General Finance Corporation
Q2 2018 Earnings Call Transcript

Published: 6 Feb 2018

[Operator:]

Welcome to General Finance Corporation's Earnings Conference Call for the Second Quarter Ended December 31, 2017. Hosting the call today from the company's corporate office in Pasadena, California are Mr. Ronald Valenta, Executive Chairman of the Board; 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 interest rate indebtedness; our ability to raise capital or borrow additional funds; 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 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-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'll turn the call over to Ron Valenta, Executive Chairman of the Board. Ron, please go ahead.

[Ronald Valenta:]

Thank you, Chris. Good morning, and we appreciate you joining us to discuss General Finance's Second Quarter Fiscal Year 2018 results. My last, as Chief Executive Officer. I'm now officially the Executive Chairman of the Board and Jody Miller, as of January 1 has taken over as Chief Executive Officer, adding to his role as President. Going forward, I'll remain active at the board level and the support to Jody and his senior executive team. However, this will be the last time that I'll be in the quarterly earnings conference call. I will begin with a brief discussion of our operations and then provide an update on our outlook for the remainder of the fiscal year. Our CFO, Chuck Barrantes, will then provide a financial overview and following his remarks, we will open the call for your questions. After the Q&A session, Jody will provide some closing remarks. We are pleased to report very strong performance for the second quarter of fiscal year 2018, as demonstrated by our highest quarterly level of revenues and adjusted EBITDA in 3 years. The solid momentum that we experienced in the second half of fiscal year 2017 and the first quarter of fiscal year 2018 has continued into the fiscal year's second quarter where we generated year-over-year improvement in all of our key operational and financial metrics, which include, sales, leasing revenues, fleet utilization, average lease rates and adjusted EBITDA. Our North America leasing operations continue to experience healthy demand in the majority of its end markets where total revenues increased by 26% compared to the prior year's second quarter. We experienced higher average units on lease, higher average fleet utilization, higher average lease rates across virtually all of our product lines during the quarter as compared to the second quarter of fiscal 2017. Our core portable business continues to be, storage business, continues to perform at the high-end of our expectations driven in large part by our organic growth, geographic expansion and superior customer service. Pac-Van continues to post an excellent net promoter score, which was 86% for the most recent quarter and 84% for the last 12 months. In addition to organic growth, we continue to focus on geographic expansion of our portable storage container business in North America. During the second quarter, we completed an acquisition in Louisiana, adding 2 branch locations that primarily serve the commercial and industrial markets in the southern part of the state. In late January, we completed an acquisition of the storage container business in central Vermont adding to our presence in New England. So we have completed 3 acquisitions and added 1 greenfield location this fiscal year. We remain focused on expanding in North America, both organically through greenfield locations and through accretive acquisitions. In the United States, we currently have a presence in 48 of the top 100 MSAs and our pipeline remains healthy. In our liquid containment business in North America, we delivered another very strong quarter, generating leasing revenue growth both sequentially from the first quarter and on a year-over-year basis. Increased oil and gas production activity in Texas has enabled us to achieve higher sequential average fleet utilization for the sixth quarter in a row. For the second quarter, frac tank average utilization was 79%, up from 72% in the first quarter and 44% during the prior year's second quarter. At December 31, our frac utilization rate was just about 80%, it's highest level in nearly 3 years. And these higher utilization rates are enabling us to be more selective on pricing, which is also flowing through to our results. We experienced an increase in average lumpy lease rates on a sequential basis for the fifth quarter in a row to $729 for the second quarter, up nearly 8% from the first quarter and 48% from the second quarter of fiscal year 2017. Our North America manufacturing operations delivered another quarter of improved revenue both sequentially and year-over-year. This improvement included higher sales to external customers as well as to our North America leasing operations. We have experienced increased demand for frac tanks, including some specialty tanks as well as ongoing intercompany demand for our office container modifications. Stand-alone adjusted EBITDA was slightly positive for the quarter, an improvement over the modest EBITDA loss in both last year's second quarter and this year's first quarter. Much of the increase in sales was from our existing inventory frac tanks that have been previously written down, which negatively impacted the overall contribution margin. We are also making good progress on the marketing of our chassis and specialized blast-resistant container products and have been receiving bid request. We again cautiously optimistic that we will see some meaningful orders on these products in the near future. Now turning our attention to the Asia-Pacific region. Our Asia-Pacific region delivered it's strongest quarterly performance also in the last 3 years, driven by higher sales revenue, which included 2 large sales, one was for a customized container product that we will be -- that will be used as a component in recycling station setup in a number of locations across the state of South -- New South Wales. The other consisted of specialized container sold to a freight logistics customer. These types of sales demonstrate the talent of our design engineering teams to meet new customer specific needs with creative and innovative products, something that has been a hallmark of the company for many years. Our team continues to build upon it's leading market position across the region by implementing a number of growth initiatives. These include a combination of organic growth, greenfield openings and accretive acquisitions to the extent that they become available. During the second quarter, we opened one greenfield location just southwest of Melbourne and subsequent to quarter end, another greenfield location east of Perth, bringing the year-to-date greenfield openings for the Asia-Pacific region to 3. Management also continues to work on redeploying its workforce accommodation fleet either through outright sales or through re-leasing it in the normal course of business. And now I would like to discuss our company-wide outlook. Based on our year-to-date results and our outlook for the remainder of the fiscal year, we are increasing our financial guidance from what was provided on our fourth quarter fiscal year 2017 conference call. Assuming the Australian dollar averages $0.78 versus the US dollar for the remainder of fiscal year 2018, we now expect that consolidated revenues for fiscal year 2018 will be in the range of $320 million to $330 million. And the consolidated adjusted EBITDA will increase by 28% to 34% in fiscal year 2018 from fiscal year 2017. This outlook does not take into account the impact of any additional acquisitions that may occur in the second half of this fiscal year. To conclude, I'm very pleased with the efforts of all of our operating teams that have led these very strong financial results. Our company-wide focus on implementing our disciplined growth strategy over the last several years continues to pay off. And we still have a number of long-term growth opportunities, including significantly expanding our North American footprint and strengthening our market leadership in the Asia-Pacific region. I'm very confident that Jody Miller and his expanded role as CEO, will continue to provide outstanding leadership that will enable us to continue to execute on our growth plans and to capitalize on these opportunities, both in the near term and beyond. I'll now like to turn the call over to Chuck Barrantes for his financial review.

[Charles Barrantes:]

Thanks, Ron. We will be filing our quarterly report on Form 10-Q shortly today, 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 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 financial results. Total revenues were $92.1 million in the second quarter of fiscal year 2018 compared to $72.3 million for the second quarter of fiscal year 2017, an increase of 27%. Leasing revenues were $54 million, an increase of 19% over the prior year's quarter, and comprised 60% of total nonmanufacturing revenues as compared to 64% for the same period last year. Nonmanufacturing sales revenues were $36 million in the quarter, an increase of 42% over the second quarter of the prior year. In our North America leasing operations, revenues for the second quarter fiscal year 2018 totaled $51.1 million compared to $40.7 million for the year ago period, an increase of 26%. Leasing revenues increased by 30% on a year-over-year basis, primarily driven by increases in the oil and gas, commercial and construction sectors. Revenues at our North American manufacturing operations for the second quarter were $3.5 million, including intercompany sales of $1.4 million to our North American leasing operations. This compares to $1.9 million in total sales during the second quarter of fiscal year '17, including intercompany sales of $300,000. As Ron mentioned, our manufacturing operations saw increased demand for some specialty frac tanks as well as ongoing intercompany demand for modified containers or GLOs. In our Asia-Pacific leasing operations, revenues for the second quarter of fiscal year 2018 totaled $38.9 million compared to $30 million from the second quarter of fiscal year 2017, an increase of 30%. As Ron mentioned, the increase in revenues was largely driven by 2 large sales to customers in the utilities and transportation sectors, totaling approximately $10.5 million. These live sales were, partially offset by decreases in the oil and gas and industrial sectors. Leasing revenues were effectively flat on a year-over-year basis, but increases in the construction and mining, industrial and transportation sectors were offset by declines in the oil and gas sector. Revenues were positively impacted by a slightly favorable foreign currency translation between the periods. On a local currency basis, revenues increased by 28% during the period. Consolidated adjusted EBITDA was $25.2 million in the second quarter of 2018 compared with $17.8 million in the prior year's quarter, an increase of approximately 42%, and adjusted EBITDA margin as a percentage of total revenues was 27%, up from 25% in the second quarter of fiscal year 2017. This was the fourth quarter in a row of year-over-year adjusted EBITDA growth. In North America, adjusted EBITDA for our leasing operation was $15.9 million in the second quarter compared with $10.9 million for the year ago quarter, an increase of 46%. Adjusted EBITDA in Pac-Van was $11.7 million, up 21% year-over-year and Lone Star's adjusted EBITDA was $4.2 million, up 2.5x over the prior year's amount of $1.2 million. For our manufacturing operations, on a stand-alone basis, adjusted EBITDA was $73,000 for the quarter compared to last year's second quarter adjusted EBITDA loss of $513,000. As Ron mentioned earlier, while revenues increased significantly in Southern Frac, the increase in sales primarily occurred from product that was in finished inventory. This inventory was reduced to net realizable value in the prior periods, which resulted in lower margins, that, along with lower production levels during the quarter negatively impacted the results. Though we did it net positive. Asia-Pacific's adjusted EBITDA for the quarter was $10.2 million as compared to $8.4 million in the year ago period, an increase of over 21%. On a local currency basis, adjusted EBITDA increased by approximately 20% from the prior year's second quarter. Interest expense for the second quarter of 2018 was $9.4 million, up from $5 million for the second quarter of last year. The increase was driven by a $3.9 million higher interest expense in the Asia-Pacific area due to higher average borrowings, a higher weighted average interest, interest rate of 10% in the second quarter of fiscal year 2018 versus 4.9% in the year ago period, and by a stronger Australian dollar between the periods. At our North American operations, interest expense was $0.5 million higher due primarily to a higher weighted average interest rate of 5.9% in the second quarter of fiscal year '18 from 5% in the prior year's second quarter. The provision for income taxes were $809,000 for the second quarter of fiscal year 2018. Included in this number was the net cash benefit of approximately $750,000 for among other things the remeasurement of our estimated deferred tax assets and liabilities as a result of the enactment of the so-called Tax and Jobs Act on December 22, 2017, that totaled approximately $6.5 million. This estimated tax benefit was offset by approximately $5.2 million for both the estimated transition tax on accumulated foreign earnings and valuation allowance that was established to offset previously recognized foreign tax credit carryforward deferred tax assets that we believe will not be realized, as well as other adjustments totaling approximately $550,000. Both the estimated transition tax and valuation allowance are considered provisional allowance that require further analysis. These provisional allowances are starting to adjust the general maintenance period, which should not extend beyond one year from the enactment date of the act as in accordance with Staff Accounting Bulletin no. 118 Net income attributable to common stock shareholders in the second quarter of 2018 was $2.1 million or $0.08 per diluted share, a substantial improvement from the net loss of $600,000 or $0.02 per share in the second quarter of 2017. Both periods include $922,000 for dividends paid on our preferred stock. For the first six months of fiscal year 2018, we generated free cash flow before fleet activity of $18 million as compared to $6.7 million in the prior year same period. This year's higher free cash flow was due to a combination of factors, but primarily from higher net income and the timing and management of our operating assets and liabilities. As a reminder, we define free cash flow to be cash from operating investment activities adjusted for changes in nonmanufacturing inventory, net fleet, CapEx and business and real estate acquisitions. For the first 6 months of fiscal year 2018, the company invested a net $12.9 million in the lease fleet, consisting of $11.6 million in North America and $1.3 million in the Asia-Pacific. This compares to $15.1 million in net fleet investment in the year ago quarter, of which $7.1 million was in North America and $8 million in the Asia-Pacific. Turning to our balance sheet, at December 31, the company has total debt of $440.1 million and cash and cash equivalents of $5.5 million, with a net leverage ratio of 5.95x for the trailing 12 months. This compared with a net leverage ratio of 5.7x at June 30, 2017. The increase in total debt and net leverage year-to-date was primarily due to new borrowings used to finance the acquisition of the noncontrolling interest of Royal Wolf. Receivables were $54.7 million at December 31, as compared to $44.4 million at June 30. Days sales outstanding in receivables at December 31 for our Asia-Pacific and North American leasing operation were 45 and 50 days as compared to 49 and 46 days, respectively, as of June 30. At December 31, our Asia-Pacific leasing operation had AUD 15.7 million available to borrow under its new AUD 125 million credit facility and our North American leasing operations had $34 million available to borrow under its $237 million credit facility. This now concludes our prepared comments and 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 the line of Brent Thielman with D.A. Davidson.

[Brent Thielman:]

Great quarter. Jody, I think last quarter you talked about some expected impact from a large retailer on leasing revenue. Anyway you could quantify, what that had on numbers this quarter? Clearly, leasing sales had a nice growth.

[Jody Miller:]

Thank you. We actually had a decline in the world's largest retailer. I think I mentioned on the last call that we had strategically decided not to be as aggressive going after those bids and we had about a $625,000 decline from that one customer. We were, obviously, we will make that up with other national accounts and core business, which actually is a lot better outcome for Pac-Van and we are very pleased with that.

[Brent Thielman:]

Okay, great. And then I guess just from bigger picture, interest rates kind of broken up here, any thoughts or expectations on, I guess, accelerating debt reduction this year, and kind of what are you thinking around with the balance sheet right now?

[Charles Barrantes:]

Brent, this is Chuck. So, our plan effectively in North America, is continuing to do what we've been doing and that is invest in organic fleet, where we see opportunity and make opportunistic acquisitions. Having said that, whatever free cash flow we have after those investments, we will use to delever. In the Asia-Pacific, it's definitely a delevering both in absolute dollars and as a net leverage, that is our intent for the remainder of fiscal year '18.

[Brent Thielman:]

Got it. Okay. And then maybe just 1 more. Jody, on the M&A pipeline, any thoughts there areas, in particular, that you are focused on?

[Jody Miller:]

All right. I think we're going to continue to look at opportunistic acquisitions. The pipeline continues to stay steady. And I think we've closed a couple of real nice acquisitions so far for the year, and we'll kind of continue on the same path, cautious, but taking advantage of any that are opportunistic.

[Operator:]

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

[Daniel Hultberg:]

It's Daniel on for Scott here. Congratulations on a good quarter. The pricing environment, I mean, you have strong momentum across the end market. Can you guys elaborate a little bit on the pricing environment impact and in Lone Star? And can you like help us think about the offset from here, where you think is down on the curve and so forth?

[Jody Miller:]

Sure. Dan, I think, I would describe them as steady as it goes. We have price increases, again, this quarter, and I think we will continue to see steady growth on the Pac-Van side in the core storage and then on the tank side, we've seen some larger jumps. As utilization has risen, we've been able to be a little more selectable with our customers and push pricing a little more. That's on the Pac-Van side. And then on the Lone Star side, we've seen some very nice price increases quarter-over-quarter and year-over-year, and again, I think as the Permian continues to be very busy and active and tanks become shorter in supply, then we will be able to push the pricing -- continue to push the pricing quarter-over-quarter and steady in that area as well.

[Daniel Hultberg:]

Got it. It sounds good. Switching gears to Asia-Pacific, if you guys can discuss like what do you expect for the second half of fiscal '18 here? And maybe some color on the end markets over there and the expectations going forward?

[Jody Miller:]

So I just get back from a visit over there, and I would tell you I think the construction market is optimistic. I think our execution on that side will continue to progress. They've kind of went through a stagnant stage, and I think it's picking up. So I think, on the leasing side, we'll see steady stable performance. And I think on the sales side, we've got some new opportunities. We closed a couple of large sales. That pipeline continues to be positive for the future. So we've got another one on the books for next quarter and we hope that relationship continues to grow throughout as well.

[Operator:]

And your next question comes from the line of Greg Eisen with Singular Research.

[Greg Eisen:]

Also, congratulations on way better than anyone was expecting. Could you talk a little bit about those larger sales in the Asia-Pac region? Are those -- just looking at the consolidated gross margin, I would guess that those came at a higher margin than otherwise. Would that be correct? Or is that discount?

[Charles Barrantes:]

Greg, this is Chuck. Yes, that is correct. They are higher than normal margins for sales, whereas, in the past, the large sales were low, low single-digit margin. This is closer compared to the [indiscernible] margin on the two sales.

[Jody Miller:]

Greg, these are modified units. So they are just not a raw unit. These are actually modified by our depots for their application in the recycling side and seems to have optimistic outlook for the future.

[Greg Eisen:]

Good, good. You mentioned that there is -- you have another one in the pipeline for the next quarter. Is that the same type of modified unit business?

[Jody Miller:]

Yes, same customer and they continue to expand. So we've got another order, not as large as this quarter so far, but yes, it's in the works now.

[Greg Eisen:]

Good, good. And you mentioned making some progress on the repositioning of the accommodation units in Asia. Could you amplify what you meant there?

[Jody Miller:]

Yes, I think, I would say the pipeline is looking better than its looked in quite some time. We've got some quotes currently active that we're waiting to hear back. And we've been able to redeploy some of the units, the hoardings and other units and other applications outside of the energy or mining side. And we continue to concentrate on trying to diversify the units in the other industries. And I think there is a little more optimism on the mining side. The energy side is still a little slow on recovery over there. But there are more discussions than there has been in the past. So I would just describe it as a much more optimistic pipeline than we've seen in the last several quarters.

[Greg Eisen:]

Okay. Good, good. Turning to Southern frac, you said that you sold some inventory there, that had previously been written down of tanks. Do you have much left over in old inventory to sell? Or you're going to have to start building new equipment to meet the demand?

[Jody Miller:]

Yes, I think, it was around 225, if my memory serves me correct, onetime in inventory, I think, we are down to 76 units. So we've greatly decreased it, a lot of the units are left or more specialty type units that we are continuing to see trickles of those sales. We have some debottoms in the current quarter that -- without inventory that are already closed and delivered. So I think, it will be more steady at this point. We had some nice pops there, but we have got some new build orders on tanks, along with the specialties, chassis and other products. So they're scheduled out on a couple of lines through May. And I think it continues to be more optimistic on the manufacturing side as well.

[Greg Eisen:]

Okay. And now that the -- changing the subject. Now that the tax law is signed, could you give us some idea of what you expect for what would be an ongoing effective tax rate for the company for the rest of this fiscal year? And then more importantly, the following fiscal years, as the transition year?

[Charles Barrantes:]

That's a very good question, of course. But for this fiscal year, right now, we have and it's going to be in our Q. We have an effective tax rate of normal pretax of 38.6%. The reason I would be higher than what you would expect, which is the transitional rate of 28% for fiscal year-end. It is because there are certain expenses in Australia [indiscernible] that more in Australia, so that's going to be the effective tax rate. But of course, in our provision for this year, is the effect of the tax enactment, which is the benefit for deferred taxes less the amounts in the transition tax, which I talked about, as well as any stock option activity on [indiscernible] which is an exercise, so that impacted. So it's a -- the provision looks somewhat normal because there are actually 3 main pieces to it, but going into a normal annualized effective tax rate, 38.6%.

[Greg Eisen:]

Okay. And then next fiscal year, what should be basically...

[Charles Barrantes:]

Next fiscal year, I'm going to -- at this moment, obviously, we haven't -- everything is basically we haven't completed our analysis. I would figure, it'd be closer to what you would expect to be the tax rate at 21%-plus state of things, so I'm going to stay somewhere between 26% and 30%.

[Greg Eisen:]

So 26% to 28%?

[Charles Barrantes:]

26% to 30%.

[Greg Eisen:]

Oh, it's 30%. I'm sorry, my hearing there. Okay. I'll let someone else go.

[Operator:]

[Operator Instructions]. Your next question comes from Brian Gerber with Prudent Money Financial Services.

[Brian Gerber:]

A couple of quick questions on Lone Star. I think you mentioned in last quarter, are you seeing some of your customers holding on to the tanks in between projects, which obviously helps the utilization? And also, are you thinking about adding additional units to the fleet as demand increases there?

[Jody Miller:]

Yes. Thank you. Yes, we are seeing that. I did mentioned in the last call, in the -- we call it the old days, the customer used to leave the tanks on rent, and just move them site to site because they didn't want to give up their tanks and that hadn't happened. And recently, we are seeing a trend happen in that area as tanks become shorter in supply, so that's also good for the market. And I think it will only continue. And as far as adding to the fleet, one thing nice about the Pac-Van being a sister company, they've got tanks, as well and we've been able to utilize several of their tanks to handle the influx up and down in the Permian. As far as -- I don't believe we'll have any large additions as far as CapEx. There might be a few specialty tanks or some modifications that we do to our existing fleet. But I think, right now, we're going to try to keep that to a minimum.

[Operator:]

And your next question comes from the line of Jack Silver with SIAR Capital.

[Jack Silver:]

Terrific quarter, guys. Regarding availability of resources, financial resources, considering the growth that the company is enjoying everywhere, and also, the acquisitions that again, are available, how do you regard your availability? And again, regarding also the cost of the money, as I recall, the last conversation that, the last conference call, are you locked into a certain cost of money? When would you be able to refinance some of the more substantive obligations, particularly relating to the purchase of the minority interest?

[Charles Barrantes:]

There was a lot there, Jack. This is Chuck. So in terms of your question about availability, in both there will be thinking financial availability. There are same facilities are sufficient for the level of operations for the foreseeable future, i.e. in North America is still looking at opportunistic acquisitions and organically grow and in Asia-Pacific, basically delevering. So we think it's adequate. And I guess, your other part of the question was on the cost. So the rehab on the -- the mezzanine debt or the financing of the -- purchase not concerning Royal Wolf, which is a high interest rate is really not feasibly callable for the next couple of years. So effectively, we're going to have to live with that because we can. We bundle it up, and we're comfortable dealing with those despite the higher rates that we can service that debt. In the Asia-Pacific, we do have a portion of the facility, the Deutsche Bank senior facility, that's hedged for AUD 50 million. And here in the U.S., obviously, most of our debt is actually fixed, the senior notes, and also, the obligation preferred stock. We are looking at the possibilities of hedging a portion of the Wells Fargo facility also. We are analyzing that.

[Jack Silver:]

On another subject, regarding, again, Asia-Pacific, again, energy and mining, those areas have picked up fairly dramatically. Obviously, you're enjoying the -- in The United States, a tremendous increase in terms of what's going on in your Energy business. Is there any reason to believe other than the fact that it's been slower there? What are the dynamics associated with those particular areas of your business? And China, also seems to be stirring a lot, giving some very strong numbers recently in terms of its ISM, and so on. How does China fit into the picture either in terms of again, itself or in terms of impacting either energy and mining?

[Jody Miller:]

I think from the mining side, as I indicated earlier, we have seen some signs of increased activity, and obviously, that's where a lot of our pipeline, as I mentioned earlier, on the combinations and camps, it came from. So we are cautiously optimistic that, that business will start to improve. From the core side and rental and offices, we continue to have, positive signs and increased activity on the construction as well. So we're with you. We think there is optimism towards that segment in the future. We just haven't seen a lot of actual orders come through yet, but the pipelines are definitely going up.

[Jack Silver:]

Okay. Lastly, in relation to the financial leverage in the business, not in terms of debt but more in terms of margin improvement. As you look at the business, I mean, the business obviously, it can only grow so much. But you have a dynamic in your business, which relates to both utilization and rates, okay. How do you -- just in terms of say the balance of the year and perhaps, to the extent that you can see further than that, how do you look at the contributing elements to both the increase in terms of EBITDA guidance into, again, the contribution of what you believe will be higher levels of utilization, and consequently, the opportunity for higher lease revenues rates as well?

[Ronald Valenta:]

This is Ron. So I think, he had a lot in there, Jack. But theoretically, so what happens is we want to push the leasing side as much as we can. And so, our time-tested model over a very long time, many decades has indicated to us that we're in at utilization rates at 80%-plus and our leasing stream is 80% of the total revenue, then we start seeing better margins that start with a four. And so I think, our objective has always been to try to get to that ultimate formula. So I would say, as we move forward, we will continue to focus on the leasing side without giving up sales, but ultimately -- the ultimate goal is to get to 40-plus percent EBITDA margin. And you do that through focusing on leasing and driving the leasing because that's where the profitability is. So I think, you ask a lot of theoretical stuff there. But I'm -- so rather than trying to explain all the ins and outs, I think that's our ultimate goal. And of course, as we've been saying through quite some time, it takes time unless you already give up the sales, which we clearly are not.

[Jack Silver:]

Right. And I think the last time we spoke, one of the things that you mentioned was issues associated with finding personnel. Obviously, people had left the area going back -- I'm talking about now the U.S. Permian, people had left the area. To what extent has that issue been relieved or can it be relieved based upon, again, the growth in the area?

[Jody Miller:]

No, that is correct and I would say, it's still a challenge. I don't think a lot of the -- the people that left are still to the comfort level to moving back into the area, and then you've got the whole housing challenges as well. We've been more fortunate than some as far as keeping our good drivers and help in the Permian. And we've had companies, they know that we're there for the long haul and we'd be able to come over. So we're not fully staffed. We still have the challenge, but I think, we've been able to navigate through it. We've got outsource more than we like, and obviously, if we can hire folks to do things in-house, we don't have to pay that higher outsourced cost. So that will be some gain when we get to that point, but we are managing through it, but still a challenge.

[Operator:]

[Operator Instructions]. There are no other questions at this time. I would like to turn the call over to Mr. Jody Miller, President and CEO, for closing remarks. Please go ahead, Mr. Miller.

[Jody Miller:]

Thank you, Operator. On behalf of our management team and the board, I want to take this time to thank Ron for his many years of leadership as CEO with General Finance Corporation. He has provided great leadership and strategic vision for the company since the IPO, almost 12 years ago. He has led the significant expansion of our geographic footprint and successfully navigated the company through both the global financial crisis of 2009 and more recent disruption in the oil and gas sector. While Ron is stepping back from the day-to-day operation of the company, he will remain actively involved at the board level and will continue to contribute to our strategic direction and long-term goals. In addition, he and his family remain the company's largest shareholder. I want to personally thank Ron for having the confidence in me to take over the leadership as CEO. I have some big shoes to fill, but I'm grateful he will continue to serve as a great resource to me, our team and our Board as we move the company forward. It is an honor to work for this great company and I look forward to my new leadership role on serving the Board, shareholders, employees and customers in my new capacity. Together, we have built a great culture with strong foundation positioned for growth. Our dedicated and hard-working employees continue to execute our time-tested business model and, combined with our disciplined and focused strategy has led to these positive results. Our performance year-to-date positions us well to exceed our goals for this year, while also laying the solid foundation for the fiscal 2019 and beyond. I would like to thank you for joining our call today. We appreciate your continued interest in General Finance Corporation and look forward to speaking with you next quarter.

[Operator:]

And that does conclude today's conference call. We thank you for your participation and [Technical Difficulty]. Please disconnect your lines.