Q3 2020 Textainer Group Holdings Ltd Earnings Call

As a reminder, today's conference call is being recorded.

I'll now turn the call over to Ed Yuen Investor Relations for Textainer Group Holdings limited.

Thank you certain statements made during this conference call may contain.

Looking statements in accordance with US Securities laws. These statements involve risks and uncertainties are only predictions and may differ materially from actual future events or results. The companys 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, 2019 filed with the Securities and Exchange Commission on March Thirtyth, 2020, and going forward any subsequent quarterly filings on form 6K for additional information concerning factors that could cause actual results to differ materially from those in the forward looking statements. During this call we will discuss non-GAAP financial measures as such measures are not.

Compared to corners to 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 can be found in today's earnings release.

Finally, along with our earnings release today, we have also provided slides to accompany our comments on today's call. Both the earnings release and the earnings call presentation.

Station can be found on fasteners Investor relations website, and investor decks introduction I.

I would now like to turn the call over to alleviate riskier Textainers, President and Chief Executive Officer for his opening remarks.

Thank you Ed good afternoon, everyone and thank you for joining us today.

I'll begin by reviewing the highlights of our third.

Our results and then I'll 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.

We are pleased with our solid performance in the third quarter delivering improved lease rental income of 149 million.

And others.

Adjusted EBITDA of $119 million and adjusted net income of $22 million.

These results reflect the expected turnaround from the disciplined execution against our long term strategic plan and a favorable market environment.

We had a very active quarter.

In that so our customer pick up almost 400000 to you our factory and depot containers, helping drive our utilization up to 97.7% as of today.

This leaves elsewhere achieved at attractive terms, including improved lease rate longer and staggered tenor and Asia focused returns.

The full financial benefit of these activity will be reflected in our fourth quarter results.

This positive performance, if you'd talk preparedness and ability to execute rapidly and effectively in order to capitalize upon market opportunities that presented themselves in this past quarter.

Not only did we activate.

A record number of containers, but we were also able to quickly secure additional production at attractive pricing and would prompt delivery.

We expect additional on high a fitful any unit in the fourth quarter that will translate into further long term growth and profitability improvements.

Okay.

A favorable market condition stem from an increase in trade volume, notably in export from Asia into the us and Europe.

This has been driven by traditional holiday even spent on merchandise less personal protective equipment furniture, only proven goods and computer equipment in fact.

Trade growth has been amplified by a shift in consumer spending away from travel and services and into physical goods.

The surge in imports contributed to port congestion and trucking capacity shortages, which in turn created a shortfall in containers returning to China, particularly for.

40 foot high Q.

Since the beginning of the year with added $610 million of containers into our fleet.

And project over $350 million of additional delivery during the fourth quarter, which will bring our total capex for the year very close to $1 billion.

All these container.

Centers are on lease or pre committed under attractive returns.

New container prices increased during the past few months from $2100 for two new for orders placed in August to about $2600 per SKU for orders placed today.

The price increase is primarily driven by the.

Coupled with production capacity management from manufacturers.

Resale container prices have also increased benefiting from the overall market shortage and decrease in new container prices and remain high today.

We are also pleased with the continued strong financial results reported by.

Our customers shipping.

Shipping lines have indeed been capitalizing on the recent surge in volumes strong freight rates and lower operating costs.

The strong financial performance has allowed carrier to shore up their balance sheet and we continue to see timely collection against our receivables as demonstrated by our reserve reduction.

Ian it's quarter.

Looking ahead, we expect steady earnings momentum and favorable market conditions to continue into the lunar new year, leading to continued improvement in our container utilization rate revenues and profit.

While we remain cautiously optimistic with the outlook for 2021.

One.

Significant uncertainties remain due to the unpredictable impact of a resurgence of COVID-19.

Yet our optimism is also based on the fact that even with the current surge in container on hires the overall container market is not oversupplied as shipping line started this cycle with limit.

It is entry and continue to show a strong preference for leaving overbook chasing in order to be new containers, reaching their normal retirement age.

In closing, we're pleased with the direction of the business and ongoing execution of our strategic turnaround plan.

We're seeing tangible results.

A number of actions taken this year to strengthen our business financial resources and long term outlook.

In particular since the beginning of the year, we lowered our borrowing cost with the successful issuance of nearly $1.3 billion in asset backed financing, we invested over 56 million.

Limits in share buybacks.

And we invested over $610 million in container delivered to the third quarter.

We continue to be committed to delivering long term value to our shareholders, while maintaining a strong financial position to support the current and future growth of our customers.

I will now turn the call over to Michael.

And he will give you a little more color about our financial results over the past quarters.

Finally, I will now focus on the key drivers of our financial results.

Q3, adjusted net income was $22 million or 41 cents per diluted common share.

Significant improvement versus prior quarters, and the second highest.

Or the just net income within the last five years.

Q3, adjusted EBITDA was $119 million, an increase of 9 million as compared to Q2.

Straighten, our strong cash generation ability.

Q3 lease rental income was $149 million, an increase of 4 million as compared to Q2.

Due to an increase in utilization and fleet size, while market activity continues to improve we were very pleased with the increase in our utilization rate, which currently stands at 97.7%.

This improvement is sourced from both new production and deputy South at attractive terms, our topline continues to be supported.

By reliable revenue stream from our lease portfolio, which includes an 86% composition of long term fixed rate leases.

As Olivier commented the recent increase in lease out activity is expected to further improve our utilization and lease rental income through Q4.

We have also been able to secure more.

Our future revenue stream and protect ourselves against risk from a possible future loan demand next year by already renewing a large portion of our expiring leases at attractive terms.

Q3 gains on sale of old fleet containers, net was $8 million, an increase of $2 million compared to Q2.

We are pleased with the continued resale price environment remains favorable today.

Q3 direct container expenses for the owned fleet was $60 million, an increase of 1 million compared to Q2.

This increase was mostly due to higher handling and maintenance to prepare depo units for lease up partially offset by lower storage costs.

Helping from an increase in utilization.

We expect to see lower direct container expenses for the owned fleet in Q4 as usual realization continues to improve through the end of the year.

Q3, depreciation expense was $65 million, an increase of 2 million as compared to Q2 due primarily to fleet growth.

Q.

Good day expense of $11 million, an increase of $1 million from Q2, due primarily to an increase in consulting fees associated with our IP enhancement project.

And management incentive compensation, resulting from improved company performance.

As a reminder, last quarter, we discussed our plans to continue to improve the quality of our spending.

As you can see through among other methods enhancement of our technology tools and staff talent.

We expect our investment in DNA to slightly increase in Q4, as we continue with our enhancement objectives. We've.

We benefited from a bad debt recovery of $2.1 million in Q3, driven by a reduction in reserves from continue.

Recruitments in collections, and our general customer credit profile.

While customer performance and liquidity have dramatically improved this year, we intend to continue our proactive approach portfolio risk reduction and we'll continue to maintain a conservative reserve on our receivables when appropriate.

Q3 interest expense, including real.

Realized hedging costs was $33 million consistent with Q2 and.

As previously announced we were pleased with the issuance of $1.3 billion in fixed rate asset backed notes during the quarter at attractive prices.

The majority of the proceeds were used to refinance $887 million of higher priced asset backed notes.

Lowering our all in average effective interest rate to approximately 3.1%.

Which includes noncash amortization of debt issuance costs.

Proceeds from the issuance also freed up additional commitment capacity within our current facilities.

Use in conjunction with our strong cash flow generation to firmly support our capital allocation strategy.

[music].

The refinancing resulted in a onetime $9 million noncash write off of an amortized debt issuance costs associated with the retirement of the higher price notes.

As most of our refinancing to the closed late in Q3.

The benefit of our debt repricing will begin to be fully reflected.

In Q4.

Turning now to our share repurchase program.

During Q3, we repurchased 2.4 million shares out takes care of common stock in the open market at an average price of $11.61 per share.

Since the beginning of the year Weve invested approximately $56 million in share buybacks.

Under the current program.

As announced on September 14th 2020 textures Board of directors authorized an increase to the share repurchase for rep for an additional $50 million.

At the end of Q3, we had approximately $35 million still available under the plan and we will continue to repurchase stock units.

Particularly as we move forward consistent with our capital allocation plan.

Looking now at our balance sheet and liquidity, we remain focused on maintaining a healthy balance sheet and adequate liquidity through both are well structured bank facilities and cash reserves.

We ended Q3 with a cash position inclusive of.

This restricted cash of $234 million.

As well as Apple available commitment capacity under our existing credit facilities.

We remain confident in our ability to support significant accretive organic growth through capex, while continuing to improve our profitability metrics.

As a reminder, we do not have any refined.

Financing requirements within the next 12 months and remain financially well positioned to continue to take advantage of the currently favorable market conditions.

This concludes our prepared remarks. Thank you all for your time today operator, please open the line for questions.

Thank you with.

At this time, we'll be conducting a question.

Let me answer session.

I wanted to ask a question today. Please press star one from your telephone keypad and the confirmation tone indicate your line is in the question Q3.

Let me first start to hear that you move your questions in the queue for.

For participants using speaker equipment may be necessary to pick up your handset before pressing the star keys.

One moment, please while we poll for questions.

Thank you and our first question is from the line of Mike Brown with KBW. Please proceed with your question.

Hi, Good afternoon, Michael analytics are you guys.

Good how are your mind well, Mike. Thank you copied oil good anchor.

Good.

Thanks for asking so.

Michael One one comment that you made in your prepared remarks was that you've seen some success in the.

And I don't want to put words in amount, but it sounds like you've seen some success in the repricing.

On the leases towards the current market rates.

Some of those legacy.

Though our OE leases have certainly kind of saddled the profitability Textainer historically, so I wanted to just hear a little bit more about.

The trends there what you've seen out if I recall correctly 2021 is where the larger portion of those contracts.

Rollover or.

When the when the bill down period kind of works itself out.

So wanted to just hear a little bit more about what you've seen so far youre Umm confidence in your ability to continue to reprice those contracts and then could you potentially size, what the aro improvement could be.

See if you're able to.

Complete that endeavor successfully with the current our OE rates that you're seeing in the market.

Yes, Mike you did ask the question to add to Michael but allow me to just step in here from a market.

Perspective, a little bit.

We're certainly been very happy with that with the market. Then you rightly pointed out that we had a lot of that legacy leases as we like to call them that were coming for repricing this year and next year.

And in which you have a combination of a order.

Orderlies is that's where we price down in 2016 as well as a very cheap container that we purchased in 2015 Thats where on Liza.

Fairly low rates.

Now, we've already been able to essentially extend and reprice.

A substantial portion of those leases with the current market environment I would say, we repriced about a 200000 to you so far.

And we've really focused on making sure that we get good terms and that those containers also stay on lease for the longer term.

In terms of outlook, we certainly.

Expect to to continue that we have a lot of leads us as you can see in our investors presentation page eight that are coming up for renewal, but were very positive and encouraged by the fact that.

The average maturing leases.

[music].

A rate is probably well below the current market rates, we estimate that that those leases are about 20% to 25% below current.

Market rate for equivalent container so.

The impact in terms of our are we.

It's going to be significant I think it's a little bit early to estimate exactly what that is going to be because it will obviously also will be very much blended with the additional capex that.

You have seen in our result, this this quarter and that pool.

Will contribute further in the coming quarters, but we certainly expect that that will have a very positive impact and we hope that we will.

Somewhat offset come closer to.

A level, which you know.

That is what we think should be the long term level.

Which is probably.

In the region of 10% or above 10% are always over the longer term.

Okay I appreciate the color on that so just to put a finer point on it I guess it'd be helpful to know what do you think is like like what inning are you in for that.

Repricing those legacy leases and when do you think in a reasonable time to expect to reach something like 10% Aro is it 2022, more you kind of talking a little bit longer than that.

So Mike just to rephrase that question are you.

Referring to.

Are there other lease renewal opportunities.

I was specifically focusing on goes in legacy leases from into the 2015 in 2016.

Yeah, well there was a substantial portion of that.

Still have to be renewed.

That are maturing in 2021 Uh huh.

The vast majority of them are actually maturing towards the end of 2021. So I think that the repricing of those will be felt most likely in 2022, but certainly all of those that were maturing this year will be felt in 20.

2021.

Did that answer your question, Mike or yeah, Yeah, I believe so yes, I was just trying to kind of get to the timing of those of those various pieces. So thats that is helpful. Thank you Lydia.

Wanted to talk about the fourth quarter.

You hear so your adjusted net income this quarter was up.

About 46% quarter over quarter and got your commentary about how the benefits that started to come through in the third quarter will really have a larger impact for a full quarter impact in the fourth quarter I'm not also included.

He is obviously the benefits on interest expense.

Any.

Any ability to put some guidance around that for where you're expecting the adjusted net income could come out.

For the fourth quarter, obviously, you know there could be some surprises, but just generally were not.

During the quarter, just any color on that.

Well I would say we would not expect surprises are certainly we don't expect that surprises at this point in time I think it's one of the.

Few times in my short career in the container leasing business that I would say.

I see no clouds on the horizon. So to answer your question, we don't like to give a specific guidance, but it's fair to say from our commentary and from the situation that we expect a continuous improvement and continuous improvement into Q4.

But also towards the Nate.

Make next year as you know we continue to benefit from all the additional capex that we have generated and also from the full revenue generation from those on the hires and the strong sort of like an incremental.

The fact that those containers will continue to contribute.

Okay, Great and then just to shift gears to capital return.

I'm sorry, the commentary in the press release about the share buybacks. It sounds like you have about 35 million left on the.

Recent.

Authorization increase so you are purchase I guess 15 million sense. The middle of September was that heavily weighted to the third quarter or were you actually.

Using a tenbfive one and buying.

A lot during the fourth quarter just trying.

To kind of model out how that played out between the two quarters.

Yeah. So Mike I think we had about $35 million capacity still available at the end of the third quarter. So yeah. We continue to buy opportunistically during the fourth quarter of course says as part of our cap.

Capital allocation plan. So you should expect that that's certainly one of our choices and options within that.

Choice of using our capital.

Having said that we certainly are attracted to capex given the yields that they're providing to us. So we're certainly going to be looking at that for fourth quarter as well, but think of it as we are going to do both definitely in the fourth quarter.

Okay, Great and just one last one for me on the bad debt recovery.

Or as a reserve recovery could you just provide me a little more color about that was that what drove that and then item this quarter.

Just a thing I may have missed your comment on it in your prepared remarks.

No worries.

Mike. So if you think back in prior quarters, a second quarter, perhaps you might recall, we are entering into the throes of Cove at where.

Cited to set up some prudent reserves just to be proactive and conservative.

No Sir.

Proven wrong.

For us certainly in.

Very good position.

<unk> performance on liquid standpoint, where they certainly paid.

In accordance with terms and paid well and performed well as well. So we are we're essentially reversing some of these earlier reserves as they are no longer needed, but having said that we still definitely want to maintain a concern.

The level of reserves associated receivables when it makes sense, but that recovery is essentially reversing those excess reserves that are no longer needed.

Okay perfect I appreciate that color and that makes that makes a ton of sense.

Okay, guys I'll leave it there. Thank you for taking my questions.

So welcome Michael Thanks, much. Thank you.

At this time I'll turn the call over to Olivier for closing remarks.

Well. Thank you everyone for listening into our third quarter earnings call and looking forward to update you on a hopefully a further positive news for the fourth quarter. Thanks.

Very much.

Thank you everyone. This will conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation.