Textainer Group Holdings Ltd (TGH) 2014 Q3 法說會逐字稿

Good morning and welcome to the Textainer Group Holdings' third-quarter 2014 earnings call. My name is Brandon and I will be your Operator for today.

(Operator Instructions)

Please note that this conference is being recorded.

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

Thank you and welcome to Textainer's 2014 third-quarter earnings conference call. Joining me on this morning's call are Phil Brewer, TGH President and Chief Executive Officer. At the end of our prepared 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 actual future events or results. Finally the Company's views, estimates, plans and outlook as described within this call may change subsequent to this discussion. The Company is under no obligation to modify or update any or all of its statements that are made.

Please see the Company's annual report on Form 20-F for the year ended December 31, 2014 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 third-quarter 2014 earnings conference call. Last quarter we stated that we expected to see an improvement in revenue and an uptick in utilization during the third quarter. As you can see, both occurred.

Revenue for the quarter totaled $143.8 million, the highest in our history. Revenue increased 8.4% compared to the third quarter of 2013 and 3.1% compared to the second quarter of this year. Additionally, our leasing revenue of $129.8 million was also the highest in our history, an increase of 10.3% compared to the year ago quarter and 5% sequentially.

Utilization now stands at 97.4% which is almost 4 percentage points higher than it was in March and the highest it has been since 2012. Adjusted net income was $50.2 million for the quarter, or $0.88 per diluted common share, an increase of 26% compared to the prior-year third quarter. This amount includes $7.9 million attributable to a settlement of previously expensed bad debt and related cost with a lessee in bankruptcy proceedings. Excluding this recovery, our adjusted net income would be $42.4 million, an increase of 6.5%.

We are very pleased with our third-quarter results. The strong increase in container demand we saw during the second quarter continued into the third quarter, representing a return to the traditional peak season demand the we have not seen in recent years.

75% of year-to-date bookings occurred during the second and third quarters. The ratio of dry container lease outs and turn-ins during the third quarter was 2.6 to 1. Our depot container inventory has declined by more than 110,000 TEU since it's high point in March and is currently at its lowest level in two years. After experiencing a strong third-quarter peak season, we are now seeing a traditional fourth-quarter slowdown in the demand for dry containers.

Our 2014 CapEx exceeds $820 million including $130 million invested in purchase lease back transactions and $44 million to purchase previously managed containers. We have acquired more than 430,000 TEU of new and used containers this year. Virtually all of this CapEx is for our own fleet, we now own 78% of our fleet.

Rental rates continue to remain under pressure for the same reasons we and our competitors have mentioned in the past. Easy access to financing by all lessors, low new container prices and low interest rates. It is worth noting that so far in 2014, five lessors have raised more than $2.1 billion in the asset-backed and term note markets.

Notwithstanding the decline in rental rates, our margins have remained relatively stable due to declines in our funding costs and opportunistic purchasing of containers. We declared a dividend of $0.47 per share which represented dividend yield of more than 5.5%.

New container prices are around $1950 currently per CEU currently. We do not expect prices to increase over the near term. We estimate that current new build inventory factories to be approximately 500,000 TEU. We believe container lessors will purchase at least 55% of total 2014 container production. Indeed, this number likely underestimates the true extent of lessor investment as containers ordered by shipping lines are often sold to or financed by container lessors but still listed as shipping line purchases.

Used container prices continue to decline. They are down approximately 25% from the year-ago quarter and have resulted in reduced gains on sales and minimal trading container profits. While the rate of decline has slowed down, we believe further declines are possible as we enter the fourth quarter when demand for used containers traditionally weakens. We do not expect used container prices to increase materially from the current levels over the near term.

We expect revenue utilization to remain relatively steady. Furthermore we believe the return earned on containers purchased at today's prices will increase over time as the containers depreciate and especially if interest rates and/or container prices rise. Containers purchased to date also have reduced repricing and residual value risk compared to the higher cost containers purchased during 2010 and 2011.

Compared to our public competitors, we are the least levered and have the lowest overhead cost per CEU per day. We have a long history of consistent new container investment in strong and weak markets that has helped buffer the impact on our results of any one years' lease renewals. Consistent purchasing not only validates our repetition as the most reliable container supplier but also means that only 7% of our fleet is subject to leases that expire next year.

We remain financially and operationally flexible and believe we are well positioned to take advantage of the future growth of our industry. I would now like to turn the call over to Hilliard.

Thank you, Phil. Turning to the results, this quarter we had strong growth in lease rental income due to a 13% increase in the size and a 2.7 percentage point increase in the utilization of our own fleet. However, lower resale prices reduced gains on sale and trading container margins.

Core operating expenses were up 13% year over year. Direct container expenses increased by only 3% in spite of a 13% increase in the size of our own fleet. The increased utilization of our own fleet resulted in lower associated storage and handling expenses.

Depreciation expense was $48 million for the quarter, up $5 million year over year largely as a result of our larger owned fleet. Annualized depreciation expense increased from 4.1% to 4.4% at average gross container asset value.

During the quarter, as Phil mentioned, we successfully settled a claim with a bankrupt lessee. We had recovered over 99% of our container subsequent to their filing for bankruptcy. As a result of this settlement, we received a $7.9 million which increased lease rental income by $2.6 million and added 2 percentage points of year-over-year growth to lease rental income.

This settlement reduced bad debt expenses by $5.2 million contributing to a net bad debt recovery of $4 million during the quarter. Excluding the impact of this settlement, our bad debt expense would have been around 1% of revenue. We continue to believe the normalized run rate for bad debt expense should trend around 0.5% to 1% of revenue on a longer term basis.

We saw a 10-day improvement in DSO versus last year, reflecting continued diligence over our ongoing credit and collection processes and expect the positive direction of our DSO improvement to continue.

Our interest expense, including realized hedging losses but excluding write-off of unamortized bank fees, was $21 million for the quarter, down 5% versus the year-ago quarter in spite of a 10% increase in our average debt balance. We are reaping the benefits of the refinancing activity completed earlier this year as our average effective interest rate, which concludes hedging cost, is currently 3.08%, a decline of 48 basis points when compared to the year-ago quarter.

Early in the quarter we refinanced our $1.2 billion warehouse facility, lowering the borrowing cost by 25 basis points to LIBOR plus 1.7%. We were the first container leasing Company to establish a three-year revolving period versus the two-year industry norm for a container ABS warehouse facility. We also recently issued $301 million of 10-year fixed-rate ABS debt at 3.27%, which enabled us to extend the term of our debt and lock in a very attractive rate. The benefits of these financings coupled with the refinancings of our older ABS notes completed in Q2 will continue into Q4.

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 total fleet subject to long term and finance leases. The weighted average remaining term of our fixed or hedged debt is 42 months. The weighted average remaining term of our long term and finance leases is 40 months.

Income taxes for the quarter were approximately $800,000 resulting in a 1% effective tax rate for the quarter. Our effective tax rate varies from quarter to quarter due to discrete one-time items. As we've stated previously, we expect our annual effective tax rate to be in the low-to mid-single digits.

Adjusted EBITDA was $120 million in Q3, up 13% from last year, a clear indication of our continued strong cash generation. Adjusted net income, which excludes unrealized gains and losses on interest rate swaps and the write-off of unamortized bank fees for the quarter, was $50 million resulting in an adjusted EPS of $0.88 per share.

The previously mentioned settlement contributed $0.14 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 September 30, 2014, our cash position was $87 million, total assets were $4 billion and our leverage ratio was 2.3 to 1. Thank you for your attention and I'd now like to open the call up for questions. Operator, can you inform the participants of the procedures for the Q&A?

(Operator Instructions)

FBR Capital Markets, John Mims.

This is Chris Carey on for John, thanks for taking my question. I was wondering did you mention where year-to-date box production was at?

This is Robert here. Dry container production is about 2.6 million TEU plus probably 100,000 TEU of dry specials, and we believe reefer production to be around 220,000 TEU. (Multiple speakers) that reefer production is about the same as 2013 while dry container production is up compared to last year.

Okay, thanks. And then do you have any sense of where that is relative to maximum theoretical production capacity in the year? Trying to get a sense of where the producers are versus where they could theoretically go if demand got -- demand continued to accelerate.

Well yes, most of the producers are still producing one shift. We believe that the theoretical production capacity is about 6 million to 6.5 million TEU. So production is still only about half of theoretical production.

Okay, thanks, that make sense. I had one quick modeling question. I know you guys have been talking the last several quarters about there's old [void] depreciated containers being sold and replaced by more expensive containers and PLBs are becoming a larger part of your resell business, is that trend continuing? The percentage -- D&A as a percentage of average gross container value is very small to a small degree ticked up sequentially. Do you see that trend continuing from here on the D&A line?

Yes it will continue directionally but maybe not at the same velocity. So going from let's say 4.4% maybe up to 4.6% might be reasonable.

Okay. Yes, that makes sense. And then I had one last question then I'll turn it back over. I'm not sure if you mentioned, but -- and or if you're willing to disclose, what's the percentage of the 430,000 TEU at least directionally that were new versus PLB versus managed?

We -- the bulk of it is new production, and we prefer not be more specific than that.

Okay, well very much appreciate the time. Thank you.

Deutsche Bank, Amit Mehrotra.

My question is on the outlook for incremental margins and margin expansion in this environment. You guys have done a great job of improving the utilization levels but at the end of the day the type of operating leverage from higher utilization is less favorable than the leverage you get from the higher rates, obviously. So the question is, do the realities of the market cap the opportunity for incremental margins or margin expansion until the rate environment improves? Or is there really anything you can do proactively to improve the underlying profitability of the business despite the lackluster rate environment?

Well I think it's important to keep in mind that if you look at not just Textainer but any of the container leasing companies, the returns were all provided and are actually quite attractive. So while we acknowledge that returns are down, there is little we can do about improving rental rates right at this moment. As I think we've said many times, the best thing that can happen for us and other competitors in the industry would be to see new container prices and our interest rate rise. But in the meantime, we're also generating quite attractive returns.

And to add, Amit, I think we've done a lot of on the financing side to lower our funding costs which I think has helped counterbalance some of that as well.

Yes, no -- for sure the margins are very impressive already, but I'm just thinking about it maybe from over the next year or 1.5 years, but I think you answered the question. My second question is on the actual rate environment. Yields have been under pressure for quick some time now and maybe the visibility is not that great, but maybe you can offer some -- a little bit more color on where you think we may get a bottoming out here given the fact that they've been under pressure for quite some time.

Well we actually think that yields in 2014 have been pretty stable. When we compared with funding cost container prices, we're not too unhappy about where the situation is. Of course we would like higher rates but as we have seen out in the marketplace, most of the requirements from shipping lines have been relatively small maybe repetitive which means you don't have to be the largest or the second or the third largest provider to supply the containers.

That means that there's a lot of competition for every transaction. And that's really what we have seen out there. Every transaction there are five or six or seven providers that can actually supply 100% of the containers.

So to get a stronger price environment I think you certainly need stronger container prices. But you also need more extreme demand at the same time for even the biggest buyers to get some pricing power.

Okay, that's helpful. Thanks very much and nice job in the current environment. Thanks.

SunTrust, Doug Mewhirter.

Actually a question on CapEx. The -- Phil, you had mentioned you'd invested $821 million for new purchase lease back in previously managed containers year to date. I looked at your year-to-date operating -- your year-to-date cash flow statement and the -- that line item year to date is actually only $492 million. So is -- are you including both containers that you've put orders in for delivered next quarter plus fourth-quarter orders that you've delivered this year? How do you reconcile those two numbers?

Sure, Doug, you actually have to also look at container contracts payable. You'll see there's $170 million there. But I think you're correct in that this is the amount of containers that we've ordered year to date so not all of the containers are flowing through our cash flow statement or are on the balance sheet as of yet.

Okay. Great, thanks. And actually my second question maybe a little in the weeds for Robert. I remember a year or two ago and Maersk was talking about outsourcing more of its reefer production. Previously they had been pretty protective of that piece of the business. And with the high season for reefers coming up, has that made any kind of impact on the market dynamics and what are the -- in your opinion, what are the returns on new reefer boxes that are coming off the line right now?

I think I can answer that in two ways. Certainly the lines are still focused on increasing their reefer cargo loadings. That goes for Maersk lines, that also goes for most of the other global operators. We see that probably about 60% of all the reefers this year will be added by leasing companies and only 40% bought by shipping lines.

The market is clearly very competitive. The spreads are better than dry containers, but quite frankly not really acceptable compared to the additional technological risk you take and the added depreciation you have upfront.

So I think we have certainly been pretty choosy about which deals we go for, we're selective. We go for the deals that make our spreads. If they don't make our spreads, we pass on them. For that reason our share in the reefer sector is less than what we have seen in the dry container sector. I don't know if that answers your question.

That's very helpful and that's all my questions. Thank you.

Sterne Agee, Sal Vitale.

We can start off with how do you think about from the manufacturers perspective what their margin is given current container prices?

Well there's no doubt it's tight. It's still there fortunately they have seen reduction in steel prices that has helped. the oil content in paint has also helped, floor prices are pretty steady. I think the issue is, is that they have produced more containers this year than they did last year which will help in making their production cost more competitive. But I think there is no doubt that their spreads are pretty thin right now.

But this year I think they made a conscious decision that they wanted to keep the lines going at least until the end of the year and maybe through Chinese New Year next year. Chinese New Year is mid February, so it's later than last year and it seems like they want to continue to keep the lines going at least through then.

And then we can all guess what's going to happen thereafter whether they're going to extend the shutdown like they did this year or I think that will all depend on how the order situation looks when they get into the early next year.

Okay, thanks, that's helpful. And than the other question is, big picture, your strategy seems to be to continue to invest through the downturn in market lease rates. Can you give us a sense for the long-term leases that you're writing today, are they different in terms than what you wrote say last year or the year before that in terms of are they still say five years, is that your standard or are you writing shorter leases at this point?

Yes, most of the leases we close have a term of five to eight years. But I would say the bulk of them are still five years. And that goes for both our dry containers and reefers.

Okay. And then the last question, Hilliard, can you refresh my memory. What percentage of your -- of the leases written say at peak levels of late 2010, early 2011, what percentage are expiring in 2014?

In 2014 the number is 4%. But I think that number doesn't really go beyond 6% to 7% or 6% to 8% as the years progress. We've been a pretty consistent buyer, Sal, so there isn't a big cliff or any of that sort that we face. It's a pretty small amount that expires each year.

And just following up on that, say whatever expires in early next year or maybe, you could even say full next year, what is the gap between the rate on that and the market lease rate today?

There's a slide in our IR presentation that walks through that. And if you look at that slide, it shows that the rates for next year are somewhere close to the $0.80 level. And I think if you look at where today's rates are, that's probably roughly about $0.30 or so higher than where today's market rates are.

Okay, that's helpful. Thank you very much.

Bank of America Merrill Lynch, [Ari Rosa].

Congrats on the good quarter. Wanted to ask in terms of an outlook on the global economy, what are customers saying when you talk to them? And curious to hear are there any areas that you're seeing any particular strength?

I think so much of global trade is really surrounded by trade to the US but even more so to Europe. And I think what our shipping line customers saw this year, they saw a pretty dramatic improvement in the trade between Asia and Europe and that has led to the additional demand we have seen this year with North America as well being acceptable.

Going forward, I think to -- later towards the end of this year the issues in Russia and ebola has certainly had an influence on trade. But overall the lines are relatively optimistic about the trade growth next year. I think what they're more concerned about is there is a lot of very large vessels being added to their fleets. And there's no doubt that the vessel additions will outpace the growth in trade.

And therefore the environment is that they are -- they will try to go for general rate increases. I don't know to which extent they will be successful in achieving them. Certainly some shipping lines with their vessel additions will have to gain market share from other lines and that usually makes a very competitive rate environment. So we see that next year we think on the shipping line front will be a very competitive year despite acceptable growth rate.

Having said that for us, that means container demand with the additional growth and with normal replacement, that should be a healthy environment for us out there.

Great. That -- and then in terms of obviously you guys have been driving up utilization and just wanted to hear, is there any sacrifice that you guys are taking in terms of rates? How do you think about that kind of a balance between utilization and rates? And certainly given that you guys seem to be expanding your fleet given the difficult environment, what's the logic there? Wanted to understand a little bit better.

Well the logic is you can do both. You have many shipping lines who prefer new production and really want to focus all of their pick ups on China. Having said that, there are lots of other locations where there is production and not new container production which means depot containers are more in demand. And while for a container next to a brand new container, an in fleet container next to a brand new container, yes there is a rate differential.

But if you go away from those new production areas, that may disappear. Or maybe sometimes you can get a better rate for your depot unit then you can for the new production unit especially in a high utilization environment. And so we don't think it's an either/or, it's a both/and.

Great, that's helpful. Thank you, guys.

(Operator Instructions)

Raymond James, Art Hatfield.

My questions have been pretty much answered, but I want to get your thoughts on how you see the shipping line alliances and how that may impact the lessor business model, if at all, over the next few years.

Well we read a lot about the alliances and clearly the lines they have to work together to avoid that they all go out and add additional vessel capacity, which will put even more pressure on a freight rate. So at the current freight rate environment, alliances make a lot of sense. We certainly supports all the initiatives, we don't see them as a threat towards our industry at all.

As a matter fact the more efficient they are and the better well tuned, the less we have to be concerned about credibility. So there's nothing new about all of these alliances. Clearly they're getting better, clearly the vessels are getting better and there are new constellations out there. But there's really no dramatic change in how we see that working towards our business.

And for the shippers I think that they are dealing with the individual shipping lines just like they did before. And I don't think the shipper really cares very much whether an embassy container is on a Maersk line vessel or a CMA box is on a China shipping container. I don't think they care much about that, they want the service, they want to documentation. They want the accurate billing and that's what the shipping lines will continue to compete on.

Commercially they're still competing against each other just like they did before. They just found a way where they can become more efficient and keep their slot cost per carry TEU down at the minimum level.

Great, thank you for that insight. That's all I got today.

FBR Capital Markets, John Mims.

This is Chris Carey again. One quick question, with the worsening port congestion on the West Coast, you're hearing about some boxes being laid up for as much as a month, are you seeing any effect of that on available capacity specifically in that Asia-Pacific string?

Yes, well we have not really seen that yet but if large container vessels are waiting off terminal and there's a slow down at the terminal, meaning turnaround of the containers will be considerably slower, meaning it will be slower to get the containers back to Asia, if there is a peak season pre-Chinese New Year, there's a very good chance that could stimulate container demand for us.

And would that have any impact on near-term pricing or is that just speculative at this point?

I don't think it will have a lot of impact on pricing. I think most of the certainly larger leasing companies are preparing themselves for a busy next year and that's why we're buying containers in the fourth quarter. So I think we're pretty prepared for something like that to happen. Obviously the higher utilization on the in fleet containers will remove that chance to supply the 10,000 of depot containers in the high demand locations. But I'm pretty sure new production can make up for that gap.

Okay, that makes sense. Thanks so much.

And we have no further questions at this time. I will now turn it back to Mr. Hilliard Terry for final remarks.

I'd like to say thanks to everyone for joining us and we look forward to talking to you as we progress through the quarter. Thanks for joining us. Have a great day.

Ladies and gentlemen, this concludes today's conference. Thank you for joining, you may now disconnect.