CAI International, Inc.
Q3 2014 Earnings Call Transcript

Published: 29 Oct 2014

[Operator:]

Good day, ladies and gentlemen and welcome to CAI International Q3 2014 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 is being recorded. And I would like to introduce your host for today’s conference, Timothy Page, Chief Financial Officer, please go ahead.

[Timothy Page:]

Good afternoon and thank you for joining us today. Certain statements made during this conference call may be forward-looking and are made pursuant to the Safe Harbor provisions of Section 21E of the Securities Exchange Act of 1934, and involve risks and uncertainties that could cause actual results to differ materially from our current expectations, including but not limited to economic conditions, expected results, customer demand, increased competition and others. We refer you to the documents that CAI International has filed with the Securities and Exchange Commission, including its Annual Report on Form 10-K, its quarterly reports filed on Form 10-Q and its reports on Form 8-K. These documents contain additional important factors that could cause actual results to differ from current expectations and from forward-looking statements contained in this conference call. Finally, we remind you that the company’s views, expected results, plans, outlook and strategies as detailed in this call might change subsequent to this discussion. If this happens, the company is under no obligation to modify or update any of the statements the company made during this discussion regarding its views, estimates, plan, outlook or strategies for the future. I will now turn the call over to our President and Chief Executive Officer, Victor Garcia.

[Victor Garcia:]

Thanks, Tim. Good afternoon and welcome to CAI's third quarter 2014 conference call. This quarter, we have reported a revenue increase of 10% from the third quarter of 2013 and rental revenue increased over the same period by 9%. I am pleased to report that for the quarter, we have reported $16.4 million of net income or $0.77 per fully diluted share. Included in the results was a $2 million of revenue and $1.7 million of net income related to a settlement with the customer on prior amounts due. Excluding this benefit, our net income attributable to CAI common shareholders was $14.7 million or $0.69 per fully diluted share. These are outstanding results for the quarter considering the overall marketing conditions that prevail. We are pleased to report that we had a number of positive developments this quarter from our container and rail businesses. During the quarter, we leased out 35,000 CEUs containers from the factories that contributed additional income this quarter. We were also successful on leasing more units from our depot stocks which has led to an increasing utilization of our fleet from 92.1% at the beginning of the quarter to 94.1% at the end of the quarter. In some locations, we have eliminated our stock of equipment or have low inventory levels. Increasing utilization and thereby reducing our higher cost such as storage expenses has been an important initiative for us. We have made significant improvement in this regard during the quarter and we will continue to make it a priority to increase our overall profitability. We also continue our momentum in our rail business. During the quarter, we committed to purchase an additional 500 railcars for delivery in 2015 and 2016. We now have 920 railcars being delivered by the end of 2015 and have over 90% of those cars already under letters of intent on attractive terms with average lease term of seven years. We now owned or are committed to purchase 106 million of railcars, and thus rail assets are expected to become a more significant contributor to our future results. The financial returns we expect to receive from our rail investment currently exceed the financial returns we are finding in the container business. With the strong demand outlook for rail assets and the overall business diversification that rail provides to our company, we will continue to look for additional investment in rail over the coming year and are looking for opportunity to future enhance our position in that marketplace. The committed equipment we have in place will give us significant momentum for our company in 2015. During the quarter we purchased an additional 600, 000 shares of our company stock. Completing the 1.5 million share repurchase program that the Board of Directors approved earlier in the year. The Board of Directors continues to evaluate the best opportunities to increase long-term shareholder value and may consider further share repurchases in conjunction with reviewing investment opportunities for our company, our financial position and overall market conditions. We have been watching the recent news regarding world economic growth particularly in Europe. For 2015 it is still expected that world economic growth will increase from the level of 2014, and thus demand for containership remain strong. Although, we are watchful for any changes in demand for containers, we continue to see demand for equipment in Asia and Europe and expect utilization of equipment to remain strong over the coming year. For rail, we continue to see strong demand for equipment and limited incremental manufacturing capacity for delivery in 2015, and thus we expect the overall demand for rail equipment and utilization to remain strong over the coming year. Pricing levels for many car types have been improving and we are looking for opportunities to extend leases on the long-term basis and improved rates. I will now turn over the call to Tim Page, our Chief Financial Office, to review the financial results for the quarter in greater detail.

[Timothy Page:]

Good afternoon everyone. Earlier today we reported our 2014 third quarter results, was the 18th quarter in a row we achieved record quarterly total lease related revenue. Total lease related revenue in the quarter was $58 million. During the quarter, we received $2 million settlement from a customer related to lease obligations pulling back a number of years. Adjusting for this settlement, rental related revenue was 6% higher than the third quarter of 2013 and 4% higher than the second quarter of 2014. The increase in rental related revenue was driven by strong new equipment leasing activity in the quarter and by an increase in our overall utilization rate during the quarter. In the quarter total revenue was $59 million and adjusted total revenue was $57 million with adjusted total revenue being 6% higher than the third quarter of 2013 and 3% higher than the second quarter of 2014. Net income attributable to CAI common stockholders in the third quarter of 2014 was $16.4 million. Adjusting for the customer settlement I just mentioned, net income in the third quarter was $14.7 million, $0.7 million or 5% better than adjusted net income for the second quarter of 2014. As of September 30th, 2014, our total container fleet consisted of approximately $1.2 million CEU, an increase of 4% compared to the third quarter of 2013 and 1% more than the second quarter of 2014. CAI's owned fleet is now $1 million CEUs comprising 81% of our total fleet. Our owned fleet has grown 10% over the past year and 3% as compared to the second quarter of 2014. We ended the third quarter of 2014 with proximately $1.6 billion of container revenue assets at approximately $80 million of railcar assets. As we commented in our second quarter earnings call, we have been seen an encouraging steady upward trends of utilization over the past several months. Our average owned fleet utilization in the third quarter increased to 130 basis points over the second quarter. At the end of the third quarter, it increased an additional 10 basis -- excuse me -- an additional 80 basis points and has increased an additional 10 basis points this month. We expect utilization to remain strong through the remainder of the year. The improvement in utilization has resulted in decreasing container storage expense. Expenses related specifically to container storage was $3.3 million in the third quarter, accounting for our about 50% of the total $6.5 million third quarter storage handling and other direct equipment expense. The run rate for container storage expense at the end of the quarter was about 10% below the average rate we experienced in the third quarter. Gain on disposition of used equipment in the quarter was $1.2 million, $0.3 million less than the second quarter. This lower gain is the result of a slight increase in average selling price along with an increase in the average net book value of equipment being sold, because the equipment being sold was slightly newer than what has been sold previously. I addition, we saw a slight decrease in the volume of sales at the end of the quarter because increasing utilization reduced the volume off hire inventory particularly in Asia. On a go-forward basis, we would expect there to be some modest price pressure in the fourth quarter and the volumes might somewhat seasonally lower resulting in lower gains on sale in Q4. MG&A expense in the quarter was $6.7 million was in line with our expectations and is a level we expect to see over the next several quarters. Interest expense was $9.3 million in the quarter and is likely to remain at this level in the fourth quarter. Our effective tax rate in the quarter was 8%, and on a year-to-date basis is roughly 10%. 10% is the level we would expect to be reflective of where we will end the year. During the third quarter, total purchases of equipment were $68 million. Year-to-date capital expenditures are $226 million. At the end of the third quarter of 2014, we have total fund to debt of $1.2 billion and approximately $660 million of availability in various credit facilities. Net of $40 million of various restricted bash balances our debt to tangible net worth leverage ratio at the end of the third quarter was 2.81. On October 1st, we closed an amendment to one of our term loan facility that increased the fund amount to $150 million, decreased our interest cost from LIBOR plus 225 basis points to LIBOR plus 160 basis points and extended the term for five years. During the quarter, we purchased approximately 0.6 million of our shares completing the 1.5 million share repurchase program our Board had authorized earlier this year. In total, we purchased approximately 7% of our fully diluted shares outstanding. In conclusion, the third quarter saw continuation of a number of positive trends. Solid new equipment lease out volumes in the third quarter should result in some marginal revenue improvement as we enjoy the full quarter impact and the fourth quarter of new equipment we lease out during the third quarter. We should also get some revenue momentum from the continued improvement in our utilization. The trend in storage expense is moving in the right direction as utilization has improved. And we are reducing expenses further by repositioning equipment and increasing the volume of used equipment sales. We have a number of used railcar portfolio acquisitions we expect to close during the fourth quarter as well as new railcar production with associated leases coming on stream beginning in the fourth quarter and throughout the first two -- three quarters of 2015 that should provide positive earnings momentum in our railcar business. That concludes our comments. Operator, please open the call for questions.

[Operator:]

Thank you. (Operator Instructions) Our first question comes from Bob Napoli with William Blair. Your line is now open.

[Robert Napoli:]

Thank you. Appreciate it. A question, I guess on your utilization, guys nice move up in utilization to 94, is that where you kind of feel fundamentally you max out on utilization rate or do you feel that you -- there are still a few hundred more basis points of potential improvement?

[Victor Garcia:]

Our utilization has been our biggest focus and it continues to be the biggest focus. Market conditions change over time. Let say, we are focused on is getting utilization up there some of our peer groups are. And wherever the market is we wanted to be at or above that marketplace. So if the market environment is such that utilization is at 97, 98. We are targeting to be at 97, 98.

[Robert Napoli:]

Indeed. When do you -- I mean, do you think you can get there by mid next year, or is that a kind of -- would that be a target?

[Victor Garcia:]

It really depends on -- and how the market is. I would say, you know, usually you have more of an opportunity over the second and third quarters because that's where demand picks up. But we will continue to focus on getting equipment picked up and on higher and moving that number up as a way to continue to increase our overall yield and our asset. So I would think more in as we get into the middle of next year, but we will continue to work hard to get sequential improvement.

[Robert Napoli:]

And then just I guess on -- you know, the buyback that you did looks, I mean, is very accretive, reduced your share count by 7%. If you look at your stock price today, I mean, you are still trading at pretty big discount to where your book value will be at the end of 2015, like a 15% discount. Why not reload? If you look at your ROE, historically you have targeted 20% ROE, you are kind of in the -- just about 14% I guess run rate average ROE. With the discount to book, with the capital you are throwing off it looks like you could continue to buyback and drive up that ROE. As you look at your investment opportunities and buyback railcar and containers, isn’t buyback at this point at this valuation probably the most attractive?

[Victor Garcia:]

It’s -- we have been on fairly rapid basis buyback stock -- effectively over two quarters, we bought back 1.5 million shares which has about 7% of our flow. We are still looking at whether or not to buyback stock is a right thing. The Board -- we meet with the Board on several times during the quarter, every quarter. It will be an ongoing discussion with the Board. We do think our shares our under valued. I believe our shares are under valued. Even with the number you indicated in terms of the return on equity in this kind of market environment where we actually increase earnings second quarter to third quarter to have multiple and the stock to be where it is. In my estimation we are under valued. But we will continue to look at that. We have a number of attractive opportunities that we are looking to fund long-term, so we have to balance some of that. Some of the rail investments that we are achieving are very attractive rail returns. And so we need to make sure that we can try to serve that marketplace and try to take advantage of very long-term opportunities with the capital that we have.

[Robert Napoli:]

Great. Thank you.

[Operator:]

Thank you. Our next question comes from Gregory Lewis with Credit Suisse. Your line is now open.

[Gregory Lewis:]

Yes. Thank you and good afternoon gentlemen.

[Victor Garcia:]

Hi, Greg.

[Gregory Lewis:]

Victor, as I was -- in the prepared remarks when we -- when you outlined what the investment strategy looks like in rail. It looks like it’s shifted a little bit or maybe evolve is the right word from, you know, I guess, initially looking at more secondhand assets or secondhand railcars. It looks like you have made the decision to really start to invest in new equipment. And you can just provide a little bit of color on, I guess, what drove that decision and some background, I think that would be helpful.

[Victor Garcia:]

Sure. Although, we have specific types of assets that we are going invest in, you know, its core part of our business, our decision on any investment has based on what we think the return expectation is going to be. So, we will invest more on used cars, if the opportunity is there and we find the return to be attractive relative to new cars. Right now, we find that with some of the car types that we have that we can get very high returns with long-term leases and it makes more sense for us to invest in those cars than what's available in the secondhand market. But what we do in terms of looking investment in containers, used railcars, used containers versus new containers, new railcars, it’s all return oriented. What do we think the returns are going to be, what's the best return opportunity we have? So we will look at -- we will continue to look at both the used car market and the new car market.

[Gregory Lewis:]

Okay. Great. And just -- I guess, following up a little on that business, I mean, there is multiple types of rail cars, just like in containers that you can invest in. Are you seeing those opportunities spread across all railcar types or is there sort of a focus where you guys are drilling down into where you are investing.

[Timothy Page:]

Well, there are a number of car types that are in strong demand and they range all the way from the cars that are serving the energy business on the sand side, to box cars, to flat cars and we really are looking for a balance in our investment over time, because we wanted to be in multiple areas of the economy, multiple commodities, multiple customers. So, right now, some of the higher return opportunities are in some of -- the cars are related to the energy side. But we look -- continue to look for some of these other car types for investment.

[Gregory Lewis:]

Okay. And just following up on that and that's what I was wondering. So, those energy investment, is that just the dry cars that carry sand or is that also tank cars?

[Victor Garcia:]

At this point, the traditional oil tank cars is not something that we're focusing on.

[Gregory Lewis:]

Okay.

[Victor Garcia:]

And we don't intend to go into. It's more non-hazardous cargo cars.

[Gregory Lewis:]

Okay, perfect. And then, just Tim, thanks for the update on the buyback and I apologize if I missed it in the press release, did you give an end of quarter share count?

[Timothy Page:]

No, we didn't. Let me see if we can get that for you here quickly.

[Gregory Lewis:]

And then, Victor, just as Tim is looking for that, as we look out -- as we start to move into the traditionally slow Q4 for the dry boxes and -- at this point, are we seeing opportunities more normal for the reefer market or is that something that is kind of -- I mean because it clearly looked like there was a pick-up in dry boxes in the first three months of the year on a year-over-year basis, is there any expectation that the reefer market is going to pick up?

[Victor Garcia:]

Let's say generally speaking, whether you talk about the dry market or you're talking about the reefer market, customers are telling us that they're seeing a good demand; and actually, we had very good demand over the course of the summer months and the more of a traditional peak season. And as we're looking now in the opportunities and what we're seeing in the fourth quarter, we're seeing, particularly around Asia, customers being more optimistic about the opportunities. And I think the trends should follow each other. So, the reefer market traditionally is now coming up on its season as we get into the end of the fourth quarter and first quarter. So, we would expect there to be similar type of strong demand for reefer assets as there is for dry vans.

[Gregory Lewis:]

Okay. Perfect, guys.

[Timothy Page:]

Just to answer your question on the share count, the basic share count was 20.8 million at the end of the quarter.

[Gregory Lewis:]

Perfect, guys. Hey, thank you very much. Have a good night.

[Timothy Page:]

Fully diluted 20.4 million.

[Operator:]

Thank you. Our next question comes from Kevin Sterling with BB&T Capital Markets. Your line is now open.

[William Horner:]

Hey, good afternoon, guys. This is actually William Horner on for Kevin.

[Victor Garcia:]

Hi William.

[William Horner:]

Hey, going back to the railcar discussion for a second, I appreciate the color you all have given and obviously it seems to be an area of focus right now. And I guess, my question is, with the kind of the noise in the energy space right now with falling crude prices, are you still seeing the same level of appetite from your potential customers in that space or are you seeing any sort of slowdown at all or are things still pretty healthy?

[Victor Garcia:]

I'd say we still see things very healthy. We have, as I said, most of the cars that -- all the cars that we have to be delivered between now and the end of 2015, which is the majority of what we have, they are already under letters of intent and we're going through the documentation process, but we have a number of other customers who continue to inquire to us to see if we have any cars available for that period, particularly 2015. There's really more demand for cars than there is capacity of cars to be delivered. And customers are really looking. We have a very large energy service companies talking to us about seeing if we can have any cars available.

[William Horner:]

Okay. So, that's the kind of incremental demand or for inquiries, you're seeing that's primarily in the energy space or is it across the board and all the railcars you're looking to acquire?

[Victor Garcia:]

Demand for railcars in general is extremely tight.

[William Horner:]

Okay.

[Victor Garcia:]

No matter what car type you talk about; and part of it is the economic growth, but the other part is there is a lot of rail congestion right now and there are a lot more cars being put on to the system to help alleviate, ironically enough, some of the congestion because of the delays that some of the rails are experiencing and that -- depending on the railroad, that is not expected to change for the next couple of years.

[William Horner:]

Okay. That make sense with everything we're hearing with all the rail service issues. Just one quick item I don't think you mentioned it, but did you say Victor somewhere does the inventory are at today -- the current levels?

[Victor Garcia:]

We don't usually talk about specific numbers of units, but you can back in from the statistics, we do provide in terms of total TEU what's the higher end and what's on higher.

[William Horner:]

But in the industry-wide, do you all have any indication?

[Victor Garcia:]

Well -- I would say generally speaking, utilization is high for everybody. There are certain locations where there is port congestion -- or depo congestion in small locations such as in the Pacific Northwest here in the United States. But generally speaking, inventory levels are low in most locations.

[William Horner:]

Okay, great. Thanks. I'll turn over.

[Victor Garcia:]

Also factory inventory or depo inventory?

[William Horner:]

Well, I guess, in factory inventory and I apologize.

[Victor Garcia:]

Okay. Factory inventory. It's still relatively low, relative to what we would see in a more traditional year. I think the numbers are closer to 400,000 TEUs for the leasing companies and those -- I think it's in part a sign of people being a little more cautious because of the pricing environment on the container side, not because of demand.

[William Horner:]

Right. Okay, great. Thanks for the clarification.

[Victor Garcia:]

Great.

[Operator:]

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

[Michael Webber:]

Hey, good afternoon guys. How are you?

[Victor Garcia:]

Good.

[Michael Webber:]

Good. Victor before I start just want to go back you said the diluted share count was that 20.4 million or 20.8 million at the end of the quarter?

[Victor Garcia:]

The fully -- it's 21.4 million.

[Michael Webber:]

21.4 million. Okay. Got you.

[Victor Garcia:]

Excuse me 21.2 million.

[Michael Webber:]

Okay. Got you. Thanks. I wanted to jump back to I think about questions earlier when you were talking to the relative value associated with buybacks versus kind of other uses of capital and you kind of already addressed the fall process behind buybacks. So, maybe if I look at the way you are allocating capital towards railcars versus dry vans, your commentary on the spaces in line what we've heard from some other box less or this seems like there's been a modest improvement within that space and maybe pricing is under a little bit less pressure. I'm just curious as to where are those returns right now in the dry van space relative to the rail space and if you going to give me the total or in absolute return maybe the relative spread between the two and is it a more narrow after we've seen a bit of an improvement here and just how do you think about offloading between those two uses of capital?

[Victor Garcia:]

I started in an open forum to talk about returns on the business growth, but I'll just share--

[Michael Webber:]

Well, maybe just relative to sector-wise relative to where -- where is rail right now relative to dry vans maybe on the spread basis, so without actually getting what the return is 100 basis points wider?

[Victor Garcia:]

If you look at -- we are on a pre-tax basis 100 to -- if you just look at the investor returns, a couple of hundred basis points to a little bit more than that, better on the rail side then on the container side.

[Michael Webber:]

Okay. And is that moved around at all the last two to three quarters that have been pretty consistent?

[Victor Garcia:]

It's actually been moving up because of the tightness in the capacity for production and in particular with the strong demand. A lot of production has gone into tank car production as well as some of sand tankers. So, although the number of railcars being delivered had been growing, it's been in specific car types, which means that all the other -- even though the economy is growing and demand is growing, certain other car types, there hasn't been as much capacity built. And so there is a high utilization -- there is very high utilization across pretty much all car types, even coal cars today than it was let's say a year ago.

[Michael Webber:]

Okay. And kind of back up a little. And think about that relative to the buybacks and our returns there and then when you look at your CapEx schedule for the rest of the year. I know you're not getting into detail there, but when you think about buying back stock on top of that and reupping that authorization, are you guys liquidity constrained in anyway when you look at your forward purchases? Is there a practical limit that we should think about in terms of what you guys could really go in and buyback over the next two to three quarters? As would be duplicating the last authorization is that a fair way to think about it, if you were to put something in place and just any constraints on that would be helpful?

[Timothy Page:]

No, I think what I would say is at last two quarters our purchases of our stock has exceeded what we've earned over the last two quarters. So with that pace we wouldn’t expect that we would be able to be purchasing at that kind of rapid pace. But that being said, as we going to go forward we will continue to evaluate whether it makes more sense to continue to buyback our stock or to invest or a combination thereof. So it's something we are in active discussions with the Board. As I mentioned earlier, we are very financially driven, so we are looking at the relative investment return and buying back our own shares versus a long-term investment. But we would have to make commitments for some of these investments and we have to make sure that we have the appropriate financial wherewithal to properly address that. So our leverage is in the range of where we wanted be, but we do look at what the impact of the investment we are making and then the buybacks and what that does to our leverage.

[Michael Webber:]

Okay. That’s fair. One more for me and I will turn it over. And then Tim, I think in your -- very end of your prepared remarks you talked about some sale leaseback opportunities on the rail side that you were kind of evaluating into the back end of the year. Can -- without getting into too many specifics can you maybe put a sense of scale around those, maybe relative to what you've guys have done year-to-date or dollar value? And how that sale leaseback market compares on a scale perspective to the new build opportunities that you guys were talking to earlier?

[Timothy Page:]

Those aren’t really sale leasebacks. They are purchases -- portfolios of used cars…

[Michael Webber:]

Sure…

[Timothy Page:]

From other leasing companies.

[Michael Webber:]

Okay.

[Timothy Page:]

…or banks or whatever. It's in the range of just $20 million for this quarter.

[Michael Webber:]

Okay. And that’s what you are looking at now, okay. Okay, great.

[Timothy Page:]

It -- there would be others that we are looking, but that’s kind of our expectation.

[Michael Webber:]

Your expectation. Okay. That’s good. All right. Great. That’s all I have got. I will turn it over. Thank you guys for the time.

[Timothy Page:]

Thank you.

[Operator:]

Thank you. Our next question comes from Steven Kwok with KBW. Your line is now open.

[Steven Kwok:]

Great. Thanks for taking my questions. Most of them have been answered already. Just two data questions, one was around the -- what percentage of your leasing revenues today are coming from the railcar side?

[Timothy Page:]

We're -- I think we're about 5%.

[Steven Kwok:]

Okay. And I guess going forward is there plans to perhaps break that out given that this is becoming a bigger part of your business?

[Victor Garcia:]

Yeah, we do. We do have intentions of breaking it out and as it becomes material significant entity we will segment out our business segments.

[Steven Kwok:]

Okay, okay. And the last question I have was around the tax rates. I think Tim mentioned that the tax rate to use was 10%. Is that on a GAAP basis, because I think in the second quarter there was some one-time impact on the tax rate? Yeah. That’s on a -- where we expect to wind up this year. On a go forward basis it's probably going to be a little less than that. But it’s the function of where our earnings come from, the ratio of U.S. earnings to international earnings. So I would expect that in the fourth quarter to be about 10% and then next year to be slightly lower.

[Steven Kwok:]

Got it, got it. Great. Thanks for taking the questions.

[Operator:]

Thank you. Our next question comes from Sal Vitale with Sterne, Agee. Your line is now open.

[Sal Vitale:]

Good afternoon, gentlemen. Just a quick question as -- first the clarification. Sorry, Tim, I'm not sure I heard you earlier. So regarding the end of period shares, basic that was 20.8 million and the fully diluted was 20.4?

[Timothy Page:]

21.2 is the fully dilutive.

[Sal Vitale:]

Okay. 21.2 fully diluted and basic of 20.8. Okay.

[Timothy Page:]

Correct.

[Sal Vitale:]

Thank you. And Victor, thank you for the break out on the railcar revenue. Can you provide a breakout on your -- I'm not sure you actually provided this. But of the 1.56 billion of rental equipment, how much is of railcar?

[Victor Garcia:]

About 80 million.

[Timothy Page:]

We have about 80 million and we have about another $100 million that’s going to be coming in over the course of 2015. So…

[Sal Vitale:]

That’s for the 106, right? Okay, so that comes in over the course of 2015. Okay. That’s very helpful, thank you. And then just staying on the railcar business there, so are there any specific areas. So just to make sure I follow that. All the railcar investment you've done this year is all on the new site?

[Victor Garcia:]

In terms of commitments the majority -- the vast majority has been on new cars and we were able to -- part of the thing -- part of what we've benefited from is that we got positioned for some equipment delivery early enough in the year and demand continues to be strong and there's really a shortage of equipment. So the capacity space that we do have is highly priced by lot of our customers.

[Sal Vitale:]

Okay. Would you say at this point that -- because I know that pricing on the new side continuous to heat up in terms of prices paid for the railcar. Are you finding the -- how you're finding the returns, because I assume that the rates you would realize on a car, whether its new or used, are probably close to the same. How do you look at the difference in returns between buying a new car and a used car?

[Victor Garcia:]

I would say for the cars that we bought the returns -- because we have new cars and the delivery of those new cars which are the higher capacity cars, those are more sought of, you can get better returns on those cars than in the used car market right now.

[Sal Vitale:]

Okay. Thank you very much. That’s helpful.

[Victor Garcia:]

Sure.

[Operator:]

Thank you. (Operator Instructions) And our next question comes from Doug Mewhirter with SunTrust. Your line is now open.

[Doug Mewhirter:]

Hi, good afternoon. Just a couple of questions. First, could you just give a few more details of the nature of the settlement? Was it sort of a reversal of the bad debt expense or how -- I'm just little curious as to how that came about?

[Victor Garcia:]

What -- it’s a combination. It’s a -- the settlement included expenses that we incurred to get equipment returns as well as rental charges that we owed and any damages related to those -- to that account. And it’s a default that happened a few years ago and as we've even gone through the process of trying to settle, we've incurred additional cost and really settled it up. So it’s a combination of expenses, but it relates to a customer who we had put into default a few years ago and sometimes it takes a long time to actually get through a settlement process.

[Doug Mewhirter:]

Yeah, thanks for that. And my second question is, Tim, what was the dollar value of equipment that you sold this quarter?

[Timothy Page:]

Dollar value of the equipment we sold? You mean the gross proceeds?

[Doug Mewhirter:]

Yes.

[Timothy Page:]

It's about $15 million.

[Doug Mewhirter:]

$15 million. Okay, great. And my last question deals with the balance sheet, it looks like -- if you take your total debt and you divide it by your net equipment, it's in the very high 70s, about 79% or so, which is kind of on the high side of your historical range. Are you looking to get that closer to 77%, 78% or you comfortable where it's at now?

[Victor Garcia:]

If you take our net debt less cash and look at over our long-term assets, we're around 75%.

[Doug Mewhirter:]

Okay.

[Victor Garcia:]

74.5%, 75%, which is about where the industry is, about where we would target to be. We can get a higher advance rates than that, but we usually keep some flexibility on it.

[Doug Mewhirter:]

Okay. And just a quick follow-up question on that. What advance rates you get on railcars? Is it similar to containers?

[Victor Garcia:]

We get an 80% advance rate.

[Doug Mewhirter:]

Okay, great. Thanks that’s all my questions.

[Victor Garcia:]

Great.

[Operator:]

And we do have another question from Sal Vitale with Sterne, Agee. Your line is now open.

[Sal Vitale:]

Just one follow-up question. Tim, one of the figures you mentioned earlier, I think you said $216 million year-to-date CapEx, I assume that’s only the container CapEx, correct?

[Timothy Page:]

That’s everything.

[Sal Vitale:]

That’s everything, okay. Because I'm looking at here, I see a 106 million of the railcar and then…

[Timothy Page:]

106 million are forward commitment sale.

[Sal Vitale:]

Right. Okay. Understood. So that’s all container. That’s helpful. Thanks.

[Operator:]

Thank you. And I'm showing no further questions at this time. I would like to turn the call back over to Victor Garcia for further remarks.

[Victor Garcia:]

Great. Well, we're really pleased to have reported this quarter. There were number of items that as we'd outlined here that we view very positively. We like the momentum that we are seeing on our rail business. We like the momentum that we are seeing in our container business. We're going to continue focus on increasing both sides of the business, both in terms of investments as well as profitability. So we look forward to reporting next quarter and thank you for your time and attention.

[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.