Q1 2020 Earnings Call
Thank you and welcome to Textainers first quarter 2020, <unk> earnings Conference call.
At this time, all participants are in listen only mode.
Later, we'll conduct a question answer session and instructions will be provided at that time.
As a reminder, today's conference call is being recorded.
I will now turn the call over to you and Investor Relations for Textainer Group Holdings limited.
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 I described within this.
I'll make change after this discussion the company is under no obligation to modify your update any or all Stephens that are made please see the company's annual report on form 20-F for the year ended December 31st 2019 involved with the Securities Exchange Commission on March Thirtyth, 2020, and going forward any subsequent quarterly filings on form 6K for additional information concerning risk.
Factors that could be could cause actual results to differ materially from those in the forward looking statements.
During this call will discuss in non-GAAP financial measures as such measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of non-GAAP financial measures are the most directly comparable GAAP measures will provide to either on this conference call. What can be found in today's earnings press release finally, along with our earnings release today, we have 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 Dot com.
I would now like to turn the call over to alleviate secure texting as president and Chief Executive Officer for his opening comments.
Thank you Ed good afternoon, everyone and thank you for joining us today.
We start by saying I Hope you your families and loved one our old staying safe and healthy during this difficult time.
Or talks are with all of you would have been impacted by the Colgate My team and then make and were thankful to the essential workers on the front line and the family supporting them every day.
Together with ensuring business continue to meet our most important priority is the health and safety up more employees and we have reacted swiftly by transitioning to a remote working environment, we don't see significant impacts to our operation.
I'm proud of how our team has a reason to the challenge with their dedication and professionalism to remain focused on providing exceptional services to our customers in the face of the significant disruption caused by just health crisis.
I would like to turn to Textainers performance.
I'll begin by reviewing the highlights of our first quarter results and then I will provide some perspective on the industry.
Michael will then go overall financial results in greater details after which we'll open the call to your question.
Our performance for the first quarter was in line with our expectations.
We delivered lease rental income of $145 million adjusted net income of $10 million and adjusted EBITDA of $117 million. Despite challenging conditions at the current pandemic disrupted global trade and we used container demand.
Average utilization remained strong at 96.2% and that the ended the first quarter, we owed approximately 86% of our fleet, we stood at 3.5 million <unk>.
Try our tour last earning called in February we saw some favorable elements in our business that go more opportunistic market outlook for the balance of the year.
We experienced positive lease out activity ahead of the lunar new year would customer expressing renewed optimism on the heels of the phase one trade agreements and positive world economic outlook. In addition, we so madrid and manageable levels of inventory and increasing container prices.
As we progress to February the wide, reaching impacts of the cobot, 19th and then make study between much initially trade volumes were negatively impacted by the quarantine measures in China, you what was essentially a supply disruption.
Unfortunately, I try not reopened its economy. The rest of the was started to implement quarantine metros okay.
Leading to even more demand and supply chain disruptions with buyers delaying and canceling orders for Cogs.
In response.
Shipping lines has aggressively cut capacity would cancel sailings and taken other measures such as navigating alternatives and sometimes longer routes.
He's got might fit you management measures has helped carrier support freight rates well cheap oil prices contributed favorably to their various cost savings initiatives.
Consequently demand for additional containers, particularly dry freight has been affected by to reduce trade volume with minimal lease out activity since late January.
I should be light struggled to balance their container fleets in a new environment must reduce capacity the pace of container. We did they read has remained low and continues to remain limited.
We believe shipping lines have also mostly held onto their containers given to surrounding uncertainty and possible catch up demand when economy open up again.
Additionally, after about a year and a half of limited new container demand dreamed appeared of trade disputes shipping lines do not have significant surplus container.
As a result of the uncertainty dry freight containers orders to April were very limited at 800000, T. you barely have to production scene for the same appeared last year, which was itself lowered any 2017.
We expect this situation to continue shipping lines continue to focus on preserving liquidity and reducing capital expenditure for the foreseeable future well, let's try to switch for Clearsign that'd be my for new containers, it's coming back.
Total drybulk sector eventual yes actually.
Has been stable at 800000 can you.
New container prices have also remain well above $2000 per see you as the impact of lower demand has been compensated by pricing discipline and reduction in production capacity implemented by the factories.
The container retail environment also remains positive with prices up from last quarter.
Volumes have been somewhat lower in March and recently has the global love down is impacting local economies worldwide. But this is also a traditional slower quarter for resale.
Well declining trade volumes I, creating a challenging environments for our customers. We did not have any credit didn't you credit issues in Q1 or in April.
However, recognize you creates great Chris can drink gets crises and continue to work closely with all customer to avoid unpleasant surprises.
As we look out into the rest of the year, we anticipate a slower quarter in Q2 before a gradual recovery in the second part of the year, the strength of which remains to be detriment.
Nevertheless, we expect this to generate demand for lease container given shipping lines constraint likely container supply imbalances and continued supply chain disruptions.
With regards to Q2, we expect to see sort of drop in trade volumes, reflecting the full impact of cancel orders for non essential merchandise and imports.
As such we expect minimal container demand for more customer, causing our lease rental income to weaken as compared to the first quarter.
We expect container utilization rate in Q2, two continued to decline due to the expect like awfully that activity.
Direct operating cost and Ginnie expense should remain at current normalized level ordered and storage costs, which are impacted by change it you'd like it should.
In addition, we expect interest expense to decline driven by the impact of lower LIBOR rates of or an edge.
Think breaks facilities.
The market remains challenged like extraordinary effect and implications of the broad based responds to Colgate 19, pandemic and there was a high level uncertainty to our outlook for the rest of the.
However, textainer is well positioned to navigate through the current crises and participate in an eventual market recovery with a strong balance sheets healthy liquidity and optimize capital structure as well as demonstrated expense control inefficiency.
Well, we await an economic recovery, we remain focused on leveraging our strong and stable cash flow to optimize long term shareholder value creation.
During Q1, we strengthened our balance sheet by reducing our debt outstanding by 135 billion was conserving cash reserves.
We also repurchased almost 2 million shares, while increasing or buyback program to a total of $50 million.
I will now turn the call over to Michael will give you a little more color about a financial results for the past quarters.
Thank you Olivia I will now focus on the key drivers of our financial results.
Q1 lease rental income was $145 million decrease of 6 million, that's compared to Q4, primarily due to a reduction of fleet size and average rental rates.
We're pleased that Q1 lease rental income for old fleet was $130 million, a 3 million increase from Q4.
Excludes the full impact of the acquisition of the previously match lack of fleet.
In summary for 2019.
Utilization averaged 96.2% for the quarter, reflecting just somebody or decrease of 20 basis points from Q4.
As market actually remains muted.
She was Tritton katana margin was $1 million decrease of 1 million compared to Q4, primarily due to decrease the number of can tear salt.
Do you want gains on sale of owned fleet continues that $6 million, an increase of three light compared to Q4.
This was driven by improvements in the average game for container sold albeit at lower volume.
We're pleased that that contain a resale prices are remains favorable.
She one direction church, that's where the old fleet was $13 million, an increase of 2 million compared to Q4, mostly due to the inclusion of acquired lap go fleet.
She wanted depreciation expense was $67 million relatively flat compared to Q4.
Do you want you didn't make sense was $10 million that after removing expect a cyclical items remains consistent at normalized levels.
We continue to improve the quality of our spending and GE and they.
Sure among other methods enhancement of our technology tools and staff talent.
Do you want bad debt expenses $2 million.
Well, we did not having your credit issues in Q1, we increased our provision given the uncertainty and heightened risk.
From continued weakness in the global economic conditions.
As Louis mentioned, we have not experience a default or unusual changes the payment patterns through the end of April.
We continue to extensively larger credit and are pleased with our ability to closely communicate with our customers.
She want interest expense net realized hedging cost was $38 million relatively flat through the fourth quarter, even with additional debt.
Yes, the laptops, we acquired at the end of 2019.
Our Q1 average effective interest rate improved to 4.01%.
Or three point, 70% when excluding the non cash amortization of deferred loan fees.
We expect our effective interest rate to continue to decrease in Q2, driven by lower libraries.
For the month of April our effective rate was already 25, bips lower than the first quarter.
We had net unrealized noncash loss on derivatives journals.
$18 million in Q1 as compared to the game Threemillion.
For this was primarily driven by decrease and an increase respectively in afford LIBOR curve at each respective quarter end date.
These changes in the fourth libeled <unk> impact the spot mark to market value of our interest rate derivatives use for long term hedging purposes.
We intend to hold the underlying hedges until maturity. Therefore, any unrealized loss will methods zero over the life of the hedge.
Do you want net loss was $4 million or eight cents per diluted common share.
Do you want adjusted net income was $10 million or 17 cents per.
Moving to common share adjusted net income for the quarter excluded the noncash $15 million unrealized loss on derivatives.
Do you want to adjusted EBITDA was $170 million, a 4 million.
Increase from Q4.
Turning now to our share repurchase program during Q1 repurchase close to 2 million shares at Exterran common stock in the open market at an average price of $7 need which that's for sure.
On March <unk>, 2000, Teus, we announced that I board increase the plan to $50 million.
At the end of Q1, we had approximately 25 billion available under the increase plan and we will continue to repurchase opportunistically as we move forward.
Looking out our balance sheet liquidity, we remain focused on maintaining strong balance sheet healthy liquidity through both our well structured that facilities.
As well as cash reserves, we ended Q1 with the cash position.
SIV of restricted cash of $226 million as well as $816 million in available commit like capacity under our existing credit facilities.
During Q1, we are strong and consistent cash flows from our long term lease agreements to reduce debt outstanding by $135 million.
This was done to reduce interest expense and to further strengthen our balance sheet.
Our credit facilities are great shape and in full compliance with debt covenants.
Do not have any debt maturities or refinancing requirements. This year and remain financially well prepared to dress dresses and uncertainty from currently weak market conditions.
Lastly, we are very well positioned as we wait for an eventual market recovery in order to improve the quality of our fleet and our performance.
This concludes our prepared remarks. Thank you all for your time today operator, please open the lines for questions.
Well now begin the question and answer session to join the question Q You May Press Star then one on your telephone keypad you most you're telling acknowledging your request. If you are using a speakerphone. Please pick up your handset for pressing any kids.
Draw. Your question. Please press Star then too.
Well pause for a moment as colors join the queue.
Our first question comes from Michael Brown with KBW. Please go ahead.
Hi, Thank thank you operator, hi.
Hi, Michael how are you guys.
Good how are you highlight.
Good.
So you know it's nice to hear that you really haven't seen any credit issues you're default at this point.
Well I'm told diving, a little bit on a little bit more into the bad debt expense. So.
Can you give us a little bit more color, how you determine essentially appropriate amount to to to set aside in this environment and what are some of the assumptions you use to support the.
With that build them do you expect it continued to build French here. This is Ah Ah the the environment that we're continuing to operate in like.
Oh, yes, Mike I mean that wasn't that question, we were all all expecting and it certainly our focus at that at the moment that.
I think you know we were working with all the big shipping line that and in this world and a you know it's a reality that they don't always comply fully with their care payment terms that they have some small variations and therefore, we are sometimes heavy to oh prey to <unk>.
Then you New research at this stage had you know with mentioned in D. at a call earlier on a we have seen that nothing you nothing that it's absolutely a an abnormal that payment patterns and certainly no no credit that event, but we obviously need money cream.
The situation and you know it is that one of war on main concern and we continue to work with all customers to make sure that they're up to date with their their payment now this just to put a little bit that things into perspective and explain why we have a small increase.
In a in reserves or it's not a reserve that it's specific to one customer. It's just a a general assessments that the environment is the is a little bit more risky and that's we felt that it made sense to increase all our reserve very nice likely I don't know Michael maybe you want to.
As a little bit to this.
Oh, that's exactly correct Olivier so we don't see any changes in payment patterns that anything unusual.
So we thought that you'd be prudent to increase the overall reserve against a receivable portfolio, we feel comfortable at this time as to where it stands.
But well continue to monitor it of course on ongoing basis as conditions are surely stress right now.
Got it thanks.
So you know your your top two customers represent over or approximately 33% of your lease income.
Can you asked specifically address how are you feeling about those customers specifically it sounds like you're in discussions with your with your customers you're a close say I'm trying to more now that than typical she can you speak to how you're feeling about those customers and then also about really the top and shipping lines broadly I mean.
Not necessarily your top and since we honestly no your top 10, but I guess, how you're feeling about all the major shipping launch thanks.
Yep.
The answer in a nutshell is we we're feeling good as Michael said, we haven't seen any any yet slippage in up payments so far.
I think we are confronted by that the general environment, although although pretty dire and and I would a very high level of uncertainty.
We are seeing a market where a shipping line those two in particular, but but I mean that the top 10 has really been able to manage capacity and to cancel sailings and the first very positive implications. There. That's a it has really helped them a.
Taking a ocean freight rates, a we see certain routes, where do you have even been able to.
Take advantage of the shortage of five ships to actually increase the ocean freight rates, but by and large we see a a level where ocean freight rates are only very very slightly below last year, which was not a bad level.
Now I'd exactly the same time shipping lines are benefiting from the low oil prices and especially the bunker costs that has dropped tremendously and that means that although they're facing a certain cost associated with the hiding ships and paying to cool and servicing the finance.
Moving on to train on those ships.
They have some positive you know income streams that you know they would not have had or that they certainly didn't have in previous similar environment. So.
I think that's the best way to look at it is too to say that so far shipping lines haven't come under tremendous pressure.
Hi, everybody certainly money treating the cargo flows a very very closely because if the call go where to drop substantially for an extended period of time, there's no secret that it would get a lot tougher for shipping line, but that's not no shipping lines have announced that earnings so very few so far.
I wouldn't be surprised if <unk> earnings release for the first quarter turned out to be fairly fairly positive.
Great appreciate the color.
So I guess.
Where we sit today.
How is tech center really thinking about credit and how it could perform almost downturn versus person the financial crisis is it.
Potentially similar that I guess you could if you could also compare it to you know what we saw in that 2015 in 2016 timeframe that would be helpful as well. Thanks.
Yep.
Maybe I'll I'll, let Michael speak a little bit on on this as well.
If I can go back Mike, even a little bit murder and go back to 2008 and 2009, a drink that financial crises. You know, we so trade really collapse, but the actual container trade dropped by about 10%, which I think why quite often.
Our environment today people are talking about you know a container trade dropping by 10%, even though a the world trade organization is forecasting a a drop in overall trade closer to 230% and GP GDP numbers are also a much much more negative that then days.
But this is I think important to keep in mind, because it means that no even when economies are going to severe recession at least likely right now container trade actually continues there's a lot of cargo would that still needs to move [laughter] now in 2008 2009.
We had a very strong are bouncing back of the economies in the other crises that it's probably more relevant then is the one you mentioned, which is really 2016.
We didn't have Ah, we did have a bounce back but the factors driving to crisis with very different <unk> in that environment. There was very very strong competition and there was a lot of capacity that was being added to the market by shipping lines and that led to a collapse in freight rates.
Which are really puts the balance sheet to allow for more shipping lines under pressure and their cash flows trends were so much under pressure that that the Andy trees I'll take that as we all know in into bankruptcy of of hedging I think as I explained at the environment today. It is different because if anything I.
No shipping lines are have demonstrated so far that they are much better at managing capacity, which means that they are maintaining a a price level would shut which doesn't make sense and I think that that it gives rise to optimism that it will allow shipping lines to fail to this dispute with you fight.
Can I express it this way, we certainly expect that.
We will see a a drop in cargo that will take place in Ah Ah may and June, but we think that you know.
Economy I. It is recovering slowly and the countries are coming out of look out. We think that you know we could see a cargo picking up in early July which would be certainly very very positive for the whole industry, including ourselves and that's what we're positioning ourselves for so to your second.
And the second part of your question in terms of liquidity key what what we really striving for is to be prepared and be ready for the bonds back into markets and be able to invest at that point in time.
Michael do you want to [laughter].
Yes. Thank thank you live dates so up but one of the one thing. So we had done with our credit facilities during the last year and half yard where it has been rather quiet was to work on them a structural changes.
Staggering renewal dates so in other words will always have a major credit facility, that's available to us during up and down times, where.
It renewal.
Can be done and they will not come up for dual all the same time. So it's a good way to diversify and ensure that you have adequate credit even a very challenging times is that you have staggered a renewal periods for your facilities number one and if you might recall, we didn't work on these facilities during the last.
Sure and half where are we.
Modified certain things such as the company hips ensure that they were hoping for our type of the business as well reprice Dallas facilities to well, while we have the opportunity to do so whereby the prices optimized.
And all those things combined and managing the load against them right now.
Sure as that they're ready for a when there is a and ultimate upturn in the market as well if there is a downturn that you can manage those facilities as well easily when things and when times could be challenging. So I think there. The point is that we're very well positioned right now we're very happy to have done to work during the last six core.
There is to get them in a position where it's a there they are perfect for a vibrant we're in right now.
Okay, and just wanted to change gears, a little bit it sounds like in this environment that.
Just given any kind of where we were going into this where how about production levels have been more rational than in previous cycles.
I guess, how do you expect utilization rates to perform at the you know I saw this quarter years stayed came down but it came down kind of less than we had expected so.
Is it fair to assume that.
Decline that we get Frank I'm here in this downturn couldn't be less severe than what we saw.
During the financial crisis.
Oh, Yes, I I think you know what we're very happy with the at the very limited decline in utilization rate <unk> as I stated earlier on we we expected to continue and and possibly to be very slightly higher.
We still we don't expect the utilization rate decline to be that drastic as as the ones you're referring to so we kind of see an environment, where a shipping lines continue to hold on to their equipment at the moment.
They know that they want has capacity to buy container wisdom market bounced back. They know that there is likely to be further disruption to supply chain and congestion as a result of them are cutting capacity and reducing the number of sailings. So shipping lines overall are not rushing.
At this stage to read the Liberal container, which is I think another sign of offered their optimism in terms of a possible a rebound in the market.
So what we're observing is a more a complete absence of a new lease outs, then really a strong increase of turning of containers. So we expect oh utilization rate to continue to trickle down not a very high speed, but it will continue to treat.
Hold on until such time that treat we see cargo coming back.
Okay great.
Maybe just one more for for me.
You know we.
Yeah, I've noticed that a lot of companies have really bad and turning off their buybacks too.
Serve some some liquidity or maybe sit on a little bit higher cash.
You guys have been very active in the first quarter bought back at some very attractive levels.
But I guess, given the fact that no one really knows how this whole environment.
He's out or how long.
The downturn because last.
I guess, what gives you comfort in buying back shares and continuing to buy back shares.
This at this pace thanks.
[laughter] effect like.
As you mentioned, we wouldn't be buying the opportunistically and I think that's always been our focus and that will continue to be or focus or we will buy back share. If we think that you know weekend biden very opportunistically.
We didn't the trading limitation and restrictions that are in place, but the fundamental aspect for us. It's a really to make sure that we preserve our liquidity, an all cash and get ready for the market uptake. So that is what really drives or or decision in terms of off capital allocation.
At the moment and you're right to mention that no. There's a lot of uncertainty in the marketplace. But you also observed that you know we are in in a fairly positive situation in terms of our cash balances at the moment, but the short answer is that we will buy but who buy very healthy.
Okay.
Got it great. That's all the questions I have thank you guys.
Thank you Mike Mike.
This concludes the question in my first question.
I would like to turn the conference back over to the presenters for any closing remarks.
All right well, thanks again for taking the time today to listen to us and look forward to updating ever want to know progress during our next call. Thank you very much.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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