SeaCube Container Leasing Management Discusses Q3 2012 Results - Earnings Call Transcript

Nov. 6.12 | About: Seacube Container (BOX-OLD)

SeaCube Container Leasing (NYSE:BOX-OLD)

Q3 2012 Earnings Call

November 06, 2012 10:00 am ET

Executives

David F. Doorley - Vice President of Investor Relations and Treasurer

Joseph Kwok - Chief Executive Officer and Director

Stephen P. Bishop - Chief Operating Officer, Chief Financial Officer and Principal Accounting Officer

Analysts

Christian Wetherbee - Citigroup Inc, Research Division

Justin B. Yagerman - Deutsche Bank AG, Research Division

Michael Webber - Wells Fargo Securities, LLC, Research Division

Salvatore Vitale - Sterne Agee & Leach Inc., Research Division

Operator

Good morning. My name is Christie and I will be your conference operator today. At this time, I would like to welcome everyone to Seacube's Third Quarter 2012 Conference Call. [Operator Instructions] It is now my pleasure to hand the program over to you, Mr. David Doorley, Vice President of Investor Relations.

David F. Doorley

Good morning, and thank you for joining us on today's call.

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

Before I turn the call over to Joseph, I would like to point out that this conference call may contain forward-looking statements. Any forward-looking statements contained in this presentation are based upon our historical performance and our current plans, estimates and expectations in light of the information currently available to us. Such forward looking statements are subject to various risks and uncertainties, as well as assumptions relating to our operations, financial results, financial conditions, business prospects, growth, strategy and liquidity. For a discussion of such risks and uncertainties, see risk factors included in our annual report on our Form 10-K.

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

Joseph Kwok

Thank you, David. Good morning, and thank you for joining us on today's conference call.

In the third quarter of 2012, SeaCube once again, generated strong financial and operational results for our shareholders.

I shall begin our review with Slide #3, recapping some of the highlights of our third quarter results.

Our adjusted net income in the third quarter increased 15% year-over-year to $12.8 million or $0.63 per share. Our revenue for the quarter increased 9% year-over-year to $49.5 million. Our average utilization for the quarter remained high at 97.9%.

Year-to-date, we have committed to invest almost $320 million in equipment.

Consistent with our goal of maintaining significant contractual revenue stream, 85% of this equipment has already been committed to long-term leases.

We expect these investments to continue to positively impact our revenue earnings and cash flow.

Based on Seacube's strong and consistent performance, our Board of Directors has approved a dividend of $0.30 per share. This is our sixth increase since going public and a 25% increase from the same quarter last year.

In the next few slides, I'd like to comment on our market outlook. On Slide #4, the line Carriers showed improvement in their financial performance in the second quarter. Most carriers continue to prefer leasing to owning new containers. Utilizations rate of the existing container fleet is expected to remain high as carriers continue to keep their existing lease containers in operations.

Leasing inquiries and demand for reefers has picked up and should continue into the first quarter of 2013. Leasing demand for new dry containers is expected to pick up in the first quarter of 2013 and ahead of the next shipping season.

Containers sales and lease-back opportunities continue to be an attractive way to raise capital for the carriers. We expect to continue to see keen interest from carriers for sale and lease-back transactions.

On Slide #5, a few comments regarding the supply of containers. New container inventory in China factories was approximately 500,000 TEUs at the end of third quarter. New container prices weakened in the third quarter. Pricing for dry containers has recently declined to $2,200 per TEU with production lead time shortened to 4 to 6 weeks.

Whereas reefer pricing has declined slightly to $17,000 for a 40-foot high cube reefer due to the slow start of reefer shipping season. Production lead time is now about 10 to 14 weeks.

Inventory of existing containers continues to be stable and utilization among the container leasing companies remain high. As a result, secondary market supply has been limited and resale values have continued to be strong.

On Slide #6, our fleet is now about -- our fleet is now more than 700,000 units of equipment. The net book value of Seacube equipment is about $1.5 billion. 94% of our containers are on long-term leases and the average remaining lease term is currently 3.6 years.

Steve will now review our financial results.

Stephen P. Bishop

Thank you, Joseph. I will start with Slide #8 and as the number shows, SeaCube continues to post strong financial results. This slide compares our results for the third quarter of 2012 to the same quarter in 2011.

Total revenue for the quarter was $49.5 million, which is an increase of $4.3 million, or 9%.

The revenue growth was a direct result of our investment in containers. Direct operating expenses were $1.3 million, which has decreased approximately $800,000. During the quarter of 2011, we incurred higher recovery cost attributed to one customer.

Selling, general and administrative expenses were $5.9 million, which is approximately the same as the prior period. We continue to manage our SG&A cost aggressively and have been able to grow our revenues earnings and cash flow with relatively modest increases in SG&A.

Our provision for doubtful accounts was minimal this quarter as well as the same period last year. Overall, we continue to have very good collection experience. This part of being in the leasing business over time, we will incur some bad debt expense.

Depreciation expense was $13.3 million, compared to $12.2 million last year. The increase in depreciation is in line with our increase in investment and equipment.

Interest expense was $17.7 million, compared to $15.4 million last year. The increase in interest expense is due to additional debt incurred to purchase equipment.

Adjusted net income was $12.8 million, compared to $11.1 million for the same period last year. This is an increase of $1.7 million and a year-over-year increase of 15%.

Adjusted EBITDA increased $12.6 million to $74.2 million, that's in a year-over-year increase of 20%. And again, the increase is attributed to revenues and cash flow generated by investments and equipment.

On Slide #9, a quick recap of the third quarter compared to the second quarter of 2012. Starting with total revenue, was $49.5 million compared to $49.4, it's an increase of about $100,000. While we're pleased that 85% of our $320 million is committed to long-term leases, most of the new leases start late in the quarter or actually in the fourth quarter -- will be starting in the fourth quarter.

To kind of help quantify this for investors in SeaCube, 85% of 320 million is $272 million and then at the end of the third quarter, we had $151 million on hire. So most of the remaining $120 million is going on hire in the fourth quarter, which will help us not only in the fourth quarter, but will help us in the first quarter of 2013.

Direct operating expenses were $1.3 million, about $100,000 less than previous quarter. The small decrease is due to the fact that we incurred less expense from containers being returned during the quarter.

Selling, general and administrative expenses were $5.9 million, which is $200,000 less than the previous quarter. As we mentioned earlier, we continue to manage SG&A cost aggressively as we continue investing in the fleet of containers.

During the quarter -- during the current quarter, we had lower spending in travel, professional and legal expense than in the previous quarter.

Bad debt expense was about $200,000, slightly higher than the previous quarter. Depreciation expense is $13.3 million compared to $13.2 million last quarter, an increase of $100,000. The increase in depreciation expense is due to our increased investment [indiscernible].

Interest expense was $17.7 million, compared to $16.8 million last quarter, increase is primarily due to our increased investment in equipment.

Adjusted net income was $12.8 million, compared to $13.3 million last quarter. Again, due to the increase in interest expense, offset by savings in SG&A and direct operating expenses.

Adjusted EBITDA was $74.2 million which is $3.2 million better than the previous quarter.

On Slide #10, a couple comments about our balance sheet. On the asset side of the balance sheet, our equipment investments increased by $55.4 million. As a result of these investments, our total liabilities increased by $43 million. At the end of the third quarter, our ratio of net debt to annualized adjusted EBITDA was $4.1 million, which is in line with the previous quarter.

On Slide #11, regarding our strategy for growth. Year-to-date, we have committed to purchase almost $320 million and our current expectations are that we'll invest somewhere between $350 million to $400 million this year.

Our leasing strategy is to focus on long-term leases and maintain high utilization. We continue to develop container sale and lease-back opportunities, leveraging on our direct finance leasing expertise as well as our close customer relationships.

Our asset strategy is to invest in both reefers and dry containers, but manage our uncommitted inventory to match demand.

We will invest in container sale and lease-back transactions that have good returns and credit quality.

On the capital strategy side, we look to raise capital to continue to invest in equipment. This allows us to grow our revenues, earnings and cash flows, and then grow our business and create shareholder value.

Finally on Slide 12, we declared a third quarter dividend of $0.30 a share., a 3.4% increase. This is our sixth dividend increase since our October 2010 IPO, and the dividend we've made this quarter is 50% more than the initial dividend we paid after the IPO. Since going public, we've declared cumulative dividends of $2.25 per share. We typically payout 40% to 50% of adjusted net income. Average payout since the IPO was 45%.

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

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Chris Wetherbee with Citi.

Christian Wetherbee - Citigroup Inc, Research Division

Yes, maybe a quick question just kind of on the outlook here. When you think about the market, coming in $350 million to $400 million on the CapEx side, maybe a touch below what you maybe thought earlier in the year, but can you just characterize kind of how the market feels from a competitive dynamic perspective particularly on the reefer side where it felt like maybe we're getting a little bit of pressure earlier this year?

Joseph Kwok

First of all, we are still on target of our own expectations by this year end and we are optimistic that there will be opportunity because of the recent activities. The reefer market started off a bit slow because somehow, the reefer season is delayed. But we are seeing increased inquiries and demand and this is observed and can be seen from our committed long-term leases of the investment has improved to 85% from the previous quarter. As you'll recall, we were at 58%.

Christian Wetherbee - Citigroup Inc, Research Division

Okay, that's helpful. I guess it may be a little bit early, but when you think about kind of the expectations for 2013, is there any guidance you can give us on how maybe you think about CapEx or maybe how the environment appears to be initially shaking out?

Stephen P. Bishop

Yes, Chris, I think it's frankly a little bit early for that. I do think that the activities and inquiries that we're seeing in the fourth quarter give us rise to think that we'll have a good 2013, but frankly, it is too early to make that kind of projections.

Joseph Kwok

I think we could look at 2013 from 3 aspects. First of all, there will be continuous growth of global container trade and that translates to higher volume, higher container demand. And also, the carriers are continuing relying on lease container rather than buying their own. And thirdly also, the carriers have been holding back phasing out of old aged containers and they keep them in operation. This cannot go on forever. So we expect more old containers to be phased into the secondary market. So if you look at all these 3 factors, I think 2013 seems to be a pretty good year.

Christian Wetherbee - Citigroup Inc, Research Division

Okay, that's helpful. Then maybe 2 quick ones here. On the container prices themselves, we've seen a little bit of a stepdown on the price. We're starting to get a little bit of an indication that steel prices are moving upwards to some extent. Can you just give us a sense on how you guys think about the next quarter or so as you're deploying capital particularly to the fourth quarter, how you think about the potential for prices of the assets to fluctuate?

Joseph Kwok

The steel price affects mostly the dry containers because a dry container basically is a steel box but if -- wooden floor, but for reefers, the steel component is less.

Now I already mentioned that the price has declined to $2,200 and this is mainly because of the slow pickup by the carriers during the third quarter.

$2,200 per TEUs is actually a very low pricing. And I think given the prospect of next year, we probably would see there's a good chance that the price will gradually increase.

Christian Wetherbee - Citigroup Inc, Research Division

Okay, that certainly make sense. And my final one is just on the dividend. I just want to get a sense, it looks like the last 4 quarters, you guys have steadily stepped up the dividend by $0.01 or $0.02 each quarter. Obviously, I think you have that target out there but at least from the timing of dividend increases there, is there anything we should be reading into this kind of quarterly step up that we've seen over the course of last year?

Stephen P. Bishop

Yes, not particularly. I mean, I think we expect to see our earnings continue to grow. I think we expect to continue to pay out a decent amount of our dividends, again, 40% to 50%. We try to be as transparent as we possibly can. The Board looks at this every quarter and we look at it on a forward basis and so we have a high degree of confidence in terms of our ability to continually pay at the levels that we have and sustain that and then we'll look at dividend increases every quarter. But obviously, as we grow the business, we'll grow our dividend.

Operator

Your next question comes from Justin Yagerman with Deutsche Bank.

Justin B. Yagerman - Deutsche Bank AG, Research Division

I wanted to get a little bit more granularity on the CapEx side. I mean, it sounded like you got about $120 million of that $320 million this year that's going to hit in Q4 and I wanted to get a sense of the timing on any additional Q4 CapEx, how that's going to hit or at least in your expectation of how it hit? So I mean, it sounds like we've got anywhere from $30 million to $80 million more of CapEx coming this year. Is that going to be a month's worth of CapEx in terms of timing or should we think about that getting more deployed in 2013?

Stephen P. Bishop

Sure, so just to -- it's probably worthwhile for me to just kind of recap in those numbers I threw at you in the first and you are correct, basically. When you think about that $320 million of commitment, most of that gets delivered this year. Right now, we've got $272 million of that under a long-term lease. We'll probably put that extra $50 million on long-term lease in the next -- and most of it will probably go on lease in the next quarter but the timing and the impact to earnings of the last $50 million is probably kind of more a Q1 2013 number.

On the other hand, if you looked at what we had on hire at the end of September, it was basically $151 million and most of that difference of $120 million is really going on hire -- went on hire -- it was going on hire in Q4. So we should have some sequential revenue growth on both the -- for both the fourth quarter of 2012 as well as the first quarter of 2013.

Justin B. Yagerman - Deutsche Bank AG, Research Division

Okay, all right, that's helpful. And I know you're reluctant to handicap it but for 2013, I mean, given what you're seeing in the marketplace, if we saw the pace continue I mean, is it crazy to think that we could have a year similar to this one or I mean, with the factors just called out, it actually sounded like the bias would potentially be to the upside. I mean, is that how you guys are thinking about things?

Stephen P. Bishop

Yes, I think the bias is to the upside. It's just a question -- we just don't want to get ahead of ourselves.

Justin B. Yagerman - Deutsche Bank AG, Research Division

No, that's fair and I won't peg you down to a number right now. In terms of the reefer lease yields, I mean, it feels like some of the pressure has eased up. If you're able to get these things committed and on higher gear, can you give a little bit of color around that in terms of what you're seeing from a reefer lease yield standpoint right now and maybe put some parameters around where you guys think is an acceptable lease yield and where you step away from the business?

Stephen P. Bishop

Yes, I think that last part, Justin, is a little bit competitive so I don't know that I want to tell my competitors what -- whether or not I'll walk away from a transaction...

Justin B. Yagerman - Deutsche Bank AG, Research Division

As I was asking it I kind of thought about that.

Stephen P. Bishop

At the same time, we did see, in the last reefer transactions that we're able to do, yields that we found attractive and we're able to do that. Now in the summer, there were some transactions that get done that were just were -- we thought were below hurdle rates that we felt comfortable with. So we continue to be able to invest our capital at good rates, consistent with previous expectations and in line with what we think makes sense.

Joseph Kwok

The only part I want to point out is that the reefer container pricing and yield have been stable compared to dry containers because it has less steel components. So you see that the prices of -- pricing of our new reefers have actually -- have not been changed substantially.

Justin B. Yagerman - Deutsche Bank AG, Research Division

That's fair and that's good color. Has there been any change in terms of customer concentration as all of this CapEx has come on? Any big shift in your top 3 or 5 customers and any thoughts in terms of counterparty strength as we close out the year here?

Stephen P. Bishop

Yes, I think the counterparty strength is a good one to talk about. I think we actually, as you've seen, our bad debt continues to be very low, our collections experience has been very, very good, all of our customers are paying us on time. I think the carriers in general as Joseph commented on, had a pretty good second quarter and they're -- had kind of a choppy -- may have a choppy third quarter but overall, we think the carriers will do better in 2013 and I don't think that we have any particular concerns about the industry or any specific customer.

Justin B. Yagerman - Deutsche Bank AG, Research Division

Okay, and last one before I turn it over. You guys referenced the $2,200 price on dry boxes right now. And I know this isn't typically your MO, but is there any thought to being more opportunistic in your purchases of dry boxes and potentially getting more aggressive at these lower prices? I mean, that's around where we've heard breakevens quoted for the manufacturers and I wouldn't think that pricing goes too much lower in the near-term unless the economy really falls out. Is there any thought to potentially buying more than you usually would at these types of levels ahead of what would be a normal dry leasing season in the first half of next year?

Joseph Kwok

$2,200 per TEU for dry container is indeed a very good price. However, as you know that the lease rate is a reflection of the price. So our focus is really on putting our new investment into long-term leases and maintain a high percentage. As I mentioned earlier that we've actually improved from 68% to 85% in the fourth quarter and we'll continue to focus on that factor. We want to make sure that we put our investment to work rather than holding equipment because we bought it at low price. So we will buy some equipment but to that extent we will -- our focus is still remaining on keeping a high percentage in commitment to long-term leases.

Operator

Your next question comes from the line of Michael Webber with Wells Fargo.

Michael Webber - Wells Fargo Securities, LLC, Research Division

I just wanted to come back to Steve, your earlier comments around having kind of boxes hitting the fleet a little bit later in the quarter and we've heard from some of your competitors, a lot of commentary on slowing pick up speeds. Can you talk to, I guess, what drove that or that is the function of when they were purchased or did you see slowing pick up speeds throughout the quarter as well? There are a lot of things that can obviously drive that, just a little bit more color would be helpful there.

Stephen P. Bishop

Yes, I think the thing that was notable in this quarter was this comment Joseph was making that the reefers pickups were later than we normally would see. I don't know that -- we don't really have any great insight as to why that occurred but we would typically see reefers picked up a little bit earlier than they ultimately were. They went on lease and at pretty attractive rates.

Michael Webber - Wells Fargo Securities, LLC, Research Division

Did you notice anything on the dry side or along the lines we've always heard from some of your competitors or no?

Joseph Kwok

Well, the dry side, I mentioned earlier, that at the end of the third quarter, there were about 500,000 TEUs waiting in the factory. That is not a really big number and as you can see -- as what we understand and that's how happening to us, or sort of [ph] that we're seeing speed up in picking up of dry containers particularly into the fourth quarter. So I'd like to believe that the pickup is accelerating right now into the fourth quarter.

Michael Webber - Wells Fargo Securities, LLC, Research Division

Got you. All right, that's helpful. Steve, just to kind of -- to parse out that CapEx number a little bit more. You threw out $350 million to $400 million and it's late in the year [ph] that's a decent kind of -- decent variance there. When -- internally, when you guys are thinking about what your customs are coming to you looking for, what makes up the biggest portion of that variance? I mean, I guess along the lines of kind of reefers now versus kind of maybe an early dry prebuy, kind of towards at the end of the quarter I mean, when you guys are kind of coming up to that range, where is most of the variance coming from?

Stephen P. Bishop

You mean what would drive us from being $350 million versus $400 million?

Michael Webber - Wells Fargo Securities, LLC, Research Division

Yes, basically.

Stephen P. Bishop

I mean, if you think about -- we've always talked about the fact that the fourth quarter tends to have some interesting transactions, typically something what looks like sale, lease-back transactions. Last year, we did a $50 million transaction literally last week of December. We certainly have some good transactions in the pipeline that we're talking to our customers into maybe the late stages of those discussions. And those are anywhere from $25 million to $75 million investments. And so, not unlikely that we will close something like that in the fourth quarter.

Michael Webber - Wells Fargo Securities, LLC, Research Division

Okay, so it's sounds like it could be kind of anywhere. I guess, finally, your payout ratio picked up a little bit on the quarter, but you're still below 50%. Is that still a level we should think about in terms of kind of a functional and kind of reasonable kind of threshold for you guys in terms of where you could potentially move the distribution?

Stephen P. Bishop

Yes. Again, it will stay in this 40% to 50% range. I don't think there's magic about being 45% or 46%. We just -- we look at it 40% to 50% and then we'll look at it out in the future and want to make sure that we don't get ahead of ourselves. But right now, we continue to feel pretty good about growing the business and continuing to grow our dividend as time plays on.

Operator

[Operator Instructions] Your next question comes from Sal Vitale with Sterne Agee.

Salvatore Vitale - Sterne Agee & Leach Inc., Research Division

Steve, just a quick question. You said earlier that on the reefer side, that pickups happen a little later than what is typical. If they had happened pretty much where you had expected at that point in the quarter where you had expected, what would we be looking at in terms of incremental revenue for the quarter?

Stephen P. Bishop

Yes, I'm not sure I can do that math in my head, but certainly, it would've added a couple cents to our adjusted net income.

Salvatore Vitale - Sterne Agee & Leach Inc., Research Division

Okay, that's reasonable. And then going to the math that you went through earlier, that remaining roughly $120 million that will be deployed or will be picked up by customers during the fourth quarter, how much of that has already happened? How should we think about how that -- where that -- how that occurs throughout the quarter?

Stephen P. Bishop

Yes, I think this last $120 million is kind of in mid-quarter. I mean, the last call, the stuff that takes us past that is probably late in the quarter, if you want to parse it that way.

Salvatore Vitale - Sterne Agee & Leach Inc., Research Division

The stuff that takes us past that [ph] -- a you meaning the 15% that has not yet been committed?

Stephen P. Bishop

Yes, or if you think of us having towards $72 million of commitment, that last $120 million is probably mid-quarter and remained -- the $272 million to $320 million is probably late in the quarter.

Salvatore Vitale - Sterne Agee & Leach Inc., Research Division

Late in the quarter, okay. So then the fourth -- first quarter, rather, will contain a full quarter of what is that? $320 million of earnings, of revenue earning assets?

Stephen P. Bishop

Yes.

Salvatore Vitale - Sterne Agee & Leach Inc., Research Division

Okay, that makes sense. And then just the last question, what are you seeing from your customers in terms of willingness to purchase containers on their own? I mean, I know it's pretty low that there really hasn't been so many container purchases. Are you seeing them much more reliant on yourself and lessors in general?

Joseph Kwok

Yes. We continue to see them relying on different companies for the containers. And then this of course, will be a reason that we're going [ph] -- everyone knows that. First of all, the trade prospect remain uncertain due to the -- actually due to the Europe financial crisis. And secondly, they do have commitment for other capital expenditures such as their new ships, their terminals and so on. And for container leasing it's really a soft set they can rely on to meet the increased demand for containers and we will continue -- we expect that to continue.

Operator

Your next question is a follow-up from Michael Webber with Wells Fargo.

Michael Webber - Wells Fargo Securities, LLC, Research Division

Give a breakdown on the CapEx operating lease versus DFL? And if I missed it, I apologize.

Stephen P. Bishop

It's okay. So in terms -- I'll do the -- so if you take the $318 million CapEx, or $320 million, it's basically 32% reefers, about $102 million and 68% dry, so $215 million, tune that up to about the total.

The operating lease, direct finance lease is on the smaller subset. Right now, that was to be about -- if you do -- stay in the same base of $320 million. You'd have 50% as operating leases, 35% as truck finance leases and basically add 15% as uncommitted at this stage.

Operator

That does conclude our answer and question session for today. I hand the program back over to Mr. Joseph Kwok for any further comments or closing remarks.

Joseph Kwok

Thank you. I appreciate everyone participating in our current quarter call and we shall look forward to talking to you all again in the next quarter. Thank you.

Operator

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

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