Q4 2019 Earnings Call
Thank you and welcome to Textainers fourth quarter and full year 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 provided at that time.
As a reminder, today's conference call is being recorded.
I'll now turn the call over to add <unk> Investor Relations for Textainer Group Holdings limited.
Thank you certain statements made during this conference call me contains forward looking statements in accordance with your securities laws. These statements involve risks and uncertainties are only predictions.
Surely from actual events or results.
These views estimates plans and I look as described in this call may change after this discussion.
Companies under no obligation to my part of the inner all statements that are made leased to the company's you report on form 20-F, whether you're ended December 31st we achieved all of the Securities Exchange Commission on March 20, so it sounds like team and going forward any subsequent quarterly filings on form 6K for additional information concerning factors that may cause actual results to differ material.
No it wasn't a forward looking statements.
During this call will discuss non-GAAP financial measures such measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures most directly comparable GAAP measures. We provided either on this summer school. We found in today's earnings press release finally, along with the earnings release today. We've also provided slides to accompany our comments on today's call.
Both the earnings release in the earnings call presentation can be found no textainers, especially she's web site at Investor Day objects Theater Dot com.
I'd now like turn call over to alleviate this year takes years, President and Chief Executive Officer for something called.
Thank you at good afternoon, everyone and thank you for joining us today for Textainers fourth quarter 2019 earnings call.
I'll begin by reviewing the highlights of our fourth quarter and full year results and then I will provide some perspective on the industry.
Michael will then go overall financial results in greater detail after which we will open to cold for your questions.
Thanks, <unk> achieved solid results last year, despite a challenging environment that has persisted into twentytwenty.
We delivered stable lease rental income of 620 million and leased out 400000, T. you dream to yet.
Most of which was new production leased out at attractive yields with double digit returns.
We made new container investments totaling $739 million during the year and also put shape a container investment company known I'd Love cool transferring about 165000 T U from our managed fleet to our own fleet.
Adjusted EBITDA increased 4.8% to 464 million was adjusted net income increased 7.6% to 55 million or 96 cents per diluted common share as compared to 51 million or 90 cents per diluted common share in the prior year.
Average utilization for the year remained high at 97.4% and at yearend, we owed approximately 85.4% of our fleet, which stood at 3.5 million to you.
Why do we are pleased we don't performance for the full year <unk> fourth quarter results reflect the continued atypical in market activity, which limited our incremental capex to 28 million during the quarter.
For the fourth quarter, we achieved lease rental income of 152 million adjusted EBITDA of 113 million and adjusted net income of 11 million or 19 cents per diluted common share.
All of which decreased slightly as compared to the toward quarter, given a modest decrease in utilization and resale prices. However book remain at high level with our average utilization at 96.4% for the fourth quarter and currently stands at 96.3%.
We also booked 14 million of net cash proceeds from the Hanjin bankruptcy estate, which contributed to reinforcing our strong cash position and reflects the very successful equipment recovery and insurance collection effort following to answering insolvency in September 2016.
While the overall market for new container activity remained low into fourth quarter, ending twentytwenty to date or the key elements of our business are favorable.
First new container prices have recently increased the current level of approximately $1900 Percy you from around 1600 $50 at the end of the third quarter, primarily driven by a reduction in factory production capacity.
While demand for new leaves US was low we have seen some incremental new container demand ahead of new revenue you.
At the same time, let's sort of continued to demonstrate discipline by limiting new orders and mashing factory inventory level.
Total inventory of new dry container available that factory reduced slightly to a level currently below 800000 T U.
During the build up to the lunar new year, we saw evidence to suggest shipping lines are running at very tight container inventory as they substantially reduced a piece of turning at least you and used equipment on the markets.
In addition shipping lines continue to manage capacity very aggressively to cancel ceilings, which has further increase in recent weeks, we'd be outbreak of the corona virus epidemic.
We continue to see a madrid and manageable level of inventory and an attractive container resale environments.
Oh fleet utilization decreased only marginally in the last quarter and has since been stable with about 80% of already infantry strategically help in Asia.
Resale container prices decreased slightly into fourth quarter, but have experienced a slight rebound and remain positive given to low supply of container put two disposal.
Finally, the recent signing a phase one of the U.S., China trade deal has reduced the level of uncertainty and should help improve visibility and optimism for economic player.
We continue to believe that seasonal volumes will see a rebound in the second half of the year.
The recent outbreak of the core not virus isn't you factored that well, it's not shipping volumes worldwide and in particular doors originating from Asia.
As we monitored the situation closely all we can see is that it is too early to assess its full potential impact.
Experience. However indicates that market disruptions are generally favorable to leasing companies I think create create lease out opportunities. However, this assumes a reasonably fast resolution of the virus epidemic, which we all hope for.
Notwithstanding the most positive developments, we expect the overall market activity to go to a few quite months following the lunar new year.
As we look ahead for the first quarter, we expect rental revenue will decline slightly given attrition and limited capex.
And cost will remain at current normalized level, except for storage, which is impacted by changes in utilization.
As we look out to Twentytwenty, we remain optimistic about the market outlook.
I am that's global forecast remains above 3%, which is supportive of moderate shipping volume growth.
Given limited Capex in 2019, and normal sleet attrition, we believed that the markets would undergo a rapid turnaround when organic demand returns. That's currently expected for the traditional peak season.
Hi, or container prices and lessors discipline should have market deal recovered to a level more in line with required long term capital returns.
We expect intra Asian trade to continue to grow and have recently seen demand improvement in specific European and South American markets.
We expect resale volumes to slow down temporarily we'd resale prices to remain stable and likely to increase in Europe and North America. In Q2, we currently do not have any significant concern with customer credits and finally, we believe shipping last will continue to increase their reliance on container leasing companies.
They focus their liquidity on this is Rick capex related to new ships compliance with the IMO Twentytwenty emission regulations.
In summary, while the overall market activity remains muted, we remain focused on improving or business to be best in class true up cost control initiatives and order efficiency investments such as improvement in our ickes system and continued up the ization of our capital structure.
We remain committed to our disciplined growth strategy targeting specific yield and return thresholds. We will also pursue any strategic fleet purchase.
Demonstrating buddy acquisition of containers from one of our managed fleet Investor, which closed on December 31st and will contribute positively to our twentytwenty results.
Finally, we remain focused on driving shareholder value creation.
Last year, we repurchased approximately 879000 shares our common stock under our share repurchase program.
I was at the end of 29 team, we have 60 million remaining into program and we will continue to strategically deployed capital to create shareholder value.
In addition on December 12, we started trading onto chart on the Johannesburg stock exchange under the ticker <unk> XT in connection with trend course unbundling of its chair in Textainer.
We believe this will lead to a broader and deeper shareholder base any proved liquidity you know stock over the long term.
I will now turn the call over to Michael who will give you a little more color about a financial results for the full quarter into full year.
Thank you Olivia I will now focus all the key drivers of our financial results Q4 lease rental income decreased $4 million from the third quarter 2019, largely due to a decrease in utilization and speed size.
Well, we income for the year increased $7 million from 2018, largely due to an increase in fleet size, partially offset by lower utilization in average rental rates.
While utilization decreased during this currently quite market. We are pleased that turned his work well magic controlled allowing us to maintain a high level utilization at an average at 97.4% for the year.
Q4 trading container margin increased by $1 million compared to Q3, yeah by $4 million compared to fiscal 2018, partly due to an increase in sales volume, partially offset by a reduction in per unit margin.
Q4 gain on sale old weaken tears debt decreased by $3 million as compared to Q3.
By $15 million as compared to fiscal 2018, driven by a reduction in the average game for content sold any slight decrease in the number of can tercel.
While average gains Perkins here sold decreased the resale can share price environment still remains favorable.
With some noted recent improvement for 40 foot prices.
Q4, direct container expenses $12 billion was essentially flat compared to Q3 in spite of lower utilization.
For the year direct contrary expense decreased by $8 million against the prior year fairly due to reduction and repositioning expense maintenance expense and military sublease expense, partially offset by higher storage costs.
We're pleased with the results or continue to focus on cost control efforts to normalize these expenses.
Depreciation expense was $66 million for the quarter and $260 million what are your.
$11 million increase from fiscal 2018 was mainly due to an increase in fleet size.
We're pleased that can Terry lessee default expense net continues to be minor or nil in Q4 Q3 for the year content unless you default expense that was $8 million compared to 18 million in the prior year.
2019 included in earlier charge for the estimated over a couple contenders for one nonperforming less.
Well 2018 included continued recovery costs any charge for the estimated other couple compares from several nonperforming lessees.
Q4, G. an expense of $10 million remained contained compared to Q3.
For the year Gionee expense was $30 million decrease of 6 million from the prior year.
We're pleased with the results of our ongoing focus on cost management to maintain this baseline level going forward.
We continue to improve the quality of our spending in g. the expense through among other methods enhancement of our technology tool and staff talent.
That does include <unk> million dollars recovery for the quarter, primarily due to improved financial condition for certain lessees for the year that that was a 2 million dollar expense, which included an earlier charged to fully reserved receivables for one nonperforming lessee there were no new credit issues in Q4.
Gain on insurance coverage and legal settlement was $14 million in Q4 and $15 million for the year.
This was related to a $14 million distributions received from the hodgen bankruptcy state.
Well certainly prefer not to be required to use our insurance or be involved in such settlements. We were pleased with the results of our state negotiations to recover significant die for Textainer.
Do you for interest expense, including realized hedging costs was $30 million decrease of 2 million from Q3, primarily driven by lower interest rates for the year interest expense, including realized hedging gains was $151 million, an increase of 18 million driven by higher average doubles.
Was partially offset by lower interest rates.
Our Q4 average effective interest rate proved to 4.04% or 3.81% when excluding the non cash amortization of deferred loan fees.
Unrealized gain on derivative instruments net was again, a $3 million in Q4, and a loss of 15 million for the full year, primarily driven by increased Andy decrease respectively. In the Ford LIBOR curve at the end of each of their respective periods.
The changes in the fourth LIBOR curve impact the spot mark to market value of our interest rate derivatives use for long term hedging purposes.
Starting in December and on an ongoing basis, we have elected to designate nude route is using hedge accounting under U.S. gap.
Before net income was $29 billion or 50 cents per diluted common share for the year net income was $57 million or 99 cents per diluted common share.
Q4, adjusted net income was $11 million or 19 cents per diluted common share.
For 2019, adjusted net income was $55 million or 96 cents per diluted common share an increase as compared to adjusted net income of $51 million or 90 cents per diluted common share in the prior year.
In Q4, we suite at both the $14 million distribution from the Hanjin bankruptcy estate, Andy $1.8 million gain on terminating the existing magic remit for the fleet, we purchased when calculating adjusted net income given the unusual and nonrecurring nature of these items.
Q4, adjusted EBITDA was $113 million for the year adjusted EBITDA was $464 million increase of $21 million, four or 5% as compared to the prior year.
Turning now to our share repurchase program, we repurchased approximately 630000 shares in 879000 shares of text or a common stock in the open market in Q4, and the full year respectively.
At the end of the year, we had $16 million available from our board authorized program for repurchases, which continues as we move forward.
Finally, consistent with Olivia's earlier comments, textainers very well positioned as it enters 2020 with the capital allocation strategy, well supported by available liquidity and optimize capital structure and.
Demonstrated expense control and efficiency.
This concludes our prepared remarks. Thank you all for your time today operator, please open the lines for questions.
Thank you at this time, we will be conducting a question and answer session. If you would like to ask the question. Please press star one on your telephone keypad, a confirmation telling will indicate your line is in the question Q you May press Star too if you would like to remove your question from the Q.
Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star Keith one moment, please while we poll for questions.
Our first set of questions come from a lot of Michael Brown of KBW. Please proceed with your question.
Hi, Olivier and Michael how are you guys.
Good how are you might have all Michael how are you.
Well well.
So.
Really appreciated the thorough guidance yeah. Thank you provided a lot of great color on a on a current environment.
So I wanted to dig in a little bit there though.
So at this point I'm you know you have the same expectation that you you guided to last quarter, which is that the second half they spend will start to see the strengthen the market come back.
Relative to where you were [laughter] third quarter earnings do you feel kind of better about that expectation. Then you did at that point and do you think that that improvement could be stronger than what's your thinking at that time.
On that we had now have the the phase one deal and finalize or does the potential impact on the krona virus on activity Kinda give you pause it at this point and then maybe it's actually.
Yes.
Improvement, but maybe a little bit weaker than you initially thought back at a third quarter earnings that's trying to maybe kind of frame that a little bit that would be helpful. Thanks.
Yes, Thank you Mike.
That's a very good and interesting question and let me try to to handle it I'll, let Michael maybe a chime in as well Oh.
I would say, we probably feel a little bit better because I don't think that the macro situation has changed fundamentally a the macro situation is that a we have had a very slow year last year.
We have that customers are shipping lines that have been turning in containers, We've had limited investment and and we were always anticipating that sort of like cat I I midpoint in this year, we would see demand starting to to come back I think that given that a world trade or de certainly.
Yes, economic growth is still there a we don't see any major change there or even if one could raise the question about the corona fires between we kind of at this stage think it's way too early to think that the core not virus will have a lasting impact on the economy. The reason.
We are probably more optimistic comes from several reasons. The first one is as you mentioned yourself.
The fact that that's been a a phase one trade deal now let's be realistic.
The trade deal in itself, it's not a huge improvements at terrorists remain in place. So there are still restriction to trade what it does however is that it or reduce the and uncertainty and creates more visibility for economic players, meaning that a buyers in the U.S. no what terrorists take on.
They imported goods and producers in China can talk organizing their production. So I think that's all I'm positive for Fourq trade.
The second element is a recent development that predates the CRO not virus epidemic, which is that manufacturers in China have them restricted production capacity and with the immediate effect that that container prices have.
Gone up and quite substantially a was mentioned that that if shut up from 16 50 up to about $900.
<unk> dollars $1900 per see you.
And that is a four deals that if effectively been close before Chinese new year, and then before the full outbreak of the corner virus at this point in time prices.
Our our very difficult to to get by because obviously manufacturers don't get have full visibility, but we believe that it's likely that container prices will continue to rise. So that's sort of like all leads us to believed that we will see a corresponding increase in leasing rates now.
The last October and this one is harder to predict is related to the epidemic a itself, which obviously is creating a short term disruption and assuming that the effects are not too long lasting.
We anticipate that there'll be some catching up going on with.
First of all producer trying to catch up on on production and a exporting goods to Europe and to.
The U.S. that they haven't been able to explore I think that's that's one element, but we also have a situation where a container factories are not operating as they normally should so we have further restriction on supply while we expect that we're going to see catching up in demand. So we think that.
All of that has the potential to create more demand and higher prices. Then we certainly were anticipated in Q3, Oh my can on top of that if you look at the capacity that's pretty well controlled by the manufacturers right now as living had mentioned if one were to try to place an order.
Price would likely be a higher price and was living mentioned right now and delivery schedules were probably indicate getting a whole your equipment in maybe April or may so that type of dynamically dynamic is kinda lends itself to recovery when it does happen that will be pretty dramatic we would expect.
So let me just follow up on that point.
Why.
It's positive to see that either decline and the factory inventory levels, but 800000 do you still screens as relatively high to those historical levels. So based on what you're saying can you just help me frame that is it sounds is that inventory all set for delivery over the next couple of monster to bring.
Those inventory levels down to lower levels thinking about that correctly.
No I think do you you're right. The 800000, nor was slightly below right now, it's still a fairly high level, but I would point tied that not normally the inventory level to rise is any way before that the seasonal activity a an 800000, it's actually fairly short if activity.
Demand comes back 800000 containers can be picked up in less than two months. So really we're not talking about a lot of container standing on the on the ground.
Okay great.
And then on the capital return so nice to see the buyback activity in 2019 and that obviously still a sound like 16 million left on the authorization.
Environment It sounds like it will be soft over the next couple of months. So how do you think about the cash flows that you're generating now as it pertains to.
The trajectory of your buyback activities and.
At this point, even once you get that bounce back in the second half how do you think about kind of your capital allocation going forward or would you.
Consider introducing a a dividend.
Do you think you still want to sit on time or a dry powder for that bounce back and you know just how do you kind of toggle between each of those levers.
Yes, Mike Yes.
It's a question or not or an answer if not one or the other yeah. We like are we sort of like Capex. If the yields are there and weve and that's what we're waiting for and meantime, if the market remains quite we're certainly very focused on buybacks that makes perfect sense. It and we're we're chasing that route right now as we speak.
As we start moving down into the year, if the buybacks or priceless you're still do you make some sense. It. We think it is a compelling compelling story to buy back shares we will continue to continuing to do that when Capex comes back well also put money there as well, it's not that it's not to answer a one or younger.
We are likely to do both if they make sense, but of course. The key thing is that Capex has to ship deals that were looking for and be accretive to accretive to our balance sheet.
But we see it as the answer is that is answered with deploying capital to both options, yeah, and if I can chime in I I think we'll certainly intend to continue our or buybacks, but what is very important for us is to keep some powder dry afford for the market or turn as as the you know we with me.
South Park, the and the last upturn in the market and we certainly don't want to repeat that mistake. This time around so we want to make sure we have plenty of stops capex capacity for when the market times.
Okay, great and.
On the the Hanjin distributors. This corner do you expect that to really be kind of the last item from from the Hanjin bankruptcy is kinda marks the end of the of the saga there.
Hi, This is Dan co and I'm, a general counsel.
Yeah, we have we're close communication with our Korean law firm that is.
In deeply involved with the hundred on solvency and they've advised that the bankruptcy estate still has a substantial amount of money. After the distributions. They made in the fourth quarter. So we are expecting another distribution.
Unfortunately, it's very hard to time that.
They they've indicated that it could arrive at any point in the next year or so based upon the do you see the duration of the appointment of the Hanjin bankruptcy.
Administrator, but so we haven't claims we have a certain fixed amount of our claim was emitted by the bankruptcy court well received was a partial payment.
And there still is you know unexpected additional distribution and that may ultimately be limited by the size of the funds at the bankruptcy estate, but we we expected at some point, we will receive another immaterial distribution.
Very helpful. Thank you.
Just one last one from for me I heard the guidance on the first quarter about the lease rental income.
The sequential decline that you're expecting it's fair to think about that decline as a kind of similar to what we saw on a sequential decline this quarter.
That's right when I think about it.
I I would say that it's probably going to be a a little bit less because we've had a little bit of an uptake with the build up to the lunar new year, which has resulted in some containers being activated.
But the overall you know often to the lunar new year, you know a decorum not virus study that you know being being felt and I think that you know that's going to have an impact on the second part of that quarterly five may say, so I I would say that you know it's going to be slas very very slightly down.
Probably a little bit less than the fourth quarter, but not much.
Okay, great. Thank you for taking my questions.
Thank you very much Michael Thank you Michael.
We have reached the end of the question and answer session I will now turn the call back over to Olivier for any closing remarks.
[laughter]. Thanks again, everyone for taking the time today to listen to our conference call and I look forward to updating everyone on our progress strings and Nicole Thank you.
This concludes todays conference you may disconnect your lines. Thank you for your participation.
Good bye.