CAI International, Inc.
Q3 2017 Earnings Call Transcript

Published: 20 Oct 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the Q3 2017 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 is being recorded. I would now like to introduce your host for today’s conference Timothy Page, CFO. Sir, you may begin.

[Timothy Page:]

Good afternoon and thank you for joining us today. Certain statements made during this conference call maybe 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 would 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 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 third quarter 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 our company and industry. We will not be going through specific slides in the prepared remarks, but can address any questions related to the presentation on this call. For the quarter, we reported a revenue increase of 15% from the third quarter of 2016. Container lease-related revenue increased 25% as a result of investments in our own fleet and higher utilization. During the quarter we reported net income of $17.6 million, or $0.90 per fully diluted share. Our net income has increased 39%, as compared to the $12.6 million reported in the second quarter of 2017. The improvement in our net income is due to increased utilization of our fleet, revenue from new investment and containers, renegotiation of expiring leases at higher rates, and a gain on sale of used equipment. Net income for the third quarter of 2017 also benefitted from the recognition of $1.5 million of pretax insurance proceeds related to the previously recorded repair costs from the bankruptcy of Hanjin, and the pre-tax release of an earn-out liability of $1.6 million associated with acquisitions in the logistics business completed in prior periods. These were partially offset by a foreign exchange loss of approximately $0.5 million caused by the settlement of Euro denominated intercompany loan. In total, there was a net income benefit this quarter from these items of $2.2 million. Our focus all year has been to improve our cash flow, net income and return on equity. We have done this through a combination of attractive investment of leases, higher utilization of our fleet and entry into new lease renewals at high rate. The combination of lower cost and higher revenue has led to improvement results each quarter this year. The core fundamentals in our container leasing business remain strong as can be seen by a utilization which is currently 98.8%, effectively fully utilized. Our available inventory for lease or sale is at historic lows and we expect utilization to remain at these elevated levels for the coming months as there is limited new investment in containers by lessors who remain constrained in their ability to deploy capital. We believe those constraints will keep supply and demand for containers tight over the coming months assuming a continued demand – steady demand for containerized cargo around the globe. Most of our new leases have required that equipment be returned to high demand areas in China which we expect will enable us to redeploy the equipment if it is returned. For the year-to-date, we have committed investment in containers of $470 million, all of which are subject to long-term leases with an average lease duration of over eight years. Of the container investment made this year, $253 million was delivered during the third quarter. We have an additional $64 million of containers to be delivered in the fourth quarter, all of which are fully booked under attractive long-term leases. We expect our fourth quarter results to see some benefit from the full quarter effect of the equipment placed on lease during the third quarter. Because we have limited equipment available for sale, we expect our gain on sale to decrease in the coming quarter. However, the price of containers in the secondary market continues to rise due to the limited supply and, as a result, we expect the average gain per unit to increase. Our shipping line customers are optimistic about their container demand needs calling into 2018 and we expect that we will be looking to the lease market to continue being a primary provider of equipment. If demand per containers remained consistent with 2017 demand, and the leasing companies continue to be disciplined in procurement due to capital constraints, we expect continued opportunity for investment at attractive returns and higher utilization of the existing fleet. Our rail segment continues to work through a difficult market environment. Leases on new equipment continue to be priced aggressively as we believe other lessors are prioritizing having units on lease rather than on overall lease rental rates. However, we have diversified equipment being delivered and we continue to try and reach a broad market of customers to place our equipment. Our focus on the rail segment is to delay equipment deliveries where possible and place as much equipment on short-term leases to bridge to a potentially better market in the future. We do not intend to invest uncommitted, incremental capital in our rail segment until the market opportunity improves. We expect all uncommitted, incremental capital investment to be focused on our container segment where returns are currently higher and demand is clearly stronger. We have great momentum in our operating results, and with equipment due to be delivered in the coming quarters on committed leases, we expect to maintain growth in our utilization and revenue for the remainder of the year. We will continue to look for opportunities to increase our overall return on capital by increasing the utilization and returns on our equipment. I’ll now turn the call over to Tim Page, our Chief Financial Officer, to review the financial results for the quarter in greater detail.

[Timothy Page:]

Thanks Victor. Total revenue in the quarter was $90.2 million, as compared to $82.7 million in the second quarter, an increase of 9%. Net income in the quarter was $17.6 million, as compared to $12.6 million in Q2, an increase of 39%. Net income per fully diluted share in the quarter was $0.90, compared to $0.65 in Q2, an increase of 38%. The annualized run rate for Q3 return on equity based on an average equity in the quarter was approximately 12.6%. Consistent with Q1 and Q2 of this year the significant incremental growth in net income in the quarter was driven by the strength in our container business. I’m going to focus most of my remaining comments on the container results for the quarter and what we expect for the container business in the coming quarters. Container lease related revenue was $61.9 million in Q3, an increase of 13% as compared to Q2. The increase in container revenue incurred primarily as the result of several factors. First, the average utilization of our own container fleet increased from 97.2% to 98.2% in Q3. We expect that the average utilization in Q4 will exceed the 98.2% in Q3, as utilization today stands at 98.8%. Second, we benefited from a full quarter's worth of per diem revenue from the approximately 63,000 TEU of new factory equipment we leased out over the course of the second quarter. Third, effective August 1, we acquired a $36 million portfolio of used containers that we formally managed from one of our third-party investors. Lastly, and most importantly, we leased out approximately 118,000 TEU of new factory containers in the third quarter with a book value of approximately $223 million. Looking forward to Q4, there are a number of factors we expect will drive continued growth in container revenue. First, as I mentioned earlier, we expect further utilization growth. Second, we’re going to get the benefit of having the $223 million of the equipment that we leased out in Q3, generating revenue for the entire fourth quarter. Last, we expect to take delivery of approximately 64 million of new containers in Q4, all of which have committed leases at attractive rates at an average lease tenor of twelve years. Besides the significant lease revenue growth we experienced in the second – in the third quarter, several other factors were also significant bottom line contributors to Q3 container results. First, we realized the again on the disposition of used containers of Q3 – in Q3 of 1.7 million, slightly less than the gain we realized in Q2 but a significant result given the high level of utilization we are currently operating at. Average sale prices remain strong and we expect them to remain so through the fourth quarter. We may see a modest decrease in the overall gain in disposition of used equipment in Q4 because we have relatively limited levels of equipment available to sell. Second, as a result of the improvement in utilization, I mentioned earlier, we have seen container storage cost drop to only $0.2 million in Q3, a decrease of over $1.6 million, as storage costs are 83% as compared to Q1 of 2016. We expect – just on a monthly basis, we expect container related storage costs to decrease modestly in Q4, but the rate of decrease will be less than Q3 because we are approaching full utilization. Third, because the vast majority of our year-to-date pretax income has been generated by internationally sourced container operations, which is subject to a low non-US tax rate our consolidated tax rate has decreased from 3.5% rate that was book for year-to-date in Q2 to an estimated 1.5% full year tax rate as of Q3. We are expecting the tax rate for the remainder of the year will be it around this level. Overall consolidated G&A expense in Q3 was $10.8 million, as compared to $11.1 million in Q2. There was an incremental $1 million credit related to contingent earnout considerations in Q3, as compared to Q2. Adjusting for this credit G&A – Q3 G&A expense was $12.4 million, as compared to $11.7 million in the Q3. The $0.7 million quarter-to-quarter increase in G&A expense is related to increase incentive compensation and bad debt expense, offset somewhat by an overall decrease in some other G&A related items. We expect a run rate level for G&A expense in Q4 to be in the range of $12.5 million. Interest expense in the quarter increase to $14 million from $10.9 million in Q2, which was primarily a function of the impact of Fed rate increases during the year and their impact on the floating rate portion of our debt and the $110 million increase in our funded debt as a result of the new investments we have made in new containers this year. Interest expense in the coming quarters will increase as total debt levels increase as we pay for the container investments we made in Q3. During the quarter our own container fleet increased approximately 139,000 CEU, with 13%, as compared to what it was at the end of Q2. Year-to-date our own container fleet has increased by 174,000 CEU, or 17%. At the end of Q3 we had approximately $2.2 billion of revenue earning assets consisting of $1.8 billion of containers and $400 million of railcars. We invested approximately $274 million in Q3, $253 million of which was containers. We currently have 64 million of container purchases commitments for delivery in Q4, all of which is leased out at rates that generate incremental ROEs in the 20% to 25% range and have an average lease tenure of 12 years. At the end of the third quarter we have total funded debt net of restricted cash and cash held in variable interest entities of approximately $1.55 billion, an increase of approximately $100 million from the end of Q2. At the end of September the undrawn amount available to us under our container secured revolving credit facilities was $568 million. We had $246 million undrawn capacity in our rail revolving credit facility. On July 6 we close a $253 million asset backed securitization. This 10-year fixed rate facility was priced at a very attractive rate of 3.7%. As of the end of Q3 our ratio of fixed to floating rate debt was approximately 43% to 57%. That concludes our comments. Operator, please open the call for questions.

[Operator:]

[Operator Instructions] One moment for our first question. And our first question comes from the line of Brian Hogan from William Blair. You line is now open.

[Brian Hogan:]

Good afternoon.

[Victor Garcia:]

Hi Brian.

[Brian Hogan:]

Great quarter. It's a substantial improvement from, I guess, expectations earlier in the year. How fast things can change. I just want to start off with the level of competition, can you describe the – I mean with your presentation is I mean there’s still a few buyers versus historically. And given the level of returns from I understand like elevated returns wouldn't generally attract more competition. What are you seeing there, is that just a handful of buyers?

[Victor Garcia:]

I think there are couple of factors that need to be kept in perspective. First, from the time period that we had that very aggressive competition we had three additional companies competing for business. There have been three consolidations since that time. So there are three major players that are effectively part of other organizations now. And that's a big long-term factor. The other factor is amongst the players, really there's only a subset of players with any kind of capital to be able to invest in new containers. So I would say if you were to mark the number of players out there, there are really only three on the outside, four players out there in the marketplace that are active. And I think in this kind of market environment where we have fairly consistent demand in an industry that has been constrained because of prior investment at low returns, we would expect that the that utilization of the fleet, as well as the returns to be elevated for an considerable period of time to make up for some of the aggressiveness that was being done in prior years.

[Brian Hogan:]

Are you seeing basically improved level of discipline amongst the competitors? Is that a fair statement?

[Victor Garcia:]

And because of the consolidation that has occurred, our company has been in a unique position where a customer – we have strong customer support because of our history with many of these customers, to do more with them. And we're reaching out point where we're finding customers who are saying that they would rather do business with us because in certain ways they're overexposed to some other players. So because of some of the consolidation that’s occurred. So assuming steady demand we would think we have more than ample opportunities for investment.

[Brian Hogan:]

I guess considering the ample opportunities, do you – I mean, we just went through the available capital. But I mean could you put more capital to the work? Would you need to raise equity obvious your leverage is still reasonably below your covenant levels? I mean, but would you raise equity if you wanted to grow if the returns were attractive enough?

[Victor Garcia:]

We will, we've invested quite a bit this year we need to digest some of what we've already invested in. It was a significant year for us. We will look at whether or not it makes sense for us to raise capital and relative to what we see the market opportunities. So I wouldn't say it's out of the realm possibility, but it's something that we're always evaluating.

[Brian Hogan:]

Alright. So the ROEs on new investments, are they, I would imagine, they're comfortably above 20%, which is long-term average, I think, has been 25% or so. I guess what I'm getting I get locked in these leases that are 12 years currently, nine years to twelve years, I think, is on your presentation. Is that fair?

[Victor Garcia:]

We have of a group of customers who look at leasing containers as a life cycle lease, where they expect to hold on to the containers from initial factory release update right through the last year. And we continue to focus on those customers that are looking for extended lease terms. We believe that the returns over time with high utilization outweigh other considerations. And fortunately up to this point we haven't had to trade off tender for return. And it's in part because of the constrained environment.

[Brian Hogan:]

Great. And then one last one for me at the moment, I’ll turn back in queue. Storage and handling costs, Tim, I appreciate your commentary, 0.2 per month, I mean, obviously, driven by strong improvement in utilization and your efforts focused on that area over the last couple years. The 3.5 in the in the quarter from a dollar perspective in on that line item, is that net of some of the onetime items you called out? I guess what is the appropriate run rate for that line item?

[Timothy Page:]

Well there's storage costs, but there's also handling charges, maintenance and repair, rail maintenance and repairs in there, so that number really the run rate is that is the number plus 1.5 million.

[Brian Hogan:]

So more like five million going forward?

[Timothy Page:]

Yes.

[Brian Hogan:]

Alright thank you.

[Operator:]

And our next question comes from the line of Doug Mewhirter from SunTrust. Your line is now open.

[Doug Mewhirter:]

Yes, hi, good evening. A couple of questions have been answered. Could you actually just to clarify Tim it sounds like the insurance settlement is netted against storage and handling costs is that, did I hear that correctly?

[Timothy Page:]

It's in that category, yes.

[Victor Garcia:]

Yes.

[Doug Mewhirter:]

Okay. Thank you. And could you, I guess remind me of your 2018 or your from this date forward, committed capital schedule for rail and the amount.

[Timothy Page:]

We have $130 million remaining. But that's over the course of the remainder of this year and next year. The vast majority of it expected to come in the second half of next year.

[Doug Mewhirter:]

Okay. Thanks, that's helpful. May be one last question on the bigger picture. The shipping lines have actually had better results, which is obviously good for them and actually good for your credit risk. But one thing that’s puzzled me a little bit and some of the people that I have talked to is now if they – are actually earning profits why haven't they gotten back in the market and why aren't they buying more, sort of taking share back from the lessors and buying more of their boxes rather than paying what seems to be very high releasing rates on the margin?

[Timothy Page:]

I think if you were to ask many of the shipping of many of our customers they're looking at all the capital providers and whether it's the banking community, or leasing companies their prioritization appears to be to invest and utilize their capital to go against shipped terminals. And looking at other kinds of land operations. Containers have been viewed to be something that can be accessed through the leasing side and not a priority. So although they could finance it less expensively for a large percentage of their needs, they're looking for containers. The other aspect is the value that this industry brings is to have containers available when they need them. And having inventory on the ground is a key aspect of success. So this is the only sector with a very limited number of players who have equipment on the ground when they need it. And we take the inventory risk for that. We now – we take educated risks based on what we think our customers are going to need, but that's real value to customers who have shipments that they need to send and they need to balance their outgoing shipments with their container needs. And so we provide real value to the marketplace.

[Doug Mewhirter:]

Thanks, that's a very helpful answer. And my last question and again industry-related question, there's been a lot of talk this year about the factories how their productivity was impacted by the water-based paint and then also about maybe the commercial instincts of the factory owners wanting to maybe go a little slower anyway just to help support prices. What's the I guess the state of the factories in terms of their ability to produce and also their willingness to produce? As more capacity come online, have they ironed out the bugs in the paint process? And are they still maybe kind of hedging their bets in trying to support prices?

[Timothy Page:]

Well, if you look at steel prices in general they're up and so there's a cost pressure to increase container prices. And actually there currently is some pressure on the upside for container prices. The prices that we've paid so far have below what is some of the current asking prices. Overlay that with also that there has been a desire to regain margin by the manufacturers, they had not been profitable previously. And there is less capacity created by the waterborne paint. Their ability to produce is not as much as it was before. And when we get into the winter months we’re expecting closure of some northern factories because of the coldness that will affect their paint production. So it's a much more constrained market than it used to be. Not to say that it couldn't be expanded, but it does help to keep supply and demand more alive.

[Doug Mewhirter:]

Ok thanks. Another helpful answer. And that’s all my questions.

[Timothy Page:]

Thank you.

[Operator:]

And our next question comes from the line of Helane Becker from Cowen. Your line is now open.

[Helane Becker:]

Hi. Thank for – hi guys, thanks for the time. So with respect to the railcar leasing business would you consider divesting of it and actually selling the rail cars at this point in time given that fact that there are – returns are lower than you thought they would be or than they were a couple years ago.

[Victor Garcia:]

We’re always looking at where we have capital and where we need to deploy capital, or get capital back. Rail is a cyclical business like containers is a cyclical business. We’re in a down cycle. Our view is the best way for us to have value created for our shareholders is by looking at those kind of decisions in a better market opportunity and limiting the capital that we put into it during these downturns. We've delayed equipment purchases, we put equipment on shorter term leases, we're continuing to try to make some of the weakness in that market in our overall operations. Our decision to get out of the rail business would be based on our thinking that this is – this current state of market is the ongoing state of market. If you ask other industry players, they would say that this is a downturn. So in the rail market there are true – there is true franchise value and because of the diversification of the shipper community. So we think there'll be better opportunities to consider that in the future, but not at this point.

[Helane Becker:]

Okay, that's fair. Thank you. And then my other question is on Page 14 of the slide deck, there's this big looming $751 million debt maturity in 2020, I know that’s a long time away. But should we think about you guys recently announcing that in 2018 and 2019, to smooth out that debt maturity or to push it out the mid-20s.

[Victor Garcia:]

I think that timeframe 2018, 2019 is the right timeframe. The facilities that make up the lion share of that is our corporate revolving credit facility, that's a credit facility that we have rolled over since almost the inception of the company. It is one of the strongest lines that we have of support from our banks who have been with this a long time. During that period of time we’ll take some of those outstandings and we’ll term them out with some of the same banks. We’ll also look at securitize finances. It's a long-term warehousing vehicle it’s proven to be extremely effective for us. And it allows us to bridge through market cycle because we can usually get a five-year term out of it. So we feel really well positioned with where that maturity is coming in and will certainly make sure that we extend it well before the maturity date looms.

[Helane Becker:]

Okay. And then on the 12-year leases, thank you for your answer before with respect to your client who like to do long-term leased. So when you think about sending that acquisition cost in the containers, can you actually match your funding to your lease? What do I want to say your lease length? That's wrong but you know what I mean, can you borrow for 12 years so that that debt matches the lease?

[Victor Garcia:]

In some cases yes. Some of the securitized financing we have final maturity dates that are approaching 10 years and more. But we think it makes more sense to have a portfolio of maturities. And to hedge some of the lease rates as they expire to new opportunities. Clearly this year the vast majority of the business that we've done has been on much longer leases. And so we’ll try to better match that we've done a securitized financing earlier this year that pushed out a lot of maturities, it's another funding source for us. So we do try to match, it's not a perfect match, but we're trying to combined both the average lease maturity with a mix of floating and fixed rate interest rates. And just trying to keep some form of hedge policy.

[Helane Becker:]

Okay. And so when you think about this long-term lease, I mean, obviously the market is pretty good right now. I would say leases are probably one in the mid-70s. So do you, but if interest rates go up, would you reprice these leases, or are they fixed rate leases for the entire term?

[Victor Garcia:]

They are fixed rate leases for the entire term. The way the lease works, it’s a the fixed per diem over the life of the lease. So the yield as the capitals were turned on that lease increases over time. And the mid-life leases are more profitable than brand new leases, just because of that. So it gives us some flexibility on the funding side.

[Helane Becker:]

Perfect, oaky. I think that was all my question. Thank you.

[Victor Garcia:]

Thank you.

[Operator:]

And our next question comes from the line of Sam Cho [ph] of Wells Fargo. Your line is now open.

[Mike Webber:]

[Indiscernible] guys. This is Mike Webber actually on for Sam Cho [ph]. How are you doing?

[Victor Garcia:]

Hey Mike, how are you?

[Mike Webber:]

Good. One of my questions have already been answered and Helane has kind of fixed through the bump in the tenor on the new leases. I'm just curious it seems like it’s certainly making up a bigger proportion of your incremental business. Can you maybe talk a bit about or describe the customers that are actively looking at lifecycle leases? Does it impact your – when you think about your credit metrics and you think about what we just went through with Hanjin? Are we talking about top five European lines that are looking for lifecycle leases or these kind of mid-tier lines or large Asian ones?

[Victor Garcia:]

We for the last several years have been focusing more on the top-tier global shipping lines. The ones who have the infrastructure, the ones who have the market share, the ones who are going to be the best as we can determine the survivors of the business. So we're following the leaders. I won’t go into specifics. But whether we're signing up for an eight-year lease, or a ten-year lease, or a five-year lease, one of the priorities that we had is the lease returns, the redelivery schedules. Because our ability to profitably manage a lease increase is significantly with a tighter redelivery schedule. So that's been a longstanding focus for us that is something that we've worked for the last several years. In this market environment we've had more success with it. And it's what gives us a lot of confidence in being able to continue to provide better returns than we had over the last say three years ago, because we can turn those assets around much faster now with where they're expected to be delivered. Not to mention, our just greater effort in terms of repositioning assets with logistics and things like that. But it gives us a lot of confidence about utilization, given where we are. And if you look at our utilization the last three quarters we've been the leading the market in utilization.

[Mike Webber:]

Right.

[Victor Garcia:]

We expect to continue to be at the at the top end of the range.

[Mike Webber:]

No that’s helpful. I’m just thinking of if you were to look at the customer base as really going after the life cycle leases, is it spread evenly across your customer base or is it more concentrated on one area specifically? And maybe just give us some color. It's just an interesting wrinkle under the – kind of the portfolio.

[Victor Garcia:]

Some customers are exclusive five-year lessors. That's been extended with some lines to now being more like seven years. But there's clearly a set of customers that are looking at a five-year lease which has always been the mainstay. But we have seen an evolution with customers, with some customers of keeping units through the full life cycle. And that's our preference because the higher we get utilization that we can maintain, the better returns over the life that we can get.

[Mike Webber:]

Would you say that shift is maybe more concentrated within your portfolio or do you think it's something that we're seeing kind of industry wide at the same kind of level and same concentration?

[Victor Garcia:]

It's been a focus of ours, but I can't speak for the whole industry.

[Mike Webber:]

Right, right fair enough. Just to continue for a second on the market share gains and then you talked a bit about – I think your first question was even around how constrained were your competitors and how many people were kind of chasing new deals which seems like it's been a helpful tailwind for you and the competitor, too. I'm just curious, just what do you think is a reasonable expectation in terms of how much market share you could gain? If we look at a market share chart in two years, are we talking a couple of hundred basis points? What's reasonable in terms of just the way things look right now?

[Victor Garcia:]

In my estimation, our ability to gain market share and it's not the major driver for us, but our ability to gain market share is more how much capital we have to provide. We have great relationships with all of the major players. We have an outstanding reputation of service. We have an outstanding reputation of doing what we do. We have not failed any customers in terms of telling them what we could commit to. And that level of trust that we have with our customers pays dividends all the time. So it really is – if you just look at this year and how much we've been able to invest, clearly, we have the capital to do it, but we also have the customer acceptance. And I've said this many, many times. We are uniquely positioned given our size to increase market position, our market share. And it's easier for us to do it because of our starting point. Around 6%, we can go up. If you're at a much higher level, you have to win four times or five times that level of business, and it's very difficult to do that. And I would say when you look at the major cost components, we all have the same major cost components, we all have the same major cost components. So its interest costs and it's cost of equipment. Those are the major drivers. And as we gain market share, we also gain efficiency in terms of cost per TEU, so we have an upward slope in that kind of efficiency as we continue to invest, and particularly when we're looking at 8-plus year leases that we don't think we have to manage over that full life cycle. So we'll continue to be able to put more equipment on this platform and grow our operating leverage.

[Mike Webber:]

Okay that’s helpful. One more I’ll turn it over. Just at a high level, Victor, the growth rate of the global container fleet just as measured on a TEU basis and really kind of your opportunity set. It's been healthy but if you look at everyone it’s like kind of 10, 15 years the growth rate of the containership fleet has kind of outpaced it, to their detriment, but the box-to-slot ratio kind of when you think about the number of containers, the lessor complex kind of can make work, it continues to kind of narrow which makes sense. They're just being more efficient. I'm just curious, if you just think about the container complex on a box-to-slot perspective, are we at a point now where we're at a structural minimum, or do you think we could actually see that number move lower as we actually see more real consolidation among your customer base?

[Victor Garcia:]

I think different customers have different viewpoints. I think if you look just at the effect of the consolidation that we've had amongst the shipping lines, there's going to be some realignment of that – of some of their container equipment needs. But the major difference between the supply balance between containers and what we've seen on the ship side is the time it takes to order equipment and put it back on market. And these are shorter-lived assets. So we can adjust to the market demand pretty quickly, and our peers do the same. So we maintain and we have a very active secondary market. So the market for sale of equipment continues to grow more and more. Every year, it seems to grow. Certainly, we've sold a lot more. As far as the slots itself, that number bounces around a little bit. It's hard to know – the bigger ships have an impact on that. But what I would say is this year's demand was a good demand year. If we had a stronger demand year as some are expecting in 2018, as the world economies continue to grow out of their slumber. We could have a really strong new equipment demand period. And we have varying opinions among some customers on that but we haven't had one of those years in a while.

[Mike Webber:]

Alright, okay. That’s what I was getting out of the efficiency gains on the liner side, at what point are we at a baseline to where they absolutely need more boxes. So that's helpful. I’ll turn it over. Thanks guys.

[Victor Garcia:]

I’ll just say one other thing related to that. Our time to – from when a piece of equipment has left the factory to when we put it on lease has been measured in terms of days. So we've had customers as almost as soon as the equipment made available at the factory. And that's in part attributable to what we've – the demand for equipment has been this year, but it also has been how our team has managed all of the equipment needs that our customers have and making sure that we supply each customer based on where they are most strongest demand is. And it's – that level – the difference of being able to put equipment on a lease in a matter of days versus holding it for weeks has a significant effect on your capital needs as well as your returns on your assets.

[Mike Webber:]

Great. Alright, thanks for the time guys.

[Victor Garcia:]

Sure.

[Operator:]

[Operator Instructions] Then we have a follow-up question from the line of Brian Hogan. Your line is now open.

[Brian Hogan:]

Yes just a couple quick follow-ups. You said the tax rate for 2017 is going to be right around 1.5. I guess looking out into 2018, is that going to be a similar level given the market environment for containers, rail, I mean, and logistics and the mix of the business? Is that – what's your outlook for the tax rate?

[Timothy Page:]

We expect it to be at low-single-digits given how quickly and how profitably the container side of the balance sheet is growing. We're going to continue to put more capital towards containers, and that will keep the tax rate low.

[Brian Hogan:]

Alright. And then talk about the logistics business a little bit. Obviously, you made some management changes there, maybe beefed up the staff. Can you just kind of go through those? What have you learned from integrating the things? And then are they actually providing benefits to your, I guess, your overall strategy of being a transportation logistics global player there?

[Victor Garcia:]

So we’ve had, as you could tell by the utilization of our container fleet in part, it's been as a result of some of the logistics efforts that we've made. So it has had a positive effect in our being able to keep high utilization as well as the cost of repositioning assets. As to logistics itself, we bought three companies, with three independent management teams we expected to integrate them into one platform. We were disappointed with the progress we were making on our truck brokerage side. And so we've consolidated the leadership there. I'm very confident of the leadership team that we have that's now in place, that's in charge of all of the domestic intermodal, including truck brokerage. And our focus there is to continue to leverage technology, to leverage processes with carrier attainment and to really increase our penetration with existing customers. As much as we want to attain new customers, it's much easier to penetrate a customer who's already been utilizing your services. And if we can expand it into other areas it's a higher margin opportunity for us.

[Brian Hogan:]

Sure. I mean, can you talk about the long-term growth aspects? I mean, you kind of just touched on it maybe a little bit of it. But you talked of the gross profit was essentially flat year-over-year in the logistics business. I mean, what kind of long-term growth do you expect to generate out of those businesses?

[Victor Garcia:]

We’re expecting double-digit topline growth in that business over time. And as much as we want it to be a contributor to earnings, it is a business that's an asset-light business, it's a service business. We generate a lot more income and a lot more cash flow from the asset side of our business. It's the utilization of our assets – the higher utilization of our assets that really throws off the excess cash flow. And so it's not just the contribution that we will get from that, but it's the flexibility that we get by having access to those customers and having access to those services. That's probably, over time, a bigger contributor to our overall results than the actual contribution that would come from logistics.

[Brian Hogan:]

Alright. And then one bigger picture question, I mean obviously the environment in the container business is very attractive today. In your mind, I guess, what are you watching for signs of like it not improving or going sideways or maybe even reversing. What are you most concerned about?

[Victor Garcia:]

What I would be concerned about would be starting to see signs that equipment is being returned at a pace that would be higher than what we would expect. And I can tell you our – to this point, our utilization has continued to increase. And so we are seeing continued demand even during this fourth quarter. And at this point, we don't see a turning point where we would expect our utilization to be declining. And so we still have a lot of the quarter ahead of us. But we also have the Asian demand that is ahead of us. And we're starting to see some of those customers come in. The difficulty for us is the amount of available equipment that we have around Asia is almost nil. So we're really only looking at incremental factory investment to supply many of those customers, which is a good problem to have because we're always looking for incremental growth. But we don't have idle equipment sitting around with 98.8% utilization. It's just scattered about, which is where we need to be long-term.

[Brian Hogan:]

Sure, have a great time.

[Victor Garcia:]

Thank you.

[Operator:]

We also have a follow-up question from the line of Doug Mewhirter. Your line is open.

[Doug Mewhirter:]

Yes thanks I just have one follow-up on lease rates. Obviously they're very profitable lease rates on a spot basis. However, the renewal rates for leases coming off your 2012 and 2013 vintage leases that are coming off lease this year and next year. There’s still some pretty tough comps. Are your renewals, on average, accretive? Or are you renewing up dollar basis or per diem basis for those vintage leases? And is there still a positive trajectory there?

[Victor Garcia:]

Okay. Obviously we've had some leases that we've renewed at higher rates. We've also had some leases that we – have made sense for us to renew at lower rates, and we've kind of blended it in. What I would remind people is that the higher – the more expensive leases were done in late 2010 and 2011. If you look back in those years when we had a big investment year, a lot of our investment that year was not actually on new equipment. That was at elevated levels. A lot of our investment related to portfolio purchases that we made from our investment fleet as well as a lot of sale leasebacks. So proportionately, if you look at what we have in that category, I believe it's significantly less than others. We do have some headwinds going into 2018, but we've already taken care of some of those. And I don't think it will be a significant drawback to us as compared to what it would have been if we had 5-year leases expiring in 2015.

[Doug Mewhirter:]

Okay, thanks very much.

[Victor Garcia:]

Thank you.

[Operator:]

And at this time I’m showing no further questions. I will like to turn the call back over to Victor Garcia, President and C.E.O. for closing remarks.

[Victor Garcia:]

I appreciate everybody being on the call today. We have had a tremendous year this year. We see continued strong momentum. We are very optimistic about the future of our company and the future of the industry as we go into 2018, and we look forward to reporting our fourth quarter results in the early part of 2018. Thank you.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. And you may all disconnect. Everyone have a great day.