Textainer Group Holdings Ltd (TGH) 2014 Q2 法說會逐字稿

Welcome to the Textainer Group Holding's second-quarter 2014 earnings call. My name is Joe and I will be your Operator for today's call.

(Operator Instructions)

Please note that this conference is also being recorded.

I will now turn the call over to Executive Vice President and Chief Financial Officer, Hilliard Terry. Mr. Terry, you may begin.

Thank you, Joe, and welcome to Textainer's 2014 second-quarter earnings conference call. Joining me on this morning's call are Phil Brewer, TGH President and Chief Executive Officer. And at the end of our remarks, Robert Pedersen, TEM President and Chief Executive Officer will join us for the Q&A.

Before I turn the call over to Phil, I'd like to point out that this conference call contains forward-looking statements in accordance with US Securities laws. These statements involve risk and uncertainties, are only predictions and may differ materially from the actual future events or results. Finally, the Company's views, estimates, plans and outlook, as described in this call, may change subsequent to this discussion. The Company is under no obligation to modify or update any or all of the statements that are made.

Please see the Company's annual report on Form 20-F for the year ended December 31, 2013 filed with the Securities and Exchange Commission on March 19, 2014, 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.

I would also like to point out that 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 measure to the most directly comparable GAAP measure will be provided either on this conference call or can be found in today's earnings press release. At this point, I'd now like to turn the call over to Phil for his opening comments.

Good morning and welcome to Textainer's second-quarter 2014 earnings conference call. I'm sure many of you noticed that we released second-quarter financial results yesterday instead of this morning. Trencor, our 48% shareholder, issued it's quarterly earnings statement in South Africa yesterday earlier than expected. Their release incorporated references to our yet to be reported earnings. As a precaution, Textainer issued its earnings press release earlier than normal after becoming aware of the disclosure and discussing the matter with the New York Stock Exchange.

We are pleased with our second-quarter results and the strong increase in container demand we saw during the quarter. Our average weekly container bookings increased almost 50% from the first quarter to the second quarter and this strong demand has continued through today. Our depots container inventory has declined by 42% since it's high point in March. We have not seen such a rapid pick up in container demand since 2010.

Our utilization, which bottomed at 93.6% at the end of March, is now 96.4%, an increase of almost 3% in four months. Several members of our Senior Management have recently met with our shipping line customers around the world. Based on these discussions, we believe that the demand we are seeing will continue through at least the third quarter.

Lease rental income grew to $123.6 million, a 7.2% increase compared to the year ago quarter and a 2.5% increase compared to the first quarter of 2014, due primarily to growth in the size of our owned fleet. Adjusted net income was $40.2 million for the quarter.

Our year-to-date CapEx is much better then we expected at the beginning of the second quarter. We have invested more than $658 million in containers for delivery during 2014, including $598 million to acquire more than 314,000 TEU during this year. This 2014 CapEx include $65 million invested in purchase lease-backed transactions, and $44 million to purchase 38,000 TEU of previously managed containers. We now own 77% of our fleet, a new record.

Notwithstanding the strong increase in demand, rental rates remain under pressure. For the same reasons we have mentioned in the past, such as easy access to financing by all lessors, lower new container prices and low interest rates. The return earned on container investments has declined as a result. Although our margins on new investments have not suffered to the full extent of the decline in rental rates because of our ability to reduce our funding costs and due to timely purchasing of new containers.

Nonetheless, we have not pursued all of the transactions we have been offered and have not won all the transactions we have pursued. This has been especially true with refrigerated containers where our new container CapEx is below budget and at a run rate below 2013, due to our unwillingness to match lower-than-expected returns.

In addition to pursuing only those deals we find attractive, we are also committed to remaining the lowest cost operator in the industry. Our overhead cost for container are approximately half the cost of our public competitors.

We declared a dividend of $0.47 per share, which represents a dividend yield of above 5%. Keeping in mind that the dividend yield on the S&P 500 is below 2%, we believe we provide an attractive return to our shareholders.

New container prices are approximately $2000 per CEU. We estimate the current new build inventory factors to be approximately 530,000 TEU. This level of inventory is perfectly manageable representing about two months of demand during normal market conditions. We expect that consistent with the past several years, container lessors will purchase slightly more than 50% of total container production.

Used container prices continue to decline, they are down approximately 25% from the year ago quarter and 5% year to date. These declines have resulted in reduced gains on sales of our own containers, as well as, negatively affected our trading business. Although further declines are possible, we believe we are near a bottom. However, we do not expect used container prices to increase from the current level in the near term. It is important to keep in mind that even after this price decline, used prices are approximately equal to 50% of the current new container price, which is attractive on the historical basis and an excellent residual relative to most other transportation assets.

We are optimistic about the third quarter. We expect to see a sequential improvement in rental revenue and normalized adjusted net income as second-quarter bookings are picked up. We expect our utilization to continue to increase but not to the same extent as during the second quarter. Keep in mind that only 4% of our fleet is subject to long-term leases that will expire this year.

Perhaps more importantly, unlike some of our competitors, we have been a consistent buyer of new containers over time. We do not have years during which an unusually high percentage of our leases will expire. Looking forward, only 6% of our fleet is subject to leases that expire in 2015 and 7.5% in 2016. We believe the structure of our fleet and the terms of our leases positions us well to address repricing risk over the coming years.

New container prices are close to the cost of production. Manufacturers have been unwilling to sell at prices much, if at all, below current levels. The returns on containers purchased at today's prices can be expected to increase over time as the containers depreciate and especially if interest rates and our new container prices rise. Given the relatively low purchase prices, today's containers also have reduced repricing and residual value risk compared to the higher cross containers purchased in 2010 and 2011.

Our low 2.3 times leverage gives us operational flexibility and dry powder for strategic opportunities. We look forward to benefiting from the future growth of our industry. I would now like to turn the call over to Hilliard.

Thank you, Phil. This quarter we saw good growth in lease rental income due to a 14% increase in the size of our own fleet and increased utilization. Management fees were down year over year given the lower fleet performance and the smaller managed fleet as a result of recent managed fleet acquisitions. We had a 50% decrease in gains on sale, resulting from lower used container prices.

Lower resale prices also put pressure on the margin in our trading business, which was down year over year, in spite of the increase in the volumes of containers sold. Nevertheless, this was up from the loss we reported last quarter. As Phil stated earlier, we believe resell prices are near the bottom, but we do not expect prices to rebound much in the near term.

Excluding the cost of trading containers sold, total operating expenses were up 18% year over year, primarily due to increased in direct container expenses and depreciation expense. Direct container expenses increased due to the increased size of our own fleet and higher associated storage, repositioning, maintenance and handling expenses. A little less than half of this increase was due to recovery expenses related to problemed lessees. As utilization continues to improve and recoveries wind down, we should see a sequential improvement in direct container expenses.

Depreciation expense was $42 million for the quarter, up $8.3 million or 24% year over year, largely as a result of our larger owned fleet. Annualized depreciation expense increased from 4.0% to 4.3%, of average gross container asset value. As I mentioned last quarter, this increase in depreciation expense is due both to fully depreciated old containers being sold and replaced by more expensive new containers, and the fact that PLBs have become a major source of supply for our resell business. As you may recall, PLBs containers are depreciated while trading containers or not.

The final factor is the increasing percentage of reefers in our fleet. Between 1% and 2% more of a reefer containers' original equipment cost is depreciated annually compared to dry freight containers.

Bad debt expense was $700,000, or about 0.5% of revenue. We saw a nine day improvement in DSOs versus last year, reflecting continued diligence over our credit and collections processes. Our interest expense including hedging cost was $23 million for the quarter, almost flat versus the year ago quarter in spite of a 12% increase in our average debt balance.

Consistent with the analyst models and peer results, we have excluded a $6.4 million write-off of unamortized financing fees that we highlighted last quarter from our adjusted net income and our effective interest rate. Our average effective interest rate, which includes hedging cost, is currently 3.39%, down 29 basis points when compared to the year-ago quarter.

We have continued to lower the Company's funding costs with our recent refinancing. And going forward, we will continue to benefit from these reduced financing cost in the second half of this year and beyond.

Currently, the duration of our debt is aligned with the duration of our lease portfolio. About 80% of our debt is fixed or hedged, consistent with the percentage of our fleet subject to long-term leases. The weighted average remaining term of our fixed or hedged debt is about 38 months. The weighted average remaining term of our long-term leases is about 40 months. We are opportunistically looking at ways to extend the duration of our debt with minimal impact on our overall borrowing cost.

Income taxes for the quarter were approximately $800,000, resulting in a 2% effective tax rate for the quarter. Our effective tax rate varies from quarter to quarter, due to discrete one-time items. As we stated last quarter, we now expect our annual effective tax rate to be in the low to mid-single digits.

Adjusted EBITDA was $106 million in Q2, similar to last year. EBITDA remains a clear indication of our continued strong cash generation. Adjusted net income, which exclude unrealized gains and losses on interest rate swaps and the write-off of unamortized financing fees for the quarter, was $40 million, resulting in adjusted EPS of $0.70 per share.

As Phil mentioned earlier, our dividend was $0.47 per share. As a reminder, some or all of such distributions may be treated by US tax holders as a return of capital rather than dividends.

Finally, turning to the balance sheet. As of June 30, our cash position was $102 million, with a standby liquidity in excess of $500 million. Total assets were $4 billion. And our debt-to-equity ratio was 2.3 to 1. Thank you for your attention. I'd now like to open the call up for questions. Joe, can you inform the participants of the procedures for the Q&A?

(Operator Instructions)

Gregory Lewis, Credit Suisse.

Phil, you mentioned some comments and I'm looking for you to elaborate a little bit more around them. You mentioned that the overall cost of Textainer containers is potentially roughly half the cost of its peers. Could you provide a little bit more color around that?

Sure, Greg.

No, it wasn't the cost of our containers is half the cost of our peers. Generally we calculate our overhead cost per CEU per day. And looking at the information provided by our public peers and looking at our own information, which is disclosed in a presentation on our investor website, you will see that our costs are less than our peers.

Okay. So you're referring to operating costs?

Yes.

Okay, thanks. Thanks for clearing that up.

And I guess I had another question. So it looked like in the second, well it didn't look like it happened, in the second quarter utilization started to move up nicely. Yet, as I look at the direct container expenses, that also moved higher. I would think typically when utilization goes up, those expenses would go down.

Was there something that happened in the quarter or was it more of a function of the timing of the boxes going back to work?

Well, Greg, this is Hilliard.

If you look at a sequential compare, I did mention that part of what was going on was some bankrupt lessee recovery costs that were included in the direct container expenses. So that had an offsetting impact.

The other thing is that, I also mentioned that the handling maintenance repositioning expenses also did increase. And that's a function of our fleet being larger. But if you look at what would impact us on a sequential basis, things like storage, is down sequentially.

So if we were to strip out those items, is it safe to assume that going forward, utilization -- or direct container expenses should look more like the second quarter or the first quarter?

Well, yes.

I guess what I'm wondering is, are we going to continue to see these charges related to bringing boxes back to service in the next -- in the back half of the year?

I would expect some of those costs to wane in the back half of the year, Greg. And as utilization continues to increase, I think you'll start to see a better sequential compare on direct container expenses.

Okay, guys. Thank you very much.

John Mims, FBR Capital Markets.

This is Chris Carey on for John Mims. Thanks for taking my question.

And going on the general operating backdrop here and specifically on the utilization, we saw that nice uptick in the quarter here. You did mention in your prepared remarks, that you expect utilization to increase, but not necessarily to the same extent as in the second quarter.

Are you talking about more on a sequential basis, year over year? How should we think about that comment, as we head into the second half of the year?

The reason I made that comment is simply because we're up 3% from the low point in March. We're now above 96% utilization. Clearly, we can't go up another 3%. I don't see us returning to the 99% level we had back in 2010.

But we do expect to see utilization continue to go up, especially as the containers that have been booked for lease out over the course of the second quarter and through today, are picked up during the remainder of the third quarter.

Okay. Yes, no, that makes sense.

And on that point, demand is clearly accelerating here. But as we head into the third, fourth quarter, are you guys seeing any indications of an early peak season? Or is this organic demand?

Or wondering how you guys are thinking about the second half of the year from more of a peek perspective?

Chris, it is Robert here.

We're definitely seeing stronger demand than we have seen in past years. And we're really seeing a truly -- a true peak season that could very well continue both through September but also into October.

The shipping lines have seen about 8% growth between Asia and Europe, and 5% from Asia to North America. And that is much better than what they estimated at the end of last year, beginning of this year, which was probably between 3.5% to 4.5% growth. So no doubt the demand and thereby the pull for the containers is much greater than both our customers and we actually envisioned early on.

Yes, I guess that makes sense and that's really helpful. And on one housekeeping item, then I'll turn it back over.

With the uptick in interest expense here in the second quarter, understanding that that was partly related to the write-off. Going forward, from a modeling perspective, how should we be thinking about that interest expense more off of the first quarter basis or even the fourth quarter, or should we expect a slight uptick here going forward?

So last quarter, we talked about the fact that there was going to be a $6.4 million charge in Q2. We expect about $0.06 per share of savings in the second half. If you were to look at that on an annualized basis, obviously it would be about $0.12 per share.

But again, we may be looking at some other financings that could put a little bit of upward pressure on our financing cost. But we're going to do everything we can to make sure that we keep them at the levels that they are.

Okay. Okay, well I really appreciate the time. Thanks so much.

(Operator Instructions)

Doug Mewhirter, SunTrust.

I have one question and I'm not quite sure how to frame it. I guess it's the paradox of rising demand and stagnant prices to, for lack of a better term.

You have -- you said demand is up 50%, net pick up activity is great. And the shippers are caught on their heels a little bit with demand, yet the new -- and the inventories aren't that big either, they're 0.5 million TEUs. But the new box prices are staying low and lease rates are staying low. I'm wondering, what other lever do you have to pull to break loose either the box prices or the lease rates?

Or maybe if the answer that because box prices are so low and which -- that it's almost spurring the demand. What's the shipper alternative if demands are 50%? Is there alternative that they would just buy it themselves?

I'm trying to -- I'm struggling to understand the supply and demand dynamic right now.

Well this year, we expect that the lessors will provide over 50% of the containers that the industry consumes, similar to the past several years. In fact, it might even be a bit more above 50% then we saw last year. So the shipping lines continue to look to the lessors to provide the containers they need.

As long as container prices stay where they are, or around the current level, I think it's unlikely that we're going to dramatic increase in rental rates, unless and until, interest rates rise, which I do expect will happen, perhaps not in the next several months but certainly over the course, well not certainly but I do expect over the course of say the next year.

And if and when container prices increase, that is a more difficult projection. I'm not certain when container prices will increase. Although I do expect them to increase over time, specifically if you look at the cost of production in China, labor costs, energy costs, et cetera, it seems likely that that will happen.

We've seen an anonymous amount of resistance for prices to fall below their current level. So we don't think it's likely that prices are going to decline much from the current level. So over time, as we see either or both, interest rates and/or new container prices increase, I think you'll see rental rates increase as well.

Thanks for that.

And following under that or building on that answer, so what is preventing the factories from gaining the upper hand in with regards to pricing power? If their inventories aren't that big and demand is up so much?

Well, this is Robert here.

I don't think you can just correlate it to the inventories on the ground. I think you should correlate it to what is the theoretical production capacity. And it's probably 5.5 million to 6 million TEU on an annual basis. And this year, we don't estimate that more than 2.5 million TEU are going to be produced. So I think that is the factor that is holding pricing down.

If you see a stronger trade between Asia and Europe and to North America, we're seeing trends of now and hopefully continuing into 2015 and 2016, we would expect production volume to increase quite a bit above the 2.5 million TEU range that we're seeing now. And if that is so, you would also expect that the manufacturers who would not go to three shifts would be a little bit tighter on their 1 to 2 shifts and therefore have a little bit better pricing position.

Okay, thanks. That makes sense. That's all my questions.

And thank you. This concludes the question-and-answer session. I will now turn the call back over to Mr. Terry for closing remarks.

Thank you very much for everyone participating on this call. We look forward to talking to you as we progress through Q3. Thank you very much.

And thank you, ladies and gentlemen, this concludes today's conference. Thank you for your participation and you may now disconnect.