Q3 2020 CAI International Inc Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to the C. A high Q3 2020 earnings conference call.
This time, all participants are in a listen only mode.
Following the presentation, there will be a question and answer session task.
I guess a question via the telephone. Please press Star then the number one on your telephone keypad keypad.
I'd now like to hand, the conference over to your Speaker today, Mr., David Morris, Vice President of Finance and corporate controller.
Good afternoon, and thank you for joining us today.
Certain statements made during this conference call may be forward looking made pursuant to the safe Harbor provisions of section 20, Onee of the Securities Exchange Act of 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 that C. O <unk> 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 expectations and from forward looking statements contained in this conference call fine.
Finally, we remind you that the company's views expected results plans outlook and strategies as detailed in this call might change subsequent to this discussion. If this happens the company is under no obligation to modify or update any of these statements. The company made during this discussion regarding its views estimates plans outlook.
Our strategies for the future.
I will now turn the call over to our interim President and Chief Executive Officer, Tim Page.
Good afternoon, and thank you for joining sea ice third quarter 2020 earnings conference call.
We're very pleased with our solid third quarter results container lease revenue grew 6.4% during the quarter 73.9 million.
Adjusted net income from continuing operations attributable to see a common stockholders grew 24% to 18.4 million.
Or a dollar four per fully diluted share as compared to adjusted net income of 14.9 million or 84 cents per fully diluted share in the second quarter.
Global Containerized trade global shipping lines and the container leasing market. Once again demonstrated incredible resiliency just as they did during and after the 2009 global recession as they did during the week in 2016 trade market. Once again in 2020 snapping back from it.
Unprecedent Unprecedent and slowdown in global trade during the first half of this year due to the global pandemic Trey.
Trade volumes are now running at levels above last year global shipping lines are enjoying freight pricing levels that are at the highest seen in many years, which combined with low fuel prices and focused management of ship capacity has produced high levels of profitability across the shipping industry.
The container leasing industry and see I particular responded to the dramatic downturn in the market earlier this year as it always has the market slow down we have the ability to quickly stop investment and because the majority of our leases are long term in nature, our cash our customers continue to pay.
We increased sales of idle assets overall cash flows remain strong and we de lever when the market recovers as it always does we're in a position to immediately deploy large levels of capital at very attractive rates.
Demand for containers has been exceptional container manufacturers continue we continue to closely manage their production levels and have been increasing prices with current quotes for Q2 2021 delivery in the $2500 range.
As a result is more difficult to secure containers and normal. However, we have a solid order position for Q4 and our order position for Q1 is larger than we would normally have at this time of year.
Based on long term relationships, we have with our manufacturing partners. We have no reason to believe we will not be able to source containers next year at least in line with our market position.
Which has a new long dated lease associated with it.
Total that's $400 million of new container leases from Q3.
Through the early part of 2021, which represents approximately 17% of the book value of our.
Where are <unk>.
Container fleet was at the end of Q2 2020.
Again, while we're not the largest container lesser lesser we have consistently had the lowest average funding cost of our public peers on a pro forma basis are average cast funding Cross fund.
Funding costs across all of our credit facilities is now slightly below 2% and 82% of those facilities are fixed rate.
Ah results in the secondary Mark Ah results in the secondary sale market.
We're also strong this quarter selling $26 million a containers with the gain of $2.4 million with the container manufacturer's quoting new container prices of $2500 per Cu, along with high utilization levels across the container across the entire container market you see the trend of high secondary container.
Resale prices continuing.
In conclusion, we're looking forward to a continuation of growth in both are top and bottom line in the coming quarters.
We have a strong lease order book high utilization are locked in a low cost that structure and a strong market for container dispositions, we expect to see significant improvement in a row and Q Q4, and the coming quarters.
We remain very focused on the commitment we've made to our shareholders to strive to be the best container lessor make prudent capital allocation decisions invest one returns are attractive as they are now, but when the market turned down focused on other ways to enhance shareholder value.
Thank you I will now turn the call over to David Morris, who provide some additional color on our financial results.
Thank you Tim and good afternoon, everyone. We've enjoyed a strong quarter with an increase in utilization strong customer demand for both new and depo equipment, leading to a 6% increase in contain a lease revenue from 69 4 million in queue to 73.9 million in Q3 <unk>.
Net income adjusted for the rise off of definitions costs that I will discuss later was $18 $4 million for the cool water or a dollar and four cents per fully diluted sure.
Container related depreciation expense for the third quarter was 28 3 million slightly higher than the second quarter, reflecting increased investment rental depreciation was $2.1 million and a quarter and will remain at a similar level in the fourth quarter.
Container related storage and handling costs were four 7 million in Q3 compared to 5.2 million in queue to reflecting the increase in utilization between the quarters.
As containing utilization continues to improve we would expect total storage and handling costs in the fourth quarter to be approximately $6 million slightly less them in the third quarter.
Gain on sale containers was 2.4 million in the third quarter compared to $1.8 million in the second quarter, reflecting strong demand in the secondary sales market. We expect a similar result in the range of $2 million to $2.5 million in queue for.
We scrapped more than 200 end of life Royal calls in the third quarter generating a small gain we have.
Renewing to explore opportunities to dispose of additional royal calls, although it is difficult to predict when or if any transaction would close.
[noise] administrative expense was 6.4 million in the third quarter compared to 7.4 million in queue to several non-recurring items were included in the cool water, including an increase in bad that recovery of 7 million as a result of collecting cash from previously reserved customers.
It is worth touching on the company's outstanding receivables. We currently have a DSO 45 days the lowest levels management can recall <unk>.
Including Royal G&A costs of approximately point 8 million, we would expect total G&A in the fourth quarter to be in the range of seven and a half to $8 million.
As I mentioned earlier, we continue to explore opportunities for disposing environmental assets, having said that we are having some success and leasing out some of our I phone calls and expect a royal business to break even in the fourth quarter.
We completed the soil amount logistics business during the third quarter. The business was sold for proceeds of five 6 million. The results of the business for the period up until Syal recorded and discontinued operations we.
We would true off the proceeds with the perch, serving Q1 of 2021 for any changes in the estimated working capital of the closing date, but the adjustment is expected to be minimal.
During the quarter, we issued 743 million of a b S. In hopes at an average rate of 2.3%.
We use the proceeds from the issuance to pay down and fully amounts outstanding under three existing ABS facilities.
The series 2017, one in the series 2018, one notes will pay down in September and the series 2018 notes 2018, two notes will pay down in October.
This will save US approximately 11.4 million in cash interest expense in 2021.
As a result of prepaying the 2017, one and 2018 one notes the recorded a three 6 million non-cash right off of that issuance costs.
As we reported on our queue to earnings cool, we entered into an interest rate swap in early July swapping one month LIBOR for a fixed rate of no 0.29% on 500 million about floating raped that for a time with five years apart.
Ultimately, 82% of add that is now fixed rate.
Net interest expense was 16.6 million in Q3 compared to $17 6 million in queue to the decrease in interest expense was primarily due to a decline in the average interest rate across my credit facilities caused by the significant dropping LIBOR rates that occurred during the second quarter.
[noise] interest expense in queue for should be in the same range is Q3.
The total book finally, if I can kind of revenue owning assets at the end of Q3 was 2.4 billion, an increase of $32 million compared to Q too.
At the end of the third quarter, we have total fun to that nurse of restricted cash and cash held in variable interest entities are approximately 1.8 billion compared to approximately 1.9 billion at the end of Q too.
As of today total cash and liquidity available Underact credit facilities is approximately 225 million the highest level in our history based.
Based on our current current outlook for the fourth quarter, we would expect liquidity to decrease slot you as a result of investment commitments.
While it is difficult to predict with certainty. We believe we will continue to have sufficient liquidity in future quarters to deal with any unexpected issues related to COVID-19. Furthermore, we believe I liquidity position will allow us to be favorably positioned to take advantage of a strong contain a market order a ton capital to shareholders.
That concludes my comments operator, please open the call for questions.
Yes, Sir and ladies and gentlemen, again, if you would like to ask a question that is star any number one on your telephone keypad, we will pause for just one brief moment to compile the Q&A roster.
And we have one.
[laughter].
Oh.
Yeah, again, ladies and gentlemen that a star any number one.
And we have our first question from a Mister Michael Brown from K V. W.
Good evening, Thank you for taking my questions.
Yeah.
So.
No I think everything sounds like it's certainly progressing while in the business and your outlook sounds very certainly there in positive here I guess, what I wanted to hear first is maybe a kind of a high level view as we think about 2021 and I guess, what you're kind of hearing from your shipping line customers.
If the strangeness rebound uhm continues.
How should we think about maybe the or if it continues or if it was to deteriorate how should we think about the bold bear case here for for the business. So if cases continue to spike and we see widespread lockdowns, what would that kind of mean for your business and you see it and then alternative alternative.
If we were to see things like greater stimulus come through and help that they consumer actually accelerating continue to improve I would say that's yeah potentially another positive for your business how could that plan I know those two things aren't really mutually exclusive but I'm interested to hear about I guess, it's kind of the upside or downside cases.
As you look into 21 from here.
Well I think on the on the on the upside case, there will be you know opportunities to there there'll be strong container demand.
Customers are still telling us that they their expectations are that.
There's going to be some growth in demand and that they have a fairly high level of just replacement needs.
Due to the limited amount of container production and.
High levels of dispositions that occurred 2019, and the first half of 2020 haven't really caught up yet.
So the outlook there I think would be and if there's any kind of growth.
It'll be a pretty.
Robust year I believe for you know overall demand.
Both on standard dry boxes in refrigerated containers and the specialized containers also.
In terms of a downside I think that.
There was still a fairly decent level of shipping during last downside.
Biggest impact really.
Uhm.
Volumes occurred when China shut down.
Because obviously, that's a source of a lot of.
Exports are Andean per cent of the U S.
A little less less impact that really what was China started open backup.
You know I'm not.
I suspect that it's unlikely that China shuts down again to the extent they did.
Earlier this year.
But even when that happens.
Supply chains tend to get just wrapped it.
More difficult to.
For the shipping companies to get their containers back from wherever they're from wherever they're being.
Delivered ultimately.
Cycle times six stand in that generally keeps.
Keeps or even increases demand for containers. So.
And in either case I think in one case, I think the floor or unless it obviously, if it's a very extended here.
Period of time.
Could have a different outlook, but.
For a relatively short term a quarter or so I don't think that there would be a great dropped off in the in the amount of container containers needed to keep whatever trade there is growing.
And on the upside I think there's a.
A chance to you could have particularly because of work container prices are from a dollar standpoint, you could have a pretty significant.
Investment year in containers.
Right, Okay, great I appreciate that.
Clinton.
S U did.
Did you think about some of the you know containers that you've you've ordered in our already booked out.
Apologies if he gave him his call at the beginning of the call I got out a little bit late but.
How should we think about how that.
Feeds through into the revenue line through the fourth quarter and into the first quarter as a kind of.
Steadily building.
Month by month for wanted this going out you know I was it already kind of already gone out in in October and so we kind of get a full quarter impact.
Yeah, just any color that would be would be helpful.
It's it's a pretty steady.
Dispersion amongst the months of so what what are what our delivery of containers will be to us and that consequently.
As we sit here today customers are basically.
Yeah.
Almost waiting for the paint to dry to pick them up so.
It should be pretty pretty steady I mean there'll be.
There'll be.
A little bit of a push it in January for delivery.
[noise] delivery, so containers, and then there'll be a slowdown because of.
Chinese new year.
And then again there'll be a pickup in March so.
A little bit on the front end and the.
More of the backend in the second quarter.
Okay great.
And.
It sounds like the row, he's kind of moved to that in your press release said mid teens plus on [noise] on these new deals.
Is it possible for them to really go any higher or is that really just the kind of natural ceiling. At this point I think in the past and you were able to go on.
Above 20% right around 20%.
Is it possible that they could go to something like that level or is this really kind of the the best that you you see you see it for this current environment.
Well the the hour week over that we're quoting as the the average across the entire fleet.
So new transactions are are pretty attractive.
Tractive.
Lots of that is certainly new transactions are happening.
Are helping to pull that average number up.
So.
So it just becomes a a math game as to how big of a percentage the newer transactions become of the overall total.
Do you tend to get better are we on deals relative to some of your peers because.
Of your smaller size and therefore, you can participate in transactions, maybe a smaller amount, but at a at a higher or are we just trying to.
Think about that relative to your peers.
Well.
I think it's.
Can't really comment on what.
What other People's Rovs are I think we we benefit.
Because we can be selective transactions, we don't have to participate in every transaction.
We do have I think Ah.
An advantage in funding costs.
Which offsets.
To some offset some of the.
Vantage.
Some of the bigger players have in terms of you know a lower G&A cost per Cu.
So it's possible, but every every on every transaction. It's it's it's Ah you know stands kind of odd itself. So I think we have the opportunity to to get a little bit.
Better roe's, but it's all about how we execute the end of the day.
Hey.
Okay, I appreciate that that come out there.
How how we're kind of production levels as as you've seen in the is it.
It sounds like the factories are.
Adding some shifts extending though to work day is a little bit huh.
His production kind of ramping up to a point, where it's it's kind of able to meet.
The growth in demand and how should we think about it sounds like you've you've been very active in and ordering kind of as many containers as you can and it sounds like you're you've already ordered some containers into the first corner delivery, which I think is a little bit further out than you typically would go.
But given the limited production how much more.
More containers would you like to be ordering right now if if the production demand could.
Production supply could meet the demand that you're seeing out there.
Well, we'd be I mean, we would be ordering more of the factories aren't really quoting.
All the factories are not quoting for.
Much of second quarter delivery, so, it's a little bit hard to order one can't get a quote.
It's a we would like we have the capability to order a lot more obviously comes down to trying to match customer.
Demand and the available.
Capacity as I said that.
My comments.
US ordering containers directly ourselves isn't the only way we're going.
Finance things.
There are a number of conversations going all on all the time was shipping companies cause they they're order in containers also and they they often times look for takeout financing so they're the ones I've made the commitment and the ship and the container manufacturers like to work with it with the shipping companies in terms of commit.
So that a leasing company will come in and do takeout financing and then on top of that their sales leasebacks. So.
The ability to invest is not strictly limited to just new containers.
New containers from tier ourselves.
Yeah, great Great point Greenpoint appreciate that uhm. It maybe just one last one for me on capital allocation.
We just spend talking about some of the constraints on the investing side cause sound like there are some opportunities outside of just you know my new containers, but you know you clearly through and off line of Cashflow here you instituted the dividend they buying back shares.
How should we think about how you'll kind of use each of those levers going for in as your cashflows, you know likely continue to increase from here.
I mean, but all I can say is that we will use those levers when it makes sense to do that we certainly have put ourselves in a position from a liquidity stay on quite that we can be opportunistic and we're certainly sensitive to Max.
<unk>, Inc. Shareholder returns of maximizing R O E and that.
In order to do that we're going to have to.
When investing is not attractive or not possible that's gonna require returning.
No capital to shareholders above and beyond just a regular dividend.
Okay got it alright.
Alright, well, thank you Tim and David Thank you for taking my questions.
Thank you.
At this time, we have no further questions.
Thanks, everyone for joining the call and we look forward to.
Arago enjoy it again at the end of the fourth quarter.
Ladies and gentlemen, does does conclude today's conference call. Thank you for participating you may now disconnect.
[music].