Q2 2019 Earnings Call

Greetings.

Thank you for welcoming welcome to Textainers second quarter 2019 earnings Conference call.

At this time, all participants are in listen only mode.

Later, we will conduct a question answer session and instructions will provided at that time.

As a reminder, today's conference call is being recorded.

I will now turn the conference over to your host today Mr., Ed Yuen Investor Relations for Textainer Group Holdings Group. Please proceed sir.

Thank you certain statements made during this conference call may contain forward looking statements in accordance with <unk> Securities laws. These statements involve risks and uncertainties are only predictions and may differ materially from actual future events or results.

The company's views estimates plans and outlook as described because it's called May change. After this discussion the company is under no obligation to modify it up to any or all statements that are made please see the company's airport on form 20-F for the year ended December 31st we achieved all of the Securities Exchange Commission on March 27, 2019, and going forward any subsequent quarterly filings on form 6K for additional information concerning factors that may cause actual results to differ materially from those in the forward looking statements.

During this call we 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 to the most directly comparable GAAP measures. We've provided either on this conference call can be 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 Textainers Investor Relations website at Investor Dot Textainer Dot com.

I would now like to turn the call over to Olivia because your tax years, President and Chief Executive Officer for his opening comments.

Thank you Ed good afternoon, everyone and thank you for joining us today for Textainer second quarter 2019 earnings call.

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

Michael will then go over our financial results in greater detail after which we will open the call to your questions.

We're pleased with our performance in the second quarter, where we delivered stable lease rental income of 155.1 million and adjusted EBITDA of 114.7 million. Despite the slow market activity in the second quarter that has persisted in the third quarter to date.

New container activity continues to be driven by macro headwinds.

Such a slow European trade, a slowdown in Chinese economy, and ongoing trade disputes.

While overall market growth remains muted textainer has been proactive and disciplined with new lease opportunities.

During the second quarter, our fleet grew by 190000 to you as we make container investment at attractive rates and double digit returns.

This was achieved as we successfully targeted replacement demands opportunities with some parts from customers relationship to achieve mutually beneficial deals when new container prices reach a low point in the earlier part of the.

We expect to see the full impact of the Nikki your growth to lease rental income to be completely realized in the third quarter, though partially offset by a reduction in further additional capex.

At the end of the second quarter, we owned approximately 81% of our fleet, which stood at 3.6 million T U.

Overall, they have been very few if they can extend that deal form shipping lines and new container prices have decreased to the current level of approximately 1700 and $50 per c., you, primarily driven by weak new container demand.

Rental rate for new container lease outs have declined in line with new container prices, but the total volume of new deal with small and we do not believe that they were representative of normal market conditions.

As we have mentioned in prior calls this management team is focused on a disciplined growth strategy and we have not changed on rates on the few competitive open tenders.

During the second quarter, our utilization remains strong at 97.9%.

While demand for new lease outs was low we continue to see a moderate manageable level of turning and an attractive container retail environments.

The market supply remained stable, we total new drive any inventory slightly above 1 million T. U we presenting only three months supply in a normal market environment.

In addition, there was very limited new container ordering in the past few months and we are starting to see factory shutdowns, which are positive signs for the industry utilization and inventory level.

While the general market activity remains low, we're particularly pleased with our cost control initiatives. We achieved further declines in both Ginny and direct cost in the second quarter as compared to the first quarter and prior year, we intend to continue working on minimizing cost level going forward.

Unfortunately during the quarter, we incurred 9.1 million impairment and 3.3 million in bad debt expenses to recognize the potential exposure from a nonperforming midsized regional shipping line.

This customer is continuing to operate and attempting to restructure some recently announced government support.

We believe this incident to be an isolated credit issue.

And we currently do not have any significant concern with customer credits.

To provide some context textainer has had a longstanding relationship with this customer and there was no recent history of credit issue.

The company was profitable over the last two financial years and conditions that led to the default arose from alleged financial Misfeasance reported this quarter.

We remain cautiously optimistic that the government like restructuring will ultimately allow these carrier to regain market confidence and become current in their obligation, but we do believe it's prudent to recognize this impairment now as we actively seek redelivery of our containers and have filed an insurance claim for them.

The financial impact to Textainer is contained as our exposure is capped at or insurance policies deductible of 10 million and the total container value of these leases is well below our coverage limits.

Our management team continues to be proactively taking expedient steps to address credit concern and limited exposure as soon as potential issues are identified.

Turning now to our outlook for the balance of the year.

We believe new container demand will remain muted in the third quarter.

The outlook for Q4 remains uncertain perten pending economic activity level and ongoing trade negotiation.

This will result in limited additional supply of new container as well as likely additional factory closure, which will help stabilize the overall container supply.

The IMF recently revised its 2019 global growth forecast to 3.2% and we expect global container to put growth to remain well above 2.5%. We believe these level I feel supportive of moderate shipping volume growth.

There is innate replacement demand for containers that are coming to the end of their life and will need to be replaced with new production.

We expect container lessors utilization to remain high and continue to support strong resale prices and finally.

We believe shipping lines will continue to increase their reliance on container leasing companies as they focus their liquidity unnecessary capex related to new ships and compliance with the IMO 2020 emissions regulations.

We continue to believe leasing companies will represent approximately 60% of total purchases.

In summary, our performance is reflective of the low level of market activity in the second quarter, which has continued into the third quarter.

While there were a few significant lease up opportunities, we managed to grow our fleet by securing specific replacement opportunity I attractive yields with several of our valued customer relationships.

We expect a slow growth environment to persist in the short term given the current macro headwinds. However, the fundamentals of our business remain positive as evidenced by the industry high utilization rate limited, new orders and favorable container retail environments.

We continue to normalize or cost and keep our balance sheet, what position, while waiting for any possible uptake, which will eventually materialize.

I will now turn the call over to Michael will give you a little more color about our financial results for the past quarter.

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

Q2 lease rental income was $155.1 million decrease of only 400000 as compared to Q1.

This included the impact of higher Capex in the second half of Q2 offset by a slight decrease in utilization.

Q2 trading container margin was $3.4 million, an increase of $800000 compared to Q1 due to an increase in per unit margins and the number of trained they're sold.

Due to gains on sale of old fleet containers net was $5.4 million a decrease of 1.4 million compared to Q1 and included a reduction in average game per container vessel.

While average gains per content sold decreased the resell container price environment is still favorable.

Due to direct your parents that's for the old fleet was $10.8 million a decrease of 1.9 million compared to Q1, primarily due to a decrease in repositioning expense and maintenance expense.

We're pleased with this improvement I believe our direct container expense reflects the lower baseline level going forward.

Q2 container impairments included a $9.1 million charge.

We're estimating on recovered containers held by non performing legacy.

Bad debt expense also includes a 3.3 million reserve for receivables.

You from the same legacy.

As discussed earlier by Olivier. This lessee continues to operate and is undergoing a restructuring program with evolving from a significant government controlled entity with experience it after that.

Well, we are cautiously optimistic that the PURA will improve the lessees operating performance. We believe it is still prudent to recognize these charges in Q2.

Q2, depreciation expense was $61.7 million or relatively flat compared to Q1.

Due to general and administrative expense was $9.4 million down 8.4 million from Q1, primarily due to a reduction in compensation costs and professional fees were pleased that this reflects the pru baseline level going forward.

Q2 interest expense, including realized hedging gains was $37.1 million, an increase of 1 million from Q1.

Driven primarily by higher average debt balance due to capex.

Our Q2 effective interest rate was 4.3% and remains one of the lowest in our industry.

Due to unrealized loss on interest rate swaps collars and caps net was $10.1 million, primarily resulting from a decrease in the forward LIBOR curve at the end of the quarter, which reduce the spot mark to market value of our interest rate derivatives used for a long term hedging purposes.

We intend to hold the underlying hedges until maturity, therefore, any unrealized gain or loss will net to zero over the life of the hedge.

Well, we had an income tax benefit of.

Point $2 million for Q2, we continue to expect our annualized income tax rate to be in the mid single digits.

Due to net income was <unk> point $3 million or one cents per diluted common share.

Q2, adjusted net income was $9 million or 16 cents per diluted common share.

Adjusted net income for the quarter, excluding the noncash unrealized loss on interest rate swaps caps and collars.

And it came from an insurance recovery and legal settlement.

Had we excluded the impact of charges associated with the nonperforming lessee.

Q2, adjusted net income would have totaled $21.4 million relatively stable compared to the previous quarter.

Q2, adjusted EBITDA was $114.7 million.

3.4 million when compared to Q1.

Turning now to our liquidity, we ended Q2 with a cash position inclusive of restricted cash of $244 million, an increase of 24.5 million from the prior quarter.

Finally subsequent to the end of Q2 on July 29, we announced the completion of an amendment to extend the term and lower pricing on our $1.2 billion warehouse credit facility.

The revolving period other facility was extended by three years to July .

2022.

And the spread was reduced by 15 basis points.

Two 1.75%.

We are very pleased with the continued support of our bank group all of this transaction, which improves textainers capital structure and financial flexibility.

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

[noise]. Thank you at this time, we will conduct a question and answer session [laughter]. He would like to ask a question. Please press star one on your telephone keypad.

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One moment, while we pull for our first question.

Our first question comes from Helane Becker with Cowen. Please proceed with your question.

Hey, guys, it's actually Cotter Cunningham in for Helane, how are you.

Good Hawaiian right.

Good so I just wanted to go back to the the that can take the Capex replacement comment that you had I'm. So I was a little surprised to see that the the size of the investment, but obviously you spoke to like it being being more replacement going out and then growth but can you.

When you talk about container replacement like annually like from from an industry level, how many containers need to be ordered just keep the fleet flat on a year to year basis.

Are you talking 40 industrial for Textainer specific to the industry as a whole yeah.

Yeah for the industry as a whole we estimate that about five 5% of the total love will sleep that needs to be replaced annually, a which you know in itself. We present, probably 1.5 million T. you a year off of drive an equipment. So it's it's about half of the production in in a normal year.

Okay. Okay, perfect and then just I wanted to come I wanted to talk a little bit about that but then a trade war that's going on so maybe come at it from a little bit differently at different angles. So.

I think originally when on a trade war started the consensus view that like global trade would flow and that's pretty much played out as as one would expect but can you speak to maybe maybe anything that you've seen that surprised you.

As a result, this feels like it seems like trade lanes are shifting pretty quickly overall not and that's been maybe that's been maybe that's been like consistent with your thoughts or just any thoughts around on on what surprised you on the train or that or that would be helpful.

Well, there's several very interesting that that have happened I think for me probably the most surprising thing has been to see how how well shipping volumes have held up a wet when this whole trade tariffs were initially implemented I would personally have expected.

More direct impacts the reality is that the volumes have held up very strongly a ship sets remain that they're very very full over over the duration and one of the big conclusion is that initially to terrorists has not had an immediate direct impact on the volumes they have more of a psychological impact.

In terms of driving new you, new demand and especially new investment in China, but I think that you know they they haven't affected immediately that the volume that there was a big surge last year and I think that we are still in a way paying the price today for that big search because you know we were now in kind of a a little and we have been in a in a slow market for you know, maybe nine months or a little bit more than that certainly from a a leasing perspective, but shipping lines have continued to enjoy a fairly large volumes watch what we've also seen it is a shift in some production to other countries Ah it hasn't been a lot of talking about the Vietnam picking up a a lot of opportunities their exports are up 20%.

But I would say that's something that we had started to observe even before that Paris, where were implemented it. It's a it's certainly been accelerated by the situation, but but either have started before and it was driven primarily by the fact that production cost a you know over the years have become an economical in China and producers were looking at a at shifting production then Vietnam is probably the number one beneficiary of that but we see other countries benefiting from that I mean, we see India, we see Bangladesh, we see Thailand benefiting so there has been some shifting production, but that I think will materialize over a longer period of time. Then then over adjusted just a few months.

Okay, Great and then last one for me I'm, just trying to current environment demand, that's relatively low for new containers.

And just moderate trade growth going forward due to the spirit have you guys have is there an opportunity for you to convert your managed fleet owned I would think that that would be a pretty accretive way to to drive the volume side.

So you guys at a at a high level of any thoughts there would be great. Thanks again.

Oh. Thank you were certainly on the look out for that that's a very attractive investment proposition for us.

A couple of good things related to that we typically see couldn't get that equipment as good basis and one attractive characteristic also is that if we buy a fleet that are already under our current management that equipment is already on lease so earning revenues from day one of ownership. So that's certainly something that we always watch l'oreal and are open to.

But is there any barriers for the from a occurring like it did is it more like your customers have to want to give up the containers is as I kind of how that how you view it.

Sometimes we see that some customers may have oh apartments to exit their position. So we provide them a good are paid too.

Liquidity and transfer the cash that ginger position.

I think it's a good opportunity an option for them to get out on a very quick flexible basis and.

So you think about it where the likely buyers that we understand asset very well and we can respond quickly to so like I don't really see too many barriers in them going in that direction. In fact, I think it's a good option for them to look at that as a potential exit.

Okay, great. Thank you.

There were no question comes from Scott Valentin with Compass point. Please proceed with your question.

Hi, Good afternoon. Thanks for taking my question just trying to get more I guess information on the the credit it sounds like there's a potential for recovery is that recovery the receivable or do you see recovery of the the write off of the containers I'm, sorry, I'm sure I guess that sounds like that the <unk>. The study continues to operate or anticipates continue to operate. So just wondering you know probably the probability of a maybe collecting in the up and the appearance.

Oh, Hi, Scott no you're right the phone Todd that that we've decided to to be prudent and to be proactive in this case, but did the company continues to operate there's actually a.

A government a you know I'm the related agency that is trying to restructure the company and certainly we hope that over the long term, but we don't think it will be a short term solution over the long term, we will be able to recover first of all some of our account receivable, but most most importantly, our or container and that would possibly allow us to minimize our all losses or what we have done right. Now is is you know we've been conservative and we've taken at the heat so to speak or so so that we can really you know I recognize it's fully in our books and focus completely on trying to minimize our losses are going forward.

Okay. That's helpful. And then just thinking about a low capex environment and you know, it's a high cash flow.

Business just wondering how you think about you know what to do with that cash flow to pay down debt and delever the balance sheet or do you do you find other uses for it.

Oh, we're finding that you did a allocation of that cash is towards capex. So long as that capex is at attractive yields.

So right now that is taking much of our cash is because of those are pieces that have arisen in the <unk> for example in Q2.

On an ongoing basis, we'll certainly assess what's the best use of our cash but right now we like the proposition provided by Capex, but again, assuming that it hits the yields in our AD is indeed are as attractive for US has good tender as well and good credit also.

Okay, and then just Oh, I'm I'm pretty EMS and container prices you mentioned container prices are pretty low for this time of year. It like 17 50 is the is the kind of pricing you mentioned.

Yeah, I guess I've heard from other other container lessors it difficult for factories to make money at that level. So just wondering if do the premiums reflect that that low price it containers and and to.

You mentioned I think the IR ours are the returns are still double digit just want to confirm that.

Yeah, I I think you know.

I'd like to draw a distinction between or the larger replacement a deal that we've been able to secure a essentially without going too much into detail. We secured those deals very early in the year. We took advantage of of the manufacturing price that they are very briefly a very early in the year and there was a unique opportunity actually.

Several unique opportunities there for us to be able to invest and achieve or double digit returns, while still providing our customer with a a very attractive deals. If you look at the market. The way. It is today or there has been very very few open tenders and it is fair to say that the rates have been an attractive and weve for that matter stayed out of those open tenders and we're basically a sitting and waiting with our existing inventory, which we believe it is limited and perfectly adequate for us to maintain.

Waiting for the market to pick up but the cash on cash yields you know have certainly dropped but again you know there has been so few deals that it's hard to tell that this would be fully representative of a normal market environment.

Okay, alright, thanks, a lot.

Our next thing once again to ask a question at this time. Please press star one on your telephone keypad. Our next question comes from Michael Brown with KBW. Please proceed with your question.

Hi, good afternoon guys.

Hi, Michael Hi, Michael.

So just wanted to start off on Capex again, yeah I saw that you know strong first half on a 640 million.

And it sounds like some of the more tepid outlook going forward.

I appreciate your commentary about kind of a lower expectation going forward, but I guess it.

Any color that you could provide on your expectation there for the full year and.

Yeah. It sounds like Youve had kind of some benefits from some larger amin on replacement deals coming through at those kind of one offs or should we expect that I'm more of those could come through thanks.

At this point in time, we don't expect more of those to to come true. We're very much thinking that we're not going to see a a typical peak season or what we have seen over the last shall I say three four weeks is that what I would call a little Bubbling and the markets are there has been a little bit of activity. You know we have leased out some some therefore units I think at that some of our competitors that lease out some some therefore units nothing dramatic but it's still something positive that indicates that volume has increased a little bit I think at the same time, you see that you know ocean freight rates, a anew <unk>, Europe , and Asia, Europe , and Asia or North America have also gone up over the last few weeks. So there was a little bit movie now we.

Don't expect the search to be a a very major search for a typical surge as we have seen in the in the previous year. So we don't anticipate that there will be many opportunities for us to or implement new capex or or invest more into container I think the big question for US is really what happens for the for the fourth quarter and a at this point in time, we remain optimistic about the fourth quarter and we feel that say the U.S. The consumer demand remains strong a we feel that a you know demand will still be there for the a end of the year holiday, which are driving demand and typically a we also have tend to build up to the Chinese lunar new year dust starts taking place in a in in the last quarter, but I think no more fundamentally we have now been a in a fairly slow markets for all.

Most a nine months or 10 months or you know every month that passes that means that the shipping lines that you know will reach a level, where they have to start replacing some of the older containers. They have in their fleet. So we remain kind of hopeful that towards the end of the year, we will see a recovery in demand to normal levels.

Great. Thanks, and then just a follow up on the Capex. The 440. This quarter was that really to support I'm kind of one customer or a couple of customers I'm just trying to get kind of an idea of the activity this quarter. Thanks.

Well there are several customers in there one one larger one was involved of course, but there are several in there.

Great. Thanks, and then last quarter, you guys kind of gave guidance on the lease rental income guide to potentially being kind of flat in the second quarter, and that's kind of where they were to come in this quarter. It was actually.

Wondering if you had some guidance for the third quarter.

Yeah, Yeah, we're thinking that third quarter could be flat compared to Q2 and reasons for that is that you know we did put some capex work in Q2, but as we mentioned earlier there is that normal attrition that every fleet experiences. So we're selling boxes at good prices.

But they know that will bring down the spend only come a bit however that would be buffered by the capex that we put in place so potentially there could be a bit of a flattening or flattening of lease rental income if you're to look at Q3 versus Q2.

Great. Thank you for taking my questions.

Thank you.

Thank you at this time I would like to turn the conference back over to allow them to your guess gear for closing comments.

Thank you for taking the time to listen to us today, and I look forward to updating everyone on our progress during the next call. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.

Good bye.