Textainer Group Holdings Ltd (TGH) 2018 Q2 法說會逐字稿

Welcome to the Quarter 2 2018 Textainer Group Holdings Limited Earnings Conference Call. My name is Zanera, and I'll be the operator for today's call. (Operator Instructions) Please note that this conference is being recorded. I will now turn the call over to your Executive Vice President and Chief Financial Officer, Hilliard Terry. Mr. Terry, you may begin.

Thank you, and welcome to Textainer's 2018 Second Quarter Conference Call. Joining me on this morning's call are Phil Brewer, President and Chief Executive Officer. At the end of our prepared remarks, Olivier Ghesquiere, Executive Vice President, Leasing, 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 U.S. securities laws. These statements involve risks 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 after 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, 2017, filed with the Securities and Exchange Commission on March 14, 2018, 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.

This quarter, we've also included slides to accompany our comments today. The Q2 earnings call presentation can be found on our IR website next to the link for this webcast.

At this point, I'd now like to turn the call over to Phil for his comments.

Thank you, Hilliard. I would like to welcome you to Textainer's Second Quarter 2018 Earnings Call. The momentum we saw during the first quarter carried through the second quarter. We leased out more than 260,000 TEU during the first half of the year, the largest amount we have ever leased out during the first half of the year. Total revenues of $140.7 million for the quarter were an increase of 18% over the second quarter of 2017.

Lease rental income increased 12% year-to-year to $121.6 million. This was our sixth consecutive quarter of lease rental income growth. Adjusted net income was $17.7 million for the quarter, or $0.31 per diluted common share, an increase of $0.7 million or 4.3% from the prior quarter. Utilization averaged 97.9% for the quarter. Our depot inventory remains very low. Furthermore, almost half of our depot containers are booked for lease-out. As these remaining depot units go on lease, our utilization will trend higher.

We continue to invest in containers to meet the demand from our customers. We have ordered or taken delivery of $700 million or 360,000 TEU of new containers this year. 80% of the new containers delivered during 2018 have already been leased out. We continue replenishing our new container inventory with levels necessary to support our customers and take advantage of any market opportunities.

Lease-out demand during 2018 has followed a traditional industry pattern. We leased out approximately 100,000 TEU during the first 2 months of the year, largely prior to the lunar new year. Lease-out activity picked up again in June and July, during which period, we leased out more than 110,000 TEU. Our overall fleet average rental rate is below current rates due in part to the low-cost containers purchased 2 to 3 years ago.

New container lease-outs not only provide attractive returns, but also improve the overall yield on our fleet as today's rates are approximately 20% above the average rate on our fleet. The average rental rate per day at our own fleet has increased almost 4% over the last year.

The demand for new containers this year has been very strong. Total output through the end of July is estimated at 2.5 million TEU, which, if annualized, would be the second largest production year in history. Lessors have purchased 60% of this production. Shipping lines continue to rely on lessors to provide majority of their container needs for several reasons, including the impact of increased bunker prices on their profitability and an uncertain outlook due to actual and proposed tariffs.

Current new container inventory at factories is approximately 750,000 TEU, which is a 25% decline from the end of the first quarter. We have consistently maintained an inventory of $200 million or more of new containers at factories to meet immediate customer demand.

New container prices have been very stable since early last year and are currently around $2,200 per CEU. We expect new container prices to remain around their current level given high steel prices, slim manufacturing margins and strong demand.

Resale prices have remained high resulting in more than $11 million in gains on sale for the quarter. Prices are expected to remain around their current levels as a result of the relatively low level of turn-ins, the limited quantity of containers being put to sale and the stability of new container prices. Since containers often sell for 40% or 50% of their initial cost, maximizing the sales proceeds is critical to improving investment returns. With dedicated resale professionals in our offices around the world selling 130,000 containers per year, we consider resell to be one of our core strengths.

The question of the impact of tariffs on trade has received a lot of attention recently. We have not yet seen an impact on lease-out demand as a result of trade disputes. If trade patterns change as a result of tariffs, supply chains will be disrupted, which should lead to an increase in demand. However, if the overall level of trade declines, container demand could also.

It is worth noting that, recently, the IMF reconfirmed its projection of worldwide GDP growth at 3.9%, and our customers continue to expect trade growth of 4% to 5%.

With our strong CapEx and ready supply of new containers at the factories, we are well positioned for current and projected future demand.

New and used container prices and rental rates remain at very attractive levels. Given the strong lease-out demand we have seen this year and the continued dependence of shipping lines on lessors to provide majority of their containers, we expect the positive momentum we saw during the first half of the year to continue into the third quarter.

I will now turn the call over to Hilliard.

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

Lease rental income was $121.6 million, a $12.8 million increase, and up 12% compared to the year-ago period. The increase was driven by higher utilization, an increase in average per diem rates and an increase in the size of our owned fleet.

Gains on sale of containers were $11.4 million, up almost two-fold on a year-over-year basis. Sales volumes have decreased as fewer containers are available for sale, yet gains on sale continue to be healthy due to strong used container prices, which were up 16% year-over-year. We expect demand for resale containers and gains on sale to continue at current run rates.

Direct container expenses were down $1.4 million or 10% versus a year ago same quarter. The year-over-year decrease primarily resulted from lower storage expenses as a result of higher utilization.

Depreciation expense was $57.8 million, down $1.9 million or 3% year-over-year, primarily due to last year's depreciation policy update, and only partially offset by an increase in the size of our owned fleet. Annualized depreciation expense for the quarter was 4.5% of average container cost. We continue to expect the run rate to remain close to this level as our recent CapEx comes online.

General and administrative expenses were $8.6 million, up $1.3 million or 18% year-over-year. This increase was primarily due to people and technology platform investments. Bad debt expense was $1.4 million or 0.9% of revenue, in line with our historical run rates of 0.5% to 1% of total revenue.

For the quarter, interest expense, including realized hedging costs, was $33 million, a $2.6 million increase from the second quarter of last year. The year-over-year increase in interest expense was primarily due to higher borrowing costs as we increase the fixed-rate portion of our debt, higher debt balances due to our recent CapEx and higher LIBOR rates. Our average effective interest rate, which includes realized hedging costs, is currently 4.12%, a 3 basis point increase when compared to last year.

Yesterday, we closed a $259 million, 7-year fixed-rate ABS notes offering to free up borrowing capacity in our short-term facilities for additional container investments. This also increased the fixed portion of our overall debt balances. After the completion of this ABS issuance, over 76% of our debt was either fixed or hedged compared to 77% of our total fleet subject to long-term and finance leases. And the weighted average remaining term of our long-term and finance leases is 46 months. We will continue to be opportunistic in our approach to the financing markets.

Adjusted EBITDA was $109.1 million for the quarter, up 20% or $18 million when compared to Q2 of last year. Our cash position has increased by more than $14 million when compared to the same period last year, and more over, we have more than $800 million of liquidity for new CapEx.

Our tax expense for the quarter was $951,000, reflecting a 4.7% effective tax rate for the quarter. We continue to expect our annualized income tax rate to normalize in the mid-single digits, which will result in an annualized rate slightly lower than this quarter's rate.

Adjusted net income for the quarter was $17.7 million or $0.31 per diluted common share, excluding unrealized gains on interest rate swaps and noncontrolling interest.

Thank you for your attention. And now, I'd like to open the call up for questions. Operator, can you inform the participants of the procedures for the Q&A?

(Operator Instructions) Our first question comes from Helane Becker from Cowen.

Just a couple of questions. On the calls, you guys used to be like the first or like the largest or second largest, and you're kind of like the third largest now, which is fine. I assume that your customers are still kind of calling you first. But are you seeing increased competition from other lessors in the market that aren't necessarily bigger than you guys?

Helane. Thank you for the question. I'm not sure I agree with your first point. Our CapEx this year has been quite strong. So I'm not sure I believe that we're the second or third largest investor. But to get to the meat of your question about competition, the competition in our industry is the same as it has been for many years. There was a brief period last year when, clearly, the competition was less than it had been historically, but that period is gone. And I'd say the competition in our industry remains as it has been for years and years.

Okay. I just would refer to Slide 3, where it just shows the fleet overview, and you guys are behind Triton and Florens, which is just where that came from.

Oh, I'm sorry. Let me let me comment on that. Yes, that's true. Obviously, Triton is the largest in our industry since the merger. Florens, I think you know has a very large exposure to COSCO. They grew also because of their merger with Dong Fang, which puts them into second place overall. But if you were to remove their exposure to COSCO because they're related -- they have a corporate relationship between the two, if you were to remove and that exposure, we believe we would be larger than Florens.

Got you. Okay. And then my other question is just related to containers that you manage versus containers that you own. That seems like that business would be a relatively high margin business. Would you think about expanding the number? Are there other opportunities to expand the number of managed containers?

Well, that's something we mentioned in our past earnings calls. For years, we grew our owned fleet as opposed to our managed fleet. Recently, we have been talking to several entities that are interested in investing in containers with the expectation of looking to grow our managed fleet. We don't want our managed fleet to become much larger than, say, it is currently about 20% of our fleet, perhaps we'd look to target 25% or 30%. We think that's a more appropriate number, but no larger than that. We do have some interested parties that we're speaking with currently.

And Helane, also, as you know, last year, we did increase the size of our managed fleet as well.

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Yes. What Hilliard is referring to is when we took over the management of the 180,000 TEU Magellan fleet.

Our next question comes from Michael Webber from Wells Fargo.

Phil, just wanted to follow-up on the question around (inaudible) I guess, tariffs and the impact on trade. You mentioned in I guess your previous answer, you talked about Florens and that alpha's exposure to COSCO. I'm just curious, maybe getting a bit more granular, are you seeing any mix shifts, I guess, within that customer base? Just anything on the margin that maybe -- it's obviously not impacting the demand -- the investment opportunity the entire space has invested heavily throughout the year despite all the concerns, I guess, the market had around competition in kind of Q4, Q1, has been a pretty robust quarter. I'm just curious with kind of from a mix perspective, are you picking up on anything within maybe your Chinese versus non-Chinese customers? Just anything that would be helpful.

I don't think our customer mix this year is any appreciably different than our customer mix has been in past years. Is that your question, Mike? I'm sorry, I'm not sure I understood.

Just maybe any changes in behavior. Are they moving? Are you seeing COSCO more heavily leaning towards Florens in this environment? Just anything on the margin would be helpful.

Mike, I have -- I don't think we have seen any dramatic change. It is a fact that a company like COSCO has certainly been very aggressive. They're really essentially trying to build market share. You've, I'm sure, followed the recent completion of their takeover of OOIL, although they claim that they will continue to manage the 2 businesses separately. It's clear that they have major ambitions and that they continue to want to grow the business. But I don't think that's a dramatic change. I think that other major shipping lines have pretty much the same strategy. They're all trying to continue to build market share and drive efficiency.

Okay. All right. That's helpful. Phil, I think you also mentioned earlier when you talked about your utilization and -- though actually, you're talking about your managed book. I'm just curious, around your utilization, you guys are I think 100, 150 basis points inside of your 2 public peers, very firm level at almost at 98%, but you've got a bigger managed book from the rest. So I'm just curious, if I look at that delta, which is not huge, but not insignificant, how much of that is just noise from kind of the consolidated calculation between your owned versus managed books, versus maybe a utilization pickup that's still ahead of you for the back half of the year?

I don't think it's really an issue between the owned and managed books, we treat both our fleet similarly. The primary driver here is earlier in the year, depot container rental rates out of Asia were relatively low. And we intentionally held back from leasing those containers out of Asia in the expectation that as that supply would dry up, we would be able to achieve better rental rates on that equipment. And I believe it's proven to be true. We now have virtually all of our depot equipment that's in Asia booked, and the rental rates are certainly higher than the rental rates we saw earlier this year. So we expect our utilization to trend up into the third quarter. But achieving high utilization's always possible depending on what you're willing to do with respect to the rental rates.

No. Absolutely. I think that has been our main strategy since the beginning of the year, is to try to push our average share of rental rate up. And it's a fact that the new containers, new production containers that we put on hire are leased out at a rate which, on average, is about 20% higher than our existing average fleet rate. But simultaneously, we're also trying to push the rates up on our existing fleet. And to achieve that, we sometimes have been now holding back on some containers and not leasing them out all as fast as we have normally. So that's the main reason.

Right. Okay. Yes, we're not talking about a big number, but it seems like that. There's no reason why you couldn't get to the kind of high 98.5%, 99% range. That seems like that would still be ahead of your years being picky.

Yes, absolutely. Now to be honest, if we wanted to increase our utilization rate by 100 basis points, it's only a matter of us dropping the rate a little bit in the current market.

Okay. So just one more for me and I'll turn it over. And Phil, this is kind of just a higher-level question. I didn't realize this, but you mentioned in your prepared remarks that if you were to annualize production this year, it'd be the second-largest year ever. Obviously, that's -- annualizing, that's a big if. But it kind of just speaks -- it speaks to the level of demand, I guess, we've seen throughout '18. I guess on the back of that demand and the fact that we've had strong steel prices tariffs, the remnants of kind of the uplift from waterborne paint, box prices are still pretty flat kind of year-to-date. And I'm just curious, and maybe you can help me make sense of why haven't we seen box prices move higher? I guess from the other angle, why haven't box manufacturers been able to gain more margin? And maybe is there something we're missing in terms of kind of not understanding why we haven't seen maybe that box pricing jump to kind of 23, 24, 25 and then kind of per diems kind of moving in tandem?

Michael, we're asking ourselves the same question, to be very honest. One explanation we have is that although there's a limited number of manufacturer, their production sites are very fragmented. And they also have to maintain some production at the various factories to keep those factories alive. And we're coming a few years after very, very low production levels. I mean, last year was strong; but before that, it was very low. And the only explanation we have is that the manufacturers are really trying to ensure that those factories get that position volume so that they can justify their existence. But it is a bit puzzling that in a market that has been so strong, you have manufacturers that are actually announcing losses. I would agree with that.

There is very intense competition, even though there are a few manufacturers. There's intense competition. And surprisingly, there's actually new manufacturer that has started up recently as well. So I think all these factors play into the container price.

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

So you noted -- yes, you guys noted that the new lease rates are coming at levels above your average lease rates, about 20% above. So kind of first off, what is the daily per diem lease rates that you're currently putting on the new containers at? And then as we look out to when those containers in 2015, 2016 roll off, if we kind of assume lease rates and demand are at their current levels, when would we really start to see that pickup come through? Is it a 2020 or 2021 event? Or is it something that we really start to see that traction come through in 2019?

The current lease rates are in the neighborhood of $0.60 per CEU per day, $0.60 to below $0.60 depending on who the lessee is, how strong their demand is, when they need to containers -- do they need them yesterday, do they need them -- is it a request for delivery a few months in the future? The real impact of the repricing, which we've noted in the past, and I would say it again, that we purchased many containers in the time period you mentioned, in the 2015, 2016 years, that were very inexpensive containers. I think the average cost per CEU for the containers we purchased in 2015, I believe, or probably '16, I'm sorry, I don't remember which, was in the neighborhood of $1,500 per CEU. And we are selling used containers today for not too far off of that. A used 20-foot containers price -- cash price plus rebill can be in the neighborhood of $1,400 or more. Those containers are returning rental rates that are significantly below current rental rates and they have impacted the revenues that we're generating on our fleet. However, when they reprice, and the repricing is shown in a graph in our Investor Presentation, next year, the repricing effect is not that dramatic. Where it really becomes dramatic is in 2020 and 2021, where eventually, you'll see that the rental rate per CEU per day on some of those containers is less than $0.40 per day versus today's rate that's more in the range of low $0.60 per CEU per day.

Okay. Changing gears a bit there. So really, the proportion of new containers that have been purchased by the shipper versus the lessors is in that, I guess, 40% to 60%, so 60% more for the lessors. It seems like the -- you kind of noted that the tariffs actually could support that and the higher bunker costs and the low freight rates would also kind of help support those levels. Is there kind of any potential for that to actually take up? Are you actually seeing that, that could increase? Because it kind of stayed at that level over the last couple of quarters, so just interested to hear your thoughts there.

Well if we look back many years, you would see that the split was much closer to 50-50, and in some years, in fact, lessors bought less than 50%. However, the trend has changed over the past several years to where lessors generally are buying the majority of containers. And although we have seen years when the percentage was higher than 60%, the trend seems to be around 60%, if you were to average the past several years. And I don't think we're expecting that, that trend will -- that the percentage split with the lessors is going to trend up beyond 60% this year. I think if you're looking to model, I think that's a fair assumption to make, at 60%.

Okay. And then you guys had said that the gain on equipment sale was strong this quarter and that you kind of expect it to stay at those elevated levels. But really with these high utilization levels, wouldn't that be hard to maintain as, really, it's not a whole lot of containers that are available for sale? Just was kind of interested to hear your thoughts there.

We've had volumes come down slightly, but we've seen used container prices remain pretty strong. So in spite of slightly lower volumes, we're still seeing strong gains on sale. And we do expect that level to continue.

Our next question comes from Scott Valentin from Compass Point.

Just around the financing. I know you guys had talked about -- I think you had said 76% of your financing is long-term. Just wondering what that number can grow to. And then correlated with that, I guess where you see your cost of funds going. I think you said it was up 3 basis points year-over-year. I would've thought it'd be up more than that given the move-in rates we've had.

Scott, thanks for the question. We've done, so far this year, 2 financings, both longer-term financings, and they total, in aggregate, close to $600 million. So obviously, as we continue to fix more of our debt, there's upward pressure on the actual rate. I would expect that to trend up versus down. In terms of where that number could ultimately be, I think we're probably looking to fix more of our debt today. But if you actually look at the balance of how much of our overall total fleet is subject to long-term leases, we're pretty well-matched and hedged in terms of the percentage of our debt that's fixed versus the percentage of our fleet that's subject to long-term leases. So that's where we are today. But as I've said earlier, we're going to continue to be opportunistic. I think something else to note on the financings that we've done this year... If you look at the required principal amortization, it's much lower than you've seen in the industry. So that's another positive that you really don't see unless you look under the hood on some of the financings we've done.

Okay, that's really helpful. And then just last question. When I talk to investors about the stock and they know it's trading at pretty good discount to book value, I'm just wondering in terms of capital management, are there any thoughts there on maybe repurchasing shares given you're trading at a decent clip below book value?

That's a discussion that we have at every board meeting. We have a board meeting coming up, I'm sure it will be discussed again. We did have a share repurchase program several years ago. I really can't comment on whether there would be one in the future. Our shares -- we're well aware our shares are trading at a discount, and it's just something we'll have to take into consideration.

We have no further questions at this time. I will now turn the call back to Mr. Hilliard Terry for closing remarks.

I just wanted to say thanks to everyone for joining us, and we look forward to speaking to you as we move through the quarter. If you have any other questions, feel free to give us a call. Thank you.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.