Q3 2019 Earnings Call
Thank you and welcome to Textainers third quarter 2019 earnings Conference call.
At this time all participants are in a listen only mode.
Later, we will conduct a question and answer session and instructions will be will be provided at that time.
A reminder, todays conference call is being recorded.
Well now turn the call over to onto it HERA Investor Relations for Textainer Group Holdings Ltd. Please proceed with your conference or.
Thank you certain statements made during this conference call may contain forward looking statements in accordance with U.S. Securities laws. These statements involve risks and uncertainties are only predictions and may differ materially from actual future events or results. The company's views estimates plans and outlook as described within this call may change. After this discussion the companies and.
Jason to modify or update any or all statements that are made please see the company's annual report on form 20-F for the year ended December 31st 2018 filed with the Securities Exchange Commission on March 27, 2019, and going forward any subsequent quarterly filings on form 6K for additional information concerning factors that could cause actual results.
For materially from those in the forward looking statements. During this call we will discuss non-GAAP financial measures as such measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures will be provided either on this conference call or can be found in today's earnings press release.
Finally, along with our earnings release today, we've also provided slides to accompany our comments on todays call. Both the earnings release any earnings call presentation can be found on Textainers Investor Relations website at Investor Day, Textainer Dotcom I would now like to turn the call over to Olivier get scared Textainers, President and Chief Executive Officer for.
The opening comments.
Thank you I can't.
Good afternoon, everyone and thank you for joining us today for Tastiness turret quarter 2019 earnings call.
I'll begin by reviewing the highlights of our third quarter results and then I'll provide some perspective on the industry.
Michael will then go over to financial results in greater details after which we will open the call for your questions.
Textainer acute solid performance in a challenging market environment, delivering a stable lease rental income of $154.7 million adjusted EBITDA of 100, an $18.3 million, a 3.1% increase over the second quarter and adjusted net income of 20.
$1 million or 22 cents per share compared to $9 million or 16 cents per share in the second quarter.
The market for new container activity remained slow in the third quarter. Other traditional peak season did not materialize given the ongoing trade tension and slower economic growth.
No lacking a seasonal search.
Good thing volumes have remained positive in 2019 and will trade continued to grow during the third quarter, albeit at lower rate than in the previous two years.
Overall, the industry remain disciplined as demonstrated by the much reduced level of new container orders and decreasing factory inventory levels. However, I shipping lines has continued to seek efficiency and they have reduced capacity, we canceled ceilings, we've seen an increase in containers redeliveries.
We continue to see few lease opportunity into prison market with very few opened 10 goes from shipping lines, the mostly for the replacement of aging compares.
New container prices have decreased due to current level of approximately 1600 $50 per see you primarily driven by a decrease in steel prices and weak new container demand.
Rental rates for new container lease outs have declined in line with newly container prices.
But the total volume of new deals has been small infrequent and not representative of normal market conditions as less or offloaded, the excess container capacity the accumulated in prior month when market anticipations West trauma.
We do not expect demand for new containers to increase significantly until there is greater certainty around trade disputes and stronger economic environment and we believe this loan may persist until the middle of next year.
As such we have limited or incremental Capex was $67 billion delivered during the third quarter, two specific opportunities or back to back leases that meet our investment criteria.
We remain focused on a disciplined growth strategy targeting specific heels and return thresholds.
While demand for new lease outs was slow we continued to see a madrid and manageable level of turning and an attractive container reset environment.
Orders for new containers remain minimal as we continue to see discipline from industry player. As a result, the total inventory for new dry container available that factories has reduced to a level closer to 800000, T. you from a level well above 1.1 million to you.
Shifting lies continued to optimize their fleets. They put inventory has increased but remain very reasonable level as evidenced by the continued high utilization rate throughout the industry.
Resale container prices remain positive given does low supply of container put a disposal. However, the decrease in new container prices has generated some downward pressure on resale prices of 20 foot coordinators in Asia.
Against this macro headwinds, we're particularly pleased to deliver stable lease rental income into third quarter as we recognized the contribution from more proactive discipline container investments during the second quarter. When we grew our feet at attractive rates and double digit returns. In addition, we're pleased with a steady pro.
Congrats of our ongoing cost cost control initiative, which is reflecting into normalized level of generally expenses and direct container cost.
However, our financial performance in the third quarter was impacted by lack of Capex.
We also saw a modest decrease in utilization and retail prices both remain at high level with our average utilization of 97.3% sort of try at quarter end up 96.4% currently.
As we look out for the balance of the year, we believe new container demand will remain muted to the end of the year and possibly to the first half of 2020, given uncertain economic activity levels and ongoing trade negotiation.
Given low inventory level, we believe the market could turn more rapidly with of resolution to the trade concerns. However, these potential catalyst maybe tempered by the clear signs a weakening GDP growth.
The IMF global growth forecast is 3% entry, 0.4% for 2019, and 2020 , which are level still supportive of one day rate shipping volume growth.
We expect container lesser fleet utilization and retail prices to remain high although decreased slightly.
We currently do not have any significant concerned with customer credits and finally.
We believe shipping lines will continue to increase their reliance on container leasing companies at the focus their liquidity unnecessary capex related to new ships and compliance with the IMO 2020 emission regulations.
We continue to believe leasing companies would represent approximately 60% of total purchases.
Specifically for the fourth quarter, we expect revenue will decline given fleet attrition and limited Capex. We expect cost will remain at current normalized level with exception of storage, which is impacted by utilization.
In summary, while the overall market activity remains muted and he is reflected in our operating results. We have taken a number of actions this year to drive shareholder value.
First we've improved our capital structure to our previously announced asset backed notes and warehouse facility financing, which leaves us strongly positioned to participate in the individual rebound in market demand.
Second we repurchased approximately 240000 chair of our common stock during the third quarter under our 25 million dollar share repurchase program, which the board authorized at the end of August 2019.
Third we have invested in technology and personnel, while implementing cost cutting initiatives that have lowered operating expenses.
Finally in September we announced plan to Joe list or shares under dryness brick stock exchange to enable trencor to unbundle, its chairs and Textainer, which we believe will lead to a broader and deeper shareholder base and improve liquidity you know stuff over the longer term.
I will now turn the call over to Michael Who'll give you a little more color about our financial results for the past water.
Thank you Olivier I will now focus all the key drivers of our financial results.
Threed lease rental income of 154.7 million was stable as compared to Q2 as we further realize the benefit of attractive investments made in the second quarter offset by decrease in utilization.
Q3 trading to tear margin was 2.4 million it decreased a 1 million compared to Q2 due to decrease the number of training stare sold and a slight decrease in the per unit margin.
Q3 gains on sale of old fleet cutters, net was 6.1 million an increase of 8.7 million compared to Q2.
Driven by an increasing the number can tear sold partially offset by a reduction in average games per country Airseal.
While average games per container sold decreased the resell container price environment on average still remains positive.
Q3 direct can terex, that's for the old fleet was 11.8 million an increase of 1.1 million compared to Q2, primarily due to an increase in storage costs, resulting from lower utilization.
Well storage has increased we're pleased with the results of our continued cost control efforts to normalize these expenses.
Q3, depreciation expense was 67.6 million.
An increase of 3.5 compared to Q2, primarily due to mark to market netbook value adjustment on certain containers held for sale.
Q3, G. an expense was relatively flat at 9.4 million compared to Q2, we're pleased with our ongoing focus on cost management to maintain this baseline level going forward, while also continuing to improve the quality of our investment in June it.
In order to approve the transparency and usefulness of our financial statements. We have introduced a new line item in operating expenses called container lessee default recovery or expense net.
They have removed the container impairment line item.
The new line item will capture any content costs or recovery benefits associated with let's see credit issues, including any container impairments related to non recoverable containers and any container recovery costs previously reported within direct container expenses.
Any normal mark to market netbook value adjustments for certain containers put two disposal will appear in depreciation expense.
Hey, let's see default recovery net was point $2 million in Q3 compared to an expense of eight point sixmillion.
In Q2.
As previously reported Q2 included a 9.1 million reserve for the estimated under a couple of containers held by not for me lessee.
Q3, bad debt recovery was 1.2 million and was primarily due to the improved financial condition for certain lessees.
Bad debt expense of 3.7 million in Q2 included three point Threemillion fully reserved receivables 40 nonperforming lessee.
Q3 interest expense, including realized hedging gains was 39.8 million an increase of 2.7 million from Q2. This was primarily driven by higher average step else due to capex, partially offset by lower interest rates.
We're pleased with our continuously decreasing effective interest rate, which averaged 4.23% in this quarter.
Q3, unrealized loss on it's straight swaps collars and caps net was 2.5 billion, primarily resulting from a decrease in the four LIBOR curve at the end of the quarter, which reduced the spot mark to market value of our interest rate derivatives used for long term hedging purposes.
Q3, net income was 10.6 million or 18 cents per diluted common share.
Q3, adjusted net income was 13 million or 22 cents per diluted common share.
Q3, adjusted net income was 4 million higher than Q2.
Q3, adjusted EBITDA was 118.3 million, an increase of 3.5 billion when compared to Q2.
On September Threerd, we announced that our board had approved a 25 million dollar share repurchase program.
During Q3, we repurchased approximately 240000 shares it takes their common stock.
The open market for a total of roughly $2.5 million.
The end of Q3, we had $22.5 million available from our board authorized program for repurchases, which continues as we move forward.
Turning now to our liquidity, we ended Q3 with a cash position.
The restricted cash of $267.5 million, an increase of 23.5 million from the prior quarter.
As a reminder, on July 29, we announced the completion of an amendment to extend the term and lower the pricing of our 1.2 billion dollar warehouse credit facility. The revolving period of the facility was extended by three years to July 2022, and the margin was reduced by 15 basis points to 1.75 per se.
Yes.
We do believe our liquidity and financing platform are well positioned to adequately support our future capital allocation plans, including funding investment in high yielding capex and support of our ongoing share purchase program.
This concludes our prepared remarks. Thank you all for your time today operator, please open the life for questions.
Thank you will now be conducting a question and answer session.
If you'd like to ask a question. Please press star one on your telephone keypad. It confirmation tone would indicate your line is in the question Q you may prestart too if you'd like to remove your question from the Q for participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys, one moment, please while we pull for questions.
Your first question comes from the line of Helane Becker with Cowen. Please proceed with your question.
Thanks, Operator, hi came thanks for taking the time just could you just clarify what you said about returns are you are you, saying can yeah I kind of missed some of what you said customers are returning containers and not picking up new containers is is that what's going on.
Yes, Hi, Alan I, I think you pretty much nailed. It. So we we have a situation where the market is very slow and shipping lines are really a trying to optimize their fleet. So what essentially they're doing it there shedding also the excess container.
Irrs or when they have containers coming to the and off their lease agreements there turning them in a and because they're really trying to run a ship aside as possible given the uncertainties, both from well trade and IMO 2020, a they are refraining from my taking new containers.
<unk> into their fleet then that's at least for a purchase containers as well as for our lease container. So.
What we see very much in our fleet is that or continuous being turned need to that they pool is that it's only very slightly higher than it was a at the beginning of the year, but it's very consistent it's very stable, but what's really lacking is the fact that there is no demand for new container.
And and enhance very limited capex on our part.
Okay, and then what I am I 2020, I understand that about a third of Oh.
Ships have been.
You know fitted with scrubbers at this point series you look ahead to 10 next year I don't know what you think will happen I'm not sure you know any investor I know what will happen other than maybe some slow steaming or something [laughter]. The do you do you think that there will be an increased given all this other uncertainty <unk> Jude.
There would be an increased level of ship retirements that would push more containers and to the depose it's like us Dod a possibility.
[noise] no I I don't think so I think where we're seeing a situation right now where there is indeed a lot of ships that are in the shipyard, Colorado scrubber retrofits.
But is that a new ships as those ships come out new ships will go in so I don't think we will see a reduction in capacity because the ships that are being upgraded our pretty full <unk> at the moment or it just so happens that you know a did this is the kind of.
A good timing for shipping line to send shifts to shipyards and have them retrofitted with scrubbers chess when demand is not running at a very high level, but the ships that are running are running pretty full so I don't think we can anticipate a reduction in into requirement order of number.
Charles container as a matter of fact or even though a everybody talks about a slow market. We have seen oh occasional situation where in specific areas shipping lines are running short of containers and I think that's in order to indication that they're running a very very tight ship and trying to up to.
Hi, there suite as much as possible.
Okay [laughter]. So this is my other I have a few other questions, but I don't know if there's a long queue.
No not really go ahead, you have plenty of time, we have plenty of time for you and your line yeah. Okay. That's very kind of your thank you on that trend quarter listing of their shares can kit.
<unk> shares to be treated outside of South Africa or can they only p. traded in South Africa.
Hi, This is Dan Helena General counsel of Textainer.
You know, we've got we're envisioning that assists us if the listing that occurs and all conditions precedent our Matt.
There may be a pop up a mechanic where shares can cross exchanges that.
Kind of all were at Liberty to say right now.
We will update the market.
Got it goes on but it is common and dual listings that there wasn't mechanics for the cross enough shares to avoid arbitrage situations, where pricing differentials occur between markets.
Gotcha, Okay. Yeah, that's what I was wondering actually thank you for that and then my my other question is for Michael I think Oh, not on the comment about the.
Two and a half million dollar loss.
But you talked about the decrease in a forward LIBOR curve [laughter]. So does your debt provide for something other than my board since my Boris theoretically going away at the end of 2021.
Hi timing.
Just a question so our debt agreements contemplate using library, but we've already spoken to our banks are growing mechanisms to convert to a different index that's market market excepted out there. So there are rates that this will shift you in the future. When this gets closer so it's not a concern.
Okay and then my last question promise is on consolidation I don't know how are you guys are thinking about it now but given.
The low level of Capex and the flat to down S. kind of revenue now.
I mean your revenues you noticed there's only off a couple of percent I think right couple of million dollars wasn't that bad do you think this means we'll see more industry consolidation is this a good time for that.
Thank you and that's it [laughter].
Hi, it's very it's very difficult question Elaine mill and normally we don't like to to comment on on the on on that but I I wouldn't say you know on a high level I think when when everything goes well and the market is booming a occurs have less incentive to start looking.
Got that the consolidation a in an environment, where teams get a bit tougher that's probably when people start asking themselves question about their their strategy.
I think that you know to downturn and we were not actually really facing a downturn, it's really more of a load right now so I don't forecast anything happening in the industrial term I think that if if if something happens it will have to to take a little longer still but you know not.
No one can Kent can ruled anything I think from from our side, we are Ah Ah focusing more on our own business, improving our own business and possibly looking at no buying back takes existing fleet that we have under management, we think that would be a more immediately accretive. So we're really focused on our own business.
Okay. Thanks, those are all those are all my questions. Thank you so much.
Thank you like.
As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad.
As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad.
One moment please.
As we pull for more questions.
Your next question comes from mine of Michael Brown with KBW. Please proceed with your question.
Hi, guys good afternoon.
Good afternoon.
Hey, Mike.
Yes, first I just wanted to kind of follow up on the yeah, the realized gains and interest rate swaps and collars.
So I appreciated the color on the impact from the mood and liable for but what does.
Questioning is de how come we didnt necessarily see a decline of a similar magnitude last quarter.
Following the rate Cod and then how should we think about the potential impact this quarter given the fact kite yesterday I'm. So that's civic Tonight.
Realized gain on interest rate swap line, but also any color that you could provide on the interest rate expense as well would be would be very helpful.
Thanks, Mike So if you track our effective interest rate over the last several quarters Hassan downward trend.
We had during the prior quarter, some adjustments to our credit facilities, which lowered the margin as well.
That that happened near the end of the quarter I believe so we didn't get the full impact W., we'll see it in future quarters.
LIBOR floor, when I was certainly a pack or variable rate facilities, which would be the revolver that we haven't a warehouse credit facility.
So we think that that's just show a downward trend with this.
Recent reduction the fast they will impact the pricing of our of our variable rate debt.
The swaps, we haven't place our fixed of course, so there will be some impact there in terms of realize portion of interest expense that will go up just a smidgen, but yeah, we'll certainly see a or a reduction in the interest expense line relate to the variable pieces of our debt over the course of Oh.
The next year I would expect.
Okay.
And.
I'm not sure if I missed it did you give where your utilization rate is today and then how would you expect kind of pace of drop off activity to impact that going forward.
Yeah, I didn't mention it in my script, I think where we're at 96.4% right now.
And you know it's slowly drifting down I would I would say like a a an erosion.
I I think it's it's sort of like dropping probably 0.2, 0.3% per month at the moment, a and not that we were discussing this with delay and it's really because we don't see a much on on the higher activity certainly under under new container side.
Now this could very well change reasonably quickly I mean are there there's talk about a you know, possibly a bit of frontloading. If there's no no trade agreement as also talk about a little uplift or prior to two Chinese new year, but I think that you know if we look at it from a.
Figure I perspective, we're going to continue to see a a slow erosion or or a a stability until the aftermarket start picking up probably a middle of next year.
Okay, and then just a change gears on the buybacks, obviously positive to see the authorization during the quarter and increased activity.
How much have you bought back quarter to date for the fourth quarter and then how should we think about the pace of repurchases on a quarterly basis.
Good to be kind of steady or really more opportunistic.
Hey, Mike It's all my clear so Oh, we are buying shares in the fourth quarter and will be disclosing that as part of the results of that of the fourth quarter as well.
It is an active program and we are buying back shares that's fight except that we get disclose at this point in time, but yeah. We are continuing with the program.
Okay, Great I'm, just one last one from me.
On the on the dual listing is it really any other change.
To your business following that listing is or is it really just kind of big.
Well once that is is executed.
We don't anticipate any major impact from a from an operational business. If that is youre. Your question Uh Huh.
Mike did you Oh, yeah, no we think it it will obviously, a you know broaden our or shareholder a basis, then its might that impact or or float positively.
But from an operational point of view it it should not a you know change anything in the way, we operate our business and and keep our effort focused on the on improving our profitability and our yields.
Okay. Thank you appreciate the color there and thank you for taking my questions.
Thank you thanks, Mike.
Now.
Gentlemen, we have reached the end of the question and answer session and I would like to turn the call back to Olivia for closing remarks.
Thanks, again for taking the time to listen to us today, and I look forward to updating everyone on our progress during our next call. Thank you [noise].
This concludes todays conference you may disconnect your lines. Its time, thank you for your participation.