Q2 2023 Textainer Group Holdings Limited Earnings Call
Thank you and welcome to <unk> second quarter 2023 earnings call.
French call.
At this time all participants.
Only mode.
We will conduct a question and answer session.
<unk> will be even at that time.
As a reminder, today's conference call is being recorded.
I now turn the conference over to the carrion.
Carrion Investor Relations of Ducks, Tanger script Holdings limited.
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 2022 filed with the Securities and Exchange Commission on February 14, 2023, and going forward any subsequent quarterly filings.
And we're in 6K for additional information concerning factors that could cause actual results to differ materially from those in the forward looking statements.
During this call we will discuss non-GAAP financial measures.
As such measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of 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 the earnings release today, we have also provided slides to accompany our comments on today's call.
Our earnings release and the earnings call presentation can be found on tech seniors Investor Relations website at Investor <unk> X gene or Dot com.
I'd now like to turn the call over to Olivier just scared to X gene 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 second quarter results, followed 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 are very happy with our second quarter 'twenty 'twenty earnings results, which continued to demonstrate the benefits of our long term contracted revenue and strong utilization levels.
For the second quarter.
Net income was $1 billion or $1 20 per share.
Lease rental income of $192 million.
Our utilization rate has continued to support our topline remain very firm at nearly 99%.
This results from both a reduction of our container turn ins as well as our continued success in renewing maturity needed a testament to our strong customer relationships and proactive actions.
Additionally, despite the current interest rate landscape or financing costs remain well under control. Thanks to a policy of long term interest hedge it and.
Deleveraging strategy.
Gain on sale for the quarter continued to normalize but remain nicely profitable on the back of slightly higher volumes being disposed.
The second hand market for smart by geographical disparities with slower demand in Europe , but an increase in demand and price level in China, which is by far our largest outlet for older containers.
Order or we like the team generated a profit of $7 $7 million the ongoing significant cash generation.
Overall, the container shipping market remain stable through the second quarter and we have now observed initial signs of higher ship loading as well as firming up ocean freight rate on major shipping routes.
There is growing optimism that August will see further ocean freight.
Rate hikes, especially on the transpacific routes with shipyard light vision has recently been much stronger.
Our customers also.
I treat destocking cycle in the U S to come to an end to paving the way they need to replenish inventory ahead of the winter holiday season.
Such a shipping line customer anticipate cargo volume to pick up in the second half of the.
For our part we expect this market situation to provide support for high fleet utilization and we do.
As well as new containers, we made more expensive at about $2200 per seat.
At the same time orders for new containers remain minimal at one 650000 Teu. So far this year as the industry continues to absorb the elevated production volumes of the Kobe Super cycle.
We view this situation I supposed to do for the industry as demand for cargo is recovering from its recent lows.
In effect the global fleet of shipping containers is likely to remain stable or even increase slightly this year.
Factory inventory has declined to about 850000 teu from level, well above 1 billion you ought to start to the year and production for the rest of the year is expected to remain muted.
We did see some small capex deployment towards the end of the quarter, which were focused on special equipment and pre committed long term leases due to stock in the third quarter of the year, but we do not anticipate substantial follow up order at this stage.
Our ongoing strategy for new container investment, we made to focus and securing back to back container leave it keeping uncommitted new inventory at a minimum.
Disciplined approach ensures our readiness to pivot when you long term profitable capex opportunity arise to drive long term value creation.
In the present climate, where investment opportunities remain limited or attention remains towards the efficient allocation of our free cash flow to optimize shareholder value.
With this and we're pleased to report that we have repurchased one 1 million common share this quarter, allowing us to reach a total of five 5% of our outstanding common shares repurchased since the beginning of the year.
We are also very pleased to report that our board has authorized an additional $100 million decrease in our buyback program and continues to view our buyback program is accretive and beneficial to long term value for our shareholders.
Our current market outlook remains firm and continued stability and optimism.
The IMF has recently revised its world GDP growth projections upwards to 3% from two 8% inflation appears to be moderating and consumer spending was up one 6% for the second quarter in the U S.
The shipping industry are starting to see the cargo volume recover over the past few weeks and ocean freight rates have likewise, starting to firm up.
Potato industry players have remained disciplined with very limited container production and stable manufacturing prices that 'twenty $200 for C U.
Fleet utilization is stable and is expected to remain elevated for the foreseeable future, which will minimize storage costs.
Lease revenue continues to be well protected with six years' worth of lease rental income under firm contracts Likewise.
Financing costs are control due to corresponding fixed rate debt.
Gain on sale of older computers have normalized but can.
To generate profit in excess of 20% of N B G.
Looking further out shipping line as a large order book of ships to be delivered in the coming quarters.
This will eventually require additional container usage and drive container fleet growth opportunities.
Also I am more recently issued greenhouse gas emission target, calling for a 40% reduction in emissions by 2030, when you require shipping lines to continue to upgrade their fleet, while slowing down ships rotation to reduce fuel consumption, thereby requiring larger container fleets to transport the same amount of Cogs.
No.
Finally shipping lines remain financially strong with robust balance sheet and continue to be mostly profitable despite current environment and low cargo volumes and freight rates.
To conclude we are very proud of the resilience exhibited throughout the first half of the year and we continue to effectively navigate the demand landscape remaining steadfast in our strategic objective of focusing on increasing share value creation.
Anticipate continued strong operational performance in the future our strong cash flow generation allows us to focus on our capital allocation to optimize returns to shareholders to robust share buybacks and regular dividends, while deleveraging the higher interest rate portion of our unhedged steps.
I will 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.
Pleased that Q2 adjusted earnings per diluted common share was $1 20.
Which was relatively in line with the prior quarter.
Illustrates the strength of our business model driven by very reliable cash flows from our long tenure fixed rate lease portfolio that is well supported by associated fixed rate finance.
The solid EPS level was further enhanced by our ongoing share buyback program.
To adjust net income was $51 million only a slight decrease from Q1.
Q2 lease rental income was $192 million compared to 195 million in Q.
One remaining relatively steady for the quarter.
We're pleased that utilization rate remains at a very strong level.
98% average for both Q2 and Q1.
And would you currently now stands at 98, 9%.
This is a result of our successful efforts to control limit container journey, which still mostly consists of older sales age can change.
We have also begun to see a reduction in container off higher levels from our customers as we move further into the second half.
While new topic, Oh, Jeez Ive been limited given the large amount of it that's been in recent years, we have been able to deploy some nominal capex at the end of Q2, which will benefit Q3 lease rental income.
Q2 gain on sale of $8 million compared to 10 million in Q1.
While secondary container prices might be reduced in Q2 and remained relatively stable and still provide an attractive margin well above that.
We expect to sell different driven by available volumes of containers being redelivered are more lucrative markets such as China.
Q2 direct container expense of $10 million was in line with the last quarter as a result of our stable 98, 8% utilization rate.
The storage component within direct insurance expense will logically fall our utilization rate through the remainder of the year.
Q2, depreciation expense was $71 million, a little over $8 million decrease from last quarter.
Depreciation expense is expected to continue slightly decreased in line with fleet attrition as capex deployment remains minimal.
Q2, G&A expense of $13 million was in line with Q1, we continuously manage G&A expense, which is expected to remain relatively flat through the remainder of 2020 three.
Q2 interest expense of $42 million remained lovely versus Q1.
Our Q2 average debt balance was lower than Q1 from a continued deleveraging and the building of dry powder and borrowing capacity.
Our Q2 average effective interest rate wasn't attracted 3.16% only a slight decrease from $3 one 2% during Q1.
In conjunction with protecting our lease cash flow margins, 92% of our debt is fixed or hedged to fixed with an average coverage 10 are consistent with the average tenor of our long term fixed rate.
It seems business model with balls protecting the liability and the resilience of its cash flows over the long term.
While short term market sulfur library interest rates have increased by nearly 500 basis points over the last 18 months.
Average effective interest rate has only increased by about 50 basis points over the same time.
Representing exceptional management of interest rate risk.
Turning now to our common share repurchase program, we repurchased approximately one 1 million shares during Q2.
And five 5% year to date through the end of Q2 of our standing common shares at the beginning of linear.
Since commencing our share repurchase program in September of 2019, we have repurchased $18 1 million shares or approximately 32% of outstanding common shares.
Illustrating our commitment to effectively manage and enhance shareholder returns.
Including the recently announced $100 million buyback authorization by the board.
The available authority under our share purchase program totaled $139 million as of the end of Q2.
We are pleased to announce that our board has also approved and declared a cash dividend of <unk> 30 per common share payable.
Payable on September 15th to holders of record as of September 1st.
In addition, our board 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 1st.
Yeah.
Our capital allocation strategy, which is funded by exceptional cash flows from our business includes our share purchase program and your progressive and sustainable common duped.
Both serve as important and focused methods for building shareholder value and enhancing returns to our investors.
Moving forward, we expect to remain committed to both our share repurchase and common dividend programs.
Looking out strong asset quality of our balance sheet, our high quality lease portfolio provides long term fixed rate cash flows covering nearly 80% of the remaining depreciable life of our young five two year old suite.
In closing the second quarter continued to demonstrate the strength and durability of heart.
We continue to improve the quality of our balance sheet as well as remain well position for the summer months and the potential for some further investment opportunities when those become available.
We remain committed to maintaining a disciplined capex investment approach, while continuing to optimize long term shareholder value creation.
They focused capital allocation strategy.
This concludes our prepared remarks. Thank you all for your time today operator, please open the line for questions.
Thank you.
We'll be conducting a question and answer session. If you would like.
To ask a question. Please press star one on your telephone keypad.
A confirmation tone will indicate your line is in the question Jim.
If you would like to remove your.
Question from the queue.
All participants using speaker equipment, it may be necessary to pick up.
Handset before pressing the star keys.
One moment please.
Four questions.
Our first question comes from Liam Burke with B Riley Securities. Please go ahead.
Thank you and good morning, Olivier Good morning, Michael.
Good morning Liam.
Olivier you mentioned and it's obvious.
Sent your renewal rate on expiring leases.
Very favorable during the quarter has been which.
Which has supported a utilization rate.
Have you been renewing at better than past rates or the same or what is the.
Right, you're getting on these renewals vis a vis the past right.
Where we renewed as you mentioned quite a big chunk of our contracts are you know it was over 100000, the see you for the quarter the average rate at which we renewed those lease was probably a little bit below their previous rate, but you have to remember that it.
All depends on the actual rate that we were enjoying on those contracts and it so happened that on those contracts. We had very high rates. So we did have to take a little discounts in exchange for a very long maturity on the on a large chunk of leases, but the overall I think that the weird.
At a level that still supports the average lease rate that we're enjoying on the fleet.
Great and staying in terms of utilization.
Bumping along here through a down cycle utilization rates are.
Well above what they were during the past cycle.
Do you anticipate as we move towards a potential up cycle over the next few quarters.
That you can keep these utilization rates relatively high.
Well it certainly looks that way at this point in time I mean, we are not only enjoyed the contracts that we were able to put in place during the Covid Super cycle and those have super long maturity. That's as you know in excess of 13 14 years sometimes.
And then for the rest of the operating leases you know, we've also been able to renew the leases, but the market environment is such that we see are customer of holding onto existing equipment, we see them continuing to renew leases and on the back of a new container.
<unk> remaining at a fairly good level of $2200 per see you, there's very little incentive for shipping lines to shift away from renewing maturing leases and taking new continually so we get the support because the demand is still there for those containers in Cogs.
<unk> has started to pick up as I mentioned in the last few weeks.
And on the other hand, the shipping lines have no incentive to replace those older containers with new containers. So we're very optimistic that our utilization rates will remain highly elevated the until the end of the year and most likely into next year.
Great. Thank you Olivier.
Youre welcome them.
The next question comes from Michael Brown.
K B W. Please go ahead.
Great eight in hall on for Mike Brown, just wanted to see how you're thinking about capital allocation from here buybacks have remained elevated saw the authorization, but just around the balance of capex buybacks and possibly delevering and.
It's also related how do you think capex in the second half of this year compare to what you've seen in the first half.
Well you know we as I mentioned in my earlier comment, we don't necessarily see Capex rising substantially.
We're in a situation where cargo volumes are increasing but she'd be like still have enough containers and essentially they have an incentive as I mentioned to hold onto their existing containers. So our view would be that we are not going to see a lot of capex.
In the second half of the year as a matter of fact, we see the overall fleet at the World fleet of containers, probably contracting slightly this year and I've mentioned before as well we think that is probably an overall positive. It's part of the dynamic of our industry with a very.
Short lead times to deliver containers, which mean that supply and demand and to readjust, our very very quickly and we're in the cycle, where we oversupplied the industry during the Covid Super cycle and company now for the past five quarters or so production has been a lot of them.
More moderated and we expect that situation to continue probably until the end of the year, meaning that there will be a very limited opportunity to deploy capex. That's before next year, where we see the market coming back to a much more normal situation, but.
Of course ship shipping as you know always.
Keeping some some surprises in store so we could that we could see an increase in manufacturing.
Manufacturing in the last part of the year, but our view is that we will probably have to wait until next year to see significant volumes and attractive opportunities in the markets.
Great appreciate the color and then Olivier you mentioned the shipping lines have a large order book of ships to be delivered in the coming quarters can you just give us some additional thoughts on how you expect us maybe if we look out to 2020 for the second half of the year, how that could have a <unk>.
The market.
Yeah, I mean, those ships are actually started arriving already and I think it gives us a good indication of what that shipping lines are doing with those ships essentially they're adding shifts to their existing routes and typically where they were operating 10 or 11 ships on one rob they're adding one or two ships.
There then, adding one or two stops Ah alone along the the round trip.
Slowing down the ships are they consume less fuel Ah they improved reliability and very importantly, they reduce their C. O. Two emissions. So I think it's becoming clearer and clearer that a lot of shipping lines have been ordering new ships because of those constrains in terms of the environment.
And their desire to try to get a little bit ahead of the new regulation and the big benefit for us.
Is that essentially if there are more ships in service then they're selling slow it means it takes longer for the cargo offer the containers to move around which means that our more containers are actually need it and that is highly supportive to demand and it may not be 100% visible right now.
We are coming from very elevated cargo volumes to the Colgate Super cycle, but I believe that as we recover from the current downcycle, we are going to see the effects of you know the increased cargo and additional less shipping capacity and that is going to translate into demand for.
For more containers over time.
Great I appreciate you taking my questions.
As a reminder, if you would like.
To ask a question. Please press star one on your telephone keypad.
There are no further questions I would like to turn the floor back over to Lindsay I guess care for closing comments.
Yes, and thank you everyone for joining us today, and we certainly look forward to update you on our continued performance for the next quarter.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines and have a great.
Okay.
Goodbye.
[music].
Yeah.
[music].
Okay.
Okay.
Yes.
Hum.
[music].