Q1 2021 Triton International Ltd Earnings Call
[music].
Good day and welcome to the training of International Limited first quarter 2021 earnings Conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero after today's presentation.
There will be an opportunity to ask questions.
Question You May Press Star then one on your phone to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to John Burns. Please go ahead.
Thank you Jordan.
Good morning, and thank you for joining us on today's call we.
We are here to discuss triton's first quarter 2021 results, which were reported this morning.
Joining me on this morning's call from Triton is Brian Sunday, our CEO and John O'callaghan, our head of global marketing and operations.
Before I turn the call over to Brian I would like to note that our prepared remarks will follow along with the presentation that can be found in the investors section of our website under investor presentations.
I'd like you to direct direct you to slide two of that presentation and remind you that today's presentation includes forward looking statements that reflect triton's current view with respect to future events financial performance and industry conditions.
These forward looking statements are subject to various risks and uncertainties trading has provided additional information in its reports on file with the SEC concerning factors that could cause actual results to differ materially from those contained in this presentation and we encourage you to review these factors.
In addition, reconciliations of non-GAAP measures to the most directly comparable GAAP financial measures are included in our earnings release and the presentation.
With these formalities out of the way I will turn the call over to Brian.
Thanks, John and welcome to Triton International's first quarter 2021 earnings conference call on.
I'll start with slide three of our presentation.
Trading achieved outstanding results in the first quarter of 2021, we.
We generated $1 91 of adjusted net income per share an increase of 12% on the fourth quarter of last year.
And we achieved an annualized return on equity of 25%.
Our excellent results in the first quarter were supported by very strong market conditions.
The balance of container supply and demand remains highly favorable for us.
And all of our key operating metrics are at a high level.
We are focused on locking in durable benefits from the current strong conditions.
We are making large high value of investments in our container fleet.
We are placing our new and used containers on leases with very long durations.
And we are further securing our position as the go to supplier in the industry.
Through our unique ability to meet even the largest and most urgent container needs of our customers.
Triton's balance sheet is in great shape.
Our leverage remains historically low despite our aggressive fleet investment.
Our corporate credit rating was recently upgraded the triple B minus by standard and Poor's.
And we continue to raise substantial amounts of efficient capital to support our fleet investments, including our recent inaugural issuance of senior secured investment grade bonds.
We expect market conditions to remain strong as we move into the traditional summer peak season for dry containers.
And we expect to continue to achieve outstanding results.
I will now hand, the call over to John O'callaghan on global head of marketing and operations.
Thank you Bryan turning to slide four on the card.
Market overview.
We continue to benefit from favorable market conditions and trade volume to remain exceptionally strong.
Ongoing demand for goods and retail inventories remaining below normal levels.
Lines continue to thanks logistical challenges in accessing on Repap trading equipment empty containers, which is boosting demand even further.
The container manufacturers have significantly ramped up production to meet demand.
But the availability of containers remains limited.
On the lines of continue to rely heavily on the lease companies for their containers.
Triton has again secured sizable bookings servicing their shipping line requirements due to on extensive supply capability.
We have ordered two $6 billion of containers, so far on 2021.
<unk> already secured in excess of 35% of the lease market share.
And locked in 20% asset growth of 2021.
$700 million of containers have been absorbed by our customers on the first quarter on.
And this will rise further as deliveries accelerate through the second quarter.
In addition to securing of sizable share the average duration of new production business is over 12 years.
The expected lifetime all of our Lee.
On the upper teens.
A large percentage of the use of depth of containers have been locked into lifecycle of leases.
The remaining sale inventory is very low on a continued strong demand for used containers is reflecting that steep incline in the sales price which continues to strengthen.
Slide five illustrates that strength and trade cargo volumes have continued to remain above pre pandemic levels since July 2020.
Market forecasters expect solid trade growth in 2021.
And you can see monthly trade volumes are still very strong with significant improvements over last year and remain at record levels.
There wasn't a slight anomaly in February which is normal for over the Chinese new year period.
But the year on year performance remained strong.
Turning to slide six.
Alright, six helps illustrate why vessel space and container shortages of driving freight rates and container prices to record levels.
Trade volumes continued to be restrained by lack of container vessel on special capacity pushing on freight rates.
Dana on disposal prices.
You can see ended up the right chart that new container prices are in the range of $3500.
The bottom chart illustrates that sales price of used containers increased steadily throughout the quarter of <unk>.
<unk> of available sale containers led to prices.
Creasing week on week as the inventory has been depleted.
The chart on the left illustrates illustrates the trends specific lease less spot freight rates relative bunker costs.
This also encapsulates, but we are at this point in time, where container shortages as well as of lack of ship capacity pushing container prices and freight rates to unprecedented levels.
Slide seven.
<unk> seven shows that triton's key operating metrics reflect the strong market and are pushing up even further then we protected.
This can clearly be seen on the top left chart, but utilization of their maximum levels.
We have accepted and placed on order 890000, Teu so far on 2021 of the.
The majority of which would be locked into durable long term leases and.
And will be absorbed by customers fleets of the next two quarters as they become available at the factories.
Over 75% of of used containers have gone into lifecycle of leases and the average interest rate has increased.
These sorts of used containers of non slowing because we bump up against full utilization on.
On the last couple of units go on lease.
The bottom charts demonstrate the significant bookings of new and used dry containers over the last nine months.
On the bottom right chart looking to the extreme right Bob on the <unk>.
What's current we only have limited drive depth of units remaining uncommitted around the world.
The low left is a chart showing new leasing transactions by quarter.
The bubbles rep of <unk> represents a significant amount of new production at the time the leases were negotiated.
The leases negotiated in 2021 have an average duration of 12 years.
And of bubbles also illustrates the increase of market lease rates as container prices jumped to meet demand.
Turning to slide eight.
Slide eight shows container production and the evolution of new container inventory as well as the overall container fleet over the last 10 years.
On the upper right you can see new production inventory and despite the factories ramping up container production activity at the end of last on the beginning of this year.
Inventories of new containers remain very low.
Sitting on the ground roughly represents two to three weeks of supply only.
The chart on the left shows annual production also broken out in percentages between leasing companies and shipping lines.
There are a couple of observations on this chart.
First quarter production is half of last year, and we show on the bottom line that we expect of substantially a substantial amount of new production to be built over the remainder of 2021.
This would represent over 6% to 8% growth in the container fleet.
This may be higher than anticipated trade growth of content.
On a production was not much above replacement value in 2019 and 2020.
And so to some extent, we're still playing catch up.
All of that shown on here, we believe most of the containers of scheduled for delivery in the first half of the year are already fully committed to lease.
Finally, as you can see by the percentages and the Orange box of the button.
Leasing share has been strong in this current size.
I'll now hand, you over to John Burns our CFO.
Thank you John.
Turning to page nine.
On this page we have presented our consolidated financial results.
Adjusted net income for the first quarter was $128 $7 million of $1 91 per share on.
An increase of 12, 4% from the fourth quarter and over 100% from the prior year's first quarter.
These exceptional results represent a return on equity of 25%.
Turning to page 10.
Our results from the first quarter reflect the benefits of the continued surge in container demand at.
That started in the second half of last year and continues to generate strong leasing demand and exceptional disposal gains.
We added $700 million of new containers in the first quarter growing our fleet by six 1% in just one quarter.
Lease revenue was up two 8% over the fourth quarter.
But normalizing for the two fewer days in the first quarter.
Leasing revenue would have been up 5%.
Average utilization increased 1% from the fourth quarter the averaged 99, 1%.
And utilization is currently 99, 4%.
These near maximum utilization levels drove down direct operating expenses by $5 5 million from the fourth quarter.
Largely due to lower container storage and repair expenses.
The container shortage and high new container prices continue to drive disposal gains to record levels.
Resulting in $31 million of gains on sale and trading margins in the first quarter.
A jump of $4 7 million over the fourth quarter.
This increase was in spite of of roughly 50% decrease in disposal volumes as our available sale inventory has shrunk to exceptionally low levels due to limited container redeliver east.
The current strong market conditions are also significantly enhancing the credit profile of our shipping line customers.
Turning to page 11.
On this page, we highlight our strong balance sheet significant liquidity.
And our well structured debt portfolio.
Our key leverage metric is net debt as a percentage of revenue earning assets.
And this metric was approximately seven <unk>, 70%.
Which is at the low end of our historical levels.
And our current strong cash flows will enable us to maintain our leverage at the low end of these historic levels. Despite the $2 6 billion.
Of new container investment.
We have access to a wide range of funding sources to support on new container investment.
And of raised $1 $8 billion of new debt this quarter this year.
At an average yield of one 9%.
In addition to our low leverage we are of significant liquidity as shown on the table on the right.
Turning to page 12.
We are very excited by S&P's recent upgrade of our corporate credit rating to Triple B minus.
We believe this investment grade rating reflects our industry leadership strong long term earnings on a conservative balance sheet.
And it further differentiates us from our peers.
In April we issued an inaugural senior secured investment grade bond, which was well received.
We issued $600 million of five year notes at a spread of 120 basis points over treasuries.
For a yield of 2.07%.
This inaugural deal introduce Triton to the investment grade bond market.
And it gives us access to the deeper pool of debt capital and tighter spreads provided by that market.
The S&P upgrade and the success of our inaugural secured offering provide a path for us to transition our key debt capital funding sources to the more traditional unsecured investment grade bonds.
Yeah.
This transition is currently constrained by the high portion of our assets that are pledged of secured financings.
As part of the transition process of.
Our recent secured bond issuance.
Included of collateral fall away position provision.
Which is a structure that will help us create the necessary pool of unencumbered assets in the future.
If we are successful in transitioning to being an unsecured investment grade bond issuer, we would expect further benefits and accordingly intend to actively pursue this transition.
Turning to page 13.
Yeah.
The graph on the top left shows our cash flow before capital spending.
And you can see the resiliency of our cash flows across market cycles.
And you can see the strength of our current cash flows and the annualized first quarter figure.
The graph on the bottom left shows our stable cash flows.
Together with short order cycle for containers enables us to maintain our leverage in a steady range over the long term.
And as I noted earlier, our strong cash flows of profitability supports our high current growth rate with limited impact on our leverage.
And the graph on the right demonstrates how these strong cash flows and our financial stability.
Have enabled us to create significant shareholder value.
By steadily growing the book value of the business, while paying a substantial dividend.
I will now return you to Brian for some additional comments.
Thanks, John.
2014 shows our trading is building long term value unlocking and durable benefits through our aggressive fleet investment and our focus on long duration leases.
The chart on the left shows the expected growth of our revenue, earning assets through the second quarter.
We have ordered over $2 $6 billion of containers for delivery in 2021.
And most of these containers of scheduled to be delivered by the end of July.
The chart on the upper right puts our expected new container lease outs and average new container lease durations and to recent historical context.
Based on our existing lease commitments the pace of new container lease outs in the first half of 2021 should significantly exceed the pace we achieved during the strong markets in 2017 and 2018.
Our average new container lease durations have also increased substantially.
The average lease duration for committed lease transactions is now over 12 years of 2021.
These long leases locking the current favorable economics for most of the containers life.
Which boosts our investment returns and reduces our exposure to weak market conditions in the future.
The chart on the lower right illustrates how we're using lifecycle of leases to further protect our lease portfolio.
Lifecycle of leases are primarily used for used container pickups.
Under a lifecycle of lease our customers agree to keep all containers on hire until the end of their useful life.
Which eliminates the utilization risk for these containers and usually leads to extra revenue years.
In return, we offer customers advantage pricing and maximum logistical flexibility it off here.
Since last July roughly 75% of our used dry container pickups were placed on lifecycle of leases.
And that of about half of our total dry container fleet is covered by lifecycle of leases.
I'll finish the presentation on slide 15.
Trading is off to a great start in 2021, and we expect market conditions to remain highly favorable.
We expect our performance will remain strong.
Our disposal gains maybe increasingly constrained by very low disposal volumes.
While we expect strong growth in leasing revenue and expect our adjusted earnings per share will remain near the record level, we achieved in the first quarter.
Trading is also extending our leadership advantages.
Our aggressive fleet investment is extending our scale and cost advantages also further securing our position as the go to supplier in our industry.
And the opportunity to transition our debt issuance toward investment grade bonds.
To provide a meaningful boost to our capital efficiency.
We are highly focused on locking in long term benefits for our profitability and cash flow.
Our substantial new container investments are being placed onto long duration high value leases.
And the large number of used containers on lifecycle of leases will underpin our utilization for years to come.
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 phone.
If youre using a speakerphone please pick up on your handset before pressing the keys.
If at any time your questions and interest and you would like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Kenn Hoekstra with Bank of America Merrill Lynch. Please go ahead.
Hey, good morning, Brian John.
John I mean, this is obviously a great quarter, you talked about it last quarter in terms of how things were improving and utilization, obviously can't get much higher so.
It's better from here and how do you look out and continue to grow Brian we've been at this calling you for more than a decade now and it just seems everything has come together right now post the acquisition.
Given the environment given the upgrade.
What.
Where is the where's the risk to the model here is it just returning to the cycle and things that are on long term lease.
To be become shorter going forward or.
I guess what is the outlook for you from here.
Yes, so thanks.
Thanks, Kevin.
We are very pleased with where things are on and think we continue to be really well positioned to benefit from what's happening in the world and so in terms of where we go from here I mean, the first thing is we have a lot of runway to go on the containers that we've purchased in the deals that we've done.
We've probably said a few times debt, we bought $2 $6 billion of containers and I think John John Burns mentioned that something like $700 million of that was delivered and accepted in the first quarter.
And so the vast majority.
<unk> is still to come in terms of delivery and pickup and the vast majority of those containers are already committed to lease. So there's there's certainly a long way to go in terms of leasing revenue growth and profitability growth just from that.
The deals that we've already done in containers that are in the process of being produced in.
I think when we talk with our customers about where the market goes from here I think.
Obviously the market is very strong for a number of reasons.
Because of that probably harder to predict than usual, but but I think the conventional wisdom and what you hear from customers on what you read of what Theyre, saying about their results is that there is an expectation that very strong conditions last deep into the year likely maybe even and certainly through the summer likely into the fall on maybe through the year.
And so.
There is definitely room to play and I think in this in this current environment.
And then the thing that we keep trying to hopefully get across is that what we're doing right. Now in this current environment is going to create benefits that last for many years and so even if inevitably.
The market comes back down to a normal balance of container supply and demand in the meantime, we've locked away billions of dollars of containers on very high value very long duration leases.
As we see it has shifted our likely performance range in the future both shifted upwards and narrowed the likely range between sort of good outcomes.
Less attractive outcomes in terms of the future state of the world.
And so we feel very excited about all of that and then.
We are again very excited about the upgrade to our corporate ratings to triple B minus and the path of that gives us to be.
Hopefully a more regular issue of investment grade bonds, hopefully also eventually unsecured investment grade bonds.
Net pro certainly further differentiates us in this industry. It gives us a capital advantage to go on top of our operating and non customer advantages.
And so yes, we feel that I mean, obviously the world doesn't always day.
In a way that's just perfect for us, but but but again, we think we're making improvements in the business that will last for quite some time and also really further separating ourselves from the pack when it comes to our capabilities and cost structure and customer positions and so on.
So just flipping to the bubble chart on page seven of if you can for a second which sort of the trend of leasing transactions.
Debt.
And you talked about.
Is that if I look at the big bubbles kind of in a year ago. You were you were at <unk>, 8% pricing would those be on shorter term leases that you have a chance to re price and improve further over.
With those at the start of this cycle also had been on on longer term leases yes.
So certainly on long term leases I think virtually all of the deals that we've done since July we're on kind of minimum five years.
A look at Theres a chart we included.
Back in my section I think its page 14, which looks at the evolution of the lease terms.
Over the last.
On a couple of years on yes, youll see that the lease terms were still pretty long.
On the fourth quarter of last year, I think probably averaged eight or nine years on.
And what we're doing in the third and fourth quarter. The only thing I'd say about that bubble chart is the size of the bubbles is a little bit confusing in the sense that we because we wanted to attract market conditions when it comes to leasing rates.
Kind of located the deals from a size standpoint based upon when the deal was negotiated.
Rather than when the containers of picked up and so youll see the bubbles look bigger than.
In the third and fourth quarters in 2020 than they do in 2021, but in fact of pickups will be bigger in 2021.
Okay and then.
Lastly for me I've been just phenomenal seen these still at 3500 for new boxes.
Are we seeing a surge in leasing do you think Brian is that of suggestion from the liner companies that.
We're seeing the end of I mean, it's conflicting question because are they seeing an end and thus they're putting more on lease or are they putting lease just because it's a way to get access to boxes is there anything that you view and change just given how tight it is or is it just a land grab it's just outside of that need to get boxes any way I can maybe just from your experience.
And looking through the cycles, how do you view that now.
Yes, I don't I don't think Theres, a big connection between the price of containers right now on the debris and the amount that are customers of leasing in fact, if you look back to what was happening in the second half of last year. When this market took off the leasing share was also very high back then and container prices Werent really that high.
Not till the end of the year and so.
A couple of things going on one we've said before and we believe that a lot of the shipping lines have just made the decision that leasing is probably the the way they want to bring most containers into their fleet debt. There's a lot of benefits they get from not having to plan so far in advance of especially to deal with.
Rising markets like this one.
And it's probably easier for us to maintain bigger inventories of available equipment, because we can spread that risk across many customers.
For an individual shipping line, they're taken all of that speculative factory or sort of a container additions on themselves.
And in addition, we've talked about how the extra cost of leasing relative to the cost of the customers owning and financing their own containers has come down a lot as a leasing company has gotten bigger as our financing has become very efficient.
And so I think of lot of the lines of just decided leasing is just a sensible way to rely on adding containers.
And then maybe just on top of that what I mentioned earlier is just that and at times.
<unk> of greater uncertainty and less predictability, that's where leasing is even more valuable and because you can just you can make decisions on short notice and.
And so I think that's what's happening in.
And so we're making big investments to make sure we have ready inventory and.
Because we see that valuable service to customers of how we are generating a lot of leasing share for ourselves.
But it's something we think we think continues.
Wonderful I appreciate the time of thought and a lot of things of that certainly come together for you. So congrats thank you.
Yes, Thanks, Ken.
Our next question comes from Michael Brown with <unk>. Please go ahead.
Thanks, Operator, hi, good morning, guys.
Yeah, Hi, good morning.
So Brian I, just wanted to maybe start off with one of the question a little bit higher level here I mean, obviously it seems like disruption just continues to be a very persistent trend and team in the shipping market whether it's.
<unk> can now being being in the.
On a major issue and all of the news or port congestion and just general supply chain disruption. So what I'm trying to parse out is really what is in your view of what does this really mean for the shipping lines.
Just kind of like a secular trend, where they just need to really run with more equipment than they had historically just you to be better prepared for these.
One off events of that just seem to be much more frequent than they've been in the past.
So just curious what you're hearing from the shipping lines on what your thoughts are there.
Yes, so youre right I mean, certainly we hear a lot about a variety of operational disruptions.
Starting I think back when the Lockdowns first started occurring with stranded containers.
Retailers and wholesalers of holding on to containers is kind of almost like temporary warehousing.
And then probably debt.
Of that transitioning to then just the flood of containers overwhelming the ability of the ports to move containers in and out and so of that low to containers coming in we're getting prioritized empty containers going out we're not.
And then finally, the icing on the cake.
The day blockage of the Suez Canal, just slowing the flow of containers and requiring more containers to be added in at the front end to handle the cargo that wanted to wanted to load them.
And so all of that is slowing down the velocity of containers and meaning the shipping lines need to box up to handle.
Even more than they would just just based upon the growth in trade.
What we hear is that most customers don't think these bottlenecks are going to evaporate quickly, but they also don't think they're necessarily permanent.
So what.
We're all trying to figure out is just what what does that transition process looked like I haven't seen any of our customers.
Express confidence that they can say.
Within this current strong period.
Bottleneck their operations.
So I think our general view is it's likely continues until.
Until trade flows and that who knows exactly when thats going to be but I think probably the vetting of sometime end of this year early next year when maybe the trade world starts to get back towards normal, but again, that's just that's just a guess.
From our standpoint, what that means is we're just we're always on lookout for not just what is container supply and demand now, but what is it likely to be in the future.
And no doubt as as bottlenecks EPS that could free up container capacity effectively and something that we need to think about.
But what container supply and demand might be in 2022.
But overall, we're pretty optimistic about that in the sense of that trading.
Economic growth forecasts are right now quite optimistic for 2022 trade forecasts are pretty optimistic a lot of the container production. That's happened this year as John O'callaghan pointed out.
To some extent is making up for low production volumes in 2019 of the first part of 'twenty. So.
And then finally whenever really of that exposed to a chain of to a sudden change in market conditions that the vast majority of our containers on long term lease.
Available inventory, we have of Unbox, new containers, it's meaningful in the sense of our ability to supply customers, but relative to our overall fleet size is not that big.
And so there's a whole bunch of moving parts right now, where we're trying to be mindful of all of them, but again, we feel.
We should be able to adapt pretty flexibly as of the situation changes.
Yeah, great. Thank you for all of that color.
Very comprehensive.
Okay.
If I switch gears to the commodity.
On capital actions that you guys took on the balance sheet. So your interest expense is down over 20% year over year. So it's really great to see you are taking advantage of the day rate environment here.
As we as we start to look forward just wanted to hear your thoughts about potential for any other actions that you guys can take here.
One area that jumped out to me is.
Some of your preferreds for the higher.
A relatively high dividend rates is it possible for you to buy back some of those shares I think that was part of your buyback authorization is to actually take out some of the preferreds, if you find out economically attractive.
So, let's just kind of one one thought debt.
That came to mind, but just curious what are there.
Levers are at your disposal here and then and then maybe just a question for John with all the moving pieces on the <unk>.
On the debt side, whereas kind of the interest expense likely to land next quarter just to make sure we're kind of right on the right ballpark here.
Well, Mike let me take a crack at that Brian.
Brian Chime in certainly.
A number of things we talked about that.
We're excited about what the upgrade by S&P provides for US there is a transition process that will take a little bit of time, but we do think debt.
Of the time, there will be meaningful benefits.
Transitioning teams.
Again, we need to be successful in doing it but getting there will provide meaningful improvement on our efficiency of capital of debt capital.
On the on the preferred side of that you mentioned.
We'd like to take out those of if we could unfortunately, there is a five year on no call on of preferreds, but we do we like that product and again, we don't think of it as debt. We do think of it more as equity of the way it's structured it's fixed for life.
And.
There is no there is no put so we think it's more equity based.
So anyhow overall.
The ABS deals we did in the first quarter the inaugural deal on the bond transaction again, combined one 9% really it would be used funding a lot of the capex, we talked about that will meaningful bring down.
Our effective interest rate for the first quarter was about three 3%, including the debt itself and the amortization of fees.
We expect that'll come down into the high two percents on again over time, we hopefully as we transition to the investment grade bond bond market that theres more opportunity of that.
Yeah, and I think as John pointed out too, even though three three probably somewhat of a low point for us for an average effective interest rate.
While.
It's quite a bit above where our margin of financing cost as we've been.
For many years.
Reliant on fixed rate financing, which we think is of very good match against our fixed rate leases.
And so as interest rates have fallen really far.
<unk> transitioned slowly, but certainly the incremental debt, we're putting on is at rates below our averages.
And then maybe just one point on the preferred John mentioned, we'd love to call the preferred and that's really just because the rates on those are higher than we could issue for today.
But we actually as John mentioned, we do like the preferred as a part of our capital structure that we think again, we don't think of it relative to the cost of our debt we think of it.
Mostly relative to the cost of our common equity.
Again to us it looks like it provides a nice mix of of sort of risk protection and overall capital cost.
Of course, yes.
Certainly agree on it certainly true feeling comment.
Maybe just one last one.
What are kind of the cash on cash yield that you guys are getting on these on these transactions obviously high.
On prices and a strong demand on containers, certainly probably supports very strong cash on cash yields in row.
But the fact that youre getting such long terms.
Maybe it's a bit of on.
It is an offset there so just kind of curious what are they low.
Double digits, just what's the what's the current market.
Yeah. So first of all I'd say is we typically don't focus that much on cash on cash returns we model our leases it's much more on lifetime.
<unk> equity returns.
<unk> remained stronger than usual in the upper teens in terms of of modeled lifetime equity return.
In terms of the cash on cash on you're right that debt.
We are focusing on long duration leases, which does have the.
The effective of bringing the cash on cash yields down.
Cause of those durations and so.
Most of the I guess, the if we're doing 10 11 12 year leases.
Cash on cash is in low double digits.
And.
But again, we think just given those durations that translates to quite attractive.
Equity IRR.
Great great. Okay. Thank you for taking my questions.
Our next question comes from Larry Solow with CJS Securities. Please go ahead.
Hi, Good morning, it's actually lead you go to for Larry Great quarter.
Great. Thanks Lee.
Just a couple of questions for me I think you mentioned a bunch of times that you've ordered $2 6 billion of new containers. So far this year and obviously $700 million.
Got absorbed in Q1 that being said looking at your guidance for Q2, and then trying to understand the visibility for the balance of the year.
If all of these new containers are going to be absorbed over the next couple of quarters and you've got committed leases for them why would Q2 only be sort of consistent with the Q1 levels on why shouldn't we see more of a sequential uptick as we go through the year in terms of earnings.
Yes, so certainly a good question and we really think of it maybe in two pieces.
And so most of our revenue and profitability is from leasing containers.
And the leasing revenue and leasing margin, we do expect to go up strongly sequentially through 2021 for the reasons. You mentioned that we have lots of of containers committed to leases that are going to be building up that that lease revenue based on leasing margin base on the other hand, we've been making extraordinary gains.
On selling our used containers.
And we've got some charts and graphs that we showed where you see the price for used containers has.
I think more than doubled on an absolute basis, which maintains the margin is probably gone up by a factor of three or four given that the the gain is over a fixed residual value.
And it just so happens that we had enough containers on inventory.
To carry us through the end of 2020 and into 2021, we show a chart on page seven of the of the presentation that looks at container pickups and drop offs.
Which is on the upper right chart on that slide and if you look at the container drop off volume like you can't even see the color on the picture and it's that we're getting no continuing on I shouldn't say no. We're getting very very few containers returned by customers because they're so containers. They have are at a very big discount to the market leasing rates.
And typically our leases don't require of containers to be returned immediately when the lease expires.
So we're.
We're getting almost no containers back which means we have very few containers that we can sell.
And so we expect those large disposal gains.
To come down.
We expect price probably going to need to go up in the per unit gains youre going to go up but our volume is coming down very quickly.
So what's happening as we see this growth in this recurring leasing revenue and recurring leasing margin, which is great.
But that's going to be offset at least for a little while.
By a headwind of decreasing disposal gains.
Got it and then just thinking about your visibility in total and like you guys have done a phenomenal job since the middle of 2019, extending your lease durations from five years to what's going to be closer to 12 years here.
How should we think about your earnings run rate.
In terms of of lag when and if demand ultimately falls on the utilization falls and how long can you hold on to sort of the positive performance. We're seeing now in any way to kind of project out three four years in the face of a 12 year lease duration like what.
Kind of a normalized level of earnings might look like.
So of course, we do a lot of that internally, we've got a forecast model for the business that's built up on our lease level basis.
Which allows us to do a lot of exploring on.
What does the or what do these very long leases mean in terms of likely outcomes in the future for profitability and we typically do forecast our business five six years out.
To see to see what may happen given different states of the world. What we find is that if you would look back 12 months ago at the sort of likely scenarios that we ran based upon future market conditions.
Look at the scenarios are running today that two things have happened one.
Our expected profitability has meaningfully shifted upwards.
And not because we're so much more confident with the world might look like in 2025, but just because we have built.
So much we've locked in so much value and so much profitability on cash flow from all of these leases that were doing from extending even though just any containers on very long term leases and on the other thing. That's happened is the GAAP between are more optimistic and more conservative cases in terms of what the world might look like that while our assumptions haven't changed is the impact on us has narrowed because.
Again of that very large block of business that's locked in one way on the other.
We don't give long term guidance.
Due to the public.
But basically you can think of it as are our view of the future has become more optimistic and the GAAP between the good outcomes and more sort of challenging outcomes has narrowed quite a bit.
And one last one for me I think one of the things you mentioned was as a result of being able to extend these customers on a favorable rate environment, you've sort of given the customers more flexibility on the back end of the lease I think as I remember at one of your big competitive advantages was the ability to.
Have customers return.
Units two favorable locations to be easily lease that has any of that changed as a result of the more favorable lease terms youre getting on your side.
No no. So that's still a very key part of our leasing structures and that's why I think I was trying to differentiate and sorry, if it wasn't very clear between normal leasing leasing structures and lifecycle leases.
And so for regular leasing structures, where containers can be returned prior to their sale age.
We're highly focused on making sure that containers come back to good demand locations, which of these days primarily in Asia, mainly China.
That tight logistical focus of ours is one of the reasons why we can maintain high utilization across different kinds of of market cycles on across the container life for.
For lifecycle of leases all of the containers by definition will come back at the time the container of sale age and it just so happens that the sale of market for containers.
Is much more even globally, we can sell containers very effectively all over the world and in fact, given our.
Cigna.
Significant infrastructure, and we can talk containers and far more locations than anybody else kind of on the world and.
That allows us to give customers the opportunity to return containers in the middle of Europe in the middle of the U S and South America on Africa.
Which provides many backlog could could provide significant backhaul savings for the customers and so part of the deal is state of the customers. How you take these containers and rather putting on a five year lease we'll put them on a lease thats flexible based upon the container age on the I'll come back at the time that containers of ready to sell and in return for that we can give you probably of.
Little bit better of of rate and we're going to allow all of the containers when you're ready to bring them back where you want to bring them back rather than requiring you to bring them back where we want them to come back.
Because we can sell them effectively anywhere.
That sounds great. Thanks, very much guys.
Thank you.
Our next question comes from Dan Day, with B Riley FBR. Please go ahead.
Yeah, guys. Thanks for taking my questions just a quick one first the direct operating expenses.
On a lot.
9 million ish for the quarter.
As long as we're above the sort of 99% utilization rate is that sort of the right number to think about or is there.
Anything one timing in the first quarter that it was particularly low.
No. Thanks, Dan now of those that's right.
The big expenses included indirect op of storage.
<unk> utilization is to your point and also as we've mentioned couple of times that the sales stack, which is not calculated in utilization is also an extraordinarily low level. So.
And repairs is the other item and again as Bryan pointed out on a chart very limited number of units coming back.
Again, we don't anticipate debt low level of staying forever, but at this current state I'd say, you'll probably get into the to the bottom on the direct operating expenses and nothing unusual in there in the quarter.
Got it got it thank you.
Yes.
Kind of capital allocation, obviously youre, putting on the part of Capex. The next few months.
On the other side of this say say next year you guys.
Really well set up to generated upon the cash.
Can you remind us how you think about sort of maybe raising the dividend and buyback of shares.
Kind of once we're on the other side of the Capex what the plan is to do with all of it.
Yes, no good question and I can tell you that.
The very thing we talked about at our board meetings and right now we see this opportunity continuing and so we are we're mostly focused on.
On.
On investing right down the middle buying containers in support of our key customers on putting them on great leases.
And that's been our main focus for our capital in addition to paying on a regular dividend of course to the extent, we get to a market where our growth is no longer at the current level and where our capex is more normal.
Youre correct at the current level of profitability, we're going to have a lot of extra cash flow.
At normal levels of investment and we will look at that time think about.
What's the right what's the right use for that capital we tend to be very flexible and very I think disciplined and thoughtful on how we allocate cash net.
We have shifted from high capex to lower capex from aggressive share buyback buybacks shifting back to Capex.
Again, I think we'll continue to make.
Decisions that makes sense given the circumstances that we're in and but we'll be looking at that for sure when we get to the point of.
On Capex is coming down.
Awesome. Thank you just last one any update on that.
Maybe M&A.
Any sort of acquisition targets out there has this sort of strong market kind of total spending appetite for revenue for the foreseeable future.
So I mean, we can't talk of course about any particular M&A opportunity as we've said in the past that M&A is something that we are interested in doing that we got many benefits when we merge Tal and Triton.
And we expect if we did M&A in the future that we would get benefits again.
And of course, it depends on having opportunities that are available and again, we tend to be pretty disciplined on how we use of our capital and we'd want to make sure that.
Using capital, whether it's cash or of our stock for an M&A deal that it was a valuable use for our shareholders.
But again in general we're interested but of course very hard to predict when and if something might come available.
Awesome.
Thank you for taking my questions and keep it on what you're doing.
Thank you very much.
This concludes the question and answer session I would now like to turn the conference back over to Brian Sandy for any closing remarks.
I want to say, thank you for joining our call and thank you for your continued interest in Triton International.
Thanks and goodbye.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
Yes.
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