CAI International, Inc.
Q1 2016 Earnings Call Transcript

Published: 4 May 2016

[Operator:]

Good day, ladies and gentlemen and welcome to the CAI International first quarter 2016 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 call is being recorded. I would now like to introduce your host for today's conference, Mr. Timothy Page, CFO. You may begin, sir.

[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 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 will 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 first quarter 2016 conference call. For the first quarter, we reported a revenue increase of 14.5% from the first quarter of 2015 and lease related revenue increased over the same period by 1%. During the quarter, we reported net income of $7.2 million or $0.36 per fully diluted share compared to net income of $13.5 million or $0.64 per fully diluted share for the first quarter of 2015. The first quarter is typically our weakest quarter of the year. The quarter started off slowly with very limited lease outs and equipment sales activity that was lower than expected in January. The activity levels, both in sales and lease outs, improved in the second half of the quarter and is continued steadily improving through April. Overall I would characterize the quarter as being consistent with past first quarter activity levels. However, during the quarter, we continued to deal with low container sales prices primarily in Asia and Europe due to the high inventory levels of sale equipment available in the market. The situation is improving as there has been a marked increase in sales activity and we have begun to increase prices in certain locations, both within and outside of Asia. Freight rates for shipping lines remain very challenging due to the excess capacity of ships currently in the worldwide fleet and expected delivery from the shipyards. Nonetheless from a container demand standpoint, the market is following the traditional path to a seasonal upturn. And if the pattern holds, we are expecting utilization of our fleet to improve over the next three to six months. Lease rates have remained very competitive for both new and depot lease opportunities. We would expect lease rates to improve as demand for containers and lesser utilizations improve. Steel prices have increased significantly since the low price levels in December of 2015 Chinese steel prices at the end of April were at approximately the same level as at the beginning of 2015. There is uncertainty as to whether the increase will be sustainable considering the widely reported overcapacity of steel manufacturing. However, we believe that the rising steel field prices, at least in the short term, will provide some upward price support to used and newly manufactured containers. One manufacturer recently indicated to us that it is there expectation that new container prices will be $1,600 to $1,650 for a 20 foot container over the next few weeks due to the rising price of steel. Our rail segment reported utilization of 96.5% for the quarter and the segment's performance was strong. For the quarter, revenue from rail assets was $7.3 million or 12% of total lease related revenue. We expect our rail segment to continue being a growing share of our revenue and earnings. Railroad equipment velocity has increased as a result of a decline in coal volumes and oil tank car shipments. As a result of the increased rail velocity and backlog of new equipment deliveries, the need for equipment has moderated which has placed pressure on railcar leasing rates. We continue to have a diversified fleet of equipment on long-term leases and expect that overall performance of our rail group before will remain strong in 2016. Logistics revenue for the first quarter was $8.2 million or an increase of 35% from the fourth quarter of 2015. Approximately 60% of the increase was due to organic growth in the business. We are very pleased with the progress we are making in enhancing our logistics business. We have continued to win new customers and add additional operational and sales staff to enhance our national presence and expect continued strong revenue growth from the segment. We included only a partial quarter's results from our acquisition of Challenger that was completed in February. The business remains in line with our expectations and we expect second quarter results to contribute to our overall net income. During the quarter we completed the repurchase of approximately 700,000 shares at an average price of $8.54 per share. During the last two years, we have repurchased approximately 3.3 million shares, representing 50% of our common stock, which we believe benefits our long-term shareholders. We will continue to look for opportunities to build long-term shareholder value that strengthens our overall business. I will now turn the call over to Tim Page, our Chief Financial Officer, to review the financial results for the quarter in greater detail.

[Timothy Page:]

Thanks Victor. Lease related revenue in the quarter was $58.8 million, 1.4% less than the fourth quarter of 2015 and 0.5% higher than lease related revenue in the first quarter of 2015. Rail revenue was up 28% as compared to Q4 of 2015 and was 150% greater than Q1 of last year. Container related revenue declined from both Q4 and Q1 of last year as a result of lower average utilization and lower average per diem rates. Rail rental revenue accounted for 12% of our total revenue as compared to 10% in Q4 of 2015 and only 5% during Q1 of last year. We expect a continuation in this trend of strong growth as we continue to focus on diversifying our asset and customer base. The growth in rail revenue has not only been significant, it's been profitable. During the quarter, our operating margins in our rail business were 48% as compared to 28% in Q1 of last year. Pretax rail margins in the quarter were 28% as compared to 9% a year ago and rail accounted for 25% of our present pretax income in Q1 of this year. Total revenue in the quarter was $67 million, 2% higher than the fourth quarter of 2015 and 14% higher than Q1 of last year. Besides the growth in rail rental revenue I just mentioned, top line growth was driven by our acquisition of Challenger Overseas, an asset light NVOCC that we acquired in mid-February combined with the July 2015 acquisition of ClearPointt Logistics, a domestic intermodal logistics company, we have added about $40 million of annualized logistics revenue in the past eight months. We expect to continue to be focused on growing and expanding our logistics capabilities. Net income in the quarter was $7.2 million or $0.36 per fully diluted share, as compared to a loss of $12.6 million in Q4 of last year and a profit of $13.5 million in Q1 of last year. There was a $6.4 million or 47% year-over-year decline in net income in Q1 of this year as compared to last year which can be traced almost entirely to the weakness we have experienced in the container lease market over the past year. There was an approximate 230 basis point decline in average container utilization during the past 12 months, which resulted in lower revenue and higher storage costs. Lower secondary container prices resulted in a $1.1 million lower gain on sale of containers than we experienced last year and the lower utilization and sales prices also contributed to lower management fees. On a positive note, as Victor mentioned, over the past month we have seen a moderate increase in utilization, signs of an improving secondary sale market and an expectation of a fairly significant increase in new container prices in the coming months, which should translate the higher per diem rates. As of March of this year, our total container fleet consisted of 1.2 million CEUs, which is 0.7% smaller than what it was at the end of Q4 of 2015 and 0.6% less than Q1 of last year. Our own container fleet is 1 million CEUs, which is 2.7% larger than Q1 of last year, but was 0.4% smaller than at the end of Q4, reflecting our focus on aggressively disposing of idle assets. Our own container fleet now accounts for approximately 86% of our total container fleet. Average total container fleet CEU utilization was 91.2% in the quarter as compared to 91.1% for the fourth quarter of 2015 and 93.5% in Q1 of 2015. Our average owned fleet CEU utilization for the quarter was 92% as compared to 91.9% in Q4 of 2015 and 94.4% in Q1 of last year. We ended the fourth quarter of 2015 with approximately $1.6 billion of container revenue assets, about $20 million or 1.2% less than Q4 of 2015. During the quarter, we invested only $18 million in container assets, almost all of which were refrigerated or specialty containers. As of today, we have only approximately $15 million of commitments to purchase containers, almost all of which are specialty and refrigerated containers that have committed leases associated with them. During the quarter, we sold approximately 13,000 CEU of containers or about 13 million of proceeds. In the coming months, our priority will be to continue to focus on leasing or selling our existing depot inventories. We continue to increase our investment in rail assets. During the quarter, we invested $28 million in our rail fleet acquiring 242 new and used cars. Our rail fleet now consists of a diversified portfolio 5,338 railcars with a net book value of $258 million, a year-over-year increase of 166%. We have commitments to acquire an additional $120 million of railcars during the balance of this year. Additionally, we will continue to pursue acquisitions of used rail car portfolios. We expect that our rail assets will represent over 20% of revenue earning assets by the end of 2016. The average utilization of our railcar fleet was 96.5% during the first quarter. Total storage, handling and maintenance expense in the quarter was $9.1 million, approximately $0.7 million greater than Q4 of 2015 and $2.3 million greater than Q1 of 2015. Almost all of the difference is related to the higher levels of off-lease containers. MG&A expense in the quarter was $8.8 million, or $1.5 million greater than in Q1 of 2015. Almost all of the increase was related to our efforts in diversifying our business, additional marketing related headcounts in rail and our investment in people in the logistics business through internal staff as well as the acquisition of ClearPointt Logistics and Challenger Overseas in the past eight months. Interest expense in the quarter was $10 million, in line with our expectations. On a year-to-date basis, our effective tax rate is 13.6%, somewhat higher than in previous quarters and reflects the impact of U.S. sourced income, particularly rail being a higher percentage of our overall pretax income. We would expect the tax rate in the coming quarters to be similar. At the end of the first quarter of 2016, we had total funded debt of approximately $1.4 billion. From a liquidity perspective, we are in a very strong position with cash flow and committed credit facilities that allow us the ability to repurchase shares, delever or invest further in the business. Based on the commitment amounts of our rail and container based revolving credit facilities, we had $564 million of undrawn credit line capacity at the end of Q1. That concludes our comments. Operator, please open the call for questions.

[Operator:]

[Operator Instructions]. And our first question comes from the line of Kevin Sterling from BB&T Capital Markets. Your line is now open.

[Kevin Sterling:]

Thank you. Good afternoon, Victor and Tim.

[Victor Garcia:]

Hi Kevin.

[Kevin Sterling:]

Yes. Timothy I think you said this, but just want to make sure I heard it right. Your marketing and G&A expenses were higher than what you anticipated? When you reported Q4, you had given us a guidance for Q1. Was that mainly due to the higher level of off-lease containers?

[Timothy Page:]

The MG&A? No, the MG&A was a function of, we acquired Challenger. So we had a G&A for that. And then we also accelerated the pace of new headcounts during the quarter for the logistics business. So we had a plan during the year to add some headcounts. So we were able to find people in the first quarter. So we put them in place now. So it's really just related to growing our logistics business a little bit faster than we anticipated.

[Kevin Sterling:]

Okay. Got you. How should we think about a run rate from MG&A for Q2 and going forward? So it would be similar what we saw in Q1?

[Timothy Page:]

It's probably going to be similar to what we saw in Q1. We will have a little less auditing and there were some transaction expenses in Q1. So it should be similar. We are going to have a full quarter of Challenger. But I think somewhere around $8.8 million, $9 million is probably a good number.

[Kevin Sterling:]

Okay. And your higher storage cost for Q1, should we think about a similar run rate for that for Q2 and going forward?

[Victor Garcia:]

Yes, I think so. I think part of it included in that numbers not pure storage cost. There is cost of repositioning assets. As we continue to try and get equipment into right places, we are moving a lot of equipment around. So some of those costs get incurred. So probably same number is probably appropriate.

[Kevin Sterling:]

Got you. Okay. Thanks Victor. And it looks like your railcar utilization was better this quarter. Is the primary driver there just better rail service?

[Victor Garcia:]

No. The primary driver is that we had at the end of the year, we purchased some railcars and so that's now a full quarter into this quarter. Plus we took delivery of some cars and put them on lease. So it's really the additions to the fleet, the reason for the slight increase in rail utilization.

[Kevin Sterling:]

Okay. Do you expect that higher utilization going forward, Victor?

[Victor Garcia:]

We are at almost full utilization. So picking exact numbers is tough, but somewhere around that range is where we would expect it to be.

[Kevin Sterling:]

Okay. I think you mentioned in your prepared remarks, you said 20 foot box, your total might rise by about $1,600 to $1,650. How much of that would be from the bottom?

[Victor Garcia:]

It's about $300 from the bottom.

[Kevin Sterling:]

Okay. That's a meaningful increase there. Thank you. And lastly, just kind of a bigger picture question, if you don't mind, there has been a lot of news about Hyundai and Hanjin and some of the issues there in the debt levels and Korea Development Bank taking over. Could you comment or give us how you are thinking about maybe an impact to your business, if at all? And maybe how you guys are thinking about it from a strategic perspective as we see some lease container lines struggling and possibly entering receivership and the impact to your business?

[Victor Garcia:]

Sure. Well, whenever you get into these restructuring discussions, there is a lot of uncertainty, so I am going to preface it by saying, there is always a lot of uncertainty. But I would say, our current view is that as it's being discussed right now, we view this as a positive and that the two entities in Korea that you are mentioning, are going through restructuring. They will be in better financial footing once they complete the restructuring through some debt for equity exchange. We have been monitoring our exposure for the last couple of years with these two particular lines. So I think we feel like were in a relatively good position as this process unfolds. Bu as I said, we think if everything goes as the companies plan, they will be in better footing which is for all of us who have them as customers, is a positive note.

[Kevin Sterling:]

Okay. Got you. That makes sense. I think can you ask you too, Victor, another kind of big picture question, how should we think about the impact from SOLAS and the container weight rules on your business? Is there possible, could it create some more demand if there is more need for containers? Or maybe get your thoughts on the verification of the container weights going forward?

[Victor Garcia:]

There is a lot of discussion around this amongst the lines on who is responsible and who should be measuring and how it goes. The data is coming up as to when this actually need to be done. But I don't expect that there will be a disruption in the flow of equipment because of this additional requirement. So however it plays out, I would expect it to have you really no impact.

[Kevin Sterling:]

Got you. Okay. All right. Victor and Tim, that's all I had. Thanks so much for your time this evening. I appreciate it.

[Victor Garcia:]

Thank you.

[Operator:]

And our next question comes from the line of Michael Webber from Wells Fargo. Your line is now open.

[Donald McLee:]

Good evening guys. This is Donald McLee, on for Michael.

[Victor Garcia:]

Hi Donald.

[Donald McLee:]

Just to go back to the box pricing. I wanted to clarify when you mentioned the $1,600 to $1,650 per CEU as a potential box price, is that an actual quote or just an expectation of where pricing could go once the production restarts?

[Victor Garcia:]

It was not an actual quote. It is simply a discussion related to the impact of rising steel and an indication of their expectation of where it would go. So it was not an actual quote.

[Donald McLee:]

Okay. Yes. That's what I figured. And focusing on the rising steel prices, could you comment on how long it typically takes for any improvement in steel to translate to an improvement in new and used box prices?

[Victor Garcia:]

On new box prices, it's more immediate because the cost of production has to be reflected. On the used box prices, I think there is more of a delay. It's a matter of how much equipment is available and it's a location-by-location. Also as box prices on the used side did not decrease as quickly as new box prices did because of a similar lag. So I can't give you an exact amount of time, but I would say anybody, if steel prices remain here and based on the indication we were given, we expect some of that new box price would be higher. Whether or not there is already a commensurate increase in used box prices, it's much harder to tell.

[Donald McLee:]

Okay. Fair enough. And in your prepared remarks, you mentioned an increase in sales activity as well as prices in certain areas. Is that mostly of a seasonal uptick following Q1? Or is there some indication of a pickup in demand and improving fundamentals?

[Victor Garcia:]

Container sale prices are really a local market phenomena, in the sense of the price you get for a box has a lot to do with the local inventory levels, how much is there, the regional activity. So there is a lot of variability from location to location. And in places where we are seeing some increases in box prices has been primarily in Asia where the price had gone down the most as there was very little inquiry and plenty of availability. A lot of the excess equipment that's off hire is in Asia. So there is a lot of inventory for people to pick from. But as we started seeing multiple quotes, request for equipment come in and as we had already begun to see more equipment being sold, that give us the confidence to start looking for some price increases from pretty depressed levels.

[Donald McLee:]

Okay. And then my last question is around your share repo. I think you have purchased about half of the two million share authorization following Q1. Given the recent improvement in the stock over the past couple of months, how quickly do you expect to unwind that remaining authorization?

[Victor Garcia:]

I can't give guidance on that right now. We are looking at all of our needs in terms of new investment and opportunities as well as the share repurchase. I will say generally speaking, new investment in containers given what we are seeing in per diem rates is not our preferred area of using capital. But I can't give an indication as to how quickly we will be able to purchase the remaining allocation.

[Donald McLee:]

Actually the commentary on the CapEx is exactly what I was looking for. So thanks, guys. That's all my questions.

[Operator:]

And our next question comes from the line of Brian Hogan from William Blair. Your line is now open.

[Brian Hogan:]

Good afternoon.

[Victor Garcia:]

Hi Brian.

[Brian Hogan:]

A question on your rail business and your strategy there. The rail is not in the best of, say, big picture environments right now as you kind of alluded to in the velocity increasing, but you have $120 million of committed railcar purchases over next year or so, correct me if I am wrong, but what are you doing in terms of lease terms and lease rates? And what are you targeting for an ROE in managing this kind of the cyclical rail business during, obviously you are growing this? How does that ROE compared to the container?

[Victor Garcia:]

I am not going to go into specific ROE targets on the call and what we expect. What I will say is, the equipment that we have on order, we have multiple equipment types on order and we have some flexibility on being able to change what we want to have delivered towards the end of the year. So we have quite a bit of flexibility. Where we have looked, where we have selected equipment types is in areas where we can best forecast where we think there will be demand in that car type going into this next 12 to 18 months. So we think there is demand there. To the extent that lease rates are below our target level, we will consider going slightly shorter than we would otherwise to try and have an opportunity to reprice. And it depends on again what the overall opportunity is.

[Brian Hogan:]

Do you have a rail assets rolling off this year? Or is it so new that nothing is rolling off yet, is it?

[Victor Garcia:]

We have some but as with any leasing business, you have some that and I wouldn't say roll off because our expectation is that clients will renew their leases. Our expectation is that most lease expirations will result in a re-lease of the equipment. But you always have some equipment that is potentially rolling off.

[Brian Hogan:]

All right. And then can you go into the strategy around your logistics business? You said you were going to look to continue to grow that. Does that include acquisitions? And was that just organically cross-sell opportunities? Can you elaborate on your logistics strategy, please?

[Victor Garcia:]

Sure. So when we look at the importance of logistics, it's a couple of things you mentioned. One is the cross sell opportunity because with some of our customers, we can touch them in multiple ways, whether it's a freight movement or it's a equipment lease. And there is an ability to utilize our own assets in some of these moves to better position. So we are looking to grow the business organically and doing it in a way that makes sense for us in terms of creating a broader platform nationally. But we will look at acquisitions to the extent it give us a capability that we would think we don't have or it would take us too long to develop.

[Brian Hogan:]

All right. And then on the gain on sale or actually it was a loss on sale in this quarter, with the rebound, expected rebound I guess, in container prices and then obviously there is a lag effect into the secondary market, would you expect that loss on sale to reverse later this year, if trends hold, based on that $1,600 to $1,650? Would that go back to make a net neutral? Or what are your expectations?

[Victor Garcia:]

I think I am more certain about our coming quarter or maybe the next two quarter than I could say anything beyond that. I think it would be unexpected for prices to move up materially enough so that we would be reporting gains on sale. I think there is still quite a bit of inventory there around Asia based on how far prices have fallen and what we see still even today in certain markets, what we see other selling equipment for it. We are nothing the momentum yet that would result in rising prices to a point where on average we would be reporting a gain on sale. So I think we will probably still be somewhere in that breakeven to a loss on container equipment in the second quarter.

[Brian Hogan:]

All right. And then my last question is actually on the container business, as it pertains to procurement and sales. Obviously it's a local market and you do relative DCFs in selling and buying. But you have $50 million of committed CapEx, utilization is rising, do you pull back on the selling and maintain those assets instead of buying new ones? What is your thought process around new container procurement versus maybe pulling back on the sales? Can you walk through that philosophy?

[Victor Garcia:]

When we have an opportunity to lease an asset, we will lease an asset. So we will always look at that. I don't think it's quite as simple as that because a lot goes into when you decide to sell an asset, it's the condition of equipment, the location and the age of the equipment. So we have a lot of assets that we are moving into other locations where we are looking to target just to sell them. I would say just generally speaking, we haven't seen lease rates come up to a level that would justify us looking at significant new investment. And so our priority is to improve earnings as best we can by reducing our costs. In reducing our costs, we are looking at off-hire cost, we are looking at the capital that we have employed and trying to get static costs out of the system. So until we see improvement where we think it makes sense to put additional capital to work, we are more focused on just enhancing our cash flows and our earnings through getting rid of these costs.

[Brian Hogan:]

All right. Thanks for the time.

[Operator:]

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

[Doug Mewhirter:]

Hi. Good afternoon. About your logistics business, like you said it shows a nice growth and also the utilization, although, I am sure you would like it to be higher, it seems to be have not been maybe quite as bad as worst-case scenarios and looks like your end of quarter utilization is a little higher than the average. Is there any way to quantify the positive impact in logistics business on utilization with basically using your assets as tools to enhance utilization? Or even on sale prices maybe arranging more one-way leases to better markets? Has that moved the needle at all with your logistics business?

[Victor Garcia:]

Well, we are continuing to gain, it's having more and more of an impact. But we are doing a lot, when we use the term logistics also outside of what we have defined here as logistics, we do a lot of movement of containers globally, one way moves, like you mentioned and all of that is in the interest of getting units out of depots and into places where we can sell them and sell them for a better price than where they originated from. So that is a big emphasis that we have. It's a big emphasis what we are within as we defined here logistics and we have a growing presence in that. But also globally just like every other container leasing companies are doing it, is trying to better position equipment to get it out of the system or position for sale. So it is, I would say, strategically what our main focus is. Our main focus is to really wring out costs, increase utilization and to do it as effective as we can. We have had a lot of headwinds over the last 12 months, where we haven't had the demand that would normally lift up utilization naturally. Hopefully we will have a seasonal upturn this summer and that will help quite a bit. But in the interim, we are sticking to the same game plan that we have had for the last 12 to 18 months, which is to grind it out and strategically try to get equipment out and get that utilization number moving.

[Doug Mewhirter:]

And I guess just to follow-up on that. So has there been any, I guess, measurable positive impact to-date on any of those strategic initiatives in terms of either better utilization or better prices or more sales volume? Or is it just too early for that right now?

[Victor Garcia:]

It has. It's hard for us to quantify here, but we look at it everyday. We look at the alternatives we would have had if we had not continued in this plan of enhancing our overall logistics capability. So yes, we see it and we expect that we will continue over time to continue to enhance our capabilities and have an ongoing impact. We are gaining customers all the time.

[Doug Mewhirter:]

Okay. Thanks. And as my last question, shifting gears a little bit on the loss on sale which you expect to continue for another quarter or two. Container steel prices have spiked nicely. I am not sure whether there is going to be follow through to use container prices. Have you maybe thought about your residuals? I know that you have a long-term outlook on setting residuals. Have you reviewed that? Or is that just an annual process? Or do you look at that every quarter?

[Victor Garcia:]

We look at it every quarter. We are required to look at it every quarter. Again, we look at to see, it's not what the prices today, but what we could reasonably expect the long-term to be on average. But it's something that we are required to look at every quarter.

[Doug Mewhirter:]

Okay. Thanks. That's all my questions.

[Victor Garcia:]

Thanks Doug.

[Operator:]

[Operator Instructions]. And our next question comes from the line of Helane Becker from Cowen and Company. Your line is now open.

[Helane Becker:]

Thanks operator. Hi guys. Thank you for the time. Just a couple of questions. One, victor, when you talk about demand and you are not really seeing demand and all these containers hanging around and moving them around, I get that part. But if nobody is really ordering containers, how can prices actually move higher?

[Victor Garcia:]

Just to clarify, on new containers?

[Helane Becker:]

Yes. I get steel prices are up and that by definition would mean if you ordered, the manufacturers are going to try to pass that cost on to you, but if you are not ordering, how do they move higher?

[Victor Garcia:]

There has never been a year, well, I should say there was never a year since 2009 but we would expect that there are going to be containers that are going to be produced. It's a matter of degree. There are shipping lines that have ordered containers. Some that really primarily own their containers, don't lease. So there have been some orders by some shipping lines for that. There are some leasing companies that have put some orders in. We haven't seen the level of ordering that we would with prior periods or prior years. I think my expectation is that the reason is because it's not just the container prices, it's looking at also what the expected return would be for a leasing company once you did order the equipment. But there will be containers produced. And I think because of the cost of steel is such a significant cost, it's got to have, in the same way it had an impact on the way down, it's going to have an impact on the way up.

[Helane Becker:]

Got you. And then, on your watch list of customers, has that list increased? Or what does that look like?

[Victor Garcia:]

I would say our watch list is consistent. We have had very good overall collections from customers. We are very mindful of the freight rate environment for the shipping lines and the freight rates have been very low over the last several months. And so we keep a watchful eye of that. And then the announced restructurings of the two Koreas lines, we are watching closely. But I wouldn't say, that we have seen anything materially change in terms of our actual payments or the number of companies we watch.

[Helane Becker:]

Okay. And then my last question is, with respect to the way you are changing the business has been really hugely, obviously, beneficial for you all. And I am just wondering as we think about going forward, should we think about other railcar or rather container leasing being maybe trending down to be half the business and other things, logistics and railcar leasing being half the business? Or do you have something in mind for where you want that to trend to? I don't really know how to ask the question. Are you and the Board thinking about getting back into the business more aggressively as a leader, if things improve? How do you think about your overall goal for your business going forward? Because you have rightly diversified pretty much at the right time, so how are you going to take advantage of that, I guess?

[Victor Garcia:]

We are going to do what we are doing. We have two things we look at. First of all, it's what the current market situation in terms of investment returns. So we have to look at that and make our investment decisions as to whether or not it's worth putting capital out for a particular customer. It's not rail or containers or even when we look at a potential acquisition of a logistics business, something like that. But we also have a longer term imperative in that we do think it's important for us to, I would say, diversify the business, broaden up the business. It's widely reported and it's an ongoing trend. There is consolidation amongst shipping lines. We don't expect that trend is going to change. And it's our firm belief that to be a successful company, you need to continue to broaden out your opportunities and your customers. And we want to do it in a way that makes strategic sense. So the things we are in all have interrelation amongst each other and there is cross benefit between our asset investments and our services with logistics. But I would say, we do expect that overall container leasing will be a smaller percentage of our combined company over time. And that doesn't mean that we are shrinking container leasing, but we would expect we are going to continue to invest in these other businesses and that it will become a more balanced mix, if you will.

[Helane Becker:]

Got you. That's very helpful. Thank you very much.

[Victor Garcia:]

Sure.

[Operator:]

And I am not showing any further questions. I would now like to turn the call back to Mr. Victor Garcia, CEO, for any further remarks.

[Victor Garcia:]

I appreciate everybody attending our call. We look forward to our next earnings call for the second quarter. Thank you very much.

[Operator:]

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