Q1 2020 Earnings Call

Please note. This event is being recorded. I would now like to turn the conference over to John Burns CFO, please go ahead. Thank you. Good morning. And thank you for joining us on today's call. We are here to discuss Triton's first quarter 2020 results which were reported this morning joining me on this morning's call from Triton is Brian Sunday our CEO and John o'callaghan or Global head of 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 investor section of our website industrial presentations.

I'd like to

Direct you to slide to 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 package and Industry conditions. These forward-looking statements are subject to various risks and uncertainties. Triton has provided additional information and its reports on file with the SEC off any 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 financial measures to the most directly comparable gaap Financial measures are included in the earnings release and presentation with these folks is out of the way. I'll now turn the call over to Brian. Thanks John and welcome to Triton International's first quarter 2020 earnings conference call.

Before I start with the main presentation, I would like to thank all of our employees for their extraordinary efforts over the last few months.

This of course has been a difficult time for everyone. But Triton has been able to do transitions seamlessly to working fully remotely. Our team is maintained their strong focus on our customers and made sure our internal and external operations are proceeding smoothly.

I would also like to thank our customers for their close communication and ongoing support.

We are proud to be part of your efforts to keep vital Global Supply chains moving during this extraordinary time.

And I'll start the presentation with slide three.

Triton achieve solid results in the first quarter of 2020 despite facing significant Market disruptions from the covid-19 outbreak.

Triton generated 67.1 million dollars of adjusted net income in the first quarter or 93 cents per share.

We also achieved an annualized return an equity of 13.1%

We expect the impacts from covid-19 to increase in the second quarter as the effect of the widespread business shutdowns fully away on economic and trade activity.

But writing is well positioned to manage through the current challenging time and benefit from the eventual recovery.

Or high quality lease portfolio continues to generate strong and stable cash flow.

Our Leverage is well below our typical level.

We have over 500 million dollars of cash on hand plus extensive borrowing availability.

And we have a large share of the available containers and key demand areas and already support our customers with our unrivalled container supplied capability when the market recovers.

Trend continues to use our strong cash flow to drive shareholder value.

We've ordered $193 of containers for delivery this year.

We declared a $0.52 per share dividend this quarter.

We have repurchased 2.1 million shares so far in 2020.

and if not

I purchased over 13% of our outstanding shares since the current program started in August of 2018.

And we recently re-upped our share repurchase authorization to $200.

I will now hand the call over to John o'callaghan a global head of marketing and operations.

Thank you Brian turning to slide for.

S I mentioned covid-19 is having a significant impact on trade volumes all manufacturing in China close to the Chinese New Year holiday period at the end of January birth and remain closed with fabric as China implementers extensive work restrictions due to the covid-19 outbreak

These restrictions Eastern China export volume starts to recover through March would exports from China starting to approach normal levels by the end of the month.

Our customers are not preparing for another significant decrease of cargo volumes in the second quarter resulting from the spread of covid-19 and the extensive global economic shut down.

The expectation is that Manju would be exceptionally slow for the trans-pacific and East-West trade.

Well, we expect underlying trade volumes to be very weak in the second quarter. We have not seen a major impact on our own operations.

Although we're not seeing much pick up activity container off high as a moderate and utilization is holding up. Well on average dropping 40 basis points over the quarter.

You're welcome texted from the drop off. She tried a lot of time these portfolio.

Another Factor supporting our performance right now is that the operational container float instructions actually create more need for containers because containers have been stuck internal commitment disrupted by blank sailing.

In addition the distribution challenges for cause of movies are leading to them to use containers for longer-term storage.

Refrigerated containers are also not typically heavy the impacted by economic cycles. And we are also seeing refrigerated containers being used as storage for food at the cold chain gets back off.

You can send a price increase strong in the first quarter due to an early expectation for increased demand in 2020 and by actions taken by container manufacturers to reduce production capacity.

24 try can't contain a price increase from under $1,800 at the end of last year to do $2,150 range in March.

All the modifications for 2020 how much reduced the capacity reductions remain in place and Katella prices remain above $2,000.

Our business continues to be actively managed remotely with the team performing. Well, there were no destruction serving our customers or would internal processes. I would like to congratulate and thank our team for their extraordinary efforts.

Maybe Slide Five Slide Five says Triton's key operating metrics.

Triton's operating performance remains solid through the first quarter drop-offs remained moderate in the first quarter despite the curve at the options in China, and we have not seen an acceleration of container of time.

Utilisation average 95.4% the first quarter and so far. It's up ten basis points in April.

Our average selling price you remain at a healthy level and we continue to generate gains on used container disposals through that.

Let me just like six like six looks like the key measures of containers supply and demand the top of the upper-left illustrate the general expectation of the global economy and trade contract deeply in 2020.

We expect a contraction in the second quarter to be well into the double digits though. The industry is hoping we'll see volumes recover in the second half of the year.

The bottom two charts. I'm not sure if Supply.

You can't end it production volumes were very low for the third quarter 2019 to the first quarter of 2020 the production over that time considerably less than our estimate for potato display off.

We expect antenna production to increase in the second quarter do two orders placed earlier in the year, but since then new orders have been low for the last month.

We expect new container production will decrease again in the third quarter if we do not seem Improvement in market conditions.

The industry you containing the factory is moderate with just under eight hundred thousand to you presenting slightly over 2% of global container capacity home. I'd be able to jump on I'll CFO

Thank you. John turning to page seven on this page represented. Our Consolidated Financial results adjusted net income for the first quarter was 67.1 million hours or 93 cents per share a decrease of 13% from the fourth quarter.

The solid results represent a return on Equity of 13.1%

trying to page eight.

A results in the first quarter compared to the fourth quarter were largely driven by the normal seasonal slowdown compounded by the initial impacts of the Coronavirus.

We continue to limit investment in containers as least demand has been limited resulting in a 1.5% decrease in our Revenue earning assets since year-end.

The decrease in our Fleet together with a 40 basis-point Decline and utilization drove a 2.9% decrease in leasing Revenue compared to the fourth quarter off a direct operating expenses, which are largely made up of storage for all fire units and repairs for containers redelivered decreased by $500,000. As long as lower re deliveries in the first quarter reduced repair costs offsetting an increase in storage expense.

And the first quarter we provided a 3.9 million dollar allowance against the receivables of a mid-sized customer whose payments have deteriorated. However, overall customer payment perfect remain strong in the first quarter.

Generated salad games on sales and trading margins in the first quarter though. They were down 1.1 million from the fourth quarter due to a decline in sales volume and a small reduction in sales prices.

We increased our share repurchase during the first quarter purchasing one point four million shares at an average price of $27.43 and have we purchased an additional seven hundred thousand shares through April 17th.

Trying to page nine.

On this page we have highlighted are strong balance sheet significant liquidity and are well-structured debt maturity profile.

We show our balance sheet as of December 2018 relative to our March 31st balance sheet to capture the full impact of the actions. We have taken to strengthen our balance sheet off over the last five quarters.

Since the beginning of 2019 we issued $555 million dollars of preferred shares and due to the challenging market conditions of investment in new containers.

Together these actions have led to a significant reduction in a leveraged.

We focus on net debt as a percentage of Revenue earning assets or as our key leverage metrics. We typically manage our leverage based on our pre-owned. No accounting balance sheet as our debt facilities are structured based on those asset values.

As you can see below the pre-purchase accounting balance sheet net debt-to-revenue earning assets has dropped from 74.5% at December 2018. 67.8% at March 31st. This is the lowest level on our history.

In addition to reducing our leverage you can see in the table on the bottom left that we have significant liquidity are strong cash flow current cash balances and additional ability under a credit facilities gives us liquidity of more than two billion dollars in excess of our major cash commitments over the next twelve months.

On the bottom right graph. We showed that we have a well-structured debt portfolio with no significant maturity Cliffs enabling us to meet our debt obligations from a cash flow, which is shown by the Blue Line without the need for refinancing for several years. Overall. We believe we are well-positioned to manage through the current environment. I am fully participate in the eventual recovery.

I need 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 their cash flow before Capital spending and you can see the resiliency of our cash flows across Market Cycles.

The stability of our cash flow together with the short-order cycle for containers also enables us to maintain our leverage in a steady range over the long term as shown in the graph and the bottom left wage.

Graph on the right demonstrates how these strong cash flows and our financial stability of enabled us to create significant shareholder value by steadily growing the book value of the business office while paying a substantial dividend.

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

Thanks, John. I'll wrap up the presentation The View summary comments on slide 11 Triton achieve solid performance in the first quarter despite facing significant economic and trade disruptions off and the covid-19 outbreak.

Looking forward looks like market conditions to be more challenging in the second quarter.

And there's a high level of uncertainty to our outlook for the rest of the year.

Trade volumes are expected to decrease significantly in the second quarter. And we expect to see week dry container demand until global economic conditions recover.

We are also facing elevated customer credit risk due to the sharp decrease in Freight revenue for our customers credit risk will be especially high if the covid-19 shocks resulting in sustained economic and trade downturn.

We have not yet seen a significant increase in container drop-off volumes and container demand could Spike if the global economy bounces back quickly from the covid-19 shutdowns.

Overall, we expect our adjusted net income to decrease from the first quarter of 2022 the second quarter.

the trajectory of our performance after the second quarter will be heavily impacted by the shape of the global recovery from covid-19 and whether we Face meaningful credit losses

Despite the challenges from covid-19. We remain in strong shape to manage through the current environment and we are well positioned to take advantage of the eventual Market recovery.

We Remain the clear scale cost and capability leader in our industry.

Are well-structured lease portfolio continues to deliver strong and stable cash flow?

Our balance sheet is in great shape.

We Stand ready to quickly provide large and creative container solutions for our customers and we believe we are prepared to address unexpected challenges and quickly capitalized on any opportunities as they arise

Are now open up the call for questions.

We will now begin the question-and-answer session ask a question, and they press * then 1 on your touchtone phone. If you're using a speaker phone, please pick up your handset before pressing the keys off your question, please press * then two at this time. We will pause momentarily to assemble our roster.

Our first question comes from Michael Brown KBW, please go ahead.

Great. Thanks. Thanks for that operator morning guys. Good morning.

So I want to start with with credit, you know, appreciate the color glad to hear that the payment Trends have generally been been good. So if you could first start with where are the cracks that you're seeing, you know near-term that you're most focused on and given your top three customers represented 35% of your lease buildings, and your top five is over 50% Can you specifically address how you feel about those customers specifically and how closely you're working with them to kind of understand their financial position. Thank you.

Sure, you know in terms of what cracks were seeing, you know, I think the the we took a reserve of three point nine million in the first quarter for one of our customers to mid-size customer that has been you know, I'm not really I think having Financial challenges for some time and where we seen erratic payments for some period of time but but but getting payments we decided to you know, take the reserve in the first quarter of this year as their payment choice. I'd say it's slow a little more than they had been as well as just giving you know our view that the environment has become more challenging and so just made you know losses on the receivable more likely, you know in terms of other cracks as we've seen a few times we we didn't see, you know, a real problem with payments in the first in the first quarter and and we haven't heard from customers, you know outside of the the one we mentioned you were talking about having, you know in abilities to pay going forward as you know, we typically don't take you know, significant credit losses for a bunch of reasons. We believe we underwrite carefully we focus our busy day.

On the strongest customers are customers generally speaking are are large and have deep resources many are supported by governments or bigger industrial conglomerates and you know containers are are critical to the operation. And so when we do see customers go into Financial restructuring, especially big asset owners. Typically, we see creditors wanting to you know, have the operations continue and therefore we continue usually to get paid through financial restructuring. You know, I'd say just the thing about the current situation is it just I mean it's unprecedented and just the size of the impacts on the economy and trade, you know, makes it very difficult to rely entirely on history and life. And so we are having some customers come to us and and ask for you know payment delays or deferrals other customers coming to see if what they can reduce, you know expenses in the near-term and you know say we're working constructively with customers we often in these kind of situations look for win-win transactions where we provide customers, you know, near-term relief in return for longer-term benefits for us and we're we're having a number of those kinds of conversation wage.

you know in terms of the structure of our lease portfolio, it's it's concentrated by the nature of our industry the top I think seven Shipping Lines probably represent 75% or more of of you know, operated Basta Pasta T in the

And so there's no there's no other really way to be in our business other than to be highly concentrated, you know, fortunately, you know, the customers where we believe we have concentrations are great. Great operators wage given their size their significant components of the global supply chain. And so, you know, we have a lot of faith in their resiliency, but but certainly it's it's a very unusual time out there.

Okay, great. And then just given the years of experience here in this industry to call would love to just get off you guys just out this this environment really compares to Prior downturn. So assuming we you know enter recession and I have kind of more of a project protracted down to our not be shaped recovery. How could the credit cost this time compared to the financial crisis or no more saw in 2015-16 including you know, the hanjan bankruptcy. Excellent. Yeah. Sure. So, you know I'd say that the the unusual thing so far in this crisis is that you know while we have we did see trade volumes, you know drop significantly in the first quarter because of the month just the the the manufacturing problems in China, and there's no expectations for a very significant decrease in in trade volumes in the second quarter, and we haven't yet seen that translate into a big increase.

Turn off hires for us just yet, you know where we did in the financial crisis. We went from a situation of having strong demand in August of 2008, you know, basically facing massively deliveries and you know, October and November of 2008 and it's all very quick translation of changing market conditions to change in our utilization in the financial crisis interestingly. We didn't really take any significant credit losses. I think probably a lot of reasons, you know, I was just describing that we did see major customers do Financial restructuring but we typically repaid right through those and and didn't take any big Financial Isis in the industrial wage 2015 and 16 again, we saw uh, you know as economic and activity and trade activity slowed. We we saw our utilization moved down fairly, you know, fairly readily I also saw really the only major credit hit we've taken in our history least in the last twenty years during that time when when hunjan when when suddenly, you know, kind of chapter seven style liquidation dead.

You know right now we're we're we're curious to see what what it's going to mean for us. And in terms of you know, impact and on our utilization. I think our customers are holding onto containers right now to some extent wage to see you know, what kind of recovery and how long you have a downturn we face? I think it's John o'callaghan mentioned is also a lot of operational disruption that our customers are having to deal with because of the month their vessel schedules have been disrupted with the blank sailings and the way it containers are piling up and Terminals and and blocking efficient operations. And then we hear you know, that Cargo movers are hanging onto containers for a while to keep the their car goes in there because you know where housing other distribution is is also backed up on the ground in the US and Europe. So, you know, it's a shame really have a great roadmap. I think you know when we look at what what could the impacts be? We I think we looked through the financial crisis, you know, we're which is where we really saw trade volumes drop precipitously in that crisis. We saw dead.

I think three-quarters of weak demand before containers ply, you know reacted and adjusted down to where a trade volumes were and then we saw a very quick recovery once we got into the latter half of 2009, but

but again this is such an unusual time uh you know we we're trying not to give too much of a of a prediction

thank you that's that's very helpful just one quick quick clarification does the second quarter guidance does that include any assumption for elevator credit cost to get off or is that not included there and you know too early to tell

so we we don't anticipate credit losses again that's why we haven't seen any other customers other than the one we've mentioned you know showing you know real signs of stress or cracks me up so we we haven't you know forecast credit losses I think the one thing just just from a say a modeling standpoint I'd say is that you know we did take that almost four million dollar charge in the first quarter off what from an earning standpoint it was a little bit offset by we had some delayed recoveries on prior losses I don't think they'll showed up in our in our credit line but they bought some extent offset the credit loss I think by you know two or three million dollars you know so the the net impact of the sort of you know one time is kind of events was only a negative one or two

Okay, great. Thank you for taking my questions. Sure.

My next question will come from where is solo. Let's see. Do you have security breach go ahead. Good morning. Give it a little more color on the back in the environment and the the uncertainties. What's the the rationale behind the two hundred million or a hundred? Ninety million additional investment in new containers is that they you have, you know a place to put those is that replacing some older ones in your Fleet. Can you just this little color on that? Sure, so it represents a number of things, you know back in the John Callahan mentioned the refrigerated container Market is not as impacted by typically economic, you know Cycles or disruptions as dry container know we all want to get our food and and so on and so we've done a a couple of large refrigerated container deals so far this year in addition. We you know, we also just always watch our inventory wage.

And earlier this year especially, you know, we saw, you know the possibility back in and say January and February that you know, the trade volumes may increase in 2020 that you know, I think turns out to be an optimistic view at the time and so we were building some containers for you know for inventory and in anticipation of that and then we also are generally talking with customers about trading deals and Sally's back transactions alone not included in the Investments as well.

Got it. Okay. So it's a fair to say perhaps some of that happened, you know, as you said earlier in the quarter when there was more optimism before sort of Corona got done when I guess I'm not saying we you know, we look at our inventory of factory containers and we're we're pretty happy where it is the pricing on containers, obviously as you mentioned last quarter on the cake made a nice move up, um, since the fall, you know, even with a little bit of leveling lately read more recently. I know it's hard to sort of, you know, get your crystal ball out. But clearly, you know, things have gotten a little bit worse on the economic front. Yeah, and and is there, you know risk debt that price comes down again wage significantly, maybe, you know, maybe a little take a little while because that gets sounds like cold sort of displacing and perhaps artificially inflating or or

uses of of of these containers that you know, but say Beyond covid-19

The year type of recession. Um, you know, how do you see things reacting in in that type of scenario? Sure. Well, there's no doubt if we're in a prolonged, you know month. Of of weak global economic activity and and and we trade volumes of that'll have a negative impact on container prices. My personal prediction is I don't think they'll go down to the same level. They were in 2019 unless we see prices fall dramatically in 2019, you know, we always look at a number of things for container prices. But but one of the things I always find most telling is looking at the month the margin at the manufacturers charge for containers over the cost of the steel input and in 2019, it was a a really extraordinarily low levels and and our understanding is because of that that most of the container manufacturers were losing quite a bit of money and the main thing that drove prices up this year, you know wasn't necessarily, you know, incredibly bullish views of of trade growth and it was more just a manufacturer's rep.

Sizing their shift capacity for the amount of production that there is right now or or that there had been and so they brought the margin, you know back into the sort of normal range, but you know, but of course if if you know the thoughts of a prolonged period of week, you know, we demand, you know margins tend to get pushed down to lower levels. But again, my my personal prediction is I don't think we would see you know in the margins getting back down to where they had been in 2019 just because the the manufacturer seem quite determined, you know on you know to reduce and kind of right size their shift capacity.

Okay, great. Thank you. I appreciate the call.

Adele if you'd like to ask a question, it has started them one star then one to ask your question.

Our next question will come from Ken hoexter with Bank of America Merrill Lynch, please go ahead.

Good morning, Brian John John Brian any thoughts on the timing of contract expiration. Is there any lumpiness coming up over the next month? I know a couple of months quarters.

Yes, so for for us fortunately our our lease portfolio is in pretty good shape, you know from an expiration standpoint. We put a chart in into the back of the investor presentation on page sixteen, you know, looking at the page or dry containers refrigerated containers, the number of containers expiring off of lease that require repricing better say less than sale age and you know, both are pretty small percentages of our portfolio wage, um, you know for now and actually the next couple of years and and so I think you know, one of the reasons why we've seen utilization and you know hanging very well and also we we've seen average rates holding very well both this quarter, but as well a year is just the fact that we don't really face the cliff, uh, you know for Explorations and I think we've talked in the past that one of the things that made the 2015-16. So challenging for us off in addition to the you know, drop and trade do the industrial recession was just at that point. We did face a big Cliff at least Explorations. In fact, they were very expensive leases, you know, fortunately, we just don't we don't face that situation now,

So maybe I'll just take another step further if I look back in 2016 utilization felt so not much farther than where you are. Now in the Great Recession, I think it was in the upper 80s wage what what then has to happen to get there is that kind of this low activity has to go out for another year before you can see utilization given that

To those levels giving your contracts. I mean what kind of I mean, it seems like you're still pretty solidly tied up on on some of these long-term contracts if there's no kind of lumpiness in in that expiring wage. Yes. So we we've done a lot of scenario modeling just to try to understand, you know, what would it take to to hit different levels of stress? And you know, it's saying it it would take a dramatic increase in the level of off hire, you know for us to see a utilization decrease, you know similar to what we saw certainly in the financial crisis and and even to get to say the same slope of of utilization change where we were, you know, a 1015 16 you'd have to see a very large percentage of containers on expired visas or on short-term lease is coming back because again, a lot of them are locked away and so I mean certainly I guess it's mathematically possible those things happen, but it would take you know, a really sustained effort by our customers in a very very negative view I think on longer-term expectations to see you know, utilization beyond that kind of negative slow down.

Yeah, that's the other thing that we could that could cause it to would just be some credit challenges and so obviously, you know, our long-term lease portfolio gives us great protection when customers live by the terms of the lease agreements. If we were to see, you know, more widespread, you know customer problems where we were either ourselves taking actions to get the containers back or you know, the customers weren't paying us and and and so we took them or hire. Yeah that could do as well, But again, we haven't seen that across the portfolio.

Maybe just help me understand that given that the past two downturns is that because your better structured post the Triton merger is that you've changed or is it? Yeah, it's a couple of different things so long, you know going back into the financial crisis. I think both companies both Talent rate and you know, ten years ago, you know had larger percentages of short-term leases. It was worth more than nature of of the business office and I don't remember exactly what was happening with a lease portfolio at that time, but I think it was just a it was a higher turnover kind of business in terms of containers coming off and going back higher in 2015 and 16. It was just really unfortunate timing that you know, the market broad backs in the financial crisis and 2010-11 and we both towel and Triton did a tremendous amount of business in 2010 in June at very high container price is very high lease rates and just you know, most of the container leases done at that time. We're 5 year deals. And so just by the rhythm of the calendar they expired in 2015 and

And you know we were subject to a lot of you know, return pressure and a lot of repricing pressure, you know, like to think we learn some lessons in life and and so in the very strong markets we had in two thousand Seventeen and eighteen. Well fortunately they're not five years yet. But we also during those two years. I took a lot of time to put a lot of emphasis on on staggering the lease expirations and a lot of deals we did or not just five years, but also a lot of seven years and eight years even some 10-year deals at the same time. We've made an emphasis in our existing portfolio when we renewing leases or putting older containers on higher to focus on life cycle leases that keep the containers on higher to the end of their typical useful life. And so I think all those things together, you know have just meant that we I think not just now but likely the future periods as well, you know aren't going to have the same portion of our portfolio at risk.

It's really helpful understanding that really shows a great maturity on the on the business if the container price is are up now.

What are your thoughts on on pricing return? So let me just praise that for a second. It sounds like you thought that because of of the I guess congestion in the system. You've got more box office. I guess more on the dry side than refrigerated. So if the supply chain then starts to move to you see the reverse and where when you would normally then start signing up you may see some returns increasing when the economy sucks. It's yeah, so so definitely, you know, operational disruption can move around demand relative to underlying cargo and and so in periods of disruption in this can be. Like now where there's two lines were just having a hard time, you know, moving containers cuz the unusual vessel schedule and terminal and efficiencies. We've also seen things like that around Port strikes or you know other things like that off, you know that can create its own container demand and then when the disruptions, you know, get released, you know that can bring Supply back to the market outside of say production. And so it's something we keep our eye on tipping.

It takes a while I'd say to clear, you know, operational efficiencies, especially during periods. Like now we're Bethel capacity is coming down and sailings are being missed. And so I took General thought and I guess we'll have to see if this is right is that you know, if we if we see a a reasonably, you know near-term rebound and activity and both economic and trade activity that they're likely to be additive. You know that same options are going to be difficult to clear and we're see sort of an increase demand to bring containers into the systems of our customers, but at some point, you know as the disruptions are cleared. Yes, that would be sort of like kind of a negative factor, you know on demand, but but at least our our our thinking is initially it would probably be a double positive if we see, you know a recovery in the second half

Thanks. I appreciate it. Thanks again.

This concludes our question-and-answer session would like to turn the conference back over to Brian Sunday CEO any closing on box, which is like to thank everyone for your continued support for international and we'll look forward to talking with you soon, and certainly hope everyone stays safe and healthy. Thank you very much.

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