Q2 2021 Textainer Group Holdings Ltd Earnings Call

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Please standby.

Thank you and welcome to <unk> second 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 is being recorded.

Now I'll turn the call over to anchor the here at Investor Relations for <unk> Group Holdings Ltd.

The overall financial results in greater detail after which we will open the call for your questions.

We're pleased to deliver another quarter of strong results with outstanding performance across the all of our key operating metrics.

For the second quarter compared to the first quarter. These rental income increased 11% for $187 billion driven by organic feed growth in a very strong demand environment.

It just it EBITDA increased 17 per cent to $178 million, which reflects our ongoing cost optimization initiatives as well as of favorable lease and resale environment.

Just the net income decreased 27 per cent of $75 million or $1.48 per diluted chair, which represents an annualized autoweek of 22 per cent.

We continue to benefit from the current market environments, which remains very favorable for.

Previous in material costs.

Total factory inventory levels remain very low at about 2 weeks of the equivalent current production.

During the year, we have also further strengthened our financial position true the optimization of our debt financing.

As of the end of the quarter or effective interest rate stands at 2.7% and 87% of our debt is fixed rate with an average remaining tenor of almost 7 years.

Combined with the extended to remaining tenure of our lease portfolio, we have effectively locked in attractive economic gains into the long term.

Our strong cash flow generation and capital optimization initiatives facilitated our accretive capex investment as well as our ongoing share repurchase program, where we repurchased approximately 616000 shares in the second quarter or over 1.1 million shares in the first half.

Of the year as we continue to see this as an attractive investment.

As we look out for the second half of the year, we remain confident in the strength of our underlying business fundamentals and we believe we are well positioned to sustain the positive momentum in our business.

The current market environment remains very favorable and we expect the container demand to remain elevated through the rest of the year.

We are heading into the traditional peak season with retail inventory levels. The low end of U S and we see of similar wave of demand building in Europe.

We expect cargo volumes to remain strong for the lunar new year, despite potential shifting spending to travel and services related to COVID-19 reopening and recovery.

We expect the new container prices to remain high as manufacturers maintain their discipline.

We expect retail prices for all the containers to remain elevated due to supply constrained and overall, we expect our customers to continue to benefit from the current the very favorable ongoing market environment.

Year on year on net on the higher fleet growth is very near 30% with further on higher can be generated by $600 million of forward capex and associated committed leases.

I'm very proud of the strong execution across the organization as we continue to grow organically and improve profitability and returns to our disciplined capex.

<unk> focus on cost control and continued optimization of our capital structure we.

We remain committed to enhancing our financial performance and delivering long term value to our shareholders.

I'll now turn the call over to Michael who will give you a little more color about our financial results for the second quarter.

Thank you Olivier Hello, everyone I will now focus on our Q2 financial results.

Delivered outstanding performance across the enterprise during Q2, which reflects the strong underlying fundamentals of our business and the strategic actions. This management team has undertaken over the past few years to guide the position Tech center to capitalize on this very favorable market environment.

Q2, adjusted income was $75 million, an increase of $16 million or 27% as compared to Q1, and an increase of over 400% year over year.

Q2 adjusted earnings per share was the $1.48 per diluted common share a 20% increase from Q1.

We are very pleased that this results in a Q2 annualized adjusted ROE of 22%.

Which builds upon the adjusted ROE of 18% from Q1.

Q2, adjusted EBITDA was $178 million, an increase of $25 million or 17%.

As compared to Q1, illustrating our strong and reliable cash generation ability.

Q2 lease rental income was $187 million, an increase of $18 million for 11% from Q1.

This very good showing in our topline was largely driven by a strong organic fleet growth supported by very attractive long tenure leases at favorable fixed rate yields and the continued the increase in utilization and average rental rates.

We are very pleased with our utilization rate, which averaged 99, 8% during Q2.

Note that Q2 lease rental income includes the benefit of the $6 million settlement received from the previously and solve the customer related to unrecognized lease rental income from prior periods.

Having said this we expect lease rental income to further improve in Q3, resulting from continuing very attractive fleet growth.

Each of gain on sale of the old fleet containers was $19 million, an increase of $7 million as compared to Q1 day.

Moving mostly by an increase in resale container prices.

We expect Q3 resale prices to remain strong with volume to somewhat decreased due to low container availability consistent with strong utilization levels.

Q2, direct container expense of $6 million, a decrease of $1 million as compared to Q1, primarily due to lower storage maintenance of hailing costs, resulting from higher utilization and very limited depot inventory.

We remain focused on driving cost efficiencies and we expect direct container expense to remain relatively stable at these attractive levels in Q3.

Q2, depreciation expense of $70 million and is expected to increase from Q3 due to continued attractive fleet growth.

We're pleased the Q2 G&A expense of $11 million remained relatively flat as compared to Q1.

While at the expense fleet and the lease rental income continue to grow.

We expect G&A expense to remain at this level of going forward.

Q2 interest expense, including realized hedging costs was $33 million, an increase of $1 billion from Q1.

This was primarily driven by higher average debt balance due to the funding of attractive capex opportunities reflected on our substantial free growth, which was largely offset by a lower effective interest rate from Q2.

We continue to Opportunistically optimize our clients restructuring to secure long term fixed rate financing debt is valuable to our business.

In closing <unk> is very well positioned to continue executing the strategic plan to capitalize on the very favorable market environment.

And the further improved 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.

Like to ask the question. Please signal by pressing star 1 on your telephone keypad. If you are using a speaker phone. Please make sure of your mute function is turned off to Larry smoothed feature of equipment.

Again press star 1 to ask the question.

And we'll take our first question of day from Michael Brown with K B W.

Great. Thank you operator.

The Olivia Hi, Michael how are you guys.

Good how are you mining of Walmart.

Oh Wow.

So your fleet has grown by 30% year over year, you're clearly had been investing a lot and you're doing a lot more investment in the third quarter here.

What are your expectations for growth over the next 12 months for the for the fleet. If we assume a similar environment can you achieve double digit growth over that same period.

Okay.

I think we could definitely imagine the continued growth of the current environment remains very favorable with stated that the we've already committed to a number of 600 million of of Capex.

Obviously, the 30% the.

The growth of on the higher fleet. The has a component coming from the improvement of the utilization rate, which sort of like dates back to the beginning of the cycle, but since then you can see debt. We have been investing you know very consistently you know.

The $1.1 billion over the first half of this here close to 900 million the over the second half of last year, we have $600 million committed.

So you know the trend certainly seems to be continuing at this point in time, and we certainly look forward to a double digit the growth continuation.

Okay, Great and then.

Michael you just touched on the cash level and it's I guess.

By my estimation of it looks like its running more than double the historical levels at least that's where it is currently.

For your container of payables are down.

But clearly you are facing a lot of investment here in the third quarter or is that is that why the the large jump because of just you know with all of the.

The capex coming that you're kind of sitting on the little extra cash this quarter or and the.

That's the case is that how that will ultimately work down over time.

Yes, Mike we always carry a healthy amount of cash on hand, but we are pretty much keep it in the.

In the form of Delever at a lower debt levels and we draw when we need them.

At year end our.

$401 million, it's a matter of just timing of actually saw where we drew longer facilities day ready to pay down some of our payables.

So it's a it's probably a timing difference right there, but we usually keep a lower level of while keeping the dry powder so to speak and then.

And the borrowing capability within our credit facility. So we don't pay too much interest.

Okay great.

And let me just sneak in 1 more here.

1 of the to talk about the competitive landscape, that's kind of a 3 part question. So.

So bear with me.

1 obviously this is a very strong environment and I just wanted to check in to see if you're seeing any new competitors or new entrants.

For the market is there or is there really any private equity hedge funds or anything that you're looking to kind of moving to enter the space here.

2.

Any comments on the recently announced the acquisition in the space. The there's no let's say now a larger competitor of once integrated and so I'm just curious what that could mean protect standard in the industry and then you know.

Finally, there is that there are some reports that theres, a private player that maybe up for sale and so I wanted to hear.

Just your thoughts on that and what.

What is the tech standards appetite and desire to do an acquisition and increased size and scale. Thank you.

Yeah.

Thank you Mike I know the market of certainly are.

Evolved in a very interesting way of as you mentioned there was an acquisition.

By 1 existing strategic player of of another.

Player in the industry.

In our IR deck on page 17, we we kind of we present the the market concentrations for container lessors.

We kind of compare that to the concentration of for shipping lines and container manufacturer and its very interesting to see debt. You know we ended up with the essentially 85% of the market controlled by 5 container lessors the concentration has increased.

The increase tremendously amongst shipping line, but it has increased even further amongst container manufacturers in terms of the leading market, which is really what we want to talk about today.

We are well come of the consolidation debt. We have seen we think that it makes for a better market with another of larger player.

And we now have a situation where we essentially have the Triton who is the is larger than most players, but you didn't have.

A lot of for players who are very disciplined players in a in the market and that's a very very.

Positive and you know all of our strategy has really been to be focusing on organic growth.

And to answer the second part of your question of I think that we've demonstrated that we have the you.

You know Don that very successfully with our fleet growth and all of the other metrics and the tremendous improvement in all of profitability over the past 18 months or 12 months.

And we certainly intend to continue focusing on the.

The doing what we do best which is to focus on our business and growing organically and continue to improve our metrics and our profitability.

Great. Thanks for taking my questions over here.

Thank you Mike.

Thanks, Mike.

Next we'll hear from Liam Burke with B Riley.

The renewal on those existing containers that on average has probably are probably a set of 7 O..8 years old that were renewing of lifecycle lease would that day will stay on leave until they're 13 or 14 years of age. So it's really a combination but that has been clearly or or focus as we.

See a great opportunity to lock in the cash flow and make sure that we can continue to sustain the high high levels of profitability going forward.

Great and you mentioned in the earlier discussion of the.

Consolidation or 85 per cent of the the of the industry is consolidated among a limited number of players.

With your R. O E. In the low twenties is there any danger of you is there any concern on your part of either non concentrated of smaller players coming in sacrificing our away, but still getting of healthy return.

And.

Lowering prices.

Well I I I would say that that the possibility of always exists then we should never ignore it but the reality is that there are 5 large substantial players that are I think all good competitors that will certainly continue to play on the.

Potent role in the market I also think that there are certain barrier to entry in terms of new players wanting to get access to the market first of all the there's the financial barrier because you need to build up the sleep and size is very important when it comes to occupying Ah Ah Ah Ah.

A sustainable position, indeed industry, it and be credible with the customer, but it's also very very important the when it comes to have availability at the right place at the right time, and I think that's where you know I'm, having a larger fleet plays a very big of rule and kind of prevent set you players from coming.

In very aggressively to the market they can definitely come in but they have to select their targets and that will kind of limit their ability to to grow and as I said, there's no denying that the small player cannot come in but it will take them a long time to reach the kind of scale and size that.

We joke today, we'd all fleet.

[noise] great. Thank you Olivia.

Thank you very much of them.

That will conclude today's question answer session I Dunno of turn the conference over to the Vegas gear, President and Chief Executive Officer for any additional closing remarks.

And I'd like to thank everybody for attending the earnings release with the great results and we look forward to or third quarter with the even the better of resolved. Thank you very much.

That will conclude today's conference. Thank you for your participation you may now disconnect.

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