Triton International Ltd (TRTN) 2018 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Triton International Limited Third Quarter 2018 Earnings Release Conference Call. (Operator Instructions) Please note, this event is being recorded.

At this time, I would now like to turn the conference over to Mr. John Burns, Chief Financial Officer. Mr. Burns, please go ahead.

Thank you.

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

Joining me on this morning's call from Triton is Brian Sondey, our CEO; and John O'Callaghan, our Executive Vice President and Head of 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 our website in the company's presentation 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 these expressed or implied in the forward-looking statements.

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 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, presentation as well as our SEC filings.

In addition, certain non-GAAP financial measures will be discussed in this call. A reconciliation of these non-GAAP measures to the equivalent GAAP financial measures is included in our earnings release.

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

Thanks, John, and welcome to Triton International's third quarter 2018 earnings conference call.

I'll start with Slide 3 of the presentation. Triton achieved outstanding results in the third quarter of 2018. Triton generated $94.8 million of adjusted net income in the third quarter or $1.17 per share, an increase of 6% from the second quarter and an increase of 46% from the third quarter of 2017. We also realized an annualized return on equity of 16.9%.

Our excellent results in the third quarter were driven by favorable market conditions, outstanding operational performance and continued value-added investment and growth. Leasing demand was supported by solid trade growth and a continued shift toward leasing. Net container pickup activity was strong. Our utilization remained over 98%, and we continue to win more than our fair share of new leasing transactions due to our many market advantages.

We're now entering the slower season for dry containers and market metrics have slowed seasonally. However, the supply of containers remains well controlled, and we're carrying significant financial momentum due to the growth in our equipment on hire that we achieved throughout the third quarter.

We continue to use our strong and stable cash flow to create shareholder value in multiple ways. We continue to drive strong organic growth in our business. Our Board of Directors has authorized a dividend of $0.52 per share this quarter. And through October 31, we repurchased 976,000 shares of our common stock under our recent share repurchase authorization.

I'll 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, we've had another good quarter, which caps a very strong season for us in terms of business performance and investment. Utilization remains firm with continued pickup activity and demand for both our depot stocks and new production inventory. Churn-ins remained at a low level.

Due to continued steady container growth, we did well, in part because of our competitive strength and position in the market, but also because our customers are not buying containers in meaningful numbers and therefore mostly rely on leasing. We're heading into the time of the year when business activity naturally slows down and we're seeing that. But overall, the fundamentals are solid. There is a restricted supply of containers, utilization remains high and factory inventory has been coming down, as both leasing and shipping companies curtail purchases now that the peak season is over.

Turning to Slide 5, as I mentioned, the metrics mainly show that the third quarter was strong. With high pickup activity, utilization was over 98%, box prices remain solid, the average lease rates continue to drift upwards and used container sale prices remain strong. Now as you can see in the lower left-hand chart under pickup to drop-offs, the net pickup activity was closer to record levels of 2017. Each of these metrics have come off as we move -- off a little as we move into the slow season.

Slide 6 looks at the key measures of container supply and demand. The top charts look at our key demand drivers, trade growth and leasing share. Loaded in the upper left chart, the container trade expectations from our customers and forecasters have been steady this year, with trade growing around 4% to 5%. Though 2018 -- through 2018, we continued to see shipping lines rely heavily on leasing as they focused their capital investments elsewhere.

The upper right chart shows the growth and evolution of the global fleet. You can see that the share for leasing went from 40% to 50% over a 10-year period. We estimate that the leasing share of new container additions in 2018 is over 60%. The incremental demand for our containers from the lines as well as taking share from the leasing companies enabled our strong growth. And we anticipate the shift and mix from owned to demand for leasing containers to continue.

The bottom 2 charts are measures of supply. On the left, factory inventory decreased in the rush to pre-Golden Week to just over 600,000 TEU, which is only 1.5% of the total global container fleet. And the chart on the right is Triton's availability of used containers in Asia. Even though the tariffs have created uncertainty, there's a general expectation that the global economy and trade growth will be in about the same place next year.

Overall, the combination of trade growth, controlled supply and an increased shift to leasing creates a strong backdrop for the over -- overall fundamentals to remain positive.

Turning to Slide 7, we've had another great investment year. We import over 680,000 TEU, we're taking more than our fair share growing about twice as fast as the market. The levers that have got us there are trade growth in the range of 5%, leasing taking ownership from the lines was another couple of percent; we continue to take market share from within leasing, and we continue to invest in specialized container types, which also gives us some extra growth.

These investments remain attractive. The initial duration of leases are long, and the structures are protected by robust and defensive logistics.

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

Thank you, John.

Turning to Page 8, on this page, we have presented our consolidated financial results. Adjusted net income for the third quarter was $94.8 million or $1.17 per share, up over 6% from the second quarter and over 46% from the prior year quarter. These strong results represent an annualized return on equity of 16.9%. The increase in earnings was driven by continued strong fleet growth, high utilization, strong disposal gains and lower operating costs.

I'll expand on these key profitability drivers on Page 9.

Leasing revenue for the third quarter is up 16% over the prior year quarter, driven by nearly 12% year-over-year growth in our revenue earning assets. The increase in leasing revenue has also been driven by continued high levels of utilization. Utilization in the third quarter averaged 98.7%, up 1.1% from the prior year quarter. And this was the fourth consecutive quarter our utilization has been over 98%.

In addition to the revenue benefit, these high levels of utilization keep our direct operating expenses very low. Operating expenses, which are largely made up of storage for off-hire units and repairs for containers we delivered, were $11.5 million in the third quarter, down $2.3 million from the prior year quarter.

Our combined trading margin and gain on sale was $12.9 million in the third quarter, an increase of $1.2 million over the prior year. These gains were largely result of a 13.5% increase in average dry container selling prices.

Also, there are 2 noncash items that are benefiting our year-over-year results. The first, the purchase accounting adjustments related to our merger in 2016 provided a $5 million net benefit in the third quarter compared to a $2.2 million net benefit in the prior year quarter. The second is the reduction in our effective tax rate to 10.3% in the third quarter from 16.8% in the prior year. This change is largely due to the reduction in U.S. corporate income tax rate last December. Over time, we expect our effective tax rate to trend down below 10%.

Turning to Page 10, this page highlights our strong and stable cash flows that enable us to grow the fleet and maintain a strong balance sheet, while paying a substantial dividend. The graph on the top left shows our annual cash flow before CapEx, which is EBITDA less interest expense plus container disposals and principal payments and finance leases. The chart shows strong growth on these cash flows as we've grown the fleet over an extended period. This cash flow metric was $1.2 billion based on annualized third quarter financial results, which is generally in line with prior peak levels, despite significantly lower disposal volumes in the current period.

The graph on the bottom left highlights the significant discretion we have in timing our fleet investments and therefore our ability during market downturns to quickly curtail capital expenditures, enabling us to delever during these periods.

The graph on the right demonstrates the benefit of these strong cash flows. Over the last 12 years, we have grown a market-leading business, while paying a substantial regular dividend. If you combine the growth in our net book value with the cumulative dividends, we have generated over $45 of value per share, representing a compounded growth rate of 15% even without compounding the dividend cash flows.

Turning to Page 11, this page highlights our well-structured and conservative approach to financing our business. We limit our exposure to rising interest rates by focusing on long-term fixed-rate debt and using interest rate swaps to lock in interest rates on our floating rate facilities. And we focus on staggering our debt maturities to avoid significant maturity cliffs. This approach together with our strong cash flows gives us access to multiple debt markets to fund our container investments.

In August, Standard & Poor's revised the outlook on our BB+ corporate rating from stable to positive. With this positive outlook, we have made achieving a BBB- investment grade rating a high priority, as we believe it will provide significant benefits, including increased access to debt markets, increased financing flexibility, lower overall cost of funds over time and would further distance ourselves from our competition.

I now return you to Brian for some additional comments.

Thank you, John.

I'll continue the presentation to Slide 12. Before wrapping up, I thought it'd be useful to make a few comments on IMO 2020.

In 2016, the International Maritime Organization passed new regulations reducing the amount of sulfur allowed in vessel emissions. These rules go into effect January 1, 2020. There are 3 main ways our customers can comply with the tighter regulations. They can purchase more expensive low sulfur fuel, they can install scrubbers to clean the emissions from burning standard fuel or they can install engines that use alternative fuels, notably LNG.

While these regulations and the actions required by our customers do not impact us directly, the costs associated with the tighter regulations could further challenge the financial performance of our customers. In particular, there is concern about whether the shipping lines will be able to increase their freight rates to recover the higher cost for low sulfur fuel. And the investments required to outfit vessels with scrubbers would likely require shipping lines to take on additional debt, well many are already highly levered.

That said, we believe several factors will mitigate the impact on our credit risk. First, the increase in costs associated with the tighter rules are known in advance and they're permanent. It should be easier for our customers to pass these costs on than it has been for them to recapture the normal unpredictable changes in fuel prices.

In addition, the ongoing consolidation of the shipping lines has strengthened the credit quality of our lease portfolio. And over time, the tighter rules could actually help solve the core problem of excess vessel capacity by accelerating the scrapping of older vessels with poor fuel efficiency. The new rules could also have some secondary benefits from leasing demand. The higher cost of low sulfur fuel should encourage further slow steaming. And the additional capital requirements for scrubbers should encourage our customers to continue to rely on leasing for containers.

I'll now wrap up the prepared presentation with a few summary comments on Slide 13. Triton achieved outstanding results in the third quarter. We generated $94.8 million in adjusted net income, an increase of 6% from our strong second quarter results. Our profitability in the third quarter represented an annualized return on equity of 16.9%. We have invested over $1.5 billion in our container fleet this year, and the highly expected lifetime returns and long initial durations on our new container leases will provide a long tail of enhanced profitability and cash flow.

We're entering the slow season for dry containers, but market fundamentals remain sound, and we expect our fourth quarter profitability will remain in the same range as our strong third quarter results.

Looking forward to 2019, increased tariffs for goods traded between the United States and China are adding uncertainty to our market. We have an optimistic outlook. Our customers and market forecasters continue to expect trade growth to remain solidly positive next year. We expect our customers will continue to rely heavily on leasing. We continue to have significant advantages in our market. And our strong and stable cash flow gives us many levers to create shareholder value, including strong organic growth, a high dividend and share repurchases.

I would now like to open up the call for questions.

(Operator Instructions) The first question today comes from Michael Brown with KBW.

Just wanted to start off with -- could you give an update on how the new container prices are trending in the fourth quarter?

Yes. So our new container prices are down some -- for most of the year, they were in the range of $2,100 or slightly above, I'd say, beginning toward the end of the third quarter and continuing into the fourth quarter; they've been trending down gradually. New container prices right now are somewhere probably in the mid-1,900s. And I think the change has been a combination of a slight decrease in steel prices in China, coupled with just the seasonality that we referred to coming off the peak season now into the slower season for dry containers.

Okay. So it's been widely reported that HNA is looking to sell Seaco. So I know the merger is still relatively recent for you guys, but is this a business that try and looked to purchase? And if so, would you expect to receive any regulatory pushback given your leading market share?

Yes. I don't want to talk too much any specific transaction. I think we've talked before that the merger of Triton with TAL was a huge success for us in terms of just the cost synergies and building out a competitive distance in terms of our operating capabilities and scale and supply capability and so on. And we think M&A generally speaking will continue in our industry as either our competitors look to try to catch up to us or as we continue to look to extend our advantages.

I think I don't want to comment specifically about regulatory matters or anything like that. But again, I think, generally speaking, growing through mergers makes sense in our business. We look at deals as they become available, but we also tend to be very disciplined, that we've got a great ability to grow our business by investing organically. If we wanted to increase our deal share and our growth rate, we could do so, I think, very quickly just by adjusting the way we approach leasing transactions. We have a great look at almost every deal that's out there. And so again, we look at these kinds of deals, but we look at them very carefully with a disciplined eye.

Okay, great. And just one more. So regarding your commentary on IMO 2020, that you believe the shipping lines will be able to pass on the pricing to customers. But so what are your views on kind of shipping industry, do you see really any cracks out there? Or do you expect consolidation to continue as well?

Yes. Certainly, we've been pretty clear, I think, in our calls and our filings that our customers, that the shipping lines are under a lot of financials stress that they -- the business has been characterized by excess vessel capacity and freight rates that aren't providing a real return on their invested capital. And that's been true for a long time.

And -- but here, we've got a lot of insulation from credit risks. We've got a lot of very good tools to make sure people pay us on time. And to the extent that customers go through financial restructuring and want to use their assets while they're doing that, generally speaking, they have to pay the container leases. And we've experienced very few credit issues over time, the Hanjin bankruptcy being the one real exception to that.

As I mentioned in our own notes -- in our call that -- prepared part that the consolidation of the shipping lines we view as positive for the credit of our portfolio to make the shipping lines stronger, and also means that the shipping lines just are more significant in terms of the cargo that's moving around the world, and their vessels and containers would need to be utilized by someone to handle the global trade that's out there.

So in general, we look at IMO 2020, as a -- certainly a challenge for our customers. All of them are very focused on it. But as -- for the variety of reasons that we talked about, we don't think it's going to likely lead to significant credit issues for us.

Next question comes from Ken Hoexter with Merrill Lynch.

Brian, in the past, you've been really good at kind of calling market turns. Just want to understand what -- when you step back and think, what should we be looking for? I just want to know because as I dig in, obviously, you talked about utilization rolling over; it was 98.7% for the third quarter. Now, it's 98.4%. I don't know if that's minor, if that's part of the seasonality you talked about. Just want to understand how we should think about looking at the difference between seasonality and kind of the market turn?

Yes. Sure. So seasonality is a typical feature of our business. I'd say, in 8 of 10 years or something like that, you see a seasonal pattern where, generally speaking, you're getting net container off-hires in the fourth quarter of the year and the first quarter of the year and net container on-hires in the second and third quarters of the year.

It's been a while since we've seen the normal seasonal pattern. Just 2015 was just a year that was challenging throughout the year, while in -- the fourth quarter of '16 through -- right through now, we've seen nothing but positive on-hires as we've experienced just a very strong market conditions right through the -- both the strong and slower seasons.

As we look at the fourth quarter of this year, it feels like a normal seasonal pattern to us, that as we've outlined in our presentation, there's still a very tight supply and demand balance for containers. But it is past -- we just passed October and if the goods aren't on the ship, they're not going to get on the shelves for Christmas, and most of the shipping lines are generally speaking looking to reduce capacity over the next quarter or 2. And therefore, just aren't really looking to pick up containers other than spot requirements, particular container types, their locations, just where they're operationally caught short.

When we think about 2019, it's just feels to us like that, the things that have made the market attractive for us over the last 2 years are likely to remain in place. The trade growth, just talking with our customers and reading market forecasters, seems widely expected to remain in may be the 4% to 5% range. We think that our customers are going to continue to be very cautious about buying containers, meaning that leasing will continue to take share. We feel our advantages in the market every day as we go out and compete for business and just run our business. And so all these ingredients still -- they still very much feel like, it should make 2019 another good year for us.

Can you -- I don't know if this is for Brian or John. But how have lease rates changed more recently -- have returned -- I guess, have returns on the lease rates adjusted?

Yes. So maybe I'll start and if either John wants to jump in, they can. So in terms of market lease rates, just because it's the slower season, we don't have as good of a handle on that right now than we -- as we typically do say in the second and third quarters when we're doing deals literally a few a week. But we've seen a few deals out there even as it is the slower season. And container prices have come down, as I just mentioned. But in terms of the returns on investment against that lower container price, I think, they're pretty similar.

So the market lease rates are down because the container prices are down. But generally speaking, returns are the same.

Right. Okay. That's -- I guess, that's key for you in terms of seeing a shift, right? Is the returns more than the lease rates?

Yes, for sure. I mean that's for our new investment, that's what really matters. For the existing fleet, we do like to see lease rates staying higher. But again, the change we've seen in container prices and lease rates, we see really it hasn't been that significant, and mainly, we think it's a seasonal thing, where right now, when you look at the margins that the manufacturers are getting in terms of the container price versus the steel input costs, it's very low right now. And so again to me that's just kind of a seasonal thing and as more demand returns, just as you know that the more containers are needed, that ought to reinflate.

Okay. Just two quick ones. I guess, I think, it was John through the slides, is the draw on Page 6, is the dry depot lease inventory starting to creep up through 2018? That seemed like a longer term chart than just the seasonal call. Is that -- am I reading that one right? Or is that...

Yes. So, I mean it's just really what you mentioned earlier, that utilization has gone down slightly from 98.7% to 98.4%. And just given the size of our fleet, these days of 6.2 million TEU that 30 basis points of utilization change adds up to 10,000, 20,000 containers. But those containers the way we run our business are in our key export market locations and -- so again, that's -- we still look at that as a very tight level of inventory for us.

Okay. And then last one for me is, you're buying back shares, it looked like that was, I guess, all post-quarter close. I think the press release said in October or by the end of October, the $30 million in purchases. Maybe just some thoughts on the timing of the program? I know you've got $170 million-or-so left on the program, but maybe just some thoughts on timing?

Yes. So we announced, I think, on our last conference call that we had authorized or our Board had authorized up to $200 million of share repurchases. As you pointed out, I think we started buying, I think, September 30 even or something like that. And most of the purchases that we made of that now probably including yesterday is slightly over 1 million shares. We're done from the end of the quarter.

That also corresponds to when our share price came down and when we announced the share repurchase plan, we said we were going to purchase opportunistically. Frankly, because it was the timing, we had to do it through an intent-to-buy plan. We have one in place that various purchases, both the overall amounts of the purchases, but also the pace of the purchases by the share price. And I think that's really the main driver rather than trying to choose the days or the time.

So it remains opportunistic not -- okay.

They remain opportunistic, yes.

Next question comes from Scott Valentin with Compass Point.

Just with regard to the quest for investment grade rating, BBB-, from S&P. Does that hamstring capital management at all? Do you guys have to kind of limit your ability to buy back stock, doesn't seem like it but just want to get your thoughts on any constraints that, that going after BBB- might have on capital management?

Yes. So I'll start and then John Burns can maybe jump in.

First, Standard & Poor's in their communication to us indicated that our financial ratios, our leverage ratios, our interest coverage ratios are already consistent with where they would expect them to be to get an upgraded rating. And so there's nothing that we need to do, for example, to tighten down our capital structure from where we are to try to make ourselves eligible for that.

Similarly, we've talked many times in the past that we generate a lot of equity cash flow. And typically, we prioritize making sure we have a very strong and flexible balance sheet is sort of the first use. Investing again to support our customers and kind of maintain pace with the market as perhaps the second use. Covering our dividend as the third use. And then above that, we then typically look at, do we want to grow faster than the market, should we be buying back shares, should we be increasing the dividend, should there be a special dividend even? And we've -- given just our profitability, we have a fair bit of cash that's in that last bucket as we sort of think through those other alternatives. And all those things we can do at our current level of profitability without increasing our leverage.

And John, do you want to...

Yes, I'll just add to that, that when S&P issued the upgrade to the outlook to positive, they indicated, as Brian mentioned, that all our metrics to be a BBB- investment grade were in place. But they were -- now I think wanted to normal course to go through a positive period, an outlook upgrade before a full upgrade, but also they pointed to the uncertainty relative to trade and said that, I think, they wanted to see how that played out certainly over next quarter or 2 or 3.

Yes. I think, uncertainty just with the trade tariffs is what they were pointing to.

Okay. And then just on tariffs, there has been some speculation of fourth quarter typically seasonally slower, but with tariff rates have to go up on January 1 from 10% to 25% on $200 billion of goods, is there some speculation that you're seeing some pull forward? I don't know if you guys are seeing or hearing it from your shipping customers.

Yes, we certainly think there's some of that. We, of course, just see the pickup activity and don't really know exactly why or what it's for. But, yes, I think generally speaking, the Trans-Pacific trade has been performing pretty well this year, somewhat ironically as perhaps goods are being brought forward ahead of the increased tariffs. But as I said earlier, it doesn't feel like a unusual seasonal pattern, generally speaking, for us.

One of the things we keep pointing out on these calls is that while Trans-Pacific trade and the China to U.S. trade is very important, Trans-Pacific trade overall is something only like 16% or 17% of vessel capacity and China-U. S. is just a piece of that. So while probably there are some bringing forward of cargo in that particular trade, it's just a part of the overall global trading network, and our business is driven by what happens globally.

Okay. Fair enough. And then one final question. Just speaking about per diem rates and I think that you guys -- you mentioned, you're focused on the return of investment and return on equity. Are current -- current leases you're entering into, are they kind of ROE accretive or ROI accretive to the portfolio? Are they kind of stable with what the portfolio is running?

Yes. So -- yes, I guess it depends what you mean by accretive. So we're pretty disciplined when it comes to how we evaluate new leasing and new container investments. As I mentioned earlier, just given our position in the market, we see and have an opportunity to win a large share of virtually every leasing deal that's out there. And the transactions we win are much more governed by, are we willing to match the best terms or not that even offered by others? And so we said that the deals we're doing this year, we think generally speaking are going to give us lifetime equity returns somewhere in the mid-teen kind of range.

Right now, our return on equity is 16.9% for the quarter. I think those things are pretty consistent. We think from a value standpoint that we're building value by investing into deals that give us mid-teen returns, but again those returns are fairly consistent with returns we have right now.

Next question comes from Helane Becker with Cowen and Company.

So I just have a question. Brian, I don't know if it was in your presentation, but there was a comment made about investing in specialty containers. And I was kind of wondering what containers that you are branching out into, and is it because you're seeing improved returns in that area? I had thought earlier this year, refurs, for example, we're in -- I don't know how to say it, returning the returns you would want to see? I guess, that's a bad way of asking the question. I want to give it to go.

So we have a pretty long tail of specialty container types. And for most of those container types, we're not the #1 player in those submarkets, but we've gotten into them because we can leverage our operating network that we have around the world, we can typically use our base financing structures to finance these specialty types. And because of the fact that we have the operating network already there, we can get into these new products with very little incremental costs. And with a fair bit of operating scale and feel that we again can compete kind of above perhaps our punching weight in those products and add nice incremental returns to us.

On things that we do there, it's not all new to this year, it's just continued investment that we've been doing this year -- are things like tank containers that carry specialty chemicals, Europe pallet wide containers or European pallet wide containers that are used for intra-European cargo, things like road trailers that carry cargo on and off railroad vessels and things like that. And collectively, they're probably less than 5% of our assets, but they do give us just interesting value-added extra little bit of growth.

Okay. And then my other question is just are you seeing a shift in where your customers want to pick up containers? And I ask because I was in Hong Kong earlier this week and I was at the port, and it seemed like activity at the port was not as robust as it has been in prior year. So I go every year this week and I just didn't see the level I just saw like last year, the year before, and I'm just wondering if it's like a seasonal thing? Or if you're seeing customers really shipping into other markets and not like your traditional Southern China ports?

Yes. So I would say, a couple of things there. So first, certainly seasonal impacts are large that once the peak season passes, typically before Golden Week typically [has its] peak season, anything after that, after the first week of October typically slows quite a bit, so that that's probably part of it.

We have seen increased intra-Asian bookings from customers that trade within Asia. And there's speculation that is that, are we seeing some relocation of supply chains outside of China into Southeast Asia, could it be some kind of triangulation where they're trying to have a stop someplace outside of China before moving the goods on, we don't really know. But we've seen some of that. And I wouldn't say it's gigantic in the context of our overall business, but it's certainly been noticeable.

I think also one thing that we see every year is that the -- really the hot location in China shifts around. Sometimes we see most of them coming from the south, sometimes more out of Shanghai, sometimes out of Ningbo, sometimes more to the north, it does also change seasonally. But all those things, kind of, run into the mix. And, but that said, I mean, if we looked at where our container pickups came from this year, the vast majority came from China right up through the end of the third quarter.

Okay. And then my last question is, as you look ahead to the first quarter, I think, we have a relatively early Chinese New Year. I think it's like February 5 or 6 or something. But then we have a very late Easter, something like April, I don't know, 15 or 20 or somewhere in that time. So that distance, does that -- is that going to affect a -- will there be a shift from first quarter into second quarter containers? Or how should we think about, like that February? Because when the ports close or when the manufacturers close for that week or 2, you would normally see a rapid pickup getting ready for Easter. So how should we think about that March-April this year versus other years?

That's a very good question and I had sort to make -- hazard to guess about. Certainly, Chinese New Year, we see, you know, has a very large impact on the rhythm of our business. Sometimes we see a rush right before Chinese New Year as shippers look to get whatever they need ahead of the factory closures.

I'd say just in my personal experience, I haven't seen as much of an impact for Easter. In terms of -- are there any correlation between the timing of Easter and just the way the trajectory plays out in terms of on-hire growth through -- from the first through the second quarter, yes, so I'm not exactly sure. I think, I don't know what to say.

(Operator Instructions) The next question comes from Michael Webber with Wells Fargo.

I wanted to circle back to an earlier question on pricing, and obviously it's all tethered to the box pricing. I'm going to try to think about the right order to think about this. But a couple of quarters ago, or last quarter maybe I think I asked you guys, why we weren't seeing a bit more upside to box prices and it's a bit perplexing, and it might have been like kind of the Q1 time frame, where it seemed like there were an awful lot of tailwinds and we didn't really seem to breakthrough kind of maybe that midcycle level.

It's eased off a little bit to $1,900 or $1,950. So I'm just curious, maybe to start off, like what do you think is a realistic range for box prices maybe the next couple of quarters, I won't ask you to go longer than that. But is the true box price something north of $2,000 and we're just seeing a seasonal lull here? Or is there something else going on? I know steel prices are a bit weaker, but it certainly seems like given the pace of this year that, I continue to be surprised there is not a bit more support for box rates.

Yes. It's a good question, and I recall talking with you about that. And I think we've made a comment probably right all the way from the first through the -- probably the July, August, that we were surprised that box prices weren't higher. We always typically think of box prices in 2 components. The first being the cost of the steel input and the second being the margin the manufacturers get above the cost of the steel to cover things like the floor, the paint, labor, their return on capital, et cetera.

And the thing that was particularly strange in our minds at least about 2018 box prices is that steel prices have been fairly high throughout the year, but the margin over steel prices has been very low. Typically, we see that there's a range of, I don't know, may be $850 to $1,200 on top of the steel input cost. And so with steel being, say, somewhere around $650 for most of the year, we would have expected box prices to be kind of $2,300 or $2,400, maybe even a little on top of that in the second quarter building toward the peak.

But instead, they were kind of hanging in the $2,100s, and despite the fact that that production of dry containers was fairly high this year. And so there's a lot of chatter within the industry on just why is that? Why are the manufacturers feeling such competitive pressure to price that margin down?

And then as I mentioned earlier, we've seen that, that margin go from the low end of the typical range to kind of break below the typical range as we've gone toward the fourth quarter. Frankly, that actually makes us feel okay, that, that sort of margin over steel costs for container price is one of those numbers in our business that seems to have a lot of gravity around it. And you may break out a little bit to the upside in a particularly, great market, you may breakout a little bit to the downside, but generally speaking container prices trend back toward that, that kind of margin level.

And steel prices, they have come down, but they remain kind of upper third of where they are or where they have been historically. So we look at that and say, yes, container prices have come down, but all else equal, we would expect it to go back up as we move back toward the busier time of year, certainly by next year.

Do you think like a realistic range the next couple of quarters as you guys start thinking about your early investment for 2019, $1,900 to $2,100, is that reasonable? I mean, I don't want to put words in your mouth. I'm just trying to get -- I was a bit -- I'm honestly a bit surprised that we backed up a little bit. And it was a bit tough. Outside of more inflationary pressure, I guess, on steel prices, I'd assume it inches up a little bit. I'm just trying to think about the range. Is that about right, you think?

Well. So it's again, we never think we're particularly great at forecasting steel prices. And we obviously spent a lot of time looking at it because it matters for our container purchases. But forecasting steel is like forecasting oil prices. It's very tough. And so you said to me that steel prices, let's assume they stay around where they are, maybe a little bit under $600 a ton for hot rolled in China. I would tell you that I would bet the container prices are going to go back up. The margin is too low by a few hundred dollars.

But again, that's just -- if you believe in terms of the reversion to the mean and in terms of margin pricing and if steel prices hold flat. And generally speaking, we do believe, yes, there's probably a long-term inflationary trend in steel and box prices, but again you need to think about it in those 2 components.

Got you. Okay. In terms of yields, I know someone addressed this with an earlier question, but can you maybe characterize where yields have trended with box prices sliding a bit on new business? And are you seeing any material divergence between maybe the historical norms between where you're able to price new business versus the re-led business you're seeing right now?

Yes. So I'd say, as I mentioned earlier, we just don't see a lot of business in this time of year. And so to say what's the market yield, what's the market deal is a little bit misleading just in the sense that there is not a lot of market activity. But we have seen some deals. And the deals that we've seen, I would say, again the cash on cash returns and the investment IRRs are not out of the range from where we saw them over the course of the year, but with box prices being lower, that means lease rates are lower.

Right. Okay.

Just in terms of -- conceptually thinking about maybe like the yield on a new box and you've an asset curve, the pricing of yield base kind of fix that yield and you kind of effectively get like a pricing curve across like the entirety of the asset life. How -- if I think about that curve relative to where you guys see like a repricing tailwind, based on where your average boxes are priced, like how wide is that range on a percentage basis, ballpark? I'm not -- I won't expect you know to off the top of your head, but like, are we talking 5% to 10%, if we even look like a 10% yield on $1,900 to $1,950 versus where you guys would see a repricing? You know, you had flipped to maybe seeing a bit of a headwind. Like how close are we right now to that kind of marginal price point?

Yes. So I'm not sure I fully understand the question, but I think when we forecast our investment returns over the container life, we look at the 3 different periods: The initial lease rate, which we know of course; the releasing period, and the resale value. And to forecast that second period, the releasing returns, we're typically we're looking at a range of forecasts for what container prices might be in the future in a range of, say, ratios of lease rates to container prices at that time, as well as sort of a, we typically think of a factor of how productive are our used units relative to our new units from a revenue standpoint?

And I'd say, right now, where new container lease rates are, it's probably somewhere around the same range of what we think the net productivity would be of our used equipment when the first leases expire. But not sure if that's what you meant. But let's say, when we're writing leases today, we wouldn't be baking in a tremendous amount of inflation on the rate in the future.

But that said, we typically look at it, like I said, it's a range of outcomes. And so we look at what might happen in the future from low to high future container prices, low to high future productivity of the assets and just try to do deals that are disproportionately weighed into outperforming our cost of capital compared to the opportunity to underperform the cost of capital.

Yes. Okay. Yes, I kind of jumbled the question. I can take it offline. But you got pretty close with not a lot to go on, so I pretty appreciate the answer.

So just one more and it's around M&A and obviously you guys can't comment on it specifically. But historically, there has been a pretty healthy margin or kind of spread between where financial buyers -- or what they're willing to pay on any kind of multiple basis a couple of turns relative to, say, operators. It hasn't always -- I mean it's worked out well in some cases and obviously not well in other cases, considering HNA [and] those -- that Seaco and Chronos are back on the block.

Just has that dynamic changed at all, in terms of when you guys are looking at those kind of deals, is it more competitive now? Or would it be realistic for you guys to compete with PE money that's coming in, is it still a couple of turns north? I know it's still a bit direct, but have the dynamics changed versus, say, last cycle?

Yes. So I could say maybe just a couple of different things. So, one, our approach hasn't unchanged. We -- if we're looking at consolidating acquisition, we look at the value of the lease portfolio, we look at the value of the containers at the end of their current leases. We try to assess the current state of the lease portfolio of whoever we're looking at and just to what extent are we going to incur positioning costs if the leases aren't well written from a logistical standpoint, how many, what kinds of repairs have been given away until the last season. And then just some assessment of how is the box quality compared to ours, how is the credit quality compared to ours? And just look at it as almost like a giant chunk of container acquisition and lease portfolio acquisition really rather than, say, a business investment. And that, that's the way that we would look at this transaction.

I think we've seen enthusiasm from PE firms come and go in our space as there's been times where there was a number of PE firms invested including through us and through others. There are other times when the PE firms are not that interested in this business.

Generally speaking, I don't -- PE firms typically, at least, they say they have a higher cost of capital than we believe we have. And obviously, they don't have a -- if they're new to the space, don't currently have a business, they don't have the synergies that we would have. So it's hard to say in what instances would we be outbid by PE firms, but I can tell you that our -- the way that we approach it. Again as I kind of bottom-up fundamental space analysis, and again, while we're very strong believers that there's significant synergies available in an acquisition like that. Also we have the ready opportunity to go out and grow faster our business if we decide that's what we want to do. And so we're very disciplined on how we look at the value.

Okay. And just sorry, one more follow up. Along those lines, when there are these bigger blocks of containers or lessors that are out there, when you're looking at stuff like that, to what degree do you get concerned about deterioration of a footprint or -- neglect is a strong word, but the kind of some erosion in terms of the quality of the asset base if they haven't been in the market and it's active over the past couple of years? Is that something that would be pretty high on your radar? Or is that something that, considering the minimal moving pieces in this space, that it's less of an issue if you're talking about a year or 2?

No, it's something we would look at very carefully. And fortunately we know what lease agreement should look like, how we consider the credit quality of the shipping lines in our business and even from a container standpoint. What -- how containers should look at various ages and can always compare those things to how our lease portfolio and our containers and even our credit quality looks.

And so I think we've mentioned a few times, but probably the most important buying factor for our customers is reliability of supply and consistency of business approach because that's -- it's very important for them to be able to rely on us to adjust their operations to take leasing into account. And generally speaking, when you have that reliability and consistency, you're getting a preference to win transactions. And so typically you can be relatively firm like we are, relatively disciplined like we are, on our lease structuring and credit decisions and so on. And so for sure, we would have, I'd say, increased concern for -- in situations where we thought maybe for a variety of reasons shipping lines might need to stretch to win business because of their position.

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

Just like to thank everyone for your continued support and interest in Triton, and look forward to speaking with you soon. Thank you.

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