Yahoo Finance Textainer Group (TGH) Q1 2019 Earnings Call Transcript
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Textainer Group (NYSE: TGH)
Q1 2019 Earnings Call
May. 09, 2019, 5:00 p.m. ET
Contents:
Prepared Remarks
Questions and Answers
Call Participants
Prepared Remarks:
Operator
Thank you, and welcome to Textainer's first-quarter 2019 earnings conference call. [Operator instructions] As a reminder, today's conference call is being recorded. I will now turn the call over to Ed Yuen, investor relations for Textainer Group Holdings Limited.
Ed Yuen -- Investor Relations
Thank you. Certain statements made during this conference call may contain forward-looking statements in accordance with U.S. securities laws. These statements involve risks and uncertainties, are only predictions and may differ materially from actual future events or results.
The company's views estimates, plans and outlook, as described within this call, may change after this discussion. The company is under no obligation to modify or update any or all statements that are made. Please see the company's annual report on Form 20-F for the year ended December 31, 2018, filed with the Securities and Exchange Commission on March 25, 2019, and going forward, any subsequent quarterly filings on Form 6-K for additional information concerning factors that could cause actual results to differ materially from those on the forward-looking statements. During this call, we will discuss non-GAAP financial measures.
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As such, measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures will be provided either on this conference call or can be found in today's earnings press release. Finally, along with our earnings released today, we have also provided slides to accompany our comments on today's call. Both the earnings release and the presentation can be found on Textainer's Investor Relations website at investor.textainer.com.
I would now like to turn the call over to Olivier Ghesquiere, Textainer's president and chief executive officer, for his opening comments.
Olivier Ghesquiere -- President and Chief Executive Officer
Thank you, Ed. Good afternoon, everyone, and thank you for joining us today for Textainer's first-quarter 2019 earnings call. I'll begin by reviewing the highlights of our first-quarter results, and then I'll provide some perspective on the industry. Michael will then go over our financial results in greater detail, after which we will open the call for your questions.
Our performance in the first quarter was in line with our expectations. We delivered adjusted EBITDA growth of 2.7% to $118.1 million while adjusted net income increased $10.5 million or 88.3% to $22.4 million in the first quarter as compared to the fourth-quarter 2018. These improvements were achieved despite the slow market activity that we experienced toward the end of 2018 and which continued through the first quarter, resulting in slightly slower lease rental income of $155.5 million. At the end of Q1, we owned approximately 80% of our fleet, which stood at 3.4 million TEU.
We're particularly pleased with the results as they represent a gradual improvement toward a more normalized performance following the last two quarters of 2018. As we had previously indicated, we expected activity in the first quarter to be modest given traditional seasonality patterns as demand for new containers is typically softer during the fourth and first quarter of the year. In spite of the current uncertainties about world trade and GDP growth, we saw a modest level of growth in intra-Asia trade driven by the Lunar New Year's seasonal activity pickup. This was clearly less pronounced than last year, but given the strong growth experienced in 2018, we see this as a positive sign that the market is absorbing the 4 million TEU produced last year and adjusting itself to a more stable growth outlook.
During the quarter, we took delivery of about $200 million worth of new capex as we took advantage of the lower pricing level to maintain our competitive available stock and locking back-to-back replacement business. New container price has since recovered to the current level of approximately $1,900 per CEU driven in part by the increase in fuel prices, as well as a small pickup in new container demand. However, there have been few substantial leasing deals for containers from shipping line as most of the activity and demand for new containers has been driven by opportunistic replacement of older boxes given the low pricing level. Rental rates for new container lease-outs have adjusted in line with new container prices, but the total volume of deals was small and we do not believe that they're representative of normal market conditions.
Despite this current trend, the container resale environment remains attractive and resale prices on our depot boxes remain strong. Overall, we experienced very few depot lease-outs but also very low turn-in activity. Consequently, our first quarter revenue was essentially flat sequentially to the fourth quarter, and our utilization remained close to 98%. Given the low on-hire activity in the first quarter, we expect lease rental income in the second quarter to remain relatively flat.
While the market is off to a slow start to the year, we remain cautiously optimistic about the outlook for the balance of the year. Our perspective is driven by the following. While the IMF trimmed its world economic growth outlook to 3.3% for 2019 as compared to 3.6% in 2018, we believe this revised level is still supportive of shipping volume and trade growth. Also, Drewry forecast container trade growth in 2019 of 4% and there is innate replacement demand for container that are coming to the end of their life and will need to be replaced with new production.
While there is continued uncertainty surrounding the U.S. -- ongoing U.S. and China trade negotiation, the Chinese economy has shown encouraging signs of improvement. Utilization remains high.
And while total industry new production dry box inventory has increased to approximately 930,000 TEU, up from 780,000 TEU in February at the time of the last earnings call, this is still within the reasonable range of three-month supply for this time of the year. In addition, in the last few months, the number of idle vessel and the rates for tracking container ships have dramatically improved, reflecting underlying trade demand. And finally, we believe shipping line will continue to increase their reliance on container leasing company as they focus their liquidity on necessary capex related to new ships and compliance with IMO 2020. We believe leasing company will represent approximately 60% of purchases, and we expect demand for leasing will strengthen in the second half of the year.
In anticipation to our seasonal pickup in market activity, we remain focused on our strategy of improving our core business and preparing ourselves for the right market opportunities. Our team continue to make progress implementing our various initiatives to focus on profitability. As a reminder, we are seeking opportunities to drive efficiency, lower operating costs and speed up turnaround time. We're focused on quality revenue with double-digit average cash-on-cash yields, and we intend to continue to improve our fleet yields through organic growth and optimize repricing of existing leases.
We're taking a profit-oriented approach to lease reviews and extensions, and we'll leverage the favorable resale environment for used container to dispose of equipment if a potential expansion does not achieve our targeted yield. We've taken a stricter and more proactive approach toward credit default risk, and we continue to invest in the business to maintain adequate new production inventory to better serve customer needs on short notice. However, we will only do so if we can achieve the right returns. In summary, despite a quiet start of the year and uncertainties about the world economy, trade and shipping volume continue to hold following the robust expansion experienced in 2018.
We remain optimistic that this will help us deliver profitable growth and improved financial performance as we continue to implement our strategic initiatives and anticipate an acceleration in the overall market activity in the second half of the year. The fundamentals of our business remain positive, evidenced by low turn-in activity, high utilization, a stable container resale environment, reasonable inventory levels and recently increasing new container prices. I will now turn the call over to Michael, who will give you a little more color about our financial results over the past quarter.
Michael Chan -- Chief Financial Officer
Thank you, Olivier. I will now focus on the key drivers of our financial results. Q1 lease rental income was $155.5 million, a decrease of $1.6 million as compared to Q4 primarily due to having two fewer billing days in the first quarter of 2019. This was also partially offset by a slight increase in our average rental rates, overall resulting in a stable revenues per available day during the quarter.
Q1 trading margin container margin was $2.6 million, an increase of $1.3 million compared to Q4 due to an increase in the number of trading containers sold. Q1 gains on sale of owned fleet containers, net, was $6.8 million, a decrease of $2.8 million compared to Q4 due to a decrease in the number of containers sold as volumes fell back in line with our normal run rate. Q1 direct container expense for the owned fleet was $11.6 million, a decrease of $3.5 million compared to Q4, primarily due to container recovery costs for the defaulted lessees that did not recur in Q1, as well as a decrease in repositioning expense. We believe our direct container expense has become more normalized and reflects an improved baseline level going forward.
Q1 container impairment was only $800,000, mostly related to normal activity from containers moved to disposal status. Overall, the level of impairment was lower than in the fourth quarter as no further impairment for unrecoverable containers held by these defaulted lessees was recorded in Q1. Q1 depreciation expense was $60.9 million or flat compared to Q4. Q1 general and administrative expense was $9.8 million, down $800,000 from Q4, primarily due to a reduction in professional fees and more in line with normalized levels.
Q1 interest expense, including realized hedging gains, was $36.1 million, an increase of $800,000 from Q4, driven primarily by a higher average debt balance due to capex and higher short-term liabilities. Q1 unrealized loss on interest rate swaps, collars and caps, net, was $5.7 million, primarily resulting from a notable decrease in the forward LIBOR curve at the end of the quarter, which reduced the mark-to-market value of our interest rate derivatives used for long-term hedging purposes. This is a noncash loss that flows through our income statement as we have not elected to designate our derivative instruments under hedge accounting treatment, whereby the loss amount would have been otherwise disclosed in our statement of stockholders' equity as an equity reduction. However, we intend to hold these underlying hedges until maturity.
Therefore, any unrealized gain or loss will net to 0 over the life of the hedge. Income tax expense was $400,000 for Q1, reflecting a 2.1% effective tax rate. We continue to expect our annualized income tax rate to be in the mid-single digits. Q1 net income was $17.1 million or $0.30 per diluted common share.
Q1 adjusted net income was $22.4 million or $0.39 per diluted common share. Adjusted net income for the quarter excluded the noncash $5.7 million unrealized loss on interest rate swaps, caps and collars. Q1 adjusted EBITDA was $118.1 million, up $3.1 million when compared to Q4. Turning now to our liquidity, we ended the first quarter with a cash position inclusive of restricted cash of $219.5 million.
Finally, after the end of Q1, April 26, we announced a $350 million asset-backed financing, which was completed at attractive terms with overwhelming investor demand. This transaction allowed us to refinance debt from our short-term credit facilities lease and maintain ample capacity for capex growth. We remain well-positioned and ready to capture profitable market growth opportunities as they arise. This concludes our prepared remarks.
Thank you all for your time today. Operator, please open the line for questions.
Questions & Answers:
Operator
[Operator instructions] The first question comes from Michael Brown with KBW.
Michael Brown -- KBW -- Analyst
So the first quarter, it started off slow and not surprising given the kind of seasonal nature of the business. We heard from one of your peers that really the economics of the quarter weren't very favorable given the seasonally weak first quarter. It sounds like you saw kind of similar trends but your capex was pretty decent this quarter. So can you kind of speak to the cash-on-cash yields that you're expecting on the containers that you deployed this quarter?
Olivier Ghesquiere -- President and Chief Executive Officer
Well, I think you're perfectly correct in saying that it was a slow quarter, but what also happened is that it opened up a certain opportunity for us to buy containers at very low prices, and that is essentially why we decided to go ahead and make some investment now. Some of those investments were driven not so much by growth but mainly by replacement demand, and this is where we had our biggest opportunity for this quarter because other than this, I must say that it was an extremely slow quarter and that there weren't that many deals that we're out there in the open. That's why we stated that we feel that given the few deals that were open, the market rates may not necessarily be completely representative of a normal market situation.
Michael Brown -- KBW -- Analyst
OK. And as we look at the second quarter, appreciate the guidance on the lease rental income, how would you kind of categorize the start of the peak season? It sounds like it may be a little bit slower compared to last year but appreciate any additional color you can share there.
Olivier Ghesquiere -- President and Chief Executive Officer
It is definitely slow. As I stated in my script, our read is very much that last year was overall a very strong year. If you look at the actual growth, there was a production of 4 million TEU of dry container, which is probably 0.5 million or a bit more of containers that would be producing a typical normal year. So last year was a very strong year.
So we were kind of expecting a slow start to the year as the market had to digest the production from last year. Of course, the trade frictions are not helping because they're adding to the uncertainty, but what we see is that shipping lines still continue to experience decent volumes. They're probably not necessarily willing to make big decision in terms of capex or taking additional container on board, but as demand picks up and we have seen the first signs of demand actually picking up because the situation in the depots in Asia and in China in particular indicate that volumes have started moving, we can see that we're slowly, slowly moving into the normal seasonality pattern. But it is correct that this is delayed compared to last year, and that's why we remain cautiously optimistic and we think that most of the surge in demand will actually take place in the second half of the year as opposed to a more classic year where we would see it happening right now.
Michael Brown -- KBW -- Analyst
And then just to change gears a bit. We're looking at kind of your stock performance. It's been down over 40% in the past year, and you're trading below 50% of your book value. And how do you kind of think about what investors are kind of misunderstanding about your stock or the value of your platform? And how are you going to address that? I mean it sounds like you're focused on some profitability initiatives, but how can we kind of track your progress against those initiatives? You have margin or return targets that we can kind of track just to kind of hold you accountable and see that you are truly making progress toward return improvements.
Olivier Ghesquiere -- President and Chief Executive Officer
Thank you, Michael, a good question. It is fair to say that we also feel that our share price is probably not fully valued fairly, but you could argue that the market always values the shares fairly. But if you look at the overall industry, I think that there's an overall sentiment that is negative toward container leasing businesses because it's perceived as too closely related to the current negotiation or trade frictions that are taking place and the slowdown in the economy. I think that very often, the market fails to see that we're essentially a financing business and that we have long-term contracts that generate fairly stable returns and that our profitability doesn't move necessarily as fast as the sector associated to transport or commodity sector would suggest.
Now coming back to, I think, the second part of your question as to Textainer's performance, we're completely focused on turning this business around and improving our net earnings. To us, that is absolutely the first priority. We've spoken a little bit about our initiatives. You have seen in the last two quarters that we've been doing a little bit of a cleanup.
I think that is now behind us and then we're certainly looking ahead. We're starting to see the result of a lot of initiatives. We have been cleaning up the excess inventories we had in several locations. We now have 80% of our available stock located in Asia, which I think is a very positive situation to be in.
Our utilization is very high at 98%, and we think that it's actually going to be stable because we have been proactive in renegotiating a lot of our leases already. We're working on several optimizations, but ultimately, we will continue to see gradual improvement, but we're also going to depend on the market to help us. And I think that you will see that most of the capex that we still think we will deploy will take place in the second part of the year.
Michael Chan -- Chief Financial Officer
Michael, a couple of things to add to that as well that you might want to keep an eye on is our adjusted net income, how that's panning as well on top of improving profitability, controlling cost as well. So take a look at our -- or keep an eye on our direct container expense and our G&A and see ourselves holding and normalizing those levels as well because that's part of the picture, too. But pretty much whatever Olivier just mentioned there, focused on that utilization also, maybe our revenues per day as well is what I would probably look at.
Operator
The next question comes from Tyler Seidman with Cowen.
Tyler Seidman -- Cowen and Company -- Analyst
So to kind of shift gears a bit, recently, COSCO announced they are going to purchase Singamas. And I'm just wondering, without actually saying how much exposure do you have to COSCO, do you think that shipping line will begin to start taking more boxes in-house rather than leasing them? Or do you think trends will kind of continue as they happen?
Olivier Ghesquiere -- President and Chief Executive Officer
I don't think there'll be a major change. COSCO and the other component of COSCO, China Shipping, have always been taking containers from their own factories over the previous year and in the past. What this will do, this merger, it will certainly create a stronger player than today, but you have to remember that COSCO, through DFIC, already controls a few factories for containers in China. Now DFIC combined with Singamas will have a market share of probably about 30%, and certainly, that is significant.
But I think one element to keep in mind is the fact that the other producers have a lot of capacity and that none of the producer right now run at full capacity. So do we think that it will change the market dramatically probably in the sense that it will create a player that will be a little bit of a stronger competitor to CIMC in the marketplace? Yes. But will it impact COSCO? Probably not. They've been running that business pretty much at arm's length so far.
So we're not too concerned about that situation.
Tyler Seidman -- Cowen and Company -- Analyst
Got it. That was very helpful. And then just to kind of transition, you guys did a really good job of kind of refreshing your customer base and kind of rightsizing your fleet. Just looking out to 2Q, is there any inclination or any reason for us to believe that you would have another issue with riskier customers particularly in the Asia region? And just given the recent commentary on U.S.-China trade, there's been some chatter that things haven't been going so well.
So what are your thoughts there on the recent revelations as well?
Olivier Ghesquiere -- President and Chief Executive Officer
Listen, I think that we had seen earnings of main shipping line last year with sort of mixed results with some shipping lines performing very well, some performing a little bit less well. The first results for Q1 are coming out and we see essentially the same trend. If anything, the star performers are still performing very well, and I think that the weaker ones are still struggling a little bit at the moment. I would say we're not overly concerned, but the reality is that much will depend on the trend of the economic growth and what happens over the coming months and the seasonality.
As I mentioned earlier on, we have the first signs that cargo has started to move and we think that this will essentially help most shipping lines. So we're not particularly concerned, certainly not so much on -- as to our customer base at the moment.
Operator
[Operator instructions] This concludes the question-and-answer session. I would like to turn the conference back over to Olivier Ghesquiere for any closing remarks.
Olivier Ghesquiere -- President and Chief Executive Officer
Thanks again for taking the time to listen to us today. I look forward to updating everyone on our progress during our next call. Thank you.
Operator
[Operator signoff]
Duration: 33 minutes
Call participants:
Ed Yuen -- Investor Relations
Olivier Ghesquiere -- President and Chief Executive Officer
Michael Chan -- Chief Financial Officer
Michael Brown -- KBW -- Analyst
Tyler Seidman -- Cowen and Company -- Analyst
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