Textainer Group Holdings Limited Common Shares

Thank you and welcome to Textainer's second quarter 2022 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will be provided at that time. 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. Please go ahead. Thank you.

Certain statements made during this conference call may contain forward-looking statements in accordance with U.S. securities laws. These statements involve risks and uncertainties, are only predictions, and may differ materially from actual future events or results. The company's views, estimates, plans, and outlook as described within this call may change after this discussion. The company is under no obligation to modify or update any or all statements that are made. Please see the company's annual report on Form 20F for the year ended December 31st, 2021, filed with the Securities and Exchange Commission on March 17th, 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 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 Giscard, Textainer's President and Chief Executive Officer, for his opening comments.

Thank you, Tamara. Good morning, everyone, and thank you for joining us today. I will begin by reviewing the highlights of our second quarter 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 question. We're very pleased to report our best-ever quarterly debt-adjusted income and adjusted EPS on the back of solid revenue, exceptional gain on sales, and continued disciplined expense management, with EPS further benefiting from the impact of our increased share buyback activity. For the quarter, we delivered lease rental income of $203 million, adjusted net income of $79 million, and adjusted EPS of $1.63. These numbers compare to the first quarter lease rental income of $199 million, adjusted net income of $73 billion, and adjusted EPS of $1.48. The consistent improvement of our financial metrics demonstrates the resilience of our business model in the current normalizing environment as we benefit from our long-term lease contracts and take advantage of market opportunities to sell older containers at a substantial profit. As we navigated the second quarter of the year, which is traditionally the industry's slow season, demand for containers was subdued with limited lease-out opportunities as shipping lines now operate with sufficient inventories. This follows a prolonged period of container fleet expansion driven by the mobilization of virtually all container ships available throughout the world. Congestion continues to remain the central focus of global container shipping, with an estimated 12 to 14% of total ship capacity currently tied up as a result of logistical bottlenecks, labor shortages, and COVID disruptions. Overall shipping volumes have come down from the peak, but remain much higher than pre-COVID, causing spot rates on the Trans-Pacific to decline over the recent months. Globally, ocean freight rates are now roughly in line with last year's level, but remains historically very high, which continues to support healthy performance of our customers in spite of rising bunker costs. The best example of this is probably the Shanghai Container Freight Index, which is approximately four times higher than pre-pandemic levels. In this environment, shipping lines have reduced their intake of new containers and are holding on to existing units. As a result, our average fleet utilization for the quarter was stable at 99.6% and currently stands at 99.5%. We've only seen a small increase in re-deliveries of mostly old sales-age containers, which have helped us achieve record gain on sales of $23 million for the quarter. As our customers position themselves for the summer months, they're choosing to hang on to older and thus cheaper containers as new production units remain much more expensive. Production of new units at factory has moderated substantially to about 300,000 TU per month. with shipping lines placing over 70% of recent orders. Total factory inventory of new containers has increased slightly to 850,000 TU, with limited factory orders resulting in reduced lead times. Given the slowdown in lease-out opportunities and relatively short production lead times, Texaner is maintaining a minimal level of container inventory until demand picks up again. As illustrated by our very strong quarterly performance, the resale market continues to be supported by the continued shortage of older containers being re-delivered. Even if prices may have eased for 40-foot high cube containers, they have strengthened in some parts of the world for 20-foot standard units, which we commonly sell for more than their original cost 14 or 15 years ago. As supply situation for all the containers is unlikely to materially change over the peak season, we're optimistic that retail prices will remain elevated over the summer before reducing somewhat towards the later part of the year. This scenario will depend very much on whether any drop in consumer demand will be sufficient to reduce congestion given the many supply constraints that remain in place. Although some of the COVID lockdowns in China may have been lifted, in Shanghai in particular, several other restrictions remain that hinder fully efficient logistic flows. New events may further delay a return to normalcy, such as the recent 48-hour warning strike by German port workers, the risk of a rail strike in the US, though currently delayed by presidential executive order, or the possibility of industrial action related to the ongoing longshoremen negotiation on the US West Coast. As we look out to the coming months, we see a continuation of the currently well-supported market with likely additional disruptions in the world of shipping. We're optimistic that container utilization will remain elevated and that we will continue to demonstrate resilient performance for our business going forward, given the following business drivers. Overall demand for cargo remains well above pre-COVID level as underlined by the U.S. consumption, which was unexpectedly up for June. Our average remaining lease maturity is now in excess of six years versus less than three years historically, providing for substantial locked-in cash flows. Exposure to expired leases, which have not reached the end of their economic life, has been considerably reduced and today represents a much smaller portion of our portfolio at about 3% of our fleet based on net book value. Furthermore, our customers continue to renew most maturing leases given the alternative of higher priced new containers. Resale prices will remain historically high for as long as the supply of older containers continues to be limited. We expect supply chain to remain under pressure and subject to further disruption with the risks of industrial action increasing worldwide. Additionally, the current global inflationary environment should benefit us as an asset owner by supporting lease rates and resale prices longer term with minimal cost to us given our large existing fleet and fixed and hedged debt. Finally, During the quarter, we repurchased over 1.4 million shares, or 3% of our outstanding common shares, with our Board of Directors further increasing our share repurchase authorization by an additional $100 million. Given the current climate of low CAPEX, allocating some of our significant cash flow to continued share repurchases continues to be an attractive use of our capital and has enabled further improvement in earnings per share and other financial metrics. In closing, we're pleased with our performance for the second quarter. The current economic situation creates uncertainty and market challenges, but we remain optimistic with our outlook for the rest of the year. Lexena continues to optimize capital allocation in this slower growth period while preparing for future market cycle opportunities. Our balance sheet remained strong, with healthy liquidity, an efficient capital structure, and fixed rate and hedge financing, and demonstrated expense control and efficiency. I'll now turn the call over to Michael, who will give you a little more color about our financial results for the second quarter.