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Triton International Limited (NYSE:TRTN)
Q3 2019 Earnings Call
Oct 24, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Triton International Limited Third Quarter 2019 Earnings Release Conference Call. [Operator Instructions]

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

John Burns -- Chief Financial Officer

Thank you, Ted. Good morning, and thank you for joining us on today's call. We are here to discuss Triton's Third Quarter 2019 results, which were reported this morning. Joining me on this morning's call from Triton is Brian Sondey, our CEO; and John O'Callaghan, our Executive Vice President and Head of Global Marketing and Operations.

Before I turn the call over to Brian, I'd like to note that our prepared remarks will follow along with the presentation that can be found in our investor section of our website. I'd also like to point out, the Company will be making statements on this conference call that are forward-looking statements as the term is defined on the Private Securities Litigation Reform Act of 1995. Any forward-looking statements made in this call are based on certain assumptions and analysis made by the Company and are not a guarantee of future performance.

Actual results may vary materially from those expressed or implied in the forward-looking statements. The Company's views, estimates plans and outlook as described in this call may change subsequent to this discussion. The Company is under no obligation to modify or update any of these statements, that are made despite any subsequent changes. These statements involve risks and uncertainties and are only predictions. A discussion of risks and uncertainties included in our earnings release and presentation, as well as the SEC filings.

In addition, certain non-GAAP financial measures will be discussed on this call, a reconciliation of these non-GAAP measures to the equivalent GAAP financial measures is included in our earnings release. With these formalities out of the way, I will now turn the call over to Brian.

Brian Sondey -- Chairman and Chief Executive Officer

Thanks, John, and welcome to Triton International's third quarter 2019 earnings conference call. I'll start with Slide 3 of the presentation. Triton achieved solid performance in the third quarter of 2019. Triton generated $85 million of adjusted net income or $1.16 per share. We also achieved an annualized return on equity of 16.1%. Triton has achieved solid results this year despite facing a more challenging environment. Global economic conditions have softened this year and the ongoing trade dispute between United States and China continues to disrupt trade flows and create uncertainty.

Our solid performance in this more challenging environment reflects our cost and capability advantages as market leader, the strength of our long-term lease portfolio and the natural resilience of our business model. We've reduced new container procurement this year but we're using our strong cash flow to drive shareholder value in other ways. We have repurchased almost 11% of our outstanding shares, since we initiated our share repurchase plan last fall. We have also repurchased the minority investor interests and a portion of our container fleet and we continue to pay a significant regular dividend, which is currently yielding almost 6%.

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

John O'Callaghan -- Executive Vice President, Global Head of Field Marketing and Operations

Thank you, Brian. Turning to Slide 4, Triton's operating performance continue to be solid in the third quarter of 2019 with utilization averaging 96.7%, down 50 basis points on the second quarter. Container activity remains slow in the third quarter with limited leasing demand. The third quarter is typically the peak season for our business and transactions are well down from 2018.

We had seen some promising signs at the end of the second quarter and very early in the third quarter, though it didn't lead to much. Instead of seeing a leveling off of utilization or even a slight increase in the third quarter, it kept going down, albeit, by relatively small amounts. There was limited new container transactions through the third quarter with aggressive competition for available deals. Triton participated prudently in some, but instead generally chose to allocate equity cash flow to higher yielding investments.

Overall, the market is slow and our customers' expectations are on the conservative side for the remainder of 2019. Market forecasters are also predicting that growth expectations will be done from earlier estimates. However, new production inventory levels are under control and absorptions were up a little from the second quarter as the shipping lines started to pick up their own new production equipment.

Turning to Slide 5; Slide 5 shows Triton's key operating metrics. As mentioned, the third quarter was unseasonably slow. However, our utilization is down by only 50 basis points over the quarter. This is a very reasonable change in the existing market and utilization remains high at 96.1%. The chart on the lower left of the slide shows our quarterly picks and drops of containers. You can see that the picks for this time of year remained low, while over the same period drops increased though at a moderate levels. Our expectation is for drops to remain well-controlled due to our customers' container fleets being in balance.

Turning to Slide 6; Slide 6 looks at the key measures of container supply and demand. On the upper left chart, we see current expectations for trade growth. While our customers previously expected growth in the same range as 2018, it has ended up being slightly positive. There remains a great deal of uncertainty tied to ongoing US-China tariff issues and to a lesser degree, US and EU tariffs.

The bottom two charts are measure of supply. Although factory new production inventory decreased to about 900,000 TEU, absorption volumes were low for the third quarter, especially as it's the traditional peak season. These new production numbers are manageable. And will remain so as the factories are presently not seeing a requirement for additional orders.

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

To sum up, our customers continue to run tight container fleets and although cautious about additional container capacity, they continue to retain their existing positions. This time of the year the market is traditionally slow and we're looking forward several more quarters before we expect to see a change. Inventory levels remained under control. We are seeing decreased production, and existing inventory levels reduce as the shipping lines absorbed their equipment. This inventory correction typically sets the stage for recovery and when demand inevitably shows up, we remain ready to supply our customers when they need us.

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

John Burns -- Chief Financial Officer

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

Turning to Page 8; our results for the quarter were driven by several factors. Leasing revenue was down 3.8% reflecting a nearly 5% decrease in our fleet size and a 2% decrease in utilization from the prior year. Though down, utilization remained high, averaging 96.7% for the quarter, but was down from a very high 98.7% in the prior year quarter.

In addition to the impact on leasing revenue, lower utilization drove a $9 million increase in direct operating expenses reflecting higher storage and repair costs. Our container disposal results remain quite positive generating combined gains on sale and trading margin of $10.3 million in the third quarter. This was a decrease of $2.5 million from the prior year, reflecting a moderation in disposal prices, partially offset by increased disposal volume.

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

Turning to Page 9, despite the slow lease demand, our third quarter EPS was up $0.01 sequentially from the second quarter. This is due to our well structured lease portfolio, a 2.6% reduction in average outstanding shares. And the timing of several annual expense items. The slow lease demand led to a negative impact on earnings of approximately $7 million, reflecting a 50 basis point decline in utilization, and an increase in related operating expenses together with lower gains on disposal.

However, much of this was offset by $5 million of benefits due to the timing of certain annual expense items, Including lower lease intangible amortization, lower depreciation, as another vintage of containers became fully depreciated, and lower SG&A with our annual share grants to our Board of Directors occurs in the second quarter, and is not repeated in the third quarter. And earnings per share also benefited from the reduction in shares outstanding.

Turning to Page 10; this page highlights our long-term financial stability, and how this is enabling us to create significant shareholder value over an extended period. The keys to this financial stability and value growth is our strong cash flow over multiple economic cycles as shown in the graph on the top left. These cash flows together with the short order cycle for containers, enables us to maintain our leverage in a steady range over the long term as shown in the graph on the bottom left.

The graph on the right demonstrates how the strong cash flows and financial stability have enabled us to create significant shareholder value, by steadily growing the book value of our business, while paying a substantial dividend. Over the last year, we've increased our adjusted tangible book value by more than 8% to over $36 per share, while continuing to pay a significant dividend.

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

Brian Sondey -- Chairman and Chief Executive Officer

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

The resiliency of our financial performance is supported by several factors, creating a significant cost and capability advantages in our market. These give us a premium return on equity over the lifetime of our investments and provide strong support to our profitability when market conditions slow.

We have a strong long-term lease portfolio. Over 75% of our containers on hire, are under multi-year long-term or finance leases. These leases have an average remaining duration of 48 months. We order containers with only a few months of advance notice, so supply adjust quickly to changing demand. And as John O'Callaghan showed, the inventory of new containers decreased in the third quarter despite the disappointing container demand. This combination of a long revenue tail from our leases and a short ordering cycle for containers provides great support to our utilization of cash flow and profitability.

It's also important to note that the current market environment does not contain the same mix of challenges we faced during the last downturn in 2015 and 2016. In 2015 and 2016, we faced a wave of lease expirations from high rate leases that were written during great markets in 2010 and 2011. The resulting downward repricing of these leases significantly compressed our margins. We are much less exposed to margin compression from lease expirations now.

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

Our profitability is also supported by the significant investments we made in high return leases in 2017 and 2018. These leases have many years to run and also have well staggered maturities. And we significantly extended our cost and capability advantages through our merger in 2016.

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

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

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

We'll now open up the call for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question will come from Michael Webber with Webber Research. Please go ahead.

Michael Webber -- Webber Research -- Analyst

Hey, good morning guys. How are you?

Brian Sondey -- Chairman and Chief Executive Officer

Yeah, good. Good morning, Mike.

Michael Webber -- Webber Research -- Analyst

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

Brian Sondey -- Chairman and Chief Executive Officer

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

Michael Webber -- Webber Research -- Analyst

Got it. So if I think that from kind of the average to Q3 to today, that's still kind of inching down from here that from I guess [Multiple Speech]

Brian Sondey -- Chairman and Chief Executive Officer

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

Michael Webber -- Webber Research -- Analyst

Okay.

Brian Sondey -- Chairman and Chief Executive Officer

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

Michael Webber -- Webber Research -- Analyst

Yeah. Now that cause me to go back to for your decks to hunt for that chart you guys used to put in there on the around steel prices, and steel values and box prices with regards to margins there. But if I think about that $1,600 and put that within the context of maybe kind of other cycles and then we troughed [Phonetic] last cycle probably around, I guess, what 12 -- $1,300. Obviously every cycle is going to be a little bit different. But I am curious whether you think that would still apply today. And then, I guess, within the context of that saving like to what degree is the consolidation of the manufacturers have -- what impact, if any, that has and where that floor ends up being?

Brian Sondey -- Chairman and Chief Executive Officer

Sure. So, during the last down cycle in 2015 and 2016, very briefly, the container prices went below $1,500, but it was my recollection, it was only a month or two, and that reflected the combination of low steel prices plus margins briefly getting down to where they are today. The curious thing about this year has been despite the manufacturer consolidation that you mentioned, the margin is held low for quite some time, really if I guess for the last four quarters or so.

And again, our expectation is, as soon as production volumes go back up that we would see prices get back to a more normal range just given that steel prices were high, and margins are really low. And I think that there are several reasons, I think, that the margins should actually grow over time, including the consolidation of the manufacturers, but also just general inflation and labor cost in China, more stringent enforcement of environmental rules and more expensive land costs around the port areas and things like that.

Michael Webber -- Webber Research -- Analyst

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

Brian Sondey -- Chairman and Chief Executive Officer

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

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

I think there it's some of the same factors in this down cycle compared to others, and certainly in terms of impact on us. See whenever container demand is weak-ish, we see our utilization go down and we used to and tender prices typically weaken as the manufacturing margins compress. But the big difference is, this time compared to last time for us and for our customers is we just don't have a large volume of leases expiring that are on high rates. And that ended up really changing the dynamic of how we work with our customers in 2015 and 2016, and very much put us on the defensive. I think, we don't really have to be so defensive in our actions this year, because I again feel container prices will come back soon, and also it's just our lease portfolio is in very good shape.

Michael Webber -- Webber Research -- Analyst

Yeah. Now, it seems like you have a pretty defensible position. Just I was more thinking along the lines of their posture toward capital deployment now and by -- each measured by boxes slot ratio and whether they're kind of pulling back, just as they kind of head into a more uncertain 2020, whether you've seen any -- anything on the margin there from a behavioral standpoint?

Brian Sondey -- Chairman and Chief Executive Officer

Yeah. I think the -- for making the customers' standpoint, as you're probably seeing, the vessel orders are pretty low this year. And that reflects, I think, a variety of things. One, just the fact that there continues to be an excess supply of vessels in the world, and I think the manufacturers in the shipping lines are starting to get a little bit more disciplined around capacity, management and deployment.

Also I think you've mentioned the IMO 2020, that's creating, I think, additional capital requirements for our customers as they start to install scrubbers earnestly on their vessels. And also just on the additional layer of uncertainty, and I think when times are more uncertain, it's tempting to rely on things like leasing and we continue to see leasing being a big share, our customers are adding containers. And for all of those reasons I think it will stay that way.

Michael Webber -- Webber Research -- Analyst

Got you. Okay. Thanks for time guys, I appreciate it.

Brian Sondey -- Chairman and Chief Executive Officer

Yeah. Thanks, Mike.

Operator

The next question comes from Michael Brown with KBW. Please go ahead.

Michael Brown -- KBW -- Analyst

Hey, good morning, guys.

Brian Sondey -- Chairman and Chief Executive Officer

Good morning, Mike.

Michael Brown -- KBW -- Analyst

And so I'd like to kind of follow up along a similar vein there. So what do you kind of seeing in terms of the shifting supply change? Can you kind of speak to the puts and takes there for containerized trade, I assume maybe there is some benefits from activity moving to Southeast Asia. But we're hearing reports of activity kind of moving to Mexico, which may and unnecessarily be -- may actually hurt your business. So I was interested to hear your thoughts on the supply chain movements?

Brian Sondey -- Chairman and Chief Executive Officer

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

Obviously, the topic of onshoring showing or moving manufacturing closer to where it's being used is a big topic these days for tariffs and other reasons. We've always been a little bit skeptical that you can see very significant movements. I think there is, obviously, at this point trillions of dollars invested in manufacturing and transportation infrastructure in China.

It doesn't seem obvious that there is a reservoir of production capacity that can replace the large portion that anytime soon. And so probably just means that the margin, do you see a little bit more, a little bit less growth. Certainly it's something that's mentioned as a reason why trade growth is a little bit low this year, but again we don't see it as a fundamental game changer, at least, at this point.

Michael Brown -- KBW -- Analyst

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

Brian Sondey -- Chairman and Chief Executive Officer

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

When we look out to the situation now, we would be interested in participating in the right kind of consolidation opportunities. We have tended to be pretty disciplined in the past, but how we look at opportunities and wanting to make sure that building the Company through M&A is viewed essentially the same way as it is building the company through investment and held that same kind of financial tests.

Similarly, we hold it to the same standard of, is it a better investment than buying back the shares. And as you indicated, the share stocks look fairly compelling, if we're buying below book value and below run off value. So for the right opportunity, for sure, we'd be interested. We typically have looked at most of the deals that have been around in our industry and participated in some way and got one big one done and didn't do the others, but we're definitely interested.

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

Michael Brown -- KBW -- Analyst

Okay. Thank you. Thanks for taking my questions.

Brian Sondey -- Chairman and Chief Executive Officer

Yeah. Thanks, Mike.

Operator

The next question comes from Scott Valentin with Compass Point. Please go ahead.

Scott Valentin -- Compass Point -- Analyst

Good morning, thanks for taking my question. Just on the utilization rate, I understand seasonally it usually trends down into the fourth quarter, maybe first quarter. In terms of the delta, do you expect it to be kind of in line with recent performance. I mean, I was trying to measure the amount of [Phonetic] weakness you're seeing versus capex has been limited. So we think your utilization rate should hold up maybe better than it has in the past in terms of the rate of decline into the seasonally weak period, is that a fair assessment?

Brian Sondey -- Chairman and Chief Executive Officer

Yes. So I mean, we -- typically we see utilization go up in the third quarter. So the decrease in the third quarter of course, it just been a little bit. The timing has been funny. I'd say the rate of decrease in the third quarter reflects what you might typically see in the fourth quarter and there is some question of what does that mean. Do we, more than the rate of decrease, increase as you get to the fourth quarter or what just sort of stay the same. Our view is, it won't accelerate much. Certainly the seasonal trend is weaker and our customers, generally speaking, in the fourth quarter are not looking to bring in capacity. But as we've said a few times, our lease portfolio is in good shape. We're not hugely exposed to off hires at this time. And also, as you mentioned, there hasn't been a whole lot of containers brought into service this year, and so there shouldn't be that much, there wasn't a lot of building to the peak and so you wouldn't think there'll be much kind of shedding from the peak. But we're really just getting started in that slower period seasonally, it was typically slower seasonally, and so we'll have to see. But again, we feel relatively well-positioned to weather it well.

Scott Valentin -- Compass Point -- Analyst

Okay. And then just in terms of current rates, I know you mentioned that it's competitive market. Just wondering, relative to where current portfolio ROIs are on, one, new leases and how that compares to the portfolio? And 2, when you are releasing containers, where is that release rate relative to the current portfolio rate?

Brian Sondey -- Chairman and Chief Executive Officer

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

We've talked about on this year, we see the expected returns that we're modeling being lower than that usual range. And we're seeing a number of the deals fall below that sort of low teen range. And typically, we have decided not to participate in those deals. Some deals are falling into the range that we find OK. But let's say very much toward lower end of that acceptable range. And that's the main reason why we've been having a lower share on new investment this year. And allocating our cash flow to other things. That said even if we were being more aggressive in our pricing, we still would have seen capital spending and growth downs, because there isn't the amount of investment opportunities out there that we typically see in a more robust kind of market.

Scott Valentin -- Compass Point -- Analyst

All right. Thanks very much.

Operator

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

Ken Hoexter -- Bank of America -- Analyst

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

Brian Sondey -- Chairman and Chief Executive Officer

Yeah, sure. That's a good question. So when we gave our outlook, we felt that almost always you see utilization trend down in the fourth quarter and in the first quarter, just for seasonal reasons that I was describing earlier. And every once in a while, and you see that trend not be the case when there's just a very strong market typically recovering from a slower time and customers just need to add containers back regardless of the seasonality. We definitely don't think we're in that kind of environment now. And so just naturally we would say OK, because we're heading into the slow season, utilization is going to go down fourth and first quarters. We typically would look to the second quarter as perhaps the time we might start to see stronger activity.

And if we do see that, that will be obviously a good sign that we're sort of back on track and that capacity has adjusted enough to take into account the lower demand that we experienced this year. But we -- I'd say, we expect it to be sometime during the busy season next year. Exactly when will depend on just how much building there is over the next couple of quarters. We don't think there'll be much. We think supply will adjust relatively quickly over the next quarters, couple of quarters here. But you never know and also, of course, will just depend on what happens with the trade disputes and the global economy, how much demand comes back in 2020.

I'd say, historically, and we do spend a lot of time looking through our historical statistics. We've rarely seen a slowdown in container supply and demand last more than eight quarters and if you look back to the, even the financial crisis in 2009, we measured kind of trough to sort of go, decline to recovery, I think, probably six or seven quarters in 2015 and 2016; it probably was eight quarters. We would point to about this time last year, when we first started seeing demand fall off as kind of the start of the slower period.

And so if historical trends hold up, we're somewhere between two-thirds and a half or half and two-thirds of the way through. And then the reason, it tends to be that way. It's just the way supply adjusts that even in without demand coming back, just the fact that there is little building in every year. 5% or so of the containers age out of service does have a very natural way of bringing supply and demand back in the balance.

Ken Hoexter -- Bank of America -- Analyst

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

John O'Callaghan -- Executive Vice President, Global Head of Field Marketing and Operations

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

Ken Hoexter -- Bank of America -- Analyst

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

Brian Sondey -- Chairman and Chief Executive Officer

So, say, and we do see competitors being a little more active than us this year and we have some charts we've probably start in more extended decks where we look at, say, the strength of the market. I'd say, one element is analysis and our market share as the other. And the markets from a pricing standpoint, we're really strong in 2017 and 2018, just great investments, we had significant shares in those years probably over 40% on average across 2017 and 2018.

This year we see pricing, and not a disaster, but certainly lower than we like to see and we've allowed our share to drift down and used our cash in other areas. We certainly have a number of competitors that have done the opposite that for a variety of reasons, just we didn't have the financial capacity or the will to invest in 2017 and 2018 and kind of playing catch up this year and loading up disproportionately in years where the returns are, perhaps, a little lower than you might like to see.

But as you say, they're not terrible, and so we do see some competitors being again more active than us, but to some extent, we like to take what the cycle gives us and see that as a way we build value over time.

Ken Hoexter -- Bank of America -- Analyst

Appreciate the time guys. Thank you.

Brian Sondey -- Chairman and Chief Executive Officer

Thanks.

Operator

[Operator Instructions] The next question will be from Larry Solow with CJS Securities. Please go ahead.

Larry Solow -- CJS Securities. -- Analyst

Great. Good morning. Thank you. Just a few follow-ups. On the competitor side, I know your cost -- I know your competitors, excuse me, they -- then them spending on new containers or are they've also been very quiet like you guys?

Brian Sondey -- Chairman and Chief Executive Officer

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

Larry Solow -- CJS Securities. -- Analyst

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

Brian Sondey -- Chairman and Chief Executive Officer

Sure. And so something we always see as container prices change and as lease rates change, we love to lock in extensions when rates are high, and our customers like to lock them in when rates are low. As if you followed our financials over time, there is, say, it's still a relatively small portion of our lease portfolio, but it's growing a little more than usual of the expired long-term leases and partly it reflects the fact that our customers are trying to hold out to see if they can lock in these lower rates, and we're saying no, that we see lots of reasons why container prices and lease rates are going to go back up as soon as supply and demand rebalance. And as I was saying earlier with Ken, that typically doesn't take that long.

And in the meantime, it takes our customers typically a pretty long time to return containers. And so we just kind of letting it ride for now, not in every case, but generally speaking we're holding out for rates that we think are fairly long-term, before we lock in container term.

Larry Solow -- CJS Securities. -- Analyst

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

Brian Sondey -- Chairman and Chief Executive Officer

That's exactly right. And honestly, trying to think of the right word for several or what [Speech Overlap]

Larry Solow -- CJS Securities. -- Analyst

Well, several could be Q3 I guess. So...

Brian Sondey -- Chairman and Chief Executive Officer

Yes. Exactly. And so it really depends on when we see that supply and demand lines cross and I just mentioned with Ken, we probably our own time between -- sometime between March and August, I don't know.

Larry Solow -- CJS Securities. -- Analyst

Right. Okay. It's 5% -- more than 5% this quarter, is that sort of a better rate to use going forward then...

Brian Sondey -- Chairman and Chief Executive Officer

We had a special benefit in...

Larry Solow -- CJS Securities. -- Analyst

Okay.

Brian Sondey -- Chairman and Chief Executive Officer

In the third quarter. So that's why we have adjusted. We actually adjusted that.

Larry Solow -- CJS Securities. -- Analyst

Back to the 8%, OK. Fair enough.

Operator

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

Michael Brown -- KBW -- Analyst

I mean down [Technical Issues] -- so I just wanted to see what your expectation was for the interest [Technical Issues]

Brian Sondey -- Chairman and Chief Executive Officer

Just start with our expectations for the -- the overall expense, we expect to be down. The effective rate to generally be in the similar range, but given the lack of capex in our cash flows, we expect the overall debt balance to drop and overall leverage to nudge down.

Operator

[Technical Issues] ends our question-and-answer session. I would like to turn the conference back over to Brian Sondey for any closing remarks.

Brian Sondey -- Chairman and Chief Executive Officer

Like to thank everybody for your ongoing interest in Triton and I look forward to talking to you soon. Thank you.

Operator

[Operator Closing Remarks]

Duration: 44 minutes

Call participants:

John Burns -- Chief Financial Officer

Brian Sondey -- Chairman and Chief Executive Officer

John O'Callaghan -- Executive Vice President, Global Head of Field Marketing and Operations

Michael Webber -- Webber Research -- Analyst

Michael Brown -- KBW -- Analyst

Scott Valentin -- Compass Point -- Analyst

Ken Hoexter -- Bank of America -- Analyst

Larry Solow -- CJS Securities. -- Analyst

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