Textainer Group Holdings Ltd (TGH) 2020 Q2 法說會逐字稿

Thank you. And welcome to Textainer's Second Quarter 2020 Earnings Conference Call. (Operator Instructions) As a reminder, today's conference call is being recorded. I will now turn the call over to Ed Yuen, Investor Relations for Textainer Group Holdings Limited. Please proceed.

Thank you. Certain statements made during this conference call may contain forward-looking statements in accordance with U.S. 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 within this call may change after this discussion. The company is under no obligation to modify or update any or all statements that are made. Please see the company's annual report on Form 20-F for the year ended December 31, 2019, filed with the Securities and Exchange Commission on March 30, 2020, and going forward, any subsequent quarterly filings on Form 6-K for additional information concerning factors that could 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 will be provided either on this conference call or can be found in today's earnings press release.

Finally, along with our 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 Textainer's Investor Relations website at investor.textainer.com.

I would now like to turn the call over to Olivier Ghesquiere, Textainer's President and Chief Executive Officer, for his opening comments.

Thank you, Ed. Good afternoon, everyone. And thank you for joining us today. I'll begin by reviewing the highlights of our second quarter results and then I will provide some perspective on the industry. Michael will then go over our financial results in greater detail, after which we will open the call for your questions.

We are pleased with our performance in the second quarter, which proved resilient in spite of the global economic downturn and is enjoying a strong start to its third quarter. For the second quarter, we delivered stable lease rental income of $145 million and adjusted EBITDA of $110 million while improving our adjusted net income to $15 million. The COVID-related disruption on trade continued to suppress container demand during the second quarter. While China was able to reopen their economy in March, trade worsened as the rest of the world implemented their own quarantine measures. Supply chain was significantly disrupted and buyers increasingly delayed or canceled cargo orders. Overall, global container trade during the first half of 2020 was approximately 7% lower as compared to the first half of 2019.

Started to see a stabilization in trade activity by mid-June, leading to a market turnaround in lease out demand that continues to this day. The existing container inventory at factories held by lessor, which stood at a level of about 600,000 TEU has by now been almost entirely committed. In addition, we have seen increased booking of available depot inventory and an increase in leasing rates and yields.

The recent increase in container demand is driven by several factors. First, trade activity has picked up as a result of the traditional seasonal summer increase for cargo to Europe and North America. Secondly, this has been compounded by the need to restock inventory and catch up on order previously canceled or delayed during the initial implementation of quarantine measures. In addition, we believe container demand is also driven by the impact of supply chain disruption caused by the pandemic. And finally, the impact of these factors has been amplified by the fact that for most of the past 6 quarters, shipping lines remain focused on cost optimization, thereby limiting their container fleet sizes.

New container prices remained relatively consistent during the second quarter, dipping slightly below $2,000 per CEU and have since increased to $2,100 per CEU as of today. Disciplined pricing has been generally supported by production capacity reduction implemented by container factories earlier in the year and are now benefiting from current market turnaround and increase in demand. The container resale environment remains limited and relatively consistent through most of the second quarter. However, over the past several weeks, we have now also seen an improvement in resale demand and prices particularly for [high queue].

Given the stronger-than-expected financial performance of shipping lines during the first half of 2020 and access to government support during the pandemic, the perceived elevated credit risk has now mostly moderated, and we are pleased to report that we have not encountered any notable credit issue this year. Despite the ongoing challenging environment, shipping line efficiently cut their cargo capacity, driving a significant increase to their freight rate, while also benefiting from lower fuel costs. Nonetheless, we continue to work closely with our customers to avoid any unpleasant surprises. And as a reminder, we continue to carry a credit default insurance policy that covers certain costs and losses for customer defaults, including lost revenue and recovery cost or replacement value of containers.

As we look out to the balance of the third quarter, we expect the recent improvements in trade volumes and related container lease out to continue till the end of the summer, leading to an increase in our container utilization rate and revenue. We also fully expect shipping lines to show further strengthening in their financial performance, driven by the recent increases in freight rates.

In closing, we are pleased with our performance in the second quarter and are encouraged by the rebound in activity during the third quarter to date. COVID-19 pandemic continues to create uncertainty and market challenges. However, we remain optimistic with our outlook for the rest of the year. Textainer remains well positioned to participate in the rebound in market activity with a strong balance sheet, healthy liquidity and optimized capital structure and demonstrated expense control and efficiency.

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

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

Q2 lease rental income was $145 million, relatively consistent with Q1, primarily due to a slight reduction in utilization. While market activity remained muted, we were pleased with the stability of Q2 lease rental income. This was supported by a reliable revenue stream from our lease portfolio, which includes an 86% composition of long-term fixed rate leases. As Olivier had commented, with the recent increase in container lease out activity, we expect utilization and lease rental income to improve during the second half of this year.

Q2 gains on sale of owned fleet containers was $6 million, also relatively consistent with Q1. Both sales volume and average gain per container sold were consistent with the prior quarter. We are pleased that the container resale price environment remains favorable.

Q2 direct container expense for the owned fleet was $15 million, an increase of $2 million compared to Q1. This was mostly due to higher storage costs and handling expense associated from lower utilization.

Q2 depreciation expense was $64 million, a decrease of $3 million as compared to Q1, due primarily to improved mark-to-market value [adjustments] on certain containers held for sale. We realized a container lessee default recovery of $2 million in Q2 due to a cash settlement received in full from a small customer default, which was previously written-off in 2018.

Q2 G&A expense was $10 million, and after removing expected cyclical items remains consistent at normalized levels. We continue to improve the quality of our spending in G&A through, among other methods, enhancement of our technology tools and staff talent.

We benefited from a bad debt recovery of $0.3 million in Q2, driven by improvements in collections and our general (inaudible) credit profile. However, we maintain a conservative approach and a healthy reserve on our receivables given the continued weakness in global economic conditions. We are very pleased to see the improvement in overall collections, which continue through today. We'd like to recognize our team for a job well done in continuing to extensively monitor credit and closely communicate with our customers.

Q2 interest expense, net of realized hedging costs, was $33 million, a $4 million decrease as compared to Q1. This was driven by lower rates and lower outstanding debt in Q2. We are pleased our Q2 average effective interest rate improved to 3.62%, which is 39 basis points lower than Q1.

We had a net unrealized noncash gain on derivative insurance of $1 million in Q2 as compared to a noncash loss of $15 million in Q1. This improvement was partly driven by an increase in the forward LIBOR curve at the end of Q2 versus Q1, which is used to measure the mark-to-market value of our interest rates used for long-term hedging purposes. Q2 net income was $16 million or $0.30 per diluted common share. Q2 adjusted net income was $15 million or $0.28 per diluted common share. Q2 adjusted EBITDA was $110 million, which was relatively consistent with Q1.

Turning now to our share repurchase program. During Q2, we repurchased over 1.6 million shares of Textainer common stock in the open market at an average price of $8.33 per share. On an accumulated basis, through the end of Q2, we've repurchased approximately 8% of our outstanding shares. At the end of Q2, we had approximately $12 million still available under the plan. And we will continue to repurchase opportunistically as we move forward and consistent with our capital allocation plan.

Looking out at our balance sheet and liquidity, we remain focused on maintaining a strong balance sheet and very healthy liquidity through both our well-structured bank facilities as well as cash reserves.

We ended Q2 with a cash position inclusive of restricted cash of $281 million as well as ample available commitment capacity under our existing credit facilities. During Q2, we used strong and consistent cash flows from our long-term lease agreements to reduce our average debt outstanding and further strengthen our balance sheet. Both our short-term credit facilities and long-term ABS financing platforms are performing well and in great shape. We do not have any debt maturities or refinancing requirements this year and remain financially well positioned to address any potential stresses and uncertainty from weak market conditions, or alternatively, any sustained increase in market demand.

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

(Operator Instructions) Our first question comes from Michael Brown with KBW.

So I just wanted to start on credit. Great to see that customer credit has really remained benign through this really challenging environment. And then actually, for you guys this quarter, you've got some recoveries that came in. As we think about really the coming quarters, I mean, we're still not really in the clear here, but it does seem like the environment is certainly better than I feared a couple of months ago. But are there really any other cracks out there that we should kind of keep an eye on? It sounds like the bigger shipping lines are in certainly good financial condition, and some have gotten some government support. But are there smaller players out there that they were probably the ones more at risk anyways that we should still be concerned about? And how do we think about potential financial impact from maybe those smaller players?

Yes. Thank you, Mark. I must say we are certainly feeling a lot more relaxed about the situation now than we were at the beginning of the pandemic. In April, we were having, I would say, daily calls to make sure that we would monitor our payment very carefully. And I must say that, that has worked up very, very well. We remain in very close contact with our customers, and they have been very helpful.

Now the reason why the issue has really faded away is primarily because shipping lines have acted very well in controlling capacity, thereby maintaining their freight rates. And I think there's a very big lesson here from the 2016 crisis where Hanjin went bankrupt and where shipping lines were going after each other's throat and fighting for market share. In this environment, I think that they all realize that this would be really detrimental and would be a big danger for them. So they've been really disciplined, and they're all got capacity that maintain the ocean freight rate. They have then benefited from much lower fuel cost, which was a blessing.

And I also like to say that a secondary effect of them reducing capacity has meant that they have been able to start charging a more normal ocean freight rates on the return. As you may know, traditionally, shipping lines charge a full fare on the originating trade from Asia to Europe or North America, and then they kind of subsidize the weight on the way back. But because there was so little capacity available, they have also been able to charge much more a decent rate, if not normal ocean freight rates. So all that has really helped them, and that was even before the current turnaround in the market that we have witnessed since July.

In addition, we've also taken a lot of comfort from the fact that governments have shown willingness to help the weaker players. I think they've also learned from the Hanjin disaster and realize that it made a lot of sense in a time of great uncertainty to come to the help of the weaker players, and we've seen several government coming with indirect or even direct help to their shipping line.

And more to your question about the smaller line, whether we see some issue there, I must say, we feel very positive. The payments have actually improved. Our debt to ratio today is better than it was 1 year ago at the same time. And we certainly see the smaller shipping lines also starting to benefit from the read in activity and the danger of the COVID sort of like drifting away. So we feel very good about it, and we certainly don't anticipate any default between now and the end of the year.

Okay, great. And a lot of good commentary about what you're seeing in the current quarter and the pickup in activity. How does that translate to your CapEx opportunities in the second half? And how should I think about how that could also play out for your utilization rate? It looks like 2Q could be a near-term trough here. But as you're seeing this pickup in demand, I guess, where's the [utilization currently]? And how that could play out to -- obviously, we don't know how to play out, but [just] what you're expecting right now?

Yes. Thanks, Mike. As Michael explained, we are feeling very good about the situation of financing facility and our ability to deploy CapEx. And we certainly see this market environment has a great opportunity for us to buy more containers. So I think you can expect to see probably more CapEx in the second half of the year as opposed to the first half of the year. But another very big benefit that we are likely to see over the coming quarters is that the fleet utilization is also likely to get some support from the current market.

And to your point about the utilization rate, we fully expect our utilization rates to move progressively up, and we certainly think that we could increase our utilization rate by at least 200 basis points by the end of the year. So no, we're feeling very, very comfortable on both sides in terms of fleet utilization and in terms of our ability to deploy CapEx.

One element that I have to mention is that manufacturers have also been limiting production capacity to some extent. So obviously, the negative of that is that there isn't as much production available as there probably would have been last year or in a less-controlled environment. But on the other hand, a positive aspect for us is that prices have also remained a little bit firmer, but more importantly, for us, a lot more stable and probably a lot more stable for the foreseeable future. So I think those 2 elements are certainly very, very positive for the long term of outlook of Textainer.

Mike, it's Michael here. I might add on top of Olivier's comments there. As we expect utilization to improve, one thing to note also is that we're very happy that we're able to lease out some of our depot units as well. The ability to do that has 2 positive impacts. It improves our lease rental income, of course, but also reduces our storage expense in addition to that. So 2 benefits there that will show up in the second half of the year.

Okay. Great. Yes. As you mentioned, the expenses, I was hoping if you could maybe put a little finer point on how you're thinking about maybe the sequential expenses here. My numbers, you're (inaudible) came in lower and is really the depreciation [expenses] was kind of one of the pieces. So any color that you could provide when I think about the third quarter here from direct operating expenses, depreciation expense, et cetera?

Yes. So Mike, I probably look at direct operating expenses linked straight to our utilization. So as you see some improvement there, we expect the storage to come down. As you know, we work on really focusing in on reducing our line item. I think we've done a good job there, but if utilization ticked down, so do (inaudible) that line to (inaudible). I think we're alluding to the fact that there's going to be certainly some improvement after Q2. And in line with that, I'd expect direct containing expense to start coming down actually because of the decrease in storage.

Depreciation, that certainly will go up with added CapEx on there. Of course, a couple of things. We did have improved values in our containers held for sale, which has the impact of being part of a small piece of that line item. So improved values of our held-for-sale inventory improve that line on our depreciation. But on an ongoing basis, I'd expect that to start [tickering] up gradually as we deploy CapEx, but that is a good thing associated with deploying CapEx at good yields is that you are going to have depreciation cost.

G&A, we're quite happy with that line. It's pretty normalized. There are a few cyclical items embedded in there in Q1, but I think you could kind of rely upon that level being, say, the mid-9 area or about $9.8 million as being something normalized as we try to focus in on that spend as well. As we noted earlier in the comments, we really feel it's important to spend wisely there. So as we focus in on our staffing costs, we want to get a lot of productivity on what we spend there. And as we alluded to earlier as well we're investing quite a bit into our IT, where we should be able to leverage really good efficiencies on an ongoing basis when that goes live. That -- hopefully, that helps a bit.

Yes, appreciate the color. Maybe just one last, to ask about maybe any inorganic growth opportunity. It seems like we've got more certainty about the operating environment or at least a little bit more (inaudible) So as (inaudible) put out, is there any opportunities for inorganic growth that (inaudible) your eye on? And I guess, conversely, is there any partnering with another institution?

On the first question, Mike, I would say that the M&A market, as we all know, it's been pretty quiet given the environment. So we don't really see that many opportunities out there. We're obviously monitoring very closely and remaining open to any opportunity that may arise. But we're not actively pursuing any specific opportunity at the moment. So I would expect that the M&A front is probably going to remain a little bit quiet until markets kind of stabilize. And I would guess that, that will at least take until the end of the year before we see movements on that front, certainly.

Got it. I appreciate that. I know it's a -- it seems like it's recovering quickly, but still some more room to go until (inaudible) I think that's all of the questions that I had. Appreciate all the color.

Thank you. At this time, I would like to turn the call back over to Olivier's closing comments.

Yes. And thank you very much, everybody, for listening in, and we very much look forward to you joining us for our next call and hopefully, some good news on our third quarter earnings release. Thank you very much.

Thank you, everyone. This does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation.