The container shipping market is slowly coming out of its cyclical downturn, which is starting to drive a noticeable improvement in Textainer Group Holdings Limited's (NYSE:TGH) financial results. While the company has yet to return to profitability, revenue is heading higher due to improvements in utilization, lease rates, and container prices. Given current market trends, the company expects further improvement in its business this year, and should be back in the black in the second half.

Textainer Group Holdings results: The raw numbers

Metric

Q2 2017

Q2 2016

Year-Over-Year Change

Revenue

$119.2 million

$127.0 million

(6.1%)

Adjusted Net Income

($1.2 million)

$2.5 million

N/A

Adjusted EPS

($0.02)

$0.04

N/A

Data source: Textainer Group Holdings Limited.

A container ship at sunset.

Image source: Getty Images.

What happened with Textainer Group Holdings this quarter? 

Market conditions are noticeably improving:

  • Lease rental income fell 9.7% from the year-ago quarter to $108.8 million due to a decrease in average rental rates and lost revenue from the Hanjin bankruptcy. However, it increased 1.1% from last quarter thanks to an increase in fleet utilization, which rose from 95% to 96.3%, and rental rates.
  • Revenue from management fees and the net gains on the sale of new containers was also higher year over year, though the sale proceeds from container trades fell. 
  • While the company reported an adjusted loss for the quarter, it narrowed from last quarter's loss of $9.1 million, or $0.16 per share, thanks to the sequential improvement in revenue.
  • The company has been very active on the strategic front over the past few months. It raised $920 million of new asset-backed financing, which it used to pay down existing debt that freed up liquidity to acquire new containers. Textainer has invested $275 million into new containers this year at an average initial yield of 12%. Finally, it signed an agreement to assume the management of a container fleet, which should boost its management fee revenue.

What management had to say 

CEO Philip Brewer commented on the quarter by saying:

We continue to see strong improvement in container leasing market conditions with a quarter-to-quarter increase in lease revenue, decrease in direct container expense, reduction in container impairments and increase in gains on container sales. New container prices were around $2,150 per CEU [cost equivalent unit] during the quarter while used containers prices continued to increase. Our utilization continues to improve as we lease out new-build and depot inventory.

The rebound in the container market continued to take hold during the second quarter, which is starting to nudge Textainer's results in the right direction. The company is leasing out its containers at higher rates, which should boost earnings in the coming quarters, especially considering that it has several contracts expiring that are below current market rates.

Looking forward 

Textainer's CEO was decidedly bullish on the company's prospects. He stated that "we are excited about our outlook; the lease-out market is strong and a number of sustainable trends appear to be in place for this strength to persist." He elaborated on that point:

Should current market conditions continue going forward, we project our revenue to increase significantly due to the repricing of maturing leases which are at rates well below the current market. We believe that these positive changes and trends, especially the future impact of lease repricing, may not be recognized by the market.

Because of this, the company expects to return to profitability in the second half of this year.

Matt DiLallo owns shares of Textainer Group. The Motley Fool recommends Textainer Group. The Motley Fool has a disclosure policy.