General Finance Corporation
Q4 2018 Earnings Call Transcript

Published: 5 Sep 2018

[Operator:]

Welcome to the General Finance Corporation’s Earnings Conference Call for the Fourth Quarter and Fiscal Year ended June 30, 2018. Hosting the call today from the company’s corporate offices in Pasadena, California are Mr. Jody Miller, President and Chief Executive Officer and Mr. Charles Barrantes, Executive Vice President and Chief Financial Officer. Today’s call is being recorded and will be available for replay beginning at 2

[Chris Wilson:]

Thank you, operator. Before we begin today, I would like to remind you that this conference call may contain certain forward-looking statements. Such forward-looking statements include, but are not limited to, our views with respect to future financial and operating results; competitive pressures; increases in interest rates for our variable interest rate indebtedness; our ability to borrow or raise capital and additional funds; the availability of sufficient and qualified employees to staff our businesses; changes in the Australian, New Zealand or Canadian dollar relative to the U.S. dollar; regulatory changes; customer defaults or insolvencies; litigation; acquisition of businesses that do not perform as we expect or that are difficult for us to integrate or control; our ability to secure adequate levels of products to meet customer demand; our ability to procure adequate supplies for our manufacturing operations; labor disruptions; adverse resolution of any contract or other disputes with customers; declines in demand for our products and services from key industries such as the Australian construction and transportation industries or the U.S. construction and oil and gas industries or a write-off of all or a part of our goodwill and intangible assets. These risks and uncertainties could cause actual outcomes or results to differ materially from those described in our forward-looking statements. We believe that the expectations represented by our forward-looking statements are reasonable, but there can be no assurance that such expectations will prove to be correct. For more details regarding these risks, please see the Risk Factors section of our periodic reports filed with the SEC and posted to our 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 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 fourth quarter and fiscal year 2018 conference call. We will begin with a brief discussion of our operations and then our CFO Chuck Barrantes will provide a financial overview and an outlook for fiscal year 2019. Following his remarks, we will open up the call for any questions. We are very proud of our accomplishments in fiscal year 2018 delivering record revenues and record adjusted EBITDA as well as strong growth across all of our operations. We finished the year with solid momentum in the fourth quarter generating year-over-year improvement across virtually all of our key operational and financial metrics. Our North American leasing operations continue to see healthy demand in the vast majority of our end-markets with total revenue in fourth quarter increasing by 28% year-over-year. We experienced higher average units on lease, higher average fleet utilization and higher average lease rates across all of our product lines in the quarter. Our core portable storage business continues to perform at the high-end of our expectations driven by consistent execution and broad-based demand across the majority of our end-markets. Pac-Van is enhancing its brand both in new and existing markets and once again posted a world class net promoter score of 85 for the full year. In addition to our organic growth, we remain focused on our long-term goals of growing Pac-Van’s brand across North America geographically expanding our portable storage business particularly into adjacent markets. During the year we completed four acquisitions and opened two Greenfield locations. Since year end we completed an acquisition in the Baltimore DC market adding to our presence in the Mid-Atlantic region, we are also now serving half of the top 100 MSAs in the U.S. and our acquisition pipeline remains healthy. Our liquid containment business in North America delivered another very solid quarter generating leasing revenue and adjusted EBITDA growth both sequentially from the third quarter and on a year-over-year basis. Strong oil and gas production activity particularly in the Permian Basin has enabled us to achieve higher sequential average fleet utilization for the eighth consecutive quarter and higher average monthly lease rates for the seven quarters in a row. Our North American manufacturing operations delivered its fifth consecutive quarter sequential growth in sales to external customers. This ongoing improvement is due to increased demand in specialty tanks and other steel related products. Our outlook remains positive as we have healthy sales pipeline and order backlog. Now turning to our Asia-Pacific region, our Asia-Pacific region continues its positive momentum with fourth quarter growth in sales and leasing revenues resulting in its highest annual revenue in 3 years. The growth in fourth quarter was mainly driven by another follow-on order to a large scale we made earlier in the year for a newly introduced container product that’s used for consumer recycling stations. The increase in leasing revenues was broad based across a number of end markets with nice increases in mining, construction and specialty event sectors. This is the seventh out of the last eight quarters where Royal Wolf has delivered year-over-year growth in leasing revenues mainly due to the growth in average units on lease and improved fleet utilization. Our team remains focused on building upon this leading market position across the Asia-Pacific region through a combination of organic growth and Greenfield openings and to the extent they become available accretive acquisitions. During the fiscal year we opened three Greenfield locations in the region and in July we acquired a portable storage business in New Zealand operating eight locations across the country. To conclude, our outstanding performance in fiscal year 2018 as a result of the hard work and commitment of all of our employees executing our disciplined and focused strategy over the past few years. This being said, we still have a number growth opportunities ahead including expanding our North American footprint and strengthening our market leadership in Asia-Pacific region. We ended the year on a high note and our positive momentum has continued into the first quarter of fiscal year 2019 positioning us well for another strong year of financial results. I will now turn over the call to Chuck Barrantes for the financial review and our outlook for fiscal 2019.

[Charles Barrantes:]

Thanks Jody. We will be filing our quarterly report on Form 10-K at the end of this week at which time this document will be available on both the SEC EDGAR filing system and on our website. And I encourage investors and other interested parties to read it as it contains substantial amount information about our company, some of which we will discuss today. Turning to our fourth quarter results, total revenues were $93.8 million in the fourth quarter of fiscal year 2018 compared to $73.3 million for the fourth quarter of fiscal year ‘18, an increase of 28%. Leasing revenues were $56.5 million, an increase of 23% over the prior year’s quarter and comprised 63% of total non-manufacturing revenues for both fourth quarter periods. Non-manufacturing sales revenues were $33.8 million in the quarter, an increase of 28% over the fourth quarter in the prior year. In our North American leasing operations revenues for the fourth quarter totaled $57.4 million compared to $44.9 million for the year ago period, an increase of 28%. It’s mainly driven by increases in oil and gas, commercial, construction and industrial sectors. Leasing and sales revenues increased by 31% and 20% on a year-over-year basis respectively. Revenues in our North American manufacturing operations for the fourth quarter were $3.7 million including intercompany sales of $109,000 from our North American leasing operations. This compares to $1.7 million of total sales for the year ago period, including intercompany sales of $700,000. As Jody mentioned our manufacturing operations saw increased demand especially tanks and other steel related products, particularly specialty container chassis. In our Asia-Pacific leasing operations, revenues for the fourth quarter totaled $32.9 million compared to $27.3 million for the fourth quarter of fiscal year 2017, an increase of approximately 21%. Sales revenues were up 33% primarily due to a large follow-on sale in the utility sector and leasing revenue increased by 7%. Revenues were also positively impacted on a favorable foreign currency exchange effect between the periods. On a local currency basis, revenues increased by 19% year-over-year. Consolidated adjusted EBITDA was $23 million in the fourth quarter 2018 compared to $15.5 million in the prior year’s quarter, fourth quarter, an increase of 49% and adjusted EBITDA margin as a percentage of total revenues was 25%, up from 21% in the fourth quarter of the prior fiscal year. This was the sixth consecutive quarter of year-over-year adjusted EBITDA growth. In North America, adjusted EBITDA for our leasing operations was $17.6 million in the fourth quarter compared to $10.9 million for the year ago quarter, an increase of 61%. Adjusted EBITDA at Pac-Van was $11.8 million, up 36% year-over-year and Lone Star’s adjusted EBITDA was $5.8 million, up 164% from the prior year’s amount of $2.2 million. For our manufacturing operations, on a standalone basis adjusted EBITDA was $460,000 for the quarter compared to last year’s fourth quarter adjusted EBITDA loss of $371,000. Asia-Pacific adjusted EBITDA for the quarter was $7.5 million compared to $6.4 million in the year ago period, an increase of approximately 18%. On a local currency basis, adjusted EBITDA increased by 16% from the prior year’s fourth quarter. Interest expense for the fourth quarter 2018 was $9.3 million up from $4.6 million for the fourth quarter of last year. The increase was primarily driven by higher interest expense in the Asia-Pacific area due to higher average borrowings, higher weighted average interest rate of 10% for the fourth quarter of fiscal year ‘18 versus 5.2% from the year ago period and by a stronger Australian dollar between the periods. Net loss attributable to common shareholders in the fourth quarter of 2018 was $11.6 million or $0.44 per diluted share compared to net loss of $1.8 million or $0.07 per share in the year ago quarter. Included in this year’s fourth quarter net loss is a non-cash charge of $11.5 million for the change in valuation of standalone bifurcated derivative in our outstanding convertible note in the Asia-Pacific area. Both periods included $892,000 for the dividends paid on our preferred stock. For the fiscal year 2018, we generated free cash flow before fleet activity of $50.1 million compared to $27.4 million in the prior year. This year’s higher free cash flow was due to a combination of factors, but mainly from higher adjusted EBITDA and the timing and management of our operating assets and liabilities. Turning to our balance sheet at June 30, the company had a net leverage of 4.6x for the trailing 12 months, which compares very favorably with a net leverage of 5.7x at June 30, 2017. Our strong financial results enable us to enhance our capital availability and improving our net leverage ratio even with the additional debt that we incurred as a result of our successful acquisition of the public non-controlling interest of Royal Wolf. Turning to our companywide outlook for fiscal year 2019 assuming the average exchange rate for the Australian dollar versus the U.S. dollar averages $0.72, which represents an approximate 7% decrease from fiscal year 2018, we expect the consolidated revenues for fiscal year 2019 will be in the range of $355 million to $375 million and the consolidated adjusted EBITDA will increase between 6% and 12% in fiscal year 2019 or fiscal year 2018. This outlook does not take into account the impact of any additional acquisitions that may occur for the remainder fiscal year 2019. 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 Scott Schneeberger of Oppenheimer.

[Scott Schneeberger:]

Thanks very much. Good morning everybody.

[Jody Miller:]

Hey, Scott. Good morning.

[Scott Schneeberger:]

Hey, guys. It appears I am going to jump right in on Lone Star, could you speak a little bit about the volume you are seeing there, the pricing obviously there is some favorable guidance going into next year and just talking a little bit about what you are thinking about for Lone Star as its portion of that guide? Thanks.

[Jody Miller:]

Sure. Scott, I would say, Lone Star is very consistent. I think our outlook is in line with the current trends. We feel like there is still some room on utilization as we continue to convert some things in the vapor-tight. And also on the rate side, I think there is a good opportunity. We are not anywhere close to where the rates were in its peak and we have had some pretty good success on moving those rates up as things get harder to find and service companies levels drop off, because of labor issues and things we have done quite well with Lone Star to maintain that and we still maintain a very positive outlook for Lone Star.

[Scott Schneeberger:]

Thanks. Appreciate that. And then going to the quarter on Pac-Van, a similar question I am curious about the pricing environment what you are seeing there and how you are thinking about that as we enter the next fiscal year? Thanks.

[Jody Miller:]

Yes, I think again very consistent. We have had good opportunities to move the rates up nicely in 2018 and we continue that trend into this year. Transportation rates are going up. I think across the board people are more accepting of rate increases, so we feel very good about rate increases going into the New Year as well.

[Scott Schneeberger:]

Hearing anything adverse at all, I am guessing as your field speaks with customers, Pac-Van customers, any concerns about cycle or it’s still very favorable?

[Jody Miller:]

No, it’s very favorable construction, commercial all the segments seem to be very positive and we aren’t getting really any concern at this time at all.

[Scott Schneeberger:]

Thanks. Switching over to Asia-Pac, a follow-on sale in this quarter, how should we think about the sales category over there in fiscal ‘19, is there – we are going to see some continuation of that some lumpiness just so we can get a feel for what’s going to…

[Jody Miller:]

Yes, I mean, as we have stated a few times last year, we hit that large sale to utility sector for the recycling portables, recycling containers. We have got one added on order for this year. They are obviously still trying to grow their business. So we don’t have any orders in hand, but we feel like there is going to be some things happened throughout the year, so there might be a little lumpiness, but their leasing revenue continues to have an increase. And again, we feel like we are doing the things we need to in Asia-Pacific to have positive trends.

[Scott Schneeberger:]

Yes, the leasing outlook sounds favorable. With the sales, how much that is baked into the guidance, I am just curious if there is risk on the lumpiness if it doesn’t come through or is it fairly conservative than what you put in the guidance?

[Jody Miller:]

We are fairly conservative. They always seem to come through with the sale every year. They have very strong sales business, especially in the custom stuff. So, we are very confident that if this doesn’t happen there is other things in the pipeline that we feel like will that I think it’s fairly conservative, but we also know that there is some sales that need to happen throughout the year, but it always has in the past and we are confident it will.

[Scott Schneeberger:]

Thanks. I appreciate that. I am going to ask one more and then I will go back in queue, but Chuck, it sounds like nice improvement in DSOs, could you just speak to what’s occurring there and it sounds like predominantly in Asia-Pac, but just what the initiative is there and what you foresee going forward? Thanks.

[Charles Barrantes:]

Yes, Scott. This is Chuck. So, really no secret to the DSO, in the past, we had higher DSO in the Asia-Pacific area primarily, they had a lot of inroads in the construction industry, which is habitually slower and we have improved on that. We have better system information on collections and really just more of a concentrated effort, which we said throughout the year when it was at a high DSO and we will eventually get down to a good DSO and that has happened.

[Scott Schneeberger:]

Nice work there. I will turn it over. Thanks.

[Operator:]

Your next question comes from the line of Zane Karimi of D.A. Davidson.

[Zane Karimi:]

Thank you and good morning. First thing, I was kind of hoping to get some more color on is over the past couple of quarters, you guys have experienced pretty solid inflection in the profitability in your manufactured unit segment, what do you figure the main reason is and is it like new products and uptick in frac tank demand and how do you look at this expansion in margins moving into 2019?

[Jody Miller:]

Yes, thanks Zane. This is Jody. I would yes, you hit the nail on the head. We made a conscious decision when the frac tank business was slowing to diversify our products. So, now we go the container-chassis storm shelters, trash hoppers, a lot of specialty tanks for very specific applications, some through energy and some without like portable fuel stations, those types of things. So, we have really made great headway in diversification of product and now we have got a really nice backlog on sales. We also continue to do modifications and build the GLO, which is the ground level offices and Southern Frac and Southern Fab are doing quite well and their outlook is very positive.

[Zane Karimi:]

Great. Thank you for that. And then can you provide clarity on the main catalyst for the $11.5 million charge for the change in valuation and how are we likely to see further valuation changes moving forward?

[Charles Barrantes:]

Yes. Zane, this is Chuck. So, the accounting literature is such that when you have a convertible instrument and that conversion is not in the hands of the company, you have to separately account for it similar to way you account for stock ops in other words is the valuation every quarter and there is I am talking about stock options to consult that to employees. So as our stock goes up, the value of that conversion goes up. And the other side of that charge is P&L, it is non-cash, it’s strictly valuation if and when that stock is converted, it gets reversed to equity and that’s the reason why there is a gain. So, the answer to your question, yes, it will change fluctuate based on our stock price, which has been going up the last few quarters.

[Zane Karimi:]

Thank you. And then one final one before I jump back in queue, in the current interest rate environment, how are you thinking about leverage moving through by 2019?

[Jody Miller:]

Well, most of our debt other than the North American facility is effectively fixed or in the case of the Asia-Pacific debt, there is 50% of it that’s had. So, in terms of – if you are talking about leverage, with respect to interest, we are constantly looking at hedging and reducing our variable interest rate exposure. I am not sure if that’s fee content of your question, but I assume it was.

[Zane Karimi:]

Yes, thank you guys. I will jump back into queue.

[Operator:]

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

[Robert Maltbie:]

Hi, Jody. Hi, Chuck. How are you doing? I am sitting in for Greg. So couple of questions, regarding I dropped off the call, so apologies if you have already answered this, your adjusted EBITDA margin was in the 25% area this quarter, can you remind us what the prior peak margin was and when it was and can you get there again?

[Jody Miller:]

What our adjusted EBITDA margin was in the prior quarter?

[Robert Maltbie:]

Prior peak.

[Jody Miller:]

Well, the peak can be in the high 30s, low 40s if you have a greater proportion of leasing revenues to total revenues. Our proportion is around 63%. Added to that, we also have some manufacturing margin there also. So to answer your question, whether you can get up to high 30s, low 40s once you get the model running smoothly, so we are currently at 25% moving upwards, which was higher than it was in the third quarter.

[Robert Maltbie:]

And you I guess bought a portable storage container business in Baltimore, a little color on that and what’s the end-market and it’s not I guess fracking, but how big is the market in that area?

[Jody Miller:]

Yes. So, just to clarify, it was through our Pac-Van operation, so it’s a container business in the Baltimore DC area. So it was a relatively small acquisition somewhere around $0.5 million, but what the big motive there was, was the location. So, it’s right in the heart of that high growth area with a nice yard and we are able to get into that market with a more than a cold start with several units on rent and expand very quickly, so we are very optimistic about that market and excited that we could enter into that market.

[Robert Maltbie:]

Great. And you had hit the upper end of your guidance from I think last quarter, could you I guess focusing on or showing us what the key drivers were on this performance?

[Jody Miller:]

I think it was really across the board. If you look at the performance by region Pac-Van had a phenomenal quarter as well as Lone Star, Royal Wolf and Southern Frac, so really all four divisions are doing quite well and we carry that momentum into 2019.

[Robert Maltbie:]

Okay, terrific. Thank you.

[Jody Miller:]

Thank you, Robert.

[Operator:]

Your next question comes from the line of Brian Gagnon of Gagnon Securities.

[Brian Gagnon:]

Good morning gentlemen.

[Jody Miller:]

Good morning Brian.

[Charles Barrantes:]

Good morning.

[Brian Gagnon:]

A few questions for you, Chuck if I hear you, you said your free cash flow for 2018 was $50.1 million?

[Charles Barrantes:]

Yes.

[Brian Gagnon:]

Okay. So if I look at the numbers for Q4, I have your debt going down sequentially by $10 million and your cash going up sequentially by about $11 million, is that correct?

[Charles Barrantes:]

I would think so, yes.

[Brian Gagnon:]

Okay. So here is my big question, what do you think the investment program is going to look like for 2019 versus prior years because you only invested about $21 million in 2018 which is low versus prior years and how and this all goes around what are you thinking about for your debt pay down in Australia and U.S. for ‘19 and beyond?

[Jody Miller:]

Yes. I think Brian it’s going to be very similar. We feel like there is still room on utilization opportunities as well as rate opportunities. And we still continue to invest pretty close to the same rate that we did this year. So from our projections budget wise, it’s very similar to 2018 and acquisitions are on top of that, so that’s kind of a wildcard as far as CapEx. But as far as fleet CapEx we are looking for very similar year.

[Brian Gagnon:]

Okay. So there should be quite a bit of additional cash flow to be able to use to potentially pay down the Australian debt, Chuck can you give us a breakout of the Aussie versus U.S. debt at quarter end?

[Charles Barrantes:]

Yes, I can. At quarter end or at year end, the Australian dollar so total debt, a little bit just recap here, so total debt is $427.2 million. Of that Australia the Deutsche Bank facility is $79.7 million at the end of June. The buys in notes total a net of $81 million. North America totals $184 million effectively. And then you have the senior notes of $77.4 million and then the rest is other.

[Brian Gagnon:]

Yes. So which one of those did you pay down the most this quarter?

[Charles Barrantes:]

Probably the Asia-Pacific there is an amortizing piece that we pay down.

[Brian Gagnon:]

Excellent, okay. So in terms of that as you go throughout 2019 you would be able to hopefully continue to pay down the Australian debt?

[Charles Barrantes:]

Exactly, we would use free cash flow to pay the Australian debt assuming there is no acquisition opportunities there.

[Brian Gagnon:]

Okay, wonderful. Thank you. Congratulations, wonderful job.

[Charles Barrantes:]

Thank you.

[Jody Miller:]

Thank you.

[Operator:]

[Operator Instructions] Your next question is a follow-up from Zane Karimi of D.A. Davidson.

[Zane Karimi:]

Hi guys. Thanks for taking my questions again. Next, follow-up question would be I was hoping I got little bit more nitty-gritty, I noticed SG&A was up 23% in a bucket so-called run-rate, can you provide clarity on what is going on there?

[Charles Barrantes:]

Yes. Well, SG&A is up in absolute dollars, but as a percentage of total revenues down, so obviously there are some variable costs as our revenues go up. So I mean effectively our SG&A is state level have gone down.

[Zane Karimi:]

Okay, thank you. And then also with the recent Mobile Mini announcement of their fleet asset divestiture, how do you see this playing out with regards to industry pricing?

[Jody Miller:]

I don’t think it has a big effect. I think they are getting rid of some odd ball units and old units and if anything it’s probably a positive, but I don’t think net-net it’s going to be a big change, I think it’s just then cleaning up fleet from what I gathered from the announcement. So I think again pricing on containers went up a little bit. I think everybody is more accepting the price increases. And as I stated earlier, I think it’s only positive for the pricing environment.

[Zane Karimi:]

Okay. And then given the moving pieces in the retail market, are we still anticipating an incremental step up during this holiday season?

[Jody Miller:]

Yes. I mean, we are just getting into that. So, it’s little bit hard to predict, but our forecast right now is above last year and from all indications it’s going to be a very solid retail season. Some of our larger customers are requesting more units. So, again, I think it’s a positive at this point.

[Zane Karimi:]

Yes, thank you for your time and good job with the quarter.

[Jody Miller:]

Thank you.

[Operator:]

There are no other questions. At this time, I would now 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. I would like to thank you for joining the call today. We appreciate your continued interest in General Finance Corporation and look forward to speaking with you next quarter.

[Operator:]

Thank you. That does conclude today’s conference call. You may now disconnect.