CAI International, Inc.
Q3 2018 Earnings Call Transcript

Published: 31 Oct 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the Q3, 2018 Earnings Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct the question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would like to introduce your host for today's conference, Timothy Page, CFO. 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, increase 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 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'll now turn the call over to our President and Chief Executive Officer, Victor Garcia.

[Victor Garcia:]

Thanks Tim. Good afternoon, and welcome to CAI's Third Quarter 2018 Conference Call. Along with the 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 on this call. We had our best quarterly performance in the history of the company with record revenue and net income from core operations. For the quarter we reported record total lease related revenue of $115 million and $84 – excuse me total revenue of $115 million and $84 million respectively with strong year-over-year double-digit revenue growth in all of our business segments. Net income attributable to common shareholders was $20 million or $1.03 per fully diluted share compared to $17.6 million or $0.90 per fully diluted share in the third quarter of 2017. A 14% increase in net income attributable to common shareholders. Excluding the impact of Hanjin Insurance proceeds received last quarter, third quarter net income increased 10% as compared to the second quarter. Our container segments continue to drive our results and benefited from ongoing new investment and average utilization of 99.2% for the quarter. During the year-to-date we have invested $721 million in container equipment. The vast majority of which has been either placed on long-term lease or committed to long-term lease. We also continue to benefit from a strong secondary sales market and we're able to report $2.6 million gain on sale of equipment for the quarter. Container investment has been strong throughout the first nine months of the year due primarily to overall global economic growth and we expect a strong fourth quarter based on the level of customer lease commitments we already have in place. We are expecting some moderate easing of demand in the traditional seasonally weaker first quarter, however, our expectation for 2019 is that overall demand for containers will remain strong. As we mentioned in our press release we do not think the imposition of tariffs on China by the U.S. or the IMO 2020 regulations will have a long-term effect on container demand. We believe that the potential for permanent imposition of tariffs will result in supply chain disruption as manufacturers’ source products from other regions creating logistical bottlenecks and increasing the overall demand for containers. We are already observing some surprising equipment demand in Asia outside of China that implies to us some cargo is moving from those countries that may have otherwise been shipped from China. Moreover, we do not believe that the imposition of IMO 2020 regulations requiring shipping lines to deploy scrubbers on their ships or consume low sulfur fuel will negatively impact our business. The new regulations are not a surprise to the marketplace and everyone involved shipping lines and shippers are discussing and preparing for the additional expense. In my opinion it is not a major concern. Shipping lines are already modifying their bunker adjustment calculations to take into account a higher cost which we believe will be passed on to their customers in the form of higher freight rates. Our rail segments continue to experience positive momentum during the third quarter of 2018. We had net lease outs of 580 for rail cars during the third quarter and have commitment to lease an additional 625 new rail cars over the coming quarters. Utilization of our rail car fleet improved to 87% in the third quarter and we are expecting utilization to increase further over the coming quarters. We continue to experience increased lease activity for rail cars across various equipment categories and lease rates are generally improving for many rail car types. Demand for tank rail cars has been particularly strong and lease rates have doubled from last year's levels. We are very focused on improving the profitability of our rail segment. By the end of the first quarter of 2019 will have taken delivery of all of the rail assets under our three-year purchase commitment with one of the rail manufacturers. Our ongoing focus will be to find the best opportunities to improve results which includes increasing utilization, renewing leases at higher rates, and where it makes sense selling equipment. Our logistics business continues to gain momentum and has a growing customer portfolio that has led to record revenue during the quarter. Growth has been particularly strong in our domestic intermodal and truck brokerage businesses. We reported logistic revenue during the quarter of $31.4 million an increase of 49% compared to the third quarter of 2017. Similarly gross margin and logistics has increased 21% during the same quarter compared to the third quarter of 2017. The difference in revenue and gross margin growth rates reflects the change in mix between our domestic intermodal, truck brokerage, and international businesses. We are focused on expanding our portfolio of customers and gaining more penetration with our key clients. We expect continued double-digit expansion of our logistics business into 2019. We recently announced that the board of directors has approved the repurchase of up to 3 million shares or approximately 15% of our common stock. We view the current trading levels of our stock as an attractive investment and expect to actively be repurchasing shares. With this most recent quarter our book value per share is $30.69, an ongoing strong committed cash flow. So we strongly believe that the repurchase of our shares that around the current price level will enhance shareholder value and our future financial results. In summary we have strong momentum in each of our businesses including record quarterly lease and logistics revenue. Our container investment for the year-to-date has exceeded last year's total investment and is also a record for our company. The vast majority of this investment is on lease are committed to be leased. Rail utilization is increasing and lease rates are improving. Our logistic segment is experiencing very strong heartily momentum and we expect continued double-digit year-over-year growth in revenues and gross margin from the segment. I'll now turn over the call to Tim Page, our Chief Financial Officer to review the financial results for the quarter in greater detail.

[Timothy Page:]

Thanks Victor. Good afternoon everyone. Total revenue in the quarter was a record $115 million an increase of 9% compared to the second quarter and an increase of 28% as compared to Q3 of last year. Lease related revenue is also a record in the quarter at $84 million versus $77 million in Q2 and an increase of 9% compared to Q2 and 22% compared to Q3 of last year. Driving the increase in total revenue in the quarter was both strong growth in container lease revenue, up 10% compared to the second quarter of this year and 22% compared to the third quarter of last year. And strong top-line growth in our logistics business with Q3 logistics revenue up 11% versus the second quarter of this year and 49% versus the third quarter of last year. Year-to-date container lease revenue was 23% greater than the same period last year and logistics revenue year-to-date is up 33% versus last year. Q3 was also a record quarter for CAI in terms of operating income and pre-tax income. Operating income in the quarter was $43 million, an increase of 7% versus Q2 of this year and up 34% versus Q3 of last year. Our overall operating income margin in the quarter was 37% and our container business our operating margin was 54%. Q3 pre-tax income was also a record for CAI of $23 million, up 9% from Q2 of this year and 31% over Q3 of 2017. Net income in the quarter was $20 million. At 20 million Q3 net income was a record for quarterly net income other than Q4 of last year which included $17 million of tax benefit from the Tax Cuts and Jobs Act. The net income margin in Q3 was 17%. Q3 net income margin for our container leasing operations was 28%. Consolidated Q3 return on average equity was 14%. The ROE for our container business was 18% in Q3. During Q3 we leased out approximately 150,000 TEU of containers a new long-term in finance leases representing approximately $296 million of investment. As of the end of the third quarter we had leased out approximately 285,000 TEU equipment with a net book value of $558 million. As for Q4 we have forward lease commitments for approximately $140 million of new equipment for delivery in the fourth quarter. Average CEU utilization in the third quarter was 99.2%. The average lease tenure for equipment we have already leased out this year is approximately 9 years as 2018 draws to a close CAI will list out approximately 1.2 billion of newly acquired containers in the past two years with an average lease term of approximately 8 years. So a very strong base of secured, predictable, long term, committed cash flow which will provide us the high level of protection from any cyclical downturns Rail utilization increased from 79% at the end of Q2 to 87% at the end of Q3 due to net lease out of 584 cars during the quarter. The 584 cars represented 8% of our Q2 ending rail car fleet count. While Q3 was a strong quarter from a leasing perspective, rail lease revenue in Q3 declined to $8.8 million versus $9.1 million in Q2. The decline in revenue is related to two factors; first Q2 included $0.2 million of revenue related to reimbursements for lease and maintenance obligations and Q3 had an adjustment of $0.3 million related to a [indiscernible] rental that it had been accrued in prior months. Going forward we would expect rail revenue to increase sequentially in line with the strong order book we have for rail car deliveries in Q4 and Q1 of next year. We anticipate that utilization will be approximately 90% by year end and will increase in Q1 of next year. We also expect that we will take delivery in Q1 of the final rail cars from 2000 car commitment we have with one of the rail car manufacturers. Other than that commitment we have no other rail car purchase commitments. Our logistic business experienced strong revenue growth in the quarter up 11% versus Q2 of this year and 49% versus Q3 of last year. Year-to-date the logistic business has grown by 33% as compared to last year. Gross margin percent in the quarter declined from 13.9% in Q2 to 12.2% in Q3 reflecting a change in mix of the strongest revenue growth in the quarter occurred in our rail intermodal business which has lower gross margins that our truck brokerage in international fleet forward divisions. While revenue growth in the quarter was strong, both revenue growth and margins were impacted by severe weather in the Carolinas. We are seeing a market improvement in gross margin in October to more normalized levels. As mentioned earlier we expect to continue to invest in [personnel to grow] of the business and would expect G&A to continue to increase in coming quarters. We expect the logistic business to be EBITDA positive in the coming quarters. Depreciation expense increased $1.9 million from $29.4 million in Q2 to $31.3 million in Q3 of 2018. This increase is in line with what we expected given the high level of lease out activity we have in the last two quarters. We expect to see a much smaller increase in depreciation expense next quarter at the level of lease outs in Q4 is expected to be seasonally lower than the previous two quarters. Storage handling and other operating expenses were $0.9 million higher in Q3 than Q2. However, Q2 included $1.4 million credit for the receipt of Hanjin related insurance proceeds. We would expect Q4 storage and handling to be $0.2 million to $0.3 million higher than Q4 in Q4 than Q3 as a result of higher rail maintenance expenses as we have seen a significant increase in the number of rail cars on lease. In Q3 we had a gain on the disposition of a rental equipment of $2.6 million compared to $2.7 million in Q2. Going forward we would expect our gain in sale to remain in the $2.5 million per quarter range. G&A expense in Q3 of 2018 was $12.9 million, an increase of $0.7 million compared to Q2. About half of the increase is timing related with the balance being related to continuing top line growth investment we are making in our logistic business and marketing sales and operation headcount. We would expect G&A to increase approximately $0.3 million to $0.4 million in the next several quarters as we plan to continue to invest in growing our logistic business. Interest expense in the quarter increased to $19.8 million from $18.4 million in Q2, an increase of $1.4 million. Approximately $1 million of the increase is related to an increase in the average debt balance in Q3 versus Q2. The remainder of the increase quarter-over-quarter interest expense is related to an increase in our average funding cost during the quarter which was caused by an increase in the LIBOR and by the addition of approximately $700 million of fixed securitization transactions we completed in late June and mid-September. We expect an increase in interest expense in Q4 similar to what we experienced in Q3 as our average debt balance will increase in line with the level of new equipment lease outs and because of continued expected Fed rate increases and a full quarter impact from the ABS transaction we completed in mid-September. Our average funding cost in Q3 was 3.77%. As of the end of the third quarter 65% of our debt was fixed rate. In mid-October we completed $100 million fixed-rate credit facility that pre-star fixed rate debt to approximately 70% of our total outstanding debt commitments. Our effective tax rate in Q3 was 5.3%. This brought our overall 2008 tax rate to 4.4%. We expect our Q4 tax rate to be 4.4%. We recorded $1.7 million of preferred dividend expense this quarter on $103.9 million of liquidation value of preferred stock. Q4 preferred stock dividends will be $2.2 million. During the quarter our own container fleet increased approximately 130,000 CEU as compared to Q2 of 2018, an increase of 10% and is 287,000 CEU larger than it was at the end of Q3 of 2017, an increase of 24%. On a dollar basis our container revenue earning assets were $2.4 billion at the end of Q3, an increase compared to the end of Q2 and Q3 2017 of 13% and 30% respectively. At the end of Q3 we had 465 million of rail cars versus 457 million at the end of Q2. Rail assets represents 16% of our total revenue earning assets. We have continued to strengthen our balance sheet by converting floating rate debt to fixed rate debt and by raising preferred equity. In the quarter we completed a $343.5 million asset back securitization. This facility is a 10-year fully amortized 4.37 fixed rate facility. Additionally, we sold 2 million shares of preferred stock with the liquidation value of 48.9 million. In total we now have 4.2 million shares or 104 million of liquidation of preferred stock outstanding. The dividend rate is 8.5% as I mentioned earlier the quarterly dividend going forward will be 2.2 million. At the end of the third quarter we have total funded debt net of restricted cash and cash held and variable interest entities of approximately $1.9 billion, an increase of approximately $122 million from the end of Q2, 2018. The undrawn amount available to us under our container revolving credit facilities was $964 million under. Undrawn rail revolving credit facility available to us was $194 million. That concludes our comments operator. Please open the call for questions.

[Operator:]

Thank you. [Operator Instructions] And our first question comes from the line of Helane Becker with Cowen. Your line is now open.

[Helane Becker:]

Thanks very much operator. Hi everybody. Thank you very much for the time. Two quick questions here Victor. One is are there any companies on your watch list and as you think about IMO 2020 I know you said that you're not expecting any impact to you but what about some of the [weaker] ship owning companies?

[Victor Garcia:]

You say my watch list. I'm not sure what particularly you mean.

[Helane Becker:]

A list of ship owning companies that might have some financial difficulty sort of like a conscience situation?

[Victor Garcia:]

Shipping lies themselves.

[Helane Becker:]

Yes.

[Victor Garcia:]

Really our payments are actually been very strong and improving. The shipping community right now is experiencing actually a very strong. They had a very strong third quarter and what we're seeing is particularly on the trans-Pacific trade the market is very, very strong and think in part because of some shipments being made for prior to the imposition of a larger potential tariff in January. So I think their financial results are improving. Our payment structures is really improving. So I don't perceive right now any kind of issue. We always have [constantly] watching but I would say everyone is seems to be performing as planned and I think their current results are actually going to be better than they were in the first half of the year. On the second question, IMO 2020 I know, we don't, I mean we don't directly have anything to do with that IMO. It's really the financial health of our customers. I always think that the things that you can foresee and you're worried about are usually not the things that are going to be the real problems is the things that you want foresee. This one is very well telegraphed. Everybody knows the data which this regulation applies. Everybody knows it applies everybody. Everybody knows that the cost is going to have to be absorbed. There already are factors that are there – people are already negotiating adjustments to the bunker price, I would say from everything that we come across the bigger issue is whether or not the shippers are concerned that will be a cost plus adjustment and not just in a factor per cost that shipping lines will use it as a reason to enhance their profitability as opposed to just recouping cost and this is an industry that has a challenges sometimes passing along cost but we're already seeing people do that in terms of announcing to the market adjustments to do it. So in my opinion I don't think it's an issue and we'll certainly keep monitoring it but we do expect everything to be adjusted accordingly.

[Helane Becker:]

Okay and then I just have one follow-up question. I noticed and I think Tim said you've got nine years now on your average leases and that's up from eight, is there I mean obviously there's a trend to longer term leases, I mean do you see that getting above nine years to 10 or 12 years may I know you can't go much about 12 because of the difference between operating versus finance leases but do you think it goes that long?

[Victor Garcia:]

It really dependent on the customer. I think what you're seeing is that some of our customers are depending more on leasing for the [indiscernible] core fleet and so they're intending to hold the leases for this full life and so that's I think one of the factors that you're seeing, and so clearly we've made significant commitments to some of our customers and we're absorbing a significant amount of what we would term their core fleet but it is customer by customer. Some customers really look at a five-year lease but other customers are looking at longer term leases as we've been doing. So we do expect compared to two or three years ago that the lease profile will be longer than it used to be but again it's customer specific.

[Helane Becker:]

Okay. Great. Thanks very much for your help.

[Victor Garcia:]

Thank you.

[Helane Becker:]

Have a nice afternoon.

[Operator:]

Thank you. And our next question comes from Michael Webber with Wells Fargo Securities. Your line is now open.

[Michael Webber:]

Hey good morning guys. How are you?

[Victor Garcia:]

Hey Michael.

[Michael Webber:]

Hey Victor, I wanted to first touch on asset values and you've got I think it's slide seven which is pretty interesting kind of looking at kind of your gains on sale on box prices and I'm just curious it looks like used box prices or second-hand box prices are actually moving higher. It looks like that number kind of moves against new box prices in Q3 and I guess first the question is the right way to read this that you sold more boxes in Q3 at a higher price, but you just had a higher cost basis on the boxes you happen to sell which is why the game kind of inch down a bit and then want to take second, can you just explain why you would have – why the market would see new box prices and used box prices moving opposite directions to that degree this quarter? Just it's interesting I'm going to figure it out.

[Victor Garcia:]

Sure. So you're right that we do have some younger boxes that we've sold and so that's part of the reason why you're seeing, so the average kind of cost and compared to the gain -- the sale price compares to the gain, so there is a little bit of factor in there. The volumes that we have been selling are relatively small, so small changes here and there have probably more of a statistical adjustment than really is warranted but to the second part of your question what we're dealing with, you're right new box prices have declined a little bit but what's happening in the secondary market it's all local markets and we're still seeing that as we reported we're even today still at 99.3% utilization. So there's very little equipment out there. We don't expect given the strength we're seeing right now in the fourth quarter. We're not expecting much equipment to come back in the fourth quarter and that's really dynamic. It's a local market dynamic and there's a scarcity of equipment in the local markets that's maintaining those price levels.

[Michael Webber:]

Yes. I guess when I think about the trajectory of used box prices that make sense to me considering supply and demand dynamics. I guess what seems like the outlier is that new box prices haven't been able to get more traction and one, can you give us a vague figure of where you think new box prices currently sit and then why we haven't seen box manufacturers be able to grab a bit more margin and push those new box prices higher because it does seem the more you look at it seem like that's the outlier within most of these trends.

[Victor Garcia:]

Okay. Box prices have come in to the low 1900s, 1950 thereabouts from most recent kind of sense. That's down probably about $100 for where it was before. As far as manufacturers, it's a very competitive business. The manufacturers have all year long been complaining that they haven't really made money and I think some of the public financial results that have come out have corroborated what they've said. So I think it's just a function of that, just heavy competition on the manufacturing side that kept margins to be pretty tight.

[Michael Webber:]

Okay. That's helpful and then I guess as it pertains I kind of leave kind of the IMO and the macro stuffs kind of to the side but just when I think about the way they'll, your customer base is configured you've seen a decent amount of consolidation in that space, the last handful of years particularly using the Japanese lines converting emerge into a single entity and generally seen kind of a shrinking of the overall list is still a pretty healthy group of midsize lines. I'm trying to just rectify the idea that we've seen more consolidation but the average container line operating margin is negative 4% and the Chinese just marked down their expectations for 2018 by $700 million, like I guess do you think that that operating margin and/or that operating environment for the broader space still could tighten as a result of more pricing discipline effectively. Is that – we haven't really seen the flow through yet from that consolidation.

[Victor Garcia:]

I would expect that if concern about some tariffs and shipping lines actually more concerned about profitability and rationalizing capacity in general. So we could see that. I think there is a strong desire amongst the shipping lines to improve overall profitability and they're taking advantage. If you look at what's going on right now for instance ships are leaving full and freight rates particularly on the trans-Pacific are at historically high levels. So everybody is trying to maximize profitability right now. The other thing is when you look at the shipping lines there has been a lot of consolidation and some of these lines are basically national lines now, I mean government particularly in Asia have taken a greater role in these companies. So if you look at what's happened with a company like HMM, Hyundai Merchant Marine, the government has played a big role and has been very vocal about its involvement in supporting that company. You could say the same thing about what's happened with the Taiwanese carrier Yang-Ming where the government would have raised additional capital where the government's played a role. So there is – these entities continue to be viewed as strategically important for a lot of countries and I think they will support but I clearly everybody needs to improve their performance from where it used to be.

[Michael Webber:]

Got you. Okay. That's helpful. One more for me and it's actually for Tim and then forgive me if you already mentioned this but it looks like you really brought down the percentage of your floating rate debt to 35%, I don't think it was that much higher but given the fact that we continue to see some upward pressure on interest rates, do you give it – can you remind us where your target is for that floating component? Are we pretty close to anything some more work to do?

[Timothy Page:]

Yes. We completed a fixed-rate financing in October that took that overall fixed rate percentage to about 70% and that's kind of in the range where we'd like to maintain it.

[Michael Webber:]

Okay. Great. All right. I'll stop there and turn it over. Thanks for time guys.

[Victor Garcia:]

Thank you.

[Operator:]

Thank you and our next question comes from Brian Hogan with William Blair. Your line is now open.

[Brian Hogan:]

Good afternoon.

[Victor Garcia:]

Hi Brian.

[Brian Hogan:]

Nice performance. First question is always kind of hit on the ROE and you said the 18% ROE in the container business and that's nice trends and has that been stable at that level and then kind of with that the ROE in the rail business is kind of roughly break-even. I guess where do you see that rail business ROE going and a couple of years and can you get that the blended ROE? What are your longer term blended ROE target?

[Victor Garcia:]

Okay. So the container business has been sequentially and this goes most recent quarters as well as into last year. We've sequentially been improving our results. So we said we were going to target to be it mid-teens ROEs as a company and we're effectively there. The container business sequentially every quarter has been improving and it's 18%. We continue to see that we're expecting those kind of results given that we're not expecting much of a change in terms of utilization and we're still expecting a full effect of the equipment that we got delivered in the third quarter going into the fourth quarter. So we expect those trends to continue on and we're looking for ways of improving on those. We want to as best we can have market leading results for each of our segments but particularly the container segment. As far as rail we want that business to be in kind of mid a low-teen ROEs. We're doing a number of things in terms of, we are getting better lease rates. We're getting our utilization up. There's a lot of things we can do but to be honest with you when we're looking at the amount of time that we take to get us to that point we are looking and we're looking at other opportunities that we could do it. We are looking at ways of shrinking the amount of capital we have there, if it makes sense to sell some assets and redeploy it and other things either in the container business or in maybe repurchasing additional shares. So our whole focus is to get not one of our segments operating at a high-teen ROE but to get the whole company operating and at a higher overall ROE and so we're going to look at all aspects of that and try to front-end and improve the overall performance of the company. We're not satisfied. We're happy with where we are but we're not satisfied where we are.

[Brian Hogan:]

All right. Thanks for that. CapEx for the year, I mean said you've invested and have committed 720 or so is that – is there going to be any additional to that for the year or is that – are you done for the year is it?

[Victor Garcia:]

Well, most of -- obviously most of the investments already done for the year. I think we're always looking at opportunities. There could be some more opportunities but anything that we also start getting ordered now, say we order in November it likely will start coming in early January. So a lot of our investment that incremental investment that we're targeting now starts coming into the first part of next year.

[Brian Hogan:]

All right. And I guess looking forward in 2019 and obviously budgets change and as the environment changes and the short lead time can really move that around pretty quick but the 720 of CapEx this year is a -- are you looking at 500 next year? Do you think demand is going to be that strong considering the shifting environment or the shipping lines turning to leasing more? What's going to drive your CapEx budget for next year?

[Victor Garcia:]

It's really going to be what we see the demand picture. So we always have a baseline amount that we think that should be available to us to profitably invest but we will adjust that upwards or downwards based on what we see the investment -- the opportunity to be. So we're not going to commit ourselves to a particular number. We're not market share driven. I think our results show particularly in our container business that effective management of the business is a greater predictor of results than market share and so we're really focused on the attractiveness of the opportunity. And as I said we are taking a good hard look at repurchasing our shares and we're looking for the best investment opportunity and if certainly as we look at it today that's one of the more compelling things that we could invest in.

[Brian Hogan:]

I would certainly agree with that. And then last one for me, can you discuss the competitive landscape from the shipping minds to your peers that viewed as being rational and any shifts that you're seeing?

[Victor Garcia:]

Well, the market is being good this year. Specific transactions get bid more competitively than others sometimes. It has to do with people's inventory levels and I'm sure it's what they're looking to invest but I would say it's been rational and we've been very pleased with the returns that we've gotten in all the investments. Everything that we've done today on average we would expect to have mid-teen type plus ROEs and so and with some I would say reasonably conservative assumptions.

[Brian Hogan:]

Thank you.

[Victor Garcia:]

Thank you.

[Operator:]

Thank you. And our next question comes from Michael Brown with KBW. Your line is now open.

[Michael Brown:]

Hi, good evening.

[Victor Garcia:]

Hi Mike.

[Michael Brown:]

Hey, so actually update on me the tariff impact that was helpful. So I mean, how are you, what are you hearing in your conversations with customers as to kind of how they plan to proactively adjust their business models for the tariffs in 2019. How are those conversations going? Do expect them to kind of shift to more of a leasing more containers versus buying as they kind of manage through the uncertainty?

[Victor Garcia:]

Well, I think it can pose both pretty well for us. I think there everybody's is on licensing mode to get a sense. Certainly demand this year has been strong. It's been, I would say potentially 50% just the overall growth in the economy, world economy and then 50% maybe of some push forward of demand but everybody's trying to see what the real impact will be. I really think that the impact of all of this tariff is really an adjustment factor. If these tariffs become imposed we're already starting to see that the trade flows seem to be already shifting somewhat and we would expect that to be enhanced. So anything is going to transitory but all the shipping lines are trying to figure out exactly how thing – how everything will shake out and if they prove to estimate fairly conservatively the place that they'll come to is the leasing market which will have the equipment available. So it potentially could be a significant opportunity if they find themselves caught short.

[Michael Brown:]

Okay. That's helpful and then just a modeling question. You guys had called out two items in the rail car leasing revenue this quarter. Could you quantify those we can't have the right jumping off one if you think about the fourth quarter and then into next year.

[Victor Garcia:]

Which can you ? Which numbers?

[Michael Brown:]

Tim had mentioned there was kind of I think was a true up or --

[Victor Garcia:]

It was about [300,000].

[Michael Brown:]

[indiscernible] and then in a maintenance impact as well. Reimbursement and –

[Victor Garcia:]

So in Q2 there was about $200,000 receipt of revenue that was related to customer obligations to cover some maintenance expenses at the end of lease term. In Q3 we had a credit to customers of about $300,000 for not credit to customers but a reversal of accrual of expected per diem revenues. Our per diem revenues are based on usage of cars and we don't get the data to get make the final calculations on that till several months after the fact. So we're always estimating based on prior usage and the usage patterns changed and we got this – we have got less usage. So we had to make an adjustment downward in the third quarter. Does that answer your question?

[Michael Brown:]

Yes. That is helpful. And then the run rate on the logistics revenues are now at this $125 million range. You guys kind of noted in the presentation. Obviously, the growth has been very strong there. So how do you – what is kind of your guidance because 2019 is that how stronger growth continues to be and have? Where you think that run rate goes from here?

[Victor Garcia:]

I think we would expect something in the 20% plus range.

[Michael Brown:]

Great. I don't have any questions.

[Victor Garcia:]

Great.

[Operator:]

Thank you. And our next question comes from Scott Valentin with Compass Point. Your line is now open.

[Scott Valentin:]

Thanks for taking my question. I just follow up on logistic questionnaire with revenue running at 20% plus growth as you mentioned EBITDA positive for logistics. Is there any target for kind of GAAP profitability for lack of a better description?

[Victor Garcia:]

Yes. I mean I think we're doing a couple of things at the same time. So we are adding a lot of people and tell this is a people business, so we're adding infrastructure in terms of people. So we're willing to absorb the short term cost of a larger employee base as we kind of grow this, but we're also at the same time analyzing as we're getting more and more customers, analyzing how we can more efficiently and get better margins, so we can get better bottom line results. But I will say for where we are right now I think investing in the business and growing the overall revenue base is the priority, but we do expect it to be a cash flow positive business and with an – we are targeting for bottom line profitability but I would say first and foremost is building the infrastructure.

[Scott Valentin:]

Okay.

[Victor Garcia:]

But just to put it in perspective we're talking the difference plus minus $100,000 -- $200,000 a quarter of being positive earnings or not positive earnings positive cash, positive EBITDA, not positive EBITDA. These are very small numbers and in the context of what our net income and EBITDA are overall.

[Scott Valentin:]

Fair enough. It's helpful and then just Victor you described it the kind of a situation as we go towards fourth quarter with additional tariffs increase, in the tariff rate looming probably seeing some pull forward again for shipping demand and there's a seasonal week first quarter but is it – is there a risk that's exacerbated by what's happening in the fourth quarter with logistics? I mean I'm sorry with the tariffs or do you think that they mentioned that the transitions and some of the shipping routes that offset that inefficiencies created by that kind of offset typical seasonal weakness or some of the pull forward may happen?

[Victor Garcia:]

I think the current thinking is that prior to Chinese New Year demand will be fairly strong. There's a question mark as post Chinese New Year so you have maybe a couple of months where there might be a slightly more pronounced slowdown in terms of that. We will not be heavily affected by it because a lot of our business is contractual. So even if the shipping lines don't have quite that much demand they're still contracted to have it. So we don't expect major swings in our utilization. We're talking really at the margin and as we get into we would expect as we get into the second quarter and third quarter of next year again that the overall growth in the economy and what's going on all things being equal should be again a pretty strong economic environment for us.

[Scott Valentin:]

Okay. All right. So just one – okay I am sorry.

[Victor Garcia:]

Just another factor is just as our gains on sale are driven by relatively low volumes of used containers to sell that's because shipping companies are keeping containers longer. They're also utilizing their own containers longer. So there hasn't been much – they haven't taken many containers out of their fleets to dispose of either. So if utilization – if business slows down a little bit I would just expect at least initially that they're just going to take some of their older equipment out of use that's kind of nearing its useful life end anyway and you won't see a huge impact from little bit less business in these coming months that might be a little softer than the last year has been.

[Scott Valentin:]

Okay. That helps. And then just one follow up question. I think you mentioned the buyback you guys obviously haven't authorized and the stock is [indiscernible] how should we think about the cap structure of the company. I know your fixed floating ratios are about where you wanted. Is there room to issue more preferred if you want to, if let's say for instance the stock is remains attractive to buy back more stock. Is that still possible?

[Victor Garcia:]

Yes. Absolutely. We could either open up and do kind of [indiscernible] market transaction on the preferred or doing an expansion of the existing issuance but to be honest right now with the utilization and the investment that we've done over the last two years we're generating a substantial amount of cash. We don't foresee raising any capital. As I said before we're looking at the opportunity of just straight-up repurchasing shares. So right now there's no expectation of raising any kind of capital.

[Scott Valentin:]

Okay. All right. Thanks very much.

[Operator:]

[Operator Instructions] And our next question, we do have a follow up with Michael Webber with Wells Fargo Securities. Your line is now open sir. Q - Michael Webber. Hey Victor just a quick follow up to my question earlier on asset values. If I think about where yields are for new box prices so you've got new box prices sitting around 1900 have yields stay relatively consistent with per diems kind of coming down to match that 1900 hour level you are able to gain a bit more pricing I guess on a relative basis as those new box prices have eased off.

[Victor Garcia:]

I think as box prices go down there will be a slight adjustment but I think those are already kind of an expectation that box prices were more likely to come down and as we get into the fourth quarter and some of the per diems that are out there already reflecting that. I say the overall yields have been stable is the way I would characterize it. And in our situation in particular we have very limited inventory available. So as we kind of look at investment now we'll be able to take advantage of the current box prices and everything that we have is already committed on very long term leases. That's all locked in so we're actually not only are we pleased with the results we've done but where we're positioned right now I think as the box price is adjusted we can have the lowest cost containers out there.

[Michael Webber:]

All right. Are you still north or still double digits or are you 10% or inside of that number?

[Victor Garcia:]

Double digits and more than 10%, yes.

[Michael Webber:]

All right, great. Thanks guys.

[Operator:]

This concludes the question and answer session. I would not like to turn the call back to Victor Garcia, President and CEO for any further remarks.

[Victor Garcia:]

Okay appreciate everybody being on the call. We're very pleased with the results. As I said we are optimistic about not only the coming quarter but the longer-term outlook for our business in 2019. We look forward to following up at the conclusion of the year and appreciate everybody's attendance at this call. Thank you.

[Operator:]

Ladies and gentlemen thank you for participating in today's conference. This does conclude today's program. You may all disconnect and everyone have a great day.