Q1 2021 CAI International Inc Earnings Call
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Good day, and thank you for standing by welcome to the fee a I 2021 first quarter earnings conference call.
At the time, all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
The ask a question during the session you will need to press star one on your telephone at least the advice of todays conference is being recorded if you require any further assistance. Please press star zero I would now like the hand the conference over to your speaker of today, David Morris Chief Accounting Officer. Please go ahead.
Thank you.
Good afternoon, and thank you for joining us today certain statements made during this conference call may be forward looking and are made pursuant to the safe Harbor provisions of section 20, <unk> of the Securities Exchange Act of 1934 and involve risks and uncertainties. The actual results to differ materially from our current expectations, including but not <unk>.
Limited to economic conditions expected results customer demand increased competition and others. We refer you to the documents the C. E O. The 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.
Okay.
These documents contain additional important factors that could cause actual results to differ from the current expectations on 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 on this call might change 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 estimates plans outlook.
The strength of juice for the future on.
I'll now turn the corner. This is one of the interim President and Chief Executive Officer, Tim Page.
Thanks, David and good afternoon, and welcome to Cai's first quarter 2021 earnings Conference call. We're very pleased with the exceptional performance achieved in the first quarter net income from continuing operations was a record $32 5 million our book value per common share increased 6% during.
The quarter, and we achieved and the exceptional return on common equity of 21, 3%.
David is going to provide some additional color on our performance during Q1, so I'm going to focus my comments on the current market and our expectations for the remainder of the year.
Demand for containers continues to be exceptional and there are no signs of abating.
<unk> current forecast for container shipping growth in 2021 of 6% that level of growth alone would be the highest level. We have experienced in the number of years, but there are additional factors that have been contributing to increase in container demand.
As has been well documented in the press every aspect of the global supply chain is operating at capacity shipping rail trucking and warehousing.
Any hiccup anywhere of results in the shipping companies being forced to leave them empty containers behind when they return to China, resulting in a shortage in China and the need to lease new containers to replace that capacity.
Capacity is under such pressure that of single ship grounding on the Suez Canal disrupted the China Europe trade lane to the extent that a number of shipping companies had to scramble to find containers deal with the extended transit times.
Several of several of our major customers report that virtually every ship, leaving China and other export areas as fully loaded.
Because of the type of ceiling schedules on the need to turn shifts quickly and they are unable to wait for all of the empty containers and they leave with the 5% to 8% fewer containers on the outbound leg and there were there on the inbound Blake.
Clearly besides strong trade growth supply chain inefficiencies of part of the story for container demand today.
Which leads to the obvious question, what's going to happen when the inefficiencies began the work their way out.
It's hard to predict with certainty, but we believe there are a number of factors that are going to meet the underlying container demand will absorb the impact if the efficiency improves.
First in the short to midterm you have to realize that even in the U S. There are large parts of the economy.
Haven't begun to or just beginning to reopen.
Europe is behind us and much of the world behind that.
As these economies reopen we believe business in consumer demand and subsequently global trade is only going to correspondingly increase.
Second because utilization and campaign in container demand is so high there are very few older containers being retire normally we expect three per cent of the current fleet to be retired every year.
The returns of older containers will begin to happen when the inefficiencies in the supply chain and begin to go away.
We believe though net net the new containers required to replace ketchup and fleet attrition.
More than offset the incremental container supply curve created by the easing of supply chain inefficiencies.
Third and longer term there are two appears to be a trend where some companies are looking to diversify the at least some of their sourcing away from China.
Won't happen overnight, but as it does supply chain cycle times will increase.
No other country has the manufacturing and logistics infrastructure to the to handle the export volumes of China currently produces shy.
China has seven of the top 10 container ports in the world with massive warehousing and in inland transportation networks to support the volume of outbound freight yelp.
The ultra large ships that are currently used in the China, Europe, and China West Coast U S. Trade lanes are too big for most ports in the world, which means that exports from smaller companies will not move directly from those countries will have to be trans loaded to large ships.
Increasing the cycle times and increasing the need for more containers as a result of this expectation of sourcing relocation drewery is forecasting the container efficiency metrics will decline over the next five years. So at a minimum you know even if there is zero trade talks trade growth it would take more containers to move the same volume.
Some of freight.
Everything I've mentioned the leads us to believe that the container leasing business businesses operating in a new more favorable long term paradigm.
In regard to see AI as mentioned in our earnings release Q1, we leased out of $129 million of containers on new long dated operating and finance leases.
To put that level of lease activity in perspective, our previous investment our previous record investment year was 2018 with $730 million of new container investment.
During 2018 in the first quarter, we leased out for only $40 million of containers. So this year's lease activity is more than three X. What it was in 2018.
And Q1 is historically, the weakest quarter per container lease outs.
Our current order book for Q2, and early Q3 stands at 350 million well ahead of what we would expect to see at this time of year given at the peak shipping season, usually doesn't start until July August.
Based on feedback from our customers.
Believe they will have significant additional container needs in Q2 Q3 and beyond.
We have secured additional production capacity and are in an excellent position to take advantage of the continued strength with the market.
We're very bullish on the prospects for continued growth in container demand for the rest of this year well into next year.
In conclusion, while it may be difficult to achieve the same level of gains on sale that we achieved in Q1, we expect Q2 net count net income to be at or slightly better than Q1, driven by growth in our core container leasing business.
We will have more containers on lease at the end of Q2, but then at the end of Q1 and overall lease rates are going up as well.
Furthermore, because of the long term nature of the leases we are putting in place that court of leasing flipped fleet growth and associated revenue growth provides the basis for what we expect will be increasing revenue and block bottomline results throughout the rest of the year.
All of which Lee just leads to our expectation of continuing to produce high teen or better roe's and continuing to increase shareholder value.
And with that I'll turn the call over to David.
Thank you Tim and good afternoon, everyone.
We've enjoyed an exceptionally strong quarter with an increase in utilization strong customer demand for both new and definitely equipment on a significant increase in gain on sale of equipment as.
The results we recognized record net income from continuing operations for the quarter of $32 5 million.
Or a dollar of 85 per fully diluted share.
As we mentioned in our earnings release, the run rate of that business exiting Q1 was robust and we anticipate on our Q2 net income will be at or slightly above that of Q1.
Total leasing revenue in Q1 was 80 points of $8 million slightly less than Q4 2020 due to there being two less billing days in the quarter.
Although we have invested nearly $130 million in the first quarter of 2021, we expect revenue in Q2, two and the increased slightly during Q1, we recognized several million dollars of revenue from the customer, but will not recur in Q2, partially offsetting some of the gains we expect to achieve from the increase in billing days on the new investment.
It is also worth noting that about two thirds of the new leases, we put in place in Q1 were finances.
While we target the same bottom line returns of finance and operating leases finance lease revenue be typically only be about 70% of what the similar time operating weeks would be.
We currently have about 280 million of new leases book for Q2, and we expect the proportion of finance leases to be similar.
In Q2 to Q1.
Depreciation expense of the first quarter of 2021 was $28 $6 million. We expect this to increase slightly in the second quarter, reflecting the increased investments in recent months.
Storage and handling costs with $2 5 million in Q1 compared to $3 5 million in the fourth quarter of 2020.
The increase in utilization between the quarters, causing storage cost to continue to decline.
As of our equipment is close to being fully utilized the RIN little in the way of additional savings to be made in storage and handling and we would expect these costs to remain at a similar level in Q2.
Gain on sale of containers was $6 7 million in Q1 compared to $4 4 million in the fourth quarter of 2020, 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 in the range of three on a half the 4 million in the second quarter of 2021.
Nonetheless, as I mentioned earlier, driven by new lease activity, we expect Q2 net income to meet or slightly exceed that of Q1.
Administrative expense was $7 7 million in Q1, we expect this the stay at a similar level in Q2.
Our operating income from continuing operations was 48 8 million in Q1, an increase of 4% compared to the fourth quarter of 2020.
Net interest expense was $11 2 million in Q1 compared to $12 2 million in the fourth quarter of 2020.
The average cash interest rate on our outstanding debt is now $2 one per cent compared to $2 two 5% at the end of Q4.
Although we expect the debt levels to increase due to increased investment we expect interest expense in Q2 to be in the same range as Q1.
As previously reported we disposed of our logistics some rental businesses during 2020 certain accrued revenue on costs from these businesses with true up in the first quarter of 2021, resulting in net income of $1 $1 million, we do not expect this to recur in Q2.
Income taxes for the first quarter of 2021 with $2 5 million of rates of $6 seven percentage, we expect our full year tax rate for 2021 to be approximately 7%.
The total on book value of our container revenue, earning assets at the end of Q1 was $2 5 billion, an increase of 65 million compared to the fourth quarter of 2020.
And at the end of Q1, we had total funded debt net of restricted cash on cash held in variable interest entities of approximately $1 8 billion compared to approximately $1 7 billion and the product on.
As of today, a total cash and liquidity available under our credit facilities is approximately $250 million the highest level in our history and is available for investment or return of capital to shareholders.
That concludes our comments operator, please open the call for questions.
Thank you.
A reminder to ask the question you will need depressed power one on your telephone.
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On by while we compile the Q&A roster.
And your first question comes from the line of Michael Brown with gave you double your your line is open.
Okay, great. Thank you operator.
Hey, Tim I, just wanted to start with your market commentary I thought that was a really comprehensive overview of.
Sort of you know tailwind that that are supporting the container leasing market.
As I parse through what Youre, saying it sounds like there's just a lot of secular tailwind that could continue to play out over time.
But if you had to nail down how long the market can stay as tight.
Tight and strong as it is currently is.
Is it fair to expect that that at the.
The market will stay relatively similar through the balance of 2021.
I think at the at a minimum of it'll stay that way there's no.
The indication from manufacturers that they're going to re increase container production, there's no indication from the shipping companies that they expect to see any.
Easing of the tightness of supply that they're dealing with.
And as I said I think the.
Of the economies open up the it's only logical that youre going to see some level of increasing consumer spend and business then.
As you know of huge sections of the world economy that are still effectively shut down right now so.
You know I think.
The step back and remember you know a lot of a lot of global trade moves in places other than just the U S and Europe.
So, but you know the power.
Our expectation is that.
You know the horizon looks pretty pretty good to us over the next like I said at a minimum of them through the end of this year and likely well beyond that.
Yeah. That's helpful. Thank you.
So you've got.
Capex of 350 million.
It sounded like through what's the mortgage dipping into the third quarter.
If you had to take a stab at that.
At the full year, where do you think capex kind of ultimately go or is it just some of that you really can't nail down just given the fact that it's really limited by being on what that the factory production ultimately is.
Both of the $3 50 isn't the Capex. That's just what we have leased we have capex beyond that.
I would say that our you know our expectation is that we'll have a record year in terms of investments so more of than what we did in 2018.
But it's that's not all committed to yet and.
A lot of it just has to do with how you know how how the how the manufacturing.
Second of all the manufacturers play out and how the holiday ultimately handle the allocating.
Reduction capacity of the various container lessors and the shipping companies.
Great.
Then just to just the change gears a little bit.
Ken on the to just get your thoughts on.
You know the debt.
The very clear difference between the fundamental outlook that you've been talking about and that your results show and really just the way the stock has outperformed the kind of recently.
The Guy I'd say, just the more recent periods, but the the stock is trading at.
On one three times of book value, So a little bit over book value here, but you just put up 21% Roe vs.
And you know just the very favorable outlook from here of which would certainly argue for a straw.
The stronger valuation.
So.
Just curious what's your thoughts on that and obviously at the day like today.
On the stocks down.
There's just a little debt.
Complexing and just you know interested to hear your thoughts on on the <unk>.
And if it kind of gets you a little bit more.
Attracted to two ramping up buybacks if possible.
Well I mean, its perplexing to us as well.
But we recognize also that our sector is pretty and our container leasing some of it on the other public companies are pretty small.
Drop in the AR.
And the pool of Investor interest in the World and and.
In the Grand scheme of things, we're all pretty.
Small amount of volume that trades.
So theres obviously.
The relatively few people can you know deciding to take profits or whatever it can can.
Have any impact on the price and.
But I think generally we think that the stocks of great value and.
We think the long term prospects are very.
Very.
Very good.
And we'll continue as we have will continue to evaluate.
You know whether the best use of our capital at any point in time is to repurchase shares or or invest in the containers and they're not necessarily mutually exclusive.
So I will just.
Do the math and figure out what you know what makes the most sense at any point in time.
Set of number of times, we're committed to.
Two of using all of the put using all the levers we have to increase shareholder.
Turns on that includes dividends and the.
Dividends stock buybacks and investments and.
We'll continue to have that philosophy.
Okay, great. Thanks, and then I will leave it there thanks for taking my questions.
And your next question comes from the line of Bob Napoli with William Blair. Your line is open.
Hey, Tim.
Thank you. Thank you guys for the questions.
So I mean, having watched this industry for a long time.
And then.
You know there've been times when the industry was healthy and it lasted for.
You know for several years and then there are times when somebody.
Decides they want to go for market share and take the pricing.
Are you seeing any signs of when the time Kim of.
And maybe.
Market share of irrational competition or what do you think no other than the reversal when the macro could oh.
The change the outlook for some of your business for.
The negative.
Not really seeing any any of that to means of the returns that are available and given that.
Everyone is dealing with.
The restricted supply.
Really no reason to.
Go Crazy.
The cause.
You can you can basically lease.
Pretty much whatever you get at very attractive returns. So there's no there's no pressure to.
To do anything different.
And you know the.
The the termination of the who.
Oftentimes of who wins the particular transaction has more to do with do you have the equipment available.
Rather than you know whats your prices because the.
The rig.
The returns are good as you've seen from you.
Some of one of our peers announcing today that the generating.
The very high returns as we are and really everybody on the industries so right.
Absent.
You know a complete shift in behavior from the container manufacturers, which no one seems to think that that's.
Likely.
It would take them willing.
Willing to produce containers would take them going after market share too.
Two.
Produce container as well in excess of.
The demand.
Or are there even to be an opportunity for somebody to two.
You now have.
In excess of containers in just one of them.
Push the market on price.
Thank you.
What are the current lease rates what is the the GAAP versus the the leases that are running on today.
Well I mean, the the gaps are pretty.
Pretty significant but.
And all as all things.
Net loss oftentimes just like in maybe in real estate.
You just.
Just because of the lease rate that runs out you don't necessarily always get all the way back to what market is if youre walking in the leasing space.
Brand, New you know, there's there's the amend and extend and you know what.
The increase in extend type things that go on all the time or.
Trade. This for different you know doing something different on a different way. So so you know.
Renewal rates are current are obviously.
Better than they would've been of a year or two ago, but they're not at the same level as brand new rates the.
And I'd, rather not get into specifics because its very customer specific very customer specific as to what goes on.
Thank you that makes sense and then I'm sorry, I missed the very beginning what of what were the average term what are the average length of the leases that youre putting on currently.
So in the second quarter was just a little less than 10 years.
So the visibility to your earnings.
Obviously, it increases the quality of earnings the big.
The ability of earnings.
Over the next couple of years of higher earnings.
You know relatively locked in somewhat locked in I guess is that of fare relatively locked in particularly when you put into context that in 2017 and 18.
We've put a billion one of new leases in place at that time had roughly nine year average lease terms. So we're building on top of that everything we did in the second half of last year and this year is building on top of that so we have a huge percentage of our of.
Of our.
Lease portfolio of that has very long term lease rates very long lease terms associated with it.
Just given that why not double.
Double your dividend alright.
I mean, it just seems like the dividend relative to the locked in earnings powers.
Pretty pretty small.
Yeah.
Certainly.
On the topic of conversation and you know.
That's that's something that.
No I wouldn't I wouldn't.
Necessarily rule that out in the future.
But we just didn't do it this quarter so.
The cause.
As I said it comes down to are evaluating what's the best use of the capital.
What do we think we're going to need in the way of capital equity capital for.
The investments for growth.
Thank you good times in the leasing industry appreciate it nice the execution.
Thank you.
Okay.
Again, if you would like to ask the question Press Star then the number one number one on your telephone keypad that as part of one on your telephone keypad.
And your next question comes from the line of Dan Day, we'd be wildly securities. Your line is open.
Afternoon, guys. Thanks for taking my question just first of all maybe.
If you could just provide a little commentary on the the rationale for concentrating so heavily in finance leases as opposed the operating leases.
Well part of it is part of it is just responding to the customer's desire to lock in.
The containers for a long period of time.
A number of the leases that.
The categorized as finance leases are actually.
Operating leases that become finance leases because of GAAP rules not because of the customer. So we have leases out of that are operating leases that are 13, 14 years of duration, where we will own the container at the end of the end of the life.
But because of GAAP because of either triggering the 75% or <unk> 90 per cent rules relative to life of container in total.
Total value of the lease payments may become finance leases.
So there's there's a part of part of the finance lease portfolio is true.
The finance leases, where the customer owns the container at the end of the term and part of the finance lease proposal as it is.
Very long term operating leases.
Got it got it but it's all it's all on response to its all in response to what the customer wants or not.
Well, we do have an interest in having as long the lease term as possible given the container prices today, but it's really customer driven in the at the end of the day.
Got it thanks, and then just on the balance sheet.
You started to mention it towards the end of the last question. How do you kind of think about where you're at on a leverage situation right now raising maybe more on the preferred market et cetera, et cetera, just the things youre thinking about there. Thanks.
Well, where we are.
Sure.
Well below three <unk> times.
Yeah.
Levered and.
At the present time, we don't need any.
Excess capital.
Additional capital so I don't see us.
Hum.
Going into the into the preferred market anytime soon.
As a result of that so.
We're generating cash.
Cash that's sufficient to meet our investment needs and can cover.
The amounts of capital, we think will be returning to shareholders over the next 12 to 18 months.
Got it thanks, and then just one last one on the.
The the new box prices it seems you're kind of stuck at this 3500 level.
Given your outlook.
It doesn't seem like things are going to get better for all of this year is there a situation where that takes another leg up to 4000 of Teu or are we kind of capped out on on the ryzen new container prices.
Well, it's hard to say I mean the.
You know if demand stays really strong there is some inflationary pressure on China's steel costs have gone up.
Those haven't really been pass through.
Because they are the priced container price. The can manufacturers are getting was already pretty pretty lofty.
And the returns have been very good, but you know depending on what happens with inflation.
It's it's not inconceivable that container prices could go up.
And you know in the.
In the Grand scheme of things rising rising asset prices are always always good for an asset owner.
No.
Okay.
It's to be seen whether or not there will be any upward pressure on container prices.
Got it thanks, Tim really appreciate I appreciate all the color here in the basketball.
Okay. Thank you.
Thank you speakers I'm showing no further questions at this time.
And I'll hand, it back over to Timothy page interim President Chief Executive Officer for the closing remarks.
We just like the thank everybody for their continuing interest and we look forward to speaking with you again next quarter.
Hi.
This concludes today's conference call. Thank you for participating you may now disconnect.
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Yes.
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