Q4 2021 Triton International Ltd Earnings Call

February 15, 2022

Good morning, and welcome to the Triton International Limited fourth quarter and full year 2021 results conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero on your telephone keypad after.

Today's presentation, there will be an opportunity to ask questions.

Ask a question you May press Star then one on your telephone keypad to withdraw your question. Please press Star then two please.

Please note this event is being recorded.

I would now like to turn the conference over to John Burns Chief Financial Officer. Please go ahead.

Thank you.

Good morning, and thank you for joining us on today's call we.

We are here to discuss triton's fourth quarter and full year 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'd like to note that our prepared remarks will follow along a presentation that can be found in the investors section of our website under presentations.

I'd like to direct you to slide two of that presentation and remind you that today's presentation includes forward looking statements that reflect <unk> current view with respect to future events financial performance and industry conditions.

Forward looking statements are subject to various risks and uncertainties.

Triton 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 the earnings release and the presentation.

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

Thanks, John and welcome to Triton International's fourth quarter 2021 earnings Conference call.

I'll start with slide three of our presentation.

Triton achieved record performance again in the fourth quarter of 2021 with.

We generated $2 67.

Adjusted net income per share an increase of nine 9% from the third quarter.

And we achieved an annualized return on equity of over 30%.

Our exceptional results in the fourth quarter were driven by growth in our recurring leasing revenue due to continued strong pickups and a further reduction in our average effective interest rate due to successful financing activity.

Triton's performance for the full year 2021 was outstanding.

We generated $9 16.

Adjusted earnings per share an.

An increase of nearly 100% from 2020.

And we achieved a return on equity of 28, 1%.

Triton's outstanding performance in 2021, well supported by very strong market conditions.

A surge in consumer spending drove solid growth in trade volumes and.

And container demand was boosted further by extensive logistical bottlenecks that slowed container turn times.

A shortage of vessel capacity drove exceptionally high freight rates, keeping our customers highly focused on container availability.

And container manufacturers had a hard time catching up to demand. Despite a large increase in production volumes, leading to record prices for new and used containers and very high market leasing rates.

In this environment triton's deep container supply capacity and our reputation for reliability where key.

We invested over $3 $6 billion of new containers for delivery in 2020 <unk>.

Increasing our revenue, earning assets by over 30%.

We are very proud to have been the leading supplier of leased containers to most of the world's top shipping lines and in the process, helping them manage through severe supply chain challenges.

Perhaps most importantly for Triton, we've been able to lock in durable enhancements to our business.

The large block of containers added in 2021 replacement high IRR leases with an average duration of 13 years.

We are aggressively refinanced our debt and reduced our average effective interest rate by 140 basis points over the last few years.

And our high profitability is driving rapid growth in our net book value per share.

Overall, our expected long term financial performance has shifted meaningfully upwards.

It's also important.

Important to note that the balance sheets of the major shipping lines have dramatically de levered due to their exceptional current profitability.

Leading to a significant improvement in the shipping industry is credit profile.

We continue to use our strong cash flow to drive shareholder value in a number of ways.

We used most of our cash flow in 2021 to fund massive value added investments to our container fleet.

As the peak shipping season ended in the fall, we shifted our investment focus to share repurchases.

We also announced an increase in our quarterly dividend to <unk> 65 per share.

And we've done all of this massive fleet investment renewed share repurchases and an increased dividend, while keeping our leverage comfortably in our historical range.

We are starting 2022 with significant operational and financial momentum.

Good consumption remains strong and our customers expect significant logistical disruptions will now deep into the year.

We expect our adjusted net income will hold fairly steady from the record fourth quarter results. Despite being in the slow season for dry containers and having two fewer billing days.

Our trajectory after the first quarter will depend on how market conditions develop.

So we have a high level of confidence that 2022 will be another outstanding year for Triton.

I will now hand, the call over to John O'callaghan, our global head of marketing and operations.

Thank you Bryan turning to page four.

Page four explains that goods consumption and logistical bottlenecks continue to drive strong container demand.

The charts that illustrate the consumption remains very high in the U S.

As extreme event pool, it's continues to flow to try and meet that demand.

Pounds existing logistical problems in the supply chain.

Further impacting the restocking of inventories that remain at relatively low levels.

Chances are wide helps to illustrate why do we stocking of inventory onto the shelves is challenging.

As global trade volumes remain elevated you can see on the bottom right chart. The number of container vessels waiting to discharge the causes of the U S. West Coast remains high but this is only one of many issues.

No slowdown in the movement of goods and supply chain remains challenged by itself.

Some interconnected and some independent, namely the terminal trucks rail warehouse space and labor shortages.

These issues cannot be examined in fixed until the industry get some breathing space.

Page five.

Page five illustrates the freight rates on new and used container prices remained high through the quarter driven by continued demand for vessel space and container.

The chart on the left illustrates transpacific east west spot freight rates.

<unk> costs.

Freight rates remained extraordinarily high reflected in the continued strong demand cargo and logistical bottlenecks keeping capacity short.

You can see in the upper right chart that new container prices have come down.

In the $3400 range in part due to the high volume produced through 2021 easing some of the shortage.

But container availability remains tight and prices remained well above normal.

The bottom right chart illustrates the sale price of used containers remained high throughout the fourth quarter due.

Due to the continued strong demand and a decreasing availability of containers.

Page six.

Page six shows at the high container production in 2021 has alleviated some supply constraints with.

Chocolate left shows annual 2021 container production for leasing companies and shipping lines broken out in percentages.

We've seen the shipping lines increased their short share towards the end of the year and for the beginning of 2022.

While we do not believe the shipping lines do containers as a strategic investment. It is possible. They may continue to buy due to their profitability.

On the right you can see container factory inventory and depot stocks.

While there has been some easing of container shortages as you can see container factory inventory is up to normal levels.

But it is still only 2% of the global container fleet available.

And at the bottom right chart illustrates well know that the units available. So the overall picture is still quite tight.

Turning to page seven.

Page seven shows Triton's key operating metrics remain very strong.

This concludes will be seen in the top left chart showing utilization remaining at near maximum levels.

On the upper right chart, you can see the fourth quarter pickups remained very high as customers continue to absorb equipment.

Drop offs have been very low with these almost makes me going out to lease with a higher gain on sale.

The lower left public chart just shows how extraordinary the market has been in 2021 with the unprecedented amount of new production volume we have put on lease.

The leases negotiated have an average duration of 13 years.

Signs that these investments are impressive.

<unk> three $6 billion of orders leading to over 30% of asset growth in 2021.

We estimate that Triton achieved a 40% share of new leasing transactions.

Hey, Jay helps illustrate what we've achieved in the long term value with great.

Put on new containers very long duration leases.

And we are focused on placing our used containers on lifecycle leases.

Which has had a significant impact on our average lease duration across the fleet.

Typically we summarize our lease portfolio by CE, because that weight the container by container type, but it's misleading in 2021, because we bought a lot of very expensive dry containers that typically have very low CPU ratings.

These are also put on very long duration leases.

So for now we're also putting net book value and to capture the impact of those expensive dry containers.

Very long term basis.

We're in very good shape, and that's close to 90% of book value long term and finance leases.

We're looking forward to continuing to build an even longer term benefits across the fleet portfolio.

With a tailwind of 2021 being carried into 2022 with strong market conditions, our utilization at near maximum levels.

I'll now hand, you over to John Burns our CFO .

Thank you John .

On page nine we presented our consolidated financial results.

Adjusted net income for the fourth quarter was $177 $5 million.

$2 67 per share.

An increase of nearly 10% from third quarter.

And we finished the full year with adjusted net income of $614 $2 million or.

Or $9 16 per share.

These exceptional results represent an annualized return on equity.

Of over 30% for the fourth quarter and 28% for all of 2021.

On page 10, I will discuss the drivers of our strong profitability.

In the fourth quarter, we benefited from continued strong on higher activity during the quarter.

Along with a full quarter's benefit from the high volume of new containers on hired in the third quarter.

This drove a four 2% sequential increase in leasing revenue on.

On a five 3% increase in average revenue earning assets.

Revenue growth was less than asset growth largely due to the growth in the finance lease portion of our fleet and the way it finance lease revenue was recognized.

We expect average on hires to increase in the first quarter.

Reflecting a full quarter of the significant fourth quarter on higher activity.

We expect leasing revenue to be down slightly due.

Due to two fewer days in the quarter.

Average utilization in the fourth quarter remained effectively maxed out at 99, 6%.

Supporting our high level of revenue and keeping direct operating expenses very low.

And we expect utilization to hold steady at these levels in the first quarter.

Our active refinancing over the last few years, along with our recent upgrade to an investment grade credit rating.

Enabled us to drive down our effective interest rate to 248% for the fourth quarter and.

And we expect it to remain near this level in the first quarter.

We continued to generate exceptional levels of trading and disposal gains.

<unk> $34 $2 million for the fourth quarter.

Only slightly from the third quarter.

And we expect gains to remain high in the first quarter.

As the peak season ended we shifted a portion of our strong cash flows to share repurchases.

During the fourth quarter, we repurchased one 1 million shares and.

And we have repurchased an additional 700000 shares through last week.

On page 11, we highlight our strong and stable cash flows which drives long term value.

The graph on the top left.

Shows our cash flows before capital spending.

Excuse me.

And you can see how this year is exceptional operating performance.

Together with the $3 $6 billion in new container investment.

As generated a step function change in our cash flows.

And we expect this higher level of cash flows will be durable.

Ported by long duration high value leases.

The graph on the bottom left shows how strong and resilient cash flows.

Together with the short order cycle for containers.

<unk> enables us to maintain our leverage in a steady range over the long term.

Okay.

Our leverage has increased back into the normal range over the last several quarters.

Reflecting our aggressive investment in new containers pars.

Partially offset by a third quarter preferred share issuance.

The graph on the right demonstrates how these strong cash flows and our financial stability.

A enabled us to create significant shareholder value by.

By steadily growing the book value of the business.

While paying a substantial dividend.

Page 12 highlights why we are confident that our high level of earnings are durable.

On the left we show how we have leveraged the strong market conditions to rapidly expand our leasing margin.

On the right we show why this higher level of performance is durable.

The top right graph shows the increase in the average remaining lease duration for containers on long term and finance lease.

You can see that the remaining lease duration increased over 60 months on a CPU basis by year end.

And when we calculate this on a net book value basis, which captures the high cost of our 2021 container purchases.

The remaining lease duration jumped to 78 months.

And if we include the typical time it takes customers to return or build down containers once the lease expires.

This adds roughly 12 months to both figures.

On the bottom right.

Show that we funded this long term lease portfolio.

With long duration fixed rate or hedged to fixed debt at very attractive interest rates as a result of our financing activity over the last two years.

We expect this combination of attractive long term lease and debt portfolios will lock in a high level of leasing margin for years to come I will now return you to Brian for some additional comments.

Thanks, John .

Slide 13 summarizes that we think about our equity cash flow and illustrates how this cash flow gives us a variety of powerful levers to drive shareholder value.

The top grouping of numbers summarizes the cash flow power of our business.

We are currently generating over $1 $6 billion of cash flow before capital spending on an annualized basis.

And remember the duration of these cash flows are substantial due to the strength of our long term lease portfolio.

We need to allocate a little more than half of this cash flow for replacement capital spending.

In order to maintain our fleet size as containers age out of service.

This leaves us with a little more than $700 million steady state cash flow.

We currently pay a quarterly dividend of <unk> 65 per share, which represents about $170 million in annual dividends.

As a result, we have about $550 million of steady state cash flow after our substantial regular dividend.

The next set of numbers illustrate a few of the things we can do with this $550 million.

If we focused on capital investment, we can self fund the equity needed for nearly 20% asset growth well.

Keeping our leverage ratio constant.

Alternatively, if we focused on share repurchases, we could repurchase about 13% of our shares at their current trading range.

If we wanted to instead to focus on dividends, we could pay over $8 per share on top of our regular dividend.

Bringing the total annual dividend to almost $11 per share.

We've typically pursued a mix of these options.

I'll finish the presentation on slide 14.

Overall, we are carrying significant operational and financial momentum into 2022.

And we expect to have another outstanding year.

We expect our market environment will remain favorable.

Container demand should remain strong.

Goods consumption remains elevated, especially in the United States.

And our customers expect logistical disruptions will continue.

The extreme shortage of containers has eased due to high production volumes of new containers, but.

But we expect the overall container fleet will stay tight while global logistics are challenging.

We expect triton's operating performance will remain very strong in 2022.

Our utilization is holding near maximum through the dry container slow season.

And we expect utilization will stay very high through the year.

Market leasing rates for dry containers remained well above average lease rates on our portfolio.

Mitigating exploration risk and providing potential for re pricing upside.

We expect our disposal gains will eventually start to moderate.

We are not yet seeing used container sale prices come off peak levels.

Fleet investment will likely be down from a very aggressive level in 2021.

So as always we stand ready to support our customers and overall container demand remains solid.

Triton's financial performance should remain very strong in 2022 and into the longer term.

We have locked in a large expansion to our leasing margin and cash flow.

We expect our adjusted net income in the first quarter will hold fairly steady from our record results in the fourth quarter, despite being in the slow season for dry containers and having two fewer billing days.

The trajectory of our performance after the first quarter will depend on market conditions and investment opportunities.

So we're very confident Triton will deliver another outstanding year.

I'd like to thank the Triton team for their dedication professionalism and outstanding results in 2021.

And I would like to thank our customers for your support for Triton and your trust and relying on us during this extraordinary time.

We will 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 telephone keypad.

If youre using a speakerphone please pick up your handset before pressing the keys if at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

The first question comes from Michael Brown with <unk>. Please.

Please go ahead.

Okay, great. Good morning, guys how are you.

Good morning, Michael.

Hey, I wanted to start on the leasing portfolio.

One element that I.

Observed here is that you've been seeing a lot of growth in the finance leasing.

A portion of the book here.

Can you just give us a little bit of color. There what is driving this mix shift towards more finance leases and operating leases.

And do you expect that trend to continue.

And.

Just to maybe add one more follow up on that what are the pros and cons of growing this piece of the business.

How should we think about modeling that out because of course it impacts here.

Our leasing revenue line and also your depreciation line a bit differently than the operator.

Yeah. Thanks, Thanks for the question Michael So there's a few things that are driving the trend of the increase in finance lease for us. This year. The first is just the very high cost of containers and I think we've talked several times about the fact that container prices are so high really makes it.

Very useful for us and safer for us to lock in very long duration leases.

And our customers in fact, I prefer to it as well because it mitigates our need to charge really exceptionally high rates in the early years to cover our risk that container prices might be below this current level.

On the leases expire and so as you've seen in the portfolio, we've been pushing the average duration, including for the operating leases even to like 12 13 years.

So I think when the operating leases when we're asking customers for that kind of duration. It's a much smaller step to go from a 12 or 13 year operating lease to a finance lease than it is from say a five year operating lease to a financial lease.

And so I think in general some customers have preferred.

And that if we're going to have to lock in leases of this duration anyway, we might as well do it in the form of a finance lease.

So I think thats, probably the most important driver.

Another driver is just specific to our customer portfolio, who were driving business with them and we've done a substantial amount of business with some customers that just have a general preference for finance leases.

That preference probably has strengthened over the last few years and so that also contributed to the increase in the financial lease portfolio.

Maybe I'll turn it over to John to talk about the differences.

How the finance leases show up in our balance sheet and income statement, maybe I'll sort of wrap up with some after that some thoughts on the pros and cons, yes. Thanks Blayne, So so Mike it's Rob.

We know this but just for everybody's benefit finance lease billings to the customer is includes both principal and interest but.

But we recognize just the interest portion on finance lease and operating lease again includes the full billing to our customer but that in that full amount of billing is recognized as revenue with depreciation as the adoption or the I'll say the equivalent.

His principle on a finance lease so that's why you get when you when you have the growth of the balance sheet.

The actual portion.

Hitting revenue from finance leases different than operating leasing smaller yeah, Yeah, and then maybe from our side a few pros and cons from the pro side of it obviously, the finance lease finance leases have less future market risk.

They are structured so that the customers have a significant economic incentive to purchase the container at the end.

And so we don't have remarketing cycles, where the containers were.

We don't sell the container and subject ourselves to price variability.

In addition, I think most of our lenders certainly have 80 agencies look at the finance leases favorably I think because of that lower risk.

And so.

Give us.

The higher ratings for whatever we might look like because of the finance leases.

The downside is that we don't get the upside and we typically find especially for dry containers.

That the upside outweighs the downside that we typically get.

Lots of stick factor for dry containers that they have very high re marketability through their life in our re leasing cycles typically go better than we planned for at least.

Similar for resale, there's very high resale value for dry containers as a share of the new container prices and again, we typically outperform our assumptions.

With resale and so there is there are some pros, especially in locking in lower cyclicality, but you do give up some upside.

Okay, Paul Walker's comprehensive answer.

Yeah, I just have a follow up it is a bit longer term question here.

Brian I was thinking about.

2023, and beyond and so I think the kind of two things that I'm trying to.

The process here is the fact that we've got more ships that are set to be delivered starting in 'twenty three 'twenty four and 'twenty five.

And there is also some emission standards that I believe are going to also impact.

Shifting trends out there.

Could result in slower.

Slower slower shipping so when I think about those two things and the fact that there has been very high production levels.

And trying to figure out how that ultimately.

Balances out over time with the fact that theres more ships coming online and potentially be seeing slower shipping overall.

What how does that impact your business, how should we think about the size of the global fleet for years.

How do you.

Process each of those moving pieces.

Yes, sure. So I'd say the first thing is we typically don't find that the supply and demand balance for vessels impacts us significantly.

It's a major driver of freight rates of course, and we're seeing freight rates right now being exceptionally high because cargo volumes and operational disruptions.

Basically overwhelmed vessel capacity.

And that's been it has been beneficial for us in 2020 wanted it kept customers very focused on container availability and if theyre going to are they erred on the side of extra containers, which for US was right wave we want customers to think.

But generally speaking it's not a major driver for us that that balance and I think as we see more vessels come in and as we see capacity get freed as bottlenecks ease.

I'd say I'm, just going to have a very quick impact on freight rates, but we don't see it having a large direct impact on us or our utilization or the container market.

We watch much more closely the supply and demand balance for containers and I think we showed some charts that looked at container production volumes being very high in 2021.

Some of that and I think we talked a few on a few calls was catch up for low production in 2019 and 2020, but then some of it also was just helping our customers deal with this logistical bottlenecks and especially when they were super motivated to make sure they didn't miss bookings because of a shortage of containers.

Our general view over time is that container supply and demand stays pretty tightly balanced.

Because of the ability for the manufacturers to flex to flex their production up and down.

It's going to be interesting to see how what happens is the bottleneck CES. This year and some container capacity comes available certainly something that we're going to be focused on.

But that said I think overall, we see a pretty good picture for the next couple of years for container supply and demand with some of the same factors, we've been talking about goods consumption being elevated and staying high.

And.

Just logistics remaining very challenging.

Okay, Great I will leave it there thank you.

Thanks, Michael.

The next question comes from Ken <unk> with Bank of America Merrill Lynch. Please go ahead.

Hey, good morning.

And what a great great environment to keep placing the boxes can you John I think you could just clarify you kind of talk this time in terms of your duration. Overall did you mentioned the duration of leases signed in this quarter versus last quarter I don't know if I missed that number but my question then would be.

Brian just reading into the Big picture commentary it sounds like Youre seeing some of the tightness start to loosen that is that how we should read into this in terms of shrinking box prices liner starting to buy.

Because their profitability.

I want to understand your messaging here in terms of the big picture commentary.

Sure. So in terms of the duration I mean, frankly I'm not sure. The average duration, we did in the first quarter, but it's going to be well over 10 years.

And so quite consistent with what we were doing last year.

You're getting really the vagaries of what customers were doing what.

But but still at the same thing market's tight container prices are still very high leasing rates are still very high.

So the same drivers that are.

<unk> us and our customers to go for longer leases.

Of the the changing market dynamics 2021, and I'd say really from maybe July 2022, just probably July August September ish 2021, we're one of those few periods that I've seen over my 23 years, or so where container supply was a an overall limiter of global trade.

And so there was just an absolute shortage of container capacity.

And that shortage drove pricing.

Have to very high levels. So we peaked out at close to $4000 for 20 foot dry container probably the previous record which was the last time, we saw that dynamic in 2010 in early 11 was under $3000. So push container prices well above previous highs, but we have seen is over the course of 2021 they can.

Dana manufacturers dramatically ramped up production, probably by 150% to 200% compared to where they had been in 2020.

And that has put us in a situation where the container supply is tight.

And we still are at effectively almost 100% utilization, but is no longer. The fact that every container that shipping lines can get means one more cargo load they can take that.

They do have enough containers in their systems to move the cargo that's there at least it's not lending in vessel capacity is more of a constraint at this point.

So we see a market that is tight we see that continuing.

But we don't see that absolute shortage, where containers are a limiter for global trade and that probably cleared up back in.

Late summer early fall.

So if I understand that you're still I know you've always refrained from putting a you gave the kind of what can we do with the $550 million after the $900 million of box prices youre not ready to say, we're going to be still.

Still expanding the fleet or put a half of number versus this year is there kind of a range and I guess just to follow up on Mikes question. There before how does this shift as you get into 'twenty three when the vessels start to deliver does that mean naturally you have to have more boxes or the box has moved from I don't know some of the vessels that are there now too.

I just want understand your future view on on the box nature.

Yes, so lets say a couple of different things. So one of the real strengths of the business as I think I know you know is that we place container orders with short notice and so while we have expectations for what Capex is going to be this year, we don't really have to act on them.

Any point in time, we keep $400 million or so of containers that we've ordered and haven't yet leased out and as we do leasing transactions, we backfill with our container orders.

So we're taking a stance for this year that is.

The stance, we typically take where we've got substantial orders of the factories and some containers on the ground.

And as we do deals we will rebuild our shelf and we'll see where we get to by the end of the year.

But I'd say your expectation is that it is going to be a good year that the basic equation that that drove market over the last two years almost of strong consumption growth coupled with logistical challenges.

Our customers that I speak with seem to think Thats, most likely the environment for most of 2022, which I think bodes well for the need for containers and for our opportunity to do deals and also the fact that freight rates they've come down some but there is still very high and so customers when they need containers. They want to work with companies like us that have a very.

A high degree of reliability of deep container supply capacity, because that's what's most important making sure when you need the containers they come.

So again, our view is actually we could see a pretty good year, but unfortunately, we don't have to bet on it we can wait and see what happens and.

When it comes to 2023 and beyond.

I was trying to say earlier, we don't focus a lot on what's happening on the vessel side. We typically don't see that container demand is correlated to say vessel production I think it's much more correlated with what we're seeing in terms of cargo volumes and logistical challenges.

To the extent there is sort of second level orders.

We do see some of that and so for example, I think Mike May have mentioned this that.

Because of the emissions rules and if there is a excess vessel capacity. It makes it a lot more attractive for our customers to slow steam the ships.

Which does create some incremental container demand.

In the past and I would say for much of the last 10 years.

The fact that there was excess vessel capacity kept our customers having to conserve their capital pretty carefully.

And I think contributed to the high share for leasing.

Over the last 10 years, and although that said even as they became much more profitable than the shipping lines that is in 2021. They continue to lease that at pretty high levels. So so again, we look at it and we were mindful of what's happening with the vessels, but it typically has not been a big driver of demand are much more focused on what's happening with trade volumes.

And what's happening with container supply.

Thanks, Brian I appreciate the insight.

Because it sounds like you don't know whether were where were still keeping this tightness or if it's starting to loosen and it seems like stay with already because you're ready to buy but but not certain.

Yes, I'd say that said, yes, that's fair enough I would say in general we feel a lot better about this year than we might typically feel in February of any given year.

It's in the slow season for dry containers, typically we get much more visibility as we head into the mid to late spring. That's when the peak shipping season starts to build but but again I think we feel very fortunate to be in a market where there is.

Some real key drivers underpinning container demand, including that's very high consumption.

Activity in the U S. In particular and again, it's not just the people talk about the port of La but but really there is a whole bunch of things that are challenging for the shipping lines right now, including port productivity issues in many places around the world at warehouse staffing issues again in the U S and Europe .

And then as we've all seen the trucking capacity challenges so.

It doesn't seem to us and certainly our customers are I'm talking about.

That clearing up anytime soon.

Great. Thanks, guys I appreciate the time.

Thanks, Ken.

The next question comes from Larry Solow with CJS.

CJS Securities. Please go ahead.

Great. Thank you and good morning, gentlemen, just a couple of follow ups on that so I know you. Obviously, you don't guide on the pace of fleet investment, but it does sound like.

You expect a probably a good year not what you did last year, but certainly.

It sounds like at least that maintenance capex of somewhere in that percentage of your higher.

First starting point is that a fair assessment or again I don't want to pin you down on that but.

Yeah sure. So again I think we feel pretty good about the investment.

I've been running this company now or one of its predecessors since 1999.

2021, and investment levels was far and away the best year, we've I've ever seen and so it's hard to assume youre going to get two years in a row like that.

We've been talking about that we see a fairly attractive market for ourselves in 2022, and that's coupled with the fact that we've done so many things to derisk the business.

With the lease portfolio has us feeling quite optimistic overall.

In terms of the replacement Capex number as we talked in our press release that we have already spend a little bit over $400 million on capex.

John we're in.

Again, I never say never but it certainly feels like we ought to have some growth for 2000 right right absolutely.

And a really encouraging about the and I know you guys have shared this before the 40% share.

Leasing in 2021.

Pretty big number considering I think your market share was somewhere probably more around 30% at least.

And maybe it's not much more than that today, but going forward do you feel like this capture rate is sustainable.

The unusual and that obviously were an unusual times, but.

Anything you could speak to on that.

Sure. So we think one of the nice things about our business is that our customers are mainly focused on container availability and reliability now more so than cost and obviously, we're very cost efficient to but what we really offer customers is far and away the worlds deepest container supply capacity on short notice.

And so when the markets are strong like they are in 2021 also like they were in 2017 and 2018.

We've been able to get disproportionate share and doing so without leading with price again, we're we're very price competitive and our scale lets us be that way.

But we also know that our customers really want access to our deep supply capacity and just the comfort of knowing that if you book containers with Triton theyre going to come in they're going to come on time and.

So I think across the last five years has been three particularly strong markets and our share in all of those years was between 40 and 50% and again, we work very hard to get business, our customers and try to give them great service, but I think there is a very natural kind of win win with us and the customer working with Triton in years, where it really.

<unk> for our customers.

And we've seen our market share has gone up steadily over the last five years I think at the time of our merger in 2016. The combined shares was 25% I think by the end when the stature written for 2021, we will hopefully be getting closer to 30%.

But I do think we have an opportunity.

To outperform, especially when the market is strong and the great thing with that is we're doing most of our business when the markets.

It's a sellers' market.

So that tends to build a very high value portfolio too.

Right, Okay, how about how about pricing in the quarter I know that'll that'll be in the K I'm sure but.

I know the last couple of quarters, you start we started to see some benefit from these higher price contracts.

I think last quarter to get a 5% benefit in pricing.

Do you guys have about what the benefit was in this quarter.

So we always put in the quarter or whats the trajectory with the leasing rates on average across our major product lines and in the dry container average lease rate continues to go up and Thats I think at this point close to 80% of our.

Or 75% of our book value.

The repo rates on average have been coming down.

We talk about it in the K some of their marketing challenges, we see with <unk> and <unk>.

<unk> is an upward moving rate environment across our portfolio.

And Thats something that has continued in the first quarter and something that will continue as long as container prices and market leasing rates are a lot higher than our portfolio average.

Okay. Thank you I appreciate that just lastly on the share repurchases, obviously you guys have.

I think you mentioned, 20% since 2018.

And yes, a little bit of a reacceleration in Q4, it sounds like maybe that's just maybe that's a temporary reacceleration or youre not sure I guess, obviously, you can always pivot towards that more.

But any thoughts on that and is that could you just remind us is there is there a particular authorization out there and have.

Is there any limitations on share repurchases or the covenant has changed at all with your refinancing.

Yes, let me I'll start with that technical question first and so we typically have asked our board.

Occasionally to reauthorize.

Our share repurchases and then typically we've done it I believe in like chunks of $200 million.

But we always say that's much more an administrative item than it is something thats trying to guide investors, who would expect to spend one thing we really like about the businesses how nimble we can be.

With redirecting our equity cash flow and so we talked a lot about how in 2021 for most of the year, we were putting all of our cash into building our container fleet because the returns were very.

Nice when our customers needed the support.

And then as we saw the peak shipping season ended in deal activity slowed.

We had plenty of cash flow and our balance sheet was in great shape still and so we were able to quickly pivot and take that cash flow from container purchases too to buying back stock and again, we didn't turn off container purchases either we're still buying containers.

And I.

I think we'll continue to do this well we will continue to look at what we expect for our container purchases in fact, probably even more than that just what we actually purchased.

And we'll continue to make judgment calls on what seems to be the highest values for our cash flow. Although again, we have enough cash flow it doesn't have to be either or an orphan like it has been it's been both.

But.

Again, I think we'll just have to see what the year provides in terms of container investment opportunities.

But again, regardless of that we see very interesting opportunities in buying our shares.

Great. Thank you very much I appreciate it.

Thank you. The next question comes from Liam Burke with B Riley. Please go ahead.

Good morning.

Good morning, good morning.

On the incremental returns on equity that you had in the fourth quarter, So you've ticked up.

29% to 30%.

How much of that benefit was coming from resale and do you expect to be able to reinvest at that type of incremental return.

Yes, so certainly a 30% return is pretty extraordinary.

That does reflect.

A number of things that I'd say are above what you might expect to get see going forward certainly from a container gain standpoint, where gains are probably the highest they've been in my 20 years on a quarterly basis.

Both our southern and their own containers as well as the profitability, we're getting for for selling our customers containers, and then but as buying and trading containers in the marketplace.

That's been very supportive of this year.

I think in addition, we were successful in refinancing our debt portfolio.

And in some cases, having.

At least the leases had longer duration than the dead because a number of our debt is several billion dollars worth of our callable.

And that allowed US also to expand the leasing margins on sort of a one sided basis.

And so when we look at our at the deals we're doing we've talked a number of times, but how we think that.

The deals were doing in 2020, and 21 were very attractive and we are modeling investment returns in the high teens into low twenties typically we talk about modeling investment returns into the low to mid teens, and then trying to outperform our assumptions to get to the kind of upper teens, which is kind of a long run average return on equity.

So maybe that's a long winded way of saying, we expect return on equity to stay very high probably above trend.

For some period of time here because of all the work we've done.

With the lease portfolio and our debt portfolio and just because from conditions continue but no.

We think we're doing very attractive deals with but not as a 30% level.

Okay, that's fair.

I know you've touched on this earlier in the discussion, but the availability of containers either used or new won't hinder your your resale income for 2022.

Well again, we don't like that forecast line item from tumor I think what we have.

<unk> said is that we see gains staying very high for the first quarter and we have not yet seen sale prices come off peak levels at least not by much.

But it is hard to say when we might see that start to normalize sale prices are still extraordinary high extraordinarily high historically.

And we do expect sale prices to eventually start coming down although we have been saying this now for four quarters and it hasnt happened yet.

On the other hand sale volumes have been very low just because we haven't had any containers to sell customers have been holding on to them.

And one thing that will offset the impact of falling prices is that would likely be driven by increasing availability and so we do expect volume to come up as oil prices come down.

Mitigating the impact on gains, but overall, we would be very happy if sale prices are still gains would stay at this level forever.

We've been saying theyre going to come down eventually they will but it hasnt happened yet.

Great. Thank you.

Okay.

This concludes our question and answer session.

Like to turn the conference back over to Brian Sandy for any closing remarks.

Well I'd like to thank everyone for your interest and support of Triton International. Thank you look forward to talking with you soon.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Okay.

[music].

<unk> presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad 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 Chief Financial Officer. Please go ahead.

Thank you.

Good morning, and thank you for joining us on today's call we.

We are here to discuss triton's fourth quarter and full year 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'd like to note that our prepared remarks will follow along a presentation that can be about found in the investors section of our website under presentations.

Forward looking statements are subject to various risks and uncertainties.

Triton 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 the earnings release and the presentation.

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

Thanks, John and welcome to Triton International's fourth quarter 2021 earnings Conference call.

I'll start with slide three of our presentation.

Triton achieved record performance again in the fourth quarter of 2021 with.

We generated $2 67.

Adjusted net income per share an increase of nine 9% from the third quarter.

And which is an annualized return on equity of over 30%.

Our exceptional was also in the fourth quarter were driven by growth in our recurring leasing revenue due to continued strong pickups and a further reduction in our average effective interest rate due to successful financing activity.

Triton's performance for the full year 2021 was outstanding.

We generated $9 16.

Adjusted earnings per share an.

An increase of nearly 100% from 2020.

And we achieved a return on equity of 28, 1%.

Triton's outstanding performance in 2021 was supported by very strong market conditions.

A surge in consumer spending drove solid growth in trade volumes and.

And container demand was boosted further by extensive logistical bottlenecks, that's low container turn times.

A shortage of vessel capacity to have exceptionally high freight rates, keeping our customers highly focused on container availability.

And container manufacturers had a hard time catching up to demand. Despite a larger increase in production volumes, leading to record prices for new and used containers and very high market leasing rates.

In this environment trends deep container supply capacity and our reputation for reliability where key.

We invested over $3 $6 billion of new containers for delivery in 2020 <unk>.

Increasing our revenue, earning assets by over 30%.

We are very proud to have been the leading supplier of leased containers to most of the world's top shipping lines and in the process, helping them manage through severe supply chain challenges.

Perhaps most importantly for Triton, we've been able to lock in durable enhancements to our business.

The large block of containers added in 2021 replacement high IRR leases with an average duration of 13 years.

We have aggressively refinanced our debt and reduced our average effective interest rate by 140 basis points over the last few years.

And our high profitability is driving rapid growth in our net book value per share.

Overall, our expected long term financial performance has shifted meaningfully upwards.

It's also important to note that the balance sheets of the major shipping lines have dramatically de levered due to their exceptional current profitability.

Leading to a significant improvement in the shipping industry is credit profile.

We continue to use our strong cash flow to drive shareholder value in a number of ways.

We use most of our cash flow in 2021 to fund massive value added investments to our container fleet.

As the peak shipping season ended in the fall, we shifted our investment focus to share repurchases.

We also announced an increase in our quarterly dividend to <unk> 65 per share.

And we've done all of this massive fleet investment renewed share repurchases and an increased dividend, while keeping our leverage comfortably in our historical range.

We are starting 2022 with significant operational and financial momentum.

Good consumption remains strong and our customers expect significant logistical disruptions will now deep into the year.

We expect our adjusted net income will hold fairly steady from the record fourth quarter results. Despite being in the slow season for dry containers and having two fewer billing days.

Our trajectory after the first quarter will depend on how market conditions develop.

It will be at a high level of confidence that 2022 will be another outstanding year for Triton.

I will now hand, the call over to John O'callaghan, our global head of marketing and operations.

Thank you Bryan turning to page four.

Page four explains that goods consumption and logistical bottlenecks continue to drive strong container demand.

The chart in the left illustrate the consumption remains very high in the U S.

As the stream eventful, it's continues to flow to try and meet that demand.

<unk> existing logistical problems in the supply chain.

Further impacting the restocking of inventories that remain at relatively low levels.

Jonathan Reich helps illustrate why do we stocking of inventory onto the shelves is challenging.

No slowdown in the movement of goods and supply chain remains challenged by a set of problems some interconnected and some independent, namely the terminals trucks rail warehouse space and labor shortages.

These issues cannot be examined in fixed until the industry get some breathing space.

Page five.

Page five illustrates that freight rates on new and used container prices remained high through the quarter driven by continued demand for vessel space are contained on.

The chart on the left illustrates the trans Pacific East West spot freight rates relative to bunker costs.

Freight rates remained extraordinarily high reflected in the continued strong demand for cargo and and logistical bottlenecks keeping capacity short.

You can see in the upper right chart that new container prices have come down.

In the $3400 range in part due to the high volume produced through 2021 easing some of the shortage.

Container availability remains tight and prices remained well above normal.

The bottom right chart illustrates the sale price of used containers remained high throughout the fourth quarter.

Due to the continued strong demand and a decreasing availability of sell containers.

Page six.

Page six shows that the high container production in 2021 has alleviated some supply constraints.

The chart on the left shows annual 2021 container production for leasing companies and shipping lines broke about percentages.

We've seen the shipping lines increased their short share towards the end of the year and for the beginning of 2022.

While we do not believe the shipping lines do containers as a strategic investment.

As possible they may continue to buy Q2 net profitability.

On the right you can see container factory inventory and definitely stocks.

While there has been some easing of container shortages as you can see container factory inventory is up to normal level.

But it is still only 2% of the global container fleet is available.

And at the bottom line chart illustrates that no definitely units available. So the overall picture is still quite tight.

Turning to page seven.

Page seven shows Triton's key operating metrics remain very strong.

This continued to be seen in the top left chart showing utilization remaining at near maximum levels.

On the upper right chart, you can see the fourth quarter pickups remained very high as customers continue to absorb equipment.

Drop offs have been very low with these almost immediately going out and leased or sold with a higher gain on sale.

The loan less public shock just shows how extraordinary the market has been in 2021 with the unprecedented amount of new production volume we have put on lease.

This is negotiated and have an average duration of 13 years.

Slides that these investments are impressive.

<unk> three $6 billion of orders leading to over 30% of asset growth in 2021.

We estimate that Triton achieved a 40% share of new leasing transactions.

Hey, Jay helps illustrate what we've achieved in the long term value with Craig.

Put on new containers on very long duration leases and.

And we're focused on placing our used containers on lifecycle leases.

Which has had a significant impact on our average lease duration across the fleet.

These are also put on very long duration leases.

So for now we're also putting net book value and to capture the impact of those expensive dry containers.

The long term rate cases.

We're in very good shape and have close to 90% of book value and long term and finance leases.

Looking forward to continuing to build an even longer term benefits across the fleet portfolio with a tailwind of 2021 being carried into 2022.

Strong market conditions, our utilization at near maximum levels.

I'll now hand, you over to John Burns our CFO .

Thank you John .

On page nine we've presented our consolidated financial results.

Adjusted net income for the fourth quarter was $177 $5 million or $2 67 per share and.

An increase of nearly 10% from third quarter.

And we finished the full year with adjusted net income of $614 2 million or.

Or $9 16 per share.

These exceptional results represent an annualized return on equity.

Of over 30% for the fourth quarter and 28% for all of 2021.

On page 10, I will discuss the drivers of our strong profitability.

In the fourth quarter, we benefited from continued strong on higher activity during the quarter, along with a full quarter's benefit from the high volume of new containers on hired in the third quarter.

This drove a four 2% sequential increase in leasing revenue on.

On a five 3% increase in average revenue earning assets.

Revenue growth was less than asset growth largely due to the growth in the finance lease portion of our fleet and the way it finance lease revenue is recognized.

We expect average on hires to increase in the first quarter.

Reflecting a full quarter of the significant fourth quarter on higher activity.

We expect leasing revenue to be down slightly due to two fewer.

Fewer days in the quarter.

Average utilization in the fourth quarter remained effectively maxed out at 99, 6%.

Supporting our high level of revenue and keeping direct operating expenses very low.

And we expect utilization to hold steady at these levels in the first quarter.

Our active refinancing over the last few years, along with our recent upgrade to an investment grade credit rating enabled us to drive down our effective interest rate to 248% for the fourth quarter.

And we expect it to remain near this level in the first quarter.

We continued to generate exceptional levels of trading in disposal gains totaling $34 2 million for the fourth quarter.

Down only slightly from the third quarter and.

And we expect gains to remain high in the first quarter.

As the peak season ended we shifted a portion of our strong cash flows to share repurchases.

During the fourth quarter, we repurchased one 1 million shares.

And we have repurchased an additional 700000 shares through last week.

On page 11, we highlight our strong and stable cash flows which drives long term value.

The graph on the top left.

<unk>, our cash flows before capital spending.

Excuse me.

And you can see how this year is exceptional operating performance.

Together with the $3 6 billion in new container investment.

As generated a step function change in our cash flows.

And we expect this higher level of cash flows will be durable.

Supported by long duration high value leases.

The graph on the bottom left shows how strong and resilient cash flows.

Whether with the short order cycle for containers and.

<unk> enables us to maintain our leverage in a steady range over the long term.

Okay.

Our leverage has increased back into the normal range over the last several quarters, reflecting.

Reflecting our aggressive investment in new containers.

Partially offset by our third quarter preferred share issuance.

The graph on the right demonstrates how these strong cash flows and our financial stability.

Have enabled us to create significant shareholder value by.

By steadily growing the book value of the business, while paying a substantial dividend.

Page 12 highlights why we are confident that our high level of earnings are durable.

On the left we show how we have leveraged the strong market conditions to rapidly expand our leasing margin.

On the right we show why this higher level of performance is durable.

The top right graph shows the increase in the average remaining lease duration for containers on long term and finance lease.

You can see that the remaining lease duration increased over 60 months on a CPU basis by year end.

And when we calculate this on a net book value basis, which captures the high cost of our 2021 container purchases.

The remaining lease duration jumped to 78 months.

And if we include the typical time it takes customers to return or build down containers once the lease expires.

This adds roughly 12 months to both figures.

On the bottom right.

We showed that we funded this long term lease portfolio.

With long duration fixed rate or hedged to fixed debt at very attractive interest rates as a result of our financing activity over the last two years.

We expect this combination of attractive long term lease and debt portfolios will lock in a high level of leasing margin for years to come I will now return you to Brian for some additional comments.

Thanks, John .

Slide 13 summarizes though if you think about our equity cash flow and illustrates how this cash flow gives us a variety of powerful levers to drive shareholder value.

The top grouping of numbers summarizes the cash flow power of our business.

We are currently generating over $1 $6 billion of cash flow before capital spending on an annualized basis.

And remember the duration of these cash flows are substantial due to the strength of our long term lease portfolio.

We need to allocate a little more than half of this cash flow for replacement capital spending.

In order to maintain our fleet size as containers age out of service.

This leaves us with a little more than $700 million steady state cash flow.

We currently pay a quarterly dividend of <unk> 65 per share, which represents about $170 million in annual dividends.

As a result, we are.

Of about $550 million of steady state cash flow after our substantial regular dividend.

The next set of numbers illustrate a few of the things we can do with this $550 million.

If we focused on capital investment, we can self fund the equity needed for nearly 20% asset growth, while keeping our leverage ratio constant.

Alternatively, if we focused on share repurchases, we could repurchase about 13% of our shares at their current trading range.

If we wanted to instead to focus on dividends, we could pay over $8 per share on top of our regular dividend.

Bringing the total annual dividend to almost $11 per share.

We've typically pursued a mix of these options.

I'll finish the presentation on slide 14.

Overall, we are carrying significant operational and financial momentum into 2022 and.

And we expect to have another outstanding year.

We expect our market environment will remain favorable.

Container demand should remain strong.

Consumption remains elevated, especially in the United States.

And our customers expect logistical disruptions will continue.

The extreme shortage of containers has eased due to high production volumes of new containers will.