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Edited Transcript of GFN earnings conference call or presentation 10-Feb-20 4:30pm GMT

Q2 2020 General Finance Corp Earnings Call

PASADENA Feb 12, 2020 (Thomson StreetEvents) -- Edited Transcript of General Finance Corp earnings conference call or presentation Monday, February 10, 2020 at 4:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jody Miller

General Finance Corporation - President, CEO & Director

* Chuck Barrantes

General Finance Corporation - Executive VP & CFO

* Christopher A. Wilson

General Finance Corporation - General Counsel, VP & Secretary

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Conference Call Participants

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* Evan Dreyfuss

* Scott Andrew Schneeberger

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* Zane Adam Karimi

D.A. Davidson & Co., Research Division - Research Associate

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Presentation

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Operator [1]

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Welcome to General Finance Corporation Earnings conference call for the Second Fiscal Quarter ended December 31, 2019. Hosting the call today from 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)

It is now my pleasure to turn the floor over to Mr. Chris Wilson, Vice President, General Counsel and Secretary of General Finance Corporation. Please go ahead, Mr. Wilson.

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Christopher A. Wilson, General Finance Corporation - General Counsel, VP & Secretary [2]

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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 interest 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 or a write-off of all or a part of our goodwill and intangible assets. These risks and uncertainties could cause our 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 our forward-looking statements.

In this conference call, we may also discuss certain non-U. S. GAAP financial measures such as adjusted EBITDA. A reconciliation of how we define and arrive at adjusted EBITDA is in our earnings release and will be included in our quarterly report on Form 10-Q.

And now I'll turn the call over to Jody Miller, President and Chief Executive Officer. Jody, please go ahead.

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Jody Miller, General Finance Corporation - President, CEO & Director [3]

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Thank you, Chris. Good morning, and we appreciate you joining us today for our second quarter fiscal year 2020 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 will open the call up for questions.

Before I turn to our results, I want to comment about the recent bushfires in Australia, where Royal Wolf operates. Our heartfelt support goes out to the people of Australia in these difficult times. We were fortunate that none of our staff or property has been significantly impacted by the bush fires. A number of our team members at Royal Wolf have been involved with the relief efforts and will continue to help those in the communities that have been impacted as they look to recover and rebuild.

Now turning to our results. Our core North American leasing operations again delivered strong quarterly performance. Pac-Van continued to generate exceptional results, delivering 11% year-over-year increase in leasing revenues, driven by strength across nearly all sectors. Our containerized fleet led the way with 15% growth in rental revenues, driven by a combination of higher units on lease and moderate price increases. Year-to-date containerized rental revenue growth is 18%.

Our team at Pac-Van man is doing an excellent job executing on its strategy. Our national accounts program continues to win business and had a very strong quarter. Our recently introduced PV3 Safety Container is gaining acceptance with customers. At quarter end, 9% of Pac-Van's portable containers were equipped with the PV3 safety locking system. We plan to increase the penetration of this exceptional value-added product.

Pac-Van remains highly recommended by our customer base, once again achieving world-class net promoter score of 85 for the most recent quarter and 86 for the trailing 12 months.

Offsetting the strong growth at Pac-Van was the ongoing softness in the liquid container business at Lone Star, which recorded lower results for the quarter due to a decrease in oil and gas activity in Texas. As we've indicated on past calls, the vast majority of our work in this sector involves completion and production work and not with the initial drilling of the well. In the back half of the calendar year 2019, many of our customers scaled back on their completion work as they exercised restraint on their capital spending in order to generate higher cash flows.

Given the large number of wells in both basins that have already been drilled and are now awaiting completion and given the indications we are hearing from a number of customers about their plans to increase completions in 2020. We believe that we will see improved activity down the road and therefore remain cautiously optimistic about this business.

Our North American manufacturing operations posted a slight EBITDA loss during the quarter as sales to external customers were lower due to reduced sales of liquid containment tanks and chassis. The intercompany sales to Pac-Van remained healthy, driven by higher demand for the ground-level offices.

Now turning to the Asia Pacific region. Our second quarter results in the Asia Pacific region were impacted by slightly lower revenues and a declining Australian dollar relative to the U.S. dollar.

However, leasing revenues increased in local currency for the 13th out of last 14 quarters and was up 5% in the second quarter with higher leasing revenues across most sectors, notably in education, government, consumer and moving and transportation. Leasing revenue growth was primarily driven by higher year-over-year average lease rates.

Our Royal Wolf team remains focused on building upon its leading market position across both Australia and New Zealand through a combination of organic growth, greenfield openings and to the extent they become available, accretive acquisitions. During the quarter, we opened one greenfield location in Australia.

To conclude, we continue to have both organic growth and expansion opportunities in North America, as well as the ability to strengthen our market leadership in Asia Pacific region. Our second quarter performance was generally in line with our expectations, but not without its challenges in our liquid containment business. We are proud of the success that we're seeing in both Pac-Van and Royal Wolf and working hard towards improving the results in Lone Star, all of which should lay the groundwork for strong performance in the years ahead.

I'll now turn over the call to Chuck Barrantes for his financial review and our outlook for the remainder of the fiscal year.

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Chuck Barrantes, General Finance Corporation - Executive VP & CFO [4]

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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 financial results. Total revenues were $92.1 million in the second quarter of fiscal year 2020 compared to $98 million for the second quarter of fiscal year 2019. Leasing revenues were $60.8 million, down from $63.5 million in the prior year's quarter and comprised 67% of total nonmanufacturing revenues for both periods. Leasing revenues, excluding the oil and gas sector at foreign exchange rates increased by 9%. Nonmanufacturing sales were $29.7 million in the quarter compared to $31.8 million in the prior year period.

In our North American leasing operations, revenues for the second quarter of fiscal year 2020 totaled $60.6 million, compared with $63.9 million for the second quarter of fiscal year 2019, a decrease of 5%. Leasing revenues decreased by 6% on a year-over-year basis. The decline in leasing revenues was primarily in the oil and gas sector. Substantially all attributed to the Lone star, while being partially offset by increases in the construction, commercial, and retail and industrial sectors. Sales revenues decreased by 3%, primarily in the industrial, education and services sectors, while being partially offset by increases in the construction and commercial sectors.

Revenues at our North American manufacturing operations for the second quarter were $3.1 million and included intercompany sales of $1.5 million from products sold to our North American leasing operations. This compares to $3.6 million of total sales, including intercompany sales of 946,000 thousand during the second quarter fiscal year 2019. As Jody mentioned, our manufacturing operations saw reduced demand for frac tanks and chassis, offset by increased demand for ground level offices built for Pac-Van.

In our Asia Pacific leasing operations, revenues for the second quarter totaled $29.9 million as compared to $31.4 million for the second quarter of fiscal year 2019, a decrease of 5%. However, on a local currency basis, total revenues were relatively flat. Leasing revenues were up by less than 1% on a year-over-year basis, but as Jody mentioned previously, increased by 5% on a local currency basis.

Consolidated adjusted EBITDA was $26.4 million in the second quarter of 2020, compared to $29.7 million in the prior year's quarter and adjusted EBITDA margin as a percentage of total revenues was 29% for the second quarter of fiscal '20, down from 30% from the second quarter of fiscal year '19.

In North America, adjusted EBITDA for our leasing operations was $19.9 million in the second quarter compared to $22 million for the year-ago quarter. Adjusted EBITDA at Pac-Van increased by 14% to $17.6 million, from $15.4 million in the second quarter of fiscal year 2019. And adjusted EBITDA at Lone Star decreased to $2.3 million from $6.6 million in the year-ago quarter. For our manufacturing operations on a stand-alone basis, adjusted EBITDA was a loss of $97,000 for the quarter, compared to last year's second quarter adjusted EBITDA of $228,000.

Asia Pacific's adjusted EBITDA for the quarter was $7.9 million, compared to $8.6 million in the second quarter of fiscal '19, a decrease of 8%. But on a local currency basis, adjusted EBITDA decreased by approximately 4%.

Interest expense for the second quarter of 2020 was $6.9 million, down $2 million from $8.9 million in the second quarter of last year. The decrease was comprised of a reduction of $1.2 million in North America and $800,000 in the Asia Pacific. In North America, the lower interest was mainly due to a lower weighted average interest rate of 5.8% versus 7.2% in the year-ago period. In the Asia Pacific, the lower interest expense was due to lower average borrowings, a lower weighted average interest rate of 7.7% compared to 8.9% in the prior year's quarter and by a weaker Australian dollar between the periods.

Net income attributable to common stockholders in the second quarter was $9.5 million, or $0.30 per diluted share, compared to a net loss of $5.1 million, or $0.17 per share in the year-ago quarter. Including these results were a noncash benefit of $3.9 million and a noncash charge of $9.3 million in fiscal years 2020 and 2019, respectively, for the change in valuation of stand-alone bifurcated derivatives. Both periods include $922,000 for the dividends paid on our preferred stock.

For the first six months of fiscal year 2020, we generated net cash from operating activities of $37.5 million, up from $19.4 million in the prior year period and mainly the result of improved profitability and working capital management.

Now turning to our balance sheet. At December 31, the company had a net leverage ratio of 3.8x for the trailing 12 months, which is comparable with the net leverage ratios at both September 30 and June 30, 2019. We've reduced our cost of capital and enhanced our financing flexibility over the past couple of years, and we'll continue doing so over the remainder of this calendar year.

Turning to our company-wide outlook for the remainder of fiscal year 2020. On our first quarter earnings call, we stated that consolidated revenues for fiscal 2020, were expected to be in the range of $370 million to $390 million, and the consolidated adjusted EBITDA was expected to be in the range of plus or minus 4% in the fiscal year 2020 from fiscal year 2019.

Based on our year-to-date results, we now expect that consolidated revenues for the fiscal year 2020 will be in the range of $365 million to $375 million, and that consolidated adjusted EBITDA will be in the range of minus 2% to minus 8% in fiscal year 2020 from fiscal year 2019. This outlook does not take into account the impact of any acquisitions that may occur in fiscal year 2020.

This now concludes our prepared comments, and I would like to turn the call back to the operator for the question-and-answer session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Scott Schneeberger with Oppenheimer.

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Scott Andrew Schneeberger, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [2]

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I'm going through a few of your segments. I'm going to start with Pac-Van though, another really good-looking quarter. Could you address -- you cited in the press release, some of the end markets that drove strength. Could you speak specifically to retail and the others? But a retail with seasonal activity included in the commentary.

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Jody Miller, General Finance Corporation - President, CEO & Director [3]

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Sure. Thanks, Scott. This is Jody. Our retail season was good. One of our largest customers were up around 1,500 units, national account business picked up, which obviously, some of those are retail. So we did have a strong retail season. But just overall demand in general is really good with Pac-Van with -- again, growing 18% year-to-date. So very happy with the performance at Pac-Van.

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Scott Andrew Schneeberger, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [4]

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Excellent. Could you speak a little bit to the pricing environment at Pac-Van, given the strong demand environment.

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Jody Miller, General Finance Corporation - President, CEO & Director [5]

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Yes, we actually -- we've been pretty stable in our price increases, and there was a slight uptick even from previous quarters. So we're very happy with the trends and don't really see any reason that they will change going forward. A very robust pricing [environment] (added by company after the call).

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Scott Andrew Schneeberger, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [6]

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Excellent, Jody. And then the ground-level offices have been very much in demand recently and it looks like that will persist. Just -- I'd love to get your comments on that and what the Pac-Van's strategy is surrounding that asset?

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Jody Miller, General Finance Corporation - President, CEO & Director [7]

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Yes, it's a great product. Again, there's just so many advantages to the ground-level offices versus the wheeled mobile offices. So we look for that demand to continue, and we're actually pretty excited. We're introducing a new ground-level office with restrooms recently, too. So that will be a new product coming out, and we're excited about. The ground-level offices, GLOs, are doing well, and we see them to continue -- our year-over-year price increase on GLOs is just a little over 8%. So again, very robust.

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Scott Andrew Schneeberger, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [8]

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Excellent. Excellent. And switching up, Asia Pacific, obviously, you mentioned, fortunately, your employees and property base were relatively unscaled by the wildfires. So that's quite fortunate. They were so profound though as far as what we were seeing in the news. Was there much influence on -- or will there be much influence in the upcoming quarter or quarters from the fires?

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Jody Miller, General Finance Corporation - President, CEO & Director [9]

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Yes. So it's kind of a pro and a con. We had a large sale that got pushed because of the bushfires, the roads and site were damaged. So that was a con. But obviously, anytime there's this type of damage, there is a tremendous need for our type of product to store goods and offices and things like that. So we do have business happening as we speak from the bushfires. We got hurt a little bit on certain things and gained a little bit. But net-net, it will be a positive for business.

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Scott Andrew Schneeberger, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [10]

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And then on leasing over in Asia Pac, 5% on local -- growth on local currency basis. And it was -- you cited across all sectors, except for 1 or 2. How was your seasonal activity in that geography?

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Jody Miller, General Finance Corporation - President, CEO & Director [11]

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Yes, they really don't have the type of seasonal activity that we do, there is some, but not near the impact that we have here with the retailers. So most of theirs is through many different sectors, really had nothing to do with retail directly. It is a small part of their business.

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Scott Andrew Schneeberger, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [12]

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And then lastly, and maybe we'll bring Chuck in on this, too. The -- in Lone Star, obviously, we understand the dynamic and the end market there. How is the visibility for volumes? And how is that factored into the guidance for the balance of the fiscal year?

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Jody Miller, General Finance Corporation - President, CEO & Director [13]

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Yes. So I mean, we had said on the last call that we looked for things to pick up. But the first of the year, we have stayed in very close contact with our customers because they need our product from day 1 when they're either fracking or completing a site or drilling. So we obviously stay very close to those customers. And they've always said that we're going to ramp up after the first of the year. I'm happy to report January was an uptick for us. We had one of the best months we've had in several months. Going back to late summer, early fall levels. So we're hoping that will continue, and we're cautiously optimistic that it will.

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Operator [14]

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Your next question is from Zane Karimi with D.A. Davidson.

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Zane Adam Karimi, D.A. Davidson & Co., Research Division - Research Associate [15]

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Just a follow-up on Scott's earlier question. Can you talk about the quarterly rates with regards to Lone Star? And if they're kind of stabilizing through this January uptick?

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Jody Miller, General Finance Corporation - President, CEO & Director [16]

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Yes, they seem to be -- again, we were cautiously optimistic this is going to happen based on the feedback we have received from our customers and it kind of fell right into place in January and maybe even slightly above where we are hoping it would be. So again, we're just hoping that will continue. The pricing definitely has stabilized, and there seems to be a loosening of CapEx to start the new year. So I think they had just naturally -- as I've mentioned earlier, on the prepared comments, the downturn was just preserving capital and increasing cash flow. They've got new budgets, new year and things seem to be picking up a bit.

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Zane Adam Karimi, D.A. Davidson & Co., Research Division - Research Associate [17]

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Got you there. And then for asset classes outside of liquid containment, can you provide us the growth rates for this last quarter, actually Lone Star in particular?

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Chuck Barrantes, General Finance Corporation - Executive VP & CFO [18]

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So in North America -- so what I'll do, Zane, is if I give you the average [utilization] (added by company after the call) rates, would that be appropriate? That's what we usually disclose in the Q.

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Zane Adam Karimi, D.A. Davidson & Co., Research Division - Research Associate [19]

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Sure.

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Chuck Barrantes, General Finance Corporation - Executive VP & CFO [20]

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Yes. So in the second quarter, storage containers were 79% average for Q2. Office containers 80%. Mobile offices were 84%. Modular units were 82%. And the frac tank containers are [57%] (corrected by company after the call).

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Zane Adam Karimi, D.A. Davidson & Co., Research Division - Research Associate [21]

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Okay. Then one last one. With regards to the situation currently going on in China, presenting any headwinds for you in terms of like you're sourcing new units or any sort of indirect impact to your Asia Pacific businesses that you were seeing this last quarter or this current quarter, I guess?

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Jody Miller, General Finance Corporation - President, CEO & Director [22]

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It's too early to tell. We haven't seen any impacts yet, but talking to some of the suppliers, some of the factory production is down. A lot of factories haven't ramped back up. So if that continues for several months it could impact a little bit on the supply and drive up pricing on containers a bit. But we've had containers on order, they're already coming in for spring, and we have a normal flow. So it really is not a factor until we get into probably the May time frame and then if supply is limited, then that could start to probably push up pricing, but less on new CapEx coming in. But it's too early to say.

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Operator [23]

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(Operator Instructions) Your next question is from Evan Dreyfuss with RMB Capital Management.

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Evan Dreyfuss, [24]

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I just have a quick capital structure question for Chuck. You have 2 pieces in your cap structure, 9% preferred and then 8 and [1/8] baby bond that's going to be due and 18 months. And your credit story is improving. Your leverage is down, the 10-year treasury is at [1 55]. So we're curious as to the delay in trying to refinance these. These are both callable and with your debt structure in Asia Pacific and in North America at the Opco, we think you could probably issue a bond, and it's a really, really -- I mean, rates are quite low and the IO market is open. So we're just looking for an update on what you're trying to do?

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Chuck Barrantes, General Finance Corporation - Executive VP & CFO [25]

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That is pretty much on point. We are looking at the refinancing of our senior notes with the intent -- and I'm not the last call on this, obviously, it has to go through the board -- of calling the preferred stock through the senior offering. We do have the capacity to theoretically pay the preferred stock with the North American facility, but it is an ABL, and we want to keep the capacity for our continuing growth into our core business at Pac-Van, right? So whether it's organic fleet or whether it's acquisitions, which we have not done the first six months, but the pipeline looks very good for the next six months. So we prefer to pay our preferred stock through the refinancing of the senior notes, which we are looking at.

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Evan Dreyfuss, [26]

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Okay. And is it your intention to keep the structure as is, each division would have its own -- a credit line in North America and a credit line down in Asia Pacific? Or is it better do a little bit more holdco?

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Chuck Barrantes, General Finance Corporation - Executive VP & CFO [27]

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Yes. That is intent because the practicality is, it'd be very difficult to have a worldwide ABL or credit facility. We've looked at that. So that is the way we're going to do it. Going forward to the Asia Pacific, we intend, as the leverage gets lower in Australia to ultimately refinance into a more a traditional senior facility. Our facility and their excellent partners, which led by Deutsche Bank and [Commonwealth Bank] (corrected by company after the call), which includes Highbridge are a little higher than the normal senior facility because of the leverage, which is about 3.8 in Australia. We need to get down to 3.

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Operator [28]

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(Operator Instructions) And there are no further questions at this time.

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Jody Miller, General Finance Corporation - President, CEO & Director [29]

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All right. Thank you, operator. I'd like to thank you for joining our call today. We appreciate your continued interest in General Finance Corporation and look forward to speaking to you next quarter.

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Operator [30]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.