The tough operating conditions in the container market continued to persist during the fourth quarter, impacting Textainer Group Holdings' (TGH +0.00%) financial results. The shipping container leasing company was hit not only by decreased customer demand as trade growth slowed more than expected, but container prices plunged due to weak steel prices and muted demand for new containers. Neither trend is showing any signs of reversing in 2016, which is expected to pressure the company's results in the year ahead.
A look at the numbers
Tepid demand and weak container prices were evident by comparing revenue across its various sources from last year's fourth quarter:
|
Sources of Revenue |
Q4 2015 Actuals |
Q4 2014 Actuals |
Growth (YOY) |
|---|---|---|---|
|
Lease Rental Income |
$124.6 million |
$129.5 million |
-3.7% |
|
Management Fees |
$3.6 million |
$4.2 million |
-12.5% |
|
Trading Container Sales Proceeds |
$1.3 million |
$7.3 million |
-81.8% |
|
Gains on Sale of Containers, Net |
($0.3 million) |
$2.6 million |
-110.8% |
Data source: Textainer Group Holdings Limited.
Lease rental revenue was hurt by lower rental rates and utilization due primarily to a slowdown in global trade. In addition to that, the company's fleet size actually decreased by 2.6% on a 20-foot equivalent unit, or TEU, basis because it has been selling off older containers. Unfortunately, lower steel prices as well as limited demand for containers put tremendous pressure on container prices, which affected the income the company derives from selling or trading older containers.
A look at the outlook
Industry conditions were worse than expected last quarter and those conditions haven't shown any signs of improving in early 2016. Because of that, CEO Phillip Brewer noted in the earnings release that:
The outlook for 2016 remains challenging for many of the same reasons that affected our 2015 results. Improved performance depends largely on an increase in demand, container prices and/or interest rates, none of which seems likely in the near term. Maturing leases that are extended will continue to be repriced at lower rental rates and container impairments are likely to remain high until resale prices improve. We expect these factors combined will lead to reduced financial results in 2016.
Brewer makes it pretty clear that as bad as things were in 2015, they're expected to be worse in 2016 because none of the three factors needed to improve conditions appear poised to reverse. One of the issues he points out is container prices, which were down 25% year over year due to both weak demand and falling steel prices. Those steel prices don't appear poised to rebound in 2016 according to steel companies like ArcelorMittal (MT 5.37%) and U.S. Steel (X +0.00%), both of which see their earnings in 2016 falling because of weak pricing.
ArcelorMittal CEO Lakshmi Mittal, in discussing the steel market, noted that "Although demand in our core markets remained strong, prices deteriorated significantly during the year as a result of excess capacity in China." Because China is producing more steel than the market can use, U.S. Steel believes that its steel products are being "dumped and/or subsidized" which is putting even more pressure on steel pricing. Given this overcapacity, China's steel industry needs to restructure for a lower growth economy, meaning that "2016 will be another difficult year for our industries" according to ArcelorMittal's CEO because that restructuring will take time. That means weak steel prices are here to stay for a while, which is going to impact container prices and continue to pressure Textainer's earnings.
One thing the company is doing during this time is taking advantage of cheap container pricing by investing heavily in new and used containers so it's well positioned for the eventual upturn. It has already invested $65.5 million year to date after spending $600 million last year. Brewer noted that the reason it is being aggressive is because "containers purchased at today's prices are expected to generate attractive returns over their lives" because the industry is cyclical, making this low point a great long-term opportunity for the company to expand.
Investor takeaway
Slowing global trade, weak steel prices, and low interest rates are all impacting the container leasing market. With those conditions expected to persist, 2016 will be a very tough year for Textainer. However, it has seen these cycles before, which is why it's investing to position its business for when the next up-cycle occurs, even though conditions could certainly get worse before they eventually get better.
