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Triton International Limited (TRTN) Q4 2020 Earnings Call Transcript

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Triton International Limited (NYSE: TRTN)
Q4 2020 Earnings Call
Feb 16, 2021, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Triton International Limited Fourth Quarter 2020 Earnings Release Conference Call. [Operator Instructions] Please note, today's event is being recorded.

I would now like to turn the conference over to John Burns. Please go ahead, sir.

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John Burns -- Chief Financial Officer

Thank you, Malcom. Good morning and thank you for joining us on today's call. We are here to discuss Triton's fourth quarter and full year 2020 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 would like to note that our prepared remarks will follow along the presentation that can be found in the Investors section of our website under Investor Presentations.

I would 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 those 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 will now turn the call over to Brian.

Brian Sondey -- Chairman and Chief Executive Officer

Thanks, John, and welcome to Triton International's fourth quarter 2020 earnings conference call. I'll start with Slide 3 of our presentation.

Triton's outstanding results in the fourth quarter of 2020 provided a fantastic finish to a remarkable year. In the fourth quarter, we generated $1.70 of adjusted net income per share, an increase of almost 50% from the third quarter and we achieved an annualized return on equity of 22.9%.

For the full year of 2020, we generated adjusted EPS of $4.61 and achieved an adjusted return on equity at 15.9%. We did not anticipate having the opportunity to achieve this level of performance when the pandemic initially took hold. It's of course been a tragic and difficult time, but the changes in consumer spending patterns caused by the pandemic have led to a surge in trade and very strong demand for containers.

We are pleased to have the opportunity to work closely with our customers to keep global supply chains functioning, and we're very proud of the way the Triton team has executed seamlessly through all the challenges and disruptions created by the pandemic.

In 2020, Triton demonstrated the resilience of our business and our discipline and agility with capital management. Our financial performance held up very well in the first half of the year, while trade volumes were hit hard by the initial COVID lockdowns and we focused our investment on share repurchases during this time.

We then achieved exceptional operational and financial performance in the second half of the year, as trade volume surged. We drove record levels of containers on hire, boosting our utilization to almost 99% by the end of the year. We also quickly pivoted our investment focus to aggressive fleet growth. We accepted $550 million of containers in the fourth quarter, and we are on pace for a record level of fleet investment in 2021.

Market conditions remained very strong, and we are carrying significant momentum. Trade volumes remain well above pre-pandemic levels and the supply of containers is tight. Our utilization is close to the maximum level. And we have almost 600,000 TEU of new containers booked for pickup in 2021.

We expect our adjusted EPS will hold steady or increase slightly in the first quarter from the record level achieved in the fourth quarter of 2020, and we expect our profitability will remain at a high level throughout 2021.

We expect the business and financial benefits from the current strong market will be durable. We have placed large numbers of containers on to well-priced long duration leases. We have expanded our leasing margins with attractive financing activity, and we have further secured our position as the go-to supplier in our industry.

I want to hand the call over to John O'Callaghan, our global Head of Marketing and Operations.

John O'Callaghan -- Executive Vice President, Global Head of Field Marketing and Operations

Thank you, Brian. Turning to Slide 4 and the current market overview. Trade volumes have remained exceptionally strong and continue to be boosted by consumers shifting from services to goods. The lines continue to face shortages in own ship capacity to meet this demand and have relied heavily on the lease companies for their containers.

The availability of containers remains limited. The depot container inventory has been completely absorbed, driving utilization to record levels. In addition, new production inventory remains low despite manufacturers increasing production, leading to a jump in container prices as well as market lease rates.

Triton has secured sizable bookings, servicing those shipping line requirements due to our extensive supply capability. We have booked over 1.3 million TEUs since July 2020, capturing in excess of 35% of the lease market share. In addition to securing a sizable share, the average duration of new production business is over 10 years, with an expected lifetime ROE in the upper teens and a large percentage of the used depot containers have been locked into life cycle leases.

The pace of magnitude of the volumes required to meet demand has also increased sales demand to record levels and used container disposal prices continue to strengthen as there are limited containers available for sale.

Slide 5 illustrates the strength of trade driven by the shift in consumer spending from services to goods and also that cargo volumes have continued to remain above pre-pandemic levels since July 2020. The bottom left chart gives us some indication that there may be room for this to run. Inventories are still below where they were at pre-pandemic levels in the ratio of inventories to sales. It's evident the goods are not piling up on the shelves, but continue to find a way to consumers. Those goods continue to drive as quickly as they come in. You can see the strong growth levels on the chart on the right.

As the market contracted hard in the first half of 2020, it then recovered very quickly and was back to normal levels by July, pushing into very strong levels of growth in the second half of 2020. We think this will at least push into the second quarter of 2021. We continue to hear from our customers that the numbers are strong and trade volumes are currently constrained by container and vessel capacity rather than demand.

All of this trade, in addition to creating demand for containers, has continued to create a range of logistical challenges for our customers with a decrease in turn times, boosting demand for further containers.

Slide 6 shows that Triton's key operating metrics reflect a strong market and are pushing up even further than we predicted. This can clearly be seen in the top left chart, with utilization at near maximum levels. We have booked 1.3 million TEUs since July, with a little more than half picked up in 2020, including almost all of our available used containers, and we have 600,000 TEU of new containers to be picked up in the first half of 2021.

Over 75% of Triton's used containers have gone into life cycle leases. These sites of used containers are now slowing as we bump up against full utilization and our last depot units go on lease.

The bottom chart demonstrate the significant bookings of new and used dry containers over the last seven months. On the bottom right chart, looking to the extreme right bar under What's Current, we only have limited dry depot units remaining uncommitted. The lower left is a chart showing new leasing transactions by quarter. The bubbles represent a significant amount of new production that has been placed on lease over the last seven months. These leases have an average duration of 10 years. The chart also illustrates the increase in market lease rates as container prices jumped to meet demand.

Slide 7 explains that container supply remains very tight despite factory production ramping up. The chart on the right shows factory production by quarter from the beginning of 2019. It's worth observing two things. Leasing is making up the vast majority of purchases. And for a period of 12 months, production was below replacement. In addition, shipping line container fleet contracted as customers took action to tighten costs through 2019 and look to gain efficiencies to offset revenue pressure. This helps explain in part what has contributed to the shortfall.

As production has ramped up, it's mainly lease companies buying; and as traders surged, customers have depended on leasing companies to add containers to their fleet quickly and efficiently. The production in second quarter is likely to be even higher, and the lines are continuing to rely on leasing companies for that supply.

You can see that the factories have really boosted production in response to higher demand over the last six months and are projected to do the same for the remainder of the first half of 2021.

Despite this high level of production, you can see low levels of available factory inventory on the bottom left chart. These are orders by shipping lines and leasing companies combined. What's sitting on the ground is very small, roughly representing two to three weeks of production supply only.

Slide 8 helps illustrate why vessel space and container shortages are driving freight rates and container prices to record levels. Trade volumes have been restrained by the lack of container and vessel capacity, pushing up freight rates and container prices.

You can see in the upper right chart that new container prices are in the range of $3,500, the highest I can remember. The bottom right chart illustrates that the sale of used containers increased steadily throughout the quarter. The shortage of available sales containers led to week-on-week price increases as inventory was depleted.

The chart on the left illustrates the Transpacific and East West spot freight rates relative to bunker costs. And this also perfectly encapsulates where we are at this point in time with container shortages as well as the lack of ship capacity, pushing container prices and rates to unprecedented levels.

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

John Burns -- Chief Financial Officer

Thank you, John. Turning to Page 9. On this page, we have presented our consolidated financial results. Adjusted net income for the fourth quarter was $114.7 million or $1.70 per share, an increase of nearly 50% from the third quarter. And we finished the full year of 2020 with adjusted net income of $319.9 million or $4.61 per share. These exceptional results represent a return on equity of 22.9% for the fourth quarter and 15.9% for the full year.

Turning to Page 10. Our results in the fourth quarter reflect the benefits of the surge in container demand during the second half of the year, which generated strong leasing demand and exceptional disposal gains. Though our fleet growth was limited for the full year, when the lease demand jumped in the second half of the year, we pivoted and aggressively ramped up our capex, accepting almost $550 million of containers in the fourth quarter.

Average utilization increased 2% in the fourth quarter to average 98.1%. And the year-end utilization was 98.9%. The increase in utilization drove down direct operating expenses by $11.2 million from the third quarter, largely due to lower container storage and repair expenses. And the container shortage and high new container prices drove a sharp increase in container disposal prices, resulting in $25.4 million of gains on sale and trading margins, a jump of nearly $11 million over the third quarter. We had not anticipated this rapid increase in disposal prices and related jump in disposal gains.

In 2020, our shipping line customers managed the rapid swings in trade volumes caused by the pandemic, by managing vessel supply better than they have in prior periods. This supply discipline led to strong profitability for the year and may indicate long-term financial stability for them and a reduction in our overall credit risk.

We repurchased 1.4 million shares of our outstanding shares during the fourth quarter, reducing our average diluted share count by 1.5% from the third quarter. And for all of 2020, we repurchased 5.1 million shares at an average price of $30.85, reducing our average outstanding shares by 7.2% compared to the prior year.

Turning to Page 11. On this page, we highlight our strong balance sheet, significant liquidity and our well-structured debt profile. Our key leverage metric is net debt as a percentage of revenue earning assets. This metric was 69% at year-end, well below our historic levels. In addition to our low leverage, we have significant liquidity as shown on the table on the top right.

We also continue to maintain a simple capital structure, which you can see on the bottom left, made up of common equity, a small slice of fixed rate perpetual preferred shares and the balance is senior secured debt.

The current cost of our debt is competitive, with an average effective interest rate in the fourth quarter of 3.4%. And we issued $500 million of ABS notes in January this year, and a yield of roughly 1.7%. On the bottom right graph, we show that we have no significant maturity cliffs in our debt portfolio, enabling us to meet our obligations from our cash flow, which is shown by the blue line, without the need for refinancing for several years.

Turning to Page 12. This page highlights how we've been able to use our strong cash flow to create significant long-term value for shareholders. The graph on the top left shows our cash flow before capital spending. And you can see the resiliency of our cash flows across market cycles, and you can see the strength of our current cash flows in the annualized fourth quarter figure.

The graph on the bottom left shows how our stable cash flows, together with the short order cycle for containers enables us to maintain our leverage in a steady range over the long term.

As John noted, we continue to invest aggressively in new containers, with $1.7 billion of containers already ordered for delivery through June. This volume alone would lead to over 10% asset growth. And with our strong current cash flows, we could support significant further investment in growth this year without a meaningful change in our leverage.

The graph on the right demonstrates how these strong cash flows and our financial stability have enabled us to create significant shareholder value by steadily growing the book value of the business, while paying a substantial dividend.

I'll now return you to Brian for some additional comments.

Brian Sondey -- Chairman and Chief Executive Officer

Thanks, John. Slide 13 shows how Triton has consistently created value for shareholders by nimbly shifting our strategic and capital allocation focus. Over the last five years, we've experienced a wide range of market conditions. But Triton has been successful throughout this time and created value for our shareholders in a variety of ways.

In 2016, trade volumes and container demand were impacted by a global industrial recession. We executed well in this challenging environment, but our main strategic focus was structuring and closing the Triton and TAL merger. This merger generated substantial cost savings and created the clear scale, cost and capability leader in this industry. Our shareholders continue to benefit from this merger through our steady outperformance.

Global trade and container demand rebounded strongly in 2017 and 2018, and we shifted our focus to fleet growth. We estimate we won roughly 40% of new leasing transactions over this time and grew our fleet over 20% across these two years.

Trade growth was weak in 2019 due to the global trade dispute, and trade volumes were down sharply in the first part of 2020 due to the initial COVID lockdowns. We dialed back on capital spending over this time but aggressively repurchased shares at attractive levels.

With the recent surge in container demand, we have now shifted our focus back to aggressive fleet growth, and we are on pace for a record year of container investment. It's also important to note that we paid over $10 per share in dividends during this time and reduced our leverage.

I'll now finish the presentation with Slide 14. 2020 was a remarkable year for Triton. We performed well for the challenging first half of the year and created meaningful value for shareholders through share repurchases. We drove our operating and financial performance to record levels in the second half as we experienced a surge in container demand, and we quickly pivoted our investment focus to growth. We provided large, critically needed container solutions for our customers. And we once again demonstrated the business and financial advantages of our market leadership and disciplined capital allocation.

We expect the benefits of the current straw market will be durable. We have locked away large numbers of containers on long-duration, high-value leases. We've expanded our leasing margins with attractive financing activity, and we have further secured our position as the go-to supplier in our industry.

Triton has started 2021 with significant operating and financial momentum. Market conditions remain very strong. Our critical operating metrics are at high levels. And we have already secured a substantial volume of attractive new container lease transactions.

We expect our adjusted EPS in the first quarter will hold fairly steady or increase slightly from the record level we achieved in the fourth quarter of 2020. And we expect our profitability will remain strong throughout the year.

I will now open up the call for any questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Today's first question comes from Ken Hoexter with Bank of America. Please go ahead.

Ken Hoexter -- Bank of America -- Analyst

Hey, great. Good morning. So Brian, just a phenomenal result and congrats on a great year and shifting to the growth. But let me just ask you this, I don't know if this is for you or John. But it looked like lease rates were a little bit soft in the fourth quarter. The annual lease yields declined, it looked like, sequentially. Is that because you're shifting on the longer-term lease rates in order to lock in longer terms? Or maybe you can just talk about the environment, and it sounds like your outlook remains even more robust going into '21 and talk about that a bit.

Brian Sondey -- Chairman and Chief Executive Officer

No, it's interesting, Ken. It's something -- we actually didn't see that in the fourth quarter. My guess is, and it's a calculation, I'll take a look at, is perhaps the container acceptances that we made were back-ended in the quarter or something so that the average containers in our fleet are certainly the average number on hire. We're less than maybe it looked like if you just take maybe the quarter end number.

But as John O'Callaghan noted in his discussion, market lease rates are up significantly. And one of the interesting things to note about the bubble chart that we show there, as you can see that the lease deals that we're doing are well above where they had been in the previous strong cycle in 2017 and '18. But actually, the average duration of the leases is probably four or five years longer, which is -- so the apples-to-apples rates are even higher relative to those prior periods.

So again, I'll have to sort of look at the mathematical quirk that may be giving that impression. But generally speaking, lease rates are very strong.

Ken Hoexter -- Bank of America -- Analyst

Okay. And how do you -- I mean, you've been very good at understanding the cycles and figuring out when to buy. And so, I want to dig into that a bit. I mean, just given how tight it is now, but John also mentioned the shift that you've seen in a shift to goods from services. So it's just so good right now when you're getting these phenomenal 10-year leases, which is great to lock in long term. How do you understand to not overbuy into an upswing period? Or how do you see this cycle lasting longer?

Brian Sondey -- Chairman and Chief Executive Officer

Sure. So as you point out, it's -- certainly, it's a strong and somewhat unexpected -- unexpectedly strong time right now and driven by things that just kind of fundamental changes in consumer behavior, I think, because of the pandemic. And I think now that's also compounded by some logistical challenges created for the shipping lines as they try to get containers offloaded from their vessels and moved inland just due to the same challenges, just the volume of goods, but also, I think, lower workforces on the terminals and in trucking because of the pandemic.

We're constantly talking with our customers to get their assessment on how long market conditions are likely to remain very strong. What we're being told right now is that the market right now is really being limited more by capacity than demand. And so that creates some of its own natural momentum as containers that are -- or load that can't be moved now will have to move later.

We're hearing from our customers that they expect conditions to remain strong into the second quarter. I think beyond that, it's not that they expect conditions to necessarily weaken. It's just it gets less predictable. But I think because this is unusual things that are driving demand, it's a little bit even more difficult to anticipate how it changes. But as I think, you know, as we get through the second quarter into the third quarter, that typically is the peak season for shipping where goods that are going to make it onto the shelves in Europe and the U.S. for Christmas have to start moving. And so again, our view generally is that the market feels pretty good for 2021.

I think, as you know, we try to be very careful in managing our inventory of new containers. That one of the benefits of this business is that you order containers typically with only a few months of lead time. That's lengthened a little bit this year because of the strength of demand, and so we purchased containers through June. But that said, the amount of uncommitted containers that we have are very small portion of our overall spend so far this year.

So certainly, it's not without risk. We do have containers that we purchased at high values that are waiting to go on lease to customers. That's why customers use us. But that said, it's a very small portion of our container fleet at any time. It's not locked away, either on lease or waiting to be picked up on the lease.

Ken Hoexter -- Bank of America -- Analyst

So just a quick follow-up on that, just so I understand it. Do you see a shift of adding more contract business to your pre-buying of containers? Or is that just a feature of the market you'll still look to take that risk of ordering the containers going forward?

Brian Sondey -- Chairman and Chief Executive Officer

Yes. So I'd say our basic business model has not changed, that we buy containers from the factories and have them ready for customers to commit to them. So we're always taking some level of inventory risk. I think what's strange really just is the pace of activity, that the shipping lines are scrambling to grow the size of their container fleets because they're being limited on volumes right now because of a lack of equipment. And we've been scrambling to place orders, and to some extent, it's been a race between our ability to order and our demand from our customers. But again, the basic business model of us buying equipment to have ready availability for customers hasn't changed.

Ken Hoexter -- Bank of America -- Analyst

Great. Brian, John, John, thank you very much for the time. That's great quarter.

Brian Sondey -- Chairman and Chief Executive Officer

Thank you, Ken.

Operator

And our next question comes from Michael Brown with KBW. Please go ahead.

Michael Brown -- KBW -- Analyst

Hey, good morning, guys.

Brian Sondey -- Chairman and Chief Executive Officer

Good morning.

Michael Brown -- KBW -- Analyst

So Brian, I wanted to start with maybe the cadence of how these containers will come on and how we should think about the leasing revenue growth from here. It's just when I've been modeling this out the last two quarters, I think I've kind of mismodeled when the new bookings start to kind of hit their full revenue ramp. And so you obviously had a very active fourth quarter and it sounds like some of that came in toward the end of the quarter based on your comment that you just made. But you clearly have a lot coming on in the first half here. But I was hoping you could just give a little more color about that -- the 600,000 containers, when those are kind of expected to start to ramp up as we think about first quarter, second quarter and beyond?

Brian Sondey -- Chairman and Chief Executive Officer

Sure. So maybe I'll just provide a little perspective for maybe 2020, and then we can talk about 2021. So again, we'll take a look at the timing of containers coming in and just sort of perhaps quirk of the modeling that looks like rates went down. But I think if you just dial back to when we really started seeing the strength in the market, it was in July. And then we started ordering containers probably in earnest in August. And just given the timeline for container production, we probably started getting deliveries in high volumes, probably not much until October -- September, October. So -- and then monthly deliveries were growing month-on-month. And so, I think that's probably the issue that's leading to the modeling issue in Q4.

I'd say since probably January of 2021, the factories are producing at a high level of monthly production. And we probably expect a steadier delivery of containers and on-hire growth throughout 2021. Probably, it's still going to grow, probably second quarter relative to first quarter, but it will be a lot less ramped because the factory is already -- are producing at high volume for the beginning of this year.

Michael Brown -- KBW -- Analyst

Okay. That's helpful. And then just in the prepared remarks, you talked a little bit about how the shipping lines continue to really rely on the leasing companies here, which is obviously great to hear. But just curious if you could -- about that dynamic? And what causes them to kind of use you guys more versus looking to deploy kind of their own capex? I know they've got kind of a number of levers that they have to toggle between their own businesses. But I would just love to get some additional comments about that.

Brian Sondey -- Chairman and Chief Executive Officer

Sure. So I think basically, it's just the same reasons that they've used leasing companies in the past in the sense that leasing is an efficient way to add equipment to their fleets. Say relative to purchasing containers, they get much greater flexibility on how many containers to take and where to take them from. There's number of locations in China where containers are produced. Their container size types is more flexible when you lease and then just the pickup timing.

We maintain this ready inventory. And so it just cuts the time between knowing you need the container to the time you can actually get it rather than, say, placing your own orders.

And all of those things allow the shipping lines to operate fewer containers in their fleet. And generally speaking, that's why they use leasing.

And also, something we talked about at our Investor Day, is the extra cost of leasing relative to buying container, I think it's come way down that we finance our containers very efficiently. We use a higher percentage of debt to finance our containers than the shipping lines do, just due to the greater stability of our business model; and just the greater scale that we operate, certainly compared to our history. There's not a very high charge that gets put on top of the container for our operations because we operate such a large fleet.

So overall, I think it's just -- the shipping lines have, at least most of them, kind of crossed the bridge that using leasing to add equipment is just a sensible way to manage their container operations.

At this time right now, it is interesting, the shipping lines are doing very well financially, starting in the second half of this year and expecting to have really phenomenal, I think, first and second quarters because of the very high freight rates. But they continue to rely on leasing. And again, I think it just mainly reflects the fact that adding -- using leasing is a pretty sensible way for them to add equipment.

Michael Brown -- KBW -- Analyst

Okay, great. So it's not really any major change in the recent months here. Let me just sneak in maybe one more here. So as I think through your business, you're at maximum utilization rates. Your seeing -- expecting a record level of investments. You're seeing a pace that points toward that level at least. Leverage is at historically low levels, but production is still somewhat constrained here. So it seems like it's a -- it sounds like they probably want to lean in even more, if possible. So against that backdrop, how are you feeling about like consolidation here? Do you still see that as a potential opportunity or has that -- has your mindset kind of shifted at all here? Thanks.

Brian Sondey -- Chairman and Chief Executive Officer

Yes. So I think we're still believers in consolidation. I think we've talked many times about all the benefits we see ourselves getting from the TAL and Triton merger that we were able to put together in terms of cost savings, capability advantages, supply advantages to our customers, having a bigger fleet to draw from and simpler to work with one customer.

So I think, generally speaking, in terms of the strategy, we still see a consolidation is being interesting for us and very much remain interested in looking for opportunities. And I think just as you know, that really just depends on what opportunities become available and how they stack up financially. Do we think it's a good investment for our shareholders? And so from a strategy of consolidation, yes, we very much are interested, and it just comes down to the practical details and what opportunities present themselves.

Michael Brown -- KBW -- Analyst

Okay. Great. Thank you, Brian.

Operator

And our next question today comes from Larry Solow with CJS Securities. Please go ahead.

Larry Solow -- CJS Securities -- Analyst

Great. Thanks. Good morning, guys. Congratulations as well, and it's a very good year and an exceptional quarter. Just a couple of follow-ups. Just on the -- just from a high level, sequentially. I know you guys don't give guidance beyond the quarter. But just in terms of just looking at it from a high level on the revenue side. So I think it seems like your operating lease revenue, I guess, we should assume should bump up. I think you have, like you mentioned, 600,000 new TEUs coming online in 2021. I would assume that would bump up. And then maybe there's a little bit of -- a little bit of a drop on sales of used containers. I know you mentioned -- I got to imagine the supply of that will be dwindling, right, and what's in your hands. So -- and you had a little bit of a pop the last couple of quarters, I think, $8 million plus and the $10 million plus this quarter. So is that a good way to kind of view those two line items?

Brian Sondey -- Chairman and Chief Executive Officer

Yes, for sure. So you're right, there's going to be a lot of revenue strength coming from all the investments that we made. I think the easiest way to think about it, and I think John Burns mentioned it in his prepared remarks, that $1.7 billion that we've committed to be produced for us through June 30, that in alone would lead to about 10% asset growth for the year. And I think that -- if all else equal, that's pretty close to probably once we get that $1.7 billion delivered, 10% revenue growth, something like that. Again, all else equal, if nothing else in the business changes in terms of utilization or other things.

And I think, yes, certainly, in the short term, the biggest challenge will be likely to replicate the gains on disposal. Prices, as John O'Callaghan showed in his charts, are exceptionally strong right now because there's a lot of value to have a container, and there's not many around. And that pushed our gains up to very high levels in the fourth quarter. I think they'll be very high again in the first quarter. But at some point, yes, it's -- the inventory is getting quite small. And the customers -- typically, the inventory gets replenished as customers drop older containers. And just given the shortage of equipment, we're getting very few containers dropped off lease.

Larry Solow -- CJS Securities -- Analyst

Right. I guess that's a high-class problem, I guess, in the overall grand scheme of things, but absolutely. Yes. And then on the expense side, in terms of direct expenses, obviously, sequentially, it came down pretty nicely. Still about 6% of revenue. As we go forward, I think if we look back, historical peaks on utilization was running really high. I think it was even closer to 4%. Is there room for this to drop as we go out over time on a percentage basis?

Brian Sondey -- Chairman and Chief Executive Officer

I think what you'll see in the first quarter is that the fourth quarter utilization was up about two points during the quarter. And so, say, on average, was one point less than where it finished. And the easiest way to forecast direct operating expenses is to -- it's kind of an inverse of utilization. And so there should be some further benefit as we do think the utilization will remain virtually near peak, 99% range throughout the first quarter. After that, it really just depends what happens with utilization.

Larry Solow -- CJS Securities -- Analyst

Right. Okay. And then obviously, you're spending a lot more than you're investing. So I suppose, and you did announce a new $500 million ABS notes, I know, a few weeks ago. I'm not sure, I think a part of that maybe was funding some existing debt. But I suppose interest expense should start to creep up, they could go up a little bit as we look out?

John Burns -- Chief Financial Officer

Larry, John here. I would say our average effective rate will stay probably in the similar range or notched down a little bit. As you know, we did the $500 million in ABS, that was at 1.7%. And we do have about $1.6 billion of institutional notes, private placements that slowly wind down about $300 million per year. So as we refinance those, those are at about 4.5% to 4.6%. So as we refinance those at lower rates, we'll get a little bit of benefit from that, right?

Brian Sondey -- Chairman and Chief Executive Officer

So we expect, I think, a little further improvement in the average effective rate offset, I think, as you're pointing out by increasing debt associated with the -- all the containers that we're buying.

Larry Solow -- CJS Securities -- Analyst

Got it. Okay, great. Thanks. Appreciate it.

Operator

And our next question today comes from Dan Day with B. Riley Securities. Please go ahead.

Dan Day -- B. Riley Securities -- Analyst

Good morning, guys. Thanks for taking my questions and congrats on a really, really great quarter. It's great to see. Most of my questions have been asked, but I'll get a couple more in. Just on the gain on sale and leasing equipment here, it was really strong in fourth quarter. Obviously, you talked about it. Just -- is part of that due to, like, for example, increased demand for static storage, like the Amazons of the world looking to take delivery of these containers for storage? Is that kind of a factor here? And how strong the demand is for the used containers?

Brian Sondey -- Chairman and Chief Executive Officer

So we definitely are hearing from customers that cargo shippers are holding on to containers longer. And we've seen some interest in people like Amazons of the world to start maybe owning some of their own containers because they get charged by the shipping lines when they hold on to containers longer than they're supposed to. But frankly, I think the main thing that's driving containers is the fact that the shipping lines, our customers, are having a hard time getting them, so that some cargo movers are actually buying containers and then using those containers they purchased to move cargo and are finding that somehow it's a net lower price. And so, we're seeing the strongest prices and strongest demand in Asia where we think, again, the containers are primarily being used as a way around the container shortage.

Dan Day -- B. Riley Securities -- Analyst

And that $25 million in the quarter between the gain on sale and the trading margin, do you think that's the kind of sustainable number going forward, at least kind of through first quarter and then kind of tapering off after that?

Brian Sondey -- Chairman and Chief Executive Officer

We don't like to give too much guidance below or just maybe above EPS. But right now, it's a little difficult to predict. We're seeing prices continue to -- I think John O'Callaghan called it increase week by week, which is the case. And on the other hand, we're seeing very few containers coming back. And so there's just not much inventory to sell from. But -- so overall, I'd say we expect the gain to be at a high level, certainly very high relative to how many containers we're selling, but it's not so easy to predict just how the decreasing volume because of lower inventory, how that works against the rising prices and just how long this extreme shortage situation lasts. But overall, we expect to be selling for good gains for some time here.

Dan Day -- B. Riley Securities -- Analyst

Awesome. Thank you. And then just last one. Obviously, the focus here, probably through the first half of the year is going to be on capex, once the containers are in place and once the sort of capex spend starts to come down. As far as returning capital to shareholders, can you just maybe refresh us on how you're thinking of between buybacks and dividends? How much have been left on the repurchase authorization? And sort of what you look forward to balance the two?

Brian Sondey -- Chairman and Chief Executive Officer

Yes, sure. Actually, we tried to make the point in the presentation that we're nimble and try to be fairly thoughtful on how we allocate our cash flow. And one of the good things, of course, of having a performance like we're having is that we generate lots of cash. And so, we can actually do quite a few things with cash flow right now.

John Burns mentioned that we've already get invested for 10% growth through June 30. But of course, the year doesn't end in June 30, and we could actually continue to invest at a high level before we're going to move our leverage upward. So if we wanted to, we could do other things as well as buying containers at a pretty aggressive pace right now.

But I think in terms of what else we might consider, share repurchases, obviously, we look at that regularly. We've been active buyers a number of years here, and we'll continue to look at that relative to the attractiveness of other uses of our capital, including further growth, M&A or portfolio opportunities, increased dividends, etc. It's something we spend a lot of time on as a senior management team and with our Board. And again, we just will -- we've got lots of cash to use, and we'll try to make sure we continue to make good decisions about where to put it.

Dan Day -- B. Riley Securities -- Analyst

Awesome. Appreciate it. Thanks, again, for taking my questions. I'll turn it over.

Operator

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

Brian Sondey -- Chairman and Chief Executive Officer

Well, I'd just like to thank everyone again for your interest and attention for Triton, and we look forward to talking to you soon. Thank you very much.

Operator

[Operator Closing Remarks]

Duration: 43 minutes

Call participants:

John Burns -- Chief Financial Officer

Brian Sondey -- Chairman and Chief Executive Officer

John O'Callaghan -- Executive Vice President, Global Head of Field Marketing and Operations

Ken Hoexter -- Bank of America -- Analyst

Michael Brown -- KBW -- Analyst

Larry Solow -- CJS Securities -- Analyst

Dan Day -- B. Riley Securities -- Analyst

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