Textainer (TGH +0.00%) has been hit hard in 2015 by weak demand for shipping containers amid a slowing global economy. That weakness was on full display last quarter, after the company reported subpar results because of a combination of lower rental rates and weaker gains on container sales. Given that the global economy has continued to weaken, there's a good chance Textainer's third-quarter results, which are due on Tuesday morning, won't show much improvement.
First, let's review
Before we consider those results, let's take a step back for a refresher on the second quarter. Here are the numbers that mattered:
| Metric |
Q2 2015 Actuals |
Q2 2014 Actuals |
Growth (YOY) |
|---|---|---|---|
|
Revenue |
$138.2 million |
$139.5 million |
(1%) |
|
Adjusted net income |
$37.7 million |
$40.2 million |
(6.1%) |
|
Adjusted EPS |
$0.66 |
$0.70 |
(5.7%) |
Data source: Textainer.
While these numbers suggest weakness, it was really a tale of two quarters. That's clear by taking a deeper look at where the company makes its money.
|
Revenue Sources |
Q2 2015 Actuals |
Q2 2014 Actuals |
Growth (YOY) |
|---|---|---|---|
|
Lease rental income |
$128.3 million |
$123.6 million |
3.8% |
|
Management fees |
$4.0 million |
$4.4 million |
(8.4%) |
|
Trading container sales proceeds |
$4.2 million |
$7.7 million |
(45.3%) |
|
Gains on sale of containers, net |
$1.6 million |
$3.8 million |
(58.2%) |
Data source: Textainer.
Here we see strength in the company's core container leasing business, which was partially due to strong utilization, which averaged 97.3% for the quarter. Also driving strong lease rental income was a 7.1% year-over-year increase in the company's fleet. However, this performance couldn't quite offset weakness within the company's other income streams, primarily because of the weak sales of older containers, which drove total revenue and adjusted net income lower.
Here's the outlook for the third quarter
In the company's second-quarter press release, CEO Phillip Brewer provided investors with his outlook for the balance of the year:
We have not seen a traditional peak season and remain cautious about container demand during the second half of the year. We expect a further slight decline in utilization during the second half of the year, and we do not expect the competitive environment to wane. Given the outlook for steel prices, ample manufacturing capacity, and muted demand, new container prices are not expected to increase in the near term and are likely to fall further. With low new prices and increasing quantities of containers being put to disposal, used container prices will also remain under pressure.
This outlook suggests that the company's financial results were probably under even more pressure during the third quarter. One number in particular that's been under pressure is the company's utilization, which had been at very high levels. However, while utilization was north of 97% last quarter, it was down to 96.6% when the company reported its second-quarter results about a month into the third quarter. If that number fell any further during the quarter, it would have had an even bigger impact on lease rental income.
What its competitors saw
With two of its competitors having reported last week, investors already have a sneak peek into the market environment that probably shaped Textainer's quarter. CAI International noted in its earnings release this past Tuesday:
The third quarter has traditionally been when we observe a seasonal increase in demand for containers. However, the seasonal pattern did not materialize and utilization declined slightly during the quarter. We attribute the lack of a seasonal upturn to more moderate international trade growth associated with Asia, and China in particular.
From what CAI International experienced, that traditional peak season that Brewer referenced in his outlook last quarter didn't materialize in the third quarter, either. Further, CAI International would go on to note: "Soft economic conditions in China this year have caused steel prices, and new container prices, to decline, placing pressure on per diem rates and secondary container prices. We expect the weakness in per diem rates and container prices to continue until overall demand for containers increases."
Again, we get a suggestion that not only could Textainer's third quarter be weak, but that weakness also appears poised to affect future quarters.
Meanwhile, TAL International (NYSE: TAL) went even deeper into what's causing the industry's issues when it reported this past Wednesday by noting:
Market conditions in 2015 have been challenging. TAL has been experiencing lease pricing pressure and decreasing disposal gains for several years due to falling steel and new container prices, widely available low-cost financing and aggressive competition. In 2015, lease pricing pressure has accelerated due to a 40% drop in steel prices, and we are also facing unusually low demand this year. Trade growth in 2015 has been disappointing, particularly on the critical Asia to Europe trade lane, and the traditional summer peak demand season for dry containers failed to materialize. This lack of demand has led to reduced pick-up volumes, increased drop-off volumes, and a decrease in utilization and investment opportunities. Lower new container prices and reduced leasing demand has also led to an increase in disposal volumes and lower sale prices for used containers.
Investor takeaway
Because of what its competitors CAI and TAL experienced, the expectations are pretty low for Textainer this quarter. The company will probably report lower utilization and weaker sales of used containers, both of which probably took a bite out of the company's results in the third quarter, as well as future quarters.
