Textainer Group Holdings Limited (NYSE:TGH) Q4 2022 Earnings Call Transcript

Textainer Group Holdings Limited (NYSE:TGH) Q4 2022 Earnings Call Transcript February 14, 2023

Operator: Thank you, and welcome to Textainer’s Fourth Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. As a reminder, today’s conference call is being recorded. I will now turn the call over to Tamara Bakarian, Director of Investor Relations with Textainer.

Tamara Bakarian: 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 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.

Olivier Ghesquiere: Thank you, Tamara. Good morning, everyone, and thank you for joining us today. I will begin by reviewing the highlights of our fourth quarter and full year 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. Our financial results for the full year 2022, reflects the tremendous growth achieved over the last two years. For the year, lease rental income increased by 8% to $810 million, driven by organic fleet growth from CapEx deployed in the first half of the year and the full year impact from CapEx investment in 2021. We additionally continued to benefit from an exceptional retail market, achieving gain on disposals of $77 million during the year, with adjusted EBITDA that increased by 7% to $746 million and adjusted net income reaching $290 million or $6.13 per diluted common share, all record level, resulting in an ROE of 18%.

The last two years were a pivotal period for growth within the greater shipping industry, allowing us to expand our fleet and more importantly, improve the quality of our top line while greatly strengthening our balance sheet. In 2022, we added $786 million of new containers assigned to very long-term leases at favorable rates. As a result, the average remaining tenure across our entire lease portfolio reached 6.3 years at the end of the year, with 98% of those leases on fixed rate terms and finance lease contracts. As exceptional gain on disposal normalized to more sustainable levels, our long-term lease contracts will support high utilization and long-term profitability, keeping us in an ideal position to benefit from the next favorable market opportunity.

In the meantime, the strong cash flow generation of the fleet continued to support our ability to return capital to shareholders. Through the full year, we repurchased 5.6 million common shares, representing just under, 12% of total shares outstanding as at the beginning of the year, and we continue to view our share repurchase program as a key aspect of our capital allocation policy. In addition, I’m very pleased to announce that the Board has authorized a 20% increase to our quarterly cash dividend to common shareholders, increasing it from $0.25 per share to $0.30 per share. We continue to firmly believe in distributing a durable and consistent dividend for the foreseeable future, and this increase certainly reflects confidence in our business future.

While the fourth quarter resulted in the much anticipated normalization of the retail market, several developments point to a return to greater predictability, and we feel optimistic that the container leasing market is now showing multiple positive signs of stabilization as we are entering into 2023. Cargo volumes and ocean freight rates on major trades are stabilizing and remain equal or higher than before COVID, as illustrated by the recent financial results announcement of major carriers. Port congestion, which was a telltale indication of overheating shipping markets throughout the past two years, has now halved to about 7% of the world containership fleet, yet our container fleet utilization has remained very stable at an elevated level close to 99%.

In fact, the net balance of container redelivered has recently somewhat reduced as localized demand pre-lunar New Year resulted in a mini cargo rush and depot pick-up. Secondhand prices for older containers also appear to have stabilized and are further supported by the recent increase in newbuild asking prices. Indeed, major manufacturers faced with low order volumes, increase in material costs and a stronger renminbi have placed several factories in extended shutdowns and have raised their asking price to $2,200 per CEU. More generally, and while macroeconomic concerns remain, the growth outlook appears to be improving with greater than expected resilience in Europe and North America, easing of inflationary pressure and the anticipated recovery in China now that antivirus restrictions have been lifted.

We expect CapEx opportunity will remain limited to the first half of the year, giving time for the market to absorb the current factory inventory that has remained stable at about 1.1 million TEUs. As previously emphasized, this represents an opportunity to shift our focus to cash flow allocations across capital return and deleveraging. We continue to keep our inventory at low level and plan to only deploy CapEx when expected returns can be achieved, ultimately viewing CapEx deployment as financial opportunity, not as an operational necessity. Container industry players continue to remain diligent as it pertains to capacity in the market. New orders placed at container factories have virtually stopped. Credit risk continues to be minimal as our customers continue to enjoy profitable results and strong balance sheet with low to no debt.

Rising interest rates have continued to push up interest expense. However, market rate increases may be nearing their peak as inflation stagnates. In summary, 2022 was a tremendous record year for Textainer, achieving our highest ever level of revenue and income. Looking ahead to 2023, we expect stabilizing performance, thanks to our core business model with contractual revenue and profitability protected by our long-term lease contracts and fixed rate financing policy. While we wait for the market demand to turn, possibly with a return of the summer seasonality, we will continue to prioritize our capital allocation towards both strengthening our balance sheet and returning capital to our shareholders through ongoing share repurchase and dividend programs.

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.

Michael Chan: Thank you, Olivier. Hello, everyone. I will now focus on our Q4 and full year financial results. Adjusted net income for the year was $290 million, a company record and an increase of $6 million compared to 2021. Q4, adjusted net income was $62 million, decreasing by $15 million from last quarter. This decrease was driven primarily from an expected lower gain on sale. Our Q4, annualized adjusted ROE was nearly 15% and 18% for the full year 2022. Adjusted EPS for the year was $6.13 per diluted common share, an increase of 9% from $5.62 in 2021. Q4, adjusted EPS was $1.38 per diluted common share, a decrease from last quarter’s $1.64 per diluted common share. Q4, lease rental income was $203 million as compared to $205 million in Q3.

For the year, lease rental income totaled $810 million, an 8% increase from 2021 driven by CapEx deployed through the first half of 2022 and full year impact of CapEx investments from 2021. Q4, gain on sale was $15 million, a roughly 35% decrease from the exceptional gain levels experienced during the previous two quarters. For the year, we earned a record $77 million in gains, a 15% increase from 2021. This was driven by an increase in sales volumes sourced from slightly higher redeliveries or older, mostly sales age containers from expired lease contracts. As resell container prices have reduced from peak levels, gain on sale is expected to stabilize closer to the prior historical averages. Having said this, as mentioned by Olivier, resell prices have begun to stabilize in conjunction with increased new box asking prices and higher material costs and the renminbi.Q4, direct container expense of $11 million increased from the previous quarter by $2 million due to higher maintenance, handling and storage fees.

Going forward, we expect direct containing expense to increase marginally as we process most of the older containers before selling them on the secondary market. Q4, depreciation expense was $74 million and is expected to remain mostly flat in 2023 with tempered remaining CapEx expectations. Q4, G&A expense of $12 million remained flat from Q3. G&A expense is expected to continue to remain relatively flat through 2023. Q4, interest expense of $43 million increased by $2 million from Q3 due primarily to the impact of higher market interest rates on the un-hedged component of our debt. Our Q4, average effective interest rate stands at 3.02%, an increase from 2.83% in Q3. Turning now to our common share repurchase program. We repurchased approximately 1.5 million shares during Q4.

For the full year, we repurchased 5.6 million shares or nearly 12% of outstanding shares from the beginning of the year. Since commencing our share repurchase program in September 2019, we have repurchased 15.7 million shares or 27% of our outstanding shares, demonstrating our commitment to effectively managing shareholder returns. The remaining authority under our existing share repurchase program totaled over $122 million as of the end of the year. Our share repurchase program continues to be a key component and significant focus of our capital allocation policy to further drive shareholder value to our investors, and we expect to remain active as it relates to future purchase activity. As mentioned by Olivier, we are excited to announce that our Board has approved an increase of 20% to a common share quarterly cash dividend, increasing it to $0.30 per common share, payable on March 15 to holders of record on March 3.

The combined impact of Textainer share repurchases and common dividend during the year represented 78% of 2022 adjusted net income, highlighting the Board’s confidence in the business and value placed on shareholder returns. Additionally, book value per share increased $8.54 per share to $38.87 or by more than 25% over the past year, reflecting our strong net income and substantial share repurchases, Textainer’s book value per share increased by more than 50% over the last few years. Looking now at the strong asset quality of our balance sheet, we have very well benefited from the addition of significant levels of attractive long-term fixed rate CapEx and life cycle lease extensions over the last 2.5 years. Our high quality lease portfolio provides long-term fixed cash flows, now averaging 6.3 years of remaining contractual lease tenor and covering nearly 80% of the remaining depreciable life of our young 4.9 year old fleet on an NBV basis.

Our revenue-generating assets continue to be well supported by an efficient fixed rate or hedged to fixed long-term financing structure to mitigate market interest rate risk. This financing platform was well optimized when very attractive long-term fixed interest rates were available and therefore locked in and continues to be carefully managed to protect lease profit margins. Opportunistic deleveraging of the higher-priced un-hedged component of our debt stack has assisted us in controlling interest costs and has provided us with an attractive 2.6 times net debt to equity ratio. Current debt levels are easy to manage, and we are ready to finance additional investment when appropriate CapEx opportunities are available. In closing, we had an excellent year that produced very strong results.

The fourth quarter reflected the much anticipated normalization with its expected impact on resale prices in particular. But we are optimistic for 2023 as we enter the year with recession fears easing away. Our balance sheet and the liquidity generation, continues to be strong, and we intend to remain disciplined when it comes to evaluating capital expenditure opportunities. We will also continue to execute and 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.

Q&A Session

Operator: Thank you Our first question comes from the line of Mike Brown with KBW. Please proceed with your question.

Michael Brown: Great hi, good morning everyone

Olivier Ghesquiere: Good morning, Mike.

Michael Chan: Hi, Mike.

Michael Brown: Olivier, I wanted to start off with the market here. You gave a lot of – very interesting color about what you’re seeing and how to potentially think about the year. So clearly, container trade has cooled and normalized. And going back, we went – going back to coming out of COVID, we went from a shortage of containers to a potentially an equilibrium and now it seems to be that the market is kind of overstock given the cooler market? So as the market picks up, which timing is still uncertain, how will your customers balance their existing fleets? And then what kind of gives you confidence that we’ll see a re-ignition of growth? Like what are the puts and takes that we need to consider? It just seems like, but there’s still modest excess in the system won’t that need to really work itself out, before demand will come back such that you could almost see a bit of a delay in the recovery?

Olivier Ghesquiere: Yes, no, that’s a really good question, Mike. I think to answer this correctly, I really have to go back to the pre-COVID situation, where we really had a situation with the new tariffs implemented, where shipping lines we’re trimming their fleet, which really meant that we entered the cycle with shipping lines having undersized container fleets overall. Now through the cycle, we all know what happened. There was a catch-up that had to take place because there was so much cargo that needed to move and there was congestion. And last year – sorry, 2021, we had a huge production, which – was probably double the normal average production that was required by the market. As you mentioned, 2022, we saw demand pulling off and certainly, production level came back to about 3 million TEU for the full year.

But that probably still leaves the shipping lines with a little bit of an excess capacity. But the excess capacity may not be as big as what people think. First of all, there has been some growth in the overall market. And what we really observed at the moment is, first of all, as you have noticed, our utilization rate is holding very, very well. We’re still very close to 99%, which we regard – as close to maximum utilization rate. What we are seeing is we are seeing shipping lines, offloading primarily their very old containers, those containers they held on because they needed them throughout the surge and the cycle. But we are not seeing shipping lines desperate to really downsize their container fleet. They really are in a situation which is very much a situation where they are keeping a little bit of spare capacity, because they all probably expect that towards the end of the year, we’re going to see a, normalization in demand.

And the reality is that depots are reasonably full around the world, that’s a fact. But for shipping lines to keep a little bit of an excess capacity is not a huge cost in the short to medium-term. So, we certainly see a situation where we have no new containers being added to the fleet. I think that’s a very fundamental aspect of our industry that supply and demand tends to adjust very quickly, because the lead times to produce new containers are so short. So, we have no containers being added to the fleet, which I think is very healthy overall. We have shipping lines returning to very old containers, which we are then as lessor selling or they’re selling containers themselves. But those returns are not coming back to huge numbers as we can tell from the gain on sales and the pricing that we still enjoy in the secondary market.

So we’re very much are, seeing kind of what I would call a soft landing. And probably a situation that is going to remain fairly flat or stable for the first and second quarter of the year. And then we kind of see a little bit of a potential uptick in demand for containers in the second half of the year when the seasonal starts – demand starts to come in. And we really think that this year may see a return of the seasonality in our business. We are seeing definitely that trade volumes or shipping volumes on the Transpacific are affected, and they’re clearly down. But they’re holding better on European trade. And the situation in China with the end of the COVID restrictions is also giving a boost to the local economy in Asia. So all in all, we see very much a year with low production of new containers, but a normalization year and continued very high utilization on our existing fleet.

Michael Brown: Great, thanks for all of that color Olivier. If we could just narrow in on the utilization rate. You talked a lot about that and have flagged. How it has really almost stayed at almost full utilization rate at 99%. But clearly, it is a challenging environment here. So what are you guys thinking about in terms of where that goes from here? Because it does sound like it will still stay quite high. But I’m just trying to think through if turn-ins do rise a bit and you’ve been able to really sell a lot of those containers, should it stay semi close to where it is? Like how should we think about the trajectory for 2023?

Olivier Ghesquiere: Well, I think we’re going to see a continuation of older containers coming back, certainly in the first half of the year, which will translate to us probably in a small attrition to our revenue because the revenue we lose is not compensated by new CapEx and new additions to the fleet. But utilization at the same time will remain high, because those containers are mostly old containers, which we are disposing and disposing in a market that all in all remains very favorable. It’s not the absolutely crazy market that we experienced last year. But we’re certainly still selling containers much above their NBV and realizing a gain in our sales. So we – so this is an interesting thing for us. We saw slightly higher volumes of redeliveries in October, November.

And then December, January, we’ve actually seen an easing off of redeliveries. And we very much feel that the redeliveries are going to remain fairly stable, which is a perfectly management level as far as we are concerned. So small attrition until potentially demand picks up, which we expect or we hope would take place with the summer and moving on from there possibly opportunities to lease out a few depot containers that remain extremely competitive price-wise versus new containers given that new container prices – have even gone up a little bit even though there has been very, very few transactions on the market.

Michael Brown: Great, thank you Olivier. I will leave it there.

Olivier Ghesquiere: Thank you, Mike.

Michael Chan: Thanks, Mike.

Operator: Our next question comes from the line of Liam Burke with B. Riley. Please proceed with your question.

Liam Burke: Thank you, good morning Olivier, good morning Michael.

Olivier Ghesquiere: Good morning, Liam.

Michael Chan: Hi, Liam.

Operator: Looks like we lost Liam. We have a follow-up from the line of Mike Brown. Please proceed with your question.

Michael Brown: Okay, great. I have a question on the balance sheet and maybe the other analysts will be back to ask their question. Yes, so on the capital allocation front you guys have had a very active year for share buybacks in 2022. And you talked about how CapEx opportunities will kind of remain soft here in the first half. Is there any reason that the pace of buybacks that we saw in ’22 won’t continue into 1Q and then likely 2Q if that CapEx opportunity remains subdued? And I guess – the point of my question is that, one, just to size how you’re thinking about buybacks? And then two, is there anything else in terms of balance sheet opportunities that you are thinking about or considering here just to make sure we are thinking about capital allocation correctly?

Michael Chan: Mike it’s a good question here – as buybacks, as we’ve mentioned many times, is a core emphasis of our capital allocation policy. So you probably expect the share buybacks to be at a continued very healthy level more essentially. On top of that, the dividend as well, you heard Olivier mention the increase to the dividend, the cash dividend as well. We like that. We want to keep it – a sustainable and reliable dividend as we go forward. On top of that, what we may do is manage and leverage as well. You might have noticed that we de-levered a bit during Q4 with some excess cash flow. While we like the long-term fixed rate debt that is very, very well priced a lot of that was locked in when we had opportunity to do so when those long-term fixed rates were attractive.

We do have that un-hedged portion of the debt that we try to manage – where we do have available cash, sometimes well allocated, so that to de-lever that component or manage down our interest cost opportunistically. While keeping some of these facilities ready and available in advance for when CapEx opportunities arise and where we can trigger them and fund using the facilities. But as I said, that will manage and maintain higher cost portion of our debt stack to the lowest level that we can keep to minimize that interest expense exposure there. But consistent approach, the same function we’ve always been taking that we’ve communicated to you guys.

Michael Brown: Okay. Just maybe one follow-up on that, is there any – have you seen any interesting opportunities on the M&A front? How have, some of your maybe smaller sized private competitors has been faring in this market? And does that potentially present you with some opportunities to actually deploy capital into inorganic growth?

Olivier Ghesquiere: No really clear opportunity at this point, Mike. We operate in a very, consolidated industry with really five major players that essentially occupy most of the market space. So at this point in time, we probably remain focused on capital allocation and return to shareholders and awaiting the market to turn so that we can grow organically, which has been extremely successful for us over the last few years. So that certainly will continue to be our focus. I mean not to say that we won’t look at any opportunity, shall there be one that arises, but we don’t see any immediate opportunity arising.

Michael Brown: Okay, thanks for the thoughts there.

Operator: Our next question comes from the line of Liam Burke with B. Riley. Please proceed with your question.

Liam Burke: All right, thank you, good morning Olivier, good morning, Michael.

Olivier Ghesquiere: Good morning again.

Michael Chan: Hi, Liam.

Liam Burke: Good morning again. Your ROE fell off from 18% to 15%. If I looked across all your metrics, though, I mean, utilization was strong. What caused that drop off?

Olivier Ghesquiere: I think the main explanation is really down to the gain on sales that were at an exceptional level. If you look at the last two quarters, we had a gain on sales that we never would have ramped, we could achieve a few years back. And that’s kind of like a normalized right now. So that’s really the big impact. But I think that the ROE today reflects very much more the solidity of our core business.

Liam Burke: Fair enough, okay. And if I’m looking at your clients, both the liners and the container operators, balance sheets are in good shape, even though we’re looking at short-term rate weakness. Any discussion on any kind of change in existing contracts or is everybody just in line with your duration and your rates?

Olivier Ghesquiere: No, I would say most of the discussions we’ve had are, ongoing lease extensions that we always have with customers. We always have some contract maturing, which we are extending on a regular basis. There are costs for shipping lines to redeliver containers, obviously, and there are costs for leasing companies to have those containers back. So, I would say that in an environment like today where new container prices remain fairly expensive, we have a mutual interest in finding a middle ground. So, most of our discussions are really about extending maturing leases and certainly extending leases for those containers that haven’t reached sales age. And I must say we continue to be fairly successful in that respect in terms of extending those leases.

Liam Burke: Great, thank you Olivier.

Olivier Ghesquiere: Thank you, Liam.

Michael Chan: Thanks Liam.

Operator: Our next question comes from the line of Climent Molins with Value Investor’s Edge. Please proceed with your question.

Climent Molins: Good morning team, thank you for taking my questions. You’ve already provided some commentary on the ordering front and the few opportunities currently available. But I was wondering, as a significant containership order book is delivered, do you expect significant CapEx opportunities to arise or should we expect a gradual normalization, let’s say?

Olivier Ghesquiere: Yes, this is a very difficult question. The way we look at it is that with more ships being delivered, we essentially should see additional demand for containers because obviously, those ships will enter into service. The likelihood is that shipping lines will use those ships to optimize their trade routes. They will probably sail those ships slower to save on fuel and reduce their CO2 emission. And that will imply that they will need more containers to operate those ships efficiently. I think the other interesting factor here is probably the announcement that the MSC and Maersk line would terminate their alliance. And obviously, this will have some indirect consequence because they will have to operate themselves potentially in an arrangement that will be less efficient than the current arrangement, which will imply that overall, there will be a higher requirement for containers.

Whether that will lead necessarily to big CapEx opportunity, I think we’ll have to wait and see. What is sure is that it will provide support for utilization on the fleet that is out there, especially, therefore units. It may provide additional impetus for adding new containers to the fleet, but I think that this will be gradual over the coming few years.

Climent Molins: That’s very helpful, thank you. And following up on Liam’s last question, could you provide some additional insight on the impact you expect from renewing leases that have already expired or asset to lose throughout 2023? Are those being renewed at generally higher rates?

Olivier Ghesquiere: So just to confirm Climent, you’re asking about the renew – the impact from renewed leases?

Climent Molins: Yes, exactly.

Olivier Ghesquiere: Okay, so yes, I think your question is really about whether we’re able to renew leases at favorable rates. And I would say that, obviously, the situation is not as favorable as it was last year. Last year, we were – over the last two years, shall I say, we were in a seller’s market, where we were able to increase the rates as we were extending leases. The situation has somewhat moderated. And we’re probably in an environment where we’re renewing maturing leases at the same rate or slightly below the prevailing rate, which is kind of a return to what we have historically seen in all markets where all the containers tend to go for slightly cheaper rates or that’s, kind of a discount for older containers. But the discount is not dramatic. And I would say, just a return to normalcy and what we have experienced in the past.

Climent Molins: Make sense, that’s all from me. Thank you for taking my questions and congratulations for the quarter.

Olivier Ghesquiere: Thank you, Climent.

Michael Chan: Thanks, Climent.

Operator: There are no further questions in the queue. I’d like to hand the call back to Olivier Ghesquiere for closing remarks.

Olivier Ghesquiere: Yes and thank you, everybody, for joining us today, and we certainly look forward to continue to update you on the Textainer story next quarter.

Operator: Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.