Textainer Group (TGH) Q3 2019 Earnings Call Transcript

Textainer Group (TGH)
Q3 2019 Earnings Call
Oct 31, 2019, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Thank you, and welcome to Textainer's third-quarter 2019 earnings conference call. [Operator instructions] As a reminder, today's conference call is being recorded. I will now turn the call over to Angkit Hera, investor relations for Textainer Group Holdings Limited. Please proceed with your conference, sir.

Unknown speaker

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 and 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 the 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 could cause actual results to differ materially from those in the forward-looking statements. During this call, we will discuss non-GAAP financial measures.

As such measures are not prepared in accordance with generally accepted accounting principles, a reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures will be provided either on this conference call or can be found in today's earnings press release. Finally, along with our earnings release today, we have 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.

Olivier Ghesquiere -- President and Chief Executive Officer

Thank you, Angkit. Good afternoon, everyone, and thank you for joining us today for Textainer's third-quarter 2019 earnings call. I'll begin by reviewing the highlights of our third-quarter results, and then I'll provide some perspective on the industry. Michael will then go over the financial results in greater details, after which we will open the call for your questions.

Textainer achieved solid performance in a challenging market environment, delivering a stable lease rental income of $154.7 million, adjusted EBITDA of $180.3 million, a 3.1% increase over the second quarter and adjusted net income of $13 million or $0.22 per share compared to $9 million or $0.16 per share in the second quarter. The market for new container activity remained slow in the third quarter as a traditional peak season did not materialize given the ongoing trade tension and slower economic growth. Though lacking a seasonal surge, shipping volumes have remained positive in 2019 and world trade continued to grow during the third quarter, albeit at a lower rate than in the previous two years. Overall, the industry remains disciplined as demonstrated by the much reduced level of new container orders and decreasing factory inventory levels.

However, our shipping lines have continued to seek efficiencies and have reduced capacity with canceled sailings. We've seen an increase in containers redeliveries. We continue to see few lease-out opportunity in the present market with very few open tenders from shipping lines, being mostly for the replacement of aging containers. New container prices have decreased to the current level of approximately $1,650 per CEU, primarily driven by a decrease in steel prices and weak new container demand.

Rental rates for new container lease outs have declined in line with new lease container prices, but the total volume of new deals have been small, infrequent and not representative of normal market conditions, as lessors offloaded the excess container capacity they accumulated in prior months when market anticipations were stronger. We do not expect demand for new containers to increase significantly until there is greater certainty around trade disputes and stronger economic environment, and we believe this lull may persist until the middle of next year. As such, we have limited our incremental capex to $67 million delivered during the third quarter to specific opportunities or back-to-back leases that meet our investment criteria. We remain focused on a disciplined growth strategy, targeting specific yields and return thresholds.

While demand for new lease outs was low, we continued to see a moderate and manageable level of turn ins and an attractive container resale environment. Orders for new containers remain minimal as we continue to see discipline from industry players. As a result, the total inventory for new dry container available at factories has reduced to a level closer to 800,000 TEU from a level of well above 1.1 million TEU. Our shipping lines continue to optimize their fleet, depot inventory has increased but remains at a very reasonable level as evidenced by the continued high utilization rate throughout the industry.

Resale container prices remain positive given this low supply of containers put to disposal. However, the decrease in new container prices has generated some downward pressure on resale prices of 20-foot containers in Asia. Against these macro headwinds, we are particularly pleased to deliver stable lease rental income in the third quarter as we recognize the contribution from our proactive disciplined container investments during the second quarter when we grew our fleet at attractive rates and double-digit returns. In addition, we're pleased with the steady progress of our ongoing cost control initiative, which is reflecting in the normalized level of G&A expenses and direct container costs.

However, our financial performance in the third quarter was impacted by lack of capex. We also saw a modest decrease in utilization and resale prices. Both remain at high level, with our average utilization at 97.3% for the third quarter and up 96.4% currently. As we look out to the balance of the year, we believe new container demand will remain muted through the end of the year and possibly through the first half of 2020, given uncertain economic activity levels and ongoing trade negotiations.

Given low inventory level, we believe the market could turn more rapidly with a resolution to the trade concerns. However, this potential catalyst may be tempered by the clear signs of weakening GDP growth. The IMF global growth forecast is 3% and 3.4% for 2019 and 2020, which are levels still supportive of moderate shipping volume growth. We expect container lessor fleet utilization and retail prices to remain high, although decrease slightly.

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 and necessary capex related to new ships and compliance with the IMO 2020 emission regulations. We continue to believe leasing companies will represent approximately 60% of total purchases. Specifically, for the fourth quarter, we expect revenue will decline given fleet attrition and limited capex.

We expect costs will remain at current normalized level, with the exception of storage, which is impacted by utilization. In summary, while the overall market activity remains muted and is reflected in our operating results, we have taken a number of actions this year to drive shareholder value. First, we have improved our capital structure through our previously announced asset-backed notes and warehouse facility financing, which leaves us strongly positioned to participate in the inevitable rebound in market demand. Second, we repurchased approximately 240,000 shares of our common stock during the third quarter under our $25 million share repurchase program, which the board authorized at the end of August 2019.

Third, we have invested in technology and personnel while implementing cost-cutting initiatives that have lowered operating expenses. Finally, in September, we announced plans to dual list our shares on the Johannesburg Stock Exchange to enable Trencor to unbundle its shares in Textainer, which we believe will lead to a broader and deeper shareholder base and improve liquidity in our stock over the longer term. I will now turn the call over to Michael who will give you a little more color about our financial results for the past quarter.

Michael Chan -- Executive Vice President and Chief Financial Officer

Thank you, Olivier. I will now focus on the key drivers of our financial results. Q3 lease rental income of $154.7 million was stable as compared to Q2, as we further realized the benefit of attractive investments made in the second quarter, offset by a decrease in utilization. Q3 trading container margin was $2.4 million, a decrease of $1 million compared to Q2 due to a decrease in the number of trading containers sold and a slight decrease in the per unit margin.

Q3 gains on sale of owned fleet containers net was $6.1 million, an increase of $0.7 million compared to Q2, driven by an increase in the number of containers sold, partially offset by a reduction in average gains per container sold. While average gains per container sold decreased, the resale container price environment, on average, still remains positive. Q3 direct container expense for the owned fleet was $11.8 million, an increase of $1.1 million compared to Q2, primarily due to an increase in storage costs resulting from lower utilization. While storage has increased, we are pleased with the results of our continued cost control efforts to normalize these expenses.

Q3 depreciation expense was $67.6 million, an increase of $3.5 million compared to Q2, primarily due to mark-to-market net book value adjustments on certain containers held for sale. Q3 G&A expense was relatively flat at $9.4 million compared to Q2. We are pleased with our ongoing focus on cost management to maintain this baseline level going forward, while also continuing to improve the quality of our investment in G&A. In order to improve the transparency and usefulness of our financial statements, we have introduced a new line item in operating expenses, called container lessee default recovery expense, net, and have removed the container impairment line item.

The new line item will capture any container costs or recovery benefits associated with lessee credit issues, including any container impairments related to nonrecoverable containers and any container recovery costs previously reported within direct container expense. Any normal mark-to-market net book value adjustments for certain containers put to disposal will appear in depreciation expense. Container lessee default recovery, net, was $0.2 million in Q3 compared to an expense of $8.6 million in Q2. As previously reported, Q2 included a $9.1 million reserve for the estimated unrecoverable containers held by a nonperforming lessee.

Q3 bad debt recovery was $1.2 million and was primarily due to the improved financial conditions for certain lessees. Bad debt expense of $3.7 million in Q2 included a $3.3 million to fully reserve receivables for a nonperforming lessee. Q3 interest expense, including realized hedging gains, was $39.8 million, an increase of $2.7 million from Q2. This was primarily driven by a higher average debt balance due to capex, partially offset by lower interest rates.

We are pleased with our continuously decreasing effective interest rate, which averaged 4.23% in this quarter. Q3 unrealized loss on interest rate swaps, collars and caps, net, was $2.5 million, primarily resulting from a decrease in the forward LIBOR curve at the end of the quarter, which reduced the spot mark-to-market value of our interest rate derivatives used for long-term hedging purposes. Q3 net income was $10.6 million or $0.18 per diluted common share. Q3 adjusted net income was $13 million or $0.22 per diluted common share.

Q3 adjusted net income was $4 million higher than Q2. Q3 adjusted EBITDA was $118.3 million, an increase of $3.5 million when compared to Q2. On September 3, we announced that our board had approved a $25 million share repurchase program. During Q3, we repurchased approximately 240,000 shares of Textainer common stock in the open market for a total of roughly $2.5 million.

At the end of Q3, we had $22.5 million available from our board-authorized program for repurchases, which continues as we move forward. Turning now to our liquidity. We ended Q3 with a cash position inclusive of restricted cash of $267.5 million, an increase of $23.5 million from the prior quarter. As a reminder, on July 29, we announced the completion of an amendment to extend the term and lower the pricing of our $1.2 billion warehouse credit facility.

The revolving period of the facility was extended by three years to July 2022. And the margin was reduced by 15 basis points to 1.75%. We do believe our liquidity and financing platform are well positioned to adequately support our future capital allocation plans, including funding investment in high-yielding capex and support of our ongoing share repurchase program. This concludes our prepared remarks.

Thank you, all, for your time today. Operator, please open the line for questions.

Questions & Answers:

Operator

[Operator instructions] Your first question comes from the line of Helane Becker with Cowen. Please proceed with your question.

Helane Becker -- Cowen and Company -- Analyst

Thanks, operator. Hi, team. Thanks for taking the time. Just could you just clarify what you said about returns.

Are you seeing any -- I kind of missed some of what you said, customers are returning containers and not picking up new containers. Is that what's going on?

Olivier Ghesquiere -- President and Chief Executive Officer

Yes. Hi, Helane. I think you've pretty much nailed it. We have a situation where the market is very slow, and shipping lines are really trying to optimize their fleet.

So what essentially they're doing is they're shedding off the excess containers or when they have containers coming to the end of their lease agreement, they are turning them in. And because they're really trying to run a ship as tight as possible, given the uncertainties, both from world trade and IMO 2020, they are refraining from taking new containers into their fleet. And that's valid for purchased containers as well as for leased containers. So what we see very much in our fleet is that our containers being turned into the depot is only very slightly higher than it was at the beginning of the year, but it's very consistent, it's very stable.

But what's really lacking is the fact that there is no demand for new container and, hence, very limited capex on our part.

Helane Becker -- Cowen and Company -- Analyst

OK. And then with IMO 2020, I understand that about a third of all ships have been fitted with scrubbers at this point. So as you look ahead to next year, I don't know what you think will happen, I'm not sure, not any of us really know what will happen other than maybe some slow steaming or something. But do you think that there will be an increased -- given all this other uncertainty, do you think there would be an increased level of ship retirements that would push more containers into the depots? It's like, is that a possibility?

Olivier Ghesquiere -- President and Chief Executive Officer

No, I don't think so. I think we're seeing a situation right now where there is indeed a lot of ships that are in the shipyard for scrubber retrofit. But as the new ships -- as those ships come out, new ships will go in. So I don't think we will see a reduction in capacity because the ships that are being operated are pretty full at the moment.

It just so happens that this is kind of a good timing for shipping line to send ships to shipyard and have them retrofitted with scrubbers, just when demand is not running at the very high level. But the ships that are running are running pretty full. So I don't think we can anticipate a reduction in the requirement of number of containers. As a matter of fact, even though everybody talks about a slow market, we have seen occasional situation where in specific areas, shipping lines are running short of containers.

And I think that's another indication that they're running a very, very tight ship and trying to optimize their fleet as much as possible.

Helane Becker -- Cowen and Company -- Analyst

OK. So this is my other -- I have a few other questions, but I don't know if there's a long queue.

Olivier Ghesquiere -- President and Chief Executive Officer

No, not really. Go ahead. You have plenty of time. We have plenty of time for you, Helane.

Yeah.

Helane Becker -- Cowen and Company -- Analyst

OK. That's very kind of you. Thank you. On the Trencor Limited listing of their shares, can their shares be traded outside of South Africa? Or can they only be traded in South Africa?

Dan Cohen -- General Counsel

Hi, Helane. This is Dan Cohen. I'm the general counsel of Textainer.

Helane Becker -- Cowen and Company -- Analyst

Hi, Dan.

Dan Cohen -- General Counsel

We are envisioning that if the listing occurs and all conditions precedent are met, there may be a mechanic where shares can cross exchanges. That's kind of all we've liberty to say right now. We will update the market as time goes on. But it is common in dual listings that there is a mechanic for the crossing of shares to avoid arbitrage situations where pricing differential occur between markets.

Helane Becker -- Cowen and Company -- Analyst

Gotcha. OK. Yeah, that's what I was wondering, actually. Thank you for that.

And then my other question is for Michael, I think. On the comment about $2.5 million loss, you talked about the decrease in forward LIBOR curve. So does your debt provide for something other than LIBOR since LIBOR is theoretically going away at the end of 2021?

Michael Chan -- Executive Vice President and Chief Financial Officer

Hi, Helane. I appreciate the question. So our debt agreements contemplate using LIBOR, but we've already spoken to our banks growing mechanisms to convert to a different index that's market-accepted out there. So there are rates that this will shift to in the future when this gets closer.

So it's not a concern.

Helane Becker -- Cowen and Company -- Analyst

OK. And then my last question, promise, is on consolidation. I don't know how you guys are thinking about it now, but given the low level of capex and the flat to downish kind of revenue, I mean, your revenue was only off a couple of percent, I think, right, a couple of million dollars, wasn't that bad. Do you think this means we'll see more industry consolidation? Is this a good time for that? Thank you, and that's it.

Olivier Ghesquiere -- President and Chief Executive Officer

It's a very difficult question, Helane. And normally, we don't like to comment on that. But I would say, on a high level, I think when everything goes well and the market is booming, actors have less incentive to start looking at consolidation. In an environment where things get a bit tougher, that's probably when people start asking themselves question about their strategy.

I think that the downturn, we're not actually really facing a downturn. It's really more of a lull right now. So I don't forecast anything happening in the short term. I think that if something happens, it will have to take a little longer still.

But no one can rule anything. I think from our side, we are focusing more on our own business, improving our own business and possibly looking at buying back existing fleet that we have under management, we think that would be more immediately accretive. So we're really focused on our own business.

Helane Becker -- Cowen and Company -- Analyst

OK. Thanks. Those are all my questions. Thank you so much.

Olivier Ghesquiere -- President and Chief Executive Officer

Thank you, Helane.

Operator

[Operator instructions] Your next question comes from the line of Michael Brown with KBW. Please proceed with your question.

Michael Brown -- KBW -- Analyst

Hi, guys. Good afternoon.

Olivier Ghesquiere -- President and Chief Executive Officer

Good afternoon, Mike.

Michael Chan -- Executive Vice President and Chief Financial Officer

Hey, Mike.

Michael Brown -- KBW -- Analyst

Yeah. First, I just wanted to kind of follow up on the realized gains in interest rate swaps and collars. So I appreciate the color on the impact from the move in LIBOR. But what I was kind of questioning is the -- how can we didn't necessarily see a decline of a similar magnitude last quarter, following the rate cut? And then how should we think about the potential impact this quarter given the Fed cut yesterday? So that's specific to the realized gain on the interest rate swap line, but also any color that you could provide on the interest rate expense as well would be very helpful.

Michael Chan -- Executive Vice President and Chief Financial Officer

Thanks, Mike. So if you track our effective interest rate over the last several quarters, it's on a downward trend. We had, during the prior quarter, some adjustments to our credit facilities, which lowered the margin as well. That happened near the end of the quarter, I believe.

So we didn't get the full impact of it, we'll see it in future quarters. LIBOR now would certainly impact our variable rate facilities, which would be the revolver that we have and the warehouse credit facility. So we think that that should show a downward trend with this recent reduction and that will impact the pricing of our variable rate debt. The swaps we have in place are fixed, of course, so there will be some impact there in terms of the realized portion of interest expense.

That will go up just a smidgen, but we'll certainly see a reduction in the interest expense line related to the variable pieces of our debt over the course of the next year, I would expect.

Michael Brown -- KBW -- Analyst

OK. And I'm not sure if I missed it, did you give where your utilization rate is today? And then how would you expect kind of the pace of dropoff activity to impact that going forward?

Olivier Ghesquiere -- President and Chief Executive Officer

Yeah. I did mention it in my script. I think we're at 96.4% right now. And it's slowly drifting down.

I would say it's like an erosion. I think it's sort of like dropping probably 0.2%, 0.3% per month at the moment. And as we were discussing this with Helane, it's really because we don't see much on higher activity, certainly on the new container side. Now this could very well change reasonably quickly.

I mean there's talk about possibly a bit of front-loading if there's no trade agreement. There's also talk about a little uplift prior to Chinese New Year. But I think that if we look at it from a bigger perspective, we're going to continue to see a slow erosion or stability until the market starts picking up probably middle of next year.

Michael Brown -- KBW -- Analyst

OK. And then just change gears. On the buybacks, obviously, positive to see the authorization during the quarter and the increased activity. How much have you bought back quarter to date for the fourth quarter? And then how should we think about the pace of repurchases on a quarterly basis? Is it expected to be kind of steady or really more opportunistic?

Michael Chan -- Executive Vice President and Chief Financial Officer

Hey, Mike. It's Michael. So we are buying shares in the fourth quarter, and we'll be disclosing that as part of the results of the fourth quarter as well. It is an active program, and we are buying back shares.

That's probably the extent that we could disclose at this point in time. But we are continuing with the program.

Michael Brown -- KBW -- Analyst

OK, great. Just one last one from me. On the dual listing, is there really any other change to your business following that listing? Or is it really just kind of business as usual once that is executed?

Olivier Ghesquiere -- President and Chief Executive Officer

We don't anticipate any major impact from an operational business, if that is your question, Mike, did you -- yes. No, we think it will obviously broaden our shareholder basis, and it might impact or float positively. But from an operational point of view, it should not change anything in the way we operate our business and keep our effort focused on improving our profitability in our yields.

Michael Brown -- KBW -- Analyst

OK. Thank you. I appreciate the color there and thank you for taking my questions.

Olivier Ghesquiere -- President and Chief Executive Officer

Thank you.

Michael Chan -- Executive Vice President and Chief Financial Officer

Thanks, Mike.

Operator

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Olivier for closing remarks.

Olivier Ghesquiere -- President and Chief Executive Officer

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

Operator

[Operator signoff]

Duration: 31 minutes

Call participants:

Unknown speaker

Olivier Ghesquiere -- President and Chief Executive Officer

Michael Chan -- Executive Vice President and Chief Financial Officer

Helane Becker -- Cowen and Company -- Analyst

Dan Cohen -- General Counsel

Michael Brown -- KBW -- Analyst

More TGH analysis

All earnings call transcripts