CAI International, Inc.
Q2 2013 Earnings Call Transcript

Published: 31 Jul 2013

[Operator:]

Good day, ladies and gentlemen. And welcome to the CAI International Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Tim Page, Chief Financial Officer. Please go ahead.

[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 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 document that CAI International has filed with 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:]

Thanks, Tim. Good afternoon. And welcome to the CAI second quarter conference call. Our financial results for the second quarter of 2013 showed continued growth for the quarter on a year-over-year basis and sequentially from the first quarter. This quarter we reported approximately $53 million of revenue, an increase of 33% from the second quarter of 2012 and net income of $16.9 million, 12% above the same period in 2012. We are pleased with this result considering that general economic, slow economic environment within which we are operating. The volume of request for new containers from the factory increased during the second quarter of 2013, from what we experience in the first quarter, which was a positive development during the quarter. Moreover, during July, there was an increase in the number of new containers being picked up and commencing their contractual leases. We expect further pick ups of units during the months of August and September. Our utilization of approximately 92% has remained relatively flat compared to the first quarter. We had expected an improvement at seasonal demand increase, however because global trade growth has been modest this year, we have not seen the increase in utilization that we had expected. Clarkson Research, however, estimate that containerized trade growth will be 5% this year and 6.3% next year, which we believe will support continued strong utilization of our fleet for the remainder of the year. Overall, demand and supply of containers is in our view balanced. We estimate that new production of equipment this year is likely to be closer to $2 million TEUs, approximately 20% below last year’s production. With Clarkson trade growth forecast for next year and the decline in production level this year, we are optimistic about demand for containers in 2014. During the course of the quarter, our operating costs have increased. Our storage and handling increased to $4.3 million during the quarter, compared to $1.8 million for the second quarter of 2012. The increase in storage and handling costs was due to our purchase of several container portfolios over the past 12 months that had equipment off-hire, lower utilization this quarter than the same period last year, and finally, operating expenses relating to full service rail leases. Our gain on disposition of used equipment was also down in comparison to the prior period. We also today announced that we had received a BBB unsecured corporate rating from Kroll Bond Rating Agency. Being an investment grade company provide us with great opportunity to access in various capital markets that will give the company more financial flexibility. We expect to utilize the rating to lower our cost-to-capital and strengthen our overall business. Lastly, I wanted to make a comment about our common shares which have decline in price over the last several weeks. As I stated already, we think business overall has been good and we optimistic about the general market for the reminder of this year and into 2014. In addition to the general market environment, we have significant and exciting our investment opportunities both for assets we current manage and for asset purchases outside of the company that we believe will add value to the company. We will be evaluating those opportunities, as well as ways of improving the valuation of our shares. I’ll now turn the call over to Tim Page, our Chief Financial Officer to review the financial results for the quarter in greater detail.

[Tim Page:]

Thank you, Victor, and good afternoon, everyone. Earlier today we reported our 2013 second quarter results. For the 13th quarter in a row we achieved record quarterly total revenue and lease-related revenue. Total revenue in the quarter was $53 million, 33% higher than the second quarter of 2012 and 4% higher than the first quarter of 2013. Year-to-date, revenue has increased 31% compared to last year. Net income in the second quarter of 2013 was $16.9 million, a 12% increase over the second quarter of last year and 5% higher than the first quarter of this year. On a year-to date basis, net income was $33 million this year as compared to $29.5 million last year, an increase of 12%. Earnings per fully diluted share for the second quarter of 2013 were $0.75, a decrease of 3% compared to the prior year. The decrease in EPS was attributable to a 15% increase to the number of fully diluted share outstanding as compared to Q2 of 2012. At the end of the second quarter of 2013 our total container fleet consisted of approximately $1.1 million TEUs, 74% of which represented our own fleet as compared to the same period last year, where we own 56% of the fleet. As of the end of the second quarter we had approximately $1.5 billion of revenue generating assets on our balance sheet, 96% of which are containers with the balance approximately $53 million being railcars. During the quarter we completed two sale-leasebacks totaling $37 million, both completed in the last few weeks of June and purchased about $60 million of new containers. Through the end of the quarter we had total investment of approximately $265 million, which is above the same level as last year. As we mentioned in our earnings release and Victor mentioned in his comments, overall demand for new containers this year has been less than we expected it to be and we are not experiencing the level of demand we would expect in the traditionally busy summer shipping season. While it’s disappointing that we are not seeing the market demand we expected, one of the great attributes of the container leasing industry is that we can quickly react and adjust investment levels to match changing market conditions. As a result for the time being, we have scaled back our plans for additional new container investment to match current demand levels. As of today, we have what we considered to be a modest level of unlease factory inventory, a level that we would consider to be normal for a company of our size. We are constantly evaluating these trends and we will adjust our investment in new containers very quickly if there is any indication of an improvement in global trade outlook and we do expect that to happen. Fortunately, we have investment alternatives. We expect to continue to see opportunities for sale-leasebacks, portfolio purchase, transactions and railcars. During the second quarter of 2013, we began to see an increase in deal flow in our railcar business. We completed one small railcar purchase transaction at the end of the quarter and have about $24 million of committed transactions which we expect to close during the third quarter, assuming that we satisfy for the complete inspections and final documentation. We expect to have a number of additional railcar investment opportunities over the remainder of the year. Our average overall fleet utilization during the second quarter on a TEU basis was 92.1%, virtually unchanged from the first quarter. We expect utilization levels remain at this level or slightly improve during the third quarter. Management fee income during the second quarter of 2013 was $2.3 million as compared to $3 million for the same period last year. This decline in management fee revenue was expected and is largely a result of the reduction in the size of our managed fleet as we purchased portfolios that used to be part of our managed fleet containing more than 150,000 TEUs during the past 12 months. Total operating expenses in the second quarter of 2013 were $25.1 million, compared to $23.1 million in the first quarter of 2013, an increase of $2 million. The increase in operating expenses was primarily a reflection of three factors. First, depreciation expense increased $1 million as a result of an increase in the size of our own fleet. As a result of the new equipment put on leased during the quarter and sale-leaseback transactions. Second, the gain we realized from the sale of used containers was $0.8 million less this quarter as compared to last quarter. The overall volume of used equipment dispositions in the quarter was consistent with previous periods. The decrease in the gain on sale reflects, first, a slight decrease in our average selling price and was somewhat impacted by the reduced level of global economic activity, and second, an increase in our average net book value at the time of sale as we have sold some newer equipment rather than reposition it. Also impacting the average net book value of equipment was the increase in our GAAP depreciation residual values which was effective at the start of 2012. The final significant operating expense variance was the strengthening of the euro relative to the dollar which resulted in a $0.4 million negative P&L impact. These three areas of increase operating costs were offset by a $0.2 million reduction in MG&A expenses during the quarter. At the end of the second quarter we had total funded debt of $1.1 billion, $580 million of availability in various credit facilities and a leverage ratio of 3.0. In conclusion, some of the commentary we are reading and some of the sentiment in the markets seems to indicate that there's some sort of fundamental shift occurring in the container leasing space. We don't believe that’s the case. Global trade is a bit weaker than we expected for the year and as a result our rate of growth has also slowed. We believe this is a temporary phenomenon and is very important to understand that even though the global container trade market is temporary soften, we are still an exceptionally profitable company with after tax, net income margins in excess of 30% and very strong stable cash flow generation. That concludes our comments. Operator, please open the call for questions. Operator?

[Operator:]

(Operator Instructions) Our first question comes from the line of Gregory Lewis from Credit Suisse. Your line is open and you may proceed.

[Gregory Lewis:]

Thank you and good afternoon.

[Victor Garcia:]

Hi, Greg.

[Gregory Lewis:]

Victor, as I sort of come to my model, it looks like the average per diem rate of the fleet had moved lower in the second quarter, was that the func, could you sort of provide a little bit of color on that, was that a function of the makeup of the fleet or was it a functional of just spreads coming down for new equipment or really just any color you can provide on that would be great?

[Victor Garcia:]

The real -- the primary reason for the change has been that over the course of the first quarter, towards the end of first quarter, we purchased two container portfolios of used equipment that had obviously lower per diems than our new equipment, plus sale-leasebacks that we did during the quarter. So the yields on those were actually above where market rates would be. But because the equipment prices were lower that had the net effect of reducing the overall per diem rate. So its not that margin got compressed, it was more that we had bought -- we had larger portion of mid-life assets being added to the fleet.

[Gregory Lewis:]

Okay. And just as we think about opportunities maybe in the back half of the year, are those types of opportunities that we should think about. So in another words just, how should we balance potential growth with maybe where average per diem rates are going for the fleet?

[Victor Garcia:]

I think, obviously, as a fleet is bigger, any purchase in any one quarter has less and less of an impact on the overall averages. But where we are prioritizing our investments is looking at sale-leaseback opportunities, as well as other kind of rail asset investments and similar to what we've been trying to do in the first half. So, we do have some -- potential for some portfolio purchases within the portfolio that we are also looking at. So, I would say whether or not the mix will be 50% in the second half of the year, it’s hard to say, but there will be a component of it.

[Gregory Lewis:]

Okay. Great. And then shifting gears over to the rail business. I mean, clearly, that was, that disaster, accident up in Canada in early July and I guess, there has been talk about, increase regulations for railcars. Should we -- does that provide an opportunity as sort of we go through high grading -- potential high grading of the railcar industry? Is that going to provide -- should that provide like, what type of CapEx potentially, do you think that going to rise or is that really not an opportunity then more CAI get involved?

[Victor Garcia:]

I think, just to be clear, we don't have that kind of equipment size and those type of hazardous cargo tanks. We don’t have them in our fleet. And so it’s not a focus for us given our level of investment in railcars right now. It hasn’t been a focus and I don't expect it will be a significant focus for us. But anything that provides more of a service element and requires people to have greater care in how after such a use should in the long run be a positive thing. But really for us right now where we are, it’s really not relevant and we don’t have any exposure to that particular car type.

[Gregory Lewis:]

Okay, guys. Hey, thank you for the time.

[Victor Garcia:]

Great. Thank you.

[Operator:]

Thank you. And our next question comes from the line of Bob Napoli from William Blair. Your line is open and you may proceed.

[Bob Napoli:]

Thank you very much. Just got a question on, I guess, on the investment opportunities and your thoughts on returns available to you on those opportunities and looking at sale-leaseback, I think you mentioned, Victor and Tim, sale-leasebacks portfolio purchases in rail versus buying new cars for now? Are those, are the returns on the investment that you’re looking at, I mean, this quarter your return on equity was just shy of 20%. What types of returns do they generate and how do you think about whether to make those investments versus other ways of increasing shareholder value?

[Victor Garcia:]

We’ve had the strategy over the last couple of years of trying to broaden our business to have as many investment opportunities that we can be comfortable with in order to maximize the return on the capital that we can get. So our effort to get into the European specialized business, our effort to get into the refrigerator container business, our effort to get into the railcar business has all been geared around that very thing of broadening out the business both from a downside risk protection as well as for opportunities. So we’re continuing to focus on that. And I would say we’ve been in railcar business now for over a year. And we continue to establish ourselves as a player in that business and we see opportunities that we think are attractive, very attractive. And we’ll look to pursue that. We will not pursue investment, I mean, the commentary relating to our share prices that are clearly we’re disappointed with where our shares are trading. And our focus will be on how we can better properly get an appropriate valuation, leasing my estimation of appropriate valuation. And we’ll look at different ways either of returning capital to shareholders or in one form or another. In certain cases, we view that our own shares are a better investment and returning capital in terms of evaluation to investors as a consideration and we’re very focused on that.

[Bob Napoli:]

Thanks. And just a question on, if you do get to the point where return in capital makes more sense than making the investments that you see to drive the valuation, maybe you can do some of both. But just curious how much cash do you have available with the low tax rate and the tax structure that you have, how much capital do you have available without having to pay taxes if you were to bring cash back into the U.S. to make share repurchases? Any one of you can help me with that?

[Tim Page:]

If you just -- as far as share repurchase, we have equity capitals like any other company we can just buyback shares. As far as dividend distributions, something like that, it’s depend on a number of factors including forecast of profitability, payout ratios and stuffs like that. But under a number of different scenarios, we believe that we have well over a decade to much longer than that before we have a concern about repatriation of capital back to the U.S.?

[Bob Napoli:]

Thanks. Then last question, just on, one of your competitor on the call last week suggested that they thought that shippers were lot more activity in the market and it was more like a 50-50 market in 2013. And they didn’t know if that was temporary or long term but I think -- I'm not sure do you agree with that statement or what do you think the shippers are as far as being involved in the industry. Thank you very much.

[Victor Garcia:]

I think as I said in the first quarter what we’re seeing in terms of -- we're seeing a number of shipping lines that historically have bought containers -- they buy containers. The biggest factor is that we can look at is that overall demand created because of moderate trade growth has been the biggest factor. So whether it’s 50% shipper-owned containers versus 60%, I think the biggest factor is that we’ve had a more muted overall demand cycle and that’s really the biggest factor. I think if demand were to pick up a little bit more, I think we would see a lot more leasing activity. And I think that that really is a driver, the rest of it is a little bit more subjective in terms of the actual percentages between owned and leased.

[Bob Napoli:]

Thank you very much.

[Victor Garcia:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Steven Kwok from KBW. Your line is open and you may proceed.

[Steven Kwok:]

Hi. Thanks for taking my questions. Just really have to follow-up, one was, in terms of, how should we think about the depreciation going forward. I think in China quarter, we saw like 47% year-over-year increase while the container leasing revenues increased about 38%. Just wanted to see what the dynamics would be like going forward?

[Victor Garcia:]

Well, obviously, we’ll take the most recent quarter that we’ve provided and that’s a good initial estimate as to what the third quarter is going to be and then factoring in some additional investments. But year-over-year the number will look more short but I think if you’re going to look at model and trying to get a base number, obviously the most recent quarter is where you work from in and then you wouldn’t see as larger jump sequential quarters as you would year-over-year.

[Steven Kwok:]

And then in terms of the new debt rating, I was wondering are there opportunities to lower you debt cost?

[Tim Page:]

We’re very pleased about getting an investment grade rating. We think it opens up a number of opportunities in terms of the types of financing structures that we can have and that runs up and down the balance sheet. Overall, it’s a -- we're firm believer that long-term success in our business and for any finance business is to continue to improve your access to capital and your cost of capital. And being investment grade is a step in that direction for us. And so we want to continue to do that, if we want to continue to grow and excess more capital. It’s an evolutionary process. And we’re going to look at areas where we can gain additional, financial flexibility and reduce cost of capital. So we will be looking at different ideas.

[Steven Kwok:]

Are there any specific tranches that say where it could be half of that could go down?

[Tim Page:]

No, I don’t want to get into specifics about the kind of facilities we’re looking at in this call. But we are -- we initiated this rating process for a purpose and we’re looking at it.

[Steven Kwok:]

Okay. Thanks for taking my questions.

[Tim Page:]

Thank you.

[Operator:]

Thank you. The next question comes from the line of Michael Webber from Wells Fargo. Your line is open and you may proceed.

[Michael Webber:]

Hey, good afternoon guys. How are you? I just -- Victor wanted to jump back to, I guess, I could comment early. I think within your leases is well about it. Thos things have slight pick up and pick up, I guess, activity towards the beginning of the second half of the year. Without getting into specific counterparties, not anyways you would do that but, would you kind of classify that as coming from larger lines or half towards the smaller end of your counterparty base or could we even make that distinction?

[Tim Page:]

I would say that it's a little bit across the board, not to be too general. But we are seeing the global carriers with some more interest as well as some of the regional carriers. So, I think what we are finding this year is there is similarity across all of the different regions but some growth coming in the U.S., a stabilization of Europe and continued level of growth in Asia overall. So, that is met that although when you take everything into account it's fairly muted, in terms of a 5% kind of global trade growth, but it has been broad based.

[Michael Webber:]

So you wouldn’t classify, it’s across the board not maybe shorter hauls versus longer hauls just kind of -- it's pretty even?

[Tim Page:]

While the other way, we can really get an insight into that is based on who the customer is. So, if it’s a regional -- we have a pretty good indication it’s a global carrier then it could be either or.

[Michael Webber:]

Yeah. Makes sense. You mentioned the pretty competitive pricing environment certainly in line with the last quarter and we heard [that’s how]. Can you maybe talk a little bit about how that's trended specifically kind of quarter-over-quarter as we move through the summer, maybe kind of where our yields, maybe not your yields, but we are seeing deals getting done in the market. We are now participating in with that incremental price point, like on yield basis, kind of, where our net spreads right now?

[Tim Page:]

I don’t want get into specifics about where yields are on a call, but the way I would characterize it my estimation. So first quarter, we had a fairly quiet period and clearly we started picking up in the second quarter but people had been anticipating a higher investment levels or leasing pace and although increase have gone up, I think people have been working down some of their inventories. So yields have gotten compressed. So the one comment I will make is we are very focused on as a management team to not just sit and wait for the market to give us what the opportunities are. We are going to continue to pursue opportunities that are higher yielding opportunities. We are not going to sit and just accept that. Rates are going to be low and we have to invest in containers and because that's what we do, our new containers. We are challenging our whole organization to find attractive opportunities that provide good long term value.

[Michael Webber:]

All right. I mean, I have just kind of a along that line of thought, you get -- you are building out the rail fleet but typically returns are a bit inside of drive ins from a railcar perspective, has that spread narrowed or are you thinking really outside the box in kind of towards the other areas even outside of rail?

[Tim Page:]

I think although the volume of activity that we had on the rail side, we have seen actually better opportunities on the rail side than we have seen on the container side. It’s -- we've always said the rail market is a very large market. There are different elements to it. Prices are very competitive with financial institutions but we have gone into it with a focus on abandon where we want to pay. And we are container pursuant and we were finding consistently attractive opportunities.

[Michael Webber:]

Got you. Okay. And just kind of coming at the U.S. based cash question as someone got at it earlier, let me kind of coming at it from a different angle. What are your train earnings here in the U.S. and you are certainly building out that U.S. based asset fleet such that you have going to have sustainable cash flows in the U.S. at a certain point. And I think you mentioned you got a decade before you start running into repatriation issues. As the investment opportunity internationally, it’s called a bit more subdued currently and may be in the '14. And as you are looking for more opportunities to build out that U.S. base kind of cash flows stream, is there a level in mind or a target mind at which point you think about a dividend just from a sustainable cash flow perspective. Though you are not actually keeping under retained earnings and I guess, how do you think about that in what's the kind of a shifting environment as you have allocate more capitals in the U.S. and you probably are showing to anticipated?

[Tim Page:]

Well first of all, the issues that of necessarily retained earnings, but equity capital, or capital in the US. So we have most of our capital in the U.S., but I would -- two comments I would make to clarify the previous statement. The first is, our first priority is to make sure that we are doing the right investment decision and that includes our own capital. We are not going to put capital work at low yielding returns for the sake of putting capital to work at low yielding returns. The issue in terms of dividend, the long-tem issue we’re very -- we are very focused on it and it’s a discussion with the board and we are working internally on figuring out regardless of what decision we make, what is going to be the thing that some locks value and show us the strength of the company.

[Michael Webber:]

Great. That's helpful. Thanks for the time guys.

[Tim Page:]

Thanks.

[Operator:]

Thank you. And our next question comes from the line of Helane Becker from Cowen & Company. Your line is open and you may proceed.

[Helane Becker:]

Thanks very much, operator. Hi, guys. Thanks for the time.

[Tim Page:]

Just on a nip-pick question on the tax rate. So it was down to I think 10.4% from 13. -- what's your annum, just kind of wondering is that a function of the portfolio that you bought, is that what happened there?

[Tim Page:]

No. It's the function of every quarter we take a look at where we think we are going to end up at the end of the year. The mix of revenue or income from various jurisdictions and estimate what we think our ultimate taxable income is going to be and then ultimately what tax we are going to statutory, if you will, or GAAP tax we are going to have on each entity. And then we adjust our total year-to-date tax provision to that level and that causes the quarterly tax rate to move around a bit from one quarter to the next when we make that adjustment. So it had nothing specifically to do with anything that we bought. It's just a reflection of the mix of where we are making our income this year.

[Helane Becker:]

Okay. All right. So then when we think about it for modeling purposes going forward, are we thinking about it being in the same relative level?

[Tim Page:]

You should look at it what the average is for the year-to-date.

[Helane Becker:]

Okay. Well, that's helpful.

[Tim Page:]

… which is at 11.4%.

[Helane Becker:]

Okay. That's actually hugely helpful. Thanks very much and I am okay with the rest of the stuff. Thank you very much for the time.

[Tim Page:]

Sure.

[Operator:]

Thank you. And our next question comes from the line of Doug Mewhirter from SunTrust Robinson Humphrey. Your line is open and you may proceed.

[Doug Mewhirter:]

Hi, good evening. I just had one -- actually one clarification. Tim you mentioned, I think you bought 60 million of new boxes in the second quarter and you mentioned to sale-lease back number, but I had missed the number? Could you clarify that please, or …

[Tim Page:]

37 million of sale-leasebacks.

[Doug Mewhirter:]

Okay. Great. Thanks for that and my second and final question, just remind the railcar yields, if you would, if normalize on a cash-on-cash type yield they are similar to the broad range of yields you can get from containers, is that correct?

[Victor Garcia:]

Well, again, as in this kind of open forum, I don’t think we want to get into yield. I’d just say when we look at we measure our investments on the same basis. We look at long-term unlevered IRRs and that goes for all the different asset classes and we do our best case of estimating the future cash flows, and what kind of yield that does, what we say is that those yields today are -- we find them to be more attractive than what say, certainly on the new container cost right now.

[Doug Mewhirter:]

Okay. Fair enough. And remind me what the average lease term in railcars, is it similar to containers?

[Victor Garcia:]

We’ve got leases that are typically three to five years.

[Doug Mewhirter:]

Three to five years. Okay. Thanks. That’s all my questions.

[Victor Garcia:]

Yeah.

[Operator:]

Thank you. And our next question comes from the line of Sal Vitale from Sterne Agee. Your line is open and you may proceed.

[Sal Vitale:]

Good afternoon, Tim. Good afternoon, Victor.

[Victor Garcia:]

Hi Sal.

[Sal Vitale:]

First, quick question for Tim, just the clarification on one of the cost items you mentioned earlier. I think you said that the effect of the euro versus the dollar, stronger euro had a negative $400,000 impact. Can you clarify was that foreign exchange gains, is that in the foreign exchange gains line?

[Tim Page:]

Yes.

[Sal Vitale:]

Okay. And what was that, was that at all significant last quarter?

[Tim Page:]

It was the other direction last quarter.

[Sal Vitale:]

The other direction, okay. And then just, Victor, just a quick question on the comments, your closing comments, you had mentioned that you had some exciting opportunities for -- on the manage portfolio side and on sale-leasebacks? So, just and thinking about that in the context of the broader discussion of the potential for returning cash to shareholders? Should we draw the conclusion that one of the factors that’s holding you back right now from initiating a dividend is the fact that you might have some significant managed portfolio deals or sale-leaseback deals that could occur in the next three to six months and you just want to, you'd rather not lever up a little bit by initiating a dividend? How do we think about that?

[Victor Garcia:]

Well, again, without getting into that, generally speaking, we say, when we’re looking at -- we are looking at some opportunities and I don’t want to elaborate into what it is. We have to weigh those opportunities and the impact those opportunities have before we implement anything else. But that being said, when we look at our priority, my priority is getting what we believe is a fair value for our shares, in terms of valuation and it’s my belief and my opinion that we need that’s where our focus needs to be. How we accomplish that is, something we have to pursue, but the priority just to make clear is, we believe that we have a very attractive franchise with significant opportunities and we need to first and foremost make sure how we can have that best reflected in the valuation of the shares.

[Sal Vitale:]

Okay. Yeah. That’s helpful. And then, if I could, just, on that topic of the potential CapEx, it seems that if I just, if I took that at all the numbers correctly, it seems that your year-to-date CapEx is about, you said $265 million and you mentioned roughly, I think $24 million of railcar CapEx? So that gets you close to $300 million? And it sounds like without getting into what the potential size of whenever potential transactions you’re looking at that it could be fairly significant. So it seems that a $400 plus million overall CapEx number for the year is not outside the realm of possibility. Any comments on that, I mean can you provide any color on that?

[Victor Garcia:]

Sure. I guess, we’re -- I would take you back to the beginning of this call where we said overall the market is showing a general moderate growth. So I don't when we talk about significant opportunities and things like that, the things that we might see in the market that might come to fruition or not, well, I would give some level of direction is look at the kind of things that are more day in day out and where we are saying that, I would caution and putting significant kind of growth CapEx numbers in there given that we are operating in a more muted growth environment this year.

[Tim Page:]

So maybe another way to say that is, on the new container side we probably don’t see a lot of activity. So the activity would come -- is going -- would come from sale-leasebacks and portfolios and railcars and that’s much more transactional-oriented, little more difficult to predict the timing and certainty. So it’s not like, as Victor said, it’s not as easy to say, okay, growth is going to be 4%, so we’re going to have a significant amount of CapEx related to growth in the container trade from new equipment.

[Sal Vitale:]

Right. So used equipment side is definitely more opportunistic, that’s fair to say?

[Tim Page:]

Yeah.

[Sal Vitale:]

Just on that topic regarding your current leverage ratio, are you comfortable with where it is now and if there's some, let’s call it significant transaction that you might undertake in the near future on the horizon? Is the potential increase in leverage is that something you are comfortable with?

[Victor Garcia:]

Yeah. Well, we’re comfortable with our leverage where we are and I don’t think that there is anything that we’re going to do that would make us uncomfortable from the…

[Sal Vitale:]

Okay.

[Victor Garcia:]

So I guess, long-term, yeah, we’re comfortable where we are.

[Sal Vitale:]

Okay. That’s helpful. And then just the last question and this was mentioned earlier. It seems like your per diem had a step down sequentially from 1Q to 2Q. If your additional CapEx for the rest of the year is probably going to be on the used side, I guess, it would be fair to assume that we probably see a continued decline at least and maybe more modest decline, but a continued decline nonetheless in your average per diem rate, is that fair to say?

[Victor Garcia:]

Well, if you measure it on a TEU basis. But if you look at it in terms of yield, in terms of revenue divided by the revenue-generating assets or average of revenue-generating assets, we don’t think it would go down from that perspective. But if we’re buying older equipment that has lower average lease rates on a TEU basis, yeah, it would go down on that basis.

[Sal Vitale:]

Okay. That makes sense. Thank you very much.

[Operator:]

Thank you. And our next question comes from the line of John Mims from FBR Capital Markets. Your line is open and you may proceed.

[John Mims:]

Hi. Good afternoon. Thanks guys for taking the questions. Couple things for me, Tim, on when you said the $2 million in TEU production, I miss that, what was the number you gave out as far as just from an industry standpoint being down relative to last year?

[Tim Page:]

I think that was Victor that mentioned that.

[John Mims:]

Okay.

[Tim Page:]

And our, I guess, best industry intelligence that we have right now puts overall container production for this year at somewhere around $2 million TEU range.

[Tim Page:]

Right. It's down from about 2.5 million last year…

[John Mims:]

Down from 2.5.

[Tim Page:]

I mean that's what -- that's our estimate for the full year. Obviously, it is going to change up and down, but we estimate that through July, it is above 1 million TEUs built. So, that would mean second half of the year similar amount.

[John Mims:]

Sure. That makes sense. On that same thread, where are prices being quoted now and how far you are -- to what extent people you -- in the industry you or anyone else is buying new containers? How far out are lead times and what's the average CEU -- cost per TEU?

[Tim Page:]

Well, container -- container prices have moderated. They are around $2,100 on a 20-foot equivalent basis. Lead times, we can get equivalent as in most periods we can get equipment within say six to eight weeks.

[John Mims:]

Okay. So that hasn't really come down a whole lot. Now switching a little bit, looking at the storage expense and obviously that -- that ticks off, but if I do a little quick math and look at your storage expense per idle box, that's up pretty significantly year-over-year as the boxes go on storage because that makes sense. But, when you look at your fleet growing and utilization staying about the same and you see global trade (inaudible) and slowing kind of across the board, at what point -- how much storage capacity is there for you and for the industry? At what point is that cost on a per box basis really start to ramp up if utilization stays kind of the 92% level or even trends back down to 90% or is there some way, I mean, do you have some flex there as far as having storage available at the current prices or how should we be thinking about that?

[Tim Page:]

Again, just to be clear, most of the reason for the storage cost going up is the fact of taking equipment that we bought over the last 12 months, that was used equipment in our fleet and with a component that was -- a significant component that was off hire, and moving it on to our own books and now incurring those storage costs directly. The investments we made were with the recognition that a component of those assets were off hire. And so with that the investment overall and the portfolio was still very attractive to us but that’s the bigger thing. So, again to answer your question, in terms of where do we run into capacity, one of the problems that is out there is that there is limited storage capacity. More, there are fewer and fewer depots available that have land to be able to store containers and in certain locations even at the current utilization levels, there are some capacity constraints. Largely what that means, what happened last is that the biggest area of capacity for containers is still back in Asia, which is where we want the containers to be. We would work with our customers to maximize what we could do to bring half of the units be brought back to Asia, which is where we want the containers to be any way. And there is ample capacity in Asia for our containers to be dropped off.

[Victor Garcia:]

Just one additional thing on storage, I mean, it’s kind of a catch-all at storage handling. There are some other items in there that move up and down from quarter to quarter, but one of the factors is that, it also includes cost related to repair and maintenance in our rail business which didn't exist in the first half of 2012. So we have some full service leases which have expenses related with upper maintenance that --- that are in this year that weren't in last year. So it's not all containers.

[John Mims:]

Right. Okay. That's helpful explaining that ramp up, but just looking at Asia and the depot capacity, even if there is ample there, are prices going up. I mean are they charging more per space in the depots?

[Tim Page:]

No. It has been fairly stable. No, we wouldn't expect -- we think we have ample capacity out there and relationships with depot is that we don’t expect any way a material increase on a cost per unit basis.

[John Mims:]

Okay. One last one, Tim, on the -- going back to the CapEx on the purchase containers on the new container side, $60 million this quarter and I know that visibility is limited and we shouldn’t expect that you would be putting all the money to work under containers. But what is kind of a low-level run rate, we should be thinking about? I mean is $60 million trending down on a quarterly basis reasonable or does that number put zero or how should we think about that just from a modeling standpoint?

[Tim Page:]

From a -- I think I said in my commentary that we’re not expecting to order a lot of additional new equipment for the year at this point. In that we have, what we think our adequate levels of factory inventory right now. So I don’t want to give specific numbers, but I would certainly say that you could expect less CapEx on new equipment for the rest of the year than we did in the first half of the year. Again, that could change in two weeks, if the market changes.

[John Mims:]

Right.

[Tim Page:]

So, it mean we are constantly adjusting how we view this. So.

[Victor Garcia:]

As just at the base level of in terms of what's going to show up in the third quarter, we have about $24 million that we swept the pay for main factors, that will show there as. Anything that we probably will down with the terms of we have we show up as CapEx in the fourth quarter.

[John Mims:]

Okay.

[Victor Garcia:]

So that's kind of the base level of investment that we sought to pay for it, the $24 million.

[John Mims:]

And how many TEUs do you have on the ground with manufacturers?

[Tim Page:]

Well, we don’t want to get into that in this kind of power form, but just say we are -- we believe our unbooked inventory today is at around the base level of what we need to have in equipment types and locations across all of China. So we think we are actually in a very good position in terms of inventory.

[John Mims:]

Okay. Fair enough. All right. I will turn it over. Thanks a lot.

[Tim Page:]

Thank you.

[Operator:]

Thank you. (Operator Instructions) Our next question comes from the line of Kevin Sterling from BB&T Capital Markets. Your line is open and you may proceed.

[Kevin Sterling:]

Thank you. Good afternoon, Victor and Tim.

[Tim Page:]

Hi.

[Victor Garcia:]

Good afternoon, Kevin.

[Kevin Sterling:]

Most of the questions have been answered. I just have one question. It relates to your gains on disposals of equipments. It was down this quarter with some of the drivers to why those gains were down and should we think about smaller gains going forward?

[Victor Garcia:]

The drivers as I mentioned, couple of them, a slight decrease in the average sales price probably not even enough to be significant or statistically significant. But the main factor was that we’ve got an increase in the average net book value of the equipment that we sold. Couple of factors there, one, we sold some newer equipment, so the percentage gain if you will is going to be lower when we are selling newer equipment. It just makes sense for us to do that. And then we also had some equipment that we have acquired in the last few years that we expected to get back and relative to the net book value relative to what we sold it for was a little bit lower than some of our equipment that we acquired a number of years ago. But we had kind of built that into the assumptions when we acquired that equipment. So, it's really more a function of net book value rather than selling price. And on a go-forward basis, I would say that the gains are going to be somewhere in kind of the average range between if the first and second quarter of this year on a go forward basis, at least on a per unit basis, now the quantities may fluctuate, but I would say, on a per TEU basis or per unit basis they will be relatively consistent to what they’ve been in the first half of this year.

[Kevin Sterling:]

Okay. That’s all a head. Thanks so much for your time.

[Victor Garcia:]

Thank you.

[Operator:]

Thank you. And our next question comes from the line of Sal Vitale from Sterne Agee. Your line is open.

[Sal Vitale:]

Hi. Just a quick follow up. Tim, on that topic of the used sale prices, so they’ve tick down just a little bit, what is the latest sale price, what is the latest quote on the sale price and used container?

[Tim Page:]

Well, we don’t really quote on about sale price, it’s regionally based, so different market have different prices but, historically, we’ve been able to get $1,400 to $1,500 on a 20 foot container equivalent.

[Sal Vitale:]

Right. And so it’s down a little bit from that range, is that we assume?

[Tim Page:]

It is as low single digits compared to the first quarter, so it -- like I said it, it could just be anomaly is to the mix of where the containers were sold because it’s based on regions and also that, it could have been a mix issue, the real driver is just that the average net book value has increased. So, as we look at the gain on sale going forward, I think as kind of a base level what we reported this quarter will be a reasonable estimate going forward.

[Sal Vitale:]

Okay. And then, Tim, earlier you mentioned, what the utilization was, can you provide what the utilization was for the used fleet in 2Q and just remind us what it was in 1Q?

[Tim Page:]

For the used fleet

[Sal Vitale:]

I’m sorry, for the owned fleet, what I meant to say?

[Tim Page:]

It was 92.1% on a TEU basis…

[Victor Garcia:]

That’s a total…

[Tim Page:]

… that’s a total, like we don’t disclose what the owned fleet utilization is.

[Sal Vitale:]

Okay. It’s probably higher than the 92% on the reef?

[Tim Page:]

It is higher because we get the ability, two factors for being higher. One is, we are constantly putting new investments into the fleet, those coming at 100% utilization and we also have a more proactive sale program on our older equipment, we have complete discretion on being able to sale our owned fleet. So those factors are largely to do with the discrepancy. And I would say that, right now I think about 72% of our fleet is owned, so it’s becoming primarily an owned fleet.

[Sal Vitale:]

That’s helpful. And just last question, on the sequential revenue, so the sequential revenue, rental revenue was up about 4% in 2Q? I think it’s fair to say or can you comment, it’s -- I think it’s reasonable to assume that is going to be higher than that given that you’ve seen additional pick ups in July and you expect more in August?

[Tim Page:]

Yeah. I mean, we are getting new equipment put on lease. We also have equipment that we dispose it on a regular basis, so the level of increase will be moderate.

[Sal Vitale:]

Okay. Thank you very much.

[Victor Garcia:]

Thank you.

[Operator:]

Thank you. And at this time, I’m not showing any further questions. I would now like to turn the call back over to Victor Garcia for any closing remarks.

[Victor Garcia:]

Thank you, Operator. I appreciate everybody attending today’s call and we look forward to reporting our third quarter results in just a few months. Thank you very much.

[Operator:]

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