Good day, ladies and gentlemen, and welcome to the Triton International Limited Second Quarter 2018 Earnings Release Conference Call. (Operator Instructions) Please note, today's event is being recorded. At this time, I would now like to turn the conference over to John Burns, Chief Financial Officer. Please go ahead, sir..

Thanks, Rocco. Good morning, and thank you for joining us on today's call. We are here to discuss Triton's Second Quarter 2018 Results, which were reported this morning. Joining me on this morning's call from Triton, Brian Sondey, CEO; John O'Callaghan, our Executive Vice President and Head of Global Marketing and Operations.

He is unable to join our call today due to a long-standing prior commitment. We look forward to John rejoining us for our third quarter earnings call. Before I turn the call over to Brian, I would like to note that the prepared remarks will follow along the presentation that can be found on our website in the Company Presentation section.

I would also like to point out that the company will be making statements on this conference call that are forward-looking statements as the term is defined by the Private Securities Litigation Reform Act of 1995.

Any forward-looking statements made on this call are based on certain assumptions and analysis made by the company and are not a guarantee of future performance. Actual results may vary materially from those expressed or implied in the forward-looking statements.

The company's views estimates, plans and outlook, as described in this call, may change subsequent to this discussion. The company is under no obligation to modify or update any of these statements that are made despite subsequent changes. These statements involve risks and uncertainty and are only predictions.

A discussion of such risks and uncertainties is included in our earnings release, presentation as well as our SEC filings. In addition, certain non-GAAP financial measures will be discussed on this call, and per SEC rules, important information regarding these non-GAAP financial measures is included in our earnings release and presentation.

With these formalities out of the way, I'll now turn the call over to Brian..

Thanks, John, and welcome to Triton International's second quarter 2018 earnings conference call. I'll start with Slide 3 of the presentation. Triton achieved outstanding results in the second quarter of 2018. Triton generated $88.9 million of adjusted net income in the second quarter or $1.10 per share, an increase of 11% from the first quarter.

Our strong results in the second quarter were driven by outstanding operational performance and Triton's many advantages. Our results were also supported by continued value-added investment and growth. Market conditions remain favorable. Demand for our containers remains strong. And the supply of containers remains well controlled.

The new tariffs introduced by the United States are creating some uncertainty in our market. We've not yet seen a noticeable impact on our business. We expect our adjusted net income will continue to increase in the second half of 2018 due to continued fleet growth and our expectation that positive market conditions will continue.

And our Board of Directors has authorized a dividend of $0.52 per share this quarter and has also authorized up to $200 million for share repurchases. The share repurchase authorization will allow us to opportunistically repurchase shares, which we believe could provide an attractive additional avenue for shareholder value creation.

I'll continue with Slide 4. Triton achieved outstanding operational performance in the second quarter. Container pickup volumes were near record levels in May and June, reflecting ongoing trade growth and the start of the traditional summer peak season for dry containers.

Our container utilization averaged 98.8% in the second quarter and it currently stands at 98.8%. And our average used container sale prices increased in the second quarter due to the low inventory of containers available for sale, driving the increase in our disposal gains.

Triton's strong operating performance continues to be supported by favorable market conditions. Our shipping line customers are achieving solid volume growth this year, and they continue to rely heavily on leasing for new container additions to their fleets.

The supply of containers remains well controlled, with a moderate amount of new container inventory and very limited availability of used leasing containers. And new container prices had held stable in the second quarter in the range of $2,200 for a 20-foot dry container.

We're also on track for another successful year of value-added investment and growth. Slide 5 shows the number of our key operating metrics. As you can see, the chart reflects our outstanding operational performance. Our utilization remains very high. Our average lease rates continue to move gradually upwards.

That container pickup activity has been very strong. And average used container sale prices are up significantly over the last year, driving sizable gains on disposals. Slide 6 looks at a number of key market indicators. You can see in the upper left chart that market forecasters continue to project trade growth will be in the 4% to 5% range in 2018.

And this is consistent with what we're hearing from our customers. The upper right chart shows the evolution of the global container fleet. The chart shows the steady growth of the container fleet, as global trade volumes have grown.

And you can also see the increasing share for leasing of the global fleet from just over 40% 10 years ago to over 50% today. For 2018 production, we estimate the leasing share as over 60%. The increased share for leasing creates incremental demand for our containers and boosts our growth. The bottom 2 charts look at container supply.

The chart on the lower left shows the inventory of new containers held at the container factories by leasing companies and shipping lines. We estimate the total inventory of new containers is currently about 750,000 TEU, which represents about 2% of the global container fleet.

The chart on the lower right shows Triton's available inventory of used containers in Asia. Our used container inventory remains very low, and most of our limited inventory is booked and waiting for pickup.

Overall, this combination of solid trade growth and increasing share for leasing and well-controlled container supply creates a positive background for us, and we expect these positive conditions will continue. Turning to Slide 7.

Given the current positive market conditions, we've not seen any noticeable impacts from trade war threats or the opening rounds of increased tariffs. However, the U.S. has proposed that an additional $200 billion of goods imported from China will be subjected to incremental tariffs. And it seems likely that China will respond.

The proposed expansion of the tariffs is creating some uncertainty in our market. But market forecasters and our customers continue to expect solid trade growth this year. While trade between United States and China is large, it represents just a fraction of global container volumes.

For example, Alphaliner estimates that 17% of global vessel capacity is currently deployed in the Far East to North American trade. And the China/U. S. trade is just a portion of this.

In addition, it seems unlikely that tariffs will cause manufacturers and retailers to make sudden dramatic changes in their global supply chains, especially while it's unclear how long the new tariffs will be in place. And finally, for container flows that are disrupted between the U.S.

and China, it seems likely that a large portion will be relocated rather than eliminated. Turning to Slide 8. Triton is achieving another successful year of value-added investment and growth. We've ordered almost $1.4 billion of containers for delivery in 2018.

These investments have been spread across all the equipment types that we operate, and they should lead to growth in our revenue earning assets in the 10% range this year.

Our strong investment continues to be supported by an increase in the share for leasing relative to direct container purchases by our customers, and we continue to win and outsize share of new leasing transactions. The economics of our investments remain favorable, allowing us to build a long tail of enhanced profitability and cash flow.

We estimate that our lease transactions will generate mid-teen equity IRRs over the lifetime of our containers. And the average initial duration of our leases for new containers is in the range of 7 years. Turning to Slide 9. Triton's strong operating, financial and investment performance continued to be supported by our many competitive advantages.

Our market-leading size gives us meaningful scale advantages, and we benefit from a very powerful combination of the most extensive and capable global operating infrastructure with the lowest level of unit costs. We maintain the largest ready inventory of new containers and have, by far, the greatest global coverage with our customer service team.

Our unrivaled customer service and container supply capabilities make us the preferred supplier to the world's largest shipping lines. Our extensive global footprint also allows us to remarket our containers more effectively as they age, control our container depot costs and sell our older containers effectively in a huge range of global locations.

And as seen on the chart on the right, our SG&A costs are a smaller share of our revenues than they are for our public peers. All of which means that we can offer our customers premium availability and service, achieve better lifetime value for our containers and operate our business for lower unit cost than our competition.

I'll now hand the call over to John Burns, our Chief Financial Officer..

Thank you, Brian. Turning to Page 10. On this page, we've presented the consolidated results for the second quarter compared to the first quarter and compared to the second quarter of last year. Adjusted net income for the second quarter was $88.9 million or $1.10 per share, up 11% from the first quarter and nearly 90% from the prior year quarter.

These strong results represent an annualized return on equity of 16.4%. The increase in earnings was driven by continued strong fleet growth, high utilization, strong disposal gains and lower operating costs. Turning to Page 11. Here I'll expand on those key drivers of our strong profitability.

Leasing revenue for the second quarter is up $47.8 million or 17% over the prior year quarter, driven by 13% growth in our container fleet and 2.3% increase in average utilization. Utilization averaged 98.8% in the second quarter, up from 96.5% the prior year.

In addition to the revenue benefit, this high level of utilization drove a reduction in direct operating expenses of $5.4 million.

A tight supply and demand balance for containers has also pushed dry container prices up nearly 25% over the prior year quarter, leading to a combined $4.1 million increase in gain on sale of leasing equipment and trading margin over the prior year.

As part of the postmerger consolidation of operations, we sold an office building in San Francisco, resulting in a gain of $21 million. We have excluded this gain from the adjusted net income. Also, there are 2 noncash items that are benefiting our year-over-year results.

First, the impact of purchase accounting adjustments related to our merger in 2016 turned to a positive $5.1 million in the second quarter from a net expense in the prior year quarter of $2.8 million. The lease intangible we established continues to amortize and the benefit of these purchase accounting items will grow.

The second noncash item benefiting our year-over-year results is a reduction in our effective income tax rate on adjusted income to a 11.3% in the second quarter, down from 20% in the second quarter of last year. This change is largely due to a reduction in the U.S. corporate income tax rate last December.

Over time, we expect our effective tax rate to trend down below 10%. I will refer to income tax as a noncash item, because accelerated tax depreciation on our containers has meant that we have historically paid 0 meaningful -- no meaningful amount of cash taxes and do not expect to in the future. Turning to Page 12.

This page highlights the strong and stable cash flows that enable us to grow our fleet and maintain a strong balance sheet, while paying a substantial dividend. The graph on top left shows our annual cash flows before CapEx, which is EBITDA, less interest expense, plus container disposals and principal payments on finance leases.

The chart shows strong growth in these cash flows as we've grown our fleet over an extended period. The annualized $1 billion in cash flow -- in this cash flow metric for 2018 is somewhat lower than prior peak levels, reflecting significantly lower container disposal volumes as tight container supply has limited redeliveries.

The graph on the bottom left highlights the significant discretion we have in timing our fleet investment, and therefore, our ability during market downturns to quickly curtail capital expenditures enabling us to delever during these periods. The graph on the right demonstrates the benefit of a strong cash -- stable cash flows.

Over this 12-year period, we have steadily grown a market-leading business while paying a substantial regular dividend. Turning to Page 13. This page highlights our well-structured and conservative approach to financing our business.

This approach together with our strong cash flows gives us access to multiple debt markets to fund our container investments, and all of those markets are open and attractive at this time.

We minimize our exposure to rising interest rates by focusing on long-term fixed-rate debt and using interest rate swaps to lock in interest rates on our floating-rate facilities. At the end of the second quarter, 82% of our debt is either fixed rate or swap to fixed, with a weighted average remaining duration of approximately 50 months.

In addition, as shown on the table on the right, we focus on staggering our debt maturities to avoid significant maturity cliffs. I will now return it to Brian for some additional comments..

Thanks, John. I'll wrap up the presentation with a few summary comments on Slide 14. Triton achieved outstanding results in the second quarter of 2018. We generated $88.9 million in adjusted net income in the second quarter, an increase of 11% from our strong first quarter results.

Our profitability in the second quarter represented an annualized return on equity of 16.4%. We've already invested $1.4 billion in containers for delivery in 2018.

We expect our revenue earning assets will grow in the 10% range this year, and the high expected lifetime returns and long initial durations of our new container leases will provide a long tail of enhanced profitability and cash flow.

We're starting the second half of the year with great momentum, and container pickup and new lease transaction activity remained very strong in July. We expect market conditions will remain favorable, and we expect our adjusted net income will continue to increase in the second half of 2018.

We continue to have significant advantages in our market, and believe we are well positioned to create long-term value for our shareholders. I'll now open up the call for questions..

[Operator Instructions] And today's first question comes from Sahm Cho of Wells Fargo Securities..

As I'm sure you saw like right before the call, China expanded their retaliatory tariff number to about $60 billion. And I think your Slide 7 does a really great job laying out some of the insulations that Triton has from these impacts.

But can you shed some insight into maybe what actions your counterparties kind of the major liners are taking? And really how that's shaping your forward negotiations?.

Yes, I'd say in general, in the conversations that I've had with our customers, their sentiments are the same that we just talked about that they've seen so far very limited impact on volumes in their business or either the total amount of the volume or the origination and destinations for the volumes. And so far, there hasn't been much impact.

I think, like we were expressing, there is uncertainty, that they feel just about what -- ultimately how these tariffs are going to play out and what does it mean over time. But I think, as I mentioned, they again feel the same way that U.S., China of course is a very important trade and important for their businesses.

But I would say it's not the totality of global trading volumes. And also there is very significant benefits, I think, to manufacturers and retailers of the global supply chains that they've developed. We don't expect them to pull apart those supply chains very quickly in response to the current political environment.

And so in general, I would just say it's adding uncertainty, but everyone really is taking a wait-and-see attitude..

Great. And then on one of your slides, you showed $1.4 billion of containers set for delivery. Can you break that down us for a little bit by investment date and kind of delivery quarter? Just because I think last quarter you had about $850 million expected for the year and so....

Yes, so when we talk about the number, we talk about containers that are ordered for delivery this year. So in terms of our, say, negotiations with the manufacturers, it typically starts and perhaps the containers that we're negotiating to purchase on October get delivered in January, and that's when we start counting it. I think you're right.

I think when we had our call in early May, I believe we had already ordered about $850 million of containers. And so ordering between May and today was the balance or something in the range of $550 million.

I think that just reflects the ongoing, very strong pace of deal activity, reflecting continued solid growth in trade, continued increased share of our leasing and our strong share within the leasing market.

In terms of the delivery of the containers and the way they get absorbed into our customers, frankly, I don't have top of my head exactly what portion of those containers still are to be delivered and absorbed. But it's a significant amount. We have a lot of containers booked with customers that haven't yet been picked up.

And so we do expect the third quarter to be another strong quarter for container pickups..

Great. And then just last one from me. There has been a good number of quarters where the company has maintained these really high utilization rates.

How long should we expect the company to kind of maintain these levels or is there a fundamental shift in how you're operating the business that it should last for quite some time?.

Yes. We think, basically, the higher utilization is coming from a few things, and none of them are extraordinary. It's coming from solid trade growth and really just coming from the fact that our customers continue to rely more heavily on leasing and they've been reducing the container purchases themselves.

Our view is that those things are likely to continue, that trade growth is going to remain solid, and that our customers are unlikely to start buying containers very aggressively. I think as long as those things remain true, utilization should remain very high.

I don't know, but I'd predict we're going to continue to operate somewhere close to 99% forever. But we do think utilization is going to remain strong for the foreseeable future..

And our next question today comes from Helane Becker of Cowen & Company..

Two questions really for me.

One is, given where used container prices are, are you more likely to sell containers going forward? Or are you finding that your customers are re-upping their leases?.

Yes, so sale prices are quite high, and we certainly factor that into our fix-versus-sell decision. Whenever containers come off higher, we have algorithms in our fleet management systems that try to evaluate systematically the re-lease value of the container and they compare that then to the sale value of the container.

And it really -- the decision ends up being heavily impacted by the age of the container, the location of the container and the damage on the container. I'd say over the last few quarters, higher percentage of the containers that are being returned are going into sale just because the sale markets are very strong.

That said, the leasing market remains quite strong as well. And I think, as we mentioned in the prepared comments, we're effectively booked out of containers in Asia for our used equipment. So it's kind of there's too high metrics, especially for containers returned in Asia, which is the vast majority of our equipment.

So we have seen the percentage of containers that are being returned going into sale increase, but we still have a very low level of containers being returned..

Okay. I appreciate that.

And then my other question was just related to, as you think about going forward into, maybe, I don't know, how your crystal ball is, kind of past the current peak that do your customers talk to about seeing signs that this continues into 2019?.

In terms of just the current environment?.

Well, I think, you have a combination of 2 things in the current environment, right? You have strong trade growth and you have a shift in owned for -- in shipping-owned versus shipping-leased containers. So you have 2 growth avenues.

And I'm just kind of wondering, if you're thinking that, that continues or if there is a point where leasing can't go -- you can't go above some certain level that we haven't reached yet..

Yes. So, I mean, in my view, and I think this certainly is informed by talking with our customers, is that the current setup is likely to continue. That we're benefiting from solid trade growth. I wouldn't say trade growth in 2018 is extraordinary. It's something in the, we think, 4% to 5% range, just slightly higher than global GDP.

And I think, our customers would describe that as probably a normal level of trade growth.

I also think that, that our customers are unlikely to shift back to wanting to own more of their own containers, and this is for a variety of reasons, including the tough combination that many of our customer face of reduced profitability, but high investments required into the container fleets and vessel terminals remain competitive, coupled with just greater efficiency in the leasing market due to our ever-growing scale and better systems and efficient financing.

So our general view is that, again, as long as we're correct that there is not a major macro disruption that's going to occur, then we feel that the current environment is nice environment for us. Solid trade growth, increasing share for leasing, well-controlled container supply is likely to continue..

[Operator Instructions] Today's next question comes from Michael Brown of KBW..

I appreciate the comments on the tariffs and kind of what you're currently seeing out in the markets.

So if we were to kind of see trade wars really kind of pick up and see a dampening impact on global trade, would you -- is there any kind of offsets or benefits that you could see come through your business?.

Yes. I mean, in general, things that are bad for global trade are not great for our business.

And so if we were to see the trade wars really start to bite on global trading volumes and either just through lower economic activity or re-onshoring, then that certainly would lead to lower growth, fewer investment opportunities for us and reduced demand for containers.

And for us, though, that -- the one I think silver lining of sort of higher uncertainty and even greater challenge is it just reinforces one of the things that or I guess maybe 2 of the 3 things that are benefiting the market right now, which is increased reliance on leasing and fairly tight control on the supply of containers.

I think, we do benefit when our customers are challenged in those areas. But overall, of course, we're certainly rooting for our expectations to be correct that we're not going to see meaningful disruption at the global trading volumes because of the current spat between the U.S. and China..

Great. So this quarter, you posted an ROE of 16.4%, an annualized ROE.

You're targeting 15% to 16% ROE, and do you have the ability to raise that target a bit higher, especially now you have kind of this share repurchase authorization out there?.

[indiscernible] maybe investments in IRRs that we have for new container transactions. I think, we just said, we expect to get mid-teen equity IRRs on the new investments that we're making. We analyze our deals very carefully.

But in an operating lease business where we're only locking in the first portion of the container life, there remains uncertainty on just exactly how the investment plays out if locked in for in our case of about 7 years on average initially and then we go through a re-lease period that we've got a lot of experience with, but it's uncertain.

In terms of our target of mid-teen IRR, we think it's just kind of reflective of the current market environment.

We talked a lot on our Investment Day a few months ago that we believe we get a significant premium on our investment IRRs relative to most others in the market due to our cost advantages, the way we operate the container over its life to maximize, the duration of the container life and the utilization and so on.

And so the mid-teen IRRs we're getting is reflective of normal competitive environment among the leasing companies and then our outperformance we think relative to our peers. I don't know that we're going to be able to dramatically move that upwards if we wanted to, in terms of shifting capital from investment to share repurchases.

It tends to be a threshold above which if we price too high, the business goes away from us. Outside of those few transactions, we were the only supplier that has the equipment available, which there are some.

So I think it's not really so much that if we allocated some portion of spending away from containers to share repurchases that would boost significantly the IRRs of our investments. I think, we would just be shifting capital from funding growth to funding buybacks..

And our next question today comes from Ken Hoexter of Merrill Lynch..

Brian, if I could just follow up on that -- on the returns there. I believe you used to talk about getting into the low 20s in the market, maybe it was towards the end of last year and now you're talking mid-teens.

Has anything shifted or you seeing increased pricing competition come back in as some of the smaller carriers ramp up ordering again?.

Yes. So we did talk certainly about low 20% and maybe even mid-20% equity IRRs. That was really -- that's in very good markets for us.

And that's happened a few times and it was actually the case for much of 2017, that it was a combination of trade growth being higher than expected and then many shipping lines and also many of our leasing company peers not having the financial capability or willingness to invest in large massive containers.

And so we and maybe just 1 or 2 others kind of very much had the market to ourselves. And while we still think we're giving good value to our customers, we're certainly able to as pricing leverages on our side. I'd say the market now with mid-teen equity IRRs for ourselves is probably a normal market.

And I'd say competition went from being very limited to normal really at the end of 2017..

So nothing indicates that you're starting to see as you had in kind of prior peaks, I don't know, you called it kind of the sailing money of whatever is private equity or some of the smaller shops coming in with buying containers to get into the business.

Are you starting to see any of that percolate yet?.

No, no, really. And I think, it's -- as I mentioned, the container supply remains pretty well controlled.

And just the fact that many of the shipping lines, who historically had been the biggest buyer of containers, historically the shipping lines made up 50% to 60% of purchases, now that, that portion is much smaller, we also -- there's been some consolidation in the leasing business, which has just made a more orderly market for us.

And then finally, there still are a few leasing companies that aren't really actively engaged in the market. So while pricing again is normalized, we certainly don't think it's getting to the uneconomic range..

All right. That's helpful. And then last for me would be, just I guess following on Helane's question on your profits. You noted that second half profits would be up year-on-year.

Can you offer any thoughts on your -- your initial thoughts as you look into 2019? Is there anything that you would -- you see that would stop that continued growth as you move into 2019?.

No. Really, as I said, I think we feel certainly very good about our position within the container leasing business, and we see every day just in our interaction with customers, the way we win deals that we have -- the benefits of our size advantages are meaningful.

So I think the only real risk that we look out into 2019 and the future really again are macro risks, things that affect our market.

And as we said, we think this combination of solid moderate trade growth, increased share for leasing and kind of well-controlled container supply because of lack of buying by shipping lines seems likely to continue, outside of us being wrong on the macro environment..

And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to the management team for any closing remarks..

Thank you. I just want to thank everyone for your continued interest and support of Triton, and we look forward to talking with you again soon..

And thank you, sir. Today's conference has now concluded. And we thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.+.