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Edited Transcript of TRTN earnings conference call or presentation 24-Oct-19 12:30pm GMT

Q3 2019 Triton International Ltd Earnings Call

HAMILTON Nov 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Triton International Ltd earnings conference call or presentation Thursday, October 24, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian M. Sondey

Triton International Limited - Chairman & CEO

* John C. Burns

Triton International Limited - Senior VP & CFO

* John F. O'Callaghan

Triton International Limited - Executive VP and Global Head of Field Marketing & Operations

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Conference Call Participants

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* Kenneth Scott Hoexter

BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials

* Lawrence Scott Solow

CJS Securities, Inc. - MD

* Michael Webber

Webber Research & Advisory LLC - Managing Partner of Export Infrastructure

* Michael C. Brown

Keefe, Bruyette, & Woods, Inc., Research Division - Associate

* Scott Jean Valentin

Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Triton International Limited Third Quarter 2019 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 Mr. John Burns, Chief Financial Officer. Please go ahead, sir.

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John C. Burns, Triton International Limited - Senior VP & CFO [2]

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Thank you, Ted. Good morning, and thank you for joining us on today's call. We are here to discuss Triton's third quarter 2019 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 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 in our Investors section of our website. I'd also like to point out the company will be making statements on this conference call that are forward-looking statements as the term is defined on the Private Securities Litigation Reform Act of 1995. Any forward-looking statements made in 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, 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. As -- a discussion of risks and uncertainties included in our earnings release and presentation as well as the SEC filings.

In addition, certain non-GAAP financial measures will be discussed on 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.

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Brian M. Sondey, Triton International Limited - Chairman & CEO [3]

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Thanks, John, and welcome to Triton International's Third Quarter 2019 Earnings Conference Call.

I'll start with Slide 3 of the presentation. Triton achieved solid performance in the third quarter of 2019. Triton generated $85 million of adjusted net income or $1.16 per share. We also achieved an annualized return on equity of 16.1%. Triton has achieved solid results this year despite facing a more challenging environment. Global economic conditions have softened this year, and the ongoing trade dispute between the United States and China continues to disrupt trade flows and create uncertainty. Our solid performance in this more challenging environment reflects our cost and capability advantages as market leader, the strength of our long-term lease portfolio and the natural resilience of our business model.

We have reduced new container procurement this year while using our strong cash flow to drive shareholder value in other ways. We have repurchased almost 11% of our outstanding shares since we initiated our share repurchase plan last fall. We have also repurchased the minority investor interests in a portion of our container fleet. And we continue to pay a significant regular dividend, which is currently yielding almost 6%.

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

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John F. O'Callaghan, Triton International Limited - Executive VP and Global Head of Field Marketing & Operations [4]

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Thank you, Brian. Turning to Slide 4. Triton's operating performance continued to be solid in the third quarter of 2019, with utilization averaging 96.7%, down 50 basis points on the second quarter. Container activity remained slow in the third quarter with limited leasing demand. The third quarter is typically the peak season for our business, and transactions are well down from 2018. We had seen some promising signs at the end of the second quarter and very early in the third quarter, though it didn't lead to much. Instead of seeing a leveling off of utilization or even a slight increase in the third quarter, it kept going down, albeit by relatively small amounts.

There was limited new container transactions through the third quarter with aggressive competition for available deals. Triton participated prudently in some but instead generally chose to allocate equity cash flow to high-yielding investments. Overall, the market is slow, and our customers' expectations are on the conservative side for the remainder of 2019. Market forecasters are also predicting that growth expectations will be down from earlier estimates. However, new production inventory levels are under control, and absorptions were up a little for the -- from the second quarter as the shipping lines started to pick up their own new production equipment.

Turning to Slide 5. Slide 5 shows Triton's key operating metrics. As mentioned, the third quarter was unseasonably slow. However, our utilization is down by only 50 basis points over the quarter. This is a very reasonable change in the existing market, and utilization remains high at 96.1%.

The chart on the lower left of the slide shows our quarterly picks and drops of containers. You can see that the picks for this time of the year remained low, while over the same period, drops increased though at moderate levels. Our expectation is for drops to remain well controlled due to our customers' container fleets being in balance.

Turning to Slide 6. Slide 6 looks at the key measures of container supply and demand. On the upper left chart, we see current expectations for trade growth. While our customers previously expected growth in the same range as 2018, it has ended up being slightly positive. There remains a great deal of uncertainty tied to ongoing U.S.-China tariff issues and, to a lesser degree, U.S. and EU tariffs. The bottom 2 charts are measure of supply. Although factory new production inventory decreased to about 900,000 TEU, absorption volumes were low for the third quarter especially as it's the traditional peak season. These new production numbers are manageable and will remain so as the factories are presently not seeing a requirement for additional orders.

The bottom right chart shows Triton's inventory in Asia. We have seen an increase in our depot fleet off-hires in Asia. However, it remains under control, and the equipment is where we need it when the market picks up. We have very few leasing containers in inventory outside of Asia.

To sum up, our customers continue to run tight container fleets, and although cautious about additional container capacity, they continue to retain their existing positions. This time of the year, the market is traditionally slow, and we're looking forward several more quarters before we expect to see a change.

Inventory levels remained under control. We are seeing decreased production and existing inventory levels reduce as the shipping lines absorb their own equipment. This inventory correction typically sets the stage for recovery. And when demand inevitably shows up, we remain ready to supply our customers when they need us.

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

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John C. Burns, Triton International Limited - Senior VP & CFO [5]

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Thank you, John. Turning to Page 7. On this page, we have presented our consolidated financial results. Adjusted net income for the third quarter was $85 million or $1.16 per share, down 1% on a per-share basis from the prior year. These results represent a return on equity of 16.1% and reflect the solid operating performance of our lease portfolio despite the soft global economic conditions. Our earnings per share also benefited from our share repurchase program, which has reduced our outstanding shares by nearly 11% over the last year.

Turning to Page 8. Our results for the quarter were driven by several factors. Leasing revenue was down 3.8%, reflecting a nearly 5% decrease in our fleet size and a 2% decrease in utilization from the prior year. Though down, utilization remained high, averaging 96.7% for the quarter but was down from a very high 98.7% in the prior year quarter. In addition to the impact on leasing revenue, lower utilization drove a $9 million increase in direct operating expenses, reflecting higher storage and repair costs.

Our container disposal results remain quite positive, generating combined gains on sale and trading margin of $10.3 million in the third quarter. This was a decrease of $2.5 million from the prior year, reflecting a moderation in disposal prices partially offset by increased disposal volume.

We continue to realize incremental benefits from purchase accounting adjustments related to our 2016 merger, and we have realized further improvements in our effective tax rate. And with limited new container investment opportunities, we have directed a significant portion of our strong cash flows to share buybacks.

Turning to Page 9. Despite the slow lease demand, our third quarter EPS was up $0.01 sequentially from the second quarter. This is due to our well-structured lease portfolio, a 2.6% reduction in average outstanding shares and the timing of several annual expense items. The slow lease demand led to a negative impact on earnings of approximately $7 million, reflecting a 50 basis point decline in utilization and an increase in related operating expenses together with lower gains on disposal. However, much of this was offset by $5 million of benefits due to the timing of certain annual expense items, including lower lease intangible amortization, lower depreciation as another vintage of containers became fully depreciated and lower SG&A as our annual share grants to our Board of Directors occurs in the second quarter and is not repeated in the third quarter. And earnings per share also benefited from the reduction in shares outstanding.

Turning to Page 10. This page highlights our long-term financial stability and how this is enabling us to create significant shareholder value over an extended period. The keys to this financial stability and value growth is our strong cash flow over multiple economic cycles, as shown in the graph on the top left. These cash flows, together with the short order cycle for containers, enables us to maintain our leverage in a steady range over the long term, as shown in the graph on the bottom left. The graph on the right demonstrates how these strong cash flows and financial stability have enabled us to create significant shareholder value by steadily growing the book value of our business while paying a substantial dividend. Over the last year, we've increased our adjusted tangible book value by more than 8% to over $36 per share while continuing to pay a significant dividend.

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

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Brian M. Sondey, Triton International Limited - Chairman & CEO [6]

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Thanks, John. I'll continue the presentation with Slide 11. Triton's financial performance has remained solid despite facing more challenging market conditions in 2019. Trade disruptions and lower global economic growth have led to limited leasing demand since the fourth quarter of last year, and container prices have been at the low end of their historical range due to reduced procurement volumes. Still, our return on equity is over 16% year-to-date, and our cash flow is close to record levels. The resiliency of our financial performance is supported by several factors.

Triton has significant cost and capability advantages in our market. These give us a premium return on equity over the lifetime of our investments and provide strong support to our profitability when market conditions slow. We have a strong long-term lease portfolio. Over 75% of our containers on hire are under multiyear, long-term or finance leases. These leases have an average remaining duration of 48 months. We order containers with only a few months of advanced notice, so supply adjusts quickly to changing demand. And as John O'Callaghan showed, the inventory of new containers decreased in the third quarter despite the disappointing container demand. This combination of a long revenue tail from our leases and a short ordering cycle for containers provides great support to our utilization, cash flow and profitability.

It's also important to note that the current market environment does not contain the same mix of challenges we faced during the last downturn in 2015 and 2016. In 2015 and '16, we faced a wave of lease expirations from high-rate leases that were written during rate markets in 2010 and '11. The resulting downward repricing of these leases significantly compressed our margins. We are much less exposed to margin compression from lease expirations now.

Steel prices collapsed to below $300 per ton in China in 2015, reflecting the general route of commodity prices at that time. This pressured container prices and created the fear of further container price reductions. Hot rolled steel prices in China are currently in the range of $500 per ton, and we expect container prices will rebound when container demand improves.

Our profitability is also supported by the significant investments we made in high-return leases in 2017 and '18. These leases have many years to run and also have well-staggered maturities. And we significantly extended our cost and capability advantages through our merger in 2016.

While we have reduced procurement this year due to limited leasing demand, we've been aggressively using our strong cash flow to build long-term shareholder value. Our cash flow before capital spending is close to record levels this year. We have used this cash flow to reduce debt and buy back almost 11% of our outstanding shares. And we believe the investment in our shares has been compelling. The average price we have paid is well below our adjusted tangible book value and the projected runoff value of our container fleet and lease portfolio.

I'll conclude the presentation with a few summary comments on Slide 12. Triton achieved solid results in the third quarter of 2019. We generated $1.16 of adjusted earnings per share, and we achieved an annualized return on equity over 16%. Our container procurement has been limited this year, but our strong cash flow has been put to good use. We're now heading into the slower time of year, and we expect our operating metrics will continue to gradually trend down. We also expect our adjusted earnings per share will decrease from the third to the fourth quarter. But overall, we remain fundamentally optimistic in our outlook.

Our financial performance remains solid. New container production is down, and the supply of containers is starting to adjust. We have significant advantages in our market and will be in a great position to capitalize on investment and growth opportunities when the supply-and-demand balance for containers tips into our favor. And in the meantime, we're making high-return investments in our shares, and our strong cash flow gives us many opportunities to create shareholder value.

We'll now open up the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from Michael Webber with Webber Research.

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Michael Webber, Webber Research & Advisory LLC - Managing Partner of Export Infrastructure [2]

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Brian, first off, and I apologize, if you mentioned this earlier, I missed it. But can you give the actual dry van price for where you think new prices were for Q3 and then where you stand today?

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Brian M. Sondey, Triton International Limited - Chairman & CEO [3]

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Sure. It was -- it changed a bit throughout Q3, but I'd say it's somewhere in the middle $1,600 right now, middle to upper $1,600s per 20-foot.

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Michael Webber, Webber Research & Advisory LLC - Managing Partner of Export Infrastructure [4]

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Yes. So if I think about from kind of the average in Q3 to today, is that still -- is it still kind of inching down from here or from -- I guess, from the middle of Q3?

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Brian M. Sondey, Triton International Limited - Chairman & CEO [5]

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I'd say it's been fairly stable for the last month or 2.

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Michael Webber, Webber Research & Advisory LLC - Managing Partner of Export Infrastructure [6]

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Okay.

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Brian M. Sondey, Triton International Limited - Chairman & CEO [7]

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And the thing that we talk about container prices is -- I mentioned on the call that steel prices have actually held in quite well this year, while container prices are down significantly from last year. And so all of the change has been margin compression. At least most of it has been. And so again, that gives us the expectation that as demand improves and production volumes increase that we'd expect those margins to go back to normal levels and the container price to come back.

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Michael Webber, Webber Research & Advisory LLC - Managing Partner of Export Infrastructure [8]

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Yes. No, that caused me to go back to your decks to hunt for that chart you guys used to put in there on the -- around the steel prices and steel values and box prices with the gross margins there. But if I think about that $1,600 and put that within the context of maybe kind of other cycles, I know we troughed last cycle probably around, I guess, what, $1,250, $1,300? Obviously, every cycle is going to be a little bit different. But I'm curious whether you think that would still apply today? And then I guess within the context of that statement, like to what degree does the consolidation of the manufacturers have -- what impact you think that has on where that floor ends up being?

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Brian M. Sondey, Triton International Limited - Chairman & CEO [9]

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Sure. So during the last down cycle in 2015 and '16, very briefly, the container prices went below $1,500, but it was -- my recollection, it was only a month or 2. And that reflected the combination of low steel prices plus margins briefly getting down to where they are today.

The curious thing about this year has been despite the manufacturer consolidation that you mentioned, the margin has held low for quite some time, really, if I guess, for the last 4 quarters or so. And again, our expectation is as soon as production volumes go back up, that we would see prices get back to a more normal range just given that steel prices are high and margins are really low.

And I think there are several reasons to think that the margins should actually grow over time, including the consolidation of the manufacturers but also just general inflation and labor costs in China, more stringent enforcement of environmental rules, more expensive land costs around the port areas, things like that.

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Michael Webber, Webber Research & Advisory LLC - Managing Partner of Export Infrastructure [10]

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Got you. Okay. That's helpful. I guess just within the broader market, it seems like some of this might have been some kind of the lagged effect for some -- a pull forward ahead of sanctions, I guess, last peak season. But some of it obviously seems like it's some weakness in the global economy. What are you hearing from your customers? Are you noticing any -- noticing a different posture maybe this cycle versus last cycle just given you've got IMO 2020 regs hitting pretty soon, which is kind of potentially a shock to their cost curve? The geopolitical backdrop is obviously more volatile than it has been in previous cycles. So just curious what your takeaway is in your conversation with your customers now versus the last couple of years, and you've been kind of looking at a similar set of dynamics.

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Brian M. Sondey, Triton International Limited - Chairman & CEO [11]

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Sure. So I'd say, like many businesses right now, that our customers are struggling to interpret just what are the tariffs meaning for their business. And the tariffs have had several effects. One has been changing the timing of shipments. Initially, shippers tried to front-load shipments to avoid the implementation of the tariffs. I'd say most of our customers probably think shippers are holding back on cargo flows, hoping that the tariffs go away this year. And so perhaps compounding what might be kind of natural slowdown anyway because of the economies in certain places around the world.

So I'd say they're uncertain as well. They started the year with fairly decent expectations for trade growth. And I think as we've mentioned, they have come down some over time to expecting trade this year to be just slightly positive. But I wouldn't say they've got a feeling they have a crystal ball. I don't think anyone really knows how to read the ongoing trade discussions or just what it's going to mean if there is some kind of mini resolution.

I think there's some of the same factors in this down cycle compared to others. And certainly, in terms of impact on us, the -- whenever container demand is weakish, we see our utilization go down, and we -- container prices typically weaken as the manufacturing margins compress. But the big difference is -- this time compared to last time for us and for our customers is we just don't have a large volume of leases expiring that are on high rates. And that ended up really changing the dynamic of how we worked with our customers in 2015 and '16 and very much put us on the defensive. I think we don't really have to be so defensive in our actions this year because again, we feel container prices will come back soon, and also, it's just our lease portfolio is in very good shape.

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Michael Webber, Webber Research & Advisory LLC - Managing Partner of Export Infrastructure [12]

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Yes. No, it seems like you have a pretty defensible position. I'm just -- I was more thinking along the lines of their posture towards capital deployment, and you can probably measure it by a box-to-slot ratio and whether they're kind of pulling back just -- as they kind of head into a more uncertain 2020, whether you're seeing anything on the margin there from a behavioral standpoint.

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Brian M. Sondey, Triton International Limited - Chairman & CEO [13]

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Yes. I think the -- from, I think, the customer standpoint, as you've probably seen, vessel orders are pretty low this year. And that reflects, I think, a variety of things. One, just the fact that there continues to be an excess supply of vessels in the world. And I think the -- or some of the shipping lines are starting to get a little bit more disciplined around capacity management and deployment. Also, I think you mentioned the IMO 2020. That's creating, I think, additional capital requirements for our customers as they start to install scrubbers earnestly on their vessels. And also, just an additional layer of uncertainty. And I think when times are more uncertain, it's tempting to rely on things like leasing. And we continue to see leasing being a big share of how our customers are adding containers. And for all of those reasons, I think it will stay that way.

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Operator [14]

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The next question comes from Michael Brown with KBW.

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Michael C. Brown, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [15]

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So I wanted to kind of follow up along a similar vein there. So what are you kind of seeing in terms of the shifting supply chains? Can you kind of speak to the puts and takes there for containerized trade? I assume maybe there's some benefits from activity moving to Southeast Asia. But we're hearing reports of activity kind of moving to Mexico, which may not necessarily be -- may actually hurt your business. So I was interested to hear your thoughts on the supply chain movements.

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Brian M. Sondey, Triton International Limited - Chairman & CEO [16]

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Sure. So we don't have direct visibility into that. We typically supply most of our containers from the factories, and the factories remain all in China. And so for us, the business -- the leasing transactions still are very much China-centric. We look at the data, and we talk with our customers. And there is a lot of talk about movements or exports shifting from China down into Southeast Asia. And when you look at the stats on China-to-U. S. direct trade, it's down and offset to some extent by increased direct trade with places like Vietnam. Yes, I think it's an open question, how much of that reflects movement of actual production to Vietnam versus movement of cargo flows through Vietnam? Again, I don't have a good insight into that. But I think it's -- it does take time to relocate production facilities and to build infrastructure in different places.

Obviously, the topic of onshoring or moving manufacturing closer to where it's being used is a big topic these days for tariffs and other reasons. We've always been a little bit skeptical that you can see very significant movements. I think there's obviously, at this point, trillions of dollars invested in manufacturing and transportation infrastructure in China. It doesn't seem obvious that there's a reservoir of production capacity that can replace the large portion of that anytime soon. And so probably, it just means that the margin -- do you see a little bit more, a little bit less growth. Certainly, it's something that's mentioned as a reason why trade growth is a little bit low this year. But again, we don't see it as a fundamental game changer, at least at this point.

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Michael C. Brown, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [17]

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That's helpful. And then I just wanted to shift gears. So I mean given the challenging environment for organic growth at the moment, it's obviously good to see free cash flow being deployed into share buybacks especially at these valuation levels. But would you consider an acquisition of a competitor obviously that it could be very accretive to earnings? So I wanted to hear your thoughts there. And would you expect from an acquisition that you may receive some regulatory pushback? I guess did you hear any from the merger with -- the TAL and Triton merger? Was there any pushback at that time?

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Brian M. Sondey, Triton International Limited - Chairman & CEO [18]

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Sure. So we're definitely believers in the benefits of consolidation. When we went through our merger in 2016, I'd say the benefits were even a little more than anticipated. We got the cost savings we wanted to get very reliably. And we also found that we built out our capabilities by combining the best pieces of each organization.

When we look out to the situation now, we would be interested in participating in the right kind of consolidation opportunities. We have tended to be pretty disciplined in the past about how we look at opportunities and wanting to make sure that building the company through M&A is viewed essentially the same way as building the company through investment and held to the same kind of financial tests similarly and would hold it to the same standard of, is it a better investment than buying back the shares? And as you indicated, the shares to us look fairly compelling if we're buying below book value and below runoff value. So for the right opportunity, for sure, we'd be interested. We typically have looked at most of the deals that have been around in our industry and participated in some way and got one big one done and didn't do the others. But we're definitely interested.

In terms of the regulatory issues, we did not actually receive any regulatory pushback in the Triton and TAL merger in 2016. One, it's not -- our leasing industry isn't so concentrated. There is a fairly long tail of medium-sized and smaller players. And then secondly, Mike, we certainly characterize the industry, and I think it actually is accurate, as total containers that probably, the biggest competitor we face is our customers buying and financing their own containers. And when you look at the concentration in the industry, including all containers as the denominator, there's still a long way to go before the industry feels consolidated.

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Operator [19]

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The next question comes from Scott Valentin with Compass Point.

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Scott Jean Valentin, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [20]

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Just on utilization rate, I understand, seasonally usually trends down into the fourth quarter, maybe first quarter. In terms of the delta, do you expect it to be kind of in line with recent performance? I mean I'm just trying to measure the amount of weakness you're seeing versus CapEx has been limited. So I would think your utilization rate should hold up maybe better than it has in the past in terms of the rate of decline into the seasonally week period. Is that a fair assessment?

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Brian M. Sondey, Triton International Limited - Chairman & CEO [21]

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Yes. So I mean we -- typically, we see utilization go up in the third quarter. So the decrease in the third quarter, of course, has just been a little bit -- the timing has been funny. I'd say the rate of decrease in the third quarter reflects what you might typically see in the fourth quarter. And yes, there's some question about what does that mean? Do we -- will then the rate of decrease increase as you get to the fourth quarter or will just sort of stay the same? Our view is it won't accelerate much.

Certainly, the seasonal trend is weaker, and our customers, generally speaking, in the fourth quarter are not looking to bring in capacity. But as we said a few times, our lease portfolio is in good shape. We're not hugely exposed to off hires at this time. And also, as you've mentioned, there hasn't been a whole lot of containers bought into service this year. And so there shouldn't be that much. There wasn't a lot of building to the peak, and so you wouldn't think there'd be much kind of shedding from the peak. But we're really just getting started in that slower period seasonally, at least what's typically slower seasonally. And so we'll have to see, but again, we feel relatively well positioned to weather it well.

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Scott Jean Valentin, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [22]

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Okay. And then just in terms of current rates, I know you mentioned that it's a competitive market. Just wondering, relative to where current portfolio ROIs are on, one, new leases, well, how that compares to the portfolio; and two, when you are re-leasing containers, where is that re-lease rate relative to the current portfolio rate?

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Brian M. Sondey, Triton International Limited - Chairman & CEO [23]

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Sure. In terms of ROIs, when you make new container investments, you never fully know what you're getting because the initial lease usually is half or slightly less than half of the container life. And so you're making a lot of assumptions about what happens after the first lease. But we have lots of experience with that, of course. And we typically -- we talked before that when we model new leases, we typically try to model them to get levered equity returns in kind of the low to middle teens, hopefully using assumptions, we think, are conservative. And then we try to outperform those assumptions in the re-leasing and resale periods to get our investment IRRs to the middle to upper teens. And that's what you see in terms of our long-term return on equity.

And we've talked about, in this year, we see the expected returns that we're modeling being lower than that usual range. And we're seeing a number of the deals fall below that sort of low-teen range. And typically, we have decided not to participate in those deals. Some deals are falling into the range that we find okay, but I'd say very much towards the lower end of that acceptable range. And that's the main reason why we've been having a lower share on new investment this year and allocating our cash flow to other things.

That said, even if we were being more aggressive in our pricing, we still would have seen capital spending and growth down just because there isn't the amount of investment opportunities out there that we typically see in a more robust kind of market.

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Operator [24]

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The next question comes from Ken Hoexter with Bank of America.

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Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials [25]

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Brian, just kind of, I guess, going back to Michael's questions, and maybe we haven't seen fourth quarter earnings lower than third quarter, as you mentioned, going back to, what, 2015. And you slowed your new buys, as you mentioned, down to $10 million. So how long do you anticipate this environment lasting given you kind of mentioned a couple of quarters here of reduced activity? Maybe also throw in your history of kind of market turns. Where does this feel? Does it just feel like it's light relative to kind of what we've seen maybe the last 2 kind of Great Recession or even '15, '16, and that it's just going to trend this way for maybe a little bit longer? Or maybe just your historical view on that.

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Brian M. Sondey, Triton International Limited - Chairman & CEO [26]

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Yes. Sure, that's a good question. So when we gave our outlook, we felt that almost always, you see utilization trend down in the fourth quarter and in the first quarter just for seasonal reasons that I was describing earlier. And every once in a while, you see that trend not be the case when there's just a very strong market, typically recovering from a slower time and customers just need to add containers back regardless of the seasonality. We definitely don't think we're in that kind of environment now.

And so just naturally, we would say, "Okay, because we're heading into the slow season, utilization is going to go down fourth and first quarters." We typically would look toward the second quarter as perhaps the time we might start to see stronger activity. And if we do see that, that will be obviously a good sign that we're sort of back on track and that capacity has adjusted enough to take into account the lower demand that we experienced this year. But we -- I'd say we expect it to be sometime during the busy season next year. Exactly when will depend on just how much building there is over the next couple of quarters. We don't think there'll be much. We think the supply will adjust relatively quickly over the next quarters, couple of quarters here, but you never know, and also, of course, will just depend on what happens with the trade disputes and the global economy, how much demand comes back in 2020.

I'd say historically, and we do spend a lot of time looking through our historical statistics, we've rarely seen a slowdown in container supply and demand last more than 8 quarters. And if you look back to the -- even the financial crisis in 2009, we measured kind of trough to -- or sort of go decline to recovery, I think, probably 6 or 7 quarters. In 2015 and '16, it probably was 8 quarters. We would point to about this time last year when we first started seeing demand fall off as kind of the start of the slower period. And so if historical trends hold up, we're somewhere between 2/3 and 1/2 -- or 1/2 and 2/3 of the way through.

And then the reason it tends to be that way, it's just the way supply adjusts, that even in -- without demand coming back, just the fact that there's little building and every year, 5% or so of the containers age out of service, it does have a very natural way of bringing supply and demand back into balance.

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Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials [27]

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That's a great perspective. Appreciate that. Maybe, John, you mentioned that drops are kind of staying -- increasing but relatively steady. Is there anything that happens that gets those drops to all of a sudden pick up above target? I guess just is it contract timing that keeps that in check? Or is there something that demand takes a leg down, and those drops can accelerate beyond kind of scheduled? Just want to see if there's anything that maybe accelerates that process a little bit.

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John F. O'Callaghan, Triton International Limited - Executive VP and Global Head of Field Marketing & Operations [28]

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No, it's pretty much contract timing that's dictating this right now. There's 3 contracts that have ended. The equipment that's been coming in has been coming in at a steady pace. We don't see that accelerating in any way. My expectation would be that it might get a little bit more elongated through the fourth quarter, but we haven't seen any signs of that yet.

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Kenneth Scott Hoexter, BofA Merrill Lynch, Research Division - MD and Co-Head of the Industrials [29]

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Okay. That's helpful. And then lastly for me. Brian, just given the low rates on the market, and I think you just got a question on pricing, are you seeing any increase in competition given it still is a pretty solid ROE? Are you seeing any private equity money return in any way? I know a lot of that had left after last cycle. Just seeing if there's any kind of -- I mean they are pretty solid returns even at these levels, if you're seeing that increased competition.

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Brian M. Sondey, Triton International Limited - Chairman & CEO [30]

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So I'd say we do see competitors being a little more active than us this year. And we have some charts we've probably shown in more extended decks where we look at, say, the strength of the market as one element of the analysis and our market share as the other. And the markets, from a pricing standpoint, were really strong in 2017 and '18, just great investments. We had significant shares in those years, probably over 40% on average across '17 and '18. This year, we see pricing -- and not a disaster, but certainly lower than we like to see, and we've allowed our share to drift down and use our cash in other areas.

We certainly have a number of competitors that have done the opposite, that for a variety of reasons, just either didn't have the financial capacity or the will to invest in 2017 and '18 and kind of were playing catch-up this year and then loading up disproportionately and in years where the returns are perhaps a little lower than you might like to see. But as you say, they're not terrible. And so we do see some competitors being, again, more active than us. But to some extent, we like to take what the cycle gives us and see that as a way we build value over time.

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Operator [31]

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(Operator Instructions) The next question will be from Larry Solow with CJS Securities.

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Lawrence Scott Solow, CJS Securities, Inc. - MD [32]

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Just a few follow-ups. On the competitor side, are any of your competitors -- excuse me, are any of them spending on new containers? Or have they also been very quiet like you guys?

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Brian M. Sondey, Triton International Limited - Chairman & CEO [33]

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So just overall, investment is down because just the overall number of transactions is down. But there are a few competitors out there that have been taking a more aggressive stance on investment and transacting this year than we are. One of the luxuries we have as being, I would say, the financially most capable and also the, from a supply point, most capable is we're able to pick and choose the -- to some extent, the deals that we participate in. And I'd say most of the transactions out there in most years, we have an opportunity to win a large share if we match the competitive rates. And when markets are good, we're taking a lot of those opportunities. When markets are weaker, we don't. I think there's a number of competitors that maybe don't have that luxury and, when they have the opportunity, try to maybe do more deals than we feel we need to. And so we definitely see there are some competitors out there that are leaning a bit more forward into what we see as a weaker market.

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Lawrence Scott Solow, CJS Securities, Inc. - MD [34]

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Right. And then in terms of pricing, obviously, pricing on new contracts is down. You guys have a decent amount of sort of outstanding pending contracts that you've just been continuing to run at the old rate. Do you guys have any sense that customers want to try and lock in as the rates are somewhat lower today than maybe the ones that are expiring?

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Brian M. Sondey, Triton International Limited - Chairman & CEO [35]

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For sure. And so it's something we always see as container prices change and as lease rates change. We love to lock in extensions when rates are high, and customers like to lock them in when rates are low.

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Lawrence Scott Solow, CJS Securities, Inc. - MD [36]

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Right.

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Brian M. Sondey, Triton International Limited - Chairman & CEO [37]

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And if you've followed our financials over time, there is a, say -- it's still a relatively small portion of our lease portfolio, but it's growing a little more than usual of the expired long-term leases. And partly, it reflects the fact that our customers are trying to hold out to see if they can lock in these lower rates. And we're saying no, that we see lots of reasons why container prices and lease rates are going to go back up as soon as supply and demand rebalance. And as I was saying earlier with Ken that, that typically doesn't take that long. And in the meantime, it takes our customers typically a pretty long time to return containers. And so we're just kind of letting it ride for now. Not in every case, but generally speaking, we're holding out for rates that we think are fair long term before we lock in containers for long term.

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Lawrence Scott Solow, CJS Securities, Inc. - MD [38]

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Right. And just to clarify on your guidance, obviously, you used the word several quarters. But it sounds like we're in a seasonally slower period, that the market is relatively flattish as it is. So we're going to go down Q1 -- Q4, Q1, and then maybe you get an improvement seasonally Q2. You don't know yet, it sounds like, right? I mean...

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Brian M. Sondey, Triton International Limited - Chairman & CEO [39]

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That's exactly right. And we were, honestly, trying to think of the right word for several or what is that...

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Lawrence Scott Solow, CJS Securities, Inc. - MD [40]

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Well, several can be Q3, I guess, right? So...

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Brian M. Sondey, Triton International Limited - Chairman & CEO [41]

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Yes, exactly, exactly. And so it really depends on when we see the supply and demand lines cross. And as I just mentioned with Ken, we -- probably earliest is sometime March, April, we think, certainly by the -- I shouldn't say certainly. We think by the end of the summer. And so I don't know, several was supposed to mean sometime between March and August. I don't know.

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Lawrence Scott Solow, CJS Securities, Inc. - MD [42]

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Right, right. Okay. Just last question on the tax rate. John mentioned it was like, I think, like 5 -- a little over 5% this quarter. Is that sort of a better rate to use going forward than sort of the 7%, 8% we were more thinking of?

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John C. Burns, Triton International Limited - Senior VP & CFO [43]

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No. Larry, the -- we had a special benefit in the third quarter. So that's why our adjusted -- we actually adjusted that...

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Lawrence Scott Solow, CJS Securities, Inc. - MD [44]

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Back to the 8%. Okay. Fair enough, great.

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Operator [45]

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The next question is a follow-up from Michael Brown with KBW.

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Michael C. Brown, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [46]

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Yes. Just had a quick modeling-related question. So we saw the interest expense come down nicely this quarter with leverage and the rate coming down. So just wanted to see what your expectation was for the interest expense next quarter assuming we get maybe a cut from the Fed. And any thoughts on 2020 as well? And then just -- and one other item, what was the percentage of debt that was fixed or hedged this quarter?

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John C. Burns, Triton International Limited - Senior VP & CFO [47]

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So let me just start with our expectations for -- the overall expense, we would expect to be down, the effective rate to generally be in the similar range. But given the lack of CapEx in our cash flows, we expect the overall debt balance to drop and overall leverage to notch down. So that's -- as far as the overall fixed rate, it's, again, somewhere in the low 83%, 84% overall fixed between fixed rate and hedged floating rate.

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Operator [48]

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Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Brian Sondey for any closing remarks.

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Brian M. Sondey, Triton International Limited - Chairman & CEO [49]

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I'd like to thank everybody for your ongoing interest in Triton, and we look forward to talking to you soon. Thank you.

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Operator [50]

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