Hello and welcome to the Q3 2 2018 Textainer Group Holdings Limited Earnings Conference Call. My name is Zanera and I will be the operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Executive Vice President and Chief Financial Officer, Michael Chan. Mr. Chan you may begin.

Thank you and welcome to Textainer's 2018 third quarter conference call. Before I turn the call over to Olivier Ghesquiere, President and Chief Executive Officer of Textainer Group Holdings Limited, I would like to point out that this conference call contains forward-looking statements in accordance with U.S. securities laws. These statements involve risks and uncertainties, are only predictions and may differ materially from actual future events or results. Finally, the Company's views, estimates, plans and outlook as described within this call may change after this discussion. The Company is under no obligation to modify or update any or all statements that are made. Please see the Company's Annual Report on Form 20-F for the year ended December 31, 2017, filed with the Securities and Exchange Commission on March 14, 2018, and going forward any subsequent quarterly filings on Form 6-K for additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements. I would also like to point out that during this call, we will discuss non-GAAP financial measures. As such measures are not prepared in accordance with Generally Accepted Accounting Principles, a reconciliation of the non-GAAP financial measure to the most directly comparable GAAP measure will be provided either on this conference call or can be found in today's earnings press release. For this quarter, we have also included slides to accompany our comments on today's call. The Q3 earnings call presentation can be found on our IR website next to the link for this webcast. At this point, I would now like to turn the call over to Olivier for his opening comments.

Thank you, Michael. Good morning everyone and thank you for joining us today for Textainer's third quarter 2018 earnings call. I'll begin by reviewing the highlights of our third quarter and then I'll provide you some perspective on the industry. Michael, will then go over our financial results in greater details, after which, we will go over to questions. Let me start by saying that I'm honored to believe in Textainer as CEO. As many of you know I joined Textainer in January 2016 and was until recently responsible for marketing and operations based here in San Francisco. Before this, I was CEO of Ermewa Groupe which operates the second largest railcar leading fleet in Europe, as well as the leading business for locomotives and tank containers. I've pretty much been in equipment leasing all my career during which I spent 10 years in Asia and then the last 13 before joining Textainer in Paris. I would also like to take the opportunity to welcome Michael as Textainer's new CFO. As most of you probably know, Michael had significant prior experience with Textainer previously serving as the Company's corporate controller before spending some time with Cronos as well as several other businesses where he served as CFO. Since Michael rejoined Textainer 18 months ago, he has been instrumental in helping us reorganize our treasury and finance platforms. I'm delighted to have him as our CFO and I look forward to working side-by-side with Michael to continue Textainer's long history of delivering value for investors, our customers and our employees. Turning now to our results for the third quarter, there is good news and bad news. So, let's start with the good new first. The quarter was positive from an operational perspective as we saw record on higher activity, resulting in a net 165,000 TEU lease out of which 137,000 TEU of new equipment lease out under operating leases with average maturities above six years and mostly Asian return schedules. This drove solid top-line improvement with lease revenue up 6.8% sequentially to the second quarter of this year, and even more significantly, an increase in lease revenue of 15.7% over the prior year period. Since the start of the year, we have leased out over 350,000 TEU of new production equipment as we have been able to utilize our strong financing platform and take advantage of attractive market opportunities. We are focused on quality revenue with average cash-on-cash yield above 11% and we intend to continue our focus on improving our fleet yields through organic growth and optimizing reprising of existing leases. This has been a very positive year for leasing activity with continued container shipment up above 4% and demand for lease equipment growing at slightly faster pace still, as shipping line continue to increase the reliance on container leasing companies. At the end of September, total dry van production reached 3.4 million TEU with over 60% of purchases going through leasing companies. As I mentioned earlier, our priority is to improve our bottom-line and yields, and favorable market conditions have helped us achieve positive results in that direction. Just as importantly, we remain intensely focused on the relationship we've maintained with our key customer to whom we strive to provide the highest possible quality of service, to ensure that we remain their first call, be it for depot containers or new production. While we are pleased with our solid operational performance during the third quarter, we did have three specific events which impacted all earning. Firstly, we incurred $10.6 million related to two defaulting customers in Asia which increased our container impairment and direct container expenses. Second, we incurred $6.9 million in impairment cost to write-down unleasable container to their estimated resale value as we made the determination that it was more economical to dispose of these units rather than to continue to incur storage cost. Most of these impairments are related to reefer containers, the bulk of which were recovered from Hanjin. Finally, we have cost associated with the departing senior executive as well as a write-off of unamortized financing cost associated with the recently renewal of our revolving credit facility. We believe the bulk of the cost associated with these defaulting customers are now mostly behind us. In addition, we believe that after these action to reduce storage, the level of depot container inventory is low, positioned in good location and leasable aft attractive rates. We expect an improvement in our result over the next quarter, as most of the other metrics of our business remain positives. First, retail activity remained strong. Volumes are up and while our average price is like down compared to the last quarter, this was mostly due to damage recovered equipment put to disposal. We intend to continue to take advantage of the current positive market and dispose of assets whenever we feel profit can be realized and the equity redeployed by new containers. Second, our utilization rate continues to increase as we lease off units in high demand location and dispose or reposition unit from low demand locations. Third, turning booking at a very low level which is an indication that our customer continue to experience stable freight volume and need containers. And finally, average rental rates continue to increase incrementally as we lease out containers at higher rate than the current average fleet. As we look at the industry through the global perspective, we are cautiously optimistic about the market outlook. The main area of concern remains the trade frictions and the uncertainty this brings for economic players. While short-term disruptions are usually positive for container lessors, the longer-term impact is much harder to predict. As I mentioned earlier, the impact has been positive so far with shippers rushing to beat the tariff deadlines and causing a surge in demand on the transpacific trade while euro bound cargo remained slow. In addition, many of our customers now expect an increase in regional cargo as production shifts towards alternative countries less affected by the current trade disputes. Whether this is sustainable remains to be seen and we continue to monitor the longer-term impact of these developing situation. I think it is important to put things into perspective and remember that slower growth does not mean no trade, and that transpacific only represents about 17% of the containerized trade in the world. With the seasonal activity prior to the Lunar New Year about to pick up, demand for container leasing is expected to strengthen in December and January. Current new container inventory at factory stand at about 600,000 TEU. This level is slightly above historical average but we do not feel that there is excess supply in the market given the current very low depot unit availability across the industry. More significantly, manufacturing prices have recently declined to about $1,900 per CEU, the result of which is a combination of low demand following the transpacific peak season and a depreciating renminbi. This reduction in order does not come as a major surprise given the high volume of 3.4 million TEU of dry container manufacturing so far this year. Even if production volume reduces substantially, as we're now observing, the total production will reach close to 4 million TEU, which will be one of the best year in the history of container manufacturing. We expect demand lease equipment to pick up again towards December as we entered the seasonal buildup to Lunar New Year. To summarize the market situation, new container inventory is reasonable. Depot container availability is low, new factory orders are being reduced, and utilization is at a virtual maximum for all major lessors, shipping lines are relying more on lessors given the higher economic uncertainty and weak financial performance in the first part of the year. And finally, lessors are purchasing 60% of the container being produced. I will now turn over the call to Michael who will give you a little more color about our financial results for the last quarter.

Thank you, Olivier. I will now focus on the key drivers of our financial results. Q3 lease rental income was $129.8 million, a $17.6 million increase or up 15.7% compared to the same quarter a year ago, and an $8.3 million increase or up 6.8% compared to Q2. These increases were driven by higher utilization and increase in the size of our own fleet, and an increase in our average per diem rates. Q3 net gains on trading container sales was $1.8 million, a $1.4 million increase compared to the same quarter a year ago, due primarily to greater trading container volume. Q3 gains on sale containers was $8.5 million, exhibiting continued relatively strong resale container prices. Q3 direct container expense was $16.5 million, up $5.5 million compared to the same quarter a year ago. The year-over-year increase was primarily due to $2.5 million in container recovery costs associated with two insolvent Asian regional lessees. So high repositioning expense partially offset by lower storage expense, resulting from higher utilization. Q3 container impairment was $16.8 million, and it primarily contained $8.1 million in estimated under recovered containers with the same two insolvent lessees. While the majority of these containers were located by Textainer, the containers were either too damaged or too expensive to recover. Q3 container impairment also contains $6.9 million and impairments were specific mostly niche containers, which include mostly reefers with limited commercial marketability. The current favorable container resale environment is probably the best time to maximize the value of these containers, while also saving storage expense. Depreciation expense for the quarter was $60.4 million, up $5.1 million or approximately 9% compared to the same quarter a year ago, due primarily to a larger fleet size. During the quarter, we also increased our residual value for 40 foot high cube containers by $50 to $1400, while reducing our residual value on 40 foot high cube reefer containers by $500 to $4000. The net impact of these changes is negligible with average annualized depreciation expense for the quarter remaining at approximately 4.5% of container cost. We continue to expect the run rate to remain closer to this level as our recent CapEx comes on line. Q3 general and administrative was $8.5 million, up $1.2 million compared to the same quarter a year ago. The year-over-year increase was due primarily to costs associated with departing senior executive personnel as well as higher headcount. Our long term incentive compensation expense was impacted by $1.9 million and accelerated stock compensation expense associated with departing senior executive personnel. Interest expense increased year-over-year primarily due to higher volume costs as we increased the fixed rate portion of our debt, higher debt balances due to CapEx and higher LIBOR rates. Q3 interest expense including realized hedging gains was $34.4 million, a $4.5 million increase from the same quarter a year ago, with effective interest rate at 4.24%, a 13 basis point increase when compared to last year. We have not yet seen a reciprocal increase on lease rental rates as this typically lies behind increases in market borrowing rates. However, our ratio fixed rate and hedge debt to total debt stands at 78%, limiting the broad line impact as interest rate increases. Q3 net income was $1.9 million or $0.03 per diluted common share. Our adjusted net income was $4.8 million for the quarter or $0.08 per diluted common share. As Olivier mentioned, this performance is the result of top line improvement that offset by unusual costs and impairments affecting the quarter. Adjusted net income excluded $2.5 million of costs mostly associated with departing senior executives and a $900000 right off of unamortized debt issuance cost from refinancing certain debt in connection with the renewal of our revolving credit facility. Q3 adjusted EBITDA was $111.3 million, up $10.7 million when compared to the same quarter a year ago. Turning now to our balance sheet. We ended the third quarter with a cash position, inclusive of restricted cash of $239.2 million, an increase of $33.8 million when compared to the same quarter a year ago. Moreover, our financing platform is well positioned and well-priced to adequately fund our future CapEx plans. We are pleased to have executed on September 26, an amendment to expand our revolving credit facility from $700 million to $1.5 billion. The facility which is important to our financing platform was also extended to a 5-year term and repriced lower by 50 basis points. In connection with amendment, we use proceeds from the facility to pay in full and terminate the separate $190 million revolving credit facility and a $332 million terminal further streamlining our capital structure. Finally, subsequent to the end of the third quarter, on October 31, 2018 we purchased the remaining non-controlling interest in TW Container Leasing. This was a joint venture use for finance leases, which was already fully included in our consolidated financials. The purchase provides us with sole ownership of the portfolio of mostly season finance leases with an asset book value of approximately $110 million. We expect to pay off the existing financing on these assets and position them in our corporate facilities where leverage can be increased and financing costs lowered. This transaction will be included in our fourth quarter results and we expect the accretive returns from this portfolio. This concludes our prepared remarks. Thank you all for your time today. Operator, please open the line for questions.

[Operator Instructions] And our first question comes from Michael Brown from KBW. Please go ahead. Your line is open.

Hi, guys. Good morning.

Good morning, Michael. How are you?

Good. Just a first question here, so with the reefer containers that you wrote down and sold this quarter. What were you seeing there that it weren't able to deploy the containers by given overall strength in the market and high utilization rates?

Well, there are several issues as I mentioned earlier on. The vast majority of those containers are actually former Hanjin containers. These are you know for a large part container that we acquire through fleet repurchases. So in other words, these where finance leases that we took over and we never assume that we would have to deal with remarketing that equipment and that equipment wasn't really build to what we regard as up to our specification. So that's the first part. The second element is that a lot of those containers were of a machinery type and with certain specific design to Hanjin that made them pretty difficult to remarket for other players. And although, we did recover them and repair them and had them standing on the depot, we found that it was very difficult to lead them out. And one issue with reefer is that if the machinery doesn't run for a little while, it causes all sorts of other concerns then even if you are then able to lease them out, you risk having a lot of incidents, so you have to spend money on repairing them, upgrading them and making sure they perform. So, at the end of the day, we calculated that disposing of those containers was probably the right thing to do. We think it's going to save us close to $1 million in storage costs overall. And from an economic standpoint, that's really the best thing we could do.

Hi Mike, it's Michael. On top of that Olivier mentioned that it is going to save ongoing storage expense by an over $1 million per year, which is about 10% of our overall storage expense annually. On top of that it's going to also have immediate accretive effect on our utilization computation. So we're having pick up an utilization of about 60 basis points as well, part of that is really clearing this portion of the fleet out of the depots actually once we sell them.

And perhaps the last point I'd like to add is that, we also estimate that the current market is positive. We see opportunities to dispose of those containers at reasonable prices and we feel that now it's probably the time to take that action.

Okay. Just two follow ups on that. So one, you guys are still on relatively new in the sea. But as you kind of look to the portfolio, do you still see other areas where you may need to do a little bit clean up and dispose of some other container assets. And then, the second part being, if the utilization rate is already kicked up again or it's already up to 98.6. Does that already reflect the disposal of those containers or should we expect that to increase an additional 60 basis points from there? Thank.

Okay. Well on the first part of your question Michael, we do not expect any sort of clean up. As you pointed out yourself, with utilization of the level that is it means that our fleet is now pretty close to full utilization and we don't see any further need for cleaning up. That was really a very specific case associated to those reefer containers. I think I'll let Michael answer the second part of your question on utilization.

The utilization impact is normal. You might have noted that we somewhat lag behind some of our public peers. With this leading of this portion of the fleet that was really dragging us if you will that utilization is going to get to close 99%, whereby I think we'll see a smaller bridge if you will between us and our peers. So we are happy to do that, but really not apart from that metrics, the saving on storage is quite notable and we are happy to take action to get that out of there and to redeploy our cash or something else.

Okay. And then, you guys identifying that you're really seeing a lot of strength in the resale market. So how should we think about related a gain on sale revenues as we look forward in the fourth quarter? And then after till 2019 obviously that's maybe a little bit further than what you can see with the market will look like at that time. How should we kind of think about how active it will be in selling younger boxes going forward?

Thank you, Michael. I think we stated that, yes we were going to probably be a little bit more proactive in disposing of certain containers a little bit younger in their life cycle. It doesn't mean that the volume will increase tremendously. What we see right now is that volume of certainly supply till it's limited in terms of second hand resale containers. Although, we have seen a slight decrease in our average resale price, it's primarily due to the fact that we recover some of those badly damaged container from defaulting customer and we couldn't get a very high value on those, so that impacted our average retail price. But buying large our resale prices remain quite strong and they're still actually going up in certain parts of the world. Supply is limited. So looking ahead, we don't anticipate any issue. We actually think that it is the right time to sell containers and we expect that certainly for the foreseeable two quarter as resale prices will remain fairly strong.

And Michael, as we mentioned earlier, what we like is this current environment where there is low depot inventory out there. So as we negotiate extensions or rate renewal talks if you will. This puts us in a very strong negotiating position whereby we are not afraid to take the box back if we are not going to get a rate that is satisfactory to us. So, with that in hand, if we don't get the where we want, we can get the box back, sell that and very likely have gain and redeploy that capital to different piece of equipment that is high-yielding and we could then walk that return over a longer term as well.

Okay, great. Thank you. That's all the questions from the.

Thank you, Mike.

Thank you. [Operator Instructions] Our next question comes from Helane Becker from Cowen & Company. Please go ahead. Your line is open.

Thanks very much operator. Hi guys. Thank you for the time here. Just on the watch for us now. So one question, one were you surprised at the one or the two referees that are defaulted? And two, as you think about other customers, is there anybody else about which you have to be concerned? And do you think you would consider being more aggressive in reprocessing your equipment in the future?

Hi Helane, thank you. It's a very good question. Did you expect those two customers to default, no. It's actually that surprise. Depending on the truth, we've actually had business with those two referees for more than 10 years and we had quite a stable relationship. We are not pretty much – no problem so far until about six seven months ago their payment started slipping. And I think although the two cases are very, very different in nature. They're essentially down to a high bunker cost, increasing competition, and some external currency effect that has impacted them. And the reality is that what these effectively happening is that a competition intensifying in Asia than anywhere else and consolidation is taking place. Unfortunately what's happening in the Chinese market is that the consolidation is a little bit more Darwinian than it has been for deep sea carriers. Meaning that there is no consolidation by a takeover of other players and the weaker players just simply are left to die on the side. And this is what's happening with those two players, whereas the larger players become stronger on the domestic Chinese market, which is really maturing. And if you look at the situation, we now have quite a few Chinese players that used to be small domestic players that are now ranking in the top 20 or top 15 in the world with very, very substantial fleet sizes. Now do we expect other bankruptcy is obviously the next question? We don't expect any. We don't have any radar at the moment and I think that essentially those two incidents traced back to earlier this year where currency fluctuated as bunker costs went up all of a sudden. I think if we are going to have more they would have happened at the same time, so I am reasonably confident that we should not see further defaults of similar lessees.

Okay. Has any of your lessees come to you or fallen behind on payments, at least after this two?

No. Those were really the two that we were concerned about. And I think if I may, I would like to answer the second part of your question earlier on which is was about the people assessing the equipment a bit more aggressively. I don't think there is a fundamental change, but I think that you know if we see that lessee is running late, we certainly are taking action as we always have actually.

Okay. And then just on – I asked one of your competitors this question earlier today. When you think about the demand for equipment, you kind of think about it being picking up in December, January ahead of the Chinese New Year? And then normally in February it would fall off and then it would kind of pick up again mid February to late February. But given that the spring season in eastern you know no whether that affects, shopping or not retail. But given that Easter so late and Chinese New Year so early, do you think there would be an increase in demand you know in the beginning of March, or would it move to the latter part of March?

That's a very good question Helane. To be honest, as you stated we expect that increase in demand towards the Lunar New Year, certainly traditionally December and January have been very strong. I think we expect that this year and everybody is expecting that as well. To your question, as to whether the demand remains strong towards Q2, that is traditionally the low season and I personally don't see that you know we will see very high volume even though there is this gap as you mentioned with Easter. I think that very much will depend on the situation on the trade, the sanction side. I mean if the problem goes away, I think we will very likely have a very strong first half of the year, but if the situation remains as it is now, I think that we are going to experience a typical sort of low-cycle in the beginning of the year after Chinese New year.

Okay. Alright. Well, thank you very much Olivier. I appreciate your help.

Thank you very much Helane.

Thanks Helane.

Our next question comes from Scott Valentine from Compass Point. Please go ahead. Your line is open.

Just in regard to the capital management, I know not so long ago, Textainer paid a dividend. It was halted part of the Hanjin, I guess issue. I'm just wondering how maybe given your new role, how you guys think about capital management, is it dividend, it's a priority near term or given where the stock is trading at pretty discount to book value, does the buyback make sense and how you weigh those two against CapEx opportunities?

Thank you, Scott. Just high level, I would like to say that, this is something we always review on a constant basis. At this point in time, I think Michael and myself and the rest of the team were really focusing on the – getting the business right. And definitely, capital allocation is part of that discussion. As you know in the past Textainer has paid dividend. We even had a small share repurchase program. But you know, I would like to say that – that is very much a decision that has to be taken jointly with the Board, or probably more by the Board than by the Management. It's something we look at, it's something we keep in mind, but as far as we're concerned on the day-to-day basis we're focusing on improving the business performance first.

Okay. And then just a follow-up, Michael, I think you mentioned that with the $110 million in finance leases that you guys, JVs you guys took over, there is some accretion from that. Is it – I mean is it $0.05, or $0.10 a share annually, is it in that range or…?

I guess if you look at, Scott if you look at the whole dollar amount, they're probably – adds maybe $3 million to the bottom-line if you will. We have 25% of it earlier. Now, we've got the additional 75%, so probably – and from a whole dollar standpoint, about that much. The good news, what we like seeing there is that, as part of the $110 million, we got the finance leases in there, but there are also some operating lease assets in there two near the end of their lives. So, we see a potential nice sale-off whereby we may be able to reap the gain on those assets. So, that's a nice portion of the fleet that is part of that.

Okay. Alright, thanks very much.

Thank you. At this time I'm showing we have no further questions. I would now like to turn the call back over to Olivier.

Thank you. In closing, I'd like to say that I'm pleased with our performance in the third quarter during which we did deliver some solid top-line growth, but we also took proactive steps to optimize our portfolio. Above all, I think we remain focused on maintaining this positive momentum, while also improving our bottom-line. Textainer is and remains a formidable company with a global presence and a fantastic team of specialist dedicated to do their jobs. We're also supported by our great and loyal customers who have strong interest in our success as a vibrant participant in the leasing industry. I'm excited to lead Textainer and believe our future is bright. I'm also fully committed to taking the necessary actions to strengthen our business and position Textainer to deliver strong long-term shareholder value. Thanks again for taking the time today to listen to the Textainer story. I look forward to updating everyone on our progress during next call.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.