Triton International Ltd (TRTN) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Triton International Limited Fourth Quarter and Full Year 2018 Earnings Release Conference Call. (Operator Instructions) Please note this event is being recorded.

At this time, I would now like to turn the conference over to Mr. John Burns, Chief Financial Officer. Please go ahead, sir.

Good morning, and thank you for joining us on today's call. We are here to discuss Triton's fourth quarter and full year 2018 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 Executive Vice President and 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 on our website in the Company Presentations section.

I would also like to point out that the company will be making statements on this conference call that are forward-looking statements as the term is defined under the Private Securities Litigation Reform Act of 1995. Any forward-looking statements made on this call are based on certain assumptions and analysis made by the company and are not a guarantee of future performance. Actual results may vary materially from those expressed or implied in the forward-looking statements.

The company's views, estimates, plans and outlook as described in this call may change subsequent to this discussion. The company is under no obligation to modify or update any of these statements that are made despite any subsequent changes. These statements involve risks and uncertainties and are only predictions. A discussion of such risks and uncertainties is included in our earnings release and presentation as well as our SEC filings.

In addition, certain non-GAAP financial measures will be discussed in this call. And per SEC rules, a reconciliation of these non-GAAP measures to the equivalent GAAP financial measure is included in our earnings release.

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

Thanks, John, and welcome to Triton International's Fourth Quarter 2018 Earnings Conference Call. I'll start with Slide 3 of the presentation.

Triton's strong performance in the fourth quarter of 2018 provided a great finish to an outstanding year. Triton generated $99.4 million of adjusted net income in the fourth quarter or $1.25 per share, an increase of 7% from the third quarter and an increase of 47% from the fourth quarter of 2017. We also achieved an annualized return on equity of 17.7% in the fourth quarter. For the full year of 2018, Triton generated $363 million of adjusted net income or $4.52 per share, an increase of 63% from 2017. Our return on equity was 16.7% for the full year.

Our strong financial results in 2018 were driven by favorable market conditions and outstanding operational performance. And we continue to leverage our scale, cost, supply and operating capability advantages to go faster than our market while also driving industry-best investment returns.

Leasing activity slowed in the fourth quarter, following the end of the peak season for dry containers. And the ongoing trade dispute between the U.S. and China is creating uncertainty. But we expect demand will improve seasonally as we move into the spring. And we expect to achieve another year of outstanding operational and financial performance. We have also continued to use our strong and stable cash flow to create shareholder value in multiple ways, including strong organic growth, our substantial dividend program and share repurchases.

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, 2018 was a very strong year for us in terms of business performance and investment with utilization averaging 98.6%. Due to continued steady container growth in 2018, we did well in part because of our competitive strength and position in the market, but also because our customers did not buy containers in meaningful numbers and therefore mostly relied on leasing.

In 2018, we purchased $1.5 billion worth of containers, growing our revenue-earning assets by 8.8% and placing these on leases with a duration of approximately 7 years. Activity slowed in the fourth quarter and we did see increased drop-offs as lines balanced their fleets, but our utilization rate strong at well over 97%. New container prices dropped to $1,700 due to lower steel prices and aggressive competition amongst manufacturers because of the limited volume of slow season orders.

We estimate that the manufacturers are pricing containers at not much more than the production cost, which we believe is difficult to sustain. We are now heading into the time of year when business activity starts to pick up and most customers are expecting trade growth to remain positive in 2019. Utilization remains high, factory inventory is at reasonable levels as both leasing and shipping companies curtailed placing large orders over the fourth quarter. Due to ongoing financial challenges, we're expecting our customers to again mostly rely on leasing through 2019.

Slide 5 shows Triton's key operating metrics. The metrics show the strong operating performance we achieved through 2018. As mentioned, the fourth quarter was seasonally slow, and you can see that the drop of activity was negative in that period. But despite being mostly through the slow season, utilization was only slightly down but remains high at 97.6%. We continue to be optimistic about 2019 as do our customers. We are again well positioned to service their requirements as the busier season approaches.

Slide 6 looks at the key measures of container supply and demand. The top charts look at our key demand drivers, trade growth and leasing share. The upper left chart shows global GDP growth and estimates for global trade growth. Estimates for 2018 is that market grew between 4% and 5%. The container trade expectations from forecasters and our customers is that growth for 2019 will remain in the 4% range. But uncertainty is higher than this time last year due to the ongoing trade disputes. We continue to expect our customers to rely heavily on leasing due to continued financial challenges and as they focus their capital investment elsewhere.

The upper right chart shows the growth and evolution of the global fleet. You can see that the share for leasing went from 40% to 50% over a 10-year period. We expect that the leasing share for new container additions in 2019 will remain well over 50%. The incremental demand for our containers from the lines as well as taking share from the leasing companies through 2018 enabled our strong growth. And we anticipate the shift in mix from owned to a demand for leased containers continue in 2019.

The bottom 2 charts are measures of supply. On the left, factory inventory decreased in the rush to beat the September tariff cutoff to just over 600,000 TEU and then increased to just under 800,000 TEU, which is only 2% of the total global container fleet. The chart on the right is Triton's availability of used containers in Asia. We started to build some inventory due to the slow season off-hires. But overall, the numbers remain very low, indicated by our utilization, which remains high at 97.6%. Overall, the combination of trade growth, controlled supply and an increased shift to leasing creates a strong backdrop for the overall fundamentals to remain positive.

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

Thank you, John. Turning to Page 7. On this page, we have presented our consolidated financial results. Adjusted net income for the fourth quarter was $99.4 million or $1.25 per share, an increase of 7% on a per share basis from the third quarter. And we finished the full year of 2018 with adjusted net income of $363 million or $4.52 per share, an increase of 63% over the prior year. The strong results represent a return on equity of 17.7% for the fourth quarter and 16.7% for all of 2018.

Turning to Page 8. Our outstanding results in 2018 were driven by several factors, including fleet growth. We invested $1.5 billion, purchasing over 600,000 TEUs of new and used containers, growing our revenue-earning assets by 8.8%. This solid growth was driven by the roughly 4% to 5% trade growth, the continued shift to leasing from ownership by our shipping line customers and another year in which our competitive advantages enabled us to capture an outsized share of the leasing transactions. This fleet growth, together with continued high utilization, drove a 16% increase in leasing revenue.

Utilization averaged 98.6% in 2018, up 1.6% from the prior year and remained high through the fourth quarter, ending the year at 97.8%. In addition to the revenue benefit, these high levels of utilization kept our direct operating expenses very low. Operating expenses, which are largely made up of storage for off-hire units and repairs for containers we delivered were $32.7 million in 2018, down $14.6 million from 2017.

We also benefited from strong gains on sale and trading margins, which on a combined basis were $56 million in 2018, up $14.3 million over the prior year. These gains were driven by a 21% increase in dry container disposal prices and several block purchases of trading containers.

In 2018, our adjusted net income also benefited from 2 noncash items. First, the runoff of the purchase accounting adjustments related to our merger in 2016 provided a $21 million net benefit in 2018. And we expect this benefit to grow over the next several years. Second, our adjusted GAAP tax rate declined to 10.6% in 2018 from 18.3% in 2017.

Turning to Page 9. On this page, I'll provide a little more detail on the improvement in our effective tax rate. As I noted, our 2018 effective tax rate was 10.6%. And this has declined further in the fourth quarter to 9.4%. And looking forward, we expect the effective tax rate for 2019 to be in the 8% to 9% range.

The biggest change in our effective tax rate from 2017 to 2018 was a result of the tax legislation passed in December 2017, lowering the U.S. corporate tax rate from 35% to 21%. In addition, since our merger in 2016, we have placed a majority of our new container investments in our Bermuda subsidiary. And in 2018, we sold $700 million of containers from our U.S. subsidiary to our Bermuda subsidiary.

Although this was an intercompany sale and was eliminated from our pretax consolidated results, we were required to record a $24.7 million tax provision to increase our deferred tax liability. Because this was an intercompany transaction with no impact on our operations, we have excluded the $24.7 million tax provision from our adjusted net income.

Turning to Page 10. This page highlights our strong and stable cash flows that enable us to grow the fleet and maintain a strong balance sheet while paying a substantial dividend. The graph on the top left shows our annual cash flows before CapEx. The chart shows strong growth in cash flows as we've grown our fleet over an extended period. The graph on the bottom left highlights the significant discretion we have in timing our fleet investment and therefore our ability during market downturns to quickly curtail capital expenditures, enabling us to delever during these periods.

The graph on the right demonstrates the benefit of these strong and stable cash flows. Over the last 13 years, we have grown a market-leading business while paying a substantial regular dividend. If you combine the growth in our book value with the cumulative dividends, we have generated over $45 of value per share, representing a compounded annual growth rate of over 13%. And this excludes the compounding value of reinvesting dividends.

Turning to Page 11. This page highlights our well-structured and conservative approach to financing our business. We limit our exposure to rising interest rates by focusing on long-term fixed rate debt and using interest rate swaps to lock in interest rates on our floating rate debt facilities. We focus on staggering our debt maturities to avoid significant maturity cliffs.

During 2018, we completed $3.1 billion of financing, enabling us to fund the 8.8% fleet growth, the intercompany container transfers and to continue to extend our debt maturities. The competitive pricing on these financings, together with our long-term fixed rate facilities and interest rate swaps, minimized the impact of the increase in short-term rates in 2018. Our effective interest rate for all of 2018 was 4.4%, up only 25 basis points from 2017. And we expect our effective rate will remain in this range for the first quarter of 2019.

In August last year, Standard & Poor's revised the outlook on our BB+ corporate rating from stable to positive. We think this revision in our outlook, together with the potential for an upgrade to BBB- investment-grade rating, is recognition of our market-leading position, our strong and stable earnings and cash flows, along with our conservative approach to financing our business.

I'll now return you to Brian for some additional comments.

Thanks, John. I'll continue the presentation with Slide 12. Triton's strong cash flow gives us multiple levers to drive shareholder value. In 2018, we generated over $5 per share in adjusted pretax income. We used just under half of our pretax income to grow our revenue-earning assets 8.8% while maintaining constant leverage. We generated high-quality leases for these assets that had attractive expected lifetime returns and average initial durations of 7 years. This asset growth increases the future earnings potential of our business.

Triton's substantial dividend program also remains an important driver of shareholder value. We pay just over $2 per share in dividends in 2018. These dividends represented a 6% yield compared to our average trading price during the year. And finally, we repurchased 2.4% of our shares during 2018, further increasing our future earnings and value per share.

I'll now wrap up the presentation with a few summary comments on Slide 13. Triton achieved outstanding results in the fourth quarter of 2018, and we had an excellent year overall. We achieved strong financial and operating performance, and we continue to leverage our many advantages to win more than our fair share of new transactions while also driving industry-best investment returns. We expect our adjusted net income will decrease from the fourth quarter of 2018 to the first quarter of this year since the first quarter represents the depth of the slow season for dry containers and has the fewest number of revenue days.

Looking deeper into 2019. We expect our profitability to increase moderately from the first quarter through the rest of the year as container demand improves seasonally. The ongoing U.S.-China trade dispute is creating uncertainty. But we remain optimistic that we will achieve another outstanding year.

We are starting 2019 with significant financial momentum. Our customers and market forecasters continue to expect trade growth will remain solidly positive this year. We expect our customers will continue to rely heavily on leasing. We have significant advantages in our market. And our strong and stable cash flow gives us many levers to create shareholder value, including strong organic growth, a high dividend and share repurchases.

We'll now open up the call for questions.

(Operator Instructions) And our first question comes from Ken Hoexter with Merrill Lynch.

Just on Slide 6, John, you had mentioned the build of inventory in Asia. Just want to get your -- maybe a review on that. Why is that not more concerning if we start seeing that build to these levels?

Well, what's been interesting is since 2016, we've had demand all the way through to 2018. And normally, there is a cycle, there's a slowdown at the beginning of September and then post Golden Week, which takes us through to Chinese New Year. So we've had 2 exceptional years, where that hasn't actually happened. But now this cycle is reasserting itself, so there's really no surprise. And sort of the content that we've got is pretty low compared to our overall fleet. And we have got no real concerns about that.

Yes, just, Ken, to put it in perspective, I think the slide that you're referring to shows that we have or had just under 100,000 TEU off-hire in Asia at the end of the year. Our fleet includes 6.2 million TEU or so, so it's still a pretty small component of our fleet as reflected in the fact that utilization remains on the upper 97% range.

No, it's helpful. I mean, it was a solid performance. But I guess, back to John Burns, you mentioned the lease is now over -- or the recent ones were up to 7 years. Is that an extension from recent contracts? Is that -- maybe you could just give a little description on how that's trended.

Yes, Ken, that referred to the initial durations for the new containers that we're putting on-hire. And so we've made it a priority to extend the initial durations on the leases that we're writing just to help reduce exposure to changes in market conditions and reduce volatility. And I'd say probably a few years ago, the average initial durations were probably just over maybe somewhere between 5 and 6 years. And we've been able to extend that out to 7. And that's consistent actually over the last few years, we've been able to do that.

Is there any change in rate adjustment for that? Or I mean, yield seemed to be relatively strong. So I don't know if there's -- do you have to adjust your return on the initial box or not necessarily?

So there certainly is a relationship between lease rate and lease duration. And actually, the magnitude of that correlation depends on how expensive container prices are and whether market lease rates are above or below people's expectations for, say, maybe long-term averages. But generally speaking, you give a little bit of rate to get a little bit of extra duration. But it's been a good market for leasing companies over the last few years. And so we've been able to push that through with, I think, still preserving very attractive expected lifetime investment returns.

And then I guess, just 2 to wrap up for me. Brian, you noted a sequential decline in the first quarter. I think it's been a while since we've heard that from an outlook for you. Is that really just due to the trade concerns? Or maybe is there anything underlying on the economy that you think about as well?

Yes. So I'd tell you, we haven't -- I think as John O'Callaghan mentioned, from the summer of 2016 really right through the fourth quarter of 2018, we saw kind of a straight line upwards in terms of leasing activity but also in terms of our quarterly financial performance. And I think what we just saw there is that the cyclical recovery from the very challenging markets in 2015 and '16 outweighed this seasonality. And so I think this seasonality was still there, but it was just again overwhelmed to some extent by the cyclical improvement. And so I'd say probably in the last 10 or 12 years, if I had to guess, we've seen decreases from the fourth quarter to the first quarter in probably something like 2/3 to 3/4 of those years. We didn't actually count them. But that would be my guess. So I wouldn't say it's something that's unusual for us. Certainly, the business activity slowed pretty quickly from the end of September into October and has remained, I'd say, at a relatively slow pace since then.

It's always a little bit difficult this time of year to untangle exactly what's driving it because we typically, in most years, don't see a lot of activity this time anyway. And so I think to us, our take is it generally feels pretty normal. We talk to our customers. Most of our customers continue to expect their businesses to grow something in the 4% to 5% range in 2019. I think there's some talk about whether -- perhaps there was some front-running volumes that might have normally moved in the fourth quarter up into the year to avoid the tariffs that were being imposed on trade from China to the U.S. But overall, I'd say we look at the backdrop for the market, the expectations for moderately positive trade growth, our expectations that customers will continue to rely heavily on leasing, the fact that now that we're something between, say, I don't know, 70% or so through the slow season and utilization remains in 97.6% or whatever it is, it feels like we're heading into a pretty good environment.

Okay. And then just one last one on tax, the noncash -- wait, is that noncash impact, John, the transfer of the assets? Or is that a taxable event?

This is a noncash transfer, so it's -- and that's why we excluded it from internal transfer between our U.S. and Bermuda subsidiary in a noncash item.

Yes. And then maybe just to clarify that a little bit, it was noncash to us. It was a taxable transaction because it was a transfer of jurisdiction from the U.S. to Bermuda. But because we have significant NOLs in the U.S., there was no cash effect on us.

(Operator Instructions) And next question comes from Helane Becker with Cowen and Company.

This is actually Tyler on for Helane. So just to kind of piggyback off of the last question. So obviously, it seems like the 1Q guide is mostly due to seasonality. But I'm wondering, is the magnitude of decline kind of bigger than what you saw in 2/3 out of those years, where the sequential decline from 4Q to 1Q a little bit more severe due to the uncertainty with U.S.-China and Brexit? Or is it typically in line with those prior years?

That's a good question. We probably should have done that analysis, but I can't answer how it compares in magnitude. But there's a number of things that's behind the sequential decrease. One is just we're another quarter into slower activities. So the off-hires that accumulated in the fourth quarter and the decrease in utilization, you get a full quarter impact of that in the first quarter. The other thing that's actually always just a function of the calendar is that there's 2 fewer days and we charge for our containers on a per diem basis while many of our expenses, including interest expense and others, are not calendar day-driven. And so we see profitability compress always in the first quarter for that reason. I'd say just our take on it is it feels relatively normal to us, the decrease in profitability from Q4 to Q1. But it's certainly -- our expectation is that it will be down.

I'd say in terms of the comments we've made about uncertainty from the U.S.-China trade dispute, I think that really refers more to where we go from the first quarter. And as we've mentioned, our customers are planning and then expecting that their businesses are going to grow this year. But I'd say if you asked our customers this time last year, I think that degree of confidence around that growth was very high. I think if you asked customers or anyone involved in global trade these days about growth, I think there's an expectation that it's going to happen. But I think the confidence around just what to expect for the year is lower because of the uncertainty from -- the direct uncertainty in what the U.S.-China trade dispute might do to tariffs and trading volumes and then I think the indirect uncertainty about what it does to business investment and the economy in general.

Got you. And then my next question is for John. Just looking at the balance sheet and the accounts receivable line, it kind of looks like there was a pretty big jump from 3Q to 1Q and then there was a pretty meaningful decline in payables also from 3Q to 4Q, so do you have any more color on that? Or how should we be thinking about those 2 line items moving forward?

Yes, good question. On accounts receivable, we had a couple of customers, one that we worked with proactively in exchange for a delayed payment into January to do that exact thing. They subsequently paid in January. We had a couple, and we see it somewhat often at the end of the year, where people are doing window dressing on their own balance sheets and we get their December payments in January. So we had a very big collection in January and eliminated any concern about collectibility of those accounts. And the receivables were back in line. On the payables side, I don't think anything unusual there, just the normal processing of our payables.

And our next question comes from Michael Webber with Wells Fargo.

This is Greg on for Mike. So first question, how have box prices trended since Q4? And along these lines, how have yields trended? And where would you put the market range for yields on new boxes right now?

Yes. So box prices have gone down since, say, September. And I think for most of 2018, 20-foot dry container prices ranged from $2,100 to $2,200. As I've mentioned briefly to an earlier question, we saw business activity in terms of pick-up volumes and new container transactions filled pretty quickly as we got from September into October. Again, our take being that, that was mostly the seasonality and perhaps the front-running of cargo from the fourth into the third quarters. And what we've seen since then is that the volume of new container orders has gone down correspondingly. And so that has had an effect on pricing for the manufacturers. In addition, steel prices in China for most of 2018 were somewhere in the low to middle $600 per ton for hot-rolled coil. And that index that we follow is down something in the $75 to $100 range as well. And so we've seen container prices go from that $2,100 to $2,200 range for most of 2018 all the way down to $1,700 or thereabouts recently. And it reflects -- I'd say slightly less than half of that is because of the steel price decrease and slightly more than half reflects a compression of the selling margins that the container manufacturers are getting as they all sort of chase the limited amount of slow season orders that are out there.

I think John O'Callaghan mentioned briefly that our view is that right now, the selling margins are at an unsustainable level and that the manufacturers selling containers were not much more than the materials cost of producing the containers. And our expectation is that as we come back from Chinese New Year and the factories adjust their ship capacities and also demand improves seasonally, and that all else equal, we would expect the prices to have upward pressure from here. In terms of leasing margins, certainly new container lease rates for new transactions adjust very quickly as container prices change and as interest rates change. And we've seen the market rates for new leases drop similarly. I'd say the thing that doesn't have much impact on us, there's not lot of transactions happening right now. And I'd say a lot of people, I think, share our view that we probably shouldn't benchmark what to expect over the year based upon the current price of containers. And so for example, we're not facing a lot of pressure on re-leasing extensions to try to match current market levels or -- and we haven't seen really much translation of all -- at all from that drop in new container prices to a drop in used container prices. Used prices have held on very well, reflecting the fact that there's still quite limited inventories of available containers to sell. And I think the expectation that most people have that container prices will rebound as demand improves.

Okay, very helpful. And then any change to the way private players in the space are acting or dormant platforms that are on the market?

Yes. So I believe we probably talked over the last year or 2 about how one of the things we've seen that's been a benefit is just there's been a number of players that have been less active than they had in the past partly due to some challenges that sort of lingered for some of these leasing companies coming out of 2015 and '16 and partly, I think as you referred to, is maybe the owners having less focus on growing those businesses.

I'd say certainly a number of competitors have become more active as they've finally recovered, say, footing from 2015 and '16. But I'd say there still are several that are less active than they've been historically. So I'd say overall, it's a more competitive environment than we certainly saw in 2017. And I guess, maybe similarly competitive to what we saw for maybe the back half of 2018 is our feel of what's happening right now.

What do you think is the discount between what an operator would bid for some of those platforms versus the ask? Is it like 1 to 2 turns EBITDA or more like 3 to 4?

In terms of, say, the platforms, you mean, that are perhaps available for sale?

Yes.

We don't have, I wouldn't say, any real insight and certainly can't talk either about where we think -- what might happen in particular transactions. When you think about as operators looking at consolidating acquisitions, of course, you have the ability to take out cost. And that obviously is a big advantage relative to, say, financial buyers or others outside the industry. And I think, unfortunately, what you also have is you have knowledge and caution. And then so I think when you look at different platforms for sale, that's something we also bring to our evaluation. And so it's unclear exactly how those 2 things play out.

And this will conclude our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

I'd just like to thank everyone for your interest and support for Triton. And we look forward to speaking with you soon. Thank you.

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