Q2 2019 Earnings Call
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Hi, I'm looking to connect to the Triton International earnings call.
May I have your person last night please.
Ryan you in B R Y and H E. A R. Eli.
What's the company I do quoting from.
Era era.
I'm, sorry could you repeat it once again.
You are.
Oh.
On the line I was going to the call.
You.
$103 million.
Which is well below the book value of the investor interests.
Weve also been actively repurchasing our common stock.
The average price we paid for our shares is well below our adjusted tangible net book value.
And our projections for lease runoff value.
It's also important to note that we are not increasing financial risk with our share repurchases.
We've been able to repurchase almost 9% of our shares since last August without increasing leverage.
I'll conclude the presentation with a few summary comments on slide 11.
Triton achieved solid results in the second quarter of 2019.
We generated one dollar and 15 cents of adjusted earnings per share.
And we achieved an annualized return on equity over 16%.
Lease transaction and container pickup activity were slow in the second quarter.
But our operating metrics remain at a high level and continue to support strong financial performance.
And while our investments in new containers have been limited so far this year.
We're putting our cash flow to good use.
Our customers continue to expect trade growth will be modestly positive in 2019.
And we expect some increase in third quarter leasing activity.
We expect our adjusted earnings per share will hold fairly steady from the second to the third quarters.
Our financial performance remained strong.
We repurchased meaningful portions of our business for compelling values.
Our customers and market forecasters continue to expect trade growth will be modestly positive.
We expect our customers will continue to rely heavily on leasing.
We have significant advantages in our market.
And our strong and stable cash flow gives us many levers to create shareholder value.
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 Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys if at any time. Your question has been addressed and you would like to withdraw. Your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
The first question is from Scott Valentin with Compass Point Research. Please go ahead.
Good morning, everyone. Thanks for taking my question.
Just with regarding you mentioned us China.
The trade dispute, having an impact I think in the past you've said that you as China trades about 12%.
Of global trade just wondering one if you can maybe if you can quantify maybe decline has been in the U.S., China trade and maybe demand for containers and two.
Obviously reports of supply chain shifts and movement around the Vietnam, Indonesia other countries picking up.
Just wondering if you're seeing any supply any shifts in consumer demand customer demand.
For containers with an inter Asia is that is that growth in inter Asia.
Bill able to offset some of the decline in the U.S. China.
Yes, so in the past our comment about the share of trade made up by US in China really was driven by statistics that are published around the deployment of vessel capacity.
And where we don't really see the movements of containers on a daily basis, we see where they're picked up and dropped off and so we don't have great real time visibility into how trade patterns are changing we just see really how the overall demand for containers and supply. Good interest line demand is changing we hear from our customers. In fact, I think the Myrisk CEO was quoted.
A few weeks ago, as saying that they have seen.
Production shift or at least export shift from China to southeast Asia and that is making up some of the difference in the shortfall of.
China Us trade.
But but we don't really have great visibility for that.
Okay Fair enough and then just a question regarding the manufacturer inventory, obviously, it's grown quite a bit and then can I just 1.1 million to you about 3%.
Back to where it was back in 2015, which was a tough period.
Just wondering 17 or dollar seems like a low price for new container.
Typically given seasonality I know seasonally is weaker than usual, but I would have thought that you'd be maybe 18 50 1900 level for containers. Just wondering one if you can comment no I guess manufacturer profitability is going to be close to zero given steel prices have been I think relatively flat.
And to expectations, if they do close factories in August do you think that can boost container prices.
Yes, so certainly container prices are very low both on an absolute sense and also in particular, they're very low relative to steel prices and.
We always track the margin between the price for the container and the cost of the steel in the container and that margin is very close to historical lows.
And in fact, probably only a few quarters in the last 12 or 15 years have been.
In in the range, where it is now and so I think while we don't have perfect visibility into the manufacturing profitability.
Our guess is they're certainly not doing very well right now at these margins.
Which would certainly be helpful. Both from a tightening of supply and then ultimately helpful for the manufacturers I think it allowing them to sort of bunge orders.
After they reopen and get more normal margins and so our expectations would be that.
All else equal, we should see container prices push up from here.
Okay, all right. Thanks, very much for answering my questions.
The next question is from Michael Brown or with KBW. Please go ahead.
Hi, good morning.
Warning warning.
So I mean the.
The new purchase of containers year to date, you know its been a light and appreciate the color there, but how should we kind of think about.
Yeah on your Capex trajectory from here.
I guess kind of relative to last year's levels I mean, clearly it seems like it's going to be trending lower but kind of some guidance there would be a it would be helpful.
Sure. So you know we have the ability to turn on and to ramp down Capex very quickly and so I think our capex trajectory will mainly just reflect the trajectory and trade growth and the market.
Yes, the Capex has been light for two reasons, mainly just the overall volume of of lease transactions activity has been light.
And that reflects the fact that as we've said container supply and demand.
Well balanced overall, but theres been very little interest in customers and expanding the size of their container fleets novels due to say cautious outlooks on what growth might be this year as well as just a very tight focus on cost control.
And so we have reasonably good shelf of equipment ready to supply customers as we always do.
And as soon as we see customers coming for containers and us.
Winning deals could be like the returns.
I think then we'll start buying again and really the timing of that again just depends on the market. We still think we're very well positioned to win the deals we want to win.
I think we're the supplier of choice still to most of the major shipping lines and the deals that have been out there. This year that we haven't participated in.
Again, very much driven just by our preference to use capital for we consider to be higher value uses rather than say a loss of.
Competitive positioning or anything like that we still think we're you know we can go out there and win the deals we won.
Weaker start to the peak season.
I kind of seeing.
In the competitive environment are you seeing some of your your peers kind of giving concessions, whether theyre capitulating on rate or or terms on deals.
Yes, certainly pricing is down from where it was in 2017 and 2018 in those years was.
We did a lot of leasing share and customers very much valued our capacity to supply large numbers of containers on short notice and that's a that's a good pricing environment from a leasing company standpoint.
This year again, just due to the lack of deals we have seen certain companies compete aggressively to win deals that are out there and there always are a few leasing companies that seem to prioritize.
Investment volume are achieving investment budgets.
Above investment returns at Triton, our priority always is on returns.
And also servicing our customers.
But I wouldn't say.
Like deal terms aren't crazy.
But there are some are above our threshold and participating in them some are below and we're not.
You know, we do typically think we get a.
3% to 5% are are we margin over most of our competitors and so.
The deals that are marginal for us we do question, what what they might look like over time to some of our peers.
But that said, we don't know exactly what theyre thresholds are compared to ours.
Okay, and just one more from me.
The what's kind of your views on the outlook for the shipping industry I mean, you've seen a pickup in that.
Outlook for the profitability of the shipping sector or anything that we should be kind of concerned about.
Yes, I think in general what's another year, where.
It's a tough environment for the shipping companies are there still.
At levels that.
Don't provide a lot of profitability for most of the shipping lines in particular, the other the smaller ones and medium size ones can construct will.
But I think so far at least this year looks like a lot of the last three or four years.
And so we don't see anything sort of uniquely challenging about it.
January of next year around the sulfur.
And most of the customers feel that they will be able to pass those costs on effectively to the shippers.
But and it doesn't seem like they are others in industry are terribly concerned about it but that is something that's been talked about.
Okay. Thank you for taking my questions.
Thank you.
The next question is from Ari Rosa with Bank of America Merrill Lynch. Please go ahead.
Hey, good morning, guys. So I just wanted to get a little bit of additional color. You said your outlook for the second half was a little bit more optimistic maybe you could just give.
That leads you to that conclusion.
Sure. So it comes from a few different things I mean first as I think we mentioned a few times, we are hearing from customers that.
Despite.
The uncertainty created by the trade dispute that they still expect.
Trade growth to be in the 3% range and.
Based on that and just the way that containers will age out of service on a regular basis, we expect them to have to come to market and and.
To supplement their container fleets, which will drive leasing demand. We've also been seeing over the last.
A month or two customers regularly coming to market for spot requirements.
And so we know that their fleets are fairly tight.
And driving.
Demand at a particular poured at a particular time.
And.
Those.
Those requests and spot requirements have increased over the last month or two and we think will remain.
You know at a higher pace than they were earlier in the year.
And so it's really it's really those things.
Got it but it's not like it's contingent on on.
A resolution to the U.S. trying to trade dispute or something of that sort.
No I don't think so I think if you asked the most people in the industry with the last time, we did our call at the end of April would we see a resolution I think everyone was quite confident we would.
I think the the base case expectations now have shifted to who knows.
And no one counting on it in the near term.
Okay. That's helpful.
Sounds good thanks.
The next question is from Helane Becker with Cowen. Please go ahead.
Hey, this is Tyler on for Helane.
I'm just curious the deals that you walked away from in the quarter and I know that you walk away from deals all the time, but I'm wondering what were the primary factors have you decided to walk away from a few of the deals in the in the quarter.
Yes. So generally you know we look at the expected returns and which includes not just the most likely return, but you know a balance of upside opportunity relative to the risk and.
Most of the deals we walked away from had some combination of just expected returns and most likely returns below our thresholds, which typically for us our thresholds are somewhere in the.
The low teens equity IR ours, we typically like to do much better than that on average.
And so some combination of expected returns below that level.
And coupled with or leasing structures like.
Large possibilities to returns of containers outside of demand areas or.
Giving away repair conditions and things like that or a credit situations that we just didn't feel comfortable with.
But it was a variety of those factors that just let us to conclude that.
Those deals they didn't provide the kind of returns we like to get on our capital and I think just also driven by the fact that we have very good deployment opportunities and the other things we've been doing.
Got it and then this might be more for John .
Just out of curiosity.
LIBOR is going away.
And a few years and I'm wondering you guys have.
A little exposure to the benchmark and I'm wondering if you have thought at all about a new benchmark and how you plan to roll over that debt.
When LIBOR goes away I think in 2021 or 2022, Thank you Greg.
You know when the industry is responding all the refinancings of LIBOR based.
Debt that we have over the last year and a half has been included.
Language that the that we would work with the lenders to make the adjustment to whatever the.
The index is at that time people seem to be very much focused on so far which is the secured overnight lending rate.
Exactly how that rolls out remains to be seen but but all of our facilities are.
Incorporating that type of language in as Weve refinanced them.
Got it thank you guys.
Yes.
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Again, if you have a question. Please press Star then one.
This concludes our question and answer session I would like to turn the conference back over to Mr. Burns for any closing remarks.
Yes, we'd like to thank everyone for your continuing interest in Triton International and we look forward to speaking with you soon thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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