CAI International, Inc.
Q2 2019 Earnings Call Transcript

Published: 8 Aug 2019

[Operator:]

Good afternoon, ladies and gentlemen, and welcome to the CAI International Second Quarter 2019 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded.I would now like to turn the conference over to your host, Mr. Timothy Page, Chief Financial Officer. You may begin.

[Timothy Page:]

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 President and Chief Executive Officer, Victor Garcia.

[Victor Garcia:]

Thank you, Tim. Good afternoon and welcome to CAI’s second quarter 2019 earnings conference call. Along with our earnings released today, we have also posted on our website, under the Investor section a presentation on our results in our view of the state of our company and industry. We will not be going through specific slides in the prepared remarks but can address any questions related to the presentation on this call.For the second quarter of 2019, we reported net income from continuing operations attributable to common shareholders of $12.3 million or $0.69 per fully diluted share. The results were driven by our container leasing segment, which grew its revenue by 11% as compared to the second quarter of 2018, primarily due to a larger fleet size.Our results are down as compared to the second quarter of 2018, when we reported net income per share from continuing operations of $0.99. The quarter-over-quarter decline is largely due to comparatively higher interest costs, lower gain on sale of equipment, a $1.4 million insurance recovery that reduced storage and handling expense in the second quarter of 2018 and a higher tax rate.In the container leasing segment, our utilization remains very strong, averaging 98.8% for the second quarter of 2019. Our current expectation is that utilization will remain strong for the rest of the year based on continued trade growth and the long-term structure of our lease contracts. Despite the strong utilization of our fleet, we have not seen the traditional peak season demand that would normally commence during the second quarter. We believe that the ongoing tariff discussions between the United States and China have created uncertainty around the level of global trade and economic activity.The most recent declaration by the U.S. President that he intends to raise additional tariffs on September 1 of this year creates additional uncertainty about trade demand over the near-term. As a result, we do not expect demand for new containers to increase significantly until there is greater certainty around tariff discussions and a stronger economic environment. We have thus limited our incremental committed container investment to $27 million during the second quarter.Prices for new containers have declined slightly to approximately $1,750 for a new 20 foot container but we see little incremental ordering by shipping lines or container lessors. We are expecting that some manufacturers may close some manufacturing facilities in China over the coming weeks because of limited demand for containers, despite the lower container prices.Used container prices have declined slightly in Asia, particularly in China where most idle equipment is based. However, in general prices for used containers remain strong outside of Asia due to the high overall utilization rates of lessors and limited equipment being made available by shipping lines.Because of uncertain economic environment, we are currently experiencing, we have been actively managing our various businesses and have made the decision to sell our remaining railcar fleet. Although we continue to see improving trends in the returns and utilization of our railcars, we believe it is in the interest of our shareholders to reallocate the capital invested in our railcar fleet to other investments, including the potential repurchase of additional shares.As such, we are in dialogue with prospective acquirers regarding the sale of our railcar portfolio. We cannot provide assurance that a sale will be successfully concluded, however, we are optimistic that a sale can be completed before the end of 2019. Because we have made the decision to seek a sale of our remaining railcar fleet, we have accounted for the railcar business in the second quarter as a discontinued operation. Under accounting rules for discontinued operations, the railcar business reported a net loss for the quarter of $5.2 million or $0.29 per fully diluted share. The net loss of the railcar business included an impairment arising from the reclassification of rail assets as assets held for sale.We believe that global uncertainty around trade growth and tariffs has affected transportation and logistics demand in the United States this year. Coming into 2019 we expected continued strong demand for transportation services, and as a result, increased our logistics personnel. However, because demand has been softer than we planned we have downsized and restructured our logistics business with a 23% reduction in workforce and the closure of one of our offices.Our priority is to bring costs closer in line with our existing revenue and to place more emphasis on core customers where we have the opportunity to expand the level of business and more efficiently service those customers. Because of the restructuring we recorded a pre-tax charge of $0.5 million in the second quarter related to severance and office closure. We expect third quarter logistics revenue to be more in line with costs. We are focused on positioning the company for the future and deploy our capital to increase shareholder value. We think the decisions we have made during the second quarter position CAI well to achieve those goals.I'll now turn the call over to Tim Page, our Chief Financial Officer to review the financial results for the quarter in greater detail.

[Timothy Page:]

Thank you, Victor, and good afternoon, everyone. My comments, unless I note otherwise, will focus on our continuing operations. Total revenue in the quarter was $106 million, an increase of 2.3% versus Q1. Year to date total revenue from continuing operations was $209 million as compared to $183 million for year-to-year to date Q2 2018, an increase of 14.2%. Container lease revenue was $75.8 million, $0.3 million higher than Q1, reflecting the soft market conditions that Victor mentioned in his comments.Year to date container revenue is 13.8% higher than the same period last year, which primarily reflects the run rate impact of the strong lease market we experienced in the second half of 2018. Logistics revenue in Q2 was $29.8 million, an increase of 7.5% as compared to Q1. Year to date logistics revenue has increased 15.3% as compared to year to date Q2 2018. Depreciation expense in Q2 was $0.2 million higher than Q1, reflecting a slight increase in the size of our on lease container fleet.We would expect depreciation expense to increase at a similar rate in the coming two quarters as we are not anticipating strong incremental investment or lease outs of new containers in the balance of this year. Storage handling and other related operating expense in Q2 are all container related and were $4.1 million as compared to $3.9 million in Q1 of this year, an increase of $0.2 million, which was primarily related to a slight decrease in average utilization we experienced in Q2 versus Q1. As compared to Q2 2018, storage handling and other related operating expenses increased $3 million.Q2 2018 had a $1.4 million credit associated with an insurance recovery, the remaining $1.6 million in expense primarily reflects the year-over-year increase in our container fleet and the slight decrease we have seen in utilization this year as compared to the all time record high utilization we experienced last year. We would expect storage and handling expense to increase slightly from it’s Q2 level during the balance of the year, reflective of our expectation that while utilization will remain at historically high seasonal levels. It will likely fall modestly during the remainder of the year.Logistics cost of sales increased from $24.5 million in Q1 to $26.1 million in Q2, an increase of $1.6 million. Logistics gross margin in Q2 was $3.7 million as compared to $3.2 million in Q1, an increase of $0.5 million or 16.1%. Gross margin percent in Q2 was 12.5% compared to 11.5% in Q1. The improvement in gross margin dollars and gross margin percent was driven by the incremental – it was primarily driven by the international freight forwarding portion of our logistics business.Gain on sale of used container rental equipment in the quarter was $1.6 million as compared to $1.4 million in Q1. We would expect gains on sale in the coming quarters to be in the $1 million to $1.5 million range. General and administrative expense in Q2 was $12.3 million as compared to $13.1 million in Q1, a decrease of $0.7 million. During the quarter, we took $0.5 million charge related to the right sizing of the overhead in our logistics business. This charge was offset by $0.2 million decrease in other logistics G&A expense in the quarter and $0.8 million decrease in our container related G&A. The decrease in container related G&A is primarily related to a reduction in bad debt expense. We would expect G&A in the coming quarters to be in the same range as Q2.Total operating income from continuing operations increased from $34.8 million in Q1 of this year to $36 million in Q2, an increase of $1 million or 3.4%. $0.8 million of the increase was related to the container belt business. The balance of the improvement in operating income $0.4 million was related to logistics. The improvement in logistics operating income in Q2 versus Q1 was somewhat seasonal in nature but also occurred in spite of the fact the results for logistics included $0.5 million of restructuring charges I just mentioned.Year-to-date operating income from continuing operations increased $2.2 million or 3.1% as compared to the same period last year. Interest expense for continuing operations in the quarter increased the $0.1 million reflecting a slight increase in our average debt balance in the quarter. Given our expectations for limited container investment for the balance of the year and falling LIBOR rates, we would expect interest expense to decrease slightly in the coming quarters.The weighted average interest rate of our funded debt in Q2 was 3.9% flat with Q1. We’re expecting that our average borrowing rates will remain relatively constant next quarter. Any incremental interest expense over will be related to changes in the average debt balance. Income tax expense on continuing operations increased $1 million as compared to Q1. The increase in pre-tax income and the change in the expected mix sources where our income will be generated in the balance of the year.The effective tax rate in Q2 was 8.4%. Year-to-date, our effective tax rate was 5.6%. We expect the effective tax rate in coming quarters to be in this 5.6% range. Our owned container fleet was 1.6 million CEU as of the end of Q2, an increase of 33,000 CEU during the quarter. While demand for new containers has been limited this year, there’s also been limited turn in our older containers. Consequently, our average utilization in the quarter remain there historically high levels at 98.8%, and with 98.8% as of the end of Q2. As of today, utilization stands at 98.5%.The total book value of our container revenue earning assets increased $50 million in the quarter to $2.5 billion. At the end of the first quarter, we had total funded debt net of restricted cash and cash held in variable interest entities of approximately $2.1 billion, flat with Q1. Rail related debt accounted for approximately $250 million. We expect that all rail related debt will be retired upon consummation of a sale of our rail assets.Funded debt in Q2 net of cash related to continuing operations was $1.85 billion as compared to $1.8 billion at the end of Q1. We would expect the fund to debt balance to remain in this range to slightly decrease in the coming quarters. During the quarter, we repurchased approximately 900,000 shares of our stock.Year-to-date, we have repurchased 1.5 million shares, which represents approximately 7.8% of the shares outstanding as of the beginning of the year. Since the beginning of 2018, we have repurchased 3.2 million shares or approximately 15.8% of the shares outstanding at that time.We are committed to continuing to allocate capital based on investments that generate the best long term returns for our shareholders.That concludes our comments. Operator, please open the call for questions.

[Operator:]

[Operator Instructions] Your first question comes from the line of Scott Valentin with Compass Point. You are now live.

[Scott Valentin:]

Good afternoon. Thanks for taking my question. Just with regard to the railcar sale, I know obviously the prices, you guys are still negotiating some prices unknown, but is there any estimate of how much capital it would be freed up if you can – if you sell the railcar, so you can sell them close to book value, how much capital would that free up on the balance sheet?

[Victor Garcia:]

I’m really hesitated to talk about, where we are with the railcar sale, even how much capital we have. So we’re in an open process right now. So I preferred that. We really don’t – we’re not in a position to really talk about the rail sale.

[Scott Valentin:]

Okay, fair enough. And then just in terms of, you mentioned CapEx, obviously with demand um, being weaker than seasonal, historically, seasonally. Just wondering how you think about container sales. I mean, it’s a goal to maintain the fleet about where it is? Or do you see the size of the fleet contracting and all, as you sell more containers take advantage of stable use container prices?

[Victor Garcia:]

Our interests to sell containers will be dependent on how many units come in and the age profile of those units and locations. So if a customer’s hold on to equipment, we won’t be selling a lot. If a lot of units to come in and lost to consider selling – selling equipment. We’re really more focused on positioning the fleet for higher utilization. And I would just say, the level that we get on a monthly basis wouldn’t expand or contract, well wouldn’t contract the fleet by a significant amount. The fleet trickles in and so we wouldn’t expect a big difference in the size of the fleet over the next couple of quarters.

[Scott Valentin:]

Okay, thanks. And then just one final question. There was some concern around credit, one of your peers announced that they had a shipping company, I guess bankrupt or fail. Just wondering as been any changes in your watchlist and as you think about the slowing global economy and slowing trade, how you’re watching this looks.

[Victor Garcia:]

I’d say generally speaking, credit situation is good. We do have a particular situation similar to what they have, but it’s a manageable level from our standpoint. And we’re working through it in terms of recovering units. But I would say, generally speaking, the credit situation is good. Our payment history with customers is still in a good position and we’re not seeing deterioration.

[Scott Valentin:]

Okay. All right. Thanks for taking my questions.

[Operator:]

[Operator Instructions] Your next question comes from the line of Helane Becker with Cowen. You’re now live.

[Helane Becker:]

Thanks for operator. Hi guys. It’s Helane Becker and you didn’t get that. I just have a question on the balance sheet, actually Slide 13, two questions really. One is on just of tied for LIBOR that goes past 2021. Are there provisions in there to replace LIBOR with so far or some other way, that’s determined by you in the lessor?

[Timothy Page:]

Yes, that provisions in the credit – credit facilities that have floating rate depth in them to move to some other type of base to be negotiated whenever that happens.

[Helane Becker:]

Okay. And then the other question I had with was, maybe Victor for you. Thanks for all your comments on. So are you happy now with where the logistics business is? I feel like we talk about that a lot and I feel like you’ve – since you’ve gotten into the business have be further ups and downs and I’m just kind of wondering if after this latest restructuring are you going to be happy with where the business is?

[Victor Garcia:]

I think we’ve made significant changes and progress on the logistics business that we are optimistic. We’ll put us on a better path. I wouldn’t say I’m happy with the logistics business. We have we entered it to that business with the expectation that it would be a growing business and it would be a profitable business and the profits have been alluding us. So we’re very focused on making sure that business is a contributor to the overall results of the company. And that’s an important future side. I can’t say that I’m happy with kind of where we are right now.

[Helane Becker:]

Okay. All right. And I think, Scott asked a bunch of the other questions I have and you covered everything else in your prepared remarks. So we’ll leave it at that. Thank you.

[Victor Garcia:]

Thank you.

[Operator:]

And I’m showing no further questions at this time. I will now hand the call back to Victor Garcia.

[Victor Garcia:]

Great. Thank you everyone for being on the call and we look forward to reporting our third quarter results in the coming months. Thank you.

[Operator:]

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation and have a wonderful day. Here we all disconnect.