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Edited Transcript of TGH earnings conference call or presentation 21-Feb-19 10:00pm GMT

Q4 2018 Textainer Group Holdings Ltd Earnings Call

HAMILTON Mar 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Textainer Group Holdings Ltd earnings conference call or presentation Thursday, February 21, 2019 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Michael K. Chan

Textainer Group Holdings Limited - Executive VP & CFO

* Olivier Ghesquiere

Textainer Group Holdings Limited - President, CEO & Director

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Conference Call Participants

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* Helane R. Becker

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

* Michael C. Brown

Keefe, Bruyette, & Woods, Inc., Research Division - Associate

* Ed Yuen

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Presentation

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Operator [1]

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Thank you, and welcome to Textainer Fourth Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, today's conference call is being recorded.

I will now turn the call over to Ed Yuen, Investor Relations for Textainer Group Holdings Limited.

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Ed Yuen, [2]

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Thank you. Certain statements made during this conference call may contain forward-looking statements in accordance with U.S. security laws. These statements involve risks and uncertainties, are only predictions and may differ materially from actual future events or results. 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 differently from those in the forward-looking statements.

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 measures to the most directly comparable GAAP measures will be provided either on this conference call or can be found in today's earnings press release. Finally, along with our earnings released today, we've also provided slides to accompany our comments on today's call. Both the earnings release and the earnings call presentation can be found on Textainer's Investor Relations website at investor.textainer.com.

I would now like to turn the call over to Olivier Ghesquiere, Textainer's President and Chief Executive Officer, for his opening comments.

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Olivier Ghesquiere, Textainer Group Holdings Limited - President, CEO & Director [3]

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Thank you, Ed. Good morning, everyone, and thank you for joining us today for Textainer's fourth quarter 2018 earnings call.

I'll begin by reviewing the highlights of our fourth quarter and full year results, and then I will provide some perspective on the industry. Michael will then go over our financial results in greater detail. After which, we will open the call for your questions.

For the full year 2018, we delivered lease rental income of $612.7 million, an increase of $63.3 million or 11.5% over the prior year.

Please note, that we are now reporting lease rental income, including of our managed fleet. Michael will go more into the detail of this reporting change, that does not impact our earnings.

We leased out over 500,000 TEU during the year, 3 quarters of which was new production at an average yield of 11%. We delivered adjusted EBITDA growth of 18.3% to $443.1 million. Adjusted net income was $51.5 million or $0.90 per diluted common share as compared to $23.2 million or $0.41 per diluted common share in the prior year.

Our average utilization for the year was 98.1%, an improvement of 170 basis points over the prior year with our current utilization standing at 98.3%. At year-end, we owned approximately 79% of our fleet, which stood at 3.4 million TEU. While we are pleased with our performance for the full year, the strength in the market that we saw through the first 9 months of the year did not carry through to the end of the year.

This is not unexpected, given traditional seasonality patterns as demand for new containers is typically softer during the fourth and first quarter of the year. Concerns and uncertainty around the ongoing trade friction and slower global economic growth forecast served as additional headwinds to market activity this quarter.

Accordingly, these rental income of $157.1 million for the fourth quarter was essentially flat sequentially to the third quarter as we saw low level of -- on the higher activity and reduced production volume. In addition, during the fourth quarter, we incurred $4.6 million in impairment related to delinquent lessees. As previously communicated, we've taken a fresh look at the business and are being proactive in optimizing our portfolio. We believe with these actions, our efforts are now largely completed, and we do not expect there will be any notable impairment in the first quarter of 2019.

In addition, during the fourth quarter, we finally arrived at a settlement arrangement with insurers related to the Hanjin claim, and we recognized the gain in insurance recovery of $8.7 million.

As we look at the industry through the global perspective, we're cautiously optimistic about the market outlook. Our perspective is driven by the following: While the threat of a widening trade war, Brexit and steeper-than-anticipated slowdown in China were cited by the IMF as it recently trimmed global growth outlook for 2019 to 3.5% from 3.7%. We believe this revised level is still supportive of shipping volume and trade growth. There is innate replacement demand for containers that are coming to the end of their life and will need to be replaced with new production.

Utilization remains high. The market supply appears balanced as new production inventory is reasonable at 780,000 TEU. And lessors and shipping lines have not been placing large new additional orders. During the fourth quarter, our utilization was strong at 98.6%, while demand for new lease outs was low. We continue to see favorable low level of turn-ins and attractive container resale environment. We have seen a modest improvement in lease-out activity in January, but the overall environment remain muted leading up to the Chinese New Year. New container prices have recently come down to about $1,700 per CEU, driven by combination of the decline of steel prices, a depreciating renminbi and softer demand. However, we believe new container prices may increase as seasonal demand ticks up in the second quarter of 2019.

And finally, we believe shipping lines will continue to increase their reliance on container-leasing companies as they focus their liquidity on necessary CapEx related to new ships compliance with IMO 2020. At the end of December, total dry van production reached 4 million TEU with over 60% of purchases going to leasing companies. We expect demand for leasing to remain strong.

As we continue to navigate an uncertain market environment, our team remained focused on executing against our strategic priority to improve profitability. We're seeking opportunity to lower operating cost and speed up turnaround time. We're focused on quality revenue with double-digit average cash-on-cash yield, and we intend to continue to improve our fleet yield through organic growth and optimized repricing of existing leases.

We're taking a profit-oriented approach to lease reviews and extension and will leverage the favorable resale environment for used container to dispose of equipment if a potential expansion does not achieve our targeted yield.

We're taking a stricter and more proactive approach to identify and initiate recovery of equipment held by customers on the verge of default in order to limit future losses. We intend to invest in the business to maintain adequate new production inventory and better-serve customer needs on short notice. However, we will be measured and disciplined with yields on leases and will only seek growth under the right returns. And finally, we further strengthened the leadership team with the addition of a new Controller and a VP of Marketing. And I believe, we now have one of the best teams in the industry. I will now turn the call over to Michael, who will give you a little more color about our financial results for the past quarter.

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Michael K. Chan, Textainer Group Holdings Limited - Executive VP & CFO [4]

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Thank you, Olivier. I will now focus on the key drivers of our financial results. Q4 lease rental income was $157.1 million or flat sequentially compared to $157.8 million in Q3. As high utilization and an increase in average per diem rates were partially offset by a slight decrease in fleet size. For the year, lease rental income increased $63.3 million or 11.5% year-over-year to $612.7 million, driven by high utilization and an increase in fleet size and an increase in the average rental rates of the fleet.

Q4 gains on sale of owned fleet containers net was $9.6 million compared to $8.5 million in Q3 due to an increase in the number of container sold, partially offset by a reduction in average gain per container sold. For the year, gains on sale of owned fleet containers net was $36.1 million, compared to $26.2 million in the prior year due to an increase in average gain per container sold, partially offset by slight reduction in the number of containers sold.

Q4 direct container expense was $15.1 million, a decrease of $1.4 million compared to Q3, primarily due to $1.2 million in lower repositioning expense. For the year, direct container expense was $58.8 million, a decrease of $1.5 million from the prior year, primarily due to $6.8 million in lower storage cost, resulting from higher average utilization, partially offset by $4.4 million in container recovery cost, incurred for lessees that became insolvent in 2018. Q4 container impairment was $8.2 million and primarily consisted of $4.6 million in estimated unrecoverable containers held by delinquent lessees and a $3.6 million impairment to write down the value of containers held for sale to their estimated fair value less cost to sell.

For the year, container impairment was $26.8 million, consisting primarily of $12.6 million in estimated unrecoverable containers held by delinquent lessees and $13 million in impairments to write down the value of containers held for sale to net realizable value. These impairments included $6.9 million from unleasable containers moved to disposal, primarily reefer units, many of them recovered from Hanjin for which there was limited commercial marketability.

The current container resale environment remains favorable, and we continue to opportunistically evaluate our portfolio to maximize the value of these containers, while also saving storage expense and providing an opportunity to redeploy capital to higher-yielding assets on a long-term basis.

Q4 depreciation expense was $61.1 million, an increase of $700,000 from Q3. For the year, depreciation expense was $235.7 million, an increase of $4.7 million from the prior year, primarily these are larger fleet size in 2018.

This was partially offset by the depreciation decrease, resulting from an increase in future residual values effective July 1, 2017. Q4 general and administrative expense was $10.7 million, down $1.8 million from Q3, primarily due to $2.4 million in cost associated with departing senior executive personnel recorded in Q3 with no comparable charge in Q4. For the year, general and administrative expense increased $4.6 million from the prior year, primarily driven by $2.4 million in cost associated with the departing senior executive personnel and a $1 million increase in our short-term incentive compensation cost. In Q4, we recognize the gain on insurance recovery of $8.7 million related to the final insurance settlement of Hanjin bankruptcy for insurable costs, including primarily unrecovered containers and incurred container recovery costs, net of the insurance deductible.

We collected the remaining or same portion of the final settlement during January and early February 2019. Q4 interest expense, including realized hedging gains, was $35.3 million, an increase of $900,000 from Q3.

Before the year, interest expense, including realized hedging gains was $133.2 million, an increase of $14.5 million compared to the prior year, driven primarily by higher average debt balance due to CapEx and higher interest rates. Unrealized loss on interest rates swaps, collars and caps net was $8 million for the quarter and $5.8 million for the year, primarily resulting from a notable decrease in the forward LIBOR curve at the end of 2018, which reduced the carrying value of our interest rate derivatives at year-end.

Longer tenured and higher fixed rates swaps were also hard to be traded, to replace expiring lower fixed rate swaps.

Income tax expense was $800,000 for Q4 and $2 million for the year, reflecting a 5.6% and a 3.6% effective tax rate, respectively. We continue to expect our annualized income tax rate to normalize in the mid-single digits. Q4 net income was $12.2 million or $0.21 per diluted common share.

For the year, net income was $50.4 million or $0.88 per diluted common share. Q4 adjusted net income was $11.9 million or $0.21 per diluted common share. This excluded an $8.7 million gain on insurance recovery, and $8 million unrealized loss -- interest rate on swaps and caps. For the year, adjusted net income was $51.5 million or $0.90 per diluted common share. This excluded an $8.7 million gain on insurance recovery, a $5.8 million unrealized loss on interest rate, swaps and caps, $2.4 million of cost mostly associated with departing senior executive personnel. And a $900,000 write-off of unamortized debt issuance costs. For refinancing certain debt in connection with amendment of our revolving credit facility.

Q4 adjusted EBITDA was $115 million, up $1.3 million or 1.1% when compared to Q3.

For the year, adjusted EBITDA was $443.1 million, up $68.5 million or 18.3% when compared to the prior year. Turning now to our balance sheet. We ended Q4 with a cash position inclusive of restricted cash at $224.9 million. As a reminder, on September 3, we executed an amendment to expand our revolving credit facility from $700 million to $1.5 billion, while also extending it to 5-year term and repricing it lower by 50 basis points. We believe our financing platform is well positioned and well-priced to adequately fund our future CapEx plans.

As we discussed in our Q3 call on October 31, 2018, we purchased the remaining noncontrolling interest at TW Container Leasing for approximately $29.7 million.

The purchase provided a sole ownership of our portfolio of mostly seasoned finance leases with an asset book value of over $100 million. Finally, as noted on our earnings release earlier this afternoon, in connection with preparing our 2018 financial statements, we reevaluated our fleet's management agreements for managed containers and determined that these agreements conveyed to the company the right to control the managed feet. Therefore, meeting the accounting definition of a lease based on U.S. GAAP guidance. As a result, lease management fee income previously presented on a net basis was reclassified and presented on a gross basis for all periods presented. This reclassification has no impact to underlying income from operations or net income, as well no resulting changes to the consolidated balance sheets and consolidated statements of cash flows. This concludes our prepared remarks. Thank you all for your time today. Operator, please open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Helane Becker with Cowen and Company.

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Helane R. Becker, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [2]

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So just a couple of questions. I think, Olivier, you said that your cash-on-cash returns were in the low double digits. So are you seeing -- you mentioned on the repricing, are you having -- are your customers accepting higher rates, as you go to reprice containers? That's my first question. And then my second question is on the -- it's probably a question for Michael on the balance sheet. I'm just kind of wondering if the accounts receivable line being up so much from year-end '17 to year-end '18 is reflective of concerns about customers. I mean, are they are -- or is it just the size of the fleet grew so much that accounts for that increase?

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Olivier Ghesquiere, Textainer Group Holdings Limited - President, CEO & Director [3]

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Hi Helane, how are you? On your first question on the cash-on-cash and on the repricing, I think that's a very interesting question because clearly, prices of new containers have dropped fairly rapidly since the third quarter of the year. And normally, repricing is closely tied to the prices on new container. What we're seeing, however, is that because that drop has been so sudden, it hasn't fully translated on the prices of -- or depot containers. And certainly, our depot lease outs rates have remained much stronger than the rates on the new containers. I think, because most of those leases can go on shorter term and in a very uncertain environment customers like to take containers on short maturities. When it comes to repricing of existing long-term leases that is a different question. Very clearly, we are feeling a little bit of pressure coming, but it's more a kind of a wait and see game at the moment. Because a lot of people, including ourselves, expect price of new containers to bounce back. So we're sort of like playing for time and hoping that by the time we really have to renegotiate the prices or the rental rates, price will have come back up. The second element I think, which is important to us is that resale price of containers have remained fairly strong and that puts us in a slightly stronger position because we are now able to essentially postpone reducing rates or actually not exceeding to customer request to reprice lower because we rather take the containers than sell them because we estimate that as a more profitable situation. So in a nutshell, I don't think we are seeing a major impact in having to reprice or long-term leases downwards at the moment. I hope this answers your question, Helane.

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Michael K. Chan, Textainer Group Holdings Limited - Executive VP & CFO [4]

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And Helane, this is Michael, here. Thank you so much Olivier. To add on top of that, what's interesting is that, if you look at the underpinning average per DM rate of the fleet during Q4, it actually went up as compared to Q3 by about a $0.005, which is a great underpinning metric here. We're doing our best to manage the renegotiations as well, as Olivier mentioned. We're in a very advantageous environment, given the very strong resale environment, making -- taking a box back, not adverse to us, actually, given that we can probably sell it for a nice gain. That translates to being in a key position and actually showing a good underpinning metric of a higher per diem rate on average for Q4. Go ahead.

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Helane R. Becker, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [5]

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Great. Could I just follow that up real quickly with, what's your average lease term on new containers? Olivier, I think, you said, your customers were going shorter. But we heard from CAI yesterday that their lease term is 8.5 years. And Triton also mentioned last week, their average lease terms are closer to 7 years now, and I'm kind of wondering how yours compare?

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Olivier Ghesquiere, Textainer Group Holdings Limited - President, CEO & Director [6]

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No, we're talking about new container lease outs. I mean, our average is still closer to 6 years. I think, we exclude our finance lease from more calculation but 6 years is the average for our operating lease of new containers. When I was referring to short-term maturities, I'm referring to lease outs of depot containers, which can go out on leases of anywhere between 1 to 3 years.

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Helane R. Becker, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [7]

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Okay. And then on the -- sorry, on the balance sheet question, Michael?

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Michael K. Chan, Textainer Group Holdings Limited - Executive VP & CFO [8]

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Certainly. Helane, interestingly, at the end of the year, one of our major lessee relationships reached out to us and asked to temporarily delay payment on a short-term basis whereby, they made the payment after the fiscal year-end, early part of January. So there's an accommodation for them. What happened was that it caused the AR balance to be higher at calendar year-end, but it dropped within the week right after year-end. This was merely something that was negotiated between us and the lessee. No issues in terms of credit by all means, but it was, in essence a relationship favor, if you will, whereby that balance normalized right after end of the year.

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Helane R. Becker, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [9]

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Okay. And then are you seeing an environment in which you think there can be increased industry consolidation?

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Olivier Ghesquiere, Textainer Group Holdings Limited - President, CEO & Director [10]

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It's a good question. I don't think the situation has changed fundamentally. I think that we're likely to see more consolidation amongst the big shipping lines. There's a few companies, and few names that keep on coming up. Quite clearly, the environment remains competitive. And I think that there's a clear demonstration that size matters in this industry. So I think, we can expect more consolidation on the shipping side. I think if your question also refers to leasing company, I see probably a little bit less potential for consolidation. There has been talk about certain opportunities on the market for transactions but I don't see an immediate opportunity in terms of consolidation amongst lessors.

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Operator [11]

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(Operator Instructions) Our next question is from Michael Brown with KBW.

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Michael C. Brown, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [12]

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So just wanted to dig in first on the impairment charges this quarter. So last quarter, you basically said that the impairments that were related to kind of the cleanup activity. That was generally complete. Sounds like this quarter there were some additional write-offs on the legacy, on Hanjin portfolio, like the reefer units, specifically. So I mean, what occurred in the quarter that you discovered that there is more containers to dispose. And then, how can we be sure that really the cleanup efforts are done at this point?

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Michael K. Chan, Textainer Group Holdings Limited - Executive VP & CFO [13]

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Mike, thanks for that question. In the fourth quarter, we had -- actually we had 2 lessees that we had payment plans, if you will, and redelivery schedules associated with them. They failed to honor them during the fourth quarter. So these are a couple of workouts. Smaller in size to what we counted earlier, and save the third quarter. But nonetheless, they disappointed us and that they didn't honor their payment terms and the delivery terms. Given that facts, we felt that it was prudent to go ahead and impair the boxes that were with these guys. So we went ahead proactively, took that impairment in Q4. We're still working with these customers and trying to get them to adhere to the payment and redelivery plans but -- and we're also pursuing legal actions. But at the same time, from an accounting standpoint, we thought it would probably, best to report it in Q4. Again, smaller number of impairment but nonetheless, we're not happy with that of course.

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Olivier Ghesquiere, Textainer Group Holdings Limited - President, CEO & Director [14]

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Mike, I think the first part of your question, you alluded to some Hanjin remaining. I don't think there's anything to do with Hanjin in the impairment this month. The second part is really due to the ongoing impairment as we put container to disposal. I think because we are impairing containers on the individual basis we always have a few containers that we end up selling below book value. But they really have to be seen in context of the global disposal of assets and all the other containers on which we actually realized gains. And those $3.6 million impairment on some containers have to be viewed in line with the $9.6 million gain on sales that we also realize for the quarter.

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Michael C. Brown, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [15]

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Okay, thank you for the clarification. And then just focusing on the leasing revenues, I mean it sounds like, we're in the midst of the seasonally slow period. And so as we look to the first quarter, clearly, there is less days in the quarter. So really would you expect to kind of leasing revenues to decline sequentially? And if so, can you kind of frame the magnitude of the decline, given we really didn't see that last year?

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Olivier Ghesquiere, Textainer Group Holdings Limited - President, CEO & Director [16]

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It's a very good question. I think that more than the number of days for the quarter, we would look at the general macroeconomic environment and it's a reality that the fourth quarter of the year was slow and because of that, we are not expecting revenues to increase in the first quarter, if anything we're expecting, revenues to be flat over the first quarter. But primarily as a result of not having on hand a lot of container in the last quarter of the year. We also expect the first quarter to remain fairly soft. And certainly, as I mentioned earlier, we have seen a much smaller build up to Chinese New Year than we had seen last year. Last year, we have seen a very strong buildup to Chinese New Year, which really helped to boost up the revenue. But this year, there was a fairly, fairly small increase. It was positive, but it was much smaller than last year. And I think that we will have to wait until the second quarter of this year, until we really see the impact of the seasonal activity that will help boost our revenue of top line.

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Operator [17]

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Ladies and gentlemen, we have reached the end of our question-and-answer session. I would like to turn the call back over to management for closing remarks.

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Olivier Ghesquiere, Textainer Group Holdings Limited - President, CEO & Director [18]

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Okay, well thank you everybody for attending our call and we look forward to meeting you again next quarter for continuation of the Textainer story. Thank you very much.

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Michael K. Chan, Textainer Group Holdings Limited - Executive VP & CFO [19]

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Thank you.

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Operator [20]

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Thank you. This concludes today's conference you may disconnect your lines at this time and thank you for your participation.