CAI International, Inc.
Q4 2020 Earnings Call Transcript

Published: 16 Feb 2021

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the CAI International Fourth Quarter 2020 Earnings Conference Call. Please be advised that today’s conference maybe recorded. I would now like to hand the conference over to your host today, Mr. David Morris, Chief Accounting Officer. Please go ahead.

[David Morris:]

Thank you. Good afternoon and thank you for joining us today. Certain statements made during this conference call maybe 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.

[Tim Page:]

Good afternoon and welcome to CAI’s fourth quarter 2020 earnings conference call. We are very pleased with the exceptional performance CAI achieved in the fourth quarter. Net income from continuing operations, which is effectively net income for our container leasing business, was a record $32.5 million. Adjusted net income from continuing operations was $31.6 million, 69% higher than Q3 of 2020 and nearly 200% higher than Q4 of 2019. Container lease revenue was also a record at $81.6 million, an increase of 10% versus the third quarter. Every aspect of our container operations contributed to this outstanding quarter and provides a runway for continued strong financial performance in 2021. Average CEU utilization was 99.3% in the quarter and currently stands at 99.7%. We invested aggressively in the fourth quarter, taking advantage of the unprecedented level of global container demand and put in place $154 million of leases for new standard dry and refrigerated containers with average lease rates well in excess of our fleet average. These new leases have an average lease term of 11 years. Since the end of June, we have put in place approximately $300 million of new leases and have grown our revenue earning assets by 6%. In addition to leases for new containers, we renewed and extended leases on many older containers with lease terms reaching up to 14 or 15 years and, in some cases, even longer. These renewals were at rates that are very attractive relative to historical norms. Our average cash funding cost continues to decline, and as of the end of Q4 was 2.25%, a decrease of 38% as compared to the end of Q4 of 2019. During Q4, we saw a continuation of strong secondary sale market, with sales of $29.4 million generating gains on sale of $4.4 million. Demand for containers has been exceptional, and there are no signs of abating. We expect global container fleet to increase by more than 5% in 2021. We have a robust forward order book with $340 million of container purchase commitments through the early part of Q3 2021. Additionally, we are working with several of our large customers to provide take-out financing for their own container purchases.

[David Morris:]

Thank you, Tim and good afternoon everyone. Following the disposal of our remaining railcars during the fourth quarter of 2020, my comments will be limited to the continuing operations of our container leasing business. We have enjoyed an exceptionally strong quarter with an increase in utilization and strong customer demand for both new and depot equipment, leading to a 10% increase in container lease revenue from $73.9 million in Q3 to $81.6 million in Q4. Net income from continuing operations, adjusted for the write-off of debt issuance costs and a one-off tax credit that I will discuss later, was $31.6 million for the quarter or $1.76 per fully diluted share. As we mentioned in our earnings release, the run rate of our business in Q4 was robust. However, for reasons I will elaborate, we anticipate that our Q1 net income will be at or slightly below Q4.

[Operator:]

Our first question comes from Michael Brown with KBW.

[Michael Brown:]

Hi, Tim, David.

[Tim Page:]

Good afternoon.

[Michael Brown:]

So, wanted to just start with some maybe additional comments about the operating environment here, clearly, the demand levels are certainly still elevated. Supply is still relatively, I think rational was kind of the word you used in the prepared remarks. You have got some orders extending out beyond the second quarter. So I guess my key question that I am trying to understand a little bit better here is just how long can this type of an environment last? I mean certainly, I hate to use the term that it’s – this time is different, but this cycle seems to be elongated here. So I am just curious how you are thinking about how this plays out into the end of – throughout 2021 and in the second half of ‘21 specifically?

[Tim Page:]

Well, I think you have to put in perspective where we were to answer that question. Coming out of the second half of 2019, there was very little container production. Similarly, in the first half of 2020, there was very little container production. So this ramp up of production that we’ve seen in the fourth quarter of this year really comes on the heels of container fleets shrinking over the 12-month period, second half 2019, first half 2020. So in that context, a lot of what’s been going on is really replacement of fleet just to kind of stay even. So Drewry just recently updated their container forecast for 2021, and their expectation or their estimate of container fleet growth is 6.5% in 2021 and then a little bit of a moderation in the years after that to 3.5% or so. Of course, the 3.5% growth in 2022 and then each subsequent year is on a bigger base. So still relatively – relative to prior years, it’s still a lot of additional TEU being produced. In terms of – so we think that based on Drewry and based on conversations we’ve had with customers, we are not anticipating much of a decline in the demand for containers. And you have to also take a look at we are going to – we are starting to perhaps see – coming out of the – the light at the end of the tunnel coming out of COVID as vaccines get more widely distributed. And while there is a lot of speculation that demand might fall off because people will have – consumers will switch from spending money on home improvements and this and that and other thing to maybe discretionary travel and the like. You have to remember that there is a large portion of the population that’s still unemployed and they are certainly not unemployed and underemployed and they are certainly not consuming at levels that would be anywhere near what one would consider to be normal. So I believe as time goes on, just the fundamental growth in the economy, plus all the stimulus that’s going to happen in the U.S. and what’s happening in Europe, we’re going to see strong consumer spending for some time. And that’s going to continue to drive container growth.

[Michael Brown:]

Yes. Thanks, Tim. That’s very helpful color. If we switch gears to capital return, you guys are obviously very aggressive on the buybacks and returning capital to shareholders. You have got the increase in the authorization just – obviously just given how elevated the fourth quarter and the first quarter were, how do you think about – how should we think about what that pace could be now going forward? Just trying to figure out if those are relatively good guideposts for the balance of 2021 or how you may – and balance that lever here with obviously a very strong CapEx environment? Thanks.

[Tim Page:]

I think fundamentally, we are very interested in and we have the liquidity to return capital to shareholders. I can’t predict what the market is going to be able to let us actually execute. There are obviously limits around how much we can acquire at any given point in time. But fundamentally, we think it’s possible for us to be investing at the kind of levels we have spoken of and return significant amount of capital to shareholders. We are going to generate a lot of additional liquidity at the earnings pace that we expect for the year. We will be generating pretty significant liquidity every quarter on top of what we already have. So, we think fundamentally – as I said fundamentally, we certainly have the capability to do it again would the market allows us to actually execute is another question.

[Michael Brown:]

Okay, great. I will leave it there. Thank you for taking my questions.

[Operator:]

Our next question comes from Bob Napoli with William Blair.

[Bob Napoli:]

Hi, thank you. Good afternoon, Tim and David. Congratulations on an incredible year. Obviously, tales of two halves and just crazy unbelievable times, and you guys managed it quite well. Just I guess – so your comment, Tim, very well understood that earnings would be down – flat or down slightly in the first quarter from the fourth quarter. Obviously, you are getting the benefit of putting on leases at higher rates, offset by 2 shorter days and not as much gain on sale as you have very little available. But how would you think about the second quarter with the extra days? Would you expect earnings to grow sequentially in the second quarter given you still have a fair amount of assets coming on board here in the first quarter?

[Tim Page:]

I mean we would expect second and third quarters to grow sequentially. There is one additional day in the second quarter, and then there will be another additional day in the third and fourth quarters. We do have additional assets going on on the lease. So that will drive some incremental revenue. It’s hard to predict what we will have available for – to actually sell in the market because at 99.7% utilization, and that’s the CEU utilization. If you actually measure it in terms of TEUs or units, it’s actually higher than that. It’s 98.8% – 99.8%. So there is just not very much to sell. And we are not expecting to see a lot of turn-in of equipment other than unless it’s really old, and probably really beat up at this point. So the available product that we’re going to have is going to be – we think is going to be pretty limited for some time. But absent that, we should generate more – every day, we have more lease revenue because we’re putting more assets on lease. So we would expect the second and third quarter to sequentially grow off the first quarter.

[Bob Napoli:]

Great. Thank you. So it sounds great. It’s pretty good earnings number for the year both mathematically versus current expectations.

[Tim Page:]

Yes. We are expecting a pretty significant year.

[Bob Napoli:]

Right. So, you are looking at $6 – I mean just mathematically, if you are flat and then grow, over – okay, alright. We can all do the math on that. Let’s see, just the lease rates and looking at your chart, the leases that are coming off-lease in 2021 look to be a fair amount, probably below current lease rates. As those get re-leased, are they getting – are you able to re-lease those at the current lease rates? Are you – would you – so essentially, you expect the yield on containers to move up quarter over quarter over quarter?

[Tim Page:]

Yes. When the older equipment comes off lease, you typically don’t get a lease rate that’s at the rate for a brand-new piece of equipment. You’re going to get something – depending on what the rate was, you’ll get something in between somewhere. And it just varies based on the lease and who the customer is and are you rolling that conversation in with additional new equipment leasing. So, it’s hard to predict on any one specific lease what the actual outcome is. But as a general rule, we certainly don’t expect it to see any decreases in lease rates as leases renew, which by historical standards would be very unusual.

[Bob Napoli:]

Great. Thank you. And then just a question on competition, having been through a number of these cycles occasionally, I mean, have we seen – there has been periods where we have 5 or 6 years of good times, of a healthy – really healthy environment. But you can have one or two competitors that decide to go for market share, that throw a wrench and things. And I mean have you – I mean I think, clearly, you are being disciplined. I think your competitor that reported this morning is very disciplined. Are you seeing any signs? Is there anything concerning you on the competitive front at this point?

[Tim Page:]

I would say generally not as – for starters, there is just not production available to – for any one person to go crazy. So the factories themselves are behaving differently than they have in the past, and they are not – they are closely monitoring the supply demand balance. And they are not – they don’t have any interest in increasing production at the expense of price. So, I think it’s kind of a new dynamic in our industry. And I think that’s going to stick.

[Bob Napoli:]

And just last quick numbers question, what was the ending share count?

[Tim Page:]

David, what was it 17.560 something like that?

[David Morris:]

Yes. You’ve got it pretty much spot on, 17.563.

[Bob Napoli:]

Great. Thank you very much. Appreciate it.

[Operator:]

Our next question comes from Dan Day with B. Riley.

[Dan Day:]

Hey, afternoon, Tim and David. Thank you for taking my questions and congrats on a really strong quarter really strong outlook. I guess first question, just a quick modeling one. On administrative expenses, on that line with the other businesses going, is that like $8 millionish a quarter number a good benchmark to use going forward?

[David Morris:]

Yes. I think $7 million, $7.5 million.

[Dan Day:]

Okay, cool. Thank you. More of a higher level question, average lease duration, I think, you noted 11 years. Chart in this morning says 10 years. Kind of what’s driving this? In the past, you had kind of said like 6, 7, 8 years is pretty typical. What’s driving the average lease durations up 3, 4 years compared to what they were?

[Tim Page:]

I think it’s a combination of things. One is the owner of assets, as the price has accelerated rapidly, we want to make sure that we limit our exposure to getting equipment back and container prices maybe being lower in the future impacting our ability to lease that equipment out at the same rate. So we are – we have been, for a long time, very focused on trying to get as long a lease term as possible, full lifecycle leases, we like to refer to them as. So that’s a driver, but also the container lessors, I mean our customers are also – some of them also are looking at the same thing. They want containers. They want to know they are going to have the container for its full life cycle. They want to fix the price. They know that sometimes – they want to fix their rates. They know that sometimes prices might be high, prices might be low sometimes. So it’s a portfolio approach. And they see value in not returning equipment multiple times during what would normally be a container’s life to chase a little bit lower, to do my math, they have done the calculus, and it’s less costly to hang on to the equipment, even if it’s at a higher lease rate than it is to return it and incur all of the upfront costs associated with returning equipment. So it’s – I think it’s a combination of our desire to minimize risk and the leasing – the shipping company’s desire to minimize their repositioning end-of-life – or not end-of-life necessarily, but repositioning an equipment turn-in costs by having just one turn-in at the end of the container’s life.

[Dan Day:]

Got it. Thank you. That’s helpful. And then one more just on – I’ve heard some commentary on new container prices around $3,500 a TEU. How do you see that evolving from here? Like do you think we have sort of hit a top – what do you – how high can those new container prices go and sort of what should we be looking for before that starts to roll over?

[Tim Page:]

Well, it’s hard to get into the – ultimately, the Chinese manufacturers are controlling what production levels are and what container prices are. It’s hard to say. I wouldn’t try to predict that we have seen a maximum on this price, but I just don’t know to be honest. It’s all a function of what supply and demand is. And ultimately, if a shipping company has freight to move from China or some place in Asia to Europe or the United States and they need containers to do it and they don’t have those containers and they are not readily available, that’s a recipe for rising container costs.

[Dan Day:]

So it’s safe to say all the manufacturers are running full out and there is sort of no way they can just increase production from here? They are sort of at their...

[Tim Page:]

I wouldn’t say that they can’t increase production. I would say that they are managing their capacity to maximize revenue and profitability.

[Dan Day:]

Got it. Got it. Okay, appreciate you taking my questions and I will turn it over.

[Tim Page:]

Okay.

[Operator:]

We have a follow-up question from the line of Michael Brown with KBW.

[Michael Brown:]

Great. Thank you for taking my follow-up. So Tim, CAI is now a pure-play container leasing company. You’re generating significant cash flow. You’re sitting on high cash flow. The organic growth is certainly good. The outlook seems very good there but somewhat constrained here. So just curious now that you’ve kind of gotten some of the cleanup activity behind you, would you actually look to make any acquisitions in this space, maybe something in the private side of things or conversely, do you see opportunities to actually partner with another company?

[Tim Page:]

No. I think looking at our ability to acquire somebody certainly is a much more realistic option for us given where our share price is trading and the liquidity we have. So it’s certainly on the menu of possibilities. There aren’t a lot of options, but certainly, we would be interested in looking at anything that might be available. That’s about all I can say about that.

[Michael Brown:]

Okay, great. And then just one more on – one more question for you, Tim. And I understand this one is maybe a little more sensitive question, but I noticed you still have the interim title and has been a while now. So just kind of curious on what the Board’s thoughts are on that and the expectation there, because clearly, there is still some uncertainty in the C-suite. So just curious if there is any thoughts or comments you can share on that? Thank you.

[Tim Page:]

I think that the status is pretty much unchanged. The Board is obviously quite happy with the performance. My own personal, I guess, objectives are to certainly help with an order with transition and regardless of how long that takes. And so we’re in a position to do the best thing for the CAI shareholders. But at some point, it’s time to bring in a new era of leadership to the company.

[Michael Brown:]

Okay, great. I appreciate the color there. And I will say that investor sentiment certainly echoes the Board’s positive comments as well. So, thank you for sharing that. That’s it for me. Thank you taking my follow-ups.

[Operator:]

We have a follow-up question from the line of Bob Napoli with William Blair.

[Bob Napoli:]

Yes, thank you for the time. Just on the earning assets, so Drewry’s outlook for 6.5% growth with container values much higher than – I think that’s a unit, not a dollar number, if you will. What are your thoughts, Tim on – or David, any commentary on the ability to grow the earning assets? I think you had about $2.4 billion of container earning assets at the end of the quarter.

[Tim Page:]

I think we expect to grow our fleet on a TEU or CEU basis and along with that grow – the assets will grow in value. The assets that are falling off are at pretty low value, particularly relative to where we are today with container prices. So I would expect a continuation of revenue earning asset growth as long as the market stays like it is today. With utilization where it is, there is very little coming off. So the little bit of decrease in asset value really is coming from depreciation, not from asset dispositions.

[Bob Napoli:]

Have you seen any new entrants given the really favorable environment that – I mean, I am not sure it’s easy to stand up a global container leasing business that quickly, but have you seen any...

[Tim Page:]

We haven’t seen anybody attempting to greenfield a container leasing company. It is not easy. It’s particularly not easy right now because it’s very difficult to get production from the manufacturers. So as it is, the established players are jocking – constantly jocking for position to get container production. So the ability for any potential new player to come in and do that would be very difficult. There are financial players, who will finance containers here and there, but generally, the limiter there is how much credit exposure somebody might want to any individual shipping company. So we haven’t seen a huge amount of new financing sources or there are certainly no new container leasing companies of any consequence in this really good market.

[Bob Napoli:]

Thank you. Just last question, the depreciation during the quarter, was that a clean container depreciation number? So if we looked at that number relative to the average earning assets, that’s a reasonable run-rate?

[David Morris:]

Yes, yes. This is just continuing operations, just standard stuff, so good for a run rate.

[Bob Napoli:]

Good. Thank you. Appreciate it. Congratulations.

[Tim Page:]

Thank you.

[Operator:]

I’m showing no further questions in queue at this time. I’d like to turn the call back to Tim Page, Interim President and Chief Executive Officer, for closing remarks.

[Tim Page:]

I’d like to thank everyone for listening in, and thank you. Goodbye.

[Operator:]

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.