Triton International Ltd (TRTN) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Triton International Limited First Quarter 2018 Earnings Release 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, Chief Financial Officer. Please go ahead, sir.

Thank you, Andrew. Good morning, and thank you for joining us on today's call. We're here to discuss Triton's first quarter 2018 results, which were reported this morning.

Joining me on this morning's call from Triton are Brian Sondey, 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 with the presentation that can be found on the website in the Company Presentations section.

I would also like to point out that the company will be making statements on this conference call that are forward-looking statements as the term is defined under the Private Securities Litigation Reform Act of 1995. Any forward-looking statements made on this call are based on certain assumptions and analysis made by the company and are not a guarantee of future performance. Actual results may vary materially from those expressed or implied in the forward-looking statements.

The company's views and 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 of these statements that are made despite any subsequent changes. These statements involve risks and uncertainties and are only predictions. A discussion of such risks and uncertainties is included in our earnings release and presentation as well as our SEC filings.

In addition, certain non-GAAP financial measures will be discussed on this call, and per SEC rules, supporting information regarding these non-GAAP financial measures is included in our earnings release and presentation.

With these formalities out of the way, I will now turn the call over to Brian.

Thanks, John, and welcome to Triton International's First Quarter 2018 Earnings Conference Call. I'll start with Slide 3 of our accompanying presentation.

Triton is off to a great start in 2018 with our outstanding first quarter results. Triton generated $79.8 million of adjusted net income in the first quarter or $0.99 per share, an increase of 17% from the fourth quarter of 2017. The increase in our net income was driven by outstanding operational performance, reflecting strong market conditions and Triton's many capability advantages. We also benefited from a reduction in our average tax rate to just over 11% in the first quarter due to U.S. corporate tax reform at the end of last year.

We're optimistic about the rest of the year. We expect market conditions to remain favorable, and that we'll continue to achieve outstanding operational and financial results. We expect our adjusted net income will increase gradually throughout 2018. We should benefit from improved seasonal demand over the next few quarters as we head into the traditional summer peak season for dry containers. And we're off to a good start with our investment program and expect growing contributions from ongoing fleet growth as our substantial new container purchases continue to go on higher.

Our Board of Directors has authorized a dividend of $0.52 per share this quarter. This represents a 15% increase in our dividend level and reflects our outstanding performance, strong cash flow and optimistic outlook.

I will now hand the call over to John O'Callaghan, our Global Head of Marketing and Operations.

Thank you, Brian. Turning to Slide 4. As Brian mentioned, it was an outstanding first quarter. Despite moving through the traditional slow season for our business, the strong momentum of the last 12 months continued through the first quarter of 2018. Overall utilization remained firm with continued pickup activity and demand for both our depot stocks and new production inventory. Turn-ins were at a very low level, and what redeliveries we did see were predominantly sale units.

Our customers remain optimistic about trade growth this year. Vessel load factors remain high, and the shipping lines are facing container shortages in Asia due to the addition of new tonnage and services. This will culminate in even fewer off-hires and more demand for leasing.

We've already ordered over $850 million of containers for delivery in 2018. New box prices have remained stable in the first quarter at $2,200 but could increase as we head toward the peak season. The strong starts puts us in a very good shape to achieve another year of value-added investment and fleet growth.

In addition, we've proven over time that the investments we make have attractive returns and continue to generate high-quality business. One of the reasons we continue to achieve attractive terms in the market is that we have a lot of locked-in advantages. These include the lowest operating cost structure and the fact that customers really want access to our large available inventory. We have close and extensive relationships with the key shipping lines, driven by years of focusing on customer service and our extensive operating and supply capabilities.

We maintain new container availability in all key locations, export locations, and we have a reputation for supply reliability. We're the easy solution for our customers and often the only company that can meet all the urgent container requirements for the largest shipping lines. This, in turn, means we can get slightly better pricing and lease structuring, especially in terms of duration and logistic.

We also have the best capability to manage containers as they age through an established network in 340 locations across 85 countries, providing the most extensive and capable global marketing, operating, container sales and service professionals in our industry.

Turning to Slide 5. As I mentioned, the first quarter activity was positive despite the typical seasonality. As you can see in the lower left-hand chart, on the pickups/drop-offs, the net pickup activity was strong in the first quarter with firm pickups and low levels of drop-offs. Box prices have remained solid, and this, combined with a healthy pickup activity, continues to drive market lease rates. Because of this, our utilization remained at very high levels, and we also continued to see our average lease rates and sale prices strengthen.

Turning to Page 6 or Slide 6. This looks at the key measures of container supply and demand. The top chart looks at our key demand drivers, trade growth and leasing share. We expect demand to remain strong. Trade growth is expected to remain solid with both customers and forecasters expecting around 5% growth for the year. We also continue to see customers rely heavily on leasing as they continue to focus their capital investments on other strategic assets, such as vessels, terminals and logistics operations. So we anticipate a continuing shift in mix from owned to a demand for lease containers.

On the bottom of the slide are 2 measures of supply. On the left, the factory inventory has increased as we have seen leasing companies and shipping lines building inventory, which is a normal preparation for the peak season. If you put it into the context of overall availability, we see supply demand as remaining favorable with relatively low factory inventory at only 2% to 3% of the overall global fleet and virtually no availability of used leased containers.

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

Thank you, John. Turning to Page 7. On this page, we have presented the consolidated results for the first quarter of 2018 compared to the fourth quarter of 2017. Adjusted net income was $79.8 million or $0.99 per share, up 17% from the fourth quarter, generating a 15.4% return on equity. The increase in earnings reflects a 6% increase in pretax income, driven by continued fleet growth and strong operating performance.

Adjusted net income benefited further from a reduction in our effective tax rate to 11.2% in the first quarter from roughly 18% in 2017 due to the reduction in the U.S. corporate tax rate. We expect that we will be able to push our effective tax rate lower over time as we continue to place a majority of our container investment in our offshore entity.

The improved operating results were driven by continued positive container supply and demand environment. This generated strong top line leasing revenue, which was up slightly from the prior quarter despite the first quarter being the traditional slow season and having 2 less revenue days. Solid pickup activity and seasonally slower redeliveries also pushed utilization up 10 basis points to 98.7% at the end of the quarter.

Our gain on sale on trading margin activities remained quite strong, generating a combined $12.2 million of gain, up slightly from the fourth quarter as lower disposal volumes were offset by continued increase in disposal prices. Limited customer deliveries kept storage and repair expenses low, leading to further improvements in operating expenses. Administrative costs declined by $1.8 million, largely due to incentive compensation returning to target levels.

Turning to Page 8. This page highlights the strong and stable cash flows generated by our business. The graph on the left shows our annual cash flows before CapEx, which we define as EBITDA, less interest expense plus the net book value of container disposals and principal payments on finance leases. The chart shows strong and relatively stable growth in operating cash flows as we've grown our fleet through value-added investment over an extended period.

The stability of our cash flow is largely due to the long-term nature of our lease portfolio, the short order cycle and the discretionary nature of new container investments. This strong and steady cash flow and the discretionary nature of investment leads to financial stability and creates long-term value. And in periods of excess container supply allows us to delever, as we did in 2009 and 2015 and 2016.

Turning to Page 9. 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 the end of the first quarter, 84% of our debt is either fixed rate or swapped to fix with a weighted average remaining duration of over 50 months, beyond the 42 month remaining duration of our long-term leases.

Due to this matching, we believe, we have limited exposure to rising interest rates. In addition to locking in interest rates on our debt facilities, we focus on long-duration debt and staggering our maturities to avoid significant maturity cliffs, as shown in the table on the right.

Turning to Page 10. The purchase accounting entries we made at the time of our merger in July of '16 resulted in over $750 million write-down in book value of our container assets since container prices were close to historical lows at that time. The impact on equity was much less, though still material, as the accounting rules required the creation of a related lease intangible and a reduction in our deferred tax liability. Because of these adjustments, our book equity is understated and our leverage is overstated, and therefore, we believe historical or prepurchase accounting values are more relevant.

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

Thanks, John. I'll continue the presentation with Slide 12 -- Slide 11. As our results for the first quarter indicate, Triton is off to a great start in 2018, and we expect to have an outstanding year. We're also very pleased with how we're positioned for the long term and believe we'll continue to create long-term value for our shareholders through a powerful combination of steady growth, high investment returns and strong cash flow.

Triton has organically grown its assets nearly 10% per year, on average, over the last 15 years, and we expect we'll continue to achieve a high level of growth going forward. The container leasing business has multiple growth levers, including natural exposure to high-growth emerging economies, an expansion of trade relative to global GDP, continued cargo conversion into containers and an increasing share for leasing relative to direct container purchases by our shipping line customers.

In addition, Triton grows faster than the leasing market without needing to lead with price. We're able to leverage our unrivaled container availability and our preferred supplier status with many of the world's largest shipping lines to take an outsized share of new container leasing transactions. And we also regularly add new specialty container types and engage in large sale leaseback transactions for middle-age and older containers, both of which add incrementally to our growth.

Similarly, we take advantage of attractive industry fundamentals and our leadership position to achieve high investment returns, and the average ROE for Triton is close to 20% over the last 15 years. As John O'Callaghan described, Triton's scale, cost structure, preferred supplier status, and container supply and operating capabilities turn opportunities that would be solid investments for our peers into outstanding investments and high ROEs for us.

Our strong and stable cash flow provides financial stability and underpins shareholder returns over the long term. Investors in TAL's 2005 IPO would've already collected 125% of their original investment through regular dividends. As John Burns described, our strong cash flow comes from the high investment returns on our assets, the long-term structure of our leases and the short ordering cycle and discretionary nature of our container investments.

I'll now wrap up the presentation with a few summary comments on Slide 12. Triton is off to a great start in 2018. We generated $79.8 million in adjusted net income in the first quarter, achieving another quarter of strong sequential earnings growth. We're off to an excellent start with our investment program and expect another strong year of value-added investment and fleet growth, and we announced a 15% increase in our dividend level to $0.52 per share this quarter.

We expect market conditions will remain favorable and expect that our adjusted net income will increase gradually throughout 2018 as we benefit from improved seasonality and fleet growth. And we believe we are very well positioned to continue to deliver long-term value to our shareholders through a powerful combination of steady growth, high investment returns and strong cash flow.

I will now open up the call for questions.

(Operator Instructions) The first question comes from Michael Webber of Wells Fargo Securities.

Brian, just a couple questions on box prices and then maybe kind of competitive dynamics. But I think if -- I heard box prices being firm, I believe, in the deck and in your remarks. I didn't catch a number. Can you give a little bit of color around where we are right now for new prices and how that's kind of trended quarter-on-quarter?

Sure. So the box prices have held, I'd say, somewhere below -- just slightly below $2,200 for a 20-foot dry container. And that's been the case, yes, since, I'd say, the fourth quarter of 2017, and it's held firm through now.

During that time though, we've actually seen steel prices increase in China, especially from, say, the third quarter level when box prices first got to that range. And so we've seen over the last quarter or 2, the margin of container prices over the price of the steel shrink.

And so that's why I think John O'Callaghan made a comment that box prices have held firm. But if we see that sort of normal peak season strength, we wouldn't be surprised to see box prices increase some, as that margin might be pushed back towards normal levels.

Right. And how have used prices reacted to that? I would think they would -- given just the velocity of pickups and (inaudible), I would assume that they're rising. But if the spread between new and used is narrower, it's maybe more people are skewing towards acquiring new containers. Where are used box prices now on a percentage basis than new (inaudible) they were there last year?

Yes. Used prices held -- they actually increased during the first quarter, which, again, is fairly unusual, just given the seasonality. It's due to a combination of things, probably, most importantly, was just the very low drop-off activity of containers and the continued very high utilization, which means that just very few containers are being put into the sale market. And so we saw prices continue to trend up.

In terms of the relationship of used prices to new prices, it's actually much higher now than it was last year as last year prices were still kind of rising after a weak 2015 and 2016 on this space. And 20-foot used prices are actually now fairly strong relative to new prices, and 40-foot prices are in a normal range, I'd say, relative to new prices. But overall, it's a good, sound market.

Got you. That's helpful. I mean, just around kind of competitive dynamics. Obviously, you guys have been pretty active in your new purchase program, still maintaining and growing share. Can you maybe talk to -- there are a handful of dormant or sleepy competitors out there. Any shifts in what you've seen, I guess, maybe quarter-on-quarter?

And then maybe any secular shifts or any major pivots you've seen since we last spoke around the way you think this cycle plays out in general in terms of how many people in there competing for your business?

Yes. So overall, we see the market, generally speaking, being in very good shape. Supply and demand dynamics feel good with continued strong growth in trade, a continued shift from owned to leased containers and then kind of normal levels of new factory equipment, but very low levels of used leasing equipment.

And then coupled with that, the leasing industry has consolidated a fair bit over the last 3 to 4 years. And even within that consolidation, there still are a handful of players that have not, say, fully reengaged with the market. And so there are perhaps, say, more competitors actively investing than we saw in 2017, which was, extraordinarily, few companies were investing actively.

But overall, we look at it as a very healthy market environment and believe we're making nice investments with mid-teen type level of equity, lifetime returns. And just given where we are with investing so far, I think we're going to have another good year of growth for the business.

It's -- yes. I mean, it's specifically relative to Q4 '17. I mean, Q4 '17 and Q3 '17, I guess -- I mean, those dormant competitors have been there for a while. Again, any shifts in what we've kind of already known for the last kind of 9 to 12 months?

Not really. I'd say we saw the market being, I'd say, the most favorable for us from an investment standpoint in the first half of 2017. And then during the second half, we saw perhaps 2 of the bigger competitors that have been quiet in 2017, start to reengage with the market. But I'd say since maybe fourth quarter of 2017, there hasn't been too much change in who's engaging actively.

The next question comes from Ken Hoexter of Bank of America Merrill Lynch.

Brian, just following on that. Any thoughts on pricing as -- on your lease rates, right? So it seems to hang around this 12% on a lease yield on a new run rate or maybe low double digits. I mean, in years past, we've seen that get up to more mid-teens. Is this kind of the new market, given the increased competition? Or through consolidation, could we see that continue to rise?

Yes. So from a pricing standpoint, if you mean, say, the relationship between leasing revenue relative to the cost of the equipment, we typically think of that as like the cash-on-cash return, that has been in the low double-digit range, which I think is actually quite typical for the business.

And specifically that cash-on-cash yield, we see range from perhaps just under 10% in a market with low container prices and challenging dynamics up into the 12-plus percent range when container prices are higher and competitive dynamics are more favorable for the leasing companies.

And in 2017, we saw the cash-on-cash return get into the 12s, partially reflecting maybe slightly higher container prices than today, but mostly, just a very favorable environment for leasing companies. Those cash-on-cash returns have come down some, just as a number of those bigger competitors reengage. But they're still favorable, and so we still see them in the low double-digit range and 11-ish perhaps or so, but it varies by deal and by leasing structure and so on.

But as I said, we think that type of cash-on-cash return is translating to a mid-teen type level of equity investment returns over the life of the equipment, where the kind of the 12% plus cash-on-cash returns we were seeing in 2017 was translating to what we think were low to mid-20% lifetime equity returns. And so it compressed some, but we think they're still at an attractive level.

Is there anything, given the -- you mentioned, I guess, 2 of the larger competitors coming back to market. Are you seeing anything that would increase the pressure on those returns? Or you view still 2018 and even into 2019 at these levels as of right now?

Yes. So far, we've actually seen all the leasing companies pricing fairly reasonably and thoughtfully. Again, just given the overall attractive dynamics of supply and demand, there's not really a need for anyone to price more aggressively than seems reasonable. And again, we have a fairly optimistic outlook for where trade growth and leasing demand goes from here, so.

That's helpful. And then just one, maybe John, on the direct operating costs. It seems like post merger, we -- direct operating costs ran up into the $20 million run rate for -- per quarter. Last couple quarters, come down at $14 million, $11 million, now $11 million. Is this kind of a post-merger stable run rate level?

The direct operating expense, the major components in there are storage and repairs. And given where we are with overall utilization at nearly 99% and redeliveries low, I would say it's -- for a long-term basis, that's at a low level because of those activities, so.

Okay. So given that you see the demand staying this strong or demand just -- I mean, especially if we're going into peak season, you wouldn't see that return coming up, right?

Yes. The utilization -- we expect utilization to remain strong for the rest of the year, but we certainly don't anticipate, in the long term, we would stay at 99% utilization. That is very high. And we have noted that repair -- redeliveries are low, therefore repairs are low. Over the long term, both -- over time, end of '18, into '19 things may normalize a little bit.

The only thing I'd say, and that's for sure. Again, operating expenses are low because utilization is high. We also though see -- we've got ancillary revenues. Some of our revenues are per diem revenues or most of them are. But we also, when containers are being off-hired, have repair revenues. We have drop-off fees and so on. And so there is some natural buffer there. But for sure, operating expenses are an attractive place now, because utilization is high.

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

So Brian, my first question is with the investment that you've done so far since, let's say, October 1, has all the money from the equity offering now been put to work? Or is there still some to go?

Yes. So I think we typically don't match the dollars from the equity offering to investment, but I'd say our leverage is still slightly below its long-term average. And so we still have room to accommodate a fair bit of above-normal levels of growth within our capital structure.

That said, we're also generating a lot of operating and equity cash flow because of our strong profitability, which also is why we increased the dividend, reflecting both, we think, significant and attractive new investment opportunities, but a strong increase in cash flow that also supported the dividend. And so we think we've got a lot of room for both.

Great. And then my other question is with respect to pickup rates, I know you said that storage costs are low. But can you say how quickly your customers are picking up the containers that are available to them?

Sure. So as I think we've mentioned a few times, the first quarter is typically the slow season for dry containers. And while we certainly saw that seasonal impact, we continued, though, to see I'd say pretty good level of pickup activity in the first quarter.

We are seeing as we're -- and typically, what you do see is as you get into May and in June and July, that the pickup activities really start to ramp up. I'd say we are starting to see that ramp up towards the peak season, and so it all feels pretty good in terms of the progression of pickups and the deal activity that we see building toward the peak.

Right. So would you say like it's taking them 10 days to pick up or 30 days to pick up, that kind of thing?

It really depend -- it depends on the deal. So we do a lot of transactions that are big transactions that often are partially done by our customers because they have an immediate requirement, but then they also will commit to more containers to be a little bit of blocked capacity for them. And the deals are structured to have pickups occur over -- it could even be many months.

So we don't really look or track a comparison of when we negotiated the deal versus when the containers were picked up. We much more kind of watch the overall velocity of the pickups. Again, that overall velocity feels like it's certainly starting to move in the right direction toward the peak season.

The next question comes from Scott Valentin of Compass Point.

Just with regard to trading versus retaining the boxes, I understand there's not much inventory to trade. But how you think about -- you mentioned the high prices relative to new. How do you think about trading and maybe the gain on sale, the kind of trade-off between the long-term cash flows versus immediate gain?

Yes. So it's something we always are evaluating. In our operating systems, we have algorithms in there that for every time a container is dropped off, it puts it against a mathematical calculation of what we think the net leasing value of the box would be relative to the net sale value and then, on the basis of that calculation, make automatic decisions about whether the boxes will be allocated toward sale or leasing. Although for situations where you're close to the line, there is some and a fair bit of intervention by our marketing and operations team.

But what we do is we were constantly updating the assumptions in that algorithm, and we update it for changes in market conditions, like expected lease rates, expected sales prices. And we also update them on a location-by-location basis for how we see -- that not just the overall leasing market and overall sale markets, but also the localized leasing and sale markets. And so we're constantly moving that dial.

Right now for -- we've probably moved the dial towards sale, just because sales prices are very high, especially for certain container types in certain locations. And for those, we probably are selling a higher percentage than we were.

But that said, the drop-off volumes are exceptionally low so that overall disposal volumes are low. And while our disposal gains were at a level that we think are fairly attractive, it was really just because price was so high. And so the per unit margins are very high while the overall disposal volumes continue to be low.

That's helpful. I appreciate that. And then just you mentioned something like the dry van market is very -- is pretty tight, but can you talk out reefer conditions? I know they've kind of lagged a little bit in terms of the improvement that you've seen in dry van?

Sure. So certainly in 2017, the improved market conditions very much came to dry containers first. But we have seen, over the last few quarters, conditions really improve on the reefer side as well. And part of it is due or probably maybe even most of it is due to just reduced reefer new -- new reefer investment levels over the last 2 years or so.

And so we've seen our utilization come up very nicely. We've also seen market leasing rates for reefers improve, not because new reefer prices have increased, but just because there's sort of less aggressiveness among all the players, I think, to push volume, perhaps recognizing some of the greater challenges in remarketing reefers over time.

But we do see much improved conditions. We've started investing in reefers. I wouldn't say we're investing aggressively, but we've started investing more actively than we were 12 months ago. And I'd say that's probably true for all of our product line. I think each of the product lines we operate right now is either very close to where we'd want to get it in the strong market environment or moving upwards.

Okay. Just one final question. Just with regard to -- obviously, the tariff issue is still out there. And wondering, so far, not much impact, obviously, on a trade.

But just wondering how your shipping customers are thinking about when you talked them about -- so far not much impact, but is there kind of contingency planning going on? Or how have those conversations kind of gone towards when you talk about future demand for containers?

So as you note, so far, we've seen very little impact, as far as we can tell, from the talk of a trade war to actual impacts on volumes. Again, the trade volumes are pretty nice for us in the first quarter. And, I'd say, our customers and industry forecasters remain optimistic about volumes for the balance of the year. Everyone I talk with or everything I read continues to point to trade growth in 2018 of something around 5%.

And so I think just in general, our customers and probably -- our customers of shipping lines and their customers, the retailers and freight forwarders, I think are still operating under a base assumption that whatever trade actions happen will not be incredibly disruptive to the global trading pattern, just given how interconnected everything is, from manufacturing supply chains to retail distribution chains and so on.

But I think the other important thing to keep in mind though is just the -- keeping the U.S.-China business in perspective. Obviously, we have a global business that involves many different trade lanes and many different countries. And we see estimates at least that something in the range of 15% of vessel capacity, and so therefore, probably also container capacity, is deployed on the Asia to North America trade, which obviously will be most impacted by sort of the trade war talk you here between the U.S. and China.

And the U.S.-China bilateral trade is some portion of that overall 15%. And so even a fairly significant disruption to that portion of trade wouldn't be necessarily a huge change in the overall volume of global containerized trade.

And then also I think -- one thing I think our customers talk about too is that even if, say, China to the U.S. movements are disrupted, a lot of that isn't just going to be an elimination of trade, but a relocation of trade, which the way our containers naturally follow the trade, for us, wouldn't be hugely disrupted either.

So I think at least when we think about the trade war, it's much more in regards to what could the spillover effects be. That while we wouldn't welcome any bilateral challenges between China and the U.S., I think it wouldn't, again, significantly disrupt what's going on globally other than if we saw, say, trade protectionism spread as a political objective around the world or perhaps real income effects of trade in the U.S. and China having follow-on consequences. But overall, we don't yet see a lot of impact on activity or yet a lot of anxiety among our customer base.

The next question comes from Doug Mewhirter of SunTrust.

First, just a numbers question for John. I think I might know the answer to this. But I notice that depreciation expense was sort of flattish sequentially from the fourth quarter while your fleet -- the book value of your fleet grew a bit.

I just didn't know if maybe your CapEx was really backloaded in the quarter so you just had a few less -- so you didn't really have that incremental depreciation. Or was there something else in the mix?

No, it's a good point question. We start depreciation when the units go on hire, they're first on hire. So we will have containers that are accepted and go into the fleet but are not on hire yet in the new containers.

We also -- over time, as we have units continuing to go past the 13-year depreciation age and then stop depreciating, so a combination of those items is what led to the change in depreciation.

And just the reason for the -- well, the first one, you see -- tends to be a seasonal item. So as we've talked about the peak season for moving dry containers for our customers, typically, say, is May through October.

And because of that, we typically, as we build containers, they tend to go on hire pretty fast and so you don't have a lot of, say, containers that are on our balance sheet but not yet deployed to customers.

When we go into the slower part of the season, we typically start building inventory to handle the next year's peak. And you see that in some of the supply metrics that John O'Callaghan shared. And so we just have a slightly larger portion of our fleet that we've built and put on the balance sheet but haven't yet deployed with customers.

That's very helpful. Regarding CapEx, it sounds like you still are sort of eager to take advantage of these conditions, notwithstanding the higher dividend. And you mentioned in the press release you had $850 million, I think, committed for lease, which I assume some of that was in -- a lot of that was in the fourth quarter cash flow statement. Do you think that your second quarter sort of investing cash flow would exceed your first quarter, all is equal?

So I'd say couple of things -- sorry, Doug. And so first, when we talked about CapEx in terms of the number that we give, we define it by containers delivered in a calendar year.

So you're right that some of that $850 million that we've talked about was ordered in the fourth quarter, but all of it's been delivered or is planned to be delivered in 2018. So it wouldn't have been reflected yet in the cash flow statement. Typically, it goes in there even a month or 2 after it's delivered. So there is a lag there between the ordering activity and the where -- when it shows up in the cash flow statement.

In terms of the pace of ordering, it's been, I'd say, at a pretty good clip straight on through from the fourth quarter through now as we've -- some of it was building inventory getting ready for the peak season, but we also did a lot of leasing transactions along the way as well. And right now, we're ordering for delivery in June. So from -- on a delivery basis, we're kind of about a halfway through the year.

That's very helpful. My last question, maybe for John or one of the Johns, the -- you reported a shortage. And I think you cited that there was increased ship deliveries. So -- and I thought it was unusual that they would order to the number of ships sort of the containers rather than the absolute demand, and I didn't know how that dynamic worked.

And would there be a risk of maybe a little bit of an air pocket because they sort of filled up that initial capacity for the ships -- these new ships and they wouldn't need any more like the next quarter?

Yes, maybe, I'll give that a shot and one of the other guys can jump in. But there -- what drives container demand is not the vessels, but rather the actual trade.

So certainly, the -- what we're seeing, our customers order a lot of vessels. A lot of that is to address growth in the market, but it's also to get more competitive vessels. So -- but we don't try to link the 2 because it's really about worldwide trade growth, which is linked to worldwide GDP growth, et cetera.

Yes. I think really sort of the impact is much more secondary. And so I think John O'Callaghan mentioned that we have seen the increased share for leasing continue, and we think that's mainly because our customers continue to be competing very aggressively on kind of the vessel level efficiencies of getting bigger, more fuel-efficient ships. Also competing aggressively on landside investments.

And so one reason we have some confidence that we're going to see leasing share continue to be high is the pace, the ongoing pace of container vessel ordering and delivery. And I think we also just take it frankly as a sign of optimism by the customers that trade growth is going to remain fairly solid. (inaudible) [mechanical] connection.

Yes. I see when -- they didn't order boxes to necessarily fill up ships, they ordered boxes because they used all their money on ships, the way -- okay, the way I interpret that question. Okay.

The next question comes from Michael Brown of KBW.

So just a question about the fixed and hedged debt. So it declined very slightly this quarter to make the last quarter to 84%. So what would kind of be the target mix as we look at a period of rising rates? I guess, where would you want to take that?

And then you also had said that the duration of the fixed rate debt is a bit longer than the average lease duration. Did you give that number? And if not, could you just share what the average lease duration is?

The average show long-term lease duration and finance leases is about 42 months, but again, that's to the end of the contractual term. And given the way the business operates, typically, those units will stay on for 6 to 12 months beyond that. So that ties to your question about how we think about a little bit beyond the lease duration for hedging.

You noted that it was down a little bit. It was 86% at the end of the last quarter to 84%. A large portion of our business is long-term business. It ranges in 80% plus fixed rate leases. So somewhere in that range, whether it's high 70s, low 80s, is where we like to be.

Yes. And I'd just say too, and similar to the question on depreciation, that right now is sort of the time of year where we probably have the largest portion of our containers waiting for pickup because it's right ahead of the peak season. And so similarly, when we tend to try to match interest rates, it's for the containers on lease. And so you would just expect naturally a bunch of this.

And the reason, it's also just some random variation as we do debt deals and swap transactions. But it also would make sense right now that the variable rate might be a little bit higher or variable portion a little bit higher while we're getting ready to enter the peak season and to lease out that inventory.

Great. Two-part question here. During the quarter, one of your peers went to market with a preferred stock issuance. Is that something that you would consider to do to fund CapEx?

And part of the proceeds from that preferred stock were used to repurchase shares and clearly the dividend raise is a positive. So how do you view kind of valuation of your shares currently? And would you kind of look to also return capital to shareholders via a share repurchase?

Yes. So I'd say we look at our stock right now as a very good investment. We have a business that we think is in a very interesting business niche with attractive fundamentals. We've got the clear dominant position in that business.

We're performing really well. We've got an optimistic outlook going forward, and all that comes together, and we say, "Boy, it's interesting where our shares are trading."

I think when it comes to preferred stock, as a financing tool, I also think it's an interesting tool and it's something that we have seen others, not just the recent issuance in the leasing space, but also others, say, in related businesses use as a way to finance their growth.

I'd say, for us, we have sufficient cash flow, as we mentioned, to both finance a pretty high rate of growth, certainly well in excess of market growth, while also paying a high regular dividend. And so we don't really need to issue any new kind of capital to defund the growth that's out there.

I guess if you're saying could we have some kind of program where we issue preferred and repurchase common, I suppose that is something we could consider. And we always do consider share repurchases as alternative uses for our cash and something that we will continue to consider going forward.

Great, that's helpful. Just one last one. In your prepared remarks, I believe you guys said that you could kind of bring the tax rate down from that 11.2% range, bring it down a bit. Now are you basically guiding to that you could bring that to the bottom end of your range? And then if so, I guess could you give some guidance as to your timing on when you expect to get there?

Yes. I'd say what we had talked about for the current year is somewhere in the 10% to 12% range in the earnings release. As we go forward, exactly what the number will go down to, it'd be over time, as we invest more of the containers in the offshore entity and less in the U.S., that should drift downwards to high single digits over time.

This concludes our question-and-answer session. I would like to turn the conference back over to Brian Sondey, Chief Executive Officer, for any closing remarks.

I'd like to thank everyone for your ongoing interest and support of Triton International. Thank you.

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