Textainer Group Holdings' Management Presents at JPMorgan Aviation, Transportation and Defense Conference (Transcript)

| About: Textainer Group (TGH)

Textainer Group Holdings Limited (NYSE:TGH)

JPMorgan Aviation, Transportation and Defense Conference Call

March 5, 2013 1:55 pm ET

Executives

Hilliard C. Terry, III – Executive Vice President and Chief Financial Officer

Analysts

Richard B. Shane – JPMorgan Securities LLC

Richard B. Shane – JPMorgan Securities LLC

Good afternoon. I’m Rich Shane from the JPMorgan Specialty Finance Team. It is my pleasure to introduce the CFO of Textainer, Hilliard Terry. Textainer as many of you know is the largest public container leasing company. They have 2.8 million TEU which is roughly 800,000 TEU larger than their second, than their next competitor. That fleet is roughly 72% owned with the remainder managed. The company is generating quarterly recurring leased revenues of almost $115 million. When I think about Textainer and their growth over the last couple of years and where they’ve really differentiated themselves, a lot of the transition has been a function of very successful sale lease back transactions as a way to grow the portfolio, deploy capital without necessarily increasing market or increasing supply in the market and compressing price.

And with that, I will turn it over to Hilliard.

Hilliard C. Terry, III

Thank you, Rick. And thank you again for inviting us to participate in this year’s conference as well. And thank you for those of you in the audience, and those of you listening online.

Before I start, I would like to point out that I may forward-looking statements. I encourage you to take a look at our filings with the SEC to get a read and full representation of all the risk and that’s associated with some of the forward-looking statements.

So with that I’d like to just introduce the company and just talk a little bit about what we do here. We were established back in 1979, we are the world’s largest container lessor. As Rick said, we have 2.8 million TEU in our fleet. We control roughly about 18% of the container leasing market. And I’m going to correct you Rick, we now own 73% of our fleet. That’s an interesting number, because over the past year, this time last year that number was 59%. So we’ve been very active in acquiring some of our managed fleets over the past 12 months. And we sell up to 100,000 containers annually through our resale division of our business.

We own and manage containers throughout the full life cycle of an intermodal container. And I will walk through a slide that goes through the details of that later. 82% of our fleet is subject to long-term leases, which includes both life-cycle leases and finance leases. We’ve been profitable for 27 consecutive years and we’ve paid either stable or increasing dividends for 24 years and of course we’re listed on the NYSE under the ticker TGH.

So if I only had a couple of minutes to talk to you, I would sort of talk to you about the fact that we are the world’s largest container lessor. And we have what I would describe as a fairly strong track record of growth profitability and we’ve consistently paid very attractive dividends. If you look at the environment, you might say well in one sense this seems like a fairly commodity type business, but there are a lot of what I would describe as secular trends that has allowed this company to grow, and I think that positions us to grow as we go forward. And the thing that I’ll note first is that, there’s been a secular change where for shipping lines, container ownership is not seen as a core need. And frankly, shipping lines have been leasing more containers versus buying containers and directly owning containers.

If you had to look back a few years ago, that number would have been roughly a 60:40 split whereas shipping lines purchased roughly about 60% of the containers and leasing companies purchased 40%. It’s actually flipped and last year leasing companies purchased roughly about 65% of the containers.

And additionally, if you look at the environment, shipping lines have been holding on to containers for a longer period of time. So there is what I would describe as a replacement cycle that will occur going forward. And also there is a lot more vessel capacity that’s coming online. Not only are – is it just more capacity but these are much larger and more efficient ships that are coming online, which allow container lines to actually operate more efficiently.

But one thing that I will leave you with and if you don’t remember anything else, just remember that there is a dichotomy between shipping lines and container lessors, oftentimes people will sell that the shipping business, but read the headlines and the headlines will be lukewarm about the overall shipping business. But the reality is that if you look at the performance, not just of Textainer but of our peers as well, you’ll see that the container lessors have performed quite well over the past couple of years.

So why do shipping lines lease containers? Well, first off, it allows them to reduce capital expenditures, a lot of the shipping lines are financed by European banks as you know, there are a lot of European banks have pulled back on many of their funding areas of what have you. And so capital expenditures or capital dollars are much more precious. And so shipping lines are more focused on doing things that will improve their overall operations, buy more efficient ships, investing in terminals, as well as investing in IT that will really sort of make a depth in their operating costs structure.

And frankly if you look at the levels at which we’re able to fund ourselves and what have you, basically it’s much easy for them to revert to leasing and use our balance sheet as opposed to using those precious CapEx dollars. Another thing that I’ll point out is that, there is very attractive supply and demand fundamentals. On the demand side, basically you’ll find that container trade grows at multiple global GDP. That multiple could be anywhere from 1.5 to 2.5 times.

And then if you look at on the supply side, there are a finite number of suppliers and so it’s very, what I would describe as disciplined supply-side. And it’s unlikely that you’ll find a lot of excess supply of containers, because what happens is, basically when demand falls, these container suppliers slow their production and we’re not able to order containers more than two or three months out. So there is not a situation that would occur, where we’re going to get too far ahead of ourselves in terms of ordering too much supply in the marketplace.

And when that does happen because of the very short ordering cycle, basically it’s a shorter period of time to observe if you will that supply that’s in the market. When you compare and contrast that to our customers when shipping line basically orders a new ship, it takes years before that vessel is ready to be put into the water.

This slide highlights the dichotomy between our business model versus our competitor, our customers business model. As you will see, over the past 10 years, we and all of the other container lessors have continued to be profitable even in spite of the downturn in 2009. But as you’ll see here also if you look at the profitability of our customers, it’s been much more volatile and that has to do with some of the dynamics that I just mentioned.

We’ve continued to grow our fleet and as I mentioned earlier today, we own 73% of our fleet. We’ve been investing much more significantly in our own fleet versus increasing our managed fleet. And you could see here that additionally if you look within our fleet, we’ve been also growing our refer fleet as well our refrigerated container fleet, whereas before 2008 we were not really a player, today roughly about 10% of our fleet is refrigerated containers.

The next slide walks through the landscape, as I stated before with 2.8 million TEU we are the world’s largest lessor. To the left of the slide, it walks through our competitors, many of these companies can fall into either private equity owned or a few of them are publicly traded companies. And if you look at the right side of the page, it gives you a breakout of our current fleet. And as I said earlier, roughly about 10% of our fleet is refrigerated containers. And then the vast majority of our fleet is what I’ve described as the workhorses of the industry, which is the 20 foot standard and the 40 foot high cube that makes up roughly about 60% of our fleet. And then there are also specialized containers as well, which is a small portion, but we do believe it having a diversified fleet of containers.

We have 14 offices over the world and the purpose of this slide is just not to show you pretty globe, but it’s to point out that we do have infrastructure around the world to be able to supply equipment to our customers in a very efficient manner. And it segways into the next slide which walks through the returns or the expected returns over the life cycle of a container. The important takeaway of this slide is, if we did not have that global infrastructure, if we were not an operating company, we would not be able to benefit from this entire life cycle. Rick, the two of us could actually start a leasing company and we might be successful for the first year or two, but when those containers started coming back, we wouldn't have the infrastructure to really be able to release and redeploy those containers.

So the initial lease term is roughly about 55% of the expected return, and then subsequent to that we will either release or redeploy some of the containers will go into our mass lease fleet or in some cases it will go on to what's called life cycle leases whereas our customers will keep containers until the end of the life of a container.

The mid-cycle part of it is roughly about 30% of the expected returns, and then also we have a division that’s focused on the disposition of containers whereas that's about 15% of the return, you’ll see that the residual values are fairly significant for containers and this particular part of our business is very important part of the business from the standpoint we think we have one of the largest organizations amongst the leasing companies. And this provides us very good insight as to where we want containers return to and where we can achieve the highest residual values as well.

If you compare our lease portfolio today to what it look like back in 2000, there is a major difference here. As I stated earlier, roughly 80% of our fleet is subject to long-term leases, but if you look back in 2000, you'll see that the majority of our fleet was subject to short-term leases. And so if you look below, you will see the utilization levels and you will see that back in 2001, there was much more volatility. So during that downturn, you will see utilization rates went down to 74%.

What’s interesting is that, in addition to the fact that for the last eight years, you’ve pretty much seen utilization rates above 90%. For 2009 period, which was much worse than 2001, our residual – not residual, utilization level only went down to 86% versus the more drastic move back in 2001. And so that’s just a function of the fact that the vast majority of our leases are subject to long term leases. And while we get a lot of questions from investors about small movements one way or the other utilization rates as you can see, our utilization rates have been fairly stable over the past eight years.

This slide is just a sampling of our customer base and our top 25 customers on average represent about 80% of our containers. And I would say that of our public company peers, we probably have the lowest customer concentration. Our largest customer is roughly 12% to 13% of our overall portfolio.

Unidentified Analyst

Actually, I have one quick question. What would say on average will be the credit rating of all your customers right now?

Hilliard C. Terry, III

Well, there is different ways that you kind of look at the credit rating. I think in essence, I would say that the credit rating of our customers, and I’m going to talk about it in a relative sense, has improved. But if you look at overall at the shipping industry, it doesn’t have the highest credit ratings?

Richard B. Shane – JPMorgan Securities LLC

Let’s – actually let we’ll go to slides little, yeah sorry, my mistake.

Hilliard C. Terry, III

Okay. No problem. Another thing that I will point out is that over the past decade or so, we’ve made a lot of acquisitions in the industry. This represents fleets that we’ve purchased, what’s interesting about this particular business is, you’ll find that we are able to integrate a new fleet rather rapidly in one to three months there’s no disruption or anything to customers, for us there is no new headcount needed, because we’re simply acquiring assets. And today we have an IT system that’s scalable to exercise of our current fleet.

In terms of growth opportunities, the next slide walks through the major growth opportunities for us. Obviously a lot of our CapEx, the majority of our CapEx is spent on new container purchases. And really this is sort of focusing on growing our fleet and expending as I said earlier, our refrigerated container fleet. As I mentioned, we’ve acquired a number of managed containers out of our managed fleet, taking our own feet from 59% up to 73% of our total fleet. And then also we've seen purchase leasebacks or sale leasebacks from our customer standpoint whereas we will purchase used containers from our customers and then lease them, put them on lease to them.

What's beautiful about these is that these containers on lease immediately and whereas this time last year, there were not a lot of purchase leasebacks out there. I think the market has clearly picked-up, and we're seeing a lot of purchase leasebacks in the marketplace. And then lastly, there is the trading business where we’re opportunistically purchasing containers that to be from our customers, from our competitors and we have in-house expertise that gives us a real competitive advantage here.

From a top line standpoint, this equates to just a real diverse income stream and that roughly about 78% of our income is derived from leasing owned assets about 16% comes from the management of third-party containers, and really that's just leveraging our existing infrastructure and it's a nice recurring revenue stream for us. And then roughly about 6% of our income comes from the buying and selling of containers or I think the market and used containers.

Looking at the financial highlights, we have a very predictable cash flow roughly about and that results from the high percentage of our leases that are on subject to long term leases. The average remaining term is roughly 37 months and again as I stated earlier, it’s a diversified revenue mix of owning, managing, and resell. We’ve demonstrated our ability to access capital last year. We arranged more than 2 billion of financing in the ABS and bank markets. We have some very strong relationships and if you look at the financing markets, I think they have continued to get better and better for us and our competitors, which also on the flipside has provided more liquidity overall to the industry and made it slightly more competitive in the marketplace.

We have the lowest cost structure relative to any of our public company peers. And as I said earlier, we have a scalable platform. So we can basically grow our fleet to 2X the size without any significant investments in IT infrastructure. And then lastly, but not least in all, we’ve been able to deliver very, very attractive shareholder returns. We’ve averaged roughly about 23%, 24% return on equity and we’ve paid as I said earlier increasing our stable dividends since our IPO.

If you look at our top line over the past five years, we’ve seen compound annual growth rate of 14%. If you look at our EBITDA margin or EBITDA, you will see that CAGR is then 22% and I think this is a great example of what the type of cash generation that comes from this business looking at this particular chart.

The next chart walks through just our improving productivity trends, but basically this simply looks at our infrastructure cost on a per employee or per TEU basis or overall base of assets on a per employee basis. If you look at our assets on a per employee basis, we have the most assets per employee and we have the lowest SG&A per TEU per day.

Hilliard C. Terry, III

We’ve generated very strong returns and whether you look at EBITDA over income earning assets or if you look at our net income or return on equity it’s been a very, very respectable track record that we've been able to deliver.

The other thing I’ll point out is the fact that we've really ramped up our level of CapEx spending and this is really – last year, we invested $1.2 billion in new and used containers and the year before that we invested roughly about $800 million to $900 million in CapEx and that's really a step function improvement as you can see versus previous years.

And I again this is a function of the environment, the demand environment, a lot of people and meetings in last call, what do you think you're going to do this year? Our view is that, we are going to do what the market allows us to do. We're very discipline in terms of our approach and in terms of the returns that we want to achieve and so to the extent with the market flexes achieve those returns, and the market is there we are going to do as much as we can. And this is really representative of going our overall asset base, and it allows us again to position ourselves well for future growth.

In terms of the balance sheet, the only thing that I will point out here is that we have fairly low leverage relative to our public company peers. We closed the year out with debt to equity of roughly 2.2 times and we’ve had significant growth and revenue generating assets over the past five years.

I probably can’t emphasis it enough, but if you look at our dividend, it’s increased more than 2X. If you look at our total shareholder return, it has been well over 200% since our IPO. So again, this is what I would describe as very respectable returns that we are very proud of.

And in closing, I just like to say that I think we offer what I would describe as a very predictable revenue base and earnings stream. Part of this has to do with the fact that we have many long term leases and we have the ability to redeploy assets and release assets very efficiently given our infrastructure. We have limited customer concentration, and we have a business model that what I would describe is mitigates the cyclical nature of the broader industries that we plan.

And at the end of the day, I think this is a business that has been enabled to deliver good solid organic growth as well as a very solid dividend yield or return to our investors. Often times, you have to pick one or the other. In this particular case, I think we’ve been able to deliver both. So overall, I think it provides a very attractive total return opportunity for our investors.

Thank you.

Richard B. Shane – JPMorgan Securities LLC

I know we have a couple of questions.

Question-and-Answer Session

Unidentified Analyst

In terms of, would yourself that you thinking to do.

Hilliard C. Terry, III

I’m sorry, repeat that again.

Unidentified Analyst

You dispose of the containers – who do you sell it to?

Hilliard C. Terry, III

Who do we sell them, the disposal containers to? We will sell containers to wholesalers, but the end use for those containers is often for static storage or in some cases one way moves to third-world countries or in some cases you don’t even see the news for buildings and housing and things of that sort, but again we primarily sell to wholesalers who then sell to the end users.

Unidentified Analyst

I'm relatively new to this space. But are there any investment graded container lessors in this space?

Hilliard C. Terry, III

No there are not.

Unidentified Analyst

Looking back to January, December timeframe, some of the commentary coming out, was that the shipping companies were ordering maybe – interesting, so sooner than previous cycles (inaudible) orders coming in?

Hilliard C. Terry, III

Are we talking this past?

Unidentified Analyst

This past January and December timeframe maybe for the spring volumes?

Hilliard C. Terry, III

It hard to tell honestly right now, because we are just coming out of Chinese New Year. Our view is that in the subsequent weeks following Chinese New Year you will kind of get a really get sense of the demand picture is going to look like for the next couple of months or quarter or what have you.

Unidentified Analyst

The customers (inaudible).

Hilliard C. Terry, III

Yeah pretty much they do, there is a lot that happens before Chinese New Year, but there is basically sort of a week before and week after working sort of dry down.

Unidentified Analyst

(Inaudible).

Hilliard C. Terry, III

I think so. Yes. We are back in January, I was actually in Asia with Phil our CEO visiting customers and my sense is talking to customers, it’s kind of interesting they would always say, they thought their business was on the margin may be going to be slightly better, but still so high is how we describe it overall. But they – everyone consistently always said, but you guys are going to do well because we think we are going to lease more as opposed to less. So that was kind of if you will the sentiment that we got when we were talking to customers. But at the end of the day, I think the proof is in the putting, and so I think the next couple of months will give you a sense of how strong the environment could be.

Unidentified Analyst

As far as pricing, is it still started to come back a little bit or still?

Hilliard C. Terry, III

Pricing on…

Unidentified Analyst

New containers.

Hilliard C. Terry, III

I think pricing on new containers has increased slightly, and it will probably continue to increase especially after Chinese New Year and if demand picks up, it will definitely increase. So pricing is increased slightly.

Unidentified Analyst

(Inaudible)

Hilliard C. Terry, III

I think the used box market has been stable. It’s not to going to move exactly at the same timing as new boxes, but it’s been pretty stable.

Richard B. Shane – JPMorgan Securities LLC

We’ve got one over here as well.

Unidentified Analyst

It’s a two part question, which is basically Asia North American business in terms of your customer base. What’s the average monthly rent growth, is it basically in Asian, North American business? What are the areas are you involved with and what’s the typical lease versus the purchase price of a new trailer?

Hilliard C. Terry, III

Okay, container. So in terms of our customer base, I would say where our customers are domiciled are largely in either Asia or in Europe, European area. But if you talk about where our goods are flowing, I would say probably the biggest area of goods flowing back and forth is intra-Asia, that really you service goods flowing intra-Asia versus goods flowing from Asia to the Americas or Asia to Europe. But again to answer your question specifically our customers are predominantly domiciled in either Asia or Europe.

And then your question was sort of what doesn’t typical lease look like?

Unidentified Analyst

(Inaudible)

Hilliard C. Terry, III

Well, I’m just going to give you kind of round numbers, so these are not real numbers for everyone in the room. But let’s say typically you will find container prices over the past year have ranged in the $2,200 to $2,700 range over a years period of time. And when you lease the container it depends on where container prices are, but you typically try to get what I would describe as double-digit returns in terms of IRR or cash on cash return that’s in the low double-digit range.

Unidentified Analyst

Is it un-levered?

Hilliard C. Terry, III

That’s un-levered, yes on a container. And so with that I would equate to is roughly about something sort of in the $0.60 to $0.70 depending upon where container is priced if it is $2000, $2100, $2200 container. These are round numbers, but I’m just trying to give you a sense of magnitude.

Unidentified Analyst

And is the standard that you are typically over the first lease life trying to recover the purchase price, is that still at the roll of thumb?

Hilliard C. Terry, III

We really look at an overall IRR, okay when we look at our lease. The other thing I would point out to you is that you’ve seen a large component of this is also the residual, and you'll find that residual values have continuously increased as you’ve seen container prices rise and so what's interesting in the back of the presentation that I just gave which is on our website we’ll see a trend of container prices and I think over the past year residual values have been roughly 60% of the original equipment cost.

Unidentified Analyst

What are the main drivers to box values obviously it's upon demand, what is it input cost, is it just the value of the freight that – derivative play on container rates, what's the main driver?

Hilliard C. Terry, III

There’s lot that goes into it. I would say probably the input cost give you the floor of what a container would be, but I would say if a container price goes below let's call it and I'm talking for it, when I talk prices I use the standard for 20 foot container, but containers depending on exactly what kind of container there you can have different prices. But you will find that manufactures, because there are a finite number of manufacturers roughly about three companies control 80% plus of the market.

When container prices go below a certain level, and they are not profitable the input and the raw materials as well as the labor let's say it's goes below $2,100 for 20 foot equivalent, they will not stop making containers, because for them it's not profitable. But the largest driver is really the demand and so because you have this very discipline supply side, really the demand side of things is what really drives that range of container prices that I gave you that we’ve seen over the past year.

Just to clarify, you also asked about freight. I would say, we are more or less agnostic to what goes into the containers and things like if shipping lines announce general rate increases and then that means their customers will try to jump in front of the line to try to get freight booked before these rate increases occur which creates demand and that starts to demand cycle for containers and that all that. So that’s part of the demand side of things.

Unidentified Analyst

One of the interesting dynamics that you pointed out and something we’ve observed in covering the industry is that there is a lot of operating leverage on these models and that when you acquire fleets, you bring over the assets, you bring over the revenues, but you tend not to bring over a lot of the operating expenses and that makes sense. It doesn’t – once you get the infrastructure in place, you don’t need a lot more. There have been a number of larger transactions in the space that round up being private equity transactions. I am curious given your size and balance sheet and the operating leverage that you demonstrate, why you think so many of the larger transactions have gone to private equity route, not to the public side.

Hilliard C. Terry, III

I think part of it has to do with just how we look at transactions. When we look at acquiring companies, it's really extreme of cash flows or assets that we're acquiring, and so we don't necessarily need the infrastructure that comes along with it, and our view is we’re valuing a stream of cash flows basically. Depending and I can’t speak for the private equity players, but I think depending upon what their return requirements are, their view on what they need in terms of infrastructure and the returns that they are able to accept, they may or may not be able to pay higher price than you find some of the industry players like ourselves.

Richard B. Shane – JPMorgan Securities LLC

Okay, great. Thank you. One question from back.

Unidentified Analyst

Revenue visibility, has (inaudible) quarter what visibility out in terms of revenue?

Hilliard C. Terry, III

Well, again roughly 80% of our fleet is subject to total long-term leases, and so it's a fairly – our average lease is roughly about 37 months remaining on the leases. So we have fairly good visibility any given quarter. We don't provide guidance or anything of that sort, but the visibility is fairly good. It's a fairly stable business that given the long-term nature of leases.

Richard B. Shane – JPMorgan Securities LLC

Any other questions? Thank you very much. Thank you all for being here and look forward to seeing you next year.

Hilliard C. Terry, III

Thank you very much.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!