Textainer Group Holdings Ltd (TGH) 2021 Q1 法說會逐字稿

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

I will now turn the call over to Ankit Hira, 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 that 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, Ankit. Good afternoon, everyone, and thank you for joining us today for Textainer's First Quarter 2021 Earnings Call. I'll begin by reviewing the highlights of our first quarter 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 extremely pleased with our record first quarter results and revenue growth, which confirms our dramatic turnaround. This has been achieved through organic fleet growth, improved utilization on our base business and optimized financing structure thanks to the effort of the entire Textainer team over the past 2 years.

For the quarter, our lease rental income was up 7% when adjusted for the fewer number of billing days and 16% higher than for the normal corresponding quarter last year. This represents a substantial increase for a business like ours, consisting of more than 85% long-term leases. It also augurs well for continued positive momentum given the compounded effect of our current fleet growth and the future very long-term leases already secured for containers to be delivered in the coming months.

In addition to revenue growth, we continued to reduce costs and enjoyed strong gains on sales, allowing us to report a record adjusted EBITDA, which increased 12% to $153 million, as well as a record adjusted net income, which increased 44% to $59 million. This adjusted net income represents $1.16 per diluted share and sets us on track to a great full year performance. Similarly, we achieved an annualized Q1 ROE of 18%.

Container demand has remained elevated since last summer, driven by a prolonged surge in world trade. In response to high demand, we have invested heavily in organic growth and build up accretive quality revenue. During the second half of 2020 and first quarter of 2021, we added containers totaling $819 million and $580 million, respectively.

As the market remains strong, we placed additional orders for $700 million of containers for delivery through July, while focusing on back-to-back leases and longer tenures. This means that substantially all these containers are already on or committed to attractive long-term leases with levered IRR well into the mid-teens and Asia returns. Furthermore, the average tenure of leases concluded since the beginning of the year has further increased to 12 years, virtually guaranteeing that all these containers will be fully utilized until they reach their depreciated value and can potentially be extended or sold at a profit.

Putting things into perspective, for the period of July 2020 through July 2021, we will have invested a total of $2.2 billion in new containers that will provide strong cash flows and attractive revenue for many years to come. This is a significant investment volume, representing 45% of our container asset value as of the beginning of this period, which will greatly contribute to our future profitability. At the same time, we continue to support our historically high utilization rate by successfully renewing expiring leases under long-term arrangements that guarantee most containers will remain on lease until they reach their sales age, further securing our stable future cash flows.

While production volumes of new containers have increased substantially to meet demand, inventory levels at factories remain very low, especially as we approach a traditional peak season of the year, while container prices have remained stable at about $3,500 to $3,600 per CEU since earlier this year. Our utilization rate averaged 99.6% during the quarter and currently stands at 99.7% on a fleet that reached another important milestone at 4 million TEU at the end of April.

We continue to experience minimal level of container redelivery and we continue to focus on opportunity to renew and extend expiring leases in a very favorable environment. These lease renewals have contributed and will continue to contribute to our revenue growth and, more importantly, are being structured under long-terms arrangement that guarantee the containers will remain on lease until they reach disposal age.

The extra long duration of our recent leases both on brand-new containers and lease renewal, will lock in the cash generated by a significant portion of our fleet to most or all of its remaining economic life. This will provide a strong and stable revenue stream for many years to come.

In addition to our strong operating performance, we also continue to further strengthen our financial position. So far this year, we have issued 2 fixed rate ABS, one for $550 million that closed in February and another for $651 million that closed in April. The combined average interest rate of these ABS was very attractive at 2.03%.

We also recently announced a successful issuance of $150 million in perpetual preference shares with a cumulative quarterly dividend of 7%. This issuance provides a new and diversified source of funding at an attractive price. Combined with the leverage potential of our existing debt facilities, these additional resources will ensure that we can continue to participate in the current exceptional market while optimizing our low blended cost of capital.

Finally, we're pleased to announce that we repurchased a total of 546,000 shares of our common stock during the first quarter. And that on May 1, our Board authorized a $50 million increase to our buyback program. As we look into the remainder of this year, we're optimistic about the momentum of our business and strong market fundamentals. We expect the economy to continue to strongly perform thanks to the government incentive programs and the full reopening of the North American and European economies.

We expect container demand to remain elevated through the rest of the year, boosted by high trade volumes and restocking of current very low inventories and likely to be further amplified by the traditional peak season of the summer months.

In summary, I'm extremely proud in both the financial and strategic performance of our business. We plan to continue our disciplined approach to our fleet growth, investing selectively in the most attractive long-term opportunities and remain committed to enhancing our financial performance and delivering long-term value to our shareholders.

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

Thank you, Olivier. Hello, everyone. I will now focus on our Q1 financial results. Q1 adjusted net income was $59 million, an increase of $18 million or 44% as compared to Q4, and a record for Textainer. When compared to Q1 of the prior year, we have an increase of over 500%.

We expect another solid performance in Q2, thereby confirming the strong basis and foundation of our much improved results. Record Q1 adjusted earnings per share was $1.16 per diluted common share, a 43% increase from the prior quarter. This very strong showing in Q1 translates to an annualized adjusted ROE of 18%, a dramatic improvement from 13% in Q4. We expect to be able to achieve a high teens area adjusted ROE in Q2 and for the rest of the year.

A reliable indicator of substantial cash flow generation, adjusted EBITDA in Q1 was $153 million, an increase of $16 million or 12% as compared to Q4 and also another record for Textainer. While we are extremely pleased to report record results, it is gratifying to see this level of performance, achieved with strong contributions from the key operating line items from our P&L.

Q1 lease rental income was $169 million, an increase of $8 million from Q4 or $24 million greater than Q1 of the prior year. This was largely due to an increase in fleet size, utilization and average rental rate. We expect our Q2 lease level income to show more improvement resulting from continued attractive fleet growth.

Q1 gain-on-sale owned fleet containers was $12 million an increase of $5 million as compared to Q4. This was driven by a substantial increase in resale container prices, partially offset by a reduction in the number of containers sold. We expect Q2 resale prices to remain strong given continued high demand and the very limited amount of container redeliveries and available resell inventory.

Q1 direct container expense was $7 million, a decrease of $4 million as compared to Q4. This is due primarily to lower storage, maintenance and handling costs resulting from higher utilization and very low depot stock. We are pleased with the results of our disciplined efforts to manage and control costs. We expect these costs to remain relatively stable at these attractive levels, if not slightly improved in Q2.

A Q1 depreciation expense was $66 million for the quarter and is expected to increase in Q2 due to continued attractive fleet growth. Q1 G&A expense of $11 million remained relatively flat as compared to Q4 and is expected to remain at this normalized level going forward.

Q1 container lessee default recovery was positive. And included a benefit from the restructuring and recovery of an insolvent customer that had previously defaulted and was written down in the second quarter of 2019.

Q1 interest expense, including realized hedging costs was $32 million, an increase of $1 million from Q4. This was primarily driven by a higher average debt balance due to our substantial fleet growth. But largely offset by our lower effective interest rate in Q1. I am pleased with the result of our latest ABS issuance, which closed on April '20 and raised $651 million at attractive fixed rate pricing [in terms]. The proceeds were used to pay off our higher-priced 2019-1 ABS notes and to pay down their rate bank facilities, which further lowered our effective interest rate and created additional borrowing capacity for future container investment.

We continue to be very pleased with the performance of our ABS financing program, which provides a flexible and attractive source of long-term fixed rate financing that is valuable to our business. Our effective interest rate continued to drop to a level of 3% in Q1. We expect this rate to fall below 3% in Q2.

Turning now to our share repurchase program. We purchased 546,000 shares at an average price of $19.68 during Q1. At the end of Q1, we had approximately $13 million available under our current plan. In addition to this $13 million, our Board authorized an additional $50 million under the program on May 1. We continue to execute our capital allocation plan and we'll repurchase shares opportunistically as we move forward.

Finally, as announced on April 14, we successfully completed a public offering on April 13 of 6 million depositary shares, each representing an interest in Textainer's 7% Series A cumulative redeemable perpetual preference shares with an aggregate public offering price of $150 million. The preference shares represent another source of attractively priced and perpetual capital. When used in conjunction with financing our attractive container investment opportunities, the preference shares contribute by greatly improving the equity cost of the company's weighted average cost of capital, or WACC. The first quarterly dividend on the preference shares will be paid on June 15 for holders on record as of May 31.

Looking now at our balance sheet and liquidity, we continue to maintain a healthy balance sheet and adequate liquidity, through both our well-structured bank facilities and cash reserves. We ended Q1 with a cash position inclusive of restricted cash of $213 million and a well optimized financing structure. We continue to remain confident in our ability to support significant accretive organic growth through CapEx, while continuing to further improve our profitability metrics.

Consistent with Olivier's earlier comments, Textainer is very well positioned to continue executing its strategic plan to further improve financial performance and enhance shareholder value.

This concludes our prepared remarks. Thank you all for your time today. Operator, please open the line for questions.

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

So I guess, I just wanted to start off with probably the question I get the most, which is really how long can this environment last? And I heard in your prepared remarks, Olivier, that you see this market is staying strong for this year.

I think there's probably a number of elements that could keep it going for longer than that. But I wanted to just hear your thoughts as we think about 2022 and the potential for the market to stay -- perhaps not this strong, but to stay very attractive for a while.

And I guess the follow-on to that would be what causes it to end? And do you think it will be somewhat of like a soft landing here as things normalize eventually?

Thanks, Mike. Listen, I think the first element here to really understand is that -- it's a very good question. But because all those leases and all the CapEx that we or have committed to, is really essentially back-to-back and leads to customer.

The question is somewhat probably less relevant, except if you're trying to assess whether the growth is going to continue to accelerate. But as we've mentioned -- or I've mentioned in my script, quarter-on-quarter, we had a 7% revenue growth. And this is really with a business that has a long -- a lot of long-term business. 88% of our business is actually long-term leases. Meaning that container lessors, like a lot of long-term leasing business is a business with tremendous inertia and a lot of momentum.

And it means that where we add those containers to the fleet, our revenue continues to grow. And we are going to enjoy the full year revenue of the containers we placed on leads in the end of last year, then we are going to enjoy in Q2 the full quarter revenue of those containers that we -- [unhired]in the first quarter.

And on top of that, we are going to get the contribution of those containers that we've already committed and will be delivered in the second quarter. So I think that is very important. And what is even more important is that all those containers are committed on extremely long maturities. Actually, I think, maturities that have never been seen in this industry.

Now how long can this momentum and this additional growth continue? Listen, we are actually very optimistic. I mean, not only have we moved to a COVID economy where people are really buying a lot of things online, we are now moving to a more open economy where people will continue to buy online, but will buy a lot more things that they probably did not buy. That is further supported by additional government incentives by a lot of people potentially finding new activities and new jobs and additional revenue.

And all that is going to be boosted by the seasonal demand of the summer months, which will coincide with the fact that we're at extremely low inventory level and so we'll have to replenish those inventories. We'll have to get ready for the shopping season of the fall, leading up to Christmas and the end of the year.

So we see absolutely no kind of stop or slowing down in this very, very strong demand. And that's probably one of the other important element here is that this exceptional demand is really fundamentally driven by high demand, right? It's just high demand, which causes ship capacity to be fully utilized, which causes container capacity to be fully utilized. And it's almost like disruption are bound to happen when you're stretching a system to the limit like it is now.

But the disruptions are really not the driver here. The main driver is really the growth in trade that is really causing this incredible demand for cargo to be moved from Asia to North America and Europe and to the rest of the world as well.

So when does this end? It's a very good question, and the timing is hard to predict. If we look a little bit closer at it from a container lessor's point of view. We probably think that demand for new container will somewhat ease off towards the end of the year and into next year.

But we are going to have an extremely soft landing, and I think we're going to continue to see sustained demand. And the reason we believe we are heading towards a very, very soft landing is because I like to remind people that in 2019 and 2020, we had extremely low production volumes. If anything, the shortage compared to the long-term trend would be about 1.5 million to 2 million TEU. And this year, if you look at the projection, they vary sort of like between 4.7 million TEU to 5.3 million TEU for the full year. That will just only allow us to catch up on the shortage of production that we had in the 2 years leading to this incredible market.

So what will then happen is that, yes, there will maybe be a slightly smaller demand for new container, but the market will definitely not be oversupplied with container. And the second element here is that the resale market has been starved of supply. And when demand slows down or comes back to normal, shipping line will start returning some of the older containers that they've been holding on to, and those will hit the resale market which really has a very, very big appetite for containers.

So we think that it's certainly going to be a very soft landing, and there's going to be very, very limited impact on the demand for lease containers. And probably the final element here, Mike, is that with new container prices remaining extremely stable at that $3,500, $3,600 per CEU, we also expect that this will continue to provide very strong support for contracts that are maturing and that we will have to renew.

That was great. A lot of important points in there that you address. I guess as a kind of follow-on to that question, it sounds like you're expecting the adjusted ROE to be in the high teens in 2Q, if I heard that correctly. Last quarter, if I recall, the commentary about maybe, I think it was longer term, you think like a mid-teens, ROE is the right spot. So a, is that still how you're thinking about the business through the cycle?

And then, b, what, in your word, just kind of driving the disconnect in the stock and that fundamental outlook? Because you're basically trading at book value here, and you're down to about 10% in the last month. And even at most, you were trading at a modest premium to book, despite that high-return outlook. So I just wanted to hear your take on that dynamic.

Yes. Just on the ROE, I think that we were being overly careful last quarter. The reality is the performance of the business is even stronger than we anticipated ourselves. And we've essentially changed our view from sort of like mid-teen to high teens ROE. And we're now going one step further into saying that we certainly expect this to stay at this high-teen ROE for the full year and the foreseeable future.

On your second question, that's the question I ask myself every morning when I wake up, Mike. How is it possible that container lessors are trading at multiples that are around 7x forward earnings, when the commentary from ourselves and our peers and everybody can see that the market has got a lot of momentum and that everything is positive.

So not only is that multiple low compared to the rest of the market, but people kind of can imagine that the earnings are going to go up. So it's a very, very, very difficult question for me to answer. I think that if it was Textainer, we certainly believe that our share has a lot of value. That's why we continue with our buyback program. And we could only hope that the market would see that the segment is probably a gem in the overall market that is being ignored. Why that is? That is completely puzzling me, to be honest, Mike.

Yes. That's fair. Maybe just one last one from me. Just looking for a quick update on the capital management philosophy here and kind of how that's maybe evolved a little bit. You're still effectively buying back stock, doing a lot of -- a lot of CapEx, which is great to see. There's obviously some balance sheet optimization actions that you guys took in the quarter, been quite busy there.

But as you think about that mix here, toggling between investing in the business, buying back stock. And I think last quarter, you expressed some interest or discussions that you've been having with the Board about a dividend. Just looking to get an update there and see if any of those things have changed and how you're thinking about each other's levers?

No, it's essentially pretty much the same, Mike. I think that we've always stated that as long as we see continued market momentum and opportunities to put capital at work under favorable leases, we would continue that. And we certainly continue to see the market in a very positive light. So our first priority is to continue to deploy CapEx. That CapEx and those investments will generate the future cash flow that will eventually allow us to allocate capital back to shareholders.

We continue to see value in our stock price, as we just discussed, and that's why we had the Board increase our capital -- or allocation for buybacks. And in terms of dividend, yes, most definitely Textainer is an ideal business to pay a stable, steady dividend. I'd like to say that Textainer paid a dividend from the first day it went public and it's only because of a little accident that Textainer had to stop paying a dividend, but the intention is certainly to resume paying a dividend as soon as we see that it's the best capital allocation that is in front of us.

Our final question is from Dan Day with B. Riley Securities.

Yes. So you grew the fleet by around 5% in the quarter on a TEU basis. Can you just give us any guidance for how we should be thinking about fleet growth in 2Q, 3Q with all this CapEx coming on? So should it be around a 5% increase in 2Q similar to the first quarter and then moderate from there? Or just any commentary you can provide around that would be great.

Yes. Dan, as we mentioned, we have substantial CapEx already committed that will be added to our fleet in the second quarter, and that will go on lease fairly fast. And I think that you can expect the growth in our overall fleet to continue along the same pattern. Probably in Q2, it will be slightly faster than what we have seen in the first quarter.

Towards the end of the year, I think it's a little bit less clear at this point in time how much growth there will be. We estimate that there will still be growth. It might be a little bit slower compared to what we've experienced since July last year.

But the other important thing to keep in mind is that containers are now more expensive. So looking at it purely in terms of TEU is probably not the most accurate measurement. We like to look at it in terms of amount of dollars or CapEx being deployed. Because ultimately, that's what contributes and translates into our EPS. But no, you could expect that there will be still some element of growth in the second half of the year, most definitely.

Great. That's helpful. And then just on the lease renewals. So we've talked in the past, you guys had a lot of leases put in place in '15 and '16, well below market value. As those are coming up in this kind of market, is it just kind of extended the same rate when in the past, you would kind of be taking a discount? Or are you -- do you have the leverage to sort of increase those leases, kind of more to market rates?

Yes, Dan, it's customary to say in our industry that it's very difficult to reprice all leases. But I've got to say we could not have dreamt of a better market environment for those leaders to mature, sort of like sometimes you have to be lucky. And listen, in 2016, we had the perfect storm against us. We were forced to renew some of those leases at very cheap rates.

Right now, we're exactly in the opposite situation. And certainly, we're looking to renew those leases and reprice those leases positively. But possibly even more importantly for us, and I emphasize that in my earlier comments is, I think, the duration of those lease, what we're really looking at is to lock in those cash flow streams for the foreseeable future for the long term.

So it's really a combination of keeping those assets on lease until they reach maturity and also repricing them favorably in this market environment.

Got it. Last one for me, kind of a different question here. Do you have a sense with -- this business seems to be changing dramatically compared to what it was just in terms of how long these leases are, right? Do you have a sense of -- or kind of keep track of what your total revenue backlog is? Or would you be willing to, kind of, maybe disclose that, just to kind of -- or at least talk about where it is relative to the past. Or provide any detail around that.

I just have gotten some questions on that and think it would be interesting. So whether you have the exact number or not. Just any commentary around that thought.

What exactly do you mean by revenue backlog? What we have kind of committed going forward?

Yes. So effectively, if you add it up, I guess the question comes because, obviously, you're talking 12-year average leases versus kind of 5-, 6-year leases in the past or more common. So just how much revenue you effectively have contracted on your book versus where that number would have been in the past? I guess, just if you added all of the contracts up.

Okay. We do track that. But to answer your question very specifically, we'd have to go back and really compare historically, making sure we're comparing apples and apples. But at this point in time, we are close to the equivalent of 6-year revenue that is committed on those leases.

Obviously, those leaders are stretching from higher utilization and then are being spread over time. But if we add up that revenue, that's roughly equivalent to 6 years' worth of revenue. I think -- is that one way you wanted to look at it?

Yes. Yes. No, that's interesting. That's fine. Just I thought it would be an interesting way. And maybe in the future if it's something you think is helpful to kind of get people to realize how different this is than it was in 2015.

Sure. And another way to look at it. And this is for the total revenue, including our finance lease. Another way to look at it is that the average remaining maturity of our operating leases only used to be around 3 years, and it's now definitely slightly above 4 years.

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. I will now turn the call over to Olivier Ghesquiere for closing remarks.

Thank you, everyone, for listening in. And yes, we look forward to getting together again for our next quarter. Thank you.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation. Have a great day.