Triton International Ltd (TRTN) 2017 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Triton International Limited fourth quarter and full year earnings conference call. (Operator Instructions) Please note, this event is being recorded.

At this time, I would like to turn the conference over to John Burns, Senior Vice President and 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 fourth quarter and full year 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 I turn 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 our website in the Company Presentation section. I would like to 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. 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 in 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 actual future events and results. For a discussion of such risks factors 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 will now turn the call over to Brian.

Thanks, John, and welcome to Triton International's Fourth Quarter and Full Year 2017 Earnings Conference Call. Before I start the formal presentation, I would like to mention that this will be the last call joined by our President, Simon Vernon. As mentioned in our January 18 press release, Simon has decided to retire after a long and very successful career. Simon has been a great partner in making the merger of Triton and TAL so successful, and he played a key role in many of our accomplishments in 2017. I would like to thank Simon for everything he's done for the company and also let him know how pleased I am that he'll be staying on our Board of Directors. Thank you, Simon.

I will now start the formal presentation with Slide 3. Triton's results in the fourth quarter provided a great finish to an outstanding year. We generated $84.9 million of adjusted pretax income in the fourth quarter, an increase of 16% from the third quarter. The sequential increase in our profitability was primarily driven by strong growth in our leasing revenue as a large number of containers continue to be picked up onto attractive leases.

Overall, 2017 was a remarkable year for Triton. We completed our merger integration smoothly and successfully. We drove a rapid increase in our operating and financial performance, and we capitalized on our many advantages to secure a very large share of new container investments with attractive returns.

Triton's strong performance in 2017 was supported by favorable market conditions. Trade growth was higher than expected, creating strong demand for containers. Leasing demand was further supported by our customers' increased reliance on leasing, while the supply of containers was constrained by reduced container purchases from a number of major shipping lines and other leasing companies. We used this strong supply and demand balance to drive utilization to very high levels and achieved rapid growth in our profitability.

We also used our financial strength and container supply capability to aggressively invest into the market upturn and provide critically needed containers for our customers. We estimate we captured nearly a 50% share of new container leasing transactions in 2017. The high expected returns and long average lease durations covering this large block of containers will boost Triton's profitability for many years. And by demonstrating our unique ability to supply a very large number of containers on short notice, we reinforced our position as the supplier of choice to the world's largest shipping lines.

We're starting 2018 in great shape. Our key operating metrics are currently very strong despite the fact that we're in the middle of the slow season for dry containers. And we expect market conditions will remain favorable in 2018, supported by expectations for solid trade growth and well-controlled container supply. Finally, 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, who'll talk more about market conditions and our operating and investment performance.

Thanks, Brian. We will now look at the current market environment and our performance over the fourth quarter. The very 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 that containerized trade growth maintained its robust trajectory through to the end of 2017. This is providing support both for our customers in terms of better cargo growth and for us, as more demand is created both for our depot stocks and new production inventories. Many of our customers are now forecasting growth in the 5% range, and prospects remain encouraging as we move deeper into 2018. Enhancing this growth in demand is also the ongoing preference for leasing rather than ownership that we have seen for the last 8 years from the core shipping lines, and we expect this trend to be maintained in 2018.

Steel costs remained predominantly flat during the course of the fourth quarter, and this has kept pricing for 20-foot containers delivered in the fourth and in the early part of the new year in the $2,200 range. We expect pricing for delivery into the second quarter of 2018 to remain close to this level after container factories open again after their 2- to 3-week closure for Chinese New Year.

As you can see from the left -- from the bottom left-hand chart, dry container new production inventory at factory yards during the fourth quarter increased to approximately 750,000 TEU. 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, as you can see, the lead up to Chinese New Year in Asia has seen a decrease in new production inventories that demonstrates that solid momentum in the market continues and the 700,000 TEU that are currently in inventory still represents only a small shelf of overall availability as we approach a traditional seasonal pickup in the market that begins towards the end of March. It should be noted that 700,000 TEU is less than 2% of the overall in-service global fleet of containers.

A good percentage of leasing company's stocks shown are already committed to customers. The fourth quarter saw good absorption of new dry containers onto lease, and this velocity increased substantially in the run-up to factory closures in China for the new year celebrations that began on the 15th of February.

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

Moving to Slide 5. We expect the positive momentum seen during all of 2017 to maintain -- to be maintained as we move deeper into the first quarter of the new year despite the fact that this is usually a quiet time of the year.

As you can see on the bottom left-hand chart, dry container pickup activity remained at a high level for the fourth quarter. And the fact that activity dropped off somewhat from the third quarter is more a reflection on the quieter time of the year post the third quarter peak season and on a lack of depot availability as dry van utilization is now at over 99%.

Just as importantly, turn-ins have continued at very low levels despite the fact that the last and the first quarters tend to be the weakest when looking at overall market demand.

The shortage of containers in the market relative to demand has continued to push overall utilization higher. Our fleet utilization is now well over 98.5%, as you can see from the top left-hand chart. We are also continuing to see improvements in our refrigerated container performance, driven by the fact that there has been limited investment in new equipment in the sector over the last 24 months, and we are now well into what promises to be a strong season for reefers that usually lasts through May.

Looking at the top right-hand chart. Having seen our average portfolio dry container lease rates decline over a period of 5 years, we are now seeing a sustained recovery. The very powerful turnaround in both market dynamics and market lease rate levels has helped to stabilize this trend during the course of 2017. This rebound is continuing to the first quarter, and we're expecting further improvements throughout the whole of 2018.

As we discussed during all the previous earnings calls for 2017, one of the main beneficiaries of this combination of stronger demand in the leasing side of our business, overall reduced supply and improved new container prices has been our resell business. Average used dry container sale prices in the fourth quarter increased 7.6% from the third quarter of 2017 and 59% from the fourth quarter of 2016. We expect average dry container selling prices to increase further in the first quarter of 2018.

Slide 6 clearly shows the vital role that Triton has played in supplying and servicing our key shipping line customers during the last 18 months since our merger in July of 2016. New container orders, especially in the first part of 2017, were limited by production constraints related to the conversion of container factories to waterborne paint application and the financial constraints on a number of our customers and competitors. This restricted their orders despite the acceleration of container demand. Triton filled the resulting supply gap by leveraging our unrivaled financial and operating resources to deploy over $2.5 billion or just under 900,000 TEU of new dry containers to our customers since our merger. During the third and fourth quarters alone, over 325,000 TEU of new dry containers were on hand by our core customers. We calculate that this represents close to 50% of the leasing share of the overall dry container new production market and over 25% of the overall market, including shipping line orders.

Year-to-date in 2018, we've already seen over 100,000 TEU of dry containers on hand for the factories in China, and we currently have an additional 50,000 TEU of new production already committed to customers 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. Consolidation amongst our customers had set ever larger requirements and a much higher level of scrutiny. For our key shipping line customers, a large reliable and quality-focused supplier has never been as important.

Post-merger investments now represent approximately 25% of our revenue-earning assets and will enhance profitability and cash flow for many years to come. 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. We expect investment opportunities to remain attractive as lines currently have to rely almost exclusively on sourcing dry containers new from factory as supply from the depots is so constrained by high levels of fleet utilization.

Slide 7 highlights some of the unique capability advantages that Triton International enjoys. We have 24 of our own dedicated offices in 15 countries, ensuring an extensive local marketing presence. We leased all the container stocks from our depot network in 2017 to a total of 259 customers across over 50 countries. Equally, these offices focus on making sure that our lease contract durations extend the average life of our containers out to beyond 14 years whilst maintaining a steady overall fleet utilization level. We have business relationships with over 130 different logistics providers and concluded 40,000 containers on one-way moves. This enables us to cost effectively move both our leasing stocks of containers to better demand markets and our sale units to locations where we can obtain better pricing.

Our team of container resell experts operate out of all our key office locations. This enables us to access the full portfolio of potential customers from the largest to the smallest. 2017 (inaudible) maximized sale values by selling containers to over 1,400 customers in 77 different countries.

Our scale, infrastructure and operating capabilities enable us to deliver our services at the lowest unit-level SG&A cost 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 fourth quarter compared to the third quarter and for the full year of 2017.

Adjusted pretax income for the fourth quarter was $84.9 million, and we finished the full year of 2017 with adjusted pretax income of $259 million. Our adjusted net income for the fourth quarter was $68.3 million, reflecting an adjustment to exclude from our reported GAAP income about $139.4 million tax benefit we recorded in connection with the enactment of the new tax law.

The fourth quarter adjusted pretax results are up over 16% from the third quarter, reflecting continued strong market conditions in what is typically a seasonally slow period for dry containers.

We generated strong top line revenue growth, with leasing revenue increasing nearly 4% from the third quarter as pickup volumes remained seasonally strong and we benefited from a full quarter's revenue on the significant pickup activity in the third quarter.

In addition, ongoing depot pickup activity during the quarter pushed utilization up 0.6% to end the year at 98.6%. Our gain on sale remained very robust at $10.7 million in the fourth quarter, up slightly from the third quarter, reflecting a more than 7% increase in dry container disposal prices during the quarter that was partially offset by a drop in disposal volumes. Volumes are being constrained by limited disposal inventory as the continued tight supply in the leasing market is limiting off higher activity and therefore, fewer units are becoming available for sale.

Direct operating expenses declined $2.3 million from the third quarter as our continued improvements in utilization and the shrinking size of our disposal inventory reduced storage expense further and the low levels of redeliveries reduced repair and handling costs.

Administrative costs were essentially flat from the third quarter at $21.3 million and remained above our long-term expectations as our strong financial results led to above-target levels of incentive compensation, and professional fees remained elevated. Looking forward, we expect administrative expenses for the first quarter and the full year of 2018 to decrease by between 10% and 15% from the fourth quarter run rate as incentive compensation returns to target levels and we realize the full synergies of the merger.

Turning to Page 9. Our reported GAAP income for the fourth quarter included several unusual items, which we excluded from our adjusted results to better reflect the underlying operating performance of our business. The first adjustment was for $6.8 million of income recorded as insurance recovery income from the settlement of our insurance claims related to the default of Hanjin Shipping in 2016. The $6.8 million is the portion of the total insurance proceeds collected related to post-default revenue covered under these policies.

The second item is the $139.4 million tax benefit we realized as a result of the reduction in the U.S. statutory corporate tax rate to 21% from 35% in connection with the new tax legislation. This resulted in a reduction on our deferred tax liability that flowed through the fourth quarter income tax line as a tax benefit. As a result of the new tax rates, we expect our effective tax rate to decrease to between 10% and 13% beginning in the first quarter of 2018.

Turning to Page 10. These 3 graphs look at our key metrics of financial performance over the last 3 years. In all 3, you can see that we're back to and surpassing the strong revenue, earnings and cash flow levels we achieved prior to the market challenges in 2015 and '16. The graph on the left shows that our revenue and cash flow metrics have been strong throughout the period. And when combined with the short order cycle and the discretionary nature of our new container investments, we realized significant cash flow stability even in tough market conditions.

Turning to Page 11. Here, we have presented the December 31 balance sheet with the operating entities on the left, then purchase accounting adjustments to arrive at the consolidated balance sheet on the right. Since all of our debt agreements are at our subsidiaries and are structured based on an advanced rate against our container book values, we measure leverage at the subsidiary level based on net debt to revenue-earning assets, which, you can see at the bottom of the page, was 73.8% at year-end or slightly less than 3:1.

Also, as a reminder, these purchase accounting adjustments were recorded with the closing of the merger in July 2016 using the very low container values and market lease rates at that time. If these actuaries were to be made in the current market, the overall impact would be close to 0 or potentially positive.

Turning to Page 12. Given the long-term nature of our lease portfolio, we look to match the financing of our container assets with long-term fixed-rate debt. At year-end, nearly 80% of our lease portfolio was made up of long-term or financed leases with fixed lease rates and an average remaining term of over 43 months. At the same time, 86% of our debt is either fixed rate or swap to fixed with a weighted average remaining duration of 48 months. This matching limits our exposure to rising interest rates.

In addition to locking in interest rates in our debt facilities, we focus on staggering our debt maturities to avoid significant maturity cliffs. As you can see in the table on the right, over the next 5 years, our scheduled principal payments are in line with our annual cash flows, thereby limiting our refinancing risk.

I will now return you to Brian for some additional comments.

Thanks, John. I'll continue the presentation with Slide 13. We expect market conditions will remain favorable in 2018. The global economy continues to perform well, and our customers are indicating they expect trade growth will remain solidly positive. The supply of containers is well controlled with a moderate level of available new containers and very limited availability of used leasing containers. We expect many of our customers will continue to rely heavily on leasing as they focus investment spending on their vessels and terminal networks. Container prices have held firm through the slow season for dry containers and could increase as we head into the second quarter.

Some leasing companies that had limited investments in 2017 have been investing more actively, and we expect competition for new container leasing transactions will be more normal this year. But we expect we'll continue to see ample attractive investment opportunities. We have significant cost and capability advantages, and we expect to achieve another successful investment year in 2018.

The first quarter is usually our weakest quarter of the year since it represents the slow season for dry containers and because it has the fewest revenue days. However, container pickups and deal activity have remained solid in the first quarter. Container drop-offs have been unusually low, and our utilization has increased slightly so far this year to reach 98.7%.

Used container sale prices have also increased so far in 2018, supporting high disposal gains. And our administrative costs will benefit in the first quarter as incentive compensation accruals return to their target level. As a result, we expect our adjusted pretax income will increase slightly from the fourth quarter of 2017 to the first quarter of 2018. We expect the sequential increase in our adjusted net income will be larger as our consolidated GAAP tax accrual rate decreases to the 10% to 13% range due to the recent reduction in the U.S. corporate tax rate. If market conditions remain favorable, we expect our profitability will increase throughout the year.

I will now wrap up the presentation with a few summary comments on Slide 14. Triton's strong performance in the fourth quarter was a great finish to an outstanding year. In 2017, we took advantage of favorable market conditions to drive strong growth in our operating and financial performance, and we leveraged our financial and operating strengths to secure a very large share of new investments with attractive returns that will enhance our cash flow and profitability for many years.

We're starting 2018 in great shape, and we're optimistic we will achieve another year of strong financial performance and investment success. Our operating metrics are very strong despite the fact that we're in the middle of the slow season for dry containers. The supply and demand balance for containers remains favorable, and we expect many of our customers will continue to rely heavily on leasing. We have significant competitive advantages in our market that boost our investment returns and allow us to win the deals we want. We are very well protected against rising interest rates, and we expect our profitability will continue to increase throughout 2018 if market conditions remain favorable.

I'll now open up the call for questions.

(Operator Instructions) Your first question this morning will be from Michael Webber of Wells Fargo Securities.

Brian, I wanted to start off with a bit about the, I guess, the overall environment. I know there's kind of a bit of an anomaly in 2017 or kind of a perfect storm in terms of dynamics. But I guess, I'm more interested in kind of popping where we are today and maybe kind of, call it, somewhere between the third and the fourth inning of the cycle with the last cycle. So maybe -- can you maybe provide a degree of context for where we are today, both in terms of the number of competitors, the availability of capital and then cash-on-cash returns with where we are today versus, say, where we were 6, 7 years ago when we were kind of in this stage of the cycle last time?

Yes, for sure. I think we mentioned, as some others did, that we have seen some of the companies that didn't invest much in 2017 start investing again. But I think as you mentioned, 2017, it was a very unusual year, where, especially for the first half of the year, we effectively almost had the market to ourselves just given our greater financial strength and just capability advantages as the market shifted for being difficult to strong again. We were able to take advantage of that and put a lot of containers to work at great lease rates that will continue to benefit our cash flow and profitability for a long time. Certainly, again, having a few companies come back into the market has had a marginal effect on pricing. Our investment returns last year were exceptionally high. But I'd say they're still very attractive. And when you think about, say, the market environment, there's been a number of major consolidation transactions over the last few years, 3 major leasing companies, including -- 4 involved, for us and Triton obviously merged into 1. Two other sizable transactions happened. So there are fewer major companies today than there were a number of years ago. Also, especially for a company our size and with our advantages that we have in the leasing market, we typically think of our biggest competitor as ownership of the major shipping lines trying to buy their own container. And as we've mentioned a few times, we are seeing even the biggest shipping lines increasing the portion of containers that they lease for a variety of reasons. And so that's also a very positive thing. And then finally, for a new container transactions, as always, typically, an option for customers is to take used equipment. And the fact that there's effectively no used equipment available in the world, let alone in China, also provides new container leasing transactions. So overall, we think it's going to be another interesting year for us in terms of being able to do a lot of business at what we think are attractive conditions. And also, I think, as Simon mentioned, that with the shipping lines merging and becoming very big entities and with their increased reliance on leasing, there is a preference to work with us, and that also makes us optimistic for this year. We continue to see the desire by the biggest shipping lines to -- if they're going to rely on leasing, they want to make sure the containers are available, and they have the greatest comfort, for sure, with us. And then maybe just the final thing I'd say is just the things that really matter in terms of driving our profitability this year are things like utilization, what happens with our lease renewals, what happens with used container sale prices. Certainly, investment's important. But the real drivers of profitability are those other things. And the favorable supply and demand dynamics for containers really support those key profitability drivers.

Okay, that's helpful. In terms of -- just one more in terms of the landscape. When I think about the last cycle, say, there were maybe 8 competitors and were kind of back at kind of 5 or 6 now, do you still have a couple kind of P/E sponsored or kind of aggregated competitors that are kind of sitting on their hands? And there's speculation around what happens with some of those entities. I'm curious, the last -- previously, your merger, the M&A in the space that was P/E driven, the operator seemed like they were priced out by a turn or 2 upfront. And then maybe when the Chinese private equity boost came in, it was more than a turn or 2. How motivated do you think the sellers of those platforms are at this point? And I guess, what I'm asking is, are they motivated to the extent that the operators like yourselves are actually -- can get a look at some of those private equity-owned groups with everything and that would imply about where they would actually be willing to sell it, right? I'm just curious on how motivated the sellers are.

That's a good question. We, of course, don't have a lot of insight into what's going on in the minds of those guys. But the one thing we do believe is that there will be further consolidation. And I think a lot of it, frankly, is just driven by our outperformance and our outperformance in terms of our investment success, our outperformance in terms of our just capabilities and financial performance. And so I just do think that as our competitors are trying to chart their course for the next few years, they have to be wondering how they compete with us. And I think the natural solution would be to try to get larger themselves. And so for that, my guess is that there's a fair bit of strategic discussion about how everyone else in the industry makes that happen.

Okay. When I think about back that your used inventory levels -- or I guess, just in general, your utilization levels are kind of at or near peak, and you could say that's for most of the industry at this point and we're looking at relatively healthy containerized greater market share gains. I'm curious around box production capacity, I guess, and the ability to kind of have swing supply kind of come in and meet that demand. You mentioned the waterborne paint issues. If I kind of comp maybe I think it was around 5 million TEU per annum that were -- that we produced in the peak in the last cycle, and that's maybe going back 8 to 10 years, where would you kind of put global box production capacity -- peak production capacity right now? And do you think that we'll see a move in that in terms of what looks like pretty tight dynamics for new and used containers?

Yes. So in terms of the maximum production, I don't have the charts in front of me. But my recollection, it was more, say, in the high 3 million to maybe 4 million, and that was probably in 2007 or something like that. But in terms of capacity, I think a lot of times, the sort of market prognosticators think -- look -- focus on the wrong thing. They look at, say, theoretical factory capacity based upon square foot or something like that of container factories. The real thing that governs capacity is shift hiring by the manufacturers, and they hire tens of thousands of workers that have relatively short tenures at the container factories. And that's really the thing that the factories are always adjusting. It's just how many workers they have and how many shifts are running and how many lines are running in the factory. We think usually that factory production capacity doesn't really restrict supply in most years. Occasionally, it does. And for example, as you mentioned in early 2017, the shifting of the production to waterborne paint and a few other environmental challenges did, for a time period, limit production capacity and productivity. But in general, that's not the case. And we will see, coming out of Chinese New Year, for example, that's a big challenge for the producers to hire enough workers and get them trained quickly. But in general, we don't see that being really a driver of supply and demand. It's much more driven by just how much -- how many dollars different players are investing and how expectations of trade growth end up comparing to actual trade growth. But overall, it's -- the manufacturers are going to be stretched to meet the amount of containers the market's going to need if trade growth does end up being again sort of 5% in that range given the ongoing disposals and the amount of containers that will be needed. It's going to be tight.

Yes. Michael, I would maybe just add one other thing there, too. When you look at the in-service equipment, too, one of the benefits of this tightness in the market and the -- and really the lack of overall availability in the depots and obviously, very good demand for our new production and our competitors' new production inventories is the effect that that's going to have on leases as they expire. And this obviously came from the -- from our shipping line customers' very strong desire to keep hold of mid-aged containers. And that should really help benefit extension rates and overall demand to keep per diem at sort of very reasonable level and improving levels as far as our in-service equipment is concerned. And that -- again, I think Brian was referring to that earlier. The tightness in the market, obviously, is very beneficial at the front-end of the business, but the real benefits are in the -- throughout the existing fleet in terms of extending leases at very attractive per diems. And of course, the tightness has this knock-on effect on resell pricing with lack of supply coming in for sale containers. It's really helped to push pricing up. So that's a very, very key benefit we see.

Got you. One more for me, and I'll turn it over. It's actually along those lines. But we've been sitting right around mid-cycle almost like for the better part of it. It feels like a year or maybe slightly less than that, kind of $2,100, $2,200 per TEU. Brian, just given what you're looking at in 2018, do you think it's more likely that we would roll over and break $2,000 for dry van or that we hit $2,500 this year?

Yes, no, it's a good question. And to some extent, it depends on what happens with steel prices. But one of the things that we always look at is how does the price of containers compare to the price of steel and sort of what that margin over steel costs. I think as we -- both Simon and I mentioned that container prices have held firm. And frankly, steel prices were stable in the first quarter, but they're up quite a bit from where they were during the peak season last year. And so when you look at that margin over steel prices, right now, it's actually very low for the factories in the first quarter despite the fact that container prices are in the $2,200 range. So I mean, frankly, my personal view is that if steel prices stay in their current range, we're more likely to see container prices go up than down as we head towards the peak season.

Okay. So I'll take that as more likely to break $2,500 than $2,000.

Well, again, it's -- a lot of it's predicated on steel prices for just where spot container prices are. But again, assuming steel prices stay in their current range, it seems more likely to me that prices will go up than down just because the margins right now, steel prices are low.

The next question will be from Helane Becker of Cowen.

John, did you say what the increase in bad debt expense was related to from third quarter to fourth quarter?

I did not, but certainly happy to address that with a couple of very small customers that have been slow in paying us for an extended period of time and slow in redelivering containers. So we're working our way out of those arrangements. And that was a couple customers to solve those small problems.

Okay. And then can you, maybe Brian or Simon, speak to the geography where you're seeing significant strength that may be surprising relative to where we were a year ago, let's say? Or is it pretty consistent with where we were?

Maybe I'll start. This is Brian, and Simon can provide some more color. I'd say in terms of the geography, as we've mentioned before, we don't really see the container flows. We don't track them as they're flowing. And so what we see now is what -- typically, what we do see is just the real strength for pickups out of China and maybe Asia a bit more broadly. But one of the things that was so nice about 2017 is that when we're talking with our customers about why was trade growth much better than expected this year is, for the first time in a while, we hear that all the major trade lanes are performing well. And just I think it follows the news that all major economies are performing reasonably well also. And so I think the industry takes a fair bit of comfort in that in the sense that we're not relying on one particular trade or one particular engine for economic growth, that it does seem fairly distributed globally.

Yes. And I think -- Helane, I think in -- supporting that and enhancing that is particularly with the larger major shipping lines who have exposure on a global basis. They can obviously -- and they prefer to get their supply from China. But when there's restricted supply there, they'll -- and they got empty slots, whether it's in North America or Europe, when the market is tight there, they're much more likely to on-hire containers in Europe and North America. Not for export cargoes, but really trying to reposition those containers back to China. And then those containers enter their fleets and often stay on lease right through to their full length of life. So we're certainly seeing that at the moment, is the very strong demand in China supported what -- by what Brian said in terms of trade lanes being much stronger throughout the world. We're also seeing -- particularly with a lot of the major lines there, on-hiring equipment on a global basis really to service their needs in China.

Got you. I think you actually -- one of your slides actually spoke to the -- working with customers to reposition some containers, right? And then the other question I had was I don't know if you saw the article in today's Journal of Commerce that there's a reefer container shortage. And I guess, that's -- I suppose that's consistent with the comments you made earlier on reefers with...

Yes, I think very much so. We've -- certainly, during the latter part of 2016 and for a great deal of 2017, we weren't particularly interested in increasing our exposure to that market because we wanted to see frontline new production rates recover to somewhere close to where we're -- where the returns were on the dry van side. What we have seen definitely, particularly in 2016 and to a slightly lesser extent in 2017, were much lower levels of investment, much lower levels of output from the factories, both from the leasing sector and from the shipping lines. And that's really had a very positive effect on stabilizing the reefer market. It's not so much driven by an increase in demand. I think demand still is staying reasonably robust on the reefer side. I think that article you mentioned, Helane, said there was 4% growth on the reefer cargo side, and that's being enhanced by the shift from bulk cargo into unit size cargo for containers. So it's probably slightly higher than 4%. But the real driver of that is on the supply side. And that, again, is what really helped on a disciplined side. The recovery on the dry van side was lack of investment. And we're now seeing the benefits of lower levels of production on the reefer side coming through to our market. So we are -- we're much more optimistic about reefer performance in 2018 that we've gone back to some small investment orders as far as reefers are concerned, too.

Got you. And then just have you looked at the number of ships that are going to be delivered this year and kind of thought about the number of containers that you'd need to have available to kind of outfit those ships? And as you think about that over the next, say, 4 or 5 years, I think there's something like 100 ships on order, and I'm just thinking that the demand for containers would have to be pretty high to satisfy those larger ships especially. No?

I think the thing we follow much more closely than vessel capacity growth is containerized trade growth. And the only thing that creates a need for containers is containerized trade growth. I mean, the -- I think there are benefits of more vessel capacity coming onstream. But certainly, the key driver is containerized trade growth.

Yes. I think the main effect that we see from that is really kind of a second order effect, which is we've mentioned a few times that our customers, even the very big ones, are increasing their reliance on leasing. And I think it's because they want to save their investment capital to invest in their vessels and also on their container terminals. And we just see even, say, trade growth levels are solid and their ship investments for that reason, but we continue to see the sort of unit-level competition among the shipping lines competing to have the biggest, most fuel-efficient vessels to compete on a unit basis continuing to drive ship investment as well. And so as Simon mentioned, we don't typically see a direct connection between how many containers are needed and how many vessels are being delivered. But there is an indirect connection between the leasing share and container ship deliveries.

Right, got you. And then of your 200 -- this is my last question, I promise. Of your 200 and whatever, did you say 59 customers from 53 countries? So I guess, we always think of you as leasing to ship owners, right, like CMA and Maersk and people like that. But do you also count in those customers people like Walmart or Amazon or Target, people like that?

I mean, for sure, the bulk of our containers are on-hire to the world's biggest shipping lines. It's something -- I think the last I saw, the top 12 or 13 shipping lines in the world had maybe more than 80% of vessel capacity. And that, certainly, is reflective of where our containers are on-hire. That said, having a large tail of smaller customers is important, mainly to maintain utilization and useful life of our equipment as it ages and as it gets scattered around the world. And we pointed out those things just to show that having an extensive global presence like we do really makes a big difference for our business and the way that we keep our assets productive and just our capabilities really squeezing the full lifetime value out of our container investments. And it's a similar thing on the container resale as well, where having a very long tail of customers and a wide array of locations lets us maximize value.

The next question will come from Doug Mewhirter of SunTrust.

I wanted to follow up on the statements you made about the sale of used containers and how prices have been very favorable, although offset by the fact that you're basically running out of used containers to sell, which, I guess, is a high-class problem. I know that in the last couple quarters you have been trying to maybe tamp down expectations about the gain on sale income just because you're running out of used containers to sell, but it seems to be very consistently strong over the past couple quarters. And I was just wondering if there's maybe a shift in outlook in that -- on that line item going into 2018 because the price levels have been so strong.

Yes. Certainly, as the months have gone by and we continue to see the price climb, that, obviously, has been a nice outcome for us. And in particular, it's fairly unusual to see container sale prices increasing through the slow season for dry containers. One, we typically see utilization decrease during this period and off-hires increase as customers shed capacity after the peak season. It also just happens to be the weaker buying season for some of our customers as well. And so usually, we don't expect to see prices continue to climb. And so we had some concerns that the decreasing volumes that we expected to see coupled with perhaps, say, flat pricing would lead to still gains, but maybe lower gains, as we headed into the fourth quarter. But fortunately, as you know, that didn't happen. And so the fact that off-hires have stayed really low through the slow season of dry containers and that our utilization has actually gone up instead of down really sort of changed that dynamic for the first part of the year.

Good. That's helpful. And the second question, more of kind of a speculative question about your balance sheet. Assuming that you take advantage of whatever investment opportunities -- CapEx investment opportunities there are in front of you, is there a number, like a CapEx number? And assuming you would get -- you have basically unlimited debt capacity to raise debt, is there a CapEx number above which you would have to raise equity again in 2018 or 2019, for that matter?

Yes. Maybe I'll start, and John can fill in some of the numbers. But as you sort of imply, of course, we did the equity offering in September to support the very high level of investments that we did in 2017. And I think our asset growth in 2017 was an 11% range, I think. And I think the other difference with 2017 was that we were -- especially in the first part of the year, earnings were still recovering. And so we weren't generating the level of equity cash flow that we are today. And so generally speaking, given our current level of cash flow generation and profitability, we can support an awful lot of investment in our business and maintain constant leverage. In addition, because of the equity offering, we have a fair bit of excess equity capital right now relative, at least, to the constraints in our borrowing facilities. So I wouldn't say it's an impossible situation. Again, we do feel optimistic about investment opportunities in 2018, but we also have a lot of equity cash flow and financial strength to back it.

Okay. And my last question deals with the per diem rates or yields or however you want to characterize it. So if you look at your current portfolio average, your consolidated average in per diem rate or yield, is the CapEx that you're putting on now and the renewals that you're putting on now, is that still accretive to the portfolio average? And I know there's a lot of moving parts in there, so a rough idea.

Yes. So we've been saying for dry containers especially, even though the market lease rate has come down some, it's still attractive, and the market lease rate for dry containers is still above our portfolio average. On the refrigerated container side, the market lease rates are around our portfolio average. Although relative to refrigerated container lease expirations, the expirations in the next year or 2 have higher rates than average. So where dry containers the expiration is generally -- leases are expiring below market rates. On the reefers, for the next year or 2, the expirations will be above market rates. But overall, we've been saying it's a pretty good market for lease expirations across the business.

The next question will be from [R. A. Rosa] of Bank of America Merrill Lynch.

So I wanted to actually stay on the topic of the moderating lease rates. Maybe if you'd give us a little bit of a sense of the scale to which the lease rates have moderated. And also, if you could share your thoughts on maybe being able to lock in some longer-dated contracts relative to kind of historical levels given that you seem to be achieving very satisfactory returns at the current rates.

Yes. So I mean, obviously, we don't like to talk about specific rates, but I'd say we typically talk about year 1 cash yields against the investment in containers. And that's probably down something like 100 basis points from where it was at the peak of 2017. And -- but that said, even with that kind of 100 basis point cash yield compression, again, we think these are still very attractive investments that we're making. And in general, we've had a lot of success not just in the pricing, but also in the structuring. Now getting, as you sort of imply, longer-duration leases, a lot of them, 7 years, 8 years, even some 10-year type transactions. And then as importantly -- or maybe even more importantly, just getting very restrictive dropoff conditions in the sense that the containers have to come back to locations where we foresee leasing demand being strong, mostly centered on China or other parts of Asia, where we see a lot of container demand. So it's a combination, really, of the returns are attractive because of the pricing, but also the returns are well protected by the long durations and the dropoff restrictions.

Okay, that's really helpful. And then next question, I wanted to touch on just kind of the broader market environment. I know there was some discussion around this. But maybe to Michael's question about kind of what inning we're in. It seems like a number of market participants are starting to increase their CapEx budgets, and I'm wondering to what extent maybe we should be nervous about that denting the market as we look out maybe 18 months, 24 months. Just your thoughts on that would be appreciated.

Yes. I mean, look, we'd always love a market with no competitors, but we know we never really thought that was a realistic long-term market dynamic. And so we've been talking now for probably since things got really good that, look, it's great that things are fantastic. But eventually, other companies are going to want to invest and grow their businesses. So again, we look at the market, even with some competitors coming back, as still being very favorable overall. The key thing, supply/demand balance for containers is very tight, and customers want to lease. And container prices are strong and lease rates are attractive relative to our portfolio. All those things are great. In terms of what inning we're in, frankly, we don't really look at it out into a couple of years. One of the great strengths of this business is that we order containers only a few months in advance. And because of that, we don't really have to guess what market conditions might be like in 2019 or '20. We look forward what conditions are going to be like in April and May. And again -- so we think that the market environment overall feels very good to us. And frankly, if we could push a button and have every year be like this one, we'd push that button.

Okay, that's terrific. And then just last one for me. We've seen a little bit of sabre-rattling around increasing steel tariffs and maybe putting some pressure on steel prices. Maybe you could just discuss your thoughts on that generally and what kind of impact that could have on the market.

Yes. I mean, obviously, we do like high steel prices because it typically drives high container prices. I'd say we've been watching with interest, of course, what's been going on with steel tariffs. We're also watching what's been going on with other types of tariffs around trade in the U.S. And I guess, we're not really -- or don't have any ability better than anyone to forecast where this is likely to go. But all I'll say is we don't hear a lot of specific concerns from our customer base or within the industry that somehow, the steel tariffs are really going to -- or the other types of tariffs are going to have a major impact on the outlook for this year or for the next couple of years. And the one thing, I guess, I would note when it comes to the other tariffs is, first of all, at least, the ones that have been applied are quite limited in their scope. And then secondly, even the U.S., while still a very important economy, is not what it used to be in terms of its share of world trade. We'd estimate that something in the range of 20% or so of vessel capacity is deployed into the U.S. trades. So that if something does shrink the growth rate of U.S. imports, it's not great, but it's not sort of an industry-wide catastrophe. The thing we worry about much more is just is there a contagion effect. Do we see increased protections in the U.S. drive similar sentiment elsewhere? So far, it doesn't seem like that's happening. And again, our customers aren't talking a lot about it. But clearly, of course, we're watching it.

And ladies and gentlemen, that will conclude our question-and-answer session. I would like to hand the conference back over to Brian Sondey for his closing comments.

Yes, thank you. I just want to thank all of you for your continued interest and support for Triton. Thank you.

Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. At this time, you may disconnect your lines.