John Burns - Senior Vice President and Chief Financial Officer Brian Sondey - Chairman and Chief Executive Officer Simon Vernon - President.

Steve Stone - Cowen & Company Ken Hoexter - Bank of America Merrill Lynch Michael Webber - Wells Fargo Doug Mewhirter - SunTrust.

Good morning and welcome to the Triton international Limited first quarter 2017 earnings release conference call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded.

I would now like to turn the conference over to John Burns, Chief Financial Officer. Please go ahead..

Thank you Austin. Good morning and thank you for joining us on today's call. We are here to discuss Triton's first quarter 2017 results which were reported yesterday evening. Joining me on this morning's call from Triton are Brian Sondey, CEO and Simon Vernon, President.

Before I turn the call over to Brian I would like to note that our prepared remarks will follow along the presentation that can be found on the company's presentation section of our website.

I would like to also point out that this conference call may contain forward-looking statements as the term is defined under the Private Securities Litigation Reform Act of 1995. It is possible that the company's future financial performance may differ from expectations due to a variety of factors.

Any forward-looking statements made on this call are based on certain assumptions and analysis made by the company that it believes are appropriate and any such statements are not a guarantee of future performance and actual results may vary materially from those projected.

Finally, the company's views, estimates, plans and outlook as described in this call may change subsequent to this discussion. The company is under no obligation to modify or update any or all of the statements that are made herein, despite any subsequent changes.

These statements involve risks and uncertainties, are only predictions and may differ materially from actual future events or results. For a discussion of such risks and uncertainties, please see the risk factors located in the company's Annual Report filed on Form 10-K with the SEC on March 17, 2017.

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

Thanks John and welcome to Triton International's first quarter 2017 earnings conference call. As John mentioned, we have included a presentation to go along with this call. I will start with slide three. We are very pleased with Triton's strong start in 2017.

We generated $42.7 million of adjusted pretax income in the first quarter, an increase of over $20 million from the fourth quarter of last year and the solid result still includes $6.2 million of net negative non-cash impacts from purchase accounting.

The strong growth in our profitability was driven by significant improvements in virtually all of our key operating metrics.

Our operating performance continues to be supported by favorable container supply and demand dynamics, especially for dry containers and we have used our scale, cost and capability advantages to make the most out of the improving market environment. Triton declared a dividend of $0.45 per share this quarter.

While this dividend level remains fairly high relative to our first quarter earnings, we expect our adjusted pretax income will continue to increase and our dividend payout ratio will continue to trend down if market conditions remain strong. I will now turn to slide four and talk more about our merger.

We believe we are getting close to completing our post-merger integration and believe we are on track to achieve our $40 million target of annual organizational cost savings. Our global sales and operations network has been fully integrated and close to final form for several quarters. We have recently gone live with full systems integration.

Assuming the new integrated system continues to perform well, we will consolidate our back-office operations over the next quarter. We have also recently received all the needed lender approvals to consolidate our balance sheet. This will further simplify our operations by allowing us to operate and bill our containers as one fleet of equipment.

Phase 2 of our global operations integration is well underway. In Phase 2, we are optimizing 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. Most importantly, we are in great competitive position. As I mentioned earlier, we have been using our scale, cost and capability advantages to make the most out of the current market.

Our outperformance shows clearly in the pace of our financial recovery within our very high deal share since the merger. 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 all seem keen to work even more closely with us now that we are the clear market leader. I will now hand the call over to Simon Vernon..

Thanks Brian. We will now look at the current market environment and our performance over the first quarter. The continuing positive momentum in the market that Brian just talked about can be seen when looking at the next few slides Beginning with slide five.

You can see the recovery and return to more healthy growth in containerized trade that began in the latter part of 2016, has continued on an upward curve into 2017. This is providing support both for our customers and creating demand for our depot stocks and new production inventories.

During the last quarter, steel prices have declined somewhat, but this has been offset by increases in other raw material prices such as flooring and the new waterborne paint systems that all factories are now utilizing.

This has seen new production container pricing holding steady at similar levels seen in the early part of this year, in the range of about $2,200.

All container factories in China have now converted to waterborne paint application and as expected, we are seeing productivity impacted during this process as workers get used to the new application process, new drying conditions and a slowing down of production lines to meet quality standards.

This is obviously impacting the flow of new containers coming to market at present and restricting supply. Turning to slide six. You can see that the first quarter saw an increase in new production drive on inventory in factories of about 200,000 TEU as pickup activity declined, especially in February and March following the Chinese New Year holiday.

This trend has now reversed and we are seeing very strong absorption of containers onto lease and stocks declining once again. Levels remain close to seven-year lows of approximately 500,000 TEU. In a normal year, this represents only about two months of supply and is well down from the one million TEU plus figure we saw in 2015.

This level of inventory remains extremely low, given the fact that we are still at the early stages of the peak season for leaseouts. We have also seen 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 the second quarter and demand remains very strong for the limited supply we have and as you can see from the graph, this is demonstrated by the very high percentage of units that are currently booked by our customers.

The left hand side of slide seven clearly shows the restricted supply levels that have been a feature of the market since the second half of 2015. Overall investment in new orders and capacity output remains very modest, especially compared to 2014 and the first half of 2015.

This is keeping availability very tight and has an equally positive effect on the supply/demand balance.

Using the strength in the market and the resultant firming trend for per diem levels and yields, as you can see from the right-hand graph, Triton has deployed over $1.5 billion of new capital to purchase in excess of 940,000 TEU of new and used equipment since our merger in July of last year.

The majority of this investment and growth in new equipment has been placed on very attractive, high yielding, long term leases with future redelivery restricted to demand location centered on China.

We estimate that just over two million TEU of new dry vans will have been produced from the third quarter of last year through the end of the second quarter this year and our 640,000 TEU shown in the graph represents a little over 30% of this output. Looking at just the leasing sector, we believe that this figure is over 50%.

During this time, all of the main shipping lines have had significant requirements for new containers and our customers have come to rely on Triton to provide valuable and unique service and supply. Moving to slide eight. We expect this positive momentum we have seen during the last few quarters to be maintained as we move into the third.

Dry van container activity in particular remains very robust and we saw levels of leaseout activity again at near record levels for the first quarter.

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-hire status at the end of August last year, we now see our overall fleet utilization at close to 96.5% and climbing.

We also expect to see reefers making more of a positive contribution in the months ahead, especially as there has been similar limited investment in new equipment in this sector over the last 18 months.

Our average lease rates in the fleet have been on a downward trend for five years now, but the very powerful turnaround in both market dynamics and per diem levels we have seen for new long term lease transactions in the last nine months has helped to stabilize this trend and we believe even more positive signs will be highlighted in next quarter's results.

As we discussed during our last earnings call, 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 of pricing for sale containers climbing again after five years of declines. This trend should continue for at least the next few quarters.

Following our merger, we have maintained a very strong container sale presence 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 nine.

This chart shows recent major long term lease transactions for new dry van production that graphically highlights the overall improvements in our core dry van marketplace. The Y-axis shows the lease rate 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 in the lower left represents a lease covering about 23,000 TEU.

In total, we completed in excess of 580,000 TEU of new dry container lease transactions over the period shown with about half of the transactions having an initial lease term of over seven years. Redeliveries from these transactions have been spread over initial contract periods of five to 11 years.

Most importantly, for the last nine months we have seen a continuous strengthening of the supply/demand balance, ongoing increases in container pricing and a very strong rebound in per diem levels.

This is obviously extremely powerful in terms of deploying new production at attractive returns but more valuable over the short term is the positive impact this will have when negotiating extensions and repricing terms to expiring leases during the course of 2017.

We have also seen much improved leaseout terms and per diems for business generated for our own fleet containers leased from our depot network. Finally, moving to slide 10. The initiative to recover the 3% of our fleet that was on lease to Hanjin as of August 31, 2016 bankruptcy filing date is reaching its final stages.

The recovery process has been a large effort and has 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 helpful in the recovery process.

So far, 86% of our fleet on lease to Hanjin has been fully recovered and we expect to quickly increase this number by a further 5% as negotiations for these containers are either concluded or at a late stage and should be completed soon.

For the remaining 9%, we expect this will take a longer period of time with a combination of further recoveries and some containers being abandoned. Insurance coverage will still apply to these units. It is worth noting that there is a natural lag between recovery and re-leasing.

We had only limited benefits from re-leasing our ex-Hanjin containers in the third and fourth quarters of last year. However, we are now gaining traction with 54% of our Hanjin fleet now redeployed on lease to other customers or sold.

The TIL commercial team is very focused on using the current strength in the market and greatly improved leaseout terms to increase this redeployment to include all the ex-Hanjin fleet once recovered. TIL had credit insurance covering 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 heavily impacted by the Hanjin bankruptcy.

Our own credit insurance agreements have now lapsed, but we continue negotiations to explore new options for future coverage. With that, I will hand over to John..

Thank you, Simon. Turning to page 11. On this page we present the consolidated results for the first quarter of 2017, compared to the fourth quarter of 2016.

As noted earlier, our adjusted pretax income of $42.7 million is up sharply from the $19 million in the fourth quarter as the improvement in market conditions led to significant improvements in nearly all financial line items. We experienced strong topline revenue growth.

Leasing revenue increased over 2% despite two less billable days in the quarter or 4.6% on a constant day basis. This improvement was driven by an increase in average on-hires of 152,000 units contributing to the 1.7% increase in average utilization.

This was partially offset by a drop in fee and ancillary revenue as the strong market conditions led to a sharp drop in new deliveries and related fees. We also realized a significant increase in disposal prices which led to the $9.4 million improvement in gain on sale.

And we benefited from a nearly $8.5 million reduction in direct operating expenses from the fourth quarter as strong dry container demand drove a significant reduction in off-hire units generating sizable storage cost savings and the sharp drop in container redeliveries resulted in a significant reduction in repair and handling costs.

Partially offsetting this good news was a meaningful increase in administrative costs, largely due to $1.4 million in advisory and legal fees incurred as part of a technical amendment process with our lenders, which allowed us to manage the two legacy fleets as one.

We also continued to incur a higher level of professional fees as we progressed through the integration of the two companies. Turning to page 12. As I noted earlier, we experienced a significant improvement in disposal results. For the first quarter, we recorded a gain on disposals of $5.2 million versus a loss of $4.3 million in the fourth quarter.

This improvement in gain on sale was driven by a 14% increase in average disposal prices during the quarter. Disposal prices are currently above our accounting residuals. However, they were below our accounting residuals during the first quarter.

Despite this, we recorded disposal gains in the fourth quarter because a large number of units sold had been impaired or marked down to market prices below their carrying value in prior periods.

In addition, for units remaining in our sale inventory we reversed a portion of impairment charges taken in prior periods, reflecting the increases in market disposal prices.

The gain on sale of units sold and the reversal of impairment on existing inventory totaled roughly $7 million which was partially offset by $2 million in new impairments taken on units moved into the sale inventory during the quarter. We expect disposal prices to increase further if current market conditions persist.

However, the benefit of recapturing prior period impairments will shrink as disposal prices approach and exceed our accounting residuals. At that point, our gain or losses will reflect the difference between sale prices and accounting residuals. Turning to page 13.

Looking forward, we expect the favorable market conditions to continue to provide positive earnings momentum for the second quarter. Leasing revenue should benefit from continued improvements in utilization as depot units and further Hanjin recovered units go on-hire.

We also expect large volume of new dry containers will go on-hire if customers pick up on their existing lease commitments. And with lease rates where they are today, the repricing headwind that we have faced through much of the last two years is turning and could be a tailwind if conditions remain positive.

On the expense side, we anticipate ongoing improvements as administrative expenses decline, reflecting lower third-party fees as our integration related activities phase out. We also expect continued reduction in direct operating expenses as repair and storage expenses benefit from lower redeliveries and further increases in utilization.

We expect the gain on sale line will benefit from further increases in sale prices, but the benefits from the reversal of prior period impairments will shrink.

Lastly, the net negative impact in purchase accounting is expected to drop to between $2 million and $3 million in the second quarter before becoming neutral to slightly positive during the second half of the year. I will now return you to Brian for some additional comments..

Thanks John. I will continue the presentation with slide 14. Looking forward, we expect market conditions to remain favorable especially for dry containers. Trade growth remains moderately positive. Inventories of new and used containers are tight especially for this time of year as we approach the summer peak season for dry containers.

Container production capacity is currently constrained due to the conversion of container factories to waterborne paint systems. Most shipping lines continue to rely heavily on leasing and several leasing companies remain mostly on the sidelines. As a result, our customers will likely continue to rely heavily on us for their container requirements.

We have also negotiated attractive leases covering a very large number of containers this year. These containers are still in the process of going on-hire and the high locked-in volume of pickups will provide strong support for our performance over the next few quarters. There are some risks to our positive outlook for the rest of the year.

Steel prices in China have dropped about $100 per ton over the last month. The container manufacturers have used the tight supply and demand balance to keep container prices near their recent peak but this may prove difficult over time.

We are also seeing financing come back to a wider range of leasing companies which will eventually result in more aggressive competition. We also continue to be wary of increased protectionism.

On balance though, we are optimistic and expect our operating performance will continue to improve and expect our financial performance will increase sequentially throughout 2017. Slide 15 shows our current expectations for our adjusted pretax income in the second quarter as well as our estimate for the impacts of purchase accounting.

We expect our profitability to increase from the first to the second quarter due to the expected improvements in our opening performance.

We also expect purchase accounting to weigh less heavily on our reported financial performance in the second quarter and we project that the negative impacts from purchase accounting will shrink further later in 2017. I will now wrap up the presentation with a few summary comments on slide 16.

Triton is beginning 2017 with strong operating and financial momentum. We are close to completing our post-merger integration and our scale, cost and capability advantages have put us in great competitive position. We expect market conditions will remain generally favorable and expect our operating performance will continue to improve.

We expect our financial performance will increase from the first to the second quarter and we expect our profitability will increase sequentially throughout 2017 if current market conditions are sustained.

Finally, now that we are getting toward the end of our integration efforts, I would like to again thank all of our employees for their exceptional dedication and extraordinarily good work during this challenging but highly successful process. I will now open up the call for questions..

[Operator Instructions]. Our first question comes from Helane Becker with Cowen & Company. Please go ahead..

Hi guys. It's actually Steve, on for Helane. Just a couple of questions here.

I guess first looking at your new cost structure and everything, do you guys have a new breakeven per diem or cash-on-cash yield for the business?.

Yes. So certainly when we think about pricing in the cost of an organization, we typically look to recover our organizational costs and the lease rates that we charge our customers and we have a per diem add-on that we use for the organizational cost.

And if you think about the merger, we have effectively doubled the size of the fleet and perhaps added 25% to the cost to either organization's pre-merger cost structure. So that per container add-on has gone down that we need by 30% or so. That said, we haven't necessarily passed that on.

I think part of the idea for the merger wasn't that we just wanted to use our cost efficiencies to gain share, we also want to improve our returns. And so we are trying to capture some of that for ourselves as well..

Okay. And then what's your current win rate, I guess, in Q1? And what do you guys expect that moving forward? You said some competitors may be stepping back into the market that weren't in it in Q1..

Yes. So the numbers that Simon gave in terms of our share of what we estimate is our share of leasing procurement, it was somewhere north of probably 50%. And we have seen that continue into 2017 and still see very high share for us in terms of recent container orders but also recent transactions completed.

We think there's a variety of reasons for that. One is just simply our customers are like us. They have gotten bigger and merged. They have also been relying more heavily on leasing as they have had some financial challenges too.

And I think just these bigger customers relying heavily on leasing just naturally want bigger suppliers and I think there's been a greater preference to work with us since the merger. In addition, I think really it's also driven by the fact that we came through the challenging period much better than many others in the industry.

I think we talked last quarter that if you adjust out for merger expenses and add up, say, the combined performance of TAL and Triton pre-merger plus the new company post-merger, that we earned over $80 million of pretax income in 2016, even after the bankruptcy of Hanjin.

So it actually wasn't a great performance by any stretch, but still a solid in a very, very challenging year and I think the lending community saw that. And so we were able to raise financing to back the investments we were making in the market recovery, I think, to a much larger extent than others and we have seen that also carry into 2017.

Of course, like all good things it's not going to last forever and so we do expect that competitors have seen what we have been doing and are anxious to join the activity. And so we do expect them to come back.

But that said, I think a lot of the benefits of the merger, our better capabilities, our huge supply capability will continue to drive a strong share for us..

Okay. Then looking at your guidance, Q1 to Q2 is a 25% step-up. That seems pretty big.

Assuming the environment doesn't change, what's a more normalized step-up in the back half of the year?.

Well, certainly and maybe I will pass to John and Simon too, but we are still in the midst of the recovery process. And so the quarter-to-quarter sequential improvements are driven, I would say, primarily at this point by recovery of utilization, sale prices, op expenses going down as those things improve.

And then on top of that, say, once we are fully recovered perhaps sometime in the second quarter, then it shifts to growth. And I think Simon noted and I think John did and perhaps I did too, that we have an awful lot of containers waiting to go on-hire that we have negotiated onto attractive leases that should carry us forward from recovery.

And then I think there's also just a chance that things get really tight. And so I think we have all mentioned too that trade growth has so far been better than expected for our customers in 2017.

If we see that carry through and have a strong peak season, that could tighten container supply and demand even further and that would provide also a further lift.

I don't know, John or Simon, if you have something to add?.

Yes. I would just add, as Brian said, I think the big swing you saw was some of the big lines, direct operating expense and the gain on sale line, certainly we don't expect those improvements to continue at that pace as we come out of the recovery. And a larger portion of the improvement is going to come, as Brian noted, from increased on-hires..

Yes. I think the only thing I would add is what I think all three of us mentioned, is the fact that because of the market environment and the increase in per diem levels, we are seeing much less headwind as far as repricing when leases come to their maturity and we try to extend them.

The repricing opportunity now is we have got a fair degree of tailwind behind us and hopefully we could either maintain per diems or even push them upwards. And likewise, we have always got the option of having those containers come back into our depots to have our customers redeliver them.

And with the current market environment, we can then proceed, if market conditions stay pretty much where they are today, to put them out on better leases than the ones they are being off-hired from. So I think there's much more opportunity today, for instance, than was six to nine months ago..

Okay. And then I guess one final question. Just what's your CapEx plan for the year? And can you guys give a pace of how that will occur quarter-to-quarter? Thanks..

Yes. So I think as Simon pointed out on his slide and I think it shows on slide, what is it, seven. We are trying just getting to the number..

Seven..

Slide seven. We put a listing there of our CapEx by both unit numbers and dollars that we did at the second half of last year post the merger and that we have ordered through yesterday effectively.

And so we have already, in terms of our CapEx for this year, already ordered over $900 million worth of equipment which covers slightly over 500,000 TEU, mostly new dry containers. So I mean, frankly, we are probably getting pretty close to what our initial plan had been for the year, maybe not quite there yet, but close.

And so we typically don't really think of say a CapEx plan as something that sets the stage for the entire year that we then follow. We place orders for containers. We then lease out containers. And the pace of our CapEx going forward is driven much more by the pace out of lease-out activity rather than, say, a planned number for CapEx.

If leaseout activity remains strong, if market growth is strong, if we continue to see customers relying on leasing and continue to see ourselves winning a large share of the leasing transactions, CapEx could continue at a fast pace..

All right. Thanks for the help, guys..

Our next question is from Ken Hoexter with Bank of America Merrill Lynch. Please go ahead..

Great. Good morning. Simon, that's a great bubble chart. Thanks for that great visual on the rates. Your stock kind of mimics the exact flow of that as well. So great to see the uptick there. Maybe you can talk a little bit about your per diem rates now.

How much pressure you see, especially what you mentioned on the falling box rates? Will that impact the progress that you are seeing? Or I guess if I do the math, you get to something around $0.60 per diem rate. Does that seem right to you? And how do you think that ramps up? And maybe a little bit of thoughts on where lease yields are now as well..

I think clearly in the run-up to the end of the first quarter was when we saw the strongest market dynamics. There was very little, even less competition in the market.

I think through gathering information from all our regional offices, we had placed orders based on information that a lot of our customers were going to need supply, have requirements in the near future.

And certainly having that availability, not just the cost of the equipment but having availability on the ground, is really the service factor that shipping lines want.

And they want that immediate availability particularly, as far as they are concerned, in what was certainly in the run-up to Chinese New Year this year, something of an uncertain world in terms of their ability to predict requirements very accurately. So I think we certainly got payment for having that supply, providing that service.

As Brian said, I think the environment today is somewhat more competitive. Pricing for new equipment is a little bit lower than it was a month ago due to the drop in steel prices. It's still reasonably resilient. But we expect the months ahead to revert more to what we would call a normal state of affairs.

There is going to be some opportunity, but it really depends which other companies come back to the market. In terms of per diem levels, those vary from longer lease terms to shorter lease terms. But without any exception, all the rates we are generating at the moment are well over $0.60.

So it's difficult to go into more detail than that, but just to say that I think relative to what we have seen in the last two to three years, we are getting very attractive per diem levels. We are getting attractive term leases as far as us being able to negotiate in excess of five year minimum leases.

And I think just as importantly, in terms of looking into the future and the legacy cost of these leases, we have been able to center the vast proportion of redeliveries into demand areas such as China. So I think some real quality times and quality terms and conditions in terms of what we have been able to achieve..

Yes. Maybe just to amplify what Simon said, I think we are seeing good absolute levels of per diems, which importantly are above our portfolio average and that obviously is what gives us a much better situation for expiring leases.

But I think we are probably most pleased with sort of the relative per diems that we think of sort of the year one revenue yield relative to the equipment are much higher than they have been in quite a long time.

And in addition, as Simon was indicating, the quality of the other conditions of the lease with over half of our containers put on leases that are seven years or longer, very tight redelivery conditions for where the containers can be returned at the end of these leases.

All of that leads us to believe that the equity IRRs of these investments we have been making are very much at the high end of the range that we have seen in recent history..

So I know we used to talk about low teens, maybe just low double digits in terms of yields and then it dropped to the upper single digits.

Would you say we have gotten back to double digit returns at this point? Or is it just that the incrementals would be there?.

So when you think of typically returns get talked of in two different ways. One is the cash-on-cash yield, just a year one revenue divided by the cost of the equipment. And there I would say in most of our experience, that's low double digits and dropped into the high single digits during 2015 and 2016.

We then also look at the levered equity return and I would say at least for both Triton in the past and TAL in the past and certainly the new company since the merger, I don't think we have ever seen our expected equity returns dip below double digits. Certainly we would stop investing, I think, prior to that.

And so if you think like cash-on-cash returns, yes, they certainly are well into the double digits. And if you are thinking about equity IRRs, I think they are again very, very solid compared to what we usually experience..

Yes. It's a great performance. I guess just one last one for me on, John you mentioned the Phase 1 savings were just about complete. The scale of Phase 2 savings were above your $40 million target.

Have you put a range on what you thought you could achieve on cost savings as you move into that Phase 2 on the integration?.

So maybe I will just start off and John can finish. In terms of the Phase 1, which is say the organizational cost savings, we have been saying we are about probably two-thirds done with those.

I think I mentioned that as we integrated systems just very recently, which has gone well and if it continues to go well we will be able to complete the back-office integration, which is the remaining one-third of our organizational costs and really consolidate those types of groups.

In terms of the Phase 2 operating expense savings, that's where we are hoping to achieve reductions in tariffs that we pay for storage and repairs and handling costs by one, just looking across the network of the depots that TAL previously and Triton previously worked with to choose the best vendors and just steer the containers into the most efficient places.

And then secondly, I think everyone is realizing out there that if they want to build and grow their businesses that they have to have us onboard, just given our size and we do think that gives us a further opportunity to push savings. We have really been targeting market-by-market with that and we have had a number of good wins already.

But to be honest, we don't know exactly how much is going to be there..

May I would add, as part of the merger, we continue to incur some higher legal and advisory fees as we go through, as I mentioned, the amendment process to make sure that the organization can manage all the units as one.

But we continue to make other changes in legal structure and so forth that are keeping the professional fees higher than they will be once we get through all those processes..

Great. Thanks for the time and insight everybody and great job on integrating the merger..

Thanks..

Thank you..

Our next question is from Michael Webber with Wells Fargo. Please go ahead..

Hi. Good morning guys.

How are you?.

Good morning Mike..

So my first question. I guess it's for Simon, but also I guess for John. Kind of the math that I am sure, John, makes you cringe a little bit when we take the portfolio and that's relatively complex and boil it all down to a 20-foot dry van equivalent and an average lease rate.

But if you will humor me, I am trying to figure out or think about how far into the money you guys are in terms of thinking about a back half of the year pricing tailwind.

So if we think about a lease rate or a yield rather somewhere around 13% and the current box price, how far into the money are you on a percentage basis in terms of an actual repricing tailwind for the back half of the year?.

Well, I will give it a shot and then maybe Simon. One of the things that happens with customers is they do have a fair bit of time after the expiration of a lease to redeliver the units.

And in a situation where their lease rates are below current market rates, they are likely to use all of that period of time before they get into a negotiation that will push those up or to redeliver those, because they will need to pick up one that's more expensive. So it does take time to actually move rates up.

So we are not forecasting, let's say, dramatic improvement from repricing..

Or even if we just neutralize the timetable. I am not necessarily married to the back half of the year idea.

But just in general how far, when you look at your average blended per diem based on a 13% yield and box prices that are $2,250, I would assume, vaguely, how far into the money are you and how much cushion do you have with steel prices rolling over here a little bit? How much room do you have to still have even a gradual repricing tailwind in the back half of the year if we do see a bit of a reversion?.

Yes. If you look at the bubble chart on page nine of the presentation and that is just drys and certainly the dry rates are above the portfolio average. The reefer business are slightly, I would say, below current market rates that are below.

So if you look at that running somewhere in the 140% of the portfolio rate for drys, but neutral to below on reefers. But again, when you think the size of the portfolio, it does take longer for it to move forward. $1.5 billion of investment and we have got $8 billion in the portfolio..

So I think, Mike and maybe try to jump in, I think the real question, we talked a bit about this last time I think, was just how long does the current market last.

And I think we feel very good that if market conditions continue in the same range of where they are today that we are going to be able to get some good tailwind out of these lease expirations, especially on drys, offset by some headwind on reefers.

But really, as John was mentioning, the timing of those discussions to some extent, at least for the first six to 12 months are in the customers' hands. So we have been seeing a situation where in 2015 and 2016, the customers wanted to talk to us about renegotiation and we were saying, "Oh. No, thank you.

We will wait and see how you return these containers" and wait for the market to recover. Now, it's the opposite. We want to force these discussions and the lines when they have time are saying, "Hey, we will talk to you later". And it really just depends on how long these conditions last..

We do have some leverage at the very back end of the leases because in most leases, there is a six to 12 month bill-down period where the existing rates applies.

But after that six or 12 month period, we can invoke what's known in the industry as post bill-down rates, which are higher rates which either essentially encourages the customer to sit down and renegotiate or it encourages that customer to bring the equipment back.

And then we can use the strong prevailing market terms to put that equipment out on lease to another customer. So we have got some leverage at the end point in time, usually somewhere between six and 12 months after a lease expires.

Because obviously, something that we are really concentrating on at the moment is using the better market dynamics of today to make sure that we lock in extensions as soon as we can..

Got you. Okay. That makes sense. Just to shift to market share and kind of the heightened share you guys have been able to grab recently.

One of your competitors at a conference actually mentioned that you all, themselves as CAI and Beacon, were basically the three active parties in the market and obviously, you guys are much larger than those two and already made up a dominant share of the market.

So in terms of how much of that share you are able to capture going forward? I know you guys have kind of already addressed this and it's a function of how those competitors phase back in. But you also mentioned some of the production capacity being shut down or I guess semi-impaired as they continue to transition to waterborne paint.

So I am just curious when you think about maybe a debottlenecking of that production capacity, do you think that ends up having a bigger impact in terms of dynamics and as it pertains to your share? Or do you envision Textainer or some other of your competitors getting more active and that kind of helping to rebalance things first?.

Yes.

I mean, I guess my personal view is I think we are going to see container supply demand remain tight through the busy season this year, just driven by the fact that starting inventories before the peak season are very low for this time of year coupled with usually the second quarter is the peak production quarter and just there's kind of a hard cap on production volumes right now.

And so I think people that are leasing up and just trying to come back to the market now, I think are eventually going to find themselves pushed past the peak and probably have a harder time getting a meaningful presence in time for this year, is my personal view.

And so I think it's likely, although we will have to see, of course, that it's something that will become more relevant again probably past the peak season this year.

That's not to say there will be no competitive pressures at all through the peak season, but I do think it's going to remain probably a relatively limited number of meaningful buyers through the peak season this year..

Right. And then I guess that debottlenecking and in terms of the impact that could have on price and how you think that phases in throughout the year..

So certainly, eventually the manufacturers will find their footing in terms of production capacity and especially as the peak season fades from a demand standpoint, there always is kind of a natural repricing that happens towards say the fourth quarter every year for container production.

I think as Simon mentioned, there are, though, some offsetting things that will keep price elevated say relative to steel cost. One is that just the waterborne process by its nature has less productivity than the solvent based, because the paint takes longer to dry and you have to add additional production phases for the equipment.

In addition, as my understanding is, just even forgetting time, it's a slightly more expensive process. And then finally, we have heard at least that there has been some inflation in some of the other components. But that kind of shortage pricing always comes out as you get toward the fourth quarter of the year..

Got you. Good. One more quick one for me and I will turn it over. Simon, I think you actually mentioned a bit about your insurance lapsing post Hanjin. I am sure I am not actually framing that the right way. So maybe you can clarify that. I think you are looking to renegotiate it.

And then within the context of that insurance and I guess what we are seeing from Yang Ming, can you maybe talk a bit about how you think about the new counterparty landscape and whether that near-term insurance issue has any impact on your capital allocation and basically your ongoing cash balance? Do you need to hold back a bit as you get that worked out?.

Mike, it's John. I will take a shot at that. Yes, Simon mentioned the policies for the two entities have lapsed. We continue to talk to the insurance companies. They think there is some insurance out there. The question is whether it's the type of coverage and at the price levels that will really provide a level of protection that justifies those prices.

Over time, I think we have seen, whether it's financing or otherwise, that the market will correct and I think at some point in the future, insurance will come back.

In the meantime and as always, I think we have been very conscious of our customers' financial condition and try to allocate our supply as best as possible to those customers that we feel strongly about..

And then just one point of clarification and I think it's probably clear but just in case. The fact that our insurance has lapsed doesn't affect the coverage for Hanjin. That occurred last policy year and so all those tail expenses continue to be covered. It relates to any potential new future problems..

Sure. Okay. Great. I will follow up offline. Thanks for the time, guys..

[Operator Instructions]. Our next question is from Doug Mewhirter with SunTrust. Please go ahead..

Good morning. Thanks. Just a couple specific numbers questions for John, I guess, to start.

So first, what was the negative revenue impact from purchase accounting, so the amortization in the quarter?.

The net negative of all the purchase accounting was $6.2 million..

But do you have what the impact to the revenue specifically was, because that distorts your revenue line?.

Right. The revenue line is about $23 million, down from $28 million the prior quarter..

Okay. Thanks for that. And I saw you have your insurance receivable is increasing. So I assume you accrued some insurance claims this quarter.

How much insurance claims were built into this quarter's results? And which lines did it affect, mainly the cost side?.

So all of the impact of the Hanjin that is not covered by insurance was taken in the third quarter. So from that point forward, we have capitalized the costs that we have incurred in recovering the units and so that's the $32 million that you are seeing on the balance sheet.

And we have filed a claim, a preliminary claim with the insurance companies in February and expect the preliminary amounts to be paid shortly. And then there is the final claim that will happen at the end of the year. But there was no further impact after the third quarter in the P&L. We capitalized the costs..

Okay.

So there was no actually positive reversal in the P&L this quarter then? From any --?.

That's correct..

It's just. Okay..

The only positive effect came from the revenue side. So John mentioned, there was some negative effects from Hanjin in terms of expenses after the third quarter, although there has been missing revenue and there still is.

As I think Simon mentioned that a little over half of those units are back on-hire now and as that number grows, there is some positive incremental contribution from that. But it's not like reversing reserves or something, it's just revenue coming in..

Thanks. And my last question, a little bit bigger question but still financial related. It looks like you spent or you at least allocated about $900 million to new CapEx. It looks like on the cash flow statement this quarter, you spent about $260 million, means there's a little bit to go.

And I know you actually deleveraged a little bit sequentially, but do you feel comfortable in your capital position to make the CapEx that you need to make and still pay that very generous dividend?.

Yes. So obviously, as you mentioned, we have spent a lot or committed to spend a lot of money this year to support what we think are great investments and support our customers. We do have a lot of cash flow from this business.

So even in the first quarter paying $250 million for CapEx, again, had very limited impact and maybe even a little deleveraging in the balance sheet. As that number grows, at a certain point there starts to be some tension between the dividend level, our leverage and how much more growth we can pursue. We don't feel we have gotten to that point yet.

But again, we love the investments we are making. We do think that we are going to continue to be in a unique environment for the next couple of months with perhaps a lot of customer opportunity and less than usual competitive pressure.

At some point, if we continue on this very high pace of CapEx, there starts to be some tension and we would have to consider what to do about it, but we certainly haven't gotten there just yet..

Okay. Thanks. That's all my questions..

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

I would just like to thank everyone for your continued interest and support of Triton International and we will look forward to keeping in touch with everyone. Thank you..

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