Q1 2021 Textainer Group Holdings Ltd Earnings Call
Thank you and welcome to <unk> first quarter 2021 earnings conference call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be provided at that time as a reminder, today's conference call is being recorded.
I'll now turn the call over to on Kit era, Investor Relations for testing or Group Holdings Ltd.
Thank you certain 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'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, 2020 filed with the Securities and Exchange Commission on March 18, 2021, 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 prepared in accordance with generally accepted accounting principles. A reconciliation of non-GAAP financial measures for 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 release today, we have.
Also provided slides to accompany our comments on today's call. Both the earnings release and the earnings call presentation can be found on <unk> Investor Relations website at Investor Day, It takes senior desktop.
I would now like to turn the call over to Olivier Ghesquiere, <unk>, President and Chief Executive Officer for his opening comments.
Thank you assets.
Good afternoon, everyone and thank you for joining us today for the next day in the first quarter 2021 earnings call.
I'll begin by reviewing the highlights of our first quarter results and then I'll provide some perspective on the industry.
Michael will then go for all financial results in greater detail after which we will open the call for your questions.
We're extremely pleased with our record first quarter results and revenue growth.
This confirms our dramatic turnaround.
This has been achieved through organic fleet growth improved utilization on our base business and optimize financing structure. Thanks for do you have for it off the entire senior team over the past two years.
For the quarter on lease rental income was up 7% when adjusted for the fewer number of billing days and 16% higher than for the normal corresponding quarter last year.
This represents a substantial increase for a business like ours, consisting of more than 85% long term leases.
It also augurs well for continued positive momentum given the compounded effect of our current fleet growth and the future very long term lease is already secured for containers to be delivered in the coming months.
In addition to revenue growth, we continued to reduce costs and enjoyed strong gain on sales, allowing us to report a record adjusted EBITDA, which increased 12% for $153 million as well as a record adjusted net income which increased 44 per cent.
$259 million.
Adjusted net income represents $1 16 per diluted share and sets us on track to a great full year performance.
Similarly, we achieved an annualized Q1 Roe of 18%.
Container demand has remained elevated since last summer driven by a prolonged surge in world trade.
Response to high demand, we have invested heavily in organic growth and build up accretive quality revenue.
During the second half of 2020, and first quarter of 2021 we added containers totaling $819 million and 500 on $18 million respectively.
As the market remains strong we placed additional orders for 700 billion of containers for delivery through July while focusing on back to back leases and longer tenures.
This meets that substantially all of these containers are already on or committed to attractive long term leases with levered IRR well into the mid teens and Asia recurrence.
Furthermore, the average tenure of lease is concluded since the beginning of the year has further increased to 12 years virtually guaranteeing debt all of these containers will be fully utilized until they reach their depreciated value and can potentially be extended or sold at a profit.
We think things into perspective for the period of July 2022 July 'twenty 'twenty. One we will have invested a total of $2 $2 billion in new containers that will provide strong cash flows and attractive revenue for many years to come.
This is a significant investment volume representing 45 per cent of our container asset value as of the beginning of this period, which will greatly contribute to our future profitability.
At the same time, we continued to support our historically high utilization rates by successfully renewing expiring leases under a long term arrangement that guarantee most containers will remain on lease until they reach their sales age further securing our stable future cash flows.
Well on production volumes of new containers has increased substantially to meet demand.
Entry levels, our factories remained very low, especially as we approach for traditional peak season of the year, while container prices have remained stable at about 3500 to $3600 per teu since earlier this year.
Our utilization rates.
Rich 99, 6% during the quarter.
And currently stands at 99, 7% on the fleet that reached another important milestone at 4 million Teu at the end of April.
We continued to experience minimal level of container really livery.
And we continue to focus on opportunities to renew and extend expiring leaves us in a very favorable environment.
These lease renewals have contributed and will continue to contribute to our revenue growth and more importantly are being structured under long term arrangements that guaranteed of containers will remain on lease until they reach disposal H.
The extra long duration of our recently this book.
With on brand, new containers and lease renewal with locking the cash generated by a significant portion of our fleet to most or all of its remaining economic life.
This will provide a strong and stable revenue stream for many years to come.
In addition to our strong operating performance. We also continue to further strengthen our financial position.
So far this year, we have issued two fixed rate a b S. One for $550 million that closing February and another for $661 billion that closed in April.
Combined average interest rate of the a b S was very attractive at 2.0 to three per cent.
We also recently announced the successful issuance of $115 million in perpetual preference shares with a cumulative quarterly dividend of 7%.
This issuance provides a new and diversified source of funding other an attractive price.
Combined with the leverage potential of our existing debt facilities. These additional resources will ensure that we can continue to participate in the current exceptional market, while optimizing our low blended cost of capital.
Finally, we're pleased to announce that we repurchased a total of 546000 shares of our common stock during the first quarter and debt on May 1st our board authorized a $15 million increase to our buyback program.
As we look into the remainder of this year, we're optimistic about the momentum of our business and strong market fundamentals.
We expect the economy to continue to strongly perform thanks to the government incentive programs and the full reopening of the North American and European economies.
We expect container demand to remain elevated through the rest of the year boosted by high trade volumes and restocking of current very low inventories and likely to be further amplified by the traditional peak season of the summer months.
In summary, I'm extremely proud in both the financial and strategic performance of our business.
We plan to continue our disciplined approach to our fleet growth investing selectively in the most attractive long term opportunities and remain committed to enhancing our financial performance and delivering long term value to our shareholders.
I will now turn the call over to Michael who will give you a little more color about our financial results for the first quarter.
Thank you for how long will now focus on on Q1 financial results for Q1, adjusted net income was $59 million, an increase of $18 million or 44% compared to Q4 and the record for texting when compared to Q1. Other prior year, we have an increase of over 500.
Per se, we expect another solid performance in Q2.
Confirming the strong basis on a foundation of our much improved results.
What do you want on adjusted earnings per share was $1 61 per diluted common share for.
3% increase from the prior quarter was very strong showing in Q1 translates to an annualized adjusted.
18%.
It's dramatic improvement from 13% in Q4.
We expect to be able to achieve a high teens adjusted or are we in Q2 and for the rest of them.
For reliable indicator of substantial cash flow generation.
The EBITDA in Q1 was $153 million.
The increase of $16 million or 12% as compared to Q4 and also another record for texting.
While we are extremely pleased to report record results. It is gratifying to see this level of performance achieving strong contribution from the key operating line items from our P&L.
Q1 lease rental income was $169 million.
So 8 million from Q4, or one 4 million greater than Q1 of the prior year.
This was largely due to an increase in fleet size.
Position and average rental rate.
We expect for Q2 lease right when we come to show more improvement, resulting from continued attractive fleet growth.
You won't gain on sale on fleet containers with 12 months.
An increase of $5 million as compared to Q4.
This was driven by substantial increase in resale container prices, partially offset by a reduction in the number of container salt.
We expect you to resale prices to remain strong given continued high demand on the very limited amount of container deliveries and the double resell inventory.
He wants to Iraqi terrorists not for $7 million, a decrease of for known as compared to Q4.
Is due primarily to lower storage maintenance inhalant losses, resulting from higher utilization and very low depot stock well.
We're pleased for the results of our disciplined efforts to manage and control costs.
We expect these costs to remain relatively stable at these attractive levels, if not slightly improve from Q2.
You want depreciation and stuff from $66 million for the quarter and is expected to increase from Q2 due to continued attractive fleet growth.
Do you want G&A expense of $11 million remained relatively flat from here.
Q4, and is expected to remain on this normalized level going forward.
Q1 current lessee default recovery what's pod.
And included a benefit from the restructuring and recovery of moving solving customer that previously defaulted was written down in the second quarter 2019.
Do you want on interest expense, including realized hedging costs was $32 million.
An increase of $1 million from Q4.
This was primarily driven by higher average debt balance due to our substantial fleet book.
Largely offset by a lower effective interest rate in Q1.
I am pleased with the result of our latest ABS issuance, which closed on April one and raised $651 million at attractive fixed rate price of insurance.
The proceeds were used to pay off our higher price 2019 down one ABS notes and the pay down variable rate bank facilities.
Further lowered our effective interest rate and create additional borrowing capacity for future container index.
We continue to be very pleased on the performance of our ABS financing program, which provides a flexible on an attractive source of long term fixed rate financing.
Volume for charges.
For the strike and Cheez it dropped to a level of 3% in Q1.
This rate to fall below 3% in Q2.
Turning now to our share repurchase program, we purchased 546000 share.
The average price debt.
$19 60, it sounds strength do you want.
The other Q1, we had approximately $13 million available under our current plan.
In addition to this $13 million our board authorized an additional $50 million under the program on the first.
We continue to execute on our capital allocation plan and we will repurchase shares opportunistically as we move forward.
Finally as announced on April 14th we successfully completed a public offering on April 13.
6 million depositary shares.
Each representing an interest from such thing our 7% series, a cumulative redeemable perpetual preferred shares for that.
The public offering price of $150 million.
Our free shares represent another source of attractively priced and perpetual capital.
When you usually suggestion financing our chocolate container investment opportunities.
Share of contribute by great recruiting for equity cost of the company's weighted average cost per cap on watch.
The first quarterly dividend other partnerships will be paid on June 15 from holders on record as of May 31.
Looking now at our balance sheet liquidity, we continue to maintain a healthy balance sheet and adequate liquidity.
Both are well structured bank facilities and cash reserves.
We ended Q1 with a cash position our restricted cash.
$13 million and well optimize financing structure.
We continue to remain confident going to support significant accretive organic growth through capex, while continuing to improve our profitability metrics.
Consistent with the Olivia it's early comments.
Very well positioned to continue to do X gain strategic plan to further improve financial performance and enhance shareholder value.
This concludes our prepared remarks. Thank you all for your time today operator, please open the line for questions.
Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys.
Our first question is from Michael Brown with K B W. Please proceed with your question.
Thank you operator, hi, good afternoon other dairy Michael are you guys.
Good how are you Michael doing well, Michael how are you.
I'm doing well thank you.
So yeah.
I guess I just wanted to start off with probably the other question I get the most which is really how long can this environment last in.
I heard in your prepared remarks, Louisiana that you see this.
On this market being strong for for this year, you know I think there's probably a number of elements that can keep it going for longer than that but you know I wanted to just hear your thoughts as we think about 2022 and the potential for the market to stay you know, perhaps not this strong but to stay.
A very attractive for for a while and I guess the follow on to that would be.
What causes it to end and do you think it'll be somewhat of like a soft landing here, Ted if things normalize eventually.
Thanks, Mike.
Listen I think the first element here too to really understand is that.
It's a very good question, but because all of those lease is in all the capex that we have committed to is really essentially back to back and leads to customer.
It's somewhat probably less less relevant except if you are trying to assess whether the growth is going to continue to accelerate but as we've mentioned on I've mentioned in my script, you know quarter on quarter, we had a 7% revenue growth and.
Yeah.
Is really with a business that has a long a lot of long term business you know 88% of our business is actually long term lease it meaning debt you know container less source like a lot of our long term leasing business is a business with tremendous.
Yeah, and a lot of momentum and it means that you know where we add those containers to the fleet or revenue continues to grow and you know we have going to enjoy the full year revenue of the containers. We placed on lease and are in the end of last year then.
We are going to enjoy in Q2, the full quarter revenue of those containers that we are on the higher in the first quarter and on top of debt. We are going to get the contribution of those containers that we've already committed and will be delivered in the second quarter. So I think that day.
That is very important for and what is even more important is that all of those containers are committed on extremely long maturities actually at the maturity that I have never been seen in this industry.
Now how long can this momentum and this additional growth continue listen we are actually very optimistic I mean not.
Not only have we moved to a COVID-19 economy, where people are really buying a lot of things online. We are now moving to a more open economy, where people will continue to buy online, but we'll buy a lot more things that they probably did not buy them that is further supported.
By additional government incentives by a lot of people potentially you know finding new activities and new jobs and additional revenue.
And all of that is going to be boosted by the seasonal demand of the summer months, which will coincide with the fact that you know we're at extremely low inventory level and you know so we will have to replenish those inventories will have to get ready for the shopping.
Shopping season after fall, a leading up to Christmas and the end of the year. So we see absolutely no kind of.
Stop or slowing down and this is very very strong demand and that's probably one of the other.
The important element here is that you know this exceptional demand is really fundamentally driven by high high demand right. It's just high demand, which causes a ship.
Capacity to be fully utilized which causes.
<unk> capacity can be for.
Fully utilized and and and you know, it's almost like a debt.
Disruption are bound to happen when you're stretching the assistant to delimit like it is now.
But the the disruptions are really not the driver here the main driver.
Really the growth in trade that is really causing this.
Credible as a demand for cargo to be moved from Asia to North America, and Europe and to the rest of the world as well.
So what when does this end.
It's a very good question and the timing is hard to.
Predict if we look a little bit closer and it from.
From a.
Container lessors point of view.
We probably think that the demand for new container will somewhat ease off towards the end of the year and into next year.
But we are going to have a an extremely soft lending and I think we're going to continue to see sustained demand and.
The reason, we believe we are heading towards a very very soft lending is because I like to remind people debt.
In 2019, and 2020, we had extremely low production volumes.
If anything the shortage compared to the long term trends would be about $1 five for 2 million Teu.
And this year if you look at the projection you know, they're very sort of like between $4 7 million Teu to $5 3 million Teu for the full year that that will just only allow us to catch up on the shortage of production that we had in the two years leading to this.
Incredible market. So what will then happen is that you know, yes, there will maybe be a slightly smaller demand for new container, but the market will definitely not be oversupplied with container and the second element here is that the retail market has been.
Starved of supply and you know when when demand slows down or comes back to normal shipping line will start returning some of the older containers that they've been holding on to.
And those will hit the resale market.
Which which really has a very very big appetite for for containers. So we think debt you know, it's it's certainly going to be a very soft landing and there's going to be very very limited impact on the on the demand for for lease container.
And probably the final element here, Mike is that a.
With new container prices remaining extremely stable at that 3500 $3600 per teu.
We also expect that this will continue to provide a very strong support for our contracts that are maturing and debt we will have to renew.
Yeah. Thanks, Olivia that was that was great a lot of what are important on important points in there that you addressed so thank you for that.
I guess is that is that kind of a follow on to that question.
Sounds like Youre expecting the adjusted ROA to be in the high teens and <unk>, if I heard that correctly.
Last quarter, if I recall the commentary about maybe I think it was longer term you think like a mid teens ROE is the right spot you know so so and is that is that still how youre thinking about the business you know through the cycle and then b.
What is it in your words is kind of driving the disconnect in the stock and that fundamental outlook, because you know you're basically trading at book value here and you now in your day.
Around about 10% in the last months and even at most you were trading at a modest premium to book Despite that high return outlook. So I just wanted to hear your take on on that dynamic. Thank you.
Yeah.
Yeah.
Just on the on the Arrow, we think that we were we were being overly careful last quarter.
The reality is that the performance of the business. He is even stronger than we anticipated ourselves and we've essentially changed our view from sort of like a mid teen to high teens Roe.
We're now going one step further into saying that we we certainly.
We expect this to stay stay at this high teens ROE for the for the full year in the foreseeable future.
On your second question. That's that's that's the question I ask myself every morning, when I wake up Mike how how is it possible that you know.
Container lessors are trading at multiples that are you know around seven times our forwards.
On earnings when the commentary from ourselves and our peers and everybody can see a debt that the market has got a lot of momentum and that's everything is positive so not only is that multiple.
Low compared to the rest of.
The markets, but.
You know people kind of can imagine that the earnings are going to go up so it's a very.
They are very very difficult question for me to answer I think that you know if.
It was take standard we certainly.
Believe that or share has a lot of value. That's why we continue with our buyback program.
And we could only hope that the market would see that the segment is probably a gem in the overall market that is being ignored what why that is a debt that is a completely puzzling me to be honest Mike.
Yeah. That's that's fair thanks for the thanks for the thoughts there on Wednesday.
Maybe just one last one from for me.
Just looking for a quick update on the capital management.
Philosophy here and kind of how that's maybe evolved a little bit you're still.
Buying back stock.
Doing a lot of a lot of capex.
Which is great to see you know there's obviously some.
Balance sheet optimization actions that you guys took on a quarter I'm, saying quite busy there but are you doing.
Think about that mix here toggling between investing in the business buying back stock and I think last quarter, you had expressed some interest or discussions that you've been having with the board about a dividend.
Looking to get an update there and see if any of those things.
Things have changed and how you're thinking about each of those levers.
No, it's essentially pretty much the same Mike I'll take that.
We've always stated debt as long as we see continued market momentum and opportunities to put capital work under favorable lease. This we would continue that then we.
We certainly continue to see the market in a very positive lights. Our first priority is to continue to deploy capex.
On that Capex and those investments will generate the future cash flow debt will eventually allow us to.
No other allocate capital back to shareholders, we continue to see value in our stock price as we just discussed and that's why we had the board increase our capital on.
Our allocation for for buybacks.
And in terms of dividend Yeah, most definitely takes.
<unk> is an ideal business to pay a stable steady dividend.
I like to say that they.
<unk> paid a dividend from the first day when public and it's only because of a little accident debt exchange had to stop paying a dividend, but the intention is certainly to resume paying a dividend.
As soon as that you know we see debt. It's the best for capital allocation debt is in front of us.
Okay, great. Thanks for the time with it.
Thank you Mike Thanks, Mike.
Thank you. Our final question is from Dan Day with B Riley Securities. Please proceed with your question.
Yeah. Thanks for taking my question afternoon, guys. So you grew the fleet by around 5% in the quarter on a teu basis.
Can you just give us any guidance for us.
How we should be thinking about fleet growth in two Q3 Q.
With all this capex coming on so it should it be around a 5% increase in <unk> similar to the first quarter and then moderate from there just any commentary you can provide around that would be great.
Yeah.
Hi, Dan.
You mentioned you know we have a substantial capex already committed debt will be.
<unk> added to our fleet in the second quarter and debt food go on lease fairly fast and I think that you can expect that the growth in our overall fleet to continue along the same pattern, probably in Q2, which will be slightly faster than what we have seen in the in the <unk>.
First quarter and towards the end of the year I think.
It's up a little bit less clear at this point in time, how much growth there will be we estimate that.
There will still be growth it might be a little bit slower compared to what we've experienced since July last year.
But you know the important thing to keep in mind is that container.
Containers are not more expensive so looking at it purely in terms of Teu is probably not the most accurate measurement, we we like to look at it in terms of the.
Amount of dollars or capex being being deployed because ultimately that's what contribution translates into or EPS, but no.
No you you could expect that there will be still some some element of growth in the second half of the year most definitely.
Great. Thank you. That's that's helpful. And then just with the Doe on the lease renewals. So yeah. We've talked in the past you guys had a lot of leases put in place in 15, and 16, well below market value as those are coming up you know in this kind of market.
Is it just kind of extended the same rate when in the past you would kind of be taking a discount or are you do you have the leverage to sort of increase those leases kind of more two to market rates.
Yeah, you know Don it's customary to say in our industry that it's very difficult to.
Replace all lease this but I got to say, we could not have grant of a better market environment for those leases to mature sort of like you know.
Sometimes you have to be lucky and lessen in 2016, we had the perfect storm against US we were forced to renew some of those leases that are at very cheap rates.
Right now we're exactly in the opposite situation and certainly you know we're looking to.
Renew those lease it and reprice those thesis positively.
But possibly even more importantly for us and I emphasize that in my my earlier comments is I think the duration of those lease what we're really looking at these two locking those cash flow streams for the for the foreseeable future for the long term.
So it's really a combination of you know I'm keeping those assets that you know on lease until they reached maturity.
And also a repricing them favorably in this market environment.
Got it. Thank you Olivier a lesson for me kind of a different question here.
Do you have a sense with this business is seems to be changing dramatically compared to what it was just in terms of how long these leases are right.
Do you have a sense of or kind of keep track of what your total revenue backlog is or would you be willing to kind of you know maybe disclose that just to kind of or at least talk about where it is relative to the past.
Or provide any detail around that I just.
Have gotten some questions on that and didn't think it would be interesting. So whether you have the exact number not just any commentary around that thought.
What exactly do you mean by revenue backlog, what what we have kind of committed going forward.
Yeah, so effectively if you're if you added up I guess the question comes because you know obviously, you're talking 12, your average leases versus kind of five six year leases in the past channel were more common so just how much revenue you effectively have a contracted.
On your book.
Versus where that number would've been in the past I guess, just if you added all the contracts up.
Okay.
We do track that but to answer for you.
All right question, very specifically, where they have to.
To go back and really compare historically, making sure we're comparing apples and apples, but at this point in time, we are close to two day equivalent of six year revenue that its a committed on those leases. Obviously those leaders are stretching from you know our E E.
Higher utilization and then are being spread over time, but if we add up that revenue that's roughly equivalent to two six years worth of revenue.
I think that is that one way you wanted to look at it.
Yeah, Yeah, no debt that's interesting that's fine.
Just just thought it would be a interesting way and.
You know maybe in the future.
It's something you'd think for like kind of get people to realize how different. This is then was in 2015.
Sure and and another way to look at it and this is for the the total revenue, including our finance lease are another way to look at it is that the the average remaining maturity of our operating lease is only used to be around three years and it's now definitely you know.
Slightly above above for years.
Got it.
Yeah I appreciate all the commentary guys best of luck I will turn it over.
Thank you Dan Thank you Dan.
Thank you ladies and gentlemen, we have reached the end of the question and answer session. I will now turn the call over to Olivier Ghesquiere for closing remarks.
Yes. Thank you everyone for listening in and we look forward to getting together again for our next quarter. Thank you.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a great day.