Michael Brown: I was looking at your EPS range for 2023, and just wanted to see if you could put a little bit more meat on the bone to help us understand what’s the difference between how you’re thinking about the lower bound and the upper bound, and what would cause you to maybe deliver results closer to the upper bound versus the lower bound? What should we think about there?
Brian Sondey: Yes, so I think mainly it’s just what happens to the market. I think if we were to be at the lower bound of our expectations, that just means that the market has evolved a little bit slower than we expected, that that supply-demand normalization took more time than we had hoped, and perhaps that new container prices fell to ranges below where we had expected, which can push used container prices down. In general, it just reflects probably a little more utilization pressure than we expect to see, that perhaps we don’t see any positive kind of seasonality as we move from the first to the second quarter for our utilization or sale results. I think that kind of tracks to the lower bound. The lower bound is pretty well protected by the leasing margin and the strength of the lease portfolio.
The quickest thing that adjusts downwards is the gain on sale, and the gain on sale was quite high in 2020, even through the fourth quarter – you know, sale prices held up very well, and we continue to expect that to normalize down. But as I pointed out in my prepared remarks, once we see the ratio of used prices and new prices get back into something of a normal range, we do expect that reduction to slow down. I guess perhaps the lower bound might also be defined, if that normalization doesn’t happen and sale prices go to be lower ratios than we typically are, which we don’t expect. The upper end of the bound is just the opposite of those things, that we see customers, their fleets stabilizing as we head towards the peak season. Perhaps we see an inventory restocking cycle in the U.S. that drives some trade volume, and we just see utilization stabilize better than we’d expected and maybe even start ticking upwards.
Typically when we do see container supply-demand back into balance, we can get our used equipment back on hire quickly, and so really it’s just–again, we’ve got a pretty good floor performance because of our lease portfolio, and again like to point out, as I did in the prepared remarks, that even that lower bound is something in the range of two times our pre-pandemic performance, and so we do expect to hang onto a lot of the benefits of our recent investments and lease portfolio improvements, and then up from there, really, just as the market improves.
Michael Brown: Okay, great, so you’ve got clearly some very different scenarios to consider. Thanks for giving us all that guidance and color. Brian, what have been some of your early observations after China’s reopening here? What are customers saying, and how has–what have you guys noticed in terms of how that has impacted containerized trade, if at all yet?
Brian Sondey: Yes, so I think the main thing I’d like to point is that for us, as a leasing company, what we really focus on is the head haul trade – that really is what drives the customers’ need for more equipment or perhaps if they have too much equipment, and so really what drives demand for our fleet is consumption in the U.S. and consumption in Europe, as opposed to economic activity in China or consumption there. Obviously there’s a connection – you know, there were certainly times in 2020 and ’21, and maybe a little bit early in ’22 when retailers and wholesalers in the U.S. and Europe couldn’t get everything they wanted, and so what was happening in China impacted trade volumes. The sense I have now is that with most–certainly I think retailers and so on being over-stocked in the U.S. and in Europe, that we haven’t seen a bump in trade volumes as China’s reopened on the head haul trades, which are, again, driven by consumption here.
Michael Brown: Okay, great. Thank you for taking my questions.
Operator: Our next question will come from Ken Hoexter with Bank of America. You may now go ahead.
Adam Roszkowski: Hey team, this is Adam Roszkowski on for Ken Hoexter. Thanks for taking my question. Just first off, could you, maybe Brian, just run through what percentage of boxes will expire this year and ’24, ’25, just to get a sense of the exposure to some of those rolling off?
Brian Sondey: Yes, sure. I think both Michael and John O’Callaghan referred to the fact that something like 88% of our container fleet as weighted by net book value is locked in on longer term leases, so just naturally there can’t be too much that’s expiring. What we tend to focus on when we think of expirations and market risk and earnings risk are the portion of the fleet that’s expiring that would have to be re-marketed. We find even when market conditions are tough, we usually generate gains on selling our used containers, and so we typically don’t look at that as providing too much exposure to challenges in any given year. We typically include, and it’s in this presentation, a chart showing what percentage of our fleet is expiring, or has already expired and that is expiring over the next few years in each of those years for equipment that we have to re-lease at the end of the current lease.
That’s Page 15 in the investor chart. What that shows is for our dry containers and reefers, something like a little under 2.5% of the fleet by CEU is already expired and needs to be re-marketed when it comes back to us, and then an additional little bit over 5% will expire during the course of 2023 – again, containers that are expiring and will still be leasing life and need to be re-marketed. In total, something in the range of 7% to 8% of our fleet is expiring off-lease this year or already expired and needs to be re-marketed. That is a very low number for us historically. Probably the last time we went into slower periods in the market in 2015 or 2019, those numbers were probably two to three times higher, and it’s one of the reasons why we look at the going forward and feel we’ve got very nice projections for profitability and returns even if market conditions remain challenging for some time.
Adam Roszkowski: Got it, thanks for that. Then maybe just on utilization, how should we think about sort of a floor level for utilization given the high mix of life cycle leases that you’ve built in here? Any thoughts around that?
Brian Sondey: Yes, so again, because of what you’re talking about, the life cycle leases and just what I was saying before, this very high percentage of containers locked away on multi-year leases, we do think the floor of utilization is going to be high. We include a lot of long term fixed in our operating deck, but you can see that that’s sort of, I say, a low point for utilization if you go back to some of the on previous years has been increasing from something–we got down to maybe 90% floor utilization in the financial crisis, perhaps 92, 93% in the industrial recession in 2015 and ’16, and it got down to maybe 95% during the trade war of 2019 and the COVID lockdowns in the first part of ’20. It’s been an increasing flow.
We’re hopeful that we’ll continue to see that increase and that will see our utilization bottom somewhere in the mid to upper 90s during this cycle. But again, we’ll have to see how things progress, and obviously if the cycle is somehow worse than prior cycles, that would offset some of the benefit of the improved lease portfolio, but overall we’re very confident that our performance–you know, our utilization, sort of our key leasing metrics will stay very strong because of the portfolio.
