General Finance Corp (NASDAQ:GFN) Q1 2019 Earnings Conference Call November 6, 2018 11:30 AM ET
Christopher Wilson - General Counsel, VP & Secretary
Jody Miller - President, CEO & Director
Charles Barrantes - EVP & CFO
Daniel Hultberg - Oppenheimer
Welcome to the General Finance Corporation's Earnings Conference Call for the First Quarter Ended September 30, 2018. Hosting the call today for the company's corporate offices in Pasadena, California are Mr. Jody Miller, President and Chief Executive Officer; and Mr. Charles Barrantes, Executive Vice President and Chief Financial Officer.
Today's call is being recorded and will be available for replay beginning at 2:30 p.m. Eastern Time. [Operator Instructions]. Thank you. 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.
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; the availability of sufficiently qualified employees to staff our businesses; changes in the Australian, New Zealand or Canadian dollar relative to the U.S. dollar; regulatory changes; customer defaults or insolvencies; litigation; acquisition of businesses that do not perform as we expect or that are difficult for us to integrate or control; our ability to secure adequate levels of products and customer demand; our ability to procure adequate supplies for our manufacturing operations; labor disruptions; adverse resolution of any contract or other disputes of customers; declines in demand for our products and services from key industries, such as the Australian construction and transportation industries or the U.S. construction and oil and gas industries; or a write-off of all or a part of our goodwill and intangible assets. These risks and uncertainties could cause actual outcomes or results to differ materially from those described in our forward-looking statements. We believe that the expectations represented by our forward-looking statements are reasonable, but there can be no assurance that such expectations will prove to be correct.
For more details regarding these risks, please see the Risk Factors section of our periodic reports filed with the SEC and posted to our website at www.generalfinance.com. These forward-looking statements represent the judgment of the company at this time, and General Finance Corporation disclaims any intent or obligation to update forward-looking statements.
In this conference call, we will also discuss certain non-U.S. GAAP financial measures such as adjusted EBITDA. A reconciliation of how we define and arrive at adjusted EBITDA is in our earnings release and will be included in our quarterly report on Form 10-Q.
And now, I'd like to turn the call over to Jody Miller, President and Chief Executive Officer. Jody, please go ahead.
Thank you, Chris. Good morning, and we appreciate you joining us today for our first quarter fiscal year 2019 conference call. I will begin with a brief discussion of our operations, and then our CFO, Chuck Barrantes, will provide a financial overview and our outlook for the remainder of the fiscal year. Following his remarks, we will open the call up for questions.
We are extremely pleased with our very strong start to the year. The solid momentum that we experienced in fiscal 2018 has continued into our first quarter where we delivered our highest quarterly level of revenue in the company's history, our highest quarterly level of adjusted EBITDA in almost 4 years.
Our North American leasing operations continue to see healthy demand in the vast majority of its end markets, with total revenues in the first quarter increasing by 42% year-over-year, driven by both higher sales and leasing revenues. Sales revenues nearly doubled in the quarter, mostly due to 4 large sales, which contribute just over $7 million of the $10.6 million year-over-year increase.
Leasing revenues increased by 25%, driven by overall strength in unit growth, higher fleet utilization and higher average rates across virtually all of our product lines during the quarter.
Our core portable storage business continues to perform at the high-end of our expectations, driven by consistent execution and broad-based demand across the majority of its end markets. Demand for our ground level office and storage containers were particularly strong during the quarter as these two product lines generated year-over-year rental revenue increases of 33% and 27%, respectively.
Pac-Van continues to enhance its brand in both new and existing markets and, once again, posted a world-class Net Promoter Score of 85 for the quarter and in the last 12 months.
In addition to organic growth, we remain focused on building the Pac-Van brand throughout North America by geographically expanding our portable storage container business, particularly, into adjacent markets. During the quarter, we completed two acquisitions, one that provided us strong positions in both Bakersfield, California and Miami, Florida and the other being a new entry into the Baltimore-D.C. market. In our current quarter, we also closed an acquisition in New Hampshire, adding to our presence in the New England region. We are now serving just over half of the top 100 MSAs in the U.S., and our acquisition pipeline continues to be healthy.
Our liquid containment business in North America once again delivered a very strong quarter, generating leasing revenues and adjusted EBITDA growth compared to fourth quarter and fiscal year 2018 and on a year-over-year basis. Oil and gas production activity in the Permian Basin of Texas remains healthy, enabling us to achieve higher sequential average fleet utilization for the ninth consecutive quarter and higher average monthly lease rates for the eighth quarter in a row.
Our North American manufacturing operations delivered its sixth consecutive quarter of sequential growth in sales to external customers and its fourth quarter in a row of positive stand-alone adjusted EBITDA. This ongoing improvement is due to an increase in demand for specialty tanks and other steel-related products. This outlook continues to be positive as we have healthy sales pipeline and an order backlog.
Now turning to our Asia Pacific region. Our Asia Pacific region continues its positive momentum, posting first quarter growth in both sales and leasing revenues on a local-currency basis, resulting in its fifth consecutive quarter of year-over-year growth in adjusted EBITDA. The increase in leasing revenue was spread across a majority of its end markets with noticeable increases in mining, transportation, consumer, industrial and construction sectors. On a local-currency basis, leasing revenues increased by 9%, marking its eighth out of the last 9 quarters where Royal Wolf has delivered year-over-year growth in leasing revenues. The growth is driven by increase in average units on lease, improved fleet utilization and higher average lease rates. Our team remains focused building upon its leading market position across Asia Pacific region through a combination of organic growth, greenfield openings and, to the extent they become available, accretive acquisitions.
During the quarter, we successfully completed the acquisition of a portable storage container business in New Zealand, which operates in 8 locations across the country as we mentioned on our last call.
To conclude, our continued strong results provide us optimism about the future. We have both organic growth and expansion opportunities in North America as well as ability to strengthen our market leadership in the Asia Pacific region. As always, we remain disciplined in our capital allocation, deploying our capital where we see healthy demand with an ongoing focus on portable storage containers and office container product lines. Our first quarter results were strong, and we have laid the groundwork for another year of solid financial results.
I'll now turn the call over to Chuck Barrantes for his financial review and our outlook for the remainder of the year.
Thanks, Jody. We will be filing our annual report on Form 10-Q shortly, at which time this document will be available on both the SEC's EDGAR filing systems and on our website. And I encourage investors and other interesting parties to read it as it contains substantial amount of information about our company, some of which we will discuss today. Turning to our first quarter financial results. Total revenues were $97.8 million in the first quarter of fiscal year 2019 compared to $76.9 million for the first quarter of fiscal year 2018, an increase of 27%. Leasing revenues were $58.3 million, an increase of 18% over the prior year's quarter and comprised 62% of total nonmanufacturing revenues for the quarter versus 66% in the first quarter of fiscal year 2018. Nonmanufacturing sales revenues were $35.7 million in the quarter, an increase of 41% over the first quarter of the prior year.
In our North American leasing operations, revenues for the first quarter totaled $65.2 million compared with $46 million for the year-ago period, an increase of 42%. The increase was across most sectors, but primarily in the industrial oil and gas, commercial, construction and education sectors.
Revenues in our North American manufacturing operations for the quarter were $4.3 million, including intercompany sales of $480,000 to our North American leasing operations. This compares to $3.1 million of total sales for the year-ago period, including intercompany sales of $1.2 million. As Jody mentioned, our manufacturing operations saw increased demand for specialty tanks and other steel-related products, particularly specialty tanks and chassis.
In our Asia Pacific leasing operations, revenues for the first quarter totaled $28.8 million compared to $29 million for the first quarter of fiscal year 2018, a decrease of less than 1%. However, on a local-currency basis, total revenues increased by 7%. Revenues increased in the transportation, utilities, mining and industrial sectors and were offset by decreases in the construction and retail sectors as well as a negative foreign exchange translation effect between the periods. Leasing revenues increased by approximately 1% on a year-over-year basis and 9% on a local-currency basis, driven primarily by increases in the mining, transportation and consumer sectors.
Consolidated adjusted EBITDA was $27 million in the quarter compared to $17.6 million in the prior year's quarter, an increase of 53%. And adjusted EBITDA margin as a percentage of total revenues was 28%, up from 23% in the first quarter of fiscal year 2018. This was the seventh consecutive quarter of year-over-year adjusted EBITDA growth. In North America, adjusted EBITDA for our leasing operations was $20.7 million in the first quarter compared to $12.4 million for the year-ago quarter, an increase of 67%. Adjusted EBITDA at Pac-Van was $13.5 million, up 42% year-over-year; and Lone Star's adjusted EBITDA was $7.2 million, up 148% from the prior year.
For our manufacturing operations on a stand-alone basis, adjusted EBITDA was approximately $600,000 for the quarter compared to last year's first quarter adjusted EBITDA loss of $375,000, an almost $1 million swing. Asia Pacific's adjusted EBITDA for the quarter was $6.8 million compared to $6.6 million in the year-ago period, an increase of 3%. On a local-currency basis, adjusted EBITDA increased by 11% from prior year's first quarter.
Interest expense for the first quarter of 2019 was $8.6 million, up $2.8 million from $5.8 million for the first quarter of last year. The increase was primarily driven by higher interest expense in the Asia Pacific area due to higher average borrowings, a higher weighted average interest rate of 10.6% compared to 4.6% in the year ago first quarter and was partially offset by weaker Australian dollar between the periods. Net loss attributable to common stockholders in the first quarter of 2019 was $168,000 or $0.01 per diluted share. This compares to a net loss of $965,000 or $0.04 per diluted share in the year-ago quarter. Included in this year's first quarter net loss is a noncash charge of $3.4 million for the change in valuation and the stand-alone bifurcated derivatives in our outstanding convertible notes in the Asia Pacific area. Excluding this noncash charge, the first quarter fiscal 2019 would have had net income attributable to common shareholders of approximately $3.3 million. Both periods include $922,000 for the dividends paid on our preferred stock.
For the first quarter of fiscal year 2019, we generated free cash flow before fleet activity of $18.4 million compared to $9.9 million in the prior year quarter, an increase of 86%. Turning to our balance sheet. At September 30, the company had a net leverage ratio of 4.1x for the trailing 12 months, which compares very favorable with a net leverage ratio of 4.6x at June 30. The reduction in leverage is due to a combination of factors, including the forced conversion of the convertible note at Royal Wolf and the meaningfully better operating results.
Turning to our company-wide outlook for the remainder of fiscal year 2019. Based on our excellent operating results in the first quarter and generally positive outlook, we are increasing our guidance for fiscal year 2019. Assuming the exchange rate for the Australian dollar versus the U.S. dollar averages $0.71 during the rest of the fiscal year, we now expect the consolidated revenues for fiscal year 2019 will be in the range of $365 million to $385 million, and that consolidated adjusted EBITDA will increase between 14% and 20% in fiscal year 2019 for fiscal year 2018. This outlook does not take into account the impact of any additional acquisitions that may occur for the remainder of the fiscal year.
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 Instructions]. Your first question comes from Scott Schneeberger with Oppenheimer.
It's Daniel filling in for Scott. Good quarter. Can we talk a little bit about the outlook across the end market's impact then? I'm curious on the visibility from here. And if you can comment also on what you see in the -- as far as retail and how the holiday season is shaping up?
Sure. Thanks, Daniel. This is Jody. I think, our outlook is very consistent and solid as far as we can foresee. Construction continues to be very solid. It's going to be a good retail season. We're going to be back to kind of our -- we were off a little bit of last year and looks to be back to the norm or a little bit up this year. And in our commercial side, hotel remodels, remodels in general, those type of things remain to be very solid. So as far as we can foresee, the Pac-Van side is very stable and we should continue to get the same momentum we had then.
Got it. How is pricing looking on the Pac-Van side? If you can talk about the opportunity there and the current environment?
Yes. So we've been able to raise prices for several quarters and this quarter was very similar. We had on the containerized product, which is our mainline in the office, the GLO, and storage containers was about 3.5% blended, which is very solid and consistent, so we see that continuing.
Great. Can you switch gears to Lone Star. I mean, obviously, good momentum right here. How do you see -- how would you characterize visibility if we look out the couple of quarters into calendar '19 both on the volume and the pricing side?
Yes. I think, the best way we look at it is just kind of looking in the Permian. We're extremely strong player in the Permian, a premier player in the Permian, and we have kind of our top shelf list of customers. And they do this kind of a 6-month outlook and everything kind of continues to be very stable to pipelines. Some of the new pipelines will be coming onboard in the next 6 to 12 months, which has really been the only concern on getting product out. But from everything we are seeing, no major changes. We got a couple of customers slowing down a bit here at the end of the year. Just budget reasons and others, so they are kind of ramping up to spend budget money before the end of the year. So it's kind of offset and everything that we had visibility on seems to be pretty stable.
Got it. Final one from me. Capital allocation, can we talk about that a little bit? How we think about that for the next couple of quarters?
Yes. I think, we'll be consistent on the tank side. If there's longer-term opportunities, we would look at that, but very cautiously. We're putting all of our -- basically all of our capital into containerized product. The GLO, the ground levels are growing. As I mentioned on the call, 33% and 27% on the containerized product growth. So we're definitely feeding those lines and have opportunity. And we continue to look at acquisitions that make sense. We're very active there and just like we have been and very consistent, don't see that changing as well.
[Operator Instructions]. And we do have a question from a Private Investor, Luis Hernandez [ph].
Great quarter. Revised guidance, pretty high. It's good news. And well, my only question is regarding the Asia Pacific. Do you guys see growth in EBITDA there this year? Or do you guys see that this year is going to be roughly similar as last year?
This is Jody. I think, the biggest challenge there, as you know, we had the huge [indiscernible] sale last year, which really helped us last year and will be hard to comp year-over-year. We've got solid leasing growth, which I think is the most important. And we've got a little bit of follow-on sale this year and some other opportunities. There's talks about the energy sector coming back a little bit, which would put our camp gear to work, which would be a huge positive. But overall, we're cautiously optimistic that we can stay pretty similar, overcoming the [indiscernible] sale, but we're not going to get the same growth just because of that one-off sale in the current quarter. But overall, I think they're doing a good job executing their plan. Leasing continues to grow and that's where we're going to focus on.
Okay, great. And then on Lone Star. Assuming the plans for the industry to expand the pipeline capacity and all that, how will that -- I mean, I guess, it would affect this positively, but I just want to know if you have an idea on how positive it would affect us?
Yes. I mean, I think that everybody knows the Permian is the most economical place to pull crude. So the pipeline has been the only slowdown as far as producing more of the Permian and less out of the areas. So that's why we're really focused on there. Eagle Ford being the next attractive, which we have a presence there as well. But I think the pipeline will speed up the drilling and fracking process if they have more capacity to get rid of the oil. I don't think it's going to be a huge step-up, but I think it'll be a slow steady positive outcome for the Permian. And again, we're setting in a great position there with a good customer base that can handle it. So the other thing on the Lone Star side, with steel prices and tank prices being so much higher now, not a lot of folks are building new tanks to put into the fleet, and as tanks get more scarce, then that should continue to help our pricing. We've had extremely good trends on the pricing on the tank side, and I would see that being very positive in the future as things progress and get busier as well.
Great, great. And how far are we still from the 2014 -- 2013 the peak rates on the tanks right now?
Yes. So the peak-peak blended, and this is on all fleet, it was around 1,500 per tank. And we're just over 1,000 right now, which is about 65%. So one might say there's good upside still to come, whether it ever gets back so that pricing. But I will tell you that we've had, as we reported on the call, continued positive pricing on the tanks and we're going to continue with that strategy.
And there are no further questions at this time.
Thank you, Operator. I'd like to thank you for joining the call today. We appreciate your continued interest in General Finance Corporation and look forward to speaking to you next quarter.
Thank you. This does conclude today's conference call. You may now disconnect.