside on the building construction side, the infrastructure piece should help us, so we're pretty confident that that will sustain their current path.

[Brent Thielman:]

Okay, thank you.

[Jody Miller:]

Yeah.

[Operator:]

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

[Scott Schneeberger:]

Thank you. Hey, good morning guys.

[Charles Barrantes:]

Good morning, Scott.

[Jody Miller:]

Good morning.

[Scott Schneeberger:]

Chuck, I guess if we could start, what would you say are the primary drivers across the whole company of the increased guidance and outlook and obviously part and parcel of the strong quarter? Look like things really improved across the board, but I want to hear just kind of honed in what you think with the main drivers and what pushed you higher for the year?

[Charles Barrantes:]

Well, I think, I think certainly in North America, I think the economy is solid, we've seen growth across all sectors and particularly product line wise our GLO, Ground Level Offices are doing very, very well and I've stated really for the last few quarters that there's much more tailwinds and headwinds. So we feel pretty bullish about where we're going, but I would say generally a strong economy.

[Jody Miller:]

Yeah Scott, this is Jody. I'd just say, if you look at all of our product lines across the board, you're doing very well led by the GLO and storage side that all segments are doing very well and trending positive.

[Scott Schneeberger:]

Great, thanks and on - in Pac-Van a couple of questions there, obviously, GLO has been very successful. Do you think that we're going to see an industry shift? Is it just GLOs are kind of emerging and so they are going to be incremental to what's going on in the industry or might they eat into some other products over time. And then secondly, Jody, if you could just talk a little bit to what you saw with seasonal rentals for containers and what that competitive environment looks like. Thanks.

[Jody Miller:]

Sure, thanks. Yeah, I mean, I think GLOs are definitely growing in popularity, the ease of setup, where they can set on the ground, especially for subcontractors. They can be moved very easily, they don't have to be skirted and anchor those types of things. So the GLO product itself, I think is becoming more and more popular and more widely used. The Mobile Offices, we've not seen any decline there, they're very strong and still continue to do very well. Also, they're just kind of two separate applications that I do think there is a trend in the GLO side becoming more popular all the time. And then regarding your seasonal question, we did see an increase in seasonal business this year; it is back to kind of what I would say a normalized level. It was a nice increase for the year that 400 K or so, nothing too drastic, but still nice increase in the retail side.

[Scott Schneeberger:]

Thanks and just following on that specifically to the seasonal, how is pricing in that category for you and then taking a step back, how is pricing overall in the Pac-Van side? Thanks.

[Jody Miller:]

Yeah, we continue to see price increases across the board. We saw probably a little bit better pricing on mobile modular side, I think the consolidation industry has been good and helps the industry as well. So that's been very positive as well with the storage and GLO side had nice increases as well.

[Scott Schneeberger:]

Thanks and then just switching over toward Lone Star, the kind of the same question. What are you seeing in pricing? You already touched a little bit upon pause and then utilization there. What's the pricing environment like as we had a really nice run in oil and gas prices and then a bit of a hiccup. So where does pricing expand and what do you see for the coming quarters?

[Jody Miller:]

Yeah, I would phrase it as more stabilized now. We were getting - having pretty good success in moving the prices up every quarter and going back and some customers had seen as much as two and three price increases over the last year and a half or so as the market continued to be more positive, I would say. With the oil prices going down beginning of last quarter kind of put us in a situation not to ask and so we've kind of seen the pricing kind of stabilize that we see oil and gas continue to be positive. And then we'll go back and ask for some more price increases. But the way I would phrase that right now is kind of stabilized pricing.

[Scott Schneeberger:]

Alright, thanks. I appreciate [indiscernible] question.

[Jody Miller:]

You bet. Thank you, Scott.

[Operator:]

Your next question comes from a private investor. Luis Hernandez [ph].

[Charles Barrantes:]

Thank you, Mr. Luis.

[Unidentified Analyst:]

Yes. Hello. Good morning.

[Jody Miller:]

Hey, Luis.

[Unidentified Analyst:]

Hello. Alright, my first question is on free cash flow. Chuck, you mentioned 34 million was that six months or 12 months?

[Charles Barrantes:]

Six months.

[Unidentified Analyst:]

Okay, six months were -

[Charles Barrantes:]

On a year-to-date.

[Unidentified Analyst:]

Sort of 34 million.

[Charles Barrantes:]

Yeah.

[Unidentified Analyst:]

Yeah, so as on the release, you mentioned 19 million in operating cash flow for the six months.

[Charles Barrantes:]

Okay. Yeah, the 19 million that's in the release is the operating activities for GAAP, whereas the 34 million is the free cash flow.

[Unidentified Analyst:]

Alright, okay, so 34 for six months alright. That GAAP clarifies pretty well. Alright then, the other question is on - Jody you mentioned you guys are either throwing your products. I couldn't hear you well on that. Could you expand on those please?

[Jody Miller:]

Yeah, so we entered just what we call the PV3 Safety Container and the Wolf Lock in the Asia Pacific. It's a new innovative product on the container side that has internal locking mechanisms. It's very a one handle easy opening unit. But the most impressive thing about it's got an internal emergency release. So if someone were to get locked in or trapped in the container there's one lever to pull and it will release to let you out of the container and it's the only product in the industry like that. So we feel like it's going to be very well accepted as far as safety and ease of use and simplicity and the security it has.

[Unidentified Analyst:]

All right and then how much impact you expect from these new products. Are they minor or are they going to be the other [ph]?

[Jody Miller:]

Yeah, so we just rolled out the product not long ago, we also rolled out solar lighting because the containers are pretty dark when you open the doors. There's no lights so we've got an innovative product at the panels we can still stack and deliver the units with panels to very nice light kit as well for the units. But it's still too early to say that we have high expectations that our thought process is after people see it, why wouldn't they want it in the future, so we obviously feel like it's going to take off and do very well for us.

[Unidentified Analyst:]

All right, good and then finally on pricing on the Lone Star regarding the peak, where do you think we're now?

[Jody Miller:]

Yeah, so I think - so yeah, I mean, we're not anywhere even close to where we were back in the day. I think this first little peak until the oil prices went down, I think we were in good shape. If oil price stays in the range it is now or a little higher, which most are predicting then I think there's more upside on the pricing for sure. But if you look at where it is now it's less than two thirds of where it was in the peak and has a lot of runway ahead if we could get back to those levels. But I think it'll be a more steady, slower, gradual increase, is what we're foreseeing in the future as long as stabilities there on pricing.

[Unidentified Analyst:]

Okay, good and then one last one, the derivative cost and the convertible one that goes away going forward, right?

[Charles Barrantes:]

I'm sorry, Luis. What was the question on the derivative?

[Unidentified Analyst:]

There's an expense on the conversion of it that goes away going forward.

[Charles Barrantes:]

No, it doesn't go away. Doesn't go away for a while, so what the derivative represents is a minimum return provision for Bison Capital on the shares on the convertible note. So it's 1.75 and so until they actually sell and realize down the road it's going to stay with us.

[Unidentified Analyst:]

Okay, alright. I thought it was -

[Charles Barrantes:]

Non-cash, it goes up and down, if stock goes up, it'll go down.

[Unidentified Analyst:]

Okay. Yeah, I thought it was since it was already converted than it'll go way. But, alright thanks for clarifying. That's all for me. Thanks for taking the questions.

[Charles Barrantes:]

Thanks, Luis.

[Jody Miller:]

Thank you.

[Operator:]

[Operator Instructions] Our next question comes from the line of Toby Floating [ph] a private investor.

[Unidentified Analyst:]

Hey, good morning guys, can you hear me?

[Charles Barrantes:]

Yes.

[Jody Miller:]

Good morning.

[Unidentified Analyst:]

Hey, congratulations, consistently you just did another great quarter. So thank you. This is kind of a broader base question, when you look at the financials to what extent were the financials affected by that? I'm assuming high demand you saw in like, let's call the disaster prone areas like Florida, Texas and California.

[Jody Miller:]

Yeah, it really is pretty small. We obviously deliver units into those areas that were affected that if you look at it as a whole as far as affecting the full company numbers, it was very minimal. But obviously, we try to service that area the best we can and help the folks out and optimize the opportunity, but if you look at it as a whole it's not a large piece at all, very small.

[Unidentified Analyst:]

Were you surprised by that?

[Jody Miller:]

In regards to the impact or the -

[Unidentified Analyst:]

Yeah, just a little bit - I would have expected to see a larger impact.

[Jody Miller:]

It takes a while on those rebuilds. We've always found that you don't see hundreds and hundreds of units going out day one. We've set up drop yards there in the Panama City area. We also added resources and added equipment at a fast pace. So when you're looking at a company that's got 60 some branches in the US and the volume that we do even several hundred units even a 1000 units going out for isolated areas still not a huge impact overall, but it's obviously something we're going to try to optimize the best we can and we're definitely are adding yards and equipment to service that area, but through the rebuild that's going to happen for a long time. It's not something just -

[Unidentified Analyst:]

Hey, thanks.

[Jody Miller:]

Yeah.

[Charles Barrantes:]

Thank you.

[Operator:]

And at this time there are no further questions. I will now like to turn the call back over to Mr. Jody Miller, President and CEO for closing remarks. Please go ahead Mr. Miller.

[Jody Miller:]

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

[Operator:]

This concludes today's call. You may now disconnect.