Q2 2021 Triton International Ltd Earnings Call
Good morning, and welcome to the trading.
<unk> International Limited second quarter 2021 earnings conference call.
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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.
And on today's call we.
We are here to discuss triton's second quarter 2021 results, which were reported this morning.
And me on this morning's call from Triton is Brian Sunday, our CEO and John O'callaghan, our 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 with the presentation that can be found and the investors section of our website under investor presentations.
I'd like to direct you to slide 2 of 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 and industry conditions.
Forward looking statements for subject to various risks and uncertainty Triton has provided additional information and its reports on file with the SEC concerning factors that could cause actual results to differ materially from those contained in this presentation and we encourage you to review.
Those factors.
In addition reconciliation of non-GAAP measures for the most directly comparable GAAP financial measures are included in the earnings release and presentation.
With these formalities out of the way, although I will turn the call over to Brian.
Thanks, John and welcome to Triton International's second.
2021 earnings conference call.
I'll start with slide 3 of our presentation.
Triton achieved outstanding results and the second quarter of 2021.
We generated $2.14.
Of adjusted net income per share and increase of 12% from the first quarter.
And we achieved an annualized return on equity of 26, 6%.
Our outstanding results in the second quarter were driven by growth and our leasing margin and a higher than expected disposal gain resulting from a 20% increase and disposal prices from the first quarter.
We expect our adjusted earnings per share will increase again.
And from the second to the third quarter.
Driven by strong growth and our leasing margin.
Our excellent results are being supported by very favorable market conditions.
Strong trade volumes and ongoing logistical disruptions are driving exceptional container demand.
And this exceptional demand is driving very.
Prices for new and used containers and.
And exceptionally high container utilization and leasing rates.
In addition shipping lines are relying heavily on the leasing market for their container needs.
Trade and is making the most from this extraordinary market opportunity.
We're achieving outstanding operational.
<unk> and financial performance.
And we're investing heavily and our container fleet.
We estimate triton's, achieving something and the range of a 40% share for new leasing transactions this year as.
And as our customers seek access to our industry, leading container supply capability.
And the 3 for $1 billion of containers.
Hi, because we've ordered this year.
And have already locked in over 25% asset growth.
Our strong leasing share. This year is also further securing our position as the go to supplier and the industry.
And further extending our scale and unit cost advantages.
We expect our long term performance will be meaningfully boosted by the transformations occurring within triton's business and our market.
The large block of containers. We've ordered this year are being placed on very long duration high return leases.
These leases will underpin our profitability and cash flow for many years.
Container, we have also significantly reduced our long term borrowing costs with aggressive debt refinancing.
And we expect further cost and flexibility benefits, if we're successful and transitioning our capital structure toward unsecured investment grade bonds.
We're also seeing a financial transformation of our customer base.
The major shipping lines are using their current extraordinary profitability to delever their balance sheets.
This reinforces the stability benefits provided by the consolidation that has taken place among the major carriers.
Finally, we expect our net book value per share to increase rapidly due to a very high return on equity.
Overall, our expected long term financial performance has shifted meaningfully upwards.
I will now hand, the call over to John O'callaghan, and global head of marketing and operations.
Thank you Brian.
Turning to page 4.
Page 4 illustrates the goods.
Assumption remains high and continues to drive trade cargo volume.
The upper left chart shows the good spending remains strong and <unk>.
Consumption has been sustained even if service spending has started to return to normal.
It's not a case of either or.
<unk> and the bottom left chart the ratio of inventories to sales remains historically very low.
While there remains insufficient goods on the shelves and logistical challenges continue and is widespread.
<unk> terminal and rail networks remaining congested.
In addition, there are not enough available containers trucks and chassis to make up for the shortfall to meet that continued demand for goods for.
That is slowing restocking.
And delaying rebuilding of inventories.
So we're expecting trade volumes to remain strong.
Page 5 illustrates that freight rates as well as new and used container prices have pushed to record levels.
Strong demand for vessels space and containers has created a shortage of ship capacity.
Pushing rates and prices to unprecedented levels.
You can see and the upper right chart that new container prices and a range of $3800.
The bottom right chart illustrates that the sales price of used containers continue to increase steadily throughout the second quarter.
Due to the surge and demand for cars the use and.
And the shortage of available.
Both sales containers.
Page 6 shows that altered container production is currently get elevated Devon.
Longer term supply and demand is and balance.
The chart on the left shows annual production also broken out into percentages between leasing companies.
And shipping lines.
There are a couple of observations on this chart.
And we've shown the dotted line and we expect a substantial amount of new production to be built over the remainder of 2021.
This would represent 8% growth and the container fleet.
This may be higher than anticipated trade growth.
<unk> container production was not much above replacement value and <unk>.
And 19% and 2020.
And so to some extent, we're still playing catch up.
While not shown on here, we believe the majority of the containers scheduled.
And the third quarter.
And our already fully committed to lease.
And you can see by the percentages and the Orange box at the bottom of the left graph.
The leasing share has been very high since the such started.
And over 70% and 2020.
And approximately.
The 2 third and 2021.
On the upper right you can see new production inventory.
And despite the factories producing containers and greater quantity.
Inventories of new containers remain very low.
We are approaching the middle of the peak season.
And what's being.
For the look and is being absorbed.
And what's sitting on the ground is already booked and represents at most 2 to 3 week supply only.
So despite production being at record levels, there is no spike of inventory.
You can see on the slide and the bottom right and.
Long.
Term measure of container supply and container demand.
Container growth is closely track trade growth over the long term.
Suggesting that the market is not out of balance.
And the container fleet. Despite the concerns always remains largely stabilized.
Slide 7 shows that triton's key operating metrics reflect the strong market and pushing up even further than we predicted.
This can clearly be seen in the top left chart for utilization at near maximum levels.
We have accepted and placed on order $1.1.6 million.
Teu, so far and 2021.
Over 50% of these have been delivered and the first half of 2021.
And an additional 381000 teu have been booked and will not be picked up through the third quarter.
And the.
And right chart, we show container pickups and drop offs.
You can see pickup volumes have been strong over the last 4 quarters due to the surge and trade.
And that and virtually no drop offs, which has constrained the volumes of container disposals.
Over 70.
75 per cent of the Depo pickups have gone into the lifecycle leases and the average interest rate has increased.
The bottom chart demonstrates the significant bookings of new and used dry containers over the last 12 months.
On the bottom right chart looking.
And extreme right bar under what is current on the depth of inventory.
This is all being leased out.
Lower left is a chart showing new leasing transactions by quarter.
And bubbles represent a significant amount of new production and that's been put on lease.
And leases negotiated.
Looking to the 'twenty, 1 and have an average duration of 13 years.
And the bubbles also illustrate the increase and market lease strike lease rates as container prices have jumped to meet demand.
The size of these investments and 2021 are even more impressive on a dollar value.
And <unk>.
We have put out a substantial amount of equipment and that new equipment and depot units on longer duration and lifecycle leases.
In addition to tying down the exploration schedules.
1 of our objectives over the last couple of years.
Base and you just take out volatility and.
And we have achieved that.
As well as building and longer term benefits across the fleet portfolio.
I'll now hand, you over to John Burns our CFO.
Thank you John.
Turning to page 8.
On this page we have presented our consolidated financial results.
Adjusted net income for the second quarter was $144.2 million or $2.14 per share and.
And increase of 12% from the first quarter and nearly 150% from the prior year's second quarter.
<unk> has these exceptional results represent an annualized return on equity of 26, 6%.
And the second quarter, we incurred $90 million and debt termination expense largely made up of a make whole premium associated with the prepayment of institutional notes.
Non operational nature of this charge, we have excluded and arriving at adjusted net income.
We expect to recapture the vast majority of this payment through lower interest expense over the next several years.
Turning to page 9.
Our results.
From the second quarter reflect the benefits of the continued surge and container demand that started in the second half of last year and.
And continues to generate strong leasing demand and exceptional disposal gains.
Of the $3.4 billion of new containers, we have ordered this year.
And more than 50% was delivered and the first half of the year.
Growing our revenue, earning assets by 10, 3% for the quarter and 20% over the prior year second quarter.
Lease revenue was up 6.6% over the first quarter and 15, 1% over the prior.
Yeah.
Average utilization increased 3 tenths of a percent from the first quarter to average 99, 4%.
And utilization is currently 99, 6%.
This near maximum level of utilization drove down direct operating expenses.
$3 million and from the first quarter.
And over $23 million from the prior year.
Largely due to the ongoing drop and container storage and repair expenses.
We continue to issue new debt and refinance existing facilities at lower rate levels.
Squeezing down our effective interest rate to 3.2% for the second quarter.
Our combined trading and disposal gains were stronger than expected.
Totaling $42.1 million for the quarter.
Up $12 million from the first quarter.
This increase.
And by some buy and over 20% increase and dry container selling prices from the first quarter.
Turning to page 10.
This page highlights our strong and stable cash flows which drives long term value.
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 together with the positive long term growth trend.
And you can see the exceptional strength of our current cash flows as shown in the annualized second quarter figure.
We are using the strong market conditions.
To support our aggressive fleet growth.
And long duration lease contracts, which.
Which is locking in and even higher level for long term performance and cash flows.
The graph on the bottom left.
Shows how our stable cash flows together with the short order cycle for containers.
<unk> left and maintain our leverage and a steady range over the long term.
Our leverage has increased back into the normal range over the last 2 quarters, reflecting our aggressive investment and new containers.
The graph on the right.
Demonstrates how these strong cash flows and our financial stability.
Enable has enabled us to create significant shareholder value.
By steadily growing the book value of our business, while paying a substantial dividend.
Turning to page 11.
Over the last year, we have opportunistically taken advantage of the low interest rate environment.
Issue.
Well over $6 billion and long term debt to support our aggressive capex program and to refinance high rate debt facilities.
This debt issuance activity includes $1.7 billion and secured investment grade bonds, we issued and the second quarter.
<unk>, representing a new source of attractive funding for us.
These transactions has lowered our effective interest rate by 75 basis points from last year's second quarter and have locked and further benefits and the third quarter.
We are looking to transition a debt capital structure to.
Thus the unsecured investment grade bond market.
And which will provide even further benefits door and interest cost and debt structure.
As we noted last quarter S&P upgraded our corporate credit rating to Triple B minus.
And we are working to refinance existing debt.
The facility.
Take this transition.
We believe these capital structure improvements will add to our already substantial market advantages.
I will now return you to Brian for some additional comments.
Thanks, John.
Slide 12 highlights the significant improvement and our long term credit profile.
<unk> for the container shipping industry.
And as John O'callaghan, and noted earlier cargo demand has outstripped available vessel and container capacity this year, leading to a sharp increase in freight rates.
And as a result, our shipping line customers are reporting unprecedented profitability.
The table on the.
Slide <unk> shows the EBITDA trends and major financial obligations for a number of shipping lines that publicly report full financial statements.
You can see the extraordinary current level of cash flow generation for these companies.
Many of our customers have announced sizable vessel orders to increase available capacity.
For many.
<unk> also announced they expect to prepay a large portion other interest bearing debt and.
And expect to finished the year with much lower leverage.
In addition, the structure of the shipping industry has improved through company consolidations and expanded alliances.
This has allowed the major lines to benefit from greater scale efficiencies.
And that is also facilitated a more rapid adjustment and vessel capacity as changing market as market conditions change.
We saw the benefits of this improved industry structure and the first half of 2020.
And when the shipping lines remained profitable despite a sharp decrease and trade volumes during the initial COVID-19 lockdowns.
Overall, the improved industry structure and meaningful balance sheet deleveraging combined to provide an attractive long term credit outlook for the container shipping industry.
Slide 13 discusses how we've used the exceptionally strong current leasing market to lock in long term benefits for Triton.
And as I mentioned earlier, we've already ordered $3.4 billion of containers for delivery in 2021.
These containers represent a meaningful portion of our assets.
We've been able to place these containers and leases with very high expected lifetime returns.
Due to the strength of demand and.
And Tory profits, we've derived by ordering containers ahead of our customers leasing requirements and a market with steadily increasing and container prices.
In addition, we've been highly focused on securing very long duration leases.
The average lease duration for our 2021, new container transact.
Actions of 13 years.
Which will effectively cover the full leasing life for most of our 2021 containers.
We have also been focused on extending the lease durations for the existing containers and our fleet.
The charts on the bottom of the slide illustrate how we've significantly increased our lease protections.
And the and we estimate that the weighted average duration of our long term and finance leases will increase to nearly 60 months by the end of this year.
Up from a little over 40 months at the start of 2017.
In addition, and about half of our dry containers and Alan lifecycle leases.
Which are structured to keep containers on hire until the end of their leases.
Leasing life.
This large block of new containers with high locked in profitability.
And the increased lease protections for our existing fleet of containers.
Should lead to both higher long term profitability and lower long term risk.
I'll finish the presentation with slide 14.
Triton achieved record performance again, and the second quarter of 2021.
We generated $2.14.
Adjusted earnings per share.
And achieved an annualized return on equity of 26, 6%.
<unk> is making durable improvements to our business.
Our large block of 2000.
And when containers are locked into long duration leases with high returns.
Our high share of new leasing transactions is reinforcing our scale advantages and further securing our position as the go to supplier and the industry.
We've extended the lease durations for used containers and increased the portion of our containers on lifecycle.
20 pieces.
And we have locked in lower long term interest rates and a higher leasing margin with aggressive debt refinancing.
We expect our financial performance will remain strong.
We expect our adjusted net income will increase from the second to the third quarter driven by a strong increase and leasing margin.
Cycle, we expect our cash flow and profitability will remain elevated into the longer term.
And we expect our net book value per share will increase rapidly due to a high return on equity.
We'll now open up the call for questions.
We will now begin the question and answer session to ask a question you May press.
And then 1 on your Touchtone phone.
And you are using a speakerphone please pick up your handset before pressing the keys.
And I'd like to draw. Your question. Please press Star then 2.
Our first question today will come from Michael Brown with K B W.
Hey, good morning, guys.
Good morning, Joe.
So Brian I, just wanted to start off with.
Just kind of a high level question about the environment.
Port congestion continues.
Thanks for global trade and we're seeing the headlines about that.
And each and every.
Every day here.
So just curious what's kind of the expectations are there from your seat what are you hearing from the shipping lines as to when that could potentially normalize.
Long that that issue will be with us and then on a related note what are the shipping lines doing to manage through those.
Eruptions as we head into the peak season.
And.
Reading some industry articles about kind of a pull forward of other peak season, and maybe that it's going to begin a little bit sooner to try and get ahead of some of that that.
And those disruptions and so you don't want it to.
And here, a little bit about that and what that.
Doesn't only mean for for your business.
Yes, thanks for the questions and.
So for share like like you, we see lots of reports that port congestion continues and if you look at the number of vessels anchored outside of major ports like Los Angeles.
<unk> got and briefly better I think during the year and maybe end of the second.
But ultimately it's gotten a little bit worse again.
And when speaking with our shipping line customers I think the general feeling is that the these various operational disruptions are not like likely to declare soon and I'm not sure anyone has a perfect estimate for when we will see container flows get back to normal levels of velocity, but.
Quarter, what I hear is that it's not likely this year and.
So that a lot of these disruptions will carry forward and into some time into 2022.
And I think we'll just have to see.
How successful the lines are.
And on bottlenecking, some of the some other points and and as well as how this trade volume.
And carry on because of course, it's the high continuing volume and make it difficult to to get the Debottleneck and done.
What a shipping line is doing to manage.
For the various challenges they are facing operationally right now.
And I think there is a real question about you know about the peak and of course, our retailers don't want to Miss that.
Back to school.
Volume day seasons, because the goods are of course quite specific to those things and.
And we hear there is a variety of strategies out there that you've mentioned 1 from pulling forward of cargos to try and make sure it.
Retailers and someone give us give themselves extra time.
And to get the goods here, we've seen shipping lines divert vessels from.
And how long would your ports with high congestion like Los Angeles up to secondary and third tier ports, but those of course create their own operational problems. When you do that.
But I think it just continues to be a very challenging operational environment out there with high trade volumes and a variety of things, causing.
Logistical and operational disruptions and and again the main thing from our side is we just don't we don't hear anything is going to clear quite soon.
For the 1 thing I would say and the context that we've been trying to provide is <unk>.
<unk>, we will see those things normalize and trade volumes will find their natural post COVID-19 level at some point here and.
Causing rational disruptions will ease and the market will return to normal, but 1 of the things again, we've been really trying to emphasize and our prepared remarks and and speaking with investors is that when the market normalizes. We don't think that somehow we go back to pre pandemic levels of performance that 1 and the nice things about our business model is that as we've added capacity.
To help our customers deal with the surge and trade volumes and helped them deal with the operational challenges, we have been putting those containers and a very long duration leases.
Which again, we believe puts us on a.
A new higher plateau, where performance that that doesn't erode.
And when market conditions eventually normalize.
And operator, great. Thank you for all the color there Brian.
25% asset growth that you are essentially locked in for the year based on the delivery.
And we expect to deliver deliveries for the year.
And that's certainly impressive I guess from last quarter, but theoretically that growth.
I mean, certainly higher than that so I just wanted to hear you.
And you think about what that could run rate through for the for the full year any of you and to how you guys are expecting a whole year and in terms of asset growth that could ultimately play out.
Yes, so youre right that right now is that we've locked in and.
For the most recent container orders, we're replacing we're for.
For really delivery through the end of September and so we haven't yet place meaningful orders for fourth quarter delivery, usually we see shipping lines slowing down the pace at which they bring containers into their fleets and the fourth quarter, mostly just because the peak season is over by then.
But this year of course is an unusual year and it's certainly possible, we'll see customers continuing to pull equipment and to their fleets in the fourth quarter to help them deal with these ongoing operational disruptions and again, we pointed out and our materials that even when goods consumption starts to normalize because of course and whole inventory restocking and cycle.
And that has to happen and so our general prediction is it's more likely than it might be and a typical year that we'll see demand carry through the fourth quarter.
But the good thing about our business again is we don't really have to make guesses about it and at least not yet.
And we will have the benefit probably have another month or so before we have to start.
Making guesses ourself about whether we want to order a high volumes of equipment for the fourth quarter, but to the extent that the market is there and we'll continue to buy we've got.
We're putting these containers onto again very high value long duration leases and so it's an opportunity. These investments that we would like to take advantage of and if we can and and again, we think we're providing and really valuable support for.
For our customers at this time and so if they have need for the equipment.
We'd also like to step up and and provided to them.
Great and let me just sneak in 1 more here.
And I'll hop back into the queue, but.
You touched on and 1 of your answers just kind of how the earnings power.
Sure and.
Moving on and improved and won't really be going back to 2 and its financial performance that you were producing pre COVID-19.
And it looks like kind of your run rate on EPS is now north of $8 a share and pre COVID-19. It was closer to kind of a net $4 share range.
Now look at your dividend here and the payout ratio.
It could be in the mid 40% range this quarter and fell below 30%, clearly capex and to focus right and there seems to still be a lot of uncertainty about what that means ultimately be but I'd love to just get a little a little view into how you guys are thinking about accounts or you know as things become more clear on the Capex side.
And so perhaps maybe later this year or early next year. How are you guys thinking about the dividend and you know what that means in terms of the you know and significantly improved earnings power for try and relative to pre COVID-19.
Yeah. So we're always thinking about what do we do with our cash flow and and our cash flow right now is at extraordinary levels.
And as you pointed out the dividend payout ratio is and <unk>.
Pretty close to a if not all time low of pretty close to an all time low for for US right now.
We've been as you've noted too we are focusing our excess cash flow and supporting Capex and right now we're operating it.
Mid to upper 20% Roe.
Level and it allows us to grow given our current dividend allows us to grow close to 20% and maintain constant leverage what we're growing right now a lot faster than that.
And as I mentioned earlier, we see these as very high value investments for the company and for our shareholders.
And so that for now remains our focus and supporting.
And that sort of turbo growth.
In the business.
And said, we've always believed our strong dividend and a consistent dividend as a great way for us to highlight our cash flow to our shareholders and and.
And share that cash flow with them. So my guess is when at some point here when the market conditions start to normalize where we gain more visibility about that.
<unk> this week and rethink what's what's the right level for the normal dividend for us.
Okay, great. Thanks for the other there Brian.
Yes, Thanks, Michael.
Hi, Dan if you have a question. Please press Star then 1.
Julian <unk>.
Our next question comes from Liam Burke with B Riley FBR.
Thank you and good morning, Brian Good morning, gentlemen.
Good morning.
Brian Youre generating mid mid Twenty's or OE.
The new business your market share.
Share gains and sort of justified and the strategic advantages that you do have globally, but is there any danger at these are OE rates that you get a marginal player in there to compete down some of those ROA numbers.
For sure we see the fact that the kind of performance for generating now.
Now.
Makes others interested and the business.
And.
We've always felt that we provide a really attractive combination of significant organic growth opportunities coupled with high secure investment returns and.
And for sure let me go through periods like this a very strong performance.
And that it brings new capital in whether it's existing players and we typically don't see startups, but.
It brings interest you know the thing we always try to remind.
And our investors about is it is not is not that easy to do we can do and the business that we've got significant scale advantages and cost advantages.
And also what our customers really care about and particular in markets like this 1.
And as reliable access to high volumes of containers on demand and.
And we at any point in time, if something between $300 million and $500 million of containers that we've ordered.
And keep and available for our customers at a moment's notice and.
From them and that's that.
Pretty significant investment to make and especially in a market like this 1 and again I don't think our big customers will be interested by the opportunity to pick up a few containers here and a few containers there and a market like this and and then again, where our vintages really shine or as the containers age and.
And you have to go through various remarketing cycles, and resale and induce also cost effectively.
While we do see the risk that good performance.
Breeds interest and some competition down the road.
And we really do feel that we've got but there's reasons why we generate the returns.
That we do and why the big customers come to us.
And at times like this where.
Having access to a large amount of container capacity reliably is very important to them right now.
Great and.
There's been discussion on disruptions for Suez Canal has been beneficial to the other.
And your container business, but even taking the disruptions aside the overall health of the container space has been pretty good with consolidation at the liner level and very rational behavior, even though the order book is up.
And if we go back to more normal times would you expect the duration of the contracts.
<unk> to be longer than the we'll call. It the historical 5 to 7 years, not 14, and 13 or 14, but would you expect them to be higher than the traditional normal levels.
It's a good question right now container lease container leases are so long for for 2 reasons..1 is just the strength of the market and.
And so we like long duration leases it helps us lock in high returns that are available today on our investments and it provides stability to our cash flow and our accounting results.
It's also driven by the fact that container prices are extraordinarily high.
And in our business, because we have to remarket, the containers and resell them.
We don't always.
Assume that because container prices are high today, they will be in the future and and.
When you have extraordinarily high prices, we see is that the relationship between leasing rates and container prices more than 1 to 1 and so you have to more than recapture the percentage increase and container prices and so agreeing to very long duration leases as a way for the shipping lines 2 to.
And even higher lease rates that we need to charge right now given our high container prices are.
In terms of where things go I think a lot of it depends on where container prices go and where the market goes.
We had been seeing for a number of years.
And kind of a steady and gradual increase and the average lease durations for the portfolio and for new deals and now.
To mitigate been historically typical like a 5 year leasing market way back in 2010 to maybe more typically like 7.7 ish average durations and 2017 and 18.
And my guess would be as it settles back into that kind of range.
But you'll have to stay of course.
Great. Thank you Brian.
And if I'm wondering if you have further questions. Please press star 1 to.
Star 1 at this time.
Seeing no further questions I'd like to turn the conference back over to Brian <unk> for any closing remarks.
Yeah. Thank you I'd just like to thank everyone for your continued interest and support for Triton and I look forward to speaking with you all soon thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.