Q2 2020 Textainer Group Holdings Ltd Earnings Call

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Gill and welcome to Textainers second quarter 2020 earnings Conference call.

At this time, all participants are any 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. This man recorded.

I would now kind of called <unk> Investor Relations for Textainer Group Holdings Ltd. Please proceed.

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 early predictions I may differ materially from actual future events or results.

These views estimates plans that outlook that's struggling on this call may change. After this discussion the company's under no obligation to modify the 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 2019 filed with the Securities and Exchange Commission on March Thirtyth 2028 going forward any subsequent quarterly filings on form.

6K for additional information concerning factors that could cause actual results to differ materially from those in the forward looking statements. During this call will discuss non-GAAP financial measures as such measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures of the most directly comparable GAAP measures will be provided either on this conference call or.

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 and the earnings call presentation can be found on 16 urged investor Relations website at Investor Day, Textainer Dot com.

I would like to turn call over to all the biggest secure Textainers, President and Chief Executive Officer for his opening comments.

Thank you and good afternoon, everyone and thank you for joining us today.

I'll begin by reviewing the highlights of a second quarter results and then I'll provide some perspective on the industry.

Michael will then go overall financial results in greater detail after which we will open the call for your questions.

We're pleased with outperformance in the second quarter, which proved resilient inspite of the global economic downturn and he is enjoying a strong stocked with third quarter.

What a second quarter, we delivered Steve lease rental income of $145 billion, an adjusted EBITDA of $110 billion, while improving or adjusted net income to $15 million.

Cobi related disruption on trade continued to suppress container demand during the second quarter.

While China was able to reopen Devry Columbian March trade worsened as the rest of the world implemented their own quarantine measures.

Supply chain were significantly disrupted and buyers increasingly delayed or canceled cargo orders.

Overall global container trade during the first half of Twentytwenty was approximately 7% lower as compared to the first half of 29 team.

I wanted to see a stabilization in trade activity by mid June leading to a market turned around in lease out demand that continues to do they.

Existing container inventory at factories have I live tour, which stood at the level of about 600000 T. U S by now being almost entirely committed.

In addition, we have seen increase booking off available to people in Vetri and an increase in leasing rates yes.

The recent entry the container demand is driven by several factors.

First.

Trade activity has picked up as a result of their traditional seasonal summary, treatable cargo to Europe and North America.

Secondly.

It's I've been compounded by the need to restock inventories and catch up on older previously canceled or delayed during the initial implementation of quarantine measures.

In addition, we believe container demand is also driven by the impact of supply chain disruptions caused by depend damage and finally the impact of these factors has been amplified by the fact that for most of the past exporters shipping lines remain focused on cost optimization, thereby limiting their container.

Side.

You container prices remained relatively consistent during the second quarter dipping slightly below $2000 per seat you and if it increased to $2100 Percy you as of today.

It's simply pricing has been generally supported by production capacity reduction implemented by contain a factory.

Earlier in the year and are not benefiting from current market turned around and increase in demand.

The container retail environment remain limited and relatively consistent through most of the second quarter.

However over the past several weeks. We're now also seen any improvement in retail demand and prices, particularly for high Q.

Given the stronger than expected financial performance of shipping lines. During the first half of Twentytwenty and access to government support from independent make.

The perceived elevated credit risk has now mostly moderated and we are pleased to report that we have not encountered any notable credit we shoot it here.

Despite the ongoing challenging environment shipping line efficiently cut their cargo capacity driving significant heat treat to their freight rate well also benefiting from low fuel cost.

Nonetheless, we continue to work closely with all customers to avoid any unpleasant surprises.

And as a reminder, continue to carry a credit default insurance policy, that's called for a certain costs and lost it customer default, including lost revenue and recovery cost or replacement value of containers.

That's really called for the balance of the third quarter, we expect a recent improvements it trade volumes and related container lease out to continue till the end of December leading to an increasing our container utilization rate and revenue.

We also fully expect shipping lines to show further strengthening in their financial performance driven by the recent increases in freight rate.

Moving we're pleased with outperformance in the second quarter and are encouraged by the rebound in activity during the third quarter to date.

Well, we 19th pandemic continues to create uncertainty and market challenges. However, we remain optimistic with our outlook for the rest of the.

Textainer remains well positioned to participate into rebound in market activity with a strong balance sheet healthy liquidity and optimize capital structure and demonstrated expense control and efficiency.

Well now turn the call over to Michael who will give you a little more color <unk> financial results for the past walk.

Thank you maybe I will now focus on the key drivers of our financial results.

Q2 lease rental income was 145 million relatively consistent with Q1, primarily due to a slight reduction in utilization.

Well, Mark and I can be remained muted we were pleased with the stability of future lease rental income.

This is supported by your reliable revenue stream from RBC portfolio, which includes.

86% composition of long term fixed rate leases.

I would be had covenant.

With the recent increase in container lease out activity, we expect utilization and lease rental income to improve during the second half of this year.

She to gains on sale owned fleet continues with fix Mike also relatively consistent with Q1.

Both sales volume and absolutely per container salt were consistent with the fourth quarter.

We're pleased that that can share resale price environment remains favorable.

Q2 direct container expenses when young fleet was 15 million, an increase of 2 million compared to Q1.

This was mostly due to higher storage costs inhaled expense associated from.

Or utilization.

You do depreciation expense was 64 million he decreased 3 million, that's compared to Q1, due primarily to prove mark to market value adjustments on certain compares held for sale.

We realize they container lessee default recovery of 2 million in Q2, usually cash settlement received and fall from the small customer default, which was previously written off in 2018.

She tucci, an expense was 10 million yeah, that's removing expected cyclical items remains consistent at normalized levels.

We continue to improve the quality of our spending and she may through among other methods have set up our technology tools and stuff talent.

We benefited from the bad debt recovery of zero point Threemillion in Q2, driven by improvements in collections and our general customer credit profile.

However, we maintained a conservative approach and it helps you is your body receivables given the continued weakness global economic conditions.

We're very pleased to see the improvement in overall collections, which continue through today.

We'd like to recognize our team for a job well done continuing to extensively monitor credit and closely communicate with our customers.

Due to interest expense net realized hedging costs was 33 million.

The 4 million decreased as compared to Q1.

This is driven by lower rates and lower outstanding debt Q2.

We are pleased our Q2 average effective interest rate improved to 3.62%, which is 39 basis points lower than Q1.

We had the net unrealized noncash gain on derivative instruments, a 1 million keeps you that's compared to a noncash loss and 15 million she wants.

This improvement was primarily driven by an increase in afford library.

Q2 versus Q1.

Which is used to measure the mark to market value of our interest rate dreams used for long term hedging purposes.

Q2 didn't come with 60 money or 30 cents per diluted common share.

Q2, adjusted net income was 15 million were 28 cents per diluted common share.

Q2, adjusted EBITDA was 110 million, which was relatively consistent with Q1.

Turning now to our share repurchase program during Q2 repurchased over 1.6 million shares of Textainer common stock the open market at an average price up $8 in 33 cents per share.

On an accumulated basis through the end of Q2, we've repurchased approximately 80% of our outstanding shares.

At the end of Q2, we had approximately 12 million still available under the plan.

We will continue to repurchase opportunistically as we before and consistent with our capital allocation plan.

Looking out our balance sheet and liquidity, we remain focused on maintaining strong balance sheet and very healthy liquidity.

True, both a well structured bank facilities as well as cash reserves.

We ended Q2 with the cash position inclusive of restricted cash of 281 million as well Apple double the capacity under our existing credit facilities.

During Q2, you strong and consistent cash flow. So my long term lease agreements to reduce or average debt outstanding and further strengthen our balance sheet.

Both are short term credit facilities and long term ABS financing platforms are performing well and in great shape.

Do not have any debt maturities or refinancing requirements. This year and remain financially well positioned to address any potential stresses and uncertainty from weak market conditions.

Well certainly any sustained increase in market demand.

This concludes our prepared remarks. Thank you all for your time today operator, please open the lines for questions.

Thank you.

It's time, we will conduct a question and answer session. If he would like to ask a question. Please press star one on your telephone keypad economies and Tom when do you mind isn't a question Q you made fresh start to if people like to be moved your question from the Q for participants I speak we quit it makes me not to say we did pick up your handset for this.

Sarkies, one moment, Bobby Pope our first question.

Our first question comes from Michael Brown with KBW. Please proceed.

Hi, good afternoon guys.

Oh I like how are you.

Well thank you.

Yes, I just wanted to start on on credit you know great to see that customer credit is really remain benign through this is really challenging environment.

And then actually for you guys. This quarter, you've got some recoveries that came in.

As we think about really coming quarters, I mean, we're still not really in a clear here, but does seem like the environment certainly better than I feared couple of months ago, but.

Are there really any other crops out there that we should kind of keep an eye on it sounds like you're on a bigger shipping lines, you're in certainly good financial condition and some headcount from government support but are there smaller players out there that you know there were probably you know the ones more risk anyways that we.

You should still be concerned about and how do we think about potential financial impact from maybe the smaller players.

Yeah. Thank you Mark I must say, we were certainly feeling a lot more relaxed about the situation now than we were at the beginning up that and then make no in April we were having said that date daily calls to make sure.

That that monitor all payments very carefully.

And I must say that that has worked out very very well remain very close contact with we'd all customers and they have been very.

Very helpful. No. The reason why does that she wants me, maybe the wage primarily because our shipping lines and.

Acted very well in controlling capacity.

Thereby making their their freight rates and I think that's a therapy lesson here from the 2016 crisis, where Hanjin went bankrupt and were shipping lightsquared going after her charter school and fighting for market share a in this environment I think that's you know the old realize that.

This would be really detrimental and be a big dangerous for them. So there would be really disciplined and you don't at all I cut capacity that maintain.

Freight rates.

Then benefited from much lower fuel costs, which was you know.

Last thing and I also like to see that.

Second we think all them reducing capacity has meant that they have been able to start charging a more normal ocean freight rates on the return.

You may know.

I actually shipping lines target Fullfare on D oar originating trade from Asia to Europe, or North America, and then they kind of a subsidizing weight.

But because there was so little capacity available. They have also been able to chart much for a decent break if not normal ocean freight rates. So all that has we help them and that was even before the current to turn around.

We have not seen so since July.

In addition, we've also.

Taking a lot of comfort from just like that the government has shown that willingness to help but the weaker players. So I think there also learn from the hatching disaster and realize that so it made a lot of sense in time, a great a certainty to come to help off.

The weaker players and that we've seen several government coming would tell indirect or even though direct helped to dare to their shipping.

And more to your question about the smaller a line what are we see some issue dare I say, we feel very positive the theme and I have actually improve or are they show today is better than it was a one year with a lot the same time.

And you know, we certainly see the smaller shipping lines also starting to benefit from the regained in that can be too and I know the danger that cobi or something like drifting away. So we feel very good a body that certainly don't anticipate any any before between now and.

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Okay, great and.

You know a lot of.

I'm good commentary about you know what you're seeing in the current quarter and the pickup activity.

How does that translate to your capex opportunities in the second half and Oh I'm trying to think about how that can also play out for your utilization rate.

It looks like Twoq, you could be a near term troughed here, but as you're seeing this pickup in demand.

I guess, where do you know there currently man.

Now that could play out.

You know, obviously, we don't know how though.

Well just since he was.

You're expecting right now.

Yeah, Thanks, Mike Oh, Michael explain you know, we're feeling very good about the situation or.

That's fine that's instead, sneaky and our ability to deploy capex and Oh, we certainly see this market environment, that's a great opportunity for us to buy more containers. So I think you can expect to see a probably more capex in the second half a year as opposed to that the first half of the year.

But another very big benefit that we.

We are likely to see over the coming or workers is that the D.

Fleet utilization needs also like to get to some must support from time to current market and to your point about the utilization rate, we fully expect or you'd like mission to a more progress to be up you know in certain things that no. We could decrease I was like mission Bay plant.

200 basis points, Oh by the end of the year. So now we're feeling very very comfortable on both side in terms of fleet utilization and in terms of Oh, Wow, our ability to keep flowing capex.

One element that I have to mention me that manufactures that will show or being limiting production capacity to to some extent. So obviously that but then they get people that that you know there isn't as much production available there probably be would it be.

In the last year or.

Controlled environment, but on the other had a positive aspect for US is that prices have also remain a little bit Shlomo, but more importantly for us a lot more stable and probably a lot more stable for the foreseeable future. So how do those two elements or some of these are very positive.

In the long term offtakes there.

Mike, It's Michael if I might add on top of Libya comments there.

As we expect utilization to accrue one thing to note also is that we're very happy that we're able to lease out some of our definitely units as well.

The ability to do that has got to get to a positive impacts I think the prince or lease rental income of course, but also reduces our storage expense.

Listen to that so two benefits there.

Well show up in the second time yeah.

Okay, Great. Yeah. As you mentioned the expenses I mean, I was hoping if he can you put a little finer point on how you're thinking about maybe the sequential expenses here.

And my numbers your your.

Darren just came in lower and is really.

Depreciation expense was what's kind of one of the pieces. So any color that you could provide I think about the third quarter here from.

There are a direct operating expenses depreciation expense et cetera.

Yeah, So I must say I look at a direct operating expenses.

Oh linked straight to our utilization. So you see some improvement there we expect a starts to come down.

No we worked on really.

Focusing on reducing in that line item that I am I think we've done a good job there, but if utilization ticked down a storage will go up and cause that lie down to Greece.

I think a leading to the fact that there's going to be certainly some approve it.

After Q2 and in line with that I'd expect a direct container expenses to start coming down actually because of the decrease in storage depreciation that certainly oh, well go up with Oh, Abby topic Saga of course, a couple of things Yeah, we did a how's that.

[laughter] values that are concerned as held for sale, which has the impact of pardon. The small piece of that line item. So [laughter] values of our held for sale than toward improved that why not gonna depreciation, but on ongoing basis I'd expect that to set up start ticking up gradually as we deploy topics.

No that is a good thing associated with deploying capex a good yields was that youre going to have depreciation course, gionee. Yeah, we're quite happy with that line, it's pretty normalized here a few cyclical items embedded in there in Q1, but I think you to kinda rely upon a that level being saving midnight area.

But I pointed out as being something warm wise as we try to.

Focusing on that spend as well as we noted earlier and I can't comment. So you really feel it's important to spend spend wisely. There. So what as we focus in on our staffing costs, we want to get a lot of productivity out of what we spend there and it's really too early as well we are investing quite a bit intra.

I T work should be able to leverage really good efficiencies on an ongoing basis, where that goes life.

But hopefully that helps them.

Yeah I appreciate the color, though thank you so that Michael.

Is just one last.

Well the ask about maybe any inorganic growth opportunities. It seems like you know what got you know more certainty about the operating environment.

Or at least a little bit more stuff so.

As you look out is there any opportunities for inorganic growth.

That you.

Your eye on and I guess, Conversely, either you know any partnering with another institution.

Oh, the first question, Mike I must say that the a the M&A market.

Yeah as we all know it's been pretty pretty quite given di di environment. So we don't really see that that many.

Opportunities out there, where obviously monitoring very closely and no remaining open to any opportunity does that that may arise, but we're not actively pursuing any any specific opportunity yet the moment, so I would expect that.

D emanate from its probably going to remain at or.

Little bit quite until markets that kind of stabilize and I would guess that that that at least take until the end up the year before we see movements.

So im certainly.

Got it yet the I appreciate that I know its a.

So it seems like covering quickly, but still so more.

Room together.

HM.

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Okay.

That's all of the questions that I had.

I appreciate all the color.

[noise] that's it thank you.

This time I would like to turn the call back over to alleviate for closing comments.

Yes, then Ah. Thank you very much everybody for listening in and ER, we very much look forward to you joining us for our next call then hopefully some the good news on our third quarter earnings so.

Thank you very much.

Thank you everyone. This does conclude todays teleconference. You may disconnect. Your lines at this time and thank you for your participation.