CAI International, Inc.
Q4 2018 Earnings Call Transcript

Published: 21 Feb 2019

[Operator:]

Thank you, ladies and gentlemen and welcome to the CAI International Fourth 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 will now like to introduce your host for today's conference, Mr. 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 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 risk 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 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 fourth quarter and full year 2018 conference call. Along with our earnings released 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 not be going through the specific slides in the prepared remarks, but can address any questions related to the presentation on this call. 2018 was a tremendous year for our company with record revenue in our leasing and logistics businesses and record net income. For the year, we reported record lease revenue of $300.6 million, an increase of 20% compared to 2017 and record logistics revenue of $111.5 million, an increase of 38% compared to 2017. For the quarter, we reported total and lease-related revenue of $115.6 million and $85.3 million respectively. Logistics revenue for the fourth quarter was $30.2 million, an increase of 55% compared to the fourth quarter of 2017. For the year, we reported record net income of $73.5 million or $3.71 per fully diluted share compared to net income in 2017, a $56.2 or $2.87 per fully diluted share. For the fourth quarter of 2018, we reported net income of $17.2 million or $0.89 per share. Our results for the fourth quarter remain very strong as we continue to benefit from the container investments made in the second and third quarters of the year. Average utilization of our container fleet for the fourth quarter was 99.2% and is currently today 98.8%. We would normally expect during the seasonal weaker periods to have a 1 or 2 percentage point decline in utilization. We have witnessed a smaller decrease and we attribute it to the strength of the overall market entered the high degree of committed leases in our container portfolio. Despite the strong momentum, interest expense in the quarter increased by $3.4 million compared to the third quarter, reflecting the increase in our proportion of fixed rate debt as well as overall increases in both debt levels and interest rates. This represents about an $0.18 per share of additional expense in the quarter. However, we have mitigated a significant amount of interest rate risk from our balance sheet. We continue to be optimistic regarding the prospects of our container business in 2019. We begin 2019 from a position of strength with utilization at 99% and 92% of our on lease owned fleet on -term committed leases. In the last two years, we have leased over $1 billion of new containers with an average lease term of 8.6 years. We expect our overall utilization to remain strong as we benefit from our tight contract structure and long-term lease commitments. Secondary prices of containers continue to be strong in most markets particularly outside of Asia, [indiscernible] inventories remain small. We have also made significant advances in our rail portfolio. The overall market continues to strengthen and we continue to see improving utilization in rental rate trends in our rail segment. Our railcar utilization in the fourth quarter increased to 87% as compared to 84% in the third quarter of 2018. Rental rates for most railcar types have increased by 30% to 80% as compared to the levels in 2017. So, we expect this strengthening of policy rates to bring improved overall financial returns for railcar owners. Our commitment to new railcar deliveries will be completed during the first half of 2019, when we will take delivery of 64 million of additional railcars most of which are already on committed leases with attractive financial returns. We remain focused on growth in our logistics business particularly as it relates to domestic intermodal and truck brokerage where we have had the most success in increasing our customer portfolio and volume. During the year, we have added offices in Dallas and California and we expect to open an office in Chicago over the coming weeks. We believe we have sufficient operating support to continue to grow with minimal operating overhead and most of our additions will be focused on marketing personnel. With the investments in people, we have already made, we expect continued double-digit revenue growth in our logistics business in 2019 and as we expect to expand our overall operation and gain additional customers. As we focus our ways to maximize shareholder returns, we have continued to find the repurchase of our shares and attractive use of our capital. During the quarter, we repurchased 542,000 shares of our common stock at an average price per share of $23.83. We have approximately 2.4 million shares remaining of the 3 million shares repurchase authorization we announced in Q3. We view our shares as an attractive investment for long-term shareholder value creation and expect to continue to repurchase shares in 2019. In summary, 2018 was a tremendous year for our company as we continued to expand our businesses and reported record financial returns. As we look into 2019, we remain confident in the financial strength of our company and we'll make decisions that have both immediate benefit to our shareholders and enhance the long-term strategic development of our company. We continue to be very well-positioned to take advantage of investment opportunities as they arise. 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.

[Tim Page:]

Thank you, Victor, and good afternoon everyone. Total revenue in the quarter was a record $160 million increase of 23% as compared to Q4 of last year. For the full year of 2018 revenue increased to a record $432 million, an increase of 24% versus 2017. Lease related revenue was also a record in the quarter at $85 million, an increase of 1% compared to Q3 and 14% compared to Q4 of last year. For the full year of 2018, lease related revenue was a record $321 million, a year-over-year increase of 20% reflecting both the strong container lease market and a recovering rail market that we enjoyed during 2018. Q4 and full year 2018 were also records for CAI in terms of operating income and pre-tax income. Operating income in the quarter was $43 million, an increase of 18% versus Q4 of last year. Operating income for 2018 was a record at $161 million, an increase of 45% versus 2017. Net income for the year was a record $73.5 million, an increase of 31% as compared to 2017 net income of $56.2 million which is adjusted for onetime tax benefits. Net income in the quarter was $17 million, a decrease of $2.8 million versus Q3. Most of the decrease was basically attributable to increased incurred interest costs in the fourth quarter which I'll comment on later. Depreciation expense in the quarter increased $0.5 million compared to Q3 primarily from the full quarter impact of the container equipment we leased out in Q3. We expect depreciation expense in Q1 to be consistent with Q4. Storage handling and other operating expenses were 0.8 million higher in Q4 than Q3 primarily due to a $0.1 million increase in container-related storage costs and $0.3 million additional repair and maintenance costs in the container business that was timing related. Rail had $0.4 million higher maintenance expense in Q4 versus Q3 largely because Q3 expense was lower than historical average maintenance costs. We expect storage and handling expense in Q1 to be consistent with Q4. In Q4, we recorded a gain in sale of rental equipment of $4.2 million, $1.8 million of which resulted from the sale of 385 railcars to one of our lessee. The remaining $2.4 million gain was related to gains on disposition of containers which was in the same range as we realized in the past several quarters. G&A expense in Q4 of 2018 was $14 million an increase of $1.2 million compared to Q3. Most of the increase was caused by year end related professional fees and a true compensation costs. We would expect G&A to decrease modestly in Q1. Interest expense in the fourth quarter increased to $23.2 million from $19.8 million in Q3, an increase of $3.4 million. Approximately two thirds of the increase was related to the increase in our average debt balance in the quarter as we took delivery of and leased out over 200 million of container assets late in the third quarter. The remainder of the increase was related to an increase in our average interest rate in the quarter resulting from increased LIBOR and the conversion of some floating rate debt to higher fixed rates. Our average interest rate for the fourth quarter was 3.91%. We would expect the average rate in Q1 to be in the same range and the average debt balance to decrease slightly as a result of the sale of the rail assets I mentioned previously in a limited container investment in Q1. As of the end of the fourth quarter 62% of our debt was fixed rate. Our effective tax rate in Q4 was 1%, which brought our overall 2018 tax rate to 3.5%. We expect our 2019 tax rate to be in the 5% range due to a higher percentage of expected net income from rail and logistics in 2019. We recorded $2.2 million of preferred dividend expense this quarter on $109.3 million of liquidation value of preferred stock. Preferred stock dividend in the coming quarters will remain at $2.2 million. During the quarter, our own container fleet increased approximately 26,000 CEU as compared to the end of Q3 an increase of 2% and is 292,000 CEU larger than it was at the end of Q4 2017 a year-over-year increase of 24%. On a dollar basis, our container revenue assets were $2.4 billon at the end of Q4 flat with Q3. Container revenue assets grew 29% as compared to Q4 of 2017. At the end of Q4, we had $448 million of railcars compared to $465 million at the end of Q3. Rail assets represented 16% of our total revenue assets at the end of Q4. We had total fund to debt net of restricted cash and cash held in variable interest entities of approximately $2.1 billion at the end of Q4, an increase of approximately $190 million from the end of Q3. The undrawn amount available to us under our container revolving credit facility was $800 million. That concludes our comments operator. Please open the call for questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Brian Hogan of William Blair. Your line is now open.

[Brian Hogan:]

Good afternoon.

[Victor Garcia:]

Hey Brian.

[Brian Hogan:]

My question on the container rental revenue sequentially you put on a lot of assets in the 2Q and 3Q and I just -- the flow throughs in the 4Q, I thought to be a little higher and the yield came down a lot more than anticipated. Is it due to a shift to a little bit more finance leasing or is there a shift in the yields? Can you kind of walk us through some of that?

[Tim Page:]

The yields would have come down because the revenue assets in Q3 didn't reflect all of the containers that were on lease at the end of Q3, as we paid for them in Q4. So, the assets just went up at a higher rate than the rental revenue went up in Q4.

[Victor Garcia:]

So, there wasn't much on the revenue side that changed -- really very little changed on the average yield that the containers were earning because a lot of it is on long-term leases and really there weren't contract renegotiations or anything else. So, it's just a timing issue in terms of when the assets came in and we started earning and when we recognized that on our balance sheet.

[Brian Hogan:]

Okay. So that's not the timing issue. Okay. And then, CapEx for 2019 and obviously is very dependent on the macro and I understand that. But you did mention, the first quarter investment would be pretty light. What do you seeing out of different investment opportunity competitively, I mean that's I would say right now, I don't think you could probably do another year of what you did last year containers of 733, but what do you think about from an investment outlook?

[Victor Garcia:]

I think this year as we look out it is a year that we think will continue to be a growth year given that the U.S. economy continues to expand and the world economy is expected to continue to expand. There are some uncertainties out there in terms of the trade talks and some slowing in some economies. But so, it's not as clear cut as it was last year. But I think we're still optimistic that there will be significant opportunities for us for additional container demand. The overall investment level we might see good volumes, but container prices have declined. So, the amount of dollars actually spent might be relatively speaking obviously less because container prices have gone from an average of around $2100 per 20-foot to about 1700. So even if we do the same amount of volume this year as we did last year, we would have less investment.

[Brian Hogan:]

Sure. Are we in the rail business, one, you normally give out I guess it's normally in the 10-K, the profitability of the rail segment has been running around let's say less break even. I guess do you see a visible pass to getting the double-digit ROE in that business or and how soon do you get there? Obviously, you commented, but we're [indiscernible] --

[Victor Garcia:]

We're doing a number of things where we're trying to first and foremost get the utilization of the fleet up. We are also looking for all opportunities to increase rental rates and that includes with the units that are available to be leased out as well as when we have rate renegotiations. The good news is that everybody in the marketplace is looking for improved returns. And so, the rail rates have been increasing. So fundamentally, we see that business improving. We're on the tail end of a period where we had a lot of equipment coming on as a result of the decline in the last energy shock where there was a lot of equipment that was changed in the orders to other types because the energy business wasn't strong that's reversing itself, if there's a lag effect to it. So fundamentally, the business is getting stronger and so that's kind of every day. But we are looking at different ways of expediting that and where we can put our capital. So, we look at every part of our business and we're looking where we can put capital. And to bring the overall returns of the company up.

[Brian Hogan:]

And that actually goes into my last question at the moment. Do you expect ROE to expand in 2019 from 2018 levels?

[Victor Garcia:]

Well, I think we are certainly targeting to do that. We still are looking to get mid-teen ROEs in the business and we're looking at every aspect of our business to try and get those levels on a consistent basis. And we had lower amount this quarter, but certainly we were in those levels earlier in the year and I think we can continue to strive to get to those levels.

[Brian Hogan:]

All right. Thank you.

[Operator:]

Thank you. Our next question comes from the line of Michael Webber of Wells Fargo. Your line is now open.

[Michael Webber:]

Hey, good morning guys. How are you?

[A Victor Garcia:]

Hey Mike.

[Michael Webber:]

Good afternoon rather. Hey Victor just to start on the drive hindsight. Can you talk to where were the new box prices are today? It seems like they've rolled off a bit. And just maybe -- just an indication where price points are now. And then maybe where you think margins are for manufacturers and maybe why there hasn't been more support there. It's been a little surprising I guess the -- maybe the depth of where were box prices have rolled in Q4, Q1.

[Victor Garcia:]

As I mentioned the box prices have declined from around $2100 for a 20-foot container to roughly $1700. I would say the vast majority of that price decline reflects the decline in Chinese steel prices. So, I think you could draw a direct correlation between -- to even last year when there was a lot of volume for the manufacturers. They were pricing very competitively. And if you looked at their public results for those manufacturers that are public they actually showed that they really weren't making money at the business. So, it's just been a very competitive market in the manufacturing side. So, I think there's still profit challenge. Obviously, we and everybody else who is buying containers is trying to get the lowest price possible. So, we're always going to try to do that. But I would say that the vast majority of the reason for the decline in box prices has been the decline in Chinese steel, which has stabilized over the last several weeks. And so, we don't expect unless there's a change in those steel prices. So, there to be a continued decline.

[Michael Webber:]

Okay. Now that's helpful maybe a bit of a lag or, yes, okay. Maybe I guess along those lines, can you maybe talk to where yields are now maybe kind of how they've trended over the past quarter or so and kind of year-to-date and are we talking high single digits or low double digits and kind of where is that within the context of kind of like a ballpark average level for your fleet?

[Victor Garcia:]

Yes. I'd say as the box price comes down those yields on a normal basis they come down just because there's less cost over the life of the asset to cover. So, they come down, but I think the return expectations that we have are largely the same as we had before. The first quarter is not at a time just like last year where you see a lot of activity. There are transactions out there, but tend to be some smaller transactions and it's not necessarily indicative of the full year and I'd say the way it feels right now, it feels very much like the first quarter of last year in terms of the competitiveness and the number of the volume. So not much different as we finish the early months of this year than it was last year. So, I'd love to see the bulk of the demand usually comes in the second quarter -- begins in the second quarter. So, I think in the next couple of months, we'll see -- we'll have a better indication of where competitiveness is in overall demand.

[Michael Webber:]

Great. But if I just think about where yields are today, I mean, are we in the single digits in terms of yields on new boxes is 1700 right now?

[Victor Garcia:]

I would say very low end of double digits.

[Michael Webber:]

Okay. Yes. It looks like just rough math on your average fleet and average book value, looks like a little over 11% on the existing fleet. So probably around -- you are saying around that area at 1700.

[Victor Garcia:]

I don't want to get into specifics, but it's come to -- I'd say but the important thing is not the revenue yield per se it's what we think the investment yield is and what we're doing. And I think that's been consistent. But, we haven't seen a decline in the yield that we expect on the transaction that we've had as compared to last year.

[Michael Webber:]

It's like an ROA or like a net spread that you don't find this strange around here.

[Victor Garcia:]

Right.

[Michael Webber:]

Okay. And then, just finally and I just want to make sure I'm interpreting -- towards the back end of your deck, when you're on to the railcar section, you mentioned selling $50 million of the railcar in Q4 which is a decent chunk of your actual overall fleet. Can you maybe walk through whether that's a one-off? Is that something where there is an opportunity to offload more of that exposure and now the markets start to tighten. But how do you kind of balance that process with the efforts to kind of re-let and ramp margins in that space?

[Victor Garcia:]

Well, I think if you recall at the last earnings call, I said that we are looking at potentially additional railcar sales and we'll do it if it makes economic sense. I will say that with the improving market in terms of rental rates and utilization and frankly car prices are increasing. So, if you -- the manufacturers are starting to raise car prices. Part of it is domestic steel prices are up because of the tariffs. So that's causing surcharges in car prices. But also demand particularly around tanks are pretty strong and demand for building tank cars and really demand for tanks. We've seen the largest increase in rental rates coming on the tank sector. And so that's bringing a lot more interest from people and looking at existing assets. And so, we'll look at that. We're continuing to look at that. We think we have a lot of attractive assets. The question for us is, where our shares are trading and some of the other investment opportunities. Does it make sense for us to recalibrate what we have in terms of our portfolio mix. And so, we are looking at that.

[Michael Webber:]

Okay. All right. That's helpful. I will turn it over. Thanks.

[Victor Garcia:]

Thank you.

[Operator:]

Thank you. Our next question comes from line of line Helane Becker of Cowen and Company. Your line is now open.

[Helane Becker:]

Thanks very much. Hi, gentlemen thank you for the time. Just a couple of questions because most of them have been answered, but thank you. I know I was just excited, you note in one of the slides that you continue to invest in experienced people. Can you just, I know you had some management changes over the last couple of years. Can you just kind of -- I know it's a small percentage of your business, but maybe you could just talk a little bit about how that's coming and how you're thinking about growth of that business going forward relative to the other two sectors?

[Tim Page:]

Sure. You're right, 18 to 24 months ago we had to make some changes in some of the leadership and the way I would describe it, I think we're just starting to hit our stride and what we really think we do. We've had success in growing the revenue in this quarter compared to less the same quarter in 2017, we're up on a revenue basis by 55%. But that being said in terms of our processes, our positioning in the marketplace, the quality of the team, the focus of the team, we're really just starting to hit our stride. And I think that with the infrastructure that we already in place, the leadership who's been in place now for about a year, we have a lot more opportunities still to invest in the infrastructure and to grow. But I think we have a very strong foundation that'll outpace in terms of growth the other two parts of our business.

[Helane Becker:]

Okay. And then, the other question I had was on tank cars. So, I just wanted to understand a little more because I think there was a point in time last year where maybe there wasn't a lot of interest in that asset. And I'm just wondering if the interest is picked up because there was an underinvestment. And so therefore, when demand turned around people were unprepared or is it a chicken egg thing where one came before the other or maybe you could just flush that out a little for me.

[Victor Garcia:]

Sure. Well, let's talk about the energy part of the tank car market, which is probably the strongest of all of the subsets within tank cars. So first and foremost, there is a lot of demand for tank cars because there's a lot more production of oil as a result of the fracking that's going on in the United States. And particularly since if you look at the spread between what you can get for Canadian crude and what you can -- if you bring it by rail to some of the refiners in the Gulf, there's a pretty big spread that a lot of large oil majors and marketing companies can make. And so, they are aggressively trying to maximize their volume to it. So, there's been a tremendous amount of demand for tank cars to bring it -- to bring those crude oil shipments down to higher demand areas. The overlay into that and there has been a push even with some of the cars have been retrofitted because it was an accident earlier in the year with a retrofitted car that the railroads are starting to implement surcharges on railcars enforcing and starting to indicate a force out of even some of the retrofitted cars. So that's causing some people to be more interested in even a car that meets all of the existing new regulations. And so, there's particular demand and we don't have any retrofitted cars or in the old cars. So, anything that is new and is available is really at a very, very high demand right now.

[Helane Becker:]

Okay. That's really helpful. And then my last question is, with respect to the selling containers, I guess was -- would you be more interested in selling more containers since the return seem to be strong. How should we think about like sale of containers?

[Tim Page:]

Actual -- like on an ongoing basis?

[Helane Becker:]

I guess, yes, like managing the container fleet by like you acquire a certain amount. You sell a certain amount. Are the sales opportunistic or were they designed because the demand was so strong for used containers? I guess I'm thinking about that.

[Victor Garcia:]

Okay. We every month, every quarter we're always consistently selling containers. Our focus is to try and maximize on older boxes that we want to dispose and really trying to maximize utilization. As demand slows down particularly in a seasonally weak period and equipment becomes available, we'll try to move that out to try to continue to keep utilization as high as we can. Our strategy hasn't changed on that. That's right. You will be consistently be the case during strong markets or weak markets. We're always moving boxes around. We're always trying to maximize returns. The container business requires a lot of close management. But the underlying asset is a commodity. And so, we're not wedded to units, we're willing to sell them, we can always buy new units. Customers prefer new units. So, we're always looking to redeploy capital. So, if the older equipment is idle, we'll be very focused on what we need to do with that equipment to get it out of the fleet.

[Helane Becker:]

Okay. And then just one last sneaky question in here. I know that XPO said last week that they lost Amazon as a client. Do you think your logistics segment will benefit from that?

[Victor Garcia:]

I would like to think that we can pick up XPO's business from Amazon, but I don't think we will -- it will affect our business. We're not really focused on large volume customers like an Amazon. That's for some of the more developed larger players. So, I don't think it'll affect our business at all.

[Helane Becker:]

Okay. Great. Well, thanks Victor. Have a nice evening.

[Victor Garcia:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Michael Brown of KBW. Your line is now open.

[Michael Brown:]

Hi, Victor and Tim. Good evening.

[Victor Garcia:]

Good evening.

[Michael Brown:]

Just want to touch on the tariffs a little bit more, so in your view was there really any impact on the tariffs in the quarter. So, was there any impact in the fourth quarter from activity actually being pulled into the third quarter in advance of the tariffs? And then, did you experience any pull forward an activity your customers experience pull forward an activity in advance of the increase to 25% on March 1?

[Victor Garcia:]

I would say we have -- we certainly saw a very strong third quarter. And we saw that continue on into the fourth quarter. For the most part, as I said in my prepared remarks we haven't seen a lot of equipment come back. So, demand overall has been pretty strong. Normally, we would expect one to two percentage points decline in utilization. We've seen a fraction of that. So whether that was overall economic strength or pull forward or we've seen as strong market. There has to be some element of a pull forward. But to this point even so far, this year, we have not seen a decline demand as we've indicated our utilization even today is 98.8% So, I think the underlying world economy still remains strong enough that it's keeping equipment utilized. And we're getting -- we're in the middle of February, we expect by the middle of April, the seasonal uptick to start occurring. And so that will be a natural pull forward even if there was a prior pull forward because of trade. Now the -- how those trade negotiations play out on March 1, there could be some short-term effect. But I think a lot of that has played out. And I think it has more to do with the global growth at this point that'll dictate demand.

[Michael Brown:]

And then, could you just add a little color about how your conversations with customers has -- maybe changed over the course of the quarter, has the dialogue kind of shifted from tariffs, is kind of that uncertainty continues to be out there in the market or are they adjusting their businesses at all in 2019?

[Victor Garcia:]

No. I think there's a little bit of a wait and see, but I don't think that there has been a marked change in how we interact with them. Again, we haven't seen a large amount of new inquiry. But at the same time, we haven't seen a lot of redeliveries and their outlook is cautiously optimistic. And I think it's cautiously optimistic because of really what continues to be a very strong U.S. economy. And so, I think they're looking at this year still as a growth year and I think the expectations are for it to continue to be a growth year.

[Michael Brown:]

Okay. Thanks. And then, just want to shift gears and talk about the funding side. So, it looks like a fixed rate debt that proportion declined slightly to 62%. It sounds like your debt levels could come down in the first quarter due to the lower investment levels in the sales from those railcar assets. So, if you couple that with the Fed's pass and potentially kind of being down with rate hikes. How are you thinking about your funding mix in that proportion of fixed and floating debt as we look out into 2019?

[Victor Garcia:]

Well, I think if you look back into the early part of the fourth quarter, there was a lot of talk about the Fed looking at as much as four additional rate hikes. And we saw an opportunity to effectively convert floating rate debt to fixed rate debt. And by the middle of this year those rate hikes were to be passed we would be getting --we would be paying a lower rate on a fixed rate basis that we would be paying on a floating rate basis. And so, we made decision to more aggressively switch from floating rate to fixed rate. I think at one point earlier in the year we're closer to 40% -- 35% to 40% fixed and we're now up to 62%. I would say we're comfortable with where we are. In a normalized environment, I've said in the past that a hedged position for us is a 50

[Tim Page:]

I think if we don't do anything the percent of floating rate will creep up a little bit because we make principal payments on all the fixed rate facilities every month. And what isn't raised through operating cash flow when we make those payments basically comes out of a floating rate facility. So, there is a natural decrease in fixed rate funding unless we put new fixed rate facilities in place.

[Michael Brown:]

It's helpful.

[Tim Page:]

Which then would lead to slightly lower interest costs.

[Victor Garcia:]

Yes. I mean if we look at where we had a big impact in terms of higher interest costs, it had to do with floating rates moving up. It's a roll forward of the Fed increases that we've seen over the course of last year. So, we actually -- when we look at our overall results we were able to grow and maintain our results despite an ongoing effort by the Fed to increase interest rates. So, I think we've managed through that well and we'll continue to look at how best to mitigate interest rate risk and move the company forward.

[Michael Brown:]

Certainly, it should be an interesting path forward from there. Thank you, guys, for taking my questions.

[Victor Garcia:]

Thank you.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of Scott Valentin of Compass Point. Your line is now open.

[Scott Valentin:]

Thanks operator. Good afternoon gentlemen. Victor, your kind of before I guess container prices were strong in most markets. I think you have in Asia as being maybe a little bit weaker. Do you think that seasonal or do you think there's just a supply issue that was -- slump down economically?

[Victor Garcia:]

It's just a supply demand issue. Everybody tries to get their equipment back to Asia particularly China. So, that's where it tends to congregate. And so, there's more competition there. So, we would normally expect that to be a place where as the market weakens, we see the softest or the more significant move. But we're selling around the world and it's a great place for us to be able to move equipment out of. So, we'll continue to focus our equipment to be back in China in particular. But, we will look to the markets where we think we can get the best price and try to if possible move the equipment to those markets.

[Scott Valentin:]

Okay. And then, on box prices you mentioned new box prices around $1700, but used boxes prices remain strong. I guess you foresee the new box prices increasing back to say the $2000 level or where do you think used box prices will fall, seems like that margin is narrowing right now?

[Victor Garcia:]

I think the biggest factor will be -- the biggest item is going to be the overall demand for containers and what utilization is of the fleet. If the utilization remains in the high 90s as they are now, we would expect that secondary prices will continue to be fairly strong. There's a lot of markets that are still underserved in terms of equipment availability and so prices we think will still be firm. If new container price were to decline further from here that'll have a natural pull down and further from where we are. But I think the biggest factor is going to be how much equipment is actually available on the ground because of transportation costs -- new box prices are available in China. But a lot of the demand is throughout the globe. And so, having a unit local is a lot of the value proposition as to how people price the asset.

[Scott Valentin:]

Okay. And then, just one final question there's been some I guess media reports about smaller carriers, small container carriers in Europe and China running into financial problems. Are you seeing any of that in your customer base or any changes in the watch list at all?

[Victor Garcia:]

Well, I think we've always been cautious about some of these smaller regional players particularly in Asia. So, we haven't been as exposed and not to say that we don't have any, but we do watch them closely, we do watch them closely particularly when we hear about the slowdown that's occurring in China as a result of some of these tariff discussions. So, it is something we watch closely. We tried to be conservative about it. I would say we're probably more conservative than most in exposure to those regional players. But we do have some that we do business with and we're watching them closely.

[Scott Valentin:]

Okay. All right. Thanks very much.

[Victor Garcia:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of a follow-up from Brian Hogan of William Blair. Your line is now open.

[Brian Hogan:]

Question on the logistics business actually, is gross profit margin has been declining in the past several quarters, it was down 300 basis points year-over-year in 4Q. What do you expect for the gross margin trend was I mean, is it depressed or and for what reasons and then?

[Victor Garcia:]

If you actually look at the different services, the gross margin has been stable. What's changed is the mix of business, the margin amongst the mixed businesses. So as an example, in our brokerage business, the gross margin there is 2x what it is in our intermodal business just the way the math works. We have price based on getting a certain amount of profit for each move. But the way that margin works out there's 2x as much margin in the brokerage business as there is on a percentage basis as there is in the intermodal business. We've had more very consistent and significant growth in our intermodal business which is fantastic. There is opportunity there. We think that the brokerage business will increase in growth relative to where it was last year. So, we would expect some margin improvement overall in the company in 2019 as compared to 2018 not and that wouldn't be because margins in the marketplace are increasing, it's just our -- again our mix it will be changing to where brokerage will be a slightly higher percentage of the consolidated than the intermodal.

[Brian Hogan:]

Sure. And then, is that business having halo effects on the container business and rail business, I mean are they actually benefiting the utilization of those other businesses?

[Victor Garcia:]

I wouldn't say at this point. There have been cross opportunities in terms of opening doors for other groups. But I would say that the level of improvement in our utilization having to do with logistics. I wouldn't say it's significant at this point.

[Brian Hogan:]

Sure. And then, going back to the container business, your conversations with your customers, are they leaning towards leasing more of their fleets, or is it how has that conversation changed over time? And then follow-up to that would be like the competitive environment with the three -- for everybody out there -- is anybody being irrational and just how would you describe the committed environment?

[Victor Garcia:]

So, generally speaking, the last few years we've seen a greater proportion or greater interest by the shipping lines to lease. And we've seen a greater interest in as you -- as kind of you seen in our results lengthening of leases. And so, there is more dependence on the leasing community. It's a combination of the overall capital requirements of the shipping lines, and the competitiveness of leasing. So, we are seeing our larger proportion of the investment coming from the leasing community. And the competitive landscape, like I said earlier today, it feels very much like it did in the first quarter of last year. There are smaller deals that are being aggressively pursued but not any more aggressively than they were last year.

[Brian Hogan:]

Sure. All right. Thank you for your time.

[Victor Garcia:]

Thanks Brian.

[Operator:]

Thank you. And I'm showing no further questions at this time. I'll now turn the call over to Mr. Victor Garcia, President and CEO for closing remarks.

[Victor Garcia:]

Just want to say thank you everyone for joining our fourth quarter and full year 2018 earnings call. We look forward to in a few weeks just reporting our first quarter results. Thank you.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a good day.