Triton International Ltd (TRTN) 2016 Q2 法說會逐字稿

Good morning and welcome to the Triton International second-quarter 2016 earnings results conference call.

(Operator Instructions)

Please also note that this event is being recorded. I would now like to turn the conference over to over to John Burns. Please go ahead.

Thank you. Good morning and thank you for joining us on today's call.

We are here to discuss the combined results of Triton International Container Limited, which we will refer to as TCIL, and TAL International for the second quarter. Although the combination of the two Companies forming Triton International Limited did not occur until after the end of the second quarter, we believe providing the combined information best reflects the operating performance of the two entities making up the new Triton.

The combined financial information does not reflect pro forma results on a GAAP basis. Nor does it reflect any purchase accounting adjustments related to the completion of the transaction. GAAP financial statements for Triton, TCIL, and TAL for the period ended June 30, 2016, are included in the press release and in the Triton 10-Q which will be filed on Monday.

Joining me on this morning's call from Triton International Limited is Brian Sondey, CEO, and Simon Vernon, President. Before I turn the call over to Brian, I would like to note that our prepared remarks will follow along with the presentation that can be found on the webcast or in the Investor section of our website.

I would like to point out that this conference call may contain forward-looking statements as the term is defined under the Private Securities Litigation Reform Act of 1995. It is possible that the Company's future financial performance may differ from expectations due to a variety of factors. Any forward-looking statements made on this call are based on certain assumptions and analysis made by the Company and it believes are appropriate, and any such statements are not a guarantee of future performance and actual results may vary materially from those projected. Finally, the Company's views, estimates, plans, and outlooks as described in this call may change subsequent to this discussion. The Company is under no obligation to modify or update any or all of these statements that are made herein despite any subsequent changes. These statements involve risks and uncertainties, are only predictions and may differ materially from actual future events or results. For a discussion of such risks and uncertainties, please see the risk factors located in Triton's registration statement on Form S4.

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

Thanks, John, and welcome to the inaugural investor conference call for Triton International. We have included a presentation to go along with this call, as John mentioned. I will start with slide 3 of the presentation.

We are very excited that Triton International is now successfully launched. The merger of Triton and TAL International closed on July 12, and our combined operations are running well. We continue to expect the merger will result in significant operational and financial advantages and create a large amount of value for our shareholders. On a combined basis Triton and TAL generated $18.4 million of adjusted pretax income in the second quarter and generated adjusted net income of $16.5 million. This combined performance is down significantly from the combined performance in the second quarter of 2015, mainly as a result of the very difficult market conditions we continue to face.

While business conditions remains challenging in the second quarter, we did begin to see improved leasing demand. Leasing demand for dry containers has so far remained solid in the third quarter as well. And we expect our operating and financial performance will improve sequentially for the next several quarters.

Turning to page 4, Triton International is off to a running start. The merger of Triton and TAL has created a clear market leader with significant advantages over everyone else in our business. Our combined fleet size of nearly 5 million TEU gives us roughly a 25% market share of the leasing fleet. The product, regional, and customer strengths of Triton and TAL were highly complementary. Triton International now has the leading position in all the major marine container types. We have tremendous global covered with our sales and operations footprint, and we have a presence and relationships with the world's largest shipping lines that are impossible for smaller and newer companies to replicate.

The operational integration is going well. We developed and communicated a detailed combined staffing plan in the spring. We have already gone through the first round of staffing transitions, and our sales and operations teams and our field offices are already integrated. Systems integration planning has been underway since March, and we expect our operating and financial systems to be fully integrated by the end of the first quarter of next year.

Cost savings will gradually build over the next several quarters, and we are confident that will hit our target of $40 million of annual cost savings. In addition, the combined tax rate of Triton International should reduce over time as a larger portion of our investments are made offshore. Overall, we expect significant earnings accretion relative to what we could have achieved on a standalone basis.

I will now hand the call over to Simon Vernon, who will talk more about the market environment and our operating performance.

Thanks, Brian.

Turning to page 5, we will now look at the current market environment and our performance over the last quarter. Whilst business conditions remained challenging, we did begin to see some improvements after a long period of negative activity. After almost two years of decline, fleet utilization has turned the corner and started to move upward again and continues to do so during the third quarter. Net pickup activity for dry containers was meaningfully positive for the first time since the third quarter of 2014. Activity has been spread across a good portfolio of our customer base, and we expect demand to continue into September.

Lease rates have improved somewhat from the lows we saw at the beginning of the year; however, average lease rates within the fleet continue to come under pressure as leases expire and are renegotiated close to the spot market levels we see today. These are still being negatively influenced by container prices that remain far below the ten-year average. Current newbuilding prices are in the $1,400 to $1,550 range depending on location up from a low of $1,250 during the first quarter. Per diem levels for new long term business remain very depressed due to these relatively low prices and a very competitive environment for long-term new production deals.

The recent pickup in business has been felt across the container leasing sector and has resulted in higher levels of utilization and a decline in depot inventory, especially in China. We have been specifically targeting some of our older containers for lease out, and this in turn has reduced the number of containers being designated for sale. A benefit of this will be a decline in the supply of containers waiting sale, and following further falls in disposable pricing in the second quarter, we are now seeing the first signs of stabilization in pricing. If demand continues into September, and we see more containers being taken out of storage and back into the lease fleet, we should see the supply of boxes being designated for sale reduce further, leaving more opportunity to begin to try and push pricing for disposable containers up again.

Turning to page 6, we believe that the recent demand for containers has been driven more by supply-side constraints, as only very limited new production is being placed during 2016 by shipping lines and leasing companies alike. As you can see from the graph on the left, which shows marine container new production by shipping lines and container leasing companies, we estimate that during the first six months of 2016 less than 600,000 TEU have been built, down considerably from the numbers we saw both in 2015 and in 2014. Container retirements from the Global fleet have continued and are estimated to run at about 1.5 million TEU this year, suggesting that for the last six months the overall Global fleet of containers has, in fact, probably been shrinking. Supply-side discipline, and the fact that very little speculative buying has taken place during 2016, has helped the market to stabilize, even though containerized trade grades remains at very anemic levels.

The graphs on the right side of page 6 show how margins have compressed for container manufacturers, given the very competitive environment they face, driven by the overall lack of demand for new containers. It suggests that if steel prices stay roughly where they are today, at about $400 per ton, when demand returns to the market, then the factories will do everything they can to restore margin at more historically acceptable levels, which should put container prices up by several hundred dollars. This in turn should have a positive effect, especially for per diem levels within our existing fleet, as leases come up for renegotiation or are placed back on lease ex depot. Given the very challenging market and depressed returns, Triton has had a modest year to date for new production, concentrating on what we believe are better-yielding sale and leaseback deals. We have, however, recently seen some opportunities for the first time in a long time to build again in strong demand areas where there currently is no meaningful availability of either depot or new containers.

Lastly, turning to page 7, you can see that Triton's lease portfolio provides a great deal of cash flow protection with close to 80% on multi-year long-term or finance leases with an average remaining duration of approximately 36 months as of June 30. It is also important to note that because of our close attention to negotiating attractive redelivery locations in leases and our ability to move containers on one-way leases with cargo and logistics providers, over 90% of our available off-leased inventory is in Asia, on the doorstep of where virtually all the main demand for containers is found. This has helped us enormously to capitalize on the recent uptick in demand for containers from our main shipping line customers.

I will now hand the call over to John.

Thank you, Simon.

Turning to page 8, as noted earlier, the financial information provided in the press release and discussed on today's call represents the aggregate of the individual results of Triton Container International Limited, or TCIL, and TAL. These combined results do not reflect pro forma results on a GAAP basis, and do not reflect all transaction related expenses or any purchase accounting adjustments, since the transaction was completed after the end of the quarter. The combined operations of TCIL and TAL generated adjusted pretax income for the second quarter of $18.4 million, down 77% from the prior-year quarter, reflecting an accumulation of the weak demand environment we've experienced during 2015 and the first part of 2016. The second quarter adjusted pretax income excludes $5.8 million of transaction-related expenses.

Turning to page 9, the $63 million decline in second-quarter adjusted pretax income from the prior year was driven by three main items: decreasing leasing rates, decreasing utilization, and lower disposal prices. The decline in the combined average lease rates negatively impacted the second quarter results by $26 million compared to the prior year, as leases were repriced or containers returned from high rate leases. Unless container prices increase significantly, we will continue to face repricing pressure as a large number of high-priced leases written in 2010 through 2012 expire. The weak demand environment which developed in 2015 and continued through the first part of 2016 has led to a decline in utilization, which negatively impacted the combined leasing revenue and operating costs by $14.8 million. As Simon noted we have experienced an upturn in container demand over the last several months, and if this increased demand continues through the peak season, utilization should increase further, which would allow us to recapture some of this impact. The third measured driver of the decline in the combined earnings is the roughly 28% drop in disposal prices, which led to a $27.1 million increase in the loss on sale, up from the prior-year quarter.

We think of the change in disposal income in two buckets. First is the impact of designating containers coming off hire as disposal candidates. And at the time units are moved to sales status, we mark the unit's book value down to the estimated disposal price. This impairment of the book value is recorded as a loss on sale on our income statement. This impairment of [units] flowing from the lease fleet into the sales fleet for the combined Companies accounted for $15.3 million of the negative change from the prior year. Looking forward, we anticipate the improvement in demand should reduce the volume of units been designated for sale, and therefore we expect some improvement in this item.

The second bucket represents the ongoing mark-to-market, reflecting further declines in sale prices for units previously moved into sales status. This represented $11.8 million of the change in the combined adjusted pretax income from the prior year and is also included in the loss on sale on our income statement. The impact of this mark-to-market is largely related to TAL's much larger inventory of sale containers. This impact will go away as disposal prices stabilize, even if they were to remain at current low levels.

Another item worth noting but not included on this slide is the low effective tax rate. The combined adjusted net income in the earnings release reflects a 10% effective tax rate. This was an anomaly for the second quarter, as we had lower earnings at TAL's 35% tax rate due to the negative mark-to-market and TAL's larger sale inventory. As disposal prices stabilize we anticipate earnings from the two entities will be relatively similar in the near term, which would result in a combined effective tax rate of roughly 20%. Over time we expect the combined tax rate to decline, as a larger portion of our CapEx will be made through the offshore entity.

On page 10 is a summary of the combined June 30 and year-end balance sheet. Limited investment year to date has resulted in a decrease of revenue-earning assets and a corresponding reduction in our debt balance and related leverage. The combined accounts receivable balance remained relatively flat, as collection performance has generally remained strong. However, our shipping line customers are experiencing very difficult market conditions, and several are in active financial restructuring discussions, leading to a continued elevated level of credit risk, which will remain the case until freight rates and the financial performance of our customers improves.

Turning to page 11 -- here we show the combined cash flow statement for the six months ended June 30 and the prior-year period. Despite the challenging market conditions and the significant decline in adjusted pretax earnings, operating cash flows were down only 15%. These strong cash flows, together with reduced levels of CapEx, enabled us to reduce our debt balance by over $200 million. Turning to page 12 -- here we are presented a table that highlights the combined Companies' well-structured debt facilities. As shown here, our debt maturities are well-staggered, and we have no significant near-term maturity cliffs. We are also well-protected from an increase in interest rates, with either long-term fixed-rate debt facilities or interest rate hedges covering the majority of our outstanding debt. We are also pleased that S&P has assigned the combined entity a BB-plus corporate rating and affirmed the BBB-flat secured rating for TCIL and a BBB-minus secured rating for TAL, all with a stable outlook.

Turning to page 13 -- as we have discussed since the announcement of the transaction, we expect to achieve $40 million in overhead savings as we bring the Companies together. Approximately $30 million of the savings will come from reduced direct employee-related costs, as overlapping commercial, operating, and back-office positions are eliminated. We expect approximately 60% of these employee savings to be in place by this year end and the remainder to be completed by the second quarter of next year, as they are tied to the completion of our systems integration. The remaining $10 million of savings represents a reduction in office space and various other office overhead cost, and we expect the timing of these savings to be relatively consistent with the employee-related savings. We also expect to achieve cost savings in the operating aspect of the business through [deplus] synergies and related efficiencies, though we have not included this in our $40 million cost savings estimate.

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

Thanks, John. I'll now wrap up our presentation, starting with slide 14.

As I mentioned earlier, we expect improved leasing demand to continue in the third quarter. This should lead to improved utilization and some improvements in pricing trends, though the absolute level of lease rates in these container sale prices remain historically very low. If solid leasing demand continues through the traditional summer peak season, we expect our combined financial performance will improve from the second to the third quarter.

Improving utilization will benefit both our revenue and operating costs. Merger cost savings will build quarter-to-quarter and stability or an improvement in used container sale prices would significantly reduce the combined loss on sale by eliminating the large negative mark-to-market on our existing inventory of used containers held for sale.

Page 15 shows our expectations for a combined financial performance excluding the impacts of purchase accounting and restructuring charges. We expect our financial performance to at least hold steady from the second quarter to the third quarter, as long as the improved leasing demand doesn't quickly reverse course. And we could see our combined performance rebound more meaningfully and push back above the first-quarter level by the end of the year if solid leasing demand is sustained through the fall.

Wrapping up on page 16, we are very excited by our recent merger and believe the merger will create significant value for our shareholders. There is no doubt that we are going through a very tough period in the shipping industry, but leasing trends have improved. Our business also remains fundamentally sound; and with our merger, we have positioned ourselves squarely at the top of our industry. Trade growth is slow, but there's still no substitute for containerized shipping. The supply and demand balance for containers is adjusting to the current slow growth environment, and we have clear cost, capability, and customer relationship advantages that we can use to outperform our peers over the cycle.

I would like to thank all of our customers, employees, business partners, lenders, and investors for helping us successfully launch Triton International. I would now like to open up the call for questions.

(Operator Instructions)

Doug Newheider, SunTrust.

Good morning, this is actually Matya Rothenberg on for Doug. Thank you for taking my questions. Based on current price is what are expectations regarding impairments and losses on sale for the rest of the year?

We don't like to give specific line item forecasts when it comes to sub components of the financial statements. That said what we're saying is that if sale prices remain in the range where they are, then we expect the component of our losses that was represented by a mark-to-market of the existing inventory to shrink significantly or even go away.

And that should have a big impact on sale losses. In addition as Simon described, one of the things we're doing is using the current rebound in leasing demand to really focus on pushing our older containers back out on lease, which slows the volumes of containers moving from the leasing fleet into the sale fleet.

And so even if we say prices don't increase much and you still have similar per unit levels of losses, the fact that we are slowing the flow of containers from the leasing fleet into the sale fleet would have a benefit on the loss line as well. The combination of those two things, the mark-to-market going away or shrinking significantly and the flow of containers flowing down into the sale stack, that's one of the main drivers that would lead to an improved financial performance for the combined operations if we see leasing demand continue.

And then since you already marked TAL's fleet, or you are marking it down already, is that why or one of the reasons why impairments are going to be lower?

No. You're talking about purchase accounting?

Yes

The -- were addressing this on an operating basis and as Brian noted it's about was going on with prices. Again the key is if prices stabilize even at this level, as noted in the presentation $11.8 million was the declining prices and is applied to the sales stack. If prices are stable that $11.8 million goes away.

Maybe just one thing to note is for the existing inventory of container for sale just operator basis we mark that to market so there won't be any further purchase accounting impact on that portion of the fleet again because it's already been marked.

Okay thank you

Helane Becker, Cowen.

Thanks, operator. Hi, guys. Thank you for the time. I just have three questions, one is the share count going forward is that the 100 million that we should be using?

No, 74 -- 174 million. And did you say, John, that you are going to put out the 10-Q on Monday and then in that include the full pro forma for the prior quarters? I noticed in the appendix you have some numbers for the future quarters, slide 19 specifically, but are you going to give us prior years? No, Helane, we are going to produce in the Q and as it was in the earnings release, the TIL which was the HoldCo before the completion of the merger and the separate entities TCIL and TAL separate financial statements for the three entities. Both in -- those were in the earnings release and [slightly] --

I saw that.

-- in the Q.

And so the [TIL] that John mentioned the HoldCo -- like in the earnings release the Q will just show it's pre-deal set up which was quite a limited operation. Okay. And just for a point of clarification, the pro forma is in the presentation I think actually the second quarter rather than the forward-looking. We just kind of remarked the second quarter as if the transaction had happened, but it was the second quarter financial.

Right, so it was the just for the second quarter not the first quarter?

Correct.

Right. And then but slide 19 where you have projected purchase accounting impacts on an annual basis, those are numbers that are good for us to use?

They are estimated numbers. They'll be rough numbers, that's correct.

Okay, and then my last question is you're not earning the dividend right now, but is that -- I'm just kind of wondering if your comments, Brian, that maybe we're bouncing along a bottom perhaps even starting to see signs of improvement gives you confidence and gives the Board confidence that you will be earning the dividend by the end of the year, or you know how should we think about how you guys are thinking about that return of capital?

Sure. I'll just say first of all we continue to view our dividend as a major part of the value proposition we give to our shareholders and because of that we certainly put a high priority on maintaining it. As John pointed out in his comments we continue to generate a lot of operating cash flow, and the operating cash flow is quite about more stable than our accounting earnings.

As you point, Helane, certainly the dividend is currently outsize compared to our accounting earnings. But again as you point out leasing demands are starting to improve, and frankly we're hopeful that at some point here market conditions have to eventually get better.

All the market trends can't continue to be negative forever, and so we have certainly the cash flow capacity to maintain the dividend for quite a while, and then we're hopeful that were seen market conditions at least starting to turn the corner, and so we thought it was the right thing to do is to keep paying the dividend.

Obviously if market conditions quickly reversed course and head back south and the very tough environment continues indefinitely at some point we are going to have to relook at the dividend, because obviously it should be in context of our earnings as well. But given our cash flow and given what we see is a few bright spots out there we thought -- we thought we will keep it where it is.

Okay. And I promise last question, you are much more positive than your peer group was earlier this week. Do you think that's because your size just gives you the first call all the time and I don't know makes it -- gives you that more -- slightly more optimistic outlook?

I guess first I want to clarify while we're seeing some positive trends in the market, and we're very pleased with the benefits were going to get from the merger, but there is no doubt it is still a very, very tough environment out there. One of the longest deepest tough periods that the shipping industry -- at least the container shipping industry has ever seen, and so we're certainly not saying that conditions are good.

I think though as we said in the comments and I mentioned a few minutes ago that we have seen a number of nice changes. We've seen wide spread leasing demand for the first time in about two years, and I think our competitors are seeing that same thing.

We're working very hard to make sure that improvement in leasing demand is translating into efforts on the container sale market. I think we're also just seeing -- and [maybe confident in] what we've always talked about which is that the supply side for containers adjusts relatively quickly and so that we don't suffer typically unending cycles of long overcapacity.

So I think we're just saying that we're seeing things improvement at the margin. We are able to use that I think to improve some of the drivers that we are pushing our performance down, and but again it is still tough market out there. Perhaps the one difference that you'd also mentioned is we also have some positive news going on internally.

We do expect the cost savings from the merger to build sequentially to be quite nice contributor to our performance. We expect operating synergies as John mentioned that we haven't even tried to quantify yet.

I do think that there are customers especially the biggest customers that really value our supply capability. And in situations like this one where customers maybe are finding themselves short on a spot basis across the network are being able to come to someone that can be meet all those requirements is useful for them.

Great. Thank you. Thank you so much for the time.

Thanks.

Ari Rosa, Bank of America.

Hey, good morning, guys. So first question just wanted to ask given the timing of the debt maturities, what do the credit markets look like you right now, and do you guys have a sense for how open they might be and what kind of rates you might be looking at. If you do look to refinance some of that debt?

Yes sure. Generally the markets remain good. They're not as strong as they were a couple years ago, but I think both the ABS market which TAL historically has used for [term-out] transactions and the private placement which TCIL used historically, have come in improved from their levels through the fall and the spring, and generally we think they're both open.

I think the one thing I would note, though, is we have seen I'd say at least increased caution among lenders that typically lend into to the space, while the banking group as John mentioned has been very supportive of us of both TAL and Triton prior to the merger. Both raised a significant amount of new bank loans, but we do here in our conversations with them that there is a greater level of caution around the space than there had been in the past.

And similarly while, as John points out, the ABS spreads have come down a little bit they're are still pretty high relative to where they've been. I think investors are waiting to see what happens with the recent trends and same for the banks. We're hopeful at least -- and something we've heard from some of the bank lenders is that they, once again, are starting to discriminate among who they want to lend to.

For us of course the perfect situation is that the lenders are willing to lend Triton money but are quite cautious on lending downmarket especially as you to get to midsize and smaller players. We are going to have to see how plays out, but again markets are open, but we are hopeful at least that some caution and some discrimination is returning to the markets.

Okay great thank you for that answer. And just turning to the supply/demand picture a little bit, obviously new container orders have been depressed for some time but like how does it -- how long does it take for the install base to kind of work it's way work its way to a more balanced level assuming kind of current container rates? What's your perspective on that?

It's Simon here. I will address that. I think really as far as we've been concerned over the last few months we've been very much concentrating on our in fleet containers not so much looking at the new production environments.

And as I think both myself and Brian alluded to, we've put a lot of focus on moving depot stocks particularly out of China where the vast majority of our inventory is, getting those containers out of storage and moving those containers back into lease streams. We've been more focused on that and less interested in adding to what we see as the oversupply situation in the market or the slight oversupply situation in the market by concentrating on a big [pack] CapEx program and adding to new production.

We believe there's something a little over 500,000 TEU of new production in the factories at present. In a normal year that would be something like two-months supply even less than two months supply in the peak season, so numbers are down at much more manageable levels now. We've seen numbers at over 1 million TEU in the factories over the last two years.

So as I said in my comments I think there has been some real discipline just in terms of the new production situation, and we're in a much better position that we were a number of months ago with the supply side certainly in the factories at much reduced levels and a lot of containers either already moved out of depots in China or booked to be moved out in the next four to six weeks.

Okay great and then just last question turning to the demand side, you've seen this recent uptick in demand you say, what gives you confidence that's sustainable as opposed to something seasonal or idiosyncratic?

I think at present, as I think both Brian is that I have said it is seasonal. A lot of the statistics we've seen earlier on in the summer weren't particularly attractive just in terms of volumes of cargo moving out of China, but we have seen better demand during the course of August.

Certainly from our perspective we are reasonably confident because of the feedback we are getting from our main customer base. And certainly shortages, requirements for containers are expected as we go through the end of the third quarter. We do expect that the slow season particularly in the main east-west trades will start to manifest itself as we get into the last quarter.

But then what usually happens is an uptick in demand amongst the inter-Asia carriers. So really at present, because of the fundamental weakness that's in the marketplace, we're seeing a pickup in demand through into the fourth quarter. But beyond that I would say the Outlook to the market still remains somewhat uncertain.

I think maybe I would just add to that, what we're really seeing and saying is not that we're seeing a real surge in demand. I think in terms of driven by fundamental cargo growth we're seeing it as just the container supply is finally catching up or really catching down to where the level of trade growth is.

And while Simon was describing we expect relatively typical seasonal rhythm to occur, what has changed on more of a sustained basis is just the supply of containers has come back down to be a more appropriate level given where trade volumes are.

So sounds like it's mostly a market rebalancing -- or in the process of rebalancing it sounds like?

For sure.

Okay great, thank you.

(Operator Instructions)

This concludes our question-and-answer session. I would now like to turn the conference back over to John Burns for any closing remarks.

Thank you for your interest in the new Triton and for joining us on today's call. I'd like to take the opportunity at this time to note that we are planning to have an Investor Day for investors and analysts in late September in New York, and we will be providing further information over the next week or so. And I will turn it over to Brian for some final comments.

I'd just like to thank everyone for your continued support of the Company, and I look forward to hopefully see many of you at our Investor Day. Thanks very much.

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