Good day, and welcome to the Triton International Limited Second Quarter 2019 Earnings Release Conference Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions] Please note that this event is being recorded.I would now like to turn the conference over to Mr. John Burns, Chief Financial Officer. Please go ahead, sir..

Thank you. Good morning and thank you for joining us on today's call. We're here to discuss Triton's second quarter 2019 results, which were reported this morning.

Joining me on this morning's call from Triton is Brian Sondey, our CEO; and John O'Callaghan, our Executive Vice President and 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 the presentation that can be found in the investor section of our website.

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 under the Private Securities Litigation Reform Act of 1995.Any forward-looking statements made on this call are based on certain assumptions and analyses 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 any subsequent changes.

These statements involve risks and uncertainties, and are only predictions. A discussion of such risks and uncertainties is included in our earnings release, and presentation, as well as our SEC filings.In addition, certain non-GAAP financial measures will be discussed on this call.

A reconciliation of these non-GAAP measures to the equivalent GAAP financial measures is included in our earnings release.With these formalities out of the way, I'll now turn the call over to Brian..

Thanks John and welcome to Triton International second quarter 2019 earnings conference call. I'll start with slide 3 of the presentation. Triton achieved solid performance in the second quarter of 2019. Triton generated $86.4 million of adjusted net income, or $1.15 per share, an increase of 4.5% from the second quarter of last year.

We also achieved an annualized return on equity of 16.2%.Triton achieved these solid results while facing mixed market conditions. In general, container supply and demand were well balanced. Our lease transaction and container pickup activity remained slow. The second quarter typically marks the start up of the summer pick season for dry containers.

We've not seen a real acceleration of activity. Growth rate have in a number of major European and Asian economies, and the lack of resolution in the Us-China trade dispute continues to generate uncertainty and impact trade.In this market, our utilization has decreased slightly.

And our investment in new containers has been limited, still our financial performance remains strong and we're using our substantial and steady cash flow to drive shareholder value in a variety of ways. Our regular dividend provides over a 6% yield. We repurchased the remaining outside partnership interest in one of our container owning subsidiaries.

And we have repurchased on almost 9% of our shares since last August without increasing leverage. I'll now hand the call to John O'Callaghan, our Global Head of Marketing and Operations..

Thank you, Brian. Turning to slide 4, as Brian mentioned, Triton's operating performance continued to be solid in the second quarter of 2019, with utilization averaging 97.2%, down 40 basis points in the first quarter. Used container sale prices have decreased slightly, but overall held up well and continued to generate substantial gains.

Container pick-up activity was slow through the second quarter. The US- China trade dispute continued to create uncertainty. Our customers continue to run tight fleets and remain cautious about additional container capacity. Whilst at the same time retaining their existing position.And as such we've seen relatively few drop-offs.

There was a limited amount of new container transactions in the second quarter. We participated selectively in some transactions and walked away from others. Given the limited investment, Triton instead allocated equity cash flow to higher yielding investments. Overall, the market is poised.

Our customers continue to expect trade growth to remain moderately positive. Inventory is under control. We expect our customers will continue to rely heavily on leasing.We are well placed to serve their requirements and win the deals we want. Turning to Slide 5, slide 5 shows Triton's key operating metrics. The second quarter was unseasonable slow.

Our utilization is slightly down by about 40 basis points over the quarter. That's a very reasonable change in the existing market and utilization remains high and is presently at 96.8%. The chart in the lower left of the slide shows our quarterly picks and drops of containers.

You can see that although the picks remained low, there has been an increase. While over the same period drops remain more or less static and at moderate levels.We expect drops to remain well controlled and container picks to increase as we get deeper into the third quarter. Slide 6 looks at the key measures of container supply-and-demand.

On the other left chart, we see current expectations for trade growth. The container trade expectations from forecasters are that growth for 2019 will be in the 3% range. This is consistent with what our customers are also telling us. The bottom two charts are measure of supply.

Factory inventory increased about 1.1 million TEU due to low absorption volumes in the second quarter. This represents about 3% of the global fleet.We're presently not seeing a rush for additional orders, and are hearing that some container factories will be closing over August, taking capacity out of the market.

The bottom right chart shows Triton's inventory. We've seen a small increase in our depot fleet offers in Asia, but it remains under control. We have very few leasing containers in inventory outside of Asia.

To sum up, with trade growth expectations of 3% and supply under control, we have a good shelf of equipment and are ready to supply our customers and wrap up investment as and when the market picks up.I'll now hand you over to John Burns, our CFO..

Thank you, John. Turning to Page 7. On this page, we presented our consolidated financial results. Adjusted net income for the second quarter was $86.4 million, or $1.15 per share, 4.5% on a per share basis from the prior year. Supported by the solid operating performance of our lease portfolio.

And the repurchase of nearly 9% of our outstanding shares over the last year. These strong results represent a return on equity of 16.2%.Turning to Page 8. Our results for the quarter were driven by several factors.

Leasing revenue increased 2.7%, reflecting an increase in our fleet size, driven by a strong fleet investment during the second half of last year. The benefit of this fleet growth was partially offset by a reduction in utilization. While utilization remained high averaging 97.2% for the quarter, it was down from 98.8% in the prior year quarter.

In addition to the impact on leasing revenue, the lower utilization drove an $8 million increase in direct operating costs, reflecting higher storage and repair expenses.Our container disposals results remain quite positive, generating combined gains on sale and trading margins of $12 million in the second quarter, down $3 million from the prior year reflecting a moderation in disposal prices.

Though these prices remain well above our accounting residuals. We also continue to experience incremental benefits from purchase accounting adjustments related to our 2016 merger, and will realize further improvements in our effective tax rate.

The last item driving our year-over-year increase in earnings per share is our share buyback program.Turning to Page 9. This page highlights our long-term financial stability and how this has enabled us to create significant shareholder value over an extended period.

The keys to this financial stability and growth in shareholder value are our strong cash flow over multiple economic cycles as shown in the graph on the top left. These cash flows together with the short order cycle for containers, enables us to maintain our leverage in a steady range over the long term as shown in the graph on the bottom left.

The graph on the right demonstrates how these strong cash flows and financial stability have enabled us to create significant shareholder value by steadily growing the book value of the business from $10 per share to $35 per share while paying over $25 per share in dividends.I will now return you to Brian for some additional comments..

Thanks John. I'll continue the presentation with Slide 10. This slide shows how Triton has invested our equity cash flow over the last few years. During 2017 and 2018, the vast majority of our equity cash flow was used to invest into our container fleet.

And here the equity cash flow used for investments is shown as 25% invested amounts, reflecting our typical leverage. Triton's high level of container investments in 2017 and 2018 were given by solid trade growth. The increasing share for leasing and Triton's large share of the leasing market.

We estimate that Triton represented over 40% of new container purchases by leasing companies in 2017 and 2017.And the projected lifetime equity IRR of those investments are well into the upper teens. Over the last few quarters, we have shifted our focus from adding new containers to repurchasing portions of our business from investors.

This change in focus reflects the limited number and size of new container leasing transactions this year, as well as tighter pricing on the available deals. The shift in focus also reflects what we consider to be compelling values on our repurchases.

In a series of transactions in the first and second quarters, we repurchased all the outside investor interests in one of Triton's container owning subsidiaries for $103 million, which is well below the book value of the investor interests.We've also been actively repurchasing our common stock.

The average price we've 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 few summary comments on slide 11. Triton achieved solid results in the second quarter of 2019. We generated $1.15 of adjusted earnings per share and we achieved an annualized return on equity over 16%.

Lease transaction and container pick-up activity were slow in the second quarter. But our operating metrics remain at a high level. We 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. Overall, we are optimistic we'll achieve another excellent year. Our financial performance remains strong. We've 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 will now open up the call for questions..

[Operator Instructions]The first question is from Scott Valentin with Compass Point Research. Please go ahead..

Good morning, everyone. Thanks for taking my question. Just with regard you mentioned US-China the trade dispute having an impact. I think in the past you said that US-China trade is about 12% of global trade.

Just wondering, one, if you can maybe if you can quantify maybe what the decline has been in the Us-China trade and maybe demand for containers? And two, obviously reports of supply chain shifts and movement around Vietnam, Indonesia other countries picking up.

Just wondering if you're seeing any supply, any shifts in consumer demand - customer demand for containers within inter Asia.

Is that growth in inter Asia able to offset some of the decline in US-China?.

Yes. So in the past our comment about the share of trade made up by US and 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 -- container supply demand is changing.We hear from our customers.

In fact, I think the [Merck] CEO was quoted a few weeks ago as saying that they have seen production shift, whose export shift from China to Southeast Asia. And that is making up some of the difference in the shortfall of China-US trade, but we don't really have a great visibility for that..

Okay, fair enough. And then just a question regarding the manufacture inventory. Obviously, it's grown quite a bit and I think you mentioned 1.1 million TEU about 3%, back to where it was back in 2015 which was a tough period. Just wondering $79 seems like a low price for a new container typically given seasonality.

I know seasonally is weaker than usual, but I would have thought that it'd be maybe [$1850, $1900] level for containers. Just wondering, one, if you can comment I guess manufacturer profitability has got to be close to zero given steel prices have been I think relatively flat.

And two, 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 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.And I think as John O'Callaghan mentioned we have heard from several manufacturers that they are considering closing their factories or some of their factories for portions of the third quarter, which would certainly be helpful both from a tightening of supply and then ultimately helpful for the manufacturers, I think and allowing them to sort of bunch 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..

The next quest is from Michael Brown with KBW. Please go ahead..

Hi, good morning. So I mean the new purchase of containers year-to-date it's been kind of light and appreciate the color there. But how should we kind of think about 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 helpful..

Sure. So 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. CapEx has been light for two reasons mainly just the overall volume of lease transactions activity has been late.

And that reflects the fact that as we've said container supply and demand are well balanced overall, but there's been very little interest in customers in expanding the size of their container fleets.

Both 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 a 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 on 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 -- we can go out there and win the deals we want..

Great and then I mean kind of given this weaker starts at the peak season.

Are you kind of seeing in the competitive environment, are you seeing some of your peers' kind of giving concessions? Whether they're capitulating on rate or our terms on deals?.

Yes. Certainly pricing is down from where it was in 2017 and 2018. In those years, was, we took a lot of leasing share and customers very much valued our capacity to supply large numbers containers on short notice. And that's a good pricing environment from a leasing company standpoint.

This year again just due to 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 or 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 some are above or watch over shoulders and participating in them. Some are below and we're not. We do typically think we get 3% to 5% ROE margin over most of our competitors.

And so the deals that are marginal for us we do question what they must look like over time to some of our peers. But that's it, we don't know exactly what their thresholds are compared to ours..

Okay. And just one more from me. What are kind of your views on the outlook for the shipping industry? I mean you've seen a pickup in the amount of blank sailings recently.

So we're kind of seeing any cracks in the 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. They're still--where containers supply and demand are relatively well balanced. There still is excess vessel capacity for a variety of reasons.

And that's been keeping freight rates now for many years at levels that don't provide a lot of profitability for most of the shipping lines, in particular the other smaller ones and medium sized ones can struggle.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. One thing that has been talked about from a credit standpoint is the IMO 2020 regulations that come on at the January of next year around the sulfur emissions.

And that's requiring some of our customer, requirement customers to either invest into scrubbers or LNG vessels or will require them to purchase low sulfur fuel.

And most of the customers feel that they'll be able to pass those costs on effectively to the shippers.But, and it doesn't seem like they or others in industry are terribly concerned about it. But that is something that's been talked about..

The next question is from [Audrey Rose] from 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 a little bit more color around what you're seeing specifically 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 supplement their container fleets which will drive leasing demand. We've also been seeing over the last 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 port at a particular time.And those requests and spot requirements have increased over the last a month or two. And we think will remain at a higher pace than they were earlier in the year. And so it's really, truly those things..

Got it. But it sounds like it's contingent on a resolution to the Us-China trade dispute or something of that sort..

No. I don't think so. I think if you asked the most people in the industry, when 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 base case expectations now have shifted to who knows. And no one counting on it in the near term..

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 of you decided to walk away from a few of the deals in the quarter?.

So generally we look at expected returns and which includes not just the most likely return, but a balance of upside opportunity relative to 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 low teens equity IRR. We typically like to do much better than that on average. And so some combination of expected returns below that level.

And coupled with poor leasing structures like large possibilities for returns of containers outside of demand areas or giving away repair conditions and things like that or credit situations that we just didn't feel comfortable with.But it was a variety of those factors that just led us to conclude that those deals 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 in a few years and I'm wondering you guys have a little exposure to the benchmark. I'm wondering if you have thought it all about a new benchmark and how you plan to roll over that debt when LIBOR goes away. I think in 2021 or 2022..

Correct. Yes, that's correct, Tyler. The industry is responding all the refinancings of LIBOR based debt that we have over the last year and a half has included language that the, that we would work with the lenders to make the adjustment to whatever the index is at that time.

People seem to be very much focused on SOFR which is the Secured Overnight Lending Rate. And exactly how that rolls out remains to be seen. But all of our facilities are incorporating that type of language as we've refinance them.End of Q&A.

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 just 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..