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Edited Transcript of TRTN earnings conference call or presentation 15-Mar-17 1:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Triton International Ltd Earnings Call

Mar 15, 2017 (Thomson StreetEvents) -- Edited Transcript of Triton International Ltd earnings conference call or presentation Wednesday, March 15, 2017 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John Burns

Triton International Ltd - SVP & CFO

* Brian Sondey

Triton International Ltd - CEO

* Simon Vernon

Triton International Ltd - President

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Conference Call Participants

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* Helane Becker

Cowen and Company - Analyst

* John Humphreys

BofA Merrill Lynch - Analyst

* Doug Mewhirter

SunTrust Robinson Humphrey - Analyst

* Michael Webber

Wells Fargo Securities, LLC - Analyst

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Presentation

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Operator [1]

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Hello and welcome to the Triton International Limited fourth-quarter and full-year 2016 earnings results conference call.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to John Burns, Senior Vice President and CFO. Please go ahead.

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John Burns, Triton International Ltd - SVP & CFO [2]

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Thank you, Carrie. Good morning and thank you for joining us on today's call. We are here to discuss Triton's fourth-quarter and full-year 2016 results which were reported yesterday evening.

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

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

Finally, the Company's views, estimates, plans and outlook as described in this call may change subsequent to this discussion. The Company is under no obligation to modify or update any or all of the statements that are made herein, despite any subsequent changes. These statements involve risks and uncertainties, are only predictions and may differ materially from actual future events or results.

For a discussion of such risks and uncertainties, please see the Risk Factors located in the Company's registration statement file on Form S4 with the SEC. With these formalities out of the way, I will now turn the call over to Brian.

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Brian Sondey, Triton International Ltd - CEO [3]

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Thanks, John, and welcome to Triton International's fourth-quarter and full-year 2016 earnings conference call. We've included a presentation to go along with this call. I'll start with slide 3.

Triton finished 2016 with strong momentum. After being very difficult for almost two years, market conditions began to improve last summer and the improvements accelerated in the fourth quarter. Most of Triton's key operating metrics have rebounded sharply in response to the improved environment.

Triton's financial performance has started to rebound as well. We also continue to make excellent progress in our post-merger integration, and we already are benefiting in many ways from increased competitive distance from our peers.

Triton generated $19 million in adjusted pretax income in the fourth quarter. This represents a solid improvement from our comparable third-quarter numbers. However, the recovery of our profitability in the fourth quarter was limited by several transitional factors.

Including a lag in redeploying containers previously on hire to Hanjin, and almost $10 million of negative purchase accounting impacts. We expect the impact of these transitional items to fade, and the pace of our financial recovery to increase as we start 2017.

Triton declared a dividend of $0.45 per share this quarter. This dividend remains outsized compared to our fourth-quarter profitability. But we are increasingly optimistic that we will regrow into the dividend if current market conditions are sustained.

I'll turn to slide 4 and talk more about our merger. Our post-merger integration is proceeding well. Our global sales and operations network is now fully integrated and close to final form.

We expect to complete the systems integration in the second quarter, which will allow us to complete the integration of our back-office function. We believe we're on track to achieve our target of $40 million of annual organizational cost saving, and expect our full organization to be close to final form by the end of the third quarter.

We also are starting on phase 2 of our operations integration, where we will look to optimize the combined depot networks previously operated separately by Triton Container and TAL International. We expect to achieve additional operating cost savings by focusing our business with our most efficient depot vendors, and by leveraging our combined scale. These potential operating cost savings would be on top of the $40 million of annual cost savings we expect from SG&A expenses.

We are already benefiting from increased competitive distance from our peers. We are the clear scale and cost leader in our market, and we are using this advantage to improve our profitability and also win the deals we want.

We have an unrivaled supply capability, given our combined existing fleet of containers and our purchasing scale. This massive supply capability has become increasingly important to our core customers, as the shipping lines have consolidated and as they are increasingly relying on leasing.

We have preferred access and the number one position with a large majority of the leading shipping lines, and our share of new leasing transactions has been very high since our merger last summer. We are also currently benefiting from more extensive and cheaper access to capital than our peers, as lenders have taken note of our stronger franchise and better financial performance relative to others in the leasing industry.

The increased competitive distance shown in our operating and financial results is also apparent in the approach our key stakeholders have taken to the merger. Our customers, container suppliers, depot operators, lenders and investors have reacted quite favorably to the merger and all seem keen to work even more closely with us now that we are the clear market leader. I'll now hand the call over to Simon Vernon who will talk more about market conditions and our operating performance.

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Simon Vernon, Triton International Ltd - President [4]

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Thanks, Brian. We will now look at the current market environment, and our performance over the fourth quarter. The improvements in the market that Brian just talked about can clearly be seen when looking at the next few slides.

Beginning with slide 5, you can see that the firming trend in both steel and new container pricing has continued. And currently, 20-foot new production pricing stands in the range of about $2,200, up from a low of approximately $1,300 seen in March of last year.

With the conversion of all container factories in China to waterborne paint application after April 1, this is to replace the remaining solvent-based paint application facilities. We expect factories to at least try to maintain this increase in pricing to cover the very real additional costs that they will incur in carrying out paint [brief] changes. We also expect factory productivity to be severely impacted during this process, which will limit the flow of new containers coming to market over the next few months.

During the fourth quarter, we also saw the continuing downward trend of new production inventories at the factories. And despite a small upward tick post Chinese New Year, when our lease-out activity in China is very quiet, levels are still at a seven-year low of approximately 400,000 TEU. In a normal year, this represents only about 1.5 to 2 months of normal supply, and is well down from the 1 million TEU-plus figure we saw 2015.

We also saw the trend of reducing depot inventories for both us and our competition in China continuing, which again reflects the strength of the market and the overall shortage of containers. This has continued into 2017 and demand remains very strong for the limited supply we have. And as you can see from the graph, this is demonstrative of the very high percentage of units that are currently booked by our customers.

Turning to slide 6, the positive momentum we first saw early on in 2016 accelerated in the fourth quarter, the dry container pick up activity and we saw levels of lease-out activity at near record levels. The shortage of containers in the market relative to demand has translated into much healthier levels of utilization. And despite taking our entire fleet that was on lease to Hanjin to off-hour status at the end of August last year, we now see our overall fleet utilization at well above 95% and still climbing.

Our average lease rate from the fleet is still on a downward trend. But the very powerful turnaround in per diem levels we've seen for new long-term lease transactions in the last six months where current spot-level pricing is almost 3 times higher than market levels we saw in mid-2016 should help to stabilize and reverse this trend in the coming months. Higher container prices and higher financing costs should also provide support.

One of the main beneficiaries of this combination of stronger demand in the leasing side of our business, overall reduced supply, and higher container prices has been our resale business. We are continuing to see the trend that began in the second half of 2016, the pricing for sale containers stabilizing and climbing again after five years of declines.

We believe that this trend should continue for at least the next few quarters. Following our merger, we have maintained a very strong container sale (inaudible) in all of our 20 plus offices around the world that has enabled us to get the very best out of the more positive market we are now seeing.

Moving to slide 7. This chart shows recent major long-term lease transactions that drive our new production that graphically highlights the overall improvement in our core dry van marketplace. The Y axis shows the lease rates on the transactions with our portfolio average set at 100. Each bubble represents a different new dry container transaction, with the different colors representing different customers and the size of the bubble indicating the size of the deal.

As a point of reference, the light green bubble at the lower left represents the lease covering about 23,000 TEU. In total, we completed in excess of 370,000 TEU of new dry container lease transactions over the period shown.

Most importantly, for the last six months, we have seen a continuous strengthening of the supply demand balance, ongoing increases in container pricing and a very strong rebound of per diem levels. This is obviously very powerful in terms of deploying new production at very acceptable returns. But more valuable over the short term is the positive impact that this will have when negotiating extensions and repricing terms to expiring leases doing the course of 2017.

Slide 8 addresses this impact for both dry bands and refits. As you can see from the side, the improved market conditions greatly mitigate the reduced revenue risk of repricing, especially for dry vans. And in some cases, actually presents an opportunity to increase [repit].

Our reefer business has seen rates improve somewhat over the last few quarters, but not to the same extent as drive vans. This can be explained partially by the fact that the price of steel is not a major driver of new reefer costs, and new reefer prices have moved up only slightly over the last two quarters.

However, we are also currently seeing very little new investment in reefers across the industry. And if 2017 mirrors the very low levels of overall reefer new production output we saw in 2016, we believe we should see the supply demand balance move into more positive territory that should see both utilization and per diem levels in our reefer fleet rise further.

Finally, moving to slide 9. To remind you, Hanjin Shipping Company, South Korea's biggest and the seventh largest shipping company in the world, filed for bankruptcy on August 31 last year. Triton's containers on lease to Hanjin at that time represented just under 3% of our total fleet. The recovery process has been a very large effort that's involved personnel across all of our 20-plus offices.

Having a very meaningful global footprint with a presence in nearly all the major shipping locations has been very helpful in the recovery process. So far, 78% of our fleet on lease to Hanjin has been fully recovered, and we expect to quickly increase this number by a further 11% as negotiations for these containers are either concluded or at a late stage and should be completed soon. To the remaining 11%, we expect this will take a longer period of time but we still expect a successful recovery for most of these units.

It is also worth noting that there is a natural lag between recovery and releasing, and we have only limited benefits from releasing our ex-Hanjin containers in the fourth quarter. This in fact accounted for less than $1 million in lease revenue. However, we are now gaining traction, with 36% of our Hanjin fleet now redeployed to other customers, and another 4% has either been sold or is currently up for sale.

The TIL commercial team is very focused on using the current strength in the market to increase this redeployment to include all the ex-Hanjin fleet once recovered. TIL had credit insurance coverage in place of well over $100 million at the time of the Hanjin bankruptcy.

This will cover recovery costs and up to six months of post-bankruptcy lost revenue. However, it is worth pointing out that the availability and cost of credit insurance to cover potential future shipping line defaults unsurprisingly will be impacted by the Hanjin bankruptcy. With that, I will hand the call over to John.

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John Burns, Triton International Ltd - SVP & CFO [5]

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Thank you, Simon. Turning to page 10. On this page, we have presented the consolidated results for 2016 on the left and the fourth quarter of 2016 on the right. In accordance with accounting standards for mergers, the full-year results reflect only the legacy Triton Container International Limited, or TCIL, for the period prior to the July 12 merger and the combined results of both entities after the merger. The fourth-quarter results reflect the new consolidated companies operations for the full period, and include roughly $10 million of negative effects from purchase accounting.

Turning to page 11. On this page, we have adjusted the full-year consolidated results to show the strength of the combined operations of these two great leasing companies and to highlight the resilience of our business model.

In the first subtotal, we show adjusted pretax income, after adding back to the consolidated pretax results, the cost to complete the merger and achieve synergies. We also eliminated the non-cash unrealized gain on swaps.

To understand the full-year's operating performance of the two companies, we added to the $49 million of adjusted pretax income the pretax results of TAL prior to the merger. Which as I noted earlier, are not included in our GAAP consolidated figures.

We also added back $16.5 million of negative non-cash impact of purchase accounting to get to the nearly $84 million in cash earnings for the two companies for 2016. While this level of earnings is well below our targeted returns, these are solidly positive results in a very difficult market environment, which included the bankruptcy of the seventh largest shipping line. We believe this solid performance under these very difficult market conditions demonstrates our market-leading capabilities and the resilience of our business model.

Turning to page 12. As Brian and Simon noted earlier, our financial results improved solidly in the fourth quarter, although they lagged the improvements in our operating metrics. Adjusted pretax income, which includes adjustments to add back transaction costs and unrealized gains on swaps, was $19 million in the fourth quarter compared to a loss of $2.8 million in the third quarter.

To better understand the improvement in the business during the fourth quarter, we further adjusted the pretax results to normalize for the impacts of purchase accounting, Hanjin, and other unusual items in the third quarter. The analysis shows that our core earnings improved by roughly $8 million from the third quarter to $28.7 million in the fourth quarter.

Turning to page 13. While the $8 million improvement in our core earnings that I showed on the previous page is a solid improvement, several items limited that improvement. First, the units on hire to Hanjin were generating $3 million in revenue per month prior to their bankruptcy.

While the recovery of these units is proceeding quite well, our fourth-quarter results include less than $1 million in revenue from the re-lease of the ex-Hanjin units. This lag was expected and we anticipate that the re-lease revenue from these units will increase significantly in the first half of this year.

The second item limiting the improvement in our financial results during the fourth quarter is the fact that a substantial portion of the fourth-quarter container pickups were booked before the jump in market lease rates. In addition, much of the improved utilization came in the second part of the fourth quarter.

Lastly, the strong activity in the fourth quarter led to approximately $1.5 million of higher repair expenses as we moved units previously designated for sale back into the lease fleet which required these units to be repaired to a leasable standard. We do not expect a similar impact in the coming quarters. I'll now return you to Brian for some additional comments.

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Brian Sondey, Triton International Ltd - CEO [6]

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Thanks, John. I'll continue the presentation with slide 14.

The positive momentum in market conditions and our performance has continued into the first quarter. Inventories of new and used containers remain near historical lows. Leasing demand and deal activity have been strong, and container prices and market lease rates have continued to increase.

Looking further into 2017, we expect market conditions to remain favorable and we have more confidence on supply than demand. Our customers are generally indicating to us that their volumes so far in 2017 have been better than expected. But the global economy still seems fragile, and the increased focus on protectionism is a concern.

In regards to supply, we expect new container production to be limited at least for the next several months and expect container supply to remain tight. In this environment, we expect our operating metrics will continue to improve. We expect our utilization will increase further as more ex-Hanjin containers go back on hire to other customers.

We expect sale prices for used dry containers to catch up to the increase in new container prices. And we should face much less pressure from lease repricing, as current new container prices and market lease rates are sustained.

Slide 15 shows our current expectations for our adjusted pretax income in the first quarter, as well as our estimate for the impacts of purchase accounting. We expect our profitability to increase strongly from the fourth of 2016 to the first quarter of this year. Due to the expected improvements in our operating performance, and as the transitional items that impacted the fourth quarter start to fade.

We also expect purchase accounting to weigh less heavily on our reported financial performance in the first quarter. And we project that the negative impacts from purchase accounting will shrink further later in 2017, before turning positive in 2018.

I'll now wrap up the presentation with a few summary comments on slide 16. As we've described, Triton is beginning 2017 with strong operating and financial momentum. Our merger integration is also proceeding well.

We believe we are on target to deliver $40 million of annual SG&A cost savings. We are already reaping significant benefits from the competitive distance we've opened up from our peers. We expect container supply to remain tight for at least the next several months, and expect that our operating performance will continue to improve.

We expect our financial performance will increase strongly from the fourth quarter to the first quarter of this year, and expect our profitability will increase sequentially throughout 2017 if current market conditions are sustained. I'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)

Helane Becker, Cowen and Company.

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Helane Becker, Cowen and Company - Analyst [2]

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Thanks very much for the time. I just had a couple of questions.

When you think of -- and when you think about consolidation in the shipping industry, I know that you said that they're increasingly relying on leasing. But is there going to be a period of time when there are too many containers as they work through their combined fleets as you see that industry consolidation?

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Brian Sondey, Triton International Ltd - CEO [3]

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We have seen in the past that mergers of shipping lines have sometimes led the shipping lines to be able to get efficiencies on how many containers they operate. And in particular, we've seen that be the strongest when shipping lines that have say complementary trade networks. For example, one primarily has dominant east to west trade legs and the other perhaps dominant north to south. And they then have opportunities to mix their surplus and demand locations and gain efficiencies.

We haven't seen significant or we haven't heard at least of significant benefits to container fleets when the shipping lines are more similar to each other. They just -- the surplus and demand areas stack up on top of each other.

But in general, it hasn't been a major driver for us. Just the consolidation of the lines and the container efficiencies. I think this in general there's been some positives and some negatives for us in terms of the consolidations.

On the negative side is we certainly don't like having fewer customers. I think if given a preference, we'd want more customers. Similarly of course, bigger customers means they carry more weight and that obviously impacts negotiations.

On the other hand, what we also have found, and especially recently, is that these very large shipping lines, many of which now operate several million TEU containers in their fleet, they need very large suppliers. The major shipping lines don't want to have to go to four of five leasing companies to put together any particular container requirement they might have. And I think that's one reason why since our merger we've actually seen our deal share increase just because we can deliver very big solutions to these guys.

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Helane Becker, Cowen and Company - Analyst [4]

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Got you. And then as you think about other shipping companies, are there any that you're concerned about that are maybe on your watch list?

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Brian Sondey, Triton International Ltd - CEO [5]

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Well certainly I think all of us in this industry in the post-Hanjin world are more focused on credit than we used to be, although frankly, we always tried to be somewhat thoughtful around where we invest. I'd say what we've heard from the shipping lines is that conditions have improved over the last few quarters.

Freight rates are up from where they had been in 2016. Volumes, I'd say in general we're hearing a bit better than expectations, and similar for financial performance. A few of the lines that have reported publicly have shown not great results but at least a positive trajectory, and many showing profitability at least on the operating line.

So I'd say generally speaking, things are a little bit better for the shipping lines and the environment. We've also seen a number of countries step up to officially back their national champions. I think a lot of countries have seen what happened to Hanjin, and then maybe I think the perception in the industry and I think also in those countries is that in South Korea maybe didn't handle it as well as they might have. And so we've seen more specific support provided for a number of our customers from their government.

But that said, there certainly -- it remains a tough environment out there. There's still too much vessel capacity, and we're generally concerned that, that credit risk is elevated.

Again, we try to make good choices about who we supply our containers to. But again, we don't expect to face any problems and to some extent think that there are a lot of very unique factors that led to the Hanjin -- its sudden collapse. But certainly until the vessel oversupply situation is corrected, it's still a tough time for the shipping line.

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Helane Becker, Cowen and Company - Analyst [6]

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Okay. And then I just have one last question on as you think about growth in the industry, a lot of shifting from one mode of transportation to ocean has maybe occurred and in the past. If we were to think about growth going forward to be in line with maybe worldwide GDP growth, would that be a better number to think about to say low-single digits rather than assuming things get back to the mid- to high-single digits we were seeing maybe in the last five or seven years?

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Brian Sondey, Triton International Ltd - CEO [7]

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Of course that's one of the big questions. I think just talking with our customers, I think the expectation is that there's very high rates of growth where trade growth was maybe 4% to 7% on top of global GDP growth that maybe that's gone at least for the short to medium term. And so I think the expectation in the industry, I think as you suggest, that it's going to be something around GDP growth maybe a little bit above GDP growth but not where it used to be.

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Helane Becker, Cowen and Company - Analyst [8]

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Great. Thanks for your help, guys.

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Brian Sondey, Triton International Ltd - CEO [9]

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Thanks a lot.

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John Burns, Triton International Ltd - SVP & CFO [10]

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Thanks, Helane.

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Operator [11]

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John Humphreys, Bank of America Merrill Lynch.

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John Humphreys, BofA Merrill Lynch - Analyst [12]

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I just wanted to touch on the supply side that you mentioned in the release. And understanding you believe that supply will remain constrained in the next several months, and there has been retooling going on in Chinese factories. Could you talk about in the next several months -- after that once these factories have completed their overhaul and if markets do improve, how you plan to avoid a situation (technical difficulty) past where there is a massive oversupply and we're back into a situation where used prices fall and lease rates are falling and utilization takes a dip?

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Brian Sondey, Triton International Ltd - CEO [13]

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Yes, sure. Maybe the first thing I'd say is there's it's only been very few situations in our long history where we seen massive oversupply. It just happened that one of those situations was from the middle of 2015 to the middle of 2016, and really what happened there was just a unexpected real deceleration of trade growth. In 2013 and 2014, for example, trade growth probably was 5% to 6% and everyone expected the same in 2015.

And in fact, trade growth ended up being relatively close to zero that year. And so leasing up [on As] and shipping lines had both built containers at the end of 2014 and the first part of 2015, anticipating that much higher rate of growth it just didn't materialize. And that was what led to the three or four quarters worth of excess supply.

And so I just want to make sure it's not -- the oversupply situation has not been the typical situation for the container leasing [company] back at our utilization for the last 10 years. Generally it's a 95% plus. So when it comes to supply, this year, as we've said, we feel quite confident about supply in the second quarter just given the -- there's some practical constraints of this waterborne conversion process.

On top of that though, still a lot of leasing companies and a lot of shipping lines still are financially constrained just given the tough markets that both parts of the industry have gone through. And so that we think also will be a natural break on just investment levels.

And then for us, I think both say pre-merger both Triton in the past and TAL in the past were much more focused on quality of investments and returns than we were on growth, and that certainly is the mindset of the new Triton International Management Team. So we're going to continue to invest where we think it makes sense, and continue to focus and be highly disciplined on deals. And while we have a very high level of confidence on supply in the second quarter, in general we have a pretty favorable view for the balance of 2017 as well.

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John Humphreys, BofA Merrill Lynch - Analyst [14]

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Great, thank you. And the next one, appreciate the color in the release that market rates for new -- sorry, rates for new containers on long-term leases are higher than your average lease rates in your portfolio. If you compare to where lease rates are on your current portfolio when your average box that's being re-leased in 2017, where that -- and I think you got into it with the bubble slide there, and then there was that strong ramp. If you expect that to move along sideways where it looks to be 10% to 20% higher than your average, or -- I just want to back out the new containers to your portfolio?

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Brian Sondey, Triton International Ltd - CEO [15]

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Yes, Simon, he went through a slide on slide 8. And, Simon, if you can comment as well, feel free to jump in. That slide 8 actually I think really gets to the question you're asking.

And there's two charts there, one focusing on dry containers and one on refrigerated containers. And in the charts though, the bars show how many CEU are expiring from each container type over the next few years. And the redline in the chart shows the average lease rates on each of those vintage year of expiration, and the dotted line in the chart shows the current market rate.

So you can see for dry containers, the market rate is actually above the rates on those expirations. And so that's one reason why we've been mentioning that the repricing pressure on dry containers is pretty low right now as long as market lease rates are sustained.

If you look at reefer containers on the right, the lease rate on the expirations for the next few years is still above the market rate, partially, as Simon described, the reefer rates just haven't gone up as much. But still, it's less of a differential than it used to be. And, Simon, any other thoughts on that?

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Simon Vernon, Triton International Ltd - President [16]

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No. I would probably say one way of looking at it is if you -- particularly on the dry van side. If you look at the portfolio of leases that are coming up for expiration 2017 onwards, our customers obviously have an option to let the leases expire and off-hire the containers. And there's some very real costs associated with that for the customers.

And then as an alternative for them, they could replace those containers they're off-hiring. But under the current circumstances, you can see that the replacement containers would have a higher per diem level based on the spot market level that's in place today than the containers that are expiring.

So there's some pretty good reasons why we can sit down and talk about an extension and do something in between the per diem levels that they are paying today for the existing leases that are expiring. And the alternative for them of accessing new production at higher market levels.

So there's that natural market force that leads to an extension environment with repricing for us at favorable levels, and relative to the spot market a favorable level for our customers too. So I think that's a good way of looking at it in some ways, because it shows in many ways the natural benefits for both sides to actually extend leases that are coming up for expiration in this year, in 2017, and if the market holds in the years ahead.

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John Humphreys, BofA Merrill Lynch - Analyst [17]

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Got it. Thank you very much. That's it for me. Thank you, gentlemen.

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Operator [18]

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Doug Mewhirter, SunTrust.

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Doug Mewhirter, SunTrust Robinson Humphrey - Analyst [19]

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The first question on the secondary market for used or end-of-life containers. You said there's been a bit of a lag with the pricing recovery, although there is -- there has been definitely a price recovery.

How much do you think that, that lag is caused by Hanjin containers coming back into the resale market, maybe if they got recovered by other lessors or shipping lines or lessors in a bad market, they just throw them into the secondary market? And if that has been an impact, do you think that, that would start to unwind in the second half of 2017?

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Brian Sondey, Triton International Ltd - CEO [20]

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Maybe I'll take a quick crack, and pass it back to Simon, too, for his two cents. But my sense is that the lag between the way that market lease rates and new container prices change in the way that used container sale prices change is a pretty natural thing. It's a different market, and the buyers of used containers you don't really participate in the leasing business or typically don't buy big volumes of new containers.

And so we usually see this, that there is a lag between the two markets. And on a practical basis, part of it's just driven by the fact that a lot of the used buyers don't have to buy at a particular time. They've got inventories of equipment that they can work through, and so to some extent they want to wait and see are current conditions the same.

I think at the same time, initially, certain leasing companies also look to sell into strength. And so when you see an improvement in market conditions, I do think there are certain leasing companies out there that tend to be much more focused on moving the volume as opposed to maximizing value.

And that tends to cause a delay in price movements, at least upward price movements as well. My sense would be that Hanjin hasn't really been the major factor. But, Simon, any additional thoughts from you?

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Simon Vernon, Triton International Ltd - President [21]

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No. I would just add that I think that a lot has happened very quickly in the last 6 to 9 months, and the recovery has been very sudden. And I think as you said, Brian, a lot of people were looking, a lot of traders a lot of buyers, were looking to see if that recovery was going to be sustainable. We think given the evidence today that the increases in new container prices to $2,200, in the range of $2,200 and above, much stronger demands, much less supply, with both new containers and older containers in the market place.

And I think because this change is sustainable. I think at least now throughout the industry, but it's sustainable. We also believe that buyers are going to come back to the market in the resale arena in bigger numbers as we get into the second quarter in particular. And we'll start to see these increases that we've seen at a reasonable level in the last six months, as we discussed, really come to the floor and continue as we get into the second and third quarters.

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Doug Mewhirter, SunTrust Robinson Humphrey - Analyst [22]

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Thanks. That's very helpful. My second question slightly related -- well it's more on the new side. With the factory productivity impact and the switch over to water-based paint, so do you think that your CapEx would be back loaded?

And I know that you don't buy a whole bunch on spec for a whole year, and a lot of it is billed to order. But does that mean your CapEx would be a little light in the first half of the year, all things equal?

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Brian Sondey, Triton International Ltd - CEO [23]

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Interestingly, we've actually been relatively heavy on CapEx since the merger. For the total year of 2016, the combined company, so both pre-merger and post-merger periods, CapEx was around a little over $800 million. Which leads to a little bit of asset growth for the combined company.

So far in 2017, we've invested a little more than $600 million and that's in a relatively slow market for CapEx. And it really just reflects the fact that most shipping lines do not want to put a lot of dollars into container investments, given their financial challenges. And then also it just reflects a very high deal share for us in the leasing industry.

And I'd say while the CapEx number is high, it's not something that has been high as a top priority. I think, as I mentioned before, that I think that we are much more focused on making good investments and supporting our customers than we are onto the absolute dollars we invest. But it has worked out that given the need of the big shipping lines to add equipment and the reluctance to invest themselves and the fact that a number of the leasing companies have been on the sidelines for different reasons, it has led to a pretty high level of investment for us in a market that hasn't invested very much.

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Doug Mewhirter, SunTrust Robinson Humphrey - Analyst [24]

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Okay, thanks. That's helpful. My last question, John, on the depreciation rate, now that you've had all the accounting adjustments and write-downs, does the current quarterly depreciation run rate as a percentage of your balance sheet is that about -- is that how it's going to go for the next -- over next four quarters or so (multiple speakers)?

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John Burns, Triton International Ltd - SVP & CFO [25]

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Yes, good question. The purchase accounting was a little bit higher than we anticipated in the fourth quarter, it should continue to come down. The depreciation amount is fairly constant, but the net number was negative which includes lease intangible.

And those numbers come together by about the middle of the year, and basically the overall purchase accounting should be close to zero by the end of the third quarter. But the depreciation number is pretty constant for the rest of the life of the equipment.

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Doug Mewhirter, SunTrust Robinson Humphrey - Analyst [26]

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Okay, thanks. That's all my questions.

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Operator [27]

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(Operator Instructions)

Michael Webber, Wells Fargo.

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Michael Webber, Wells Fargo Securities, LLC - Analyst [28]

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Brian, I wanted to touch base on asset values again, just because that's such an important data point, and $2,200 is such a big number. A year ago, I think we probably would've thought that was nuts. And just curious, around how much real volume -- I guess how real that figure is?

Like how much real volume do you think we've actually seen at $2,200? To where if we went back to a maybe a 2013, 2014 scenario where you had every major lessor with pretty healthy CapEx that year as whether or not you would see that figure hold about up at $2,200?

I know we've danced around that for a bit, but what got me thinking about it was slide 7, which is a really nice slide. But if you're moving in, the start dates on that slide back to 2015, I would imagine those bubbles would look an awful lot bigger, and we haven't seen a ton of volume behind this price rise. Just any color on that would be helpful.

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Brian Sondey, Triton International Ltd - CEO [29]

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Sure, so maybe just a couple of things. In terms of that slide and the amount of volume. Obviously it's been a big change in a short period of time, and so I think us like you will be more comfortable in it as it lasts longer.

In terms of the volume, there's actually a pretty hefty level of volume there for us. As I mentioned, it's -- I think Simon referred to that slide covers about 370,000 TEU of dry containers, and for us as a company, it's been a pretty hefty CapEx period say over the last nine months since the merger. It's been I think more than $1.2 billion, not that we are terribly focused on that but it just has been a lot of equipment.

In terms of the price change, say it went from a low of about $1,300 up to today's $2,200, and it really was in two pieces. The first is just a natural change as steel prices change. And so steel prices, if you look back at say the last 10 years, steel prices have typically been maybe $500 a ton up to $650 a ton in China, and they fell below $300 a ton for a period of 2015 and perhaps even in the first part of 2016.

And so there's about two tons of steel in a 20-foot container, and that you just can take that change times 2. And so the steel prices have rebounded from under $300 to I'd say in the middle $500s now. And so that adds about $500 to that improvement of about $250 of steel prices, and really it's just returning to where it had been. That adds about $500 to the cost of the container just naturally.

The second piece just comes in the difference between the price of the container and the cost of the steel. And I think we've shown in previous presentations that, that has been a pretty narrow band of costs. Typically ranging I think from a low of about $800 in slow years in a slow season on top of the steel costs, to maybe $1,100 or $1,200 on top of the costs in a busier season and a busier year.

And in 2016, just given the total lack of buying, that extra cost fell below $600, and now it's probably in the range of $900 to $1,000. So it's again up $300 or so, and the non-steel costs or $300 to $400. But it really again just returning to the normal level.

It just happened that in 2016 we saw steel prices being at 10-year lows and that margin above steel prices being at 10-year lows. And those things are going back to normal ranges. And so if we see steel prices remain and if we see a reasonable amount of container buying, we don't think $2,200 is a crazy price.

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Michael Webber, Wells Fargo Securities, LLC - Analyst [30]

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Got you. Okay, so it goes -- but we're going beyond simply just playing catch up with steel prices, and we're talking about recapturing margin for container manufacturers and it's really about their ability to maintain that margin?

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Brian Sondey, Triton International Ltd - CEO [31]

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Sure, and if you look at the results of the container manufacturers in 2016, they were losing money. And so they're certainly pricing at the level they had priced was not a sustainable thing.

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Michael Webber, Wells Fargo Securities, LLC - Analyst [32]

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Got you. Okay, that's helpful. There's one more and I'll turn it over. But it seems like per diems are up and yields seem to have improved and have moved beyond the single-digit realm back up to 10% to 12%.

Just curious how much of that improvement is due to it's a weaker competition for larger new business versus just a similar trend within a pricing recovery in the space? Some of that is going to track asset values, but the nominal yields going up is certainly why you guys are getting a bit more pricing power.

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Brian Sondey, Triton International Ltd - CEO [33]

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Sure. And so there has been a significant improvement in the relationship between lease rates and prices. So lease rates are up both because container prices are up, but they're also up a lot because lease yields are up. And there always is a natural positive correlation between container prices and lease yields in our business, and it's just because the first lease only covers a portion of the container life.

And so we typically assume constant levels of future productivity of the equipment. So as container prices go up, you have to capture a bigger portion of the value back in the first lease. And so we typically do expect the lease yields to go up as equipment prices do.

But also when we look at investment returns, they've also improved. And part of it clearly is just a different environment. So for example, probably in 2012 and 2013 and 2014 perhaps, leasing companies, a number of them were really focused on growth and pushing investment. And that I think of course caused the yields to come down, and I think some companies at least living with some of those consequences.

But and then on top of that in 2016, I think pricing was really driven more just by a desire to unload excess inventory and that pushed yields down as well. I think it's going to be interesting to see what happens to yields as more companies do come back. I think there is a realization around the industry that may be pushing investment yields down to where they had been isn't long-term sustainable and long-term healthy, but I think we'll have to see.

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Michael Webber, Wells Fargo Securities, LLC - Analyst [34]

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Got you. That's helpful. Thanks for the time, guys.

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Brian Sondey, Triton International Ltd - CEO [35]

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Yes, thanks.

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Operator [36]

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

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Brian Sondey, Triton International Ltd - CEO [37]

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I'd just like to thank everyone for your continued support and interest in Triton International, and we'll look forward to talking with you soon. Thank you.

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Operator [38]

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The conference has now concluded. Thank you for to attending today's presentation. You may now disconnect your lines. Have a great day.