Q2 2022 Textainer Group Holdings Ltd Earnings Call

Thank you and welcome to text painters second quarter 2022 earnings 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 Tamara up the car you dirt.

Director of Investor Relations with tax Tina. Please go ahead.

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 31st 2021 filed with the Securities and Exchange Commission on March 17th 2022, and going forward any subsequent quarterly filings on form 6K for additional information concerning factors that could cause actual.

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 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 at Investor <unk> Com.

I'd now like to turn the call over to Olivier gets scary Techs Juniors, President and Chief Executive Officer for his opening comments.

Thank you Tamara.

Good morning, everyone and thank you for joining yesterday.

I will begin by reviewing the highlights of our second quarter results followed by additional perspective on the industry.

Michael will then go over all financial results in greater detail after which we will open the call for your question.

We're very pleased to report our best ever quarterly debt adjusted income and adjusted EPS on the back of solid revenue exceptional gain on sales and continued disciplined expense management with E. P. S. Further benefiting from the impact of our increased share buyback activity.

For the quarter, we delivered lease rental income of $203 million adjusted net income of 17 $9 million and adjusted EPS of $1.63.

These numbers compared to the first quarter lease rental income of $199 million adjusted net income of $73 billion and adjusted EPS of $1.48.

The consistent improvement of our financial metrics demonstrates the resilience of our business model in the current normalizing environment as we benefit from a long term lease contracts and take advantage of market opportunities to sell older containers at a substantial profit.

As we navigated the second quarter of the year, which is traditionally the industry slow season demand for containers was subdued with limited lease out opportunities as shipping lines not operate with sufficient inventories.

It follows a prolonged period of container fleet expansion driven by the mobilization of virtually all container ships available throughout the world.

Congestion continues to remain a central focus of global container shipping with an estimated 12% to 14% of total shipped capacity currently tied up as a result of logistical bottlenecks labor shortages and Covid disruptions.

Overall shipping volumes have come down from the peak, but remained much higher than pre COVID-19, causing spot rates on the transpacific to decline over the recent months.

Globally Ocean freight rates are now roughly in line with last year's level, but remains at historically very high which continues to support the healthy performance of our customers in spite of rising bunker costs.

The Best example of this is probably the Shanghai Containerized freight index, which is approximately four times higher than pre pandemic levels.

In this environment shipping life of reduce their intake of new containers and are holding on to existing units as a result, our average fleet utilization for the quarter was stable at 99, 6% and currently stands at 99, 5%.

We've only seen a small increase in Ridley Reese of mostly older steels age container, which has helped us achieve record gain on sales of $23 million for the quarter.

As our customer position themselves for the summer months, they're choosing to hang onto older and that's cheaper containers as new production units remain much more expensive.

Production of new units that factory has moderated substantially to about 300000 teu per month, which shipping lines, placing over 70% of recent orders.

Factory inventory of new container has increased slightly to 850000 Teu with limited talked reorders, resulting in reduced lead times.

Given the slowdown in lease up opportunities and relatively short production lead times extend always maintaining a minimal level of container inventory until demand picks up again.

As illustrated borrow very strong quarterly performance. The resale market continues to be supported by the continued shortage of older containers being redelivered.

Even if prices may have eased for 40 foot high cube containers. They have strengthened in some parts of the world for 20 foot standard units, which we commonly sells for more than they were original cost 14 or 15 years ago.

Our supply situation for older containers is unlikely to materially change over the peak season were optimistic that retail prices will remain elevated over the summer before reducing somewhat towards the later part of the year.

This scenario will depend very much on whether any drop in consumer demand will be sufficient to reduce congestion given the many supply constraints that remain in place.

Although some of the Covid lockdowns in China have been lifted in Shanghai in particular, several other restriction remain that hinder fully efficient logistic flows.

You events May further delay a return to normalcy such as the recent 48 hours warning strike by German Port workers.

Risk off of rail strike in the U S. So currently delayed by presidential executive order or the possibility of industrial action related to the ongoing longshoreman negotiation on the U S West coast.

As we look out to the coming months, we see a continuation of the currency was supported market would likely additional disruptions in the world of shipping.

We're optimistic that the container utilization will remain elevated.

And that will continue to demonstrate resilient performance for our business going forward given the following business drivers.

Overall demand for cargo reman remains well above pre COVID-19 level as underlined by the U S consumption, which was unexpectedly up for June.

Our average remaining lease maturity is now in excess of six years or it's just less than three years historically, providing for substantial locked in cash flows.

For her to expired leases, which have not reached the end of their economic life has been considerably reduced and today. It represents a much smaller portion of our portfolio at about 3% of our fleet based on that book value.

Furthermore, our customer continue to renew most maturing Lee just given the alternative of higher priced new containers.

Retail prices will remain at historically high for as long as the supply of older containers continues to be limited.

We expect supply chain to remain under pressure and subject to further disruption with the risks of industrial action increasing worldwide.

Additionally, the current global inflationary environment should benefit us as an asset owner by supporting lease rates and resale prices longer term with minimal cost to us given our large existing fleet and fixed and hedge depths.

Finally during the quarter, we repurchased over one 4 million shares or 3% of our outstanding common shares with all board of directors further increasing our share repurchase authorization by an additional $100 million.

Given the current climate of low capex allocating some of our significant cash flow to continued share repurchases continues to be an attractive use of our capital and that's and they build further improvement in earnings per share and other financial metrics.

In closing, we're pleased with our performance for the second quarter.

The current economic situation creates uncertainty and market challenges, but we remain optimistic with our outlook for the rest of the year.

The casino continues to optimize capital allocation in this slower growth periods, while preparing for future market cycle opportunities.

Our balance sheet remained strong with healthy liquidity.

<unk> capital structure, and fixed rate and hedged financing and demonstrated expense control and efficiency.

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

Thank you Hello, everyone I will now focus on our Q2 financial results. We had an incredibly strong second quarter, yes, there are significant and high quality cheap X investments strategic financing enhancements and expense management over the last two years have combined to provide strong long term performance.

Cash flow generation and overall resiliency.

We have also been able to take advantage of the excellent resell market to generate exceptional gain on sales for the quarter.

Q2, adjusted net income was $79 million, 8% higher than Q1.

As Olivier mentioned this was Texas its highest level of adjusted net income to the Q2 adjusted earnings per diluted common share was $1 63 a.

10% decrease from Q1, driven by our strong Q2 performance.

Creative impact from increases to our share repurchase program.

We're also very pleased that this results in an annualized Q2, adjusted ROE of 20%.

Q2 lease rental income was $203 million.

A higher level than Q1, driven primarily by growth in our fleet size, particularly for long term finance leases, which continues to be an important component of <unk> lease portfolio.

Our utilization rate remained high averaging 99, 6% during Q2, reflecting continued strong demand for our lease fleet.

We expect Q3 lease rental income to be at a stable level for since Q2.

As previously noted given the tremendous level of cheap ex investment in 'twenty, 'twenty, one and as our customers absorbed to supply.

Demand for new containers has moderated this year.

Although we continue to see all three stemming from our customer relationships and strategic placements at key locations.

Our Q2, Capex investments totaled $230 million, a decrease from last quarter, but in line with our expectations due to the current demand and Bart.

In total we have deployed $727 million in shape acts through the first half of 2022.

However, we continue to anticipate very limited capex options for the rest of the year as our customers currently have enough continuing inventory to sell.

Fourth there vessel operations.

With this lower demand for new equipment, new box prices have continued to reduce from prior peak levels. Current quoted you can share prices are at about $2600 perceive still well above historical averages and continue to support our high utilization and resale prices.

Q2 gain on sale at $23 million was significantly higher than Q1.

This was primarily driven by an increase in sales volume sourced from slightly higher re deliveries of mostly sales age containers from.

From the expired lease contracts well resell container prices have slightly reduce with new box prices remained favorable during the year, we expect a continuation of this attractive price environment.

We therefore expect continued elevated gain on sales while the current quarter's results will be hard to beat.

Q2, direct tariff expense of $7 million increase from the previous quarter due to higher maintenance handling and storage fees, resulting from slightly more container turn ins, which supported the strong gain on sales performance in Q2.

We expect Q3 direct container expense to be consistent with Q2, if container redeliver volumes continue at these levels.

Q2, depreciation expense was $73 million and is expected to remain mostly flat in Q3 as most recent capex was deployed under finance lease.

Q2, G&A expense of $13 million increase from Q1 Q2, G&A expense included additional IQ system project and enhance the costs associated with our new ERP system and higher incentive compensation costs, resulting from improved performance.

Q2 interest expense of $38 million increased by 2 million in Q1 due.

Due primarily to the financing of recent capex within a higher interest rate environment and rate increases impacting the small unhedged portion of our debt financing.

We expect interest expense to gradually increase due to the current rising interest rate environment.

However, with limited Capex investment options in the near term and while continuing to follow our capital allocation policy with a greater focus on share purchases.

We may temporarily do you left to some degree are unhedged revolving debt later in the year with our available liquidity.

Our Q2 average effective interest rate was 262%.

The increase from 2.57% in Q1.

Even as market interest rates have risen we have remained well positioned to mitigate this with 91% of our debt fixed or hedged to fixed with an average coverage 10 are relatively consistent with our long term fixed rate leases.

Let's now turn to our share repurchase program, which continues to be a key component and significant focus of our capital allocation policy.

We repurchased over one 4 million shares during Q2, an increase of 48% versus Q1 to further drive shareholder value to our investors.

We have repurchased 5% of our outstanding shares through the first half of 2022.

Since the inception of our program in September 2019.

We have repurchased nearly 22% of our outstanding shares.

We're pleased to announce that our board has authorized a further increase of $100 billion to our existing share repurchase program.

We expect to remain active as it relates to future repurchase activity with $120 million available for Q3 and onward under our program.

We are also pleased to announce that the board has approved and declared a cash dividend of <unk> 25 per common share payable on September 15th to holders of record as of September 2nd.

In addition, our board has also approved and declared a quarterly preferred cash dividend for both our series a and series B perpetual preferred shares.

On September 15th to holders of record as of September six.

Looking now at our balance sheet and liquidity, we continue to enhance the quality of our strong balance sheet with our attractive lease portfolio that provides long term fixed rate cash flows.

Verging six seven years of remaining contractual lease tenure and covering 76% of the remaining depreciable life of our fleet on an NPV basis.

This is also well supported by fixed rate and hedged to fixed long term financing structure.

This is very stable and ongoing liquidity generation. In addition to our well structured bank facilities and $312 million in cash reserves inclusive of restricted cash provides <unk> with a very resilient operating platform that will provide significant long term value.

In closing the first half of the year has produced very strong results for texting and here we.

We are well positioned to navigate potential short and medium term market fluctuations as our contracted revenue and profits are well protected due to our long term lease contracts.

Fixed rate and hedged financing policy.

Given potential economic uncertainties and limited expected capex up trees, we do expect some pro forma stabilization in the near term.

But our liquidity generation remains strong and our core business model has been improved over the last several years to remain resilient in this climate.

We will continue to strategically assess the environment investing only in opportunities in line with our long term profitability objectives.

And again, if there are a limited container investment all fees, we will prioritize our capital allocation towards our shareholders through 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 join the question queue. You May Press Star then one on your telephone keypad, you will hear a tone acknowledging your request if.

You are using a speakerphone please pick up your handset before pressing any keys to withdraw your question. Please press Star then two our first.

Question comes from Michael Brown of K B W. Please go ahead.

Hi, Good morning, Olivier Michael how are you guys.

Very well good morning.

Hi, Mike.

Great.

One of them.

You made an interesting comment that congestion is is tying up about 12% to 14% shipping capacity.

I was hoping to hear how that would compare to prior periods.

Relative to maybe a year ago or year and I'd just be interested to see how that that has evolved and.

It sounded like your view there is for congestion to really see a significant relief it would probably have to come from.

A softening of the demand from the U S consumer.

Is there anything else you think there that one could alleviate some of that congestion related.

Pressure here or is that really the you know the.

Main driver here.

That abates congestion will likely stick around for a while.

Yeah. Thank you, Mike or view is very much that the likelihood that the congestion sticks around it.

It's it's much more likely than the probability that congestion goes away and to answer. Your first question. The first part of your question sorry.

Think that at the peak congestion probably reach a level of about 17% to 18%.

But it has been reasonably stable at the present level of 12, 2% to 14% and I think.

The way we look at it is that the current congestion is very much a supply issue as we see for order element in the economy.

When inflation in particular supply plays a very very big role and even if demand is easing you know those supply constraints remain in place and in all cases, what's really impacting congestion is really the inland logistics part of the year. The overall supply chain and we continue to see.

See a shortage of truck driver shortage of workers are into various warehouses, a pension you know with the railway operations and so on and so on and and those problems are not only limited to the U S. They really worldwide and that is true.

The main reason why we continue to see congestion are remaining in place and only using very very slowly and actually we see the probability of congestion increasing suddenly again, if if there are you know.

No unexpected events like a you know another situation in China, where some of the ports have to lock down due to COVID-19 or some major storms that is delaying some ships all of that could still play a big role and you know a few means that the the congestion is unlikely to go away.

He soon.

Okay, great very helpful.

And I was hoping to get some additional thoughts from you guys about the.

The trajectory of the some of the fundamentals here going forward. So Michael I appreciate the.

Comments for the third quarter here, but I guess, what I'm trying to think about is beyond that end.

Obviously, you guys don't have a crystal ball and how things could evolve from here, but maybe based on what you know today.

Today, certainly seems like the the lease rental income line, we'll certainly see.

Much more kind of flatter trajectory from here and then as containers, maybe the turn and start to pick up I suppose there could be some upward pressure on the direct expenses, but it does sound like you guys are seeing a lot of demand in the resale market. So maybe that doesn't see much of an impact in <unk>.

It's really more about selling.

Selling those containers and that keeps utilization rate high so I know, there's a lot of pieces, there, but I guess I'd like to just hear a little bit about your thoughts as you think maybe beyond <unk> and <unk>.

Now those lines could ultimately play out here from what you know today.

Yeah, no and as you say there are so many moving pieces, but if we try to to go from the first piece, which is obviously that the top line in the revenue line.

In a situation, where we are limiting our capex or have fewer opportunities you know very clearly we're in a situation, where we are reaching a kind of a plateau and all revenue is not going to grow because we're not putting more capital to work or not buying more containers that are being placed in in.

Working surveys so very much depends on you know what I would say the normal attrition and we always have an element of our older containers that Michael was mentioning that Ah I get free delivered because they are really at the end of the day life and those are the containers that we saw.

So we probably have a situation here where for a few quarters, we are unlikely to see the revenue grow.

But we get very old containers back that we can sell for a nice profit and that is certainly a positive element and the way we see the market is that it would probably take a few quarters to absorb the volume of containers that have been supplied to the industry, but 2020 Treaty remember.

It is when a lot of shipping lines are taking deliveries of our new ships now new ships will require obviously more containers to operate.

But more importantly in 2023, most shipping lines will be a we will have to comply with new a C. O two emission regulation, which essentially will force them to sell slower and this is where we are seeing those new ships, arriving and essentially you know it may.

B alleviating some of the congestion, but at the same time slowing slower meaning that the overall demand for container is probably likely to start going up again towards the middle of 2023, and that's we think that we'd probably have opportunity to start growing our topline but in them.

Meanwhile, we see very much what I will call. It a soft landing kind of scenario for container less sourcing and in this environment.

Yeah, Mike It's got it great.

Helpful.

Sorry to interrupt you might get it's Michael here and as you know Oh Wow, you know before from the lease rental income standpoint, where it may be more stable cash flows will continue coming in so it's certainly an issue of what do we do with the cash and that's it.

You can imagine and you can pay here in our messaging.

The capex opportunities are not as robust as we wait for them redirect a large liquidity towards our.

Capital allocation I'll shoot policy, which dictates.

Return of capital to shareholders by way of buybacks and of course, the dividends as well.

They'll do a certain amount of cash a dry powder handy.

Certainly that uptick that will happen actually in the in.

In the future.

And I guess just on that point on capital allocation.

You had a record amount of share buybacks this quarter.

With some opportunities to actually invest in capex. So if things are.

This is the outlook here for Capex is a bit softer or is there an opportunity to actually increase the pace.

Are buybacks and I guess, the one element I didn't hear you guys touch on the dividend does that.

Youre on the kind of one year anniversary yourselves of the implementation of the dividend.

Raising the dividend something that you guys are also contemplating when you think about capital allocation.

AH Yes, you know as you pointed out we reinstated the dividend almost a year ago now and we will definitely with you that that's a something that isn't being actually reviewed by the board on a quarterly basis are we stated when reinstated the dividend that's all in.

Pension was to make sure that dividend would be a very stable and sustainable for the long term and that our intention is to have that deferred dividends evolves with the with the performance of the company and I think it's fair to say the performance of the company is certainly more solid now than it was a year ago.

More solid than it was two years ago, and I think that as Michael mentioned, where we're really are in a situation where the decision we have to make if you know how to best allocate all capital and if we don't see the right opportunities to to buy more containers are definitely right.

Returning capital to shareholder is the main the main target here and I must say I see you know my my personal opinion here is that a buyback remain extremely compelling given the level at which we're trading where we're not even trading at book value actually right now where gen.

<unk>, 20% ROE so suddenly buyback, we remain a great investment and I think that the increase in our buyback allocation authorization by 100 million Knits are certainly are a proof that we consider that being a good allocation of our cash flows.

Understood Yeah, what well said, thank you Olivia and Michael I will leave it there.

Thanks, Mike.

Our next question comes from Liam Burke of B Riley. Please go ahead.

Thank you and good morning, Olivier Good morning, Michael.

Yeah.

Good morning Liam.

Olivier.

Priority now for you is to look at our re leasing.

Firing charters here.

How has the re leasing activity Ben in terms of both duration and what rates you're getting on those agreements.

Hmm.

The re leasing activity has actually been very strong I think if you compare you know.

We have a slide are you know in our investors presentation, if I'm not wrong. It's on slide 10, you can see that the number of like spy believes that are not up sales age has reduced.

Reduce that tremendously because we have actually renewed a whole lot of of containers actually over the last quarter, we video with more than 100000 C U E.

All of those containers that have been renewed on what we call lifecycle leaves, meaning that they will remain on lease until they reach th, probably a 14 or 15 years, depending on the on the contract. So that's very positive.

And you know that was also done with a slight improvement in our in the rental rate I think what really matters very much for us going forward is the fact that you know new containers remain at historically at an elevated level, which means that for shipping line. It makes more sense.

To renew existing leases and existing containers, because there's simply a lot cheaper than taking on new container into into their fleet.

So we remain quite optimistic that.

Renewing those are containers that are not sales age will continue to move favorably.

And at the same time, you know those containers that all of our sales age you know whenever we can get them back and you know the last two quarter I think that you know we've been in a situation where we've been trying to get those containers back. So we could sell them and realize the substantial gain on sales are those containers were actually very happy to get them back. So we can.

Continue to sell them in the current environment and I think if you allow me a little worried about the resale market I think we're seeing a very similar situation where again the supply is the issue here. There there is not a huge supply of secondhand containers there hasn't been a.

A slight increase compared to what it was the last quarter for example, but but that market remains soft of supply, which means that the container secondhand container sales price we may.

Alrighty extremely elevated.

I just wanted to touch on that point as well I mean, the net gain on sales sequentially was way up.

Even though there's a scarcity of containers that would mean that the resale prices are continuing to come to move up.

I don't think they have come up that much even if anything they're they're stable or declining very slightly what has to come up with the volume. We have received a few more of those container.

In particular from one contract, where we have been adamant with the customer that we did not want to extend the lease and that we wanted to take those containers back because we wanted to sell them. So that's really what has helped us over over the last quarter.

Great. Thanks.

Olivia.

Thank you Adam.

Once again, if you have a question. Please press Star then one.

This concludes the question and answer session I would like to turn the conference back over to Olivier for any closing remarks.

Well, thank you for joining us today.

And very much looking forward to updating everyone on our progress during our next call.

Goodbye.

This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.

Yeah.

[music].

Right.

Yeah.

Yeah.

Okay.

Okay.

Yeah.

Yeah.

Uh huh.

Yeah.

Yeah.

Okay.

Yeah.

Okay.

Alright.

Yeah.

Uh huh.

Right.

Yes.

Yeah.

Uh huh.

Hum.

Okay.

Mhm.

Mhm.

Yes.

Yeah.

[music].

Yeah.

Yeah.

Yeah.

Yeah.

Yeah.

[music].

Yeah.

[music].