Seacube Container Leasing's CEO Discusses Q2 2012 Results - Earnings Call Transcript

| About: Seacube Container (BOX-OLD)

Seacube Container Leasing Ltd. (NYSE:BOX-OLD)

Q2 2012 Earnings Call

August 9, 2012 10:00 pm ET

Executives

David F. Doorley – Treasurer

Joseph Kwok – Chief Executive Officer

Stephen P. Bishop – Chief Operating and Chief Financial Officer

Analysts

Justin B. Yagerman – Deutsche Bank Securities, Inc.

Richard Shane – JPMorgan Securities LLC

Christian F Wetherbee – Citigroup Global Markets Inc

Sal Vitale – Sterne, Agee & Leach, Inc.

Michael J. Webber – Wells Fargo Advisors LLC

Operator

Good morning. My name is Christie, and I will be your conference operator today. At this time, I would like to welcome everyone to the SeaCube Second Quarter 2012 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. It is now my pleasure to hand the program over to Mr. Dave Doorley. Please go ahead.

David Doorley

Good morning, and thank you for joining us for today's call. We are here to review SeaCube's financial and operating results for the second quarter of 2012. Joining me on this morning's call are Joseph Kwok, SeaCube's Chief Executive Officer; and Steve Bishop, SeaCube's Chief Operating and Chief Financial Officer.

Before I turn the call over to Joseph, I would like to point out that this conference call may contain forward-looking statements. Forward-looking statements reflect management's good-faith evaluation of information currently available. However, such statements are independent on and therefore can be influenced by a number of external variables over which management has little or no control.

Forward-looking statements are not and should not be relied upon as a guarantee of future performance or results, nor will they necessarily prove to be accurate indications of the times at or by which any such performance or results will be achieved. As a result, actual outcomes and results may differ materially from those expressed in forward-looking statements.

Furthermore, the company's views, estimates, plans and outlook may change after this conference call. The Company is under no obligation to modify any or all of its statements it has made herein, despite any subsequent changes the Company may make in its views, estimates, plans or outlook for the future. These statements involve risks and uncertainties, are only predictions and may differ materially from actual future events or results.

I will now turn the call over to Joseph.

Joseph Kwok

Thank you, David. I’d like to thank everyone for joining us on today's conference call.

In the second quarter of 2012, SeaCube generated strong financial and operating results for our shareholders. Year-to-date, we have committed to invest approximately $250 million in containers. Consistent with our goal of maintaining significant contractual revenue streams, approximately 68% of these containers have already been committed to long-term leases. We expect this investment to continue to positively impact our revenue, earnings, and cash flow.

Now, on slide number 3, some of the highlights of our second quarter results. The adjusted net income in the second quarter increased 28% year-over-year to $13.3 million, or $0.66 per share.

Our revenue for the quarter increased 21% year-over-year to $49.4 million. Our average utilization for the quarter remains high at 97.8%. Based on our strong and consistent performance, the Board of Directors has approved a dividend of $0.29 per share. This is our fifth increase since going public. SeaCube has now increased its dividend 45% since our IPO in October 2010, for cumulative payout of $1.95 per share.

In the second quarter, we completed a $225 million offering of A-rated Fixed Rate Secured Notes at 4.21% and increased our container revolver facilities to $150 million. With our increased capital availability, we intend to continue pursuing attractive investment opportunities that meet our investment criteria.

In the next few slides, I will comment on our market outlook. On slide number 4, first, the increase in liner freight rates this year has surpassed market expectation as carriers have successfully pushed through several general increases. Bunker fuel prices have dropped from a peak in April of $745 per metric ton to the recent $600 per metric ton level, which is also helping the financial situation of the carriers.

As a result of better freight rates and lower fuel costs, most carriers are expecting better profitability in the second quarter with continued improvement in the third quarter. At the same time, carriers are concerned about the global economy, which is another reason that most carriers are choosing to lease containers instead of buying. The utilization rate of assisting container fleet is expected to remain high as carriers continue to keep leased containers in their fleets.

After the current general cargo shipping season, the demand for dry containers is expected to slowdown in the coming months. On the other hand, as the peak shipping season for refrigerated goods approaches, we expect demand for leased reefer to pick up.

On slide number 5, a few comments regarding the supply of containers. Dry container lead times are now about six weeks. Pricing has come down from a recent peak of $2,650 to about $2,500 per TEU. Reefer pricing remains unchanged and production lead times are still 12 to 16 weeks.

Demand for reefers is expected to pick up in the third and fourth quarters. Inventory of existing used containers is stable and utilization among the container leasing companies remains high. As a result, secondary market supply has been limited and resale values have been better than expected. On slide number 6, our operating fleet is now more than 580,000 units of equipment. The net book value of SeaCube’s equipment is approximately $1.4 billion, 95% of our containers are on long-term leases and the average remaining lease term is currently 3.8 years.

Steve Bishop will now review our financial results.

Stephen Bishop

Thank you, Joseph. I will start with slide number 8, and as you can see in the numbers, we had another strong quarter. This slide compares the results for the second quarter of 2012, to the same quarter of 2011.

Total revenue for the quarter was $49.4 million, which is an increase of $8.7 million, or 21%. This revenue growth was, again, a direct result of our investment in containers. Direct operating expenses were $1.4 million, which is a small increase of $200,000. During the quarter, more containers were returned upon the completion of the lease than in the prior year quarter, and the result was essentially a modest increase in positioning maintenance or repair costs.

Our selling, general and administrative expenses were $6.1 million, which is an increase of $400,000. The increase is primarily due to the merit increases and accrued incentive compensation. Our provision for doubtful accounts was minimal this quarter, as well as in the same period last year. Overall, we continue to have very good collections experience, but as part of being a leasing business over time, we will incur some bad debt. Depreciation expense was $13.2 million, compared to $11 million last year. The increase in depreciation is in line with our increased investment in containers.

Interest expense was $16.8 million, compared to $14.4 million last year. The increase in interest expense is due to additional debt incurred to purchase containers. Adjusted net income was $13.3 million, compared to $10.4 million for the same period last year. This is an increase of $2.9 million and year-over-year increase of 28%. Adjusted EBITDA was $71 million, compared to $60.8 million last year, an increase of $10.2 million and the year-over-year increase of 17%. Again, the increase is attributed to the revenue and cash flow generated by the containers investments we've made during the year.

On slide number 9, I am going to do a quick recap of our financial results for the second quarter of 2012 compared to the first quarter of 2012. Here total revenue is, again, $49.4 million compares to $49 million and the increase of $400,000, or 1%. Direct operating expenses were $1.4 million about the same as the prior quarter.

Selling, general and administrative expenses were $6.1 million, which is the same as the previous quarter. Again, we continue to manage our SG&A cost aggressively even as we invest in our growing fleet of containers. Bad debt expense was $100,000 this quarter, which is less than the previous quarter. Depreciation expense was $13.2 million compared to $12.9 last quarter, an increase of $300,000, again, the investment in containers increased and so does our depreciation expense.

Interest expense was $16.8 million, compared to $16.7 million last quarter a small increase. Adjusted net income was $13.3 million, compared to $12.5 million last quarter and adjusted EBITDA was $71 million, which is modestly higher than the $70.5 million last quarter.

On slide number 10, a few comments about our balance sheet. So on the asset side of the balance sheet, investment in containers increased by $35.1 million during the quarter. As a result of these investments, our total liabilities increased by $34 million primarily due to an increase in payables to acquire containers. At the end of the second quarter, our ratio of net debt to annualized adjusted EBITDA decreased to $4.1 million, which compares favorably to the ratio from the previous quarter.

And then on slide number 11, in regards to our strategy for growth, our year-to-date, we’ve committed to purchase more than $250 million of containers and we’ll continue invest as the year progresses.

In terms of our leasing strategy, we will continue focus on long-term leases and maintaining high utilization. Our asset strategy is invested both reefers and dry containers. We will also invest in container sale-and-leaseback transactions that have good returns and credit quality. Our capital strategy is to raise capital to invest, so we grow our revenue and earnings and cash flows.

All right. In the quarter, we completed $225 million fixed rate secured note financing of 4.21%. And as Joseph mentioned earlier, we increased our container revolving credit facility to $150 million and we extended the term to June of 2015. We will remain focus on growing our container leasing business and or increasing shareholder value.

Then to the slide number 12, we’ve declared a second quarter dividend of $0.29 a share. This is our fifth dividend increase, since our October 2010 IPO, and the dividend paid this quarter was 45% more than the initial dividend we paid after the IPO. Since going public, we’ve declared cumulative dividends of $1.95 per share, we typically payout 40% to 50% of adjusted net income. The average payout since the IPO was 45%.

Joseph and I would now like to open up the conference call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Justin Yagerman with Deutsche Bank.

Justin B. Yagerman – Deutsche Bank Securities, Inc.

Hey, guys, good morning.

Joseph Kwok

Good morning.

Justin B. Yagerman – Deutsche Bank Securities, Inc.

So it looks like you’re on track, but I just wanted to reaffirm CapEx to $400 million, is that doable this year in your mind with where the market is? And I’m assuming the majority of that’s going to come from reefer at least from an incremental standpoint/ When do you expect to start buying and how is the market feeling in that arena right now?

Joseph Kwok

Okay. Thank you, Justin for the question. First of all, based on our current pace investment, we certainly could do $400 million investment by end of this year, of course, whether we do more or less will depend on the investment opportunities. Now, regarding reefers, as you know, that the reefer season is starting from fourth quarter and into a first quarter. We are optimistic that the growth in the reefer business among the carriers. And therefore it’s correct to say that in the second half of investment, we were leaning towards investment into reefers, of course, we will continue to invest in dry containers to meet the demand of our customers in the coming months.

Justin B. Yagerman – Deutsche Bank Securities, Inc.

Okay, all right. Can you talk a bit about how that market feels at current. Obviously, you’re not in the thick of the demand season yet, so and maybe a little bit softer. But we just saw, Textainer report this morning and their revenues were a bit below expectation. I think some of that could be due to lower yields in the reefer market, is that something you’re seeing up there, you’re experiencing, is that prevented you from doing any CapEx as of yet?

Joseph Kwok

Well, the reefer demand has been low, because the season has not set in. So I believe that the return on reefer investment is still attractive. Of course, I say so because looking at the reefer business, first of all, it's a growing business. Secondly, we see that, specialized reefer fleet is shrinking and more of the market share has been picked up by container ship carriers.

Certainly, as you know that in the past, the carriers owned typically about 70% of the reefer fleet and lease the remaining 30%. Given that now, the carriers prefer to lease more than they prefer to own. We see ample opportunity to expand into the reefer leasing business because of the increase in market share, picking up some lag behind by the carriers owning character.

Justin Yagerman – Deutsche Bank

Okay, that’s interesting. In terms of second hand prices, can you talk a little bit about where you are seeing dry and reefer second hand demand right now, when you go to sell used boxes?

Joseph Kwok

Secondary market reefer pricing for driving container has been very stable. And one of the reason is, because the carriers, as I mentioned earlier, are keeping the container in the fleet instead of returning upon expiration. As a result, the supply of used container into the secondary market is quite limited. And I believe that, the pricing for secondary used reefer were remained stable.

Justin Yagerman – Deutsche Bank

Okay. And lastly, Steve, of that unleased CapEx that you guys have an inventory, can you just give us a breakdown between what's dry and what's reefer?

Stephen Bishop

So let's see how to take this. So in terms of the total CapEx of the $250 million, about 3% to 4% of its reefer, 66% is in dry containers, and then the majority of the CapEx to come is essentially reefers.

Justin Yagerman – Deutsche Bank

What's been committed of the 68% reefer versus dry, I mean?

Joseph Kwok

Think about this way. In terms of capital has been delivered, we had a $151 million has been delivered and there's about $98 million to be delivered most of that will be reefer.

Justin Yagerman – Deutsche Bank

Okay, thanks, that’s helpful. I appreciate the time, guys.

Joseph Kwok

No problem

Justin Yagerman – Deutsche Bank

Thank you.

Operator

Your next question comes from the line of Christian Wetherbee with Citi

Christian F Wetherbee – Citigroup Global Markets Inc.

It’s Chris Wetherbee, thanks, guys. I appreciate the time. The question on just a follow-up on that last one, the timing of what’s remaining to be delivered out of the current CapEx, should we think about that is all 3Q, or does some of that leak into the fourth quarter?

Joseph Kwok

Yeah, I think it will, well it’s all going to delivered by the end of September.

Christian F Wetherbee – Citigroup Global Markets Inc.

Yeah.

Stephen Bishop

So, that is, but then when it goes on hire, you really are going to have to think of it really going on hire, it may be a little bit in September and mostly October and November.

Christian F Wetherbee – Citigroup Global Markets Inc.

Okay, okay, that’s helpful. And then just further on the CapEx build as you kind of clean up probably in the neighborhood of $150 million in the back half of the year, I'm guessing, kind of the way to think about from a deployment perspective is pretty backend-weighted, right? And then you guys are probably thinking about fourth quarter, late fourth quarter and potentially going over into the first quarter, right?

Stephen Bishop

Yeah exactly, I would think, when you think about the beyond the $250 million is fully going to be starting in September and then continuing into the fourth quarter.

Christian F Wetherbee – Citigroup Global Markets Inc.

Okay, just kind further coming back to, maybe, the pricing or competitive dynamic within the market as it stands right now, it feels like there has been some competitors coming into the reefer market, I don’t know if you determine it an aggressive market as it stands right now from a pricing dynamic, but is the pendulum shifting a little bit more to favor the dry side as far as the balance to competitive dynamic, or, am I maybe reading too much into that?

Stephen Bishop

I think that it’s more a feasibility.

Christian F Wetherbee – Citigroup Global Markets Inc.

Okay.

Stephen Bishop

So far this year of course, the first half particularly you see more dry containers being ordered and also lease out because of the shipping season. And we expect that reefer season coming in the fourth and first quarter next year, fourth quarter this year and first quarter next year, you'll see more activities. And as I mentioned earlier, we were leaning towards investment into reefers.

Christian F Wetherbee – Citigroup Global Markets Inc.

Okay, okay. And then maybe, my final question just on the sale leaseback opportunities that you mentioned previously, how do we think about the blocks of those? Those typically tend to be a little chunkier I think, than some of the other business. Could you just give us a rough sense of how, what the size of those types of orders or transactions could be?

Joseph Kwok

Sales and leaseback has always been what we have been doing for, since we started this business. And the size of sales and leaseback, you are probably right, that typically they are quite chunky, but we do have some business, some carriers that deal with us on a smaller quantity. I would say yes, they come in typically in terms of the $1 million.

Unidentified Analyst

Okay, great. Well, thank you very much for the time. I appreciate it.

Stephen Bishop

Thanks, Chris.

Operator

Your next question comes from the line of the line of Rick Shane with JPMorgan.

Richard Shane – JPMorgan Securities LLC

Guys thanks for taking my questions. One of the things that you note in your presentation is that new container pricing, manufactured pricing has fallen about 5% from the recent peak. When you look at what is currently on your shelf, which we estimated about $80 million, how much of that is sort of peak price containers? And, do you think that with the pullback in pricing, you'll be able to get the same level of return? Will you be able to pass that through in terms of lease rates given the dynamics in the industry right now?

Joseph Kwok

Yes. The way you think about the capital that's not to be committed is predominantly reefers, and so reefers are still around that $18,000 level. So we don’t really have a lot of exposure to dry containers. So from that perspective, we really don't have that kind of exposure.

Richard Shane – JPMorgan Securities LLC

Okay. And that pricing has been stable. And you guys also noted that the manufacturing lead times were about the same there, so no change in that market?

Joseph Kwok

Yeah, that’s correct.

Richard Shane – JPMorgan Securities LLC

Okay, great. That's it for me. Thank you, guys.

Joseph Kwok

Yeah

Operator

Your next question comes from the line of Sal Vitale with Sterne Agee.

Sal Vitale – Sterne, Agee & Leach, Inc.

Good morning, gentlemen.

Joseph Kwok

Good morning, Sal.

Sal Vitale – Sterne, Agee & Leach, Inc.

Just a quick clarification, if I look back at the last quarters earnings report, you had $240 million, you had committed to purchase $240 million of equipment of which 64% had been committed to long-term lease. And now, in this quarter, you're saying $250 million of which 68% has been committed.

I guess, two questions there. One, is it that you've been holding back on investing in, say, dry containers, because you know that you're going to be investing in reefers at the end of the year? And then the second question is, I would have thought that the percentage committed would have risen a little bit more than that, but I guess it could be because a lot of what's uncommitted is reefer, and that gets committed to later in the year. Is that the right way to think about it?

Stephen Bishop

I'll do the easy one first. The answer to the percentage is really, it's predominantly reefers and as those come in, call it August and September, they then go on hire. So that's part of, you're dead on for that one.

Sal Vitale – Sterne, Agee & Leach, Inc.

Okay.

Stephen Bishop

Joseph, do you want to…

Joseph Kwok

Yeah. I probably would like to clarify some misunderstanding. First of all, we always announce investment year-to-date. So in May, we announced our investment year-to-date at a time was about $240 million, of which we include April and early May orders, which were substantially reefers for delivery from August to September. As you know, the production line time for reefers is about 16 to 18 weeks. That's why we mentioned that we are taking delivery of reefer in August and September.

This other equipment we ordered in early part of the second quarter. Now, your question regarding holding back on dry containers ordering, I think first of all, we don't really take a huge position in speculated ordering of dry containers, particularly in a rising market. And that's the reason why in the second quarter you'll see that we actually keep a minimum quantity of uncommitted dry containers. And we definitely very positive about the reefer season, and we will look at the investment in reefer very positively.

Sal Vitale – Sterne, Agee & Leach, Inc.

Okay, thank you. And then just follow-up question on that is, of the $250 million to-date, is that all new container orders, or are there some purchase leaseback, or other type of transactions included in there?

Stephen Bishop

Yeah, I mean when we talk about CapEx we as well as our primary competitors always include the sale leaseback transactions.

Sal Vitale – Sterne, Agee & Leach, Inc.

Okay. Could you give us, I know you don’t want to be too specific in any ballpark sense of how much that could be?

Stephen Bishop

No, it's really competitive, so we really don't disclose the amount of sale leasebacks.

Sal Vitale – Sterne, Agee & Leach, Inc.

Okay. And then in the second half, you’re also, I assume just want to look at for those types of deals?

Stephen Bishop

Yeah, I think as Joseph mentioned earlier, there are a lot of good opportunities within sale leaseback transactions that could be $10 million transaction, $25 million transactions are even more.

Sal Vitale – Sterne, Agee & Leach, Inc.

Okay. So if you get the opportunities coming your way, what is the maximum amount you think you could do between now and year-end?

Joseph Kwok

If we keep on current pace of investment, there was a question asked earlier by Justin.

Sal Vitale – Sterne, Agee & Leach, Inc.

Yeah.

Joseph Kwok

He mentioned about $5 million and my respond to that is that given our current pace of investment, yes, we could reach there Of course, as I say that eventually whether we invest more or less than $400 million, it depends on the market opportunities.

Sal Vitale – Sterne, Agee & Leach, Inc.

Okay, that’s helpful. Thank you very much.

Operator

(Operator Instructions) Your next question comes from the line of Michael Webber with Wells Fargo.

Michael J. Webber – Wells Fargo Advisors LLC

Good morning, guys, how are you?

Stephen Bishop

Good, Michael.

Michael J. Webber – Wells Fargo Advisors LLC

Hey, most of my questions have already been answered. But just in terms of the incremental CapEx during the quarter, so that the $250 a portion of which is going to be new capacity, have you guys given a breakdown in terms of what’s DFL versus op-leases?

Stephen Bishop

Of the $250 million, as you said 68% is the non-GAAP, so the split is between operating leases about $86 million and direct finance leases about $84 million, it’s pretty close to 50\50.

Michael J. Webber – Wells Fargo Advisors LLC

Right, all right, that’s helpful. And then I guess from a macro perspective and this has already been kind of parsed over. But, if we just take look at the way reefers season is shaping up this year, can you just kind of simply overlay that to what we saw last year in terms of you’ve had some more aggressive competitors last year. It seem like that that pre-buy started a bit earlier. Can you just kind of in a high-level perspective, it’s kind of lay over this year versus what we saw last year?

Joseph Kwok

I believe that it’s quite similar pattern from last year, and there will be new entries into this business by our competitors. But I think overall, the seasonal factors pattern is going to remain same as in the last year.

Michael J. Webber – Wells Fargo Advisors LLC

Okay, that’s helpful. And then obviously, we’re hearing this from your competitors as well but that split between box lessors and container lines, is it actually widens closer to 65%, 70%. In terms of who you are seeing coming in and purchasing containers from a liner perspective, is it still just basically Maersk, or is there anyone else is really kind of stepping up and acquiring containers? Can you give me a little bit of color in terms of what you’re seeing there?

Joseph Kwok

Maersk is a big buyer of their own containers. The rest of the carriers generally prefer at this time of their business cycle to lease rather than buy. We don’t see a lot of carriers except for Maersk Line out there buying their own containers.

Michael J. Webber – Wells Fargo Advisors LLC

Gotcha. All right, that’s helpful. Thanks for the time, guys.

Stephen Bishop

No, problem. Thanks, Michael.

Operator

There are no further questions at this time. I hand the program back over to you management for further comments or closing remarks.

Joseph Kwok

Thank you very much for your interest in SeaCube and we look forward to updating you about our results and company performance during the next earnings conference call.

Stephen Bishop

Thank you, thanks.

Operator

This does conclude today’s conference call. You may now disconnect.

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