Textainer Group Holdings Ltd (TGH) 2023 Q1 法說會逐字稿

Thank you, and welcome to Textainer's First Quarter 2023 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

I will now turn the call over to Tamara Bakarian, Investor Relations for Textainer Group Holdings Limited. Thank you. You may begin.

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, and 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, 2022, filed with the Securities and Exchange Commission on February 14, 2023, 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 the 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 morning, everyone, and thank you for joining us today. I will begin by reviewing the highlights of our first 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're very happy with our first quarter 2023 earnings results. Our utilization continues to remain very strong despite this being the traditional slower season of the year and the healthy consolidation phase taking place in the industry. For the quarter, adjusted net income was $54 million or $1.22 per diluted share.

The overall market has remained stable through the start of the year despite lower cargo volumes. New container production and investment opportunities remain muted. But as mentioned, fleet utilization continues to be strong, container prices remained slightly above historical level and turn-ins remained focused mostly on sales-age containers that we're disposing in a profitable secondary markets. The strong cash generation of the fleet continues to drive our ability to return capital to shareholders and delever.

Q1 lease rental income was $195 million in spite of 2 fewer billing days in the quarter and continues to demonstrate stability a testament to the resilience of our utilization rate, which stands at an exceptional 98.8%. This in turn can be attributed to the successful proactive renewal of maturing leases, thanks to our strong long-standing customer relationships. We continue to expect utilization to remain elevated for the duration of this year.

Q1 gain on sales was $10 million, a decrease from last quarter, driven by lower volume and lower average prices. While resale prices normalize gradually throughout 2022, they have since remained stable at a more sustainable and still attractive margins. Further, we're pleased to report that even with rising interest rates, our effective average interest rate only incrementally increased to 3.1% from 3% last quarter. This increase were offset by deleveraging, helping drive our total interest expense down versus the previous quarter. This favorable outcome can largely be attributed to a long-term hedging policy, which has been strategically implemented to mitigate the impact of interest volatility.

Our strategy involves capitalizing on profitable investment opportunities whenever they arise with the aim of generating strong return and driving value creation. In the present climate where investment opportunities remain limited, our attention remains towards the efficient allocation of our free cash flow to optimize shareholder value.

To this end, we're pleased to report that we repurchased 1.3 million common shares this quarter, representing 3% of total shares outstanding as of the beginning of the year. We continue to view our buyback program as extremely accretive and beneficial to long-term value for our shareholders.

Textainer has strategically positioned itself as a long-term specialty finance business, navigating the cyclical nature of the shipping industry to deliver consistent performance to enhance long-term intrinsic value for shareholders. By understanding and adapting to the market fluctuation, we're able to provide much needed liquidity when opportunity arise, ensuring that we remain financially nimble and responsive to our customers. This opportunistic approach enables us to capitalize on favorable market trends by also demonstrating resilience during slower markets.

Our current market outlook reflect signs of continued stability and optimism for the second half of the year. While the shipping industry experienced continued normalization with lower cargo and ocean freight rates in recent months, we're now witnessing the first increase in ocean freight rates in more than a year.

As the summer season approaches, shipping lines are positioning themselves to accommodate the traditional inventory stocking that occurs during that time of the year. Utilization rates are in turn supported, as shipping lines up to retain sufficient containers in preparation for this expected increase in cargo. Further, liners are also opting to hold on to containers as returning expired containers or leasing new ones present more expensive alternatives. As a result, shipping lines are primarily returning old sales-age containers.

Meanwhile, the resurgence of the Chinese economy has added to the resilient secondary container market, reinforcing the stability of retail demand and pricing as well as offering possible opportunity for lease outs from our available depot inventory, 80% of which resides in Asia. Container factories remain mostly closed given the absence of sufficient orders for new production. This very welcome discipline provides essential support for container supply to readjust following 2 years of elevated production levels. This further helps maintain prices for new container at a level above $2,200 per CEU and, by comparison, reinforces the attractiveness of our existing fleet.

Current factory inventory has remained stable from last quarter at about 1 million TEU, the majority of which are owned by shipping lines and represents about 2% of the world fleet. Our strategy remains to avoid speculative container purchases, focusing on opportunistic back-to-back orders and ensuring our inventory of new containers remains minimal and optimally managed.

Looking ahead, we anticipate the market will maintain stability during the second quarter, followed by a gradual rise in shipping volumes and potential prospect for on hiring additional containers in the summer months. In the meantime, we intend to continue focusing our strong cash generation on to shareholders' return and opportunistic deleveraging.

In conclusion, we're confident that 2023 will showcase the resilience of our business model, including our durable committed revenue and fixed rate financing. We anticipate stable operating performance even as market condition transition past the pandemic driven cycle. And our primary focus continue to be on capital allocation, maintaining a robust balance sheet and making prudent investment aimed at delivering long-term intrinsic value growth for 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 quarter.

Thank you, Olivier. Hello, everyone. I will now focus on our Q1 financial results. Q1 adjusted net income was $54 million, a decrease from Q4. This was driven mostly by normalizing gain on sales and include impact from 2 fewer days in the current quarter and expected fleet attrition as a result of our disciplined strategy due to limited profitable CapEx opportunities.

Q1 adjusted earnings per diluted common share was $1.22. While the first quarter showed a decline from our recent record performance levels in 2021 and 2022, it is important to highlight that much of that has been driven by an anticipated normalizing of gain on sales. Having said that, today's performance is resilient and well supported by a reliable and durable stream of lease rental income, supported by 90% of our fleet on attractive fixed rate leases averaging very long contract durations of about 6 years.

Q1 lease rental income was $195 million as compared to $203 million in Q4. When adjusting for 2 fewer days in the first quarter, lease rental income decreased by only 2% from last quarter due to fleet attrition from control levels of turn-ins consisting of mostly sales-age containers. Even with limited CapEx deployment over the last several quarters, the stability of our long-term contracts is highlighted by these stable levels of revenue and utilization, which averaged 98.8% during Q1 and currently firm at 98.8%.

Q1 gain on sale was $10 million, a 36% decrease from the last quarter, it's still at historically attractive levels. As mentioned last quarter, secondary container prices have reduced from peak levels at the start of 2022 but have since stabilized. Additionally, there were slightly fewer containers sold in Q1 due to the winter season impacting construction demand in Europe and North America. Looking forward, we expect gain on sale to remain relatively stable for the remainder of the year.

Q1 direct container expense is $10 million, decreased from the previous quarter by $1 million due to lower maintenance and handling expense partially offset by an increase in storage expenses. We expect direct container expense to slightly increase through the year.

Q1 depreciation expense was $72 million, a $2 million decrease from last quarter due to 2 fewer days in the current quarter. Depreciation expense is expected to slightly decrease in line with fleet attrition while CapEx remains low. Q1 G&A expense of $13 million increased from Q4 due to higher compensation and benefits costs, including the impact of inflationary increases, which generally occur at the start of each year. G&A expense is expected to remain relatively flat through 2023.

Q1 interest expense of $42 million decreased by $1 million from Q4 due to deleveraging in 2 fewer days. Average debt outstanding during Q1 reduced by $182 million from Q4. The benefit of lower average debt was partially offset by increased market interest rates on the unhedged portion of our debt.

Our Q1 average effective interest rate was 3.1%, a minor increase from 3% during Q4. 91% of debt is fixed or hedged to fixed with an average coverage tenant consistent with the average tenor of our long-term fixed rate leases.

Turning now to our common share repurchase program. We repurchased approximately 1.3 million shares during Q1 at an average price of $32.82 per share. Since commencing our share repurchase program in September of 2019, we have repurchased 16.9 million shares or 30%, demonstrating our commitment to effectively manage and enhance shareholder returns. The remaining authority under our existing share repurchase program totaled $81 million as of the end of Q1.

We're pleased to announce that our Board has approved and declared a cash dividend of $0.30 per common share payable on June 15 to holders of record as of June 2. In addition, our Board has also approved and declared a quarterly preferred cash dividend for both our Series A and Series B perpetual preferred shares payable on June 15 to holders of record as of June 2.

Our share repurchase and dividend programs continue to be a key component and significant focus of our capital allocation policy to further drive shareholder value to our investors. We expect to remain active and consistent as it comes to our share repurchase and our common share dividend programs.

Looking now at the strong asset quality of our balance sheet, we have very well benefited from the addition of significant levels of equipment on attractive long-term fixed rate leases and life cycle lease extensions over the last 2.5 years. Our high-quality lease portfolio provides long-term fixed cash flows covering nearly 80% of the remaining depreciable life of our young 5.1-year-old fleet.

In closing, the first quarter marked our progress through the current cycle of ongoing shipping normalization. Impressively, our financial performance and cash flow generation this quarter demonstrates that with the exception of some expected volatility in our resale volume driving gain on sale, we remain well insulated from the primary risks associated with market cyclicality. This resilience can be attributed to our strategic focus on long-term lease contracts, along with a disciplined fixed interest rate or hedge financing platform, which protect lease profit margins and provide financial durability and predictability despite fluctuating market conditions. We are optimistic for the approaching summer months and the potential for new attractive investment opportunities. However, we certainly intend to remain disciplined in executing CapEx while continuing to optimize 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.

(Operator Instructions) Our first question comes from the line of Mike Brown with KBW.

So Olivier, I wanted to start with just some high-level thoughts here. I'd love to hear how you think about the path to equilibrium in the market here. Like if you had to break out your crystal ball, when could attrition of containers in the market be met with healthy demand such that we could start to really see a reengagement of demand for growth of the fleet once again?

Yes. No, that's a very high-level question, as you mentioned. I think I'd like to go back to 2019 and to the fact that we came into the cycle and the up cycle with COVID with very, very low inventories. Remember, those were the years of the first tariff from Chinese imports into the U.S. and shipping lines were essentially downsizing their fleet of containers. And then we've had 2 absolutely fantastic years with huge production numbers, probably about 10 million TEU in the space of 2 years. And we're now in a phase where essentially there's very little supply, the factory that were actually closed because they don't have enough orders. And at the same time, it's almost like it's uneconomical for them to produce very, very small quantities efficiently at factory.

So we have a very healthy consolidation taking place as shipping lines are redelivering the very old containers and that kind of like helps rebalancing the market. And it's really a combination here of no supply of new container to the industry and those old containers coming back, which we are then selling still profitably on the secondary market.

I think the second part of your question is really when does demand come back? And I think that's a little bit trickier to guess. I think that the supply and demand in terms of container, we can explain it very rationally. And realistically, we have not supplied a lot of containers to the industry for the past 4 quarters. So we cannot like think it may last another quarter or it could resume at some point. The demand for cargo itself is a different question. But if history is any guide, we kind of expect the summer season to show some increase in demand. And this year may not be huge given all the uncertainties that are there. We still expect ourselves that we're going to see increased demand, but it's probably likely that 2024 will be the year where we start seeing a major demand for cargo coming back to a growth pattern.

If we -- just looking at Slide 10, I wanted to ask a little bit about the dynamics there. So it looks like about roughly 500,000 containers or so are essentially expired leases. Why have those expired leases not seen a pickup in the turn in? Is it generally because of their attractive rental rates that are still on those particular leases? And then when I look at 2023, it looks like maybe $350,000 or so are set to expire, those rates are closer to your portfolio rate. So do you anticipate the turn-ins from that vintage to actually pick up? And if that's the case, any thoughts on how we should think about your utilization rate or your sales volumes should those turn in start to rise?

Yes. No, listen, it's interesting to look at that chart because as you point out rightly, we have quite a few containers that are sales-age container, life cycle lease. And those are actually the containers that are coming back at the moment. However, because we're selling them on the secondary market, as I was mentioning, still at profitable levels, they're not impacting utilization rates. So that is why we have this very small attrition in our top revenue line because we're not replacing those containers with new CapEx because the opportunities aren't there or they're not sufficiently profitable for us to dedicate CapEx and invest into new containers. So that is why you see that small attrition in revenue. And we fully expect that those containers will continue to come back. They're not coming back at an accelerated rate. They're very much under control. They come back and we sell them or fleet pending disposal is very stable. It hasn't gone up significantly over the past few months. And we expect that, that is not going to change for the remainder of the year.

Looking forward into next year, well, first of all, you can see that we have fewer of those sales-age containers that are maturing or coming to the end of their life. And we're also really focused on renewing the normal fleet, those containers that are not at the sales-age as we have done so far. And I think that our utilization rate demonstrate that we've been very effective at making sure we can renew those young container at acceptable terms. And as I was mentioning earlier in my prepared comments, as long as we have a new container prices remaining at a level that's above historical level, we are going to continue to be in an ideal position to extend those leases that are still much cheaper for shipping line than the alternative, which is to redeliver old containers and take new containers on their fleet.

Okay. Great. And maybe I could just slip in one more quick question for Michael. Michael, I appreciate the expense guidance that you provided. I just wanted to ask a little bit about the quarter. Anything to read into on the -- or to add about the direct container expenses. It was down about $1 million quarter-over-quarter. And then your G&A expense was actually up quarter-over-quarter. It sounds like that's going to be the level it will kind of continue at. So just curious what drove the increase for G&A and the decrease for direct operating expenses?

Pretty much normal changes there, Mike. If you look at direct container expense, pretty controlled changes the components that affect that or what effects that are turn in. So control level of turn ins, pretty happy with how directionally direct container expenses is going. It may taper up a little bit gradually over the year as we get turn-ins, but they are coming in a very controlled level. And as we might have mentioned in our earlier comments, a lot of those boxes or sales age boxes. So they will be sold pretty quickly, but there is a small component that will move storage expense a little bit up there. But pretty normal changes there.

G&A, what happens during Q1 typically is you'll have some increases in comp costs and benefit costs. And our employer payroll taxes typically maximized during that Q1 and cap out whereby then there's smaller levels ongoing during the remainder of the year. These are normal seasonal things that happened in the G&A line. But if you look at G&A for the whole year, it's going to be pretty consistent, actually, not any changes there. And the level ongoing should be pretty stable, I think, for your purposes.

Our next question comes from the line of Liam Burke with B. Riley Securities.

Olivier, there'll be more container shipping volume or ships coming online beginning probably the second half of '23 and into '24. Does that have a meaningful effect on how you see potential container -- physical container demand in the next 18 months?

Yes. Thanks for bringing it up. I almost mentioned it in the previous question. According to us, I mean, that's going to be a major driver for container demand. If you look at all those ships coming in, shipping lines will definitely find ways to utilize and optimize the use of those ships. And we're seeing already the way they're doing it is essentially by adding ships on certain routes and sailing those ships a little bit slower. And just mathematically, if you sail those ships lower, you're going to need more containers to operate the same efficient service. So we're very much of the view that all those ships coming in may intensify competition for shipping lines and it may make their life harder. But for container lessors, it's going to result in additional demand for containers because there's nothing that shipping lines hit more than not being able to satisfy customers when they have the ship capacity and the demand is there. So they're going to make sure that they have enough containers on those ships to move the cargo when the cargo is available.

Great. And Michael, I'm presuming the debt you paid was the debt that is either not fixed or hedged. It's your higher cost debt?

Yes. We target that as a combination of some of our regular amortizing debt, which is of a fixed debt. But we are certainly delevering at a higher cost component that is unhedged, definitely a combination of the 2.

Okay. Now how do you balance that versus the stock repurchases?

We -- so if we look at our capital allocation approach, the repurchases are definitely key and important to what we want to do. And it's certainly a really beneficial method of returning capital to shareholders. Having said that, we look at our deleveraging from key standpoints. One is that we want to control that unhedged portion of the debt, which is the higher price portion in, as you know. But it's also a way that we retain and maintain dry powder in anticipation of future CapEx opportunities that will eventually appear.

We always want to keep a certain level of resource available. The best way to do that is to keep that in the form of buying power in terms of available capacity in these revolving facilities where if we lever them down, delever them down, we always draw them back very quickly. But at the same time, as we delever them down, we do minimize that interest expense line, which is the best debt yield for the company. So we're going to keep our free cash in terms of a lower debt, so to speak. And then balances that way in that delevering and share buy backs and the dividend or all 3 important things in addition to CapEx, if it's a profitable opportunity.

(Operator Instructions) There are no further questions at this time. I'd like to turn the call back over to Mr. Ghesquiere for closing remarks.

Yes. And thank you, everyone, for joining us today and looking forward to continue to update you on the Textainer story.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.