Triton International Ltd (TRTN) 2017 Q3 法說會逐字稿

Good day, and welcome to the Triton International Limited Third Quarter 2017 Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to John Burns, Senior Vice President and CFO. Please go ahead.

Thank you. Good morning, and thank you for joining us on today's call. We are here to discuss Triton's third quarter 2017 results which were reported yesterday evening.

Joining me on this morning's call from Triton are Brian Sondey, CEO; and Simon Vernon, President. Before turning the call over to Brian, I would like to note that our prepared remarks will follow along with the presentation that can be found on the company's Presentation section of our website.

Would also like point out that this conference call may contain forward-looking statements as the term is defined under the Private Securities Litigation Reform Act of 1995. It is possible that the company's future financial performance may differ from expectations due to a variety of factors. Any forward-looking statements made on this call are based on certain assumptions and analysis made by the company that it believes are appropriate, and any such statements are not a guarantee of future performance, and actual results may vary materially from those projected.

Finally, the company's views, estimates, plans and outlook as described on this call may change subsequent to this discussion. The company is under no obligation to modify or update any or all of the statements that are made herein despite any subsequent changes. These statements involve risks and uncertainties, are only predictions and may differ materially from the actual future events or results. For a discussion of such risks and uncertainties, please see the Risk Factors located in the company's Annual Report filed on Form 10-K with the SEC on March 17, 2017.

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 2017 Earnings Conference Call. We have included a presentation to go along with this call, and I'll start with Slide 3.

Triton achieved excellent operating and financial performance this quarter. We generated $73 million of adjusted pretax income in the third quarter, an increase of 24% from the second quarter. The increase in our profitability was driven by strong growth in our leasing revenue due to increased utilization and our large share of new leasing transactions.

Market fundamentals remain favorable. Trade growth in 2017 has been higher than expected, leading to strong demand for containers. We've also benefited from an increased share for leasing. At the same time, container supply has been tight due to low production last year; reduced purchasing this year by many shipping lines and other leasing companies; and production disruptions, mainly driven by tighter environmental regulations in China. As a result, the container supply and demand balance has been strongly in our favor, and many of our operating metrics are historically high. Prices for new dry containers have also increased recently due to high steel prices in China.

Triton continued to win a large share of new leasing transactions in the third quarter. We have now invested $1.6 billion in containers for delivery in 2017, and we've already ordered over $100 million of container for delivery next year. We've been placing these containers on leases with attractive investment returns.

The leases are also well protected. The average duration for our new container leases this year is in the range of 7 years. And our containers are very well protected from logistical risks, with virtually all of the dry container leases we have done this year requiring all containers to be returned to Asian demand locations if the leases are not extended at expiration.

This high level of very profitable and well-protected investment is building a long tail of enhanced cash flow and profitability, and at the same time, it's strengthening our key customer relationships, as we've helped our customers access the containers they needed to take advantage of the high level of trade growth.

Triton raised $193 million by issuing 6.2 million shares in September. We have already invested $300 million since the offering and expect that we will continue to have sizable, attractive investment opportunities. We expect the capital raise will be accretive to earnings and equity cash flow when it's fully deployed.

Triton declared a dividend of $0.45 per share this quarter, as we continue to share our strong cash flow with investors.

I'll now hand the call over to Simon Vernon, who's joining the call from London.

Thanks, Brian. We will now look at the current environment and our performance over in the third quarter. The positive momentum that Brian has just talked about can be seen when looking at the next few slides.

Beginning with Slide 4, you can see containerized trade growth has continued to strengthen in 2017. This is providing support both for our customers in terms of better cargo growth and for us as more demand is created for both our depot stocks and new production inventories. Many of our customers are now reporting growth in the 6% range, with prospects remaining encouraging looking forward to 2018.

Steel costs increased during the third quarter, and this has kept pricing for 20-foot containers delivered in the third and in the early part of the fourth quarter in the $2,250 range, with a prospect that pricing for December and January delivery could increase slightly.

All container factories in China have now converted to waterborne paint application. And as expected, we have seen productivity impacted during this process. We're also expecting to see a period of closure for some factories in the lead up to Chinese New Year, as paint booths are converted to withstand the impact of the colder season, especially in North China.

As you can see from the bottom left-hand graph, dry container new production inventory at factory yards during the third quarter and the early part of the fourth has increased slightly. Both competitors and some shipping lines have recently become more active in placing new production orders again, and we expect this trend to continue into the new year.

However, the 400,000 TEU-plus that are currently in inventory still represents a small shelf of overall availability, as we move into what we believe will be a cargo rush period from China in the lead up to calendar year-end and then Chinese New Year. It is worth pointing out that this inventory of 400,000 TEU represents only just over 1% of the global fleet.

A good percentage of the leasing company stock shown are already committed to customers. The third quarter saw very strong absorption of new dry containers onto lease, and we will continue to see more activity in the fourth quarter, albeit at a lower velocity.

Just as importantly, as you can see in the bottom right-hand chart, we have also seen depot inventories in Asia for both us and our competition remain at some of the lowest levels we have ever seen, with many of the stocks already booked by our customers. Ongoing demand currently remains very strong, and we expect to see 2018 begin with little or no surplus container supply in the market.

Moving to Slide 5. We expect the positive momentum seen during the last few quarters to be maintained as we move deeper into the fourth quarter. Dry container pickup activity from the depots remained at near-record levels for the third quarter. And just as importantly, turn-ins continue to slow, as you can see in the bottom left-hand chart.

This shortage of containers in the market relative to demand has translated into much higher levels of utilization. Our overall fleet utilization is now approaching 98.25% and is still climbing, as you can see from the top left-hand chart.

We are also seeing improvements in refrigerated container performance, driven by the fact that there has been limited investment in new equipment in the sector over the last 18 months, and we are now well into what promises to be a strong season for reefers that usually lasts through May.

Our average lease rates in the fleet have been on a downward trend for 5 years now, but the very powerful turnaround in both market dynamics and market lease rate levels has helped to stabilize this trend over the last 3 quarters. As we move into the fourth quarter, we are seeing a meaningful rebound and average rates beginning to climb again. More positive signs should be seen as we get into 2018.

As we discussed during recent earnings calls, one of the main beneficiaries of this combination of stronger demand in the leasing side of our business, overall reduced supply and higher container prices has been our resell business. Average used dry container sale prices in the third quarter increased 8% from the second quarter of 2017 and 51% from the third quarter of 2016. We expect average dry container selling prices to increase further in the fourth quarter of 2017.

Slide 6 clearly shows the role that Triton has played in supplying and servicing our key shipping line customers during the last 15 months since our merger in July of last year.

Despite stronger-than-expected trade growth, overall investment in new containers remains modest for 2017, especially for the first 6 months of the year. New container orders have been limited by production constraints related to the conversion of container factories to waterborne paint application and the financial constraints at a number of our customers and competitors that have restricted their orders despite the acceleration of container demand.

Triton has filled the resulting supply gap by leveraging our unrivaled financial and operating resources to deploy over 750,000 TEU of new dry containers to our customers. During the third quarter alone, over 250,000 TEU of new dry containers were on-hire by our core customers. We calculate that this represents over 50% of the leasing share of the overall dry container new production market and over 30% of the overall market, including shipping line orders. As of today, we still have over 130,000 TEU of dry van new production committed to customers at the factories and waiting for pickup.

During this time, all of the main shipping lines have had significant requirements for new containers, and our customers have come to rely on Triton to provide valuable and unique service and supply. We estimate the lifetime equity returns for our dry van new production will be in the high teens to over 20%. These investment returns are well protected by lease terms ranging from 5 to 11 years and lease provisions that restrict future redeliveries to demand locations centered on China.

Slide 7 highlights some of the unique capability advantages that Triton International enjoys. We have 24 of our own dedicated offices in 15 different countries, ensuring extensive local marketing presence that both maintains very close relationships with all of our core customer base but also enables us to generate business with smaller lines who often have more restrictive requirements. We have leased all the container stocks from our depot network this year to a total of 244 customers across over 50 countries.

Another key advantage of our global footprint is our ability to work with many independent logistics providers who all have their own unique strengths and value propositions. By accessing these customers, we can leverage off their unique business models to efficiently and cost-effectively move both our leasing stocks of containers to better-demand markets and our sell units to locations where we can obtain better pricing. We have business relationships with over 130 different logistics providers and to date this year have concluded 47,000 containers on one-way moves.

Our global operations team, centrally and through our 24 offices, provide very close coverage of our extensive depot network to ensure that we provide the highest level of service and cost management to both ourselves and to our customers.

Equally, our dedicated in-house technical team provide on-site 24 hour a day coverage of quality control from new container production. The key is making sure that containers are built to our strict design specifications.

We have a leading team of container resell experts around the world, again, operating in all of our key locations. This enables us to access the full portfolio of potential customers, from the largest to the smallest. This year-to-date, we have maximized sale values by selling containers to over 1,350 customers in 77 different countries.

Our scale, infrastructure and operating capabilities enable us to deliver our services at the lowest unit-level SG&A costs whilst maintaining high levels of utilization for the entire life of the container, maximizing per diem levels and extending the leasing life of our assets, all of which provide for higher lifetime investment returns across our entire fleet.

With that, I will hand the call over to John.

Thank you, Simon.

Turning to Page 8. On this page, we have presented the consolidated results for the third quarter compared to the second quarter. As noted earlier, our adjusted pretax income of $73 million is up sharply from $58.8 million in the second quarter, as the strong market conditions led to improvements in nearly all financial line items.

We generated strong top line revenue growth, with leasing revenue increasing over 7%, driven largely by the pickup of over 250,000 TEU of new dry containers during the quarter and a full quarter's benefit from similar pickup volumes in the second quarter. In addition, ongoing depot unit activity pushed average utilization up 1.1% to an average of 97.6% for the third quarter.

We also experienced continued increases in our average portfolio lease rate, reflecting the solid current price environment for dry containers. This improvement in on-hires and lease rates was partially offset by a drop in fee and ancillary revenue, as the strong market conditions resulted in a much-reduced level, container redeliveries and related fees.

Gain on sale increase to $10.3 million in the third quarter from $9.6 million in the second. This increase was driven by a roughly 8% increase in disposal prices, which was partially offset by a 20% drop in disposal volumes, as the strong lease demand resulted in low levels of container redeliveries.

Direct operating expenses declined, as strong lease and disposal demand further reduced the number of idle units, resulting in lower storage costs. And the low level of redeliveries reduced repair and handling costs.

Administrative costs decreased by $800,000, though they continue to be elevated relative to our long-term expectations, as we continue to incur higher levels of professional fees driven by the ongoing integration of our back-office operation and legal entity restructuring. In addition, our current strong financial results have led to above-target levels of incentive compensation. We expect to reach our targeted $40 million of cost synergies in early 2018.

Our GAAP effective income tax rate for the quarter was 15.7%, and that was lower than anticipated, as we benefited from several discrete items.

Turning to Page 9. Here, we have presented the September 30 balance sheet with the operating balance sheets on the left, then the purchase accounting adjustments which were recorded at the holding company to arrive at the consolidated balance sheet on the right.

At the bottom of the page, we show our leverage the way we think about it, which is net debt to revenue-earning assets, at 73.7% or slightly less than 3:1 for the combined or operating entities. We look at leverage at the operating level before the impact of purchase accounting because this is the way our debt facilities are structured. Also as a reminder, these purchase accounting adjustments were recorded with the closing of the merger last July using the very low container values and market lease rates at that time. If these entries were to be made in the current market environment, the overall impact would be close to 0 or potentially positive.

Turning to Page 10. In mid-September, we completed the issuance of 6.2 million common shares, raising nearly $193 million in equity. Considering the 3:1 leveraging I mentioned earlier, this equity raise will allow us to invest roughly $800 million in incremental containers, enabling us to continue to aggressively invest in the attractive lease transactions that we see in the market.

Since the offering, we have already invested over $300 million in new containers to support several large lease transactions and to renew our investment focus in the refrigerated and specialized container product lines. This offering also adds to the strength of our capital structure, reinforces our market leadership and provides us with increased strategic flexibility.

Turning to Page 11. Looking forward, we expect the favorable market conditions to continue to provide positive earnings momentum in the fourth quarter. For leasing revenue, we expect to benefit from a full quarter of revenue from the large volume of dry container pickups during the third quarter, and we expect utilization to remain near peak levels. We continue to expect any impact from lease repricing to be minimal if market lease rates remain near current levels.

On the expense side, we anticipate ongoing improvements in direct operating expenses due to lower storage expenses. Administrative expenses should trend down slightly, as we realize a full quarter synergies associated with the completion of our systems and back-office integration.

We expect the gain on sale to benefit from further increases in sale prices, though this benefit is expected to be offset by further declines in disposal volumes as the inventory of sale units is already quite low and redeliveries remain exceptionally low.

As I noted earlier, the third quarter GAAP tax rate of 15.7% was lower than our trend rate due to several discrete items. We currently expect the fourth quarter GAAP tax rate to be above our trend rate and likely in the 19% to 20% range as certain additional discrete items flow through. Aside from these discrete items, we expect our future GAAP tax rate to trend down, and we expect to continue to pay minimal cash taxes.

On an earnings per share basis, the fourth quarter results will also reflect a full period of the additional 6.2 million shares outstanding.

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

Thanks, John. I'll continue the presentation with Slide 12. In general, we expect market conditions to remain favorable. Container inventories are tight. Most (inaudible) to rely heavily on leasing. New container prices have been edging higher in response to high steel prices in China. And our customers and market forecasters are projecting trade growth will remain solidly positive in 2018.

We are now entering the seasonally slower period for dry containers, so we expect dry container activity over the next few months to slow down from the exceptionally strong pace we've seen for the last year. But our customers are operating with very little slack capacity for their container fleets, and we continue to see interesting lease opportunities. Dry container drop-off volumes also remain very low, which should keep our utilization high and the market firm through the slow season.

In addition, the traditional peak season for refrigerated containers are just getting started. Leasing demand has been solid leading up to the peak season, and inventories of refrigerated containers are limited. We have recently increased our orders for new refrigerated containers and think we'll have good lease opportunities for this equipment as the peak season gets fully underway.

We are starting to see competitors invest in new containers more actively, but the overall inventory of containers remains low. Trade growth expectations for 2018 are solidly positive, and we're confident that we'll continue to have strong investment opportunities even as more leasing companies return to the market.

Slide 13 shows our current expectations for our adjusted pretax income in the fourth quarter. We expect our adjusted pretax income will increase from the third quarter of 2017 to the fourth. As John described, we'll benefit from a full quarter of revenue from the very large number of containers picked up in the third quarter, and we expect our utilization to remain very high.

I'll now wrap up the presentation with a few summary comments on Slide 14. Triton has taken advantage of strong market conditions to achieve excellent performance. Our adjusted pretax income increased 24% from the second quarter to reach $73 million in the third.

Our key operating metrics are very strong, and we're building a long tail of enhanced earnings and cash flow by leveraging our unique capabilities to capture a very large deal share in this attractive market. We expect market conditions will remain favorable, and we expect our adjusted pretax income will increase from the third to the fourth quarter of 2017.

I'll now open up the call for questions.

(Operator Instructions) Your first question comes from Mike Webber of Wells Fargo Securities.

I guess a lot to get to, generally all pretty positive. But I wanted to hone in, Brian, I think, on your earlier comment on the current shelf sitting at about 400k TEU, which is still pretty historically low. Can you give a sense of what percentage of that is lessor versus kind of just liner inventory that's still waiting to be picked up? And then with regards to competition, I know you guys are grabbing certainly the lion's share of incremental business for the lessors, when you kind of -- sounds like you're tempering expectations, saying, "Look, like, it's at such an unsustainable pace in terms of share gain, don't expect it to continue." But when you're out there placing orders, are you seeing lessors competing with you for those orders? Or are there simply just lines, kind of normal business, kind of sort of buying more of their own containers just to kind of keep their ratios in check?

Yes. Sure. So maybe just the first part in terms of the current factory inventories. First, for the 400,000 that we estimate that's in the factories, one thing to keep in mind is that's barely over 1% of the operated container fleet globally. So it's still a very tight number. Our estimate is that something in the range of 2/3 of those containers are leasing company containers, and that's relatively consistent with the overall buying this year. Maybe we estimate lease buying as something in the range of low 60%s of the containers purchased this year by leasing companies and shipping lines. And in fact, a lot of those 400,000 TEU of containers are ours. Simon mentioned that we have something in the range of 130,000 containers that we ordered -- leases with customers and just waiting for them to be picked up. So again, we look at the inventory that 1% of containers in the factory, virtually nothing on the ground in container depots of used equipment. And so just, I think, the container inventory still really, very tight. In terms of our expectations for next year and just going forward from here, I think in general we've been saying is that we expect our share to be -- if we were going to guess, we think it's going to be higher than our overall fleet share, which is in the mid to upper 20% range. And that's just because we think we have a lot of advantages that we bring to our customers in terms of our supply capability, very high levels of service, I guess, significant investment capability, of course. Though I'd say we don't expect to maintain a 50% market share. Certainly, that's been elevated by the fact that a number of other companies were effectively absent from the market right toward the end of the third quarter. And so as additional companies come in, yes, certainly, it's going to have some effect on our investment share. And always, we say that we focus first on investment quality, investment returns, secondarily on investment volume and asset growth. And so we're certainly going to be mindful of making sure we continue to make good investments. But just given the very tight supply-demand balance for containers, the expectations for trade growth next year and the fact that any growth is going to need to be handled by container production, we're pretty optimistic for investment volumes.

Yes. I guess what I'm getting at is that we've been expecting the market to get a little bit more competitive from some of your -- some of your competitors coming in for new lease deals. In the last couple of quarters were there a couple -- there's a large public player and then a handful of large private or PE-owned players that have been absent for several quarters now. So I'm curious, have you seen any modest uptick in activity there, kind of maybe Q4 to date? And do you think it's materially different in '18 now?

Yes. So as you note, we definitely have seen the other public company, got a large one returned, some of the private companies have started buying. But I think the main thing we've seen is just -- even the buying that they've done hasn't really changed the supply and demand balance for containers, just given the level of demand, the fact that most of our shipping line customers, who historically were the biggest buyers, still remain pretty reluctant to place large orders, at least most of them do. And so we do see that the leasing companies come in. We see some of them certainly being hunger than we would like to see them go get business. But overall, we see a market that's still a nice mix of supply and demand for us.

Fair enough. One of your competitors reported earlier and noted an uptick in demand for life cycle leases or financed leases with an average tenor that's certainly wider than anything we've really seen. I'm just curious -- maybe this is a question for John. But the -- are you seeing that across the broader space? Or is that just isolated with a couple of lines? And then do you think that's related to changes in lease accounting, where you've got guys with thinner balance sheets that really want to bring -- get as much capacity as they can now off their books? And is that business you guys typically would look at?

Yes. So maybe I'll start, and I think Simon could perhaps jump in after me. But for us at Triton, we don't do a lot of financed lease transactions. We like operating leases. We think we manage the value after the first lease very well and want to keep that for ourselves. There are a number of customers that like very long leases now. And in particular, it's a lot of the larger customers that like to operate -- they don't want to have to necessarily discriminate in their fleets as they operate containers between owned containers and leased containers. And they like the operating flexibility as the pickup point for leasing and for some extent these days like the supplemental capital, but they don't want to pay for the drop-off flexibility. And so they agree to longer-term leases. It's not a new trend. It's been -- these customers have preferred this type of lease structure for a long time. I think perhaps other company that reported may be newer to some of those names than we are. But it's a structure we like. Even though the rates are lower, we would estimate that on those longer operating leases, you probably have better -- not only less volatility but probably also better cycle average returns. And so we do a mix of that business. We always do, and we did this year, for sure. And maybe a little more of it this year as we used the strength of the market to sort of nudge other customers toward longer leases.

Sure. Okay. That's helpful. Just one more, and I'll turn it over. On Slide 5, you got kind of a used dry containers sale price index. And it just -- it looks like the 40-foot is leveling out a little bit relative to the 20. I'm just curious as to whether you're seeing -- are you seeing any marginal shift in demand for different sizes of used containers? Or is that just a function of the way the index is calculated?

No. I wouldn't say it's the index. We've seen, for example, the 40-foot high cube market usually is strongest in Asia, and that's because a lot of those containers are used for one-way shipments, and that's where a lot of cargo is coming from. And if we'd look to just Asia, you'd see very strong pricing for 40-foot high cubes. What we've seen on outside of Asia actually is that the 20-foot prices are extraordinarily good in North America and also in Europe. And while the 40-foot high cube pricing is -- actually, we're very pleased with it in those locations, but the 20 have really been strong. A lot of those containers are used for domestic storage applications in the U.S. and in Europe. And just given the very, very tight supply of containers and the lack of drop-offs from our customers, just price is responding.

The next question comes from Helane Becker of Cowen & Company.

As you think about some of the events that occurred in the third quarter, the hurricanes, weather events like that, do you think any of that had anything to do with increased demand in containers?

It's a good question. That's obviously centered in the U.S. And typically for leasing at least, the big demand comes out of Asia. So activities or events here in the States aren't things that typically drive big changes in the overall amount of containers demanded. That said, usually, the U.S. is a surplus area for dry containers, and certain markets in the U.S. are challenged for reefers too. And the hurricanes, both in the States and Puerto Rico, helped selected pockets of inventory, as cargo was moved to sort of help out those locations. My guess is it's also -- it's hard to obviously untangle what's going on, but my guess is also that's one of the reasons why the 20-foot prices that I mentioned for sale containers in the U.S. are very strong.

Okay. And then as you think about 2018 and you put that money that you raised from the equity offering to work, should we think about that as another 6 months so that it goes through the March quarter or the June quarter? How should we be thinking about you guys putting that money to work?

Yes. So it's somewhat unpredictable for us. We -- typically, we buy containers. We put them into -- effectively, we think of it as a shelf at the factory. And we -- they get taken off the shelf as we do transactions, and we buy more containers to replace the ones we leased out. And as I said, we always are much more focused on making quality investments than we are ensuring we hit a certain number of containers that we purchased. That said, we continue to be pretty optimistic for the level of investment and growth we're going to see. And if we had to guess the peak season for dry containers really gets going in the -- sometimes end of first quarter, more often early second quarter and continues through the third quarter. Reefer containers, as we mentioned, is heading into the peak season now. So I think if we had to guess, we would say, "Hey, we'll fully deploy it by some time in the third quarter." But it's very -- it's tough to know.

(Operator Instructions) The next question comes from Doug Mewhirter of SunTrust.

Reefers, you said that reefer supply is finally getting tighter after maybe a prolonged soft period. Is there also any, I guess, demand pickup? I know that market is maybe a little less public than the dry container market, which is so economically tied. I was just wondering what the dynamics are, the supply -- both the supply and the demand dynamics are with the reefer market. And is it concentrated in any particular geography or trade line?

Yes. So I'd say in terms of the reefers, as you mentioned, that demand tends to be more steady just because of the things that move in reefers, food mainly, doesn't move around as much on the consumption levels. What we've seen, generally speaking is more, I'd say, of a supply adjustment, where growth in refrigerated trade was pretty solid even in '16. It's been solid again this year. I think we'd say the market was oversupplied, in particular by leasing companies, in 2015 and the first part of 2016. One of the things we saw in the reefer market was that leasing companies that hadn't been in the lease -- the reefer market before came into the reefer market, I'd say, between 2012, '13, '14 and were effectively underpricing the reefer leases, I think, given they didn't have a full appreciation for the different life cycle dynamics of the reefers, the heavier operating elements required to keep them on-hire as they age and so on. Our sense is a lot of those companies have been surprised now by some of the challenges of operating a reefer fleet and some of the specific things that you need to do well in order to keep the reefers utilized. And so we saw in 2016 and the first part of '17 leasing investment really run down. And that, I think, is really what's created the tighter market for us. And as we look at the sort of expectations for ongoing reefer cargo volumes and we're looking at just the investment levels in particular from leasing companies, we felt that the market was kind of rebalancing to some extent, and it was an interesting investment opportunity again. And then with the equity offering, we had been allocating -- I'd say before the equity offering, more of our investment to the dry containers because that's where the demand was centered, especially early in '17, that's where returns were the strongest. But now with the equity offering and the excess -- or the extra capital we have as well as just the -- and mainly because of the improved supply dynamics that we see in the reefers, we started investing in those again.

That's very helpful. And just second and final question, Brian or maybe Simon. In terms of -- the factory production has been slow, some of it's been exogenous, imposed upon them by the Chinese government or what have you. But do you also feel that the factory owners are sort of having a little bit of gamesmanship where they're trying to maybe stretch the price increases as much as they can by maybe hoarding a little bit back on the production rates?

Simon, do you want to do that?

Yes. I think as you said, there was a real slowdown really predominantly in the second and the third quarters. I think the change to waterborne paint application is already completed, and we're seeing most of the factories getting back to normal just in terms of productivity. I think there are going to be some issues in the north of China, particularly when factories start to deal with the much colder weather for the first time, and we may still see some productivity issues there. And we also understand, as I mentioned, that a few factories are going to have elongated closures prior and then during Chinese New Year to make modifications to their waterborne paint booths. But I think just in answer to your second question, just in terms of are the factories holding back on production? Probably not. As far as I'm concerned, I think there's still pretty healthy competition between the main 4 suppliers. And I think, as in previous years, they're all very keen to fill their production lines, increase market share. And there's still a fair degree of competitiveness amongst them. And I think certainly as we get into 2018, we'll probably see productivity returning to where we were just a year, 1.5 years ago. The one thing to add, I guess, is that there have been a number of factories that haven't gone through the waterborne paint conversion process because of the costs involved, and those factories have essentially been permanently closed. So some capacity has been taken out of the market in terms of overall production numbers, which we view as reasonably positive.

Great. And just a real quick follow-up. Can you estimate what the percentage of that capacity got taken out because of the unwillingness to convert to waterborne paint?

Off the top of my head, no more than 10%. So it's not a hugely meaningful number. And it was predominantly in locations that ourselves, the leasing companies and the shipping lines, don't have particular demand in. I think if the locations where there's very strong demand, I think, the factory producers obviously want to have availability there because that's where they get their orders and that's where they get their better prices from. So I guess I would say just in terms of the overall capacity, something approaching 10%.

This concludes our question-and-answer session. I would now like to turn the conference back over to Mr. Sondey for closing remarks.

Just like to thank everyone for participating in the call and for your interest and support for Triton International. Thank you very much.

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