General Finance Corporation (GFN) CEO Jody Miller on Q1 2021 Results - Earnings Call Transcript
General Finance Corporation (NASDAQ:GFN) Q1 2021 Earnings Conference Call November 9, 2020 10:00 AM ET
Company Participants
Chris Wilson - Vice President, General Counsel and Secretary
Jody Miller - President and Chief Executive Officer
Charles Barrantes - Executive Vice President and Chief Financial Officer
Conference Call Participants
Brent Thielman - D.A. Davidson
Scott Schneeberger - Oppenheimer
Luis Fernandez - Private Investor
Operator
Welcome to General Finance Corporation’s Earnings Conference Call for its First Fiscal Quarter ending September 30, 2020. Hosting the call today 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] 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; 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 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 construction and transportation industries or the U.S. construction and oil and gas industries; the disruption of operations from catastrophic are extraordinary events, including viral pandemics such as the COVID-19 coronavirus; 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 turn the call over to Jody Miller, President and Chief Executive Officer. Jody, please go ahead.
Jody Miller
Thank you, Chris. Good morning and we appreciate you joining us today for our first quarter fiscal year 2021 conference call. I will begin with a brief discussion of our operations then our CFO, Chuck Barrantes, will provide a financial overview and our outlook for the remainder of the fiscal year. Following his remarks, we’ll open the call up for questions.
Before I turn to our results, I want to provide an update on how our company continues to manage through the ongoing global pandemic. First, I want to reiterate that physical health and safety of our employees and our customers remain our foremost concern. As an essential business, our locations remained open operating under flexible work practices while maintaining the same level of safety and service our customers expect. I would like to personally thank all of our dedicated employees for continuing to do what it takes to support each other, our customers and our communities during these challenging times.
Now turning to an overview of our results, we expect that the COVID-19 pandemic would be challenging and negatively impact our first quarter results. Despite these challenges, our results exceeded our expectations. Our North American leasing operations at Pac-Van remained solid with a 5% increase in rental revenue of our core non-liquid containment products, and total revenue was down only 2% year-over-year. Overall, leasing demand was mixed with year-over-year growth in some sectors but modest declines in others. From a product perspective, our ground level offices continue to see the highest demand across all core product offerings experiencing year-over-year increases in both pricing and volume.
We expect our product sales business held up relatively well in the quarter, declining less than 1% year-over-year. Some segments have softened somewhat as expected with the uncertain economic environment, but is offset by some COVID-19-related sales. Going forward, we will continue to monitor these trends that impact our business, such as nonresidential construction starts and special events. We are hopeful many of these projects and events are delayed and not canceled entirely.
Our liquid containment business, which primarily consists of Lone Star, is experiencing reduced customer activity with continued uncertainty in the oil and gas market aggravated by the COVID-19 pandemic. During the quarter, our customers’ production levels remained low, and we experienced continued pressure in both utilization and pricing. We have implemented measures to control costs without sacrificing our service levels or safety. As I mentioned before, this strategy served us well in the last downturn as we emerged from that period with more business from existing and new customers. We are hopeful the conditions will improve. We are prepared for these ongoing challenges in this sector and expect to be well positioned to serve our primarily blue-chip customers when the market normalizes. Our North American manufacturing operations posted lower results for the quarter, as expected, due to the reduced sales of liquid containment tanks and specialty tanks, offset somewhat by ongoing demand for GLO modifications primarily from Pac-Van’s leasing operations.
Now turning to the Asia-Pacific region, the year-over-year growth in revenues and adjusted EBITDA from Royal Wolf was driven by a number of factors: first, the economies in both Australia and New Zealand haven’t hit as hard by the pandemic as the U.S.; second, the sales were modestly higher year-over-year, mainly due to a follow-on business-related sale and utility sector. Additionally, Royal Wolf is virtually no exposure to the energy sector; and finally, the Australian dollar strengthened against the U.S. dollar between periods providing a lift to reported revenue and adjusted EBITDA.
Our Royal Wolf team remains focused on helping its customers get through the disruption caused by the pandemic and returning the business as normal. Both the Australian and New Zealand economies appear to be recovering as new COVID cases in both countries are very low and expected to remain that way in the near term. In general, the Asia economies, particularly in China, are experiencing renewed growth across the region, which should also benefit both Australia and New Zealand economies going forward.
To conclude, our fiscal year 2021 will likely remain challenging because of the ongoing disruption caused by COVID-19, particularly in the oil and gas sector. We continue to monitor the situation across all of our business units and remain focused on preserving our liquidity and minimizing the impact of our profitability while assuring the safety of our employees. While we’re unable to predict what the ultimate severity or duration of the economic fallout caused by the pandemic, our experienced management team has successfully navigated through challenging times in the past. Our resilient business model, anchored by containerized fleet with long economic lives and very low maintenance requirements provide us with the ability to enhance free cash flow and reduce debt, which we did during the first quarter. We will continue to manage our CapEx and acquisition investment prudently, where we have the high degree of discretion when making capital allocation decisions. We are also fortunate to be in the strongest financial and liquidity position we’ve ever had in the company and well positioned to persevere and eventually emerge from this crisis.
I will now turn the call over to Chuck Barrantes for his financial review and our outlook for the remainder of the fiscal year.
Charles Barrantes
Thank you, Jody. 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 a substantial amount of information about our company, some of which we will discuss today.
Now turning to our first quarter financial results, total revenues were $82.4 million in the first quarter of fiscal year 2021 compared to $89.8 million for the first quarter of the prior year. Leasing revenues were $52.3 million, down from $58.9 million and comprise 64% of total non-manufacturing revenues for the quarter down from 67% in the prior year. Leasing revenues, excluding the oil and gas sector, increased by approximately 1% in North America and by 3% in the Asia-Pacific area. Non-manufacturing sales revenues were $28.8 million in the quarter, down from $29.7 million in the prior year first quarter.
In our North American leasing operations, total revenues for the first quarter totaled $53.6 million, a decrease of approximately 12%. Leasing revenues decreased by 16% and was primarily in the oil and gas sector, substantially all attributable Lone Star as well as the services sector. This decrease was partially offset by increases in the construction and industrial sectors. Sales revenues were comparable between the periods. In our Asia-Pacific leasing operations, revenues for the first quarter totaled $28.5 million, an increase of 5% from the prior year. The Australian dollar strengthened against the U.S. dollar between the periods. So, on a local currency basis, total revenues increased by approximately 1%. A slight increase in revenues in local dollars was driven primarily by increased revenues in the utility sector and was partially offset by decreases in the government, education and industrial sectors. In the Asia-Pacific, leasing revenues were down slightly in local currency due to a modest decline in average monthly units on lease, somewhat offset by higher average lease rates.
Revenues at our North American manufacturing operations for the first quarter were $1.6 million and included intercompany sales of $1.3 million from products sold to our North American leasing operations. This compares to $3.5 million of total sales, including intercompany sales of $1.3 million during the first quarter of the prior year. Our manufacturing operations experienced lower demand from external customers for liquid containment and specialty tanks.
Consolidated adjusted EBITDA was $21.1 million in the first quarter of 2021 compared to $25.1 million in the prior year’s quarter. And adjusted EBITDA margin as a percentage of total revenues was 26% in the quarter, down from 28% in the first quarter of 2020. In North America, adjusted EBITDA for our leasing operations was approximately $15 million for the first quarter compared to $19.4 million for the year ago quarter, a decrease of 23%. Adjusted EBITDA at Pac-Van decreased by 8% to $14.7 million, and adjusted EBITDA at Lone Star decreased significantly to $284,000 from $3.5 million in the year ago quarter. For our manufacturing operations, on a stand-alone basis, adjusted EBITDA was a slight loss of $106,000 for the quarter compared to last year’s first quarter adjusted EBITDA of $286,000. Asia-Pacific’s adjusted EBITDA for the quarter was $7.3 million compared to $6.8 million in the year ago quarter, an increase of approximately 8%. On a local currency basis, adjusted EBITDA increased by 3%.
Interest expense for the first quarter of 2021 was $5.7 million, down from $7.3 million last year. The significant decrease of 22% was comprised of a reduction of $1.3 million in North America and approximately $300,000 in the Asia-Pacific. In North America, the lower interest rate was due to both lower average borrowings and a lower weighted average interest rate of 4.6% versus 6.1% in the year ago period. In the Asia-Pacific area, the lower interest expense was primarily due to lower average borrowings and a lower weighted average interest rate of 7.2% versus 7.9% in the prior year period. This was partially offset by a stronger Australian dollar between the periods.
Net income attributable to common shareholders in the first quarter was $3.2 million or $0.10 per diluted share compared to $5 million or $0.16 per diluted share in the year ago quarter. Including these results for both periods was the effect of the changes in the valuation of stand-alone bifurcated derivatives and $922,000 for the dividends paid on our preferred stock. During the first quarter, the company generated cash from operating activities of $10.7 million as compared to $13.6 million for the year ago quarter.
Now turning to our balance sheet, at September 30, the company had a net leverage of 3.8x for the trailing 12 months, which compares with a 3.7x net leverage at June 30, and our better-than-expected first quarter results and our management of working capital and fleet investment generated free cash flow and debt reduction during the quarter. In addition, we are very pleased with the recent successful completion of a $60 million public offering of 7.875% senior unsecured notes that mature on October 31, 2025. In connection with the offering, we have granted the underwriters an option for 30 days to purchase up to an additional $9 million to cover over allotments, if any. The net proceeds from the offering will be used to redeem a portion of our outstanding 8.125% unsecured senior notes that mature on July 31, 2021. We continue to evaluate alternatives to refinance remaining 8.125% senior notes with the goal of further lowering our overall cost of financing. Over the past couple of years, we have reduced our cost of capital and enhanced our financing flexibility. And as a result, our financial position and liquidity are stronger than ever, as Jody said. Furthermore, we expect to continue to generate free cash flow for the full fiscal year.
Turning to our company-wide outlook for the remainder of fiscal year 2021, it is difficult to predict the extent to which our results of operations, liquidity and financial condition will ultimately be impacted by the COVID-19 pandemic in fiscal year 2021. However, based on our first quarter results and depending on the conditions in the oil and gas sector in Texas and the translation effect of the Australian dollar to the U.S. dollar, we now estimate that consolidated revenues for fiscal year 2021 will be in the range of $310 million to $325 million, and consolidated adjusted EBITDA is expected to be 15% to 20% lower in FY ‘21 than fiscal year 2020. This improved outlook does not take into account the impact of any acquisitions that may occur during fiscal year 2021.
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
Operator
[Operator Instructions] The first question will come from the line of Brent Thielman with D.A. Davidson.
Brent Thielman
Great, thank you. Good morning.
Jody Miller
Good morning.
Charles Barrantes
Good morning.
Brent Thielman
Jody or Chuck, just wondering if you could walk through some of the moving pieces within Pac-Van and sort of modest year-on-year pressure within EBITDA this period, just be curious there?
Jody Miller
Yes. So Pac-Van, obviously, is performing exceptionally well. If you look at just the containerized fleet alone, we’re up 6% year-over-year. This quarter looks very solid. Retail season is strong. Our core products within the containerized fleet are record highs as well. So we feel very, very fortunate and pleased with how things are trending on the Pac-Van side. Obviously, the tank side is an area, which isn’t very large with their division, but the tank side is where we’re still struggling and that will continue until energy kind of bounces back.
Brent Thielman
Okay. But any positive trends or world trends you’re seeing within the Pac-Van piece of the business? I think you talked about some softness in construction and services sectors. Have you seen any possible inflection points there?
Jody Miller
Yes. To be honest, it’s really been offset by commercial, retail and some other areas. So I think part of that demand is COVID-related. Either people need extra storage space or temporary offices, testing facilities, those type of things have really offset the declines that we had on the construction side. We’re also extremely pleased with our rates. Our rates have held up very nicely, getting nice increases, the ground levels being the highest, but really across the board doing well on the rate trends as well. So feel very fortunate.
Charles Barrantes
Yes, basically all of the rates – the lease rates on our products have increased, obviously, with the exception of the liquid containment tanks.
Brent Thielman
Okay. That’s great. And then on Lone Star, I mean you’re still obviously slightly above EBITDA here. Is that still the expectation for the business in terms of guidance for the year that you can be somewhere just above cash breakeven?
Charles Barrantes
We’re hoping for better than that, to be honest. It’s a little uncertain still, but there seems to be a little bit more chatter on the completion side. I don’t know that drilling is going to pick up a lot. But again, drilling is not a huge part of our portfolio. We really concentrate on the fracking and completion and production side. So we’re hoping that some of that activity does pick up going into the first calendar quarter, which is our next fiscal quarter. So we’re still optimistic there’ll be a little bit more activity, but it really is unknown at this point. But we’re – we took measures to cut costs, and we’re in a good position to weather the storm.
Brent Thielman
Okay, thank you. Very good. I will pass it on.
Jody Miller
Thank you.
Operator
The next question will come from the line of Scott Schneeberger with Oppenheimer.
Scott Schneeberger
Thank you very much. Good morning guys. On Pac-Van, just curious with what you’re seeing with ground level offices, is demand still as strong as it had been? And if you can just follow that with any commentary you have on – with regard to your modular assets and just business environment over the last few months?
Jody Miller
Yes. So again, containerized fleet is definitely the strong point with almost 6% organic growth year-over-year. And again, record-setting numbers of units on rent. The mobile and modular has been very solid, stable, again, really happy with the rate increases that we’ve got on the mobile modular side year-over-year and quarter-over-quarter, and demand seems to be pretty stable. I think the construction start business decline has been offset by COVID-related and other areas where the units have been utilized in areas that maybe they weren’t in the past. But right now, we just keep looking at it very optimistically that we’ve made it this far and doing so well in the core business that we think the general market is going to continue. Again, we have got record high number of units on rent. So, very resilient model for sure.
Scott Schneeberger
Thanks. And specifically on the ground level offices, are you getting above-average pricing there versus the other assets and how is that demand environment holding up?
Jody Miller
Yes. It’s – again, it’s our highest-demand product, definitely, really nice pricing increases year-over-year. And we continue to – that’s where really any capital growth that we are spending right now is going in the GLOs. And again, I think where we’ve been maybe less units going out to subcontractors and things on new construction starts has been more than offset by new applications and new facility and anywhere anybody needs temporary offices, climate control, that type of thing, these things can be set up so quickly and conveniently, that it’s just a great product and very high demand. So we are optimistic that, that product is just going to continue on the same trends as it has been and looks very optimistic.
Scott Schneeberger
And then could you just speak to kind of October, November trends still in Pac-Van with regard to what you are seeing with seasonal rentals? And then excluding seasonal rentals from the conversation, how it’s trended into this fiscal second quarter versus what you saw in the first?
Jody Miller
Yes. No. Again, we are very optimistic. Retail looks to be around record highs of last year. And then you throw on top of that our core has stayed very, very strong and grown. So as I mentioned earlier, we are at a record number of units on rent currently. So, one may not have been that optimistic a few months ago. It just kind of goes back to the resiliency of our product and a low-cost solution for so many areas, whether it be storage needs or temporary office or facility. So we are optimistic in the current quarter, retail is going to be strong. Our organic core fleet is strong. Again, really, the energy oil and gas side is the only area of weakness right now, and it seems to be stable, and we are optimistic it will come back.
Scott Schneeberger
And with regards to the full year guidance, increased that and good to see. What are your main concern areas of – I saw what you listed in the press release, but if you could delve a little deeper into what would make you most concerned at the low end? And then conversely, what you think would be triggers that could put you at or above behind it?
Jody Miller
Yes. So again, construction starts are probably the biggest question mark. It seems like things have stabilized there. We have weathered this whole summer going into fall with a lot less start. So we are very optimistic that our products are being used in other areas to kind of offset. But I would say that is probably the number one question mark of what next year – calendar year brings in our next couple of quarters, physical. So construction starts will be something we will watch very closely. Events is not a huge part of our business, but when all that business comes back, that’s a big plus. So again, we feel very fortunate that there’s virtually been hardly any event business the last six months and to have our numbers where we are and again, record number of units on rent, we feel very fortunate looking ahead. And then the last thing, really, the only other big question mark is just what oil and gas is going to do and how soon it comes back. So I think those are really the big-ticket items. Everything else seems to be very stable and moving in the right direction. And again, we are very fortunate to have the diversity of customers that we have and all the different applications of our products.
Scott Schneeberger
Great. And then last one for me, just curious your prioritization of debt reduction versus perhaps M&A or other uses of capital just looking out over the fiscal year? Thanks.
Charles Barrantes
Yes. Well, Scott, this is Chuck. So our debt reduction is really effectively a function of how we look at investment opportunities, whether it’s acquisition or fleet. As it stands right now, if you stay at this particular situation, we are going to have less investment in fleet. As a matter of fact, you will see we are going to be filing our Q later today. We actually had a negative CapEx. So that would obviously entail that the free cash flow would be used to debt reduction. So debt reduction is a priority, if we do not see opportunity in areas or have any types of opportunities in acquisitions.
Scott Schneeberger
Thanks. Appreciate that. I will turn it back over.
Charles Barrantes
Thanks.
Operator
Our next question comes from the line of Luis Fernandez, Private Investor.
Luis Fernandez
Yes, hello. Good morning everyone.
Charles Barrantes
Good morning.
Jody Miller
Good morning.
Luis Fernandez
Okay. Just following up on the capital allocation, Chuck, kind of like how is the environment on M&A? How demanding are you guys on either do M&A or for debt reduction? Like, I guess the space, it’s a little tough. So I just wanted to see where your thresholds were and how are you managing that?
Jody Miller
Yes. Thanks, Luis. This is Jody. Yes. I think we always look at it cautiously. Fortunate for us, as I mentioned earlier in the remarks, we are at a record high as far as liquidity. If there is M&A activity out there that fits our portfolio very well and we feel like is a great investment, we will obviously look at that. We have got plenty of availability and capital. But at the same time, we’re very cautious and prudent with our investments. So as Chuck said, last quarter, we had negative CapEx. We turned into a cash cow, as you know, when we are not investing going forward. So from a balance sheet standpoint, we’re in great shape. We will continue to look at M&A opportunities if they come to us. And if it’s a right fit and the right investment, obviously, we’d look at that, but we’re conservative in nature now until we get a little bit of an outlook. But again, the best part of that is we’re in the best financial and liquidity position we’ve ever been as a company, so in great shape.
Luis Fernandez
Okay. And from a capital structure point of view, you just did the refinancing of the notes, and how about the preferreds? What’s the kind of like midterm vision on those, just wanted to see that?
Charles Barrantes
Yes. So Luis, this is Chuck. So on the preferred stock, the company, in general, feels that it’s a good flexible instrument to have is equity. With the dividends, it’s obviously $40 billion of our total overall capital structure is not particularly significant. So as of this point, we are viewing the preferred stock to stay as is. We like that flexibility. That’s not to say that it would not change our view down the road as conditions change. But for right now, our first priority was to refinance the senior notes. And we are going to end up doing that. We are substantially through that already. And we have reduced our overall cost of capital. So at the moment, we are going to focus in on doing what we need under the current situation, look at investments if they are opportunistic. And if not, we will reduce debt. But the preferred stock will probably stay as is for a period of time.
Luis Fernandez
Right. And then just going back to the free cash flow you said you are about around $11 million for the quarter?
Charles Barrantes
No, that’s the cash flow from operating activities. That’s not necessarily the free cash flow.
Luis Fernandez
Oh, okay. Yes, because I see that you reduced debt by around $5 million. And since you are saying you had negative CapEx, just wanted...
Charles Barrantes
Yes, yes. And we did not have any extra [indiscernible] in Q1.
Luis Fernandez
Right, right. Okay. And then kind of like more like a forward question in a more – what do you guys think is the kind of like next leg of opportunity for growth? Obviously, coming out of this current pandemic and all that recession, where do you guys see it?
Jody Miller
Yes. I mean, I think this is a good example. We have had six months of very challenging economic times, but yet our core containerized product is growing and setting records. So I think that just, again, goes back to the resiliency of our product offering. Containerized fleet, as we have mentioned for the last several years, is our number one priority. Storage containers and GLOs, we feel like are, by far, the best investment. Mobile and modular rates continue to get double-digit increases. So I mean, again, that’s phenomenal, and that business is looking better all the time as well. So from a priority standpoint, we are going to focus on containerize. We’ll continue to add dots to the map to enhance our national account program and be able to serve our customers. We are going to look at acquisitions that we feel like are the right fit and the right investment, wouldn’t make those if we didn’t and then organically is the best return. And right now, GLOs is where we’re focused on the organic side. If we need containers, we obviously can put those into the fleet pretty quickly. GLOs takes a little bit more time from a manufacturing standpoint, but they are doing quite well. And I think that product is going to continue to grow for the years to come just because of the convenience, right? You can call this morning, you need a ground level office, you need temporary facilities, climate controlled or storage, climate controlled. In many cases, we can deliver and have that set up the same-day, where other products would take a lot longer and permitting and different things. So GLOs is a great product, all the containerized fleets where we are going to focus are investment.
Luis Fernandez
Alright, thanks a lot.
Operator
[Operator Instructions] With no further audio questions, I will hand the conference back to Jody Miller.
Jody Miller
Thank you, operator. I would like to thank you for joining the call today. We appreciate your continued interest in General Finance Corporation. I hope everybody remains healthy and safe during these challenging times. Have a great day, and we look forward to speaking to you again on our second quarter earnings conference call. Thank you.
