Q1 2022 Textainer Group Holdings Ltd Earnings Call

Good day and welcome to the <unk> Group's Holdings limited first quarter 2022 earnings Conference call all participants will be in a listen only mode.

Should you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question Press Star then one on your Touchtone phone and towards your all your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to MS. Tamara Magarian.

Director of Investor Relations with texting or please go ahead.

Thank you.

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, 2021 filed with the Securities and Exchange Commission on March 17, 2022, and going forward any subsequent quarterly filings on form 6K for additional information concerning factors that could cause actual.

Adults to differ materially from those and any forward looking statements.

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

As such measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures will be provided either on this conference call or can be found in today's earnings press release.

Finally, along with our earnings 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.

And that's true that texting or dot com.

I will now turn the call over to Olivier gets scary texting as president and Chief Executive Officer.

Uh huh.

Thank you Tamara good morning, everyone and thank you for joining us today for <unk> first quarter 2022 earnings call.

I'll begin by reviewing the highlights although of course quarter results and then provide additional perspective on the industry.

Michael will then go overall financial results in greater detail.

After which we will open the call for your questions.

We're very pleased with our strong results for the start of the year.

First quarter lease rental income was $199 million.

And with the fourth quarter, despite two fewer billing days and 17% higher than last year.

Adjusted EBITDA was $182 million and adjusted net income was $73 million or $1 48 per diluted share representing an annualized Roe of 19%.

The start of the year has historically been a seasonally slower periods.

But we continue to see strong underlying consumer demand and deployed close to half a billion dollar of capex on long term and attractive leases, while increasing our share buyback to almost a million share for the quarter.

This high level of Capex deployed to date is the result of earlier commitments and strong long term strategic relationship with key customers.

As highlighted during our last earnings call going forward, we see a more normalized demand for new containers in 2022 as the market continues to digest the high production volumes from last year.

We certainly remain focused on our disciplined investment strategy deploying capex only when we can achieve our long term targeted returns and cash flows and currently have a more modest new container order book of about $150 million.

General market fundamentals remain favorable to container leasing.

Indeed shipping lines are expecting another record year of their ships continue to be fully mobilized given the ongoing high demand for goods around the world.

<unk> container freight index has come down from peak because of seasonality and the impact of the pandemic in China, but it remains 40% higher than last year at the same time, demonstrating the underlying market strength.

Disruption to supply chain with traditionally generate demand for lease containers due to localized shortages or container dislocation.

Our only likely to intensify with the war in Ukraine, and renewed Covid Lockdowns in China.

And probably most importantly, the traditional seasonal midyear increase in cargo as yet to hit in a situation that is reminiscent of the gross COVID-19 lockdowns of 2021.

When delayed production output combined with seasonal cargo demand initiated the supply chain disruptions, we have witnessed since.

More industry specific indicators also remain positive.

Container utilization rate of all leasing companies remain above 99% and we have not seen any significant re delivery of older containers since the start of the pandemic.

This is a sure sign that our customers continue to expect demand over the summer and potentially further into 2023, when you ships will be delivered.

New container inventory at factories stable and not at an abnormal level for this time of the year at about 800000 Teu.

If recent pickups episode.

As a reminder, last year's monthly production.

<unk> above 600000 Teu.

New container prices are up about $2000 per Cu, and we made almost 50% above their long term average level.

This in turn continues to support the renewal of maturing contract on new and more favorable long term leases.

Lease maturities on newly concluded deals remains very long relative good economic life of our container are all above 10 years.

Although retail prices have come down somewhat they are still high.

This therefore appears to be related more to temporarily slower demand given that availability remains limited in absolute terms as shipping lines continue to hold onto their containers.

As we look into the rest of 2022, we remain confident in the strength of our underlying business fundamentals.

While there may be cyclicality within the shipping industry takes thinner maintains a high level of stability with revenue protected against short and medium term market fluctuation.

As of the end of the first quarter, our entire portfolio had an average remaining tenor of more than six years.

Container fleet is probably one of the youngest in the industry with an average age of four and a half years.

Looking ahead to the summer peak season, we expect the current macro environment to remain favorable with elevated consumer demand low warehouse inventory levels, requiring replenishment and disrupted global supply chain extended transit times for containers even further.

We anticipate new container prices to remain elevated as manufacturers and of course, a disciplined approach to production capacity and as component cost increase with other inflationary pressures.

We expect this environment to continue to support favorable renewals of expiring leases.

High utilization rate as well as high retail prices of older containers.

We also expect our customers to continue generating strong operating results.

In closing we are optimistic about our market positioning.

As expected market activity year to date has tempered from the historic level, we saw last year, but we continue to see selective opportunities for organic growth.

Our focus on long term leases at attractive yields matched with fixed rate debt.

Secured our profitability and stable cash generation to largely mitigate cyclical risk. In addition, we remain committed to returning capital to our shareholder toward active share repurchase and dividend programs.

I will now turn the call over to Michael who will provide a bit more color regarding our financial results for the first quarter.

Thank you Olivier Hello, everyone I will now focus on our Q1 financial results. We had another quarter of very strong results further improving the quality of the revenue generating assets on our balance sheet.

And their associated stable and long term cash flows.

Cash flows are well protected over the long term fixed rate leases and fixed and hedged to fixed financing and we will continue to support our capital allocation policy and enhance shareholder value.

Q1, adjusted net income was $73 million in.

In line with Q4, an increase of 23% year over year.

Q1, adjusted earnings per diluted common share increased to $1 48.

Slight increase from Q4, and a 28% increase year over year, driven by our continued strong performance and the ongoing positive impact from our share repurchase program.

We are very pleased that this results in an annualized Q1, adjusted ROE of 19%.

Q1 lease rental income was $199 million.

Our consistent top line improvement was largely driven by an increase in fleet size supported by very attractive long tenured abuses.

With favorable fixed rate yields.

And is expected to increase sequentially in Q2.

Our utilization rate remained very high averaging 99, 7% during Q1.

As we continue to see limited container re deliveries from customers.

We're very pleased with our Q1 capex investment of $497 million.

98% increase over Q4.

Our Q1 Capex comprised of primarily attractive fixed rate long term finance leases.

Our first leases, which represent approximately 24% of our leased composition are an important and valuable component of <unk> lease portfolio.

The finance lease differs from an offering.

As the finance lease generally represents refinance sale of the container asset to the customer over the lease tender.

While both finance leases and operating leases generally have fixed rental rates finance leases have a different accounting treatment from operating leases.

While operating lease rental amounts are all shown in the lease rental income line within our statement of operations or P&L.

Finance lease rental amounts are comprised of two parts.

And interest income portion and the principal payment portion.

Only the interest income portion of a finance lease rental amount appears with the lease rental income line of our P&L.

Finance leases principal payment is reflected in the balance sheet.

Additionally, while operating lease equipment encourage depreciation expense over the life of the containers.

Equipment finance lease does not incur depreciation expense at.

At the end of a finance lease.

Or generally have an opportunity to take title to the container by paying a contractual buyout amount pursued the terms of the finance lease.

You won't gain on sale of owned fleet containers was in line with Q4 and $16 million.

This was primarily driven by higher sales volume.

So container prices have reduced from peak levels in 2021, but continue to remain at attractive levels.

While we have been very pleased with our reporting gains on sale of loans he containers.

We continue to expect resale volumes to be somewhat constrained by low inventory.

With high utilization levels, and very limited off hires.

Trading gains were down due to lower new container prices.

We're expecting gains to remain lower as we have had fewer attractive opportunities to purchase trading container inventory.

Q1, direct container expense of $6 million was flat against the previous quarter.

Resulting from continued high utilization and very limited depot inventory.

We expect direct container expense to remain at attractive levels, while utilization remains high with very limited off hires.

Q1, depreciation expense was $72 million and is expected to remain mostly flat in Q2.

As most of the recent Capex was deployed under finance leases.

Q1, G&A expense of $12 million decreased slightly as compared to Q4, but it is expected to increase slightly going forward as we incur additional costs from our ERP system launched at the start of the year.

Q1 interest expense of $35 million increased slightly from Q4 due to a higher average debt balance from the funding of attractive capex opportunities.

Our average effective interest rate at the end of Q1 was $2 six 5%.

We expect only a nominal increase in Q2 as we are very well positioned to mitigate interest rate risk with 90% of our debt fixed or hedged to fixed with an average coverage 10 are consistent with the average tenure of our long term fixed rate leases.

Let's now turn to our share repurchase program, which is an important component of our capital allocation policy.

We purchased approximately 958000 shares during Q1 since the inception of our program in September 2019.

We purchased approximately 19% of our outstanding shares.

We're pleased to also announced that our board has authorized a further increase of $50 million towards listing share repurchase program.

We expect to remain both active and opportunistic as it relates to share ongoing purchase activity with $65 million available for Q2 and onwards under our repurchase program.

We're also pleased to announce that our board has approved and declared a cash dividend of <unk> 25 per common share.

Payable on June 15th to holders of record as of June 30.

In addition, our board has also proved and declared a quarterly preferred cash dividend for both our series a and series B perpetual preferred shares payable on June 15th to holders of record as of June 30.

Looking now at our balance sheet and liquidity, we continue to enhance the quality of our strong balance sheet sure attractive equipment and lease portfolio.

With fixed rate long term cash flows well supported by matching fixed rate or hedged to fixed long term financing structure.

This very stable and ongoing liquidity generation in addition to our well structured bank facilities.

$280 million in cash reserves inclusive of restricted cash.

It provides <unk> with a very compelling operating platform.

An inflationary market environment as a net positive for <unk> and the SaaS class by improving continuing asset values enhancing our ability to manage lease renew oxy and supporting stronger resale prices.

Eliminating and controlling the impact of related increasing market interest rates has been largely successfully addressed by us through our significant debt refinancing repricing efforts over the last couple of years.

And through our ongoing disciplined management of our financing structure.

In closing, we're pleased with our strong start to the year 60 remains extremely well positioned to support accretive organic growth through capex.

While returning capital to our shareholders through our ongoing share repurchase and dividend programs. This concludes our prepared remarks. Thank you all for your time today.

Operator, please open the line for questions.

Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys and push your all your question. Please press Star then two and at this time, we will pause momentarily to assemble our roster.

And the first question will come from Liam Burke with B Riley. Please go ahead. Thank.

Thank you good morning, Olivier Good morning, Michael.

Yeah.

Hi, Liam.

Could you give us some sense you talked about renewals, but.

How do renewals look are you getting higher rates and durations through the remaining of the lifecycle of the asset.

Okay.

Okay can you hear me now.

Now here, yes, I can hear you now.

Sorry, there was a technical problem here.

Good morning, <unk> good morning, everybody.

Good question actually we alluded to I alluded to it a little bit in the script, we continue to see.

Favorable environment that to renew old maturing leases and this is really because ah.

Prevailing market lease rates are directly in function to new container prices.

We continue to have new container prices that are much more expensive than the historical price, we paid for those containers and the relative rental rates. So big picture, we essentially have.

Maturing contract at about 50.

And the cost of a new container on the market today would probably be in the region of 82 to $1.

Is that substantial difference, meaning that we're in a very good position.

Not only to improve on the rental rate, but also to achieve a very long maturities and that's essentially what we are doing and thats what thats. What we have been doing for the past 18 months, where we have successfully continued to extend the maturities and improve the.

The revenue and <unk>.

That is that partly why the average maturity we have on our contracts has gone up to about six and a half years, where historically it was it was very much below below three years.

Great.

On the Capex.

Hugh.

<unk> opportunities and that Capex for growth.

Does the full year look in terms of Capex are you going to is it going to be maintenance plus a little growth or how does that do you think it shakes out.

Yes.

The way, we see the Capex is very much.

Our normalization situation, we had a very.

Intense activity last year total production was in excess of $6 5 billion Teu, which is essentially double what the industry has been producing over the previous year. So we were expecting and we continue to expect lower numbers this year.

Simply because most of the ships are full the issue is really not an issue of demand. There's plenty of pent up demand out there I think that shipping lines would love to put more ships to work, but there isn't enough flagship capacity to take care of all of that demand and hence too.

Take on more containers in a substantial number.

That is why we kind of expect a much more tempered capex level.

And essentially a level, where there is a little bit of a replacement capex, but not much more than that I think the other factor that plays here is that.

Shipping lines are now essentially flush with cash and have a tendency to purchase.

Slightly more containers than they did last year and of course that means that there are fewer opportunities for for leasing.

This said there are always opportunities coming because of the dislocation and the fact that theres always localized shortages and that's essentially what we have.

<unk> been focusing on right now.

To try to deploy a little bit of capex, but the <unk>.

Certainly much much lower level than what we have seen last year.

Okay, and Michael very quickly.

The balance between actual purchase and finance lease those ratios still pretty much the same or are you seeing more one versus the other.

Yes, it's pretty good.

There is still a large component of finance lease in our K basically.

So you probably expect that.

During the near term.

Having said that we're certainly very happy with that with that type of lease as well, but probably Paul yes ramp.

Great. Thank you Olivier Thank you Michael.

Thanks Liam.

The next question will come from Michael Brown with <unk>. Please go ahead.

Hey, good morning, Livia and Michael how are you guys.

Good morning, Mike.

Hi, Mike.

So I just wanted to start with the Capex that.

That you guys booked in the first quarter here. So you invested almost $500 million of new containers in the first quarter. So it really.

Pretty strong start to this year.

Now you've booked an investment of $150 million in the second quarter.

Of the 500 in the first quarter has as all of that then picked up just trying to think about how that could start to come through the revenues and then the 150 <unk>. When do you expect those to start to get picked up and then come through the revenues.

Yes.

Essentially all of that Capex as we mentioned is that it.

It is pre committed.

And out of I would say to have a $1 billion.

Capex that was delivered.

<unk> delivered in the first quarter.

Pretty much everything has already been picked up and is active which is very good news for us.

And we expect to you know the balanced order book to be picked up progressively over over the second quarter as we as we move along so these are all pre committed lease so essentially.

They have a fix them on hire date, regardless as to whether the customer is actually required containers or not they are bound to.

Being invoiced for the rental.

Okay great.

And Olivia I'd love to just hear a little bit about what you're hearing and seeing from from.

Your your business, but also your customers related to China, and the Covid related restrictions how that is playing out in the ports over there what are you seeing in terms of disruption and any expectations on when that could win that could ease.

And I tend to think disruption is good for your business I think that was a pretty clear theme in 2020 in 2021, but it does seem like that pick up or that benefit that you had seen.

Related to disruption.

Over the last two years.

Maybe not maybe that that benefit is kind of weaning here just given the fact that the production levels have really caught up too.

Address a lot of the shortage in the in the global fleet. So any comments on that element of the situation as well would be great.

Sure.

As we like to say, there's never never dull quarter in our in our business.

As a surprise us to what is essentially.

Happening I think the very big difference between the situation today in the situation two years ago that we entered this cycle with essentially under supplied stock of container worldwide.

As you mentioned, we right now have that.

Supplied a lot of containers to the industry.

You said, there still are temporary shortages and the effect of the recent lockdowns in China.

Yet to be.

Yet to materialize essentially.

Shanghai has now been in a lockdown situation for 60 days.

The ports are operating normally the main issue lives really with the.

The truckers not being able to move the cargo.

And from the Port.

So initially we kind of.

Expected that.

The main factor will be the.

Export slowdown, which has indeed happened I mean shipping lines have reported.

Lower exports out of Shanghai and that has.

In a way puts the ocean freight rates, a little bit under pressure, but not.

Not much more than they are.

At this time of the year traditionally.

But there has been some.

That we didn't anticipate for example.

Imports have accumulated in the port and are adding to the congestion in the port and some ships has essentially bypass Shanghai as a result of that and if not unloaded their empty containers in Shanghai and much to our surprise.

We are seeing a situation where some of our customers are reporting shortages of container in Shanghai, even though exports are down so.

Those effects are kind of hard to predict but in general what we can say is that definitely.

They are closing more disruption and it makes it much more difficult for our customers to manage their inventories of container worldwide and that create shortages and it potentially opportunities for us to lease some of our containers, but.

The second and probably much more important issue here is really.

When the Lockdowns kind of ease off and theres been a lot of them.

<unk> talk about the <unk>.

<unk> high authorities kind of allowing operations to resume a little bit more smoothly, but I think that was personally I think that was to be very progressive but when that happens we are going to see a situation where.

Production resumes had cargo comes back just at the same time as the seasonal cargo is that it is hitting and potentially that will create a lot more congestion when all that cargo surges arrive at destination in Europe , and North America. So in that sense, we expect that.

Repeat and continued very intense activity under shipping front at least until the end of the year.

Okay, great. Thanks for all that color Olivier.

Very interesting.

Maybe one last one for me obviously, the Capex as you touched on will moderate this year and we've seen your your share buybacks ramp over the last two quarters.

If you assuming the capex opportunities continuing to fall in line with the expectations that you've laid out here.

On this call.

Is it fair to assume that the buybacks could actually grow from from the first quarter level, just trying to think about what's the right run rate for share buybacks from here either in terms of the dollar as you would be looking to deploy or share count.

Yes, I think the important element here is that.

We love buyback half, we've made no mystery of that.

But the one of the main reason is because we think it's a very flexible tool.

We continue to see our share price has.

Our attractive and therefore buyback has being an attractive investment for us.

We continue to.

Review this situation.

Very very regularly at least every quarter ultimately it is a board decision.

And I would say that.

We went pretty aggressive in the first quarter, we were certainly above what we did in the previous quarter.

But we will continue most likely with the plan but.

The exact quantity of what we will do will be decided by the board depending on the other alternatives we have to.

Or deploy more capex, which looks a little bit unlikely at the moment or are returned more cash to our investors.

Okay, great. Thank you for taking my questions.

Thank you Mike.

Thanks, Mike.

This concludes our question and answer session I would like to turn the conference over to Mr. Olivier Ghesquiere for any closing remarks. Please go ahead.

Yes, Thanks, again for taking the time to listen to us today and looking forward to updating everyone on our progress during our next call. Thank you.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

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