Q3 2019 Earnings Call

October 24, 2019

Good day, ladies and gentlemen, and welcome to the Triton International Limited third quarter 2019 earnings release Conference call.

All participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero.

After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad.

To withdraw your question. Please press Star then too.

Please note this event is being recorded.

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

Thank you Debbie.

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

I'm here to discuss Triton's third quarter 2019 result.

Which reported this morning.

Joining me on this morning's call from Triton spine Sunday, our CEO and John Ocallahan, Our executive Vice President and head of global marketing and operations.

Before I turn the call over to Brian I'd like to note that our prepared remarks will follow along with the presentation that can be bought found no investor section of our website.

Any forward looking statements made in this call are based on certain assumptions going analysis made by the company and are not guarantees of future performance actual results may vary materially from those expressed or implied 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 and have these statements that are made despite any subsequent changes.

These statements involve risks uncertainties and only predictions.

As.

In addition, certain non-GAAP financial measures will be discussed on this call reconciliation of these non-GAAP measures to the equivalent GAAP financial measures is included in our earnings release.

These formalities out of the way I'll now turn the call over to Brian .

Thanks, John Welcome to Triton International's third quarter 2019 earnings conference call.

I'll start with slide three of the presentation.

Turning to achieve solid performance in the third quarter of 2019.

Triton generated $85 million of adjusted net income or a dollar and 16 cents per share.

We also achieved an annualized return on equity of 16.1%.

Great and has achieved solid results this year, despite facing a more challenging environment.

Global economic conditions have softened this year.

Our solid performance in this more challenging environment reflects our cost and capability advantages as market leader.

We introduced new container procurement this year for using our strong cash flow to drive shareholder value in other ways.

We have repurchased almost 11% of our outstanding shares.

We've also repurchased the minority investor interest and a portion of our container fleet.

And we continue to pay a significant regular dividend, which is currently yielding almost 6%.

I'll now hand, the call over to John Ocallahan, our global head of marketing and operations.

Thank you, Brian turning to slide four.

Triton's operating performance continued to be solid in the third quarter 29 team.

We do utilization, averaging 96.7% down 50 basis points on the second quarter.

The tender activity remained slow the third quarter with limited leasing demand.

Third quarter is typically the peak season for business.

I transactions are well down from 2018.

We have seen some promising signs at the end of the second quarter.

It's very early in the third quarter, though it didn't they too much.

It was limited new container transactions through the third quarter, what aggressive competition for that type of deals.

Turning to slide five slide five shows triton's key operating metrics.

As mentioned the third quarter wasn't seasonably slow.

However, our utilization is done by only 50 basis points over the quarter.

Our expectation is for drops to remain well controlled gtwok customers container fleets being a balance.

Turning to slide six slide six looks at the key matches up and tend to supply and demand.

This time of the a democracy traditionally slow and we're looking for several more quarters before we expect to see a change.

Inventory levels remain under control, we are seeing decreased production and existing inventory levels would choose other shipping lines absorbed or at equipments.

When demand inevitably shows up we remain ready supply customers when they need us.

Stage, we presented a consolidated financial results.

Adjusted net income for the third quarter was $85 million dollar 16 per share.

Down 1% on a per share basis from the probably yes.

These results represent a return on equity 16.1%.

Also benefited from our share repurchase program, which has reduced their out chance standing shares by nearly 11% over the last year.

Turning to page eight.

Our results for the quarter were driven by several factors.

Leasing revenue was down 3.8%, reflecting a nearly 5% decrease in our fleet size.

And a 2% decrease in utilization from the prior year.

No down utilization remained high averaging 96.7% for the quarter.

But was down from a very high 98.7% in the prior year quarter.

In addition to the impact on leasing revenue lower utilization drove a 9 million dollar increase in direct operating expenses, reflecting higher storage and repair costs.

Oh container disposal results remain quite positive generating combine gains on sale and trading margin of $10.3 million and that though Gordon.

Reflecting a moderation and disposal prices, partially offset by increased disposal volume.

We continue to realize incremental benefits from purchase accounting adjustments related to our 2016 merger.

And we have realize further improvements in our effective tax rate.

Despite the slow least demand our third quarter S was up one cents sequentially from the second quarter.

This is due to a well structured lease portfolio.

2.6% reduction an average outstanding shares.

The slow least demand led to a negative impact on earnings by approximately $7 million, reflecting a 50 basis point decline in utilization and an increase in related operating expenses.

Together with lower gains on disposal.

Including lower lease intangible amortization.

Lower depreciation as another vintage of containers became fully depreciated.

And lower SGN ebay is our annual share grants to our board of directors occurs in the second quarter does not repeated in third quarter.

And earnings per share also benefited from the reduction in shares outstanding.

Turning to page 10.

This page highlights our long term financial stability and how this is enabling us to create significant shareholder value over an extended period.

The keys to this financial stability and value growth is our strong cash flow.

Full economic cycles as shown in the graph on the top left.

Enables us to maintain our leverage in a steady range over the long term as shown in the graph on the bottom line.

The lapping a REIT demonstrates how these strong cash flows and financial stability have enabled us to create significant shareholder value.

Steadily growing the book value of our business, while paying a substantial dividends.

Over the last year, we've increased our adjusted tangible book value by more than 8% Gilbert $36 per share while continuing to pay a significant dividend.

Well now we're talking to Brian for some additional common.

Try and financial performance has remained solid despite facing more challenging market conditions in 2019.

Trade disruptions and lower global economic growth and let the limited leasing demand since the fourth quarter of last year.

And container prices haven't the low end to the historical range due to reduced procurement volumes.

It's still a return on equity is over 16% year to date and our cash flow as close to record levels.

Triton has significant cost and capability advantages in our market.

And as John Ocallahan showed the inventory of new containers decreased in the third quarter. Despite the disappointing container demand.

This combination of along revenue tell from our leases and the short ordering cycle for containers provides great support to our utilization cash flow and profitability.

It's also important to note that the current market environment does not contain the same mix of challenges we faced during the last downturn and 2015 and 2016.

Significantly compressed our margins.

We are much less exposed to margin compression or lease expirations now.

Steel prices collapsed couple or $300 proton in China in 2015.

Selecting the general route if commodity prices at that time.

This pressured container prices and created the fear a further container price reductions.

Hot rolled steel prices in China are currently in the range of $500 per ton.

And we expect container prices will rebound when container demand improves.

Our profitability is also supported by the significant investments we made in high return leases and 2017 and 18.

Our cash flow before capital spending is supposed to record levels. This year.

We have used this cash flow to reduce debt and back almost 11% of our outstanding shares.

We believe the investment in our shares has been compelling.

The average price we have paid is well below our adjusted tangible book value and the projected run off value of our container fleet and lease portfolio.

I'll conclude the presentation with a few summary comments on slide 12.

Triton achieve solid results in the third quarter of 2019.

We generated a dollar and 16 cents of adjusted earnings per share.

And we achieved an annualized return on equity over 16%.

Our container procurement has been limited this year.

But our strong cash flow is being put to good use.

We're now heading into the slower time of here and we expect our operating metrics well continue to gradually trend down.

We also expect ever adjusted earnings per share will decrease on the third to the fourth quarter.

Our financial performance remain solid.

New container production is down and the supply of containers is starting to adjust.

And in the meantime, we're making high return investments in our shares.

Our strong cash flow gives us many opportunities to create shareholder value.

Well now open up the call for questions.

At this time, we will pause momentarily to assemble our roster.

20 foot, yes, so I think about from from from kind of the average Q3 today that is that still it's still kind of inching down from here.

From my guess southern Midland angry.

Okay and the thing that when we talk about container prices is you know I mentioned on the call that steel prices have actually held in quite well. This year again, you know what container prices are down significantly from last year and so all the change has been margin compression I always most of it has been and so again that gives us the.

Your expectation that as demand improves and production volumes increase that we'd expect those margins to go back to normal levels and the container price to come back.

Yeah, no. The that caused me to go back to your Dexter Hunt for that chart you guys used to put in there on the around steel prices and devising box prices. Mr. Gross margins, there, but if I think about that sixsix hundred and put that within the context of maybe kind of other cycles and then we troughed lifecycle.

Obviously every second only to be a little bit different but I'm curious, whether you think that would still apply today and then I guess within the context of that they might want to what degree to the consolidation of the manufacturers have when wouldn't that give me that has on where that floor at the bank.

Sure. So yeah during the last down cycle in 2015, and 16 very briefly the container prices went below $1500, but it was my recollection is only a month or two and not reflected the combination of low steel prices plus you know margins briefly getting down to where they are today.

The curious thinking about this year as van despite the yeah manufacturer consolidation that you mentioned the margin has held low you know for quite some time I really I guess for the last four quarters or so.

And you get our expectation is as soon as production volumes go back up that we would see.

You know prices get back to a more normal range I'm, just given that steel prices are high and margins are really low and.

And I think there's several reasons that thinks that the margins you know should actually grow overtime, you know, including you know the consolidation of the manufacturers, but also you know just general inflation and labor costs in China more stringent enforcement of environmental rules.

More expensive land costs around the port areas things like that.

Gotcha, Okay. That's helpful.

I guess this within the broader market you know it seems like.

Some of this might have been or.

<unk>.

The lag effect for some pull forward had a sanctions I guess last peak season, but some of it obviously seems like it some weakness and the global economy.

What are you hearing from your customers are you notice any noticing a different posture, maybe this cycle versus last cycle. Just given you know you got I'm, a 2020 rag sitting pretty soon but just kind of an essentially a shock to their cost curve. The geopolitical backdrops, obviously more golf, while there has been in previous cycles. So just just curious.

Sure if I'd say like many.

Businesses right now there are customers are struggling to interpret just what are the tariffs meaning for their business and.

And you know the tariffs have had several effects you know one has been changing the timing of shipments a initially shippers tried to front load a shipments to avoid the implementation of the tariffs I'd say most of our customers probably think shippers are holding back on on cargo flows hoping that the tariffs go away this year and so perhaps you know compounding what might be.

Kind of natural slowdown anyway, because of the economies in certain places around the world.

So I'd say you know there uncertain as well they started the year with fairly decent expectations for trade growth now and I think as we've mentioned they've come down some overtime to expecting trade. This year to be just slightly positive, but I wouldn't say they've got a I feel like they have a crystal ball and I don't think anyone really knows how to read the ongoing trade discussions or Joe.

What is going I mean, if there is some kind of many resolution you know I think there. There's some of the same factors in this down cycle compared to others and certainly in terms of impact on us. The never container demand is is weakish you know, we see our utilization go down and we.

He seems kinda prices typically weaken as the manufacturing margins compressed.

You know that ended up really change in the dynamic of how we worked with our customers in 2015, and 16 and brain must put put us on the defensive.

Yeah, no. It seems like you as a pretty defensible position I'm, just I was more thinking along the lines of their.

They're posture towards capital deployment, no and you probably measured by box the slot ratio and you know when it whether they're kind of pulling back.

Just a you know as it kind of that into a a more uncertain 2020, whether you've seen anything anything on the margin there.

Behavioral Yeah, I think the you know for like the customer standpoint, as you've probably seen a vessel orders are pretty low this year.

And that reflects I think a variety of things I you know one.

Just the fact that there continues to be an excess supply of vessels in the world and I think the manufacturers shipping lines are starting to get a little bit more discipline around capacity management and deployment I'm also a they give you mentioned the IMO 2020, that's creating I think additional capital.

Requirements for our customers as they start to and scrawl install scrubbers earnestly on their vessels and also just an initial layer of uncertainty I think when times are more uncertain. You know, it's tempting to rely on things like leasing and you know we continue to see leasing being a big share of power customers are adding containers and for all those reasons I think it will stay.

That way.

Gotcha, Okay. That's the time guys I appreciate it yeah. Thanks, Mike.

The next question comes from Michael Brown with KBW. Please go ahead.

Hi, good morning, guys.

Good morning, Mike.

I'm, sorry to kind of follow up Oh, along a similar vein there so.

I mean, there's some benefits for an activity moving to southeast Asia.

From the factories and the factories remain all in China.

And so for US the business you know that the leasing transactions still are very much. China's centric you know, we we look at the data and we talk with our customers and the other is a lot of talk about you know movements.

Actual production to Vietnam versus you know movement of cargo flows through Vietnam I can I don't have a good insight into that but I think it's you know it does take time to to to relocate production facilities and they thought it infrastructure in different places.

Obviously, the topic of onshoring or moving manufacturing closer to you know to where it's being used is a big topic. These days I'm for tariffs and other reasons.

We've always been a little bit skeptical that you can see very significant movements I think theres.

Obviously this point trillions of dollars invested in manufacturing and transportation infrastructure in China.

It doesn't seem obvious that there's a reservoir of production capacity that can replace the large portion of that anytime soon and so you know probably just means that the margin do you see a little bit more a little bit less growth.

You know certainly it's something that's mentioned as a reason why trade growth this little bit lower this year, but again, we don't see it as a fundamental game changer at least at this point.

And then it's going to shift gears, so I mean, given the challenging environment for organic growth on that them on its obviously good to see.

From an acquisition that you May proceed from retail regulatory pushback.

Sure. So we're definitely believers in the benefits of consolidation you know when we went through our merger in 2016, I'd say the benefits for even a little more than anticipated. We got the cost savings we wanted to get at very reliably and we also found that we built out our capabilities by combining the best pieces of each organization.

But we look out to the situation now we would be interested in participating in the right kind of consolidation opportunities we've tended to be pretty disciplined in the past that how we look at opportunities and wanting to make sure that.

Building the company through M&A is you know viewed essentially the same way is going to company through investment and held at the same kind of financial tests simulation. It would hold it to the same standard of is it a better investment than buying back the shares and as you indicated the shares to us look fairly compelling if we're buying below book value and below runoff value.

In terms of the you know regulatory issues and we did not actually receive any.

Regulatory pushed back in the Triton and Talmer merger in 2016.

One it's it's not our leasing industry isn't so concentrated there is a fairly long tail of medium sized and smaller players and then secondly, you know Mike we certainly characterized the industry and I think it actually is is accurate.

As total containers that probably the biggest competitor we face is our customers buying and financing their own containers.

And when you look at the concentration in the industry, including all containers you know as the denominator, there's still a long way to go before the industry bills consolidated.

Yeah. Thanks, Mike.

Good morning, Thanks for taking my question.

On utilization rate I understand seasonally you usually trends down and into the fourth quarter, maybe first quarter.

In terms of the Delta you took the be kind of inline with recent performance to me I just trying to measure the not a weakness you're seeing.

Versus you know Capex has been limited so I would think your utilization ratio.

Maybe better than it has in the past in terms of that the rate decline into the seasonal period.

And yes, there's some question of what does that mean do we will then the rate of decrease increases it got to the fourth quarter or what just sort of stay the same.

Our view is it won't accelerate much certainly the seasonal trend is weaker and our customers generally speaking in the fourth quarter I'm not looking to bring in capacity, but as we've said a few times or at least portfolios in good shape, we're not hugely exposed to off hires at this time and also as you mentioned there hasn't been a whole lot of containers brought into service. This.

Here.

So there shouldn't be that much there wasn't a lot of building to the peak and so you wouldn't think they'd be much kind of shedding from the peak, but we're really just getting started in that got slower period seasonally at least what's typically slower seasonally and so we'll have to see but again we feel.

Relatively well positioned to whether well.

Okay and then just in terms of current rates I know you know that you mentioned that it's competitive market just wondering relative to where current portfolio. Our lives are.

On on one new leases or how that compares to the portfolio into when you're when you are releasing containers, whereas that release rate relative to the current portfolio.

Sure in terms of ROI is when you make new container investments you never fully know what you're getting because the initial lease usually is a half or slightly less than half of the container life and so you're making a lot of assumptions.

About what happens after the first please you know, but we have lots experience without of course.

And we typically.

Modeling, you know being lower than that usual range and.

You know, we're seeing a number of the deals fall below a that sort of low low teen range, a and typically we have decided not to participate in those deals or some deals are falling into the range that we find okay, but well that's a very much toward the lower end of that acceptable range.

And that's the main reason you know why we've been.

Alright, thanks very much.

The next question comes from Ken Hoexter with Bank of America. Please go ahead.

Brian just kind of I guess, given going back to Michael's questions and maybe we haven't seen a fourth quarter earnings Lower then then third quarter as you mentioned going back to what 2015 and you slowed your your new buys as you mentioned down to 10 million how long do you anticipate this environment lasting given you kind of mentioned a couple of course.

This year have reduced activity, maybe also throw in your history of kind of market turns where does this field is just feel like it's light relative to kind of what we've seen maybe the last two.

I kind of great recession, or even 15 16 and that it. It's just kind of trend this way for maybe a little bit longer or maybe just your historical view on that.

Yes sure. That's a good question. So when we gave our outlook. We felt you know that almost always you see utilization trend down in the fourth quarter and in the first quarter.

Dig into the slow season, you know utilization is going to go down fourth and first quarters. You know, we typically would look toward the second quarter as you know.

20.

You know we would point to about this time last year when we first started.

That's a great perspective appreciate that.

No it's pretty much contract timing that statistic taken this right now there's there's three contracts that have ended on the equipments being coming in as being coming into this study spec pace, we don't see that accelerating and anyway.

More elongated through the fourth quarter, but we haven't seen any signs of that yet.

Okay. That's helpful. And then lastly from me, Brian just given the low rate.

Are you seeing any increasing competition given it still is a pretty solid or are we.

You know what are you seeing any private equity money return in any way I know a lot of that had left after last cycle just seeing if there's any kind of I mean, they are pretty solid returns even at these levels, if you're seeing that increased competition.

This year, we see pricing and not not a disaster, but but certainly lower than we'd like to see and we've allowed our share to drift down and use our cash in other areas. We certainly have a number of competitors that I've done the opposite that for a variety of reasons.

We do see some competitors being again more active than us but.

To some extend we've you know we like to.

And see that as a way we build value overtime.

Again, if you have a question. Please press Star then one.

Most capable as we're able to pick and choose the to some extent the deals that we participate in.

And I'd say most of the transactions out there in most years, we have an opportunity to win a large share we matched the competitive rates and at what markets are good we're taking a lot of those opportunities when markets are weaker we don't I think there's number of competitors that maybe don't have that luxury and and when they have the opportunity.

You know the rates are somewhat lower today than than maybe what you know do the ones that are expiring.

For sure and so that's something we always say you know as container prices change that lease rates change you know, we love to lock in extensions when rates are high and our customers like locked them and when rates are low.

Generally speaking, we're holding out for rates that we think are fair long term.

Relatively flattish as it is so we're going to go down Q1, Q4, Q wall and then.

Maybe you get an improvement in seasonally Q2, you don't know yet it sounds like right I mean, that's exactly right.

Certainly by the I shouldn't say certainly we think by the end of this summer and so I don't know several as opposed to mean sometime between March and August I don't know.

Right. Okay. I'm just last question on the tax rate John mentioned it was like I think like five it's a little over 5% this quarters that sort of a better rate to use going forward then sort of the seven eight we would more thinking.

Yeah.

Quarter. So that's why they are adjusted we actually adjusted that back to the 8% okay.

Our next question as a follow up from Michael Brown with KBW. Please go ahead.

Thank you operator, that's had a quick modeling related question just how the interest expense come down nicely this quarter with leverage and the rate coming down.

Just wanted to see what your expectation was for the interest expense next quarter, assuming we get maybe a cut from the fed and any thoughts on 2020 as well and then just and one other item was the percentage of debt that was fixed or hedged this quarter.

So I'm really just start with their expectations for the overall expense or we would expect to be down the effective rate to generally be in that similar range.

Q3 2019 Earnings Call

Request a DemoDemo

TRTN

Triton International

Earnings