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Good day, and welcome to the Triton International Limited First Quarter 2019 Earnings Release Conference Call and Webcast. All participants will be in a listen-only mode. [Operator instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded.
I would now like to turn the conference over to John Burns, Senior Vice President and CFO. Please go ahead.
Good morning and thank you for joining us on today's call. We're here to discuss Triton's first 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 Head of Global Marketing and Operations.
Before I turn the call over to Brian, I would like to note that our prepared remarks will follow along the presentation that can be found on our Web site under Presentations. I would also like to point out that the company will be making statements on this conference call that are forward-looking statements as the term is defined under the Private Securities Litigation Reform Act of 1995.
Any forward-looking statements made on this call are based on certain assumptions and analyses 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 such risks and uncertainties is included in our earnings release, and presentation, as well as our 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'll now turn the call over to Brian.
Thanks, John, and welcome to Triton International's first quarter 2019 earnings conference call. I'll start with slide three of the presentation. Triton achieved excellent performance in the first quarter of 2019. Triton generated $92.8 million of adjusted net income in the first quarter, or $1.19 per share, an increase of 20% from the first quarter of 2018. We also achieved an annualized return on equity of 17.2%. Our strong financial results were driven by continued outstanding operating performance. Our utilization remains high and used container sale prices remains strong, leading to sizable disposable gains.
Our customers and market forecasters continue to expect moderately positive trade growth this year. We have not yet seen container pick-ups accelerate. We've taken a number of actions this year to drive shareholder value. We improved our capital structure by issuing perpetual preferred stock with an attractive mix of risk protection and cost. We repurchased the majority of outside partnership interests in a portfolio of our containers. We repurchased 2.6 million shares of our common stock in the first quarter, and have purchased 5.1 million shares since last August. We have also implemented a new $200 million share repurchase program to replace the plan announced last August, and we declared a dividend of $0.52 per share this quarter.
I will now hand the call over to John O'Callaghan, our Global Head of Marketing and Operations.
Thank you, Brian. Turning to slide four, as Brian mentioned, Triton's operating performance remained solid in the first quarter of 2019 with high utilization averaging 97.6%. We also achieved sizable gains on disposables as used container sell prices remained high. New container pick-up activity was slow in the first quarter. The first quarter typically represents the slow season for dry container and US/China trade dispute continue to create some uncertainty.
There was a limited amount of new container transactions in the first quarter. We participated selectively in some transactions and walked away from others. Investment returns in the first quarter often get competed on total [ph] walk away level. Since shipping lines usually don't have urgent requirements until late in the year, we are hopeful we'll see larger opportunities and better investment returns as we get deeper into the year and into the peak season.
To date in 2019, we have invested approximately $220 million in our fleet, including $150 in new containers, and we also repurchased $70 million of third-party partnership interest in a portfolio of our existing containers. We are now heading into the time of the year when business activity should start to pick-up. Steel prices have thundered [ph] the upper $500 and new container prices strengthened to just below $1900.
Overall, we are optimistic that market conditions will be solid this year. Our inventory is under control. Our customers are expecting trade growth to remain moderately positive. We expect our customers will continue to rely heavily on leasing. And we continue to have significant market advantages that usually allow us to win a larger share of the fields we target.
Slide five shows Triton's key operating metrics. The first quarter was seasonally slow. The change in our utilization over six months from the end of the peak season last year at September 30th through the slow season to March 30th was about 120 basis points or 4.6 basis points a week over those 26 weeks. That's a very reasonable change over the slow season. And utilization remains high at 97.3%.
The chart on the lower left of the slide shows our quarterly pickups and drop-offs of containers. You can see that pickups remained low in the first quarter. But, drop-offs decreased from the fourth quarter level and were moderate for this time of the year. We expect drop-offs to remain well controlled and container pickups should accelerate as we get deeper into the second quarter.
Slide six looks at key measures of container supply and demand. On the upper left chart, we see current expectations for trade growth. Market forecasters such as [indiscernible] are projecting trade growth to be just under 4% this year, generally matching our customers' expectations for moderate growth. Container supply remains well-controlled. Factory inventory increased to about 935,000 TU due low absorption of volumes in the first quarter as well as the build up of inventory ahead of the anticipated peak demand. This inventory is less than 2.5% of the global container fleet and is usual for this time of the year as companies build up inventory for that anticipated seasonal requirements. We see a small increase our [indiscernible] in Asia, but it remains under control, and represent about 1.5% of our total fleet. We have very few leasing containers in inventory outside of Asia.
I'll now hand you over to John Burns, our CFO.
Thank you, John. Turning to page seven, on this page we presented our consolidated financial results. Adjusted net income from the first quarter is $92.8 million or $1.19 per share; up 20.2% from the prior year, supported by a continued strong up warding performance of our lease portfolio. These strong results represent a return on equity of 17.2%.
Turning to page eight, our outstanding result for the quarter was driven by several factors including solid growth in our revenue earning assets which were up 6.6% from the prior year and leasing revenues which were up 8.2%. The increase in assets and revenue was driven by the strong investment year we had in 2018 when we invested $1.5 billion in new and used containers. Utilization remained high averaging 97.6% for the quarter down slightly from 98.6% from the prior year quarter. The decrease in utilization contributed to the $5.8 million increase in direct operating cost, reflecting higher storage and repair expenses.
Our container disposal results remained quite positive generating a combined gain on sale and trading margins of $12.1 million in the first quarter in line with the prior year quarter. Two non-cash items contributed to the improvement in our first quarter results over the prior year. The first is the run-off of the purchase accounting adjustments related to our merger in 2016 which provided $9.1 million net benefit in the first quarter, up from 3.8 million in the prior year quarter. Going forward, we expect this benefit to increase gradually over the next few years.
Secondly, our adjusted GAAP tax rate declined to 7.8% in the first quarter from 11.5% in the prior year quarter. We expect our tax rate to remain in the current range for the rest of 2019.
During the first quarter we had several small unusual items that benefited our net results by roughly $3 million or $0.04 per share. The last item driving our strong year over year earnings increase is our share buyback program. Through these buybacks, we reduced the average outstanding shares for quarter at 2.9% compared to the prior year's first quarter. Because a large portion of the buybacks occurred late in the quarter, the impact on the second quarter will be over 8% reduction in average outstanding shares.
I'd now like to take a minute to address the taxability of our regular dividend. Historically, our dividends have been treated as return of capital for tax purposes for US shareholders. But due to an unusual transaction in the fourth quarter of 2018, roughly 70% of our 2018 dividends were treated as a taxable dividend. For 2019, we currently expect our dividends to be treated as a return of capital but this is subject to change and shareholders should consult a tax advisor to determine their specific tax treatment.
Turning to page nine, this page highlights strong and stable cash flows that enabled us to grow the fleet and maintain a strong balance sheet while paying a substantial dividend. The graph on the top left shows our annual cash flows before CapEx. The chart shows strong growth in cash flows as we've grown our fleet over an extended period. The graph on the lower left, looks at our leverage based on net debt to revenue earning assets after excluding the impacts of purchase accounting adjustments. This graph highlights our financial stability over an extended period covering several cycles. And throughout this period we've been able to maintain our leverage in a steady range. We were able to maintain stable leverage profile because our strong cash flows and our ability because of the short order cyclical containments to adjust CapEx quickly as market supply and demand conditions change.
The graph on the right demonstrates the value we have created for shareholders over the last 13 years. These strong cash flows have enabled us to grow the tangible book value of the company from $10 per share to $35 per share today. If you combine the growth in our tangible book value with the cumulative dividends we've paid, we have generated $50 in value for our shareholders, represented a compounded growth rate of 15% excluding the value of reinvested dividends.
Turning to page 10, on this page we review our calculation of adjusted tangible net book value of $34.80 per share which we showed on the prior page and show at the bottom of this page and then why we believe this is the appropriate measure for book value of our business rather than the GAAP net book value of $28.30. As you can see from the reconciliation at the bottom of the page, the key adjustments we make to GAAP net book value per share is first to start with shareholders equity before the purchase accounting adjustments, then add the deferred tax liability to equity.
As part of our merger, we were required to mark down the value of the form of TAL container fleet based on the historically low container prices at that time. However, we did not adjust our container values for our lending agreements and if container prices then were in the range they are today, there would have been a very limited markdown at that time. In addition to eliminating the purchase accounting adjustments, our adjusted book value calculation considers our deferred tax liability as equity. We believe this is appropriate because we have not paid meaningful cash taxes in the past and we did not expect to in the future due to the tax depreciation provided by our ongoing investments in containers.
I'll now return you to Brian for some additional comments.
Thanks, John. I'll continue the presentation with slide 11. Triton is taking a number of actions this year to improve our capital structure and create shareholder value. We issued $86 million of perpetual preferred stock in March. The preferred stock carries an 8.5% dividend that is fixed for life. Importantly, the preferred stock has no maturity date, put options, acceleration risk or conversion features. Overall, we think the perpetual preferred stock provides an attractive combination of equity like risk protection and moderate cost. We expect to consider further issuances if the market remains favorable. We've also been actively repurchasing our common stock.
Since last August, we repurchased 5.1 million shares or 6.3% of the original shares outstanding and we believe our shares currently represent a compelling investment for Triton. In considering the share repurchases, we looked at a variety of ways of measuring value, one measure we use is a fleet runoff analysis which combines the net present value of the cash flows from our existing lease portfolio plus the expected value of our existing containers at the end of the existing leases.
Our analysis shows that this expected runoff value is greater than our current market value under the vast majority of our modeled scenarios. It's important to note this runoff analysis is calculated before assigning any value to our market leading franchise and origination capability. And so, we consider this run-off analysis a highly conservative benchmark of value, we view the $70 million repurchase of outside partnership interests in TCI, similarly to the way that we analyze the share repurchases with the partnership purchases providing another way for us to increase our investment than our existing high quality lease and container portfolio. We've also strengthened our balance sheet to reduce financial risk and the ratio of net debt to revenue earning assets decreased to 73.8% at the end of the first quarter.
I'll now wrap up the presentation with a few summary comments on slide 12. Triton achieved excellent results in the first quarter of 2019, our adjusted earnings per share increased 20% from the first quarter of last year and we achieved an annualized return on equity over 17%. Container pickup activity was slow in the first quarter but our customers continue to expect moderately positive trade growth this year and we expect container pickups to accelerate as we get deeper into the second quarter.
We expect our adjusted earnings per share will decrease slightly from the first to the second quarter. Average utilization will likely be down slightly due to the quiet activity year-to-date. We do not expect the one-time items benefiting the first quarter to reoccur, and we also transferred a large number of containers on hire with one of our customers from short-term to long-term lease. This will reduce near-term lease revenue on the containers, but lock in attractive lifetime values. After the second quarter, we expect our adjusted earnings per share will increase sequentially through the second half of the year.
Overall, we remain optimistic we'll achieve another outstanding year. We have significant financial momentum, our customers and market forecasters continue to expect trade growth but remain moderately positive this year. We expect our customers will continue to rely heavily on leasing. We have significant advantages in our market, and our strong and stable cash flow gives us many levers to create shareholder value including organic growth, high dividends, and share repurchases.
We'll now open up the call for questions.
We will now begin the question-and-answer session [Operator Instructions]. The first question comes from Scott Valentin with Compass Point. Please go ahead.
Good morning, everyone. Thanks for taking my question. Just with regard to the TCI purchase, just wondering how you can maybe compare the economics of that to buying containers from the manufacturers?
Yes, we evaluated in fairly similar ways, we look at the containers in that portfolio and we project the expected lifetime, remaining lifetime lease revenue, and container sale value, and use our cost to capital to discount it. Right now in the first quarter, we felt that the attractiveness of the purchases of that portfolio plus the attractiveness of buying our stock frankly were more interesting than purchasing new containers. I think John mentioned that -- we often see in the first quarter that investment returns get competed down towards the low-end of our acceptable range, and that was certainly the case this quarter. We wouldn't say that there is irrational competition out there or that the deals being structured are crazy, but when we look at again just the value of our existing business relative to the way it's valued in the market, that was definitely more interesting, both in the form of share repurchases and the portfolio part repurchase.
Okay, thanks, that's helpful. And then just a second question, so you include the TCI investment plus $150 million of container purchases, you're at $220 million of CapEx call it for 1Q, and I think looking at last year's presentation, you'd done $850 million year-to-date. I'm just wondering does the year-to-date CapEx reflect across outlook for kind of container demand and global trade, or is it more reflective of the economics you saw in the first quarter?
I think it was a combination. So maybe just on that comparison, the $850 million this time last year was a very big number, where we had extraordinarily strong market in 2017 into the first part of 2018, and we were taking full advantage of that and pushing CapEx hard, because just the investments were -- we felt were very attractive. And as we've transitioned to 2019, we've mentioned the market has been much more typical in terms of the slow first quarter, and then we haven't yet really seen activity start to pick up building towards the peak months in June, July, August, and so, we have seen -- there's been deals in the marketplace, we participated in some, we've not participated in others, and yes, lower CapEx is I think as you point out is a combination of just less overall market activity and our decision to not feel we need to push CapEx, because we have attractive other investment opportunities.
All right, thanks very much.
The next question comes from Michael Brown with KBW. Please go ahead.
Hi, good morning, thank you for taking my questions.
Good morning.
So we're seeing kind of increasingly constructed developments coming out of the trade related conversations between U.S. and China, so I was just wondering have you really hard an improvement in the tone or the sentiment from your clients, has that begun to improve, and if we do see a resolution, how would you expect your business to be impacted? I guess, I'm just trying to get a sense of would it simply just be business as usual, but maybe less uncertainty going forward or do you see kind of pent up demand that would actually see kind of an increase in activity soon after a resolution comes through?
Sure. So, you know, most of this of course is our speculation, we don't know exactly what's going to happen, of course, with the conversations between the U.S. and China or exactly what's causing the current market out there. But in general, it would be positive for those conversations to reach resolution, and to have the uncertainty over trade clear up. I think there's been a few negative impacts of all the trade uncertainty. One is that the tariffs have contributed to the say slower first quarter, and the slower ramp towards the peak season we've seen so far both in the sense that the cargo was pulled forward, I think, from the end of 2018 and early '19 into the summer of '18 as the shippers tried to get ahead of the tariffs being implemented, the initial round of tariffs. And then I think to some extent, cargo is being delayed, maybe at the margin at least as shippers wait to see if the tariffs go away. And so just the resolution of the dispute and providing a clear path of what's going to happen with tariffs over the next quarters or few years, I think would help release some cargo. I think that there is [indiscernible] being held back.
That said, I think, our customers whenever we talk with them, and I think we all mentioned it a few times remained fairly optimistic on volumes for this year. We typically hear numbers of plus 3% to plus 5%, plus even some 6% from some of our customers on their expectations this year. That may be premised on some expectations that the trade conflicts get resolved, but overall, we've heard a very consistent story from our customers beginning late last year into this year of a fair bit of confidence on volumes. I think just from the macro economy standpoint, and not that we're experts on that, but it seems to be just beneficial for economic confidence around the world also if those were to be resolved, and yes, so certainly we think it would be a positive in the business for many reasons.
Okay. Thank you for all the color there. And then just shifting to the buybacks, obviously, significant buyback activity in the quarter, and now a large share purchase authorization from the Board, so I mean, how do we kind of think about how you may utilize that going forward, I think that's going to help [ph] for the economics that you shared as to how you think about it, but based on that, it sounds like you may be kind of opportunistic as to kind of where the stock price is trading, or is it fair to say that it could be used generally kind of, traditionally as kind of a level share repurchase quarter-to-quarter?
Yes, I'd say we're mostly opportunistic that as we walk through we see the investment in our existing fleet and existing business that we can make right now through the share repurchases as being very interesting, you know, that we're buying effectively the slices of the company back at attractive values and using the same metrics that we used to purchase new containers and the same types of valuation methodology -- it's a compelling investment. And so I think if let's say for example, our view on relative value of the company compared to the stock price changed, that could impact the pace of our buying as well as -- if we see just more attractive organic growth opportunities we could certainly shift cash back from buybacks to investing into the business.
Okay. Great, thank you for taking my questions.
Thank you.
The next question comes from Helane Becker with Cowen. Please go ahead.
Thanks very much, Operator, hi, guys. Thank you very much for the time. Just two questions here. One, what are you seeing in terms of used prices relative to new container prices? And I think you said $1,900 for new, which is maybe a little stronger than I would've expected in an environment where things may be a little weaker in the quarter. That seems to be inconsistent. So how am I getting that wrong or misunderstood…
Yes, so maybe I'll start with new container prices. I think we talked last quarter that we saw container prices at that time which were, you could say in the low $1,700 per 20-foot container, you know, as being really exceptionally low relative to steal prices. And steel prices are down a little bit from where they were in 2018 when container prices were $2,100, 2,200, but not much different. Maybe they were low $600 per ton in 2018, and maybe they fell to mid $500s in the first quarter, now they're back up to almost $600.
So there's very little difference in the steel component. What we've seen is there has been already a lot of compression on the margin over steel prices. That margin was probably close to its 12-year low where we saw it in the first quarter of this year and has come back some as container prices have moved back up toward $1,900, but still at the very low end of its historical range. And so I think we are seeing the impact of not a lot of buying of new containers in the pricing already, and our view is that if normal levels of container demand return later in this year that will see that the container price increase further.
In terms of used container prices, used container prices have held up very well. From the third quarter last year, in the peak season through today, we've seen a little bit of decrease in used container prices, but not a lot. And so, that has meant that the relationship between used container prices has actually increased compared to new container prices by percentage, and we think partially just reflects the fact that utilization remains very high for containers. And so, there's not a lot of containers available for sale. And then secondly, my guess is other share, the expectation that we have, which is that new container prices are likely to go back up, when we get towards the peak season, and so, yes, just sellers haven't felt the need to discount.
Got you. That's very helpful. Actually thanks, Brian. And then my other question is with respect to capital allocation. So if you did AVS, what would your borrowing rate be at and, borrowing on the perpetual preferred worth 8.5%, which I think seems high and relative to what your balance sheet would, normally support? And I'm just kind of wondering how you think about that from a capital allocation perspective? Because you said you do more of it. But it seems like an expensive way to risk capital?
Yes, so good question. So I'd say the first thing, we look at the perpetual preferred stock, it feels an awfully lot like equity to us not like that. Obviously, there is a regular, payment on the perpetual preferred stock, but just like, there is in our common stock, and just given the various features of the preferred and the fact that it doesn't have financial covenants that, we can suspend the dividend without any say acceleration of the principal, obviously, we wouldn't want to do that, and would be greatly reluctant to, but there's no say, that light consequence to the company of doing that. And so, when we look at issuing preferred, we very much think of it as we're substituting for our comment.
And so, we -- I think for the last couple of years, we've been telling a story about our company, a very strong and stable equity, cash flow. We showed in our charts. And, I think in general, we, we think that, maybe that value of that cash flow hasn't been reflected in our common share price we might expect. And so, to some extent, we're going out and finding another class of equity investors that focus on cash flow and dividends. And to some extent, I think the issuance that we've done has been trading out, a portion of our common shareholders that we've repurchased for these new preferred shareholders that, seem to focus on the dividend and the cash flow. And so, let's look at our overall cost of capital, we think it's a better mix of capital, substituting preferred for a portion of our common effectively.
Right, right. And then you use part of those proceeds to buy back stock. So the way to think about that is what you're taking. I'm trying to reconcile that 8.5% dividend with --
So, we think of it really as a -- mostly as a common stock. So, the two will probably will use some of the preferred issuance for de-leveraging as well but the 8.5% dividend, the preferred compares to right now a 6%, and change dividend yield on our common. And plus, of course, the common stock, it's all the upside of the business, which we continue to believe there's quite a bit of. And so I guess, you just think about it as we're paying a little bit of a higher current dividend under preferred relative to our common, but not that much more, and then on top of that, concentrating the upside for the remaining common holders.
Great. That's very helpful. Thank you. And then just one, like from a smart question to maybe a less smart question, I might, when I do my first quarter to second quarter, am I using 119 or 115 to build my model?
Oh, you mean, in terms of those $0.04 per share of unusual items?
Yes.
Yes. So we would encourage you to think of it as 115 as the base, comparative number for the first quarter. We don't like to make lots of adjustments to our adjusted numbers. Well I keep them relatively simple and straightforward. So we didn't take those ranges, small items out of the adjusted numbers, but we did point them out. You know, I think just for the purpose, you mentioned there, then we don't think they're going to reoccur for the second quarter.
Perfect. That's very helpful. Thank you.
The next question comes from Michael Webber from Wells Fargo Securities. Please go ahead.
Hi, good morning, guys. How are you?
Good morning, Mike.
Hi, I just wanted to follow-up on Helane's question, I guess her first question on kind of used container prices and new kind of moving in opposite directions, and Brian, if I could take a step at maybe summarizing your answer, and you can tell me if this is what justifiable now. But basically, you're saying that the look, that there's just not a lot of liquidity in the second hand market, and there go, people are having to kind of drop the prices to kind of tease out a bit for new containers or for used containers.
I'm sorry, but probably didn't say it. So clearly, what we're saying is that there has been some decrease in used container prices. From say, the third quarter of 2018 to this year, just due to the just typically prices are pressured in a slower season, as well as just there is a connection between what happens to new container prices and used and so the drop in new container prices, has had some negative impact on used container sale prices. But that said, the drop, the drop in used container prices has been very low. Where prices are not heavily changed from where they were last summer, and our view is that that's happened for two reasons. The first is just, there's not that many used containers to sell, utilization for our utilization is still, well over 97%. We think that's true for all the leasing companies. We don't hear of any shipping lines that are pushing out large volumes of containers, they need the containers on their fleets.
And so, they're just not that much in sale inventory. And so, that helps keep, price high. And when I said the prices were up, it wasn't done on absolute basis for used containers, the ratio between used container prices and new container prices has increased. As the new container prices are down, they were down 20% in the first quarter, they've come back some now down, say roughly 10% from where they were last year where used prices are down.
Yes, I think that makes sense. Especially, we're looking at it like a used index relative to kind of like a nominal move and kind of absolutely new pricing. All right, I mean, I can follow-up off onto it just kind of caught my eye as well. In terms of maybe kind of, in terms of the -- I guess, the current competitive dynamics, you guys, it seems like, there's lot to do right now, certainly year-over-year. And you kind of pulled back on new purchases to focus on better relatives to deal in terms of buybacks and TCI do you think about where your share was at Q1 business, how far under have underweight? Would you kind of put that? And do you think that's something that may be a -- do you think that's something that we'll see -- we'll see more of an even distribution, in terms of his participating in new business in Q1 as the people with additional kind of other options kind of exercise over those because returns might not be there?
Yes, so I think, first of all, we don't really think of our market share on a quarter-by-quarter basis, if you look back, last two years, we've invested in something like $3.2 billion in our container fleet added over a million TEU over that timeframe, and probably had a market share close to 40% or more of the deals that were out there. So, we are to some extent in a good position where we can afford to be, afford to be patient, because we've certainly built-up our fleet and supported our customers, way above our sort of overall share for the last couple of years.
And so, we look at the first quarter, and it was a combination of relatively limited demand, because just the fourth quarter typically is seasonal, we also think, we are some of the maybe increased caution by our customers of loading up capacity ahead of the peak because of the ongoing trade now. And then, there are certainly several competitors that maybe didn't participate as much in 2017 and '18 that want to get on the board and get some business done. And, as I mentioned, we looked into the churns, they weren't, it wouldn't say that they're crazy, or rational competitors, but they were just to us, certainly down from where our investment returns were in 2017 and '18. And it's just a time of year, where it just in our view doesn't make sense to feel you need to push into the market. And our real strength is when shipping lines requirements are larger, when they are more time sensitive, when the operating and capacity we can operate in capabilities and capacity we bring to them are valuable. And so, our senses, we just kind of kept our investment powder dry to some extent so far this year. But then also, from a CapEx standpoint, but they also had really great opportunities to invest into the existing business and our stock in our portfolio purchase that we mentioned.
Yes, that makes sense. It's a small number anyway in terms of Q1 business, maybe along those lines, you kind of mentioned -- it's one of your earlier answers I guess kind of in the round macro dynamics and global container trade. Despite I guess the pull forward in volumes we saw in Q4, the operating results from most of your customers wouldn't necessarily reflect the fact that they've seen a significant bump in volumes and still seems pretty challenged. Is there -- can you maybe talk a bit about what you're seeing from a credit perspective? How is your mix change and do you kind of look at I guess how was your view of credit risk in 2019 changed kind of over the last six to nine months that these companies, are the lines proving to be more resilient than maybe we would have thought or there kind of deeper pockets of concern and you start to see some of the profitability figures from maybe the Japanese or elsewhere?
Sure, sure. So I mean I think in general, I don't think our view of credit has changed that much. I think the industry that the shipping lines themselves still suffer from continued excess vessel capacity and just given the economics of the newer bigger vessels, I think the general expectation is that that overhang of capacity is likely to last for some time. Just when I look at the freight rates in the market, it does seem that shipping lines have made some progress at pushing rates off of the lows of where they were in 2018 and hopefully that coupled with some moderate trade growth in 2019 will give a lift to their financial performance and at least what we hear in the market is that the rate negotiations for the lines this year have gone okay for them. But I wouldn't say we would say they're out of the woods. There's been some dramatic change in the dynamics of the shipping business, I think it's still there's a variety of factors that challenge it.
In terms of our credit opinion, one thing we've probably talked a lot about in the last year or two is just the consolidation of our customer base and the fact that something like 75% or so of capacity is now made up by the top six or seven shipping lines and that each of those shipping lines is large enough that their capacity is basically needed to move the cargo around the world and that given that our view is just the likelihood of the kind of defaults that hit us which are the kind of sudden ramp down of a company's performance and kind of Chapter 7 style liquidation is much less likely for the vast majority of capacity out there and I think as we've seen for many, many years these are big companies, they're resilient, many of them get support from either governments or bigger industrial partners and they're getting off that same mix of factors that's been out there for a while is what we see today.
Okay. I appreciate time guys. Thanks.
Yes, thanks.
The next question comes from Kenneth Hoexter of Bank of America Merrill Lynch. Please go ahead.
Hey, good morning. Brian or John in the guide, I just want wonder what's leading the decline in the second quarter and then your expectation for the rebound in the second half?
Yes, so for the second quarter it's a little unusual for us. Typically we see the first quarter as our weakest quarter financially and then it builds from there. And I think a couple of things have happened, so one just the first quarter was boosted by some onetime items that we described, those $0.04 or so of EPS. Yes, that made the first quarter a little bit better. And I think the other thing that it's not like highly unusual. But I'd say it's probably not average either is that we do expect a decrease in our average utilization from the first quarter to the second quarter just given the way that utilization decreased throughout the first quarter, pick-ups haven't yet really accelerated towards kind of peak season levels. We do think that's going to happen and we think there'll be an inflection in our utilization during the quarter where we'll start to go up during the second quarter. But average utilization is likely to be lower second quarter compared to first quarter.
And then finally, I think we pointed it out in the press release and in my comments that we had a large number of containers, one of our big customers where we transferred them from a short-term lease with relatively high per diem rates to a long-term lease with lower kind of long-term base per diem rates. And that does have an effect on your term lease revenue and profitability on those containers. But again it's a long-term structure, we think has a attractive lifetime value and it was a transaction that made sense for both us and the customers. So we don't think it's that's not we didn't mean to give any concerns that the second quarter is going to be a bad quarter but it's just likely going to be down from the first quarter and then we think we'll see then the typical trajectory up from the second quarter to the third to the fourth.
So that's helpful, but -- and maybe if we could just keep going on that, so I mean it seems like things are progressing well, or -- and your outlooks improves. But you talked about the buildup in Asia and China of assets, when do you or how do you figure out or get nervous that that's a buildup of assets versus just seasonality? Is there any other data point you look at? Or, is it just the discussions with customers to get a feel that, hey, this is more than seasonality, or, hey, no worries. This is normal trajectory and we will see the rebound?
Yes. I think it's a mix of things that we look at. So certainly we always look probably first and foremost just the activity in the business. How do pickups and drop-offs around the world with all of our customers compared to what we might expect for this time of year. And, we then couple that with what we are hearing from our customers about their outlooks and what we are hearing about the economy just broadly to form a view on demand. And then in terms of looking at supply, we just look at how many containers are available in the factories and in depots, and that just gives us a general sense for what we think about overall supply and demand dynamics. I would say this year we eventually feel pretty good about where our supply is right now. That is just over 2% of the overall fleet of container available in the factories which is it's probably maybe a little bit lower than average this time of year heading into the peak season.
I think reflecting some caution by the shipping lines because of the trade uncertainty and some caution by these companies due to the slower -- I guess the slow pace of pickups in the first quarter. We then look at our depot inventories. And we probably we have a fleet of now 6 million TU containers or little more than that. And we've got 100,000 in depot in Asia which is our key export market of course. And again that feels very well controlled. And so, I think we are just trying say is we've got -- we feel okay about demand just given what we are hearing from our customers and about expectations for trade growth. We feel good about supply. And, that makes us feel like it should be a reasonably successful year.
One last one from me, if I may, just -- you kind of mentioned the term irrational competitors a few times through it you said you don't feel like they are being irrational, but using that term as many times you did, I just want to get your feel there, is that something you feel is creeping in more and more as competitors may be need to stay -- you mentioned kind of they need to say in the game or they had been out of the game and they need to come back in the game, is that something that gives you pause as we move deeper into this cycle?
It's funny. I think it mainly is that around this time last year we talked about increased competition and then we saw a lot of notes talking about irrational competitors. And so maybe we are trying to comfortably get ahead of the fact that people might say that if we just talk about with competitors being more aggressive. And so, we do see there is more competitors that are active in the marketplace. But it's down from a few years ago due to all the consolidations. And again, we don't look at the activity of the competitors and say we can't understand what they are doing. We do and number of the deals that we walked away from we probably could have justified. It was just that we saw other investments being more interesting. And again just given how much we have invested in the fleet over the last couple of years, we didn't feel that we were compelled to participate in everything.
All right. Great. Thanks. I appreciate the thoughts. Thanks, John.
Thanks, Ken.
[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Brian Sondey for any closing remarks.
Thank you. Just like to thank everyone for your continued interest and support of Triton, and we look forward to talking with you soon. Thank you.
The conference call has now concluded. Thank you for attending today's presentation. You may now disconnect.