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Edited Transcript of GFN earnings conference call or presentation 9-May-19 3:30pm GMT

Q3 2019 General Finance Corp Earnings Call

PASADENA May 13, 2019 (Thomson StreetEvents) -- Edited Transcript of General Finance Corp earnings conference call or presentation Thursday, May 9, 2019 at 3:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Charles E. Barrantes

General Finance Corporation - Executive VP & CFO

* Jody Miller

General Finance Corporation - President, CEO & Director

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Conference Call Participants

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* Brent Thielman

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

* Brian Gagnon

Gagnon Securities LLC - Senior Partner & Portfolio Manager

* Scott Schneeberger

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

* Luis Hernandez

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 Third Quarter ended March 31, 2019. Hosting the call today from the company's corporate office 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 call over to Mr. Charles Barrantes, Executive Vice President and Chief Financial Officer. Please go ahead, Mr. Barrantes.

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Charles E. Barrantes, General Finance Corporation - Executive VP & CFO [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-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 insolvency; 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 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 in oil and gas industries; or a write-off of all or part of our goodwill and intangible assets. These risks and uncertainties contain -- 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 Securities and Exchange Commission 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 I will 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, Chuck. Good morning, and we appreciate you joining us today for our Third Quarter Fiscal Year 2019 Conference Call. I will begin with a brief discussion of our operations, then our CFO, Chuck Barrantes, will provide our financial overview and our outlook for the remainder of the fiscal year. Following his remarks, we will open the call up for questions.

We continue to be extremely pleased with our solid operational and financial performance as all of our companies continue to perform at a high level. The strong momentum we experienced in the first half of the year continued into the third quarter, making the ninth consecutive quarter where we delivered year-over-year growth in adjusted EBITDA.

Our North American leasing operations continue to see strong demand across virtually of its end markets with total revenue in the third quarter increasing by 10% year-over-year and leasing revenues increased by 12% driven by an increase in unit growth, higher average lease rates and higher fleet utilization across most of our product lines during the quarter. We are very proud of these outstanding results.

Our core portable storage business again continues to perform at the high-end of our expectations, driven by solid execution and broad-based demand across the majority of end markets. Ground level offices and storage containers continue to show very high demand as these two product lines generated a combination year-over-year rental revenue increase of 29%, over which was organic growth. Taking into account all Pac-Van product lines, organic rental revenue growth was 15% for the quarter and 17% year-to-date. Our team continues to do a great job executing on a number of initiatives, particularly our national accounts program and our recently introduced PV3 Safety Containers, which together accounted for approximately 15% of the year-over-year growth in rental revenues.

Pac-Van continues to be highly regarded by its customers and once again posted a world-class Net Promoter Score of 83 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. During the quarter, we completed one acquisition in Fort Worth, Texas, increasing our presence in that dynamic state. We also opened a greenfield location in Panama City, Florida, adding our 8th branch in the Southeast region. This week, we completed an acquisition of a portable storage business in Kentucky, adding three locations to the three already in Kentucky. We continue to serve just over half of the top 100 MSAs in the U.S., including 39 of the top 50 and our acquisition pipeline remains healthy.

Our liquid containment business in North America delivered slightly improved the year-over-year results as we have seen some moderation in leasing activity in Texas. While oil and gas production in both basins remain healthy, we were impacted in the quarter by certain customers consolidating their field personnel due to recent acquisition activity as well as the normal seasonal slowdown combined with some pipeline availability challenges with some of our customers in the Permian. All indicators point to continued healthy production activity in both basins in the foreseeable future. Our overall business remains strong, but it's not operating at the peak level we were experiencing last fall.

Our North American manufacturing operations posted a slightly positive adjusted EBITDA during the quarter as sales to external customers declined from reduced sales of specialty tanks and chassis, but we expect activity to increase in fourth quarter as the backlog is very strong.

Now turning to our Asia-Pacific region. Our Asia-Pacific region continued its positive momentum by delivering third quarter growth in leasing revenues of 11% on a local-currency basis, up from 9% growth last quarter and marking its 10th year-over-year increase out of the last 11 quarters. Sales revenues were down year-over-year in local currency, mostly due to one large sale that occurred last year in the third quarter that wasn't repeated this year. Total reported revenues during the quarter in U.S. dollars were adversely impacted by an approximate 9% decline in the average Australian dollar exchange rate between periods.

The increase in Royal Wolf's leasing revenues was spread across almost all of its end markets, with noticeable increases in transportation, construction, consumer and industrial sectors. The growth has mainly been driven by increases in average units on lease, combined with average lease rates. Our team remains focused on building upon its leading market position across the region through a combination of organic growth, greenfield openings and to the extent they become available, accretive acquisitions.

To conclude, we continue to see both organic growth and expansion opportunities in North America, as well as the ability to strengthen our market leadership in the Asia-Pacific region. As always, we'll remain disciplined in our capital allocation. Our performance year-to-date positions us well to finish the year strong, while also providing us with a solid foundation for continued growth in fiscal year 2020.

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

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Thanks, Jody. We intend on filing our [quarterly] (corrected by company after the call) 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.

Turning to our fiscal third quarter financial results, total revenues were $86.2 million in the third quarter of fiscal year 2019 compared to $84.4 million for the third quarter of fiscal year 2018, an increase of 2%. Leasing revenues were $59.6 million, an increase of approximately 9% over the prior year's quarter and comprised 70% of total non-manufacturing revenues for the quarter versus 67% in the third quarter of fiscal year 2018. Non-manufacturing sales revenues were $25.2 million in the quarter, down from $27.3 million in the third quarter of the prior year.

In our North American leasing operations, revenues for the third quarter totaled $57.2 million, compared with $51.8 million for the year-ago period, an increase of 10%. Increases occurred across most sectors but primarily in the construction, commercial and oil and gas sectors.

Revenues at our North American manufacturing operations for the third quarter were $2.7 million, including intercompany sales of $1.3 million to our North American leasing operations. This compares to $3.2 million of total sales for the year-ago period, including intercompany sales of $922,000. As Jody mentioned, our manufacturing operations experienced reduced demand for specialty tanks and other steel related products, particularly chassis.

In our Asia-Pacific leasing operations, revenues for the third quarter totaled $27.6 million, compared to $30.3 million for the year-ago period, a decrease of 9%. The decrease in revenues was primarily due to a decrease in the utility sector as one large sale totaling $1.8 million, which occurred in the third quarter of fiscal year 2018, was not repeated this year. And as Jody mentioned, an approximate 9% decline in the Australian dollar between the periods.

Leasing revenues increased by approximately 1% on a year-over-year basis and 11% on a local-currency basis, driven mainly by increases in the transportation, construction, industrial and consumer sectors.

Consolidated adjusted EBITDA was $24.1 million in the quarter compared to $21.9 million in the prior year's quarter, an increase of 10%. And adjusted EBITDA margin as a percentage of total revenues was 28%, up from 26% in the third quarter of fiscal 2018. As Jody stated, this was the ninth consecutive quarter of year-over-year adjusted EBITDA growth.

In North America, adjusted EBITDA for our leasing operations was $17.3 million in the third quarter compared to $15.2 million for the year-ago quarter, an increase of 14%. Adjusted EBITDA at Pac-Van was $12.2 million, up 20% year-over-year and Lone Star's adjusted EBITDA was $5.1 million, up 2% from the prior year.

For our manufacturing operations, on a stand-alone basis, adjusted EBITDA was $17,000 for the quarter compared to $111,000 in last year's third quarter.

Asia-Pacific's adjusted EBITDA for the third quarter was $8.1 million compared to $7.6 million in the year-ago period, an increase of approximately 7%. On a local-currency basis, adjusted EBITDA increased by approximately 17%.

Interest expense for the third quarter was up $10.2 million, an increase of $800,000 from the year-ago period. The increase was primarily driven by higher interest expense in the Asia-Pacific area due to a $1.2 million fee on the prepayment of the Bison Capital term note, which resulted in a higher weighted average interest rate of 13.7% versus 10.4% in the year-ago period, and was partially offset by lower average borrowings and a weaker Australian dollar between the periods.

During the quarter, we completely repaid the over $60 million Bison Capital senior note in the Asia-Pacific area, replacing this higher cost debt with lower cost borrowings on an amended and expanded syndicated credit facility led by Deutsche Bank AG. This move is expected to generate interest savings of over $3 million per year.

Net loss attributable to common stockholders in the third quarter was $1.3 million or $0.04 per diluted share compared to net loss of $1.5 million or $0.06 per share in the year-ago quarter. Included in these results were noncash charges of $1.1 million and $504,000 in fiscal year 2019 and 2018 respectively, for the change in valuation of the stand-alone bifurcated derivatives in our Asia-Pacific convertible note. Both periods include $922,000 for dividends paid on our preferred stock.

For the first nine months of fiscal year 2019, we generated free cash flow before fleet activity of $35.7 million compared to $32.2 million in the prior year period, an increase of 11%.

Now turning to our balance sheet. At March 31, the company had a net leverage ratio of 4x for the trailing 12 months, an improvement from 4.6x at June 30, 2018. The reduction in leverage is due to a combination of factors, including the forced conversion of the convertible note at Royal Wolf and our strong financial performance.

Turning to our company-wide outlook for the remainder of fiscal year 2019. Based on our year-to-date results, we remain confident that consolidated revenues for the fiscal year 2019 will be in the range of $370 million to $390 million, and the consolidated adjusted EBITDA will increase by 20% to 25% in fiscal year '19 from fiscal year '18. This outlook does not take into account the impact of any additional acquisitions that may occur in the fourth quarter of fiscal year 2019.

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) Our first question comes from the line of Brent Thielman of D. A. Davidson.

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Brent Thielman, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [2]

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On the outlook, to get to the upper end of that EBITDA guidance range, you need to see a pretty sizable increase in EBITDA from 3Q to 4Q. Can you get there even with the liquid containment business sort of sideways here?

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

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I think a lot of it will depend on the energy side. We had a little bit, more of a hit, we knew some of the challenges coming, but through the consolidation and the pipeline issues and everything else, it appears it's picking up. I don't know if it'll pick up quite enough to make up the gap. Our core business in the U.S. as we stated on the call is doing exceptionally well with our containerized fleet growing at 29% for the year. But it's probably not enough to make up the top of the range for the energy side and then the Australian dollar's really hurting us at a 9% year-over-year as well. So it'll be a little bit tough to get up to the top of the range.

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

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Look, Brent, as Jody mentioned earlier on the call,we're still doing very well in the Permian. It's just not shooting at all levels it was in the early part of the year. But we do still expect to have year-over-year growth in Q4. So like anything else, it's always at a point in time. So we're still very, very optimistic on the future in that sector, and in our business in North America.

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Brent Thielman, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [5]

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Sure. And yes, I mean, Jody, it sounds like things are picking up, I'll assume that means [swell] but you've seen some changes since the end of the quarter in that business out there?

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Jody Miller, General Finance Corporation - President, CEO & Director [6]

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Yes. Correct.

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

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Okay. And then Chuck, were there additional costs that showed up in the interest line this quarter relative to the paydown at Bison Capital?

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Charles E. Barrantes, General Finance Corporation - Executive VP & CFO [8]

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Yes, I mean, that's right, taking Brent's side, maybe it didn't seem clear, but in the quarter, we had about $1.2 million, $1.3 million of a prepayment fee on the full repayment of the Bison term note. So that was the reason for the primary increase.

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

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And now it's -- okay. Got it, got it. Okay, then maybe just last question. Jody, the business in Australia, I mean obviously doing really well, it's evident in the numbers. I guess I'm just kind of curious what the boots on the ground are telling you, just with all the noise around China, obviously that has an impact on the economy there. I guess, what are you seeing from a demand perspective?

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

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Yes. Not much of a change, to be honest. The construction sector's still doing really well. As we said before, everything in Australia is moved with containers, right? All the freight. So our freight business is still very good, they still have to get product in and out all the major cities. The B&C and stackable solutions are getting more accepted and growing and that's still our fastest growing segment. So all indications show that it's still going to be strong. We got double-digit growth in leasing, which I think is exceptional. We had a couple of large sales that didn't repeat this year. We also, as you guys would probably remember, we have a large majority of camps sitting that are getting deployed currently. There's a big chunk of them going to a project that will help as well. So I think there's good optimism in this coming quarter.

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Operator [11]

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(Operator Instructions) Our next question comes from the line of Scott Schneeberger of Oppenheimer.

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

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Let's go back, just following on a bunch of things that were just discussed. In Texas, how would you classify your visibility there given the slightly changing dynamic with regard to volume and with regard to pricing?

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

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Yes. So I don't think we'll see the pricing increases that we've seen the first half of the year. I think it's kind of flattened out. The price of oil is still fine. I think with the consolidation happening right now and some of that, obviously they're not buying companies to taper that off long-term, but there's a little bit of a stall, while they catch their breath, the drill rigs are down slightly.

So completions and some of the other things are kind of catching their breath, but I look for those to kind of stay stable and gradually pick back up. So there's a little bit more happening than there was in the past. Don't have the crystal ball to say, this is what it's going to be. We had scheduled out 3 to 6 months on some of our customers and some of those are changing a little bit. Long-term we think it'll work its way out and everything will be fine, but I think there's just this, the last three months, and maybe now it seems to be kind of picking back up and being a little more positive than it has been the last three or four months.

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Scott Schneeberger, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [14]

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Right, appreciate that, it's helpful. I want to go back to swing factors. I was asking in the context of what, how you could finish the fiscal year. But just, in that light but also in the quarter itself, how much of an impact did the Australian dollar have, relative to what you were expecting at the start of the quarter? I'm just curious what kind of a swing factor that was in the quarter itself.

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Charles E. Barrantes, General Finance Corporation - Executive VP & CFO [15]

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No, the Australia dollar for the quarter pretty much performed what we had expected. We were looking at around $0.71, and that's what it was. Going to Q4, the Australian dollar's dipped down a little bit, I think it was below $0.70. So we're getting obviously some negative impact on the translation of the dollar, not on the economics locally. But for the quarter, it was what we expected, but a 9% reduction compared to the prior year, third quarter.

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Scott Schneeberger, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [16]

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All right, appreciate that color. And then, a last thing on Pac-Van, looking really good, and hearing from some of your competitors recently -- the same the trends are what we're hearing there, too. So Jody, just how do you feel about visibility there? And kind of the same question, I was asking about Texas Lone Star, the pricing, the volume and the sustainability there?

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

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Yes. The core portable storage side is extremely strong. I think, still year-to-date, it's 17% organic, which I think is just awesome. They're doing a great job there. Some of the new innovation, national accounts and things that we have implemented, I think will continue there and we see nothing but a positive forecast in our core business. The tank or liquid storage side in Texas and also on the Pac-Van side, pricing is doing very, very well, as well. We're getting nice increases and continue to be very consistent. On the Lone Star side, as I said earlier, I think pricing has kind of flattened out, where we were raising prices the first half. Maybe not quite as much visibility into the short-term future, with some of the things that are happening with consolidation, they're starting to get their pipeline challenges worked out. So we still feel very optimistic about it, but in the short term, maybe not quite as clear as we've seen the last year, but still very optimistic in the long haul.

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Operator [18]

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Our next question comes from the line of Luis Hernandez, an investor.

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Luis Hernandez, Investor [19]

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All right, the first one. On the refi of the Bison loan, that one was around 11% or 12% and -- right?

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

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Yes, 12%.

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Unidentified Participant [21]

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Sorry, go ahead.

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Charles E. Barrantes, General Finance Corporation - Executive VP & CFO [22]

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No, no. 11.9%, 12% was the...

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Luis Hernandez, Investor [23]

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And the refinancing is, what -- was at what rate, roughly?

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Charles E. Barrantes, General Finance Corporation - Executive VP & CFO [24]

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It's with Deutsche Bank, so it's somewhere not quite the senior facility rates, but around the 6% level.

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Luis Hernandez, Investor [25]

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Okay. But -- I guess that's pretty good news there. Then on the -- on Pac-Van, which segments are you most, more optimistic on over the next 12, 18 months?

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Jody Miller, General Finance Corporation - President, CEO & Director [26]

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Yes, Luis, I think it's honestly across the board. If we look at our growth, we break it out by segment, all segments are doing very well. Construction looks very positive. Our national accounts is probably the most optimistic opportunity for us, some of our new product innovation is helping with all segments, but it's really across the board. I think we're outgrowing, obviously the industry, and everything looks very optimistic in the core business.

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Luis Hernandez, Investor [27]

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Okay, all right, great. Then the other, next question would be on, do you expect a higher level of free cash flow on in Q4? I mean, these first 9 months, Chuck, you said $30 million, $36 million, roughly $35.7 million, do you expect sort of a bump on Q4, just maybe some, coming from free -- from working capital or something?

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Charles E. Barrantes, General Finance Corporation - Executive VP & CFO [28]

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I think Luis, just by the fact that on the refinance of Bison Capital, we should get a nice pick up from there, just some free cash flow, and yes, I do expect free cash flow to pick up.

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Luis Hernandez, Investor [29]

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Okay, all right. And finally, on Pac-Van, just two basic, little details, have you grown the fleet at all?

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Jody Miller, General Finance Corporation - President, CEO & Director [30]

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Yes, we're running about 80% utilization. So obviously, there's branches that are running short. That's a big part of our organic number, right? So we're 17% organic. So when you're running close to that 80% or more, we definitely have added to the fleet.

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Luis Hernandez, Investor [31]

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Yes, because you were roughly around 4,000 tanks, just wanted to know if you had grown those kinds at all?

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Jody Miller, General Finance Corporation - President, CEO & Director [32]

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No, it's all been core storage and GLO. Our GLO still leads our growth percentage and then storage containers are next. Those are two high growth products. We have not really added anything on the tank side, and very little in any other categories.

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Charles E. Barrantes, General Finance Corporation - Executive VP & CFO [33]

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So Luis, in North America last year, at March 31, 2018, we had about a total lease fleet including 4,000-something frac tanks, about 43,000 in -- at the end of the March, this current third quarter, we're at 51,500.

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Luis Hernandez, Investor [34]

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Okay. Yes, I -- when I asked the fleet, I meant the tank fleet, not...

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Charles E. Barrantes, General Finance Corporation - Executive VP & CFO [35]

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Tanks have not grown significantly at all. Last March, we had total tanks in North America of 4,146 and we have 4,216 now.

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Luis Hernandez, Investor [36]

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Okay, so it's pretty much, roughly the same, slightly above. All right, that's good. And then on the rates on the tanks versus 2014, we always check that number, how is that -- the pickup or the relationship of that?

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Charles E. Barrantes, General Finance Corporation - Executive VP & CFO [37]

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The rates on which product, are you?

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Luis Hernandez, Investor [38]

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On the tanks, on the oil tanks.

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Charles E. Barrantes, General Finance Corporation - Executive VP & CFO [39]

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Yes, and so last year, third quarter, average rate for the quarter was $805, versus a little over $900 this quarter, this third quarter.

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Luis Hernandez, Investor [40]

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Okay, so $900. And then the -- versus 2014 rates?

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Jody Miller, General Finance Corporation - President, CEO & Director [41]

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We're still well behind, not even close to the peak of those rates. I'd have to look and see but I would say, still 30%, 40% under what we were at that time.

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Luis Hernandez, Investor [42]

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Right. So maybe 70% of the rates, okay?

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Jody Miller, General Finance Corporation - President, CEO & Director [43]

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Yes, or a little less.

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Operator [44]

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(Operator Instructions) Our next question comes from the line of Brian Gagnon of Gagnon Securities.

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Brian Gagnon, Gagnon Securities LLC - Senior Partner & Portfolio Manager [45]

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I'm looking at the repayment of the Bison note. And you got hit with $1.2 million in Q3, and it looks to me like your savings going forward is something on the order of $700,000 or $800,000 a quarter. So can I think about the fourth quarter having an automatic $2 million [decrease] (corrected by company after the call) versus where you were in Q3 on interest?

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Charles E. Barrantes, General Finance Corporation - Executive VP & CFO [46]

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I would think that's fair.

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Operator [47]

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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 Miller, General Finance Corporation - President, CEO & Director [48]

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Thank you, operator. Appreciate you joining us today, and we look forward to speaking to you next quarter.

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Operator [49]

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Thank you, ladies and gentlemen, for joining today's conference call. You may now disconnect.