CAI International, Inc.
Q4 2008 Earnings Call Transcript

Published: 12 Feb 2009

[Operator:]

Good day and welcome to the CAI International Fourth Quarter 2008 Estimated Earnings Results Conference Call. Today’s conference is being recorded. At this time I would like to turn the conference over to John Nishibori. Please go ahead, sir.

[John Nishibori:]

Thank you for calling in today to our conference call. I am John Nishibori, CEO of CAI International and with me is Victor Garcia, our Chief Financial Officer. Before we get started Victor is going to make some Safe Harbor statements and then I will discuss our quarter. Victor?

[Victor Garcia:]

Good afternoon. Certain statements made during this conference call may be forward-looking and are made pursuant to the Safe Harbor Provisions of Section 21-E of the Securities Exchange Act of 1934 and involve risks and uncertainties that could cause actual results to differ materially from 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. John?

[John Nishibori:]

We decided to schedule this call because of our concern with the decline in our share value that we did not expect nor think is warranted. We will use this opportunity to provide you with our best insight into our business and the status of the industry. We are finalizing our year-end audit so we have not provided detailed figures. However I can confirm to you that we have had a very good quarter and finished the year strong. During the last quarter we estimate that excluding the goodwill impairment charge, we earned $5.4 million to $5.7 million resulting in an expected full year profit of approximately $23 million and with the impairment charge a loss of approximately $27 million. During the quarter, we sold portfolios to contain our investors and we use the proceeds to further improve our liquidity and balance sheet. At the end of the year, we have cash on hand of $28 million and committed bank lines of $72 million. Hence, we have ample resources for our investments in 2009. During the quarter we recorded a $50.2 million goodwill impairment charge. We annually test for goodwill during the fourth quarter. Most of the time during this quarter, our shares traded at a significant discount the tangible book value. Though we as management and owners feel the share price is deeply undervalued and does not reflect the true value of our company we nonetheless need to take into consideration the trading level of our stock and the equity market environment in assessing our goodwill. As a result we concluded that it was appropriate under GAAP to impair the full value of our goodwill. Though we have taken appropriate accounting steps, we ask investors when analyzing our company to not only consider the equity value that is invested in our fleet but also the 68% of the assets we operate are done so on behalf of third parties. That business mix allows us to earn fee revenue just as we did this quarter and to share operating risk with container investors. We believe the market is not giving us full credit for the combination of lower risks and free cash flow from fee income. I will move now to the current status of the industry. Average utilization for the quarter was 91.9% and we expect utilizations will stabilize towards the end of the second quarter of 2009 as we entered a seasonally stronger part of the year. Turn-in activity is not uniform across our customer base and some of the activity does reflect the normal seasonality during the winter months that has been absent the last couple of years. Customer credit remains a focus for us. However, we feel good about the credit profile of our customer base. We continually review our top customers and believe they are taking appropriate steps to manage through the difficult operating environment. Issues to shipping lines were facing in 2008 such as large order books, rising fuel costs and higher charter rates are now unwinding. Some ship order have been cancelled or delayed, thus reducing the financing needs for the industry, and some shipping lines are raising equity. Bunker costs are now much lower and shipping lines have been aggressively allowing ship charters to expire. Though this is a very difficult time to be a ship charterer, for our customers in our ship charterer; for our customers in our industry, this is a necessary and healthy process to bring profitability and growth back to the shipping industry. The container leasing industry did not experience the same dramatic increase in per diem rates that occurred with ship charters and as such there was not the same supply/demand imbalance that ship owners are now facing. One of the other significant distinctions between the ship leasing industry and the container leasing industry is that the lead times for container orders are much shorter than for ships. As such, our competitors and we have the most part stopped ordering equipment. We in particular stopped ordering equipment last summer and have very limited equipment at the factories. Most container factories remained closed and so new supply even to shipping lines has been limited. The container shipping industry is thus going through a necessary healing process which we believe in the long-term is positive and for us we operate our company with a moderate level of leverage and have taken steps over the past two quarters to further reduce leverage. We are comfortable with our international position and our objective is to benefit from the opportunities in this current environment. Operator, please open the lines for questions.

[Operator:]

(Operator instructions) And we will take our first question from Brian Hogan, Piper Jaffray.

[Brian Hogan:]

My first question and just regard to competition, what are you seeing out there in regards to that or is it just primarily the bigger guys, and smaller guys kind of struggling? And with that, do you think there is room for consolidation, kind of your viewpoint on that?

[John Nishibori:]

Yes. On the competition, we do see the usual suspects. The two other public companies as well as couple of more large companies, but the smaller companies I think are pretty much out of the market or has been out of the market for a while now. I also feel that because of that and because of the tightness incurred [ph] there is opportunity for acquisitions this year consolidation.

[Brian Hogan:]

Alright. Can you give a kind of past history of the utilization relates? What’s the highest that have been and the lowest that have been like the last cycle were they down on the 80% always that’s historically where they have been?

[John Nishibori:]

Let’s see. The highest has been I think about 95.7, is the highest.

[Brian Hogan:]

When was that?

[John Nishibori:]

That was –

[Brian Hogan:]

Recently?

[John Nishibori:]

Yes, on the first half of last year, we're actually starting with the latter quarter of 2007 and first six months, 6 months, 7 months or 6 months to 8 months of 2008. Those were the high end, historical high end.

[Victor Garcia:]

I think in the – this is Victor. I think the last downturn 2001-2002 obviously utilization was much lower, but I think we are in the somewhere in the high 60's, low 70's, but its really a whole different market both we as a company we were a different company back then, much smaller and we also had a lot of MLA, short term business.

[John Nishibori:]

Yes, we were predominantly short-term operators, whereas now 75% of our leases are in long-term.

[Brian Hogan:]

Versus opposite of that, like in the one or two?

[John Nishibori:]

Oh, yes.

[Brian Hogan:]

So just complete –

[Victor Garcia:]

Historically, we started out as a 100% – almost a 100% short-term operator and then slowly and gradually we increased the long-term portion.

[Brian Hogan:]

How many of the long-term leases are up for renewal in '09?

[Victor Garcia:]

In '09 I can’t tell you the number, but let me just, that we have a number of the normal percentage of equipment that comes of long term and then you have agreements that had continued on their launch of agreement. So we don’t – I don’t think we would in this call want to give an exact percentage on given the competitive nature of the business.

[John Nishibori:]

But there is the usual amount that’s maturing

[Brian Hogan:]

Your average lease life is 3.5 years is it?

[John Nishibori:]

No, the typical long-term lease is five years so the average of any given time probably is around three years. But I was just going to say over the next six months we expect something like 20,000 TEUs of containers to come up from maturity which is actually quite a small amount. But on the other hand we do have TEUs that have matured already but have been on leases own. The visa, things like we are negotiating with the shipping companies almost everyday in terms of what to do with them? Whether they want to drop it off or whether they want to renegotiate a different rate and lower obviously or whether they want to change to a short-term lease.

[Brian Hogan:]

Sure. And we go to the pricing is that, how much of that offers are down?

[John Nishibori:]

The pricing of some major customers, we are in the process of renegotiating. We have often been in the process of renegotiating. But in terms of numbers, vast majority of leases are pretty consistent or at constant. But its really, you know a handful of large customers that where they have the muscle really, where we have to sit down and discuss, if we should reduce rates or not. They haven’t lost fully in that that they can threaten us to return ‘x’ number of equipment and we try to hold that off by giving some discount in the rates. But this is very standard procedure as we've been doing this not decades but many, many years. I guess 15 years. Whenever there is a downturn in the market, this is something we all do. And this is not just us; all the other recent companies are subjective to this as well.

[Brian Hogan:]

Right. So do you have any orders done with the manufacturers? I mean, nobody does. And just your new business is being originated by bidders correct?

[John Nishibori:]

Yes.

[Brian Hogan:]

And since there is no kind of new business at the moment, I am just trying to get into the tax rate, would you expect a tax rate to be similar in ‘09 as it was in ‘08?

[Victor Garcia:]

I think it’s probably a fair assumption. We are in the 33%, 34% range and I think to be a fair range.

[Brian Hogan:]

Okay. And then, the state of the KG market, again on sale, can you just kind of give me an update around that?

[Victor Garcia:]

Sure. We did conclude some transactions in the fourth quarter. For the quarter, we recorded approximately $4 million of gain. We sold about $35 million equivalent. So the market remained open. I think it will become more difficult market over the course of 2009, just as we said last quarter when we had a call. But that's we’ve looked at it as a way of continuing to grow our portfolio between owned and managed, but we're certainly not dependent on that market for our funding needs and will continue to weigh it is as part of – a gross part of our business.

[John Nishibori:]

In fact this year, during the first half or so, I don’t think we will be aggressively seeking KG transactions because I think we've reported in our recent press release that we saw a little dip in our owned container fleet. And since we are not buying any new – more new containers, we’d like to keep that level of owned fleet at a fairly high level, whereas if we do the KG business during the first half or so that owned fleet declines again. But, during the last half this year assuming the market is good, we would probably get back into the sales with KG business, KG funds.

[Brian Hogan:]

Sure. And then last question before other jump in. The Consent over the German acquisition, but there was no goodwill write-down in regard to that, was there?

[John Nishibori:]

No. The goodwill was related to our stock buyback that we did in 2006.

[Brian Hogan:]

From the Interpool?

[John Nishibori:]

Yes. We bought back 50% of our shares at that time owned by Interpool.

[Brian Hogan:]

Okay. The Consent acquisition has been – is performing as expected or better.

[John Nishibori:]

Yes, obviously, they are also facing some challenging times because of the weakened European markets, but all-in-all the (inaudible) excellent, but utilization is slightly down. But we are very happy with the acquisition; we are just about fully integrated with San Francisco. So we are very pleased.

[Brian Hogan:]

Thanks.

[Operator:]

And our next question will come from Jason Arnold, RBC Capital Markets.

[Jason Arnold:]

Hi, good afternoon. Just a follow-up on one of the previous questions asked. Based on your experience in past recessions and I have really what you’ve seen so far I was just curious if you could offer us your view on the absolute value for utilization rates here at the bottom of this time around?

[Victor Garcia:]

During 2009 we are still facing a drop off return in pressures. And I won’t be surprised if the utilization goes down to say mid-80s or so. But that still a very, very much in our comfort zone. We’ll start worrying about if the utilization comes below say 75 or 70 but that will never happen in my opinion because of the composition with the long-term leases.

[Jason Arnold:]

Got you. Okay. And I guess another one maybe you could offer us a little bit more detail on the evaluation process for your goodwill impairment?

[John Nishibori:]

Sure. We did go through the formal internal evaluation process. We had – we took a look at forecast, look at assume discount rates in the current capital market environment and we’ve looked that trading multiples of other companies. Put all that together and look at what evaluation is and with all the analysis that we do, we do also have to look at a benchmark of their value has been in our current stock price. So, with our current stock price trading at where it was, we have to have to be a significant consideration.

[Jason Arnold:]

Okay, so really the share price falling significantly, it was really kind of a key driver and so. Now I guess based on the evaluation, is there any potential for that I mean bounce back in reverse or I guess I am just trying to grasp kind of the long-term perspective there on the impairment?

[Victor Garcia:]

We – you don't have the ability to recapture your goodwill once you work up; it’s a one way process. I would think what's important from our standpoint is that we don’t think there has been a fundamental structural change in our business long-term that is we will not be able to continue to speaking you have the same kind of business plan, I’ll be watching that, we’d otherwise would have expected. So we are clearly going through a cyclical downturn, profitability and utilization, of all these things that will be watching, but when we look through the cycles on a longer-term basis the cycle of growth, and our participation in that and how we manage our business we are not expecting structural change in our business.

[John Nishibori:]

Okay. You’re right. The impairment was primarily, as far as I am concerned personally, it was solely triggered by the decline in the share price.

[Jason Arnold:]

Got you. All (inaudible) FASB, right?

[John Nishibori:]

Which one? I feel personally that it was not warranted. And that is really the reason for this call. I am quite concerned with the severe decline in our stock as compared to our other public company competitors in terms of multiples and so forth and it's something that I could not understand why and I thought that maybe the market has a different perception about this company. So I wanted to clear some here. That’s the primary reason for this call.

[Jason Arnold:]

Got you. The accounting, is that what has always (inaudible) there, so.

[John Nishibori:]

Yes. It was quite a shock for us. But on the other hand, it’s just writing off the goodwill, they have really. As far as I am concerned, nothing to do with our financial condition or our business strength or whatever.

[Jason Arnold:]

Got you. Okay. And then just one final question on your credit facility. I was just wondering if you could give us a little bit of an update there. I mean that’s always a big issue these days, for companies’ kind of understanding the covenants and any other availability I guess based issues? So I was just wondering if you can offer us some color there please.

[Victor Garcia:]

Really, nothing much has changed because we have said in prior calls we've got a committed line of credit from the syndicate of banks. It’s $290 million. It matures in September 2012. We have, as John mentioned about – at the end of 2008 we had $208 million outstanding and so that gave us about $82 million. So the impairment charge has no effect on our financial covenants. Our financial covenants are we have nearly two primary financial covenants. The cash flow leverage ratio and a fixed charge ratio and both of those measures add back non-cash charges. So we don’t have any impact on those performances because of the impairment charges. So there is no effect there.

[Jason Arnold:]

Okay. Perfect. Thank you so much for the color.

[Victor Garcia:]

Sure.

[Operator:]

And we will take our next question from David Long with William Blair.

[David Long:]

Good afternoon, guys.

[John Nishibori:]

Hey, Dave.

[Victor Garcia:]

Hi, David.

[David Long:]

Questions regarding the secondary market for containers and I guess if you maybe talk about what the demand is, where the demand is coming from and what you are seeing in prices there?

[Victor Garcia:]

The market is just softening a little bit. It’s not uniform across every region. I think we are still pleased with the level of prices that we are able to get for our containers. But it will be a concern. We would expect that there would be some additional pricing pressure. As inventories build for all the companies and utilization goes down inventory so we would expect there to be continued pressure there. But as I said before not uniform and I think we are still pleased with the levels that we are able to obtain.

[David Long:]

Do you see any risk of the pricing getting to a point where nears your residual values, is that a risk?

[Victor Garcia:]

Certainly, it can be a risk. One of the things I would note that was, yes, we have over the last few years have been probably more proactive than the industry as a whole I would say in moving older equipment out of our fleet we saw on average at around 10 years of age and so, we thought it was important to take advantage of it, I heard a time when there was a lot of areas where we can get very high, what we believe to be very high residual and so a lot of the older equipment that we had when was able to sell, we had sold. So we don’t have a need to dispose off a lot of equipment until this market improves. I think we’ll continue to try to figure out how best to maximize our flat value of our fleet so it is an opportunity to get rid of old assets and redeploy the cash eventually to do assets I think we’ll continue to do that, but we are not under a stress environment where we think we need to sell equipment and being mindful of the fact that its in these economic downturns where customers begin to be choosier about the equipment that they put on hire, so customers will tend to request younger equipment during down market. And so we won't be able to make sure that we didn't have a lot of older equipment, trying to compete in that marketplace.

[David Long:]

Okay. Great. Thanks.

[Victor Garcia:]

Sure.

[Operator:]

(Operator instructions) And we will take our next question from Rick Shane with Jefferies & Company.

[Rick Shane:]

Guys, thanks, almost in the call my questions have been asked and answered.

[John Nishibori:]

Okay.

[Operator:]

And we'll take our next question from Chris Biles with CJB Capital Management.

[Chris Biles:]

Good afternoon, guys. Just a couple of questions as it relates to some housekeeping. The bank line available is $82 million or $72 million?

[John Nishibori:]

It’s a $290 million facility.

[Chris Biles:]

Right.

[John Nishibori:]

About $82 million out there.

[Chris Biles:]

Okay. And cash on hand again I got on the call little late 200 or I wrote down 28 million.

[Victor Garcia:]

Yes.

[Chris Biles:]

So guys given the cash position given the availability of the credit line, and the fact that your stock trades were roughly half of tangible book value, have you given any thoughts to a buyback plan?

[Victor Garcia:]

Yes, Chris, I think it’s an excellent idea. I would love to do it. Basically I can't and the reason is under the senior loan agreement we can only get back 50% of the GAAP net income of the most recent calendar year. And because of the impairment charge, we would be losing money and therefore there is no room for it. I see I do think that there is room for us to talk with the banks and possibly even getting a waiver or an amendment so that we could buyback stock. But at this time we have such a great loan agreement, our commitment where we only pay LIBOR plus one percent. And I really do not want to go back to the banks because I know what the growing market rates are like. We are talking many times more in interest cost if we are to do, if we are to get an amendment or waiver. So I have to think of the extra cost, that cost a buyback cost in terms of interest expense so what I think about that I think we chose the right route of not going to banks living with what we have which is excellent. So that’s really the reason why stock buyback is not – we have not decided to do the stock buyback at this time.

[Chris Biles:]

Thank you.

[Victor Garcia:]

Okay.

[Operator:]

This concludes today's question-and-answer session. At this time I would like to turn the conference back over to our speakers for any additional comments.

[John Nishibori:]

Yes. I hope I did not paint ourselves as having a bunker mentality or something like that. We are still very optimistic for this year. I think that it’s going to be a very challenging year; especially the first half is going to be very challenging. But at the same time, when the market turns and this market turn – if the worldwide economy is to even show a little sign of recovery at the end of this year, the container leasing market should turn around six months ahead of its time or the time of economic recovery, which means mid year. And when that happens because everybody, all the shipping companies is going to be sold out of containers, because there is a natural attrition of 6% per year of the container population, so the container population is rapidly declining. Nobody is making new containers. And then they are going to get caught with a huge shortage of containers. And I have the feeling, when the market turns around it is going to be a zoo. And I do feel very optimistic. First, because of that, because of the possible very strong turnaround in the market, where we can really capitalize on the fact that we have a lot of liquidity to take advantage of and also acquisition possibilities of a smaller leasing companies. So we are not exactly sitting in a bunker and we do see a lot of opportunities. And I just hope that this meeting, I was successful in conveying to you the level of optimism we have; the confidence we have in our company, in the container leasing market, in the industry, in general; and the future of the industry. Thank you very much for your participation and we look forward to getting into more detail soon, I guess beginning of March when we report our fourth quarter earnings.

[Victor Garcia:]

Thank you.

[John Nishibori:]

Thank you.

[Operator:]

This concludes today's CAI International Conference Call. Thank you for joining us and you may disconnect your lines now.