CAI International, Inc.
Q2 2020 Earnings Call Transcript

Published: 8 Aug 2020

[Operator:]

Thank you for standing by. This is the conference operator. Welcome to the CAI International 2Q 2020 Earnings Conference Call. [Operator Instructions] And the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to David Morris, Vice President, Finance and Corporate Controller. Please go ahead.

[David Morris:]

Good afternoon, and thank you for joining us today. Certain statements made during this conference call may be forward-looking and are made pursuant to the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934 and involve risks and uncertainties that could cause actual results to differ materially from our current expectations, including, but not limited to, economic conditions, expected results, customer demand, increased competition and others. We refer you to the documents that CAI International has filed with the Securities and Exchange Commission, including its annual report on Form 10-K, its quarterly reports filed on Form 10-Q and its reports on Form 8-K. These documents contain additional important factors that could cause actual results to differ from current expectations and from forward-looking statements contained in this conference call. Finally, we remind you that the company’s views, expected results, plans, outlook and strategies as detailed in this call might change subsequent to this discussion. If this happens, the company is under no obligation to modify or update any of the statements the company made during this discussion regarding its views, estimates, plans, outlook or strategies for the future. I will now turn the call over to our Interim President and Chief Executive Officer, Tim Page.

[Tim Page:]

Good afternoon, and welcome to CAI’s Second Quarter 2020 Earnings Conference Call. We are very pleased with our solid second quarter results. Net income from continuing operations attributable to CAI common stockholders was $13.7 million or $0.78 per fully diluted share, an increase of 15% as compared to Q1 2020 adjusted net income of $12 million. The quarter began with a great deal of uncertainty as we are in the depths of the COVID-19 global pandemic. As the quarter progressed, the global marine transportation markets began to stabilize. During the quarter, our customers took steps to tightly manage capacity, and they also benefited from low fuel prices. As a result, many of the major containing shipping lines have been profitable through these difficult times. In addition, a number of our customers received credit support from sovereign wealth funds as they are viewed as being strategically important to the global supply chain. Consequently, we did not experience any meaningful payment delays or credit issues during the quarter. Towards the end of the second quarter, we began to experience very strong demand for both new and depot containers. That demand has continued into the third quarter. Since mid-June, we have received customer commitments for long-term leases for approximately 70,000 TEU, which equates to about 115 million of new containers, all of which we expect to be picked up before the end of the third quarter. Additionally, we have lease commitments for approximately 50,000 TEU or 85 million of new containers for delivery in the fourth quarter of 2020. Besides these commitments for new containers, we have entered into several sale-leaseback transactions with customers. All of these transactions have attractive returns associated with them. Our operating performance during the quarter was supported by our industry-leading 98% average utilization. Our utilization started increasing towards the end of June and currently stands at 98.2%. Based on our strong order book for both new and midlife depot containers, we expect a continuation in the trend of increasing utilization in the coming months. This exceptional performance in utilization is not an accident. It’s the product of the long-term nature of our contracts, tight redelivery restrictions and our ongoing micro fleet management. All of these factors are the foundation of the resilience and long-term nature of our cash flow through the business cycle. A couple of additional data points that reflect the strength of the market. Container manufacturers are now quoting prices in the $2,100 range. They were in the low $1,900 range at the beginning of the second quarter. The container resale market is also strong from both a price and volume perspective. With improving utilization, we don’t foresee any reason for this trend not to continue. With all the favorable market factors I mentioned, our high utilization, strong customer demand, increasing container prices and a robust market for secondary container sales, we expect our core container business will generate increasing net income in the coming quarters. Because we have closely managed investment levels for most of 2019 and through the first half of 2020 and because our cash flow is supported by the fact that 90% of our leases are long-term in nature, we have been and we expect we will continue to generate strong free cash flow. As we enter the third quarter, we are in one of the strongest liquidity positions in our history with over $180 million of cash on hand or the ability to draw under our credit facilities without the need for additional collateral. During the second quarter, we terminated our previously announced strategic review process. Coincident with that announcement, we reaffirmed our intent to focus on our core container business and exit our noncore businesses. As we expect to sell our logistics business in the near term, we have accounted for the logistics business in the second quarter as a discontinued operation. Under accounting rules for discontinued operations, the logistic business reported a net loss for the quarter of $16.6 million or $0.94 per fully diluted share primarily due to the noncash impairment of goodwill and intangible assets. We are currently engaged in advanced discussions with a potential purchaser of our logistics business. CAI’s rail segment earned a net profit of $0.2 million in the quarter primarily as a result of increasing its average utilization to 90%. We have commitments for additional cars to go on lease in the third quarter. We continue to explore options for realizing the intrinsic value of our rail assets in the most beneficial manner for our shareholders. We are also pleased to announce that we have initiated a program of returning capital to our shareholders through the payment of regular quarterly dividends, the first of which is the dividend of $0.25 per share payable on September 25, 2020, to common shareholders of record as of September 11, 2020. In conclusion, CAI has a clear vision of its path forward. We are a container leasing company. We have a laser focus on shareholder value creation through prudent capital allocation decision-making. We will invest in containers when returns are attractive as they are now. We will return capital to shareholders through a consistent common dividend program. And when the container markets are unattractive, we’ll return capital to shareholders through share repurchases or other mechanisms. This is our commitment to shareholders. With that, I will now turn the call over to David Morris, our VP, Finance and Corporate Controller, to review the financial results for the quarter in greater detail.

[David Morris:]

Thank you, Tim, and good afternoon, everyone. Container lease revenue in Q2 was $69.4 million, a slight increase compared to $69.1 million in Q1. The quarter began with reduced container lease demand due to uncertainty in global trade caused by the COVID-19 pandemic. However, as the quarter progressed, expectation for a recovery improved and demand increased. The increase in demand has continued into the third quarter, and we are seeing increased utilization and strong customer demand for both new and depot equipment. Container-related depreciation expense for the second quarter was $26.8 million, consistent with the first quarter. Investment levels are likely to increase in the third quarter, leading to a slight increase in container-related depreciation expense. Rail depreciation was $2.1 million in the quarter and will remain at a similar level in the third quarter. We expect total depreciation to be between $29 million and $29.5 million in the third quarter. We recorded an impairment charge of $0.6 million in Q2 primarily related to manufacturing issues we identified on certain older railcars. We do not expect any additional charges related to this issue. Container-related storage and handling costs were $5.2 million in Q2 compared to $4.4 million in Q1, reflecting the slight decrease in utilization between the quarters. As container utilization is starting to improve, we would expect total storage and handling costs in the third quarter to be approximately $6.5 million, a similar level for the second quarter. Gain on sale of containers was $1.8 million in the second quarter, consistent with the first quarter. We expect a similar result in the range of $1 million to $2 million in Q3. We sold 100 railcars in the second quarter, generating a gain on sale of $0.3 million. Although we are exploring opportunities to sell additional railcars, it is difficult to predict when or if any transaction would close. Container-related administrative expense was $6.6 million in the second quarter compared to $6.8 million in Q1. Several nonrecurring items were included in the quarter, including an increase in bad debt recovery of $0.9 million as a result of collecting cash from previously reserved customers and stock compensation forfeiture credits of $0.9 million, offset by additional severance costs of $1.5 million. As a result of terminating our strategic review process, we are also saving approximately $1 million per quarter in professional fees. Including rail G&A costs of approximately $0.8 million, we would expect G&A in the third quarter to be in the range of $6 million to $6.5 million. As referred to earlier by Tim, we consider our rail business to be noncore, and we continue to explore opportunities for disposing of our rail assets. Having said that, rail revenue increased to $6.3 million in the quarter as we were able to lease out some of our idle cars. The rail business generated net income of $0.2 million in the quarter. Our logistics business has been treated as a discontinued operation, and we expect to dispose of it in Q3. We took a noncash impairment charge of $18.5 million during the quarter to write down various intangible and tangible assets associated with the business. Net interest expense was $17.6 million in Q2 compared to $20.4 million in Q1, a decrease of $2.8 million. The decrease in interest expense was primarily due to a 38 basis point decline in the average interest rate across all of our credit facilities caused by the significant drop in LIBOR rates that occurred during the quarter. Interest expense in Q3 should be in the same range as Q2. We entered into an interest rate swap in early July, swapping one-month LIBOR for a fixed rate of 0.29% on $500 million of our floating-rate debt for a term of five years. Approximately 77% of our debt is now fixed rate. The total book value of our container revenue earning assets at the end of Q2 was $2.3 billion, a decrease of $58 million compared to Q1. At the end of the second quarter, we had total funded debt, net of restricted cash and cash held in variable interest entities, of approximately $1.9 billion compared to approximately $2.1 billion at the end of Q1. As of today, total cash and liquidity available under our credit facilities is approximately $180 million. Based on our current outlook for the third quarter, we would expect liquidity to increase as a result of strong committed contractual cash flow and limited investment commitments. While it is difficult to predict with certainty, we believe we will continue to have adequate liquidity in future quarters to deal with any unexpected issues related to COVID-19. Furthermore, we believe our liquidity position will allow us to be favorably positioned to take advantage of a strong container market or to return capital to shareholders. That concludes our comments, operator. Please open the call for questions.

[Operator:]

[Operator Instructions] The first question comes from Michael Brown, [Keefe, Bruyette, & Woods]. Please go ahead.

[Michael Brown:]

Hi, Tim. Good afternoon.

[Tim Page:]

Good afternoon.

[Michael Brown:]

So I wanted to start with the improvement in the customer demand. Obviously, it’s great to hear that, that came through. It sounds like it’s been more kind of significant than we thought you could see at this stage of the downturn. What is really supporting that pickup? Is it pent-up demand? Is there just a lot of aging out in the fleet that needs to be replaced? And then does this really have legs here? And what’s kind of the thought as you think about the next 12 months?

[Tim Page:]

There’s a couple of factors, and you hit on a couple of them. One is the – just the transpacific trade is really strong right now. This is normally the strong part of the season in terms of the Western economies. And given that there was so little activity in the early part of the year, I think you’re seeing a level of restocking occurring and just kind of normal demand for this time of year on top of that restocking. Above and beyond that, if you look at 2019 and the first half of 2020, it was really very limited ordering of containers either by the container leasing companies or the shipping companies. And so just the natural attrition of the fleet as containers age out that our fleet – and we’ve heard from a number of our customers, our customers’ fleets, all are less today than they were a year ago. And any increase in demand with that kind of a backdrop naturally is going to lead to a need for new containers particularly when across the industry, utilizations are mid- to high 90s.

[Michael Brown:]

And I appreciated the commentary about kind of what you’re already seeing for commitments in the third quarter. How does that play out as we think about your ability to deploy what’s in the depot versus Capex? So how do we – I guess my question is really, how do I think about CapEx here in the second half based on what you know today and, I guess, your expectations?

[Tim Page:]

Well, for the most part, we have very little left in the depots to deploy that isn’t spoken for already. And in terms of CapEx for the rest of the year, other than sale-leasebacks, I wouldn’t expect us to have much additional CapEx for the rest of the year primarily because the container manufacturers are, to some extent, restricting their capacities to make sure that they maintain pricing. So I think if you wanted to get additional containers, you’d be looking for something kind of mid- to late fourth quarter at this point. And we’re just not looking at deploying capital that far out.

[Michael Brown:]

So even with a 98-plus percent utilization rate, do you feel like you should take on some CapEx just to make sure you’ve got kind of enough inventory out there to meet demand? It just sounds like at 98%, it’s kind of hard to anticipate the – what the needs could be and if it – we see a continued upswing in the market, I just want to hear your thoughts about – could you potentially kind of miss out on some of it if you don’t have more inventory available?

[Tim Page:]

I mean I think there’s always that opportunity. But there’s also – in a normal market, as you move into the mid- to late fourth quarter and then into the first quarter, those are not typically times of strong demand. And there’s still a lot of uncertainty around exactly how long economies are going to be impacted by COVID. So I think from our perspective, we’ve pretty much taken – our commitments to invest in containers have been based on very solid commitments from customers. And I think from a risk management perspective, we’re not looking to be – we’re looking to manage our risk.

[Michael Brown:]

Okay. Got it. Appreciate the color there. Let me just do maybe one more question on logistics if we could change gears there. Can you just help me understand where the equity in that business now? So looks like last quarter, you had $42.9 million is kind of the asset base for that business. You wrote it down by $18.5 million. So does the $24 million asset base – if I’m doing my math right, is that essentially what the equity is in that business?

[Tim Page:]

No. There’s – we’ve basically written off the equity in that business. What’s left is working capital. Pretty much what’s left is working capital.

[Michael Brown:]

So is my math kind of a fair way to think about what that business could be sold for?

[Tim Page:]

I don’t think there was $42 million. I mean we can get the specifics for you, but I think there’s something off there in terms of the amount of assets that were in the business pre the write-down.

[Michael Brown:]

Okay. Yes, we could take that one off-line. I just quickly was looking through the Q for that. So we can circle back on that. Okay. That’s all my questions. Thank you, Tim.

[Tim Page:]

Thanks.

[Operator:]

[Operator Instructions] We are showing no questions at this time. I’ll now hand back to Timothy Page for any closing remarks.

[Tim Page:]

Thanks, everyone, for joining our call, and look forward to a strong third quarter.

[Operator:]

That does conclude our conference for today. You may disconnect your lines. Thank you for participating, and have a pleasant day.