Triton International Ltd (TRTN) 2020 Q2 法說會逐字稿

Hello, and welcome to the Triton International Limited Second Quarter 2020 Earnings Release. (Operator Instructions) Please note, today's event is being recorded.

I would now like to turn the conference over to John Burns, Chief Financial Officer. Mr. Burns, please go ahead.

Thank you, Keith. Good morning, and thank you for joining us on today's call. We are here to discuss Triton's Second Quarter 2020 results, which were reported this morning.

Joining me on this morning's call from Triton is Brian Sondey, our CEO; and John O'Callaghan, our Head of Global Marketing and Operations.

Before I turn the call over to Brian, I would like to note that our prepared remarks will follow along a presentation that can be found in the Investors section of our website under Investor Presentations.

I'd like to direct you to Slide 2 of that presentation and remind you that today's presentation includes forward-looking statements that reflect Triton's current view with respect to future events, financial performance and industry conditions. These forward-looking statements are subject to various risks and uncertainties. Triton has provided additional information in its reports on file with the SEC concerning factors that could cause actual results to differ materially from those contained in this presentation, and we encourage you to review these factors.

In addition, reconciliations of non-GAAP measures to the most directly comparable GAAP financial measures are included in our earnings release and the presentation.

With these formalities out of the way, I'll now turn the call over to Brian.

Thanks, John. And welcome to Triton International's Second Quarter 2020 Earnings Conference Call.

Before I start with the main presentation, I would like to again thank all of our employees for their extraordinary efforts over the last few months. Our team has kept our processes running smoothly and continue to provide great service to our customers despite the personal and operational challenges presented by the pandemic.

I would also like to thank our customers and suppliers for their close communication and ongoing support. We are proud to work with you in the vital effort to keep global supply chains functioning.

I'll now start the presentation with Slide 3. Triton's performance was solid in the second quarter of 2020, despite the ongoing disruptions from the COVID-19 pandemic and our outlook for the rest of the year has improved. Our customers estimate that trade volumes were down 15% or more at the start of the second quarter, and leasing demand in container pickups were limited. But container drop-offs are moderate, and our utilization remains at 95%.

Triton achieved solid results in the second quarter. Triton generated $60 million of adjusted net income or $0.86 per share, and we achieved an annualized return on equity of 12.2%. The resilience of our operating and financial performance through this period of market turmoil highlights the stability of our business model, the strength of our long-term lease portfolio and the outperformance we can achieve as the clear market leader.

New container investments continued to be constrained in the second quarter, and our revenue earning assets decreased by 1.7% during the first half of the year. We've used our strong cash flow to create value for shareholders in other ways. Our dividend yield is currently close to 7%. We repurchased 2.1 million shares during the second quarter, and have now repurchased over 15% of our shares since the fall of 2018. And our leverage is near all-time low. Trade volumes improved at the end of the second quarter, as economies reopened in the U.S. and Europe, and leasing demand has jumped in July. We have concluded a significant number of attractive long-term lease transactions over the last few weeks, and we expect container pickups to accelerate. We've also been able to extend expiring leases covering a large number of containers. This combination of accelerating pickups and reduced risk from container drop-offs will lead to an upward turn in our utilization. The size and durability of this improvement will depend on whether the recent increases in trade activity and leasing demand are sustained.

I will now hand the call over to John O'Callaghan, our Global Head of Marketing and Operations.

Thank you, Brian. Turning to Slide 4. As Brian mentioned, COVID-19 had a significant impact of global trade, with volumes decreasing by 15% as the shutdown of spread through Europe and the Americas. Our customers significantly reduced vessel capacity, implementing blank sailing as the transpacific and East/West trade slowed.

While the underlying trade volumes weakened in the second quarter, we did not see a major impact on our operations. Although, we did not see much pickup activity, container off-hires remain moderate and utilization held up well at close to 95%. We remain protected from the near-term drop off risk by a combination of our strong long-term lease portfolio. Our customers withdraw the vessel capacity on the major trade and the boxes either being stranded or tied up by their customers for temporary storage, while land site operations got untangled.

In addition, our customers took action to tighten costs through 2019 and their container fleets contracted as they look to gain efficiencies to offset revenue pressure, while at the same time, dealing with additional cost pressure of implementing IMO 2020. The new container production orders were also below replacement over the last 4 quarters and has contributed to the shortfall. Our customers' profitability is expected to be strong in the second quarter due in part to the changes we've seen in the shipping industry. Specifically, the aggressive and speedy withdrawal of vessel capacity, which starts to push freight rates up, while at the same time, fuel prices dropped. The deeper reason is that since 2015, we've seen a lot of consolidation in the business, which greatly increased our customers' ability to match supply with trade demand and mitigate the deep cutting at freight rates that usually comes with a drop in volume.

Our near-term credit risk is mitigated by our customers' stronger financial performance, and we're hopeful this will be longer-term improvement in the credit profile of the industry. We have also moved to shore up our lease portfolio with specific transactions to alleviate any shorter-term exposure. These lease expansions will meaningfully reduce our risk to off-hires in the third quarter and on. The increase in trade volume started in June and then into July. And while our customers have seen a good bounce in trade volumes, there's not yet an understanding in the industry as to how long this will continue, and whether it is an inventory restocking or a normalization of consumption and related sales and trade activity. The second quarter was solid despite the changes, but Triton have secured sizable bookings in July, servicing those shipping line requirements due to our extensive supply capability. These pickups will speed up in the third quarter.

New container prices increased to $2,000 due in part to actions taken by container manufacturers to reduce production capacity, but also due to this recent surge in demand.

On Slide 5, you can see that utilization held up well in the second quarter, supported by relatively low drop-off volume, shown in the upper right. Neither of these charts show the benefit of the recent surge of bookings we have talked about. The bottom charts demonstrate the significant bookings of new dry containers at the beginning of the third quarter. The lower left is a chart showing new lease transaction by quarter over the last few years. There was strong activity through 2017 and 2018, very little activity over the last 7 quarters, and finally, a resurgence of deal activity at the beginning of the third quarter in 2020. This bubble, on the extreme right, represents most of the new dry blank containers we had available.

The low right chart shows our depot inventory in containers in Asia. It's clear how the inventory has built over the last 8 quarters of quiet time. That is set to change quickly. The most recent buyers for July and a large part of that inventory is now booked and will be picked up very quickly.

On Slide 6. Slide 6 demonstrates why our customers' financial performance is going to be better than expected. The upper 2 lines are the spot freight rates on the Asia-Europe and transpacific trade lanes. You can see rates are up despite weak trade volumes as our customers pulled out significant vessel capacity, managing the balance of capacity and demand better.

On the bottom dotted line, you can see fuel prices after initially jumping because of the demand for low sulfur fuel earlier in the year, prices have come back down or are below where they had been despite the low sulfur fuel mandate. The gap between higher freight rates and low fuel prices is expected to drive a strong line of profitability for our customers in the second quarter.

I'll now hand you back to John Burns, our CFO.

Thank you, John. Turning to Page 7. On this page, we've presented our consolidated financial results. Adjusted net income for the second quarter was $60 million or $0.86 per share. These solid results represent a return on equity of 12.2%.

Turning to Page 8. Our results in the second quarter were impacted by the widespread economic shutdowns, which led to a significant decline in global trade and lease demand. However, due to our high-quality, long-term lease portfolio, our key financial metrics held up well. Leasing revenue was flat compared to the first quarter. This was largely due to our utilization remaining high, averaging 95% for the quarter, down only 40 basis points from the first quarter.

Our direct operating expenses, which are largely made up of storage for off-hire units, repairs for containers redelivered and positioning expenses increased by $6.4 million, reflecting an increase in storage and positioning expense.

We generated a solid $6.6 million of combined gains on sale and trading margins, up $0.5 million from the first quarter due to a slight increase in both sales volumes and prices. Customer payment performance remained strong during the second quarter, and we had no material credit charges. As John described earlier, our customers' ability to maintain freight rates and benefit from the drop in fuel prices, enable them to improve their profitability, thereby reducing our credit risk, at least in the near term. We repurchased $2.1 million of our common shares during the second quarter at an average price of $28.70, reducing our average diluted share outstanding by 3.2%.

Turning to Page 9. On this page, we highlight our strong balance sheet, significant liquidity and our well-structured debt profile. We compare our balance sheet at June 30 to December 2018 to capture the full impact of the actions we've taken to strengthen our balance sheet over the last 1.5 years. Over that time, we have issued $555 million of preferred shares. Due to limited lease demand, we limited our investment in new containers. Together, these actions have led to a significant reduction in our leverage. We focused on net debt as a percentage of revenue earning assets, or REA, as our key leverage metric. We typically manage leverage based on our prepurchase accounting balance sheet as our debt facilities are structured based on those asset values. And these asset values are largely in line with current container prices on a depreciated basis.

As you can see on the left side, below prepurchase accounting balance sheet, net debt to revenue earning assets has dropped from 74.5% in December 2018 to 68.2% at the end of the second quarter.

In addition to our low leverage, you can see in the table on the bottom left that we have significant liquidity. Our strong cash flows, current cash balances and additional availability under our credit facilities gives us liquidity of $2.7 billion, well in excess of our major cash obligations over the next 12 months.

On the bottom right graph, we show that we have well-structured debt portfolio with no significant maturity cliffs, enabling us to meet our debt obligations from our cash flow, which is the blue line, without the need for refinancing for several years. We believe we are well positioned to take advantage of the recent improvement in the market while maintaining plenty of liquidity in case the market direction reverses.

Turning to Page 10. This page highlights how we've been able to use our strong cash flow to create significant long-term value for shareholders. The graph on the top left shows our cash flow before capital spending and you can see the resiliency of our cash flow across market cycles. The graph on the bottom left shows how our stable cash flow, together with the short order cycle for containers enables us to maintain our leverage in a steady range over the long term. On the graph on the right demonstrates how these strong cash flows and our financial stability have enabled us to create significant shareholder value by steadily growing the book value of the business while paying a substantial dividend.

I will now return you to Brian for some additional comments.

Thanks, John. I'll wrap up the presentation with a few summary comments on Slide 11.

Triton achieved solid performance in the second quarter of 2020 despite facing significant trade disruptions from the COVID-19 pandemic. We generated adjusted earnings per share of $0.86 and achieved an annualized return on equity of 12.2%. The resilience of our performance through this challenging time is a testimony to the strength and stability of our business. We are encouraged by a number of developments that have reduced our near-term risks and improved our upside potential. The risk from credit losses has been mitigated by stronger-than-expected financial performance for our customers, and several large lease extension transactions have reduced the potential for a large increase in container drop-off volumes if trade activity weakens.

The recent surge in leasing activity will lead to increased container pickups in the third quarter and improved utilization. As a result, we expect our adjusted earnings per share to increase from the second quarter of 2020 to the third. Our trajectory after the third quarter will depend on whether the recent increases in trade activity and leasing demand are sustained. While we are hoping for sustained trade recovery, Triton is well positioned to manage through a whole range of market environments. We remain the clear scale and cost leader in our industry. Our balance sheet is in great shape with leverage near all-time low. Our stable cash flow gives us many levers to drive shareholder value. Our high-quality, long-term lease portfolio provides significant protections when market conditions are challenging. And our deep supply and operating capabilities allow us to provide unrivaled service to our customers as well as maximize the opportunities for us if market conditions are strong.

I will now open up the call for questions.

(Operator Instructions) And the first question comes from Ken Hoexter with Bank of America.

Maybe just talk a little bit about your inventories. How is it standing with your inventories, your customer inventories. Brian, you mentioned a little bit at the beginning on where your customers stand, but maybe just kind of talk through that a bit?

Yes. So in terms of inventory, we think of it different ways. For us, we focus mainly on container inventories. I'd say as opposed to retail inventories or manufacturing inventories. For container inventories, we've -- the deals we've done recently in July covered a large portion of our existing inventory of new factory containers. We're actively looking to buy more to ensure we can continue to supply our customers with capacity where they need it. But the recent deals have taken a lot of the available factory inventory out of the market for us and other leasing companies, too.

We also look at our inventory of used depot containers, and we have a chart on that in the presentation. And the recent bookings have covered a fairly meaningful portion of that as well, especially for the container types, which are 40-foot high keeps that are most in demand. And so the inventory position for containers has changed a lot. I think John O'Callaghan also referred to inventories in general for, say, retailers and manufacturers, and I think just the question in the industry about whether the recent surge of trade activity and leasing demand primarily relates to the restocking inventory as businesses have reopened or is it also reflecting a more long-lasting improvement in consumption and retail sales and things like that. I'd say at least for people within the industry, there's still some uncertainty on that. But of course, we're hopeful that it's a more sustained type recovery.

And then a follow-up would be on kind of leasing yields seem to take a tiny step down in the quarter both per diem and then annual lease yield. What are your thoughts now given the pickup in demand? Are you starting to see that turn? It sounds like with box prices up at $2,000, maybe that starts to tighten a bit. Maybe your thoughts on lease yields?

Sure. So I'd say market leasing rates for new containers were actually fairly stable during the quarter. There weren't a lot of new transactions during the course of the second quarter, but container prices were fairly stable at just under $2,000. And market leasing rates, again, were stable, too. Our average lease rates came down some in the second quarter, primarily reflecting a few lease extension transactions that we did, giving rate in a few cases in return for getting greater protections, both for short-term drop-offs, but also longer-term duration extensions for the leases. And those are deals that we typically think are good NPV transactions for us, even though they have an effect of lowering our average rates now.

Looking into the third quarter, we have seen market leasing rates go up, reflecting increased prices for container, but just also a tighter supply and demand environment for containers. And so it hasn't been a massive increase in rates, but it's been a meaningful one or a noticeable one, I should say.

And in terms of -- also in the second quarter, probably the leasing yields were impacted by a slight decrease in utilization. If you're looking at say, revenue relative to asset values, but utilization, again, is expected to stop decreasing certainly for the third quarter and turn up.

Wonderful. If I can get 2 more quick ones in. Your units and trading fleet were up significantly in numbers of TEUs and fleet, but very small in terms of growing trading revenues. Is there something in those numbers that would cause that to change? And then just a final wrap up, I'll give you all my questions at once is thoughts on CapEx. You mentioned the $489 million, down significantly, your thoughts as you move forward if you want to give thoughts for the second half there?

Yes. I'll have to look at that, Ken, but I believe the reason for the increase in the units is that we did a sort of a large trading transaction with one of our customers. It was structured as a sale-leaseback, where we buy containers from customers and lease them back. But the containers, in this case, are expected to come back fairly quickly, and so I believe we classified it as trading -- as a trading purchase as opposed to into our leasing fleet. And so it sound like we sort of suddenly have a big pile of containers sitting in our depots that we need to sell. It's more expected to be an orderly return of containers as we sell those containers for the customer. Again, we purchased them for fixed price, and we sell them for what we get and take the margin. But I think that's the difference.

And I'll just add, again it's John, that the equipment held for sale on the balance sheet those units can be both trading units and then go through that accounting, that kind of gross-up accounting of trading revenue and trading costs and our own long-term lease equipment that goes through the gain on sale line item.

And John, do you just want to wrap up too on the CapEx side there?

So -- you mean just in terms of the CapEx for the year...

You mentioned in the release, you have $489 million for the first half, which is below -- well below your normal, as you mentioned in the release. I just want to know if you wanted to give a thought for based on the firming of business, what -- if you want to give any outlook for the second half in terms of CapEx?

Yes. So certainly, the first half CapEx continued to be impacted by just fairly low levels of demand, of course, because of the trade impacts of the COVID pandemic. The first half did benefit from the trading or sale-leaseback transaction I was just describing. Right now, we are actively out there looking to buy more containers. And so we are spending more money and expect CapEx to go up in the second half of the year. It won't get back to where it had been yet in 2017 and '18. There's just not enough factory capacity to go out and buy that level of equipment in 6 months. And as well, just -- I think until there's more certainty on just how long this surge is going to continue. Certainly, we and others, I think, will be a little cautious on going out and committing to big volumes of equipment.

(Operator Instructions) And the next question comes from Michael Brown with KBW.

So just wanted to dig in a little bit on the outlook here. So it sounds like your expectation for a sequential improvement in EPS, is it possible that the second quarter really represents a kind of drop-in EPS for this downturn, obviously, there's potential for unforeseen credit issues, putting that aside, is that the right way to kind of think about it as we start to look into the back half and through '21?

Yes. So certainly, it represents, we think, a near-term trough. We've seen, as we've talked about, a fairly significant inflection in leasing demand over the last -- really, last few weeks as trade volumes improve with reopenings and customers find themselves short of containers. And we've booked enough of our units in both factory units as well as our existing stock of depot equipment that we've effectively locked in a nice improvement in utilization over the next quarter or 2. And typically, other benefits come along with that, including better sale prices and just better growth, of course. And so as we look at, I think, 2020, it feels like the second quarter should be the low point for us. And again, as we talked about in our press release and our commentary that we think that shows really the resiliency and strength of the business model that we could have come through. There have been 2 relatively challenging macro years with 2019 with the trade disputes; 2020 first half, of course, with the COVID pandemic. And if our trough performance is 12% ROE, we feel pretty good about that. I'd say the one thing, though, at this point, relative to other times, we've seen market cycles is this one so unusual. Certainly, for me, I've never lived through a global pandemic, and I think it is harder than usual to feel confident to say that this marks a -- not just a short-term turning point, but a longer one as well. And I think to some extent, that's going to depend on what happens in the world with COVID and with the global economy as we get away from the third and fourth quarter. But certainly, for us, we're hoping that we are -- the economic reopenings are the beginning of a more sustained improvement in global economic and trade activity. But certainly, it's a meaningful inflection in the short term.

Got it. Appreciate all the color there. And then on the customer credit, obviously, it does sound like the financial strength of the shipping lines has been holding up well. And during the quarter, we saw some positive developments regarding some of your bigger customers. So where do you see the major risks now? I guess, what's on your radar and what should investors be focused on monitoring as we look forward?

I think the main thing we're looking at, frankly, is just the macro picture. Again, I think I was just trying to say, I think we -- it just feels the world still isn't yet reached a stable place when it comes to dealing with the pandemic and getting the economy going again. And I think the biggest concern that I have is just that something else happens or we revert to more constrained activity because of the pandemic, and it creates a longer-term global economic and trade challenge.

Great. And then just one more for me. It looks like your tax levels came down from just over $400 million last quarter to about $250 million this quarter, but that's really still well above your last year range where you were kind of in the $45 million to $60 million level. So how should we think about the cash levels on your balance sheet going forward? It sounds like the CapEx opportunities could be better in the second half, but are you also looking to take down leverage further, ramp up buybacks a little more? Or just, I guess, some combo of all of the above.

Yes. So during the second quarter, we drew down some of our revolving facilities just to build cash on the balance sheet. It was during the end of the first quarter. And it really just as a safety precaution. We've got, as John Burns described, a lot of liquidity with existing borrowing facilities and a lot of cash flow and relatively limited bullet payments on our debt. But I just think the prudent thing to do at the time we drew the cash down, the world was just beginning to deal with the effects of the economic and kind of societal shutdowns in the west and the capital markets were in a fair bit of disarray. And so we pulled down some cash just to be more fully in control of our own destiny. As the situation, certainly has not resolved, but certainly, it's become less new and less tangle than it was. We've started to let that cash balance drift down. My expectation is that as long as the world continues to function fairly smoothly, that we'll continue to let the cash drift down towards a more normal level.

And at this time, I would like to return the call to Brian Sondey for any closing comments.

Yes. Thank you. I just want to thank everyone for your ongoing support and interest in Triton, and I look forward to speaking with you soon. Thank you.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.