CAI International, Inc.
Q1 2015 Earnings Call Transcript

Published: 1 May 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to CAI International First Quarter 2015 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, Mr. 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 expectation and from forward-looking statements contained in this conference call. Finally, we remind you that the company's views, expected results, plans, outlook, and strategies as detailed in this call might change subsequent to this discussion. If this happens, the company is under no obligation to modify or update any of the statements the company made during this discussion regarding its views, estimates, plans, outlook, or strategies for the future. I will now turn the call over to our President and Chief Executive Officer, Victor Garcia.

[Victor Garcia:]

Good afternoon and welcome to CAI's first quarter 2015 conference call. This quarter, we reported revenue increase of 7.8% from the first quarter of 2014, and rental revenue increased over the same period by 8.3%. We reported net income for the quarter of $13.5 million or $0.64 per fully diluted share compared to $14.3 million or $0.63 per diluted share for the first quarter of 2014. We had a strong start to the quarter with utilization increasing over the period leading up to the lunar new yea holiday that commenced on February 19. After the holiday period, we experienced normal redeliveries primarily around Asia, which had a slight negative impact on utilization. We expect a normal pick-up in seasonal demand to occur around the middle of May and continue through late October. Average utilization for the first quarter of 2015 was 93.5% compared to 91% and 93.8% during the first and fourth quarters of 2014 respectively. Our results this quarter were negatively affected by a couple of factors. First, we had lower gains on sales this quarter due to the effect of the strong dollar on our overseas sales of equipment, particularly in Asia and Europe. We also had some heavily damaged containers in the U.S. at lower prices to remove them from our inventory. Although the strong dollar affected our gain on sale of equipment the dollar strength has improved lease-out activity from Europe which we expect to continue through the rest of the year. Secondly, we reserved $300,000 of receivables during the quarter as a result of a regional Asian carrier that is exiting the container shipping business. These factors resulted in lower net income this quarter compared to the same quarter of 2014, however, we expect the outlook for our business overall to remain positive. We believe that low oil prices and monetary stimulus by central banks in Europe and Asia will result in improved economic activity and trade flows in the second half of the year and, thus, demand for container should also increase over the coming quarters. Unfortunately, rental repricing remains very aggressive and new container prices have declined due to low steel prices. We believe these factors will continue to pressure rental rates this year. However, we will continue to be disciplined in the marketplace and make investments that meet our return expectations. We also remain pleased with the development of our other business operations which we believe will support our continued long term growth. Specifically, in our rail business, we have begun taking delivery of new railcars that are already under long term lease. We expect deliveries of approximately 440 cars in the second quarter and a further 450 cars in the third representing a total investment in new railcars of $79 million for the year. These cars will begin generating rental revenue immediately upon delivery. Even more exciting for us is our ongoing efforts in logistics. We believe that we have a significant opportunity to establish a significant logistics franchise that will increase utilization of our fleet while expanding our customer base and creating new revenue streams for our company. We are pleased with the progress we are making and expect to continue to place more emphasis in resources in this area over the coming quarter to build a full logistics platform. Although, we continue to work through some aggressive lease rate pricing headwind in our traditional container leasing business, our strategic focus is to evolve from a pure container leasing company to more of a transportation finance and logistics company, which will expand our customer base and increase the services we provide our customers. We believe that the knowledge experience and contacts of our marketing staff in intermodal and rail provide our company with a strong opportunity to cross market in the asset light logistics space. I’ll now turn over the call to Tim Page, our Chief Financial Officer, to review the financial results for the quarter in greater detail.

[Timothy Page:]

Thank you, Victor, and good afternoon, everyone. Earlier today, we reported our 2015 first quarter results. For the 21st quarter in a row we achieved record quarterly adjusted lease related revenue. Lease related revenue in the quarter was $57.2 million, 9% higher than the first quarter of 2014 and 1% higher than the adjusted lease related revenue in the fourth quarter of 2014. The increase in lease related revenue during the quarter was driven by strong new equipment leasing activity and by an increase in our overall utilization rate. In the quarter, total revenue was $58.5 million, 8% higher than the first quarter of 2014 and flat compared to adjusted total revenue in the fourth quarter of 2014. Net income attributable to CAI common stockholders in the first quarter of 2015 was $13.5 million, 5% lower than the first quarter of 2014. Earnings per fully diluted share in the quarter were $0.64 as compared to $0.63 in the first quarter of last year. The reduction in net income and earnings per share we experienced this quarter was primarily due to lower gains on the dispositions of containers, which we’ll discuss a little bit more later on in my comments. As of March 31, 2015, our total container fleet consisted of 1.2 million CEUs, an increase of 2% as compared to March 31, 2014. Our owned container fleet is now 1 million CEUs and grew by 37,000 CEUs or 4% during the quarter as a result of strong market for new lease-outs we experienced in the period immediately preceding the lunar New Year in February. Our own container fleet is 8% larger than last year at this time and now represents 83% of our total container fleet. We ended the first quarter of 2015 with approximately $1.7 billion of container revenue assets. Our railcar fleet has grown by 42% over the past year and at the end of the first quarter of 2015 consisted of 2,649 railcars with a net book value of $97 million. The utilization of our railcar fleet is 98%. Average total container fleet CEU utilization was 93.5% for the quarter compared to 91% for the first quarter of 2014 and 93.8% for the fourth quarter of 2014. Our average owned fleet CEU utilization for the quarter was 94.4% compared to 92.8% for the first quarter of 2014. Our owned fleet utilization was 94.5% at the end of March and remains at that level today. We are expecting a slow steady improvement in utilization as we enter the traditionally more active shipping months of the summer and fall. Storage and handling expense of $6.8 million was flat for Q1 of this year as compared to Q4 of 2014 and was in the range we anticipated. This general category of expense includes not only container storage related costs, which were $3.1 million in the first quarter, but also includes, among other things, $0.8 million of cost related to container handling at depots, $1.4 million of container repair and maintenance cost, $0.5 million of railcar handling and maintenance cost and some other miscellaneous operating costs. I’d like to point out that a fairly high percentage of the container handling and repair maintenance costs are related to the level of lease out and turn in activity in any particular quarter and much of those costs becomes an offsetting revenue item when we bill it back to customers. As Victor mentioned in his comments, we are very focused under roughly $3 million per quarter a container storage cost we’ve been incurring. We have a number of initiatives underway aimed at decrease in both the level of off-hire container inventory as well as the average dwell time required to sell equipment or put it back on lease. As I mentioned earlier, we expect utilization to solely improve during the coming two quarters. The expected improving utilization outlook combined with the benefits we expect from our logistics focus should result in decreasing container storage expenses in the coming quarter. However, this decrease in container storage expense will be offset to some extent as our rail fleet grows which will result in somewhat higher rail maintenance expense. When we take all these factors in the consideration we expect the broad category of storage and handling expense to decrease slightly in the coming quarter on an absolute dollar basis. Gain on disposition of used equipment in the quarter was $0.4 million, which is $1.4 million less than we realized in the first quarter of last year and $1.6 million less than the fourth quarter of 2014. The Q4 2014 gain included a $1.1 million pretax and $0.6 million after-tax gain related to a one-time transaction. So on a like-for-like basis, gains on sale in Q1 was $0.5 million lower than Q4. Over the past couple of quarters, the proceeds we received in the sales of used containers has been negatively impacted by the strong downward pressure on currency rates relative to the dollar, in particular, the euro which fell 12% during the quarter and has fallen 17% in the last 180 days. Europe represents about one third of our container sales and while prices in local currency have been relatively flat, we are receiving less dollars on these sales transactions because virtually all of our container assets are on our books in dollars we realized less sales proceeds and consequently less gain on sale than we did just a few months ago. Furthermore, in the first quarter as Victor mentioned, we sold a higher than usual percentage of older damage containers on the West Coast, which put further pressure on profitability of our container dispositions. We would expect a continuation of the current market dynamics for used container dispositions, modestly profitable but below levels we experienced over the past several years. MG&A expense in the quarter was $7.1 million and included a $0.3 million receivable write off related to a bankruptcy filing of a small Asian regional shipping line. This $0.3 million write off impacted fully diluted EPS by $0.01 per share. Adjusting for the bad debt write off MG&A, was slightly below what we expected for the quarter. We would expect the quarterly run rate for the rest of the year to be in the $7.2 million to $7.3 million range. Interest expense was $8.1 million in the quarter right in-line with our expectations. Our effective tax rate for the quarter was 9% reflecting a higher mix of pretax income from non-U.S. sources and lower gains on sale. We expect the full year 2015 tax rate to be in the same 9% range. During the first quarter, we acquired a $131 million of rental equipment, $13 million of which was railcars. The $131 million compares to only $51 million in the first quarter of last year and $270 million for all of 2014. At the end of the first quarter of 2015, we have total fund to debt of $1.3 billion and approximately $660 million of availability in various credit facilities. Our fund to debt to tangible net worth leverage was 2.83. Adjusting for $42 million of various restricted cash balances which are effectively sinking funds for various credit facilities, our debt to tangible net worth ratio at the end of the fourth quarter was 2.74. That concludes my comments. Operator, please open the call up for questions.

[Operator:]

Thank you. [Operator Instructions]. And our first question comes from the line of Brian Hogan from William Blair.

[Brian Hogan:]

Let’s start with the actually your logistics comments, that business sounds like an exciting opportunity to grow that and help your utilization. Can you help us say how many, personnel do you have dedicated to that? Do you look to add to that over the next years? And then two, maybe increase the growth rate, maybe other acquisition opportunities around that?

[Victor Garcia:]

It’s actually an area that we've been focusing on for over a year in terms of analyzing our business and how we can optimize the use of our fleet. So we have currently six people dedicated to that specifically and we are looking to add more people but we -- but it’s really an effort throughout the whole organization; the whole organization is focused on that and focused on expanding our breadth of customers in terms of utilizing our containers. And we’ll continue to primarily focus on organic build out, but if there is an opportunity to look at supplementing there with an additional business we would look at that.

[Brian Hogan:]

I imagine it’s a very large market, and from what I understand it’s fairly fragment, so could be some nice opportunities out there. The MG&A expense a little higher in the next several quarters, you said, Tim, is that related to logistics efforts or is that just ordinary course of…?

[Timothy Page:]

It’s kind of ordinary course. We -- some of it’s just timing related to when we pay for certain services that we get and so it’s - that’s kind of where we see the run rate for the rest of the year.

[Brian Hogan:]

Okay, and the CapEx outlook, Victor, you gave a nice 2Q, 3Q $79 million in railcars but -- and obviously, a very nice first quarter with $131 million, what about containers for the rest of the year? Is that at this point wait and see how demand shapes up or you have a set kind of plan already?

[Victor Garcia:]

I think we -- I do think that there will be good demand this year. For the reasons I noted, the second half we would expect there to be some benefits on the stimulus that’s going on, the monetary stimulus and as well as the impact of lower oil prices, and most people expect that the world economy should do better this year than last year. We are quite fortunate. I mean, we have been focusing on diversifying, expanding our business, thinking ahead about how we can spread out our investments. This year, we already have -- we had going into this year the biggest commitment in terms of delivery of equipment and leases already in place than we had in the prior two years. We have today from this point forward every week we have about $4 million of rail equipment that’s going to be going on lease and that will continue on for the next five months. And so from our perspective, not only are we broadening out the business but we have already in place a steady flow that will help us with our the growth of our business. To the extent that we do expect to invest in containers just like we would in normally, but we don’t have this urgency to try to invest for the sake of investment; we already have our investment in place. So we'll continue to be selective and really participate in those transactions that we think make sense not only from a per diem perspective but the structure itself. So I think we are in a unique position amongst our peer group in that regard. So although the market remains very competitive we are not as concerned about growing our earnings or growing our business with a clean piece of paper; we come into this year with a lot of good momentum.

[Timothy Page:]

We’ve got, as of right now, we have about a total of $240 million either already purchased or committed for the year of which a little over a $100 million of that is rail. So there is about a 135 or so of containers most of which are already on order but the factories much of a good number of what of which has already been delivered and as we mentioned we have pretty strong lease outs in the first quarter. So it was a fair amount of that that was leased out already this year.

[Brian Hogan:]

All right. Thank you.

[Timothy Page:]

Yes, and then depends on how we view the return profile of particularly on the container side what we do beyond that depends on how we view the return profile of the opportunities we have.

[Brian Hogan:]

All right. Thank you.

[Timothy Page:]

Thanks, Brain.

[Operator:]

Your next question comes from the line of Doug Mewhirter from SunTrust.

[Doug Mewhirter:]

Just a couple of questions. The quarter seemed pretty straightforward. I’m not sure how much - how close you’ve been following the publically traded railcar vendors and lessors. I mean, there was kind of interesting commentary in that the every pricing is still great and utilization is still in the very high 90s so there is not really much to complain about, but you started to see some I guess a little more caution; you are talking about backlogs starting to shrink at some of the manufactures and CEO of GATX said that pricing has seem to come off the highs. Have you noticed where maybe you are actually seeing factory capacity free up unexpectedly or maybe your guys who are out sort of trawling the waters aren’t being able to get a sharp pricing as maybe they thought they were; just trying to get -- and I realize you are nowhere near the scale of those big guys and they kind of play a different game, but I was just wondering what your view of the current railcar leasing and manufacturing industry are?

[Victor Garcia:]

Thanks, Doug. I think we are still looking at it as an opportunity when you look at when you talk about lease - monthly lease rates on the rail side it’s really asset type by asset type. So where we’ve seen a probably the significant drop-off has been cars related to the energy sector. So, if you - the orders that the manufactures have for tank cars and sand cars that’s obviously been negatively affected by what’s been going on with the oil price and that has potentially freed up some space which we would love to look at taking if the opportunity came up. Other car types, we have a fairly diversified fleet across a number of different commodity categories, and there we have effectively full utilization, and we’re still seeing largely lease rate renewals at or above where we previously had them. So overall, we're still finding that the market is pretty tight for equipment if you take out the energy related cars, and so we really look at it as an opportunity. One of the problems we’ve had on the rail space is just really finding good assets to purchase and if we have good assets to purchase whether it be in the used sector or on a new side where we think we can get an appropriate return I think we'd be very interested in trying to take advantage of that.

[Doug Mewhirter:]

Great. Thanks for that comprehensive answer. I just had a one more question for Tim. What was the percentage of leasing revenues that where contributed by your rail business this quarter?

[Timothy Page:]

Roughly 5%.

[Doug Mewhirter:]

About 5%.

[Timothy Page:]

It will start ramping up more quickly beginning in the second quarter, as we start taking delivery of these new cars.

[Doug Mewhirter:]

And I assume that the utilization figures that you published those are containers only, right, and you need to have you keep separate books for the rail business?

[Timothy Page:]

Right. Correct.

[Doug Mewhirter:]

Thanks. Those all my questions.

[Operator:]

And our next question comes from the line of Steven Kwok of KBW.

[Steven Kwok:]

Most of them have been answered. Just in terms of going back to the rail car, you mentioned the 5%, how big it would be by the end of this year, and then what’s the outlook for over the next couple of years? Thanks.

[Timothy Page:]

Well I think by the end of the year it'd represent about 10% of our overall business and we’ll be at a run rate that will be approximately, from a revenue standpoint, around the same level. As we go into 2016 and beyond, we are looking at investments new car investments as well as discussing some additional used car purchases. I said last -- in the last call, the container business that we have is a pretty steady; we buy equipment throughout the year and we built that up. On the rail car side, we have to be more opportunistic in terms of what the right price point is for assets to be purchased. So, we’ve looked at a lot of assets we’ve been disappointed or not while we believe what we are paying for assets. So there could be a quarter where we significantly increase beyond what our expectations are our investment in rail and other quarters where there is no investment in rail. And it's really depending -- there's a lumpiness to at least the way we are approaching it. These are 40 plus year assets. So purchasing the asset at the right price or at a good price is key to the long term success of the business.

[Steven Kwok:]

Got it. And can you just talk about the typical structure about it in terms of like the length and what the maturity schedule looks like?

[Victor Garcia:]

The length of the lease or the length of?

[Steven Kwok:]

Yes, the length of the lease.

[Victor Garcia:]

Well on the new cars that we’ve purchased we had leases that have been primarily six to eight years, and then and they’ve had good lease rates that have paid us a significant amount of the original car cost over that period of time. On the used car side, typically we see leases they are cars on lease could be as little as a year to as long as three or four years. And we would expect to renew those leases or to extend leases on many cars which is what's happened, the re-lease factor on rail cars is much higher than it is on containers.

[Steven Kwok:]

Got it. Great thanks for taking my question.

[Timothy Page:]

Sure.

[Operator:]

And our next question comes from the line of Helane Becker from Cowen.

[Helane Becker:]

As we look ahead to the rest of the year how should we think about sales of containers?

[Victor Garcia:]

Well I think sales of containers, what I would say as we talk to our team overall we see good demand for containers; actually, we’re seeing improving demand for the sale of containers in terms of volumes that people are looking for. I think what we had in the later part of the fourth quarter and then in the first quarter was we had some declining prices in certain markets; part of it was what we said currency related. The other part being the impact of the steel price and container prices coming down that there was a push down, but demand, underlying demand for our secondary containers remains very strong, and I think as we talk to our people they expect it to strengthen over the course of the second and third quarter. So we think volume would be there. The question for us is will prices stabilize at the current level, increase or slightly decrease, and there it’s really a market-by-market analysis and it depends on what certain competitors want to do at the time to get rid of equipment.

[Helane Becker:]

Okay. Do you think that as we look ahead, I know I think you or Tim said you were taking $4 million worth a week, right, is that -- was that right, did I get that right?

[Victor Garcia:]

$4 million worth of railcar investment per week.

[Helane Becker:]

Railcars, okay. But not containers?

[Victor Garcia:]

No.

[Helane Becker:]

Okay. Got you. Sorry, I'm glad. I'm glad, yes, my question cleared that up. And then I just have a question for Tim. In the marketing general and admin expenses that bit of an increase, is that related to the logistics people that were brought on board?

[Timothy Page:]

It’s somewhat related to that but most of it is just timing. So there are certain items that, most things we have to -- annual one-time payments and things we have to pay them as we incur them counting fees and like we pay them as we incur them and we don’t get to spread them out over the year and even it out. So there is timing related issues to when we pay some off our G&A expenses.

[Victor Garcia:]

One comment I’d like to make related to that. We are adding head count and we’re very focused on adding headcount. We’re adding marketing people, people with customer relationships beyond what it'd traditionally be in the container business. And we think that we’re adding people not to make up for a problem but really to enhance and grow our business, and so we’re very focused on that. We’re going to continue to add people we think that will be the differentiator for us in terms of moving away from what is largely becoming a commoditized business into something that’s more of a value added franchise. And so, enhancing our infrastructure and the talent that we have in the company is going to be a continued focus and we’re going to continue to look for good experienced people in the areas that we think are important in order to really build out this franchise.

[Helane Becker:]

Right. So I think that makes sense. So then as we think about your CapEx for 2015 and 2016 and so on, how should we think, should we think about it as kind of a 70/20/10 mix of containers, railcars and logistics or is it too soon to get that, I don’t know, granular?

[Victor Garcia:]

Well logistics effort is a people business, not necessarily going to be a significant asset business. But in terms of capital investment in assets, we’re today roughly, Tim, 50-50 on committed between rail…

[Timothy Page:]

No, we have $130 million committed for containers and $100 million for rail. And I would say that that mix is probably going to last about the year we are looking at rail car investments. We have some proposals out already; we’ll see how those play out. And we’re also looking at other types of opportunities of rail. So I do think anywhere from a 40% to 50% mix of rail and containers would be the right area for us to focus this year, and the amount of investment that we actually do with be dependent on how these opportunities come about, but I think what we did last year in terms of total investment, we’re already approaching and I would be surprised if we invest more this year than we did last year.

[Helane Becker:]

Great, okay. Thank you so much for your help. It's really appreciated.

[Operator:]

And our next question comes from the line of Sal Vitale of Sterne Agee.

[Sal Vitale:]

Actually just a -- first, I'm sorry I may have missed some comments you made earlier. Just on the container side, your competitor early today and on its conference call noted there was a revenue impact stemming from a early lease extension that occurred in conjunction with a significant order. Have you been approached by any customers for any type of extension along those lines?

[Victor Garcia:]

We talk to customers and on an ongoing basis about extending leases or renegotiating leases, not that they come us for say a renegotiation, but we’ll talk to them about possibly extending leases. And so we do have those kind of discussions. What I’d say though is we are in a, again, a fortunate position because we don’t have quite to same amount of expiring leases from that 2010, 2011 time period. And so we don’t see the same kind of urgency to renegotiate leases. We have in that 2010, 2011 time period we did a lot of eight plus year leases, so we still have a number of years away. To the extent that there was a positive opportunity of extending leases for us where we would, in our belief, get more revenue on those assets over its life we would consider it. But there isn’t a requirement naturally our average per diem on an SCU basis this quarter versus last quarter is pretty comparable to where it was a year ago so. We don’t have the downward pressure in terms of the effect of lower lease rates as might be an issue elsewhere.

[Sal Vitale:]

Okay, that’s helpful, thank you. And then switching to the railcar side, and I think you might put some of this in your 10-Q but did you -- can you give any color as to how much net income is attributed to the railcar business in 1Q?

[Timothy Page:]

We haven’t given that yet. What I would say though is we've built out a full railcar team. So we have marketing personnel, operational personnel, technical personnel in the group. We still need to build it up from the scale. When we look at the actual investments that we have, we have a profitable operation in rail and we expect it to continue to enhance. When we look at the actual investments in the same way we would look at them from the container side, the returns, the expected returns that we’re getting on rail exceed what we’re expecting from the container business at this point, but we haven’t broken it out because it hasn’t been significant enough to break it out but it is something that we will over time.

[Sal Vitale:]

Okay, and then in terms of your rail CapEx, did you place any orders between -- since the last conference call; have you increased your rail CapEx at all since that time?

[Timothy Page:]

The used railcars, some of which is already reflected in this quarter, this past quarter’s numbers, but we haven’t placed any orders for new cars since we did last year.

[Sal Vitale:]

Okay. Thank you. That’s very helpful.

[Operator:]

[Operator Instructions]. And our next question comes from the line of Michael Webber from Wells Fargo.

[Michael Webber:]

Hey, Victor, I wanted to zero in a bit on that logistics business; I know its traffic count over a little bit but and I think you mentioned earlier, I guess one of the first question is around head count you’ve already added six people, and in terms of the scale you think that could get to, could you reiterate that one more time?

[Victor Garcia:]

Well, I’d like to -- I wish I could go into great detail about it, but these conference calls are open to not only analysts and investor, but to some of our competitors. So I don’t want to go into great detail about what we’re doing. But what I’d say is when we look at our business and the returns of our business, we do think that the business gone in direction that has largely in some ways commoditized. So that’s where we’re dealing with competing on purely price basis. We think that on the long term as we develop this company focusing more on the customers and having people with relationships and experience in the transportation side is key to long term success not only for a logistics operation but even the container operation. So it’s an area that we think is going to be a significant growth opportunity for us; we’re putting sources there and we’re going to continue to put a lot more resources there because we think that that will be a real revenue enhancing opportunity for us.

[Michael Webber:]

Does that imply acquiring or building out a proprietary technology platform or is that something you'll be able to leverage based on your current systems?

[Victor Garcia:]

We've got technology that we've already brought into, have brought into the company that will leverage off of and we’ll build it out there. We’re not expecting that technology because it’s pretty established technology out there. So we don’t need to recreate the wheel on that. So that’s not our area of focus. Our real area of focus is experienced business development people.

[Michael Webber:]

Okay. In terms of, I guess, quantifying that, I don’t know you kind of [indiscernible] on that a bit earlier, I know it’s a difficult apples-to-apples comparison talking about logistics to very asset heavy, you got a very asset heavy spaces, but maybe on forward net income basis or a return basis margins will be a bit difficult. Can you talk about how you’re thinking about that business relative to your present size?

[Victor Garcia:]

Sure. I think we look at it as two stages. First, we believe that we’ll be able to relatively speaking maintain higher utilization which means we’ll decrease our operating cost in our existing operation. From there I think we will have a significant revenue impact, but we’re really -- when you’re doing this kind of business, it’s a customer by customer operation. So it’s hard to scale up right away, but we have added a significant number of new customers. We’re continuing to talk to more customers, and from my standpoint, it’s a very exciting opportunity for us because we -- I'm a big believe that successful companies expand their customer base and expand the services that we do and we are expanding our customer base, we are expanding the services we provide. We have many more customers today than we had even a year ago. So I think the revenue impact will be more reflected in 2016, and we think that with the things that we’re looking at, our overall strategy what we’re trying to do in the logistics will be become more apparent over the coming quarters and we’ll be more open to talk about specifically why we think there is a significant value proposition to us.

[Michael Webber:]

And then this is something that, again from a revenue perspective will be recognized, within your traditional line item or is there an opportunity for this to kind of expand and then kind of a 3PO [ph]…?

[Victor Garcia:]

It will be expanded into like a 3PO so you will be able to -- we'll have a separate new item -- that expense items apart.

[Michael Webber:]

Okay, fair enough, I can follow up later with [indiscernible] with comp questions. Just real quickly around just around the your traditional business on the container side, you mentioned become like commoditized and everything certainly what we’re seeing on the financing arm and certainly kind of suggest that with wider diversification -- or I guess differentiation, one of your competitor calls today there was a -- it was a decent focus around container values and outside of the pressure on pricing, just -- the underlying commodity value is kind of bring down collateral values for your fleet. When you think about where we are in the asset cycle 1900 or 1850 per TEU and you comp that against kind of the last trough, when you can go back to the early part of last decade and the early odds something around then sub 1500, where do you think a reasonable floor is? And I know that’s a loaded question and difficult to answer and may be kind of in addition to that how would you comp what we’re seeing right now to what we saw at that point maybe as it pertains to why or why not we might actually touch that level?

[Victor Garcia:]

It is a question that you really can’t answer because it’s going to be really on where underlying steel prices are going.

[Michael Webber:]

Yes.

[Victor Garcia:]

Coming down, it recently ticked up a little bit, may turn around it, but that’s the speculative game. Whenever we make investments we’re looking at it more from the yield on the assets, so per diems or as part of if more important than what the underlying asset is. We’ve bought equipment in 2010 and ’11 were viewed to be higher prices but we got a great leases. So those were great investments for us to continue to be great investments for us today. And so I can’t predict where those container prices go. They could go lower. I tend to be somewhat agnostic on whether container prices will go up or down in any market because I think you can be proven wrong 50% of the time and proven right 50% of the time. But we’re in a difficult market right now in terms of the traditional leasing business because what has been consistent has been aggressive pricing, but although that has to continue to be in place when I look at direction of what we’re doing in the company, these concerns about short term prices containers and per diem rate, those things will take care of themselves. What we’re doing is we’re focusing on how do we see the basic structure of our business over the next two to five years. And there we are very optimistic about what we’re doing; we are very focused on it; whole organization is organized around it. And so it eliminates some of the concern we have. We’re not going to sit around and wait for the market to turn. That’s not a strategy. So waiting for the market to turn is not a strategy from our vantage point. We are taking what we believe is long term action that will create value for our shareholders and that’s why we're excited about the initiatives that we're taking.

[Michael Webber:]

Fair enough. One more from me and I'll turn it over. I guess where the rubber meets the road from a collateral perspective is how your lenders look at that; it doesn’t seem like we’ve seen, I mean, a meaningful step up, I guess, in terms of ABS financing or an advance ratios, but have you noticed any material change in, I guess, your conversation are anecdotally what you are hearing maybe smaller private player want in their access to ABS financing, and then just in terms of how those creditors are approaching advance ratios?

[Timothy Page:]

We haven’t seen anybody comment about changing advance ratios. I think I made a similar comment a quarter ago in the last analyst call we have. Although lenders look at collateral and turn the ABS lenders will look at collateral, really they are looking at the company's overall financial strength and the leases, not only the leases, but the infrastructure around the ability to re-lease equipment. So although it’s a consideration I don’t think it’s a significant consideration at this point and some of these lenders will take the opposite view particularly if they are financing new boxes that they are buying they're lending into boxes that what historically have been lower rates. So, overall, we are about the industry average in terms of average box price because we buy every year. So overall, we have we don’t have a disproportionate amount of high priced containers or low priced containers.

[Michael Webber:]

Fair enough, thanks for the time, guys.

[Timothy Page:]

Thank you.

[Operator:]

Okay, and I’m not showing any further questions at this time. I’ll like to turn the call back to Mr. Victor Garcia for final remarks.

[Victor Garcia:]

Great. I appreciate everybody coming on today’s call. We’re excited about the opportunity ahead of us and we look forward to updating you on our next earnings conference call.

[Operator:]

Thanks. Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program and you may all disconnect. Have a great day everyone.