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spk05: Good day and welcome to the Textainer Group's Holdings Limited First Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal conference specialists by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, press star then one on your touchtone phone. And to withdraw your question, please press star then two. 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.
spk02: Thank you. Certain statements made during this conference call may contain forward-looking statements in accordance with U.S. security laws. These statements involve risks and uncertainties or 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. We see the company's annual report on Form 20F for the year ended December 31, 2021, filed with the Securities and Exchange Commission on March 17, 2022, and going forward, any subsequent quarterly filing 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 press 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 Textainer's Investor Relations website at investor.textainer.com. I will now turn the call over to Olivier Gascary, Textainer's President and Chief Executive Officer, for his opening comments.
spk03: 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 two 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 half a billion dollars of CAPEX on long-term and attractive leases, while increasing our share buyback to almost a 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 containers 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 the 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 leased 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 mid-year 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 leading companies remain above 99% and we have not seen any significant re-delivery 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 TU, even if recent pickups have slowed. As a reminder, last year's monthly production was routinely above 600,000 TU. New container prices are at about $3,000 per CU 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 or 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 remains limited in absolute terms as shipping lines continue to hold on to their containers. As we look into the rest of 2022, we remain confident in the strength of our underlying business fundamentals. While there may be cyclicality within the shipping industry, Textainer maintains a high level of stability with revenue protected against short and medium term market fluctuation. As of the end of the first quarter, our entire portfolio had an average remaining tenor of more than six years, and our container fleet is probably one of the youngest in the industry with an average age of four and a half 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 transit 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 rates, 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 have secured our profitability and stable cash generation to largely mitigate cyclical risk. In addition, we remain committed to returning capital to our shareholder 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.
spk01: 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 hedge-to-fix financing, and will continue to support our capital allocation policy and enhance 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 the ongoing positive impact from our share or purchase program. We are very pleased that this results in an annualized Q1 adjusted ROE of 19%. Q1 leased 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 continue to see limited container re-deliveries from customers. We are very pleased with our Q1 CapEx investment of $497 million, a 98% increase over Q4. Our Q1 CapEx comprise 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 Texaner's lease portfolio. The finance lease differs from an operating lease. as the finance lease generally represents the finance sale of the container asset to the customer over the lease tender. While both finance leases and offering leases generally have fixed rental rates, finance leases have a different accounting treatment from offering leases. While offering 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 RP&L. The finance lease's principal payment is reflected in the balance sheet. Additionally, while offering 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 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 volume. 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. P1 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 is $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 it 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 hedge to fixed, with an average coverage tenor consistent with the average tenor of our long-term fixed rate leases. Let's now turn to our share purchase 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 purchase activity, with $65 million available for Q2 and onward under our repurchase program. We're also pleased to announce that our board has approved and declared a cash dividend of 25 cents per common share, available on June 15th to holders of record as of June 3rd. 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, available on June 15th to holders of record as of June 3rd. 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 long-term cash flows well supported by a matching fixed-rate or hedge-to-fix 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 Tech Standard with a very compelling operating platform. An inflationary market environment is a net positive for Tech Standard and the SaaS class by improving container asset values, enhancing our ability to manage lease renewal opportunities, and supporting stronger resale prices. Limiting and controlling the impact of related increasing market interest rates has been largely and successfully addressed by us through our significant debt refinance and repricing efforts over the last couple of years. and through our ongoing discipline management of our financing structure. In closing, we are pleased with our strong start to the year. Texting remains extremely well positioned to support accretive organic growth through CAPEX, while returning capital to our shareholders through our ongoing share of purchase and dividend programs. This concludes our prepared remarks. Thank you all for your time today. Operator, please open the line for questions.
spk05: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. And to withdraw your question, please press star then 2. And at this time, we'll pause momentarily to assemble our roster.
spk06: And the first question will come from Liam Burke with B Reilly.
spk05: Please go ahead.
spk00: Thank you. Good morning, Olivia. Good morning, Michael.
spk06: Hi, Liam.
spk00: Could you give us some sense? You talked about renewals, but how do renewals look? Are you getting higher rates and are the durations through the remaining life cycle of the assets?
spk06: Can you hear me now? I can hear you, yes. Yeah, I can hear you now.
spk03: Sorry, there was a technical problem here. Good morning, Liam. Good morning, everybody. Good question, Liam. Actually, I alluded to it a little bit in the script. We continue to see a very favorable environment to renew old 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 rates. So big picture, we essentially have a maturing contract at about 50 cents per And the cost of a new container on the market today would probably be in the region of 80 cents to a dollar. 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 six and a half years, where historically it was very much below three years.
spk00: Great. And on the CapEx, you identified opportunities in that CapEx for growth. How does the full year look? terms of capex? Is it going to be maintenance plus a little growth, or how do you think it shakes out?
spk03: 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 billion TU, 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 demands 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 leaving. 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. definitely much, much lower level than what we have seen last year.
spk00: 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?
spk01: It's pretty similar. There is still a large component of finance lease in our Cape Exilium. So you can probably expect that during the near term. But having said that, we're certainly very happy with that type of release as well. But probably yes, Liam.
spk00: Great. Thank you, Olivier. Thank you, Michael.
spk01: Thanks, Liam.
spk05: The next question will come from Michael Brown with KBW. Please go ahead. Hey, good morning, Olivier and Michael. How are you guys?
spk01: Morning, Mike.
spk06: Hi, Mike.
spk04: I just wanted to start with the CapEx that you guys booked in the first quarter here. You invested almost $500 million in new containers in the first quarter, so really a pretty strong start to this year. And now you've booked an investment of $150 million in the second quarter. Of the 500 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 or 2Q, when do you expect those to start to get picked up and then come through the revenues?
spk03: Yeah. Essentially, all that CAPEX, as we mentioned, is pre-committed. And out of, I would say, the half a billion dollar capex that was delivered in the first quarter, you know, pretty much everything has already been picked up and is active, which is very good news for us. And we expect, you know, the balance order book to be picked up progressively over the second quarter as we move along. So these are all pre-committedly. So essentially... they have a fixed on-hire date regardless as to whether the customers actually require the containers or not. They're bound to start being invoiced for the rental.
spk06: Okay, great.
spk04: And Olivia, 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? 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 two years, is maybe 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.
spk03: Sure. You know, 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 two years ago is that we entered a cycle with essentially undersupplied stock of containers 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 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 port. 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 it potentially opportunities for us to leave 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, you know, the Shanghai authorities kind of allowing operations to resume a little bit more smoothly. But I think that was personally, I think that was to 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.
spk06: Okay, great. Thanks for all that, Collier-Olivier.
spk04: 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 two 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.
spk03: Yes, I think the important element here is that we love buyback. We've made no mystery of that. But one of the main reasons 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 this situation you know very very regularly at least every quarter ultimately it is a board decision and I would say that we went pretty aggressive in in the first quarter you know we were certainly above what we did in the previous quarter but we will continue most likely with 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.
spk06: Okay, great. Thank you for taking my questions. Thank you, Mike. Thanks, Mike.
spk05: This concludes our question and answer session. I would like to turn the conference over to Mr. Olivier Gascaire for any closing remarks. Please go ahead.
spk03: Yes, and thanks again for taking the time to listen to us today and looking forward to updating everyone on our progress during the next call. Thank you.
spk05: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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