Q3 2022 Triton International Ltd Earnings Call
Good day and welcome to the Triton International Limited third quarter 2022 earnings Conference call.
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I would now like to turn the conference over to John Burns Chief Financial Officer. Please go ahead Sir.
Thank you.
Good morning, and thank you for joining us on today's call.
We are here to discuss triton's third quarter 2022 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 with the presentation that can be found in the investors section of our website under investor 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 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 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.
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'll now turn the call over to Brian .
Thanks, John and welcome to Triton International's third quarter 2022 earnings Conference call.
I'll start with slide three of our presentation.
Triton continued to achieve outstanding results in the third quarter of 2022.
We generated $2.88 of adjusted net income per share.
18, 5% from the third quarter of last year and down just slightly from our record results last quarter.
We also achieved an annualized return on equity of 27, 5%.
Our market environment slowed during the third quarter following nearly two years of exceptional container demand.
Peak season shipping volumes were muted the summer.
And many of our customers have increased the pace of container drop offs.
New container orders have decreased across the market and new container prices and market leasing rates have returned to historically normal levels.
Used container sale prices have started to normalize more quickly though.
There's still very high.
While conditions have softened we expect a strong performance will continue.
We have significant operational and financial advantages in our market.
Our utilization remains very high and our container fleet is well protected by our strong long term lease portfolio.
The large number of containers, we purchased over the last few years are locked away on long duration high IRR leases.
We've increased the share of our containers on lifecycle of leases and increased the average remaining duration of our lease portfolio.
And we have locked in low cost financing with long term fixed rate debt.
We continue to aggressively use our strong cash flow to drive shareholder value.
We have shifted our investment focus this year from fleet growth to share repurchases.
We have purchased over seven 1 million shares year to date.
Representing nearly 11% of our outstanding shares at the beginning of the year.
While also decreasing our leverage.
We increased the pace of our buybacks in the third quarter.
I have just re upped our repurchase authorization back to $200 million.
We also announced an increase in our quarterly common dividend from 65 to.
70 per share.
We expect our financial performance will remain strong.
We expect our adjusted earnings per share will decrease from the third to the fourth quarter as our utilization and gains on sale continued to normalize.
But we expect our utilization will remain high.
And expect share repurchases will remain highly accretive.
Overall, we expect our cash flow profitability and return on equity will remain very high through the rest of this year and into the longer term.
I will now hand, the call over to John O'callaghan, our global head of marketing and operations.
Thank you Brian page.
Page four.
Page four shows Triton's operating metrics in the lower left chart you can see the shift in our pickup and drop off activity.
Net pick up activity was very strong in the second half of 'twenty or 'twenty and throughout 2021.
Pick up volumes decelerated in the first half of this year the drop offs remained low.
Recently, we've seen drop off to accelerate as our customers reacted to a muted peak season, and some easing of logistical bottlenecks.
However, our utilization I shouldn't in the upper left chart remains very high reflecting the durable protection provided by our long term leases.
A key part of our enhanced lease protection has been the increase in the percentage of our containers on lifecycle leases.
Shown in the upper right.
In the chart you can see that nearly 60% of all changes are on lifecycle pieces, which are structured to keep containers on SEDAR.
See that full remaining leasing life and still have little utilization risk.
No right public chart details the pace of our new container transaction activity.
New container activity has greatly reduced from last year.
Let me to changes in market conditions, and our customers shift in focus to operational efficiency.
The chart also shows that new container leasing rates have dropped back into the historically normal range.
Page five.
Page five illustrates that the shipping market is quickly normalizing following two years of exceptional conditions, but some logistical challenges remain.
In the Upper left chart, you can see that freight rates for our customers have decrease steeply over the last few quarters in response to cooling activity and increased vessel capacity.
In the upper right you can see that new container prices are also normalizing quickly Atkins as container capacity is no longer in shortage and as production volumes decrease.
The charts on the lower right looks at an indexed of used container sale prices.
Prices are also normalizing, but they remain very high.
You can see on the left.
Freight rates are normalizing the market is still struggling but some operational efficiency and a larger than normal level of vessel capacity is import waiting to discharge, reflecting ongoing logistical bottlenecks.
We expect it will take time for these bottlenecks to fully unwind and we therefore do not expect container fleet efficiency to police snap back to pre pandemic performance and the near term and believe it will continue to lead to some incremental container capacity requirements in the market.
Page six.
Page six looks at new container production volumes decreasing in response to slower demand.
The chart in the upper left shows that the inventory of new containers awaiting deployment was increased in response to normalizing conditions.
We now see the inventory returning back into the normal range of about 2% of the operated container fleets.
You can see the lower left that triton's definitely inventory of used containers has stops to increase as well.
Collecting the increased pace of off hires.
Again, this remains very low and our utilization remains very high.
We expect our inventory will remain well under control due to the durable enhancements, we've made to our lease portfolio.
Okay.
In the meantime, we have a natural balance of new container production slowing considerably as shown on the chart on the right.
New container production was exceptionally high in 2021, as our customers rush dry container capacity.
New container production has started to trend down in the first half of this year as the market starts to normalize and we have seen lower levels of production as customers sought to regain more container fleet efficiency through the third quarter.
Q4 production orders as shown by the top line on the and bought the Gras.
As effectively tailed off in response to our customers' shifting adding containers back to fleet efficiency.
We've talked in the past about the short order cycle for containers, which is just a few months.
The natural order of how container production as well as the overall container fleet adjusts quickly to changes in the global container supply and demand balance.
Now I'll hand, you over to John Burns our CFO .
Thank you John .
On page seven we have presented our consolidated financial results.
Adjusted net income for the third quarter was $176 $5 million or $2 88 per share.
An increase of 18, 5% from the prior year quarter.
And a decrease of one 4% from the second quarter.
These strong results represent an annualized return on equity of 27, 5%.
On page eight I'll discuss the drivers of our strong profitability.
Our third quarter performance reflects the durable enhancements, we've made to our business over the last two years.
Due to the limited investment in new containers. This year, our revenue, earning assets declined slightly from the second quarter to the third quarter.
However, average remaining earn revenue, earning assets are up nearly 6% over the prior year's third quarter.
Last year's strong investment in the fourth quarter.
Average utilization declined three tenths of a percent in the third quarter.
But remained very high averaging 99, 1%.
We expect utilization to decline further in the fourth quarter, but to remain at a very high level.
Interest expense in the third quarter increased slightly.
But our overall effective interest rate for the third quarter remained very low at two 7%.
The impact of rising interest rates has largely been mitigated.
We are well structured debt portfolio.
Which is 86% fixed or hedged to fixed.
Yeah.
In the third quarter, we recorded an $8 $1 million reserve for a small customer who ran into significant challenges as the freight market normalized.
We do not expect further notable credit provisions.
We supply the vast majority of our significant container investment over the last two years to the top shipping lines.
All of whom are very strong credits today.
Offsetting that credit item, we received $8 $2 million during the quarter from the estate of a small shipping line that defaulted and ceased operations nearly a decade ago.
We continue to generate very high levels of trading in disposal gains totaling $31 million for the third quarter.
The decrease from the exceptional levels in the second quarter.
Primarily due to moderating disposal sale prices.
We expect disposal gains to remain high in the fourth quarter, though we expect them to trend lower as disposal prices decrease.
Since the end of the peak season last year, we have shifted our strong cash flows away from aggressive container investment.
Toward active share repurchases.
Year to date, we have repurchased seven 1 million shares or 11% of our shares outstanding at year end.
All while reducing our leverage.
Okay.
And then support the share repurchase activity.
Once again increased our share repurchase authorization back the $200 million.
Page nine highlights the durable enhancements, we have made to our business over the last two years.
On the left we show how we have leveraged the strong market conditions since the second half of 2020 to rapidly expand our leasing margin.
On the right we show why this high level of performance is durable.
The top right graph shows the average remaining lease duration for our long term and finance lease portfolio on a net book value basis.
You can see the remaining lease duration is nearly 80 months to the exploration of the contract.
And if we include the usual time it takes for a customer to redeliver containers after a lease expires.
Average duration increases to nearly 90 months.
In addition to the long duration.
87% of our container fleet on a book value basis is on these long term and finance leases.
Okay.
On the bottom right. We show that we fund this long term lease portfolio with long duration fixed rate or hedged to fixed rate debt at very attractive interest rate levels. As a result of our refinancing activities over the last several years.
This combination of attractive long term lease and debt portfolios has locked 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 10 summarizes the cash flow power of our business.
In the third quarter of 2022, we generated over $1 $6 billion of cash flow on an annualized basis.
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 around $725 million of steady state cash flow.
Our new 70 cent quarterly dividend represents about $165 million in annual dividends.
As a result, we have about $560 million of steady state cash flow after our substantial regular dividend.
The next set of numbers shows a few of the things that we can deal with this $560 million.
And illustrates why we're able to create value across a wide range of market environments.
If we focus on capital investment like we did last year.
We can self fund the equity needed for nearly 20% asset growth.
Keeping our leverage ratio constant.
Alternatively, if we focus on share repurchases like we are now we can repurchase over 15% of our shares at their current trading range.
If we wanted to instead to focus on dividends, we could pay over $9 per share on top of our regular dividend.
Bringing the total annual dividend into the range of $12 per share.
We've included a table at the bottom of the slide that shows how we're able to use our strong cash flow to drive per share fleet growth almost regardless of market conditions.
And again, well holding our leverage ratio steady.
Revenue, earning assets per share have increased from $127 per share as of September 32020.
$293 per share as of September 32022.
An increase of more than 50% across two very different kinds of investment years.
This strong growth in our assets per share is another key reason, we expect our higher level of financial performance will be durable.
Yeah.
Yes.
Slide 11 looks at our Triton has created long term value.
Triton has the scale cost and capability leader in are fundamentally attractive market.
And we have a long history of delivering solid growth strong profitability and above market shareholder returns.
The chart on the upper left looks at the long term growth of our container fleet.
We have grown our fleet about 8% annually over the last 17 years.
The chart on the upper right looks at our long term cash flow before capital spending.
You can see how our cash flow has increased as we've grown our fleet.
And you can see the stability of our cash flow even in very challenging years for the global economy.
The chart on the lower left shows how we've used our cash flow to both reinvest in our business and.
And regularly return cash to shareholders.
At the time of <unk> IPO in 2005.
<unk> had an adjusted net book value of around $12 per share.
Our adjusted net book value has increased steadily recently at an accelerated pace.
And is now over $45 per share.
We've also paid out over $30 per share in dividends.
And as you can see in the lower right.
Shareholder return since our 2005 IPO is over 14% per year Cigna.
Significantly outperforming the S&P 500.
I'll talk about our outlook on slide 12.
You can see in the chart that we expect our adjusted earnings per share will decrease in the range of 5% to 10% from the third to the fourth quarter.
As our utilization and gains on sale continued to normalize.
Most of the variability in this expected range is driven by uncertainty around how quickly you used container sale prices will normalize.
However, as mentioned earlier, we expect our cash flow profitability and return on equity will remain elevated due to the strength of our long term lease portfolio.
And the very high return, we're getting from aggressively repurchasing our shares.
I'll finish the presentation with slide 13.
Triton has an exceptional franchise and we achieved outstanding performance again in the third quarter of 2022.
Market conditions have softened, but we've made durable enhancements to our business and expect our performance will remain very strong through this year and into the longer term.
Our strong cash flow gives us many levers to drive shareholder value across a wide range of market conditions.
And we believe our shift to aggressive share repurchases. This year is building value quickly.
And offers a compelling opportunity for Triton and our investors.
Well now open up the call for questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
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So the charter question. Please press Star then two.
Today's first question comes from Kevin Hester Bank of America. Please go ahead.
Hey, good morning, Brian John and team.
John .
Maybe thoughts on on the returning boxes in this in this market that you talked about.
Maybe contrast that with the massive ship deliveries that are coming at the end of next year I think you've said in the past that doesn't really matter. It's more just demand maybe just refresh us on on how we should think about that into this market.
And then maybe just expand on the pause in peak right. So if the backlog at the West Coast ports is gone and East Coast is slimming down.
Is that accelerating velocity and therefore could speed up return of boxes, maybe just walk through those two different.
Cases.
Sure. Thanks, Ken you certainly as you know, there's a large order book for vessels.
And the largest it's been in probably the largest I've ever been in terms of absolute order book size.
And the largest it's been in as a percentage of the operated fleet in a long time.
We always think that there's quite a difference between the supply and demand balance for vessels versus the supply and demand balance for containers.
The biggest challenge on the vessel side, it's just the length of time it takes to get a vessel delivered and also to some extent the game theory about trying to lock in slots at the shipyards when the market is strong and.
And so our customers in 2021 vessels were short end.
Capacity was tight they put in a lot of orders and that's going to probably act or some kind of overhang on the freight markets for a while especially now that that growth has slowed and the bottlenecks.
Has started to ease for.
For containers one of those great.
Things that makes our market resilient is just that the order cycle is very short typically a couple of months at.
Lead time, even when the market's really strong like it was in 2021 and so as we showed in one of our charts. The the ordering volume for containers has already started to come down quite significantly.
Then suddenly the life of the container is shorter than life, a vessel and so we typically see on the container side something between four five or 6%.
Containers exiting the market each year as the containers age out of service.
Where the I think vessels are operated an average of 25 years or longer and so much slower adjustment in terms of supply, leaving the market as well.
I think some people look at the the vessels that are ordered in that large order book and say is that going to be a driver for container demand.
We don't think so on a say a primary order effect that the typically trade volumes are what.
Drive the need for containers as opposed to vessel slots driving container need but that said, we do believe theres indirect effects of this large order book that are supportive for our demand.
One is that ordering vessels uses a lot of capital for our customers and so it makes it incrementally more attractive to use leasing for containers again also intends to lay on freight rates and when you have a large order book like that.
Thank.
Again makes customers more careful about how you allocate their cash flow and profitability and tends to be supportive of leasing.
Yes. So overall, we do see our market adjusting pretty quickly to changes in supply and demand in the shipping market for our customers adjusting more slowly.
In terms of the logistics, we have seen some improvements as you noted and certainly on the west coast and the.
The the time it takes to discharge containers from ships that are arriving there I think bottlenecks, though persist in other places the east coast is still quite a challenge and we hear from our customers. Some places in Europe , as well and I think John O'callaghan showed in his chart that the.
Vessels sort of tied up at discharge of waiting to discharge is still significantly higher than it was before a pandemic and so we do think thats driving some extra demand for containers likely into next year, who knows maybe beyond that coupled with the fact that our customers are also very focused on how disruptive the last few years why.
And so we think even if the bottlenecks start to ease from a container standpoint that our customers are likely to want to operate fleets that were slightly larger relative to their volumes than they used to operate.
Thanks, and then Brian I guess, just my follow up.
Just the percentage, maybe you could talk about that 5% to 10% sequential decline on an EPS that was to clarify that was sequential decline right and then maybe your exposure on.
What can can make that move anymore right I mean does that Josh used boxes. It seems like if we're down to $200 for a new box youre kind of back to normal levels.
And your euro amount that you've got tied in on lifetime leases.
And last year is kind of a full lifecycle of leases.
But what percent of boxes come due for renewal and what is the exposure that can make that either up or down worse in the near term.
Yes, so sure maybe I'll hit a few of those things. So first yes, the the 5% to 10% was a sequential change from Q3 to our expected results in Q4.
Most of that that sort of difference between that five and 10% really is driven by uncertainty just around how quickly used container sale prices normalized we mentioned that new container prices I'd say right around now or pretty close to their historical long term average same thing for used container or excuse me new container leasing rates.
From say a rate effect in the portfolio, it's relatively neutral right now.
But we're still generating large gains and so I think the main thing that it likely is pushing earnings down sequentially is just the normalizing of the.
The disposal gains and it's again some question of how quickly that happens.
Typically think of our performance in two different buckets, we look at our leasing margin.
Which is driven by the performance of our container leasing portfolio and then we look at our disposal results what kind of gains we're getting on on the disposals. The disposals is more.
Just more rapidly as market conditions change and that's driving a lot of we think the expected sequential changes over the next few quarters, our leasing margin moves very slowly, especially at a time like now where we have such a large portion of our container fleet locked away on long term and lifecycle leases. We've also locked in our financing as we referred to a few times.
And so we have a chart in the back of the presentation that looks at.
How many containers are on currently on long term leases that are either expired or expiring soon.
It's not a huge percentage of our lease portfolio.
And again, which is what gives us confidence to sort of keep making the statements that we expect our utilization is going to remain high even if market conditions stay soft for a while.
That does it for me just a clarification John did you mentioned that the $8 million balanced out the 8 million I just want to make sure I got those two numbers right. It was $8 6 million.
Yes, that's right $8, one none of the reserve and $8 two on a recovery from an old customer.
Perfect. Thanks for the time guys I appreciate it.
Ken.
And our next question today comes from.
Larry solo.
J S Securities. Please go ahead.
Great. Good morning, Thanks for taking the questions and just first off John I think this might be your last public call. So I wish you best of luck on future future endeavors.
Yes, absolutely.
I guess a follow up just on the on the on that.
Question on the direction of earnings.
For the quarter and I know you guys don't are not ready to give and don't normally give full year guidance I know, but you know you your commentary and a lot of your slides do sort of support here.
Pretty good cushion.
Going into the next couple of years it seems like.
How do you view should we again just from a very high level.
In my opinion, and maybe you can agree or disagree it doesn't feel like there's a lot of downside to earnings even as we look out over the next year or two with your pretty high you know like you said long duration leases.
Very modest amount of.
Hey, just coming off lease in a lot of them on for hire for the long term.
In combination with several levers you have including your share buybacks you bought back 10% of your shares year to date so.
From a high level do you expect us to you know even in a kind of goalposts best case worst case scenario, where things could shake out next couple of years.
Yeah sure. So as you know, we don't like to give full year guidance, but certainly understand that as the need for some some direction.
I was just talking about it Ken's question, we do think that the leasing margin part of our of our financial performance that.
That changes slowly and we believe we've locked that number in a at a high level for a long time.
Cause of the structure of the lease portfolio just a large number of containers that we have that are locked away and again, the fact that we have.
Locked away.
Most of our debt on long duration fixed rate financings and so to some extent, we've kind of mathematically locked in this is high spread between our leasing revenue and our ownership cost.
That we think will continue to drive very strong performance on our leasing margin.
Again, the the gain on sale element is more variable and I think it's still subject to some more quick.
Adjustment and as we've mentioned a few times that the gain on sale assuming that sale prices for used equipment.
Still a historically very high and so.
If they if they normalize towards that long term averages theres. Some you know some further price compression and some further normalization on gains I think you've hit on a few of the major drivers for us in terms of where our earnings per share goes from here.
No.
We talked a couple of times about our utilization and sale prices normalizing and so we do think that over the next few quarters.
<unk> line items will push our earnings per share down on the other hand, we've got very strong benefit coming from aggressive.
Share repurchases, all of which are very accretive and supportive of EPS.
For the next couple of quarters, the combined effect of the normalizing utilization and gains will outweigh.
The beneficial effect of the share repurchases for a little while.
But theres a lot of attention there and as that normalization.
If and when it starts to slow that the power of the EPS accretion from the share buyback starts to take back over.
So as we look at it we think it's a very nice financial picture and it's something we've tried to hit on a number of times that we expect our long term performance across all of our financial measures to remain really strong not just for the near term, but until the longer term.
Okay, Great and just to say just a macro question and you know again you guys are like you said showed a lot of them did you have a lot of protection in your portfolio, but a question. We get is is there excess capacity and containers in the system.
Obviously theres a lot of inefficiencies in last couple of years have empty containers trade is certainly the economies there and it looks like we're going to have a slowly slower period recession. If you want to call. It I don't think it really matters.
For the.
Next couple of quarters, if not longer.
I realize this is all small small sat right shippers customers may want to hold a little bigger fleets and it also seems like there's also a shift maybe to be more efficient maybe they would rather lease that one too so.
Do you feel like that and I remember I think you showed a slide last year at your analyst day like the last five years growth has only been a little bit above sort of the 15 year growth in the last five years of containers, but do you feel like there is a lot of excess capacity in the system or or do you feel like where you know there's been a lot of volatility and whatnot, but at the end of the day in the last 10 years it doesn't seem like we're.
I'm kind of a crazy amount of excess.
So yeah definitely it's something we look at closely and we're trying to figure out all the time you know a lot of containers are produced in 2021, and I think also a decent volume in the first half of 2022.
And as best we can tell.
Something like the container fleet grew something like 10% faster than container volumes during.
During the 2020 to say mid 2022 period.
But it's a little bit hard to say exactly because some of the big container buyers, especially in 2021 were non traditional companies that were buying containers really for one use of capturing a high freight rates coming from Asia to the U S or Europe , and then selling the container on arrival.
So again, it's a little bit of a fuzzy number for us on just how many containers that were built in 2021 will remain in ocean service for a longer period of time.
That said of that 10%, let's say rough guess of what the excess container fleet growth was we don't believe all of that is sort of quote unquote excess part of it is because we do think the bottlenecks that we were I was talking about earlier are likely to last.
You know for a while here certainly into next year and who knows how much beyond that and then secondly, as I mentioned I think our customers are not going to want to operate so close to the so close to the line.
That's where they used to operate with their container fleets more focus on resiliency, a little less focus on efficiency.
So some portion of that that's likely needs to be worked out over time to get back to.
A more balanced container supply and demand.
Market as I said, you know usually adjust quickly because of that short order cycle.
We do think container production is likely to be quite low the next few quarters.
Certainly from our standpoint, we're waiting to see what happens in the market.
Usually is again something in the range of 4% to 6% of the fleet is sold every year as containers age out of service and then even when the economy is weak you know usually there's some trade growth what sort of helps you grow into supply as well.
Our view of all of that and putting it together is we think that.
It's likely the next few quarters.
<unk> a relatively soft for container activity, we expect more off hires then on hires.
From now through the rest of the year through the first quarter.
The slow season for container shipping I think also there is a lot of economic uncertainty, that's keeping ordering levels for retailers and manufacturers tight.
We'll just have to wait and see what happens in the second quarter and it's going to be driven by again, what we see next year will be driven by what happens with container production again Rguest stay is pretty low it's going to be driven by what happens to trade growth, which will depend on the economy of course.
Yes.
We just have to see what our customers.
How they how they see the market shaping up too but.
But again, it's a pretty quick adjustment process normally for us.
Across the variety of ups and downs in the economy, you faced over the last 2025 years.
Usually it's something between a couple of quarters and get out five six quarters.
Where we see it takes containers due to adjust to a an oversupply period.
Great I appreciate all that color. Thanks, a lot.
Thank you.
And our next question comes from Liam Burke of B Riley Securities. Please go ahead.
Yeah, Hi, this is actually Nick Charles calling in to ask a question on behalf of Liam.
I believe you touched a little bit on this earlier, but could you give us a little more color just on why operating expenses, where we're kind of notably higher year over year, despite the utilization of over 90%.
Sure It just depends on where youre coming from and so the biggest operating expense. We typically have is container storage expenses.
And although we do have some repair expenses and some positioning.
And handling and so on.
And for all of 2021, we were operating at nearly INR 190, <unk> nearly a 100% utilization.
And we had very low container sale inventory as well than anything we had was getting sold very quickly and so the storage component of the operating expenses was as close to zero as you can get.
So.
Fences were driven by other things that transactional ones like repairs and handling fees and so just even though utilization is still very high just the change in utilization.
Is what drives the change in storage expense and so therefore the change in operating expense. Similarly, some of the other operating expenses also are related to drop off volumes in particular repair expenses.
And so just the even though again activity is well under control the change from very few container drop offs because customers just needed all of the containers. They had and then very few containers and storage for the same reason.
More normal levels of activity.
What's driving the change there.
Got it got it Super helpful and just a follow up there is you know kind of its container demand starts to normalize do you expect a future contracts to potentially have a shorter duration.
Yeah. So we look at I guess two different types of leasing that we do one is what's the sort of typical structure for our new containers that were buying and leasing out the first time.
And then what's happening with our leased extension discussions as those kind of first leases expire and what's happening with the.
The depot containers were getting picked up by customers.
Maybe I'll just start with the second piece first the increase in the lifecycle portion of our portfolio really isn't driven by new container leases, it's driven by.
The fact that it's almost become the industry standard for what we do with containers and when leases are expiring world when we get customers to pick up used equipment from our depot and there's a lot of reasons why it makes sense to do that for us obviously it.
Juices utilization risk and volatility in our performance, but also for our customers. We can give them great logistical flexibility at the end of those leases because we have actually quite good sale markets. All over the world. We are leasing markets are very location specific and so it's a it's sort of a nice win win with customers to focus on.
For middle aged equipment already.
To focus on lifecycle leases for newer containers.
We do think we'll see a kind of normalization of that part of the business like we've seen other parts of that market normalizing.
I think if you look back to that with very strong investment markets in 2017, and 18, although container prices were in a normal place at that time and I think the average duration of the leases we were doing for new containers was probably in the range of seven years.
That gapped out a 11% and 12 years in 2020 and 21, partially due to the strength of the market and just partially due to the very high cost of the containers and.
So containers.
One way outside of their normal historical range. The paper prices, we don't assume that that's going to be true seven or eight years from now and so if we're going to do short term leases for very expensive equipment, we'd have to capture the full premium on the first lease and so there was again sort of a mutual interest of us and our customers and not having to drive lease rates to truly extraordinary levels and so we sort of.
Spread that premium.
Over a longer durations.
That that was one of the primary drivers for that as well. There's just I get are interested in taking advantage of a strong leasing market to secure long duration, but we do think we'll see as container prices have come down.
We do think we'll see that.
Leasing market for new containers kind of get back to where it was a mix of lease durations not a compelling need for us to push out for the full useful life and so.
<unk> five year deals out there seven year deals out there eight years 10 years.
It really dependent on what the customer.
Cut the preferred.
Great Great I appreciate all the detail and maybe just one last one for me.
As utilization rates.
Historically high levels here I guess put simply do you expect them to settle in above past averages.
So we typically do but when we look at in our portfolio as the.
What's the portion of the fleet Thats locked away on long term or finance lease.
Or that's.
That's the floor for utilization analysis, and then what's the utilization of the portion of the container fleet debt that's not locked in on long term finance lease and how does that portion of the fleet perform across a sort of typical market cycle.
And so as we've increased the portion of locked away from.
High <unk> to low, 70%, we know where it was.
Over the last five or 10 years.
Up to now mid to upper <unk>.
Seven years into the 80%.
That that did that floor utilization has increased by that by that percentage change as well. As then we don't we think the other portion of fleet will perform relatively similarly, and so we do see in our expectations.
That the normal range for utilization is higher now because more of our equipment is locked away on long term lease and in particular more of its locked away on lifecycle. These.
Got it got it well really appreciate all the detail and congrats on the progress so far and continued best of luck.
Yes. Thank you.
And our next question comes from Michael Brown, Okay. VW. Please go ahead.
Great Hi, good morning, everyone and John Congrats and best of luck to you.
Thanks.
So I wanted to start with a question on your customer base here. So.
87% of the fleet is on long term and finance leases and Brian you just mentioned that a lot of your leases are on lifecycle leases Nash or really just a transformation of the business post.
Post Covid here.
And the financial strength of your customers is still very strong, but the market conditions are much much tougher and they could remain that way for some time. So how shall we think about your credit risks here if the market remains weak over the next call. It 12 to 24 months or however, long you want to.
Define that potential weakness here.
And how could that.
Impact your you know your your your approach to credit and what or when you're kind of monitoring.
Today, and then I guess finally, as Eric how bullet proof or the contracts is there any ability for customers to get out of those contracts or any situations, where you would work with customers.
To help them work through some financial pressure if that were to arise.
Yeah sure so maybe to start with the credit piece first and in general we have honestly never felt better about the credit profile of our customer base in our lease portfolio.
Vast majority of our containers that we have on lease or on higher to the top 10 shipping lines in the world and even within that.
Large majority on higher to the top five seven shipping lines.
And you know as we've seen over the last few years. These.
These companies had a level of profitability that was.
Totally historically unprecedented and effectively just about every major shipping line has repaid all the debt. They can repay and last time, we looked across the industry that the industry was in a net negative net debt position. So had more cash on the balance sheets than that.
And.
Obviously that's.
From a credit standpoint, you know a good look for US one of the things that we've done just to put it in context is to think about whats been the excess profitability of the shipping lines.
Say from Q4 of 2020 through Q3, Q2, Q3, 2022, and how does it excess profitability compare to the maximum amount.
Mount of money that the shipping industry was losing.
As most challenging years that the financial crisis, 2015, 16, and what we see and I think I haven't looked at in a while so don't quote me on it.
But that the amount of excess profitability was something in the range of 10 times greater.
The cumulative excess profitability was something in the range of 10 times greater than the maximum annual losses the industry ever taken.
And so to some extent, they're spending cash on some other things, but there can be.
A decade of of extremely challenging results.
And the balance sheets should just get into the same place where they were before we depend on make began.
Until that is not of course of some cash leakage for other investments and so on.
For returns of capital, but but generally speaking just the magnitude of the excess profitability in the balance sheet improvement is just just truly extraordinary.
And so has us feeling very comfortable about the vast vast majority of.
Of our containers on lease and the leases we.
Do have a customer base that extends beyond the major shipping lines. It's important for us to have that those kind of smaller customers to help offset the market cycles that are typically more pronounced for the bigger customers.
They also tend to help us with container demand from second tier and third tier locations and for older equipment or out of favor equipment types.
So.
We have to support not just our best and strongest customers when the market's strong we do have to provide some support to the whole range of customers we have.
And so we were very careful probably $95, 97% or so of our containers, we purchased that were expensive in 2021.
Went to the top shipping lines, where we have very strong faith in the credit some some small number one to the other shipping lines and that's what we've been looking through in the portfolio, but again, we typically make very good credit choices, we underwrite accounts for reasons.
But generally speaking we feel really good about the.
The credit place, where we are and again it would take a heck of a lot more in our opinion.
Then a couple of challenging years too.
Undo the good work that the shipping lines have done with their with their credit profiles.
In terms of the the lease structures themselves typically there there's no.
Almost no operative I should say no no no opportunity outs for customers to say, hey, we don't need the containers anymore.
Or the market's changed or some some active guard or something.
At least as a very simple customers keep containers for a certain amount of time, they pay us certain dollars for those containers.
And Theres really nothing to talk about until it's time for the containers to expire off of lease.
And so generally speaking again, we think we've got a great.
Credit in the portfolio of the contracts themselves are very well written.
Yes.
So we again feel very secure in the duration of our lease portfolio and revenue.
Okay.
Okay. Thanks, Brian that's a lot of really great color.
And then could you just share with US your latest view on the capital allocation front and I guess, specifically the capital return here. So clearly at an impressive amount of share buybacks this quarter.
And it sounds like the Capex opportunities will continue to be.
You know relatively soft so is this.
A decent expectation for pace of.
Share buybacks and is there is there any other levers that you might consider here.
It seems like Youre quite mindful of the leverage levels, but I guess the other major opportunity it could be on the M&A front is there anything.
In this space right now that that could be interesting for inorganic growth at this time.
Yeah, So maybe I'll just take it in pieces, so I think right now.
As we saw last quarter right now our focus remains on on share buybacks. We see we think a great investment opportunity for Titan and our investors to buy back shares at the current price.
Theres very low multiples of earnings and cash flow and.
We always think of it as just a way we are investing in our container fleet and so last year, we bought lots of new containers, and we put them on leases and we think those leases were great. This year in some way is we bought lots of containers to but to the existing containers. We have that are already locked away on leases already on deals, we underwrote and liked.
And it's actually a really nice way to invest back into the business and that's one reason I pointed out in the charts.
Just a very strong growth in our in our net net revenue, earning assets per share because it really reflects from a shareholder standpoint, a lot of container growth this year too.
In terms of other opportunities, we're always looking and so it's a very dynamic process that we have thinking about where are we where we allocate our cash flow and we are mindful.
It's one of the core things that we find attractively attractive about our business that we always have opportunities to redeploy the capital effectively even if it's just returning it to our shareholders in the form of a very significant dividend in terms of M&A activity. We're a believer in the sort of just the basic industrial benefits of M&A in our space.
Got a lot of advantages from our 2016 merger between talent Triton.
Drove cost efficiency it drove higher quality.
Of our operations and our team we think our customers like it because the thing they care about most is just access to large volumes of equipment when they need them and so having a super supplier.
We think was beneficial for them and one reason why we've been growing share organically.
Now that said of course from the M&A standpoint, it's always limited by what's available and.
We tend to be pretty disciplined buyers in the M&A market just like we are in the new container market.
Partly part of that discipline and I think it comes from our heart Headedness in good analysis and part frankly comes from just the attractive opportunity we have to buy back our stock, which is a pretty low risk high reward activity for us.
And.
So that it's a high bar, sometimes to meet but we certainly do believe in M&A and then we'd look as things come available.
Yeah.
Great. Thank you for all the thoughts there Brian .
Thank you.
And ladies and gentlemen, this concludes our question and answer session I would like to turn it back over to the management team for any final remarks.
Well. Thank you very much just want to again, thank our investors and others for support of Triton and we'll look forward to talking with you soon thank you.
Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.
Thank you.