SeaCube Container Leasing Ltd. (NYSE:BOX-OLD)
Deutsche Bank Aviation and Transportation Conference
September 6, 2012 2:45 PM ET
Stephen Bishop – CFO
Hilliard Terry – Textainer, CFO
All right. Well without further ado, we’re going to move on to our container panel here. So we’re moving on to the shipping side of the program. And this smooth transition – we’re not into tankers or dry bulk yet. We’re on the transportation end of the shipping world here with the container leasing guys.
And I’m very pleased to introduce the CFOs of both SeaCube and Textainer, we have Steve Bishop who we’ll hear from first and then Hilliard Terry following him. Thank you.
Thanks Jess [ph] and I’m going to keep my remark short because we 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’d 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 company, a total fleet of almost 600,000 containers that both – we produce dry containers and gen set, and we’re also one of the largest lessors of refrigerated containers with about 20% global market share.
95% of our containers are on long term leases and average in main lease term is 3.8 years. $1.4 billion net book value, currently we’ve got 43% of our portfolio in reefers, 55% in dry containers and as well 2% in generator sets.
In terms of the investment highlights of SeaCube, I won’t go into each one of these points, but if you look at our portfolio and your investment in SeaCube is that have been high return, low risk assets, strong market fundamentals, our container – global container fleet 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. The management team has been together quite a period of time all focused on this business and very good track record and our customer relationships are another differentiator when you think about SeaCube.
In terms of – just a couple of commentaries on the industry background. Obviously container shipping 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 a significantly higher as the shipping companies look to companies like SeaCube and Textainer for a significant portion of their acquisition of containers. And so I think we saw last year, roughly 65% of all containers came from container leasing companies, this year, probably absent, Myers is the largest, almost all the containers that are being produced, are being produced by four container leasing companies. So containers will be at that 65% plus range.
Again, for 30 years, we’ve had continued growth at 8.8%. And right now, as we look at the end of this year, we’re probably about 33 million TEUs at the end of the year. Supply demand factors, I think there’s a lot of discussion, I think, about the shipping lines. And so the first bullet under the demand side, I think gets a lot of attention and it deserves a lot of attention.
We continue to tweak this. There’s a couple of things I think that we lose sight of, is that 2011, the freight rates were very, very low. 2012, the industry particularly the 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 12% – are 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 Myers, again announcing 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 then the first quarter. I think we’ll see decent numbers from that in the third quarter.
Fuel continues to bounce around. It looks like there’s a trend where lower bunker fuel is going to help them. I think it’s probably going to be net-net neutral. The other thing that you lose – sometimes you lose sight of, is the fact that the shipping companies have been focused on cost reduction in all of 2011 continuing 2012.
So they in general, have taken out a fairly significant amount of cost on 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.
On the last bullet here is Canadian shipping companies can rely on us and we think that’s going to continue to be a trend. On the manufacturing, on the supply side, the important thing to know about the supply side is that manufacturers only build to demands. So there’s not a lot of speculative inventory overhang. And in fact, to some degree, the manufacturers will produce the, in a tight demand market because it helps their pricings.
So that helps us. It’s one of the reasons our utilization and others in the industry are at 97% and 98% rate.
This industry does have both two seasons. The dry container season essentially is over, so now you’re going to see the demand cycle for dry containers to be tighter, so about six weeks and we’re now entering the reaper season. And as such the delivery times for reefers expands. That’s now 12 to 16 reefers.
[Inaudible] landscape you see here, SeaCube is about 8% of the total market. On the refrigerator side, we’re about 20%. Six largest [inaudible] and the refrigerated containers would be 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 who were on the sheets, represents about 76% of our revenue.
To cover the quick comments on our strategy on the asset side. We need to focus on reefers, we like reefers because of the growing trade in perishable foods. Reefers provide great stability in underlying trade, equal in pricing and lease rates. You can see that we’re currently 43% of our portfolio, so we’re somewhat overweighed when the world wide 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’s about 95% of our assets and long term leases and the remaining lease term as I said earlier was 3.8 years. About 1.3 billion of our cash flow is contractual from these owned assets and you see the retailer or at least that strategy to fit the assets types. So we intend to put a higher percentage of our dry containers on direct finance leases. And we don’t really care whether we have operating lease – if our reefers is on opening leases or direct finance leases.
The takeaway slide from those two strategy points is that you should see our utilization in good times or bad continues to be very, very high. In 2009, it was above 95% in the industry. It dropped about 85% for us. What happened there is essentially the strong demand for reefer assets continued through to 2009 because people continued to eat and predominantly, you’re seeing refrigerated assets, fresh fruit and produce, and so that continued to have good demand characteristics. And dry containers, which are typically on long term leases or direct finance leases essentially continue to stay on those leases because it was contractual obligation.
We also focused on continuing to have a percentage of our leases renewed. And you see here that our current percentage is about 86% even 2009 is above 80%.
The management team has been together quite a period of time. Joseph is our CEO. He’s been with the company in six years, 20 years in the industry, having to do transition [ph] logistics almost 15 years. You see my background. Lisa, David, Robert, John Colabello and Brian Fitzgerald have been in the industry 20 to 30 years and most have been with the company more than 10.
Our growth opportunities, we continue to really focus on containers and investing in containers as our primary growth opportunity. In 2010, we invested $230 million. In 2011, we invested $561 million which has more than doubled the 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 around $400 million for the year.
Basically, these results demonstrate that the investments with the significant growth in revenue, earnings and cash flow, and we will continue to remain focused on growing business and increasing shareholder value.
And then you can see the concluding remarks, and with that I will pass it on to Hilliard.
Thank you. So I will start with forward-looking statements as well. I 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 – Stephen, thank you because you covered some of the industry stuff so it makes it easier for me. I’ll slide through these slides. But we were established back in 1975. Textainer is the world’s largest container lessor with 2.6 million TEU of 20-foot equivalent units either – within our fleet. There are basically three revenue lines. Lease containers, we also manage containers with third parties as well as we make markets and use containers.
We also own and manage through the full life cycle which I’ll kind of talk about that in a little bit. 80% of our fleet is subject to long term leases. We’ve been profitable for 26 years, and maybe they’re paid a stable or increasing dividend for 23 years. And we’ve been listed on the NYSE since 2007.
So something that I just wanted to emphasize, and I think you covered this a bit, and I’ll just describe it as this. The question comes up, why do the shipping lines lease from container companies as opposed to owning companies?
And I think this slide sort of gives you a sense of some of the reason why, but I want to hone in on one. And that is really around just the fact that there’s been a secular shift, and I think you spoke to this as well in terms of shipping lines are 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, buy 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, there’s been somewhat of a contraction there. And so the capital resources that they have to deploy, I think is more precious these days. And so there’s been a secular shift. We don’t think there’ll be a reversion. And I think that bodes well for leasing companies across the board.
The next sort of talks to what I like to describe as 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 up dynamics, for us, we can’t order containers more than two, three months out. So we’re never going to get too far ahead of ourselves in terms of supply. So if the market changes, we’re able to adjust relatively quickly.
If you contrast that will our customers, if a shipping line orders a new vessel, it’s going to take years for that vessel to be built and commissioned. And so a lot of things can happen with respect to bunker prices reflect to – 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 what have you 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’ve been growing our reefer fleet. Back in 2008, we sort of, if you will, started entering this market, and I think we’ve been one of the top buyers in terms of refrigerated containers over the past couple of years as we’ve been growing that portion of our fleet.
What’s interesting though here, is that if you look at our own fleet, you’ll 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, if more profitable for us to win containers. And so if you look at the emphasis going forward, it will be on growing our own portion of our fleet.
Next slide just simply shows you our fleet by container type, roughly about, today, 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 a diversified fleet.
Given our size, what we want to do is have a fleet that’s indicative of just the overall container market and sort of – we’re going to continue to grow the reefer portion of our fleet, but often times, people will ask, well how big will it get? Will it ever be 50%. I don’t think it’ll be 50% but it could be something. That would be indicative of some of the numbers that Stephen showed in terms of roughly about 20% of our overall fleet, which would be indicative of the market.
This slide shows where we’re located around the world. We do have global footprint. I think what’s also interesting is to overlay. If you look at the – where our operating leases are generated from, roughly about 56% in Asia-Pacific, 32% in Europe, 8% in the Americas and 4% in 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 that’s where a lot of the growth and trade routes are into Asia and what have you.
In terms of just looking at the life cycle of a marine container, roughly, this represents about anywhere from 12 to 14 years. And what’s important here to understand that this is an operating business. So it’s not just about sort of leasing that initial container out on a first long term lease, which represents about 55% of the returns, but it’s also being able to release the containers out through the midlife which represents about 30% of the return. And then also, being able to, as I said, make markets on used containers. We not only sell our containers into 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 it might not be 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’s 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 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 dampened 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 on 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 owned containers and really aggressively growing our own fleet.
We are continuing to expand in the refrigerated container market as well as when we look sort of inorganically, we’re always looking for acquisitions on competitors or a container fleet, looking at purchase leasebacks. That will be where our customers would sell their container fleets to us and then lease it back – 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 containers from that group of customers 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 business if you will, and that’s just the function of the percentage of our fleet that’s subject to long term leases. The average remaining life in terms of leases on our fleet, it says 41 months but in reality, because of the return requirements and what have you, when we lease a container out for the initial long term lease for let’s say 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 a diverse revenue stream between owning, managing and resale. We have excellent liquidity, we have $1.2 billion warehouse facility, we’ve been very active in the ABS markets as well. If you look at our debt to equity ratios, I think it’s one of the lowest in the industry. So there’s considerable firepower if you will from that standpoint.
Just looking in the snapshot of our financials, if you look at revenue, I think from 2009 to 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. The thing that I’ll point out here is the fact that the growth in our income earning assets as of 6:30 year over year, is approximately 28%.
And also, we continue 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 want to highlight. I think we offer some great perspectives in terms of just the overall stability of our revenues. The business model in terms of owning and managing containers, and what this is sort of manifested itself in, is just a good organic growth rate, a 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 compare that type of return to many other asset classes, I think it’s pretty good. Thank you very much.
Great. Thank you, Hilliard, thank you Steve. I’ll kick it off with a couple of questions and then open it up to the audience. First one is the one – well I’ve got two CFOs here, so you got one company heavy on DFLs, direct finance leases, one company, 4% of your book. What do you guys think? Obviously SeaCube in favor of them, Textainer doesn’t like them much. Maybe if you could talk about the merits, and Hilliard, you could talk about why you guys avoid them, a little bit.
Okay, I’ll go first. So I mean we like direct finance leases, it’s predictable cash flow, we’ve been getting good returns on investments, 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.
I wouldn’t say we don’t like them, we actually do have a joint venture with financial institution that we do use that as the 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. It’s the management of the containers that we focus on.
Something on my mind. On the current CapEx cycle, we’re in the – or 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?
Yes, it’s still a little bit early. I mean the way the way the seasons work, we finish our dry container season kind of June and July and start talking to customers 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 a little early to just have a strong read on the market.
So this year, we’ve invested – the last quarter we reported about 760 million of CapEx. Roughly if I look back 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 that 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.
Yes, Steve, you gave kind of rough time frame for how this season’s breakdown between the two kinds of boxes. So we’ve now transitioned basically out of the primary part of the year where dry would be in demand.
Do you guys – either of you have any hang over in terms of the CapEx that you did deploy in the first half of the year from an uncommitted box standpoint? And are those victims of an economy is slowing down or were you able to successfully lease out everything that you wanted to get done in the first half of the year?
Yes, I think we tend to be pretty judicious in terms of our capital deployments. And so as we kind of finish the second and third quarters, we get a very little dry container inventory carry over.
I would say ours is similar. We do like to keep a little bit of inventory just so that we have enough hand just given our size or what have you, but I wouldn’t say it’s that much out of the ordinary.
Okay. I think both of you guys alluded to sale lease back opportunities. Obviously it’s been well publicized, the whiners, that gone through it, at least somewhat it was tumultuous in the past few years. There have been – both of you guys have taken advantage of, are there still a considerable amount of container parcels that these guys are rolling off though here?
Yes, 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 slide also, it’s gotten clearly more competitive as well.
But we’ve continued to participate, we’ve been beneficiaries of some opportunities and we have a very disciplined approach, I mean we’re not going to sacrifice our returns or anything of that sort when it comes to different opportunities.
But I think as the dry container market has sort of lined a bit, I think there’s been more focus on the purchase lease back.
Yes, I think I’ll strongly echo what Hilliard said. I think you see sale lease back transaction seem to be a little bit lumpy. They kind of come and they go, and start and they stop. There does seem to be a little bit of 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 they go well, maybe I need an extra $50 million and say, maybe I’ll take this portfolio of containers and look at, see if we can finance it.
Any questions from the others? We’re going up in the front.
I thought the slide that shows the margin of the customers versus your margins is very interesting. There can’t be too many industries where the spread is quite that wide. If you think about the capacity rationalization that the containers are attempting to achieve, and I’m a bit skeptical about how successful it will be. But nevertheless, what do you see in terms of their ability to negotiate rates when you – that are perhaps a little bit competitive from their standpoint, recognize their desire to improve their margins in understanding how much margin you’re achieving currently in the economics of the business.
I’ll take the first – I think what’s interesting about this is that while the shipping companies are still financially challenged to some degree, we really don’t have a lot of conversations with them about rates because their incremental cost of capital is pretty high. And I think that’s really setting rates is a bit of dynamics between leasing companies.
So it’s not so much the shipping companies driving pricing, it’s a competitive dynamics of capital providers. Actually – and then as a group, I think we’re actually pretty just plain investors.
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 piece is a very small part of that. I think what’s been going on 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 sort of are the things that really move the needle in that slide 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.
The same question – disposable market that you mentioned, that 15% of the return of the life of container, where is pricing the disposable market strength needed a balance shipping company, and the second remark is really strong, I perhaps can – find the lease because I can file the returns from selling my containers back into buying new containers. So I guess, is there a correlation between demand and the leasing side and pricing in the disposable market?
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 is a sort of this flood of containers or actually, if you look at the percentage of containers that are typically retired each year, I think it averages somewhere around 5%. I think that number has been closer to 3% as of late.
So that and then you have new container prices that have been peaking, although they have come down. And all 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 to invest in containers because we’re able to get the cash. I think they’ll redeploy that cash into other areas.
Yes. 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 a new container, I’ve got to go spend $100 to get – I’m sorry. I got $30 from the sale of a container; I’m not going to spend $100 to get a new container. The numbers just 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 capitally constrained through 2012.
So I actually think there’s pent up demand. The normal attrition rate should be, as you’ve said 5% has been 2% or 3%. So they can only do that for so long.
And then the last point I had is that if you look at overall utilization rates, I think we both mentioned that they are at historically high levels. So that is another point to talk to the fact that the market is still pretty tight for containers.
All right. With that, we’re out of time. So thanks so 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: email@example.com. Thank you!