Triton International Ltd (TRTN) 2022 Q3 法說會逐字稿

Good day, and welcome to the Triton International Limited Third Quarter 2022 Earnings Conference Call. (Operator Instructions)

Please note today's event is being recorded.

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 Sondey, 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 2 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 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 3 of our presentation.

Triton continued to achieve outstanding results in the third quarter of 2022. We we generated $2.88 of adjusted net income per share, up 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 2 years of exceptional container demand. Peak season shipping volumes were muted this 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 they're still very high.

While conditions have softened, we expect our 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 have increased the share of our containers on lifecycle 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 7.1 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 and have just re-upped our repurchase authorization back to $200 million. We also announced an increase in our quarterly common dividend from $0.65 to $0.70 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 continue 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 4. Page 4 shows Triton's operating metrics.

In the lower-left chart, you can see the shift in our pickup and drop-off activity. Net pickup activity was very strong in the second half of 2020 and throughout 2021. Pickup volumes decelerated in the first half of this year, though drop-offs remained low. Recently, we've seen drop-offs accelerate as our customers reacted to a muted peak season and some easing of logistical bottlenecks.

However, our utilization, as shown 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, as shown in the upper-right. In the chart, you can see that nearly 60% of our containers are on lifecycle leases, which are structured to keep containers on hire through their full remaining leasing life, and so have little utilization risk.

The lower-right bubble chart details the pace of our new container transaction activity. New container activity has greatly reduced from last year, reflecting the 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 5. Page 5 illustrates that the shipping market is quickly normalizing following 2 years of exceptional conditions, but some logistical challenges remain. In the upper-left chart, you can see that freight rates for our customers have decreased 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, as container capacity is no longer in shortage and as production volumes decrease.

The chart on the lower-right looks at an index of used container sale prices. Used prices are also normalizing, but they remain very high.

You can see on the lower-left that while freight rates are normalizing, the market is still struggling with some operational efficiency, and a larger-than-normal level of vessel capacity is in port 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 fully snap back to pre-pandemic performance in the near term and believe it will continue to lead to some incremental container capacity requirement in the market.

Page 6. Page 6 looks at new container production volumes decreasing in response to slow 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 fleet.

You can see in the lower-left that Triton's depot inventory of used containers has started to increase as well, reflecting 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 have made to our lease portfolio.

In the meantime, we have a natural balance of new container production slowing considerably, as shown in the chart on the right. New container production was exceptionally high in 2021 as our customers rushed to add container capacity. New container production started to trend down in the first half of this year as the market started 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 dotted line on the end bar of the graph, has effectively tailed off in response to our customers' shift from adding containers back to fleet efficiency. We have talked in the past about the short order cycle for containers, which is just a few months, and 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.

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

Thank you, John. On Page 7, we have presented our consolidated financial results. Adjusted net income from 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 1.4% from the second quarter. These strong results represent an annualized return on equity of 27.5%.

On Page 8, I'll discuss the drivers of our strong profitability. Our third quarter performance reflects the durable enhancements we have made to our business over the last 2 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 revenue-earning assets are up nearly 6% over the prior year's third quarter, reflecting last year's strong investment in the fourth quarter.

Average utilization declined 0.3% in the third quarter, but remain 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 2.7%. The impact of rising interest rates has largely been mitigated by our well-structured debt portfolio, which is 86% fixed or hedged to fixed.

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 supplied the vast majority of our significant container investment over the last 2 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 and disposal gains, totaling $30.1 million for the third quarter. The decrease from the exceptional levels in the second quarter is 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 7.1 million shares, or 11% of our shares outstanding at year-end, all while reducing our leverage. And in support of the share repurchase activity, we have once again increased our share repurchase authorization back to $200 million.

Page 9 highlights the durable enhancements we have made to our business over the last 2 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 expiration of the contract. And if we include the usual time it takes for a customer to redeliver containers after a lease expires, the 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.

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 $0.70 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 do 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, while keeping our leverage ratio constant. Alternatively, if we focus on share repurchases, like we are now, we could repurchase over 15% of our shares at their current trading range. If we wanted 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 while holding our leverage ratio steady.

Revenue-earning assets per share have increased from $127 per share as of December 30, 2020, to $193 per share as of September 30, 2022, an increase of more than 50% across 2 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.

Slide 11 looks at how Triton has created long-term value. Triton is the scale, cost and capability leader in a 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 regularly return cash to shareholders. At the time of TAL's IPO in 2005, TAL 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 have also paid out over $30 per share in dividends.

And as you can see in the lower-right, our total shareholder return since our 2005 IPO is over 14% per year, 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 continue to normalize. Most of the variability in this expected range is driven by uncertainty around how quickly 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. I 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.

We'll now open up the call for questions.

Today's first question comes from Ken Hoexter, with Bank of America.

Brian, John and team, John, maybe thoughts on the returning boxes 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 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 2 different cases.

Sure. Thanks, Ken. Certainly, as you know, there's a large order book for vessels, the largest it's been in -- probably the largest it's ever been in terms of absolute order book size and the largest it's been 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 is 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 so our customers in 2021, when vessels were short and capacity was tight, they put in a lot of orders, and that's going to probably act as some kind of overhang on the freight markets for a while, especially now that growth has slowed and the bottlenecks has started to ease.

For containers, one of the great things that makes our market resilient is just that the order cycle is very short, typically a couple of months of lead time, even when the market is really strong like it was in 2021. And so as we showed in one of our charts, the ordering volume for containers has already started to come down quite significantly.

And then, similarly, the life of the container is shorter than the life of a vessel. And so we typically see on the container side something between 4%, 5% or 6% of containers exiting the market each year as the containers age out of service, where the I think vessels are operated, on average, 25 years or longer. And so a much slower adjustment in terms of supply leaving the market as well.

I think some people look at 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, say, a primary-order effect. Typically, trade volumes are what drive the need for containers, as opposed to vessel slots driving container need.

But that said, we do believe there's indirect effects of this large order book that are supportive for our demand. Just 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 it tends to weigh on freight rates when you have a large order book like that, which we think, again, makes customers more careful about how you allocate their cash flow and profitability and tends to be supportive of leasing.

So overall, we do see our market adjusting pretty quickly to changes in supply and demand and 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 in 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, so 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 or waiting to discharge is still significantly higher than it was before pandemic.

And so we do think that's 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 were. And so we think even if the bottlenecks start to ease from the 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.

And then Brian, I guess just my follow-up. Just the percentage, maybe talk about that 5% to 10% sequential decline on EPS. To clarify, that was sequential decline, right?

Right.

And then maybe your exposure on what can make that move anymore, right? I mean, is that just used boxes? It seems like if we're down to $2,200 for a new box, you're kind of back to normal levels and your amount that you've got tied in on lifetime leases and last year's kind of full lifecycle leases, 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?

Sure. Maybe I'll hit a few of those things. So first, yes, the 5% to 10% was a sequential change from Q3 to our expected results in Q4. Most of that sort of difference between that 5% and 10% really is driven by uncertainty just around how quickly used container sale prices normalize. We mentioned that new container prices, I'd say, right around now are pretty close to their historical long-term average. Same thing for new container leasing rates.

So 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 disposal gains. And it's, again, some question of how quickly that happens.

We typically think of our performance in 2 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 the disposals. The disposals has more -- adjust 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 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 mention that the $8 million balanced out the $8 million? I just want to make sure I got those 2 numbers right. It was $8.6 million?

Yes, that's right. $8.1 million [on] the reserve, and $8.2 million on the recovery from an old customer.

And our next question today comes from Larry Solow, with CJS Securities.

Just first off, John, I think this might be your last public call. So I wish you best of luck in future endeavors.

Just, I guess, a follow-up just on the question on the direction of earnings for the quarter. And I know you guys are not ready to give and don't normally give full year guidance anyhow, but your commentary and a lot of your slides kind of do sort of support your 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 2, with your pretty high, like you said, long-duration leases. Very few -- a modest amount of containers coming off lease and a lot of them on for-hire for the long term. In combination with several levers you have, including your share buybacks, right? You bought back 10% of your shares year-to-date. So from a high level, do you expect us to -- even in a kind of goalpost best-case, worst-case scenario, where things could shake out over the next couple of years, if you can.

Sure. So as you know, we don't like to give full year guidance, but certainly understand the need for some direction.

So just talking about to Ken's question, we do think that the leasing margin part of our financial performance, that changes slowly. And we believe we've locked that number in at a high level for a long time because of the structure of the lease portfolio. Just the large number of containers that we have that are locked away and, again, the fact that we've locked away a lot, most of our debt on long-duration fixed-rate financings. And so to some extent, we kind of mathematically locked in this high spread between our leasing revenue and our ownership costs that we think will continue to drive very strong performance on the leasing margin.

Again, the gain on sale element is more variable and I think is still subject to some more quick adjustment. And as we've mentioned a few times, the sale prices for used equipment are still historically very high. And so if they normalize towards long-term averages, there's 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. We talked a couple of times about our utilization and sale prices normalizing. And so we do think that over the next few quarters, those 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.

We think 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 there's a lot of tension there. And as that normalization, if and when it starts to slow, the power of the EPS starts -- 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 into the longer term.

Okay. Great. I just have just a macro question. And again, you guys, like you said, showed a lot of -- you have a lot of protection in your portfolio. But a question we get is, is there excess capacity in containers in the system? Obviously, there's a lot of inefficiencies in the last couple of years, half-empty containers. Trade is certainly -- the economy certainly looks like we're going to have a slower period, a recession, whatever you want to call it, I don't think it really matters, for at least the next couple of quarters, if not longer. But I realize there's also some offset, 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'd rather lease than own, too. So do you feel like -- and I remember, I think you showed a slide last year at your Analyst Day, like, the last 5 years, growth has only been a little bit above sort of the 15-year growth in the last 5 years of containers. But do you feel like there is a lot of excess capacity in the system? Or do you feel like we're -- 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 have a crazy amount of excess.

So definitely, it's something we look at closely and we're trying to figure out all the time. A lot of containers were 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 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 nontraditional companies that were buying containers really for one use, of capturing a high freight rate coming from Asia to the U.S. or Europe and then selling the container on arrival. And 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%, say, rough guess of what the excess container fleet growth was, we don't believe all of that is sort of "excess." Part of it is because we do think the bottlenecks that I was talking about earlier are likely to last 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 line as where they used to operate with their container fleets. More focus on resiliency, a little less focus on efficiency.

And so some portion of that likely needs to be worked out over time to get back to, say, more balanced container supply and demand.

Our market, as I said, usually adjusts 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, 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, usually there's some trade growth, which sort of helps you grow into supply as well.

Our view of all that, putting it together, is we think that it's likely the next few quarters are relatively soft for container activity. We expect more off-hires than on-hires from now through the rest of the year, through the first quarter. It's the slow season for container shipping. I think also there's a lot of economic uncertainty that's keeping ordering levels for retailers and manufacturers tight.

And I think 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, our guess is it stays pretty low. It's going to be driven by what happens to trade growth, which will depend on the economy, of course. And we'll just have to see what our customers, how they see the market shaping up, too.

But again, it's a pretty quick adjustment process normally for us. Across the variety of ups and downs in the economy we've faced over the last 20, 25 years, usually it's something between a couple of quarters and 5, 6 quarters where we see it takes containers to adjust to an oversupply period.

Our next question today comes from Liam Burke, of B. Riley Securities.

This is actually Nick Giles calling in to ask a question on behalf of Liam. I believe you touched a little bit on this earlier, but could you give a little more color just on why operating expenses were kind of notably higher year-over-year despite the utilization of over 90%?

Sure. It just depends on where you're coming from. And so the biggest operating expense we typically have is container storage expenses, 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 100% utilization, and we had a very low container sale inventory as well, that anything we had was getting sold very quickly. And so the storage component of the operating expenses was as close to 0 as you can get. And so the expenses were driven by other things, the 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 even though, again, activity is well under control, the change from very few container drop-offs, because customers just needed all the containers they had, and then very few containers in storage, for the same reason, the sort of more normal levels of activity is what's driving the change there.

Got it. Got it. Super helpful. And just to follow up there, as kind of this container demand starts to normalize, do you expect future contracts to potentially have a shorter duration?

So we look at, I guess, 2 different types of leasing that we do. One is what's the sort of typical structure for our new containers that we're buying and leasing out the first time, and then what's happening with our lease extension discussions as those kind of first leases expire and what's happening with the depot containers we're 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 when leases are expiring or when we get customers to pick up used equipment from our depot.

There's a lot of reasons why it makes sense to do that. For us, obviously, it reduces 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, where leasing markets are very location specific. And so 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 the market normalizing. I think if you look back to the very strong investment markets in 2017 and '18, although container prices were in a normal place at that time, I think the average duration of the leases we were doing for new containers was probably in the range of 7 years.

That gapped out to 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 went way outside of their normal historical range for prices. We don't assume that that's going to be true 7 or 8 years from now. And so if we were 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 of not having to drive lease rates to truly extraordinary levels. And so we sort of spread that premium over longer durations. That was one of the primary drivers for that as well as just, again, our interest in taking advantage of a strong leasing market to secure long duration.

But as container prices have come down, we do think we'll see the 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 5-year deals out there, 7-year deals out there, 8 years, 10 years. It will be really dependent on what the customer prefers.

Great. Great. I appreciate all the detail. And maybe just one last one for me. As utilization rates remain at historically high levels here, I guess, put simply, do you expect them to settle in above past averages?

So we typically do. What we look at in our portfolio is what's the portion of the fleet that's locked away on long-term or finance lease as sort of our, that's the floor for utilization analysis, and then what's the utilization of the portion of the container fleet that's not locked in a long-term or 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 locked away from high 60s to low 70s, where it was over the last 5 or 10 years, up to now mid- to upper-70s, into the 80%'s, that floor utilization has increased by that percentage change as well as then we think the other portion of the 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 it's locked away on lifecycle lease.

And our next question today comes from Michael Brown, at KBW.

John, congrats and best of luck to you. 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 now. So really just a transformation of the business post COVID here. And the financial strength of your customers is still very strong, but the market conditions are much tougher and they could remain that way for some time.

So how should 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 approach to credit? And what are you kind of monitoring today? And then I guess, finally, is there -- how bulletproof are 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?

Sure. So maybe just start with the credit piece first. And in general, we've honestly never felt better about the credit profile of our customer base and our lease portfolio. The vast majority of our containers that we have on lease are on-hire to the top 10 shipping lines in the world. And even within that, the large majority are on-hire to the top 5, 7 shipping lines.

And as we've seen over the last few years, 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 negative net debt position; so had more cash on the balance sheets than debt. And obviously, that's, from a credit standpoint, a good look for us.

One of the things that we've done, just to put it in context, is to think about what's been the excess profitability of the shipping lines, say, from Q4 of 2020 through Q2, Q3 of 2022 and how does that excess profitability compare to the maximum amount of money that the shipping industry was losing in its most challenging years: the financial crisis, 2015-16.

And what we see, and again, I haven't looked at this in a while, so don't quote me on it, but the amount of excess profitability was something in the range of 10x greater. The cumulative excess profitability was something in the range of 10x greater than the maximum annual losses the industry had ever taken.

And so to some extent, they're spending cash on some other things, but there can be a decade of extremely challenging results and the balance sheets should just get into the same place where they were before the pandemic began. And so that's not -- of course there's some cash leakage for other investments and so on or for returns of capital. But generally speaking, just the magnitude of the excess profitability and the balance sheet improvement is just truly extraordinary. And so it has us feeling very comfortable about the vast, vast majority 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, they 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.

And so we have to support not just our best and strongest customers when the market is strong. We do have to provide some support to the whole range of customers we have. And so we're 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 small number went to 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. And generally speaking, we feel really good about the credit place where we are. And again, it would take a heck of a lot more, in our opinion, than a couple of challenging years to undo the good work that the shipping lines have done with their credit profiles.

In terms of the lease structures themselves, typically, there's no, or almost no -- well I should say no, no opportunity outs for customers to say, "Hey, we don't need the containers anymore," or the market has changed or some act of God or something. The leases are very simple. Customers keep containers for a certain amount of time, and they pay us certain dollars for those containers. And there's 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. The contracts themselves are very well written. And so we, again, feel very secure in the duration of our lease portfolio on revenue.

Okay. Brian, that's a lot of really great color. And then can you just share with us your latest view on the capital allocation front, I guess, specifically the capital return here? So clearly, an impressive amount of share buybacks this quarter. And it sounds like the CapEx opportunities will continue to be relatively soft. So is this a decent expectation for a pace of share buybacks? And is there any other levers that you might consider here? It seems like you're quite mindful of the leverage levels, but I guess the other major opportunity could be on the M&A front. Is there anything in this space right now that could be interesting for inorganic growth at this time?

So maybe I'll just take it in pieces. So I think right now, and as we saw last quarter, right now our focus remains on share buybacks. We see, we think, a great investment opportunity for Triton and our investors to buy back shares at the current price. There's very low multiples of earnings and cash flow. And we always think of it as just a way we're 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 ways, we've bought lots of containers, too, but they're 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 it's one reason I pointed out in the charts just the very strong growth in our 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 we allocate our cash flow. And we are mindful. It's one of the core things that we find 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 our very significant dividend.

In terms of M&A activity, we're a believer in sort of just the basic industrial benefits of M&A in our space. We got a lot of advantages from our 2016 merger between TAL and Triton. It drove cost efficiency. It drove a 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 since.

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. Part of that discipline, I think, comes from our hardheadedness and 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 it's a high bar sometimes to meet, but we certainly do believe in M&A and would look as things come available.

And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn it back over to the management team for any final remarks.

Well, thank you very much. I just want to again thank our investors and others for their 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.