Textainer Group Holdings Ltd (TGH) 2021 Q4 法說會逐字稿

Thank you for standing by, and welcome to Textainer's Fourth Quarter and Full Year 2021 Earnings Conference Call. (Operator Instructions) As a reminder, today's conference call is being recorded.

I will now turn the call over to Tamara Bakarian, Director of Investor Relations for Textainer Group 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 31, 2020, filed with the Securities and Exchange Commission on March 18, 2021, and going forward, any subsequent quarterly filings on Form 6-K 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 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 Textainer's Investor Relations website at investor.textainer.com.

I would now like to turn the call over to Olivier Ghesquiere, Textainer's President and Chief Executive Officer, for his opening comments.

Thank you, Tamara. Good afternoon, everyone, and thank you for joining us today for Textainer's Fourth Quarter 2021 Earnings Call. I'll begin by reviewing the highlights of our fourth quarter and full year results, and then I'll provide some 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 very pleased with our strong results for the quarter, which provided a fantastic finish to a tremendous year. For the full year 2021, lease rental income increased 25% to $751 million, driven by organic fleet growth in a strong demand environment. Adjusted EBITDA increased by 47% to $698 million, completing our turnaround and reflecting on our ongoing profitability focus. Adjusted net income more than tripled to $284 million or $5.62 per diluted share with a return on equity of almost 21% for the year.

For the fourth quarter, we achieved continued growth in lease rental income. Our adjusted net income was $73 million as gain on sales of older container reduced somewhat due to the lack of available inventory and continued high demand for lease containers.

During the quarter, we purchased an additional $251 million worth of container and have since secured further customer commitment in excess of $500 million to be deployed in the first half of this year. This very strong overall performance reflects the durable demand environment that has enabled us to sustain organic growth and strengthen our balance sheet while driving profitability and continuing to demonstrate further operational efficiencies.

We expect to continue achieving favorable results over the next several years as we benefit from stability and reduced cyclicality risk provided by the long tenure of our fixed rate lease and fixed rate debt.

During the year, we improved the age and yield of our fleet and maximized utilization, ending the year at 99.7%. Just as importantly, we lengthened the maturity of our lease portfolio and fixed-rate debt to an average remaining tenure of more than 6 years.

In total, we leased out almost 700,000 CEU of mostly new containers at very attractive lease terms. These terms remain attractive today with favorable rate and average lease tenure in excess of 12 years for new containers. We also extended about 300,000 CEU of maturing long-term leases with average tenure extending through the remaining useful life of the containers, thereby further locking in future cash flows.

Over the past 12 months, we estimate that we have captured close to 25% of all containers purchased by major lessors, growing our fleet by 15% while improving its average yields. This demonstrates not only our agility, but also our ability to best serve our customers and grow our business while improving profitability.

As a result, total CapEx reached close to $2 billion, and our fleet ended the year at 4.3 million TEU, firmly establishing Textainer as the second largest player in the industry. We remain focused on investing only when we achieve the right returns and on the basis of mostly confirmed lease opportunities, keeping available inventory at disciplined level.

Although activity was sustained in the buildup to the Lunar New Year, new container prices have recently moderated to approximately $3,400 per CEU as manufacturers looked to fill their production lines prior to the traditional low season and anticipated factory closures. This remains well above historical level of about $2,000 per CEU and continues to support very favorable lease renewal opportunities, high utilization and elevated retail prices.

As we look into the new year, we're very optimistic about our improved performance and attractive market fundamentals, and we remain focused on our long-term objectives. We expect cargo volume to remain strong through the full year 2022 due to continued worldwide high consumer spending and restocking of low-level inventories. This will continue to put pressure on the already strained inland logistics and port infrastructure, thereby further supporting container demand.

We expect utilization to remain high with new container prices well above the historical level as manufacturers adjust production hours to market demand. This will ensure that our direct operating costs remain low. We continue to expect more normalized demand for new containers until 2023 when new ships will be delivered and we also expect shipping lines to purchase a bigger share of new containers in the near term, inverting recent trend of lessor accounting for the majority of purchase. These factors will ensure net cash flow generation as our container CapEx moderates from historic level.

And finally, we expect much reduced credit risk as shipping lines continue to benefit from historically favorable performance with high contract rates and high demand.

In summary, 2021 was a tremendous year for Textainer as we achieved outstanding performance across all our key operating metrics. I'm very proud of the strong performance across the organization, helping secure our profitability and cash flow for many years to come.

As we look out at 2022 and beyond, our strategic position in the industry, strong cash flow and financial stability will enable us to create significant shareholder value. This will be achieved through further strategic CapEx and continued capital return to shareholders to the restated dividend and ongoing share repurchase program.

I will now turn the call over to Michael, who will give you a little more color about our financial results for the fourth quarter and the full year.

Thank you, Olivier. I will now focus on the key drivers of our financial results. For the year, adjusted net income was $284 million, an increase of $197 million or 226% as compared to 2020. Q4 adjusted net income was $73 million, an increase of $32 million or 78% year-over-year. This compares to $77 million in Q3. Our Q4 annualized adjusted ROE was just over 20% and nearly 21% for 2021.

For the year, adjusted EPS was $5.62 per diluted common share, an increase of 245% from $1.63 in 2020. Q4 adjusted EPS was $1.46 per diluted common share, an increase of 80% from $0.81 in prior year Q4. This compares to $1.52 in Q3. Our attractive EPS levels are the result of continued strong performance and the positive impact from our share repurchase program.

For the year, adjusted EBITDA was $698 million, an increase of 47% from $476 million in the prior year. Q4 adjusted EBITDA was $182 million, an increase of 33% from $137 million in prior year Q4. This compares to $184 million in Q3. Q4 lease rental income was $198 million, an increase of $2 million from Q3. This was largely due to an increase in fleet size and average rental rates.

Despite fewer days in the next quarter, we still expect a slight increase to lease rental income in Q1 as we continue to recognize the benefits from attractive container investment and lease renewals and extensions. Q4 gain on sale of owned fleet comparers net was $16 million, a decrease of $4 million from Q3, driven by a reduction in the number of containers sold given limited for sale inventory as a result of our high utilization rates, partially offset by an increase in resale container prices.

We expect a continued strong resell price environment in Q1 with minimal available sales inventory, consistent with strong utilization levels and limited off-hires. Q4 direct container expense for the owned fleet was $6 million. We expect direct container expense to remain relatively stable at these attractive levels driven primarily by lower storage costs resulting from higher utilization and lower maintenance and handling expense resulting from very limited remaining GAAP inventory.

Q4 depreciation expense was $73 million for the quarter and is expected to increase in Q1 due to continued fleet growth. Q4 G&A expense of $12 million remained flat as compared to Q3 and is expected to remain at these approximate levels going forward. Q4 interest expense was $35 million, an increase of $2 million from Q3. This was primarily driven by a higher average debt balance due to funding of attractive CapEx opportunities, partially offset by a slightly lower effective interest rate in Q4.

We continue to be very well-positioned through the attractive and flexible terms, pricing and reliable sourcing of our debt financing platform, improving and optimized over the course of the last several years. During Q4, we completed an amendment to re-price, review and extend the term loan of our $1.5 billion warehouse facility, which is a key financing vehicle and supports our ability to continue investing in containers as we find attractive opportunities.

We expect the average effective interest rate of our debt to remain near its current level of approximately 2.6% during Q1. We also begin 2022 very well-positioned to address a possible increasing interest rate environment, with 92% of our debt fixed or hedged to fixed with an average coverage tender consistent with the average tenure of our long-term leases.

Turning now to our share repurchase program. We repurchased 741,000 shares and 2.4 million shares of Textainer's common stock in the open market at an average price of $35.60 and $29.70 per share during Q4 and full year 2021 respectively. As of the end of the year, we had repurchased 17% of our outstanding shares with $51 million remaining and available from our Board-authorized program for repurchases. We're pleased to announce that our Board has approved and declared a $0.25 per share common share dividend payable on March 15, 2022, to holders of record as of March 4, 2022.

Please note, consistent with our prior common dividends, our common dividend distributions may be currently treated as a return of capital by U.S. taxpayers, but our shareholders are advised to consult with their tax advisers and to review the dividend section on the textainer.com Investor Relations webpage.

In addition, our Board has also approved and declared a quarterly preferred cash dividend on our 7% Series A and 6.25% Series B cumulative redeemable perpetual preferred shares, payable on March 15, 2022, to holders of record as of March 4, 2022.

Looking now at our balance sheet and liquidity, we remain focused on maintaining a healthy balance sheet and adequate liquidity through both our well-structured bank facilities and cash reserves. We ended Q4 with a cash position inclusive of restricted cash of $283 million.

We're also very pleased with the much enhanced quality of our lease portfolio with attractive fixed rate yields, longer tenures and customers with dramatically improved credit standing. Our strong balance sheet provides us with the flexibility to continue to support accretive organic growth through CapEx, while increasing capital returns to shareholders through dividends and share buybacks. We are relentlessly focused on creating shareholder value through efficient allocation of capital.

In closing, we are very pleased with our strong performance during Q4, which concluded a tremendous year for Textainer. This concludes our prepared remarks. Thank you all for your time today.

Operator, please open the line for questions.

(Operator Instructions) The first question is from Michael Brown from KBW.

So your inflation is really top of mind for Wall Street and Main Street. And when I think about your business with a large fleet of steel boxes, I've always thought of it as being relatively more defensively positioned in an inflationary environment versus other sectors in the market. Can you just walk through some of the elements of your business and how higher inflation could be a positive to things like the per diem rate or resale values? And where do the risks lie, right, with a higher inflationary environment?

It's indeed a very current question, Mike. And I must say we're really fairly relaxed about it. As we mentioned earlier on, we really are trying to very closely match the maturity of our lease portfolio in terms of our hedged financing. And I'll let maybe Michael speak a little bit more about that later on. But from a very high point of view, inflation is always good for leasing companies because it kind of revalues or asset base.

And in our case, we definitely have a very long-term lease contracts meaning that we probably won't benefit immediately from inflation on that portfolio. And -- but the real benefit comes when we will be looking at disposing of those containers. And there it's clear that there is a potential for a substantial gain on sales of fully depreciated equipment as these are being re-priced and inflated through the economic cycle.

Michael, maybe you want to go a little bit more in detail in trying to explain how we're matching our financing and hedging as well or interest rate to protect ourselves against sudden movement in interest rates.

Yes. Thanks, Olivier. As you know, we've always looked towards fixing our debt and also locking and floating rates, locking them into fixed rates as well to match that of our fixed rate lease portfolio. So I'm happy to report that we've got probably about 92% of our debt locked in fixed -- buffered against increasing rates. We saw that environment potentially coming down the road. So as part of locking these rates with fixed rate dead-end derivatives, we locked it in longer tenured as well.

So happy to report that the tenures of this fixed in go on average for the portfolio over 6 years, really linked well with that of our long-term fixed rate leases too. So as these rates start fluctuating potentially this year, the impact of those changes, those upward increasing changes will largely be buffered by what we've done. So we're very happy to have that protection in place.

Great. Yes. Well, certainly well-positioned for a higher rate environment here. So Olivier, I heard your comments on the environment and the fact that it's expected to remain generally quite tight through 2022. When do you expect shipping demand to decline? I mean, obviously, you don't have a crystal ball. And -- but I'd be interested to hear what you're hearing from customers there. And then what ultimately causes the end of this really strong demand for goods? And is it ultimately -- outside of a recession, what gets us to a return to normal?

Yes. No, Mike, I wish I had that crystal ball, but I'll try to answer the question anyway. I think all the customers we speak to at the moment certainly see a continuation of the current environment. Essentially, cargo demand is running high. It's not tremendously high compared to what it was historically, but it is at such a level that any incremental addition to the demand is causing further disruption.

And they're all forecasting that cargo demand will continue to increase this year, estimate range anywhere from 4% to 10%. That's kind of the range we hear from customers in general. And that will kind of ensure that the infrastructure remains under pressure. So my view is very much that the congestion will be -- will remain present for most of this coming year. And it's not really a problem that can be solved easily by adding capacity because we really are in an environment where ships are fully utilized, containers are fully utilized. The problem with inland logistics is there.

And it's tremendously difficult to add capacity on short notice. You can't build new warehouses. Yes, you could potentially have more truck drivers joining the workforce and so on. But I think that long story short, the normalization would only come if consumption moderates. And all signs are at this stage that consumption will not moderate all that soon. Inflation was up we've seen today from the latest numbers.

And it's really driven by consumers buying ever more goods that are being shipped in our containers. I think that the other elements here to kind of look at the bigger picture and to keep in mind is that not only do we have a situation where we can't really normalize the present congestion by adding supply. We're also at risk of further disruption. I mean I was mentioning labor. It's no secret that with inflation, there are lots of labor movement starting to emerge around the world asking for pay increases. Those have the potential of causing ever more congestion worldwide.

We're not completely sheltered from a new variant on COVID and events like we've seen with the Suez Canal disruption. So we're in an environment where demand and the system is really running at maximum capacity and it will take quite a bit of time in our opinion for that to normalize. And that can possibly normalize, I would say in 2023. And that is also when shipping lines will get delivery of additional ships.

But we kind of are also seeing this from a very favorable point of view. We think that additional ships will mean a requirement for additional containers. And we don't really think that those ships will come and flood the market. The view is very much that shipping lines will put those ships into service and they will try to optimize their fleet, meaning that they will potentially sell those ships and sell their entire fleet of ships a little bit slower, the main reasons being that the fuel costs are probably going to remain high if inflation picks up.

And secondly, 2023 is also when new environmental regulation come into force, which will kind of put pressure on shipping lines to reduce their emission. And so far, the only short-term mean they have to reduce their emissions is essentially to have those ships sailing a little bit slower. So big picture, we think we have an environment with a lot of continued disruption for the coming year. And then we have a normalization starting next year, but potentially a resumption in additional demand for containers as those ships enter into service.

That was a lot of helpful color for a complicated question. Let me try, sneak in one more here. So as your CapEx moderated in the fourth quarter, your share repurchase activity picked up nicely. As you look into '22, and you just kind of talked about the expectation for it to normalize a bit in terms of CapEx. So should we expect the pace of share repurchases to rise off of the fourth quarter level? And then have you been buying shares year-to-date and if so, how much have you bought?

As we stated, we have a share repurchase program in place. So you can logically assume that that has not been interrupted. However, we don't like to give detail on the current operations of the current quarter. But to your wider question, I think that we signaled that we continue to see growth in the market, which is very positive as far as we're concerned. It's a normalized growth, but we definitely have commitments already on hand. And we will continue to monitor that situation very, very closely.

As we stated previously, our priority will always be to deploy CapEx provided we can achieve the yields and the maturity that we think are fair in this high price environment. And then we will optimize our capital return allocation depending on that situation. But big picture would definitely -- into an environment where our CapEx moderates from what we have seen last year, which was truly an exceptional year. And that will give us potentially more means to return capital to shareholders through our normal dividend and buybacks.

Next question is from Liam Burke from B. Riley.

During your prepared discussion, you said that the first half of the year, you would be investing about $500 million in CapEx. Is that correct?

Yes. To be more specific, we said that we've already locked in deals for that amount.

So that would be over and above your normal maintenance CapEx. Is that right?

No. We didn't differentiate between our maintenance CapEx or growth. That's our total CapEx amount.

Okay. Perfect. Okay. That's the total number. Okay. Great. And on the recharter front, you've had a lot of success as your old contracts have run off. Is there a significant amount of recharter activity anticipated in 2022?

Yes, definitely. I think we've discussed this on past calls, and this is definitely an ongoing focus and a very important focus. As we are really -- we continue to be an environment where those maturing leases are at rates that are essentially half the rate of new containers. We're in a strong position and we are trying to not only achieve extension through the end of life of those containers, but we're trying to achieve a positive re-pricing.

And as you know, we have this build-down period that means that shipping lines can kind of drag their feet and delay a little bit until they have no choice but have to agree on a lease extension. And we have a few of those leases that have been delayed because shipping lines are obviously not rushing to renegotiate contracts until they are forced to do it, knowing that they will have to pay more.

And as time passes and as prices remain high, we're getting closer to that deadline where we have to come to a conclusion and shipping lines have to agree to extend those leases or essentially we deliver them to ourselves and then we can lease them out again or potentially sell them in the current high resale environment. But yes, we certainly continue to expect some more positive re-pricing on that front during the current year.

Okay. And have you seen the market change very much since the sale of your competitor about a quarter or 2 ago?

Are you referring to the CAI transaction?

Yes. Yes.

Yes. No, the market hasn't changed tremendously. We understand that the new owner is working on merging CAI with Beacon, which makes a lot of sense. But I don't think there has been any change in their approach or strategy that we can note of so far. We remain with a market that is now consolidated to 5 large players. And the 5 players are acting very responsibly.

We haven't seen any sign of anybody trying to grab market share, even though we've actually, as mentioned before, seen a little bit of a normalization in demand for new containers because most ships lots are essentially already filled. But we continue to have a very stable environment there. The maturity on new leases hasn't reduced. We continue to see new leases concluded in excess of 12 years. So that's pretty much a stable situation from that point of view other than the new container prices that have eased off slightly.

(Operator Instructions) The next question is from J. Mintzmyer from Value Investor's Edge.

Congrats on excellent results here. When I'm looking at Slide 8, you break out in the bottom right your container resale volumes. And clearly in 2021, the resale volumes plummeted, the lowest really on record. That makes sense, right? The market was strong and the liners wanted to keep their containers. But when I look down at Slide 10, I see that you have 300,000 sales age that have expired, another 100,000 sales age coming up here in 2022, which is a massive -- I mean, 400,000 CEUs, right? So when can we expect those to start getting sold?

Well, you noticed something very, very important, J., and that's the hidden value that we potentially have with those containers. And really, we're in a situation where as we mentioned, customers are holding on to those containers for as long as they can because these are cheap containers in their fleet and they kind of want to delay returning them until essentially the contract forces them to return them.

So I think we're doing everything we can to try and get those containers back. We're doing all sorts of incentive and package deals, and we would love to get those containers back. I think it's fair to say that with the continuation of the high utilization rate congestion around the world, we're going to continue to face difficulty in getting those containers back in substantial volumes. And they will essentially take a little time and spread probably over 12 to 18 months. I think that's our estimate unless the market changes.

But the positive of that is that it also means that the market -- the resale market remains undersupplied and that the prices remain very high. So as far as we're concerned, we're not too worried about having that. We wish we could realize some of those gains as fast as possible, but we believe it's just a question of time until those containers get redelivered and then we can realize those gains. I think the other very important element is that a lot of those containers should have been returned already maybe 6 months to a year ago, and they are older containers.

And why I mention that is essentially because they have a probably a lower residual value, which means that when we sell them, the gain on sale is even higher than we sell more recent containers. I mean we're talking about containers that are potentially 18 or 9 years old. I mean not the whole 300,000, but certainly a portion of that is all the containers that shipping lines have been delaying. And that really means that the potential gain on sales there is actually substantial.

Yes. It's definitely a lot of potential. That's why we're watching it closely, and I'm hoping you'll be able to do a great job both selling and also rolling those legacy ones on the new contracts. Last year, you had $2 billion basically in CapEx, which was looks like 3 or 4 years' worth of normalized CapEx for you guys. You mentioned $500 million committed so far this year. How far does that take you into the year? Is that like through like May or June or how far out would that be, that $500 million?

Yes. It's -- we said it's the first half. It's probably fair to say that it will take us through May depending on the deliveries and any event that may happen in terms of the delivery of those containers and the pickup of those containers. But yes, I think trying to guess your next question here is does that trend continue for the full year? I would say, at this stage, there's no reason not to believe that the trend kind of continues at the same pace.

Yes, you made it easy for me. Still my next question. Now a final one for you. Your shares trade at a really attractive free cash flow multiples, return on equity, whatever you want to use. But at the same time, you've recently issued preferred equity as low as in the low 6% range, but your common share is around 20%. Is there any appetite or any potential in the market to do another preferred say, $100 million, $150 million preferred and do something like a accelerated share repurchase and really just play that arbitrage?

Yes. J., we keep on looking at the opportunities. I would say -- and maybe I'll let Michael speak on this. At this point in time, I think we're very happy with the way our balance sheet is structured. We don't see an immediate need to raise more preferred. But Michael, maybe you want to chime in on this.

Yes. And J., we understand how you're looking at that math of the preferred works. Having said that, we certainly have a healthy amount of free cash flow where we can take care of the CapEx needs that we do have, the equity portion of it. And then also execute on the buyback plan, which we really like. And you're probably (inaudible) the fact that where our shares are trading at right now, certainly still -- we see it as tremendous value to invest in ourselves. So we do have enough cash from just operations to handle that in. Especially with CapEx levels where we are at now, we do have -- we do generate a lot more cash flows in excess that we can use towards returning capital to shareholders, dividends as well as that buyback program that we like a lot.

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 very much for taking the time to listen to us today. And I look forward to updating everyone on our progress during the next call. Thanks again.

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