Textainer Group Holdings Ltd (TGH) 2019 Q4 法說會逐字稿

Thank you and welcome to Textainer's Fourth Quarter and Full Year 2019 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.

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, 2018, filed with the Securities and Exchange Commission on March 25, 2019, and going forward, any subsequent quarterly filings on Form 6-K for additional information concerning factors that may 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 for Textainer's Fourth Quarter 2019 Earnings Call. I'll begin by reviewing the highlights of our fourth quarter and full year 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.

Textainer achieved solid results last year despite a challenging environment that has persisted into 2020. We delivered stable lease rental income of $620 million and leased out 400,000 TEU during the year, most of which was new production leased out at attractive yields with double-digit returns. We made new container investments totaling $739 million during the year and also purchased a container investment company known as LAPCO, transferring about 165,000 TEU from our managed fleet to our own fleet.

Adjusted EBITDA increased 4.8% to $464 million, while adjusted net income increased 7.6% to $55 million or $0.96 per diluted common share as compared to $51 million or $0.90 per diluted common share in the prior year. Average utilization for the year remained high at 97.4%. And at year-end, we owned approximately 85.4% of our fleet, which stood at 3.5 million TEU.

While we are pleased with our performance for the full year, our fourth quarter results reflect the continued atypical lull in market activity, which limited our incremental CapEx to $28 million during the quarter. For the fourth quarter, we achieved lease rental income of $152 million, adjusted EBITDA of $113 million and adjusted net income of $11 million or $0.19 per diluted common share, all of which decreased slightly as compared to the third quarter given a modest decrease in utilization and resale prices.

However, book remained at high level, with our average utilization at 96.4% for the fourth quarter and currently stands at 96.3%. We also booked $14 million of net cash proceeds from the Hanjin bankruptcy estate, which contributed to reinforcing our strong cash position and reflects the very successful equipment recovery and insurance collection effort following the Hanjin insolvency in September 2016.

While the overall market for new container activity remained low in the fourth quarter and in 2020 to date, other key elements of our business are favorable. First, new container prices have recently increased the current level of approximately $1,900 per CEU from around $1,650 at the end of the third quarter primarily driven by a reduction in factory production capacity. While demand for new lease-out was low, we have seen some incremental new container demand ahead of Lunar New Year. At the same time, lessors continued to demonstrate discipline by limiting new orders and managing factory inventory level. The total inventory of new dry container available at factory reduced slightly to a level currently below 800,000 TEU.

During the buildup to the Lunar New Year, we saw evidence to such as shipping lines are running at very tight container inventory as they substantially reduced the pace of turn-in and leased new and used equipment on the market. In addition, shipping lines continue to manage capacity very aggressively through canceled sailings, which have further increased in recent weeks with the outbreak of the coronavirus epidemic. We continue to see a moderate and manageable level of inventory and an attractive container resale environment.

Our fleet utilization decreased only marginally in the last quarter and has since been stable, with about 80% of our inventory strategically held in Asia. Resale container prices decreased slightly in the fourth quarter but have experienced a slight rebound and remain positive given the low supply of container put to disposal.

Finally, the recent signing of Phase 1 of the U.S.-China trade deal has reduced the level of uncertainty and should help improve visibility and optimism for economic players. We continue to believe that seasonal volumes will see a rebound in the second half of the year.

The recent outbreak of the coronavirus is a new factor that will influence shipping volumes worldwide, and in particular, those originating from Asia. As we monitor the situation closely, all we can say is that it is too early to assess its full potential impact. Experience, however, indicates that market disruptions are generally favorable to leasing companies as it creates lease-out opportunities. However, this assumes a reasonably fast resolution of the viral epidemic, which we all hope for. Notwithstanding the most positive development, we expect the overall market activity to go through a few quiet months following the Lunar New Year.

As we look ahead for the first quarter, we expect rental revenue will decline slightly given attrition and limited CapEx, and costs will remain at current normalized level, except for storage, which is impacted by changes in utilization.

As we look out to 2020, we remain optimistic about the market outlook. The IMF global forecast remains above 3%, which is supportive of moderate shipping volume growth. Given limited CapEx in 2019 and normal fleet attrition, we believe that the market should undergo a rapid turnaround when organic demand returns as currently expected for the traditional peak season. Higher container prices and lessors' discipline should help market yield recover to a level more in line with required long-term capital returns.

We expect intra-Asia trade to continue to grow and have recently seen demand improvement in specific European and South American market. We expect resale volumes to slow down temporarily, with resale prices to remain stable and likely to increase in Europe and North America in Q2. We currently do not have any significant concern with customer credits. And finally, we believe shipping lines will continue to increase their reliance on container leasing companies as they focus their liquidity on necessary CapEx related to new ships' compliance with the IMO 2020 emission regulations.

In summary, while the overall market activity remains muted, we remain focused on improving our business to be best in class through our cost control initiative and other efficiency investments such as improvement in our IT system and continued optimization of our capital structure. We remain committed to our disciplined growth strategy, targeting specific yield and return thresholds. We will also pursue any strategic fleet purchase, as demonstrated by the acquisition of containers from one of our managed fleet investors, which closed on December 31 and will contribute positively to our 2020 results.

Finally, we remain focused on driving shareholder value creation. Last year, we repurchased approximately 879,000 shares of our common stock under our share repurchase program. As at the end of 2019, we had $16 million remaining in the program, and we will continue to strategically deploy capital to create shareholder value.

In addition, on December 12, we started trading on the Johannesburg Stock Exchange under the ticker TXT in connection with Trencor's unbundling of its share in Textainer. We believe this will lead to a broader and deeper shareholder base and improved liquidity in our stock over the long term.

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

Thank you, Olivier. I will now focus on the key drivers of our financial results. Q4 lease rental income decreased $4 million from the third quarter of 2019, largely due to a decrease in utilization and fleet size. Lease rental income for the year increased $7 million from 2018, largely due to an increase in fleet size, partially offset by lower utilization and average rental rates. While utilization has decreased during this currently quiet market, we are pleased that turn-ins were well-managed and controlled, allowing us to maintain a high level of utilization at an average of 97.4% for the year.

Q4 trading container margin increased by $1 million compared to Q3 and by $4 million compared to fiscal 2018 primarily due to an increase in sales volume, partially offset by a reduction in per unit margin. Q4 gain on sale of owned fleet containers, net, decreased by $3 million as compared to Q3 and by $15 million as compared to fiscal 2018, driven by a reduction in the average gain per container sold and a slight decrease in the number of containers sold. While average gains per container sold decreased, the resell container price environment still remains favorable, with some noted recent improvement for 40-foot prices.

Q4 direct container expense of $12 million was essentially flat compared to Q3 in spite of lower utilization. For the year, direct container expense decreased by $8 million against the prior year primarily due to a reduction in repositioning expense, maintenance expense and military sublease expense, partially offset by higher storage costs.

We are pleased with the results of our continued focus on cost control efforts to normalize these expenses. Depreciation expense was $66 million for the quarter and $260 million for the year. The $11 million increase from fiscal 2018 was mainly due to an increase in fleet size.

We are pleased that container lessee default expense, net, continues to be minor or nil in Q4 and Q3. For the year, container lessee default expense, net, was $8 million compared to $18 million in the prior year. 2019 included an earlier charge for the estimated unrecoverable containers from one nonperforming lessee, while 2018 included container recovery costs and a charge for the estimated unrecoverable containers from several nonperforming lessees.

Q4 G&A expense of $10 million remained contained compared to Q3. For the year, G&A expense was $38 million, a decrease of $6 million from the prior year. We're pleased with the results of our ongoing focus on cost management to maintain this baseline level going forward. We continue to improve the quality of our spending in G&A expense through, among other methods, enhancement of our technology tools and staff talent.

Bad debt included a $1 million recovery for the quarter primarily due to improved financial condition for certain lessees. For the year, bad debt was a $2 million expense, which included an earlier charge to fully reserve receivables for one nonperforming lessee. There were no new credit issues in Q4.

Gain on insurance recovery and legal settlement was $14 million in Q4 and $15 million for the year. This was related to a $14 million distribution received from the Hanjin bankruptcy estate. While we would certainly prefer not to be required to use our insurance or be involved in such settlements, we were pleased with the results of our estate negotiations to recover significant value for Textainer.

Q4 interest expense including realized hedging costs was $38 million, a decrease of $2 million from Q3 primarily driven by lower interest rates. For the year, interest expense including realized hedging gains was $151 million, an increase of $18 million, driven by higher average debt balance that was partially offset by lower interest rates. Our Q4 average effective interest rate improved to 4.04% or 3.81% when excluding the noncash amortization of deferred loan fees.

Unrealized gain on derivative instruments, net, was a gain of $3 million in Q4 and a loss of $15 million for the full year primarily driven by an increase and a decrease, respectively, in the forward LIBOR curve at the end of each of their respective periods. These changes in the forward LIBOR curve impacts the spot mark-to-market value of our interest rate derivatives used for long-term hedging purposes. Starting in December and on an ongoing basis, we have elected to designate new derivatives using hedge accounting under U.S. GAAP.

Q4 net income was $29 million or $0.50 per diluted common share. For the year, net income was $57 million or $0.99 per diluted common share. Q4 adjusted net income was $11 million or $0.19 per diluted common share. For 2019, adjusted net income was $55 million or $0.96 per diluted common share, an increase as compared to adjusted net income of $51 million or $0.90 per diluted common share in the prior year. In Q4, we excluded both the $14 million distribution from the Hanjin bankruptcy estate and a $1.8 million gain on terminating the existing management agreement for the fleet we purchased when calculating adjusted net income given the unusual and nonrecurring nature of these items.

Q4 adjusted EBITDA was $113 million. For the year, adjusted EBITDA was $464 million, an increase of $21 million or 5% as compared to the prior year.

Turning now to our share repurchase program. We repurchased approximately 638,000 shares and 879,000 shares of Textainer common stock in the open market in Q4 and the full year, respectively. At the end of the year, we had $16 million available from our Board authorized program for repurchases, which continues as we move forward. Finally, consistent with Olivier's earlier comments, Textainer is very well positioned as it enters 2020, with a capital allocation strategy well supported by available liquidity and optimized capital structure and demonstrated expense control and efficiency.

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

(Operator Instructions) The first set of questions comes from the line of Michael Brown of KBW.

So really appreciated the thorough guidance, and I think you provided a lot of great color on the current environment. So I wanted to dig in a little bit there though. So at this point, you have the same expectation that you guided to last quarter, which is that the second half is when we'll start to see the strength in the market come back. Relative to where you were at third quarter earnings, do you feel kind of better about that expectation than you did at that point? And do you think that that improvement could be stronger than what you were thinking at that time, that we now have the Phase 1 deal in front of us? Or does the potential impact of the coronavirus on activity kind of give you pause at this point and then maybe it's actually an improvement but maybe a little bit weaker than you initially thought back at the third quarter earnings? Just trying to maybe kind of frame that a little bit, that would be helpful.

Yes. Thank you, Mike. That's a very good and interesting question, and let me try to handle it. I'll let Michael maybe chime in as well. I would say we probably feel a little bit better because I don't think that the macro situation has changed fundamentally. The macro situation is that we have had a very slow year last year. We have customers or shipping lines that have been turning in containers. We've had limited investments, and we were always anticipating that sort of like at the midpoint in this year, we would see demand starting to come back.

I think that given that the world trade or the -- certainly, the economic growth is still there, we don't see any major change there even if one could raise the question about the coronavirus. But we kind of, at this stage, think it's way too early to think that the coronavirus will have a lasting impact on the economy.

The reason we are probably more optimistic comes from several reasons. The first one is, as you mentioned yourself, the fact that there has been a Phase 1 trade deal. Now let's be realistic. The trade deal in itself is not a huge improvement. Tariffs remain in place. So there are still restrictions to trade. What it does, however, is that it reduce the uncertainty and creates more visibility for economic players, meaning that buyers in the U.S. know what tariffs they're going to pay if they import goods, and producers in China can start organizing their production. So I think that's all positive for trade.

The second element is a recent development that predates the coronavirus epidemic, which is that manufacturers in China have restricted production capacity and with the immediate effect that container prices have gone up and quite substantially. We've mentioned that they've shot up from $1,650 up to about $900 -- $1,900 per CEU. And that is for deals that have effectively been closed before Chinese New Year and then before the full outbreak of the coronavirus. At this point in time, prices are very difficult to get by because obviously, manufacturers don't get -- have full visibility. But we believe that it's likely that container prices will continue to rise. So that sort of like all leads us to believe that we will see a corresponding increase in leasing rates.

Now the last factor, and this one is harder to predict, is related to the epidemic itself, which obviously is creating short-term disruption. And assuming that the effects are not too long-lasting, we anticipate that there will be some catching up going on with, first of all, producer trying to catch up on production and exporting goods to Europe and to the U.S. that they haven't been able to export. I think that's one element. But we also have a situation where container factories are not operating as they normally should. So we have further restriction on supply, while we expect that we're going to see a catching up in demand. So we think that all of that has a potential to create more demand and higher prices than we certainly were -- anticipated in Q3.

Mike, and on top of that, if you look at the capacity that's pretty well controlled by the manufacturers right now, as Olivier had mentioned, if one were to try to place an order, price would likely be a higher price than what Olivier mentioned right now and delivery schedules would probably indicate getting ahold of your equipment in maybe April or May. So that type of dynamic is going to lend itself to a recovery, when it does happen, that will be pretty dramatic, we would expect.

So if I could just follow up on that point. Why -- it's positive to see that -- the decline in the factory inventory levels. But 800,000 TEU still screams as relatively high to those historical levels. So based on what you're saying, can you just help me frame that? Is it sound -- is that inventory all set for delivery over the next couple of months to bring those inventory levels down to lower levels? Am I thinking about that correctly?

No. I think the -- you're right, the 800,000 or slightly below right now, it's still a fairly high level. But I would point out that normally, the inventory level rises anyway before the seasonal activity and 800,000 is actually fairly short. If activity and demand comes back, 800,000 containers can be picked up in less than 2 months. So really, we're not talking about a lot of containers standing on the ground.

Okay. Great. And then on the capital return, so nice to see the buyback activity in 2019, and obviously, still something like $16 million left on the authorization environment. It sounds like it will be soft over the next couple of months. So how do you think about the cash flows that you're generating now as it pertains to the trajectory of your buyback activities? And at this point, even once you get that bounce back in the second half, how do you think about kind of your capital allocation going forward? Would you consider introducing a dividend? Do you think you still want to sit on kind of more dry powder for that bounce back? And just how do you kind of toggle between each of those levers?

Yes. Mike, it's a question of not -- or an answer of not one or the other. We like -- we certainly like CapEx if the yields are there. And we've -- that's what we're waiting for. In the meantime, if the market remains quiet, we're certainly very focused on buybacks. That makes perfect sense then, and we're taking that route right now as we speak. As we start moving down into the year, if the buyback price this year still do make sense and we think it is a compelling story to buy back shares, we will continue to do that. When CapEx comes back, we'll also put money there as well.

It's not the answer of one or the other. We're likely to do both if they make sense. But of course, the key thing is that CapEx has to hit the yields that we're looking for and be accretive to our balance sheet. But we see it as an answer that is answered with deploying capital to both options.

Yes. And if I can chime in, I think we'll certainly intend to continue our buybacks. But what is very important for us is to keep some powder dry for the market turn. As you know, we've missed out partly on the last upturn in the market, and we certainly don't want to repeat that mistake this time around. So we want to make sure we have plenty of CapEx capacity for when the market turns.

Okay. Great. And on the Hanjin distribution this quarter, do you expect that to really be kind of the last item from the Hanjin bankruptcy? Has this kind of marked the end of the saga there?

This is Dan Cohen. I'm the General Counsel. We have -- we're in close communication with our Korean law firm that has been deeply involved with the Hanjin insolvency, and they've advised that the bankruptcy estate still has a substantial amount of money after the distributions they made in the fourth quarter. So we are expecting another distribution. Unfortunately, it's very hard to time that. They've indicated that it could arrive any point in the next year or so based upon the duration of the appointment of the Hanjin bankruptcy administrator.

But we have a claim -- we have a certain -- a fixed amount of our claim was admitted by the bankruptcy court, what we received was a partial payment. And there still is an expected additional distribution, and that may ultimately be limited by the size of the funds of the bankruptcy estate. But we expect that at some point, we will receive another material distribution.

Very helpful. And just one last one for me. I heard the guidance on the first quarter about the lease rental income, the sequential decline that you're expecting. Is it fair to think about that decline as kind of similar to what we saw in the sequential decline this quarter? Is that the right way to think about it?

I would say that it's probably going to be a little bit less because we've had a little bit of an uptake with the buildup to the Lunar New Year, which has resulted in some containers being activated. But overall, after the Lunar New Year, the coronavirus started being felt. And I think that that's going to have an impact on the second part of that quarter, if I may say. So I would say that it's going to be very, very slightly down or probably a little bit less than the fourth quarter, but not much.

We have reached the end of the question-and-answer session. I will now turn the call back over to Olivier for any closing remarks.

Thanks again, everyone, for taking the time today to listen to our conference call. And I look forward to updating everyone on our progress during the next call. Thank you.

This concludes today's conference. You may disconnect your lines. Thank you for your participation.