General Finance's (GFN) CEO Ronald Valenta on Q3 2016 Results - Earnings Call Transcript

May 09, 2016 3:42 PM ETGeneral Finance Corporation (GFN)
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General Finance Corporation (NASDAQ:GFN) Q3 2016 Earnings Conference Call May 9, 2016 11:30 AM ET


Chris Wilson – Vice President, General Counsel and Secretary

Ronald Valenta – President and Chief Executive Officer

Charles Barrantes – Executive Vice President and Chief Financial Officer


Scott Schneeberger – Oppenheimer


Welcome to General Finance Corporation’s Earnings Conference Call for the Third Quarter Ended March 31, 2016. 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 2:30 PM Eastern Time. At this time all participants have been placed in a listen-only mode. And the floor will be open for your questions following the presentation. [Operator Instructions]

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, 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, yet there can be no assurance 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 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 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’ for the third 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 third quarter results were influenced by many of the same trends that we have been experienced in the past several quarters. Continued geographic expansion in end market diversification offset by the challenging oil and gas sector in a weak Australian dollar relative to the U.S. dollar acting as ongoing headwinds.

While our financial results declined when compared to last year’s third quarter, we are seeing some positive signs in both of our geographic venues. In both our North America and Asia-Pacific regions we grew our non oil and gas related leasing revenues and our overall exposure to the oil and gas sector continue to decline both sequentially and year-over-year.

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 is evidenced by our industry leading net promoter score at Pac-Van, which was 85% for the most quarter and has averaged 83% for the last 12 months.

While our liquid containment leasing business in North America continues to perform at suboptimal levels, they remains profitable on an unadjusted or adjusted EBITDA basis which is a testament to the wonderful job, that our team is doing in a very tough environment.

We believe that, or we seek with that we are seeing a trough in this business and if the worst is behind us. We’re encouraged by the recent increase in the price of oil and are cautiously optimistic that this is a sign of stabilization the sector.

We do not anticipate an increase in drilling activity any times soon. But at a cost we have maintained our high levels of safety and service and in the long-term are well positioned when it eventually rebalanced.

Our North American manufacturing operations continued to be impacted by the lack of demand for our steel-based products and inefficiencies inherent in the establishment of new product lines. In addition to our chassis product which we have discussed previously, we are marketing specialized blast-resistant containers to various industry sectors in North America.

While we have had success with this type of product in the Asia-pacific region, it is too early to reach any conclusions, but we are quite hopeful. We remain 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 closely monitor the situation at Southern Frac. We continue to implement our geographic expansion strategy during the third quarter. A key focus of the strategies building on our diverse operating platform by making container based acquisitions in non-energy sectors.

In February, we made an acquisition in Houston, which expanded our footprint in Texas, in April we entered the Massachusetts market with an acquisition in the Boston area. Through the end of April, on a combined basis, we have completed six acquisitions this fiscal year. Four in North America and two in Asia-Pacific bringing the total investment to over $22 million. These acquisitions bought four new branch locations in North America. In addition, we have opened greenfield locations in North America and two in Asia-Pacific region.

Now turning to our company wide outlook for the remainder of the fiscal year. based on our fiscal year-to-date results conditions in the oil and gas market and our estimate for the value of the Australian dollar versus the U.S. dollar we believe the consolidated adjusted EBITDA for the fiscal year 2016 will be 26% to 28% lower in fiscal year 2016 from fiscal year 2015. And the consolidated revenues for fiscal 2016 will be in the range of $275 million to $285 million.

This outlook takes into the account the impact of the current fiscal year acquisitions completed to-date. So to conclude, while it has been a challenging year for both of our geographic operating units we are seeing early signs of improvement and are cautiously optimistic, then in fiscal year 2017 we will once again resume our historical pattern of growing top line and delivering improved financial results each year.

We remain committed to our disciplined approach to capital allocation that is deploying our resources and capital where we see healthy demand and opportunity whether it would be driven by geography or end market. There are number of long-term opportunities ahead of us including significantly expanding our North American footprint as well as straightening our market leadership in the Asia-Pacific region.

At this time, I’d like to turn the call over the Chuck 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. 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 $66.5 million in the third quarter of fiscal year 2016 compared to $69.4 million for the third quarter of last fiscal year. Leasing revenues were $41.9 million down from $46 million in the prior year’s quarter, and comprised 64% of total non-manufacturing revenues as compared with 70% for the same period last year. Non-manufacturing sales revenues were $23.4 million in the quarter, up 18% from $19.9 million in the third quarter of the prior year.

In our North American leasing operations, revenues for the third quarter of fiscal year 2016 totaled $40.5 million compared to $37.5 million for the year ago period, an increase of 8%. Leasing revenues declined by approximately 6% on a year-over-year basis substantial result of a 44% dropping in the oil and gas sector. However leasing revenues increased from all other sectors by 80% with notable increases in the commercial and construction sectors.

Sales revenues increased by 59% during the quarter, driven by increases in the construction, commercial and industrial sectors. Revenues in our North American manufacturing operations for the third quarter were $1.6 million and included intercompany sales of $400,000 from products sold to our North American leasing operations. This compares to $4.9 million of total sales, including $1.5 million of intercompany sales, during the third quarter of fiscal year 2015.

As Ron mentioned, our manufacturing operations continue to challenged, by reduced demand from our portable liquid containment tanks and the establishment of a new product line.

In our Asia-Pacific leasing operations, revenues for the third quarter of fiscal year 2016 totaled $24.8 million compared with $28.5 million for the third quarter of fiscal year 2015, a decrease of 13%. The decrease in revenues occurred primarily in the oil and gas, transportation and mining sectors, this decrease was partially offset by increases in the building and construction industrial consumer sectors, and was accompanied by an approximate 8% unfavorable foreign exchange translation effect between the periods.

Consolidated adjusted EBITDA was $14.2 million in the third quarter of 2016 compared to $17.1 million in the third quarter of 2015. Adjusted EBITDA margin as a percentage of total revenues was 21% compared to 25% in the prior year’s quarter.

In North America, adjusted EBITDA for our leasing operation was $9.5 million in the third quarter compared with $8.7 million for the year ago quarter. Including these results, was adjusted EBITDA for Lone Star Tank Rental of $2 million and $1.8 million for 2016 and 2015 third quarter periods respectively.

Lone Star, whose business is solely in Texas has generated adjusted EBITDA of approximately $8 million for the first nine months of this fiscal year. The Permian and Eagle Ford basins where Lone Star conducts its business have not been immune to challenges faced in oil and gas sector. However, the Permian basin does continue to receive in from some oil and gas producers. That offers the best economies relative to the other U.S basins.

For our manufacturing operations on a standalone basis, Southern Frac’s adjusted EBITDA was a loss of $692,000 for the quarter as compared to earnings of $417,000 in the third quarter of 2015. As a result of operating losses over the past 12 months, we recorded a goodwill impairment charge of $2.7 million at Southern Frac.

Asia-Pacific’s adjusted EBITDA for the quarter was $6.5 million as compared to $9.1 million in the year ago quarter, down approximately 29%. On a local currency basis, adjusted EBITDA was down 22% from the prior year’s third quarter. Interest expense for the third quarter of 2016 was $4.8 million down from $5.2 million for the third quarter of last year.

The decline was driven by a lower interest rate – lower interest expense at both our Asia-Pacific and North America venues. In the Asia-Pacific, likely higher interest rate between the periods 4.9 versus 4.7 was offset by lower average borrowings and the translation effect of a weaker Australian dollar relative to the U.S. dollar.

In North America, reduced interest expense was a result of a lower weighted average interest rate offset by higher average borrowings on a year-over-year basis. The weighted average interest rate of North America is 4.9% for the third quarter of the current fiscal year versus 5% in the prior year’s quarter.

Net loss attributable to common stockholders in the third quarter of 2016 was $3.3 million versus $1.7 million in the third quarter of 2015. Including third quarter 2016 net loss is the previously mentioned $2.7 million pretax goodwill impairment charge related to our North American manufacturing operations. Both periods include a reduction of $922,000 for the dividends paid on our preferred stock.

For the first nine months of fiscal 2016, we generated free cash flow before fleet activity of $32 million as compared to $25.7 million in prior year. As we continue to focus on maintaining stringent expense controls and managing working capital. As a reminder, we defined free cash flow to be cash from our operating and investing activities, adjusted for changes in non-manufacturing inventory net fleet CapEx and business and real estate transactions and prior to our preferred stock dividends.

For the first nine months of fiscal year 2016, the company invested a net $19.6 million in the lease fleet consisting of $12.7 million in North America and $6.9 million in the Asia-Pacific as compared to $50.7 million in net fleet investment in the year ago period, comprising of $38.4 million in North America and $12.3 million in the Asia-Pacific a substantial decrease between the periods.

Turning to our balance sheet, at March 31, 2016, the company had total debt of $359.4 million and cash and equivalents of $7 million with a net leverage ratio of 5.8 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. Receivables were $39.7 million at March 31, 2016 as compared to $47.6 million at June 30 year end. Days sales outstanding and receivables at March 31 from our leasing operations improved since June 30, 2015 from 40 to 37 days in the Asia-Pacific and from 66 to 45 days in North America.

In March 31, our Asia-Pacific leasing operations had in Australian dollars $32.9 million available to borrow under its $175 million credit facility and our North American leasing operations had $25.8 million available borrow under its $232 million credit facility. Our ongoing focus on maintaining stringent expense controls and managing our working capital, combined with the discretionary nature of our fleet CapEx has enabled us not only to maintain, but increase cash flow between the periods and to expand our geographic footprint 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.

Question-and-Answer Session


The floor is now open for questions. [Operator Instructions] Your first question comes from the line of Scott Schneeberger of Oppenheimer.

Scott Schneeberger

Thanks, good morning.

Charles Barrantes

Good morning, Scott.

Scott Schneeberger

Hi guys, could we start off on Pac-Van, sounds like that’s moving along fairly nicely. Could you speak to the end markets that are driving demand what you see kind of on a forward outlook and then transition that please over to rental rates and in the conditions there, the environment there. Thank you.

Ronald Valenta

Hi good morning, Scott. This is Ron. Yes, so we’re seeing construction and commercial side some real strengthen and in positives we’re seeing normal rate increases. So low single-digits, but the core business again which is which other containers are dealing very, very well in all fronts, but those are the two sectors where we’re seeing the most positive activity and is pretty much across the board.

Scott Schneeberger

Hi, Thanks. And then switching over to Lone Star, just obviously still a challenging environment. Could you speak Ron, I know you changed up some pricing concept a few quarters ago, and I’m just curious what the relationship is with customers now. How is the pricing environment and how you’re working to that? Thank you.

Ronald Valenta

Yes, it looks, it feels like pricing has stabilized on a volume side, it feels like every time we take a step forward with someone – someone else drops off. So from a volume standpoint we’re pretty much flush and rates have stabilized. So I think the group we’re still very profitable there for the volume that we do have even though it’s a fraction what we used to have, we continue to where others haven’t. We continue to invest, not only in our people but in our safety and our service side which we think long-term will bode very well for us. So we’re just sort of waiting and seeing, we are adding more customers although they have not done volume as yet. But I think we’re – we’re in a very good position long-term to capture things whenever the recovery really starts picking up. But again right now, our volumes are pretty flat and we haven’t had any material net increases.

Scott Schneeberger

Thanks, and then still jumping around here. Going to Asia could you talk about Titan energy services, what – where you stand there maybe with some of the troubled business how you are progressing? And what the environment looks like natural resources there for you right now?

Ronald Valenta

So we – our exposure there is very small now we did have one significant account which everyone is aware of which is Titan, we become the secured lender in that transaction. So as those assets are being sold we’ll recognize that in the period in which it is sold, we had not book to any ongoing receivables or revenue there. So anything on the sales will pretty much drop to the bottom line. So we think we’re in a very good position as relates to that. One customer which was the lion's share of our exposure to that sector.

So other than again the mining and the resource side, the rest of the business is doing well, the year-over-year variance is really made up of again the resources play and then the weak Australian dollar everything else is going well and year-over-year they are delevering as we don’t have as many growth prospects there as we do in North America. So I think its pretty much as same as last quarter other than we would anticipate seeing some positive activity on the Titan front as those assets are being sold.

Scott Schneeberger

Thanks. And then just one last one broadly. You gave some high level information with regard to the acquisitions in the quarter and the new quarter. Could you speak a little bit more in depth them, roughly how much was spent, I don’t think the cues no yet. And what’s your – strategically what you are getting for those? Thanks.

Charles Barrantes

Yes. So, Scott, this is Chuck. So through the end of March we’ve spend about $17.8 million on acquisitions to-date, three in North America, two in the Asia-Pacific and then short after the quarter, we acquired a container based company in Boston for just under $5 million. So total acquisition investment will little over $22 million and we’ve been averaging about a multiple of six times overall weighted average for the acquisitions. They’re all container based, they’re all resulted in as Ron mentioned some additional footprints in Seattle, Boston, Springfield and in Houston as well as some tuck-in acquisitions.

Scott Schneeberger

Great, thanks for that color guys.


[Operator Instructions] There are no further questions at this time. I’d like 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. I would like to thank all of you for joining our call today. We continue to appreciate your interest in General Finance Corp and we look forward to speaking to you next quarter. Thank you.


Thank you. This concludes your conference today. You may now disconnect.

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