Q2 2022 Triton International Ltd Earnings Call
Good day and welcome the Triton International Limited second quarter 2022 earnings call.
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I'd like to turn the conference over to Mr. John Burns CFO . Please go ahead.
Thank you.
Good morning, and thank you for joining us on today's call.
Here to discuss Triton's second quarter 2022 results, which were reported this morning.
Joining 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'd like to note that our prepared remarks will follow along with the presentation that can be found in the industrial section of our website.
I'd like to direct you to slide two 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.
These forward looking statements are subject to various risks and uncertainties.
This Friday provided additional information in 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 these factors.
In addition, reconciliations of non-GAAP measures to the most directly comparable GAAP financial measures are included in our earnings release and the presentation.
With these formalities out of the way I'll now turn the call over to Brian . Thanks.
Thanks, John and welcome to Triton International's second quarter 2022 earnings Conference call.
I'll start with slide three of our presentation.
Triton achieved record performance again in the second quarter of 2022.
We generated $2 92.
Adjusted net income per share.
An increase of five 8% from the first quarter.
That's an increase of 36% from the second quarter of last year.
And we achieved an annualized return on equity.
30%.
Our gain on sale benefitted by $6 $8 million in the second quarter from several finance lease transactions for older containers.
Are we still would've achieved record results without these transactions.
Market conditions remain constructive.
New container transactions have been limited this year following the exceptional demand we experienced in 2021.
Well container drop offs are low.
Our utilization remains well over 99%.
Collecting our strong long term lease portfolio.
When container supply conditions that are still fairly tight.
And container prices remain historically high.
Providing support for leasing rates and our disposal gains.
Our strong financial performance also reflects the durable enhancements, we've made to our business.
We invested $4 $5 billion of new containers over the last two years.
Leading to over 30% growth in our revenue earning assets.
We have placed these containers onto high margin long duration leases.
We've extended lease durations across our fleet.
And increased the portion of our containers on lifecycle leases to almost 60%.
And we have achieved meaningful interest expense savings through aggressive refinancing.
Locked in these savings by focusing on fixed rate long duration debt.
We continue to use our strong cash flow to drive shareholder value.
We have shifted our investment focus to share repurchases this year and believe they offer a compelling value for the company.
Year to date, we have repurchased three 9 million shares or about 6% of our total.
We accelerated our repurchases over the last few months.
And our board of directors has increased our repurchase authorization back to $200 million.
We've also announced a quarterly dividend of <unk> 65 per common share.
We expect our financial performance will remain strong.
The durable enhancements to our lease portfolio and capital structure should continue to sustain our strong leasing margin.
And our share repurchases are highly accretive.
We expect our adjusted net income per share in the third quarter will remain in line with our record results in the second quarter, excluding the extra gains from the finance lease transactions.
And we expect our cash flow profitability and return on equity will remain very high.
Throughout 2022 and into the longer term.
I will now hand, the call over to John O'callaghan, our global head of marketing and operations.
Thank you Brian .
Page four.
Age four shows Triton's key operating metrics market conditions generally remain favorable and operating metrics remain very strong.
In the upper right chart, you can see pickups have been limited as our customers focus on absorbing the large number of containers. They added last year.
But drop offs continue to be very low.
Our utilization as shown in the upper left and it remains near mine at near maximum levels, reflecting the strong protections provided by a long term lease portfolio and a high percentage of the lifecycle leases.
As illustrated by the bottom right chart.
The lower left public chart details the pace of new container transaction activity.
And it shows the lower volume of new deal activity and the trajectory of lease rates, which have come off from their peak levels of 2021.
I still historically high.
It's important to note that lease rates sharing for the last two years, including the first half for this year.
Represent much longer lease transactions than the bubbles before 2020.
Therefore, the relevant benefit on these lease rates is actually considerably higher.
Page five.
Page five illustrates the spot freight rates, new box prices on disposal prices, although lower than the peaks of 2021.
Still remain well above normal levels.
The chart in the upper left shows an index of spot freight rates for the Trans Pacific and East West trades.
Freight rates are down from last year's peak as the extreme shortages of vessel and container capacity have eased.
Freight rates remained well above pre pandemic levels.
Reflecting continued robust trade volumes and the ongoing logistical challenges that continue to disrupt shipping line operations.
And each of effective capacity.
In the upper right chart, you can see that new container prices have also reduced from 'twenty to 'twenty one peak level.
But remained historically high at around $2600.
As a result market leasing rates remain well above the average rates in our lease portfolio.
Which provides strong support for a lease renewal discussions.
The bottom right chart shows used container sale prices also remain historically high supporting our exceptionally strong disposal gangs.
The chart on the bottom left shows that port congestion.
As high as it has ever been reflecting.
<unk> operational challenges across a wide range of global ports.
This congestion continues to smoke container turn times and create extra demand for containers.
Page six.
Page six shows the container availability remains fairly tight.
Chartered left shows new container production volumes.
Turning to production has slowed this year following record production in 2021.
We anticipate the production volumes could slow further in the second half.
While trade volumes remained high.
<unk> have been focused on absorbing the large number of containers.
Added last year.
And there have been more successful moving empty containers back to Asia.
The chart in the upper right shows container factory inventory.
You can see this has been building increasing to 833000 Teu.
Versus 357000 Teu for the same period in 2021.
However, as a percentage of fleet it remains fairly low at below 2% of the global fleet.
Similarly on the lower right you can see that Triton's depot inventory of used containers remains exceptionally low.
Second very high utilization of our fleet.
Overall, the backdrop for Triton remains strong with very limited drop volume and we have at the same time locked in most of our equipment.
I'll now hand, you over to John Burns our CFO .
Thank you John .
On page seven we presented our consolidated financial results.
Adjusted net income for the second quarter was $186 million or $2 92 per share.
An increase of five 8% from the first quarter.
36% from the prior year quarter.
These exceptional results represent an annualized return on equity of nearly 30%.
On page eight I'll discuss the drivers of our strong profitability.
Our second quarter performance reflects the durable enhancements, we've made to our business over the last two years.
Along with the current constructive market conditions.
Second quarter leasing revenue increased slightly from the first quarter. Despite a slight decline in average revenue earning assets.
Reflecting utilization remaining at maximum levels.
Elemental container demand.
Solid fee income.
Revenue in the second quarter was up 14% over the prior year.
We expect our utilization and fleet size to decline slightly in the third quarter from the very high levels currently.
Interest expense in the second quarter was essentially flat from the first quarter.
<unk> a decrease in our average outstanding debt.
Set by a slight increase in our effective interest rate.
254%.
86% of our debt portfolio is fixed rate debt or swap to fixed.
With a weighted average duration of nearly five years.
Therefore, we are well protected from the recent unexpected future increases in interest rates.
Yeah.
We continue to generate exceptional levels of trading in disposal gains totaling $41 $5 million for the second quarter.
An increase of $7 8 million from the first quarter.
The second quarter figure included $6 8 million of gains generated on several lease transactions, which were accounted for as sales.
We expect disposal gains to remain high in the third quarter.
We expect them to trend lower as disposal prices moderate.
And we do not currently anticipate a repeat of the lease transaction gains.
Since the end of the peak season last year, we have shifted our strong cash flows away from aggressive container investment.
Toward active share repurchases.
We have repurchased three 9 million shares or 6% of our shares outstanding at year end.
We accelerated our share repurchases in the second quarter.
Repurchasing one 8 million shares and have repurchased an additional 850000 shares in July through the 26.
And in support of the share repurchase activity, we have once again increased our share repurchase authorization back to $200 million.
Okay.
Page nine highlights the durable enhancements, we have made to our business over the last two years.
On the left we show how we have leveraged the strong market conditions over the last two years to rapidly expand our leasing margin.
On the right we show why this high level of performance is durable.
The top right graph shows the average remaining lease duration for our long term and finance lease portfolio.
You can see that the remaining lease duration is nearly 80 months or six and a half years to the exploration of the lease contract.
And if we include the usual time it takes for customers to redeliver containers after lease expires.
Average duration increases to 90 months.
In addition to the long duration of the lease portfolio.
87% of our portfolio on a book value basis is on these long term leases.
On the bottom right. We show that we have funded this long term lease portfolio.
With long duration fixed rate or hedged to fixed rate debt at very attractive interest rate levels. As a result of our refinancing activities over the last two years.
This combination of attractive long term lease and debt portfolios has locked in a high level of leasing margin for years to come.
I'll now return you to Brian for some additional comments.
Thanks, John Slide 10 summarizes the way, we think about our equity cash flow.
And illustrates how this cash flow gives us a variety of powerful levers to drive shareholder value.
The top grouping of numbers summarizes the cash flow power of our business.
We are currently generating over $1 $6 billion of cash flow before capital spending on an annualized basis.
We need to allocate a little more than half of this cash flow from replacement capital spending.
In order to maintain our fleet size as containers age out of service.
Please ask around $710 million of steady state cash flow.
We currently pay a quarterly dividend of <unk> 65 per share, which represents about $165 million in annual dividends.
As a result, we have about $545 million of steady state annual cash flow after our substantial regular dividend.
Yeah.
This next set of numbers. So the few things we can do with this $545 million and illustrates why we are able to create value across a wide range of market environments.
If we focus on capital investment like we did last year, we can self fund the equity needed for nearly 20% asset growth.
Keeping our leverage ratio constant.
Alternatively, if we focus on share repurchases like we are now.
We can repurchase about 15% of our shares at the current trading range.
If we wanted to instead to focus on dividends, we could pay over $8 50 per share on top of our regular dividend.
Bringing the total annual dividend to over $11 per share.
Yeah.
Slide 11 looks at our trading has created long term value.
Triton has the scale cost and capability leader in are fundamentally attractive market.
And we have a long history of delivering solid growth strong profitability and above market shareholder returns.
The chart on the upper left looks at the long term growth of our container fleet.
Over the last 17 years, we have grown the fleet, 8% per year by unit count.
And about 9% by year by net book value.
That's right.
Long term cash flow before capital spending.
And you can see how our cash flow has increased as we have grown our fleet.
You can also see the stability of our cash flow even in very challenging years for the global economy.
The chart on the lower left shows how we've used our cash flow to both reinvest in our business and regularly return cash to shareholders.
At the time of <unk> IPO in 2005.
T. A L had an adjusted net book value of around $12 per share.
Our adjusted net book value is now $45 per share and we have paid out over $30 per share in dividends.
And as you can see in the lower right. Our total shareholder return since our 2005 hundred IPO is over 14% per year.
Significantly outperforming the S&P 500.
Sure.
I'll finish the presentation with slide 12.
Triton has an exceptional franchise and we continue to drive outstanding results.
We achieved another record quarter of profitability in the second quarter.
We expect our financial performance will remain strong.
2022 and into the longer term.
Our strong cash flow gives us many levers to drive shareholder value across a wide range of market conditions.
And we believe our shift to aggressive share repurchases. This year is building value quickly.
And offers a compelling opportunity for Triton and our investors.
Before I open up the call for questions I would like to take a minute to recognize and thank John Burns, our longtime chief financial Officer.
We recently announced that John intends to retire at the end of this year.
John joined one of Triton's predecessor companies in 1996.
And he has been our chief financial Officer since 2009.
John has been a tremendous CFO .
A fantastic partner for me.
John has graciously offered to stay on while we get our new CFO identified and settled.
But even then he'll be sorely missed.
Thank you for everything John .
Okay.
I will now open up the call for questions.
Thank you.
Well now begin the question and answers.
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Using a speakerphone please pick up your handset before pressing the keys.
But with longer question. Please press Star then two.
Well pause a moment to assemble the roster.
Hello.
First question comes from Larry Solow CJS Securities. Please go ahead.
Hey, good morning, guys. Thanks for taking the questions.
I guess first question just on sort of the log jams at the ports in that and there is still sort of market inefficiencies and that doesn't sound like we're getting much improvement on that.
Is that.
Reading that correctly.
Is that solely improves and who knows on timeline on that.
Would that even really impact you guys much.
From a high level.
Sure. So I mean first of all we do hear from our customers and we see in the data that's out there that the bottlenecks at the ports continue we also hear from customers is the bottlenecks extend beyond the ports to still some challenges with trucking capacity in say warehouse efficiency.
And I think it is a hard guests about exactly when the bottlenecks start to clear and things go back to normal but our take.
Listening to our customers is that it's not going to suddenly free up in the near term, it's going to be a long process of trying to debottleneck the operations and bring things back to say more efficient levels in terms of the impact on us there.
There would be some impact if bottlenecks suddenly east certainly one of the drivers for container demand over the last two years or so has been the increase in turn times for containers and so therefore, the need for more containers for every unit of cargo.
And so one reason why we've seen the container fleet grow faster than trade, but not have that lead to an excess of containers is just the containers absorbed in these bottlenecks.
Yeah again, I think our general view is that they will get eased over time in may over time reduce a little bit the amount of container investment needed relative to trade growth, but again everything we see in here is that these bottlenecks are likely to persist for some time.
Alright, and obviously you know as they do start to ease I guess that the comfort we have as your contracts were all pretty long term so it would be.
Inevitable impact on you in I guess inevitably this has to break to free you would think or improve but.
For my redo it seems like it would be it wouldn't be like a slow turning.
Turning a switch on and off for you would be a much longer term.
Very slow sort of impact right I mean, thats, how iconic that's for sure I mean, we think long and slow for a few reasons. One just as I was saying that I think the expectation is that the debottlenecking process itself is going to be long and slow and then we also think that our customers are likely to change the way they think about their container fleets I think prior to the pandemic.
There'd been a tremendous focus on efficiency in our customer side.
Year after year kind of screwed down the number of containers relative to their slots I.
I do think theres likely at all parts of the supply chain, but including with containers going to be a rethink about the tradeoff between resiliency and efficiency and so even as the bottlenecks ease we don't see our customers looking to snap back to say, where they're operating before in terms of the numbers of containers compared to their slots. So and then finally as I think as you pointed out and probably most importantly for us.
It's just the.
Actions, we have in our lease portfolio.
Majority of our containers are locked up on very long duration leases, including all of the containers that we put on on high value high margin deals over the last few years and they're just not subject to re delivery, even if our customers wanted and I think at the margin there could be fewer pickups for us and especially maybe a little bit less investment as the bottlenecks ease, but we've been.
<unk> tried to be quite clear over the last year or two even that these improvements that we're making in our business the growth in our leasing margin and so on we think is going to be very durable almost regardless of market conditions.
And then just second question just in terms of.
I realize there's a supply of.
Pricing on disposal prices, obviously coming down a little bit and you had this one time.
Gain this quarter.
At one time, but sort of a thing it doesn't occur very often.
What about just in terms of your supply of disposable containers to sell in the future is that I got to imagine that's pre.
Low how do you sort of view that as you look out the next few quarters.
So certainly our volume over the last probably 18 months has been very low really just that our customers have been hanging on to our containers and I think Brian you had mentioned a few times that just our drop off volumes have been have been really low and in fact, they continue to be allowed this year, even as we have seen fewer pickups and so we.
We do think that as.
Market conditions continue to normalize we will see drop off volumes increase starting to get back toward normal but again. We think this is going to be a very controlled increase and probably we will see an increase in disposal volumes.
As that happens, which tends to actually offset some of the impacts from the lower prices.
We continue to generate exceptional gains.
We've been saying for a while we think these are going to start to trend down towards normal and hasnt really happened yet.
But that continues to be our view that over time, we're going to see drop off volumes increase a little bit sale volumes increase a little bit stale prices, starting to moderate and our gains starting to moderate overtime.
Alright, and then just lastly.
John John Congratulations on your pending retirement that's awesome.
Brian any thoughts on it.
Replacement of it looks like you guys are looking both internally and externally for that.
Yes. So we're fortunate we've got a number of great internal candidates and we're taking a very serious look it at that.
Obviously, there's lots of positives that come along with doing it internally also we think that it's interesting for us to take a look and see what's out there in the market. We think Triton represents a really interesting opportunity for someone.
But we're looking around and it's a very controlled process. It's organized process and again as I mentioned, John has been very gracious to say hey, he will stay as long as we need them.
First I said 10 more years, but.
Yeah.
It's something that's great for Jon I think again the company. It's it's got we've got a great team here.
This is in great shape and will manage the process well great.
Alright, I appreciate all cortex.
Okay.
Thank you. Our next question comes from Nathan <unk> Bank of America. Please go ahead.
Great. Thanks, guys. This is nathan calling in for connector.
So firstly.
Kind of wanted to get the teams thoughts on.
Sort of a broader container cycle. When you guys are speaking to the liners are you hearing more about shaping.
Stripping liners are sourcing more containers themselves and also just on the broader shift in focus towards more on returns and less on sort of.
<unk> expansion.
On the three auctions that you guys noted.
Growth capex dividends and repurchases Im just kind of curious on what kind of.
What kind of metrics you guys seem to sort of drive you guys to deploy more growth capex at this stage of the cycle. Thank you so much.
Yeah sure. So I guess, a couple of different things in terms of arc, our customers focus on their fleets right now.
In general I would say our customers or most of our customers have backed off on say broadly adding capacity to their container fleets, maybe beginning early this year.
They added a tremendous number of containers in 2021 to accommodate.
The strong goods consumption growth and strong trade growth.
During that time as well as these bottlenecks I was just talking about.
And I think most of our customers lease when I speak with them feel they have enough containers in their fleet. They wish they were more of them in the right places and few of them fewer of them stuck in bottlenecks, but but there does seem more of a drive at this point to try to focus on debottlenecking as opposed to trying to cover up the bottlenecks with ever more containers and.
And so I think that's been the main shift in our customers trying to make their current fleets.
Operate better despite the bottlenecks and we have seen let's say the ratio of containers purchased by shipping lines compared to leased from leasing companies. We've seen more containers purchased this year, but frankly I don't think its really a shift in the in the share I think it represents really a decrease in purchasing.
Leasing company as we I think it.
It came off of the peak at the end of last year, and then felt we might see this.
Yes time of less investment also for a leasing company, we have to be very careful about buying containers and in an environment, where container prices are going down we buy containers and then on speculation and lease them out maybe even a month or a few months later and so that can be kind of a tough financial equation I think thats made the leasing industry, including us cautious about specular.
The investment so.
Generally we don't really think that's going to be a significant shift in how our customers source containers that there's lots of reasons to lease.
And we think that will continue to.
Just wanted them as it has in the past.
In terms of.
How we think about investing in containers versus buying back our stock.
There's a number of different things we look at first of course is the market environment.
We're always very cautious about not trying to push investment into a market that doesn't really need investment.
So typically the main thing is just where is the market and how many containers, we think our customers are going to need.
When it comes to when we have opportunities at the margin to think about investing versus repurchasing.
Kind of a classic corporate finance analysis, we look at the expected returns on on the what we think we can get from containers.
We look at the expected returns, we think we can get by buying back our stock and we see which which are more interesting often we find that are both compelling last year, we we put our money into buying containers, although our stock I think it was a really interesting value as well I think.
All else equal were biased to investing in our container fleet is supportive of our franchise. It builds our scale advantages and supports our cost advantages.
But again, we're also quite disciplined on that.
Not pushing investment when it's not there and Ross are pretty disappointed actually quite disciplined in maintaining a high hurdle rate for where it makes sense for us to invest.
I hope that was helpful.
Great. Thanks for the insights.
Again, if you have a question. Please press Star then one.
Our next question comes will be embark of B Riley. Please go ahead.
Thank you and good morning, Brian Good morning, John .
Good morning.
And John Congratulations on your retirement.
Okay.
If im looking at.
The trade off you have in the macro environment congestion will ease over time.
Brian do you see any significant offset to the easing of congestion with.
New builds coming onto onto the market in the second half of 2023.
Yes.
We do think there'll be at first is the process of the bottlenecks coming off will be a gradual process and I think there's a number of office. That's one as I mentioned, we think our customers will rethink.
How they how they consider the right amount of containers in their fleet and so we don't think they're going to try to get right back down to the same operating ratios where they were before.
So that kind of extra container slack will be one of the offsets.
The offsets is that the emissions rules for vessels tighten in 2023.
While we are not technical experts experts our understanding is that for a lot of the older vessels. Our customers are going to have to significantly slow their sailing speeds to comply with those emissions.
And that is expected to take some effective capacity out of the market both vessel capacity and container capacity.
As you point out there is a large amount of vessels on order that will start coming in and Theres probably some.
Correlation between the amount of investment capacity and container capacity again, we typically expect typically think that the correlation for containers is more related to trade volumes rather than vessel capacity, but I think there is still some positive effect of having more ships come in and more container demand, but again as we I was talking earlier, we look at these bottlenecks right now they're absorbing.
<unk> significant capacity, we do think they will ease over time.
That may again limit the growth of the container fleet, a little bit relative to the growth of trade, but again, we feel pretty well protected from from where we sit.
Okay. Thanks, Brian the other question I had is on your ROE.
Can't stay above 30, it ticked down but incredibly healthy returns on equity.
Things get back to normal.
Terms of normalized.
Container shipping volume growth.
Capacity sort of realigning yourself.
How do you see your are your more normalized ROE would it be higher than historical normalized levels.
Or where do you see that settling.
Yeah. So first I'd, just say our historical ROE is pretty high.
For many of years probably.
Over the last 20 years or so the average ROE has been in the high teens and probably something close to 18%.
So again this has been a business that's been a great business a great business for investment for for a long time right.
Right now of course, it's a lot higher than that.
<unk> been around 30% now for a few quarters.
That reflects most importantly, just the the durable benefits we've made into the business of adding a very large number of containers that were put on really high margin high return leases we.
We did a lot of good work on AR and rest of the containers in our portfolio over the last 18 months or two years and are renewing expiring leases on two attractive extensions pushing out the durations.
Of our existing leases, increasing the share of containers on lifecycle leases.
All of those things, we think are going to lead to a sustained kind of outperformance for our ROE realm.
Relative to our historical level, one thing that we do see normalizing as I was saying earlier as the gains on sale part of that 30%.
ROE or gains that are well above where they are typically.
But as I was just saying, we do things that the ROE even as the gains normalized we also expect the kind of returns driven by our sustainable leasing margin.
Is going to continue to drive outperformance on the ROE even as it does start to come down because of the games.
Thank you, Brian Congratulations again Jonathan.
Thanks Lee.
Yes.
Okay.
Thank you. This concludes our question and answer session I would like to turn the call back over to Mr. Brian Sunday for closing remarks.
What I'd like to thank everyone again for your interest and support for Triton International. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.