General Finance Corporation
Q2 2016 Earnings Call Transcript

Published: 8 Feb 2016

[Operator:]

Welcome to General Finance Corporation Earning Conference Call for the Second Quarter Ended December 31, 2015. Hosting the call today from the company's corporate offices in Pasadena, California are Mr. Ronald Valenta, President and Chief Executive Officer of General Finance Corporation 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 1

[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, consumer 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 demands, 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 website 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 our forward-looking statements. In this conference call, we will also discuss certain non-U.S. GAAP financial measures such as adjusted EBITDA. A reconciliation of how we define and arrive at adjusted EBITDA is in our earnings release and will be included in our quarterly report on Form 10-Q. And now, I’ll turn the call over to Ron Valenta, President and CEO. Ron, please go ahead.

[Ronald Valenta:]

Thank you, Chris. Good morning and thanks for joining us to discuss General Finances' results for our second quarter of fiscal year 2016. 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 second quarter results were influenced by the same trends that we experienced in the first quarter and over the last year, a challenging oil and gas sector and a weak Australian dollar relative to the U.S. dollar acting as headwinds on the one hand and continued geographic expansion in end market diversification contributing positively on the other. While our financial results declined when compared to last year's record second quarter, we generated sequential growth in consolidated adjusted EBITDA at both our North America and Asia Pacific leasing operations and then our liquid containment leasing business at Lone Star Rentals. This is a testament to the great job our operating team is doing in a very tough environment. Our North America leasing operations continue to experience healthy demand in the majority of end markets and product lines apart from the oil and gas sector. During the second quarter, total non-oil and gas revenues increased by 25% compared to the prior year second quarter. Additionally, the majority of our product lines in North America experienced strong fleet utilization and/or higher average lease rates during the quarter as compared to the second quarter of fiscal year 2015. We continue to see attractive bolt-on acquisition opportunities across both of our geographic venues, and we remain focused on pursuing accretive acquisitions of portable storage container businesses having completed four acquisitions during the first six months of fiscal year 2016, two in North America and two in the Asia Pacific, and bringing this fiscal year's investment in the two North American acquisitions to over $70 million. Further we have added four new greenfield locations to our North American branch network this fiscal year. We are very encouraged by the ongoing favorable results in our core portable storage business in North America, as well as the continued loyalty of our customer base as evidenced by our industry leading net promoter score at Pac-Van, which has averaged 82% for the first six months of fiscal year 2016. While our liquid containment business in North America have another challenging quarter on a year-over-year basis, we are realizing benefits from our stringent cost controls and remain focused on growing our business with new and existing customers benefitting from our high level of customer service and safety record while others in the industry are following a tad short in that area. Lone Star, whose business is solely in Texas generated adjusted EBITDA of just over $3 million in the quarter, up modestly on a sequential basis and approximately $6 million to the first six months of this fiscal year. The Permian Basin, which is where Lone Star conducts the majority of its business, continues to see increased interest from oil and gas producers as it still offers the best economics relative to other basins. Our North American manufacturing operations were impacted by reduced demand in portable liquid containment tanks, which is heavily reliant on the upstream oil and gas market, and inefficiencies inherent in the establishment of a new product line. Sales of our recently introduced chassis product line during the quarter were $2.1 million, and we remained focused on making this and other steel-based products commercially viable in order to diversify outside of our core portable liquid containment business. That being said, we will continue to be closely monitoring this situation. Now turning to the Asia Pacific region, in the Asia Pacific total revenues increased by 15% during the quarter primarily driven by strong growth in the construction sector as well as the inclusion of three lower margin sales to freight customers of approximately $8 million. Offsetting this growth was the weaker Australian dollar relative to U.S. dollar by nearly 16% and lower revenue from the oil and gas sector. Additionally as a result of disciplined capital expenditures and a focus on working capital management, net debt declined by just over $12 million on a local currency basis from June 30, 2015. Now, I would like to discuss our company wide outlook. Based on our year-to-date results and our expectations for the value of the Australian dollar versus the U.S. dollar, we remain comfortable with the updated outlook range that we provided as a result of Royal Wolf’s updated guidance announced in its press release on December 22, 2015. On that date, we stated that the consolidated adjusted EBITDA would be 18% to 28% lower in fiscal year 2016 from fiscal year 2015. In addition, we now expect that consolidated revenues for fiscal '16 to be in the range of $270 million to $290 million. This outlook takes into account the impact of the current fiscal year acquisitions to date. To conclude we continue to have a number of long term growth opportunities including significantly expanding our North American footprint and strengthening our market leadership in the Asia Pacific region. We remain committed to our disciplined approach to capital allocation, deploying our resources and capital where we see healthy demand and opportunity, whether it be driven by geography or end market. And we will remain active in pursuing accretive acquisitions in greenfield locations with a focus on portable storage container businesses. I will now turn the call over to Chuck for his financial review.

[Charles Barrantes:]

Thanks, Ron. We'll be filing our quarterly report on Form 10-Q shortly at which time this document will be available on both the SEC's EDGAR filing system and on our website and I encourage investors and other interested parties to read it as it contains substantial amount of information about our Company, some of which we will discuss today. Turning to our financial results, total revenues were $83.3 million in the second quarter of fiscal year 2016 compared to $88.7 million for the second quarter of fiscal year 2015. Leasing revenues were $44.1 million down from $57 million in the prior year's quarter, and comprised 55% of total non-manufacturing revenues as compared with 70% for the same period last year. Non-manufacturing sales revenues were $36.7 million in the quarter, up 49% from $24.6 million in the second quarter of the prior year. In our North American leasing operations, revenues for the second quarter of fiscal year 2016 totaled $43.5 million compared to $49.2 million for the year ago period, a decrease of 11%. Leasing revenue declined by approximately 23% on a year-over-year basis primarily in the oil and gas sector, which dropped 60%. However leasing revenues increased from all other sectors by 14% with notable increases in the construction, commercial, and retail sectors. Sales revenues increased by 33% during the quarter, driven by increases in the services, construction and commercial sectors. Revenues in our North American manufacturing operations for the second quarter were 2.6 million and intercompany revenues to our North American leasing operations were negligible. This compares to $7.1 million of external sales and $6 million of intercompany revenues during the second quarter of the last fiscal year 2015. As Ron mentioned, our manufacturing operations were impacted by reduced demand in the portable liquid containment tanks, as well as inefficiencies associated with establishment of a new product line. In our Asia Pacific leasing operations, revenues for the second quarter of fiscal year 2016 totaled $37.2 million compared with $32.4 million for the second quarter of fiscal year 2015, an increase of 15% which as Ron mentioned included three low margin sales totaling approximately $8 million. The increase from revenues occurred primarily in the transportation, building and construction, and moving in storage sectors and were partially offset by declined in the oil and gas and government sectors, and was accompanied by approximate 16% unfavorable foreign exchange translation between the periods. Consolidated adjusted EBITDA was $18.9 million in the second quarter of 2016 compared $27.7 million in the second quarter of 2015. Adjusted EBITDA margin as a percentage of total revenues was 23% compared to 31% in the prior year's quarter. In North America, adjusted EBITDA for leasing operation was $13 million in the second quarter compared with $17 million for a year ago quarter. For our manufacturing operations on a standalone basis, adjusted EBITDA was approximately $1.1 million for the quarter as compared to earnings of $2 8 million in the second quarter of 2015. Asia-Pacific's adjusted EBITDA for the quarter was $7.8 million as compared to $10.2 million in the year ago quarter, down approximately 24%. On the local currency basis, adjusted EBITDA was down 9% than prior year's quarter. Interest expense for the second quarter of 2016 was $5 million down from $5.5 million for the second quarter of last year. The decline was driven by a lower interest expense at both our Asia-Pacific and North America leasing operations. In the Asia-Pacific, a slightly higher interest rate between the periods was offset by lower average borrowings and the translation effectible weaker Australian dollar relative to the U.S. dollar. In North America, reduced interest expense was the result of a lower weighted average interest rate offset somewhat by higher borrowings in a year-over-year basis. The weighted average interest rate North America is 4.8% for the second quarter of the current fiscal year versus 5.4% in the prior year's quarter. Net loss attributable to common stockholder -- net income attributable to common stockholders in the second quarter of 2016 was $97,000 versus net income of $4.6 million in the second quarter of 2015. Both periods included reduction of $922,000 for dividends paid on our preferred stock. For the first six months of fiscal year 2016, we generated free cash flow before fleet activity of $24.8 million as compared to $28.7 million in prior year. As we continue to focus on maintaining stringent expense control and managing working capital. 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 CapEx and business and real estate acquisitions. For the six months of fiscal year 2016, the company invested a net $17.3 million in the lease fleet consisting of $11.8 million in North America and $5.5 million in Asia-Pacific. This compares to $43.8 million in net fleet investment in the year ago period, $36.5 million of which being North America and $7.3 million in the Asia-Pacific. The discretionary nature of the deployment of our capital resources has enabled us to effectively respond to the challenging market conditions in the oil and gas sector. As a result, our year-to-date net fleet CapEx declined by nearly $27 million are just over 60% as compared to the first six months of fiscal year 2015. Turning to our balance sheet, at December 31, 2015, the company had total debt of $358.3 million and cash equivalents of $4.3 million with a net leverage ratio of 5.6 times for the trailing 12 months. This compares to $356.7 million and $3.7 million at June 30, 2015 respectively with a net leverage ratio of 4.2 times in comparison to net leverage of 4.7 times at September 30, 2015. Last month, we extended the maturity date of our term loan with Credit Suisse to July 1, 2017. During our second quarter in October, we prepaid $5 million of this term loan, bringing the current balance down to $10 million. Receivables were $44.7 million at December 31, 2015 as compared to $47.6 million at June 30, 2015. DSO and receivables at December 31 for our Asia-Pacific and North American leasing operations improved since year end from 40 days to 39 days and from 66 days to 46 days, respectively. At December 31 our Asia-Pacific leasing operations had in AUD38.9 million available to borrow $175 million credit facility. And our North American leasing operations had $22.6 million available to borrow under its $232 million credit facility. We have ample liquidity both our North American and Asia Pacific leasing operations as well as at the corporate level. We have excellent relationships with our senior secured lenders and we do not expect any significant issues that in our opinion what prohibit us from satisfying interest in dividend requirements on our preferred securities in the foreseeable future. That 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 Brian Gagnon of Gagnon Securities.

[Brian Gagnon:]

Good morning, gentleman, a couple of questions for you. You talked about expanding your footprint, can you tell us exactly what you're - not exactly, but would you tell us what you're thinking about growing the footprint? Where are you today? And how many locations do you think you can be in over the next couple of years?

[Ronald Valenta:]

Good morning, Brian. It's Ron. Yes. We continue to look at growth areas. I think the greenfields that we've done this fiscal were in areas in which we didn't have any presence and we didn't have any acquisition opportunities, so we went in there and did those greenfields, which we have not consistently done. Most recently, I can tell you all four of those are - were quickly profitable and are positive EBITDA contributors to the group. So we'll continue to do greenfields as we find opportunities and then acquisitions as well. We generally are doing somewhere between four to six years. I think that will continue for some time and some combination there off. So if you'd add greenfields, I would think the location count would generally be somewhere between six to 10 additionally per year. Today, I would tell you, Brian, we probably are something of a super regional in the near national. But until we get quite a few more dots on the page, I wouldn't really suggest that we're - we are a national service provider, but we're not really national in scope as yet.

[Brian Gagnon:]

Okay. Can you talk a little bit about your utilization in North America and where it came in for containers, and the oil and liquid containment?

[Charles Barrantes:]

Yes. So our - let me just tell you what’s the utilization in North America by our product lines. It was -- the average utilization in the second quarter was 82% for storage containers, 80% for our ground level offices or office containers, 49% for our frac tanks liquid containments. That's the question obviously you're asking, 76% for our mobile offices and 82% for our modular units.

[Brian Gagnon:]

You've done a masterful job of expense control. Do you still see opportunities there or are you going to try and keep things as stable as possible at this point?

[Ronald Valenta:]

I think there’s always opportunities. As we all know, Brian, there is nothing close to perfection. So I think we have - we continue to have opportunities. I don't think they are anything material, and then the second part of your question, we are always on top of our expenses and controlling them. So, it's a given discipline. Within a Group, we'll continue to do it. And then again, we have some minor immaterial items that we can continue to focus on, but nothing that would really move the needle.

[Brian Gagnon:]

Good. Thank you.

[Operator:]

[Operator Instructions] Our next question comes from the line of Mike Powell, a Private Investor.

[Mike Powell:]

Hi, guys, thanks for taking the questions. Excellent quarter. All things considered, I had a couple of questions on both, I guess, Lone Star and Royal Wolf. I guess on Lone Star first, can you give any - the $3 million EBITDA for last quarter, pretty impressive given the macro environment, given the continued deterioration in the oil margins in January, February is there - do you see that $3 million is sustainable, bottoming, or just any color on that current environment would be appreciated.

[Ronald Valenta:]

Good morning Michael, this is Ron. I think that specific operating team has done an excellent job having seen its revenues fall by more than 65% year-over-year and through some incredible cost controls, while improving system and safety capability. They are still creating 40% EBITDA margins. So as long as, I’ve been around, I can tell you I’ve never seen a Group do that so quickly under the current landscape. So we have nothing but praise for that Group. Having said that going forward, there is still choppiness in the basins in which we are in, so we do get positive news and then that’s usually offset by some negative news. So there is still choppiness in both basins. We tend to believe going forward in our numbers that we’ve re-confirmed, would assume we can continue to operate at the current levels. Again, we are probably a little bit more hopeful seeing things turn, but again every time there is a positive, there’s a negative. So I think at this point we are content with where we are and clearly, as opportunities arise and/or other providers are beginning to close their doors, we’re certainly hoping there is some opportunity there but forecasting going forward, we are assuming where we are now is pretty much where are going to end up.

[Mike Powell:]

And as a customer concentration-wise, do you have exposure to - I mean, this news out in Chesapeake this morning and I'm not that familiar with your overall customer base. But is there, like a Titan Energy type event that could happen in the downside case? Or is that unlikely?

[Charles Barrantes:]

Yes Mike, this is Chuck. So Chesapeake, yes, I did hear about Chesapeake, and Chesapeake is not one of our largest customers in the Permian or Eagle Ford area. We don’t anticipate any significant receivable problems. In fact, our ageing and our collection efforts has significantly improved even since year-end, let alone when we first bought Lone Star. But obviously that’s a situation we have to closely monitor and keep track of. But as we stand right now, we do not expect any significant issues.

[Mike Powell:]

But the equipment's more transferable to other customers than the accommodation business.

[Charles Barrantes:]

Yes it is.

[Mike Powell:]

Thank you for answering those. Then I had a couple on Royal Wolf if you’d hear me. The numbers looked again all things considered quite good. Could you talk a little bit about the Robert Allan retirement? That was the only real negative I saw that wasn't already public?

[Ronald Valenta:]

Yes, sure. We'd love to. And it’s not the topic we had on the call based on my memory. But we do have succession planning in place for all of our senior executives within GFN specifically, as it related to Bob Allen, subsequent to him, signing his last three year employment agreement which ends this fiscal year, we did continue to actively pursue his succession planning. Over the last three years, we have touched five candidates, both internal and external that were involved in a very long process as it relates specifically to replacing Bob. And today, we can say is, you've seen the announcement that we have picked pretty much collectively both from the GFN standpoint, and the Royal Wolf Board standpoint. Bob himself, and the other executives, that we have selected Neil Littlewood to succeed Bob in the new fiscal year. So there will be and has been underway in orderly transition as it relates to handover the CEO position. Neil specifically oversaw our CSC Group, which is the core of that business. And then from there he was promoted to Chief Operating Officer. So again, we are very confident in Neil’s ability to continue Bob’s long history of success down under. So, it’s very positive, we believe for the group and clearly from a operating personnel standpoint, we don’t share everything with everyone but it’s been a very long process with the hand selection of Neil. So we are very pleased to have made that announcement this week.

[Mike Powell:]

Okay, thanks. Then two more minor questions. With Titan is referenced to collecting 400,000, with 600,000 remaining but there is other $5 million number that's some sort of other receivable. Could you just clarify what -

[Charles Barrantes:]

This is Chuck, Mike. So the $5 million dollars represents effectively future business. They have lease contracts. Obviously, a lot of the mining camps came back. So what was on the balance sheet in December was $600,000 of receivables of which $400,000 is collectable. We have a first security position in Titan, so obviously we're very, very comfortable. We're going to get the remaining receivable, but we're really talking about $5 million that's basically lost future revenues in fiscal year '16 and '17. That's what that represents, which is why we've all adjusted there guidance back in December.

[Mike Powell:]

And then the -- I don't know if it's just a GAAP number, but the tax was paid in the first half or like $4.1 million seemed -- I was expecting to see a larger tax payment in kind of a down type quarter, any commentary on that?

[Charles Barrantes:]

No. Other than they are, unfortunately or fortunately depending upon in the receiving end as a retail, their dividends are frank, which means they do pay taxes. It's just part of the tax jurisdiction in Australia, New Zealand. It's not as friendly for continuous I guess and that here in the U.S., we can depreciate over seven years major is little different rules in Australia. So no comments, other than it's just the tax law.

[Ronald Valenta:]

Yes. So Mike, so where we can create large forward here as Chuck alluded to on depreciation. They do not have that aggressive of a tax policy in Royal Wolf. So by pure definition they and everything else being equal, they would be a tax payer far sooner than we based on depreciation methodologies. And it was also planned and forecasted within our own numbers.

[Mike Powell:]

Okay. Well, thanks for taking the time. And I'd say that there seem to be some disconnect between your what's going on reality in terms of the operations of the business and how some of your securities are trading. So thank you very much for the time.

[Ronald Valenta:]

Thank you, Mike, and we're glad you said that. Thank you.

[Operator:]

[Operator Instructions] Our next question comes from the line of Scott Schneeberger of Oppenheimer.

[Scott Schneeberger:]

Thanks. Good morning. Could you speak a little bit to the acquisitions year-to-date just where, what and some of the details you're comfortable sharing just so we can get a better flavor there? Thanks.

[Ronald Valenta:]

Yes. I think they are all accretive transactions. They're at multiples around the 6 times. The detail to the transaction themselves come out in the quarterly start, but it's nothing more than or less than what we've done in the past. So they're both accretive. They're in areas in which we're not in. So we clearly felt -- we would rather acquire than do the Greenfield and just following along the same lines and part of our model to grow that we have continued to do for quite some time there.

[Charles Barrantes:]

Yes. The largest Scott -- this is Chuck. The largest was in the Seattle area with McKinney, which we announced actually talking a bit about at the last quarter subsequent that last quarter. That's the largest -- it's a key market for us. It's a great opportunity. So we made two small one in Australia and the other one was a small one here in the U.S. within Springfield. So total four acquisitions thus far.

[Ronald Valenta:]

And then going along the lines of our - survival relationships and our reputation from preceding lives, it's actually a group that's based in Southern California that we've known -- I've known the founders for well over 25 years. So a lot of the transactions we do come to us really as it relates to our reputation from prior lives. So that one transaction that Chuck alluded was -- is not only very accretive, but it has some very good growth prospects to it.

[Charles Barrantes:]

And Scott, I should also mention that all four of the acquisitions are container based and in sectors other than the oil and gas market, which has been our -- really our focus and our game plan only for the last year and half.

[Scott Schneeberger:]

Thanks guys. I appreciate. That's a good segue into my next question, which is I think Ron you mentioned four to six per years is kind of a thought, and some geographical expansion and clearly in the portable storage area, in North America mostly. And that's all logical. What is the that's not of acquisition versus Greenfield? What is the OpEx associated with a greenfield? Then the third part of the question is

[Charles Barrantes:]

Yes, so I think we are doing both in the two venues in which we’re in ironically enough. So we pursue acquisitions and organic growth simultaneously and based on where the demand is and where the greater returns are rather than as where we allocate capital. So we go into any year knowing our capital allocation for organic growth and then acquisitions are more opportunistic and we don’t find the acquisitions we think we need – we are always looking at greenfields which are defined for us as areas of high demand, that are being under supplied and hence the four markets we've gone into this year which are all now positive EBITDA within the same fiscal. So having said that, when we run out of those opportunities, acquisitions, organic growth or greenfields, we then de-lever because as long as we can reach our minimum returns, we will continue to grow as the markets give us those growth opportunities. What you find Scott today is we're in two different venues and they’re both doing the other. In North America, we're finding the growth opportunities that we have alluded to and we continue to invest heavily and allocate our capitals to those high yielding areas of growth. On the flipside we have Asia Pacific which doesn’t organically or from an acquisition standpoint have those opportunities from the greenfield perspective we touched every dot in those areas and so we have some satellites that we add, but again nothing that moves the needle. So what you’re finding in Asia Pacific is we're de-levering if you look below the numbers, those surface and in North America we're growing aggressively. So we're actually doing both today at the same time and so that’s really the answers. To the extent, the market demand is there, we will continue to grow and invest when those opportunities aren't there. We will do what we're doing currently in Asia Pacific and de-lever.

[Scott Schneeberger:]

Thanks; I appreciate that. Then just one final one. With your new initiative in Southern Frac, could you just update us on that? You mentioned in the press release closely monitoring, and there are some, I guess, some upstart costs. If you could just give us the update there on what you are seeing, how it's progressing, where you - Chuck you feel.

[Charles Barrantes:]

So Southern Frac for those that remember was a strategic acquisition that we had paid off within 18 months of buying that factory and it was to give us supply both as needed in the quality of supply that we needed to service that part of our business which was oil and gas. Since that time as we all know very well, the marketplace has changes and we were always attempting to diversify there but we were so busy with the primary business that there's just weren't enough hours in any period of time to convert them to something more diversified. Today we're offering multiple products in non oil and gas sectors. We have found product lines that are smaller margin but we've had a ramp up time that has cost us money and we moved to multiple products at the same time which is a costly endeavor. What we need ideally is a product that we can manufacture in great quantities. So this, if you were jumping round from product to product is very inefficient for us and does not lead to real profitability. So what we have experienced in the changeover to manufacturing new product is a loss during the start-up time of these new products. We do continue to have a lot of bidding activity in the non oil and gas sectors. We continue to monitor it on a daily basis. We have brought the workforce down 80% of what it was, so we have a very skeleton team down there right now, if you will, We're very committed to that team and we continue to again not only bid but win our fair share but what we do need is a little bit more consistent volume to make that operation a profitable one. Again the acquisition has been fully paid for so from that perspective it's a net positive but we are all focused especially that team - on turning it to breakeven and then from there obviously to a profitable operation which we are hopefully that we will do in the back half of this fiscal.

[Scott Schneeberger:]

Okay, thanks very much guys.

[Operator:]

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

[Ronald Valenta:]

Yes, thank you. And I would like to thank all of you for joining our call today. We appreciate your continued interest in General Finance Corporation and look forward to speaking with you next quarter. Thank you.

[Operator:]

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