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Executives

Steve Bishop - COO & CFO, SeaCube Container Leasing Ltd

Hilliard Terry - EVP & CFO, Textainer Group Holdings Limited

Analysts

Textainer Group Holdings Limited (TGH) Deutsche Bank 2012 Aviation and Transportation Conference Call September 6, 2012 2:45 PM ET

Unidentified Analyst

Alright. Well without further adieu, we're going to move on to our container panel here and I see we’re moving on to the shipping side of the program and this is a smooth transition. Yes we are not into tankers or dry bulk yet. We’re on the transportation and of the shipping world here with the container leasing guys and are very pleased to introduce the CFOs of both SeaCube and Textainer, we have Steve Bishop who we will hear from first and then you will hear Terry following him. Thank you.

Steve Bishop

Thanks [Jess] and I am going to keep my remarks short because I want to keep a panel discussion going on here. So I've just got a couple of slides. Obviously, we always do the forward-looking statements. So I ask you to read this at your leisure and use your cautionary statements.

In terms of SeaCube the company, we’re one of the world’s largest container leasing companies, total fleet of almost 600,000 containers, this is both reefers, dry containers and gensets. We’re also one of the largest lessors of refrigerated containers with about 20% global market share. 95% of our containers are with long-term leases and our average remaining lease term is 33.8 years, $1.4 billion net book value.

Currently we’ve got 43% of our portfolio in reefers, 55% in dry containers and a small 2% in generator sets. In terms of the investment highlights of SeaCube, you know, I won't go in to each one of these points, but we look at our portfolio and your investment in SeaCube is having high return, low risk assets, strong market fundamentals, a global container fleet. The growth has been about 8.8% over the last 30 years, significant growth potential. Our balance sheet allows us to continue to invest in containers and these container investments then drive revenue earnings and cash flow growth.

The management team has been together quite a period of time all focused on this business and a very good track record and a customer relationships there are no differentiator when you think about SeaCube.

In terms of the – just a couple of commentaries on the industry background. Obviously container shipping, it is important part of the global economy, $200 billion in annual revenue, the global fleet of containers right now is about 32 million TEUs. The container lessors are important part of that fleet owning about 45%. The trend recently has been to significantly hire as the shipping companies look to companies like SeaCube and Textainer for a significant portion of their acquisition of containers.

So I think we saw last year roughly 65% of all containers came from container leasing companies. This year probably absent Maersk, the largest some that saw the containers there being produced, have been produced by four container leasing companies. So it continues to be at that 65% plus range. Again the 30 years we've had continued growth at 8.8% and right now as we look at the end of this year we are probably at about 33 million TEUs at the end of the year.

Supply demand factors, I think there is a lot of discussion I think about the shipping lines and to the first bullet under the demand side, I think gets a lot of the attention, deserves a lot of attention. We continue to tweak this. There are a couple of things that I think that we loose sight of is that you know 2011 freight rates were very, very low. 2012 the industry and particularly beginning of the year got general rate increases.

So when you look at the first six months of 2011 versus the first six months of 2012, the freight rates are actually 20% higher all in. What you do see lately is some deterioration, some of that trading back. At the same time the leader in the industry Maersk has again announced another general rate increase.

So I think when we look at the overall industry we're going to see better freight rates in 2012 than in 2011 and we did see that in the second quarter numbers for all the shipping companies, they had better numbers in the second quarter than the first quarter. I think we will see decent numbers from them in the third quarter.

Fuel continues to bounce around, it looks like there was a trend where lower bunker fuel was going to help them. I think it’s probably going to be a net net neutral. The other thing that you lose some times of the ship side of it is the fact that the shipping companies have been focused on cost reduction in all of 2011 continuing in 2012.

So they in general have taken out a fairly significant amount of cost out of their structure. We certainly like our customers to do well, but at the same time being in the business of lending them capital, we also want them to borrow money from us. And so we really are focused more on them have enough money to pay us, but not so much money that they don’t need us.

And the last bullet here is can the shipping companies can they rely on us and we think that’s going to continue to be a trend. The manufacturing on the supply side, the important thing to know about the supply side is the manufacturers only build to demand. So there is not a lot of speculative inventory overhang and in fact to some degree the manufacturers will produce in a tight demand market because it helps their pricing.

So that helps us, it is one of the reasons our utilization than others in the industry are in that 97% to 98% range. This industry does have two seasons, the dry container season essentially is over. So now you are going to see the demand cycle for dry containers to be tighter, so about six weeks and we are now entering the reefer season and as such the delivery times for refeers expands, it’s now 12 to 16 weeks.

Committed landscape, you can see here SeaCube is about 8% of the total market. On the refrigerator side, we are about 20%, six largest lessor of dry refrigerator containers with 8% market share. It is a concentrated industry, the top 20 customers represent 85% of total capacity. We do business with all the top 20, on this sheet about represents about 76% of our revenue.

A couple of quick comments on our strategy, on the asset side we continue to focus on reefers, we like reefers because of the growing trade in perishable foods. Reefers provide great stability and underlying trade, equivalent pricing and lease rates. You can see that we are currently 43% of our portfolio. So we are somewhat overweighted when the worldwide fleet is about 23%.

On the leasing side, we continue to focus on essentially long-term leases. You can see that our long-term operating leases are 46%, our finance leases are 49%, put it together. It is about 95% of our actual long-term leases and the remaining lease term as I said earlier it was 3.8 years. About $1.3 billion of our cash flow is contractual from these owned assets and you see that we tailor our lease strategy to fit the asset types.

So we tend to put a higher percentage of our dry containers on direct financed leases and we don’t really care whether we have operating leases or reefers on operating leases or finance leases. The takeaway slide from those two strategy points is that you can see our utilization in good times, that continues to be very, very high. In 2009 it was above 95% and the industry you know it dropped about 85%.

For us what happened there is essentially the strong demand for reefer assets continued through 2009 because people continued to eat and predominantly we just see refrigerated assets, fresh food and produce and so that continued to have demand characteristics and dry containers which are typically on long-term leases or direct finance leases, essentially will continue to stay on those leases because of contractual obligation.

We also focus on continuing to have a high percentage of our leases renewed and see here that our current percentage is about 86%, even 2009 it was about 80%.

Management team has been together quite a period of time, just as our CEO who has been with the company six years, 20 years in the industry, have been into [transition] logistics almost 15 years, semi-background. Lisa David, Robert, John (inaudible) and Brian (inaudible) have been in the industry 20 years to 30 years and most of them have with the company more than 10.

Our growth opportunities, we continue to really focused on containers and investing in containers. It's a primary growth opportunity. In 2010, we invested $230 million, 2011 we invested $561 million, which is more than double than 2010. So far this year, we’ve committed to purchase $250 million. We said previously in some public commentaries, we're on track to do probably $400 million for the year.

Basically, these results demonstrate that the investments lead significant growth in revenue, earnings and cash flow and we will continue to remain focused on growing the business increasing shareholder value, and then you can see the concluding remarks and with that, I'll pass on to Terry.

Hilliard Terry

Thank you. So, I will start with forward-looking statements as well. May make some forward-looking statements. Please take a look at our SEC filings for a complete picture of all the factors that can impact our results. What I will attempt to do, Steven thank you because you covered some of the industry stuff. So it makes it easier for me. I will fly through these slides, but we were established back in 1975. Textainer is the world’s largest container lessor with 2.6 million TEU or 20 foot equivalent units within our fleet.

There are basically three revenue lines, we lease containers, we also manage containers for third parties as well as we make markets in used containers. We also own and manage through the four life cycle which I will try to talk about that in a little bit. 80% of our fleets is on subject to long-term leases. We've been profitable for 26 years and we either paid a stable or increasing dividend for 23 years and we've been listed on NYSC since 2007.

So something that I just want to emphasis and I think you covered this a bit and I will just describe it is this. The question comes out why do shipping lines lease from container companies as opposed to owning companies? So I think this slide sort of gives you a sense of some other reasons why but I want to hold on one and that is really around just the fact that there is been a secular shift and I think you spoke about this as well, in terms of shipping lines over basically relying on container leasing companies more so these days. I think a lot of it has to do with the fact that the capital expenditures that they do make, they want to focus those on sort of more efficient operations, buying more efficient vessels and things of that sort as opposed to buying containers.

And part of it has to do with the fact that many of them are financed by European banks so there has been somewhat of a contraction there and so the capital resource as stated that they have to deploy I think its more precious these days. And so there has been a secular shift. We don't think there will be a reversion and I think that goes well for leasing companies across the board.

The next slide sort of talks to what I like to describe is a dichotomy between sort of leasing companies and shipping lines. I think often times when people talk about container leasing the headlines that people note are what’s going on with our customers.

And frankly, because of the very different if you will supply and demand set of dynamics for us we can’t order containers more than two, three months out. So we are never going to get too far ahead of ourselves in terms of supply, so if the market changes we are able to adjust relatively quickly.

If you contrast that with our customers, if shipping line orders for new vessel, it’s going to take years for that vessel to be build and commissioned and so a lot of things can happen with respect to bunker prices with regard to freight rates and things of that sort.

And this slide simply depicts the operating margins of container leasing companies versus shipping lines and I think the major point here as you can see, leasing companies are much more stable because of the long-term nature of our contracts and (inaudible) versus our customers where it’s a bit more volatile.

In terms of Textainer’s fleet, as I said we have 2.6 million TEU. This slide shows you how much is owned versus managed roughly about 60% of our fleet is owned, 40% is managed and additionally we have been growing our [refer] fleet back in 2008 we sort of if you will started entering this market and I think we have been one of the top buyers in terms of refrigerated containers over the past couple of years as we have been growing that portion of our fleet.

What’s interesting though here is that if you look at our own fleet you will see that it’s been growing by a factor of three versus our managed fleet by a factor of two.

We do like managing containers, but we obviously make more, it’s more profitable for us to own containers and if you look at the emphasis going forward, it will be on growing our own portion of our fleet.

The next slide just simply shows you our fleet by container type roughly about to-date 8% of our fleet is refrigerated containers, the balance is sort of is dry freight containers. What I will say is our focus is really on having diversified fleet, given our size what we want to do is have a fleet best indicative of just the overall container market and so we are continue to grow, we can reach a portion of our fleet but often times people ask well how big will it get, will it ever be 50%? I don’t think it will be 50% but it could be something that could be indicative of some of the numbers that Steve had showed in terms of roughly about 20% of overall fleet which would be indicative of the market.

This slide shows where we are located around the world. We do have a global footprint. I think what is also interesting is the overlay if you look at where are operating leases are generated from roughly about 56% in Asia Pacific, 32% in Europe, 8% in America and 4% in Europe and Middle East and Africa. So we have a global footprint and as you can see fairly diversified but heavily weighted towards Asia Pacific for obvious reasons given that’s where a lot of the growth and trade routes are and for Asia.

In terms of just looking at the life cycle of a marine container, roughly this represents about anywhere from 12 years to 14 years and what is important here is to understand that this is an operating business. So it’s not just about sort of leasing that initial container out on the first long-term lease, which represents about 55% of the returns but it's also being able to re-lease the containers out through the mid-life which represents about 30% of the return and then also being able to, as I said, make markets and use containers.

Need not only sell our containers in to the disposal market but we will buy containers from our competitors as well and also sell those. So we have a dedicated group of people that's focused on container sales, end of life sales and what this does for us is it also helps us understand sort of where we can generate the best if you will, residuals around the world and that might not necessarily be where you'd want containers to be when you're looking to lease them out for bringing service.

Something, that's also important to mention is that there has been a shift in terms of just the industry. If you look back in 2000 and this is not exclusive to Textainer. I think this is indicative for SeaCube as well. You'll see that back in 2000, majority of the leases were short-term leases. What's happened is as we've moved to the current state, roughly about 75% of the leases are long-term leases and what this has done is if you look at the average utilization rates for Textainer, you'll see that it's dampen the volatility of our utilization rates. So if I take two points here, if I look at 2009 and look at 2001, 2009 was a much, much worse downturn than 2001 but as you can see the impact was much less and that's just the function of the long-term nature of the leases and the large percentage of long-term leases in our fleet.

I will skip this slide. I think our slides are similar but we do have a diversified customer base and in terms of future growth opportunities, it's several fold. We are focused on increasing the percentage of own containers and really aggressively growing our own fleet. We are continuing to expand in the refrigerator container market.

As well as when we look sort of inorganically we're always looking for acquisition on competitors or container fleet looking at purchase lease back that we'll be where our customers would sell their container fleets to us and then lease it back to -- we would lease it back to them. As well as the fact that we have a group of third party owners that we manage containers for we also look to buy container from that group of customer as well. And then we will continue to be very active on the container trading side.

From the standpoint of our financial picture this business is very sort of stable basis if you will we and that just a function of the percentage of our fleet that subject to long-term leases. The average remaining life in terms of leases in our fleet it says 41 months but in reality because of the return requirements and what have you, when we lease the container out for the initial long term lease for let's five years, it actually stays out on lease, for anywhere from six to maybe almost seven years because it takes shipping lines a while to return containers.

As I stated before we have diverse revenues stream between owning, managing and lease resell. We have excellent liquidity we have a $1.2 billion warehouse facility we've been very active in the ABS markets as well. If you look at our debt equity ratios I think it's some of the lowest in the industry, so there's a considerable fire power if you will from that standpoint. Just looking at the snapshot of our financials, if you look at revenue I think from 2009 through 2012 there is a 28% CAGR there on adjusted net income it was a 34% CAGR over the same time period. And in addition to that although I don't have a slide for this if you look at sort of our cost structure given the size of our assets I think we have the lowest cost structure in the industry.

We have a very strong balance sheet, thing that I will point out here, it's the fact that the growth in our income earning assets as of 630 year-over-year is approximately 28%. And also we've continued to pay a very attractive dividend.

Dividends have averaged about 43% of adjusted net income, we have a policy of paying anywhere from 40% to 50% of adjusted net income, the board takes a fresh look at that every quarter I think, it's really more of a balancing act between making sure that we provide a good return to our owners but also have enough capital to invest in the growth of our business.

So in closing just wanted to just highlight I think we offer some great prospective in terms of just the overall stability of our revenues. The business model in terms of owning and managing containers and what this has sort of manifested itself in just a good organic growth rate, great dividend yield and accretive acquisitions when we do make them. If you look at our actual return on equity I think most recently it was about 26% but if you look at the return on equity that we provided it has been around 23% since we've been public. So if you care that type of return to many other asset classes I think it's pretty good.

Thank you very much.

Question-and-Answer Session

Unidentified Analyst

Great thank you, Hilliard. Thank you, Steve. I'll kick it off with couple of questions and then open it up to the audience first one is a little nerdy when I've got CFOs here. So you got one company heavy on DSOs direct finance leases one company 4% of your book. What do you guys think obviously, SeaCube in favor of them Textainer doesn't like it much. Maybe if you could talk about the merits and Hilliard you can talk about have why you guys avoid them a little bit?

Steve Bishop

So okay, I'll go first. So, I mean, we like direct finance leases, it's predictable cash flow, and we've been getting good returns on investments. And it allows us to provide very stable cash flow for investors and then essentially gives us cash to make very predictable dividend and earnings projections.

Hilliard Terry

I wouldn't say we don't like them, we actually do have a joint venture with financial institutions that we do use that as a conduit to do a lot of our finance leases. So we're very active but I think sort of where we bring sort of real power to the table is the fact that we are an operating company that's the management of the containers that we focus on.

Unidentified Analyst

Just something on my mind on the current CapEx cycle, we are in the midst there of going into refrigerated season here, how is that shaping up from a yield perspective and demand perspective, as you're going out and finishing up your capital budgets for the rest of the year?

Steve Bishop

Yeah, that's still a little bit early, I mean, the way the seasons work we finish our dry container season, in kind of June and July, and we start talking to customer, now and in September. I think we're seeing transactions about what we would expect to see we expect rates to be about what we expect to see, but it's still a lower just to have a strong read on the of market.

Hilliard Terry

So this year we've invested in last quarter we reported about $760 million of CapEx. Roughly if I look back at about 25% of that has been going into the reefer fleet as we've been growing our fleet. I would say that I think the business is competitive. I agree with Steve. Jury is still out as to how things will sort of manifest through the remainder of the year but we've been very active in that area.

Unidentified Analyst

Steve, you kind of gave, kind of a rough timeframe for how lease seasons breakdown between the two kinds of boxes. So we’ve now transitioned basically out of the primary part of the year, where drive being in demand. Do you guys either of you have any hangover in terms of the CapEx that you did deploy in the first half of the year from an uncommitted [box] standpoint and you know, are those victims of an economy that’s slowing down are were you able to successfully lease out everything that you wanted to get done in the first half of the year?

Steve Bishop

Yeah, I think we tend to be pretty judicious in terms of our capital deployments and so as we kind of finished the second and third quarters, we got a very little dry container inventory carrier.

Hilliard Terry

I would say, ours' is similar. You know, we do like to keep a little bit of inventory just sort of that we can have it at hand, just given our size and what have you but I wouldn’t say that much out of the ordinary.

Unidentified Analyst

Okay, I think both of you guys alluded to say a lease back opportunities. Obviously, it's been well publicized for liners have gone through it. At least some of it has (inaudible) since past few years. There been, both you guys have take advantage of. Are there still a considerable amount of container portions that these guys are willing to offload here?

Hilliard Terry

Yeah, it was interesting because I think at the beginning of the year, it was a slow start. So we were wondering why aren’t there more opportunities. I think that’s clearly picked up. I think on the flip side, also it's gotten clearly more competitive as well. But we continue to participate, we've been beneficiaries of some opportunities and we have a very disciplined approach and we are not going to sacrifice or returns or anything of that sort when its comes to different opportunities, but I think as the dry container market has sort of [lined] a bit. I think there has been more focused on the purchase lease side.

Steve Bishop

Yeah I think I’ll echo with what Hilly said I think you sale lease back to be a little bit lumping, you know, they kind of come and they go and suddenly stop. There does seem to be a little bit trend to see them in the third and fourth quarters as the shipping companies go through their capital planning process and start thinking about the next year and may be next to $50 million and say maybe I'll take this portfolio container and look it see if we can finance.

Unidentified Analyst

Any question from the audience. There is one up in the front.

Unidentified Analyst

The slide that shows the margin to the customers versus your margin is very interesting; there [can] be too many industries where the spread is quite that wide. Can you think about the capacity rationalization that the container are attempting to achieve and obviously its skeptical but has success, but nonetheless, what do you see in terms of their ability to negotiate rates with you that are perhaps a little bit competitive from their standpoint, recognizing your desires to improve their margins and how much margin you are achieving currently in the economics of the business?

Steve Bishop

I think what's interesting about this is while the shipping companies are still challenges to some degree, we really have a lot of conversations with them about rates because their incremental cost of capital is pretty high and I think what's really setting wages a bit of dynamics between you know leasing companies. So it's not so much of the shipping companies driving pricing it's the competitive dynamics of capital providers, [it's their fault]. And then as a group I think we're actually pretty disciplined investors.

Hilliard Terry

I agree with that and the only thing I was going to add is I think when you look at sort of the cost structure of the shipping lines honestly the container pieces are very small part of that. I think what's been going in terms of bunker prices they've been able to maintain some general rate increases, earlier in the year which has been kind of a positive, but those things are the things that really moves the needle and that's why when I focused on the fact that their deployment of CapEx is on things that will help them improve that operating efficiency versus containers which is a really small piece of the pie.

Unidentified Analyst

The same question is that the disposable market you mentioned is about 15% of the return and what life of container, where is pricing of the disposable market, it strike me that if I'm a shipping company and the second hand market is pretty strong, I'm perhaps much inclined to lease because I can plough the returns from selling my containers back and then buying new containers. So is the correlation between demand and the leasing side and pricing in the disposable market.

Steve Bishop

There's a lot of questions there, let me say this I would say disposable prices have remained sort of pretty solid. Part of that is that shipping lines have been holding on to containers much longer than normal. And so there isn't sort of this flood of containers or actually if you look at that percentage of containers that are typically retired each year, I think it averages somewhere around 5% I think that number has been close from 3% as of late. So and then you have new container prices that have been peaking although they have come down and all of those factors kind of play into I think the thought process of shipping line.

So it's not – I think the idea would be maybe we'll hold on to containers a little longer as opposed on invest in containers because we're able to get the cash. I think they'll redeploy that cash into other areas.

Yeah, and just one last comment on it, so if you just think about a used container 30% to 40% of a new container. So I've got $100, I get $30 for new container, I've got to go spend $100 to get a new – I'm sorry I've got $3 from sale of container not going to spend $100 to get a new container, the numbers they've assumed, what they've actually been doing is holding on to the containers longer and they did that in 2010 because they had to meet more demand for containers than they could find, 2011 they just were just capital constrained, 2000 so I actually think there's pent-up demand, the normal attrition rate should be as Hilliard said 5%, it's been 2% or 3% so they can only do that for so long.

Hilliard Terry

And then just the last point I'll add is that if you look at overall utilization rates I think we both mentioned that they're at historically high level. So that is another point to talk to the factors in the market still pretty tight for containers.

Unidentified Analyst

All right with that we're out of time so thanks so much.

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