Q4 2019 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the C.A. I 2019, Q4 earnings conference call. At this time all participants are in listen only mode. After the speakers presentation, there will be a question and answer session.
Yes. Good question during the session you would need to press star one on your telephone. Please be advised that today's conference is being recorded if you acquire any further assistance. Please press star Zero I would now like Dan The conference over to Timothy Page Chief Financial Officer. Thank you. Please go ahead Sir.
Good afternoon. Thank you for joining us today certain statements made during this conference call. Maybe forward looking at are made pursuant to the safe Harbor provisions of section 21 eat the Securities Exchange Act 1934, and involve risks and uncertainties that could cause actual results to differ materially from our current expectations.
Including but not limited to economic conditions expected results customer demand increased competition and others.
We refer you to the documents to see a a international has filed with the Securities and Exchange Commission, including its annual report on form 10-K. Its quarterly reports filed on form 10-Q, and its reports on form 8-K. These documents contain additional important factors that could cause actual results to differ from current X.
Like patients and from forward looking statements contained in this conference call.
Finally, we remind you that the company is views expected results plans outlook strategies as detailed in this call like change subsequent to this discussion.
This happens the company is under no obligation to modify or update any of the statements. The company made during this discussion regarding its views estimates plans outlook or other strategies for the future.
I'll now turn the call over to our President and Chief Executive Officer Victor Garcia.
Good afternoon, and welcome to see <unk> fourth quarter full year 2019 earnings conference call.
Before I begin never like to take a moment to address our strategic alternatives review process.
As we previously announced say I has been working with Centerview partners as its strategic financial advisor to explore and evaluate strategic alternatives to maximize stockholder value.
As we noted in our press release today that review is ongoing and we will not be sharing any additional information on that topic today.
With that I'll turn to earnings.
I'll start by sharing our results for the quarter, then I'll walk through our progress and outlook for each of our business segments before turning the call over to Tim to discuss our financial results in more detail.
For the fourth quarter 2019, and full year 2019, our results have been supported by continued strength in our.
Our fleet utilization.
The average utilization of our own container fleet during the fourth quarter was 98.5% as compared to 98.6% in the third quarter and 98.3% current currently.
We reported container lease revenue of 73.5 million in the fourth quarter, a 3% decrease from the third quarter due to limited investment during the quarter and the extension of two large operating lease contracts that converted to finance leases.
By the lease extensions had no impact on cash flow the GAAP accounting treatment resulted in a reduction in overall revenue.
For the fourth quarter, we reported 9.5 million or 54 cents per fully diluted share attributable attributable to see I common stockholders from continuing operations compared to 68 cents in the third quarter of 2019.
Property results in the fourth quarter impacted by an accounts receivable reserve of 5.2 million related to one of our shipping line customers. This customer has fallen behind on its regular payment schedule, but continues to operate and has made intermittent payments.
We're closely monitoring the customers efforts to restructure has strengthened its been financial position. However, we have determined that the best course of access to fully reserve our outstanding receivables.
Our proactively working with the customer to reduce the number of containers. We have at least to them. We are also worked with them to implement scheduled spring payments back in line with our existing agreements.
The two conceptualize the potential go forward impact of this we have approximately 30000 units on leases shipping line and are currently building 1.2 million per month.
Until the situation is resolve lease revenue will be impacted by as our credit policy Andy situations. So only recognize revenue as its received.
[noise] to developing Corona virus matter has resulted in the extended closure of Chinese manufacturing operations, including contained in manufacturing and reduce cargo exports out of Chinese imports.
Well manufacturing in China is slowly resuming and exports from the region are increasing we expect container shipping activity overall to be down during the first half of 2020.
Well, we expect to rebound in production an increase in cargo demand the economic impact overall remains uncertain at this time.
We are engaging and ongoing discussions with our customers regarding potential impacts to their operation and outlook for the remainder of the year.
See I has positioned.
Itself for the slower demand by limiting investment commitments over the past year and focusing on enhancing its free cash flow.
We're continuing to drive improvements to our rail business as well, while the overall market for railcar leasing has experienced modest customer demand during the past three months, we have made substantial progress in reducing the level of our idle railcars during the fourth quarter, we entered into lease commitments, representing nearly 30% of our off hire fleet.
And expect most of those these railcars will be placed on lease during the first quarter of 2020.
For the three months ended December 30, Onest 2019 rail segment net income from going from discontinued operations was $1 million or six cents per fully diluted share.
Despite very challenging freight market the performance of our logistics segment improved in the fourth quarter as well, we reduced our overhead costs and develop customer relationships.
With highest potential for improved mark margins.
The fourth quarter 2020, we reduced.
Personnel in our logistics on international logistics operation, which was an important step towards profitability.
To close in the fourth quarter, we continue to take strategic steps to strengthen our business in light of today's challenged market conditions and other headwinds we are focused on improving our performance by increasing utilization disposing of low yielding assets and reducing operating costs the companys financial fuzzy.
This will remain strong and we continue to benefit from high levels of committed cash flow. We're currently working to further optimize our business and position our company for the future with that I'll turn it over to Tim page, Our Chief Financial Officer to review the financial results for the quarter in greater detail.
Thanks, Victor Good afternoon, everyone total revenue in the fourth quarter was 103 million as compared to 106 million in Q3, a decrease of 2% for the full year 2019 total revenue was 417 million compared to 396 million in 2018 and increase.
5%.
Container lease revenue in the fourth quarter was 73.5 million, 3% less than Q3 as a result of slightly your utilization a slightly lower utilization in the fourth quarter and the conversion of some leases from operating lease treatments and finance leases as Victor mentioned in his remarks, the gap lease treatment has no.
Impact on our cash flow.
As a result of this conversion of set of recording lease revenue in the depreciation expense for an operating lease on the income statement. We are now recognizing finance lease interest income as part of our container lease revenue and the principal payment portion of the cash flow on finance leases is recognized in the cash flow statement.
For the full year 2019 container lease income was 299 billion as compared to 285 million 2008 team an increase of 5%, which primarily reflects the full year impact of new leases that were put in place during 2018 offset by slightly lower average utilization.
In 2019 as compared to 2018.
We expect Q1 2020 container lease revenue to be sequentially lower than Q4 revenue primarily due to the cash basis revenue recognition associated with the shipping like customer Victor discussed in his remarks, because there is one less calendar day in the quarter that in Q4.
Logistics revenue in Q4 was 29.9 million as compared to 30.3 million in Q3. This 1.2% decrease is better than what we had anticipated as the seasonal decline between Q3 in Q4 as typically more pronounced logistics gross margin in Q4 improved to three.
<unk> point 4 million or 11.5% increase versus the 3.2 million excuse me 3.4 million or an 11.5% margin versus 3.2 million or a 10.7% margin in Q3.
We are optimistic that we can maintain this trend gross margin improvement by continuing to apply our strategy and rationalizing the types of business we accept.
Focused on that markets, where we have focused on in markets, where we have the most robust carrier network.
EBITDA for the logistics business in Q4 was roughly breakeven as compared to a loss of point 6 million in Q4 of last year and a loss of point Threemillion in Q3, the improvement in EBITDA as a direct result of the strategic targeted overhead cost reductions we made us acute made at the end of Q2.
Those reductions had little or no impact on topline revenue.
Revenue and margin trends in January and February have been encouraging but results for the quarter will be dependent on March the uncertainty surrounding the impact of the Corona virus suddenly economy limits our line of sight into March results.
Container depreciation expense during the fourth quarter was 27.5 million, 1.8% lower than the third quarter and reflects the conversion of the two operating lease contracts into finance leases.
Ongoing equipment sales and limited new investments given the low level of recent container investment, we expect depreciation expense in Q1 to be at or slightly below Q4 level.
Gain on sale of containers was $1.6 million in the fourth quarter. We expect a similar result in Q1.
Storage and handling costs were $4.9 billion into fourth quarter slightly higher than the 4.7 million reported in the third quarter. This is consistent with our utilization trend during the quarter and based on utilization trends, we expect a slight increase in storage handling and related costs in Q1.
SGN a was 14.6 million in the fourth quarter 2019, an increase of $1.9 million from the third quarter, our fourth quarter SGN a includes the accounts receivable.
Reserve of 5.2 million Victor mentioned previously as well as higher professional fees, partly offset by lower costs associated with employee compensation.
We expect overall SGN HIV in the 12, 12, and a half billion dollars range in Q1.
Interest and other expense was 18.9 million in Q4 as compared to 20.5 million in Q3, a decrease of 1.6 million.
We expect our average debt balance to decrease as a result with limited container investment Q.
We expect our average debt balance in Q1 to decrease as a result of limited container investment. In addition, as our mix the flick fixed to floating rate rate debt continues to skew towards them.
Increasing floating rate, we will continue to see a decreasing average rates in the coming quarters cost Kevin. Consequently, we expect the recent trend of decreasing interest interest expense to continue in the first quarter.
Total book value of our container revenue, earning assets at the end of Q4 was 2.4 billion a decrease of 42 million as compared to Q3 at the ended the fourth quarter. We had total funded debt net of restricted cash and cash settled and variable interest entities of approximately two 2 billion a $30 million.
Increase from Q3, we expect the funded debt balance to continued to decline during Q1 based on the cash flow generated from our container leasing operations.
Going sales of rental equipment at limits and the limited level of container investment in Q4 in Q1.
That concludes our comments operator, please open the call for questions.
As a reminder to ask a question you any to press star one on your telephone to withdraw your question press the pound or Heskey. Please standby, while we compared to Q and a roster.
And your first question is from Brian Hogan of with William Blair.
Good afternoon.
Hey, Brian.
Hey, guys customer credit quality 500 million dollar.
Reserve build in the in the quarter I guess, how you would the krona virus and now.
All that going on in that obviously is one of uncertainty out there, but how are you thinking about customer credit quality. Overall is it just this one are you have increased.
Concern.
And then do you hold insurance currently.
Let me answer the latter persist we do have some insurance.
In place for customer default.
And.
So as far as the.
Where we are in terms of the effect on our customers of the Ccrone of ours. It's certainly in this situation. This is a company that.
We're working through and.
Was already.
Being challenged by.
Bye.
Okay and leverage overall in the market. So I think the impact of the Corona virus in the closure.
Only exacerbated the situation is part of the reason why we have decided to reserve against it but that being said.
Given all the uncertainty and the.
Closures that have already been happening.
The blank sailings that a number of shipping lines of had you were certainly we're at a higher risk.
Position right now and so we're very mindful.
Of.
Our exposures to all of the shipping lines.
We are.
We're monitoring.
In discussing with all of our customers how they see the current situation impacting them.
I will say to this point.
We've not seen other shipping lines with.
Im showing payment problems.
So we don't have those at this point there is certainly something that we're we're watching.
Alright. Thanks.
Can you discuss a one the.
I've written various reports about availability of containers and be in shortages.
And in United States in Europe and.
We see in Boston, maybe just talk in China I would have you.
Can you talk about the supply and demand and how you're managing.
Your location of your box is obviously a lot depends on.
China.
Now that starts to.
Resolving you back up to speed is there any return to normalcy.
I guess, where is your box fleet and an overall from industry perspective is it.
What does the.
Inventory like.
Okay.
Well.
Two fronts as far as being factory inventory, we have very little manufacturing inventory, we have not been purchasing.
Containers.
Over the last several months.
And so our inventory level overall is modest and at the factory.
The.
Realization that we have around at 98.3%.
We don't have a lot of boxes sitting idle.
Anywhere in the globe and most of the boxes that we do have are in in China or southeast Asia, We're seeing.
We're seeing some activity in southeast Asia.
Over the last couple of weeks in particular, where customers are are needing more equipment for us that's a good sign.
We have seen some demands coming out of Europe, but we have very little inventory there.
And we have very little lease inventory in the United States. So.
We have not seen.
Significant pickup in demand.
Coming or requests coming either.
China.
And we would not we normally at this time you wouldn't expect in anyway.
But certainly given.
The supply disruptions that occurred a couple of weeks ago.
We wouldn't expect a lot right now.
Sure and then.
I guess as your leasing out a new boxes a one.
Obviously, it's limited at this year, but can you discuss our OE trends you are returns on those.
New investments or new leases, if you will.
Well like I said, we haven't bought.
Any any new boxes right.
The market right I mean, we are.
Being more cautious right at the moment in terms of investment until we have a clearer picture.
The market situation as well as.
What we're seeing in terms of demand so.
We will will continue to assess that over the course of the.
The next couple of months and see how comfortable we are.
That the market is improving.
So the competitive environment.
Pretty you've been pretty rational or what.
From what do you see from that standpoint.
As typically there hasn't been much activity at all.
But I would say typically the first quarter, we tend to see of being more competitive.
Really hasn't been.
A lot of.
A lot of activity in terms of requests were reporting the fourth quarter, but obviously, we're we're a significant part into the into the first quarter. So the trends that we saw in the fourth quarter and so far what we see.
Are the same it's just been very very quiet.
Sure and then one last one from me into Melissa.
You had previously talked about refinancing your some of your ABS securitizations.
Is that still up a plan.
Given the.
Or what's your status there.
To some sort of the concerned certainly the interest rates have come down to historic levels.
When things, we just have to evaluate is what's the state of the credit markets.
And.
Would it be advantageous right now to to try to issue something but as it is something that we are.
Looking at it would consider.
Hi, Thanks.
Thanks Frank.
Once again to ask a question press star one on your telephone keypad, Dan that is star one.
You have a question from Michael Webber of Webber research.
Hey, good afternoon, guys how are you.
Hey, you Victor just wanted to start off with with macro environment, maybe just refresh our memory. So I look at your overall lease book, maybe stripping out.
Rail percentage that is tied directly to container Chinese container once.
As opposed to.
Asia, and Eurasia, non China and Europe.
We have.
Very little allowed to Chinese shipping lines its.
We tended not to do a lot of business with Chinese.
Domestic I will say domestic Chinese shipping lines.
Costco is a major global line.
That.
We believe is up.
A shipping line that we would look to do more business with but they haven't yet Costco so why not yeah.
We don't have.
Costco for the last few years has been.
Owning their own boxes and haven't been aggressively out in the least market. So they're having hasn't been much of an opportunity there.
Ballpark on just the top line.
Present, 15%, there's just a just vaguely trying to get a sense of scale.
No nowhere near that it's.
All right, let's call it customer correct.
That's helpful and then.
Yes.
We've seen this within some other than the international shipping segments and commodity segments, where we've actually seen.
Chinese players declare force merger.
Have you seen or heard any rumblings that happening in the box leasing space and maybe going back had enough going back to.
Even sars their precedent for force majeure to be declared on.
Box on box leases.
Outside of say you know some sort of marine disaster in the boxes loss or something along those lines there.
It is force majeure in plague the box leasing space right now.
We.
To the best in my recollection, we've never had a situation with somebody declared force majeure and nor have I heard.
The other shipping line declaring or exposure.
Okay.
That's helpful.
And then finally I I think at the beginning you mentioned now when you got a duty details around the strategic review, but it just maybe help me get it nibble around the edges there.
When we.
I guess first of all what do you think how should we think about a realistic timeline just to do or vaguely around some sort of resolution or your ability to give some sort of buckley theres or something.
Something we would that be reasonable to expect in later Q1 Q2 were or no.
Yes, Mike I I completely understand the interest around the topic.
But.
As we kind of said and we've written publicly.
Strategic review will continue and they're not going to be intermittent announcements.
And.
When when the board in and.
Our financial advisor feel like Theres, something to announce I think they will and we won't put a timeframe around that.
Okay.
I think that consolidating offline I appreciate the time guys. Thanks. Thank you.
And there are no further questions in queue I would now like to turn the call over to Victor Garcia, President and CEO for closing remarks.
I want to thank everyone for being on the call. We look forward to reporting our first quarter results and in a matter of a few weeks. Thank you very much.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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