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Edited Transcript of GFN earnings conference call or presentation 7-Nov-19 4:30pm GMT

Q1 2020 General Finance Corp Earnings Call

PASADENA Nov 15, 2019 (Thomson StreetEvents) -- Edited Transcript of General Finance Corp earnings conference call or presentation Thursday, November 7, 2019 at 4:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jody E. Miller

General Finance Corporation - President, CEO & Director

* Chuck E. Barrantes

General Finance Corporation - Executive VP & CFO

* Larry A. Clark

General Finance Corporation - Sr. VP, Financial Profiles, Inc.

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Conference Call Participants

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* Brent Edward Thielman

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Daniel Erik Hultberg

Oppenheimer & Co. Inc., Research Division - Associate

* Luis Hernandez

- Private Investor

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Presentation

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Operator [1]

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Welcome to General Finance Corporation's Earnings Conference Call for the First Fiscal Quarter ended September 30, 2019. Hosting the call today from the company's corporate offices in Pasadena, California, are Mr. Jody Miller, President and Chief Operating 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. Larry Clark, Investor Relations for the company. Please go ahead, Mr. Clark.

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Larry A. Clark, General Finance Corporation - Sr. VP, Financial Profiles, Inc. [2]

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Thank you, Hilary. Before we begin today, I'd 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 debt; 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 U.S. dollar; regulatory changes, customer defaults, insolvencies; litigation; acquisitions 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 for our 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 part of our goodwill or 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 on our website.

These forward-looking statements represent the judgment of the company at this time, and General Finance Corporation disclaims any intent or obligation to update the forward-looking statements. In this 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 will turn the call over to Jody Miller, President and Chief Executive Officer. Jody, please go ahead.

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

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Thank you, Larry. Good morning, and we appreciate you joining us today for our first 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.

We are very pleased with the start of the fiscal year 2020 with strong performance from our core North American leasing operations.

Pac-Van generated exceptional results delivering an 18% year-over-year increase in leasing revenues driven by overall strength in [unit] (added by company after the call) growth and average lease rate. In addition, our team at Pac-Van continues to do a great job executing on several key initiatives, especially our national accounts program and our recently introduced PV3 Safety Containers. Pac-Van has remained highly regarded by our customer base, achieving a world-class Net Promoter Score of 89 for the most recent quarter and 85 for the trailing 12 months.

As a company, we reached a key milestone during the quarter surpassing 100,000 units on our rental fleet, mainly driven by growth at Pac-Van in North America and Royal Wolf in Asia-Pacific.

Over the last 10 years, our combined rental fleet has grown by over 2.5x, which represents an annual growth rate of over 10%. Additionally, during that same period, our combined primary branch locations have more than doubled to over 100 locations. This branch expansion along with the growth in our rental fleet is a testament of the outstanding job the teams have done at all of our geographic venues by growing market share through our organic expansion, as well as through accretive acquisitions.

Our liquid containment business recorded lower results for the quarter due to a moderation in oil and gas activity in Texas. While oil and gas production in both basins generally remain healthy, we have been impacted by slower activity year-over-year.

As we have mentioned in the past, the vast majority of our work in this sector involves completion and production work and not the initial drilling of the well. Given the large number of wells in both basins that have already been drilled and are now awaiting completion, we believe this points to a healthy activity down the road and, therefore, we remain optimistic about this business.

Our North American manufacturing operations posted a slight decline year-over-year in adjusted EBITDA during the quarter, as sales to external customers were lower due to reduced sales of specialty tanks and chassis. Intercompany sales of Pac-Van increased by higher demand for ground-level offices.

Now turning to our Asia-Pacific region. Our Asia-Pacific region, once again, delivered improved performance driven by a 4% increase in leasing revenues in local currency with increased activity across most sectors, notably in the transportation, construction, industrial and retail sectors. This is the 12th out of the last 13 quarters where Royal Wolf has posted a year-over-year growth in leasing revenues, mainly due to growth in average units on lease and improved fleet utilization.

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 1 greenfield location in New Zealand, complementing our acquisition last year in New Zealand.

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 the Asia-Pacific region. Our first quarter performance was generally in line with expectation and has laid the groundwork for another year of solid financial results. I'll now turn over the call to Chuck Barrantes for his financial review and our outlook for the remainder of fiscal year.

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

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Thanks, 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 substantial amount of information about our company, some of which we will discuss today.

Turning to our financial results. Total revenues were $89.9 million in the first quarter of fiscal year 2020 compared to $97.8 million for the first quarter of fiscal year 2019. Leasing revenues were $58.9 million, up slightly from $58.3 million in the prior year's quarter's and comprised of 67% of total nonmanufacturing revenues, up from 62% in the first quarter of the last fiscal year. Nonmanufacturing sales revenues were $28.8 million in the quarter compared to $35.6 million in the prior year period.

In our North American leasing operations, revenues for the first quarter of fiscal year 2020 totaled just under $61 million compared to $65.2 million for the first quarter of fiscal '19, a decrease of 7%. However, leasing revenues increased by 2% on a year-over-year basis. This increase is across most sectors, but primarily in the construction, commercial, retail and industrial sectors, substantially offset by a decrease in the oil and gas sector. Sales revenues decreased by 24%, primarily in the industrial, education and mining sectors. Fiscal year 2019 includes $7.1 million in sales to 4 customers that were not replicated in 2020.

Revenues at our North American manufacturing operations for the first quarter were $3.5 million, and included intercompany sales of $1.3 million from products sold for our North American leasing operations. This compares to $4.3 million of total sales including intercompany sales of $0.5 million during the first quarter of fiscal year 2019. As Jody mentioned, our manufacturing operations saw reduced demand for specialty tanks and chassis offset by increased demand for ground-level offices built for Pac-Van.

In our Asia-Pacific leasing operations, revenues for the first quarter totaled $27.1 million as compared to just under $29 million for the first quarter of fiscal year 2019, a decrease of 6%. However, on a local currency basis, total revenues were up slightly. The slight increase in revenues in the local dollars was driven primarily by increased revenues in the mining, government and education sectors and was substantially offset by decreases in construction and utility sectors. Leasing revenues in the Asia-Pacific decreased by 2% on a year-over-year basis, but increased 4% on a local currency basis, driven primarily by increases in the transportation, consumer, industrial, retail, special events and education sectors, partially offset by a decrease in the mining sector.

Consolidated adjusted EBITDA was $25.1 million in the first quarter of 2020 compared to $27 million in the prior year's quarter. And adjusted EBITDA margin as a percentage of total revenues was 28% for both periods.

In North America, adjusted EBITDA for our leasing operations was $19.4 million in first quarter compared to $20.7 million for the year ago quarter. Adjusted EBITDA at Pac-Van increased by 18% to just under $16 million from $13.5 million in the first quarter of fiscal year 2019. And adjusted EBITDA at Lone Star decreased to $3.5 million from $7.2 million in the year ago quarter.

For our manufacturing operations, on a stand-alone basis, adjusted EBITDA was $286,000 for the quarter compared to last year's first quarter adjusted EBITDA of just under $600,000. Asia-Pacific's adjusted EBITDA for the quarter was $6.8 million, comparable with the year ago quarter. On a local currency basis, adjusted EBITDA increased by approximately 8% in the Asia-Pacific.

Interest expense for the first quarter of 2020 was $7.3 million, down significantly from $8.6 million for the first quarter of last year. The decrease was primarily driven by lower interest expense in the Asia-Pacific area due to lower average borrowings, a lower weighted average interest rate of 7.9% for the first quarter of 2020 versus 9.7% in the year ago quarter and by a weaker Australia dollar between the periods. In North America, interest expense was also slightly lower, mainly due to a lower weighted average interest rate of 6.1% in the first quarter of 2020 compared to 6.6% in the prior year's quarter.

Net income attributable to common shareholders in the first quarter was $5 million or $0.16 per diluted share compared to a net loss of $9.1 million or $0.33 per share in the year ago quarter. Including these results were a noncash benefit of $1 million and a noncash charge of $12.4 million in fiscal year 2020 and '19, respectively, for the change in the valuation of the stand-alone bifurcated derivatives. Both periods included $922,000 for the dividends paid on our preferred stock.

For the first quarter of fiscal year 2020, we generated net cash flow from operating activities of $13.6 million, up from $4 million in the prior year period and was the result mainly of improved profitability and working capital management.

Turning to our balance sheet. At September 30, the company had a net leverage of 3.7x for the trailing 12 months, which is comparable to the net leverage ratio at the end of our fiscal year June 30.

Turning to our company-wide outlook for fiscal year 2020. On our fourth quarter earnings conference call, we stated that we expect that the consolidated revenues for fiscal year 2020 would be in the range of $370 million to $390 million and that consolidated adjusted EBITDA would be in the range of plus or minus 4% in fiscal year '20 from fiscal year 2019. Based on our first quarter results, our revenue adjusted EBITDA expectations for fiscal year 2020 remain unchanged and this outlook does not consider into account the impact of any acquisitions that may occur during the 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) And your first question comes from Scott Schneeberger with Oppenheimer.

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Daniel Erik Hultberg, Oppenheimer & Co. Inc., Research Division - Associate [2]

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Its Daniel, on for Scott. Can we talk about the end markets in the Pac-Van? Obviously, you're seeing strong trends there. But can you give us some perspective on what you expect near term here and particularly on the retail side as well as discuss how the pricing opportunity in that business is shaping up?

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

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Yes. Thanks. This is Jody. We're very optimistic. Retail season looks to be stronger this year, a little stronger than last year. So we're very pleased about that. Construction is still very, very strong. Our quote and our pipelines look very bullish for the foreseeable future. And then from the industrial side, we feel like it's steady as well and then across all product lines on the Pac-Van core business, obviously, performing exceptionally well, 18% growth, industry leading, and we're very proud of their performance so far and don't see anything changing.

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Daniel Erik Hultberg, Oppenheimer & Co. Inc., Research Division - Associate [4]

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Got it. Switching gears to Lone Star. I mean how would you categorize the visibility here at this point, as we try to model out the next couple of quarters?

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

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Yes. It's really hard to forecast. To be honest, it dropped a little bit more than we anticipated. A lot of our larger customers backed off a little bit more than they'd indicated in the previous quarter. But what we're being told is it is kind of going to hold steady here these next 6 or 7 weeks until new budget money hits in January and then there'll be some level of pick up. I don't think it will be back to the level where it was. I think it will be more gradual. But I think the oil companies are more cautious than they were last year. And it's probably just going to be steady until we see some change in the oil price and that obviously can trigger it. So we're optimistic it'll gradually build kind of in the second half of the year. But for right now, it doesn't look like anything's going to happen until after the new calendar year starts.

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Operator [6]

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And your next question comes from Brent Thielman with D.A. Davidson.

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Brent Edward Thielman, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [7]

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I guess EBITDA on Lone Star, you did $3.5 million this quarter in EBITDA. I think as you go into the December quarter that business usually takes a step down. Is that your expectation at this point?

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Jody E. Miller, General Finance Corporation - President, CEO & Director [8]

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Yes. I mean it's -- that's the normal seasonal trend, and I would say it's going to be very consistent this year as well. The company usually don't like to spend a lot of their budget capital in the month of November, December when they know they are not going to get any of that back, right? The wells wouldn't be online until early in the next year. So I think that's probably an accurate statement and would follow the same trends as previous years. Yes.

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Brent Edward Thielman, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [9]

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Okay. And I guess as you're having ongoing dialogue with the customers there, Jody, do you have any feel for how much of this impact is sort of a function of the environment versus some of the consolidation that's going on among the customer base? Any feedback there?

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Jody E. Miller, General Finance Corporation - President, CEO & Director [10]

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Yes. I think, honestly, it's a little bit to all. We know there's still a lot of sorting out through the consolidation. Some of our largest customers have been a part of that and they're still sorting out their processes because each company did things a little differently as far as the fracking and completion. And then the crews and infrastructure and then you've got the pipeline infrastructure that still is getting better, but it's still a bit of an issue. And I think reading most of the releases from the larger oil companies, I think they want to have stronger cash flows and as supply kind of dwindles down here over the next few months, it's going to raise oil prices up and make that sector a little more appealing and profitable than it was in the past. So I think as far as looking ahead, we don't see much change until after the new calendar year, as I stated earlier, but we're optimistic that things will kind of gradually build going into new calendar year.

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Brent Edward Thielman, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [11]

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Okay. And then last one on Lone Star. Has the competitive environment changed at all in the last 3 or 6 months and are quoted rates showing any signs of stabilization?

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Jody E. Miller, General Finance Corporation - President, CEO & Director [12]

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Not really anything changed. I think everybody kind of has their piece. It's just at a lower level than it was. We've seen a little bit of rate pressures here and there where people are trying to find new business just like we are. We've got a couple of new MSAs in the last month that will help us out. And it's not at the same rates we saw 6 months ago, but it's still fine as far as rates go. But as far as the competitive environment, in general, not really any material changes, no.

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Brent Edward Thielman, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [13]

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Okay. And just on the outlook for the year. It looks like you're holding it pretty steady. Is it sort of your view, maybe Lone Star shakes out a little lower than maybe you previously thought, but Pac-Van is running a little better than you previously thought and those 2 sort of cancel out? Is that kind of the way you're looking at it here?

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Jody E. Miller, General Finance Corporation - President, CEO & Director [14]

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That's exactly right. Pac-Van's doing exceptionally well, and we see those trends continuing and that will probably offset if the Lone Star doesn't pick up the second half as strong as we hope it will, then Pac-Van should offset it.

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Operator [15]

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(Operator Instructions) Your next question comes from Luis Hernandez, private investor.

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Luis Hernandez, - Private Investor [16]

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Well, basically my question is more on Royal Wolf. We all know it's been flat for a while. And I was just wondering if you guys expect any growth there? I mean maybe not in a very short term, but no longer medium term, longer term, do you guys see opportunities where Royal Wolf could grow? And as we saw, way in the past, I don't know, 2016, 2015, do you guys expect that at all from there?

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Jody E. Miller, General Finance Corporation - President, CEO & Director [17]

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I mean they had 4% growth in leasing revenues. As we've stated in the past, we really are trying to focus on the leasing side. Royal Wolf has always done a great job on the sales side. They started that business, right, that was what they were in before we acquired them. And there's a great steady pipeline of sales. So we don't want to discourage those, but we really try to focus on leasing, which at 4% is over GDP. They're outgrowing the economy as far as growth there. And we have a lot of initiatives that we'll continue. If you look at the whole as far as Royal Wolf, there's some really robust areas, they're doing very, very well. One area that's been a little bit tough on us is New Zealand. We had all the rebuild from the earthquakes and natural disasters that really what generated a tremendous amount of revenue and growth for many years. All that business is kind of back now and then returns. So that economy has been a little bit tougher than the Australian economy. But if you look at certain parts of Australia, they're drilling exceptionally well, and we definitely have plans in place to continue that growth and accelerated.

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

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^ So Luis, this is Chuck. I just want to I guess clarify on your first point about Royal Wolf being flattish. It's sometimes their operations get clouded by the FX change. So I just want to point out and all to the interested parties out there that we do put together investor presentation that we've put on our website, and one of the appendixes in the back, we show a basically 6 years of Royal Wolf in Australian dollars. And back in fiscal years 2014, '15, we had, as you well know, in that area, substantial amount of profitability from the mining camps that subsided and flattened out. But in the last few years, the adjusted EBITDA locally for Royal Wolf in fiscal year 2017 was $36.4 million, in '17, it was $41.2 million and last fiscal year, it was $45.2 million. In local Australian dollars, first quarter adjusted EBITDA for Royal Wolf was $10 million compared to $9.3 million. So it has not been flattish, it's actually been -- over the last -- recent years, has been growing, albeit, it's not the same level of growth as Pac-Van, which is certainly our core business in North America and doing outstanding. But it has been growing. I just thought I'd pointed that out.

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Luis Hernandez, - Private Investor [19]

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Yes. Definitely a good point. The FX definitely cloud the numbers on there given the Australian dollar has been weaker.

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

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And we try to clarify that. But obviously, we are, at the end of the day, a U.S. reporting company. So we have to report in U.S. dollars. But how they're doing locally is obviously significant.

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Luis Hernandez, - Private Investor [21]

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Right. Okay. And then on Pac-Van. We all know, it's growing very nicely. Do you guys see that as a long-term sustainable trend, I mean, I don't know, 5 years, 6 years, you guys see that continued opportunity there for Pac-Van to be able to continue to compound as it has been over the last 5?

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

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Yes. So this is Jody. I think we're very optimistic on Pac-Van's growth. If you look at the geographic opportunities, we still could double in size geographically without any problem. We also are doing very well with the national accounts program that -- now that we have a full national footprint, that's an area we think has huge opportunities. And then our innovation of product has been a great boost for us as well with the PV3 Safety Containers. So when you look at the long term on Pac-Van, obviously, we need a good economy and things to happen there. But we see no reason why the trends can't continue there. They have done an outstanding job, and we are very optimistic about the future.

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Luis Hernandez, - Private Investor [23]

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Right. And then in construction, how do you -- I mean how sensitive would Pac-Van be to a slowdown in construction overall in the country or on a certain segment? How do you see this construction area specifically?

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Jody E. Miller, General Finance Corporation - President, CEO & Director [24]

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Yes. I mean, obviously, we would feel pain there like other companies. The nice thing about our product is we are very, very diverse in our customer base. So although 30-some percent of our business is through the construction sector, there's always going to be a certain amount of that, that will continue. All the big-box chains have to do remodels every few years. And so things like that can fill the gaps if new starts kind of slowdown. Just like apartments, they were very robust for several years. They've slowed a bit on multifamily, but other areas have picked up. So we would hope that would happen with the construction sector as well and we just offset it with other growth areas. And there's always going to be a certain amount, right, through remodels and everything else. And even if you look at our product, it's so inexpensive compared to hard structure storage or any other solutions that it's a great alternative when things get tight and cash flows get tight to use it for storage. So there's a lot of pros to our product across other segments when the economy gets tight as well.

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Luis Hernandez, - Private Investor [25]

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Right. Right. Okay. And the last one for me. Chuck, do you have the last 12 months of the free cash flow, the number you reported on the last page of the presentation?

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Chuck E. Barrantes, General Finance Corporation - Executive VP & CFO [26]

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Our free cash flow for the last 12 months is just under $48 million.

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Operator [27]

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And there are no other questions at this time. I would now like to turn the call over to Mr. Jody Miller, President and CEO, for closing remarks. Please go ahead, Mr. Miller.

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Jody E. Miller, General Finance Corporation - President, CEO & Director [28]

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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. Thank you.

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Operator [29]

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