General Finance Corporation
Q3 2015 Earnings Call Transcript

Published: 11 May 2015

[Operator:]

Welcome to General Finance Corporation’s Earnings Conference Call for the Third Quarter ended March 31, 2015. Hosting the call today from today's 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 1.30 PM Eastern Time. At this time, all participants have been placed in a listen-only mode and the floor will be opened for your questions following the presentation. It is now my pleasure to turn the call over to Mr. Chris Wilson, Vice President, General Counsel and Secretary of General Finance Corporation. Please go ahead Mr. Wilson.

[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, market 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 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 natural resources industry or the U.S. construction or oil and gas industries or a write-off of all or part of our goodwill and intangible assets. These involve risks and uncertainties that 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. I now will 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 Finance’s results for the third quarter of fiscal year 2015. 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 to your questions. Despite a very challenging environment in the global oil and gas sector and a weaker Austrian dollar relative to the U.S. dollar, we were able to achieve another quarter of year-over-year growth in revenues and adjusted EBITDA. Our North America core leasing operations continue to experience growth across most product lines and end markets demonstrating the benefits of having a diversified business with respect to venue, industry and customers. The majority of our product lines in North America experienced higher fleet utilization and/or higher average lease rates during the quarter as compared to the prior year's third quarter. In addition, we have continued our efforts to grow and diversify our North American business through accretive acquisitions of portable storage container businesses, where in the first nine months of this fiscal year we completed six acquisitions, entering into seven new markets and bolstering our position in three existing markets. That being said, our liquid containment business in North America had a very challenging quarter due to the significant decline in oil prices. Producers in our two primary basins in Texas, the Permian and the Eagle Ford have responded to lower prices by significantly curtailing drilling and production activity. As a result, rig counts in these two basins dropped rapidly and dramatically during the quarter. Our total volume in all areas were down approximately 40% from December levels. Our major oil and gas customers have been putting pressure on their entire supply chain returning idle equipment and seeking significant pricing reductions on top of the earlier agreed upon cuts. Even with the relatively low production costs in these two basins it has become apparent that the field operators have been given mandates by their corporate offices to reduce spending across the board forcing them to obtain further concessions from their suppliers and we haven’t been immune to these pressures. We have quickly responded to these extreme conditions with a number of initiatives including reducing our capital expenditures and workforce, implementing stringent expense controls and actively seeking to replenish our reduced volume and pricing with business from new customers and in new regions. In the last two months we have added some new customers and expanded our business with a number of our existing customers as a result of these efforts. We believe that these actions will enable us to gradually improve results this segment of our business and will ultimately lead to more normalized levels of profitability when this industry stabilizes and eventually returns to growth. Turning to the Asia pacific region, Royal Wolf was impacted by lower revenue during the quarter driven by a weaker Australian dollar relative to the U.S. dollar, lower revenues from the oil and gas sector, and generally the sluggish Australian economy. This was offset by some positive trends in the quarter, such as an improved demand in our retail and consumer end markets and broad based strength in our New Zealand business and quarterly average fleet utilization rate came in at a very respectable level of 82% which again speaks to the diversity of our business. I'd now like to discuss our company wide outlook. Based on our year-to-date results and fourth quarter outlook which considered among other things the impact of current year acquisitions, the value of the Australian dollar versus the U.S. dollar and the current environment in the oil and gas sector, we estimate the fiscal year 2015 consolidated adjusted EBITDA should be in the 20 to 24% range higher than fiscal year 2014 and that fiscal year 2015 consolidated revenues should be in the range of $300 million to $310 million. To conclude, we have what we believe to be the best operating managers in this sector in both of our geographic revenues. These seasoned professionals have successfully navigated a number of challenging business environments in the past, including the global financial crises of a few years back and we have come out of them with stronger experienced teams and better positioned to capitalize on the opportunities when economic conditions improve. We have a strong balance sheet and ample financial flexibility. We are diversified by product type, customers, end markets and geography. And while the next few quarters are expected to be challenging we believe that we will ultimately overcome the headwinds that we are facing in the oil and gas sector and in the Australian economy. We continue to have a number of long-term growth opportunities including significantly expanding our North American footprint and strengthening market leadership in the Asia Pacific region. We will continue to remain disciplined in our 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 with a focus on the portable storage container businesses. At this time, I'd like to turn over the call to Chuck Barrantes for his financial review.

[Charles Barrantes:]

Thanks Ron. We will 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. 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 $69.4 million in the third quarter of fiscal year 2015 a 6% increase over the comparable period of the prior year and includes $9.4 million for Lone Star. Leasing revenues increased by 34% to $46 million for the quarter from $34.4million versus third quarter 2014 and comprised 70% [ph] of total non-manufacturing revenues as compared to 59% for the same period last year. Non-manufacturing sales revenue were up $19.99 million for the quarter down from $24.4 million in the third quarter of the prior year. Total non-manufacturing revenues are $65.9 million in the third quarter of fiscal year 2015 increased by 12% from the third quarter of 2014 and was driven by increases in our North American leasing operations, where revenues increased by 64 % and was partially offset by a 21% decrease in revenues in our Asia Pacific leasing operations. In our North America leasing operation the increase in revenues was driven by the inclusion of Lone Star as well as an approximately 23% increase in revenues of the Pac-Van. The increase in Pac-Van was primarily due to improved demand across a number of sectors, particularly commercial, construction and retail, which includes the impact of acquisitions. The Asia Pacific region's decline in revenues was primarily in the oil and gas, construction and government sectors and included an approximate 12% unfavorable foreign exchange translation effect between periods. And our North American manufacturing operations Southern Frac standalone revenues for the third quarter of fiscal year 2015 were $4.9 million as compared to $13 million in the prior year's third quarter, low revenue due to the slowdown in the oil and gas sector. Consolidated adjusted EBITDA was $17.1 million in the third quarter of 2015 an increase of 5% from the $16.3 million in the third quarter of 2014. Adjusted EBITDA margin as a percentage of total revenues was 25% for both periods [ph]. In North America adjusted EBITDA for our leasing operations was $8.7 million in the third quarter, an increase of 64% from the $5.3 million generated in the prior year’s quarter. The large increase in adjusted EBITDA was primarily driven by 50% increase in the average number of units on lease, generally improved lease rates and strong utilization across most product lines of Pac-Van, as well as the inclusion f Lone Star. Adjusted EBITDA on a standalone basis for our manufacturing operations was $417,000 for the quarter as compared to $2.1 million in the third quarter of 2014. Royal Wolf’s adjusted EBITDA for the quarter increased by 19% to $9.1 million. On a local currency basis, adjusted EBITDA was down 9% from the prior year’s third quarter. Interest expense for the third quarter of 2015 was $5.2 million up from $2.5 million for the third quarter of last year. The high interest expense was primarily due to higher average borrowings in both the Asia-Pacific and in North America and a higher weighted average interest rate in North America, which was chiefly the result of the issuance during the fourth quarter of last fiscal year of our 8.125% senior notes and our secured term loan with Credit Suisse, at the corporate level both which bare higher average interest rates than that of our North American senior credit facility. The weighted average interest rate in North America was 5.4% for the third quarter of the current fiscal year versus $3.7 million in the prior year's quarter. In the Asia-Pacific the current period weighted average interest rate was 5.4%, down slightly from 5.5% last year. for the quarter as compared to $759,000 million in the prior year’s quarter not only because of the increased revenue but also because of efficiencies obtained in the manufacturing process. Net loss attributable to common stockholders in the third quarter of 2014 was $1.7 million or $0.07 per diluted share versus net income of or $0.04 per diluted share in the third quarter of 2014. All the periods includes a reduction of $922,000 for dividends paid on our preferred stock. For the first nine months of fiscal year of 2015, we generated free cash flow before fleet activity of $25.7 million as compared to $16.8 million in the prior year, an increase of 53%. As a reminder, we define free cash flow to be cash from operating and investing activities adjusted for changes in the non-manufacturing inventory, net fleet CapEx, and business and real estate acquisitions. For the first nine months of fiscal year 2015, the company invested a net $50.7 million, $38.4 million in North America and $12.3 million in Asia-Pacific in the lease fleet as compared to $42.3 million in net fleet investment in fiscal year 2014. This was $24.4 million in North America and $18.2 million in Asia Pacific. Now turning to our balance sheet. On March 31, 2015 the company had total debt of $373.2 million and cash and equivalents of $8.6 million with a net leverage ratio of 3.9 times for the trailing 12 months. This compares to $302.9 million and $5.8 million at June 30, 2014 respectively with a net leverage ratio of 4.3 times on a historical basis and 3.4 times on a pro forma basis, which will include Lone Star for the full year. Receivables were $54.6 million at March 31, as compared to $61.5 million at June 30. Days sales outstanding in receivables were 41 days and 65 days for the Asia‐Pacific and North America leasing operations respectively, compared to 43 days and 67 days at June 30. At March 31, 2015 our North American leasing operations had $45.2 million available to borrow under its $220 million credit facility, and Royal Wolf had approximately 5.6 million Australian or U.S. $4.3 million available to borrow under its 175 million Australian dollar 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.

[Ronald Valenta:]

Hello operator? [Operator Instructions] Your first question will come from Scott Schneeberger with Oppenheimer.

[Scott Schneeberger:]

Thanks, good morning. Hi guys.

[Ronald Valenta:]

Hey good morning Scott.

[Charles Barrantes:]

Good morning, Scott.

[Scott Schneeberger:]

Hey could we start out just talking about in Pac-Van, how were business conditions, just any commentary with what you're seeing in the demand environment in the end market? And then if you could go, I guess Ron a little bit into how you feel about the pricing environment right now as we move through the summer months? Thanks.

[Ronald Valenta:]

Scott, we've heard the question about Pac-Van business condition. What was the second part of your question?

[Scott Schneeberger:]

It was still on Pac-Van, just as we go into the summer, how you feel about pricing, so the demand environment in Pac-Van and then how you feel about pricing in Pac-Van?

[Ronald Valenta:]

Yes, so in regards to our core North America leasing operations, they continue to be very strong in all sectors clearly other than oil and gas. We continue to invest more CapEx into the fleet as that continues to grow. So we've had pretty strong growth in all sectors, the container side we have also on the modular side seeing good improvement on utilization, so that seems to be returning on the construction side in terms of that product line. So generally, I think the business has been pretty strong going into the year and going into the summer we're seeing a lot of demand. Our close rates are improving in terms of the inbound. So we feel very positive on our core volume.

[Scott Schneeberger:]

And the pricing environment feels comfortable, is it still feel [indiscernible]?

[Ronald Valenta:]

Yes, we had modest price increases and again that's to the extent that our largest competitor has, as we understand it in the field, their increases are not as aggressive as they've been in the past and we continue to put up low single-digit increases on rate.

[Scott Schneeberger:]

Okay, thanks and then I guess it sounds like all the acquisitions in the quarter were backend related. Could you elaborate on the quantities and the strategic rationale behind [indiscernible]?

[Ronald Valenta:]

We would say North America of the leasing operations related, not necessarily Pac-Van. Pac-Van's core business did well primarily with Lone Star actually.

[Scott Schneeberger:]

Okay, thanks and then lastly with regards to Lone Star, how are your discussions with your customers with regard to pricing. I know you were conciliatory on the last conference call as oil prices came down and we’re basically looking at striking strong customer services relationships on consideration for pricing. Could you please elaborate a little bit further on your discussions with your customers on the liquid containers?

[Ronald Valenta:]

Yes, so I think as we've last had this topic, we had discussed pricing concessions. We were very aggressive in reaching out to them. In many cases we've had multiple go-around in terms of further pricing concessions. We think and really we feel that we've sort of hit the bottom on rate at this point in the two primary basins that we're in. We think we hit a low point in the quarter in terms of utilization and we have seen modest recovery every week in terms of use. So our intermediate view I think is that utilizations will come back first as they have over the last 30 days slowly and then that will be followed by rate. So again, we think we are on a bottom end on rate and utilization is slightly improving from where it was in the quarter we've just completed.

[Scott Schneeberger:]

All right great, thanks for that. I'll pass it over.

[Ronald Valenta:]

Thank you.

[Operator:]

The next question is from Brent Thielman with D.A. Davidson.

[Brent Thielman:]

Yes, good morning.

[Ronald Valenta:]

Good morning Brent.

[Charles Barrantes:]

Good morning.

[Brent Thielman:]

The $9.4 million in revenue from Lone Star, does that reflect the full effect of the price concessions you've got to make to-date or I guess another way to ask, does it feel like a bottom now that you got utilization rates to come back up?

[Ronald Valenta:]

Yes, I would say that we feel that’s pretty much the bottom yes. I mean, there was a lot of activity and change and it was very fluid throughout the quarter, but that sort of feels like the bottom end of it to us at this point.

[Brent Thielman:]

Okay and then utilization rates for the liquid containment products, could you provide what they were at the start of Q3 and kind of where things ended up at the end of the quarter?

[Ronald Valenta:]

Yes, so the utilization rate for the liquid containment tanks at the end of Q2 was 82% and at 67% at the end of Q3.

[Brent Thielman:]

Okay and then they have been higher from there presumably today.

[Ronald Valenta:]

Yes, we are seeing small improvements. We've added, we did not add a customer from the acquisition date from April through December 1. We had to add in a new account as we were or a new venue because we had a hard time just keeping up with the volume that we had in those basins and so our discipline at that point was we would capitalize what we had and invest in those customers, but we wouldn’t go outside of it really because we didn’t want any more exposure to that sector if everyone remembers correctly. And now with the added fleet that we have, we have gone out in over the last call it 30 to 45 days we've added 11 new accounts and we clearly haven't seen a lot of traction there yet, but we're clearly hopeful as they need the volume they'll come to us. So in the past we have not added accounts, but we have added 11 most recently which were pretty positive about though. I can't speak to any meaningful volume at this time.

[Brent Thielman:]

Okay, and then looking at your overall leasing gross margin below 60% this quarter, is that mostly indicative of just kind of a shift in mix in lease fleet?

[Ronald Valenta:]

Yes, so a big driver to our growth has been the containerized side and then clearly oil and gas side. So the incremental dollar flow through is north of $0.70. So as the leasing volume declines just as when it increases there's the same negative impact to margin or positive if it'd gone the other way, so part of that decline has been predominately the lesser leasing volume on the current infrastructure.

[Brent Thielman:]

Okay, and then lastly, can you quantify kind of the cost savings you expect from some of the expense control and other measures you're taking and should this kind of take effect immediately?

[Ronald Valenta:]

Yes, so a lot of that was put in place by our operating team in those basins in late January through early March. So we think in the month of March we've seen a fair amount of that and we would clearly see a full quarter's worth in the quarter in which we're in, in terms of the cost side.

[Brent Thielman:]

Okay, thank you.

[Operator:]

[Operator Instructions] There are no 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:]

Thank you. We would like to thank all of you for joining our call today. We certainly appreciate your continued interest in General Finance Corporation, and have a good day. Thank you again.

[Operator:]

Thank you ladies and gentlemen. This does conclude today's conference call. You may now disconnect.