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spk01: Thank you and welcome to TechStainers second quarter 2021 earnings conference call. At this time, our participants are in a listen-only mode. Later, we'll conduct a question and answer session and instructions will be provided at that time. As a reminder, today's conference is being recorded. I now turn the call over to Ankit Hira, Investor Relations for TechStainer Group Holdings Limited.
spk06: Thank you.
spk04: 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 20F for the year ended December 31, 2020, filed with the Securities and Exchange Commission on March 18, 2021, and going forward, any subsequent quarterly filings on Form 6-K for additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements. During this call, we will discuss non-GAAP financial measures. As such, measures are not prepared in accordance with generally accepted accounting principles A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures will be provided either on this conference call or can be found in today's earnings press release. Finally, along with our earnings release today, we have also provided slides to accompany our comments on today's call. Both the earnings release and earnings call presentation can be found on Tickstainer's Investor Relations website at investor.tickstainer.com. I would now like to turn the call over to Olivier Giscuier, Tickstainer's President and Chief Executive Officer, for his opening comments.
spk02: Thank you, Ankit. Good afternoon, everyone, and thank you for joining us today for Textainer's second quarter 2021 earnings call. I'll begin by reviewing the highlights of our second quarter results, and then I will 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 to deliver another quarter of strong results with outstanding performance across all of our key operating metrics. For the second quarter, compared to the first quarter, lease rental income increased 11% to $187 million, driven by organic seed growth in a very strong demand environment. Adjusted EBITDA increased 17% to $178 million, which reflects our ongoing cost optimization initiatives, as well as the favorable lease and resale environment. Adjusted net income increased 27% to $75 million, or $1.48 per diluted share, which represents an annualized ROE of 22%. We continue to benefit from the current market environment, which remains very favorable. Trade volume remained strong despite Q2 being a historically seasonal slower period. In addition, ongoing logistical challenge around poor congestion and repatriation of container have continued to support elevated levels of container demand to the benefit of lessor such as textainer. Consequently, we remained a very active market participant during the second quarter as we leased out over 170,000 CU of factory and depot containers under favorable terms to bring our average utilization rate to 99.8% for the quarter. We continue to experience minimal level of container re-delivery, and our priority remains to structure lease renewal as lifecycle leases to secure maturity, extending through the remaining useful life of the containers, thereby further securing stable future cash flows. During the second quarter, CAPEX amounted to $501 million for a total of approximately $1.1 billion during the first half of the year, all of this coming on top of the $890 million that we deployed in the second half of 2020. Given the continued demand, we have placed additional orders for more than $600 million of container for delivery during the third quarter with a focus on committed leases longer tenure and attractive returns. As of the end of the second quarter, our entire lease portfolio, including short-term leases, now has an average remaining tenure of almost six years, and our container fleet has a young average age of 4.7 years. New container prices increased modestly to $3,800 per CU from $3,500 per CU earlier in the year, driven primarily by sustained demand, capacity management, and increases in material costs. Total factory inventory level remains very low at about two weeks of equivalent current production. During the year, we have also further strengthened our financial position through the optimization of our debt financing. As of the end of the quarter, our effective interest rate stands at 2.7%, and 87% of our debt is fixed rate with an average remaining tenor of almost seven years. Combined with the extended remaining tenor of our lease portfolio, we have effectively locked in attractive economic gains into the long term. Our strong cash flow generation and capital optimization initiatives have facilitated our accretive capex investment as well as our ongoing share repurchase program where we repurchased approximately 616,000 shares in the second quarter or over 1.1 billion shares in the first half of the year as we continue to see this as an attractive investment. As we look out to the second half of the year, we remain confident in the strength of our underlying business fundamentals and we believe we are well positioned to sustain the positive momentum in our business. The current market environment remains very favorable, and we expect container demand to remain elevated through the rest of the year. We are heading into the traditional peak season, with retail inventory levels still low in the US, and we see a similar wave of demand building in Europe. We expect cargo volumes to remain strong through the Lunar New Year, despite potential shift in spending to travel and services related to COVID reopening and recovery. We expect new container prices to remain high as manufacturers maintain their discipline. We expect retail prices for older containers to remain elevated due to supply constraint. And overall, we expect our customers to continue to benefit from the current very favorable ongoing market environment. Year-on-year or net on-hire fleet growth is very near 30%. with further on-hire to be generated by 600 million of forward CAPEX and associated committed leases. I'm very proud of this strong execution across the organization as we continue to grow organically and improve profitability and returns through our disciplined CAPEX, continued focus on cost control, and continued optimization of our capital structure. We remain committed to enhancing our financial performance and delivering long-term value to our shareholders. I will now turn the call over to Michael, who will give you a little more color about our financial results for the second quarter.
spk05: Thank you Olivier. Hello everyone. I will now focus on our Q2 financial results. We delivered outstanding performance across the enterprise during Q2, which reflects the strong underlying fundamentals of our business and the strategic actions this management team had undertaken over the past few years to guide and position Tech Center to capitalize on this very favorable market environment. Key 2 adjusted income was $75 million, an increase of $16 million or 27% as compared to Key 1 and an increase of over 400% year over year. Key 2 Adjusted earnings per share was $1.48 per diluted common share, a 28% increase from Q1. We are very pleased that this results in a Q2-analyzed adjusted ROE of 22%, which builds upon adjusted ROE of 18% from Q1. Q2-adjusted EBITDA was $178 million, an increase of $25 million, or 17%. as compared to Q1, illustrating our strong and reliable cash generation ability. Q2 lease rental income was $187 million, an increase of $18 million or 11% from Q1. This very good showing in our top line was largely driven by strong organic fleet growth supported by very attractive long-term leases and favorable fixed rate yields and the continued increase in utilization in average rental rates. We are very pleased with our utilization rate, which averaged 99.8% during Q2. Note that Q2 lease rental income includes the benefit of a $6 million settlement received from a previously insolvent customer related to unrecognized lease rental income from prior periods. Having said this, we expect lease rental income to further improve in Q3, resulting from continued very attractive food growth. Q2 gain on sale of owned fleet containers was $19 million, an increase of $7 million as compared to Q1, driven mostly by an increase in resale container prices. We expect Q3 resale prices to remain strong, with volumes to somewhat decrease due to low container availability consistent with strong utilization levels. Q2 direct container expense was $6 million, a decrease of $1 million as compared to Q1, primarily due to lower storage, maintenance, and handling costs, resulting from higher utilization and very limited depot inventory. We remain focused on driving cost efficiencies, and we expect direct container expense to remain relatively stable at these attractive levels in Q3. Q2 depreciation expense was $70 million and is expected to increase in Q3 due to continued attractive fleet growth. We're pleased that Q2 G&A expense of $11 million remained relatively flat as compared to Q1. We expect G&A expense to remain at this level going forward. Q2 interest expense, including realized hedging costs, was $33 million, an increase of $1 million from Q1. This was primarily driven by higher average debt balance due to the funding of attractive CapEx opportunities reflected in our substantial fleet growth, which was largely offset by our lower effective interest rate in Q2. We continue to opportunistically optimize our financing structure to secure long-term fixed-rate financing that is valuable to our business. As I had discussed during our Q1 call, in April we issued ABS notes totaling $651 million as well as $150 million in perpetual preferred shares, both at attractive pricing and terms. Following the end of Q2, we again went to market, and I'm very pleased with the result of our latest ABS issuance, which priced on August 3rd and will raise $600 million at very attractive fixed rate pricing and terms. The proceeds will be used to refinance higher price debt and create additional borrowing capacity for future container investment. Our effective interest rate continues to drop, averaging 2.86% during the second quarter. We expect this rate to further decrease in Q3, which stood at 2.7% as of the end of Q2. Turning now to our share repurchase program, we repurchased approximately 616,000 shares at an average price of $29.84 during Q2. At the end of Q2, we had approximately $44 million still available under our board authorized share repurchase program. We will continue to repurchase shares opportunistically as we move forward, consistent with our capital allocation plan. Looking now at our balance sheet and liquidity, we continue to maintain a healthy balance sheet and adequate liquidity through both our well-structured bank facilities and cash reserves. We ended Q2 with a cash position inclusive of restricted cash of $401 million. We continue to remain confident in our ability to support significant accretive organic growth through CapEx. while continuing to further improve our profitability metrics. In closing, TechSaner is very well positioned to continue executing its strategic plan to capitalize on the very favorable market environment and to further improve financial performance and enhance shareholder value. This concludes our prepared remarks. Thank you all for your time today. Operator, please open the line for questions.
spk01: Thank you. If you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow us to not treat your equipment. Again, press star 1 to ask a question. And we'll take our first question today from Michael Brown with KBW.
spk06: Great. Thank you, operator. Hey, Olivier. Hey, Michael. How are you guys? Good. How are you, Michael?
spk03: Good. So your fleet has grown by 30% year-over-year. You clearly have been investing a lot, and you're doing a lot more investment in the third quarter here. What are your expectations for growth over the next 12 months for the fleet? If we assume a similar environment, can you achieve double-digit growth over that same period?
spk02: I think we can definitely imagine continued growth. The current environment remains very favorable. We've stated that we've already committed to another 600 million of Capex. Obviously, the 30% growth of on-hire fleet has a component coming from the improvement of the utilization rate, which sort of like dates back to the beginning of the cycle. But since then, you can see that we have been investing very consistently, 1.1 billion over the first half of this year, close to 900 million over the second half of last year. We have 600 million committed. So the trend certainly seems to be continuing at this point in time, and we certainly look forward to a double-digit growth continuation.
spk06: Okay, great.
spk03: And then, Michael, you just touched on the cash level, and it's, I guess, by my estimation here, it looks like it's running more than double the historical levels. At least that's where it is currently. But your container payables are down, but clearly you are facing a lot of investment here in the third quarter. Is that why the large jump? Is it just... you know, with all this capex coming, that you're kind of sitting on a little extra cash this quarter? And if that's the case, is that how that will ultimately work down over time?
spk05: Yeah, Mike, we always carry a healthy amount of cash on hand, but we pretty much keep it in the form of delivered lower debt levels, and we draw when we need them. At year end, $401 million. It's a matter of just timing, actually. So we're We drew on our facilities, getting ready to pay down some of our payables. So it's probably a timing difference right there, but we usually keep a lower level on keeping the dry powder, so to speak, in borrowing capability within our credit facilities so we don't pay too much interest.
spk06: Okay, great.
spk03: And let me just sneak in one more here. I wanted to talk about the competitive landscape. It's kind of a three-part question, so bear with me. One, obviously this is a very strong environment, and I just wanted to check in to see if you're seeing any new competitors, new entrants into the market. Is there really any private equity tech funds or anything that's looking to move into this space here? Any comments on the recently announced acquisition in this space? There's, you know, let's say now a larger competitor once integrated. And so I'm just curious what that could mean for Textainer and the industry. And then, you know, finally, there's some reports that there's a private player that may be up for sale. So I wanted to hear just your thoughts on that and, you know, what is Textainer's appetite and desire to do an acquisition and increase size and scale? Thank you.
spk02: Thank you, Mark. The market has certainly evolved in a very interesting way. As you mentioned, there was an acquisition by one existing strategic player of another player in the industry. In our IR deck on page 17, we present the market concentration for container lessors. We kind of compare that to the concentration for shipping lines and container manufacturer. And it's very interesting to see that we end up with essentially 85% of the market controlled by five container less source. The concentration has increased tremendously amongst shipping line, but it has increased even further amongst container manufacturers. In terms of the leading market, which is really what we want to talk about today, We welcome the consolidation that we have seen. We think that it makes for a better market with another larger player and we now have a situation where we essentially have Triton who is larger than most players but you then have another four players who are very disciplined players in the market and that's very, very positive. Our strategy has really been to be focusing on organic growth. To answer the second part of your question, I think that we've demonstrated that we have done that very successfully with our fleet growth and all the other metrics and the tremendous improvement in our profitability over the past 18 months or 12 months. We certainly intend to continue focusing on doing what we do best, which is to focus on our business and grow it organically and continue to improve our metrics and our profitability.
spk06: Great. Thanks for taking my questions, Olivier. Thank you, Mike. Thanks, Mike. Next, we'll hear from Liam Burke with B. Reilly.
spk00: Thank you. Hi, Michael. Hi, Olivier. Olivia, do you have any significant amounts of assets that are up for release over the next 12 months? And if you do, do you anticipate the durations to extend from what your average is of about six years?
spk02: Yes, most definitely. carry a number of leases that are coming for renewal on a regular basis. And those leases right now tend to be extended on much longer leases than historically. And I would say that what we do is we focus very much on maturity and we try to close a renewal where the assets will be used until the end of their economic life, what we call a life cycle lease. And we have been very successful at that strategy recently. That's essentially why we're pleased to announce that the average maturity of the overall fleet has reached close to six years at this point in time. So it's a combination of those new CAPEX, those new leases for which we achieved more than 12 years, and the renewal on those existing containers that on average are probably seven or eight years old that we're renewing on lifecycle lease so that they will stay on lease until they're 13 or 14 years of age. So it's really a combination, but that has been clearly our focus as we see a great opportunity to lock in the cash flow and make sure that we can continue to sustain high levels of profitability going forward.
spk00: Great. And you mentioned in the earlier discussion the consolidation or 85% of the industry is consolidated among a limited number of players. With your ROE in the low 20s, is there any danger or is there any concern on your part of either non-concentrated or smaller players coming in, sacrificing ROE but still getting a healthy return and lowering prices?
spk02: Well, I would say that possibility always exists and we should never ignore it. But the reality is that there are five large substantial players that are, I think, all good competitors that will certainly continue to play an important role in the market. I also think that there are certain barriers to entry in terms of new players wanting to get access to the market. First of all, there's a financial barrier because you need to build up a fleet, and size is very important when it comes to occupying... a sustainable position in the industry and be credible with the customer. But it's also very, very important when it comes to have availability at the right place at the right time. And I think that's where having a larger fleet plays a very big role and kind of prevents new players from coming in very aggressively to the market. They can definitely come in but they have to select their targets, and that will kind of limit their ability to grow. And as I said, there's no denying that a small player can come in, but it will take them a long time to reach the kind of scale and size that we enjoy today with our fleet.
spk00: Great. Thank you, Olivier.
spk02: Thank you very much, Sam.
spk01: That will conclude today's question and answer session, and I'll turn the conference over to Olivier Ghesquire, President and Chief Executive Officer, for any additional closing remarks.
spk02: And I'd like to thank everybody for attending this earnings release with great results, and we look forward to our third quarter with even better results. Thank you very much.
spk01: That will conclude today's conference. Thank you for your participation. You may now disconnect.
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