General Finance Corporation
Q1 2017 Earnings Call Transcript

Published: 7 Nov 2016

[Operator:]

Welcome to General Finance Corporation’s Earnings Conference Call for the First Quarter Ended September 30, 2016. Hosting the call today from the Company’s corporate offices in Pasadena, California are Mr. Ronald Valenta, President & Chief Executive Officer of General Finance Corporation; and Mr. Charles Barrantes, Executive Vice President & Chief Financial Officer. Today’s call is being recorded and will be available for replay beginning at 2

[Chris Wilson:]

Thank you, operator. Before we begin today, I would like to remind you that this conference call may contain certain forward-looking statements. Such forward-looking statements include, but are not limited to our views with respect to future financial and operating results, competitive pressures, increases in interest rates for our variable rate indebtedness, our ability to raise capital or borrow additional funds, 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 resources industry or the U.S. construction and oil and gas industries, or a write-off of all or a part of our goodwill and intangible assets. These risks and uncertainties could cause actual outcomes or results to differ materially from those described in our forward-looking statements. We believe that the expectations represented by our forward-looking statements are reasonable, but there can be no assurance that such expectations will prove to be correct. For more details regarding these risks, please see the Risk Factors section of our periodic reports filed with the SEC and posted to our Web site at 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 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 now turn the call over to Ron Valenta, President & CEO. Ron, please go ahead.

[Ronald Valenta:]

Thank you, Chris. Good morning and thanks for joining us to discuss General Finances’ results for the first quarter fiscal year 2017. As in prior earnings calls, 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. Our first quarter results were primarily influenced by two ongoing [technical difficulty]. Our continued geographic expansion and end market diversification which has been offset by a challenging oil and gas sector. While our financials declined slightly when compared to last year's first quarter we are seeing positive signs in both of our geographic venues, including an increase in our leasing revenues outside of oil and gas and the stabilization of the Australian dollar versus the U.S. dollar. Our North American leasing operations continue to experience healthy demand in the majority of the end markets or product lines apart from the oil and gas sector, where during the second quarter total non-oil and gas revenues increased by 15% compared to the prior year's first quarter, additionally most of our product lines in North America experienced higher average monthly units on lease and there were higher average lease rates during the quarter as compared to the first quarter of fiscal year 2016. Our ongoing favorable results and strong execution in our core North American portable storage business is very encouraging. The consistent loyalty of our customer base has helped inspire excellent Net Promoter Score at Pac-Van which is 83% for both the most recent quarter and for the last 12 months. In addition to our organic growth we have continued to focus our efforts on geographically expanding our portable storage container business in North America and during the first quarter of fiscal year 2017. We opened two Greenfield branches one in Portland, Oregon and one in Philadelphia. As well we've added two new locations resulting from the acquisitions of two portable storage container businesses in the Pacific Northwest, one in the Yakima, Washington and one is Vancouver, British Columbia. Even with our extensive geographic footprint in North America where we currently have 44 of the top 100 MSAs in the country we still have the potential for future expansion. Our liquid containment business in North America had another challenging quarter on a year-over-year basis due to the lower level of drilling and completion activity in the oil and gas sector. That being said we are realizing benefits from our stringent cost controls and focus on growing our business with new and existing customers in the basins that we've serve benefiting from our high level of customer service and safety record while others in the industry are having significant issues in those areas. The Permian basin which is where we conduct the majority of our liquid containment business is actually seeing increased interest from oil and gas producers as it still offers the best economics relative to other basins. We are encouraged that in September we began to see positive signs in our business including increased customer drilling activity and improved fleet utilizations. We believe that as the industry stabilizes and the rate of growth increases, we will be well positioned to benefit and return to higher levels of profitability. Our North American manufacturing operations continued to be impacted by a lack of demand for our frac tanks and the start of the new product lines. However we have made good progress in the marketing and production of our chassis and specialized blast resistant products and remain focused on making this deal-based products commercially viable in order to diversify outside of our core portable liquid container business we are optimistic people are continuing to monitor the situation as Southern frac. Now turning to the Asia Pacific regions in the Asia Pacific while total revenues this quarter were down slightly however leasing revenues increased by approximately 5% primarily as a result of increases in the construction and government sectors and combined with the moderately favorable foreign exchange translation effect between periods. The Royal Wolf’s team is implementing a number of growth initiatives as well as making progress on redeploying its workforce accommodation fleet which was impacted by the slowdown in the natural resources industry. Led by Royal Wolf’s new CEO, Neil Littlewood management remains focused on building upon its leading market position across the reason through a combination of organic growth, accretive acquisitions, Greenfield openings. Now I'd like to discuss the company wide outlook. Based on our first quarter results and assuming the average exchange rate for Australian dollar versus the U.S. dollar comparable to fiscal year 2016. We remain comfortable with the outlook range provided in our fourth quarter fiscal year 2016 earnings press release and conference call. Which was that consolidated revenues for 2017 are expected to be in the range of $280 million to $300 million and the consolidated adjusted EBITDA would be flat to increasing up to 10% in fiscal year 2017 from fiscal year 2016. This outlook does not take into account the impact of any additional acquisitions that may occur in fiscal year 2017. To conclude, we continue to have a number of long term growth opportunities, including significantly expanding our North America foot print and strength in our market leadership in Asia Pacific region. We remain disciplined in our capital allocation, deploying our resources and capital where we see healthy demand and opportunity. But it be driven geography or end market and with the primary focus on affordable storage container and office container product links. I’ll now turn the call over the Chuck Barrantes for his financial review.

[Charles Barrantes:]

Thanks, Ron. We'll be filing our Quarterly Report on Form 10-Q shortly at which time it be available on both the SEC’s EDGAR filing system and on our Web site. And I encourage investors and other interested parties to read it as it contains a substantial amount of information about our Company, some of which we will discuss today. Turning to our financial results, total revenues were 62.8 million in the first quarter of fiscal year 2017, compared to 63.8 million for the first quarter of fiscal year 2016. Leasing revenues were 41.3 million and comprised 67% of total non-manufacturing revenues for both fiscal quarters. Non-manufacturing sales revenues were 20.4 million in the quarter also comparable to the first quarter of the prior year. In our North American leasing operations, revenues for the first quarter of fiscal year 2017 totaled 37.5 million compared to 37 million for the year ago period, an increase of 1%. Leasing revenues declined by approximately 2% on a year-over-year basis, primarily as a result of a 47% drop from the oil and gas sectors. However leasing revenues increased from all other sectors by 16% with notable increases in the commercial, construction and in the industrial sectors. Revenues at our North American manufacturing operations for the first quarter were 1.7 million, included intercompany sales of 600,000 to our North American leasing operations. This compares to 2.2 million of total sales during the first quarter of fiscal year 2016 and negligible intercompany sale. As Ron mentioned, our manufacturing operations continued to be effected by lack of demand for our portable liquid containment tanks and we establishment of new steel-based product lines. In our Asia-Pacific leasing operations, revenues for the first quarter of fiscal year 2017 totaled 24.2 million compared to 24.7 million for the first quarter of fiscal year 2016, a decrease of 2%. The decline in revenues occurred primarily in the retail, oil and gas, mining government sectors partially offset by increase in the consumer sector and was accompanied by a monetarily favorable foreign exchange transaction effect between the periods. Consolidated adjusted EBITDA was 13 million in the first quarter of 2017 down from 13.9 million in the first quarter of 2016. Adjusted EBITDA margin as a percentage of total revenues was 21% compared to 22% in the prior year’s quarter. In North America, adjusted EBITDA for our leasing operation was 8.6 million in the first quarter compared with 9.6 million for the year ago quarter. Included in these results were adjusted EBITDA for Lone Star Tank Rental of $1 million and $2.8 million for the 2017 and 2016 first quarter periods respectively. For our manufacturing operations on a standalone basis, adjusted EBITDA was a loss of approximately $400,000 for the quarter and an improvement to the loss of $844,000 in the first quarter of 2016. Asia-Pacific’s adjusted EBITDA for the quarter was $6 million as compared to $6.3 million in the year ago quarter, down 5%. On a local currency basis, adjusted EBITDA was down approximately 7% from the prior year’s first quarter. Interest expense for the first quarter of 2017 was $4.8 million down from $5 million for the first quarter of last year. The decline was primarily driven by a lower interest expense at our Asia-Pacific leasing operations which benefited from lower average borrowing between the periods and a lower weighted average rate of 5% for the first quarter of fiscal year 2017 versus 5.5% in the year ago period. However this was partially offset by a stronger Australian dollar between the periods. In North America, interest expense increased slightly due to higher average borrowings on a year-over-year basis. As the weighted average interest rate is 4.9% was same for both periods. Net loss attributable to common holders in the first quarter of 2017 was 2.1 million. Our expense [ph] per diluted share slightly higher than net loss of 2 million or $0.08 per share in the first quarter of 2016. Both periods include a reduction of 922,000 for the dividends paid on our preferred stock. For the first quarter of fiscal year 2017, we generated free cash flow before fleet activity of $2 million which was impacted by a $3.3 million reduction in cash flow due to the timing on satisfaction of trade payables, accrued liabilities and earnings revenues. These working capital items reduced cash flow by 18.6 million when comparing fiscal 2017 with fiscal 2016 as they positively impacted cash type 15.3 million in last year's first quarter. Historically, we have experienced significant variations in operating assets and liabilities between periods when conducting our business in due course particularly in our first quarter, so this is not unusual. Free cash flow for the first quarter of fiscal year 2016 was 20.1 million. As a reminder, we define free cash flow to be cash from operating and investing activities, adjusted for changes in non-manufacturing inventory, net fleet capital expenditures, and business and real estate acquisitions. For the first quarter the company invested a net 6.7 million in the lease fleet consisting of 4.5 million in North America and 2.2 million in the Asia-Pacific, as compared to 7.6 million in net fleet CapEx in the year ago quarter 5.9 million in North America, and 1.7 million in the Asia Pacific. Turning to our balance sheet, at September 30, 2016 the company had total debt of 365.7 million and cash equivalents of 9.4 million with a net leverage ratio of 5.95 times for the trailing 12 months. This compares with transmitting 2.2 million and 9.3 million at June 30, 2016 respectively with the net leverage ratio of 5.6 times. Receivables of 40.5 million at September 30th as compared to 38.1 million at June 30th. Day sales outstanding and receivables at September 30, for our Asia-Pacific and North America leasing operations increased slightly from 36 to 39 days and 49 to 54 days respectively since June 30th. At September 30, 2016 our Asia-Pacific leasing operations had in Australian dollars 20.6 million available to borrow under its $175 million credit facility and our North America leasing operation had 23.3 million available to borrow under its $232 million credit facility. However as a result of the completion after quarter end of an appraisal the assets used as collateral for our American credit facility, the order and liquidation value, against our borrowing base had been reduced primarily on our mobile office to module building fleet. Which particularly impacted the borrowing availability on this credit facility. This reduction in the order of liquidation value by the appraiser of our mobile office and module building fleet, is an industry wide occurrence and not just specific to our fleet. The estimate impact of the reduced borrowing base is that we currently have approximately 2.2 million of availability on the facility, while we strongly disagree with the assumption used and the outcome reached by the appraiser, we believe by prudently managing our business and by working with Wells Fargo, the head of the syndicate. Our borrowing availability will increase and this issue will be minimizing if not eliminated in due course. We have strong relations with the syndicate and have begun the process of refinancing the credit facility, prior to its expiration in September next year. Additionally, we need a specific, we’re in the process of refinancing the $125 million [ph] facility, A portion of that facility, which is due to expire in July 2017. We remain focus on maintaining stringent expense control, of how we continue to expand our geographic foot print in both our venues. 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] Our first question comes from the line of Brent Thielman of D.A. Davidson.

[Brent Thielman:]

Ron I was wonder if you can elaborate on that, on the comments on North America, oil and gas in September, did that 47% decline you saw for the quarter, kind look more like a minus 10 or minus 15 in September?

[Ronald Valenta:]

Yes so all the oil and gas the [indiscernible] Permian and Eagle Ford quarter-over-quarter that would be June quarter and September quarter that their -- the rate counts gone up. So in the Permian they’ve gone from a 153 to a 198 and Eagleford from 42 to 47. We’re capturing some of that and again we’re mostly on the completion side and the production side and not the drill side, so our volumes comes after that but it’s a good indications what’s coming. We did add six new customers in the quarter, and we had a significant comp in utilization on the Permian side of our business. And a lot of that was back loaded, so on average during the quarter we were lower than we had hoped, but we picked up a lot of that and more in the later part of the quarter. So September was strong leading to a new quarter.

[Brent Thielman:]

Okay and then, what are you’re seeing from kind of a comparative landscape in liquid containment, anything new there?

[Ronald Valenta:]

Yes I think there was another packaged bankruptcy in the quarter of another large significant player. So the competition has dwindled and again our north strategy was not to cut in terms of our safety, our system capability or our service levels. And so again we think, we’ve positioned ourselves well for the long term, and as things continue to pick up in those basins we would think we would get more than our fair shares, but due to volumes coming to both of those faces, but again the Permian and the Eagleford.

[Brent Thielman:]

Okay, and then I know you guys are sticking with the guidance for the fiscal year, but I guess, did you see in the first quarter and first month of Q2 play out, anything that your thought might have come in a little stronger when you laid out the plan initially then it has year-to-date. I guess I'm just looking at this quarter and annualizing it to the guidance though and I'm wondering where you might think you might make up for it as the year goes on?

[Ronald Valenta:]

The results outside the oil and gas sector in North America back then was promising more than what we expected and I got to tell you, we -- it doesn’t annualize we've got a second quarter of last year that was an excellent second quarter, be harder to match that, but as far the backend and what we conservatively believe that there will be, based on what we’ve seen in late September and October the utilization picking up in the Permian basin we think that we should be able to exceed those two quarters. So that we’re still very comfortable within our guidance.

[Charles Barrantes:]

Yes, and I think that on the positive side our core fleet continues to outperform our, rate start up, our sales closed, ratios start up, our net promoters scores never been higher 83% and were continuing to do accretive acquisitions in Greenfields wherever possible. I think our challenges continue to these really on the manufacturing side. We’re narrowing that loss factor every month and we’re getting closer to breakeven, which is clearing objective for the current year and again every month we’re improving upon that as you could see the quarter-to-quarter results were 50% there has been and we were in the previous quarter. So we’re getting some good momentum there on the product and then our last challenge is everyone knows and as the consistent theme is, but thing is to find out where, wherever the new normal is in oil and gas but again if you, but again if you peel below the onion, I think the core business is doing exceedingly well relatives to our expectation and relative to competitive in the sector.

[Brent Thielman:]

Okay, thanks and I'll get back in queue.

[Operator:]

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

[Scott Schneeberger:]

On the portable storage, could you speak a bit to, one, the demand environment, you've touched on it but I think it’s a little bit deeper. To pricing what you seen from other competitors how you are handling the pricing environment. And then third your perspective of the holiday season, the holiday rental some of the big guys that do holiday rentals in the lay of the land there? Thank you.

[Ronald Valenta:]

Okay, we’ll start with the first one. So we’re [technical difficulty] we are seeing good demand on the core business again were up 50% quarter-over-quarter, so we're seeing food demand, some of it is quality product. We have been putting out ground level offices over the last year or so, but have been manufactured in Southern frac that we think are best the unit is in the marketplace. So I think between the quality of products we and a lot more focus on the sales and marketing side we are capturing more than our fair share of the core product line. In terms of pricing, I think the industry as a whole is in the low single digit, increased so it's not as healthy and robust as it was in pre-speaking and preseason -- higher seasons, same and prior year pricing. And then lastly on the retail side, which we call the holiday season, that the largest player in that market place is Wall-Mart and they’ve really focused on reducing their cost in that area. I think there internal object is using cost by the 15% which comes really for two variable EBIT from term or pricing. So we have in the current retail or holiday season, we have about the same amount of units of, might be our slightly higher in the previous season. However we don’t have the same term. So the aggregate volume for Wal-Mart specifically will be lower year-over-year, but I think our guys have done great job or people done a great job of putting out the volume, it’s just that it’s going to over a shorter term, then it was in increasing season. I think everyone has been somewhat negatively impacted and have been exposed to a lot bigger downturn that what we have within it. I think I answer Jeffery.

[Scott Schneeberger:]

Yes you did, thank for covering them, I appreciate it. And then it’s snuck three into one, and I’m going to ask a follow up two if is the outlook for could, what is the outlook for acquisition is going forward. Obviously you have some renegotiation going on with the credit facility. If you could just give us an idea of, A pipeline, I’ll do another multiple question in a question. How the pipeline looks, B, if you’re going to pause for a while and C, how long might that while be, if so how long these things we renegotiations that credit facility may? Thanks.

[Ronald Valenta:]

You’re not going easy, Scott, those are lot of question, Otherwise known as run on questions. So to answer your question. We have both facilities that we’re renegotiating, I would say the Asia Pacific facility is a little bit further along, and anticipating getting the same type of facility that we have currently with may be a few, a little bit better pricing, a little bit better terms. In North America we’re going to start that process and actually I’ve internally started the process and then we’ll build a market. We think the capacity is too short term in nature as an overreaction by the appraiser on a non-related company to us. So we’ve very confident in that market. We think the capacity short-term in nature is an overreaction by the appraiser in a nonrelated company to us. And so, we’re very confident in that, not only the ability to refine, but to get similar capacities to what we have experienced in the past, and that will be following to again the Asia Pacific facility. In terms of acquisition Greenfield will be -- we’ll continue to look at all opportunities as they come about. I think the pipeline is reasonably full at this point and we’re going to continue to move forward on those transactions.

[Scott Schneeberger:]

Great thanks Ron, you covered my sixth question wrapped into two.

[Operator:]

[Operator Instructions] You next question comes from the line of Chip Saye, AWH Capital.

[Chip Saye:]

I got a few, the 47% drop in North America oil and gas business, it sounds like things are getting a little better, but like the proprietary caller, I’d been anticipate the number to be down that much. When we are get in the Q2 quarter, Q2 2017 will that business be up year-over-year?

[Ronald Valenta:]

We think realistically it's going to be probably down a bit flattish. Q2 had a bit of an uplift, Q2 being December 2015. So while we see some positive trends on our utilization moving up in September and October, I think realistically we can probably expect sort of a flattish to tittle bit down Q2. And the way I see it, to give color on that side. I think utilizations are improving, we’re getting more units out, but we’re not getting similar rates. And it would be consistent to form in the past few quarters, I think what we've been saying that we’re going to see utilizations move up first and foremost which there is so much capacity right now in the marketplace, we’re going to see Utilizations move-up first. And then secondly, to revenue enhancement within there would be adjusted rate, but as long as there is so much excess capacity you’re not going to get old rates anytime soon. You’re going to have to put in following the same methodology and historical pattern that we had to noted earlier calls.

[Charles Barrantes:]

But Chip in my comments [technical difficulty] second quarter compared to last year's second quarter. But we do believe that from Q1 to Q2 it should be sequentially up.

[Chip Saye:]

Okay, so it's sequentially up but still flat to down year-over-year in the oil and gas and North America?

[Charles Barrantes:]

Yes, I believe so.

[Chip Saye:]

And you [multiple speakers] driving.

[Ronald Valenta:]

Primarily selective rate in that volume.

[Chip Saye:]

Okay, my next question is on the borrowing capacity. In the press release I guess on the call you gave a little more detail on -- can you just repeat that again as to what the -- how much capacity you have now and then I have a couple of questions after that.

[Charles Barrantes:]

As of now as we could go we had some two -- I said 2.2, it's really somewhere between 2 million to 4 million because it's a pro forma estimates since the appraisal was just recently completed. So certainly down significantly from the 20 million, on primarily our mobile fleet.

[Chip Saye:]

Okay, and what triggered that appraisal again because I don’t think it was an outside force, is that what you are saying?

[Charles Barrantes:]

No, there is a requirement at really both of our facilities, particularly North America that is appraisal can be done practically every three months. So this is not unusual to have an appraisal, what is unusual to have this type of significant adjustment which as Ron had mentioned was based on set of assumptions that don’t apply to us and by the way as I mentioned it's not just us that got -- gained with this reduction, it's industry wide anybody in the modular space business.

[Chip Saye:]

Okay, so a lot less credit to the space now I guess as a result of [Multiple Speakers].

[Ronald Valenta:]

To add to the space, so again were a domestic container player and so one of our product lines is modular units and so the modular part of the product line has been basically reappraised for anyone that has that product line or anyone in that sector. So there is one comp that has sort of led to a reevaluation of that part of our fleet and no, again were not a modular player, we do have some of that fleet or product line within our fleet and so that has what's been basically reappraised and brought down, and it’s impacting other values which we really don’t necessarily agree with. So the core business, its function is normal and the valuations, but it’s the module product line that again has had this downward evaluation.

[Chip Saye:]

Okay, so to shift to the core business. Will this -- I guess in the short term could this limit your ability to Greenfield or make acquisitions?

[Charles Barrantes:]

We don’t think so, because we’re moving quickly to rectify the issue through the reappraisal and/or refi. And the acquisitions usually bother to meaning they don't close overnight so they take their six months to complete.

[Chip Saye:]

Okay and my last question I guess the CapEx in the quarter, the 4.5 million in North America, how much of that was spent, on your Greenfield location versus your existing fleet?

[Charles Barrantes:]

It’s the Greenfield would be immaterial because what we’re generally doing is using existing fleet. So where we have excess capacity, we’re moving that fleet into the Greenfield. So we don’t view this as necessarily the purchase as much is just a reallocation of assets to areas of demand. But if we look at it in absolute terms it would be a small part, like 15% [ph] of that aggregate number. But again it’s not -- you shouldn’t be viewing it as a new fleet, as much it is just relocating fleet from one located to there.

[Operator:]

There are no other questions at this time. I’d now like to turn the call back over to Mr. Ronald Valenta, President and CEO for any closing remarks. Please go ahead Mr. Valenta.

[Ronald Valenta:]

Thank you, we would like to thank all of you for joining our call today and we appreciate your continued interest in General Finance Corporation and we look forward to speaking to you next quarter. Take care.

[Operator:]

Thank you. That does conclude General Finance Corporation’s earnings conference call for the first quarter ended September 30, 2016. You may now disconnect.