Q4 2020 CAI International Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the CACI International fourth quarter 2020 earnings Conference call.
At this time all participant lines are in listen only mode. So if you require operator assistance. Please press Star then zero.
After the presentation, there will be a question and answer session to ask a question. During the session you will need to press Star then one.
Please be advised the today's conference maybe recorded.
I'd now like to hand, the conference over to your host today, Mr. David Morris Chief Accounting Officer. Please go ahead.
Thank you.
Good afternoon, and thank you for joining us today seven of statements made during this conference call may be forward looking and are made pursuant to the safe Harbor provisions of section 21 of any of the Securities Exchange Act of $19 34, 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 international has filed with the Securities and Exchange Commission, including its annual report on form 10-K its cash.
Quarterly reports filed on form 10-Q, and its reports on form 8-K. These.
These documents contain additional important factors that cause actual results to differ from current expectations and from forward looking statements contained in this conference call.
Finally, we remind you that the company's views expected results plans outlook and strategies as detailed in the coal might change. The subsequent to this discussion. If this happens the company is under no obligation to modify or update any of the statements of the company made during this discussion regarding its views estimate.
Plans outlook strategies for the future.
I will now turn the call over to our interim President and Chief Executive Officer, Tim Page.
Good afternoon, and welcome to <unk> fourth quarter 2020 earnings Conference call.
We are very pleased with the exceptional performance achieved in the fourth quarter net income from continuing operations, which is effectively net income for container leasing business was a record $32 5 million.
Adjusted net income from continuing operations was $31 6 million, 69% higher than Q3 of 2020, and nearly 200% higher than Q4 of 2019.
Container lease revenue was also a record at $81 6 million, an increase of 10% versus the third quarter.
Every aspect of our container operations contributed to this outstanding quarter and provide the runway for continued strong financial performance in 2021 average.
Average seat utilization was 99, 3% in the quarter and currently stands at 99, 7%.
We invested aggressively in the fourth quarter, taking advantage of the unprecedented level of global container demand.
In place of $154 million of leases for new standard dry and refrigerated containers with average lease rates well in excess of our fleet average.
These new leases have an average lease term of 11 years.
Since the end of June we have put in place of approximately $300 million of new leases and the growing our revenue earning assets by 6%.
In addition to lease is for new containers, we renewed and extended leases on many older containers with lease terms, reaching up to 14 or 15 years in some cases even longer.
These renewals were at rates that are very attractive relative to historical norms.
Our average cash funding costs continue to decline and as of the end of Q4 was $2 two 5% a decrease of 38% as compared to the end of Q4 of 2019.
During Q4, we saw a continuation of strong secondary sale market. The sales of $29 4 million generating gains on sale of $4 4 million.
Demand for containers has been exceptional and there are no signs of abating, we expect global container fleet to increase by more than 5% in 2021.
We are of a robust the robust forward order book, the $340 million of container purchase commitments through the early part of Q3 2021.
Additionally, we are working with several of our large customers to provide takeout financing for their own container purchases.
While demand remained strong container manufacturers continue to closely manage their production levels and have been increasing prices with current quotes for future production and the $3500 range for a standard 20 foot dry container.
Given the high container prices were being cautious and are focused on obtaining lease commitments from our customer the back future purchase commitments.
As our Q4 results demonstrate size is not necessary sizes not of necessary determinant in achieving outstanding market success.
We're nimble we're selected with the deals we make the focus on returns rather than market share, we micro manage our utilization and we consistently demonstrate our ability to grow.
Our week per adjusted continually continuing operations was 21, 2% in the quarter and reflects the promise we made to prudently allocate capital to drive shareholder value.
Not only did we deliver strong operating results from the fourth quarter. We also delivered on our commitment to return the AI.
Two of container leasing focus business by completing the sale of our rail business freeing up the capital invested in that business.
Even as we are we're investing aggressively in new containers, we enjoy a record level of liquidity, which allowed us to announce an increase in our quarterly dividend.
Additionally, since the beginning of December we have repurchased 639000 shares three 6% of our outstanding shares and have also announced that the board has authorized the extension of our share repurchase program by an additional 2 million shares.
Conclusion of the results we have achieved this quarter provide an exceptional foundation for continued strong shareholder value creation throughout 2021.
I'll turn the call over to David Morris, who provide some additional color around our financial results David.
Thank you Tim and good afternoon, everyone.
Following the disposal of our remaining rail costs during the fourth quarter of 2020, and my comments will be limited to the continuing operations of Mac container leasing business.
We have enjoyed an exceptionally strong quarter with an increase in utilization and strong customer demand for both new and definitely equipment, leading to a 10% of increasing container lease revenue from $73 9 million in Q3. The way you see one 6 million in Q4.
Net income from continuing operations adjusted for the write off of debt issuance costs kind of one off tax credit and I will discuss later was 31 6 million from the quarter or $1 76 per fully diluted share.
As we mentioned in our earnings release, the run rate of that business exiting Q4 was robust. However for reasons I will elaborate we anticipate that our Q1 net income will be at or slightly below Q4.
Container lease revenue in Q4 was a record $81 6 million. However, we expect revenue in the first quarter of 2021 to decreased primarily as a result of there being two less billing days in Q1 compared to Q4.
Depreciation expense for the fourth quarter was $27 8 million similar to Q3, we expect this to increase slightly in the first quarter of 2021, reflecting the increased investment in recent months.
Storage and handling costs were $3 5 million in Q4 compared to $4 7 million in Q3, the increase in utilization between the quarters closing storage cost to continue to decline.
As our equipment is close to being fully utilized there a little in the way of additional savings to be made in storage and handling and we would expect lease cost to remain at a similar level in the first quarter of 2021.
Gain on sale of containers was $4 4 million in the fourth quarter compared to $2 4 million in the third reflecting strong demand in the secondary sales market, while demand and prices remain high volume of available for sale of equipment as low as such we expect gains on sales returned to the Q3 levels in the first quarter of <unk>.
The 21.
Admin expense was $8 million in the fourth quarter compared to $6 4 million in Q3. Several non recurring items were included in both quarters, we expect admin expenses to be in the range of 7% to $7 5 million in the first quarter of 2021.
It is worth mentioning the companys success in collecting receivables from our customers.
Dsos decreased again from 45 days at the end of Q3 to a record low of 42 days at the end of Q4.
Our operating income from continuing operations was $46 7 million in the fourth quarter, an increase of 24% compared to Q3.
Net interest expense, excluding the write off of the $2 3 million of debt issuance costs associated with the repayment of one of our old ABS facilities was $12 2 million in Q4 compared to $15 4 million in Q3, the average cash interest rate on our spending debt debt is now $2 two 5%.
Compared to $2 five 2% at the end of Q3.
Although we expect debt levels to increase due to increased investment we expect interest expense in Q1 2021 to be in the same range of Q4.
As reported previously we disposed of our remaining railcar assets in December 2020.
Although we recognize the loss of $25 million from discontinued operations during the fourth quarter, we generated approximately $33 million in cash as the result of the sale of increasing our year end liquidity.
Income taxes for the fourth quarter were impacted by a nonrecurring tax credits of $3 2 million as a result of revaluing, our deferred tax liability due to a change in future state tax apportionment caused by the sale of our logistics and rail businesses. During the year, we expect our 2021 tax rate to be approximately 8%.
The total book value of our container revenue, earning assets at the end of Q4 was $2 4 billion, an increase of $99 million compared to Q3.
At the end of the fourth quarter, we had total funded debt net of restricted cash and cash held in variable interest entities of approximately $1 7 billion compared to approximately $1 8 billion at the end of Q3.
As of today total cash and liquidity available under our credit facility is approximately $250 million the highest level in our history. This.
Of this liquidity is available for investment or return of capital to shareholders.
That concludes our comments operator, please open the call for questions.
Ladies and gentlemen, if you'd like to ask a question at this time. Please press. The Star then the number one Keith on your Touchtone telephone again that is star then one if you'd like to ask a question.
To withdraw your question press the pound key.
Please standby, while we compile the Q&A roster.
Our first question comes from Michael Brown with K B W.
Yeah.
Hi, David Good afternoon.
Alright.
Okay.
So why don't you are one of the thing to start with.
Yes in some of maybe additional comments about.
The operating environment here clearly.
The.
The demand levels of.
Certainly still elevated.
Supply is still relatively.
Okay rationale was kind of the word in the.
In the prepared remarks.
You've got some orders extending out.
Beyond the second quarter.
So I guess my my key question that I'm trying to understand a little bit better here is just how long from this type of an environment.
The minutes, certainly I hate to use the term that it will stop.
On the different but the cycle seems to be elongated here.
So I'm just curious how youre thinking about how this plays out into the end of kind of throughout 2021 in the second half of point of line specifically.
Well I think you have to put in perspective, where we were.
The answer that question coming out of.
The second half of 2019.
There was very little container production.
Similarly in the first half of 2020 of 2020, there was very little container production.
So this this ramp up of production that we've seen in the fourth quarter of this year really comes on the heels.
Container fleet shrinking.
Over the 12 month period second half 2019 first half 2020.
So in that context of lot of what's been going on is really replacement.
Our fleet.
Just the kind of stay either.
So drew res just recently updated their container forecast for 'twenty.
2021.
Sure.
Expectation or their estimate of container fleet growth is six 5% in.
In 2021.
And then of <unk>.
Little bit of.
Moderation in the years after that two of $3 five or so percent.
Of course of the three 5% growth in 2022 and subsequent years on a bigger base. So.
Still relatively relative to prior years, it's still a lot of additional pieces of new being produced.
In terms of so we think that.
Based on.
Jewelry and based on conversations we've had with customers.
We're not anticipating.
Much of a decline in the demand for containers.
And you have to also take a look at you know we're going to.
Starting to.
Perhaps the.
Coming out of the the.
The the light at the end of the tunnel coming out of Covid.
Vaccines get more widely distributed and while there's a lot of speculation that demand might fall off because people.
We will have consumers will.
Switch from spending money on.
Homelink home improvements of the other thing.
Two maybe discretionary travel and the like.
Remember that there is a large large portion of the of the.
The the.
Population that still unemployed and they're certainly not.
Unemployed and underemployed and Theyre, certainly not consuming at levels that would be anywhere near what one would consider the normal so as I believe that as time goes on.
The fundamental growth of the economy.
First of all the stimulus that's kind of happened in the U S and what's happening in Europe.
We're going to see strong consumer spending for some time.
And that's kind of continue to drive container growth.
On the pricing side, the manufacturers seem to have little or no interest in it.
<unk>.
Accelerating container production the theyre more focused on maintaining high container prices. So I think youre going to see you're not going to see of flooding of the market of containers.
Youre going to see a very measured.
The response by the manufacturers the control kind of the supply.
<unk> balanced.
The tight supply demand balance that exists today.
So I don't know if that answers your question, but fundamentally we don't as we said in our prepared remarks, we don't see the you know the market slowing down.
This year could there be a little slowdown in the fourth quarter, because it's usually a little slower.
Possible, but I don't think it'll be significant.
Yeah. Thanks, Tim that's really helpful color.
On the switch gears to the capital return.
You guys are obviously very aggressive on the buybacks and returning capital to shareholders.
The increase from the authorization just obviously.
Given how elevated in the fourth quarter and the first quarter were how do you think about how should we think about what that is.
This could be now growth going forward, just trying to figure out of those are relatively good.
Guideposts for the.
The balance of 2021 or how you may go.
Your line balance of that lever here with obviously, a very strong capex environment. Thanks.
I think fundamentally we.
We're very interested in and we have the liquidity to return capital to shareholders.
Can't predict.
What the market is going to be able to.
Let us actually execute.
There are obviously limits around how much we can acquire at any given point in time.
But fundamentally.
When you think it's possible for us to be investing.
You know what the kind of level of group.
Oaken of and return significant amounts of capital to shareholders.
We're going to generate a lot of additional liquidity.
Earnings pace that we expect for the year will be of generating pretty significant liquidity every quarter on top of what we already have.
So we think fundamentally as I said fundamentally.
We certainly have the capability to do it again with the market.
Allows us to actually execute another question.
Okay great.
I will leave it there. Thank you for taking my questions.
Okay.
Our next question comes from Bob Napoli with William Blair.
Hi, Thank you good afternoon.
Tim and David Congratulations on an incredible year.
Obviously tell two halves and just crazy on the.
Believable times, you guys managed it quite well.
Uh huh.
Just I guess.
So your comment Tim.
The well understood that earnings would be down flat or down slightly in the first quarter.
From the fourth quarter, obviously, you're getting the benefit of putting on leases at higher rates offset by two shorter days and not as much gain on sale as you have.
Very little.
Available.
But how would you think about the second quarter.
With the the extra days would you expect earnings to grow sequentially.
In the second quarter given.
You still have the fair amount of assets coming on board.
Here in the first quarter.
I mean, we would expect second and third quarters to grow sequentially. There's one additional day and in the second quarter and then the there'll be another additional day of the third and fourth quarters.
Do have additional assets going on on the lease so that will do.
Drive some some of the incremental revenue.
It's hard to predict what what we will have available for.
For the actually sell in the market because at 99, 7% utilization of the mattress Teu.
The EU utilization, if you actually measure day in terms of T use of units, it's actually higher than that it's 90 899, 8%.
So there's just not very much the cells.
We're not expecting to see a lot of churn in of the equipment other than unless it's really old can probably really beat up at this point.
So the.
Bailable.
<unk> that we're going to have is going to be.
We think it's going to be pretty limited for some time.
But absent that we should generate more.
Every day, we have more lease revenue because they are putting more and more assets on the lease. So we would expect the.
The second and third quarter to sequentially grow off of the first quarter.
Great. Thank you so it sounds like.
It's pretty good earnings number for the year, whereas some of that.
<unk> versus the current expectations.
Adjusted.
Yes of course, we're expecting.
Pretty significant year.
Great. So you're looking at $6 I mean, just mathematically if you're flat and then grow.
The over Okay, Alright, we can all do the math.
And on that.
Let's see just of the.
The lease rates and looking at your <unk>.
The chart the leases that are coming.
Off lease in 2021 looks to be a fair amount probably below current lease rates as those are.
Getting released or are they getting are you able to re lease those at the current lease rates are.
So essentially you expect.
The yield on containers to move up quarter over quarter over quarter.
Yes.
When the older equipment comes off lease you typically don't.
Get the lease rate at.
The.
The range for a brand new piece of the equipment youre going to get something some.
In the depending on what the rate was youll get something.
In between somewhere.
And it's just the varies based on the lease of who the customer is in.
And.
Are you rolling that conversation in width.
Additional new equipment leasing so it's hard to predict on any one specific lease what the actual outcome is but as a general rule. We certainly don't expect it to see any decreases in the lease rates.
Leases the Reno.
Which by historical standards would be.
It's very unusual.
Great.
Thank you and then just a question on competition.
Having been through a number of these cycles the occasionally we've seen.
There has been periods of rehab.
Five of six years of good times.
Healthy it really healthy environment.
But you can have one or two competitors that decide to go from market share the throw a wrench in things and I mean have you I mean I.
Clearly you're being disciplined I think your competitor that reported this morning was very is very disciplined.
Are you seeing any signs of is there anything concerning you on the competitive front at this point.
I would say generally not as the you know.
For starters, they're just not.
Production of available too.
Per cent for any one person to go crazy.
So the.
The factories themselves are.
Behaving differently than they have in the past and Theyre not.
We are closely monitoring the.
The supply demand balance and they're not they don't have any interest in.
And the increasing production at the expense of price.
So I think the kind of a new dynamic in the end.
In our industry.
Sure.
I think that's going to stick.
Okay.
The last quick numbers question, what was the ending share count.
David what was it 17 560 something like that.
Some of it pretty much the photo on 17 five three.
Great. Thank you very much appreciate it.
As a reminder, ladies and gentlemen, if you'd like to ask a question at this time. Please press. The Star then the number one key on your Touchtone telephone.
Our next question comes from Dan Day with B Riley.
Hey afternoon, Tim and David Thanks for taking my questions and congrats on a really strong quarter really strong outlook.
I guess first question just a quick.
Model of one on administrative expenses expenses on that line with the.
But the other business is gone is that like $8 million ish a quarter number of good.
Benchmark to use going forward.
Yes, I think the seven $775 million.
Okay cool thank you.
More of a higher level question average lease duration I think you've noted 11 years trading. This morning said 10 years of kind of what's what's driving this.
In the past you had kind of said like 678 years is pretty typical.
What's driving the average lease durations of three four years compared to what they were.
I think it's the combination of things one is one is the owner of assets as the price of the price of the accelerated rapidly.
We want to make sure that we limit our exposure to getting the equipment back.
Uh huh.
And container prices may be lower in the future impacting our ability to lease that equipment out of the same rate. So.
We have been for a long time very focused on trying to get at the longer lease term as possible full lifecycle of leases when it seemed like to refer the Walmart.
So that's the driver but also the the.
The container lessor of spending.
Customers are also.
Some of them also of looking at the same thing they want container they want to know they're going to have the container ports full lifecycle. They want to fix the price of know that sometimes.
They want to fix the rate they know that sometimes the price of might be high as the prices might be load, sometimes so what's the.
The portfolio approach.
They see value in non res.
Turning equipment multiple times.
And what would normally be container is light.
The chase a little bit lower per diem.
Good day.
They have done the calculus Senate less less costly to hang on to the equipment, even if it's out of higher lease rate.
It has to return it and incur all of the.
The upfront cost associated with return of the equipment.
I think it's the combination of of our desire to minimize risk and the lease income the shipping companies.
The desire to minimize their repositioning end of life.
Or not end of life necessarily but repositioning of man.
Equipment turn in costs.
<unk>.
By having just.
<unk> turned in at the end of the of the container life.
Got it. Thank you that's helpful and then one more just on.
I've heard some commentary on new container prices around 3500 of Teu.
How do you see that evolving from here like do you think we've sort of hit the top.
What do you.
How high can those new container prices go and sort of what should we be looking for before that starts of the rollover.
Well, it's hard to get into the <unk>.
Ultimately, but you know the Chinese manufacturers.
Our controlling what what production levels are and what the.
You know what container prices are.
It's hard to say.
I wouldn't try to predict the we've seen the maximum on this.
The price.
Just don't know.
To be honest.
It's all the function of whats what supply and demand is in the ultimately you know if the shipping company has freight to move from.
From China, or someplace in Asia to Europe, or the or the United States and the need containers to do it.
And they don't have those containers and they are not readily available.
That's a recipe for ryzen container costs.
So it's safe to say all of the manufacturers are running full out and there's a sort of no way. They can just increased production from here or sort of.
Of that there.
I wouldn't say that they can't the increased production I would say that they are managing.
Their capacity to maximize revenue and profitability.
Got it.
Got it Okay. I appreciate you, taking my questions and I'll turn it over.
Okay.
We have a follow up question from the line of Michael Brown with K B W.
Great. Thank you for thank you for taking my follow up.
So sort of 10. She is now the pure play container leasing company.
You are generating significant cash flow.
And quite cash levels.
On the organic growth is certainly.
Certainly good day outlook seems very good there, but some of them.
The constrained here.
So just curious now that you've kind of out of some of the cleanup activity.
Do you would you actually look to make any acquisitions in the space maybe.
Something in the private.
Side of things.
Or Conversely, do you see opportunities to actually partner with another company.
I think.
Looking at our ability to.
Acquire somebody is certainly in a much more realistic.
The option for us given where our share price is trading and the liquidity. We have so it's certainly on the menu of possibilities.
There arent a lot of there aren't a lot of options, but the.
Certainly we would be interested in looking at the.
Thing that might be available.
Sure.
That's about all I can say about that.
Okay, Great and then just one more.
All of them.
One more question for you Tim.
And I understand this one is a little bit.
Maybe a little more sensitive question, but no.
Notice you still have the interim title.
And the has been a while now so just kind of curious on.
What the.
The board's thoughts are on that and the expectation there clearly there's still some uncertainty in the C suite. So just curious.
If there's any thoughts.
Thoughts or comments you can share on that thank you.
Thanks.
That.
The status of pretty much unchanged the.
The the boards.
Obviously quite happy with the performance.
My own personal.
My own personal I guess objectives are too.
Certainly a.
Help with the nor do we transition and the network.
The rigs.
Our list of how long that takes.
And the.
No.
So we're in a position to do.
The best thing for the for the.
Shareholders, but the.
The some point of time to bring in a new.
A new era of leadership to the company.
Okay, Great I appreciate the color there and I will say that investor sentiment certainly icons of the boards.
Of comments as well so thank you for Computershare, Inc.
That's it from me. Thank you for taking my follow ups.
As a reminder, ladies and gentlemen, if you'd like to ask a question at this time that Star then one.
We have a follow up question from the line of Bob Napoli with William Blair.
Thank you for the follow up just on the.
Turning assets, a true res outlook for six 5% growth with.
Container values are much higher than I would think that's the case of units not a not a dollar number.
If you will.
What are your thoughts Tim on the or.
David any commentary on the ability to grow the earning assets I think you had about $2 4 billion of container, earning assets at the end of the quarter.
I think we're going to affect the demand.
We expect to grow our fleet on a teu of CPU basis, and will along with that.
Growth.
The assets will grow in value of the asset split fall are falling off are at pretty low value rail, particularly relative to where we are today with.
With container prices, so I'm kind of I would expect the continuation of.
Oh the Plano.
Revenue, earning asset growth.
As long as the market stays.
Like it is today.
Yeah.
You're right with the handle the nation what the.
The utilization where it is true.
There's very little coming off so think of it.
The little bit of decrease in asset value really is coming from depreciation not from asset dispositions.
Have you seen any new entrants given.
Given the you know the.
Really favorable environment that.
When he made some I'm not sure it's easy to stand up of global <unk>.
Container leasing business debt quickly but have.
Have you seen any.
We haven't seen anybody we haven't seen anybody attempting to.
Greenfield a container leasing company.
It is not easy.
It's particularly not easy right now because it's very difficult to get production from the manufacturers.
So.
As it is the established players are.
Jackie and constantly jockeying for position to get.
Container production so.
The ability of earning.
The potential new player to come in and do that would be.
Very difficult.
You know there are financial players who will will.
Finance.
Sure.
Painters here and there but.
Generally the limiter there as you know and that is how much credit exposure somebody might want to in any individual.
Shipping company.
So we haven't seen.
Huge amount of.
The new financing sources or or.
Certainly no new container leasing companies of any consequence.
Yes.
This really good market.
Yeah.
Thank you and just my last question the.
Depreciation during the quarter was that of clean container depreciation numbers. So if we'd looked at that.
Number relative to the average earning assets that's the that's a reasonable run rate.
Yes, yes. So this is just continuing operations just.
Standard standard stuff so.
For a run rate.
Great.
Thank you appreciate it congratulations.
Thank you. Thank you.
I'm showing no further questions in queue at this time I'd like to turn the call back to Tim Page interim President and Chief Executive Officer for closing remarks.
I'd like to thank everyone for listening in and the.
Thank you.
Goodbye.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
[music].