General Finance Corporation
Q3 2018 Earnings Call Transcript

Published: 9 May 2018

[Operator:]

Welcome to the General Finance Corporation's Earnings Conference Call for the Third Quarter ended March 31, 2018. Hosting the call today from the company's corporate office 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 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 at 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 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 to discuss General Finance's third quarter fiscal year 2018 results. I will begin with a brief discussion of our operations and then provide an update on our outlook for fourth quarter. Our CFO, Chuck Barrantes, will then provide a financial overview an following his remarks, we'll open the call up for questions. We are very pleased to report that our leasing operations in both geographic venues had another very strong quarter of financial results. The solid momentum we experienced in the first half of fiscal 2018 has continued into the third quarter where we delivered year-over-year improvements in all of our key operational and financial metrics including sales, leasing revenues, units on lease, fleet utilization, average lease rates and adjusted EBITDA. Our North American leasing operations continue to see healthy demand in the vast majority of its end markets where total revenues increased by 27%, compared to prior year. We experienced higher average units on lease, higher average fleet utilization and higher average lease rates across all of our product lines during the quarter. Our core portable storage business is performing at the high-end of our expectation and continues to rank very high in customer satisfaction as patented and again posted a world-class net promoter score of 88% in the quarter its higher score since we began tracking this indicator. In addition to organic growth we continue to focus on geographic expansion of our portable storage container business in North America. During the third quarter, we completed an acquisition of a storage container business in Central Vermont adding further presence in the New England market. In April, we completed acquisition of a storage container business in south-central Kentucky. Additionally, we opened a Greenfield branch in Greenville, South Carolina, which is our first in the state. Greenville Central placed centrally between Charlotte, North Carolina, and our Atlanta Georgia branch. To date in North America, we have completed four acquisitions and have two Greenfield locations. We are now serving 49 of the top 100 MSAs in the U.S. and our acquisition pipeline remains healthy. Our liquid containment business in North America once again delivered a very strong quarter, generating leasing revenue growth both sequentially from second quarter and a year-over-year basis as well. The vibrant oil and gas production activity in Texas has enabled us to achieve higher sequential average fleet utilization for the seventh quarter in row. Frac tank average utilization was 82% for the quarter up from 79% in the second quarter and up from 49% in the same quarter last year. The higher utilization rates have allowed us to be more selective with both customers and pricing, which is also appointed to our results. We experienced a sequential increase in average monthly lease rates for the sixth quarter in a row. We achieved a rate of $805 for the third quarter, up 10% from second quarter and up 49% from a year ago. Our North American manufacturing operations delivered its fourth consecutive quarter of second quarter sequential increase in sales to external customers. This ongoing improvement is due to an increase in demand for frac tank and other steel related products, particularly our specialized container chassis. We also continue to produce ground level offices or GLOs for our North American leasing operations. Standalone adjusted EBITDA for the manufacturing operation was positive for the second consecutive quarter and improvement over the modest EBITDA loss last year's third quarter. Now turning to the Asia Pacific region. Our Asia Pacific region continued its positive momentum with year-over-year growth in both sales and leasing revenue. The growth in sales was primarily driven by a follow-on order to the large-scale we made last quarter to the company in the utility sector. As we have mentioned last quarter this is a new introduced containerized product that used for consumer recycling stations set up on a number of locations across the state of New South Wales. The increase in leasing revenue was broad-based across the number of end markets with nice increases in construction, mining and special -- sectors. This is a sixth from the last seven quarters were all -- delivered year-over-year growth in leasing revenues to consistent growth and averaging that's on lease as well as improvement in fleet utilization during the period. Our team continue to build upon its leading market share across the region by implementing a number of growth initiatives. This include the combination of organic growth and Greenfield openings and to the extent that would become available accretive acquisitions. During the third quarter we opened one Greenfield location East of Perth, bringing the year-to-date Greenfield openings for Asia-Pacific region to three. Management also continues to work on redeployment to workforce accommodation fleet either through outright sales or through its leasing in the normal course of business. Now, I would like to discuss our company wide outlook. Based on the year-to-date results on our outlook for fourth quarter, we are increasing our financial guidance from what we provide at last call. We now expect the consolidated revenue for fiscal year 2018 will be in the range of $335 million to $340 million and consolidated adjusted EBITDA will increase by 39% to 41% in the fiscal year 2018 from fiscal year 2017. This outlook does not take into account the impact of any additional acquisitions that may occur in fourth quarter. To conclude, I am very pleased with the hard work and dedication from all of our employees that -- very strong financial results. Our Company wide discipline growth strategy over the last several years continues to pay-off and we still have a number of growth opportunities including expanding our North America footprint and strengthening our market share in Asia-Pacific region. Our performance year-to-date positions us well to finish the fiscal year strong while also laying the solid foundation for fiscal 2019. I will now turn the call over to Charles Barrantes for his financial review.

[Charles Barrantes:]

Thanks Jody. We will be filling our quarterly report on Form 10-Q shortly at which time this document will be available on both the SEC [indiscernible] and on our website, and I encourage investors and other interested parties to read it as it contains the substantial amount of information about our company, some of which we will discuss today. Turning to our financial results. Total revenues were $84.4 million in the third quarter of fiscal year 2018 compared to $68.5 million from the third quarter of fiscal year 2017. An increase of 23%. Leasing revenues were $54.8 million an increase of 25% over the prior year's quarter and comprise 67% of total non-manufacturing avenues as compared to 65% for the same period last year. Non-manufacturing sales were $27.3 million in the quarter an increase of 16% over the third quarter of the prior year. In our North American leasing operations, revenue for the third quarter total $51.8 million compared to $40.8 million for the year ago period, an increase of 27%. Leasing revenues increased by 31% 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 from the third quarter were $3.2 million including inter-company sales of $900,000 to our North American leasing operation. This compares to $1.7 million of total sales during the third quarter of fiscal year 2017 including inter-company sales of $700,000. As Jody mentioned, our manufacturing operations saw increasing demand for frac tank especially containers -- and modified office containers or GLOs. In our Asia-Pacific leasing operations revenue for the third quarter totaled $30.3 million compared with $26.7 million for the third quarter of fiscal year 2017 an increase of 13%. Sales revenues were up 15%, primarily due to a large sale in utility sector and leasing revenues increased by 12% mainly due to a year-over-year improvement in the construction, mining and special events sectors. Revenues were positively impacted by a favorable foreign currency translation effect between the periods. On a local currency basis, revenues in the Asia-Pacific region increased by 9% year-over-year. Consolidated adjusted EBITDA was 21.9 million in the third quarter of 2018 compared with 14.7 million in the prior year's quarter, an increase of 49%, and the adjusted EBITDA margin as a percentage of total revenues was 26%, up from 21% in the third quarter of last year. This is the fifth consecutive quarter of year-over-year growth in adjusted EBITDA. In North America, adjusted EBITDA for our leasing operation was 15.2 million in the third quarter compared with 9.4 million for the year ago quarter, an increase of 62%. Adjusted EBITDA in Pac-Van was 10.2 million, up 28% and Lone Star's adjusted EBITDA was 5 million, up over 2.5 times from the prior year's amount of 1.4 million. For our manufacturing operations, on a stand-alone basis, adjusted EBITDA was 111,000 for the quarter compared to last year's third quarter adjusted EBITDA loss of 294,000. Asia-Pacific's adjusted EBITDA for the quarter was 7.6 million as compared to 6.7 million in the year ago period, an increase of over 13%. On a local currency basis, adjusted EBITDA increased by approximately 10% in the Asia-Pacific region from the prior year's third quarter. Interest expense for the third quarter of 2018 was 9.4 million, up from 5.2 million for the third quarter of last year. The increase was driven by a $3.7 million higher interest expense in the Asia-Pacific area due to higher average borrowings, a higher weighted average interest, rate of 10.4% in the third quarter versus 4.9% in the year ago third quarter 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 6.2% versus 5.2% last year. Net loss attributable to common stockholders in the third quarter of 2018 was 1.5 million or $0.06 per diluted share, an improvement from the net loss of 2.1 million or $0.08 per share in a year quarter. Both periods include approximately $922,000 for the dividends paid on our preferred stock. For the first nine months of fiscal year 2018 we generate free cash flow before fleet activity of 32.2 million as compared to 13.9 million in the prior year same period. This year's free cash flow was due to combination of factors, but primarily from higher profitability and the timing and management of operating assets and liabilities. As a reminder, we define free cash flow to be cash from operating and investment activities adjusted for changes in non-manufacturing inventory, net fleet, CapEx and business and real estate acquisitions. For the first nine months of fiscal year 2018, the company invested a net 18.5 million in the lease fleet, consisting of 16 million in North America and 2.5 million in the Asia Pacific as compare to 18.6 million in net fleet CapEx in the year ago quarter, 8.3 million North America and 10.3 million in the Asia Pacific. Turning to our balance sheet, at March 31, the company had total debt of 439.4 million and cash and equivalents of 10.8 million, with a net leverage ratio of 5.3 times for the trailing 12 months. This compares with 355.6 million and 7.8 million at June 30, 2017, respectively with the net leverage of 5.7 times. The increase in total debt was primarily due to new borrowings used to finance the acquisition of the publicly held shares of Royal Wolf. Our net leverage ratio which was 6.5 times at September 30th, has declined since that transaction. Receivables were 53.2 million at March 31st, as compared to 44.4 million at June 30, 2017. Day sales outstanding receivables at March 31st for Asia-Pacific and North American leasing operations were 47 and 52 days, as compared to 49 and 46 days respectively as of June 30th. At March 31st, our Asia Pacific leasing operation had in Australian dollars 23.5 million available to borrow under its $125 million credit facility and our North American leasing operations had $35.4 million available to borrow under its $237 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] And our first question comes from the line of Scott Schneeberger with Oppenheimer. Scott your line is open.

[Scott Schneeberger:]

You guys are very good about oil prices were down being very [indiscernible] clearly things are going in a different direction now. I'm just curious how you are interacting with all of these customers and what you see with new quarter pricing and continued volume growth?

[Jody Miller:]

This is Jody. I'd say things are continuing to be very consistent. I think there is high demand for tanks obviously especially in the Permian. We do have some customers starting to lease tanks on rent instead of turning them back in which is a positive to make sure there is ample availability, but I think they are giving our first schedules out some time in advance so we can plan for it. And we continue to partner and make very strong relationships with those customers which seem as for the long-term as well.

[Scott Schneeberger:]

Going to [Pac-Van] a lot of strong trend there, it looks like it's going the be strong throughout the year I guess the tax reform side helping you, a lot of construction activity. What is the pricing environment and how sustainable do you believe that is?

[Jody Miller:]

First, we have seen favorable price increases across every product line. So we would like to think that's going to continue all sector seem to be pretty stable and construction is strong. So we are very optimistic on the future and I think our current trends will continue.

[Scott Schneeberger:]

And just one more from me and I'll turn it over. How you are thinking about the EBITDA margin as we look forward obviously we are in the last quarter but on the fiscal year but looking out ahead the environment run rate seems pretty solid, what can you do with that? I know you don't want to give guidance but what type of things that can you control internally to optimize leveraging the business?

[Jody Miller:]

Yes, so I think our leasing revenue obviously has a highest flow through and we are investing in organic growth, as well as acquisitions to become available. But we think pricing still has opportunity, we think efficiency within our operations, national accounts there are many areas that we're touching that we feel like we can still make improvements and add value in the years to come.

[Scott Schneeberger:]

Thanks. One more for me, before I turn it over. So obviously the Greenfield [indiscernible] and I also heard the acquisitions was in the month. Do you have an idea, guys I missed if you did so can you just give a little bit perspective there? Thanks.

[Charles Barrantes:]

Yes, so the acquisition, that was in the amount was under a $1 million Scott.

[Jody Miller:]

[indiscernible].

[Scott Schneeberger:]

Okay, thanks. And then how much -- what type of density did you have in that area, is that kind of an standalone or is that adjacent to some other activity that you have in that area?

[Jody Miller:]

No, we have a couple of newer branches in the area we did an acquisition last year, so we're pretty excited to expand our New England area and then the Kentucky location, it's kind of a smaller market, but again very vibrant [Technical Difficulty] market that will see good growth just not a huge market and the New England market is very exciting for us.

[Operator:]

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

[Brent Thielman:]

Jody, may be kind of following up I know the guidance is focused on updates and kind of looking more just for some qualitative color on FY '19, sort of level of visibility you feel like you have in any of the businesses. I can take your guess and what you're thinking around North America. But I think as you come into FY '19, are you more optimistic about Asia Pacific maybe than we were a year ago, and a little more color there.

[Jody Miller:]

So on the Asia- Pacific, I would say that you know the large sale that we did will be harder to duplicate. You know we are in discussions with some opportunity to expand that so it's a little bit of a question mark. But I would say that the positive side over the years is leasing continues to improve and we're more optimistic on the leasing. They just announced a big infrastructure yesterday in Australia which should really help the construction and utilities and whatnot. So I think from that point of view the Asia-Pacific is more positive on the leasing side and we're hoping to duplicate the sales side. It's a little bit of an unknown there. I think in North America as you stated is very positive. I think our outlook is very similar to others that we feel like it will continue, the construction looks very good in all other sectors energy looks very good so we're very optimistic there.

[Brent Thielman:]

Okay. And then maybe on the SG&A side, it was little higher than I thought about, anything unusual in there Chuck, was it kind of consistent with your expectations?

[Charles Barrantes:]

No it's nothing unusual there, Brent it's pretty much consistent with our volume, our revenue volume. So as a percentage of revenues it's actually lower than it was third quarter of last year. So nothing unusual.

[Brent Thielman:]

Okay. And I guess following up on that is, I guess as this momentum continues into next year, where should that number be over time or where are you targeting that over time as a portion of [that]?

[Charles Barrantes:]

Well to be honest, Brent we expect it to over time to be a lower percentage but we haven't really targeted a percentage as of yet.

[Jody Miller:]

We think, we can get more efficient obviously and that's our goal. So we like to steadily move down but there won't be large chunks I believe.

[Charles Barrantes:]

Yes. More than anything Brent, it's going to be the -- probably the variable is going to improve the percentages, a greater percentage of leasing total revenues. As you know ultimately that will drop down to the EBITDA line into the high-20s and 30s as we increase that percentage.

[Brent Thielman:]

And then maybe just one more. The foreign exchange and other line item that 1.8 million. I presume that's mostly FX related, is that correct?

[Charles Barrantes:]

No. What it relates primarily Brent is the -- in the financing of the Royal Wolf acquisition we have a convertible note that has a -- that of which the conversion feature of the rights is treated separately for accounting purposes is embedded derivative, so it's a change in the value in that derivative. Strictly non-cash for accounting purposes.

[Jody Miller:]

Similar to stock options or and the like.

[Operator:]

Our next question comes from the line of Robert Maltbie with Singular Research.

[Robert Maltbie:]

I'm [pointing] for Greg Eisen today, he is a bit under the weather. He will catch-up with you separately, with a few specific, more specific questions. But I have a couple of them from the perspective of a portfolio manager. So I guess, firstly given the nice appreciation in your equity over the last 12 months and your desire to reduce leverage. You see any opportunities to do so given the capital markets and the appreciation in your common?

[Jody Miller:]

Robert, obviously the company, the Board of Directors considers barring any capital events and then the like. But I would say that at this point in time, we're not really looking at a capital transaction certainly not need in the venue of an equity financing what have you. Absent anything significantly changing and probably the next capital that would be the delever -- or the refinancing of the senior notes, which are due in July 2021.

[Robert Maltbie:]

Just may have been partially answered. Looking at the global exposure and your various vertical exposures. What you're seeing greatest upticks and strength in various verticals and in the various parts of your operations globally?

[Jody Miller:]

Yes. So I think it's been very consistent obviously North America in the energy sector has been very good. But construction has been very stable and steady and the outlook is very strong for construction as well. If you look at the whole, we have a lot more volume going through the construction sectors and energy is much, much smaller. So both are very good and our diversification is nice, because we kind of get to take advantage of all the different sectors.

[Robert Maltbie:]

Finally specific to your business exposed to flattening, I know it's been a well drive. But how you see levels of what improvement there moving into 2018 and 2019.

[Jody Miller:]

So I think all the indicators are there to say the Permian is going to be very solid and stable, obviously oil prices have been pretty good for a while and activity has been good. So our operations there have been exceptionally well. And what we feel like are the top tier customers in that area that are very stable more predictable and we are very optimistic on the outlook.

[Operator:]

Our next question comes from the line of Brian Gagnon with Gagnon Securities.

[Brian Gagnon:]

Couple of things that I just want to make sure I heard correctly. Chuck you said your leverage went from 6.5 at the peak and its now currently 5.3 is that correct?

[Charles Barrantes:]

That is correct.

[Brian Gagnon:]

So without giving us guidance give us a direction, so at least we can have some sense. Where do you think you can get your leverage to over the next year and two years?

[Charles Barrantes:]

I would think Brian that we should be able to get the leverage somewhere around within next year to around 5 a little bit below, and within two years our sweet spot where we said publicly somewhere between 4.5 and 5.

[Brian Gagnon:]

And in that same vein how quickly are you and Jody and the Board and everybody thinking about delevering in Australia so that you can begin to think about refinancing the higher cost out there?

[Charles Barrantes:]

Well, the game plan for us which we've stated publicly for us is to continue to delever, obviously North America has a more robust pipeline, but there are some opportunities for investment in Australia. But as to some sort of acquisition we intend to continue to delevering in Australian dollars that is our plan. And we will be looking at refinancing into a more commercial facilities in Australia within two years.

[Brian Gagnon:]

Yes, because it looks like you had paid down approximately 10 million over the last quarter and half?

[Charles Barrantes:]

Sounds about right.

[Brian Gagnon:]

So actually when I look at the numbers it look like you can get it down below 2.75 leverage in about two years?

[Charles Barrantes:]

Yes.

[Brian Gagnon:]

Last question for me, each incremental dollar of revenue, holding all things constant has what incremental EBITDA margin attached to it?

[Charles Barrantes:]

We have always tried for the 0.70 mark, sometimes it does vary depending on circumstances but $0.70 on the dollar flow-through has been kind of is our target.

[Jody Miller:]

And I'll specifically say as relates to our leasing revenues obviously the sales revenues would have a different impact on margin. So we are talking about leasing.

[Brian Gagnon:]

I got one more question. At Lone Star, Jody I think you mentioned the average rental per month was [8.05] in the last quarter. How is that trending now that you get to a point where you've got high utilization and you can high grade some of the customers? Now what are you thinking about stability of that at that pricing or higher?

[Jody Miller:]

I think as I indicated earlier I think it's a positive trend. We have customers now changing the tanks, which is kind of an old trend, when things were short on supply so they didn't lose the tanks. Our tank rental is a very small piece of the pie of the total on a rig. So we can move up rates and not have any kind of material impact on their cost. So we want to continue to try to do that, again we've kind of selected the customer we want to deal with, utilization continues to be very strong. So I think rates is our biggest opportunity there and if things continue like it is right now I think that we'll have opportunities that keep moving those up.

[Charles Barrantes:]

Brian let me also, just specifically say that the 8.05 is a composite or average rate for both the operations of Lone Star and Pac-Van.

[Jody Miller:]

Yeah Lone Star rates are much higher than Pac-Van because we're at full service end user where Pac-Van subleasing through the service company.

[Brian Gagnon:]

Okay. So is there a chance that you can get back to historical EBITDA levels at Lone Star? Is that kind of what you're seeing.

[Jody Miller:]

I think in that level in the near future with the huge decreases, it's going to take a while. Obviously we didn't think it would hit the bottom as fast as it did as well. So we're at a 20 million run rate and you know that's pretty strong right now and we think again there's some opportunity on the rate side a little bit on efficiency side. Labor still continues to be a problem there but we're working through those obstacles but you know Lone Star I think has a optimistic view on the future as well mainly around rates.

[Operator:]

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

[Jack Silver:]

Good morning everybody. Terrific quarter, very proud of everybody for all the work that they've done including Ron who is no longer on the call but I'm sure in the picture. I want to drill down on a number of things that we really haven't touched on. There is in the market in general the incredible sensitivity towards the business cycle that we're in and everybody is on a short fuse regarding you know to what extent ultimately interest rates or other factors could upset the business cycle. Your company in effect is a cyclical company. So when you talk about visibility and you through your business whether it's in the fracking business or in the portable storage business through Pac-Van or even in the Far East. How much visibility -- what type of commitments do your customers have to you in the leasing business? Are these leases -- what percentage of the leases have a term to them. What percentage represent very short term, roughly what percentage represents something longer than short-term?

[Jody Miller:]

So Jack, Thanks for the comments. I think one thing is a big advantage with our company is we touch so many industries. So we're very, very diverse. So the energy sector, when you start talking about term the Pac-Van tanks are typically on longer term contracts except what's going through Lone Star. So there is some stability there. From the Lone Star side it is more the daily rate the tanks obviously stay out much longer than that. But that's where we've been, where we kind of weed off and take care of the top tier very stable long-term customers mainly in the Permian, which gives us a much longer term view as far as stability in the energy sector. Obviously if energy turned down, it hurt us, we don't see that happening, our customers don't see that happening. So that's kind of as far as visibility as we have on energy sector. On the Pac-Van side, the mobile and modular stuff and offices are typically longer term contracts. Many of our rentals on average stay out over year long on average. So when we typically put units out. Again stay out longer to periods of time can they turn after six months, yes, there is some contractual agreements on the modular and mobile side, but on your typical storage containers, it's month-to-month, but when containers get full of product, they tend to not get emptied out and returned. So that's been the historic trends for many, many years and we don't see that changing. So that's kind of the snap shot from the different areas. In our manufacturing right now, we're booked out perhaps June and is looking more optimistic as far as the outlook there as well.

[Jack Silver:]

So in the fracking business the opportunity actually given the stability and to a rising prices and again the comments that you made about your customers being short-term at this point is an advantage. Although one would perceive it to be an advantage in the sense that it gives you greater pricing power during the period again of, again appearing to be higher in levels of utilization? That's really a question not a statement.

[Jody Miller:]

Yes. And I agree, we've had multiple price increases with certain customers that we accommodated through the downturn. So to your point, we would have been able to not one year, once every six months we've been more aggressive where we needed to on certain customers. I will tell you one thing, I didn't mention is, is all those customers also requiring I say, which are the easiest to get. So getting the MSA kind of gives you a license to the business for that customer and they don't like changing and going through that billing process, they're doing setup online now digitally through their portal. So after you get [endured] and the customers, service customers well, the paper work and billing is good and that's a very strong relationship that takes a lot of break.

[Jack Silver:]

Are there practical limits to utilization? For example, I think you talked about 82%, if I remember right. Are there practical limits and what, I mean, is there such a thing is 100% utilization or is that unrealistic. Where are you likely to trend to in, as one completes this year and moves into hopefully what will be continuing strong environment in fiscal '19?

[Jody Miller:]

Definitely 100% is not viable, 85% I would say is probably within the range. But again one thing that happened in the past during the boom as people left the tanks on rent, because they didn't want to lose them before the next job. And we're starting to see some of that, which would be favorable for us and be able to push the limit a little bit higher. They're turning them in every time after a job. Then, obviously there is a flow from the time they come back get cleaned up and inspected and back out versus staying on rent to ensure their availability. So there is some possibility to move up a little above that, but 85% is pretty good target rate of maximizing in a normal environment.

[Jack Silver:]

So when they stay on rent are you more limited to price increases or are there again no sensitivities if you have something that somebody wants to lead generally is enjoying their own level of price enhancements literally at this moment on a daily basis. Do you have pricing flexibility even though those people have made a commitment to you?

[Jody Miller:]

Yes, but we do have to get them approved. So we have again had very good success with all of our customers. You saw that the large increase in pricing year-over-year. And that's us going back to the customer saying hey we work with you during the downturns now it's time to pay us back and we won't do it all in one chunk but we are going to steadily move the pricing up, and they have accepted that across the board and the ones that have a little bit lower pricing we got more aggressive with than ones that we are having a little higher better pricing. So we strategically went into that with that plan.

[Jack Silver:]

Right, regarding investment it appears that you seem to not -- and again the cash flows that you talked about you don't appear to be making a significant investment in the -- and this is not a criticism it's an observation. It appears to be making a particularly large or any significant investment in incremental units. Is that a strategy at this moment or how do you regard again relative to again objectives that you have regarding leverage okay, regarding just total debt particularly in various areas of the world and regarding, again, where you are in the cycle and the fleet that own what is your position regarding making incremental investments at this moment in the business?

[Jody Miller:]

Jack when you are saying are you really talking about the frac tank business specifically or in general?

[Jack Silver:]

No I'm talking in general but you can go through the various elements of the business where you are?

[Jody Miller:]

I can answer it this way Jack, I mean when it comes to our organic fleet investment as well as strategically when we make acquisitions, I mean we remain disciplined on our capital allocations. So we try to look at the markets that are in need and make appropriate investment and that includes frac tanks because we know that that particular sector is cyclical. So we look at it very carefully if we want to incrementally invest in the oil and gas sector with frac tanks. So our volume -- but not so much our volume but our profitability is primarily with rate increases and we remain disciplined on capital location and still focus on delevering both absolute dollars and through profitability.

[Charles Barrantes:]

And I'd just add Jack on the storage side we buy where we need. There is in the capital side of things on the storage side we don't want a limit and be able to grow a lot of markets adding organic growth into those.

[Operator:]

[Operator Instructions] Our next question comes from the line of Louis Fernandez.

[Louis Fernandez:]

Congratulations on a great quarter, definitely very good numbers and good growth. Well, basically, most of my questions have been answered, but just wanted to clarify right now on Pac-Van. Are you at all growing your capacity or you're staying disciplined and not growing your capacity at all?

[Charles Barrantes:]

Yeah, our capacity has risen because of our performance, but we are limiting CapEx growth on the storage side. We continue to do acquisitions. We continue to do Greenfields. We want to keep expanding our North American operations on the Pac-Van side. But, we continue to perform at a very high level which is generating a lot of cash.

[Louis Fernandez:]

Yeah. I meant the units in Pac-Van -- in Lone Star. The amount of tanks that you have. Just wanted to know if you are at all you know increasing the amount of tanks?

[Jody Miller:]

Right, yes we have in a way. So Pac-Van has a fleet of tanks as well. So we currently have about 400 of their tanks rented through the Lone Star. Obviously Lone Star makes a lot more money per tank. So it's been a good investment. We've also transferred some fleet from Pac-Van in the Lone Star, so it's all been internal but it has been growth on the Lone Star supporting that growth. You know that is all within the same family so to speak.

[Charles Barrantes:]

But in general Louis we have not significantly increased the number of units in our frac tank fleet.

[Louis Fernandez:]

Okay, all right, great. Yeah I guess right now it's the good times and I guess you just want to get some cash flow out of it. I think it's a good strategy. Then just a technical question, that convertible debenture on Royal Wolf. I believe it converts 8 point something dollars per common share, if that's right the common shares [indiscernible]?

[Charles Barrantes:]

$26 million convertible note of the $80 million converts at $8.50.

[Louis Fernandez:]

All right. And how many shares?

[Charles Barrantes:]

A little over 3 million.

[Louis Fernandez:]

All right, thank you. And do you have any way at all to buy that back or are you not looking at doing that?

[Charles Barrantes:]

With respect to the convertible note though there is not a way to buy that back per se.

[Louis Fernandez:]

And is there any other growth areas within Pac-Van that you are looking to long term I mean like any long term opportunities in Pac-van where you see growth that you want to focus on or is it pretty general?

[Charles Barrantes:]

Yes. So I think geographic expansion is definitely something that we've had success and we'll continue to do through acquisition and [cold start]. We do have some new products we've introduced on Pac-Van that are taking off very well. I mentioned national accounts, so we feel like there's several opportunities on the Pac-Van side to continue its great growth trends.

[Louis Fernandez:]

And then finally on free cash flow. Chuck you said the last nine months you have produced around 32.9 I believe. So…

[Charles Barrantes:]

I said 33 million that is correct.

[Louis Fernandez:]

Yeah, 33. So is there a reason why not to project 44, 45 for the full year.

[Charles Barrantes:]

Louis I don't see any reason not to on the other hand, I mean there are other factors beside profitability, but I remember that's a number before fleet CapEx, so we're talking about.

[Louis Fernandez:]

Yes. Definitely before fleet CapEx…

[Charles Barrantes:]

Certainly trending for the range, I'll give you that.

[Louis Fernandez:]

And most likely next year is going to be higher, right? I mean when you put in the 20 million from Lone Star and you leave the other one, the rest of the company you're saying your trend goes -- takes a pretty big bump?

[Charles Barrantes:]

To put in your words, I've see no reason for that trend Louis.

[Louis Fernandez:]

Because in the 44, you don't have the 20 million on Lone Star, on EBITDA in those 12 months and when you look back from June 2018 back, you don't have 20 million in Lone Star, you have much less. So when you…

[Charles Barrantes:]

Yes. Just a point of clarification, Lone Star has obviously been improving sequentially now for several quarters. But trailing 12 months, Lone Star adjusted EBITDA is around 15 million not 20 million. So just want to keep it in perspective.

[Louis Fernandez:]

That's what I meant. So assuming Lone Star able to hold the 20 million then your free cash flow 12 months projection should be much higher?

[Charles Barrantes:]

Should improve.

[Operator:]

There are no further questions at this time. I would now like to turn the call over to Mr. Jody Miller, President and CEO for closing remarks. Mr. Miller?

[Jody Miller:]

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

[Operator:]

Thank you. This concludes today's conference call. You may now disconnect.