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spk01: conference 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 given at that time. As a reminder, today's conference call is being recorded. I now turn the conference over to Tamara Bakarian, Investor Relations of Texaners Group Holdings Limited.
spk03: 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 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 31st, 2022, filed with the Securities and Exchange Commission on February 14th, 2023, 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 press release. Finally, along with the earnings released 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 would now like to turn the call over to Olivier Giscard, Textainer's president and chief executive officer, for his opening comments.
spk07: Thank you, Tamara. Good morning, everyone, and thank you for joining us today. I will begin by reviewing the highlights of 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 questions. We are very happy with our second quarter 2023 earnings results, which continue to demonstrate the benefits of our long-term contracted revenue and strong utilization levels. For the second quarter, adjusted net income was $51 million, or $1.20 per share, and with resilient lease rental income at $192 million. Our utilization rate has continued to support our top line, remaining very firm at nearly 99%. This results from both a reduction of our container turn-in, as well as our continued success in renewing maturing leases, a testament to our strong customer relationships and proactive actions. Additionally, despite the current interest rate landscape, our financing costs remain well under control, thanks to our policy of long-term interest hedges and active deleveraging strategy. Gain on sale for the quarter continued to normalize, but remained nicely profitable on the back of slightly higher volumes being disposed. The secondhand market was marked by geographical disparities with slower demand in Europe, but an increase in demand and price level in China, which is by far our largest outlet for all the containers. For the quarter, our resale activity generated a profit of $7.7 million with ongoing significant cash generation. Overall, the container shipping market remained stable through the second quarter, and we have now observed initial signs of higher ship loading as well as firming up ocean freight rates on major shipping routes. There is growing optimism that August will see further ocean freight rate hikes, especially on the trans-Pacific routes, where ship utilization has recently been much stronger. Our customers also expect inventory destocking cycles in the U.S. to come to an end soon, paving the way for the need to replenish inventory ahead of the winter holiday season. As such, our shipping line customers anticipate cargo volume to pick up in the second half of the year. For all parts, we expect this market situation to provide support for high-speed utilization and at least renewal as new built containers remain more expensive at about $2,200 per CU. At the same time, orders for new containers remain minimal at only 650,000 TU so far this year as the industry continues to absorb the elevated production volumes of the COVID super cycle. We view this situation as positive for the industry as demand for cargo is recovering from its recent lows. In effect, the global fleet of shipping containers is likely to remain stable or even decrease slightly this year. Factory inventory has declined to about 850,000 TU from level well above 1 million TU at the start of the year, and production for the rest of the year is expected to remain muted. We did see some small CAPEX deployment towards the end of the quarter, which were focused on special equipment and pre-committed long-term leases due to start in the third quarter of the year. But we do not anticipate substantial follow-up order at this stage. Our ongoing strategy for new container investment remain to focus in securing back-to-back container leases, keeping uncommitted new inventory at a minimum. This disciplined approach ensures a readiness to pivot when new long-term profitable capex opportunity arise to drive long-term value creation. In the present climate, where investment opportunity remain limited, our attention remains towards the efficient allocation of a free cash flow to optimize shareholder value. To this end, we're pleased to report that we have repurchased 1.1 million common share this quarter allowing us to reach a total of 5.5% of our outstanding common shares we purchased since the beginning of the year. We are also very pleased to report that our board has authorized an additional $100 million increase in our buyback program and continues to view our buyback program as a creative and beneficial to long-term value for our shareholders. Our current market outlook remains firm and continued stability and optimism. The IMF has recently revised its world GDP growth projection upwards to 3% from 2.8%. Inflation appears to be moderating and consumer spending was up 1.6% for the second quarter in the U.S. The shipping industry has started to see cargo volume recover over the past few weeks and ocean freight rates have likewise started to firm up. Container industry players have remained disciplined with very limited container production and stable manufacturing prices at $2,200 per CU. Fleet utilization is stable and is expected to remain elevated for the foreseeable future, which will minimize storage costs. Our lease revenue continues to be well protected with six years' worth of lease rental income under firm contracts. Likewise, of financing costs are controlled due to corresponding fixed rate debt. Gain on sale of all the containers have normalized, but continue to generate profits in excess of 20% of NBV. Looking further out, shipping lines have a large order book of ships to be delivered in the coming quarters. This will eventually require additional container usage and drive container fleet growth opportunities. Also, IMO recently issued greenhouse gas emission target calling for a 40% reduction in emission by 2030 will require shipping lines to continue to upgrade their fleet while slowing down ship's rotation to reduce fuel consumption, thereby requiring larger container fleet to transport the same amount of cargo. Finally, shipping line remain financially strong with robust balance sheet and continue to be mostly profitable despite current environment and low cargo volumes and freight rates. To conclude, we are very proud of the resilience exhibited throughout the first half of the year, and we continue to effectively navigate the demand landscape, remaining steadfast in our strategic objective of focusing on intrinsic share value creation. We anticipate continued strong operational performance in the future. Our strong cash flow generation allows us to focus on our capital allocation to optimize returns to shareholders, to robust share buyback and regular dividends, while deleveraging the higher interest rate portion of our unhedged debt. 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.
spk04: Thank you, Olivier. Hello, everyone. I will now focus on our Q2 financial results. We were pleased that Q2 adjusted earnings per diluted common share was $1.20, which was relatively in line with the prior quarter. This illustrates the strength of our business model, driven by very reliable cash flows from our long-term fixed rate lease portfolio that is well supported by associated fixed rate financing. The solid EPS level was further enhanced by our ongoing share buyback program. Q2 adjustment income was $51 million, only a slight decrease from Q1. Q2 lease rental income was $192 million compared to $195 million in Q1, remaining relatively steady for the quarter. We're pleased our utilization rate remains at a very strong level, the 98.8% average for both Q2 and Q1, and which currently now stands at 98.9%. This is a result of our successful efforts to control and limit container turn-ins, which still mostly consist of older sales-age containers. We have also begun to see a reduction in container off-hire levels from our customers as we move further into the second half of the year. While new CapEx opportunities have been limited given the large amount of investment in recent years, we have been able to employ some nominal CapEx at the end of Q2, which will benefit Q3 lease rental income. Q2 gain on sale was $8 million, compared to $10 million in Q1. While secondary container prices slightly reduced in Q2, they have remained relatively stable and still provide an attractive margin well above network value. We expect gain on sale to be driven by available volumes of containers being re-delivered to more lucrative markets, such as China. Q2 direct container expense of $10 million was in line with the last quarter. as a result of our stable 98.8% utilization rate. The storage component within direct container expense will logically follow our utilization rate through the remainder of the year. Q2 depreciation expense is $71 million, a little over a million dollars decrease from last quarter. Depreciation expense is expected to continue to slightly decrease in line with fleet attrition as CapEx deployment remains minimal. Q2 G&A expense of $13 million was in line with Q1. We continuously managed G&A expense, which is expected to remain relatively flat through the remainder of 2023. Q2 interest expense of $42 million remained level versus Q1. Our Q2 average debt balance was lower than Q1 from our continued deleveraging and the building of dry powder and borrowing capacity. our Q2 average effective interest rate was an attractive 3.16%, only a slight increase from 3.12% during Q1. In conjunction with protecting our lease cash flow margins, 92% of our debt is fixed or hedge-to-fixed with an average coverage tender consistent with the average tender of our long-term fixed rate leases. XSAN's business model involves protecting the reliability and the resilience of its cash flows over the long term. While short-term market SOFR and LIBOR interest rates have increased by nearly 500 basis points over the last 18 months, TechSinger's average effective interest rate has only increased by about 50 basis points over the same time, representing exceptional management of interest rate risk. Turning now to our common share repurchase program, we repurchased approximately 1.1 million shares during Q2. and 5.5% year-to-date through the end of Q2 of our standing common shares at the beginning of the year. Since commencing our share purchase program in September of 2019, we have repurchased 18.1 million shares, or approximately 32% of outstanding common shares, demonstrating our commitment to effectively manage and enhance shareholder returns, including the recently announced $100 million buyback authorization increase by the board, The available authority under our share purchase program totaled $139 million as of the end of Q2. We are pleased to announce that our board has also approved and declared a cash dividend of 30 cents per common share, available on September 15th to holders of record as of September 1st. In addition, our board also approved and declared a quarterly preferred cash dividend for both our Series A and Series B professional preferred shares. Canva on September 15th to holders of record as of September 1st. Our capital allocation strategy, which is funded by exceptional cash flows from our business, includes our share purchase program and your progressive and sustainable common dividend. Both serve as important and focused methods for building shareholder value and enhancing returns to our investors. Moving forward, we expect to remain committed to both our share purchase and common dividend program. Looking at the strong asset quality of our balance sheet, our high-quality lease portfolio provides long-term fixed-rate cash flows covering nearly 80% of the remaining depreciable life of our young 5.2-year-old fleet. In closing, the second quarter continued to demonstrate the strength and durability of our business. We continue to improve the quality of our balance sheet as well as remain well-positioned for the summer months and the potential for some further investment opportunities when those become available. We remain committed to maintaining a disciplined CapEx investment approach while continuing to optimize long-term shareholder value creation through a focused capital allocation strategy. This concludes our preparatory remarks. Thank you all for your time today. Operator, please open the line for questions.
spk01: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your lines 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 headset before pressing the star keys. One moment, please, while we pull for questions. Our first question comes from Liam Burke. which be Riley Securities. Please go ahead.
spk00: Thank you. Good morning, Olivier. Good morning, Michael. Good morning, Liam. Hi, Liam. Olivier, you mentioned, and it's obvious that your renewal rate on expired leases was very favorable during the quarter or has been. which has supported your utilization rates. Have you been renewing at better than past rates or the same? Or what is the rate you're getting on these renewals vis-a-vis, you know, the past rate?
spk07: We renewed, as you mentioned, quite a big chunk of contracts. You know, it was over 100,000 CU for the quarter. The average rate at which we renewed those leads was probably a little bit below their previous rate. But you have to remember that it all depends on the actual rate that we were enjoying on those contracts. And it so happened that on those contracts, we had very high rates. So we did, you know, have to take a little discount in exchange for a very long maturity on a large chunk of leads. Overall, I think that we're at a level that still supports the average lease rate that we're enjoying on the fleet.
spk00: Great. And staying in terms of utilization, I mean, we're bumping along here through a down cycle. Utilization rates are well above, what they were during the past down cycles. Do you anticipate, as we move towards a potential up cycle in the next few quarters, that you can keep these utilization rates relatively high?
spk07: Well, Liam, it certainly looks that way at this point in time. I mean, we not only enjoy the contracts that we were able to put in place during the COVID super cycle, and those have super long maturities, as you know, in excess of 13, 14 years sometimes. And then for the rest of the operating leases, you know, we've also been able to renew the leases. But the market environment is such that we see our customer holding on to existing equipment. We see them continuing to renew leases and on the back of new container prices remaining at a fairly good level of $2,200 per CU. There's very little incentive for shipping lines to shift away from renewing maturing leases and taking new container leases. So we get the support because the demand is still there for those containers, and cargo has started to pick up, as I mentioned, in the last few weeks. And on the other hand, the shipping lines have no incentive to replace those older containers with new containers. So we're very optimistic that our utilization rate will remain highly elevated until the end of the year and most likely into next year.
spk00: Great. Thank you, Olivier.
spk05: You're welcome, Leon.
spk01: The next question comes from Michael Brown with Please go ahead.
spk02: Great. This is Aiden Hall on for Mike Brown. Just wanted to see how you're thinking about capital allocation from here. Buybacks have remained elevated. I saw the authorization, but just around the balance of CapEx, buybacks, and possibly delevering. Also related, how do you think CapEx in the second half of this year could compare to what you've seen in the first half?
spk07: Well, you know, we, as I mentioned in my earlier comment, we don't necessarily see capex rising substantially. We're in a situation where cargo volumes are increasing, but shipping lines still have enough containers, and essentially they have an incentive, as I mentioned, to hold on to their existing containers. So our view would be that We are not going to see a lot of capex in the second half of the year. As a matter of fact, we see the overall fleet, the world fleet of container probably contracting slightly this year. And as mentioned before as well, we think that is probably an overall positive. It's part of the dynamic of our industry with very short lead times to deliver containers, which means that supply and demand tend to readjust very, very quickly. And we're in this cycle where we oversupplied the industry during the COVID super cycle. And probably now for the past five quarters or so, production has been a lot more moderated. And we expect that situation to continue probably until the end of the year, meaning that there will be a very limited opportunity to deploy CapEx before next year, where we see the market coming back to a much more normal situation. But of course, shipping is always keeping some surprises in store. So we could see an increase in manufacturing in the last part of the year.
spk06: But our view is that we will probably have to wait until next year to see significant volumes and attractive opportunities in the market.
spk02: Great. Appreciate the color. And then, Olivia, you mentioned the shipping lines have a large order book of ships to be delivered in the coming quarters. Can you just give us some additional thoughts on how you expect this, maybe if we look out to 2024, the second half of the year, how that could affect the market?
spk07: Yeah, I mean, those ships have actually started arriving already, and I think it gives us a good indication of what shipping lines are doing with those ships. Essentially, they're adding ships to their existing routes, and typically where they were operating 10 or 11 ships on one route, they're adding one or two ships. They're then adding one or two stops along the round trip and slowing down the ships so they consume less fuel, they improve reliability, and very importantly, they reduce their CO2 emissions. So I think it's becoming clearer and clearer that a lot of shipping lines have been ordering new ships because of those constraints in terms of the environment and their desire to try to get a little bit ahead of the new regulation. And the big benefit for us is that, essentially, if there are more ships in service and they're sailing slower, it means it takes longer for the cargo or for the containers to move around, which means that more containers are actually needed. And that is highly supportive to demand. And it may not be 100% visible right now because we're coming from very elevated cargo volumes through the COVID super cycle. But I believe that as we recover from the current down cycle, we are going to see the effect of, you know, the increased cargo and additional ship capacity.
spk06: And that is going to translate into a demand for more containers over time.
spk05: Great, appreciate you taking my questions. As a reminder, if you would like to ask a question, please press star one on your telephone keypad.
spk01: Since there are no further questions, I would like to turn the floor back over to Olivia Gascaire for closing comments.
spk07: And thank you, everyone, for joining us today. And we certainly look forward to update you on our continued performance for the next quarter.
spk05: The conference has now concluded. Thank you for attending today's presentation.
spk01: You may now disconnect your lines and have a great day.
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