Q2 2020 Triton International Ltd Earnings Call
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Now, let's turn the conference over to John Burns Chief Financial Officer Mr. Burns. Please go ahead.
Thank you Keith.
Good morning, Thank you for joining us on todays call.
We'll go to discuss Triton second quarter 2020 results, which are reported this morning.
Joining me on this morning's call from Triton, It's Brian Sondey, our CEO, John Ocallahan, our head of global marketing operations.
Before I turn the call over to Brian I would like to know prepared remarks. Following the presentation that can be found in the investor section of our website under investor presentation.
Like the direct you to slide two that presentation and remind you that today's presentation includes forward looking statements that reflux Triton current view with respect to future events financial performance and industry conditions.
These forward looking statements are subject to various risks and uncertainties.
Has provided additional information.
Ports on file with the FCC concerning factors that could cause actual results could differ materially from those companion nice presentation.
We encourage you to review these factors.
In addition, reconciliations of non-GAAP measures to the most directly comparable GAAP financial measures. All included in our earnings release and the presentation.
These formalities out of the way I'll now turn the call over to Brian.
Thanks, John Welcome to Triton Internationals second quarter 2020 earnings conference call.
Before I start with the main presentation I'd like to again, thank all of our employees for their extraordinary efforts over the last few months.
Our team is kept our process is running smoothly.
And continued to provide great service to our customers despite the personal and operational challenges presented by the pandemic.
I would also like to thank our customers and suppliers for their close communication and ongoing support.
We are proud to work with you and the vital effort to global supply chains functioning.
And I'll start the presentation with slide three.
Cranes performance was solid in the second quarter of 2020, despite the ongoing disruptions from the cobot 19 pandemic.
And our outlook for the rest of year has improved.
Our customers estimate the trade volumes were down 15% or more at the start of the second quarter.
Leasing demand you container pick ups were limited.
But container drop off from moderate and our utilization remains at 95%.
Right and achieved solid results in the second quarter.
Right and generated $60 million of adjusted net income were 86 cents per share.
And we achieved an annualized return on equity of 12.2%.
The resilience of our operating and financial performance through this period of market turmoil.
Highlights the stability of our business model.
The strength of our long term lease portfolio and the outperformance we can achieve that's the clear market leader.
New container investments continued to be constrained in the second quarter and our revenue, earning assets decreased by 1.7% during the first half of the year.
We've used our strong cash flow to create value for shareholders and other ways.
Our dividend yield is currently close to 7%.
We repurchased 2.1 million shares during the second quarter.
And if not repurchased over 15% of our shares since the fall of 2018.
And our leverage is near an all time low.
Trade volumes improved at the end of the second quarter.
As economies reopened in the U.S. in Europe, and leasing demand has jumped in July.
We have concluded a significant number of attractive long term lease transactions over the last few weeks.
And we expect container pick ups to accelerate.
We've also been able to extend expiring leases covering a large number of containers.
This combination of accelerating pickups and reduced risk from container drop off.
He will lead to an upward turn in our utilization.
The size and durability of this improvement will depend on whether the recent increases and trade activity and leasing demand or sustained.
I'll now hand, the call over to John Ocallahan, our global head of marketing and operations.
Thank you, Brian turning to slide four.
As Brian mentioned cope with my team had a significant then pack of global trade volumes decreased by 15%, that's a shutdown spreads for Europe in the Americas.
Our customers significantly reduce basket capacity implementing blank selling.
The Trans Pacific on the East West trade slaughtered.
While the other line trade volumes weakened in the second quarter.
We did not see a major impact on our operations.
Although we did not see much pick up activity during the off price remained moderate and utilization held up well because like spots.
You're right protected from the near term drop off risk by a combination of our strong long term leases.
Our customers withdrawn the vessel capacity on the major trades and the boxes auditing stranded or tied up by that customers for temporary storage.
Well one site operations got on triangle.
In addition, our customers took action to tighten cost 329 team.
And that contain fleets contracted as they look to gain efficiencies offset revenue pressure while at the same time dealing with additional cost pressure.
Implementing I'm not twentytwenty.
The new container production orders will supplement replacement over the last four quarters and has contributed to the shortfall.
Our customers possibility is expect to be strong the second quarter.
Sure in parts of the changes, which seemed the shipping industry.
Specifically.
Aggressive and speeding that's cool that's capacity, which starts to push freight rates up all the same time fuel prices dropped.
Deeper reason is that since 2015, we've seen a lot of consolidation.
Which greatly increased our customers' ability to match supply would trade.
And mitigate the deep, causing a freight rates usually comes with a drop in volume.
Our near term credit risk mitigated by customers stronger financial performance.
Well hopefully this will be longer trying to creep into the credit profile of the industry.
We have also moved to show up at least portfolio, but specific transactions to alleviate any shorter time, we didn't agree exposure.
These lease extensions will immediately which you saw risks wapasu headquarter and all.
The increase in trade volume starting in June and then into July.
And while our customers just get a good bounce and trade volumes is not yet an understanding and then in the industry. That's how long this will continue and whether it isn't inventory restocking or normalization of consumption and lake itself I try not to see.
Second quarter was solid despite the changes, but trying to have secured sizable bookings in July so obviously that should be like requirements due to our extensive supply capability.
These pickups in speed up the third quarter.
New container prices increased $2000 to you and Pops actions taken by concerned about the actions to reduce production capacity.
Also due to this recent such that the amount.
On slide five.
You can see that utilization held up well in the second quarter.
Supported by the relatively low drop off longer shown in the upper right.
Neither of these charts show the benefit of the recent subject bookings we have talked about.
Bottom shots demonstrated significant bookings of new dry containers at the beginning of the third quarter.
Hello, Alaska is a chart showing new lease transactions by quarter over the last few years.
There was strong activity through 2017 to 2018 benitez lots at the over the last second quarter and finally, it was surgeons until I could be at the beginning of the third quarter and try to try to.
This bubble or the extreme right represents most new driving goodness, we had available.
No right chart shows I'll definitely definitely inventory and contenders in Asia.
It's clear how the inventory has built over the last three quarters of quiet time.
I used to change quickly.
Most recent buys for July.
A large part about inventory is not <unk> will be picked up very quickly.
On slide six.
Slide six demonstrates why our customers financial performance is going to be better than expected.
Yeah, two lines on the spot freight rates on the Asia, Europe and Transpacific trade.
You can see rates are up despite weak trade volumes.
Customers, who got significant capacity.
Managing the balance capacity and the non backdrop.
On the bottom dotted line you can see fuel prices.
After initially jumping because in the month low sulfur fuel earlier in the yeah.
Since I've come back down or below where they had been spike that most of the fuel mandate.
GAAP between higher freight rates and low fuel prices is expected to drive a strong line of products that don't see where our customers in the second quarter.
I'll now hand, you back to John Bonn CFO.
Thank you John.
Turning to page seven.
On this page, we presented our consolidated financial results.
Adjusted net income for the second quarter was $60 million were 86 cents per share.
These solid results represent a return on equity 12.2%.
Turning to page eight.
Oh results in the second quarter were impacted by the widespread economic shutdowns, which led to a significant decline in global trade at least demand.
However, due to a high quality long term lease portfolio.
Key financial metrics held up well.
Leasing revenue was flat compared to the first quarter.
This was largely due to our utilization remaining high.
Averaging 95% for the quarter.
Not only 40 basis points from the first quarter.
A direct operating expenses, which are largely made up of storage for off highway units.
Pairs for containers redelivered and positioning expenses.
Greece by 6.4 million, reflecting an increase in storage and position expense.
We generated a salad 6.6 million of combined gains on sale and trading margins.
Oh, the half a million dollars from the first quarter due to a slight increase in both sales volumes and prices.
Customer payment performance remained strong during the second quarter.
We had no material credit Charlie.
As John as John described earlier, a customer's ability to maintain freight rates and benefit from the drop in fuel prices enabled them to improve the profitability, thereby reducing our credit risk at least in the near term.
We repurchased 2.1 million about common shares during the second quarter had an average price of $28.70.
Reducing our average diluted shares outstanding by 3.2%.
Turning to page nine.
On this page, we highlight our strong balance sheet significant liquidity and are well structured debt profile.
We compare our balance sheet at June Thirtyth.
To December 2018.
To capture the full impact of the actions we've taken to strengthen our balance sheet over the last year and a half.
Over that time, you have issued $555 million a preferred shares.
Two and due to limited lease demand, we limited our investment new containers.
Together these actions have led to a significant reduction in a leverage.
We focus on net debt as a percentage of revenue, earning assets, where our UK as our key leverage metric.
We typically manage leverage based on a pre purchase accounting balance sheet as our debt facilities are structured based on those asset values.
And he's asset values are largely in line with kind of container prices on a depreciated basis.
As you can see on the left side below pre purchase accounting balance sheet net debt to revenue, earning assets has dropped from 74.5% in December 2018.
68.2% at the end of the second quarter.
In addition to our low leverage you can see in the table on the bottom left that we have significant liquidity.
Our strong cash flows.
Current cash balances and additional availability under our credit facility gives us liquidity of $2.7 billion well in excess of our major cash obligations over the next 12 months.
On the bottom right graph, we show that we have well structured debt portfolio with no significant maturity cliffs, enabling us to meet our debt obligations from our cash flow, which is the blue line.
Without the need for refinancing for several years.
We believe we are well positioned to take advantage of the recent improvement in the market, while maintaining plenty of liquidity in case the market direction reverses.
Turning to page 10.
This page highlights how we've been able to use our strong cash flow to create significant long term value for shareholders.
The graph on the top left shows our cash flow before capital spending and you can see the resiliency of our cash flow across market cycles.
The graph on the bottom left shows how our stable cash flow together with the short order cycle for containers.
Enables us to maintain our leverage in a steady range over the long term.
The graph on the right demonstrates how these strong cash flows in our financial stability have enabled us to create significant shareholder value.
Like steadily growing the book value of the business, while paying a substantial dividend.
Well now we're tending to Brian for some additional comments.
Thanks, John.
The presentation the view summary comments on slide 11.
Triton achieved solid performance in the second quarter of 2020, despite facing significant trade disruptions from the cobot 19 pandemic.
We generated adjusted earnings per share of 86 cents.
And achieved an annualized return on equity of 12.2%.
The resilience of our performance through this challenging time.
Testimony to the strength and stability of our business.
We are encouraged by a number of developments that have reduced our near term risks and improved our upside potential.
The risk from credit losses has been mitigated by stronger than expected financial performance for our customers.
And several large lease extension transactions have reduced the potential for large increase in container drop off volumes if trade activity weekends.
The recent surge and leasing activity will lead to increased container pickups in the third quarter and improved utilization.
As a result, we expect our adjusted earnings per share to increase from the second quarter of 2020 to the third.
Our trajectory after the third quarter, what depends on whether the recent increases and trade activity and leasing demand our sustained.
Well, we're hoping for sustained trade recovery.
Triton is well positioned to manage through a full range of market environments.
We remain the clear scale and cost leader in our industry.
Our balance sheet is in great shape, what levers do an all time low.
Our stable cash flow gives us many levers to drive shareholder value.
Our high quality long term lease portfolio provides significant protections when market conditions are challenging.
And our deep supply and operating capabilities.
Well I want to provide unrivaled service to our customers as well as maximize the opportunities for us but market conditions are strong.
I will now open up the call for questions.
Yes. Thank you I will now begin the question and answer session.
Ill ask your question you Me a press Star then one on your question on phone.
If you're using a speaker phone pick up your handset before pressing the keys to withdraw your question. Please press Star then too.
At this time, we'll pause momentarily to assemble the roster.
And the first question comes from Kinda talk start with Bank of America.
Hey, good morning, I, Brian John John maybe just talk a little bit about your.
Inventories how is it standing with with your inventories your customer and that's where each I, Brian you mentioned a little bit at the beginning on on where your customer stand, but maybe just kinda talk through that a bit.
Yeah. So in terms of inventory you know the way, we think of a different ways you know for US Yeah. We focus mainly on container inventory now, let's say as opposed to retail inventories are manufacturing and tourism for container inventories a you know weve. The deals we've done recently in July I covered a large portion of our existing inventory of new factory containers.
So we're actively looking to buy more to ensure we can continue swire customers with capacity, where they need it but but the recent deals have taken a lot of the available factory inventory out of the market for us and other leasing companies too.
We also look at our inventory of used the depo containers and we have a chart you know on that in the presentation and the recent bookings have covered a fairly meaningful portion of that as well, especially for the container type side, which are 40, but I keep that are most in demand.
So.
The inventory position for containers is changed a lot.
You know I think John Kelley and also referred to you know like inventories in general for say retailers and manufacturers and I think just a question in the industry about whether the recent surge of.
Trade activity and leasing demand.
Primarily relates to restocking inventory you know as businesses have reopened or is it also reflecting a more.
Long lasting improvement and consumption and retail sales and things like that but I'd say at least for people within the industry, there's still some uncertainty on that.
But of course, we're hopeful that its no more sustained type recovery.
And then a follow up would be on on kind of leasing yield seem to take a a tiny step down in the quarter. You know both on a per diem and then the annual lease yield or what are your thoughts now given the pickup in demand are you starting to see that starting it sounds like with box prices up at $2000, maybe maybe that starts to tighten a bit maybe or your thoughts on.
On the field.
Sure. So I'd say market leasing rates for new containers, where you know actually fairly stable during the quarter a there weren't a lot of new transactions. During the course of the second quarter, but container prices were fairly stable at just under $2000 on high end market leasing rates again were fairly stable to.
Our average lease rates came down some in the second quarter, primarily reflecting it a few lease extension transaction that we did giving rate in a few cases in return for getting greater protections ball for short term drop offs, but also longer term duration extension for the leases.
And those are deals that we typically thank our good NPV transactions for us even though they have an effective lowering our average rates now.
Looking into the third quarter, we have seen market leasing rates go up a reflecting increased you know it increased prices for container, but just also you know a tighter supply and demand environment for.
Containers.
And so it hasn't been a massive increase in rates, but it's been a you know meaningful on our noticeable and I should say.
And.
In terms of also in the second quarter, yeah, probably them that leasing yields were impacted by a slight decrease in utilization.
If you look and say revenue relative to asset values.
But utilization again is expected to go stop decreasing certainly for the third quarter and in turn up.
Wonderful if I got two more quick ones and your units and trading fleet were up significantly in numbers of to use and fleet, but very small in terms of a growing trading revenues. It is there something in those numbers that would cause that to change and then just upon I'll wrap up I'll give you all my questions. The wants his thoughts on.
Capex that you mentioned, the 489 million down significantly your thoughts as you move forward. If you want to give stocks for the second half there.
We also had to look at that Ken, but I believe the reason for the increase in the units a is that we did a.
Sort of a large trading transaction with one of our customers. It was structured as a sale lease back where we buy container from customers and least them back but the containers. In this case are expected to come back fairly quickly and so I believe we've classified it as they trading.
As a trading purchase as opposed to into our leasing fleet.
And so it's it's it's not like we sort of suddenly have a big pilot containers sitting in our depo is that we need to sell its its more a expectedly an orderly return of containers as we sell those containers for the customer I can be purchased them for fixed price and we sell them for you know what whenever we get and take the margin, but but I think that's the difference ism and I'll just add it kind of John that.
The equipment held for sale on the balance sheet, a those units can be both trading units and then I'll go through that accounting that kind of gross up accounting of trading revenue and controlling costs and our own long term lease equipment that goes through the gain on sale line item.
And John you just want to wrap up too on the Capex either.
The took you mean just news just like Capex for the for the yourself that you mentioned that never really see appointed Jay I'm going for the for the crowd. The first half <unk>, which is below well below your normal as you mentioned the release I just want to know if you wanted to give a thought for you know based on on the firming up if that's what you know.
You want to give any outlook for that sure I could hatteras total capex <unk>.
So certainly the first half Capex has continued to be impacted by just.
Fairly low levels of demand of course, because of the trade impacts of the covert pandemic. The first half did benefit from the training or sale leaseback transaction I was just describing right. Now we are actively out there looking to buy more containers and you know so you know we are we are spending more my.
Okay and expect Capex to go up in the second half of the year.
It won't get back to where it had been yet in 2017 and 18, there's just not enough factory capacity and you know to go out and by that level of equipment and six months and you know as well you know just I think until there's more certainty on just how long. This you know the surge is going to continue certainly we and others I think we'll be you know a little cautious ongoing.
I didn't mean to big volumes of equipment.
Wonderful Thanks, My cashed out thanks.
Thank you.
And once again. Please press Star then one if you would like to ask your question.
And the next question comes from Michael Brown with KBW.
Thank you operator, what got real.
Good morning, good thanks.
So just wanted to dig in a little bit on the on the network you're so.
It sounds like you know your expectation for sequential improvement. It. Yes is it is it possible that the second quarter really represents a crop and he asked for this or this downturn. Obviously you know there's the contract bronchus in credit issues, putting that aside is that the right way to kind of think about it as we start to look.
You know into the back half and through 21.
Thanks, Yeah. So certainly it represents we think gain a near term trough you know we've seen as we've talked about a fairly significant inflection in leasing demand over the last a really last few weeks.
As a you know, but trade volumes improve with reopenings and customers find themselves short of containers and we booked enough of our units in both factor units as well as our existing stock of dental equipment that we've effectively locked in you know a a nice improvement and utilization over the next quarter or too.
And.
The other benefits come along with that including a better sale prices and just better growth of course, and so as we look at you I think 2020, it feels like the second quarter should be low point, you know for us and and again as we've talked about in our in our press release in our commentary that you know we think.
That you know shows a really the resiliency and strength of the business model that we could have come through it would've been two relatively challenging macro years within 2019 with the trade disputes 2021st half of course with the covert pandemic.
And if our trough you know performance is 12% or are we you know we feel we feel pretty good about that I'd say the one thing, though you know at this point relative to other times. We've seen market cycles is this one is so unusual you know certainly for me I've never lived through a global pandemic and I think it is harder than than usual feel confident to say you know that.
This marks a not just a short term turning point, but up at a longer one as well and I think to some extent that's going to depend on what happens you know in the world with Covidien with the global economy.
You know as we get away from the third and fourth quarter, but but certainly for US. We're hoping that you know we are that they economic Reopenings out you know are the beginning of a more you know sustained improvement in global economic and trade activity.
But but certainly it's a it's a meaningful you know inflection in the short term.
Got it occurred or color there.
And then on the customer credit up Oxford, and it does sound like financial strength and the second one has been holding up well and during the quarter. We saw some positive developments and regarding some of your bigger customers.
So where do you see the major risks now I guess, what's what's on your radar and what should investors be focused on on modern or screw accord I think the main thing looking at you know frankly is just the macro picture.
I cannot think I was just as I'm just trying to say I think we.
It just feels the world still isn't you know isn't yet reached a stable place when it comes to you know dealing with the pandemic and get an economy going again and I think the biggest concern that I have is just that you know something else happens when are we revert to more constrained.
Activity because of the pandemic and that creates a longer term global economic country challenge.
Great and then just one more for me it looks like your tax levels come down from <unk>.
Just over 400 million last quarter to about 250 million in this quarter, but that's really still well above your last year range, where your carbon or $45 million to $60 million level. So how should we think about or about the cash levels on the balance sheet going forward. It sounds like the capex opportunities could be could be better.
In the second half, but are you also looking to take on leverage further ramp up buybacks, a little more or just I guess some combo of all the above.
Yes, so during the second quarter, we drew down some of our.
Revolving facility is just to build cash on the balance sheet.
They will turn into the first quarter in them.
And it really just as a safety precaution you know we've got as John Burns ascribed a lot of liquidity with existing borrowing facilities and a lot of cash flow and relatively limited.
You know bullet payments on our on our debt, but it just seemed a prudent thing to do that at the time withdrew the cash down the Gold award was just beginning to deal with the effects of the economic and Pesticidal shutdowns in the west in the capital markets. We're in a fair bit of disarray.
And so we pull down the yeah. Some cash just to be you know more fully in control of our own destiny.
As you know the.
Situation, certainly is not resolved, but it but it's certainly it's a it's become a in a less.
Unless new unless tangle than it was we've started about the cash balance drift down.
Our expectation is that as long as though the world continues to function fairly smoothly that we'll continue to what the cash drift down towards a more normal level.
Great. Thank you for taking my question.
Thank you and just how I'd like to return the call to Brian Sondey for any closing comments.
Yes. Thank you just want to thank everyone for your ongoing support and interest in Triton and I look forward to speaking with you soon.
Thank you.
Thank you.
In France has now concluded. Thank you for attending today's presentation may now disconnect.