CAI International, Inc.
Q3 2015 Earnings Call Transcript

Published: 27 Oct 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the CAI International Q3 2015 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Timothy Page. Sir, 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 that 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 third quarter 2015 conference call. This quarter, we reported a revenue increase of 11.7% from the third quarter of 2014 and rental revenue increased over the same period by 3.9%. We reported net income for the quarter of $13 million or $0.62 per fully diluted share compared to $12.9 million or $0.60 per fully diluted share for the second quarter of 2015. Our results this quarter reflect the trend we reported last quarter. We normally expect this quarter to be our strongest utilization period, due to the traditional holiday peak demand. However, the increased demand did not materialize and utilization declined slightly during the quarter. Demand originating from China has been a particular area of weakness and we believe this relates to the widely reported economic slowdown in China. Our utilization during the quarter was 92%, compared to 93% during the second quarter. We expect demand will be relatively moderate in the fourth quarter though we do expect some incremental container demand created from the trade related to the lunar New Year. We also view the fact that there has been a very limited buying of newly manufactured containers over the past three months by both leasing companies and shipping lines as a positive. We believe this limited purchasing activity should enable supply and demand to remain relatively imbalance and provide for the potential increase in utilization when demand for equipment increases. We are very pleased with the ongoing performance of our rail business. During the quarter, we purchased $17 million of railcars and our results benefited from the delivery of equipment on attractive multi-year leases. We are gaining operating leverage in margin expansion in the business as we continue to add additional equipment to the fleet, while keeping our overhead constant. Rail assets represent 9% of our overall equipment rental revenue for the quarter and a similar percentage of ongoing profit. During the quarter, we sold some railcars at a gain. We expect to find similar opportunities in the future to realize the value created by placing new equipment on attractive long-term leases. This provides us with another option to increase the profitability of the group and maintain a well balanced lease profile. I’m also pleased to report that last week we closed on an expanded rail asset credit facility. We’re very pleased with the strong showing of support by our lenders. The new facility increases the commitment available to us from $250 million to $500 million, reduces pricing by 25 basis points to Libor + 150 basis points, expands the eligible equipment that can be financed with the facility, and extends the maturity out five years from last week’s closing date. This facility creates efficient financing to meet our committed new investment program, as well as putting in place financing for additional new and used equipment we may look to acquire. We believe this expanded commitment provides us with a strong opportunity to continue to grow our rail business. We’re very excited about the momentum and the direction of our rail efforts. This quarter also included the first reported results from ClearPointt, our recently acquired logistics business. We included two months of ClearPointt’s results this quarter and expect a full quarter’s result in the fourth quarter. We are off to a strong start in integrating ClearPointt into our company and finding opportunities to both expand its traditional business and incorporate the use of our own equipment into the services it provides. We are focused on expanding the overall business with additional experienced personnel and remain very optimistic about the opportunities opportunity that logistics provides to our rail and container platforms. We will continue to look for similar opportunities to expand our capabilities in the logistics space. During the quarter, we repurchased 1 million shares of our stock at an average price of $12.14. Over the past 18 months, we have repurchased 2.5 million shares or approximately 11% of our outstanding share count. We believe the acquisition of our shares is an attractive use of our capital that benefits our long-term shareholders. We will continue to evaluate the opportunity to repurchase shares in conjunction with our other capital needs and opportunities. Although we are working our way through the effects of a moderate demand period in our container business, we are excited by the steady progress we are making in strengthening and diversifying our overall business. We believe that the container demand will improve over time and that the efforts we are making on these other fronts will continue to expand the overall intrinsic value of our company. We’re excited about the direction of our efforts and are focused on achieving our strategic business plan. 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. Earlier today, we reported our 2015 third quarter results. For the 22nd quarter in a row, we achieved record lease related revenue. Lease related revenue in the quarter was $59.8 million, 4% higher than the third quarter of 2014 and 1% higher than lease related revenue in the second quarter of 2015. Lease related revenue in the third quarter of 2014 included a $2 million settlement from a defaulted customer. Adjusting for that item, year-over-year growth in lease related revenue was 8%. Both the sequential quarterly and year-over-year rental revenue growth have been driven by strong growth in rail. Rail rental revenue increased 94% year-over-year and 36% over the second quarter. Rail rental revenue now accounts for 9% of our total rental revenue as compared to only 5% a year ago. We expect a continuation of this trend of strong growth in rail revenue. Q3 2015 total revenue was $66.1 million, 12% higher than the third quarter of 2014 and 11% greater than total revenue in the second quarter of 2015. Total revenue in the third quarter included $5.4 million of logistics related revenue, most of which is related to our July 27 acquisition of ClearPointt. Excluding logistics related revenue, total revenue was $60.7 million in the third quarter, a sequential increase of 2% over Q2 of this year and 3% over Q3 of last year. Again adjusting for the customer settlement in Q3 of last year that I mentioned earlier, total revenue less logistics related revenue grew 6% over last year. Net income attributable to CAI common stockholders in the third quarter of 2015 was $13 million, a 1% increase over the second quarter of 2015. Earnings per fully diluted share in the quarter were $0.62 as compared to $0.60 in the second quarter. As of September 30, 2015 our total container fleet consisted of 1.2 million CEUs basically flat as compared to both last quarter and the same period last year. Our own container fleet is 1 million CEUs also flat as compared to the end of the second quarter of this year and 5% greater than it was at the end of the third quarter last year. We ended the third quarter of 2015 with approximately $1.7 billion container revenue assets, the same level as Q2 of this year and 5% higher than Q3 of last year. During the quarter, we invested $59 million in container assets of which about $25 million were used containers. During the quarter, we sold approximately 15,000 CEU of containers for about $20 million of proceeds. Our investment in rail assets continues to grow rapidly and we are enjoying the benefit of increasing operating leverage along with that growth. As of the end of Q3, our rail assets had a net book value of $177 million which represents 10% of our total revenue earning assets, an increase of 7% as compared to the second quarter of this year - second quarter of this year was 7% and it grew 126% when compared to Q3 of last year. During the quarter, we acquired a total of 360 railcars, 252 used, and 108 new for approximately $17 million bringing our total fleet to 3955 cars. Additionally, we have an active program to refurbish and upgrade some of the used cars we have previously acquired. During the quarter, we invested approximately $2 million in car refurbishments. All of the cars we acquired or refurbished during the third quarter have committed multiyear leases associated with them. As I mentioned earlier, rail revenue increased 36% in Q3 versus Q2. The operating margin, excluding the one-time gain on sale during the quarter, increased to 45% during the third quarter versus 37% in Q2 of this year. The pretax margin in Q3, again excluding one-time gain on sale was 28% and after-tax it was 19%. We expect continued revenue growth and margin expansion in the next several quarters as we take delivery of more new railcars that already have committed leases associated with them. We expect fourth quarter rail investment to be in the range of $20 million to $30 million. The overall utilization of our railcar fleet remains approximately 98%. Average total container fleet CEU utilization was 92% for the quarter, compared to 93.3% for the second quarter of 2015 and 93.5% for the first quarter of 2015. Our average owned CEU utilization for the quarter was 92.9% as compared to 94.3% for the second quarter of 2015 and 94.4% for the same period last year. Total storage and handling expense was $8.1 million, approximately $1.2 million greater than Q2 of 2015. $1.1 million of the increase is container related with $0.9 million of the increase being container storage cost reflecting the 140 basis point decrease in average utilization I just mentioned as well as an approximately 13,000 CEU quarter-over-quarter increase in the average number of units held for sale. The increase in units held for sale primarily results from what we expect to be a relatively short term impact of turn in of equipment from several large sale leaseback transactions that we entered into couple of years ago. We are aggressively to dispose of these additional units. MG&A expense in the quarter was $7.3 million, slightly higher than Q2 with all of the increase attributable to our acquisition of ClearPointt. With the addition of ClearPointt, we expect that quarterly G&A expense will run in the $7 million to $7.2 million range. Interest expense was $9 million in the quarter, right in line with our expectations. On a year-to-date basis, our effective tax rate is 8.5% and that is the level we currently anticipate for the balance of the year. Year-to-date total investment is $309 million, of which $102 million is rail, $34 million used containers, $169 million is new containers and $4 million was the acquisition of ClearPointt. The ClearPointt acquisition closed on July 27. While its contribution was small, ClearPointt was profitable during its first two months. It’s generated the net income and EBITDA levels that we anticipated. At the end of the third quarter of 2015, we had total funded debt of $1.4 billion. Based on the commitment amounts of our rail and container based revolving credit facilities, we had $392 million of unused credit capacity at the end of Q3. At September 30, the level of our available container and rail credit facilities borrowing basis exceeded revolving loan amounts outstanding by approximately $130 million. Our net funded debt to tangible net worth leverage calculated based on the definitions governing our revolving credit facilities was 2.88 times. With that operator, we’ll open up the floor for questions.

[Operator:]

[Operator Instructions] And our first question comes from Kevin Sterling from BB&T Capital Markets. Your line is now open.

[William Horner:]

Good afternoon, gentlemen. This is actually William Horner on for Kevin.

[Victor Garcia:]

Hi, William.

[William Horner:]

Tim, going back on what you touched on and then to about some of the short term impact you’re seeing from higher storage and handling, how should we think about that in Q4? Should we expect a similar level to Q3 or should we see that come down a bit as you work through some of those containers?

[Timothy Page:]

I think you should expect a similar level in Q4, perhaps even a little bit higher as it’s kind of a bubble moving through the system of turn ins of these sale leaseback units and that’s going to continue for a quarter or two.

[William Horner:]

Okay. And I think sticking with that for a second based on your utilization, obviously it’s a challenged market but you talked about the bubble right there within the sale leaseback but generally speaking utilization has it trend down then fairly steady or we seen an acceleration in the past couple of weeks? Just trying to get a little more color on the real speed of the market?

[Victor Garcia:]

This is Victor Garcia, let me comment on that. I would describe over the quarter as the decline in utilization has been steady and moderate. I would actually say it’s been a little bit of improved activity in the short term and leased enquiries over the most recent couple of weeks. And I think it mostly relates to the traditional Asian linear [ph] demand. So I think we are seeing that but I don’t – on the major trades, we haven’t seen the strong demand but I would say it’s been moderate and today we pretty much see – we don’t see an acceleration of that, it’s just a continuation actually or maybe in the little bit of a moderation.

[William Horner:]

Okay, that’s helpful. Thank you for that. Switching to railcars for a second, the 2,000 rail car order that you highlighted last quarter I know it’s between 2016 and 2018, but how should we think about that from a timing perspective? Is it pretty steady deliveries over that period of time?

[Victor Garcia:]

Yeah. Actually we have some other railcars that are being delivered over the course of the first half of the year that are unrelated to that 2,000 cars which relates to orders that we had made in last year. So in total we have about little over 2,400 cars we delivered and it’s pretty steady in January onwards. Every quarter we will get some cars delivered and we are working with less season circling up for the cars in the first half of the year and continue to work through that.

[William Horner:]

That’s helpful. And then sticking with that for a second, you may not disclose this but what percentage of those cars are committed to lessees?

[Victor Garcia:]

Most of them are not committed to lessees. Typically we try to market the cars six months to 12 months prior to the expected car delivery date, so we are really focused on the cars that are expect to be delivered over the first quarter and the second quarter. We also have the ability to change the car type for cars that are beyond the nine month to 12 month period, so we have the ability to adjust the type of cars that should be and made at that time.

[Timothy Page:]

Almost all the cars being delivered in the first quarter do have leases associated with them.

[William Horner:]

Okay, that’s helpful. And one more, just a housekeeping item and I’ll turn it over. I apologize if I missed this. But did you all give the end of quarter share count following the buyback?

[Timothy Page:]

It should be in our press release if you look on the balance sheet.

[William Horner:]

Okay. It’s added, I may just have missed it on the first glance.

[Timothy Page:]

So at the end of September, we have 20.2 million shares [indiscernible] you could see that on our balance sheet.

[William Horner:]

Okay, great. Sure. Thanks. I must have missed that. Thanks for your time guys.

[Timothy Page:]

Thank you.

[Operator:]

Thank you. And our next question comes from the line of Brian Hogan from William Blair. Your line is now open.

[Brian Hogan:]

Good afternoon guys.

[Timothy Page:]

Hi, Brian.

[Victor Garcia:]

Good afternoon.

[Brian Hogan:]

Question on the gain and loss on the total of rental equipment, in the press release you mentioned some of the sale of the containers was a loss and they are offset by the railcar gain. Can you actually parse out what was maybe the loss on the containers versus the railcar and then with that, what are your expectations going forward for that level especially considering the sale leaseback bubble that’s working through?

[Timothy Page:]

Our purpose is not to relate it. We did that one transaction of railcar so we prefer not to separate it out. The net effect we consider both of those to be items unrelated to the ongoing sale of containers. So we try to break out what was specific to the quarter as oppose to an ongoing trend in terms of selling equipment, but we prefer not to break it out at this point.

[Brian Hogan:]

Okay. So I guess in the second quarter you go back to that, then you didn’t prefer a loss on the sale of containers due to the sale leaseback and again you mentioned alluded to a loss this quarter as well. Should we expect losses going forward on the sale of equipment or just especially considering where the price of new containers are today?

[Timothy Page:]

Yeah. There continue to be pressure on secondary prices of containers and as the utilization has come down, as new container price come down, there has been some pressure on it. So we’ve reported approximately $0.5 million loss this quarter which was in line with what we’ve reported in the second quarter.

[Brian Hogan:]

Okay, thanks for that. Your container CapEx outlook and you mentioned your rail, is $250 million this year the ballpark and then what’s container prices being as well as there? What are your thoughts there obviously to consider a lot of factors, demand and what’s in your fleet and utilization? What is your CapEx outlook?

[Timothy Page:]

I think the majority of our new container investment had occurred in the first quarter, really at the beginning of the first quarter of this year, so we haven’t ordered any significant new container investment. We don’t see there being particularly strong demand. We’re in a fortunate position that we don’t have a lot of equipment that was purchased earlier that’s did not committed it for, so less prices have come down, but we do think that there is a fair amount of inventory there, which is not does not outsize for the industry, but I wouldn’t expect that to be a significant improvement in rental rates until demand picks up or people work through their inventory. So, I think we’re going to be somewhat cautious and look for specific opportunities. So, I think our new container investment is going to be more muted.

[Brian Hogan:]

And kind of in conjunction with that, where we are at in the cycle? Obviously we are at very slow times, very competitive times, can you kind of give a history of the cycles and your expectations going forward?

[Timothy Page:]

I think that’s a question everybody would have as to where we are in the cycle, it’s hard to predict. What I would say is historically we have seen down cycles that have been 9 months to 12 months in duration. So, we feel like we’ve been in that kind of period all of this year and even going into the last year, so we would expect that there will be a rebalance in the fact that people aren’t ordering equipment, there is a positive sign. I think people, when I say people I think it seems there is more of a conservatism out there on both acquiring as well as looking at rental rates. So, I think we’re well into it, but it’s hard to predict it. I think we’re certainly optimistic that it will turn and it’s just a matter of months. We are now going into the cyclical, the seasonal low point of the year. So traditionally demand would pick up beginning midway through the second quarter of next year, that doesn’t mean that something couldn’t happen in between, but the normal seasonal upturn would be now in the second quarter of next year.

[Brian Hogan:]

All right. With the utilization trending down it’s kind of tough to see the progress on your logistics efforts, obviously you reported the ClearPointt acquisition and the results there, it is nice to see, it’s kind of better than our thoughts from a margin perspective, but can you kind of pass out the benefits from the logistics efforts on your utilization?

[Victor Garcia:]

It’s hard to tell. We’re going to continue to move assets around to better locations both for sale and lease. Those are hard to quantify because some of it is cost savings where you don’t have equipment that was sitting idle that would have otherwise been sitting idle also equipment that got sold at a better price because you were able to put it in a better location. It’s really hard to put that into a line item that everybody can look at, but surprised to say though we think, as a standalone business we expect logistics will be a profit Centre for us and we believe that there will be significant cost savings as we utilize our assets and provide more mobility to them.

[Brian Hogan:]

Okay, and then one final one as the share repurchases, I think you did a nice job in the quarter by doing the entire program, but what are the thoughts about putting another one out there especially considering your stock price compared to your book value about 45% or so?

[Victor Garcia:]

As I said in my prepared remarks it is something that we are looking at. We did exercise the full amount in the quarter. We have a number of opportunity that we’re looking at, we’re also trying to continue to look at what our capital needs are that we’ve already committed to. So, I think we were looking in a balance of our needs as well as the opportunity of share repurchase. So, we’ve already bought back over 10% of a stock. We continue to believe the shares. The shares don’t reflect the intrinsic value of the company, but we will continue to discuss with the board at the appropriate time when we should purchase - if we should or when we should purchase some additional shares.

[Brian Hogan:]

Thanks for your time.

[Victor Garcia:]

Thank you.

[Operator:]

And our next question comes from the line of Doug Mewhirter from SunTrust Bank. Your line is now open.

[Doug Mewhirter:]

Hi good afternoon, in terms of the container activity, the purchasing activity by shipping lines are much worse, I know that the factory slowed way down in September due to a virtual halt, what’s the general production level, are they still just sort of crawling along making batch order or they start-up a minimal level of ongoing production?

[Timothy Page:]

I’d say for the most part people are stretching out what they already have. Really, when we speak to shipping lines, they have inadequate supply of their own containers. There is an adequate supply amongst the leasing communities, so there is not a strong desire to purchase containers, my estimation even with the lower price which again we view as a positive and that there is less interest and speculation in more just looking at actual expected demand.

[Doug Mewhirter:]

Is there enough, even enough sample size to give any kind of benchmark new dry box prices, still around like that 1600 to 1800 range?

[Victor Garcia:]

I would say, 1600 plus or minus would be the range. We haven’t ordered any equipment, but believe that we can probably do a little bit better than 1600 if we had an order that we wanted to place.

[Doug Mewhirter:]

Okay. Thanks for that and is there a seasonality in your logistics business, would you expect that all things equal given quarter would be better than in another terms from revenue perspective?

[Victor Garcia:]

There is generally speaking a peak season, particularly out of the West Coast, but for where we are and a lot of the customer base there is, there won’t be that much seasonality. So, we expect to grow the business on the top line with the additional focus of resources that we’re going to put on which will outweigh any kind of seasonal effect.

[Doug Mewhirter:]

Okay. Thanks and my last question, on your railcar business, what kind of railcar types are you most predominantly putting on lease? Are there any particularly strong or weak areas of the railcar market, I’m sure the sand cars aren’t exactly in great demand, but are there areas that you are concentrating on right now?

[Victor Garcia:]

A lot of different types of covered offers. The sand cars we largely have already placed on long-term leases and so we are covered there. We don’t think that there is a reason to be investing in that car type right now, but we were investing in large plastic pallet cars to serve the emerging petrochemical production of plastic pallets that’s going on around the Gulf Coast. We expect that to be a strong market in of course 2016 and 2017. We’ve invested in box cars. We’ve invested in a number of different types of flat cars. We really try to get a blend of cars. We have, we’re fortunate and we have very, very limited exposure to the cold market to more traditional railcar customers have exposure there because that was a big part of the market, we don’t because of the fact we entered, we don’t expect to be investing in that. So, we are looking at a number of different car types. There are a lot of them related to Covered hoppers.

[Doug Mewhirter:]

Great. Thanks, that all my questions.

[Victor Garcia:]

Sure.

[Operator:]

Thank you. Our next question comes from the line of Donald McLee from Wells Fargo, your line is now open.

[Donald McLee:]

Hey, guys, just to go back to the logistics business, so on an adjusted basis it looks like it accounted for 10% or 12% of revenue in Q3, is there a long-term run rate target you guys have for revenue contribution from that business?

[Timothy Page:]

We do, I guess we’re not, we haven’t put our growth expectations. We do have some growth expectations, which we think are material, but we haven’t that guidance.

[Donald McLee:]

Okay. Thanks and then the second question is for that amended revolver, what kinds of additional equipment types can be included and financed into that and are you still focusing, I guess you just spoke to the box cars going forward, is that going to be your primary growth initiative for the railcar side of the business?

[Timothy Page:]

No, we have under the order that we placed with treaty we have the ability to place a number of different types of tank cars. We are not directly focusing on looking at some of the accrued market but there are smaller tank cars that we would look to deal with both non-hazardous and some other type of hazardous type of cars the non-oil related. And so we have the ability to enter that with some of our customer base.

[Donald McLee:]

So the additional equipment type you said is the most hazardous cars?

[Timothy Page:]

Tank cars in general.

[Donald McLee:]

Okay, tank cars in general.

[Timothy Page:]

Tank cars in general.

[Donald McLee:]

Okay. And then my last question is just on, as new and used box prices remain under pressure, how do you guys think about the residual values?

[Timothy Page:]

It’s certainly that we’re obviously focused on as utilization has come down. It’s an area that we continue to monitor for sale price levels and the prospects are for being able to sell the equipment in the market.

[Donald McLee:]

All right, thanks guys. This is all my questions.

[Timothy Page:]

Sure.

[Operator:]

[Operator Instructions] Our next question comes from the line of Helane Becker from Cowen & Company. Your line is now open.

[Helane Becker:]

Thanks, guys. Thanks for the time. Just two questions, one, Victor, what are you seeing in terms of world trade right now. I think historically the numbers were mid single digits and I’m just wondering what you’re seeing at this point in time.

[Victor Garcia:]

I think when we look at the business overall, the reported numbers are expected to be containerize trade in the 4% to 5% range. That’s moderate by historical standards. When we look at what’s going on, United States is reported to have the strongest GDP growth. When you look across a lot of industrial companies whether it’s the railroads or manufacturers, it feels weaker than that. It feels more like lease term in my estimation closer to what you would expect with a 2% growing economy and not a high 3%. So we do feel like there has been a moderation in economic growth, we look at it from the stats that we see in the results that we see from the trucking community, the rail community, what we are seeing from our shipping line customers. So I don’t think we are in a recessionary period but it definitely feels like we are in a very moderate growth period.

[Helane Becker:]

So on their call earlier today, UPS, they were seeing industrial production declining and so I guess you would agree with that?

[Victor Garcia:]

Again I don’t know if it’s declining but it seems soft.

[Helane Becker:]

Okay. And then my other question is, are there opportunities for M&A that makes sense for you to expand up the business?

[Victor Garcia:]

Yes and we are actively looking at them in some of the places that we are expanding into.

[Helane Becker:]

Okay, great. Thanks for your help. I appreciate it.

[Victor Garcia:]

Sure. Bye-bye.

[Operator:]

And I’m showing no further questions at this time. I'd now like to pass the call back to Victor Garcia, CEO, for any closing remarks.

[Victor Garcia:]

Appreciate everybody joining us on our third quarter earnings call. We look forward to reporting to you on our year end results. Thank you.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day.