Textainer Group Holdings Ltd (TGH) 2022 Q1 法說會逐字稿

Good day, and welcome to the Textainer Group Holdings Limited First Quarter 2022 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Ms. Tamara Bakarian, Director of Investor Relations with Textainer. Please go ahead.

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, 2021, filed with the Securities and Exchange Commission on March 17, 2022, 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 will now 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 for Textainer's First Quarter 2022 Earnings Call. I'll begin by reviewing the highlights of our first quarter results and then provide 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 pleased with our strong results for the start of the year. For the first quarter, lease rental income was $199 million, in line with the fourth quarter despite 2 fewer billing days and 17% higher than last year. Adjusted EBITDA was $182 million and adjusted net income was $73 million or $1.48 per diluted share, representing an annualized ROE of 19%.

The start of the year has historically been a seasonally slower period. But we continue to see strong underlying consumer demand and deployed close to $0.5 billion of CapEx on long-term and attractive leases while increasing our share buyback to almost 1 million shares for the quarter. This high level of CapEx deployed to date is a result of earlier commitments and strong long-term strategic relationship with key customers.

As highlighted during our last earnings call, going forward, we see a more normalized demand for new container in 2022 as the market continues to digest the high production volumes from last year. We certainly remain focused on our disciplined investment strategy, deploying CapEx only when we can achieve our long-term targeted returns and cash flows and currently have a more modest new container order book of about $150 million.

General market fundamentals remain favorable to container leasing. Indeed, shipping lines are expecting another record year as their ships continue to be fully mobilized, given the ongoing high demand for goods around the world. The Shanghai Container Freight Index has come down from peak because of seasonality and the impact of the pandemic in China. But it remains 40% higher than last year at the same time, demonstrating the underlying market strength.

Disruption to supply chain, which traditionally generate demand for lease containers due to localized shortages or container dislocation, are only likely to intensify with the war in Ukraine and renewed COVID lockdowns in China. And probably most importantly, the traditional seasonal midyear increase in cargo has yet to hit in a situation that is reminiscent of the first COVID lockdowns of 2020, when delayed production output, combined with seasonal cargo demand, initiated the supply chain disruptions we have witnessed since.

More industry-specific indicators also remain positive. Container utilization rate of all leasing companies remain above 99%. And we have not seen any significant redelivery of all the containers since the start of the pandemic. This is a sure sign that our customers continue to expect demand over the summer and potentially further into 2023, when new ships will be delivered.

New container inventory at factory is stable and not at an abnormal level for this time of the year at about 800,000 TEU, even if recent pickups have slowed. As a reminder, last year's monthly production was clearly above 600,000 TEU. New container prices are at about $3,000 per CEU and remain almost 50% above their long-term average level. This, in turn, continues to support the renewal of maturing contracts on new and more favorable long-term leases.

Lease maturities on newly concluded deals remain very long, relative to the economic life of our container, are all above 10 years. Although resale prices have come down somewhat, they're still high. This, therefore, appears to be related more to temporary slower demand, given that availability remained limited in absolute terms as shipping lines continued to hold on to their containers.

As we look into the rest of 2022, we remain confident in the strength of our underlying business fundamental. While there may be cyclicality within the shipping industry, Textainer maintains a high level of stability with revenue protected against a short- and medium-term market fluctuation. As of the end of the first quarter, our entire portfolio had an average remaining tenure of more than 6 years. And our container fleet is probably one of the youngest in the industry with an average age of 4.5 years.

Looking ahead to the summer peak season, we expect the current macro environment to remain favorable with elevated consumer demand, low warehouse inventory levels requiring replenishment and disrupted global supply chain extending tragic times for containers even further. We anticipate new container prices to remain elevated as manufacturers enforce a disciplined approach to production capacity and as component costs increase with other inflationary pressures. We expect this environment to continue to support favorable renewals of expiring leases, high utilization rate as well as high retail prices of older containers. We also expect our customers to continue generating strong operating results.

In closing, we're optimistic about our market positioning. As expected, market activity year-to-date has tempered from the historic level we saw last year, but we continue to see selective opportunities for organic growth. Our focus on long-term leases at attractive yields matched with fixed rate debt has secured our profitability and stable cash generation to largely mitigate cyclical risk. In addition, we remain committed to returning capital to our shareholders through our active share repurchase and dividend program.

I will now turn the call over to Michael, who will provide a bit more color regarding our financial results for the first quarter.

Thank you, Olivier. Hello, everyone. I will now focus on our Q1 financial results. We had another quarter of very strong results, further improving the quality of the revenue-generating assets on our balance sheet and their associated stable and long-term cash flows. These cash flows are well protected over the long term through fixed rate leases and fixed -- and hedged to fixed financing. And we'll continue to support our capital allocation policy and enhanced shareholder value.

Q1 adjusted net income was $73 million, in line with Q4 and an increase of 23% year-over-year. Q1 adjusted earnings per diluted common share increased to $1.48, a slight increase from Q4 and a 28% increase year-over-year, driven by our continued strong performance and ongoing positive impact from our share repurchase program. We are very pleased that this results in an annualized Q1 adjusted ROE of 19%.

Q1 lease rental income was $199 million. Our consistent top line improvement was largely driven by an increase in fleet size, supported by very attractive long-tenured leases with favorable fixed rate yields and is expected to increase sequentially in Q2. Our utilization rate remained very high, averaging 99.7% during Q1 as we continued to see limited container redeliveries from customers.

We are very pleased with our Q1 CapEx investment of $497 million, a 98% increase over Q4. Our Q1 CapEx comprised of primarily attractive fixed rate long-term finance leases. Our finance leases, which represent approximately 24% of our lease composition, are an important and valuable component of Textainer's lease portfolio.

A finance lease differs from an operating lease as the finance lease generally represents a finance sale of the container asset to the customer over the lease tender. While both finance leases and operating leases generally have fixed rental rates, finance leases have a different accounting treatment from operating leases.

While operating lease rental amounts are all shown in the lease rental income line within our statement of operations or P&L, the finance lease rental amounts are comprised of two parts: an interest income portion and a principal payment portion. Only the interest income portion of the finance lease rental amount appears within the lease rental income line of our P&L. The finance lease's principal payment is reflected in the balance sheet.

Additionally, while operating lease equipment incurs depreciation expense over the life of the container, equipment on finance lease does not incur depreciation expense. At the end of the finance lease, customer will generally have an opportunity to take title to the container by paying a contractual buyout amount pursuant to the terms of the finance lease.

Q1 gain on sale of owned fleet containers was in line with Q4 at $16 million. This was primarily driven by higher sales volumes. Resale container prices have reduced from peak levels in 2021 but continue to remain at attractive levels. While we have been very pleased with our reported gains on sale of owned fleet containers, we continue to expect resale volumes to be somewhat constrained by low inventory, consistent with high utilization levels and very limited off-hires. Trading gains were down due to lower new container prices. And we are expecting gains to remain lower as we have had fewer attractive opportunities to purchase trading container inventory.

Q1 direct container expense of $6 million was flat against the previous quarter, resulting from continued high utilization and very limited depot inventory. We expect direct container expense to remain at attractive levels while utilization remains high with very limited off-hires. Q1 depreciation expense was $72 million and is expected to remain mostly flat in Q2 as most of the recent CapEx was deployed under finance leases. Q1 G&A expense of $12 million decreased slightly as compared to Q4 but is expected to increase slightly going forward as we incur additional costs from our new ERP system launched at the start of the year.

Q1 interest expense of $35 million increased slightly from Q4 due to a higher average debt balance from the funding of attractive CapEx opportunities. Our average effective interest rate at the end of Q1 was 2.65%. We expect only a nominal increase in Q2 as we are very well positioned to mitigate forward interest rate risk with 90% of our debt fixed or hedged to fixed with an average coverage tenure consistent with the average tenure of our long-term fixed rate leases.

Let's now turn to our share repurchase program, which is an important component of our capital allocation policy. We have purchased approximately 958,000 shares during Q1. Since the inception of our program in September 2019, we have repurchased approximately 19% of our outstanding shares. We are pleased to also announce that our Board has authorized a further increase of $50 million to our existing share repurchase program. We expect to remain both active and opportunistic as it relates to share ongoing repurchase activity with $65 million available for Q2 and onwards under our repurchase program.

We're also pleased to announce that our Board has approved and declared a cash dividend of $0.25 per common share, payable on June 15 to holders of record as of June 3. 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 3.

Looking now at our balance sheet and liquidity. We continue to enhance the quality of our strong balance sheet through our attractive equipment and lease portfolio with fixed rate and long-term cash flows well supported by matching fixed rate or hedged to fixed long-term financing structure. This very stable and ongoing liquidity generation in addition to our well-structured bank facilities and $280 million in cash reserves, inclusive of restricted cash, provides Textainer with a very compelling operating platform.

An inflationary market environment is a net positive for Textainer and this asset class by improving container asset values, enhancing our ability to manage lease renewal options and supporting stronger resell prices. Limiting and controlling the impact of related increasing market interest rates has been largely and successfully addressed by us through our significant debt refinancing repricing efforts over the last couple of years and through our ongoing disciplined management of our financing structure.

In closing, we are pleased with our strong start to the year. Textainer remains extremely well positioned to support accretive organic growth through CapEx while returning capital to our shareholders through our ongoing share repurchase and dividend programs.

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

(Operator Instructions) And the first question will come from Liam Burke with B. Riley.

Could you give us some sense -- you talk about renewals, but how do renewals look? Are you getting higher rates? And are the durations through the remaining life cycle of the asset?

Can you hear me now?

I can hear you, yes. Yes, I can hear you now.

Sorry, there was a technical problem here. Good question, Liam. Actually, we alluded to -- I alluded to it a little bit in the script. We continue to see a very favorable environment to renew all maturing leases. And this is really because prevailing market lease rates are directly in function to new container prices. And we continue to have new container prices that are much more expensive than the historical price we paid for those containers and the relative rental rate. So big picture, we essentially have maturing contract at about $0.50. And the cost of a new container on the market today would probably be in the region of $0.80 to $1.

And that is a substantial difference, meaning that we're in a very good position, not only to improve on the rental rate but also to achieve very long maturities. And that's essentially what we are doing. And that's what we have been doing for the past 18 months, where we have successfully continued to extend the maturities and improve the revenue. And that is partly why the average maturity we have on our contracts has gone up to about 6.5 years, where historically it was very much below 3 years.

Great. And on the CapEx, you identified opportunities in that CapEx for growth. How does the full year look in terms of CapEx? Are you going to -- is it going to be maintenance plus a little growth? Or how does that -- do you think it shakes out?

The way we see the CapEx is very much a normalization situation. We had a very intense activity last year. Total production was in excess of 6.5 million TEU, which is essentially double what the industry has been producing over the previous year. So we were expecting and we continue to expect lower numbers this year simply because most of the ships are full. The issue is really not an issue of demand.

There's plenty of pent-up demand out there. I think that shipping lines would love to put more ships to work. But there isn't enough ship capacity to take care of all that demand, and hence to take on more container in a substantial number. That is why we kind of expect a much more tempered CapEx level and essentially a level where there's a little bit of a replacement CapEx but not much more than that.

I think the other factor that plays here is that shipping lines are now essentially flush with cash and have a tendency to purchase slightly more containers than they did last year. And of course, that means that there are fewer opportunities for leasing. But this said, there are always opportunities coming because of the dislocation and the fact that there's always localized shortages. And that's essentially what we have been focusing on right now, is to try to deploy a little bit of CapEx but definitely much, much lower level than what we have seen last year.

Okay. And Michael, very quickly, is the balance between actual purchase and finance lease, those ratios still pretty much the same? Or are you seeing more of one versus the other?

It's pretty similar. There is still a large component of finance lease in our CapEx, Liam. So you could probably expect that during the near term. Having said that, we're certainly very happy with that type of lease as well. But probably yes, Liam.

The next question will come from Michael Brown with KBW.

So I just wanted to start with the CapEx that you guys booked in the first quarter here. So you invested almost $500 million in new containers in the first quarter, so really pretty strong start to this year. And now you've booked an investment of $150 million in the second quarter. Of the $500 million in the first quarter, has all of that been picked up? Just trying to think about how that could start to come through the revenues. And then the $150 million for 2Q, when do you expect those to start to get picked up and then come through the revenues?

Yes. Essentially, all that CapEx, as we mentioned, is pre-committed. And out of, I would say, the $0.5 billion CapEx that was delivered in the first quarter, pretty much everything has already been picked up and is active, which is very good news for us. And we expect the balance order book to be picked up progressively over the second quarter as we move along. So these are all pre-committed lease. So essentially, they have a fixed on-hire date. Regardless as to whether the customers actually require that container or not, they're bound to start being invoiced for the rental.

Okay. Great. And Olivier, I'd love to just hear a little bit about what you're hearing and seeing from your business but also your customers related to China and the COVID-related restrictions, how that is playing out in the ports over there. What are you seeing in terms of disruption? And any expectations on when that could ease?

And I tend to think disruption is good for your business. I think that was a pretty clear theme in 2020 and 2021. But it does seem like that pickup or that benefit that you had seen related to disruption, say, over the last 2 years is maybe not -- that benefit is kind of weaning here, just given the fact that the production levels have really caught up to address a lot of the shortage in the global fleet. So any comments on that element of the situation as well would be great.

Sure. As we like to say, there's never a dull quarter in our business. It's always a surprise as to what is essentially happening. I think the very big difference between the situation today and the situation 2 years ago is that we entered the cycle with essentially undersupplied stock of container worldwide. As you mentioned, we right now have supplied a lot of containers to the industry. This said, there still are temporary shortages. And the effect of the recent lockdowns in China are yet to be -- yet to materialize. Essentially, Shanghai has now been in a lockdown situation for 50 days. The ports are operating normally.

The main issue lies really with the truckers not being able to move the cargo to and from the port. So initially, we kind of expected that the main factor will be the export slowdown, which has indeed happened. I mean shipping lines have reported lower exports out of Shanghai. And that has, in a way, put the ocean freight rates a little bit under pressure but not much more than they are at this time of the year traditionally. But there has been some effect that we didn't anticipate. For example, the imports have accumulated in the port and are adding to the congestion in the ports.

And some ships have essentially bypassed Shanghai as a result of that and have not unloaded their empty containers in Shanghai. And much to our surprise, we are seeing a situation where some of our customers are reporting shortages of container in Shanghai even though exports are down. So those effects are kind of hard to predict. But in general, what we can say is that definitely they are causing more disruption and it makes it much more difficult for our customers to manage their inventories of container worldwide, and that creates shortages and potentially opportunities for us to lease some of our containers.

But the second and probably much more important issue here is really when the lockdowns kind of ease off. And there's been a lot of positive talk about the Shanghai authorities kind of allowing operations to resume a little bit more smoothly. But I think that was -- personally, I think that will still be very progressive. But when that happens, we are going to see a situation where production resumes and cargo comes back just at the same time as the seasonal cargo is hitting. And potentially, that will create a lot more congestion when all that cargo surges arrive at destination in Europe and North America. So in that sense, we expect a repeat and continued very intense activity on the shipping front at least until the end of the year.

Okay, great. Very interesting. Maybe one last one for me. Obviously, the CapEx, as you touched on, will moderate this year. And we've seen your share buybacks ramp over the last 2 quarters. If you -- assuming the CapEx opportunities continue to fall in line with the expectations that you've laid out here on this call, is it fair to assume that the buybacks could actually grow from the first quarter level? Just trying to think about what's the right run rate for share buybacks from here either in terms of the dollars you'd be looking to deploy or share count.

Yes. I think the important element here is that we love buyback. We have made no mystery of that. But one of the main reason is because we think it's a very flexible tool. We continue to see our share price as attractive and therefore buyback as being an attractive investment for us. And we continue to review this situation very, very regularly, at least every quarter. Ultimately, it is a Board decision.

And I would say that we went pretty aggressive in the first quarter. We were certainly above what we did in the previous quarter. But we will continue most likely with the plan. But the exact quantity of what we will do will be decided by the Board, depending on the other alternatives we have to either deploy more CapEx, which looks a little bit unlikely at the moment, or return more cash to our investors.

This concludes our question-and-answer session. I would like to turn the conference over to Mr. Olivier Ghesquiere for any closing remarks. Please go ahead.

Yes. And thanks again for taking your time to listen to us today. And I'm looking forward to updating everyone on our progress during the next call. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.