Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Textainer Group Holdings Limited (NYSE:TGH)

Q2 2008 Earnings Call

August 5, 2008 2:00 pm ET

Executives

Philip K. Brewer - Executive Vice President

John A. Maccarone - President, Chief Executive Officer, Director

Ernest J. Furtado - Chief Financial Officer, Senior Vice President, Secretary

Analysts

Justin Yagerman - Wachovia Capital Markets, LLC

Gregory Lewis - Credit Suisse

Robert Napoli - Piper Jaffray

Richard Shane - Jefferies & Co.

Bill McKenzie - Lafitte Capital

Jordan Heimowitz - Philadelphia Financial

Operator

Welcome to today’s Textainer Group Holdings Ltd. second quarter results conference call. (Operator Instructions) And now at this time I’d like to turn the call over to Phil Brewer.

Philip K. Brewer

We are here to discuss Textainer’s second quarter 2008 results that were reported on August 5, 2008. Joining us on this morning’s call are John Maccarone, President and Chief Executive Officer, and Ernie Furtado, Senior Vice President and Chief Financial Officer.

Before I turn the call over to John and Ernie, I would like to point out that this conference call contains forward-looking statements within the meaning of US securities laws. These statements involve risks and uncertainties, are only predictions, and may differ materially from actual future events or results. It is possible that the company’s future financial performance may differ from expectations due to a variety of factors. Any forward-looking statements made during this call are based on certain current assumptions and analyses made by the company in light of its experience and current perceptions of historical trends, conditions, expected future developments, and other factors it currently believes are appropriate. Any such statements are not a guarantee of future performance and actual results or developments may differ from those projected. Finally, the company’s views, estimates, plans and outlook as described within this call may change subsequent to this discussion. The company is under no obligation to modify or update any or all of the statements that are made herein despite any subsequent changes the company may make in its views, estimates, plans or outlook for the future. For a discussion of such risks and uncertainties, see the “Risk Factors” included in the company’s quarterly report Form 6K filed with the SEC on May 14, 2008.

I would also like to point out that during this call we will discuss non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures will be provided either on this conference call or can be found in the company’s August 5, 2008 press release.

I would now like to turn the call over to John Maccarone.

John A. Maccarone

We had an excellent second quarter in all phases of our business: Resale, new container long-term lease and finance lease originations, and depot container lease ups. The utilization for the second quarter averaged 93.9% about 1% higher than the first quarter average. Looking at the first half we ordered 104,000 TEU of new standard dry freight container production for our owned and managed fleets for delivery through August, and that was about $229 million of cap ex. We also ordered 2,750 refrigerated containers comprising $48 million of cap ex for the owned and managed fleet for delivery through September. We originated 164,000 TEU of long-term leases, 18,000 TEU of finance leases, sold 16,000 trading units and 30,000 owner units. We’re especially pleased about our financing and Phil will give us an update on that in just a few minutes.

Second quarter net income was up $24.5 million excluding unrealized gains on interest rate swaps net of minority interest is a 53% increase over the second quarter of 2007 and net income per diluted common share excluding unrealized gains on interest rate swaps net of minority interest is $0.51 a share.

The dividend paid in the second quarter of 2008 was $0.22 a share which is an increase of $0.01 or 5% over the prior quarter. Our next dividend to be paid this month is $0.23 a share nearly another 5% increase. In the four dividends that we will have paid since becoming a public company last October of $0.20, $0.21, $0.22, and $0.23 respective we will have distributed a total of $0.86. Textainer’s goal is to pay out about 50% of net income in dividends which we believe properly rewards our shareholders and still enables us to achieve our capital expenditure and acquisition goals.

I’d now like to turn it over to Ernie Furtado, our CFO, to take us through the numbers.

Ernest J. Furtado

I’d like to take this opportunity to review our financial performance for the second quarter and the six months ended June 30, 2008. Fleet size at the end of the second quarter consisted of slightly more than 2 million TEU of which 41% were owned and the remainder were managed, subleased or on finance lease. Utilization for the total fleet for the second quarter was 93.9%.

First I’ll review the second quarter results. Net income excluding unrealized gains on interest rate swaps net of minority interest was $24.5 million which represents a 53% increase over the $16 million in the prior year quarter. Net income was $30.4 million which represents an 83% increase over the prior year quarter and includes $7.2 million in unrealized gains on interest rate swaps which is a non-cash non-operating item and which was $6.1 million higher in the current quarter compared to the prior year quarter. Lease rental income decreased by $0.6 million or 1% compared to the prior year quarter as the 4.7% increase in fleet size was partially offset by a $1.1 million decrease in geography income due to less military activity and a 3.3% decrease in rental rates which is partially due to the decline in containers on lease to the military.

Management fee income increased by $2.2 million or 46% primarily due to $2.4 million in management fees earned from the former Capital Lease fleet. Gain on container trading increased by $1.4 million or 181% primarily due to 110% increase in the number of trading containers sold. Gain on sale of containers increased by $1.1 million or 43% due to higher sale prices partially offset by a 14% decrease in units sold.

Direct container expense decreased by $2.5 million or 26% primarily due to a $2.1 million decrease in repositioning expense due to less military repositioning. Depreciation expense increased by $1.5 million or 12% due to an increase in the side of the owned container fleet. Amortization expense increased by $1.1 million or 213% due to amortization of the price paid to acquire the rights to manage the former Capital Lease fleet. General and administrative expense increased by $1.3 million or 30% due to increases in professional fees and insurance as part of being a public company and due to compensation expense. Interest expense decreased by $3.6 million or 41% primarily due to a decrease in average interest rates of 2.9 percentage points partially offset by an increase in average debt balances which were $39 million higher. Realized losses on interest rate swaps were $1.6 million compared to realized gains of $0.9 million in the prior year quarter due to the decrease in interest rates between the periods.

EBITDA was $47.3 million, $11.9 million higher than the prior year quarter. There are three significant items that impacted income before income taxes and minority interest during the second quarter. The first was the gain on lost military containers net of $1.7 million recorded on the disposal of 4,400 owned and 500 subleased containers. Second was income tax expense decreased by $1.5 million compared to the prior year quarter primarily due to a remeasurement of income tax reserves following the conclusion of an audit by the IRS. Finally, the resolution of a dispute with a container manufacturer resulted in the reversal of reserve of $750,000 and an additional gain of $275,000 as part of the resolution.

Now I’ll review the six month results. Net income excluding unrealized gains or losses on interest rate swaps net of minority interest was $47 million which represents a 40% increase over the $33.5 million in the prior six month period. Net income was $47.8 million which represents a 43% increase over the prior year. Lease rental income decreased by $0.5 million or 1% compared to the prior year quarter as a 4.1% increase in fleet size was partially offset by a $1.6 million decrease in geography income due to less military activity, a 0.5% decrease in utilization, which is and a 2.4% decrease in rental rates were partially due to the decline in containers on lease to the military. Management fee income increased by $4.3 million or 42% primarily due to $4.8 million in management fees earned from the former Capital Lease fleet. Gain on container trading increased by $4.5 million or 344% primarily due to 192% increase in the number of trading containers sold. Gain on sale of containers increased by $1.6 million or 29% due to higher sale prices partially offset by a 21% decrease in units sold.

Direct container expense decreased by $5 million or 27% primarily due to a $4.1 million decrease in repositioning expense due to less military repositioning. Depreciation expense increased by $3.3 million or 14% due to an increase in the size of the owned container fleet. Amortization expense increased by $2.6 million or 241% due to amortization of the price paid to acquire the rights to manage the former Capital Lease fleet. General and administrative expense increased by $2.8 million or 34% due to increases in professional fees and insurance as part of being a public company and compensation expense. Interest expense decreased by $5 million or 29% primarily due to a decrease in average interest rates of 2.2 percentage points partially offset by an increase in average debt balances which were $46 million higher. Realized losses on interest rate swaps were $2.3 million compared to realized gains of $1.7 million in the prior year period due to the decrease in interest rates between the periods.

EBITDA was $47.3 million, $11.9 million higher than the prior year period. As previously noted, the three significant items recorded in the second quarter were part of the six month results.

We are very pleased with our second quarter 2008 and six month year-to-date results.

Now I’ll turn it over to Phil Brewer.

Philip K. Brewer

I would like to say a few words about Textainer’s recent activities in the credit markets. As mentioned during our last call, Textainer limited, a wholly owned subsidiary of Textainer Group Holdings Limited, entered into a five-year $205 million revolving credit agreement with a group of financial institutions in April. A few points to note. The revolver replaced a two-year $75 million facility. We initially sought $150 million but decided to increase the size due to significant bank interest in the transaction. The revolver was syndicated among seven banks, four of which were new to Textainer. The pricing currently is LIBRO +1% and is expected to remain at that level for the immediate future. Proceeds from the financing will be used to purchase containers and for general corporate purposes.

In July Textainer Marine Containers Limited, a subsidiary of Texted Unlimited, extended and restructured its $300 million master indenture funding program. A few points to note. The facility was extended for two years and increased in size to $475 million. All the existing banks remained in the facility and all but one increased the size of their commitment. Previously a Monoline insurer had wrapped the facility. Due to costs and other considerations we decided not to insure the facility at this time. The pricing for the facility is LIBOR +1.25%. Although the credit spread increased we believe that not only is the facility attractively priced in today’s market but also that our banks’ willingness to increase their commitments demonstrates a strong vote of confidence in Textainer and our business model.

I would now like to talk about the resale division. I noted during the last call that our supply of trading containers would start running low this summer. That remains true. We will not see the same level of container sales in trading that we saw over the first half of the year. Furthermore, I just returned from a two-week trip to visit customers in Asia. The general consensus is that the demand for sales containers remains strong especially in Asia but that supply is limited due to high utilization and new container prices. The good news is that we recently entered into an 8,500 unit purchase leaseback with a major international shipping line. We believe this is an excellent transaction for both the shipping line and Textainer. However, we do not know when and at what quantities we will receive the containers for sale although we do not expect many to be turned in this year.

I would now like to turn the call back to John.

John A. Maccarone

Just a few comments about the outlook going forward before we open it up for questions. We believe that the drivers of our strong performance during the first half of 2008 remain in place. Strong demand for both our new production and in-fleet containers is the result of several factors including among other things new vessels entering service which need containers; lower shipping line profits due to higher operating expenses, especially fuel; the credit crunch which is making it more difficult to borrow and causing higher spreads; and higher new container prices. As a result many of our customers have become more dependent on leasing than they were in the past three years. Shipping lines are also keeping their own and leased containers in their respective fleets longer. This has created a shortage of older containers in the secondary market and has kept prices strong. We do not see any signs that these drivers will materially change in the next few months.

We’d now like to open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Analyst for Justin Yagerman - Wachovia Capital Markets, LLC.

Analyst for Justin Yagerman - Wachovia Capital Markets, LLC

If it’s possible, could you give a little color with regards to how utilization rates are trending thus far in the current quarter?

John A. Maccarone

Yes. They are up and they are continuing to go up so far in the current quarter.

Analyst for Justin Yagerman - Wachovia Capital Markets, LLC

Considering you guys are at 94% in Q2, is there a good run rate for the quarter as far as the increase? Can you give a little more color on that?

John A. Maccarone

We’re currently just under 97%.

Analyst for Justin Yagerman - Wachovia Capital Markets, LLC

You touched on this a little bit earlier around the increased price for new containers. I’m just curious, considering the low cost basis you have on a number of the new containers that are entering, how much of a spread can you really drive between that resale value and the cost basis and how much of that is currently baked into the current numbers?

John A. Maccarone

I’m sorry. I don’t think we quite understood whether you’re talking about lease out containers or sales of containers?

Analyst for Justin Yagerman - Wachovia Capital Markets, LLC

Sales of containers. Given where prices are now and the cost basis on some of your containers, what incremental margin are you seeing right now on those and how much of that is in your current numbers?

John A. Maccarone

I’m not quite sure. Ernie talked about the earnings we have year to date on sales containers. I’m not quite sure exactly how much more specific you want us to be. I mean obviously container prices are significantly above the depreciated value of containers that are 12 years old but again I’m sorry, I’m not quite sure what you’re driving at.

Analyst for Justin Yagerman - Wachovia Capital Markets, LLC

I guess it was more just the strength of the current prices and how much of that is reflected in your Q2 numbers and whether or not we should see a little bit more of a pop going forward or whether or not that’s already been baked in.

John A. Maccarone

I don’t think that we’re going to see used container prices increase significantly above their current levels. They certainly are what would be historically very attractive prices. The resale prices will be affected somewhat by what happens in the new container market and although the sentiment there is uncertain, there’s a reasonable number of people who think that new container prices are around their peak, that the manufacturers have space, and as a result new container prices ought not go up significantly from where they are now notwithstanding that some raw material costs remain high and in fact perhaps increasing. Based on that I don’t think you’re going to see used container prices increase significantly above their current levels going forward. So to the extent that we are selling containers out of our fleet, I think you can continue to see the same gains on sales from containers in our fleet but again the trading unit supply is likely to decrease.

Does that answer your question?

Analyst for Justin Yagerman - Wachovia Capital Markets, LLC

Yes. Absolutely. That’s what I was getting at.

Regarding that 8,500 container purchase, what’s the average age on those?

John A. Maccarone

They were manufactured in 1998 or 1999.

Analyst for Justin Yagerman - Wachovia Capital Markets, LLC

One last question with regards to your tax rate going forward. Obviously you recognized a bit of a gain this quarter. Where should we see that trending for the rest of the year and I guess the restatement is that just a one-time event or should we see that amortized throughout the course of the year?

Ernest J. Furtado

That was triggered by the conclusion of the audit so going forward I would expect our tax rate to be similar to where it’s been in the past, which is kind of around the 7% range.

Operator

Our next question comes from Gregory Lewis - Credit Suisse.

Gregory Lewis - Credit Suisse

John if you could expand a little bit more on the macro backdrop for the container space, I think on the last call when we were talking it sounded like we were heading into a period where we might see demand for containers from customers sort of accelerate heading in towards the summer. I’m just trying to get a feel for if we did actually see that and sort of where demand is now?

John A. Maccarone

We did Greg. Some of the numbers I gave for the first half, for example probably the key number is long-term lease originations. At the end of the first quarter we had originated 41,000 TEU. At the end of the second quarter we were up to 164,000. So you can see that we had an absolutely incredible quarter in terms of originations. Of this 164,000 at the end of June about 99,000 had been picked up and the other ones are in the process of being picked up. So indeed there was a very strong uptick in volume of long-term leases between the end of the first quarter and the end of the second quarter.

Gregory Lewis - Credit Suisse

Do you think that’s more a function of just the overall market expanding or is it more a function of some of the liner company’s aren’t actually ordering as many containers? So for instance if we were to look at container growth year-over-year, should we be thinking that container growth in 08 versus 07’s going to be down?

John A. Maccarone

I just saw an article in one of the industry magazines the other day that was forecasting total new production for 2008 will probably be flat or maybe slightly down. And you hit the nail right on the head. What we’ve seen is several major shipping lines for a variety of reasons made a conscious decision that they were not going to buy a lot of new containers this year be it because of the prices of the containers, more difficulty in borrowing money, or the higher credit spreads, whatever. And they went into the market for existing containers which has been just absolutely fantastic for us because we’ve been able to put together several very large transactions for in-fleet containers and we’ve been able to put those on long-term lease at reasonably attractive terms with pickups all over the world, not just in the traditional high demand areas. So it’s been a real plus for us.

Gregory Lewis - Credit Suisse

And just a follow up with that. Clearly in July you had the purchase and leaseback of containers. That was totaling around $12 million and it sounds like primarily that was done so that Textainer could sell these vessels in a few years when they’re sort of fully depreciated down. What was the rationale for the liner company wanting to sell those containers at this point? Because to me $12 million just doesn’t seem like a big savings given the balance sheets of some of these liner companies.

John A. Maccarone

Especially for the company we did it. Actually Phil did that deal so I’ll let him comment on it.

Philip K. Brewer

Just to be clear on one thing Greg. We’d be happy to get the containers back right now and sell them today if we could. So I think you implied in your question that we’ll keep them for a while, while they depreciated. In fact the purchase price we paid because they are older containers was an attractive price even relative to today’s market and if they all came back tomorrow and we sold them, we’d be happy. First point. Second point, why does the shipping line want to do this? Of course they may have their own reasons but I think some of them are: One, today’s prices are very attractive and those containers are ready for sale from the shipping line’s perspective in perhaps two years’ time or a years’ time and who knows where used container prices will be at that time. So they’re locking in today’s attractive price. Two, they also are enjoying a gain on the sale of the assets and it may be for their own internal reasons that now’s the time they would like to recognize that gain. So those can be some reasons.

Gregory Lewis - Credit Suisse

Are you seeing more similar opportunities like that in the current environment?

Philip K. Brewer

I wish I could say we saw many but while we are marketing these opportunities and I frankly suspect our competitors are as well, I don’t see any large transactions on the horizon.

Gregory Lewis - Credit Suisse

You touched on it briefly. There was that resolution with the container manufacturing. Is that something that sort of just happens sporadically or is that more of a common event? I’m not familiar with something like that happening.

John A. Maccarone

It was a one-off event but no we don’t expect it to happen again. It’s a relatively complicated situation and we could explain further outside this phone call if you want but I don’t expect it to happen again.

Operator

Our next question comes from Robert Napoli - Piper Jaffray.

Robert Napoli - Piper Jaffray

A question on the specialized reefer business and your progress and outlook for that business?

John A. Maccarone

We have ordered 2,750 reefers all 40 foot high cube and we had a fairly modest goal for our first year of about 2,000 units so we’re already up to 2,750 for delivery through September and we have a good success ratio in getting lease commitments I think as of yesterday we had committed about 1,600 of them to lease that were either picked up or committed to lease. So we’re pretty happy about our entry into the business and feel that it’s going to be a long term proposition for us going forward.

Robert Napoli - Piper Jaffray

What is the price right now per container on the reefers?

John A. Maccarone

Good question. I think we’re in the vicinity of around $18,000. It depends on the price of the machinery. We’re using Carrier, Daiken and Thermo King all three of the manufacturers of the machinery and they vary in price so there’s a variance. But I think a good number for you to use is about $18,000.

Robert Napoli - Piper Jaffray

How is the profitability of that business versus your core business?

John A. Maccarone

The margins are just about exactly the same within a few basis points right now.

Robert Napoli - Piper Jaffray

How about the competitive environment versus the dry containers?

John A. Maccarone

There are a lot of sharp elbows in the reefer business let me tell you. It’s very competitive but we’re holding our own. Our cost of capital is very competitive and our purchase price for the reefers, because of our buying power not only in reefers but in our overall buying power, we think is competitive. And we’re fortunate in that all of our customers have immediately accepted us as a bona fide supplier. So we’re getting a look at lots of deals and we think we’re winning a very good share of those.

Robert Napoli - Piper Jaffray

Your leverage is very low and you have very good access to capital. I was wondering if you have any additional thoughts on acquisitions or diversification out of [inaudible] or for now is focusing on the dry ships and the reefers enough?

John A. Maccarone

We look at acquisitions constantly and always that’s very high up in our priority. We have made a conscious decision at our Board that we were only going to look at opportunities within our core container leasing business. In other words, we’re not going to look at vessels or things of that nature. And we’re sticking to that. We’re constantly evaluating opportunities but I don’t have anything concrete that I can tell you about at this moment.

Robert Napoli - Piper Jaffray

The lease rates, can you give an update on the increase in pricing versus containers that you’re seeing in the market?

John A. Maccarone

If you take a container the fourth quarter of last year, a $1,900 container, the lease rate was a function of $1,900 times the interest rate and the profit margin and now that we’re looking at $2,500 containers in August, it’s literally the same thing. So a five-year rate on an August built container is approaching $0.90 on a 20-foot container whereas back when it was an $1,800 container or $1,900 container it was in the $0.60 to $0.65 range. We’ve been fortunate in that the velocity of the container flow is that we’re leasing them out very soon after buying them so we don’t have any $1,900 containers sitting at the factory. Those are all long gone and we’re actually now working off of our August production that hasn’t even been built yet. So we’re having to quote prices based on those August delivery prices.

Robert Napoli - Piper Jaffray

Let me make sure I heard it right. You said your utilization from June 30 has moved from 94% to 97% today?

John A. Maccarone

Yes. The utilization ended last week was in the 96.9%.

Robert Napoli - Piper Jaffray

Going back John through cycles, obviously this industry’s doing very well, you guys are doing very well, and I think the biggest concern of investors at the moment is a significant slowdown in the global economy. And you gave a lot of reasons why you’re still seeing very strong business even if growth is slowing down. But if you go back to the last recession in 2001 to 2002 timeframe the industry had a tougher time and I was wondering if you could kind of compare today to then and see if we do go into a significant global recession, how you think you’ll do and how the industry will do?

John A. Maccarone

In terms of our own company we’re a much different company than we were back in the early period 2000 to 2001. Our percentage of the fleet under long-term lease is close to 70% of the total fleet and 75% of the portion that we own, so I think we’re in a much, much stronger situation where containers wouldn’t come back. When we were predominantly a short-term leasing company, it was much easier for shipping lines to return surplus containers but now they’re locked in on long-term leases and they don’t come back. They’re not allowed to bring them back. So from that standpoint, I like to think that we would be in a much better position if there was a significant slowdown. And then we talk about slow down, we’ve already factored in the US economy which is flat year-on-year. The EU economy which was very buoyant in 2007 in terms of exports from Asia, something like a 20% growth in volume, is now being forecast in something I just read yesterday about a 12% to 13%. But keep in mind that there has been a strong boost in other of the newly commodity rich countries - Russia for example with oil and the Middle East and Persian Gulf area with oil, South America with the raw materials. Some of the slack that was created by the slowdown in the US economy has been taken up by other parts of the world. So we’re not really seeing any signs of a big slowdown at this moment.

Operator

Our next question comes from Richard Shane - Jefferies & Co.

Richard Shane - Jefferies & Co.

John, last quarter on the call you had given some sort of perspective on what percentage of containers delivered by the manufacturers were going to leasing companies versus shipping lines and the indication was that it sort of moved from maybe 60/40 going to the lines in 07 to 50/50 during the first quarter. What are you seeing now?

John A. Maccarone

There are no real published facts and I should have underlined as I was just looking last night at the transcript from the CAI earnings call the other day and John Nishibori had a number that he, I don’t know where he found that number, but -

Richard Shane - Jefferies & Co.

He probably got it from you.

John A. Maccarone

He probably got it from me. I’ll find it. Why don’t you ask me another question?

Richard Shane - Jefferies & Co.

You talked about since the fourth quarter container pricings moved from $1,900 a box to $2,500 a box, day rates have gone from low $0.70s to close to $0.90 per TEU. Where is the overall fleet? And most importantly, the containers that are on leases that are expiring in the next couple quarters, what’s the average day rate there and do you have the pricing power when you re-lease those containers or is there enough incentive to keep them with the same shipping lines that you can’t really push those price increases through?

Philip K. Brewer

The average rate in our own fleet is around $0.70 per CEU per day. The whole managed fleet meaning long-term lease, master lease, total.

John A. Maccarone

I think the positive thing here is that while we don’t have the pricing power to push the rates up, we are seeing a surprising number of customers agreeing to extend the expired long-term leases for anywhere from one to three years at the same rate that they were in. And this is a dramatic change from the typical mentality of the shipping line that says “Well, I’ve already paid you for five years on this lease. If I’m going to keep it, I want a discount.” And even though we point out that replacing that container with a new container at today’s rates would be significantly higher, that message always seems to be lost somewhere. But we’re finding that surprisingly a good number of customers are extending leases at the same price as they were, which is good news for us quite honestly.

Richard Shane - Jefferies & Co.

When we first started looking at this industry back in 2004, my recollection was that reefers were in the sort of $15,000 to $17,000 range and that 20-foot drys were sort of in the $1,500 range. Obviously we’ve seen a huge increase especially on a relative basis in terms of the costs for dry containers and presumably that has to do with the fact that most of the value of a dry container is in the fuel price whereas most of the value in the reefers is in the technology and manufacturing. Given that we are potentially, and we’ve seen some pullback in steel prices recently, at a cyclical peak in terms of commodity prices, is that one of the reasons that you’re emphasizing the growth of the reefer portfolio above what you’d previously expected because you take less commodity risk there?

John A. Maccarone

No. I think it’s just more that there was an opportunity to do incremental business with the same customers without adding any overhead for additional sales and marketing people we could literally participate in reefer business that we had just passed up over the years at margins that were similar to dry cargo. There was a period and maybe it was because reefers had gotten to be so expensive, a couple years ago they were up around $25,000 level, the margins just were not similar to dry boxes. Not that the margins on reefers has improved dramatically. I think they’ve improved somewhat but let’s face it. The margins on dry boxes have come down from where they were three or four years ago. So right now they’re about equal and it gives us a chance in this case we’ve already been able to consume $48 million of additional capital expenditure which is good for us because it generates net income for us.

By the way, I’ve got that number from John Nishibori’s comment in this transcript. He was saying that he feels that it’s about 55% shipping line and 45% leasing company versus what the last couple years has been more like 60% shipping line. I think I mentioned in the last call that anecdotally we’d seen it was about 50/50 and I would tend to think it’s closer to 50/50 than 55/45 right now. But again it’s very hard to come by hard figures in that regard.

Richard Shane - Jefferies & Co.

That’s helpful. I understand it’s purely anecdotal in getting additional data points and perspective from someone who’s closer to the manufacturer than we are helps.

Operator

Our next question comes from Bill McKenzie - Lafitte Capital.

Bill McKenzie - Lafitte Capital

Following somewhat along with the last couple of questions, I’ve followed some tankers and I know that crude oil tankers have been slowing down somewhat because of high fuel costs. Have you guys noticed much of that in the container freight market that some of the container ship owners are slowing down as opposed to needing two containers per plot you need 2.2 or whatever their appropriate analysis would be?

John A. Maccarone

This is pretty well known that most of the shipping lines have slowed down the speed of the vessels to conserve fuel and as a result it’s required more containers because it takes longer for a container to make its journey from China to Europe or the United States and come back to China again for another load of cargo. So yes indeed we think that is part of the reason that the market is so strong right now.

Bill McKenzie - Lafitte Capital

Also along that line, if you look out from what you’re able to see out there on the delivery of container ships, how does it look over the next 18 months and is it a much greater amount to be delivered than has been delivered so far or how would you [inaudible] hat market?

John A. Maccarone

Don’t forget, our shipping line customers are not as lucky as we are. We only have to be smart enough to figure out what we need one month in advance. They have to order three years in advance so they’re taking delivery of ships that they ordered three years ago and the last report I saw the backlog of container ships to be delivered over the next three to four years is about 900 vessels representing somewhere in the vicinity of 5 million TEU of nominal onboard capacity. Another big year somewhere in the 14% gross increase in worldwide capacity and I think it starts to level in 2010 and 2011.

Bill McKenzie - Lafitte Capital

One of your competitors had made a lot of its growth from packaging up containers and selling to European investment funds. Is that market staying strong? If it isn’t, is it drawing up somewhat and causing opportunities for owner operators to grow at a faster rate? Or just a general comment of how you see what change is taking place with that European investment fund business versus the opportunities for people like you?

John A. Maccarone

We want to buy assets so we scratch our heads when we see competitors going out and [inaudible] because we would rather own the container if we could. Again anecdotally whenever someone seems to put up a bunch of containers for sale, there does seem to be a pretty free active market among the German KG funds for those assets.

Bill McKenzie - Lafitte Capital

So credit tightness so far hasn’t affected the KG fund market at all and created incremental more opportunity for people like yourselves that want to operate the containers?

John A. Maccarone

It depends on the different funds. Some of them don’t use any leverage at all, using all cash from the German dentists that are buying into these funds. The ones that are using leverage, I don’t know how easy it is for them to get their hands on money.

Philip K. Brewer

I would add that I think they face similar credit constraints as everybody does in this market and it has had an effect on the appetite of KG funds for these assets as well as the fact that the spreads earned on container assets over the past several years has tightened because of competition. And the KG funds do need a specific return in order to make their investments work out and in some cases the spreads have tightened such that they’ve reduced or in fact stopped their purchases of container assets.

Bill McKenzie - Lafitte Capital

So, at the margins it would be fair to say that that business is at the margin tapering off a little bit or it would appear to be positioned for that.

Philip K. Brewer

Yes, that’s true although I do want to make sure we address one thing that I wasn’t sure if it was part of your question or not, which is: Does that mean there’s some opportunity for Textainer to then buy these assets? And I would just note that if they’re assets that are currently being managed by a competitor and will remain managed by a competitor, which is certainly the case any time a competitor sells assets, then we’re not looking to buy those assets. We’re not interested in owning assets that are managed by a competitor; only assets that we can manage ourselves.

Operator

Our next question comes from Jordan Heimowitz - Philadelphia Financial.

Jordan Heimowitz - Philadelphia Financial

What percent of your business [inaudible]?

John A. Maccarone

Jordan we have been very fortunate in that our empty repositioning this year has been virtually nothing. We did a little bit in January and we had some opportunities to move some containers out of some very, very difficult areas like London and Le Havre but since January I don’t think we’ve moved any empty containers. And that’s been a very positive for us. We do have some repositioning that Ernie mentioned but that’s been primarily military business where we get reimbursed for that.

Jordan Heimowitz - Philadelphia Financial

With your utilization going from 94% to 97%, can you help me quantify that in terms of earnings? Like if there was no growth in the portfolio, how much would that add to the lease rental income?

Ernest J. Furtado

If you look at our fleet size of owned containers which I think is about 800,000 CEU and I had mentioned previously our average rental rate is about $0.70 a day, so therefore you would have three more percentage points of utilization so three more percent of the fleet is earning that $0.70 a day times 800,000 and something CEU times the number of days. I don’t have a calculator. I previously calculated this number just to see what a one percentage point utilization change does and on an annual basis I think one percentage point of utilization for TGH is worth between $3 million to $4 million so if we’re adding three percentage points of utilization, that’s your factor to use.

Jordan Heimowitz - Philadelphia Financial

$9 million to $12 million. Is that pre-tax or after tax?

Ernest J. Furtado

That’s pre-tax.

Jordan Heimowitz - Philadelphia Financial

Your $0.70 a day, would it be reasonable to think that that will move towards the marginal rate of $0.90 over the next few years? Not immediately by any range, but if the current environment persists which is a big if, but is that a reasonable thought process?

John A. Maccarone

I think if you say that the container prices and interest rates and everything stays the same over the next few years and every container we originate going forward is at $0.90 a day, then yes it’s going to be moving in that direction but to get from $0.70 to $0.90 with almost over 2 million TEU and close to 1.8 million CEU -

Jordan Heimowitz - Philadelphia Financial

But I’m saying, if the environment stayed the same today, you could have a 30% increase in earnings if the environment just stayed the same for the next three years.

Philip K. Brewer

I think we should point out that there are issues when it comes time to renew an existing term lease, and I think this is the heart of your question, if current lease rates are just let’s say $0.90 a day and that term lease was at $0.70 a day, it doesn’t mean that you renew it at $0.90 a day. If the existing lessee is interested in renewing, generally it is the tradition in this industry that renewals happen pretty much around where the current or previous or then-existing lease rate was or even lower, and if they don’t generally they trend upward on the renewals. Since I think that’s the heart of your question, that would be a factor that would mean moving towards that $0.90 figure would not be easy.

Jordan Heimowitz - Philadelphia Financial

But it’s also clearly the more demand that exists and the less supply that’s out there, the more that you’ll have more and more power to push it up. But I’m just saying there are very few companies that have huge organic pricing upswing in their portfolio and you’re one of them. [Inaudible] your dividend payout targets 50% and you’re paying out $0.23 of dividends now. Do you have a targeted dividend growth rate or what a range of that you think would be over the next two years?

John A. Maccarone

What our goal is, is to be around that 50% and it’s to not to get too far ahead of ourselves because we would never want to back track. So it’s a real slow but steady growth is our strategy.

Jordan Heimowitz - Philadelphia Financial

Do you think like a minimum of 5% dividend growth rate or something? Is there a low number? Because if you look at where the estimates are today and a 50% payout it’s assuming no growth in your portfolio over the next year, and we’ve already established you have huge organic growth potential plus you just bought a whole bunch of things and utilization’s better. So it would seem to imply that the current dividend rate is kind of a floor number.

Ernest J. Furtado

When I look at the numbers based on this 50% number, we could have gone higher but we’re trying to grow it at a measured rate. As John mentioned, we don’t want to have a huge increase one quarter and then find out that we have to cut it back. I think we can continue to expect some growth in the dividend because as we mentioned utilization is up quite a bit. Offsetting that though we have fewer trading containers currently to sell but at some point all those shipping line containers are going to come onto the market. So hopefully that’s just a timing issue.

Operator

We have no further questions at this time.

John A. Maccarone

Well again, thank you all for joining and we appreciate your fine support. I’ll see you again next quarter.

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!

Source: Textainer Group Holdings Limited Q2 2008 Earnings Call Transcript
This Transcript
All Transcripts