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Textainer Group (TGH) Q1 2020 Earnings Call Transcript

By Motley Fool Transcribing – May 5, 2020 at 12:02AM

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TGH earnings call for the period ending March 31, 2020.

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Textainer Group (TGH 1.68%)
Q1 2020 Earnings Call
May 04, 2020, 5:00 p.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Thank you, and welcome to Textainer's first-quarter 2020 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.

Ed Yuen -- Investor Relations

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, 2019, filed with the Securities and Exchange Commission on March 30, 2020. And going forward, any subsequent quarterly filings on Form 6-K for additional information concerning risk 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

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, Ed. Good afternoon, everyone, and thank you for joining us today. Let me start by saying, I hope you, your families and loved ones are all staying safe and healthy during this difficult time. Our thoughts are with all of you that have been impacted by the COVID-19 pandemic and we're thankful to the essential workers on the front line and the families supporting them every day.

Together with ensuring business continuity, our most important priority is the health and safety of our employees, and we have reacted swiftly by transitioning to a remote working environment without any significant impact to our operation. I'm proud of how our team has arisen to the challenge with their dedication and professionalism to remain focused on providing exceptional services to our customers in the face of the significant disruption caused by this health crisis. I would now like to turn to Textainer's performance. I'll begin by reviewing the highlights of our first-quarter 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 to your questions. Our performance for the first quarter was in line with our expectation. We delivered lease rental income of $145 million, adjusted net income of $10 million and adjusted EBITDA of $117 million, despite challenging conditions as the current pandemic disrupted global trade and reduced container demand. Average utilization remained strong at 96.2%.

And at the end of the first quarter, we owed approximately 86% of our fleet, which stood at 3.5 million TEU. Prior to our last earning call in February, we saw some favorable elements in our business that drove a more opportunistic market outlook for the balance of the year. We experienced positive lease out activity ahead of the Lunar New Year, with customer expressing reviewed optimism on the heels of the Phase 1 trade agreement and positive world economic outlook. In addition, we saw moderate and manageable levels of inventory and increasing container prices.

As we progressed through February, the wide-ranging impact of the COVID-19 pandemic started to emerge. Initially, trade volumes were negatively impacted by the quarantine measures in China, in what was essentially a supply disruption. Unfortunately, as China reopened its economy, the rest of the world started to implement quarantine measures of their own, leading to even more demand and supply chain disruption, with buyers delaying and canceling orders for cargo. In response, shipping lines have aggressively cut capacity with canceled sailings and taken other measures such as navigating alternatives and sometimes longer routes.

This capacity management measures has helped carriers support freight rate, while cheap oil prices contributed favorably to their various cost savings initiatives. Consequently, demand for additional containers, particularly dry freight, has been affected by the reduced trade volume with minimal lease out activity since late January. As shipping lines struggle to balance their container fleet in a new environment of much reduced capacity, the pace of container redelivery has remained low and continues to remain limited. We believe shipping lines have also mostly held on to their containers, given the surrounding uncertainty and possible catch up demand when economy open up again.

Additionally, after about 1.5 years of limited new container demand during the period of trade disputes, shipping lines do not have significant surplus containers. As a result of the uncertainty, dry freight containers orders through April were very limited at 800,000 TEU, barely half the production TEU for the same period last year, which was itself lower than in 2017. We expect this situation to continue as shipping lines continue to focus on preserving liquidity and reducing capital expenditure for the foreseeable future, while lessors, word for clear signs, that demand for new containers is coming back. Total dry box factory inventory at factory has been stable at 800,000 TEU.

New container prices have also remained well above $2,000 per TEU, as the impact of lower demand has been compensated by pricing discipline and reduction in production capacity implemented by the factory. The container resale environment also remains positive, with prices up from last quarter. Volumes have been somewhat lower in March and recently, as the global lockdown is impacting local economies worldwide, but this is also a traditional slower quarter for resale. While declining trade volumes are creating a challenging environment for our customers, we did not have any new credit issues in Q1 or in April.

We, however, recognize the increased credit risk during this crisis and continue to work closely with our customer to avoid unpleasant surprises. As we look out into the rest of the year, we anticipate a slower quarter in Q2 before a gradual recovery in the second part of the year, the strength of which remains to be determined. Nevertheless, we expect this to generate demand for lease containers, given shipping lines constraint, likely container supply imbalances and continued supply chain disruptions. With regards to Q2, we expect to see further drop in trade volumes, reflecting the full impact of canceled orders for nonessential merchandise and imports.

As such, we expect minimal container demand from our customer, causing our lease rental income to weaken, as compared to the first quarter. We expect container utilization rate in Q2 to continue to decline due to the expected lack of lease out activity. Direct operating cost and G&A expense should remain at current normalized level, other than storage costs, which are impacted by changes in utilization. In addition, we expect interest expense to decline, driven by the impact of lower LIBOR rates of our unhedged floating rate facility.

The market remains challenged by the extraordinary effects and implications of the broad-based response to the COVID-19 pandemic, and there is a high level of uncertainty to our outlook for the rest of the year. However, Textainer is well-positioned to navigate through the current crisis and participate in an eventual market recovery with a strong balance sheet, healthy liquidity and optimized capital structure, as well as demonstrated expense control and efficiency. While we await an economic recovery, we remain focused on leveraging our strong and stable cash flow to optimize long-term shareholder value creation. During Q1, we strengthened our balance sheet by reducing our debt outstanding by $135 billion, while conserving cash reserves.

We also repurchased almost two million shares while increasing our buyback program to a total of $50 million. 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. Q1 lease rental income was $145 million, a decrease of $6 million, as compared to Q4, primarily due to a reduction in fleet size and average rental rates. We are pleased that Q1 lease rental income for our own fleet was $130 million, a $3 million increase from Q4, which includes the full impact of the acquisition of the previously managed LAPCO fleet on December 31, 2019.

Utilization averaged 96.2% for the quarter, reflecting just a minor decrease of 20 basis points from Q4 as market activity remains muted. Q1 trading container margin was $1 million, a decrease of $1 million compared to Q4, primarily due to a decrease in the number of containers sold. Q1 gains on sale of owned fleet containers net was $6 million, an increase of $3 million compared to Q4. This was driven by an improvement in the average gain for container sold, albeit at lower volume.

We are pleased that the container resell price environment remains favorable. Q1 direct container expense for the old fleet was $13 million, an increase of $2 million compared to Q4, mostly due to the inclusion of the acquired LAPCO fleet. Q1 depreciation expense was $67 million, relatively flat compared to Q4. Q1 G&A expense was $10 million, and after removing expected cyclical items, remains consistent at normalized levels.

We continue to improve the quality of our spending and G&A through, among other methods, enhancement of our technology tools and staff talent. Q1 bad debt expense was $2 million. While we did not have any new credit issues in Q1, we increased our provision given the uncertainty and heightened risk from continued weakness in the global economic conditions. As Olivier mentioned, we have not experienced any defaults or unusual changes in payment patterns through the end of April.

We continue to extensively monitor credit and are pleased with our ability to closely communicate with our customers. Q1 interest expense net of realized hedging cost was $38 million, relatively flat from the fourth quarter, even with additional debt used to finance the LAPCO fleet acquired at the end of 2019. Our Q1 average effective interest rate improved to 4.01%, or 3.78% when excluding the noncash amortization of deferred loan fees. We expect our effective interest rate to continue to decrease in Q2, driven by lower LIBOR rates.

For the month of April, our effective rate was already 25 bps lower than the first quarter. We had a net unrealized noncash loss on derivative instruments of $15 million in Q1, as compared to a gain of $3 million in Q4. This was primarily driven by a decrease and an increase, respectively, in the forward LIBOR curve at each respective quarter end date. 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.

We intend to hold the underlying hedges until maturity. Therefore, any unrealized loss will net to zero over the life of the hedge. Q1 net loss was $4 million or $0.08 per diluted common share. Q1 adjusted net income was $10 million or $0.17 per diluted common share.

Adjusted net income for the quarter excluded the noncash $15 million unrealized loss on derivatives. Q1 adjusted EBITDA was $117 million, a $4 million increase from Q4. Turning now to our share repurchase program. During Q1, we repurchased close to two million shares of Textainer common stock in the open market at an average price of $7.84 per share.

On March 30, 2020, we announced that our Board increased the plan to $50 million. At the end of Q1, we had approximately $25 million available under the increased plan, and we will continue to repurchase opportunistically as we move forward. Looking now at our balance sheet and liquidity, we remain focused on maintaining a strong balance sheet, healthy liquidity through both our well-structured bank facilities as well as cash reserves. We ended Q1 with a cash position inclusive of restricted cash of $226 million as well as $816 million in available commitment capacity under our existing credit facilities.

During Q1, we used strong and consistent cash flows from our long-term lease agreements to reduce debt outstanding by $135 million. This was done to reduce interest expense and to further strengthen our balance sheet. Our credit facility is in great shape and in full compliance with debt covenants. We do not have any debt maturities or refinancing requirements this year, and remain financially well prepared to address stresses and uncertainty from currently weak market conditions.

Lastly, we are very well positioned as we await an eventual market recovery in order to improve the quality of our fleet and our performance. This concludes our prepared remarks. Thank you all for your time today. Operator, please open the line for questions.

Questions & Answers:


[Operator instructions] Our first question comes from Michael Brown with KBW. Please go ahead.

Mike Brown -- KBW -- Analyst

Thank you operator. Hi there.

Michael Chan -- Executive Vice President and Chief Financial Officer


Mike Brown -- KBW -- Analyst

Are you guys good? How are you?

Michael Chan -- Executive Vice President and Chief Financial Officer


Mike Brown -- KBW -- Analyst

It's nice to hear that you really haven't seen any credit issues or defaults at this point. I wanted to dive in a little bit more into the bad debt expense. So can you give us a little bit more color how you determine essentially the appropriate amount to set aside in this environment? And what are some of the assumptions you used to support that build? And do you expect to continue to build from here, if this is kind of the environment that we continue to operate in?

Olivier Ghesquiere -- President and Chief Executive Officer

Yes, Mike. I mean, that was the question we were all expecting, and it's certainly our focus at the moment. I think we are working with all the big shipping lines in this world. And it's a reality that they don't always comply fully with their payment terms.

They have some small variations and therefore, we are sometimes having to operate or affect new reserves. At this stage, we've mentioned in the call earlier on, we have seen nothing new, nothing that is absolutely a normal payment pattern and certainly no credit event. But we're obviously monitoring the situation. And it is one of our main concern, and we continue to work with all customers to make sure that they're up-to-date with their payment.

Now just to put a little bit things into perspective and explain why we have a small increase in reserves. It's not a reserve that is specific to one customer. It's just a general assessment that the environment is a little bit more risky. And that we felt that it made sense to increase our reserve very, very slightly.

I don't know, Michael, maybe you want to add a little bit to this?

Michael Chan -- Executive Vice President and Chief Financial Officer

No, that's exactly correct, Olivier. So we don't see any changes in payment patterns, anything unusual. So we thought that it would be prudent to increase the overall reserve against that receivable portfolio. We feel comfortable at this time as to where it stands.

But we'll continue to monitor it, of course, on an ongoing basis as conditions are certainly stressed right now.

Mike Brown -- KBW -- Analyst

Got it. So your top two customers represent approximately 33% of your lease income. Can you specifically address how you're feeling about those customers? Specifically, it sounds like you're in discussions with your customers very closely, I'm sure even more now than typical. So can you speak to how you're feeling about those customers? And then also about really the top 10 shipping lines broadly.

I mean, it's not necessarily your top 10, since we don't necessarily know your top 10, but I guess, how you're feeling about all of the major shipping lines?

Olivier Ghesquiere -- President and Chief Executive Officer

Yes. The answer in a nutshell is we're feeling good. As Michael said, we haven't seen any slippage in payments so far. I think we are comforted by the general environment, although pretty dire and with a very high level of uncertainty, we are seeing a market where shipping line, those two in particular, but I mean, the top 10 have really been able to manage capacity and to cancel sailings.

And the first very positive implication of this is that it has really helped them maintaining ocean freight rates. We see certain routes where they have even been able to take advantage of the shortage of ships to actually increase ocean freight rate. But by and large, we see a level where ocean freight rates are only very, very slightly below last year, which was not a bad level. Now, at exactly the same time, shipping lines are benefiting from the lower oil prices and especially the bunker cost that has dropped tremendously.

And that means that although they're facing certain costs associated with the idling ships than paying the crew and servicing the financing or the chartering on those ships. They have some positive income streams that they would not have had or that they certainly didn't have in previous similar environment. So I think that the best way to look at it is to say that so far, shipping lines haven't come under tremendous pressure, but everybody is certainly monitoring the cargo flow very, very closely because if the cargo were to drop substantially for an extended period of time, there's no secret that it would get a lot tougher for shipping line. But no shipping lines have announced earnings, or very few so far.

I wouldn't be surprised if the earnings release for the first quarter turned out to be fairly, fairly positive.

Mike Brown -- KBW -- Analyst

Great. Appreciate the color. So I guess where we sit today, how is Textainer really thinking about credit and how it could perform in this downturn versus the financial crisis? Is it potentially similar? And I guess if you could also compare it to what we saw in the 2015 and 2016 time frame, that would be helpful as well.

Olivier Ghesquiere -- President and Chief Executive Officer

Yes. Maybe I'll let Michael speak a little bit on this as well. If I can go back, Mike, even a little bit further and go back to 2008 and 2009, during that financial crisis, we saw trade really collapse. But the actual container trade dropped by about 10%, which is I think why quite often in our environment today, people are talking about container trade dropping by 10%, even though the world trade organization is forecasting a drop in overall trade closer to 30%.

And GDP numbers are also much more negative than this. But this is, I think, important to keep in mind because it means that even when economies are going through severe recessions, as is likely right now, container trade actually continues. There's a lot of cargo that still needs to move. Now in 2008, 2009, we had a very strong bouncing back of the economies.

In the other crisis, that is probably more relevant than the one you mentioned, which is really in 2016. We did have a bounce back, but the factors driving the crisis were very different. In that environment, there was very, very strong competition, and there was a lot of capacity that was being added to the market by shipping lines. And that led to a collapse in freight rates, which really put the balance sheet of more shipping lines under pressure and their cash flow stream were so much under pressure that at the end, it resulted, as we all know, in the bankruptcy of Hanjin.

I think, as I explained, the environment today is different because if anything, shipping lines have demonstrated so far that they're much better at managing capacity, which means that they are maintaining a price level, which does make sense. And I think that, that gives rise to optimism that it will allow shipping lines to fail through this period, if I can express it this way. We certainly expect that we will see a drop in cargo, that will take place in May and June. But we think that if the economy is recovering slowly and the countries are coming out of lockout, we think that we could see a cargo picking up in early July, which would be certainly very, very positive for the whole industry, including ourselves, and that's what we're positioning ourselves for.

So to the second part of your question, in terms of our liquidity, what we're really striving for is to be prepared and be ready for the bounce back in the market and be able to invest at that point in time. Michael, do you want to add something?

Michael Chan -- Executive Vice President and Chief Financial Officer

Yes. Thank you, Olivier. So one of the things that we had done with our credit facilities during the last 1.5 year period, where it has been rather quiet, was to work on the structural changes, staggering renewal dates. So in other words, we'll always have a major credit facility that's available to us during up and down times, where a renewal can be done, and they will not come up for renewal all at the same time.

So it's a good way to diversify and ensure that you have adequate credit even in very challenging times, so that you have staggered renewal periods for your facilities, number one. And if you might recall, we did work on these facilities during the last 1.5 years where we modified certain things such as the covenants to ensure that they were appropriate for our type of business as well. We priced down the facilities, too, while we have the opportunity to do so, whereby the price is optimized, and all those things combined and managing the load against them right now ensures that they're ready for when there is an ultimate upturn in the market as well if there is a downturn, that we can manage those facilities as well easily when times could be challenging. So I think the point is that we're very well positioned right now.

We're very happy to have done the work during the last six quarters to get them in a position where they are perfect for the environment we're in right now.

Mike Brown -- KBW -- Analyst

OK. And I just wanted to change gears a little bit. It sounds like in this environment that just given kind of where we were going into this and kind of how production of this has been kind of more rational than in previous cycles. I guess, how do you expect utilization rates to perform? I saw this quarter, yours stayed -- it came down, but it came down kind of less than we had expected.

So is it fair to assume that the decline that we get from here in this downturn could be less severe than what we saw in the financial crisis?

Olivier Ghesquiere -- President and Chief Executive Officer

Yes, I think we're very happy with the very limited decline in utilization rates. As I stated earlier on, we expect this to continue, and possibly to be very slightly higher. Still, we don't expect the utilization rate decline to be that drastic as the ones you're referring to. So we kind of see an environment where shipping lines continue to hold on to their equipment at the moment.

They know that they won't have capacity to buy containers, if the market bounces back. They know that there is likely to be further disruption to supply chain and congestion as a result of them cutting capacity and reducing the number of sailings. So ship lines overall are not rushing at this stage to redeliver a container, which is, I think, another sign of their optimism in terms of a possible rebound in the market. So what we're observing is more a complete absence of new lease outs than really a strong increase of turning of containers.

So we expect our utilization rate to continue to trickle down, not at a very high speed, but it will continue to trickle down until such time that we see cargo coming back.

Mike Brown -- KBW -- Analyst

OK. Great. Maybe just one more for me. I've noticed that a lot of companies have really been kind of turning off their buybacks to serve some liquidity or maybe sit on a little bit higher cash.

You guys have been very active in the first quarter, bought back at some very attractive levels. But I guess, given the fact that no one really knows how this whole environment plays out or how long the downturn could last. I guess what gives you kind of comfort in buying back shares and continuing to buy back shares at this pace?

Olivier Ghesquiere -- President and Chief Executive Officer

Thanks, Mike. As you mentioned, we've been buying opportunistically. And I think that's always been our focus, and that will continue to be our focus. We will buy back share if we think that we can buy them very opportunistically within the trading limitation and restrictions that are in place.

But the fundamental aspect for us is really to make sure that we preserve our liquidity and our cash and get ready for the market uptake. So that is what really drives our decision in terms of capital allocation at the moment. And you're right to mention that there's a lot of uncertainty in the marketplace, but you've also observed that we are in a fairly positive situation in terms of our cash balances at the moment. But the short answer is we will buy, but we will buy very opportunistically.

Mike Brown -- KBW -- Analyst

Great. That's all the questions I have. Thank you guys.

Olivier Ghesquiere -- President and Chief Executive Officer

Thank you Mike.


This concludes the question-and-answer session. I would like to turn the conference back over to the presenters for any closing remarks.

Olivier Ghesquiere -- President and Chief Executive Officer

All right. Well, thanks again for taking the time today to listen to us and look forward to updating everyone on our progress during our next call. Thank you very much.


[Operator signoff]

Duration: 39 minutes

Call participants:

Ed Yuen -- Investor Relations

Olivier Ghesquiere -- President and Chief Executive Officer

Michael Chan -- Executive Vice President and Chief Financial Officer

Mike Brown -- KBW -- Analyst

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Motley Fool Transcribing has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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