CAI International, Inc.
Q1 2018 Earnings Call Transcript
Published:
- Operator:
- Good day, ladies and gentlemen, and welcome to the CAI International First Quarter 2018 earnings conference call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Timothy Page, Chief Financial Officer. Please begin.
- Tim 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 and 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, outlook 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 of the company made during this discussion regarding its views, estimates, plans, outlook or strategies for the future. I'll now turn the call over to our President and Chief Executive Officer, Victor Garcia.
- Victor Garcia:
- Thank you, Tim. Good afternoon and welcome to CAI's first quarter 2018 conference call. Along with our earnings release today, we have also posted on our Web site under the Investor section a presentation on our results and our view of the state of our company and industry. We will now be going through the specific slides in the prepared remarks that can address any questions related to the presentation on this call. For the quarter, we reported record revenue for our business. Revenue for the first quarter of 2018 increased 17% compared to the first quarter of 2017, a 1.4% compared to the fourth quarter of 2017. Container lease revenue increased 22% compared to the first quarter of 2017 while rail lease revenue and logistic revenue increased 13% and 6% respectively over the same period. Net income attributable to common shareholders was $17.1 million or $0.83 per fully diluted share compared to $5.3 million or $0.27 per fully diluted share in the first quarter of 2017, a 225% increase in net income. Our results were driven by our container segment which benefited from ongoing new investment and average utilization of 99.2% for the quarter. We also continued to benefit from a strong secondary market and we are able to report a $2.2 million gain on sale of equipment for the quarter. Typically the first quarter is our weakest quarter for container equipment demand. We are pleased to see our utilization actually increase and average 99.2% during the quarter. We also experienced a strong market for leasing new container equipment during the quarter. Through the first quarter of 2018, we invested or committed to invest $336 million in containers of which approximately 80% has already been leased or as committed leases which we expect will be largely be going on lease during the second quarter of 2018. We are more than twice the level of last year's pace for customer lease commitments on new containers. We expect customer demand and our investment to remain strong for the remainder of the year and could exceed the record level we achieved in 2017. New container prices remain stable at approximately $2100 and correspondingly long-term lease rates, our new equipment also remain stable during the quarter and are at attractive levels. Our rail segment continues to experience positive momentum during the first quarter of 2018. We placed 398 of our new railcars into service during the quarter and entered into leases for an additional 340 railcars to go into service during the second quarter. The 738 railcars represented approximately 60% of the new railcars that we had available to lease during the quarter. We continue to experience increased lease activity for new railcars across various equipment categories and lease rates are generally improving for many railcar types. Ongoing economic growth in the U.S. and slowing rail velocity amongst Class 1 railroads has led to an increase in demand for leased equipment. We are more optimistic about the opportunities for the rail segment due to the improving utilization and trend in lease traders over the past few months. We expect those trends to continue over the course of 2018. Our logistics business is gaining momentum with a growing customer portfolio leading to record logistics revenue for our company this quarter. Demand for logistic services is strong particularly for U.S. domestic intermodal and trucking. Truck capacity in particular is tight due to growing U.S. freight demand and the implementation of electronic login devices. The segment as a whole reported loss for the quarter but we expect improving revenue and income trends as the year progresses. We will continue to invest in the long-term infrastructure of the business by expanding our personnel throughout the U.S. We also had some noteworthy transactions that benefited our capital structure. We were successful in issuing approximately $350 million in long-term fixed rate, asset backed notes at an average interest rate of 4%. At the time of the note issuance, we increased our percentage of fixed rate debt to total debt to approximately 60% significantly reducing our exposure to rising interest rates. During the quarter, we were also successful in issuing $1.6 million or 38.7 million of 8.5% Series A fixed to floating rate perpetual preferred stock. We are the first container leasing company to issue preferred stock and are pleased with the positive reception we have received from the investors. In addition, the addition of preferred stock to our capital structure is a great benefit to our company. And it allows us to increase our investment in equipment without issuing new common equity, while at the same time lowering our overall cost of capital. We are also able to utilize our existing cash flow to consider repurchasing common shares while continuing to invest in what is a strong investment market. In summary, we expect 2018 to be a strong demand year for containers as the global economy continues to expand and lessors continue to operate with high utilization. CAI is well positioned to continue to benefit from the investment opportunities and we expect 2018 to be a record year in terms of revenue and net income. I will now turn the call 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. Total revenue in the quarter was $95.4 million, as compared to $94 million in the fourth quarter of 2017. Leased related revenue in the quarter was $73.7 million versus $74.6 million in Q4 of 2017. Since we bill container rental on a daily basis, the slight decrease in lease revenue in the quarter is primarily a result of two less filling days in Q1 as compared to Q4. Leased revenue in Q1 of 2018 is $12.7 million or 21% higher than Q1 of last year driven by increased utilization and the impact of $487 million of container investment last year. Net income in Q1 was $17.1 million versus $5.3 million in 2017, Q1 of 2017 an increase of 225%. The $17.1 million net income we achieved this Q1 was a record for any first quarter in CAI's history. Consistent with 2017, the current strong container lease market has been the primary driver of our bottom-line performance. The trends established in 2017 of high utilization, record levels of investment, attractive pricing and investment returns and a strong resale market have all continued through the first quarter of 2018 and we expect them to continue in the coming quarters. During Q1, we leased out approximately 20,000 CEU of factory containers a new long-term and finance leases representing approximately $44 million of investment. Average CEU utilization increased from 98.9% in Q4 to 99.2% in Q1 and is further increased to 99.3% today. Rail leased revenue in Q1 was $9.1 million, a record level for rail lease income revenue and was 1% higher than Q4 of 2017 and 13% higher than Q1 of 2017. During the quarter, we leased out 398 new cars, 46 used cars. We have bookings to lease out an additional 340 new cards and 476 used cars in Q2. In addition, we have a strong pipeline of perspective lease opportunities. We are expecting solid growth in the railcar lease revenue as cars are placed on lease over the course of Q2 and the coming quarters. Our logistics business is beginning to show the results of the organizational technology and structural changes we put in place during 2017. Revenue grew 11% over Q4 2017 levels, gross margin growth lag somewhat as the trucking market in particular face cost pressures but still increase 3% over Q4 levels. Early Q2 indications lead us to believe we can expect strong revenue and margin growth across all three parts of our logistic business in the coming quarter. Depreciation expense increased $0.7 million from $28.1 million in Q4 of 2017 to $28.8 million in Q1 of 2018. This increase is inline with what we expected and reflects the full quarter impact of assets put on lease during Q4 of last year plus the partial quarter impact of new assets leased out during Q1 of this year. We would expect to see similar quarter-over-quarter increases in depreciation expense in the coming quarters as new equipment is leased out. Storage handling and other operating expenses decreased $0.2 million during the quarter primarily as a result of increasing container utilization which results in lower container storage costs. We would expect to see modest increases in this category of expense in the coming quarters as the pace of container lease outs increases which results in lease off related handling charges and as the size of the on-lease rail fleet increases, we would expect some increase in rail related maintenance expense. In Q1 of 2018, we had a gain on the disposition of rental equivalent of $2.2 million compared to $2.8 million in Q4. Q4 had a $0.6 million gain associated with the total loss casualty event at one of our container lease customers. Adjusting for that event Q4 and Q1 were basically flat. We would expect our gain on sale to remain at or be slightly less than what we saw in Q1 in the coming quarters. The sale prices are stable to slightly increasing, but our inventory of equipment available for sale is somewhat limited by exceptionally high levels of utilization we are experiencing. G&A expense in Q1 of 2018 was $11.2 million basically flat with Q4 is at a level we would expect to see in the coming quarters. Our effective tax rate in Q1 was 4% and is the rate we expect for all of 2018. Interest expense in the quarter increased to $16.9 million from $15.1 million in Q4 an increase of $1.8 million, $0.6 million of the increase is related to $76 million increase in the average debt balance in Q1 versus Q4, the remainder of the increase in quarter-over-quarter interest expense is related to an approximately 25 basis point increase in our average funding cost during the quarter. Our average funding cost in the quarter was 3.41%. As of the end of the first quarter 57% of our debt was fixed rate. We intend to increase the proportion of that fixed rate funding in the coming months. During the quarter, our owned contained fleet increased approximately 54,000 CEU as compared to the end of Q4 2017, an increase of 4% and is 239,000 CEU larger than it was at the end of Q1 of 2017, an increase of 23%. On a dollar basis, our container revenue earning assets were $1.9 billion at the end of Q1 and was $1.6 billion at the end of Q1 2017, an increase compared to the end of Q4 and Q1 of 4% and 23% respectively. At the end of Q1, we had $450 million of railcars versus $375 million at the end of Q1 last year. Rail assets represent 19% of our total revenue earning assets. We invested approximately $154 million in Q1, $141 million of which was for containers and $13 million was for railcars. We have an additional $195 million of commitments to purchase containers in the coming months. Year-to-date we have purchased or commitments to purchase $336 million of containers, approximately 80% of this commitment as a fee that have already been leased out, but we have customer commitments to lease out. Year-to-date we are running at a pace of 2x in terms of lease outs and customer commitments as a compared to the pace of last year at the same time last year. And last year was a record for both container investment and container lease outs for CAI. At the end of the first quarter, we had total funded debt net of restricted cash held in variable interest entities of approximately $1.69 billion, an increase of approximately $21 million from the end of Q4 2017. During the quarter, we raised $348.9 million in 10-year asset backed securitization notes at a rate of 4.04% and we issued 1.6 million shares of $25 liquidation value, 8.5% fixed to floating rate perpetual preferred stock which as a liquidation value of $40 million. Company received net proceeds of approximately $38.3 million. At the end of March, the undrawn amount available to us under our container secured revolving credit facility was $760 million, undrawn rail revolving credit facility commitments were $203 million. At quarter end our funded debt to tangible net worth leverage ratio was 2.87. We expect the container market to remain robust in the coming quarters with stable container costs, attractive pricing and returns on new equipment and a strong resale market. Additionally, the rail market is slowly recovering and we are making progress towards growth and profitability in our logistic operations. CAI is very well positioned to take advantage of these attractive market conditions. Our strong earnings performance and cash flow generation combined with our AVS transaction and successful preferred equity offering give us the liquidity to invest aggressively in the expected growth as well as provide flexibility to pursue share repurchases or other options to enhance shareholder value. That concludes our comments operator. Please open the call for questions.
- Operator:
- Thank you. [Operator Instructions] The first question is from Michael Webber of Wells Fargo. Your line is open.
- Sam Dubinsky:
- Hey, guys. This is actually Sam on for Mike. I had two quick questions, first, we talk about the fixed to floating rate [debt line] [ph] that you have working to, I think last quarter we mentioned that 60% was that target and was like you are kind of getting closer to that and I think you just mentioned that one of your additional targets is to kind of increase that further. So I think last quarter we had -- is there a hypothetical target that you are looking to achieve with that fixed blend?
- Victor Garcia:
- We would like to get to 75% to 80% of our total debt to be fixed.
- Sam Dubinsky:
- Got it. That's helpful. Thank you. And then, I guess with the [ELTs] [ph] and kind of the implementation, can you talk about how that -- what summer is saying is kind of this lagging implementation processes impacting your revenues this quarter you guys saw a loss, but you are optimistic about growth there. Can you talk about how that industry-wide implementation is impacting your cash flow there?
- Victor Garcia:
- I'm sorry. I didn't quite pick up which segment you were mentioning?
- Sam Dubinsky:
- With regard to the implementation of the electronic log-in devices?
- Victor Garcia:
- Okay. Well, that's effective in the trucking community, it becomes -- it came into effect last year, but I think the penalties started at April 1. But it clearly had an impact in tightening truck capacity. What happened in the fourth quarter of last year was because of the tightening capacity I think there was an increase of on trucking cost of approximately 25% which nobody had really kind of expected and we kind of -- we commit to customers on a monthly basis for rates on trucking depending on the lane. And we and I'm sure a number of others got a little bit with the increase in not being able to pass it through. That becomes a less of an issue as months ago on. But, we what we do think is that, beyond the electronic log-in that underlying demand is going to be there. So, that's what's causing a very tight market for trucking services. We are -- think long-term because of the demand that -- it's a good opportunity for our trucking operation -- our truck brokerage operation. And we were putting in a lot of -- a lot of the changes we are making, our infrastructure related in terms of putting more personnel that we think will support the long-term growth of the company. And as Tim said, we are already on our way to seeing customer growth and revenue growth and will continue to focus on that. We are really looking for that whole segment to be a much faster growth segment and we are putting the people in place for that.
- Sam Dubinsky:
- That's great. Thank you.
- Operator:
- The next question comes from the line of Brian Hogan of William Blair. Your line is open.
- Brian Hogan:
- Good afternoon.
- Victor Garcia:
- Hey, Brian.
- Brian Hogan:
- One is a question on the leasing comp for container, you mentioned on a -- you are building on a daily basis, and there is two less billing days. I guess on a like-for-like basis, would the container equipment been up, I guess what is the delta of that two days? What was that -- while putting that cost is basically what I'm asking?
- Victor Garcia:
- It would have been up. In the fourth quarter, there were also a couple of events that were unusual that resulted in some extra income in the fourth quarter. So we would have definitely been up, I'd have to go back and calculate exactly what the daily average revenue would be. But, we would have been up for the quarter with those two additional days of billing.
- Tim Page:
- I think the more important thing is two factors. As we said utilization remains strong which normally in the first quarter it declines. So that was a strong indication for the underlying strength of the market and that the overall activity for new equipment although it hasn't come in, in the first quarter is above what we saw last year. And our level of activity is significantly higher in terms of lease outs for the second quarter than what we saw last year. So I think the momentum we expect to build in the second quarter.
- Brian Hogan:
- All right. And then, kind of stick on that -- calculate a yield, income over the average assets, right, obviously, it isn't a two days thing, but dropped dramatically. I guess what I'm getting to what is the true average of the equipment you had in the quarter, it was a back end loaded and all of that start to flow through and impact 2Q going forward and you'll see a sizable increase in 2Q, is it, is that what to expect?
- Victor Garcia:
- Well, the lease outs were definitely back end loaded in the quarter. And the new assets that we put in place in Q1 had basically the same average yield of what we had saw new assets last year. So I'm not quite sure…
- Brian Hogan:
- That's actually helpful. Thank you. And then, can you discuss competition, I mean, you said lease rates have stabilized; return to stabilize, in your view competition being rational?
- Victor Garcia:
- I think some of what we saw early on in the quarter in terms of aggressiveness on pricing has eased up. And I think rates are at level that make it attractive to invest.
- Brian Hogan:
- All right. And then, last one for me, at the moment CapEx for the 336 is committed for like the first six months of the year thereabouts for container. You did 500 last year and how should we think about the pace and cadence of CapEx through the year. Can you do 500 again, obviously there's a lot of demand through the year. Now it turns out I understand that but how are you thinking about that?
- Victor Garcia:
- Well, Brian, I hope you can appreciate we have investors on this call, but we also have competitors on this call and other parties. So I'm not comfortable saying what we expect -- exactly expect to invest and we typically haven't provided that guidance in the past. But, well, I'll say this, last year we did almost $500 million. We do think that this is going to be a strong demand year. We're way ahead of the pace. We would expect that we likely will be above where we were last year.
- Brian Hogan:
- All right. Thank you.
- Operator:
- Thank you. The next question comes from Doug Mewhirter of SunTrust. Your line is open.
- Doug Mewhirter:
- Hi, good afternoon. Just wondering if you could maybe help understand the composition of the direct expense. I know railcars are becoming a bigger proportion of that line item and I know there are slightly different characteristics in containers maybe more a steady state. But, is this the same dynamic also with railcars where your railcar utilization goes up then that line would go down or is it more of a constant steady state maintenance type expense for the -- slightly we go up in proportion to the overall railcar fleet?
- Victor Garcia:
- There [indiscernible] to it. There is certainly the same underlying fundamental correlation between utilization and storage costs. And as we increase our utilization we expect our storage costs to decrease and it will be a big factor on moving towards profitability or being profitable in the business as we get the utilization up. But, in the -- as opposed to the container segment, the rail segment has a -- in the lease structure some maintenance service revenue associated with it. So we build into the revenue stream or into the lease rate an expectation on repairs that need to be done on those railcars. And those repairs are on an ongoing basis, the running repairs and that remains a constant with the fleet even if it's fully utilized. So there's a component of the repair maintenance that will continue to be there because it's an operating cost of the asset. But there will be improvement in storage costs as we bring the utilization up.
- Doug Mewhirter:
- Okay. Thanks. That's helpful. My second question staying on the railcar topic, could you refresh my memory in terms of your remaining CapEx commitments with the factories and I assume that you have not upsized or further deferred those commitments either -- I assume there's some sort of deadline for -- yet to spend a certain amount this year or this year, next year?
- Victor Garcia:
- Okay. We enter into a three year contract. We had deferred some of equipment into this year. We're in the third year of the contract. So we're in the final year of that. We have about $90 million to spend on that contract. We have already prescribed some equipment types that we would like to get delivered. The indications on because of increased demand and deliveries, some of those deliveries are now being pushed out into 2019 -- so into the first half of 2019. So we have some deferral not per request but just how the scheduling of when equipment is going in. We actually view that positively because we see the rail market on a monthly basis improving. And we see the lease rates improving and getting equipment in the early part of 2019 gives us a potential opportunity to even see more improvement by the time we get the equipment delivered. So again, we are pretty optimistic that the market is improving and fundamentally will continue to improve.
- Doug Mewhirter:
- Okay. Thanks. That's helpful. Tim shifting over to the depreciation. It seemed that sequentially the depreciation didn't really go up by a whole lot. Even though your original equipment cost or gross dollars committed to your balance sheet went up. So the percentage of -- depreciated as a percentage of total growth capital on your assets and your balance sheet has went down pretty significantly from 4Q. I didn't know if there was any quirks in there or a result of mix or just from the fluctuations.
- Tim Page:
- Half of the mix of finance leases versus operating leases. So, there were a lot of finance leases put in place in Q4. And there's no depreciation associated with them because they -- you basically wind up with interest income and principal payments as opposed to rent and depreciation expense.
- Doug Mewhirter:
- Okay. That's helpful. So would it be -- so would that be right to assume that that the -- I guess the ongoing run rate of that percentage number would be at a lower pace because of the -- because you've deployed that capital is not going away.
- Tim Page:
- Well, I think what I said is that the differential between Q1 and Q4 that's about the level we would expect to see going forward unless we get really, really high levels of additional investment during the year then obviously it would go up a little bit more than that. But it's a little hard to predict exactly because we don't know the exact percentage of finance leases versus operating leases that will ultimately wind up with.
- Victor Garcia:
- Also it depends on the timing of when the investments come in.
- Tim Page:
- Exactly, the other thing too, so.
- Victor Garcia:
- Yes. When the equipment goes on lease, if it goes on lease at March you get one month of depreciation if it goes on in January you're going to have three months. So it's timing and a mix issue.
- Doug Mewhirter:
- Okay. That's helpful. And just my last question with regarding the tradeoff between rate and utilization, I mean you're running it almost 100% utilization I realize that you've brought a lot more capacity online with your CapEx, but it would seem that it would seem just logically you would have maybe a bit more pricing power rather than sort of a flat between where your incremental rate had seem to flatten out and still a very attractive rate. I'm not sure how the dynamic works where you know the contracts are basically because you're competing against others for a large customer you have to -- just sort of an all or nothing. It's not like you can incrementally say okay -- we only have this as capacity so we can get a few extra bucks out of this next container that goes out the door. If you could just educate me on how that current dynamic is playing out?
- Tim Page:
- We look at every opportunity when a customer comes in and asks for equipment, we look at our best assessment per location that the customer is requesting and equipment type where the amount of available equipment in that area as we see competition. We also factor in how many competing lines are coming in for equipment. If we feel like there is sufficient availability of equipment amongst the various companies, we don't believe that we'll have an ability to price above where we likely think the market is. If there was a more pronounced amount of demand with multiple lines coming in or we thought that others didn't have the availability would we try to get a little bit more because of the scarcity of equipment available. Yes, we've done that in the past. But it's never a perfect science. And you really have to have some judgment about how much demand is going to be there and are you accurate on what's available. I would also say customers have alternatives other than going to the leasing community. They can purchase equipment too although if it's immediate demand they might not have quite that flexibility. But it is a competitive market. We do our best to -- we've always done our best not only for new factory equipment but for depot equipment trying to get what we believe is the best return we can get for our assets at that time.
- Doug Mewhirter:
- Okay. Thanks. That's very helpful. That's all my questions.
- Victor Garcia:
- Thank you.
- Operator:
- Thank you. The next question is from Scott Valentin of Compass Point. Your line is open.
- Scott Valentin:
- Thanks for taking my question. Good afternoon. Just in the press release you mentioned that the preferred offering, I mean you now have more ability to repurchase shares. Just wondering how you think about making investments in the portfolio versus repurchasing shares?
- Tim Page:
- First of all, nice to have you on the call. I know this is the first time you've been on the call. We actually -- one of the exciting times we have is that the preferred stock gives us some flexibility to continue to invest in the business and allow us some flexibility to use our cash flow otherwise. My only comment related to the stock is that, it's my belief that that our stock is at a very attractive level from an investment standpoint. We think we always consider what the opportunity is in terms of new investment versus repurchase shares. I will say that it's pretty compelling right now when we look at the most recent trading pattern of our stock that it's very compelling in terms of considering repurchase of shares.
- Scott Valentin:
- Okay. That's helpful. Thanks. And then just on the fixed versus floating I guess you guys -- you looking for even higher percentage now of fixed rate 75% to 80%. The ABS transaction during the quarter made, I think it's a large improvement in that ratio. Is that something you guys look to do again, another type of ABS transaction or can you talk about maybe how you guys foresee moving the ratio even higher?
- Tim Page:
- A big part of it will be looking at doing additional ABS transactions. It's a very efficient way for us to access fixed rate money. It gives us long-term financing, gives us financial flexibility. And it's a major avenue of capital for our stake. So we would expect a big part of that movement up to a fixed rate -- higher fixed rate percentage to be with another ABS transaction.
- Scott Valentin:
- Okay. Thanks. And then, just one final question, just in terms of railcar demand you mentioned, it's a little better than you thought it would be I think. Just wondering where you're seeing that demand and what type of railcars, any specific railcars just across the board just seeing improved economic activity driving demand?
- Victor Garcia:
- I'd say we were seeing demand in some of the -- more specialized cars -- some cars that are serving -- some covered hoppers that are serving some niche markets. But I will say also various categories of tank cars are probably leading the way in terms of improvement in lease rates and utilization. And so I would just make the statement, if you think about what happened over the last two and a half years, we went into this downturn because of any energy related activity meaning oil prices went from $100 a barrel down to -- I think as low as sub-30 that had a halting effect on the level of fracking activity and crude by rail movements. We are on the reverse end of that now where energy related movements fracking in particular and need for tank cars to be used for moving, is putting a lot more traffic and tightening up the market and slowing rail velocity. So we're coming full circle on that cycle. And based on what we're seeing in the trends that's going to continue and that not only means demand for those specific car types but it also creates alternative demand for the other cars. So we're seeing demand pick up almost exclusively across the board. And but there are certain car types that are leading the way. And those are the ones, I mentioned are the ones.
- Scott Valentin:
- Okay. All right. Thanks very much.
- Victor Garcia:
- Sure.
- Operator:
- Thank you. [Operator Instructions] The next question is from Mike Brown of KBW. Your line is open.
- Mike Brown:
- Hi, good evening.
- Victor Garcia:
- Hello.
- Mike Brown:
- Hi, just one follow up question on the proportion of fixed rate debt. So I'm seeing you guys are 57% today and trying to increase that. What is the duration of that fixed rate portfolio today. And as you look at maybe doing more ABS transactions, where will that -- where do you think that duration could go, would you like to term it, a bit further?
- Tim Page:
- Well, typically looking for the average duration of the fixed rate debt. But I will say, I believe it's close to 40 months; 40 months that's for all of our debt which includes revolving credit facilities. So the fixed rate itself is longer than that. I'd have to calculate if you want just the fixed rate to calculate get that back to you. The ABS transaction have been historically very standard, so their 10 year fully amortizing equally over those 10 years with the weighted average life of five years. So typically it's a average five year weighted average life.
- Mike Brown:
- Great. Thank you. And shifting gears to the equipment sales were strong again this quarter. So how have those prices held up and then how do you expect that again, [indiscernible] trend over the rest of the year?
- Victor Garcia:
- I'd say equivalent prices generally speaking have held up at the same level as they were before. And in certain particular markets, such as in China, we've seen a trend up in prices. So as long as we continue to see the level of utilization across the board that we've been seeing, we expect those equivalent prices to remain strong. The other factor obviously is what new equipment prices cost and those have been pretty stable over the course of this year around $2200 maybe a little bit less. It was that level that gives a lot of opportunity for the current level of return on the used equipment to continue to be at those levels.
- Mike Brown:
- Thanks. And then, with the funding transactions that you guys completed this quarter, your debt to equity declined to 2.8x. So what would you consider as one of your target leverage level -- can we expect that to take back up to?
- Victor Garcia:
- I think we would look at a normal range that we would like to operate and would be 2.75 to 3.25. Now, we want to operate within that band for the most part.
- Mike Brown:
- Great. That's all the question that I have. Thanks.
- Victor Garcia:
- Thank you.
- Operator:
- Thank you. The next question is from Brian Hogan of William Blair. Your line is open.
- Brian Hogan:
- Yes. Couple of follow-ups. On the logistics business, the gross margin is what I'm getting to and then you were talking it was down 300 basis points from 1Q '17. How are you thinking about the gross margin? And why is it down as much as -- just share comments around that?
- Tim Page:
- Sure. Two components. One we are -- we have put an effort earlier on last year in our intermodal segment and we're gaining a lot more momentum there in multi million dollar contract. Last year, we are truck brokerage operation represent a larger percentage of the total. Truck brokerage would normally have a 15% to 17% gross margin. The intermodals segment is closer to 10% to 12% gross margin. So there's a shift amongst the businesses and how what they represent. Within truck brokerage, one of the difficulties we had last year as we had some -- we had a concentrated accounts with a couple of accounts where -- and the margins were higher. We're rebuilding the account base and we're gaining a more solid footing. But also, the general market has been tighter, we expect as we move on to get an expansion in the gross margin on the truck brokerage operation and as that operation. And I also expect that that'll probably be our fastest growing segment. We expect over time gross margin to be increasing for the group in its entirety.
- Brian Hogan:
- All right. So, revenues, how fast can you grow, you think you can grow on over time, is it like a double-digit grower -- what kind of growth do you think?
- Tim Page:
- We're putting in place the people and infrastructure to expect to be a double-digit grower. This is a multibillion dollar sector. We are a very, very tiny player in that space. We've brought in a lot of talented people, we put a lot of structure and infrastructure to support those people. And so we're building the operation to be a double-digit grower.
- Brian Hogan:
- And with a margin of around 14% or so is that -- what's your kind of thinking on…
- Victor Garcia:
- It's hard to give you that right now because again it's all the components between the international, so hard but we are benchmarking each sector to what not only the average gross margin is, but where the leading companies are and driving the customer selection as well as the processes to get into that upper quartile.
- Brian Hogan:
- All right. Returns on your rail business, I mean what kind of -- how do they compare to your container business what are they today thereabouts?
- Victor Garcia:
- So in the rail sector as I said lease rates are improving, but where we are today we're in recovery mode where we are where we were in 2016 early part of 2017, which in the container segment, which is we're seeing increased activity lease rates are improving. But they're still not at the rate level, we would expect to -- through the cycle level to be. We think it's important just like we did in the container segment to focus on increasing revenue reducing costs. Unfortunately right now that means accepting where the market is even if it's not the ideal lease rate, but to put equipment on lease on relatively short term leases and we are focused on typically a two year lease. We think that that is the most assured way to improve results there in the short to medium term and we'll continue to look for opportunities to reprice as the market improves.
- Brian Hogan:
- All right. That's it for now. Thanks.
- Victor Garcia:
- Thank you.
- Operator:
- Thank you. The next question is from Scott Valentin of Compass Point. Your line is open.
- Scott Valentin:
- Thanks for taking my follow-up. Just apparently haven't had an impact as utilization rates are still very high. But wondering the China, U.S. tariff talk and when you talk to customers, how are they thinking about it? I mean again 99% utilization rate sounds like no one's really taking any actions yet but just wondering the conversations you're having with your customers?
- Victor Garcia:
- Well, it's had no impact to-date. I think the customers are reacting in the same way many others are reacting which is, some level of concern about the talk and but not changing what they do now. If the rhetoric continues to get bad, will people delay or will there be an economic effect there could be in the level of demand. But we have to -- to this point we have not seen a decrease in demand. In our view today continues to be that we are in a better economic growth environment that we were in 2017 and that demand should be better than it was in 2017. I will also comment where we see the biggest effect of anything that would likely come from tariffs and anything else is an incremental demand. A lot of our equipment, vast majority of our equipment is on long-term leases. So the impact to our revenue and our cash flow is limited because of that. And last year as a good example where we put almost $500 million representing about 25% of our total equipment that we have in our company on a book value basis. We signed leases that were on average about 8.5 years. So we have an extensive amount of contract cover that will continue to produce cash flow for us regardless of any discussion relating to tariffs.
- Scott Valentin:
- Okay. That's helpful. Thanks very much.
- Victor Garcia:
- Sure.
- Operator:
- Thank you. At this time, I'd like to turn the call back over to Victor Garcia, President and CEO for closing remarks.
- Victor Garcia:
- Thank you. We're very pleased with our results. We are very optimistic about the remainder of this year. We continue to think that we are focused on continuing to grow the company and I appreciate everybody being on the call.
- Operator:
- Ladies and gentlemen, this concludes today's conference. You may now disconnect. Everyone have a great day.
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