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spk02: Thank you and welcome to Texaner's third quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question and answer session, and instructions will be provided at the time. As a reminder, today's conference call is being recorded. I'll now turn the call over to Ed Yoon, Investor Relations for Texaner Group Holdings Limited.
spk01: Thank you. Certain statements made during this conference call may contain forward-looking statements in accordance with U.S. securities law's 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, and 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 20F for the year ended December 31, 2019, filed with the Securities and Exchange Commission on March 30, 2020, and going forward, any subsequent quarterly filings on Form 6K 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 release. Finally, along with our earnings release today, we have also provided slides to accompany your comments on today's call. Both the earnings release and the earnings call presentation can be found on Stainer's Investor Relations website at Investor.TechStainer.com. I would now like to turn the call over to Olivier Giscard, TechStainer's President and Chief Executive Officer for his opening remarks.
spk04: Olivier Giscard Thank you, Ed. Good afternoon, everyone, and thank you for joining us today. I'll begin by reviewing the highlights of our third 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 pleased with our solid performance in the third quarter, delivering improved lease rental income of $149 million, adjusted EBITDA of $119 million, and adjusted net income of $22 million. These results reflect the expected turnaround from the disciplined execution against a long-term strategic plan and a favorable market environment. We had a very active quarter that saw our customer pick up almost 400,000 TU of factory and depot containers, helping drive our utilization up to 97.7% as of today. These lease-outs were achieved at attractive terms, including improved lease rates, longer and staggered tenure, and Asia-focused returns. The full financial benefit of this activity will be reflected in our fourth quarter results. This positive performance is due to our preparedness and ability to execute rapidly and decisively in order to capitalize upon market opportunities that presented themselves in this past quarter. Not only did we activate a record number of containers, but we were also able to quickly secure additional production at attractive prices and with prompt delivery. We expect additional on-hires of depot and new units in the fourth quarter that will translate into further long-term growth and profitability improvements. The favorable market conditions stem from an increase in trade volume, notably in export from Asia into the U.S. and Europe. This has been driven by traditional holiday seasons spent on merchandise, personal protective equipment, furniture, home improvement goods, and computer equipment. In fact, trade growth has been amplified by a shift in consumer spending away from travel and services and into physical goods. The surge in imports contributed to port congestion and trucking capacity shortages, which in turn created a shortfall in containers returning to China, particularly for 40-foot high cubes. Since the beginning of the year, we've added $610 million of containers into our fleet, and project over $350 million of additional delivery during the fourth quarter, which will bring our total CAPEX for the year very close to $1 billion. All these containers are on leave or pre-committed under attractive leave terms. New container prices increased during the past few months from $2,100 per CU for orders placed in August to about $2,600 per CU for orders placed today. The price increase is primarily driven by demand, coupled with production capacity management from manufacturers. Resale container prices have also increased, benefiting from the overall market shortage and increase in new container prices, and remain high today. We are also pleased with the continued strong financial results reported by our customers. Shipping lines have indeed been capitalizing on the recent surge in volumes, strong freight rates, and lower operating costs. This strong financial performance has allowed carrier to shore up their balance sheet, and we continue to see timely collection against our receivables as demonstrated by our reserve reduction this quarter. Looking ahead, we expect steady earnings momentum and favorable market conditions to continue into the Lunar New Year, leading to continued improvement in our container utilization rate, revenues, and profits. While we remain cautiously optimistic with the outlook for 2021, significant uncertainties remain due to the unpredictable impact of a resurgence of COVID-19. Yet, our optimism is also based on the fact that even with the current surge in container on-hires, the overall container market is not oversupplied as shipping lines started this cycle with limited inventory and continue to show a strong preference for leasing over purchasing in order to renew containers reaching their normal retirement age. In closing, we're pleased with the direction of the business and ongoing execution of our strategic turnaround plan. We're seeing tangible results on a number of actions taken this year to strengthen our business, financial resources, and long-term outlook. In particular, since the beginning of the year, We lowered our borrowing costs with the successful issuance of nearly $1.3 billion in asset-backed financing. We invested over $56 million in share buybacks, and we invested over $610 million in containers delivered through the third quarter. We continue to be committed to delivering long-term value to our shareholders while maintaining a strong financial position to support the current and future growth of our customers. I will now turn the call over to Michael, who will give you a little more color about our financial results over the past quarter.
spk03: Thank you, Olivier. I will now focus on the key drivers of our financial results. Q3 adjusted net income was $22 million, or 41 cents per diluted common share, a significant improvement versus prior quarters, and the second highest level of adjusted net income within the last five years. Q3 adjusted EBITDA was $119 million, an increase of $9 million as compared to Q2, illustrating our strong cash generation ability. Q3 lease rental income was $149 million, an increase of $4 million as compared to Q2, due to an increase in utilization and fleet size. While market activity continues to improve, we were very pleased with the increase in our utilization rate, which currently stands at 97.7 percent. This improvement is sourced from both new production and depot lease outs at attractive terms. Our top line continues to be supported by reliable revenue stream from our lease portfolio, which includes from a possible future lull in demand next year by already renewing a large portion of our expiring leases at attractive terms. Q3 gains on sale of owned fleet containers net was $8 million, an increase of $2 million compared to Q2. We're pleased that the container resale price environment remains favorable today. Q3 direct container expense for the owned fleet was $16 million, an increase of $1 million compared to Q2. This increase was mostly due to higher handling and maintenance to prepare depot units for lease out, partially offset by lower storage costs resulting from an increase in utilization. We expect to see lower direct container expense for the old fleet in Q4 as utilization continues to improve through the end of the year. Q3 depreciation expense was $65 million, an increase of $2 million as compared to Q2, due primarily to fleet growth. Q3 GLA expense was $11 million, an increase of $1 million from Q2, due primarily to an increase in consulting fees associated with our IT enhancement project. and management incentive compensation resulting from improved company performance. As a reminder, last quarter we discussed our plans to continue to improve the quality of our spending in G&A through, among other methods, enhancement of our technology tools and staff talent. We expect our investment in G&A to slightly increase in Q4 as we continue with our enhancement objectives. We benefited from a budget recovery of $2.1 million in Q3. driven by reduction in reserves from continued improvements in collections and our general customer credit profile. While customer performance and liquidity have dramatically improved this year, we intend to continue our proactive approach of portfolio risk reduction and will continue to maintain a conservative reserve on our receivables when appropriate. Q3 interest expense, including realized hedging costs, was $33 million, consistent with Q2. As previously announced, we were pleased with the issuance $1.3 billion in fixed-rate asset-backed notes during the quarter at attractive prices. The majority of the proceeds were used to refinance $887 million of higher-priced asset-backed notes, lowering our all-in average effective interest rate to approximately 3.1%, which includes non-cash amortization of debt issuance costs. Proceeds from the issuance also freed up additional commitment capacity with other credit facilities. used in conjunction with our strong cash flow generation to firmly support our capital allocation strategy. The refinancing resulted in a one-time $9 million non-cash write-off of unamortized debt issuance costs associated with the retirement of the higher price notes. As most of our refinancing activity closed late in Q3, the benefit of our debt repricing will begin to be fully reflected in Q4. Turning now to our share purchase program, During Q3, we repurchased 2.4 million shares of Textera common stock in the open market at an average price of $11.61 per share. Since the beginning of the year, we've invested approximately $56 million in share buybacks under the current program. As announced on September 14th, 2020, Textera's board of directors authorized an increase to the share repurchase program for an additional $50 million. At the end of Q3, we had approximately $35 million still available under the plan and will continue to repurchase opportunistically as we move forward consistent with our capital allocation plan, $34 million, as well as ample available commitment capacity under our existing credit facilities. We remain confident in our ability to support significant accretive organic growth through CapEx while continuing to improve our profitability metrics. As a reminder, we do not have any refinancing requirements within the next 12 months and remain financially well positioned to continue to take advantage of these currently favorable market conditions. This concludes our preparable remarks. Thank you all for your time today. Operator, please open the line for questions.
spk02: Thank you. With this time, we'll be conducting a question and answer session. If you'd like to ask a question today, please press star 1 from your telephone keypad and a confirmation tone to indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. And our first question is from the line of Mike Brown with KBW. Please receive your questions.
spk05: Hi. Good afternoon, Michael and Olivier. How are you guys?
spk03: Good.
spk05: How are you, Mike?
spk03: Well, Mike, thank you.
spk05: Hope you're doing well. Good. Thanks for asking. So, Michael, one comment that you made in your prepared remarks was that you've seen some success in the I don't want to put words in your mouth, but it sounded like you've seen some success in the repricing of leases towards the current market rates. You know, some of those Legacy low ROE leases have certainly kind of saddled the profitability of Textainer historically. So I wanted to just hear a little bit more about the trends there, what you've seen. If I recall correctly, 2021 is where the larger portion of those contracts roll over or when the build-down period kind of works itself out. So I wanted to just hear a little bit more about what you've seen so far, your confidence and your ability to continue to reprice those contracts? And then could you potentially size what the ROE improvement could be if you're able to complete that endeavor successfully with the current ROE rates that you're seeing in the market?
spk04: Yes, Mike. You did ask the question to Michael, but allow me to just... step in here from a market perspective a little bit. We've certainly been very happy with the market and you rightly point out that we had a lot of legacy leases as we like to call them that were coming for repricing this year and next year and in which you have a combination of all the leases that were repriced down in 2016 as well as very cheap container that we purchased in 2015 that were on lease at fairly low rates. Now, we've already been able to essentially extend and reprice a substantial portion of those leases with the current market environment.
spk00: I would say we repriced about
spk04: 200,000 TU so far, and we're really focused on making sure that we get good terms and that those containers also stay on lease for the longer term. In terms of outlook, we certainly expect to continue that. We have a lot of leases, as you can see in our investors presentation, page 8, that are coming up for renewal. But we're very positive and encouraged by the fact that the average maturing leases rate is probably well below the current market rate. We estimate that those leases are about 20 to 25 percent below current market rate for equivalent containers. So the impact in terms of ROE is going to be significant. I think it's a little bit early to estimate exactly what that is going to be because it will obviously also be very much blended with the additional capex that you have seen in our results this quarter and that will contribute further in the coming quarters. But we certainly expect that that will have a very positive impact and we hope that we will somewhat come closer to you know, a level which, you know, is what we think should be the long-term level, which is probably, you know, in the region of 10% or above 10% ROEs over the longer term.
spk05: Okay, I appreciate the color on that. So just to put a finer point on it, I guess it would be helpful to know, what do you think is, like, what inning are you in for that repricing of those legacy leases? And When do you think is a reasonable time to expect to reach something like a 10% ROE? Is it 2022? Or are you kind of talking a little bit longer than that?
spk03: So Mike, just to rephrase that question, are you referring to, are there other lease renewal opportunities?
spk05: I was specifically focusing on those legacy leases from 2015 and 2016.
spk04: Yeah. Well, there is a substantial portion that still have to be renewed that are maturing in 2021. The vast majority of them are actually maturing towards the end of 2021. So I think that the repricing of those will be felt most likely in 2022. But certainly all those that were maturing this year will be felt in 2021. Did that answer your question, Mike?
spk05: Yeah, I believe so. Yeah, I was just trying to kind of get the timing of those various pieces. So that is helpful. Thank you, Olivia. I wanted to talk about the fourth quarter here. So your adjusted net income this quarter was up about 46% quarter over quarter. and you know got your commentary about how you know the benefits that started to come through in the third quarter will really have a larger impact for full quarter impact in the fourth quarter and that also includes obviously the benefits on the interest expense um any any ability to put some guidance around that for where you're expecting the adjusted net income could come out um For the fourth quarter, obviously, you know, there could be some surprises, but just generally we're about halfway through the quarter. Just any color on that?
spk04: Well, I would say we don't expect surprises or certainly we don't expect bad surprises at this point in time. I think it's one of the few times in my short career in the container leasing business that I would say I see no clouds on the horizon. So to answer your question, we don't like to give specific guidance, but it's fair to say from our commentary and from the situation that we expect continuous improvement and continuous improvement in the Q4, but also towards the next year as we continue to benefit from all the additional CAPEX that we have generated and also from the full revenue generation from those on-hires and the strong sort of like incremental effect that those containers will continue to contribute.
spk05: Okay, great. And then just to shift gears to capital return, Commentary in the press release about the share buybacks, it sounds like you have about $35 million left on the recent authorization increase. So you purchased, I guess, $15 million since the middle of September. Was that heavily weighted to the third quarter, or were you actually using like a 10b-5-1 and buying a lot during the fourth quarter, just trying to kind of model out how that played out between the two quarters.
spk03: Yeah, so, Mike, I think we had about 35 million of capacity still available at the end of the third quarter. So, you know, we continue to buy opportunistically during the fourth quarter, of course, since that's part of our capital allocation plan. So you should expect that. That's certainly one of our choices and options within that choice of using our capital Yeah, having said that, we certainly are attracted to CapEx given the yields that they're providing to us. So we're certainly going to be looking at that for fourth quarter as well. But think of it as we're going to do both definitely in the fourth quarter.
spk05: Okay, great. And just one last one for me on the bad debt recovery or reserve recovery. Could you just provide me with a little more color about that? What drove that item this quarter? I just think I may have missed your comment on it in your prepared remarks.
spk03: No worries, Mike. So if you think back in prior quarters, second quarter perhaps, you might recall we were entering into the throes of COVID where we decided to set up some prudent reserves just to be proactive and conservative. We certainly were proven wrong in that the customers were certainly in very good position from a performance and liquidity standpoint where they certainly paid in accordance with terms and paid well and performed well as well. So we're essentially reversing some of these earlier reserves as they're no longer needed. But having said that, we still definitely want to maintain a conservative level of reserves associated with receivables when it makes sense.
spk00: Thank you.
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