Q3 2022 Textainer Group Holdings Ltd Earnings Call
Thank you and welcome to <unk> third quarter 2022 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.
At this time I would like to turn the call over to camera the carrion Investor Relations for texting her group Holdings limited.
Thank you Sir.
Statements made during this conference call may contain forward looking statements in accordance with U S Securities laws.
<unk> 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.
<unk> 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 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.
Yeah.
Finally, along with the earnings release today.
<unk> 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 X gene or Dot com.
I would now like to turn the call over to Olivier just scared texting as president and Chief Executive Officer for his opening comments.
Thank you Tamara good morning, everyone and thank you for joining us today.
I will begin by reviewing the highlights of our third quarter results.
So by additional perspective on the industry.
Michael will then go over our financial results in greater detail after which we will open the call for your questions.
We're pleased to deliver yet another quarter of very strong results.
The positive momentum from our record performance last quarter.
For the third quarter lease rental income booth with $205 billion driven by Capex deployed earlier in the year.
Additionally, we continued to benefit from exceptional gains on disposals of older containers.
Adjusted EBITDA was $193 million, a slight increase from last quarter and adjusted net income was $77 million.
E P S reached a new record at <unk>.
$1.64 per diluted share as a result of our strong income and lower share count from our continued buyback program.
As we had anticipated.
Demand for new container was muted in the third quarter of shipping lines now operate with sufficient container inventories following robust fleet expansion over the last two years and an overall softening of cargo volumes.
Contrary to historical seasonality, many retailers opted to ship holiday season merchandise earlier into years due to anticipated global supply chain bottlenecks and some have reduced orders over concerns of temporary consumer spending.
In the absence of traditional summer rush and despite cargo volumes that remain above pre pandemic levels spot ocean freight rates have decreased as rapidly as they went up two years ago.
And what appears to be the start of the much anticipated normalization.
Port congestion has now dropped to just under 10% of global ship capacity and shipping lines started to increase rents sailings to better manage freight capacity and focus on their contracted business, which remains highly profitable.
In a healthy sign that container industry players are not looking to add further capacity to the market.
The orders placed a computer factories in October slowed to their lowest level in three years.
As a matter of fact, many factories in China have remained shut after the traditional Golden week holiday and plan to remain closed until the end of the year.
This should allow for the total container inventory at factories, which is primarily owned by shipping lines to decline from its current level of about 1.1 million Teu.
Yes, hi, this level of inventory represents about 2% of the world's container fleet.
Not unheard of.
As stated previously fixed there continues to pursue a disciplined investment policy focusing on back to back leasing deals and holding a low level of uncommitted factory inventory that has remained stable at approximately 40000 Teu.
Looking at our existing container fleet shipping lines have started to redeliver, mostly all sales H containers. They have kept active than in the previous keep buoyant environment.
As a result, our average fleet utilization for the quarter declined slightly to 99, 4% and currently stands at 99, 1%.
This uptick in re deliveries has allowed us to capitalize on continued favorable resale market condition.
Disposal volumes, albeit at lower average sales price per unit has translated in a third quarter gain on sales of $23 million in line with last quarter's record figure.
As we look out for the coming months and into 2020 three we see a continuation of just normalizing market condition and remain optimistic that we're well positioned to navigate this changing terrain and focus on our business fundamentals and long term objectives.
Overall cargo volumes, we made higher than pre pandemic.
Even as the ocean freight rates normalize a high number of containers I still required to satisfy the current demand.
Congestion easing from previous heights, but remains elevated and therefore supply chain remains susceptible to external disruption such as industrial action and coffee lockdowns that water on spare capacity.
New environmental regulations, taking effect in 2023, they have less impact than expected, but will nevertheless result in slower steaming overall and higher container requirements.
We expect chicken lines to continue to focus primarily on returning older containers that are past their normal retirement age.
<unk> maintained a young age profile of our fleet and allowing us to generate cash from container resale.
This combined with factory closure and a substantial reduction in new container supply as is the case seems golden week will contribute to rebalancing the current supply post pandemic.
If history is any guide previous downturns in new container supply have lasted between four to six quarter and we expect that this cycle will be no different.
If anything a possible economic stimulus plan in China could provide impetus for earlier activity pick up in the intra Asia trades.
We also expect our customers to take more aggressive steps to address fluff capacity and continue to enjoy much higher profitability than was the case pre pandemic.
Most importantly, our overall fleet may be contracting slightly but we will benefit greatly from our significant portfolio of longer term profitable leases secured over the past few years.
We continue to be focused on our strategy of improving operational efficiency and optimizing long term performance through market cycles.
Following an incredible rally that has allowed us to deploy high level of Capex on long term profitable business, we're happy to take a step back and focus on returning capital to common shareholder through our ongoing share repurchase dividend programs.
During the third quarter, we repurchased over one 7 million common shares.
And that's the end of the third quarter, our share repurchases since the start of the year represented approximately 8% of total shares outstanding.
Given our positioning in the business cycle and our substantial cash generation the board and the management team continued to see share repurchases as a very efficient use of our liquidity.
In line with this I'm pleased to report that our board of directors has authorized a further increase of $100 million existing share repurchase authorization, bringing its total to $168 million available in the fourth quarters and onwards.
We expect to remain both active and opportunistic in our share repurchases.
In addition.
The board has authorized a continuation of our cash dividend for common shareholder at its current level of 25 cents per share.
We'll continue to reevaluate this on a regular basis with a view of optimizing total shareholder return.
I will now turn the call over to Michael who will give you a little more color about our financial results for the third quarter.
Thank you Olivier Hello, everyone I will now focus on our Q3 financial results.
We had a very strong third quarter, one of tech standards best orders today.
Earlier Capex investment in the year was reflected in our lease rental revenue this quarter.
And we continue to experience exceptional gain on sales results from higher trading volumes and still albeit a resale prices in the secondary market.
Following a period of unprecedented market conditions, which provides <unk> the opportunity to dramatically improve the long term quality of the lease portfolio and our balance sheet.
Our shipping line customers are now experiencing an anticipated appeared if normalization with reduced trade volumes and new container demand.
Which will continue through the next quarters.
Q3, adjusted net income was $77 million as compared to $79 million in Q2.
Q3 adjusted earnings per diluted common share was $1 64.
As compared to $1 63 in Q2.
This was driven by our strong Q3 performance and accretive impact from increases to our share repurchase program.
We're also pleased that this resulted in an annualized Q3 adjusted ROE of 18%.
Q3 lease rental income was $205 million as compared to $203 million in Q2, driven primarily by Capex deployed earlier in the year and the benefit of one more billing day within the current quarter.
Our utilization rate remained high.
Bridging 99, 4% during Q3.
Going forward, we expect some slight natural attrition of our readiness older containers being returned or not replaced by new ones.
Shipping lines rebalanced their container fleets in line with market normalization.
We delivered another quarter of strong gain on sale at $23 million in line with last quarter's record results.
This was driven by an increase in sales volume sourced from slightly higher re deliveries of older mostly sales age containers from the expired lease contracts.
While our resale container prices have continued to reduce from peak levels in 2021, he remain at a favorable level thus far.
As we have noted in the past while it is difficult to project with precision future resale quantities and prices. We are confident in our ability to best optimize each presented resell opportunity.
Q3, direct container expense of $9 million increase from the previous quarter due to higher maintenance handling historic resulting from a slight uptick in container re deliveries, which supported the strong gain on sales performance in Q3.
We expect Q4 direct Terry Smith to gradually increase of containers deliveries continue into the end of the.
Q3, depreciation expense was $73 million and is expected to remain mostly flat or slightly lower in Q4.
With temporary remaining capex expectations and continue to resell activity during this timeframe.
Q3, G&A expense of $12 billion decrease Q2.
Q3, G&A expense included lower professional expenses and costs associated with our ERP system.
Q4, G&A expense should approximate the quarterly average over a year to date 2022.
Q3 interest expense of $41 million increased by 4 million from Q2, we expect interest expense to continue to gradually increase as higher interest rates.
Impact unhedged component of our debt and as we can see the rollover maturing swaps in line with our policy to hedge or fix the majority of our outstanding debt.
As we noted earlier, we expect limited capex opportunities in the near term and.
We may elect to Delever your unhedged components of our debt financing.
To minimize the impact of higher interest rates from this portion of our debt.
Our Q3 average effective interest rate remains well under control at 283% an increase from $2 six 2% in Q2.
We took further action to optimize our capital structure and enhance our financial flexibility in Q3.
As previously announced in August we completed an amendment to renew and extend the terms of our revolving credit facility.
Additionally, increasing the aggregate commitment amount for $1 5 billion to $1 $9 billion and reducing gets priced.
This places us in an ideal position ample dry powder and ability to access as needed when the market conditions improve.
Turning now to our share repurchase program, we repurchased approximately one 7 million shares during Q3.
This reflects an over 20% increase in repurchase volumes from the last quarter.
For the three quarters ended with Q3, we repurchased over 8% of outstanding shares as of the beginning of the.
As of the end of Q3 on a program to date basis, we have repurchased nearly 25% of outstanding shares since the inception of our share repurchase program in September 2019.
We're also pleased to announce that our board has authorized a further increase of $100 million to our existing share repurchase program.
We should now has $168 million available for Q4.
Yeah.
Our share repurchase program continues to be a key component and significant focus of our capital allocation policy.
Other drive shareholder value to our investors and we expect to remain active as it relates to future repurchase activity.
Our board has approved our continued <unk> 25 per common share of cash dividend payable on December 15th to holders of record on December <unk>.
It has also declared a quarterly preferred cash dividend for both our series a and series B perpetual preferred shares payable on December 15th to holders of record as of December .
Looking now at our balance sheet liquidity, we continue to benefit from the quality of our strong balance sheet with our attractive lease portfolio that provides long term fixed cash flows averaging $6 six years of remaining contractual lease standard and covering 80% of our remaining depreciable life of our fleet on the N b.
<unk> basis.
This continues to be well supported by fixed rate or hedged to fixed long term financing structure.
This ongoing liquidity generation in addition to our well structured bank facilities and $253 million in cash reserves inclusive of restricted cash.
Provide 16 or with a platform that will provide significant long term value.
In closing year to date Q3 has produced very strong results for <unk>.
However, given potential economic uncertainties and limited expected capex opportunities, we do expect some normalized performance in the near term.
But our liquidity generation remains strong.
In this context, we intend to remain disciplined when it comes to evaluating capital expenditure opportunities.
And we will continue to execute at an optimized capital allocation in the best long term interest of our shareholders.
This concludes our prepared remarks. Thank you all for your time today operator, please open the line for questions.
Okay.
Ladies and gentlemen at this time, we will begin today's question and answer session.
Ill ask a question you May press Star and then one using a touchtone telephone.
If you are using a speaker phone we do ask you. Please pick up the handset prior depressing the numbers to ensure the best sound quality.
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Once again that is star and then wanted to join the question queue, we will pause momentarily to assemble the roster.
Our first question today comes from.
Liam Burke from B Riley FBR. Please go ahead with your question.
Thank you good morning, Olivier Good morning, Michael.
Good morning Liam.
Olivia you said the cycle typically.
Brian It's about four to six quarters in terms of the supply and demand curve.
In terms of containers do you see anything in 2023 such as.
New vessels coming online in the second half that would pull that cycle in or at least shorten it have more of a towards the shorter end of the four to six quarters.
It's a good question, but I think Liam what's very important here is to.
Differentiate a little bit demand for containers from demand for shipping capacity because although the two are related they may not be that directly related and I think you know.
What are the situation, where you know as you know lead times on containers are very short and that essentially explains why supply and demand tend to rebalance fairly quickly.
In the container supply world, whereas the lead times for new ship deliveries are much much smaller typically two to three years before a ship gets delivered which really means that you know.
It's it's a it's a completely different ballgame so.
We're in a situation, where we have supplied a lot of containers to the markets to satisfy demand over the past two years.
And we have seen this normalization in terms of container supply taking shape, probably since the beginning of the year.
Now experience shows that although there is a little bit over 1 million Teu inventory at factories at the moment. It takes about four quarters for that to be absorbed especially in an environment, where orders are reducing drastically now coming back to the <unk>.
Once you made about the additional ship capacity that is an interesting one because.
We also believe that.
In some to some extent you know, adding ship will create new opportunities and we will probably coincide with some uplift in the market for container lessors and container in general and that is because more ships essentially will give.
More flexibility for shipping lines to operate their fleets around the world.
And they will probably decide to operate a lot of those ships at a slightly slower speed to try to save on fuel in an environment, where bunker is getting very very pricey.
They will also sell a little bit slower in order to try to comply with environmental regulation, but here I think the main driver will really be this awareness of the fuel cost and that means that if there are more ships on the water that are saving slower.
There will be more demand for containers to be use so in a nutshell I would say that although container demand is frankly fundamentally driven by demand for cargo there is going to be an impact because of these additional ships that are coming for.
Delivery starting in the second half of next year.
Great.
And on the capacity utilization it ticked down a bit which is not surprising.
Would you anticipate more normalized times your utilization rates to remain above historic levels.
Oh, absolutely I think you know this incredible rally that we've had over the past two years has not only allowed us to put a lot of that you know our money at work and all that has gone into very long matured contract that are very profitable our IRR.
Those are so to speak and locked in for the next 10 years, but what that has that rally has also allowed us to do is to essentially extend existing leases into lifecycle leaves us.
And that also has meant that the average maturity on our contracts has gone from below three years on average to more than six today and and I think that's a big sign up how resilient our income our lease rental income is that he is going to be going forward and I think.
We've been very clear in our prepared remark about utilization, great potentially coming down a little bit and it will and again, it's primarily driven by container that have which sales H <unk>.
Containers that shipping lines have been holding on over the past quarter over the past two years actually and that are now being returned because theyre. So banged up that they cant be operated in their prime candidates to be to be retired and to be essentially sold on the secondary market or our scrap so.
Will we see a small decline in utilization.
Yes, absolutely correct, but I think that the long term utilization rate is going to remain very very strong and certainly a way above our long term average of the past 10 years.
Thank you Olivier.
Okay.
Thank you Liam.
Our next question comes from Michael Brown from <unk>. Please go ahead with your question.
Great Hi, good morning, Michael and Olivier how are you guys.
Good morning, Michael.
Michael.
So.
I wanted to start with kind.
Kind of the durability of your earnings profile here in the right way to think about that.
Put up an 18% annualized Roe.
This quarter and I suppose there are some.
Element of over earning on the on the gain on sale revenue, which I'm sure will moderate over time, but.
How do you think about what that rate.
New ROE is for tax gain or <unk>.
We move through the cycle here and then.
And then thinking about the durability of your cash flows as you just mentioned is it fair to assume that.
The gain on sale as kind of a swing factor, but your EPS has a pretty durable base here that.
Well give us some kind of visibility and again durability to that that EPS over the next coming quarters here.
Yeah.
Thank you.
Mike you know.
We are.
We've always said that we think that the long term.
Ro.
For our fleet should be in the region of the mid teens.
And the reason, we've always said that is because.
That is where we effectively have been pricing containers whenever we make a new deal.
We take a lot of that power meters, we actually use a leveraged IRR model.
Which takes into account all the various elements and one main one right now is obviously interest rates, but.
The target that we've always aim for was kind of like a mid teen Roe.
So we think that you know or ROE will also normalize around that level and essentially what is boosting that ROE and your underlying need very correctly is the exceptional gain on sales that were experiencing at the moment I mean, there really.
Boosting the ROE.
The level of profit that we are achieving on resale.
As such that objectively, we expect it to moderate over the coming quarters.
So.
That said you know I think that the leasing revenue is very strong very stable for the foreseeable future and that will continue to provide you know it's very much a long term stable cash flows.
And as we have mentioned in our prepared remarks, we're really focused on buybacks.
In an environment, where we don't see opportunities to deploy capital at the right return.
The best thing, we can do is to buy our own.
Uh huh.
Containers in our own fleet that generates 18% and you know it.
It is currently trading below book, So it's definitely a very compelling argument to continue to use our free cash flow to buy back shares and thereby help support E. D. D E. P S.
Downcycle and when the market conditions are going to be right and and and and things are turning.
When we are going to move back into the investment.
Phase of our business and as Michael mentioned.
We're always making sure that we are maintaining ample capacity.
We're ready to move in when the market comes we know that the market can come down very suddenly it can also come up very suddenly as we saw in 2020.
No.
Definitely you know, where we're going through this normalization phase, but we're really optimistic that no. This is not going to be a very long term.
Kind of situation and that will be ready to start investing again in the not too distant future.
Thank you Larry I appreciate that.
Those thoughts on the on the share buybacks.
Really impressive amount of activity in this quarter.
If the environment is as you've mentioned.
Certainly normalizing in the investment opportunities are low currently so is it fair to assume that the level. We saw in the third quarter is as is.
Probably where you could operate here in the near term and is there any.
Is it actually possible that you could come in higher or did that kind of represents the amount of shares that you are comfortable buying in the open market any any color there would be helpful. Thanks.
Yes.
You know as Michael mentioned, we've been repurchasing 25% of our equity since we started the buyback program I think a little bit over 8% since the beginning of the year end.
The pace of the last quarter, we're probably on a on a pace to to buyback 15% of our equity on an annual basis. So we're certainly comfortable.
Buying back our share we're generating a lot of liquidity.
But you know I would refrain from giving too much guidance because as I explained the market can change very very rapidly.
And it is something that we are reassessing on a continuous basis and the board is that it.
Management are.
Exchanging a lot of information on those topics, but.
What I can say for sure is that we were very comfortable with the level that we.
Spent in the third quarter and that you know in an environment, where we have had no opportunities to deploy capex or very limited opportunities shall I shall I say to deploy capex.
Certainly makes a lot of sense to.
Focus on buyback and perhaps at the same time keep an eye on the on some deleverage with that with moderation given that the high interest rate environment. We are in.
Great and maybe I could sneak in one more just on the credit side, what are you seeing and hearing from your customers and.
Clearly those those spot freight rates are down sharply.
How should we think about where those credit risks lie and where.
There could be some potential.
If and when there could be some potential credit issues are.
What are you seeing at this time and what are your expectations as you look out over the next 12 months or so.
I think that the.
The credit risk has never been so low in our industry to be fair I think the.
The top 10 shipping lines in the World has generated.
Generated so much profit over the past two years and actually continue to be extremely profitable I mean.
Ocean freight rates have definitely dropped but they're still higher than they were pre pandemic.
And shipping lines are continuing to raking big Big profit and most of them have restructured their balance sheet I think of the top 10. There was only one shipping lines. That's still you know has that has some some some debt to all the others are negative.
So we really think that you know that risk will.
How has pretty much gone away for the foreseeable future.
And we personally see no exposure with the ore portfolio.
There was a situation right now with some smaller shipping lines adventure on.
<unk>.
Territory that was not their traditional territory in the Transpacific and Asia Europe routes with small ships.
They they're busy retreating from those trades because as rates are coming down they can't compete with the small ships, but we have been very aware of the risks that was associated with those small shipping nine so we have actually not done business with them. So we're not at all exposed to that situation.
Is there a limit to it but.
As I mentioned I think the.
The large shipping lines have never made so much money. So we're feeling very very secured from that point of view.
Okay, great. Thank you Olivia and I'll leave it there.
Thank you Michael.
And our next question comes from implement Mullins from value Investor's edge. Please go ahead with your question.
Good morning, and thank you for taking my questions congratulations for the strong results.
I want to start out by asking about the overall capital location priorities in the current environment.
Considering capex is expected to remain low for the foreseeable future. How do you plan on balancing share repurchases, which seemed very aggressive at the moment with potential dividend increases and deleveraging.
Michael do you want to take this one or.
Okay. Thank you Olivier. Thank you comment for that question Great question, we looked at our capital allocation policy and approach it very carefully.
As you can imagine with where the shares are trading at and limited Capex opportunities. We're certainly have we certainly have a primary focus on share buybacks. It makes perfect sense.
<unk> the company, we certainly are confident in the quality of the company quality of the balance sheet and makes sense to invest in it as well so that'll be department focus.
The dividends are also important as well we continue to evaluate that the board evaluates that and we think that it's important to make sure that it's certainly sustainable which it is and.
We will look at it on a quarterly basis, we'll see when we may adjust that rate on an ongoing basis.
In terms of Delevering.
We look at that too there is some value in doing that.
There are certain portions of the debt stack.
That are more expensive than others a portion of that is unhedged. So we may target some opportunistic deleveraging there whereby we get reduce overall interest expense, but looking at the overall capital allocation policy just wanted to make it clear that what we see is an absence of new capex opportunities that makes sense, yeah one's gonna look.
We will certainly look at buybacks as a priority and that's certainly very accretive.
Benefit the shareholders very very well until the point, where Capex offers do return.
Down the road nationally.
Thank you that's helpful.
New home sales have remained exceptionally strong despite the lower prices due to the higher volumes.
But going forward would you provide some commentary on where you see secondhand pricing stabilizing.
Yes, it's a very good point, you bring up a claimant.
We've always said that the gain on sales is probably the most volatile part of our income and we are coming from a situation, where we were selling.
15 year old container at the higher price than their OECD.
Which is obviously not a situation that is sustainable it's a dream life situations very obviously, but.
One has to be a little bit rational and realize that that is not something that is long term sustainable so I.
Predicted.
The resale prices in the second and then prices started to moderate in line with the increase of re deliveries that we have observed from shipping lines.
So far it has happened in a fairly progressive way, but the trend is definitely did there you know you can see it for yourself I mean, we achieved the same gain on sales, but with a much higher volume and a lower average price now going forward, we expect that trend to continue.
<unk>.
One indicator, which we like to use is that the fact that you know a secondhand pricing has always kind of stabilize that about 50% of the price of a new container and we estimate that the price of a new container today would probably be in the region of about $2200.
So.
Taking that into consideration, we probably would estimate that.
Secondhand prices on the average would probably move towards that level of 50% of 'twenty 200, so that it give or take 11, 100, which is still substantially higher than our current our residuals on a lot of those containers and that should continue to provide us with some gain.
On sales, but definitely gain on sales that will be more modest than what we have seen over the past three four quarters.
Thanks for the color that's all for me. Thank you for taking my questions and congratulations for the strong results.
Thank you Kevin.
Hello, Matt.
Once again, if you would like to ask a question. Please press star and then one through.
To remove yourself from the queue, you May press star and two.
And in showing no additional questions. We'll end today's question and answer session I'd like to turn the floor back over to Olivier for any closing remarks.
Yep. Thank.
Thank you everyone for taking part in this earnings call and we certainly look forward to updating you on our full year results next quarter. Thank you.
Yeah.
Ladies and gentlemen, with that we'll conclude today's conference call. We do thank you for attending you may now disconnect your lines.