Q2 2019 Earnings Call
Ladies and gentlemen, please standby.
He already see a <unk> international second quarter 2019 earnings conference call will begin momentarily again. Please stand by your conference will begin in one minute. Thank you.
Good afternoon, ladies and gentlemen, and welcome to do see a international's second quarter two Carbonite team earnings conference call at this time.
All participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time, if anyone should require assistance. During the conference. Please press Star then zero on your Touchtone telephone as a reminder, this conference call is being recorded I would now like to turn the conference over to your host Mr. team of games Chief Financial Officer, you may begin.
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, 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 at C.A.I. International has filed with the Securities and Exchange Commission, including its annual report on Form 10-K , its quarterly reports for 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.
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 the statements. The company made during this discussion regarding its views estimates plans outlook or strategies for the future.
I will now turn the call over to our President and Chief Executive Officer Victor Garcia.
Thank you Tim Good afternoon, and welcome to <unk> second quarter 2019 earnings Conference call.
Along with our earnings release today, we have also posted on our website under the investors section a presentation on our results and our view of the state of our company and industry.
We will not be going through specific slides in the prepared remarks, but can address any questions related to the presentation on this call.
For the second quarter of 2019, we reported net income from continuing operations attributable to common shareholders of 12.3 million or 69 cents per fully diluted share.
The results were driven by our container leasing segment, which grew its revenue by 11% as compared to the second quarter of 2018, primarily due to a larger fleet size.
Our results are down as compared to the second quarter of 2018, when we reported net income per share from continuing operations of 99 cents.
The quarter over quarter decline is largely due to comparatively higher interest costs lower gain on sale of equipment.
At what point Fourmillion insurance recovery that reduced storage and handling expense in the second quarter of 2018, and a higher tax rate.
[noise] indicative of leasing segment, our utilization remains very strong averaging 98.8% for the second quarter of 2019. Our current expectation is that utilization will remain strong for the rest of the year based on continued trade growth and the long term structure of our lease contracts.
Despite the strong utilization of our fleet, we have not seen the traditional peak season demand that would normally commenced during the second quarter.
We believe that the ongoing tariff discussions between the United States and China.
Have created uncertainty around the level of global trade and economic activity.
The most recent declaration by the U.S. President that he intends to raise additional tariffs on September 1st.
This year creates additional uncertainty about trade demand over the near term.
As a result, we do not expect demand for new containers to increase significantly until there is greater certainty around tariff discussions.
And a stronger economic environment, we have desolate limited our incremental committed container investment to 27 million.
During the second quarter.
Prices for new containers have declined slightly to approximately 1700 $50 for a new 20 foot container, but we see little incremental ordering by shipping lines or container lessors.
We are expecting that some manufacturers may close some faint manufacturing facilities in China.
Over the coming weeks because of limited demand for containers, despite the lower container prices.
Used container prices have declined slightly in Asia, particularly in China, where most idle equipment is based however in general prices for used containers remained strong outside of Asia.
Due to the high overall utilization rates of lessors and limited equipment being made available by shipping lines.
Because of uncertain economic environment.
We are currently experiencing we have been actively managing our various businesses and have made the decision to sell our remaining railcar fleet.
Although we continue to see improving trends in the returns and utilization of our railcars. We believe it is in the interest of our shareholders to reallocate the capital invested in our railcar fleet to other investments, including the potential repurchase of additional shares.
As such.
We are in dialogue with prospective acquirers regarding the sale of our railcar portfolio. We cannot provide assurance that a sale will be successfully concluded. However, we are optimistic that a sale can be completed before the end of 2019.
Because we have made the decision to seek a sale of our remaining railcar fleet. We have accounted for the railcar business in the second quarter as a discontinued operation.
Under accounting rules for discontinued operations.
The railcar business reported a net loss for the quarter of 5.2 million or 29 cents per fully diluted share.
Net loss of the railcar business included an impairment arising from the reclassification of rail assets as held for sale.
We believe the global uncertainty around trade growth in tariffs has affected.
Transportation and logistics demand in the United States this year.
Coming into 2019, we expect continued strong demand for transportation services and as a result increased our logistics personnel.
However, because the man has been softer than we planned we have downsized and restructured our logistics business with a 23% reduction in workforce and the closure of one of our offices.
Our priority is to bring cost closer in line with our existing revenue and to place more emphasis on core customers, where we have the opportunity to expand the level of business and more efficiently service those customers.
Because of the restructuring we recorded a pre tax charge of.
Half a million dollars in the second quarter related to severance and office closures, we expect third quarter logistics revenue to be more in line with costs.
We are focused on positioning the company for the future.
And deploy our capital to increase shareholder value.
We think the decisions we have made during the second quarter physician say well to achieve those goals I will now turn the call over to Tim page, Our Chief Financial Officer to review the financial results for the quarter in greater detail.
Thank you victory Victor and good afternoon, everyone. My comments unless I note otherwise, we'll focus on our continuing operations.
Total revenue in the quarter was $106 million, an increase of 2.3% versus Q1.
Year to date total revenue from continuing operations was 209 million as compared to $183 million for year to year to date.
Q2, 2018, an increase of 14.2%.
Container lease revenue was $75.8 million.
Point 3 million higher than Q1, reflecting soft market conditions that Victor mentioned in his comments.
Year to date container revenue was 13.8% higher than the same period last year, which primarily reflect reflects the run rate impact of the strong lease market, we experienced in the second half of 2018.
Logistics revenue in Q2 was $29.8 million, an increase of 7.5% as compared to Q1.
Year to date logistics revenue has increased 15.3% as compared to year to date Q2 2018.
Depreciation expense in Q2 was point 2 million higher than Q1.
Reflecting a slight increase in the size of our on lease container fleet.
We would expect depreciation expense expense to increase at a similar rate in the coming two quarters, because we are not anticipating strong incremental investment or lease outs of new containers in the balance of this year.
Storage handling and other related operating expense in Q2 are all container related and were 4.1 million as compared to $3.9 million in Q1 of this year.
An increase of $2.2 million, which was primarily related to a slight decrease in average utilization we experienced in Q2 versus Q1.
As compared to Q2, 2018 storage handling and other related operating expenses increased $3 million.
Q2, 2018 at 1.4 million credit associated with an insurance recovery the remaining $1.6 million in expense primarily reflects the year over year increase in our container fleet and the slight decrease we have seen and utilization this year.
As compared to the all time record high utilization, we experienced last year.
We would expect storage handling storage and handling expense to increase slightly from its Q2 level during the balance of the year reflective of our expectation that why while utilization will remain at historically high seasonal levels.
It will likely fall modestly during the remainder of the year.
Logistics cost of sales increased from $24.5 million in Q1 to $26.1 million in Q2, an increase of $1.6 million.
Logistics gross margin in Q2 was $3.7 million as compared to $3.2 million in Q1, an increase of $8.5 million or 16.1%.
Gross margin percent in Q2 was 12.5% compared to 11.5% in Q1.
The improvement in gross margin dollars and gross margin percent was driven by the incremental.
To me it was primarily driven by the international freight forwarding portion of our logistics business.
Gain on sale of used container rental equipment in the quarter was $1.6 million as compared to $1.4 million in Q1.
We would expect gains on sale in the coming quarters to be in the $1 million to $1.5 million range.
General and administrative expense in Q2 was $12.3 million as compared to $13.1 million in Q1, a decrease of point $7 million.
During the quarter, we took a point 5 million charge related to the rightsizing of the overhead in our logistics business.
This charge was offset by a point $2 million decrease and other logistics DNA expense in the quarter and a point $8 million decrease in our container related unit.
The decrease in container related Gionee was primarily related to a reduction in bad debt expense.
We would expect DNA in the coming quarters to be in the same range as Q2.
Total operating income from continuing operations increased from 34.8 million in Q1 of this year to $36 million in Q2, an increase of $1 million or 3.4%.
Point $8 million of the increase is related to the container belt business. The balance of the improvement in operating income point $4 million was related to logistics.
The improvement in logistics operating income in Q2 versus Q1 was somewhat seasonal in nature, but also occurred in spite of the fact.
The results for logistics included $8.5 million of restocking structuring charges I just mentioned.
Year to date operating income from continuing operations increased $2.2 million or 3.1% as compared to the same period last year.
Interest expense for continuing operations in the quarter increased $2.1 million, reflecting a slight increase in our average debt balance in the quarter.
Given our expectations for limited container investment for the balance of the year and falling LIBOR rates, we would expect interest expense decreased slightly in the coming quarters.
The weighted average interest rate of our funded debt in Q2 was 3.9% flat with Q1.
We're expecting that our average borrowing rates will remain relatively constant next quarter.
Any incremental interest expense will be will be related to changes in the average debt balance.
Income tax expense on continuing operations increased $1 million as compared to Q1.
The increase in pre tax income and a change in the expected mix source of where our income what we generated in the balance of the year.
The effective tax rate in Q2 was 8.4%.
Year to date, our effective tax rate was 5.6%.
We expect the effective tax rate in coming quarters to be in this 5.6% range.
Our own container fleet was 1.6 million Cu as of the end of Q2, an increase of 33000 seat you during the quarter.
While demand for new containers has been limited this year Theres also been limited turn in of older containers. Consequently, our average utilization in the quarter remained near historically high levels at 98.8% and was 98.8% as of the end of Q2 as of today utilization stands at 98.5%.
The total book value of our container container revenue, earning assets increased $50 million in the quarter to $2.5 billion.
At the end of the first quarter, we had total funded debt net of restricted cash and cash held in variable interest entities of approximately $2.1 billion.
Flat with Q1.
Rail related debt accounted for approximately $250 million.
We expect that all rail related debt will be retired upon consummation of the sale of our rail assets.
Funded debt in Q2 net of cash related to continuing operations was $1.85 billion as compared to $1.8 billion at the end of Q1, we we would expect to fund the debt balance to remain in this range to slightly decrease in the coming quarters.
During the quarter, we repurchased approximately 900000 shares of our stock.
Year to date, we have repurchased 1.5 million shares which represents approximately 7.8% of the shares outstanding.
As of the beginning of the year.
Since the beginning of 2018, we have repurchased 3.2 million shares for approximately 15.8% of the shares outstanding at that time.
We are committed to continuing to allocate capital based on investments that generate the best long term returns for our shareholders.
That concludes our comments operator, please open the call for questions.
Ladies and gentlemen, if you have a question at this time. Please press. The Star then the number one key on your Touchtone telephone. If your question has been answered her we started and leave yourself from the queue. Please press the panel key.
Your first question comes from the line of Scott fallen time.
We'd conference point, you are now live.
Good afternoon, Thanks for taking my question.
Just with regard to the railcar sale, but obviously the pricing you guys are still negotiating surprises unknown.
But is there any estimate of how much capital you know would be freed up if you can you know if you sell the railcar. So you can sell them close to to book value how much capital would that would that free up on the balance sheet.
[noise].
You know I'm really hesitant to talk about where we are with regard to you and how much capital. We have so we were in an open process right now.
So I prefer that.
Yeah, we really don't know.
We're not in a position to really talk about the real sale.
Okay Fair enough and then just in terms of you mentioned Capex, I'm, obviously with with demand being weaker than than seasonal historically seasonally I'm. Just wondering how you think about container sales I mean, it's a goal to maintain the fleet about where it is or do you see the size of the fleet contracting and all you saw more containers take advantage of a stable a used container prices.
Our our decision to sell containers will be dependent on.
How how many units come in and and the age profile of those units and location. So.
If a customer is hold onto equipment, we won't be selling a lot if a lot of units to come in and lots of consider selling selling equipment. Yeah. We're really more focused on positioning the fleet for higher utilization.
And I would just say the level that we get on a monthly basis wouldn't expand or contract.
Well wouldn't contracted fleet by a significant amount it you know that the fleet trickles in.
And so we wouldn't expect a big difference in a in the size of the fleet over the next couple of quarters.
Okay. Thanks, and then just one final question Yeah. There was some concern around credit I'm one of your peers announced that they had a a shipping company I guess.
Bankrupt or fail just wondering is there any changes in your watch list and as you think about the slowing global economy and in slowing trade how your how your watch list looks.
I'd say generally speaking the credit situation is is good.
We do have a not a particular situation similar to what they have but it's a manageable level from our standpoint.
And we're working through it in terms of recovering units, but I would say generally speaking.
The.
Ah the credit situation is good well, where our payment history with customers is still.
In a good position and we're not seeing deterioration.
Okay, all right. Thanks, taking my questions.
<unk>.
Again, ladies and gentlemen, if you have a question at this time. Please press. The Star then the number one key on your Touchstone telephone. If your question has been answered or you restore move yourself from the queue. Please press the pound key.
Your next question comes from the line of.
At launch Becker with Cowen So were no lives.
Thanks, Operator, hi, guys its Helane Becker.
And in case, you didn't get that.
I just have a question on the balance sheet actually slide 13.
Two questions really one is on.
Jeff that's tied to the library that goes past 2021 are there provisions in there to replace lie bore with you know so far or some other.
Some other rate that's you know determined by you analysts or.
Yes, there's provisions in the credit Phil.
Credit facilities that have floating rate debt.
That didn't them to.
To move to some other type of Ah Ah base.
To be negotiated or whenever that happens.
Okay and then the other question I had was maybe Victor for Ya. Thanks for all your comments on <unk>. So are you coffee now with where the logistics businesses I feel like we talk about that a lot.
And I feel like you've you know since you've gotten into the business or they've had their ups and downs and I'm just kind of wondering if you know after this latest restructuring are you.
Going to be happy with where the businesses.
I think we've made significant changes in progress on the logistics business and we are optimistic will put us on a better path I wouldn't say I'm happy with the logistics business. So yeah, we are.
[noise] entered into that business with the expectation that with a growing business and it would be a profitable business and.
The profits have been alluding us so.
We're very focused on making sure that.
That business is a contributor.
To the overall results of the company.
And that that's an important feature so I can't say that I am.
Happy with kind of where we are right now.
Okay, all right and I think I'm, Scott asked a bunch of the other questions I haven't you covered everything else in your prepared remarks, so well leave it at that thank you. Thank you.
[laughter].
[noise].
Hi, I'm showing no further question at this time.
I will now have the call back to Victor Garcia.
Great. Thank you everyone for being on the call and we look forward to reporting our third quarter results in the coming months. Thank you.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day you may all disconnect.
[noise].