Triton International Limited

All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. 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, CFO. Please go ahead.

Thank you, Anthony. Good morning, and thank you for joining us on today's call. We are here to discuss Triton's first quarter 2022 results, which were reported this morning. Joining me on this morning's call from Triton is Brian Sonde, 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 investor 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 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 in 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 first quarter 2022 earnings conference call. I'll start with slide three of our presentation. Triton achieved another quarter of record performance in the first quarter of 2022. We generated $2.76 of adjusted net income per share, an increase of 3.4% from the fourth quarter, and an increase of 45% from the first quarter of last year. And we achieved an annualized return on equity of over 30%. Triton is carrying significant operational and financial strength into 2022. we have added over $4 billion of containers over the last two years and placed these containers onto high-margin, long-duration leases. We've extended lease durations across our fleet and increased the share of our dry containers on lifecycle leases to almost 60%. And we have achieved meaningful interest expense savings through aggressive refinancing activity and locked in these savings by focusing on fixed-rate, long-duration debt. Market conditions remain constructive. Goods consumption remains high, and our customers continue to face extensive operational disruptions that are slowing container turn times. Container prices and market leasing rates are down from last year's peak, but remain historically high. Our customers have been more cautious about growing their container fleets so far this year after aggressively expanding last year. But drop-offs remain low, and a number of customers have been active leasing for spot requirements, and again, at lease rates that remain historically high. We continue to use our strong cash flow to drive shareholder value. We have repurchased 3.3 million shares, or about 5% of our total, since we shifted focus from aggressive fleet investment to share repurchases last fall. We are increasing our repurchase authorization back to $200 million. And we announced a quarterly dividend of 65 cents per share. We have made durable enhancements to our business that we believe have locked in a higher level of performance. We expect our adjusted and income per share will decrease slightly from the first to the second quarter as disposal prices and gains moderate. But we also expect our profitability and return on equity to remain very high throughout 2022 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. Turning to page four. Page four illustrates that goods consumption and logistical bottlenecks continue to drive container demand. The two charts on the left illustrate that consumption remains elevated in the U.S., and the ratio of retail inventories relative to sales remain at low levels. Charts in the right show that solid trade growth is forecasted through 2022, which combined with the logistical issues will continue to absorb capacity. As the shipping lines continue to struggle with disruptions, those disruptions have been exacerbated by what has been happening in the major port areas in China. There is potential for further disruption on the West Coast, as congestion ping-pongs back and forth between Asia and the U.S., We are hearing from our customers that these bottlenecks will absorb a lot of capacity for some time and in an unpredictable way. Page 5. Page 5 illustrates that freight rates and new and used container prices are down for the peaks of 2021, but still remain historically high. The chart to the left illustrates the trans-Pacific and east-west spot freight rates relative to bunker costs. Freight rates also remain historically high due to the continued demand for cargo and while the logistical bottlenecks continue to absorb existing available capacity. You can see in the upper right container prices have come down and are slightly below $3,000 in part due to the high volume produced through 2021 easing some of the shortage. Bottom right chart illustrates that the sale price of used containers has come down some in the first quarter but also remains historically high. Page 6. Page 6 shows the high container production in 2021 as it eased container shortages, but overall availability remains tight. The chart on the left shows container production, and although there has been a reasonable amount of building in the first quarter, it is well below last year's pace. While we do not believe the shipping lines view containers as strategic investments, they have placed a larger percentage of what building we have seen in the first quarter of 2022. Chartered to the right is container factory inventory and depot stocks. While we have seen the amount of available container factory inventory increase, as a percentage of the global fleet, it's actually lower than normal at 1.5%. The bottom right illustrates that there are next to no depot units available. Turning to page seven, page seven shows that Triton's key operating metrics remain very strong. On the upper right chart, you can see the first quarter pickups are down from last year, while still net positive as we came through the traditional slow season. Drop-offs have been very low, which is keeping utilization at maximum levels. Even though utilization is coming off a little bit, it's still exceptionally high and we remain well protected by our lifecycle leases and long-term portfolio, illustrated in the bottom right chart. The lower left bubble chart shows the pace of activity as customers have slowed their absorption of containers through what is the seasonally slow period. Customers remain cautious about additional container capacity after adding a lot last year. but they also see a market where trade volumes are still strong, and they are still dealing with significant disruption due to continued logistical bottlenecks, so are not dropping off any containers either as they wait and see how the market develops. We are still seeing a strong backdrop for us with high container prices, multiple demand drivers for containers, very limited drop-off volumes, and we have at the same time locked in most of our equipment. I'll now hand you over to John Burns, our CFO.

Thank you, John. On page 8, we have presented our consolidated financial results. Adjusted net income for the first quarter was $179.6 million, or $2.76 per share, an increase of 3.4% from the fourth quarter and nearly 45% from the prior year's first quarter. These exceptional results represent an annualized return on equity of over 30%. On page nine, I'll discuss the drivers of our strong profitability. Our strong first quarter performance reflects the enhancements we have made to our business over the last two years. Our first quarter revenue was flat from the fourth quarter, despite two less revenue delays, as we had a full quarter's benefit from the high volume of new containers on-hired in the fourth quarter, and utilization remained at maximum levels. Revenue in the first quarter was up 20 percent over last year's first quarter. Revenue growth was less than asset growth largely due to the growth in the finance lease portion of our fleet and the way finance lease revenue is recognized. We expect our utilization, revenue, and fleet size to remain at very high levels in the second quarter. We expect our first half fleet investment to be roughly at replacement levels, and therefore our revenue earning assets to hold steady. Average utilization will likely moderate slightly in the second quarter, and we expect revenue to be up slightly due to one more billing day. Interest expense decreased slightly in the first quarter, reflecting a full quarter increase in our average debt balance due to the funding of the asset growth in the fourth quarter. Our effective interest rate held steady at 2.5 percent in line with the fourth quarter, but down 80 basis points from the first quarter of last year, reflecting the benefits of our active refinancing activity over the last two years. With over 87 percent of our debt portfolio being fixed-rate debt or swapped to fixed, with a weighted average duration of over five years, the recent increase in interest rates will have a limited impact on our overall effective interest rate going forward. We continue to generate exceptional levels of trading and disposal gains, totaling $33.1 million for the first quarter, down only slightly from the fourth quarter. We expect these gains to remain high in the second quarter, though we expect them to continue to trend lower as disposal prices decrease. Since the end of the peak season last year, we have shifted our strong cash flows from aggressive container investment toward active share repurchases. Over that period, we have repurchased 3.3 million shares, including 1.7 million shares repurchased so far this year. And in support of this share repurchase activity, we have once again increased our share repurchase authorization back up to $200 million. Page 10 highlights the exceptional growth in our leasing margin and the profitability generated last year and in the first quarter of this year, and that these 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 high 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 leases. As you can see, that the remaining lease duration increased over 60 months on a CEU basis. And when we calculate this on a net book value basis, capturing the high cost and high revenue of containers purchased last year, the remaining lease duration jumps to 79 months. And if we include the typical time it takes a customer to return or build down containers once the lease expires, this adds roughly a year to both figures. In addition to the long duration of our lease portfolio, the portion of the portfolio made up by these long-term leases has climbed to 88%. from 82.5 percent at the end of 2020. On the bottom right, we show that we fund this long-term lease portfolio with long-duration fixed-rate or hedge-to-fixed-rate debt at very attractive interest rate levels as a result of our refinancing activities 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 margins for years to come. I'll now return you to Brian for some additional comments.

Thanks, John. Slide 11 summarizes the way 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 is 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 around $715 million of steady state cash flow. We currently pay a quarterly dividend of 65 cents per share, which represents about $170 million in annual dividends. As a result, we have about $545 million of steady state cash flow after our substantial regular dividend. The next set of numbers illustrate a few things that we can do with this $545 million. If we focused on capital investment, we could 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 14% of our shares at their current trading range. If we wanted instead to focus on dividends, we could pay almost $8.50 per share on top of a regular dividend, bringing the total annual dividend to over $11 per share We have typically pursued a mix of these options. Slide 12 looks at how Triton has created long-term value for shareholders. We have talked a lot recently about how Triton has achieved exceptional performance over the last two years. But Triton's strong performance stretches back a long time. Triton is the cost and capability leader in an attractive, defendable market niche. And we have a long history of delivering solid growth strong profitability, and above-market investment returns. The chart on the upper left looks at the long-term growth of our container fleet. Over the last 17 years, we have grown our fleet 8% per year on a CEU basis and 10% per year on the basis of net book value. 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 have grown our fleet. You can also see the stability of our cash flow. We generated strong cash flow even in very challenging years, like the 2009 global financial crisis and the 2015-16 industrial and commodities recession. The chart on the lower left shows how we've used our strong cash flow to both reinvest in our business and regularly return cash to shareholders. An investor in TAL's 2005 IPO purchased a business with an adjusted net book value of around $12 per share. That investor today would have a business with an adjusted net book value of $44 per share, and they would have pocketed $30 per share in dividends along the way. And as you can see in the lower right, that same investor would have earned an annualized return on investment of almost 14% per year, significantly outperforming the S&P 500. I'll finish the presentation with slide 13. Triton is off to a strong start in 2022, and we have high expectations for our business. We achieved another record quarter of profitability in the first quarter. We have made durable enhancements to our business and are carrying significant operational and financial strength. Market conditions remain constructive. We expect our profitability and return on equity to remain strong. throughout 2022 and into the longer term. And our strong cash flow gives us powerful levers to drive shareholder value across a wide range of market environments. 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 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster.

Our first question will come from Michael Brown with KBW.

You may now go ahead.

Great. Thank you, operator. Good morning, everyone.

Good morning, Michael.

Brian and John, I appreciate the comments on the bottlenecks and the challenges of the current operating environment. So we focus on the shutdown situation in China. What are your expectations or what are you hearing from customers in terms of when this could ease and then given the uniqueness of the situations once the shutdowns are done? How could trade play out from there? How will the catch up in terms of goods produced and play out from here? How will it normalize based on what your expectations are today?

Yeah, so I think the first thing I'd say is it's just a very uncertain situation. That, of course, there's a lot of things that are just unknowable about how the COVID pandemic is going to progress and how That's going to impact certainly China right now and everywhere else. And I just say the main thing we hear from customers is that the bottlenecks that were really plaguing the shipping industry and I think the economy for most of 2021 are still there. And it's not just the ports in China or previously the ports in the West Coast. It's a whole layer of factors going from port productivity to trucking capacity to warehousing efficiency. And now, of course, you know, the shutdowns of some of the biggest ports in the world. And, you know, typically what we see when, you know, we see disruption is that, you know, the same amount of goods want to flow. And so when you see temporary disruptions, that means the peak periods when things are flowing well are higher. And that also tends to mean, you know, shipping lines need more containers in their fleet, you know, relative to the cargo that they're moving. And that's what we're seeing. And I've seen for the last, you know, again, 18 months or so. And I don't think anyone really right now is brave enough to forecast just how it plays out, but certainly it continues to be a big impact on the business.

Okay, yeah, that's certainly fair. And then I just wanted to ask about the secondary market and the gain on sale trend that you mentioned here. So you talked about the fact that the gains are expected to tick down in the second quarter, at least as of what you know currently. Is this just a reflection of the limited containers that you have available for sale, or is this also an element of the gain on sale per container coming down more from here? Just trying to parse through what's kind of built into that expectation. I understand there's a lot of uncertainty here, but if you think about the coming quarters or the trajectory from here for the rest of the year, Is it possible that if turn-ins start to come in, that the volume that you're able to sell could rise and that you could actually experience a bit of growth in that line? Again, I know it's maybe a little further out in the year, but just curious how you think about that as we progress through the year.

Yeah, sure. So we've been saying now for probably three or four quarters that our gain on sale and disposal prices have to come down. And You know, really the main driver behind those comments is just that they're, you know, so extraordinarily high. You know, we have some charts in the presentation that look at, you know, used 20-foot and 40-foot high-keep container prices over time, and you can see that they reached, you know, really unprecedented levels in 2021 driven by the high cost of new containers and just the overall shortage of containers, you know, which choked off containers to the leasing and sale markets. And so what we're seeing, we are seeing price starting to come down just because, like we've seen many other freight rates and new container prices hit peak levels in 2021 and start to come off as the market just can't stay at that level forever. And so it is a little hard to say what's the pace of the container prices coming down. We've seen some of it already. We expect to see it happen more. But You know, but that said, we expect prices to remain very high. And you're right, as volume increases, if we start to see more off hires, some of which is pressuring price, that also does lead to higher volumes. And our volumes right now are historically very low. And so, you know, we're not trying to give the impression that we're going to toggle very quickly back to, you know, where sale gains had been in 2019, for example. But we do think that we'll continue to see some decrease in sale prices following the decreases we've seen in new building prices and following just the, you know, kind of the easing of the extreme container shortage that we saw in 2021, even though containers still remain pretty tight.

Great. Brian, if I could just sneak in one more here on valuation. I was just taking a look at your historical PE multiple and just going back to 2020, for example. Your PE at that time was closer to the mid-7s, looks like 7.4, which I would argue is still probably a pretty low valuation multiple for your business. Since then, the consensus estimates for 2022 are up over 60%, and you're putting up ROEs north of 30%, you've structurally really changed and improved the business model and produced some really strong growth in the earning assets, yet you're now trading at less than six times. And I understand that the macro landscape is certainly challenging, but as you think about your business here, could you just touch on how you're feeling about the outlooks for Triton and the prospects for the business and maybe just touch on the valuation and how you guys are thinking about that and what the market could be missing here.

Yeah, sure. And so obviously it's something we have taken note of and, you know, I think people that have spoken with us would know that something that's been a source of, you know, frustration for us and appreciate that it's a source of frustration for our investors. Yeah, right. I mean, we traded a very low PE multiple right now despite what we think is a, you know, a very strong business right now and a business that's created a tremendous amount of value consistently over time. You know, as to why we trade, you know, where we do in terms of, you know, our multiple, that's a question I think more for you and for the market. You know, we've been trying to communicate the structural improvements that we've made to our business through our lease portfolio and refinancing activity. The shift that's occurred over the last, you know, really five or seven years that has boosted our relative strength through our merger and really created significant capability and cost gaps between us and our competitors, as well as just the structural things that have improved in the industry around credit and the real focus on leasing for most of our customers. We look out to the future, and we've tried to be pretty clear in our commentary here and in prior meetings that we believe we've really jumped to a new level of profitability going forward. because of the very long duration improvements that we've been able to make in our business over the last two years. And hopefully, the market will start to see that. And we've built out a lot of our investor materials to show, especially in our investor day, the runoff value of our lease portfolio as we look at it, and other things that we think support a strong value for the business. Hopefully, as we continue to show strong numbers through a market that's still very good but not quite as extraordinary as last year, that that story will gain traction. But it's a question for you as well as for us, I think.

Very fair. Yeah, thanks for all those thoughts there, Brian.

Our next question will come from Liam Burke with B. Reilly FBR. You may now go ahead.

Thank you. Good morning, Brian. Good morning, John. Good morning. Brian, your lifecycle leases are up to 60%. We're seeing, obviously, investment this year normalizing from last year's peaks. Do you expect that trend to markedly continue?

You know, we'll see. I mean, interestingly, you know, a lot of the increase, in fact, probably all of it almost, of the increase in containers on lifecycle leases are not driven by our new container investment. Most new containers, even if they're going on 10 plus year leases, aren't full life leases, although some of them that we did last year are. But most of that increase in that share of life cycle leases, certainly over the last five years, has come from what we're doing with our used containers. And in fact, the typical rhythm for us has become to lease a container out on its first lease for a pretty long time, but something less than the full life, and then If it comes off higher or if we renew it with the same customer to try to put it on a lease for its second structure, that will carry it to the end. And so, I mean, 60% is a lot. I can't promise it's going to go up too much further from there just given the mix of containers in our fleet in terms of the ages. But we do think it's something that's become a feature of the business and certainly a feature of how we work with our customers that we think that number is going to stay pretty high.

Great. And on those renewal rates, are they the same, higher, lower when you extend that used container to the full life cycle?

Yeah. So, I mean, right now the market rate for new containers and for used leased containers that we're leasing out currently, you know, are significantly higher than the average rates in our portfolio and also higher than the rates on leases that are expiring over the next, you know, four or five years. And so generally, there's a tailwind as we're renewing those leases. You know, that tailwind gets reflected in different ways. Sometimes we reflect it in higher rates than we do, and we have pushed up a lot of rates over the last 12 months, you know, as we've reached the end of this. Typically, customers can hold on to containers for a while after the lease expires, you know, usually 12 months or so. And so we have to wait until then before we can really kind of force a renewal or increase. But we've been doing that. Sometimes, though, that kind of strength in the market, we reflect more on durations. And we're always doing – it's actually quite easy on these lifecycle leases to sort of understand the tradeoff of rate and duration because it's the last lease. And so if we can get the customer to keep it until year 16 or in some cases even year 17 or longer, that actually has a lot of value, perhaps more value than raising rates on a contract that might expire when it's 13 or 14. And so we think of it in different ways, but we have been able to capture that value for sure over the last 12 months or so.

Great. And your ROE is north of 30%. Obviously, that's not something that you can carry and sustainable. But as the business normalizes, congestion eases, traffic gets to normal. Would you expect the ROE to settle in at a rate higher than your historical levels?

So for sure, I think, you know, both things you say there are right. And the way that we think about it that, you know, first, we do think the ROE will come down, you know, we don't think we're writing, you know, business always at 30% plus. That reflects, you know, very good business that we've written plus, you know, extremely high utilization and, as I was talking with Michael earlier, just, you know, really unprecedented sale prices. You know, in particular, as the sale prices come down, we'll start to see that ROE come down. We think our utilization, in fact, is going to stay quite high, at least into the foreseeable future. And so, you're right. I think we'll see utilization come down somewhat, but we'll also see it be you know, at a higher range than where it was before the last few years, reflecting, again, these things we've been talking about, these durable improvements to our lease portfolio, the sort of massive investments in these high-value, high-margin containers and leases over the last few years, and, again, this just really great refinancing activity and financing cost that we've locked in.

Sure. Thank you, Brian.

Our next question will come from Ken Hoekstra with Bank of America. You may now go ahead.

Hey, great. Good morning, Brian, John, and John. So I guess it's incredible what you've done the last few years and all the credit for that, but you're now targeting earnings to roll over, and I think it's been maybe seven, eight quarters since we've heard you kind of talk about a sequential decline. So maybe just talk about that for a second. What are the terms for the current boxes? Last year... I guess through the last couple quarters, you talked about up to 13 years. I think you just mentioned you just threw out a 10-year time frame. Is that what you're looking at now from shippers? Is it now 10 years? And maybe talk a little bit about the lease rates within that. Is there anything different in terms of where pricing is now versus where it was?

Yeah, so we put some charts into our presentation looking at what's happened with container prices, and that's pretty similar to what's happened with market leasing rates. As we've seen, the market come from really unprecedented shortages of containers to just tight. The premiums that the factories can charge for getting access to their capacity has come down, and that's reflected in lower market leasing rates. But I think it all depends on the perspective you're measuring against. And so container prices and market leasing rates are lower than they were in July 2021, which was a condition we've never seen before. You know, but if you compare back over my career, which now I think, as you know, stretches back like 23 years with this company, I had never seen container prices at where they are today until 2021. Uh, and so container prices not reflected in market leasing rates as well. I mean, you know, 20 something year highs with the exception of last year. Uh, and so when we look at the market, we say, you know, boy, this is actually a pretty nice market. And if you had transported us from 2015 to here, it would be, this is unbelievable. But obviously compared to just really unprecedented shortage conditions last year at unprecedented pricing, it's down a little bit from that. In terms of our earnings, I'd say overall we were very optimistic on our financial performance over the rest of this year and into the longer term. It's something we've, I think, probably repeated a few times. And I guess, yes, we did guide that we think our second quarter will be slightly lower than the first quarter, mainly, again, as these sale prices start to come a little bit back toward earth. You know, but we're still going to be, we think, at levels of profitability that are really quite exceptional, you know, with, you know, very high profitability relative to our history, very high returns on equity, and getting maybe back to Michael's question early on, still very low multiples relative to our share price. And so, you know, at least what we keep trying to say, we think it's not a question of what's the trajectory of the earnings, it's where are they, you know, and how do they relate, you know, to the you know, to the value of the business. And again, we think they're going to stay if, you know, the things we've done to our business are durable like we expect. You know, we think earnings are going to stay very high in absolute terms and very high relative to the current value of the business, which frankly is one reason why we've been buying the shares.

No, no, I understand that. But I just want to understand what's changed. So, you know, you used to put in the release or in the charts what was the term of, new boxes. It fluctuated from 2012. What's the timeframe for new boxes?

Yeah, so I'd say most of the deals we're doing right now are in the 10-year duration. And it's down a little bit from, you know, most of 2021 was more kind of like 12 or 13. But I think that really just reflects the container prices coming back down to earth a little bit, you know, that when container prices are, you know, again, still very high, you know, but no longer at, you know, close to $4,000. it's easier to spread the premium than it was before. And so, but again, we would look at, there's been no other year in my history where we've done 10-year leases as the norm. And so again, we still look at it and say it's a pretty attractive lease-out environment, even if, you know, not quite as strong as 2021.

So then the returns on these boxes, are they the same, Brian? Or I get it, right? If you can distribute it in a shorter period of time, are... I guess the lease rate return levels similar, given that?

I mean, again, I think they're strong. They have to say the same thing as before, that the returns are probably, again, a little bit down from the levels we got in 2021. I mean, there were certainly a few quarters there where we were more capped by relationship reasons than ability to get the deals done, just because the boxes were needed so badly by our customers and the customers of our customers. You know, now it's much more of a regular market, you know, where multiple leasing companies can supply containers to the inquiries that are out there. But again, pricing is reasonable, you know, and again, reflecting, you know, a relatively tight market for, you know, for containers and, you know, just the strength of our business. You know, we don't really feel we have to reach, you know, for things. But certainly, again, I just characterize it as We think the market is constructive. There's a lot of things that are positive for us, especially the container prices and leasing rates and the tightness of container supply, but not quite as extraordinary as 2021.

Yeah, and I guess just to understand the sustainability, right? I mean, you still have very little. I don't know if you had one of the charts up that you've had before, right, where you have just very little coming due in this year, next year. Is there a chart that highlights that?

There is, Ken. We put it in the appendix. It actually should be in the presentation. Yeah, it's page 15 in the chart. We didn't put it in the – it hasn't been there in a few quarters just because there's not that much of a story to it. When you look at the expirations relative to the fleet, it's a pretty small percentage of our fleet that does expire over the next few years. And for the dry containers, the market leasing rate, as I was talking about earlier, you know, are significantly above the rates of the, you know, leases that are expiring. I mean, generally, it's a good news story. And I think this, we kind of replaced a little bit in the main presentation, you know, with the things that John Burns talked about, you know, just a very high percentage of our containers on long-term lease and the long duration of those leases. And this chart kind of falls out from that. But yeah, we still think people do like to see it and it's in there.

Yeah, no, I think that's a great chart just to highlight that there's not much really coming due. Just two cleanup questions, if I can. One, you noted the buyback was 1.7 million shares up to April 29th. Is there a quarterly number? I think on the cash flow, I got 81 million instead of 110. Is there a share number there for the quarter?

Yeah, there is. John is flipping through it now. It shows in the queue. And frankly, it's funny. We were debating what numbers are most useful for investors to put in there. And initially, we had like all four numbers, like what have we done since September? What's year to date? What's first quarter? But yeah, we can... John's scrambling for that, but it's 1.3.

1.3, perfect. Thanks. Sorry for the technical one. Just so I understand, John, you said something interesting at the beginning of the conversation. I just want to make sure I understood it. The balance sheet assets, asset base declines sequentially, right? So if I look at net assets, gross assets, but you said something that, is that due to the larger lease use or is that something different? I just want to understand what you were throwing out there.

What I was saying is that we think for the first half of the year, adding on the second quarter and based on what we've ordered to date, we're probably at replacement levels. So on a full-year basis at the end of the second quarter, we think we'll be roughly flat on a revenue-earning asset basis, the actual acceptances. to the end of the first quarter was lower than half of what we ordered. It was on the low end. So we've got more containers coming in, and we think we'll be flat on overall asset base for the first half of the year.

So to keep it flat, you have to accelerate CapEx?

The orders have been made, and we think more orders are coming. So just the acceptance level, the actual units coming into the fleet was lower than the orders placed, if you will.

I think the way to think of it, Ken, is that I think we announced in the press release that we had ordered something like $425 million or so of CapEx year-to-date. Most of that CapEx should be delivered by June 30th and probably a little bit on top of that. And we showed in other charts that our replacement capital spending is about $900 million per year. So if you think about roughly $450 million as being where we are for the first half, that's right at kind of the replacement level. But just given the timing of our orders and timing of delivery, more of that $400,000 change is going to be delivered in the second quarter than the first quarter, which is why you saw a slight decrease sequentially from December 31 to March 31, and then probably a slight increase sequentially from March 31 to June 30, making the December 31 to June 30 relatively flat.

Got it. Got it. That's helpful. Just want to make sure I wasn't missing something. Thank you very much for the time, guys. Appreciate it.

Yeah, thanks, guys. Again, if you have a question, please press star then 1. Our next question will come from John Tanwanting with CGS Securities. You may now go ahead.

Hi, it's actually Larry Sola. I don't know how I got that name, but that's great. That works. Anyhow, good morning, guys. Just one of my colleagues, I don't know how to get his name, but just a couple of follow-ups there. Just on the earnings outlook, I know you only give one quarter outlook, and not to define what a modest decline means. It doesn't sound like your earnings are, quote-unquote, rolling over. But can you just, you know, worst-case scenario, obviously it seems like, you know, not worst-case scenario, but a sort of negative look. To me, it seems like it can't get too, it can't fall too much over the next couple of years if I just look at, you know, you only have, it looks like, 5% or so of your containers coming off contract the next couple of years. So, and obviously we seem to be in a holding pattern today. Shippers don't know, you know, kind of know where the direction we're going to go. So no one's dropping off so fast. So in the meantime, you're earning great returns and you're buying back shares. And it sounds like that will continue in the short run. You know, you just replace your containers just at a minimum and use your cash flow for for buybacks until we sort of get better direction. Is that a fair way to look at it? And then even if things get really bad, there aren't that many containers that are coming off contract, right? So I'm just trying to assess, you know, I think the market perception is just that we're going to head into a recession and demand is going to fall out of bed. But even if that happens, it doesn't seem like you guys are, there's a tremendous risk for you.

Sure. So when we talk publicly, we do like to limit it to one quarter. We find that it's maybe just risky for us to put too much out there. But we also do try to help people think about how to expect general trends in the business to play out. And we do a lot of scenario modeling internally. We have a forecasting model that's built up from a lease level. And we then turn that into a long-term financial forecast. And our general view is that it's going to be – our utilization is going to be extremely resilient against market conditions because of the long duration of the portfolio. And so, again, these are financial models, and they're subject to the assumptions we make. But our general view is that even if market conditions were to turn extremely negative, which in fact we don't really think, that we're going to see utilization stay at historically high levels into the past 2022, I mean well into the medium term and beyond perhaps. And that typically is the most important driver of our earnings, you know, is just what percentage of containers are on higher generating revenue, not accumulating costs. And they're on not just on their own lease, a lot of containers on very profitable leases. And again, that sustains our profitability, you know, well beyond this year as well. You know, the greatest uncertainty, and I think that the part of our income statement, you know, most subject to market conditions is our gains on sale. You know, we have talked about that we do expect those to normalize just as prices come back to earth. Again, there'll be some offset as volumes take up there. But then offsetting that, that sort of negative pressure, you know, should be, as you mentioned, the decreasing share count and also growth over time. You know, we think that, again, some of the longer term charts we showed, you know, indicate that we don't need great market conditions to drive value in this business. You know, we grow across a wide range of conditions and create value across the same wide range of conditions. So, again, we look out and we feel we're in a really great place. We had a historic run over the last 21 months that's allowed us to build a lot of long-term value. The market out there still remains underpinned by two very strong demand drivers, high goods consumption and logistical bottlenecks. And putting that together, we've actually got a pretty optimistic outlook of where we go from here.

Well, what about in terms of some inflation, obviously? Most of that inflationary pressures have obviously pretty much helped you, right? In terms of pricing and your Your interest rates are mostly fixed now, so that's not hurting you. What about in terms of direct cost? In an inflationary period, I can't imagine the cost to store a container or repair a container goes up as much as overall inflation or does it? So are you at risk as direct costs potentially rise as capacity utilization falls a little bit? you know, do you have a higher risk or higher cost this time around in a higher inflationary period than, say, a few years ago or not really?

Yeah, I'd say in general, you know, we think inflation is value creating for the business, you know, mainly driven by the fact that we have, you know, lots of real assets and containers that we, you know, remarket to release them or we remarket them to end the sale. And those values, you know, certainly are very correlated with inflation. You know, those containers are financed primarily with nominal debt, you know, with fixed interest rates. And so you know, while the value of our liabilities doesn't change very much as inflation goes up, the value of our assets does. And that's sort of the main reason why, you know, we think, again, inflation creates value for us and for our shareholders. You know, I think there is inflationary impacts on direct operating expenses like repairs and storage, you know, but those are, you know, they can be, you know, significant in terms of the year-to-year changes, but it's still a relatively small share of our expense base. I mean, the vast majority of our expenses are ownership costs of container depreciation and interest expense. And again, the depreciation, of course, is fixed because we've purchased the containers for a historical number. And interest expense, again, is locked in very well through our debt portfolio and hedging. So again, we feel that overall it's a net positive.

Just a last question. What do you make, if anything? I know it's sort of a very short time period. The last couple of years, most of the container purchases have certainly been biased towards the leasing companies themselves. The last couple of quarters, or at least this year, it looks like the shippers have been buying a larger percentage. I realize it's a small number, a short time period, but do you make anything of that? Maybe it's just that their balance sheets have improved in the short term, so they're using some of their cash. Any thoughts on that?

Yes. For sure. So I think it's a number of things happening. For sure, the shipping lines have radically improved their capital structures over the last year and a half. And frankly, most are carrying substantial net cash balances right now. And so when you have lots of extra cash and a lot of the shipping lines have paid down the debt that's prepayable easily. I'm not sure. Can you still hear us, operator?

Anthony, are you on the line?

Yeah, that's actually the main speaker line.

playing the music um uh okay let's see we'll carry on perhaps over the uh the nice music here for us wait i think that actually might be john's line let's see here yeah why don't you why don't you just try to cut it off if you can yeah that was john's line okay yeah thank you um yeah sorry for the interruption everyone um oh my gosh where were we Oh, yeah, sorry. Thank you. My name, we were talking about the mix of shipping line purchases versus lease go purchases. And so we're saying there's a number of factors driving it. You know, one being that, you know, the shipping lines are carrying a lot of cash because of their very strong profitability over the last few years. I think, and that is driving an increase in purchasing. Also, the shipping lines do tend to do most of their buying early in the year. You know, unlike us, the shipping lines set typically annual budgets for buying containers and They typically do the purchasing ahead of the peak season, which starts to kind of get going in the second quarter. And so we often do see this, you know, higher buying for shipping lines, you know, as you get towards the, you know, the first part of the year. And then I think there's also just a little bit of sort of price uncertainty for leasing companies. You know, we think of our container purchases as investments, and we want to make sure that we can, you know, lease them out for, you know, rates that match the investments that we're making. With the shipping lines, I think look at the containers as more of just something you need to have to run your business. And as price has been changing, leasing companies are trying to be strategic about when to jump in. We have been coming in selectively to maintain our capability to supply, but I think that also, when prices are changing, leasing companies can be a little more cautious in the shipping lines.

Operator, are you there?

Yes, so that will conclude our question and answer session. I'd like to turn the conference back over to Brian Sondy, CEO, for any closing remarks.

Yeah, I'd just like to thank everyone for your interest in Triton and your support. I apologize a little bit for our technical challenges there at the end, but we'll be looking forward to talking with you soon.

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