Q4 2020 Textainer Group Holdings Ltd Earnings Call

Welcome to the Viva and Conference Center and next available conference specialist will be with you momentarily.

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Welcome to the Visor and conference Center and next available conference specialist will be with you momentarily.

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Thank you for calling conference on ACH and every Nicholas.

First name David.

Last name and Brown.

What conference connect conducted zone.

<unk> Group Holdings.

And what company are you, whether you're a private investor.

IRI AI E R. A.

Joining sir.

At that time as a reminder, today's conference call is being recorded.

I'll now turn the call over to <unk> Investor Relations for <unk> Group Holdings Ltd.

Please go ahead.

Thank you Sir and statements made during this conference call may contain 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 the company and views estimates plans and outlook as described within this call may change after this discussion.

And he 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 30th 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 and the forward looking statements.

During this call we will discuss non-GAAP financial measures.

And 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 the earnings release today. We've also provided slides to accompany our comments on today's call. Both on the earnings release and the earnings call presentation can be.

We found on <unk> Investor Relations website at Investor Day at <unk> Dot Com I would now like to turn the call over to Olivier Ghesquiere, <unk>, President and Chief Executive Officer for his opening comments.

Thank you and good afternoon, everyone and thank you for joining us today cortex, Dana's fourth quarter 2020 earnings call.

I'll begin by reviewing the highlights of our fourth quarter and full year results and then I'll provide some perspective on the industry.

Michael will then go overall financial results in greater details on.

After which we will open the call to your questions.

We're excited about the significant improvement and our financial performance and the continued very favorable market conditions.

Our fourth quarter performance underscores the renewed strength of our business and provide sustainable momentum into the new year.

For the quarter lease rental income increased 8% to $161 million and adjusted EBITDA increased 15% to $137 million.

Our adjusted net income nearly doubled to 41 million dollar.

Or any one cents per diluted common shares as compared to $22 million or 41 cents per diluted common share and the previous quarter.

Adjusted net income represents an annualized Roe.

Of 13%, which probably best summarizes the magnitude of our performance improvements.

I am, particularly proud of our team's resilience and disciplined execution against our long term strategic plan that ensures our preparedness and ability to swiftly respond to the tremendous and sudden increase in container demand.

By acting fast at the beginning of the cycle, we secured container at an attractive price and we're able to capture profitable new business and grow our market share at a critical point of the market cycle.

And the fourth quarter, we leased out 300 causes you a factory and depot containers and extend it over 280000 and Cu of maturing long term leases under favorable terms group.

And the average utilization rate for the quarter to 98, 5% and 99, 5% as of today.

These leases will secure a stable and profitable revenue stream over the long term.

The average lease tenure of our factory lease outs, whether it makes sense of 10 years with returns scheduled almost exclusively in Asia.

Most of the lease renewal and depot lease outs were structured as lifecycle leases with maturities extending through the remaining useful life of the containers.

Our fourth quarter, Capex totaled $417 million and our fleet reached a significant milestone surpassing 4 million teu by the end of the year.

Total capex for the full year exceeded $1 billion with most delivery back loaded into the second half of the year.

Given the continued demand we have also placed additional orders and $925 million for delivery during the first half of 'twenty 'twenty one and.

Essentially all these units are already pre committed to attractive leaves us with a levered IRR well into the mid teens long tenures and Asia returns.

Although manufacturers and increased production to meet market demand additional capacity has been added very progressive lead and has also been further constrained by shortages of certain components.

As a result, new container prices and lead times have steadily increased over the past few months.

Price for an order placed today is over $3500 per C. U R $1000 more than four order placed back as recently as November.

While the average price for our upcoming 2021 orders is well below this current level.

Pedro investments remain attractive and.

Lease rates and maturities have increased in tandem with container prices, thereby eliminating and considerably mitigated and re pricing risk.

Our customers continue to benefit from high cargo volumes and record freight rates.

This has resulted and improve profitability that has allowed carriers to shore up their balance sheets and improve their credit standing caviar.

Carriers, and so far and mostly prioritize deleveraging over and new investment and expansion.

Well have some element of uncertainty from Covid remains we're very optimistic about our improved performance and strong market fundamentals.

We expect cargo volumes to remain elevated in the near terms boosted by government incentive plans E Commerce and the continued spending shift from services to consumer goods.

These elevated volumes along with port congestion should continue to support container demand.

We expect container prices to remain high as container manufacturers are and a strong position to protect the current elevated price was production capacity is virtually sold out for the first half of the year.

We expect a much reduced credit risk as carriers continue to benefit from the current market favorable condition and finally, we believe that carriers will continue to lease a significant portion of their container fleets.

Before because the liquidity on deleveraging and improving vessel efficiency and developing value added service offering such as integrated logistics.

In summary, we remain focused on driving shareholder value creation for the long term and we believe that we have turned on important corner and improving business profitability and setting it on a steady path to continued earnings and returns enhancement for the eventual recommencement of a dividend.

Program.

We will continue to execute against our long term plan to further improve our business to be best in class as we take advantage of the card and favorable market condition to grow organically and improve profitability and returns and thanks to further optimize financing disciplined capex continued.

Cost control renewed I T system and continued optimization of our capital structure.

I will now turn the call over to Michael who will give you a little more color about our financial results for the fourth quarter and full year.

Thank you Liz and I will now focus on the key drivers of our financial results Q4, adjusted net income was $41 million almost doubled from the prior quarter and our highest level and the last 16 years.

We're very pleased that this resulted in an annualized adjusted <unk> 13 per cent for the.

Our adjusted net income was $87 million 58 per cent increase as compared to 2019.

Q4, adjusted EPS was <unk> 81 per diluted common share also almost doubled from the prior quarter.

For the year adjusted EPS was $1 63 per diluted common share is 70 per cent increase as compared to 2019.

Q4, adjusted EBITDA was $137 million and increase of $18 million as compared to Q3, showing continued and improving strong cash generation from our business for the year.

Adjusted EBITDA was $476 million and increase of $12 million as compared to the prior year.

Before lease rental income was $161 million and increase of 12 million from Q3.

This was largely due to an increase and fleet size utilization and average rental rates.

We were very pleased with increase and our utilization rate, which currently stands at $99 five per cent.

We expect our Q1 lease rental income to show continued improvement.

Q4 gain on sales owned fleet containers net was $8 million relatively consistent as compared to Q3.

Substantial increases on the average gain per container sold were offset by a reduction and the number of containers sold.

On the Ltd for sale inventory as a result of high utilization.

We saw container prices have increased significantly benefiting from increased demand and reduced available inventories and increases in new container prices.

While we expect to continue strong resale price environment resale volumes are expected to remain low and Q1, given the minimal available for sale inventory.

Q4 direct container expense for the old fleet was $10 million a.

The decrease of $6 million as compared to Q3.

This was due primarily to lower storage costs, resulting from higher utilization.

And lower maintenance and handling expense, resulting from very limited remaining depo inventory.

We are pleased with the results of our continued focus on cost control efforts.

<unk> expenses and expect further improvements and Q1.

Q4, depreciation expense was $66 million for the quarter and is expected to increase from Q1 due to continued fleet growth.

Q4, G&A expense of $11 million remained flat as compared to Q3 and is expected to remain at this level going forward.

We continue to improve the quality of our spending and G&A expense.

Through among other methods enhancement of our technology tools and staff channel.

Yeah.

Before interest expense income.

<unk> realized hedging cost was $31 million decrease of $2 million from Q3.

This was primarily driven by lower interest rates from our successful refinancing activity during Q3, partially offset by a higher average debt balance due to the funding of attractive capex opportunities.

I'm pleased to announce our latest say, yes issues, which closed on February the chance.

And raised $550 million and attractive fixed rate pricing and terms.

The proceeds from this issuance will be used to pay down our bank facilities to create additional borrowing capacity for future Capex.

We are very pleased with the performance of our ABS financing program, which provides a flexible and attractive source of long term fixed rate financing and.

It's valuable to our business.

We expect our average effective interest rate to remain relatively consistent at three 1% during Q1.

Turning now to our share repurchase program.

Purchased 779000 shares and six 7 million shares of <unk> common stock on the open market.

And the average price of $15 and $10 13 per share during Q4 and full year 2020, respectively.

During 2020, we repurchased over 12% of our outstanding shares.

As of the end of the year, we had $23 million remaining and available from our board authorized program for repurchases.

Which continues as we move forward.

Finally as announced on January 20th 2021, we recently acquired a 49, 9% minority interest and tap funding.

The joint venture that has been included within our consolidated results.

Following the acquisition takes interval wholly own all consolidated entities and will no longer report and Noncontrolling interest on this.

Acquisition will be immediately accretive to earnings and further streamlines our organizational structure.

Looking now and our balance sheet and liquidity, we remain focused on maintaining a healthy balance sheet and adequate liquidity.

And both are well structured data release and cash reserves.

We ended Q4 with a cash position inclusive of restricted cash of $205 million.

We remain confident and our continued ability to support significant accretive organic growth through capex.

And while continuing to improve our profitability metrics.

Consistent with Olivia's earlier comments <unk> is very well positioned as it enters 2021.

With the capital allocation strategy, well supported by available liquidity and optimized capital structure.

And demonstrated expense control and efficiency.

This concludes our prepared remarks. Thank you all for your types of day operator. Please open the line for questions. Thank you, we'll now be conducting a question and answer session, if you'd like to be placed and the question queue. Please press star one on your telephone keypad, a confirmation tone will indicate your line is and the question queue. You May press star two if he'd like.

Great question from the queue for participants using speaker equipment and may be necessary to pick up your handset before pressing star one one moment. Please pull for questions. Our first question today is coming from Michael Brown from <unk>. Your line is now lives.

Okay, Great and Highlander.

And Michael how are you guys.

And how are you Michael.

All right. Thank you. Thank you.

And.

Great great. So.

The biggest question that I get from investors today is really how long can these market dynamics last and so Olivia I noticed in your prepared remarks, you talked a lot about some of the on.

Elements here that that seem to kind of keep them.

No.

And that can support that demand.

Due to net incentive plans and and.

And on shifting towards consumer good consumption.

And then also you talked about some of the port congestion and and you know.

Relatively.

Rational.

And that dynamic from a supply side.

But you mentioned and near term and.

And so I'm trying to think about how this could play out into the back half of 'twenty one.

What are what are kind of the puts and takes here that debt.

And ultimately.

Cause of this dynamic too to reverse and revert back to something more normal.

I understand it's certainly a different and then prior periods, but just interested to hear your thoughts here.

No I mean listen first of all it's I think very obvious that.

Whatever comes up has to come down at some point in time.

The current market is exceptional and in several aspects I mean, it is exceptional because it allowed us to.

And put a lot of our capital at work and.

And and its exceptional because we secured a fantastic yields but also a very long lease durations to us to protect ourselves against the possible downturn as we mentioned earlier a day.

Average maturity of the containers, which place that.

On lease and and those that are committed for the first half of this year have an average maturity of our in excess of 10 years, so that should give us some element of protection, but.

Coming back to your fundamental question about what really drives demand.

And I always like to kind of go back a little bit and and remind the audience that our 2019 was actually a very slow year for container demand and if you remember you know it was the time of trade wars and shipping lines, and we're really trying to optimize there and.

Centuries, and essentially day, we're returning a lot of containers and certainly the production level was very low now that's really essentially continued for the first half of 'twenty and 'twenty due to the initial scare of Covid. So production was really really low and it's only really in July.

That we have seen production started to ramp up and and it's actually today at a fairly high level. This day.

This being said and the market is definitely not oversupplied and.

And with containers and our view is very much that as the market will normalize and most likely.

When we move out of the Covid economy, which I think is going to take a certain time, but as we progressive lead move out of the COVID-19 economy towards the end of the year.

We're going to see a normalization of that trade.

And container.

But we are not going to see a situation where it is in excess of container and the market. You know first of all as I mentioned.

We have our leases secured for the longer term, but secondly, I really don't see that they will be in excess of container simply because the market was in short supply before this cycle really started.

Okay, Great. That's that's really helpful color over there.

I guess when I think about.

The second half of 2020 that was really just a step function change and the operating environment and and Taxane and done a major beneficiary and he concluded and C and our fourth quarter results here.

You put up a 13% annualized ROE and the fourth quarter. So I'm trying to think about now what's what's kind of the.

And how this structural change is really impacting your fundamental.

You know outlook here.

And.

So how do you guys think about whats your ROE potential is now has 13% something and the low teens seem to be where you think X standard can perform.

Instantly know obviously credit.

But that aside we don't know exactly how to do.

And that <unk> had at some point, but is it something on the low teens or mid teens, how do you think we should.

Forecast on ROE from here.

No I think.

The big the big message that I would like to put forward here is that you know tax day.

And who is back I think.

You know we've had a certainly an exciting journey since the previous downcycle and the Hanjin bankruptcy, but we're now really seeing the fruits of our hard work over the recent two years and the numbers really speak for themselves I mean, you know they are.

And I won't go through them again, but the revenue is up and you can see we have capex are locked in and that's going to contribute to further revenue.

You know the profit is as almost doubled and that you know, it's only going to continue to improve with all the containers that we are activating so we really have a very positive momentum on.

On your question on the ROE.

We've also really been focused on making sure that you know any capex, we deploy and any additional container. We put in service is incremental to our net income, but also incremental tour on ROE and so we see the ROE and we certainly target Roe.

To continue to improve we were very pleased with the results of 13% I think it's fair to say that we're probably targeting a further improvement on that I don't want to be too specific but 15% certainly seems quite reasonable.

And and that's really on on the base of the organic cash flow that our assets can generate before.

Before we.

And possibly on the on our capital structure by reducing our equity.

Okay, great and and.

And maybe just one follow up on that for me and I'll leave it but.

You put a lot of capex on and the fourth quarter I'm, assuming that's going to be a good run rate into the first quarter. So is it fair to assume that.

You certainly have a head count or you're on.

And day, count headwind and and the first quarter, but is it fair to assume that you can you can overcome that and that leasing and rental income could be be up and the first quarter.

Just trying to make sure that kind of kind of the right you know.

Jumping off point from a modeling.

Yeah, I I personally can see how the revenue could not be up and the in the first and second quarter of the year. You know we have a all those containers going on lease and are those that went on leave that you know I think we're we really caught the market was really in the third quarter, where we.

We're extremely fast.

Fast and you know, we manage to buy container and put them on lease up very very quickly. He was really down to speed of execution, but thereafter, all the containers that go into work you service are only generating a partly their full revenue each quarter and they go on lease.

So all the revenue that have gone on lease and the fourth quarter have only generated revenue for possibly you know half of the quarter and they're going to generate revenue for the full quarter than in the first quarter, we are going to have.

The further capex and and we also have a $925 million of Capex committed to be delivered in the first and second quarter that will start generating revenue progressively so.

Our resolute, yes weekend and you can expect to see our revenue continued to improve.

Okay.

Yes, Michael on one thing.

And you just look at the utilization rate as well so the average for the fourth quarter was $98 five so where we are right now in Q1 is 99 five so yeah.

And that's going to figure into the average for the first quarter. So you could see net net benefit from that as well.

Okay, great. Thank you for that clarification and thank you for taking my questions.

Yes.

Thank you Michael Baker next question today is coming from day and day from B Riley Securities. Your line is now live.

Yeah afternoon, everybody. Thanks for taking my questions and congrats on a really great quarter, and a really great outlook, it's awesome to see.

First quick question here.

And you guys and grew the fleet pretty aggressively four years to 5% and the last couple of quarters is that a good.

Run rate to think of like for fleet growth and first and second quarter going forward like we should kind of be anchored to that 45 per cent and then maybe moderating from there.

I think it's a pretty aggressive growth rate and it certainly above our long term capex are you know us.

Renewal plan, but certainly what we have seen in the last half of 2020, we see being reproduced in the first half of 2021 and as a matter of fact, those leases are actually already and 95% committed so.

We don't expect that a.

A slow down and the in the short term, we certainly expect that group.

To continue over Q1 and Q2.

Okay. Thank you and just on on the lease re pricing you guys had a lot more leases coming up and a lot of your competitors or are those starting to re price within the market and you know are they.

And they benefiting from from these strong rates.

Yes, absolutely.

And what what is not shown on the chart that is and on a investor presentation on slide eight which does show the.

The number of containers and maturing and this year is all of those that have been renewed that were actually maturing last here and there's definitely a lot of those leases have been.

Extend it and under favorable terms, given the general environment, and we really see those needs is expiring in 2021.

A great opportunity because you know those are comprising of many legacy leases stuff from the last down cycle that are at very cheap rates and we could not have imagined a better market environment to have those needs maturing so that we can extend them and and potentially reprice.

And very positively.

Yeah, so safe to think of it like obviously with 99% plus utilization rate is going to moderate over the course of this year and next year, but maybe some of that even gets offset by and by increasing per diem rates is as you get that lease re pricing upside and set a good way to think about it and longer term.

Absolutely correct.

Great Great and then just a last one the share repurchase authorization is kind of running down here.

And he plans to re up that and then you mentioned the dividend looking at and eventual reinstatement and any thoughts on the timeline for that I I understand capex, just kind of the priority here and the near term so just with that in mind and any thoughts there.

Yeah.

Listen.

Capital allocation is always on top of our priorities you know we already has and always have that in mind. That's how we built our long term strategic plan and as you mentioned right now we benefit from a great market. So deploying capex has made a lot of sense and <unk>.

C D and the impact of that and the results for this quarter and as I mentioned is going to continue improving.

On the buyback Similarly, I think we did pretty well last year, we bought about 12% of our shares back at an average rate of $10 a share which I think is a very attractive that certainly helped improve the D. E. P. S.

And in terms of dividend really what I would like to say is that listen it takes standard has always been a strong dividend payer we've been a dividend payer.

The first day, we listed.

The company.

The business model is really an appropriate model to ensure stable steady dividends given the strong cash flow that it does that generate.

And and we fully intend to resume paying a dividend, which we see as the logical our accomplishment of our our strategic plan and yeah. I think we are assessing that situation on a very very regular basis.

And yeah, I can assure you that.

The board who has to make this kind of a long term decision because obviously when we resume our dividends and we want to make sure that it is a stable and long term yield that we can provide.

And is reviewing this question on on a very very regular basis.

Awesome, well, congrats again on a job well done and this quarter and are excited to see what's in store for 'twenty and 'twenty, one so I'll turn it over.

Thank you.

Thank you Dan.

Thank you we've reached end of our question and answer session and I will turn the floor back over to Olivier for any further closing comments.

Yes, and a yes. Thank you everybody for listening in and I'm looking forward to.

Discuss that or next quarter and wishing you a great here. Thank you very much.

Thank you that does conclude today's teleconference. You may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.