CAI International, Inc.
Q3 2012 Earnings Call Transcript

Published: 23 Oct 2012

[Gregory Lewis:]

Steven Kwok - KBW Helane Becker - Dahlman Rose Daniel Furtado - Jefferies Douglas Mewhirter - SunTrust Robinson Salvatore Vitale - Sterne, Agee & Leach Brian Hogan - William Blair

[Operator:]

Good day ladies and gentlemen and welcome to the CAI International, quarter three 2012 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 be given at that time. (Operator Instructions). I would now like to turn the conference over to Timothy Page. Please go ahead sir.

[Tim 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 and Exchange Act of 1934 and involve risk 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 document 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. I will now turn the call over to our President and Chief Executive Officer, Victor Garcia.

[Victor Garcia:]

Good afternoon. We are very pleased with our third quarter results and year-to-date results. We continued for the ninth quarter in a row to report record quarterly rental revenue. In the most recent quarter we reported $44.9 million of revenue and net income of $16.5 million. Net income was 21% higher than the third quarter of last year. This quarter we had earnings of $0.84 per fully diluted share, representing a 20% increase from the same quarter in 2011 and a $0.07 or 9% increase from the second quarter of this year. Year-to-date our return on shareholders equity at the beginning of the year has been approximately 27% on an annualized basis. We are proud of these results, particularly in light of the uncertain global environment in which we operated for most of this year. We were able to achieve these results due to our strategy of having a high percentage of equipment on multi year term leases and the ongoing investment we have made during the year. We had several significant achievements this quarter that support our results. During the quarter we were able to lease out 52,000 TEU of containers. We also completed three sale leaseback transactions for $33 million, representing 28,000 TEU and purchased 22,000 TEU of containers from two previously consolidated managed fleet portfolios for $15 million. 2012 is already a record year for us in terms of investment. With the commitments already made in the fourth quarter, we have invested or committed to invest over $500 million in equipment. We are also pleased that most of our equipment purchased from container manufacturers has already been picked up by our customers and is earnings revenue. Our remaining uncommitted inventory is the low normal levels for this time of the year, which we are pleased about considering the decline in container prices since the end of the second quarter. As was mentioned in our press release earlier today, demand for new containers has been below expectations for this time of the year. We believe this is a result of the economic uncertainty globally or particularly in Europe. World containerized trade is expected by Clarkson's research to grow 5% this year, a growth percentage that is below the historical level. As a consequence of the more limited demand, production of containers has also been restrained, particularly since the end of the second quarter and we estimate that inventory level of containers to be approximately 500,000 TEU, a level that we believe to be very moderate for this time of the year. We estimate that production of containers will total approximately 2.2 million TEU this year with approximately 50% ordered by the leasing company. There are approximately 30 million TEU containers worldwide. In the normal year to meet ongoing demand growth, we would expect 3 million to 3.5 million TEUs to be built. Annually, approximately 5% of the fleet needs to be replaced. Based on the worldwide fleet size, attritional loan requires approximately 1.5 million TEUs to be built. So as you can see, productions of container this year has largely been for replacement of expiring containers. New container production this year has represented a smaller portion of our own capital investment compared to prior years. As I mentioned earlier, this year we will have invested over $500 million in equipment; however, only 55% has gone into new drive end containers, all of which was ordered in the first half of this year. The reason I’m going through this analysis is that we believe that when container production is below normal for several months, as it has been this year, we expect there to be a catch-up demand for containers. We expect that kind of catch-up in demand to occur in 2013, as containerized trade growth increases, which Clarkson's researchers predict will be at a rate of 7%. Based on discussions we have had with customers, we believe shipping lines will continue to lease the majority of their container needs next year. We have not ordered any additional equipment since the end of the second quarter and all of our investment in the second half of the year has been for sale lease transactions or purchases of portfolios from our managed fleet. These were higher return opportunities with immediate cash flow being generated upon the acquisitions. We believe that many of our shipping line customers financial position improved over the course of this year, as they have reported improved results after suffering first quarter losses. Many of the shipping lines have implemented freight rate increases that are being passed on to their customers, while benefiting from some growth in container volume. As a result, the collection of receivables from our customers has improved over the course of the last several quarters. Our utilization this quarter was 94.8%, a slight increase from the 94.3% reported during the second quarter of this year. With the high overall level of utilization of equipment, we see continued good pricing on the secondary sale of containers. Demand-for-use containers remain relatively good, though prices have stocked in slightly in some low demand location. In general, we expect the secondary prices of containers will remain strong over the coming quarters. I would like to summarize by saying that we have great momentum in our business that will bring revenue and profit contribution over the coming quarters. 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.

[Tim Page:]

Thank you Victor and good afternoon everyone. Earlier today we reported our third quarter results. In the quarter we achieved record quarterly revenue of $44.9 million, 36% higher than the third quarter of 2011. Record quarterly net income was $16.5 million, a 21% increase over the third quarter of last year and record earnings per fully diluted share of $0.84 per share, a 20% increase compared to the third quarter of 2011. Driving our profitable growth has been a focus on investment in our own container fleet, the continuation of robust industry wide equipment utilization rate and a strong resale market. As compared to our second quarter of 2012, revenue increased 13%, net income 9% and fully diluted earnings per share 9%. On a year-to-date basis as compared to 2011, revenue has increased 39%, net income 33% and fully diluted EPS 23%. Compared to the end of the third quarter of 2011, our total container fleet has grown 18% and our own fleet has grown 45% on a TEU basis. As of the end of September, our own fleet comprised 58% of our total fleet as compared to a year ago. Underlying our growth over the past year is what we believe are strong fundamentals of our business model. Our overall fleet utilization during the quarter was 95%, a trend we expect to continue, because of the relatively conservative new container acquisitions by our customers during the past year. Furthermore our long-term lease and finance leases now account for approximately 84% of all leases in our fleet. We believe this focus on securing long-term leases will provide us with long term predictable and sustainable cash flows, as well as a high degree of visibility of future earnings. Management fee income during the third quarter of 2012 was $2.5 million as compared to $3.1 million for the same period last year and was expected to fall given our acquisition of several managed portfolios over the past 12 months and the subsequent reduction of the size of our managed container portfolio. We did not enter into any sales of the portfolios in the third quarter this year and as a result had no gain from the sale of container portfolios in the quarter, as compared to a gain of $700,000 in Q3 of last year. Finance lease income was $2 million in the third quarter, an increase of $400,000 from both the third quarter of 2011 and the second quarter of 2012 as a result of several new sale lease transactions entered into during the third quarter. Total operating expenses in the third quarter were $18.9 million compared to $11.3 million in the third quarter of last year, a change in dollars of $7.6 million. The overall increase in operating expenses is primarily a reflection of the extent to which our business has grown over the past year. $4 million of the increase is attributable to increased depreciation expense, which is directly commensurate with the increase in our fleet size and the increase in container related rental income. Storage and handling expense increased $1.1 million. Our own fleet grew 45% and as a result the absolute dollars of storage expense increased. In addition, lease out activity in the third quarter of 2012 was 57% higher than in the third quarter of last year, which resulted in higher handling expense, which I’ll point out for the most part are billed back to customers. Marketing and general administrative expense increased $1.1 million in the third quarter of this year versus the third quarter of last year, primarily resulting from the human capital investments we’ve made in our rail business with the timing of some legal and other G&A expenses. As of the end of September, year-to-date 2012 we had invested approximately $200 million in new dry containers compared to the completed $131 million of sale lease back and portfolio acquisition and have also acquired $51 million of rail cars for a total year-to-date investment of $400 million. In early October we closed a $4 million acquisition of one of our managed portfolios and on October 19, last Friday, we closed the purchase of a large portfolio we formerly managed, the Schroeder Dritte portfolio with approximately 71,000 TEU for a net cost of approximately $84 million. We believe this acquisition will be accretive to earnings. Entering the fourth quarter we had no new drive-in containers on order and had only approximately $7 million of new containers on order, as demand from our customers for new equipment had been soft. With that said, we are also not seeing much in the way of request for redelivery of equipment on short term leases, which would indicate that overall supply and demand is in balance and that utilization rates should remain relatively unchanged. Third quarter and early fourth quarter have been a very active period for how CIA finances itself. We increased the accordion feature on our container revolving credit facility from $475 million to $675 million and currently have commitments for $495 million. At September we closed on $103 million of 10 year senior secured notes with a group of institutional investors and last Thursday we closed on $171 million, 10 year fixed asset backed securitization notes that were priced at a yield of 3.5%, which is the tightest pricing today achieved by any container leasing company in the ADS market. With the confirmation of these transactions, we now have approximately two-thirds of our debt in various term facilities with maturities ranging from two to 10 years and approximately one-third of our debt now has fixed interest rate with an average yield of less than 3.8%. We believe there will be further opportunities in the coming months to reduce our overall borrowing cost and fix rates on a higher percentage of our capital structure. We are pleased to report that our rail investment initiative we started at the beginning of this year was profitable this quarter, the first quarter with any real activity. While our total investment today represents less than 5% of our total revenue earning assets, we do expect to continue to grow our rail fleet. In conclusion, we believe the remainder of the year will see a continuation of high container utilization rates, strong secondary container resale markets, as well as opportunities for sale leasebacks and portfolio purchases. Looking forward to next year we believe that even with the somewhat muted projected levels of growth and international trade, demand for new containers from our customers will be strong for the younger investment by our customers and their container fleets that Victor discussed earlier, and our belief that customers will continue to view the container leasing industry as their most viable means to finance to their container requirements. Layer on top of this potential for new container investment, a strong flow of opportunities for sale leaseback transaction, as well as the repurchase of container portfolios from our managed fleet and opportunities to make rail investments, we believe CIA has outstanding growth prospects for next year. We’ve had another strong record quarter from both revenue and earnings perspective and we anticipate a continuation of that trend. That concludes our comments. Operator, please open the call for questions.

[Operator:]

(Operator Instructions) The first question comes from Gregory Lewis from Credit Suisse.

[Gregory Lewis:]

Thank you and good afternoon.

[Victor Garcia:]

Hi Greg.

[Gregory Lewis:]

Hey there. Congratulations on a good quarter. I had a question on the utilization. It looked like it trended up about what, 50 basis points quarter-over-quarter, but it kind of stayed in the 94% range and didn’t quite get north of 95%. Is there anything specific? Is that like attributed to that not maybe like moving up a little bit higher? Is this sort of, when we think about sort of max utilization for the company, should we kind of think about like 95% as like a ceiling?

[Victor Garcia:]

Well, there’s no difference in our operation from others operations in terms of how high our utilizations can go. I think what’s particularly to our company is we have a number of different legacy transactions where we manage equivalent as a sub manager for third parties and sometimes when demand declines or is not as what it used to be, we get re-deliveries not only from the fleet that we manage, but from some other fleet, and so that tends to have a little bit of a depress in the fact and so I think we’ve been reporting slightly lower utilization than some of our peer group, but has more to do with the particulars of some of the contracts we have. It has no effect on our financial results. If you look at our results and you look at the trends we are getting and the operating margins that we are getting, our results and our operating margins are comparable to and in many cases certainly well in line with our comparable. So I think we have reached in the past higher than 95% and it’s not out. There is no reason why we couldn’t.

[Gregory Lewis:]

Okay. And just kind of thinking about that, I mean and just a really quick follow-up on that question. It looks like direct operating expenses actually ticked up a little bit, even though utilization picked up also. Usually that’s an inverse effect. Was there any reason for that or is it sort of just timing?

[Victor Garcia:]

There’s really a couple of things; one is, just the overall size of the fleet is bigger, so if you have kind of the same utilization rate, you will have some increase of absolute dollars of storage expenses, because you have more, you get its storage. The other factor and bigger factor is that in the third quarter of this year we had a much higher level of activity of lease outs in terms of the absolute quantity of units that were leased out and so we get charged handling fees from our various depots for that activity. At the same time part of the revenue increase we saw is the billing for those expenses, because they are directly passed on to customers. So it’s not always an inverse relationship between operating expenses and utilization. There are many times an operating expenses increase in periods of lot of lease out activity.

[Gregory Lewis:]

Okay great. And then just shifting gears a little bit, if I were to think about CapEx going forward, I mean clearly given, new box prices have trended down simply because there hasn’t been a lot of activity for new boxes. Even mentioned that may be inventories for CIA in the industry are probably a little bit lower than historically maybe they have been. We’re only in October and typically the leasing industry as a whole tends to start to order boxes again in January, February. Is it possible that we could see some new dry box ordering? I mean it sounds like your maybe anticipating a pretty solid year in terms of container demand next year. Is there anyway CAI is in a position to maybe play on the fact that its probably a decent time to be ordering new dry boxes.

[Victor Garcia:]

I think we are always looking at what the demand forecast is going to be. I think what we’ve always said in the past is that we make our investments based on what we are seeing in the market place and as demand picks up and we start getting inquiries I think we would end up ordering more equipment. So we will look at the price of containers and if we fell that it provide for an attractive entry point, there will be some investment there, but when we are talking about much larger volumes, typically we are looking for confirmation that the demand is there and the benefit that we have in our industry is that we can order throughout the year and the lead time is about two months. So we don’t have to speculate in a great way in order to get our equipment into out fleet.

[Gregory Lewis:]

Okay guys, thanks for the time and congratulations on a good quarter.

[Victor Garcia:]

Thank you.

[Operator:]

The next question comes from Steven Kwok from KBW.

[Steven Kwok:]

Nice quarter guys, thanks for taking my question. Just have two quick follow-ups. One was, just wondering with regards to the acquisition that closed on October 19, how should we think about the impact to the P&L? Should we see an increase in the container leasing revenues and a decrease in the management fee revenue?

[Victor Garcia:]

Yes, you would see an increase in container rental revenue and you will see a decrease in the management fee income. You will also see an increase in depreciation expense and interest expense commensurate with the size of the transaction.

[Steven Kwok:]

And that’s all expected to net out to about $1 million.

[Victor Garcia:]

Correct, correct; per quarter.

[Steven Kwok:]

Yes, got it. And in terms of the tax rate, I noticed that it declined sequentially. I was wondering if you could talk a little bit about that.

[Victor Garcia:]

We are always maintaining our revisions on our tax rate every quarter as we forecast comp profitability for the year and the profitability throughout our organization. So we will make adjustments as the year goes along and that will have an impact. I think in general what we have as a tax rate for this year, now is about an estimate of 13%. And I think as we’ve said in prior periods, we would expect that percentage over time, over the next say couple of years to decline to the high single digits.

[Steven Kwok:]

Got it, thanks.

[Operator:]

The next question comes from Helane Becker from Dahlman Rose.

[Helane Becker:]

Thanks very much operator and hi guys. Just a couple of questions. Do you think that there was a pull forward from fourth quarter to third quarter, especially September when people thought there might have be a dock strike?

[Victor Garcia:]

Helane, we really didn’t see that. What we did was work very aggressively towards what is the equivalent that we had ordered in the first and second quarter. Just as we had last year, our market team was working very aggressively to get that equivalent that has been booked out on lease and so these were ongoing discussions that we had and these were largely pickups in Asia for around the globe. So I can’t tell you that I’ve noticed anything because of this expected strike in the United States, where people are significantly pulling forward.

[Daniel Furtado:]

Good afternoon everybody. Thank you for taking the time and nice quarter. The first question I had is on the tax rate. Is it safe to assume kind of the migration to the high single digits to the tax rate will continue to build on the, I guess success for lack of a better word, we’ve seen or is it safer to say at 13, so we get closer to these two years out into the future.

[Victor Garcia:]

Certainly our expectation is 13% for this year. We would expect two to three percentage point decline over each of the next couple of years.

[Daniel Furtado:]

Got you, thank you. And then this may be too minor to breakout, but you have you any detail on the lease revenues out of the rail business for the quarter.

[Victor Garcia:]

We haven’t broken that out. We got most of our equipment at the end of the quarter, I don’t know.

[Tim Page:]

We had about $1.5 million of revenue from rail in the quarter.

[Daniel Furtado:]

Got you. And the guidance from last quarter and the sense of return on capital being very analogous to what you see in the container business, does that still hold today as well?

[Victor Garcia:]

Yes, we keep the rules for how we deploy our capital across all of our different investments the same. So we are looking for the best risk return opportunity we have and we try to be selective.

[Daniel Furtado:]

Great, thank you. That’s all my questions. Thanks Victor, I appreciate it. Thanks Tim.

[Victor Garcia:]

Sure.

[Operator:]

The next question comes from Alex Brand from SunTrust Robinson.

[Douglas Mewhirter:]

Hi, good evening. This is Doug Mewhirter in for Alex. I just had a couple of quick questions. First, would you be willing to disclose your owned utilization rate during this quarter?

[Tim Page:]

It was close to 98%.

[Douglas Mewhirter:]

Close to 98%. And also just a quick -- just for my clarification, pardon the ignorance, but could you define the term lease out and how it relates your business. I think I understand. I just want to clarify that.

[Tim Page:]

Lease out meaning, if it’s a band new lease out, a brand new container, it’s a container move out of the factory and on to a customer for initiation of a lease. If it’s a depot lease out it would be first at least out of the depot, to a customer worldwide.

[Douglas Mewhirter:]

Okay and the relatively high cost that you saw this quarter were primarily attributed to which category of those or both.

[Victor Garcia:]

Those were both.

[Tim Page:]

Both.

[Victor Garcia:]

There was just a lot of leasing activity. Typically depot lease outs is used equivalent in the other one, the other factory leak outs is new equipment. So there was a lot of activity in both areas.

[Douglas Mewhirter:]

Okay, which makes sense, since you’ve certainly been adding to the fleet quite a bit. So my last question and I’ve seen two sort of – there’s a tug-of-war going on here. First I hear Maersk and other large lines talking about their cutting routes, especially Europe and they are trying to cut capacity and they are complaining about too much capacity and then also see a big new build book to place part of these ships, whichever bigger ship with more TEU capacity. Where do you see that and how does that interact with your business? Are you more influenced by the construction or actually what’s out there right now? If you could get the gist of my question; and where do you see the dynamics between supply and the routes and the supply of new ships coming online.

[Victor Garcia:]

Hey, if you are talking about ordering or replacement of ships by our customers, their investments that are based on expectations over the next three or four years, I would say in general what we’ve seen is our customers are looking for ways of becoming more efficient and one way that they believe they can become more efficient is by operating larger ships that are more fuel efficient, as well as can have fewer turns on the ships in order to put more capacity on each ship. Those decisions, other than their confidence level in making those investments, in terms of the expected long-term outlook, other than that, it has no real bearing on what we do. What we’re seeing off the course of this year and even the course of last year is that there has been a separate dynamic. Our customers have largely had a more difficult environment because of excess capacity of ships, even though the trade growths were growing at different levels. Whereas, you know we have been on the container side much more in balance and that has a structural factor to it. First is, the ordering pattern. We can order in two months and get the equipment delivered. So as demand increases, we increase in, and I say we as an industry increase our investment. As demand lags we stopped investing, because it doesn’t make sense to continue to invest if there is no demand. So our industry tends to be in better supply-demand balance than on the shipping side, not to mention the fact that we have most of our business is under long term contract, a and the short term imbalance in supply demand will be greatly mitigated by the fact that we have multiyear contracts.

[Douglas Mewhirter:]

Okay, thanks. Thanks for your answer and that’s all my questions.

[Victor Garcia:]

Great.

[Operator:]

The next question comes from Salvatore Vitale from Sterne, Agee.

[Salvatore Vitale:]

Well, good afternoon Victor, good afternoon Tim.

[Victor Garcia:]

Hi Sal.

[Salvatore Vitale:]

Just a few more quick housekeeping questions. Number one, the $1 million of incremental net income from the shorter investment, now is that $1 million per quarter or $1 million in the fourth quarter, because since it closed October 19, that’s roughly three quarters of a quarter I guess that its going to be reflected in your results, right.

[Victor Garcia:]

That’s correct.

[Salvatore Vitale:]

Okay, so I will make that adjustment. And then the other question that I had was, did you mention earlier how much rail revenue is in your rental revenue line?

[Victor Garcia:]

Yes, Tim mentioned it was about a $1.5 million this quarter.

[Salvatore Vitale:]

Okay, and what would you say it’s the, I don’t know whether its, you want to call it operating income or net income effect from the rail.

[Victor Garcia:]

I’d say its probably contributed couple of 100,000 there. On a fully loaded basis, taking into account all of the marketing people and whatever that we have which is the business, which has been in its infancy.

[Salvatore Vitale:]

Well, so there is a lot of leverage to that, that’s what you are saying.

[Victor Garcia:]

Yes.

[Salvatore Vitale:]

Okay, that makes sense. And then just wanted to ask another question. It seems like the supply/demand dynamic that you mentioned earlier, it’s pretty impressive. I just wanted to make sure that I heard you right. Your view is that there are 2.2 million total TEUs produced this year, is that correct.

[Victor Garcia:]

I think that’s our rough estimate for the full year, I think we have looked at some numbers that I would say that, to-date its closer to about $1.9 million. But extrapolating for the full year, we would estimate for the full year about 2.2.

[Salvatore Vitale:]

Okay, well that’s pretty impressive, because 2.2 when you mentioned roughly, $1.5 million probably gets replaced, which leaves about 700,000 of growth and now 31.5 million TEU fleet; that’s a little over 2% growth. That in a situation where you have global competitors trade is growing at a 5%. So that seems very attractive. Shouldn’t that manifest itself at some point and higher lease rates, given that you have that demand exceeding supply by probably 300 to 400 bases points, not more.

[Victor Garcia:]

A number of factors will dictate where the lease rates are going to be. The amount of demand overall and how competitive people want to be. But I would just in general say that, when we look at just underlying demand, its best as we can kind of forecast at this point, there is an opportunity for a significant level demand in 2013. And typically when they raise substantial demand, at least to generally speaking affirming up with lease rates, because you have various opportunities to consider and we as I’m sure our competitors do look at the best opportunities that they have, given the inventory that they have at the time. So, clearly when the demand is up, it tends to trend up for better returns.

[Tim Page:]

And I’ll just add that even if you just look at what happened this year, we started the year with box prices in the 2,300 range and very quickly into the year where there were signs of demand, box prices went up very rapidly and lease rates went up at the same time that the box prices were going up. So the fact that box prices have fallen during the course of the year, its really not unexpected given that demand is tapered off at the end of year. We don’t see that as a permanent sort of level for box prices. Its more a reflection of the seasonality in the business right now.

[Salvatore Vitale:]

When you say – just following up on the what you mentioned earlier, your forecast of production for the year, is there a level where the manufactures have to maintain production just to keep the factories, utilize at some level. Might there be an incentive for the manufactures to start to build on speck.

[Victor Garcia:]

Typically we don’t see speculative building by manufactures and in part because for two factors; one is, this is going to be a demand driven business. So if there is demand for containers, they will benefit from whenever that demand arrives. So build early, you eventually will get the demand, so it doesn’t make a lot of sense to it. Then also you take inventory risk, because crisis could fluctuate over that period of time in terms of steel cost, which is the second factor. The actually commodity cost, steel and lumber represent the vast majority of the cost of the containers. So those kind of changes in prices could have an adverse effect and although containers are standardized piece of equipment, there is no generic box. So we have our own specs, we have our own colors, we have our own requirements. All of our competitors have similarity their own specifications. So there isn’t a generic box that is built for everybody. So to build on spick you would have to be targeting certain accounts, that you would be expectation to buy those assets and we just haven’t seen that historically.

[Tim Page:]

And even in the beginning of this year we saw manufactories shut down, when demand got to a level, which they didn’t think, was adequate to run their facility. As Victor said, ultimately the amount of global trade is going to dictate what the pool of containers needs to be and you are not going to create excess demand for containers beyond what the global trade ultimately dictates and its not like there is a mode shift or anything else that you can steel demand from somebody else by lowing price. It will ultimately be via some gain, so it doesn’t make a lot of economic sense to price a bunch of capacity at a lower price if you think there is going to be X amount of sale for the give year.

[Salvatore Vitale:]

Okay, thanks very much. That’s helpful.

[Victor Garcia:]

Okay.

[Operator:]

(Operator Instructions) The next question comes from Brian Hogan from William Blair.

[Brian Hogan:]

Good afternoon.

[Victor Garcia:]

Hi Brian.

[Brian Hogan:]

A question on compensation; what are you seeing out there from a competition on both sides, both the standard drive in and the refer side. Have you seen anybody being irrational, doing what they are doing, staying relational.

[Victor Garcia:]

I’ll just say in general, one of the things that we feel about this issue is that most of our competitors are what I would term rational players. That’s not to say the business isn’t competitive, the business is competitive. Our competition increase and decreases during certain periods of time. Typically when you have periods that are quitter in terms of enquiry, then you look at smaller transactions. They get very, very competitive, we’ve always seen that. So I would say what we are seeing now is the after business is competitive, it is largely, the per diem rates have largely reflected chances and box prices, whether you are looking at refrigerator containers or you look at the drive-in container market. So as drive in prices come down, lease rate commensurate with that will come down and it goes up when box prices go up. So I wouldn’t say that the currently environment is (a) typically of what we’ve seen in the past.

[Brian Hogan:]

Sure. You managed fleet acquisition opportunities, obviously you have made several acquisitions and you imagine you continue to expect to do so. What would be the time frame or that people looking to come out to know over there in Germany they are having some end of their life timeframe. Europe to 60% of your fleet is thereabout. Is there an optimum level of owned versus managed and then kind of with that the profitability of from a net income perspective, owning their container versus managing that container. What are the…

[Victor Garcia:]

Sure. I think if we were in a vacuum we’d say what the optimal owned versus management. We would like to keep a balanced between owned and managed. We have to recognize what the opportunities are and in particular environment. Right now the environment we’re in, that particularly with the uncertainty around Europe and the capital markets strength in Europe, that increasing the investment portfolio through programs in Europe were extremely difficult, some of the regulations are changing. So as much as we are looking for opportunities and trying to expand that, I think it’s the environment right now is not conducive for it. On the flip side, what we see is that same environment has produced for us what we believe is an interesting opportunity to invest in portfolios that we currently manage and we have ongoing discussions. The situation where some funds may want to redeem their portfolios early for their investors are discussions that we have and we think it’s a unique position for us to have those opportunities, because those are immediate cash flow opportunities, we typically find that the return is attractive. And certainly from our standpoint where we know the assets, we know the customers really well, there are a lot of reduced risk associated with that.

[Brian Hogan:]

Is it more the profitability of owning versus managed?

[Victor Garcia:]

Well, I think what we’ve always said about the managed portfolio is, we like it because it balances out. We generate earnings without capital being deployed, at least not permanent capital, but clearly when you own an asset you get the full benefits of it. Typically we’ve been managing assets for third party. We get approximate 8% to9% of the cash flow there. So it depends on how you really want to look at it, how you look at your cost allocations and things like that, but we do like to keep revenue generating that the management provides, but clearly the cash flow and the returns that we get on the owned fleet right now are pretty attractive. So we try to do a little bit of both if we could.

[Brian Hogan:]

And kind of with that the investment capacity you are left. I mean this website, your revolver and credit facilities in the ABS deal and you spend an awful lot of cash. So I assume you have ample of capital to do that, I mean to raise any excess anymore.

[Victor Garcia:]

I think the way we look at it, most of our investment is largely done for this year. I think when you look the credit portfolio that we did, that’s $84 million; we have some other investments. A $500 million investment year is a big year for us. So I mean we are pretty pleased with what we’ve done. As you stated, we have over the last couple of years with the long investment we’ve done, we’ve significantly increased the internal cash generating ability of the company and to this point we have been redeploying all of that capital back into the business. So when we look at our capital needs, we budget for the resources we have and when we look at forecasting for next year, we wouldn’t expect. Its the kind of numbers that we are doing this year in terms of $500 million. This is a big year for us

[Brian Hogan:]

Sure, and a couple of things from the balance sheet perspective. Non-controlling interest has somewhat disappeared. I believe that was the Development Bank of Japan. If not, can you clarify that.

[Victor Garcia:]

We mentioned in the press release that we bought two portfolios that we are managing for third parties. Because of the accounting rules associated with that we have, to consolidate those two managed portfolios, because we have purchase option on the equipment at the end of the management period. So we bought back those two portfolios and when we did that we eliminated the consolidation that was with it. So that equipment never really left our books, but now is a 100% owned by us.

[Brian Hogan:]

Sure. And then your command spaces, kind of the still relative to the small part of your portfolio and 4% of 5% of your total revenues, but its seen as pretty decent growth for the last couple of years. Any change in strategy there, just more demand for that product or…

[Victor Garcia:]

Its not really a change of strategy, because we’ve liked direct finance leases. It’s a full pay out lease. You can quantify your return as soon as the customer performs. The difference has been that over the last couple of years really since 2010 on, leasing on a direct finance lease basis by leasing companies has become more competitive, in part because a lot of lending that was down to the shipping lines by their own book was done by European banks and they have been less aggressive in doing that. So it’s a naturally evaluation from that and its part of the overall theme and we have been discussing in terms of moving from ownership to leasing. Some customers do expect to have the asset over the full life, so in some cases they want a purchase option at the end and we are willing to do as long as we find the overall return attractive. So we think it is a healthy environment. It tells you a little bit about the competitiveness of the industry, that there is more and more finance lease activity. And in general I would say, when you look at the average contractual lift that we are seeing, we are seeing longer contracts and again, its an indication of our customers we believe anyway, an indication of our customers expectation of how they need the equipment for and whether or not this is a temerity need or a permanent part of their operating structure, which we believe is to be the latter.

[Brian Hogan:]

Then one last question on the direction of the tax rate. You are investing in these managed fleets bringing them into your owned. Is that you are going accelerate the decline of tax rate or has that had no change and the business becomes a expected gradual decline.

[Victor Garcia:]

I think whether if we are buying from our managed portfolio or we’re investing a new equipment, the relative side of our international subsidiaries investment to our U.S. subsidiary’s investment will be dictating that, that lease rate. So all of our investment since 2008 has largely been into our international subsidiaries. So the more we invest the more it will have an affect. I think what I would say is, the guidance I’ve given on the tax rate is with an expectation about the levels of future investment.

[Brian Hogan:]

Sure. Thank you. Nice quarter.

[Victor Garcia:]

Thank you.

[Operator:]

This time I’m showing no further questions. I would now like to turn the conference back over to Mr. Garcia.

[Victor Garcia:]

Great. Thank you very much. I thank everybody’s interest in this call and we look forward to reporting our next quarter’s results.

[Operator:]

Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation. You may all disconnect. Have a good day.