CAI International, Inc.
Q3 2019 Earnings Call Transcript

Published: 30 Oct 2019

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the CAI International, Third Quarter 2019 Earnings Conference Call. [Operator Instructions]. Please be advised that today’s conference is being recorded. [Operator Instructions]I would now like to hand the conference over to your speaker today, Timothy Page, Chief Financial Officer. Thank you. Please go ahead sir.

[Timothy Page:]

Good afternoon and thank you for joining us today. Certain statements made during this conference call may be forward-looking and are made pursuant to the Safe Harbor provisions of Section 21E of the Securities Exchange Act of 1934, and involve risks and uncertainties that could cause actual results to differ materially from our current expectations, including but not limited to economic conditions, expected results, customer demand, increased competition and others.We refer you to the documents that CAI International has filed with the Securities and Exchange Commission, including its annual report on Form 10-K, its quarterly reports filed on Form 10-Q, and its reports on Form 8-K. These documents contain additional important factors that could cause actual results to differ from current expectations and from forward-looking statements contained in this conference call.Finally, we remind you that the company's views, expected results, plans, outlooks and strategies as detailed in this call might change subsequent to this discussion. If this happens, the company is under no obligation to modify or update any of the statements the company made during this discussion regarding its views, estimates, plans, outlook or strategies for the future.I will now turn the call over to our President and Chief Executive Officer, Victor Garcia.

[Victor Garcia:]

Thanks Tim. Good afternoon and welcome to CAIs third quarter 2019 earnings conference call. Along with our Earnings Release today we have also posted on our website under the Investor Section, a presentation on our results and our view of the state of the company and the industry. We will not be going through specific slides in the prepared remarks, but can address any questions related to the presentation during the Q&A portion of today's call.I'll start by sharing our results for the quarter, then I'll walk through our progress and outlook for each of our business segments, as well as provide an update on the ongoing sale process for the railcar business.For the third quarter of 2019 we reported net income from continuing operations attributable to common shareholders of $13 million or $0.74 per fully diluted share, which was an improvement from the $0.69 per fully diluted share from continuing operations in the second quarter of 2019.Overall we reported a loss of $7 million for the quarter or $0.40 per fully diluted share as a result of a $25.6 million impairment of our railcar fleet. Our container leasing segment remains the driver of our results of continuing operations and we reported sequential growth in the segment despite weak market conditions that persisted throughout the year.The trade disputes between the United States and China, along with the softening global economic conditions continue to channel the overall market for container leasing. New factory orders and leases have been modest throughout the year and we expect that trend will continue into the fourth quarter. We are however please that we've been able to maintain a fleet utilization of 98.6% in our own fleet during the third quarter, largely consistent with the 98.8% that we had reported during the second quarter. We expect utilization to remain strong over the coming quarters.Our priority in the current slow growth environment is to maximize our cash flow by maintaining a high utilization and remaining discipline in our investment decisions. During the quarter we took delivery of $7 million of containers ordered earlier in the year, but we have not invested incrementally in standard dry van containers.Year-to-date we have taken delivery of approximately $280 million of equipment, of which approximately $115 million was standard dry van containers, the remainder was in higher yielding specialized equipment and sale leaseback investment.We remain disciplined with our investments, focusing only on those transactions that meet our return expectations. We are prepared to not pursue transactions when the pricing is below our expectations or transaction structures are not acceptable to us.New container pricing was relatively steady during the quarter in spite of the low demand and minimal production of new equipment. We would expect when demand for containers to increase to a more normal level, that container prices will also increase closer to the historical average of approximately $2000.Secondary price – container pricing in most regions has remained strong and we expect this trend to continue assuming industry wide container utilization remains high and overall container availability is limited, managing to high utilization is one of our core strength and we have implemented a focused, strategy of selling idle assets to our broad network of customers, keeping to strong contract terms and repositioning equipment to high demand locations. This has helped us achieve our high utilization rate and has contributed to this quarter's $2.4 million gain on equipment sales, an increase from the $1.6 million reported during the second quarter of 2019.By carefully managing our utilization, we are positioned to be aggressive when markets are strong and maximize our cash flow during week markets. We are cautiously optimistic about overall demand in 2020. We estimate that replacement needs alone account for approximately 40% of overall container investment and that because of the limited production of new containers in 2019, that fleet replacement fell short of normal levels. Consequently in addition to container demand to satisfy a moderate level of trade growth projected for 2020, we expect 2020 to be a catch-up year for fleet replacement.In addition, we believe that leasing will continue to represent an increasing proportion of the overall container market in 2020 as customers prioritize their capital for the delivery of new ships and modifications to the existing fleet to meet IMO 2020 regulation.As we prepare for demand conditions to improve, our primary focus is unchanged. We intend to maintain high utilization, position our equipment at high demand locations and continue to apply our disciplined approach of only investing when returns are attractive.As we announced last quarter, we have been in discussions regarding the sale of our railcar business. While there could be no assurance if or when a transaction to sell all or part of the fleet can be completed, we are engaged in discussions with potential purchases that have expressed interest in the portfolio. At this point we do not expect to complete a transaction by the end of the year. That said, we are focused on achieving a strategic solution that maximizes shareholder value.In the interim, demand for our railcar fleet in the third quarter has been solid despite a weak overall rail environment. Our priority remains increasing utilization in the fleet in order to reduce our prior cost and increase revenue. We successfully placed a number of railcars on lease during the quarter and averaged 85.3% utilization during the most recent quarter.We are having discussions with several prospective customers on our available railcars and expect our utilization to increase over the coming months. During the quarter we expensed approximately $800,000 of refurbishment costs to place equipment on lease, which under prior accounting would largely be capitalized.We have several increases for many of our railcars and our overall monthly lease rates have been steady for most equipment types.Grain cars are an exception to this, with some weakness resulting from limited exports of grain to China. We have approximately 240 cars that we expect to remarket over the coming months; however, our grain car fleet is very young and we expect those cars to be preferred in the market despite the overall market segment business.The restructuring efforts we announced in our second quarter call drove improved third quarter results in our logistics segment. The segment continues to add new customer accounts in each of the services we offer, and we expect continued improvement in the fourth quarter. We believe we can make the logistics segment profitable by increasing the volume from our core customers while leveraging our existing infrastructure to generate additional revenue.We are entering the traditional annual bid season, and for many accounts we are now on our second year. We believe that having proven our commitment to service, we will be able to expand many of our accounts. In tandem, we are managing our costs closely across the services we offer and the segment to ensure the positive trends resulting from our restructuring efforts continue.We are looking to grow and improve results despite headwinds in the U.S. Transportation Logistics marketplace. Slowing U.S. economic growth and ongoing trade disputes continue to challenge overall demand for transportation services.We are continuing to take steps to manage our business through this macro environment and remain focused on core strategic customers in each of our logistics services that will form the basis of our future ongoing demand. We believe that logistic capabilities provide greater integration of our core shipping line customers and create new sources of demand for our existing container assets.In summary, we are focused on position the company for the future and deploy our capital to increase shareholder value. We continue to seek a strategic solution for our rail business and our manager in our existing container portfolio in anticipation of an improved demand environment.With that, I’ll now turn it over to Tim Page, our Chief Financial Officer to review the financial results for the quarter in greater detail.

[Tim Page:]

Thank you, Victor. Good afternoon everyone. My comments unless I note otherwise will focus on our continuing operations.Total revenue in the third quarter was $108 million, an increase of 1.9% versus Q2. Year-to-date total revenue was $316 million as compared to $290 million for year-to-year Q3 2018, an increase of 9.3%. Container lease revenue in the third quarter was $77.3 million, 2% greater than Q2 of this year and 2.6% greater than Q3 of last year.This sequential and year-over-year increase in container revenue reflects the positive impact that our focus on optimizing container utilization has had, even in the face of sluggish global GDP growth and tariff uncertainty.Year-to-date container revenue is 9.7% higher than the same period last year, which primarily reflects the run rate impact of the strong lease market we experienced in the first three quarters of 2018.Logistics revenue in Q3 was $30.3 million, versus $29.8 million in Q2, an increase of 1.6%. Year-to-date logistics revenue is up 8% versus last year. Give that there was a significant restructuring and reduction in staff in our logistics business at the end of Q2, we are encouraged that Q3 logistics revenue increased modestly versus Q2.Depreciation expense in Q3 was basically flat with Q2. We would expect depreciation expense in Q4 to be flat to slightly higher than what it was in Q3.Storage handling and other related expense in Q3 are all container related and were $4.7 million as compared to $4.1 million in Q2 of this year, an increase of $0.6 million, most of which was related to increased storage costs. We don’t expect a significant decrease in container utilization in Q4, but we would expect a similar increase in storage costs in Q4 as the normal Q4 seasonal pattern for container demand would suggest some increase in container turn-ins.Logistics cost of sales increased from $26.1 million in Q2 to $27 million in Q3, an increase of $0.9 million or 3.6%. Logistic gross margin in Q3 was $3.2 million as compared to $3.7 million in Q2, a decrease of $0.5 million or 12.9%.Gross margin percent in Q3 was 10.7% compared to 12.5% in Q2. The decrease in gross margin dollars and gross margin percent was primarily a function of a higher mix of lower margin intermodal rail business versus truck brokerage and freight forwarding business, and a very competitive truck brokerage market in Q3.EBITDA for the logistics business increased $0.9 million in Q3 as compared to Q2. It went from a loss of $1.2 million in Q2 to a $0.3 million loss in Q3. We continue to focus our revenue growth and margin expansion, while at the same time maintaining a laser focus on cost control.We expect to continue to make improvements in the business, but based on normal seasonality Q4 is a weak quarter, consequently we expect that overall profitability in the logistics in Q4 will be in the same general range as Q3.Gain on sale of used container rental equipment in the quarter increased from $1.6 million in Q2 to $2.4 million in Q3 due to a 27% increase in the volume of containers sold and a 7% increase in the average selling price. Q4 is traditionally a moderately slower quarter for container sales and we expect that gains on sale in Q4 will be in the $1.5 million to $2 million range.General and administrative expense in Q3 was $12.7 million as compared to $12.3 million in Q2, a decrease of $0.4 million. Of the $12.7 million total, container related G&A was $8.7 million in Q3 versus $7 million in Q2, an increase of $1.7 million.Professional fees increased $0.4 million as compared to Q2. In addition there were several non-recurring charges. Bad debt expense in the quarter increased $1.1 million versus Q2. $0.8 million of the increase was related to a charge to write-off receivables related to a small European lessee and Q2 had a $0.2 million credit to bad debt expense. Additionally there was a charge of $0.3 million related to a true-up of international payroll taxes. We would expect overall G&A to be in the $11.7 million to $12.2 million range in Q4.Interest and other expense increased from $20.1 million in Q2 to $20.5 million in Q3, an increase of $0.4 million. $0. 3 million of the increases was FX expense related to a weaker pound and euro in the quarter. The remaining $0.1 million increase is due to a higher average debt balance offset by a small decrease in our average borrowing cost.As for Q4, absent the non-recurring charge I will cover in a minute, we expect interest expense to be approximately equal to what it was in Q3. We are focused on reducing our overall interest costs, interest expense has been one of our most significant cost increases in 2019 and we are taking steps to reduce these financing costs.We reduced our rail revolver commitment in October from $550 million to $250 million, since we no longer anticipate a need for the higher commitment. As a result we expect to save approximately $200,000 per quarter in reduced financing costs, though we will incur a non-cash charge of approximately $1 million in the fourth quarter, to write-off deferred financing costs related to the reduced commitment.In 2020 we expect to refinance two ABS transactions that were completed in 2018 at significantly higher interest rates and are available in that market today. If rates in the ABS market remain at their current levels, we expect our funding costs for those facilities to decrease approximately 50 to 75 basis points on approximately $600 million of ABS debt, resulting in potential annual savings of $3 million to $4.5 million. Those facilities are able to be refinanced in March and September of 2020.The weighted average interest rates on our funded debt at the end of Q3 was 3.73%, 15 basis points lower than the 3.88% rate at the end of Q2. We are expecting a similar reduction in the average rating in Q4, as the fed is expected to continue to reduce the fed funds rate.Income tax expense in Q3 was $1.2 million as compared to $1.3 million in Q2, a decrease of $0.2 million, and the effective tax rate in Q3 was 7% as compared to 8.4% in Q2. Year-to-date our effective tax rate was 6.1%. We expect the effective tax rate in the coming quarters to be in this 6.1% range.Net income from continuing operations in the quarter was $13 million or $0.74 per fully diluted share as compared to $12.3 million or $0.69 per share, an increase of $0.7 million or $0.5 per share.While we expect our utilization to remain strong, and that we will benefit from decreasing LIBOR in Q4, we expect Q4 net income to be marginally softer than Q3 due to the normal seasonal cadence of the shipping industry.Our own container fleet was 1.6 million CEU as of the end of Q3, flat with what it was at the end of Q2. Our average utilization in the quarter remained at a historically high level and was 98.6%. As of today utilization stands at 98.4%.The total book value of our container revenue earning assets at the end of Q3 was $2.5 billion, flat with Q2. At the end of the third quarter we had total funded debt, net of restricted cash and cash held in variable interest entities of approximately $2.1 billion, flat with Q2. Rail related debt accounts for approximately $250 million. We expect that all the rail related debt would be retired upon consummation of the sale of our rail assets.Funded debt in Q3, net of cash related to continuing operations was $1.87 billion as compared to $1.85 billion at the end of Q2. We would expect the funded debt balance to remain in this range, to slightly decrease in the coming quarters.That concludes our comments. Operator, please open the call for questions.

[Operator:]

[Operator Instructions] Our first question comes from Brian Hogan with William Blair. Your line is open.

[Brian Hogan:]

Good afternoon.

[Victor Garcia:]

Hey Brian.

[Brian Hogan:]

A quick question on your ROE outlook. What was the container business ROE in the quarter and then do you believe you can do double digit ROE in that business going forward? I mean weather returns, obviously there’s not a lot of investment today, so can you continue to generate a double digit ROE, maybe what's your outlook for that?

[Victor Garcia:]

Well, actually we did generate double digit ROE when we look at the capital that was in the container segment. I think we expect that when the market turns back up and we have a better opportunity to put new equipment on least that the returns will increase, because we in certain ways are under leveraged on our container segment. So we do expect to continue to see improvement in terms of the returns on the container portfolio, but we are generating double digit ROEs.

[Brian Hogan:]

Alright, and then can you shift to like the competitive environment and any pricing pressures. Is anybody acting irrationally from your perspective or is it just pretty staple?

[Victor Garcia:]

I'd say the way we look at the market environment is very competitive, but it's competitive because of just the lack of opportunity. That’s similar to what we would normally see in the first quarter where there's just a number of small opportunity and there’s a lot of players looking at the same kind of investment, and given that the investments have been fairly small, people tend to be more aggressive than normal.I would expect that when demand picks up, that we’ll see a better and more disciplined marketplace and I think just the fact that what we've seen is people cutting back on investment during this year, it's something that we didn't see in prior weak markets. It bodes well for a more disciplined approach once the market turns up.

[Brian Hogan:]

Alright, then the last one from me at the moment, the logistics business and I appreciate the detail in your prepared remarks there, but can you give a little more color on how do you expect to get that profitability back up? Is it really the function of just market demand and obviously taking some strategic actions; just kind of give a little more color on what you’re doing there.

[Victor Garcia:]

Sure. Well, first of all we are dealing in a pretty tough transportation market right now. You know we are not seeing as strong a peak season across the board as we've seen in prior years and I think there's a lot of transportation and logistics companies that are you know struggling right now. But that being said, given our operation, what we did in the second quarter was we tried to right size the cost structure and put in place an infrastructure where we could leverage off of the same cost base and more volume.Everything that we are focused on is having more volume with the same cost base and with some increasing volume, with steady business that we're getting from customers; we expect that we'll be able to use that operating leverage to turn into profitability. We've made progress in the third quarter. It was in-line with our expectations. We expect to continue to make improvements and to reach profitability in that segment, and it’s – we’ve put the pieces in place to do that.

[Brian Hogan:]

Does it require more investment in technology or is it truly just right sized already?

[Victor Garcia:]

No, our technology – you know our technology is actually very good. I mean we are using technology that a lot of other companies use. We are looking at ways of increasing peoples’ productivity and that's an ongoing process, and we continue to do that, but the step change if you will in the logistics segment is really on the customer selection, the lanes that we choose, the margins that we are willing to compete on; in sort of ways very similar to what we do in the container leasing segment.There's a lot of business that gets done on an annual bid cycle. That bid cycle typically starts around this time of year, so it's hard to make those big step changes until you get an opportunity to get into the bid cycle and we're now going into our second year with many customers. We've proven that we have a very good service offering and so we expect that we'll be able to win more of the lanes that we would want in our segment. And so as we go and get awards on these bids, we expected to continue to improve in terms of volume and margin.

[Brian Hogan:]

Alright, thank you.

[Victor Garcia:]

Thank you.

[Operator:]

Thank you. Our next question comes from Mike Webber with Webber Research. Your line is open.

[Mike Weber:]

Good afternoon, guys. How are you?

[Victor Garcia:]

Hey Mike.

[Mike Weber:]

Victor, just wanted to look back on – I guess maybe kind of coming at returns, but more from just kind of a granular level. If I think about – well, first and foremast where are new box prices now? We've gotten some color from some other calls, but more importantly when you think about where your – you know where those collateral values would be kind of today versus the next 12 months, just given what we've seen, and what you guys are saying and what we are seeing in the global economy, is it reasonable to think that new box prices in 2020 probably average at a level that's inside of where we were for 2019 and where we are currently?

[Victor Garcia:]

I don't think so. I think there has been a lot of push back on lowering prices much from where they are and to answer your question, it's bumped around; there’s been very few transactions and manufactures are trying to push up price, so they increase the price and then they bring it back down, but it's averaged in the low 1,600 to about as high as 1,700 , kind of the quoted price. But I would say the 1,600 is probably on average where a lot of things are getting done, but it's really a lot of people competing around that price for orders.I think the manufacturers are likely to cut production, and instead of trying to lower prices any further – and I do think they are all looking for any kind of uptick in demand to try to increase price, because the margins are pretty tight right now for the manufacturers.

[Mike Weber:]

Got you. And this might be a difficult point in time to say the uses of basis I guess, but if I think about the dynamics that going into play in terms of where you know – in terms of those box prices where you are going to – it’s going to be underpinned by steel and then just raised to a degree, but it’s also the demand component of that. So I guess in terms of how you would think about new box prices for next year, flattish relative to what we saw for 2019. Is that a fair characterization of where you guys think would be?

[Timothy Page:]

I would think that we're gone start up in the first quarter flattish where we are, and as we get into the demand season, if we get any kind of uptick, it will quickly probably move up closer to a $2,000 level. I think any pick-up in demand will cause the manufacturers to try and bring it back to what has historically been the normal range and where a profit margin is adequate for them.

[Mike Weber:]

Got you. Okay, that’s helpful. You mentioned something in your prepared remarks around the space playing a bit of catch-up. I think it was around retirements and new boxes – sorry, of used containers. And what I wanted to make sure, I heard that was in the right context, but I guess is what you’re saying is that there is a larger chunk of containers that get aged out and the implication is that we could see a slightly heavier CapEx cycle in 2020 than we would then – kind of the underlying business we typically support. Is that the gist of what you're trying to get across there?

[Victor Garcia:]

Yeah, I think when you look at the overall container production this year, it’s below normal and utilizations have been high. So customers are stretching out their use of equipment.We normally get anywhere from 4% to 5% attrition in the fleet as if the normal replacement, you know annual replacement. So that's a significant amount – if you look at the total size, that's a significant amount of CapEx made just to replace retiring equipment and you know it's been estimated – our estimate is about 40% of all container production goes towards replacement.So if we’ve had less replacement this year, we have moderate trade growth next year, and just knowing how the industry typically operates when we get a slower market like this, there tends to be extra, more equipment being sold out of the market than is retained. So those factors would lead me to believe that if we have a more normalized year, that we’ll actually see a pretty strong overall year, because of the replacement cycle.

[Mike Weber:]

Okay, and then just on the competitive balance, not to beat a dead horse, but in terms of some of the larger Chinese players in the market that might have been absent for the balance of ‘18 and part of ’19. Are you are saying kind of the – those original players is kind of everybody back in the pool at this point or are there still feedbacks or Cosco backed entities that are not – that you're not bumping into in terms of competing from your business.

[Victor Garcia:]

Some players are in the market for certain types of transactions. We haven't seen aggressiveness from all the players, and we've seen some players still be relatively speaking outside of the market and not competing for a lot of transactions. I think the biggest factor this year has been just the lack of opportunities, which brings into play a lot of smaller players that might not be there for some larger transactions and has kind of created more of a competitive dynamics. But I would say, if we had a normalized year, I would say returns would probably be much better and we feel pretty good about the state of the industry.

[Mike Weber:]

Okay. Alright, I’ll stop there and turn it over. Thanks for the time guys.

[Victor Garcia:]

Thank you.

[Operator:]

Thank you. [Operator Instructions]. Our next question comes from Helane Becker with Cowen.Your line is open.

[Conor Cunningham:]

Hey guys. It’s actually Conor call in for Helane. Just to maybe follow up on Michael's question, just in terms of the demand environment, you talked about potentially coming back in 2Q 2020. Trying to get a sense for what you need to see in the global economy, so you can see just above replacement level CapEx back there. Is it really just a function of overall like global trade needing to improve from here to get above that level?

[Victor Garcia:]

Well, we've been going through a phase over the last couple of quarters of the softening market, and I talk about economic environment. We know that there’s a slowdown in Asia, there’s a slowdown in Europe, you know a modest slowdown in the United States. We would expect unless we're going to go into a more pronounced slowdown that there'll be a general improvement. That saw at least stability, and that with the expectations of a normal – we are going to have a normal trade growth that with the replacement needs that are there.We expect more shipping lines to be coming back to market. When you couple that with the fact that there’s a capital investment that some of our customers are making, you know container ownership on their side is less of a priority and we've seen that and it's become more pronounced with many shipping lines.So we would expect that they'll come back to the leasing market more often and when they are not planning on big CapEx budgets for their own account, the only market place that is available to have equipment ready and waiting is the container lessors. That's the value that the industry provides as having equipment available when customers need it, and they usually need it on a short term. So if there is a market change and we start seeing improvement in demand, we would expect – a larger share of that improvement will be benefited to all the leasing companies.We've been in a – I would say now going, a full four quarters into a soft market, typically 18 months is what we would normally see as a soft market. So you could argue maybe it's a little bit beyond that, but it would it fit in nicely with an expectation of a normal seasonal uptick in the second quarter.

[Conor Cunningham:]

Okay, that makes sense. And then on the container utilization rate, obviously pretty impressive; and you mentioned that you are active sellers of idle containers. How much equipment is actually supposed to come off at least for the remainder of this year and then next year. Just trying to get a sense for potential gains on sale if the environment doesn't improve or weather isn’t like a whole lot of release and that's kind of a occurring at that point.

[Timothy Page:]

I don't have an exact number in front that I can give you right now, but I would just say generally speaking, because in 2017 and 2018 we put on almost $1.3 billion of container assets, the amount of equipment that we have available to come off hire is actually proportionately much less than it used to be. So we have a lot of equipment that goes on for multi years from here, and we've also structured a lot of leases, so that they stay on lease with customers over the full life of their economic, like the assets.So the number I would say is probably somewhere less than 20%, maybe somewhere between 15% and 20%, but that's the normal – you know we would expect many of those to continue to be extended and released and customers hold on to equipment longer than the expiration of the lease.

[Conor Cunningham:]

Okay, and then on the buy back, I was a little surprised to not see much done in the quarter. It seems like you were more committed over the last couple of quarters to be more aggressive there. Is it really just a function of you needing to be – wanting to be out of the railcar fleet before you get more aggressive there or is it just like you're trying to weigh potential growth CapEx in the coming quarters versus the buyback now? Thanks so much.

[Timothy Page:]

No, I think with a significant asset sale that we have, you know we want to make sure we have a good idea of where that transaction is. We continue to look at the possibility of buying back shares, but right now I think as we're looking at it, that is one of the factors that we're considering. It is you know where we’re going to be with that sale.

[Conor Cunningham:]

Okay, great. Thanks for the time.

[Operator:]

Thank you. Our next question comes from Michael Brown with KBW. Your line is open.

[Michael Brown:]

Hi, good afternoon guys.

[Victor Garcia:]

Hi Mike.

[Michael Brown:]

So I wanted to start with a kind of clarification first. Can you share what the after tax impact of that impairment charge was this quarter? I’m not sure if I just missed it, but just trying to get at kind of the underlying performance of the railcar business within discontinued ops?

[Victor Garcia:]

Yeah, it was $19 million, almost $20 million.

[Michael Brown:]

So that would imply the railcar business was essentially breakeven?

[Victor Garcia:]

Yeah, railcar business lost about $900,000 and $800,000 of that was as Victor mentioned, capital expenses that we – if the business was an on-going business, we would have capitalized; they were improvements to railcars refurbishment expenses. So absent that, it was basically breakeven.

[Michael Brown:]

Okay, thank you for that. I guess once that business is sold, how much capital would you expect that’s kind of freed up and then it sounds like you know probably the return to shareholders through buybacks and then, given the low liquidity in the stock, how quickly do you think you could do that and would you maybe consider doing something like a Dutch tender offer?

[Timothy Page:]

I think we can we consider a number of different things. A buyback is one way to do it; a tender is another way to do it. I think we can we can look at all those options. I think with the impairment, we have a net equity position in the rail business of approximately $50 million. So you know depending on how, you know what sale price we have, we’ll be able to see what we can do.

[Michael Brown:]

Okay and then obviously during the quarter we saw the 13D filing from an investor that you know is encouraging on a strategic review, including a potential sale of the company; just wanted to hear your thoughts on that. We've gotten some questions from investors that you know I thought that was kind of an interesting thesis for the company. So wanted to hear your thoughts on a potential sale, if that would be something that you’ve talked about with the board?

[Victor Garcia:]

Mike, as you probably expect, I can’t make a comment on an item like that. I will say you know, we have dialogue with all shareholders who want to talk to us and we have productive dialogues with all our shareholders.You know I think the basic thesis is that the shares should be valued higher, so we don't have a gripe with that. We think the company has very strong cash flows. You know our container business is performing really well; we're looking to streamline our overall operation with the sale of the railcar business. We are doing all things to increase shareholder value, but we agree that the company's shares you know should be valued higher and we're focused on that.

[Michael Brown:]

Okay, I appreciate the color. And just one last one; you know what you give in logistics business was helpful. I appreciate the kind of background on the bidding process there. Do you think that next quarter you could you know share with us when you would expect that business to turn profitable, because it sounds like at that point you know you'll have a better view on kind of the outlook for next year.

[Victor Garcia:]

Yeah, I mean I’ll tell you that most of the loss that we're reporting relates to intangible assets, so it's not cash charges. You know we’re actually approaching cash flow breakeven pretty quickly. I would say that’s our first order, but I'd say we're targeting – we haven’t provided specific guidance, but certainly we're putting a lot of effort to as quickly as possible to turn the corner there, in terms of bottom line profitability.But I do want to emphasize again, you know one of the things we are very focused on, we don't want to burn cash and we want a profitable operation. So the first thing is making sure that we are throwing off cash and not consuming cash, and we're going to hit that milestone hopefully very soon.And then we'll focus on overall probability, but again the emphasis is if you really look at the cash – the non-amortized or the non-cash charges, it's a big part of where we're still not meeting our profitability.

[Michael Brown:]

Okay, thank you for taking the questions.

[Victor Garcia:]

Great!

[Operator:]

Thank you. Our next question is a follow-up from Brian Hogan with William Blair. Your line is open.

[Brian Hogan:]

Yeah thanks. Can you discuss your customer conversations, like what’s their sentiment? Are they cautiously optimistic on next year as well or are they looking to do more sale leaseback transactions as you mentioned you did in the quarter. And also as a kind of a follow-up to that, on a near term basis are you seeing any change in behavior from IMO 2020?

[Timothy Page:]

Okay. You know, I would say customers are cautious about the outlook. I think to say they are optimistic is probably an over statement; I think they are just cautious or are cautiously optimistic. As far as sale leaseback concerned, those have more – as much timing about when they have equipment that becomes unencumbered that they’ve owned and financed and now are looking to be able to sell the equipment to a third party, so that now that it doesn't have a lien on it.So it doesn't, it's not as predictable as ongoing demand is, although I will say our ability to market assets for sale and being able to find customers in geographic locations throughout the globe makes us a preferred party to do sale leasebacks, because it gives them a lot more optionality as to where they can re-deliver equipment, which is a significant consideration for many of the shipping lines.

[Brian Hogan:]

Alright, and then the IMO 2020?

[Timothy Page:]

IMO 2020, you know I think it's been predicted for a while, everybody's planning for it. I would suspect that there'll be some adjustments as we get into 2020 in terms of costs recoupment, but I really don't think, I don't think it'll be a major event. I think shippers are expecting that there will be an increase. Shipping lines are focused that they can absorb that. If anything, maybe there's gone be a tightening up of the market to make sure that costs have passed through. And so, you know we’re not expecting anything that would cause a credit concern from our standpoint at this point.

[Brian Hogan:]

Alright, thank you.

[Victor Garcia:]

Thanks.

[Operator:]

Thank you. And I’m currently showing no further questions at this time. I would like to turn the call back over to Victor Garcia, President and CEO for closing remarks.

[Victor Garcia:]

I appreciate everybody coming on the call and listening in to our results. We look forward to reporting our year-end results in the next call. Thank you everyone.

[Operator:]

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.