Good morning and welcome to the Triton International Limited Fourth Quarter 2020 Earnings Release Conference Call. Please note, today’s event is being recorded. I would now like to turn the conference over to John Burns. Please go ahead, sir..

Thank you Malcolm. Good morning and thank you for joining us on today’s call. We are here to discuss Triton’s fourth quarter and full year 2020 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 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 a presentation that can be found in the Investor section of our website under Investor Presentation..

Thanks, John, and welcome to Triton International’s fourth quarter 2020 earnings conference call. I will start with Slide 3 of our presentation. Triton's outstanding results in the fourth quarter of 2020 provided a fantastic finish to a remarkable year.

In the fourth quarter, we generated $1.70 of adjusted net income per share, an increase of almost 50% from the third quarter, and we achieved an annualized return on equity of 22.9%. For the full year of 2020, we generated adjusted EPS of $4.61 and achieved an adjusted return on equity at 15.9%.

We did not anticipate having the opportunity to achieve this level of performance when the pandemic initially took hold. It's of course been a tragic and difficult time, but the changes in consumer spending patterns caused by the pandemic have led to a surge in trade and very strong demand for containers.

We are pleased to have the opportunity to work closely with our customers to keep global supply chains functioning, and we're very proud of the way the Triton team has executed seamlessly through all the challenges and disruptions created by the pandemic.

In 2020, Triton demonstrated the resilience of our business and our discipline and agility with capital management. Our financial performance held up very well in the first half of the year, while trade volumes were hit hard by the initial COVID lockdowns, and we focused our investment on share repurchases during this time.

We then achieved exceptional operational and financial performance in the second half of the year, as trade volume surged. We drove record levels of containers on hire, boosting our utilization to almost 99% by the end of the year. We also quickly pivoted our investment focus to aggressive fleet growth.

We accepted $550 million of containers in the fourth quarter, and we are on pace for a record level of fleet investment in 2021..

Thank you, Brian. Turning to Slide 4 and the current market overview. Trade volumes remained exceptionally strong and continue to be boosted by consumers shifting from services to goods. The lines continue to face shortages in ship capacity to meet this demand and they rely heavily on the lease companies for their containers.

The availability of containers remains limited. The depot container inventory has been completely absorbed, driving utilization to record levels. In addition, new production inventory remains low despite manufacturers increasing production, leading to a jump in container prices as well as market lease rates.

Triton has secured sizeable bookings, servicing those shipping line requirements due to our extensive supply capability. We have booked over 1.3 million TEUs since July 2020, capturing an excess of 35% of the lease market share.

In addition to securing a sizable share, the average duration of new production business is over 10 years with an expected lifetime ROE in the upper teens and a large percentage of the used depot containers have been locked into lifecycle leases.

The pace and magnitude of the volumes required to meet demand has also increased sales demand to record levels, and used container disposal prices continued to strengthen as there are limited containers available for sale.

Slide 5 illustrates the strength in trade driven by the shift in consumer spending from services to goods and also the cargo volumes have continued to remain above pre-pandemic levels since July 2020. The bottom left chart gives us some indication that there may be room for this to run..

Thank you, John. Turning to Page 9. On this page, we presented our consolidated financial results. Adjusted net income for the fourth quarter was $114.7 million or $1. 70 per share, an increase of nearly 50% from the third quarter. We finished the full year of 2020 with adjusted net income of $319.9 million, or $4.61 per share.

These exceptional results represent a return on equity of 22.9% for the fourth quarter and 15.9% for the full year. Turning to Page 10. Our results on the fourth quarter reflect the benefits of the surge in container demand during the second half of the year, which generated strong leasing demand and exceptional disposal gains.

Though our fleet growth was limited for the full year, when lease demand jumped in the second half of the year, we pivoted and aggressively ramped up our CapEx, accepting almost $550 million of containers in the fourth quarter..

Thanks, John. Slide 13 shows how Triton has consistently created value for shareholders by nimbly shifting our strategic and capital allocation focus. Over the last 5 years, we've experienced a wide range of market conditions. But Triton has been successful throughout this time and created value for our shareholders in a variety of ways.

In 2016, trade volumes and container demand were impacted by a global industrial recession. We executed well in this challenging environment, but our main strategic focus was structuring and closing the Triton and TAL merger. This merger generated substantial cost savings and created the clear scale, cost and capability leader in this industry.

Our shareholders continue to benefit from this merger through our steady outperformance. Global trade and container demand rebounded strongly in 2017 and 2018 and we shifted our focus to fleet growth. We estimate we won roughly 40% of new leasing transactions over this time and grew our fleet over 20% across these 2 years.

Trade growth was weak in 2019 due to the global trade dispute and trade volumes are down sharply in the first part of 2020 due to the initial COVID lockdowns. We dialed back on capital spending over this time, but aggressively repurchase shares at attractive levels.

With the recent surge in container demand, we've now shifted our focus back to aggressive fleet growth, and we're on pace for a record year of container investment. It's also important to note, we paid over $10 per share in dividends during this time and reduced our leverage. I will now finish the presentation with Slide 14.

2020 was a remarkable year for Triton. We performed well for the challenging first half of the year and created meaningful value for shareholders through share repurchases.

We drove our operating and financial performance to record levels in the second half, as we experienced a surge in container demand and we quickly pivoted our investment focus to growth. We provided large, critically needed container solutions for our customers.

And we once again demonstrated the business and financial advantages of our market leadership and disciplined capital allocation. We expect the benefits of the current strong market will be durable. We've locked away large numbers of containers on long duration, high value leases. We've expanded our leasing margins with attractive financing activity.

And we have further secured our position as the go-to supplier in our industry. Triton starting 2021 with significant operating and financial momentum. Market conditions remain very strong. Our critical operating metrics are at high levels. And we have already secured a substantial volume of attractive new container lease transactions.

We expect our adjusted EPS in the first quarter will hold fairly steady or increase slightly from the record level we achieved in the fourth quarter of 2020. And we expect our profitability will remain strong throughout the year. I will now open up the call for any questions..

Today's first question comes from Ken Hoexter with Bank of America. Please go ahead..

Hey, great. Good morning. So, Brian just a phenomenal result and congrats on a great year and shifting to the growth, but let me just ask you this, I don't know if this is for you or John, but it looked like lease rates were a little bit soft in the fourth quarter, the annual lease yields declined, it looked like sequentially.

Is that because you're shifting on the longer-term lease rates in order to lock in longer terms or maybe you can just talk about the environment? And it sounds like your outlook remains even more robust going into '21 and talk about that a bit?.

That's interesting, Ken. It's something we actually didn't see that in the fourth quarter. My guess is and it's a calculation, I'll take a look at is perhaps the container acceptances that we made were back ended in the quarter or something, so that the average containers in our fleet are certainly the average number on hire.

We're less than maybe it looked like if you just take maybe the quarter end number. But as John O'Callaghan noted in his discussion, market lease rates are up significantly.

And one of the interesting things to note about the bubble chart that we show there, as you can see that the lease deals that we're doing are well above where they had been in the previous strong cycle in 2017 and '18, but actually the average duration of leases is probably 4 or 5 years longer, which is -- so really the apples-to-apples rates are even higher, relative to those prior periods,so again I’ll just sort of look at the mathematical quirk, that may be giving that impression, but generally speaking, lease rates are very strong..

Okay. And how do you -- I mean, you've been very good at understanding the cycles and figuring out when to buy. And so, I want to dig into that a bit.

I mean, just given how tight it is now, but John also mentioned the shift that you’ve seen in a shift to goods from services, so it's just so good right now, and you're getting these phenomenal 10-year leases, which is great to lock in long-term.

How do you understand to not over buy into an upswing period, or how do you see this cycle lasting longer?.

Sure. So, yes, as you pointed out, it's certainly it's strong and somewhat unexpected.

Unexpectedly strong time right now and driven by things that just kind of fundamental changes in consumer behavior, I think because of the pandemic, and I think now that's also compounded by some logistical challenges, created for the shipping lines as they try to get containers offloaded from their vessels and moved inland just due to the same challenges, just the volume of goods, but also, I think, lower workforces on the terminals and in trucking because of the pandemic.

We're constantly talking with our customers to get their assessment on how long market conditions are likely to remain very strong.

What we're being told right now is that -- the market right now is really being limited more by capacity than demand, and so that creates some momentum of its own, natural momentum as containers that are -- or loads that can't be moved now will have to move later.

We're hearing from our customers that they expect conditions to remain strong into the second quarter. I think beyond that, it's not that they expect conditions to necessarily weaken, it's just it gets less predictable.

But I think because this is unusual, things that are driving demand, it's just a little bit even more difficult to anticipate how it changes.

But I think the -- as we get through the second quarter and into the third quarter, that typically is the peak season for shipping where goods that are going to make it on to the shelves in Europe and the U.S for Christmas have to start moving. And so again, our view generally is that the market feels pretty good for 2021.

I think as you know, we try to be very careful in managing our inventory of new containers. That one of the benefits of this business is that you order containers, typically, with only a few months of lead time.

That's lengthened a little bit this year, because of the strength of demand and so we've purchased containers through June, but that said the amount of uncommitted containers that we have, a very small portion of our overall spend so far this year. So certainly, it's not without risk.

We do have containers that we've purchased at high values that are waiting to go on lease to customers, that's why customers use us. But that said, it's a very small portion of our container fleet anytime. It's not locked away either on lease or waiting for to be picked up on lease..

So just a quick follow-up on that.

Just so I understand it, do you see a shift of adding more contract business to your pre-buying of containers or is that just a feature of the market you'll still look to take that risk of ordering the containers going forward?.

Yes, so let's say, our basic business model has not changed, you know that we buy containers from the factories and have them ready for customers to commit to them. So, we're always taking some level of inventory risk.

I think what has changed really is just the pace of activity, that the shipping lines are scrambling to grow the size of their container fleets, because they're being limited on volumes right now because of a lack of equipment, and we've been scrambling to place orders.

And to some extent, it's been a race between our ability to order and our demand from our customers. But again, the basic business model of us buying equipment to have ready availability for customers hasn't changed..

Great. All right, John, John. Thank you very much for the time. That's great color..

Thank you, John..

And our next question comes from Michael Brown with KBW. Please go ahead..

Hey, good morning, guys..

Hi..

So, Brian, I wanted to start with maybe the cadence of how these containers will come on and how we should think about the leasing revenue growth from here. It's just, when I've been modeling this out the last two quarters, I think of kind of miss modeled when the new bookings start to kind of hit their full revenue ramp.

And so you obviously had a very active fourth quarter. And it sounds like some of that came in towards the end of the quarter based on your comment that you just made.

But you clearly have a lot coming on in the first half here, but I was hoping you could just give a little more color about that the 600,000 containers, when those are kind of expected to start to ramp up as we think about, first quarter, second quarter and beyond?.

Sure. So maybe, I'll just provide a little perspective for the -- for maybe 2020 and then we can talk about 2021. So, again, we'll take a look at the timing of containers coming in, and then just sort of perhaps quirk of the modeling that looks like rates went down.

But I think if you just dial back to when we really started seeing the strength in the market, it was in July, and then we started ordering containers, probably in earnest -- in August, and just given the timeline for container production, we probably started getting deliveries, in high volumes, probably not much until October -- September, October.

So -- and then monthly deliveries were growing month-on-month. And so, I think that's probably the issue that's leading to the modeling issue in Q4.

I would say since probably January of 2021, the factories are producing at a high level of monthly production and we probably expect a steadier, delivery of containers and on higher growth, throughout 2021.

Probably, it's still going to grow probably second quarter relative to first quarter, but it will be a lot less, a lot less ramped because the factory is already are producing at high volume for the beginning of this year..

Okay. That's helpful..

And then just -- in the prepared remarks, you talked a little bit about how the shipping lines continue to really rely on the leasing companies here, which is obviously great to hear, but just curious if you could -- about that dynamic and what causes them to kind of use you guys more versus looking to deploy kind of their own CapEx, I know, that they've got kind of a number of levers that they have to toggle between and their own businesses.

But I would just love to get some additional comments about that..

Sure.

So I think basically, it's just the same reasons that they've used leasing companies in the past in the sense that, leasing is an efficient way to add equipment to their fleets that, say, relative to purchasing containers, they get much greater flexibility on how many containers to take and where to take them from this number of locations in China, where containers are produced, the container size types is more flexible, when you lease and then just to pick up timing, we maintain this ready inventory.

And so it just cuts the time between knowing you need the container to the time, You can actually get it rather than say, placing your own orders. And all those things, allow the shipping lines to operate fewer containers in their fleet. And generally speaking, that's why they use leasing.

And also, something we talked about at our Investor Day is the extra cost of leasing relative to buying container, I think it's come way down that we finance our containers very efficiently. We use a higher percentage of debt to finance our containers and the shipping lines do just due to the greater stability of our business model.

And just the greater scale that we operate, certainly compared to our history, there's not a very high charge that gets put on top of the container for our operations, because we operate such a large fleet.

So overall, I think it's just the shipping lines have missed most of them, kind of across the bridge that using leasing to add equipment is a -- it's just a sensible way to manage their container operations.

At this time right now, it is interesting, the shipping lines are doing very well financially, starting in the second half of this year and expecting to have a really phenomenal, I think, first and second quarters because of the very high freight rates. But they continue to rely on leasing.

And again, I think it just mainly reflects the fact that adding that they’re using leasing is a pretty sensible way for them to add equipment..

Okay. Okay, great. So it's not really a major change in the recent months here. Let me just sneak in maybe one more here. So as I think through your business, you're at maximum utilization rates. You're seeing -- expecting a record level of investments.

You’re seeing a pace that points towards that level, at least leverage is at historically low levels, but production is still somewhat constrained here. So it seems like it's a -- it sounds like they probably want to lean in even more, if possible.

So against that backdrop, how are you feeling about like consolidation here? Do you still see that as potential opportunity? Or is that as your mindset kind of shifted at all here? Thanks..

Yes. So I think we're still believers in consolidation.

I think we've talked many times about all the benefits we see ourselves getting from the Talent Triton merger, that we -- we're able to put together in terms of cost savings, capability advantages, supply, advantages to our customers having a bigger fleet to draw from and simpler to work with one customer.

So I think, generally speaking in terms of the strategy, we still see consolidations being interesting for us, and very much remain interested in looking for opportunities. Adding just as you know that really just depends on what opportunities become available and how they stack up financially.

Do we think it's a good investment for our shareholders? And so, from a strategy of consolidation? Yes, we very much are interested. And it just comes down to the practical details and what opportunities present themselves..

Okay, great. Thank you, Brian..

And the next question today comes from Larry Solow with CJS Securities. Please go ahead..

Great. Thanks. Good morning, guys, congratulations as well. Nice, very good year and an exceptional quarter to just a couple of follow ups. Just on the -- just from a high level, sequentially. I know you guys don't give guidance beyond the quarter.

But just in terms of just looking at it from a high level on the revenue side, so I think you met -- it seems like your operating lease revenue, I guess we should assume should bump up? I think he has, like you mentioned 600,000, new TEU coming online in 2021. I would assume that would bump up.

And then maybe there's a little bit of a drop on sales of used containers. I know you mentioned -- I got to imagine the supply of that will be dwindling, right? And yet, what's in your hands? So should you had a little bit of a pop the last couple quarters, I think, $8 million plus and then $10 million plus this quarter.

So that's a good way to kind of view those two line items..

Yes, for sure. So you're right. There's going to be a lot of revenue strength coming from all the investments that we made. I think the easiest way to think about it, and I think John Burns mentioned it in his prepared remarks, that $1.7 billion that we've committed to be produced for us through June 30.

That alone would lead to about 10% asset growth for the year. I think that -- if all else equal, that's pretty close to probably once we get that $1.7 billion delivered. 10%, revenue growth, something like that, again, all else equal.

If nothing else in the business changes in terms of utilization or other things, and I think, yes, certainly, in the short-term the biggest challenge will be likely to replicate the gains on disposal.

Prices, as John O'Callaghan showed in his charts are exceptionally strong right now, because there's a lot of value to have a container and there's not many around. And that pushed our gains up to very high levels in the fourth quarter. I think they'll be very high again in the first quarter.

But at some point, yes, it's -- the inventory is getting quite small. And then customers, typically the inventory gets replenished as customers drop over containers. And just given the shortage of equipment, we're getting very few containers dropped off lease..

I guess that's a high class problem, I guess, and the overall grand scheme of things, but absolute, Yes, and then on the expense side, in terms of direct expenses, obviously, sequentially, they came down pretty nicely just about 6% of revenue as we go-forward, I think if we look back, historically, historical peaks when utilization was running really high, I think it was even closer to 4%.

Is there room for this to drop, as we go out over time on a percentage basis..

Yes, I think the -- what you'll see in the first quarter is that the fourth quarter utilization was up about 2 points during the quarter..

Right..

And so, say on average was 1 point less than where it finished. And the easiest way to forecast direct operating expenses is to it's kind of an inverse of utilization. And so there should be some further benefit as we do think that utilization will remain virtually near peak, 99% range throughout the first quarter.

After that it really just depends what happens with utilization..

Right. Okay. And then, obviously, you're spending a lot more than you're investing. So I suppose and you did announce a new $500 million ABS notes, I know, a few weeks ago. I'm not sure I think a part of that maybe was funding some existing debt. But I suppose interest expense should sort of start to creep up -- go up a little bit as we look out..

Larry, John here. I would say our average effective rate will stay probably in this similar range or notch down a little bit. As you know, we did the 500 million in ABS, that was at 1.7%. And we do have about 1.6 billion of institutional notes, private placements that slowly wind down about $300 million per year.

So as we refinance those, those are at about 4.5% to 4.6%. So as we refinance those at lower rates, we'll get a little bit of benefits from that..

Right. So we expect, I think a little further improvement in the average effective rate offset, I think, as you're pointing out by increasing debt associated with the all the containers that we're buying..

Got it. Okay, great. Thanks. I appreciate it..

And the next question today comes from Dan Day with B. Riley Securities. Please go ..

Yes, good morning, guys. Thanks for taking my questions and congrats on a really, really great quarter. It's great to see. Most of my questions have been asked, but I'll get a couple more in. Just on the gain on sale on leasing equipment here, it was really strong in fourth quarter, obviously, you've talked about it.

Just -- is part of that due to like, for example, increased demand for static storage, like the Amazons of the world looking to take delivery of these containers for storage, is that kind of a factor here and how strong the demand is for the used containers?.

So we definitely are hearing from customers that cargo shippers are holding on to containers longer. And we've seen some interest in people like Amazon's of the world that start maybe owning some of their own containers too, because they get charged by the shipping lines when they hold onto containers longer than they're supposed to.

But frankly, I think the main thing that's driving containers is the fact that the shipping lines, our customers are having a hard time getting them, so that some cargo movers are actually buying containers and then using those containers they purchased to move cargo and are finding that somehow it's a net lower price.

And so we're seeing the strongest prices and strongest demand in Asia, where we think again, the containers are primarily being used as a way around the container shortage..

And that $25 million in the quarter between the gain on sale and the trading margin, do you think that's kind of sustainable number going forward, at least kind of through first quarter? And then kind of tapering off after that?.

We don't like to give too much guidance below or just maybe above EPS. But right now it's a little difficult to predict. We're seeing prices continue to, I think, John O'Callaghan called it increase week-by-week, which is the case and on the other hand, we're seeing very few containers coming back. And so, there's just not much inventory to sell from.

But overall, I'd say we expect the gain to be at a high level, something very high relative to how many containers we're selling. But it's not so easy to predict, just how the decreasing volume because of lower inventory, how that works against the rising prices and just how long this extreme shortage situation lasts.

But overall we expect to be selling for good gains for some time here..

Awesome. Thank you. And then just last one. Obviously, the focus here, probably through the first half of the year is going to be on CapEx, once the containers are in place and once sort of CapEx spend starts to come down as far as returning capital to shareholders.

Can you just maybe refresh us on how you're thinking of between buybacks and dividends, how much you have left on the repurchase authorization and sort of what you look forward to balance the two?.

Yes, sure. Actually, we tried to make the point in the presentation that we’re nimble and try to be fairly thoughtful on how we allocate our cash flow. And one of the good things, of course, of having performance like we’re having is that we generate lots of cash. And so we can actually do quite a few things with cash flow right now.

John Burns mentioned that. We’ve already get invested for 10% growth through June 30. But, of course, the year doesn’t end in June 30 and we could actually continue to invest at a high level before we are going to move our leverage upwards. So if we wanted to, we could do other things as well as buying containers at a pretty aggressive pace right now.

But I think in terms of what else we might consider, share repurchases, obviously we look at that regularly. We’ve been active buyers at a number of years here and we will continue to look at that relative to the attractiveness of other uses of our capital, including further growth, M&A or portfolio opportunities, increased dividends et cetera.

It's something we spend a lot of time on as a senior management team and with our Board. And again, we just will -- we’ve got a lots of cash to use and we will try to make sure we continue to make the decisions about where to put it..

Awesome. Appreciate. Thanks again for taking my questions. I will turn it over..

Ladies and gentlemen, this concludes the question-and-answer session. I’d like to turn the call back over to the management team for any final remarks..

Well, I would just like to thank everyone again for your interest and attention for Triton, and we look forward to talking to you soon. Thank you very much..

Thank you, sir. This concludes today’s conference call. We thank you all for attending today’s presentation. You may now disconnect your lines and have a wonderful day..