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spk06: Thank you and welcome to TechStainer'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, 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 TechStainer.
spk00: 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. We 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, and according to the 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 TechTainers' 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.
spk02: 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 continue 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 billion of new containers assigned to very long-term leases at fair roll rates. As a result, the average remaining tenor 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 financed 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 opportunities. 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 dividends to common shareholders, increasing it from 25 cents per share to 30 cents 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. Boat congestion, which was a telltale indication of overheating shipping markets throughout the past two years, has now halved to about 7% of the world container ship fleet. Our container fleet utilization has remained very stable at an elevated level close to 99%. In fact, the net balance of container re-delivered has recently somewhat reduced as localized demand pre-Lunar New Year resulted in a mini cargo rush and depot pickup. Secondhand prices for older containers also appear to have stabilized and are further supported by the recent increase in new build 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 CU. More generally, and while microeconomic 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 through 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 teams. 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 sheets with low to low 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 tech standards, achieving our highest ever level of revenue and income. Looking ahead to 2023, we expect stabilizing performance thanks to a 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 sheets 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.
spk05: Thank you, Olivier. Hello, everyone. I will now focus on our Q4 and full year financial results. Adjustment of 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 investment 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 re-deliveries of older, mostly sales-age containers from expired lease contracts. As resale container prices have reduced from peak levels, gain on sale is expected to stabilize closer to prior historical averages. Having said this, as mentioned by Olivier, resale prices have begun to stabilize in conjunction with increased new box asking prices and higher material costs and the 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 container 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. Q&A expenses 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 unhedged component of our debt. Our Q4 average effective interest rate stands at 3.02% and increased from 2.83% in Q3. Turning now to our common share purchase program, we've 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 purchase 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 purchase program totaled over $122 million as of the end of the year. Our share purchase 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% for common share quarterly cash dividend, increasing it to 30 cents per common share, payable on March 15th to holders of record on March 3rd. The combined impact of taxpayer share purchases and common dividend during the year represented 78% of 2022 adjusted 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 purchases. Texaner's book value per share increased by more than 50% over the last two 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 lifecycle lease extensions over the last two and a half years. Our high-quality lease portfolio provides long-term fixed cash flows, now averaging 6.3 years of remaining contractual lease tenure and covering nearly 80% of the remaining depreciable life of our young 4.9-year-old fleet on an MBV basis. Our revenue-generating assets continue to be well-supported by an efficient fixed-rate or hedge-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 least profit margins. Opportunistic deleveraging of the higher-priced unhedged 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 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.
spk06: Thank you. Ladies and gentlemen, at this time we will be conducting a question and answer session. If you'd like to ask a question, you may press star 1 on your telephone keypad. A confirmation tone will 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 key. Our first question comes from the line of Mike Brown with KBW. Please proceed with your question.
spk07: Great. Hi. Good morning, everyone. Good morning, Mike.
spk03: Olivia, I wanted to start off with the market here. You get a lot of very interesting color about what you're seeing and how to potentially think about the year. Clearly, containerized trade has cooled and normalized. Going back to coming out of COVID, we went from a shortage of containers to a essentially an equilibrium. And now it seems to be that the market is kind of overstocked 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 real re-ignition of growth? Like what are the puts and takes that we need to consider? It just seems like Since 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 can almost see a bit of a delay in the recovery?
spk02: Yeah, 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, you know, a situation with the new tariffs implemented where shipping lines were trimming their fleet. which really meant that we entered a 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, you know, 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 cooling off and certainly production level came back to about 3 million TU for the full year. But that probably still leaves 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 observe 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 search 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, you know, the reality is that, you know, 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 the very old containers, which we are then at less worth selling, or they're selling containers themselves. But those returns are not coming back in huge numbers, as we can tell from the gain on sales and the pricing that we still enjoy on the secondary market. 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 AND THEN WE KIND OF SEE A LITTLE BIT OF A POTENTIAL UPSTICK IN IN DEMAND FOR CONTAINERS IN THE SECOND HALF OF THE YEAR WHEN THE SEASONAL STARTS DEMAND STARTS TO COME IN AND YOU KNOW 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 Trans-Pacific 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. All in all, you know, we see very much a year with low production of new containers, but a normalization year and continued very high utilization on our existing cleats.
spk07: Great. Thanks for all of that, Collar Olivier.
spk03: 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 a full utilization rate at 99%. but you know 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 um but i'm just trying to think through if turn-ins do do rise a bit you know and if you've been able to really sell a lot of those containers should it stay semi-close to where where it is like how should we think about the trajectory for 2023
spk02: Well, I think we're going to see a continuation of all the 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 addition to the fleet. But utilization at the same time will remain high because those containers are mostly all containers which we are disposing and disposing in a market that, you know, all in all remains, you know, 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 gain on sales. So, You know, this is an interesting thing for us. We saw slightly higher volumes of re-deliveries in October, November. And then December, January, we've actually seen an easing off of re-deliveries. And we very much feel that, you know, the re-deliveries are going to remain fairly stable, which is a perfectly management level as far as we are concerned. So, you know, small attrition until potentially demand picks up, which we expect or we hope would take place with the summer. And, you know, moving on from there, possibly, you know, opportunities to leave out a few depot containers that remain extremely competitive price-wise versus new containers, given that the new container prices, you know, have even gone up a little bit, even though there have been very, very few transactions on the market.
spk07: Great. Thank you, Olivier. I will leave it there. Thank you, Mike. Thanks, Mike.
spk06: Our next question comes from the line of Liam Burke with B. Reilly. Please proceed with your question.
spk04: Thank you. Good morning, Olivier. Good morning, Michael.
spk07: Good morning, man. Hi, Liam. Looks like we lost Liam. As a reminder, ladies and gentlemen, it is star one to ask a question. We have a follow-up from the line of Mike Brown.
spk06: Please proceed with your question.
spk07: Okay, great.
spk03: I have a question on the balance sheet, and maybe the other analysts will be back to ask their question. Yeah, so on the capital allocation front, you guys have had a very active year for share buybacks in 2022. And, you know, 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, you know, likely 2Q if that CapEx opportunity remains soft? subdued and i guess but the point of my question is is that you know one just decides you know how you're thinking about buybacks and then two is there anything else in terms of balance sheet um opportunities that you are thinking about or considering here just uh just to make sure we you know are thinking about capital allocation uh correctly and like it's a good question here uh so uh buybacks as we've mentioned many times is
spk05: a core emphasis of our capital allocation policy. So you probably expect share buybacks to be a continued very healthy level for us, actually. On top of that, a dividend as well. You heard Olivia 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 our leverage as well. You might have noticed that we delivered a bit during Q4 with some excess cash flow. While we like the long-term fixed rate debt that is very, very well priced and a lot of that was locked in when we had the opportunity to do so when those long-term fixed rates were attractive, we do have that unhedged portion of the debt set that we try to manage where when we do have available cash, sometimes we'll allocate some of that to delivering that component where we manage down our interest costs opportunistically. WHILE KEEPING SOME OF THESE FACILITIES READY AND AVAILABLE IN ADVANCE FOR WHEN CAP HITS OFFICE ARRIVES AND WE CAN TRIGGER THEM AND FUND THEM USING THE FACILITIES BUT HAVING SAID THAT WE'LL MANAGE AND MAINTAIN THE HIGHER COST PORTIONS OF OUR DEBT STACK TO THE LOWEST LEVEL THAT WE CAN KEEP TO MINIMIZE THAT INTEREST EXPENSE EXPOSURE THERE BUT consistent approach, same approach that we've always been taking, that we've communicated to you guys.
spk07: Okay, just maybe one follow-up on that.
spk03: Have you seen any interesting opportunities on the M&A front? How have some of your maybe smaller-sized private competitors been faring in this market, and is that potentially possible? present you with some opportunities to actually deploy capital into inorganic growth.
spk02: 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 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 opportunities, shall there be one that arises, but we don't see any immediate opportunity arising.
spk07: Okay. Thanks for the thoughts there.
spk06: Our next question comes from the line of Liam Burke with B. Riley. Please proceed with your question.
spk04: All right. Thank you. Morning, Olivier. Morning, Michael. Morning again. Hi, Liam. 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?
spk02: 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, you know, we had, you know, gain on sales that, you know, we never would have dreamt we could achieve a few years back. And that's kind of like normalized right now. So that's really the big impact. But I think that the The ROE today reflects very much more the solidity of our core business.
spk04: 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, you know, short-term rate weakness. Any discussion on any kind of change in existing contracts or is everybody just in line, you know, with your duration and your rates?
spk02: No, I would say most of the discussions we've had are ongoing lease extensions that we always have with customers. You know, we always have some contract maturing, which we are, extending on a regular basis. You know, there are costs for shipping lines to re-deliver 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.
spk04: Great. Thank you, Olivier.
spk07: Thank you, Liam. Thanks, Liam.
spk06: Our next question comes from the line of Clement Mummins with Value Investors Edge. Please proceed with your question.
spk01: Good morning, Tim. 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 the significant container ship order book is delivered, do you expect significant capex opportunities to arise? Or should we expect a gradual normalization, let's say?
spk02: Yeah, 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, you know, they will need more containers to operate those ships efficiently. I think the other interesting factor here is probably the announcement that the MFC and Merzline 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 depot 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.
spk01: 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 releases that have already expired or are set to lose throughout 2023? Are those being renewed at generally higher rates?
spk07: So just to confirm, Clement, you're asking about the impact from renewed leases?
spk01: Yeah, exactly. Okay.
spk02: So, yeah, 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, for 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 our market where older containers tend to go for slightly cheaper rates or there'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.
spk01: Makes sense.
spk07: That's all from me. Thank you for taking my questions and congratulations for the quarter. Thank you, Glenn. Thanks, Clement. As a reminder, ladies and gentlemen, it is star one to ask a question.
spk06: There are no further questions in the queue. I'd like to hand the call back to Olivier Giscard for closing remarks.
spk02: Yes, and thank you, everybody, for joining us today, and we certainly look forward to continue to update you on the tech data story next quarter.
spk06: 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.
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