CAI International, Inc.
Q2 2015 Earnings Call Transcript

Published: 29 Jul 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the CAI International Q2 2015 earnings conference call. [Operator Instructions]. I would now like to introduce your host for today's conference, Mr. Timothy Page, Chief Financial Officer. Sir, you may begin.

[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, 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:]

Thank you, Tim. Good afternoon, and welcome to CAI’s second quarter 2015 conference call. This quarter, we reported a revenue increase of 7.3% from the second quarter of 2014 and rental revenue increased over the same period by 10.2%. We reported net income for the quarter of $12.9 million or $0.60 per fully diluted share compared to $13.4 million or $0.60 per fully diluted share for the second quarter of 2014. As we mentioned in today’s press release, during the quarter we recorded a one-time nonrecurring charge of $0.8 million related to the reconciliation of management fees in prior periods. Excluding this one-time charge, our net income for the quarter was $13.4 million or $0.63 per fully diluted share. The second quarter is traditionally when we experience a seasonal pickup in demand for containers. However, we did not experience that pickup in demand this year and we faced a moderate decrease in utilization during the second quarter. Our average utilization for the quarter was 93.3% compared to 93.5% during the first quarter of 2015. We believe the decline in demand for containers was mainly due to weak global economic growth, particularly in China. Overall demand in port locations in China has been weak, and most of the inventory we have had returned to us has been returned in Asia. Demand in other regions, such as the United States and Europe, has been stronger, but has not offset the slowness in demand from China. The weak economic conditions around China has resulted in a decline in steel prices and new container prices, which has added some downward pressure to secondary container prices. However, during the quarter, demand for secondary sales of containers remains strong, and the decline in secondary prices has been more limited than on new containers. During the quarter, we reported a slight loss on the sale of equipment as we sold some older, damaged containers and some units that came from steamship line sale leasebacks that had higher [net book] values. We expect that secondary prices of containers will remain under pressure if steel and new container prices decline further in future periods. Because of the weaker demand for containers, we have invested less in new drive in containers than we had planned and have lease commitments from most of our equipment currently at the factories. We actually have very limited equipment at the factories that is not spoken for by customers. In this competitive environment, maximizing utilization has been an important objective for us. That is why I am very excited about the acquisition of ClearPointt Logistics that we closed on yesterday and announced today. ClearPointt is an intermodal marketing company based in Washington State focused on the intermodal transportation of cargo in the United States. The company is an asset light company focused on the 53 foot domestic container market, but has also moved cargo in international ISO boxes like the ones we have in our fleet. We paid about $4 million for the company, but believe it is worth significantly more to us because it complements and advances our own logistics efforts. By using ClearPointt’s state of the art logistics IT platform, operations, and marketing staff, we believe we’ll be able to improve our utilization by positioning equipment in higher demand or leased locations. Further, we will invest in expanding ClearPointt’s main operation of 53 foot domestic transportation moves. We are really excited about this acquisition and believe it provides us the tools to fully establish a logistics and asset based franchise. We believe that the transaction will be neutral to earnings per share in the current year but will be accretive in 2016 and beyond on a standalone basis, not taking into account the revenue and cost synergies we expect to achieve. The rail business continues to benefit from the ongoing delivery and lease out of rail equipment. Revenue for the quarter from rail assets was $3.8 million, an increase of 29% from the first quarter of this year. Operating income was $1.4 million, an increase of 72% compared to the first quarter of this year. Our operating margin also increased significantly from the first quarter to the second quarter. Our equipment available for lease is effectively fully utilized and we continue to extend most of our leases at higher renewal rates. Our average committed remaining lease term on our rail equipment is over three years. We announced earlier this quarter that we have entered into a 2000 rail car order with a manufacturer of new rail cars. The order will be mostly for freight cars but will include some variant types of tank cars for nonhazardous and chemical cargoes. The delivery of these cars will be between 2016 and 2018 and will give us a steady flow of new equipment every quarter over the next three years. Beyond the new equipment we have coming into our fleet, we have also continued to find attractively priced secondary equipment to purchase. Our focus will be to continue buying both new and used rail equipment as long as we believe we can meet our internal return requirements. As we mentioned in the press release, the board of directors has authorized the repurchase of up to 1 million of our company’s shares. We will evaluate repurchasing shares in conjunction with market conditions and the investment opportunities and commitments we have in place. Although we faced some slowness in our container leasing business during this quarter, we believe that we are well-positioned to manage through this period. In addition, we have made some very exciting strategic investments in our future. The rail business continues to perform very well for us and now has a significant commitment in new equipment to be delivered in the next three years which will further increase the contribution from that business to our results. Further, the ClearPointt acquisition is a strategically important addition for us and we believe increases our logistics capabilities that will expand our customer base and enhance the value we offer our customers. 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.

[Timothy Page:]

Thank you, Victor. Good afternoon everyone. Lease related revenue in the quarter was $59.1 million, 10% higher than the second quarter of 2014 and 3% higher than lease related revenue in the first quarter of 2015. The increase in lease related revenue during the quarter was driven by the full quarter impact of new container lease outs that occurred during Q1 of this year and by strong rail lease out activity. Rail rental revenue grew by 29% as compared to the first quarter of this year and is up 50% as compared to Q2 of last year. Rail rental revenue now accounts for 6.6% of our total rental revenue. In the quarter, total revenue was $59.4 million, 7% higher than the second quarter of 2014 and 2% greater than the total revenue in the first quarter of 2015. Net income attributable to CAI common stockholders in the second quarter of 2014 was $12.9 million, 4% lower than the second quarter of 2014 and 3% lower than the first quarter of 2015. Net income in the quarter was negatively impacted by a nonrecurring after tax adjustment of $0.5 million to prior period management fee income related to fees assessed on some of our container management agreements. Earnings per fully diluted share in the quarter were $0.60, the same as in the second quarter of last year. Taking into account the nonrecurring management fee charge I just mentioned, fully diluted EPS in the second quarter was $0.63, $0.01 lower than we reported in the first quarter. As of June 30, 2015, our total container fleet consisted of 1.2 million CEUs, an increase of 1% as compared to June 30 of last year. Our own container fleet is now 1 million CEUs, 1% higher than the end of the first quarter and 6% higher than the end of Q2 last year. We ended the second quarter of 2015 with approximately $1.7 billion of container revenue assets. During the quarter, we acquired 494 used rail cars and took delivery of 528 new cars, representing an investment of approximately $67 million. All of these acquisitions have committed long term leases associated with them. Our rail car fleet at the end of the second quarter was 3,671 cars, an 86% increase as compared to last year. The net book value of our rail car fleet is now approximately $165 million, more than double what it was last year at this time, and is now about 10% of our container fleet. By year end, we expect our rail car fleet to have a book value in excess of $200 million. The over utilization of our rail car fleet is 97%. Rail operating and pretax margins are expanding each quarter, with revenue growth as we absorb a relatively fixed rail G&A cost. By year-end, we expect run rate rail revenue will exceed $20 million, and we already have additional committed leases coming onboard in 2016. From an infrastructure perspective, over the past three years, we’ve made the investment in G&A that will now allow us to continue to grow the rail business with minimal additional G&A. With our recent announcement of a three year agreement to acquire an additional 2,000 rail cars, our rail business is well-positioned to become a significant profit contributor to CAI. Average total container CEU utilization was 93.3% for the quarter compared to 91.2% for the second quarter of 2014 and 93.5% for the first quarter of 2015. Our average owned fleet CEU utilization for the quarter was 94.3% as compared to 94.3% for the second quarter of last year. Storage and handling expense in the second quarter of 2015 was $7 million, approximately $200,000 greater than Q1 of 2015, reflecting the slight decrease in utilization I just mentioned, as well as an increase in the number of units held for sale. Units held for sale has increased over the past year as our overall fleet has grown and also because of what we believe will be a relatively short term impact from the return of equipment from some large sale leaseback transactions that we entered into a couple of years ago. MG&A expense in the quarter was $7 million, slightly higher than Q1, but in line with the levels we communicated during our last conference call. Interest expense was $9 million in the quarter, right in line with our expectations. On a year to date basis, our effective tax rate is 8.3% and is the level we currently anticipate for the balance of the year. At the end of the second quarter of 2015, we had total funded debt of $1.4 billion and approximately $500 million of availability in various credit facilities. Our funded debt to tangible net worth leverage was 2.95. Adjusting for $49 million of restricted cash balances which are effectively sinking funds for various credit facilities, our debt to tangible net worth leverage at the end of the second quarter was 2.85x. During the second quarter, we invested approximately $115 million, $69 million of which was an investment in rail and $46 million was container related. We are being very selective in our approach to container investments. Approximately two-thirds of our total container investment in the second quarter was for refrigerated and other types of specialized containers. We continue to diversify our container product offerings and continue to focus on segments of the container market that we feel offer the most attractive risk return opportunities. Year to date, we have invested approximately $80 million in rail and have commitments for another $30 million of new car deliveries for the balance of this year. Additionally, we will continue to explore opportunities to acquire portfolios of used rail cars. That concludes our comments. Operator, please open the call for questions.

[Operator:]

[Operator instructions.] Our first question comes from Gregory Lewis of Credit Suisse.

[Gregory Lewis:]

Victor, could you provide a little bit more color around ClearPointt? I was kind of poking around their website to see what they do and how they can benefit us. Is that more a function of just given where you see CAI going with its rail car leasing business, or will there also be some synergies here to help the traditional seaborne marine box business?

[Victor Garcia:]

Well, we think both segments, the rail segment and the container segment, there are synergies between, because containers are used by the same customers, both rail customers and our traditional container customers. But the way I would describe ClearPointt, it’s an asset-light marketing company. They have rail contracts with all of the major railroads. They basically transport cargo around the country in domestic containers just like a company like Hub Group does, on a smaller scale. And so some of that is international cargo, that’s there, but a lot of it is also just domestic cargo that has gone from truck to rail and truck. And what it does for us, it provides us access to a whole drayage network that provides us access to various rail contracts that they have, additional customers. So we’re also going to use the IT infrastructure that they have to advance our own logistics efforts. So we’ll be able to, with the team we already have in place, have the full back office and IT to really streamline our efforts there. And we think that will provide a lot more opportunity for us to get more equipment moving around the country and to position it into places where we can do something with the equipment and to do it in a profitable way.

[Gregory Lewis:]

And just as I think about one more question on ClearPointt, the 22 employees, have they locked up on multiyear contracts post the acquisition you completed I guess yesterday? Just thinking about it, it’s clearly team-oriented business with some important people there. What type of lock ups do we have on the staff?

[Victor Garcia:]

We have noncompete agreements with the senior management and all of the marketing people.

[Gregory Lewis:]

Just shifting gears a little bit, I noticed that the owned CEU fleet increase was up quarter over quarter but it looked like the TEU owned fleet was actually down. If you could just sort of explain why that happened, I think that would be helpful.

[Victor Garcia:]

Well, we’ve been focusing on selling as much equipment as possible, and as I mentioned, a lot of what we invested in this quarter had a high CEU value and relatively lower TEU value. So the additions we made to the fleet to offset what was sold, fewer TEUs, more CEUs.

[Gregory Lewis:]

So it sounds like, just given what’s happening in the next couple of quarters, it sounds like that trend probably continues?

[Victor Garcia:]

It’s hard to tell. Clearly, we’ve had in this quarter softness that we didn’t expect. We had made a lot of our container investments in the early part, tail end of 2014, with delivery occurring or pickup by customers occurring in the first half of the first quarter. So we got a lot of momentum initially there, but things slowed down really into the second quarter. So what I feel good about is the equipment that we do have, we brought our inventory in the factories down to a very small number, and of what we have left, the majority of it is already committed to customers. So we don’t feel like we have an inventory overhang right now that we’re trying to find a home for. So we’ll look for more investment, if the returns are there, and if we think that the customer demand is going to be there.

[Operator:]

Our next question comes from Brian Hogan from William Blair.

[Brian Hogan:]

How fast was ClearPointt growing at $32 million in revenues? And what was the EBITDA on that?

[Timothy Page:]

As far as how it was growing, the company hadn’t grown very much. It was privately held. So it didn’t have the resources to really add additional staff, so it had been largely maintaining what it had. What is attractive to them by having CAI is that we’re going to add the resources to be able to expand, and we think that we can expand their top line as well as bottom line significantly over the next several years, because it’s a large market. But they really had been limited on what they could do.

[Victor Garcia:]

And on an pro forma EBITDA basis, we paid around 9x trailing.

[Timothy Page:]

So about $460 million of EBITDA.

[Victor Garcia:]

$7 million. Thousand, sorry.

[Brian Hogan:]

And staying with logistics, from the organic standpoint, obviously you made this acquisition, utilization declined in the quarter based on demand, but are you seeing progress in your organic logistics efforts?

[Victor Garcia:]

Absolutely. What made us really excited about bringing ClearPointt in is that we are seeing advancement in our own logistics efforts. We’ve added several new customers into our company, we’ve been able to increase, take equipment from low demand locations into better demand locations already. And what we think this now brings us is it streamlines a lot of that so that our existing infrastructure, our existing people, can be much more efficient. You know, finding, particularly in the first quarter, appropriate drayage was very difficult. There’s a whole established national network that ClearPointt already has, so we can pick up the phone now and handle all of the drayage needs of our customers without having to spend very much time, whereas before it took us longer to find, in specific locations, drayage.

[Brian Hogan:]

And obviously, ClearPointt, $4 million from an acquisition standpoint, has been relatively small. It’s a very fragmented market. Would you look to add more from an acquisition standpoint or is it like you’re just scaling up ClearPointt?

[Victor Garcia:]

It’s a combination of both. We are looking at other opportunities to make acquisitions. There’s a broader logistics strategy that we have in place, so we’re looking for companies that fit some of what we’re doing, and some of that is domestic in the United States. We’re also looking overseas, and some of the opportunities that there are overseas. So we’ll continue to be looking at that. Our idea is to buy companies that we think would be good platform companies and then expand it organically from there.

[Brian Hogan:]

The average price, take your capex in the quarter of containers, 46 divided by the number, and you get a container price average of $2,090. I think you said two thirds of the purchases were refrigerator, special containers. Is that what we’re seeing there? Because given the dry van price is $1,750 today thereabouts.

[Victor Garcia:]

Yeah, there’s a number of different equipment types there. So to really try to put a dry box equivalent price on it wouldn’t really come up with an accurate number. I think Tim had noted that two thirds of what we purchased was in non dry van containers, there’s quite a different mix of equipment types that are in that number.

[Brian Hogan:]

Have prices declined from where you actually bought those containers?

[Victor Garcia:]

In the ones that we’ve bought, no. Where we’ve seen the biggest impact in terms of decline in prices, it’s been on the standard dry van containers, and we really haven’t purchased any of those since the beginning of the year.

[Brian Hogan:]

And then just quickly on the competition, I read an article from [Drury] saying that the leasing companies are taking more than share, more than 50% now, and that the outlook is for that to continue to increase. Competition, lease rates, they’re under obviously a lot of pressure currently. What is your outlook and feel of the competition?

[Victor Garcia:]

I think competition is going to continue to be pretty strong for the rest of the year, because I think that a number of our competitors have a substantial amount of inventory still at the factory in the data that we look at. So we think it will continue to be competitive. And ultimately, it will also depend on how much demand materializes. We’ve had a softer second quarter. We would still expect that as we get into the fall season that we’ll have an uptick in the demand for containers for the holiday deliveries. But depending on how that actually materializes, we’ll see what the demand is. One effect we’ve seen is the less demand coming out of China, and that amount, it’s hard to, at this point, determine is that because there’s not demand coming into the developed world, or is it more into domestic. But it has been a softer area for us.

[Brian Hogan:]

And then the rail business, Tim, you said $20 million of run rate revenues exiting the year. The operating income, I guess even from a margin standpoint, either or, what’s the run rate you expect?

[Timothy Page:]

I don’t have that number right in front of me, but the operating margins are going to be very similar to what we get in the container business.

[Brian Hogan:]

Then going back to the container price real quick, what are the returns on today’s boxes, those purchases that you just made? I assume they’re a little bit less than what they had been, but kind of just go into that please?

[Timothy Page:]

It goes into a number of assumptions you have to make, because they’re not full payout leases. Traditionally, I don’t think we’ve gone into what exactly returns are in the marketplace, because this is kind of an open forum. But I would say in the investments that we’ve made, the returns have been about consistent with where they’ve been over the last two, three quarters.

[Operator:]

Our next question comes from Kevin Sterling of BB&T Capital Markets.

[Kevin Sterling:]

Victor, I want to dive down into ClearPointt a little bit more too, because you made a comment, you said it’s like Hub Group. So would you consider ClearPointt an IMC then? If so, how many domestic boxes do they own, if they own any? Or do they utilize rail owned boxes?

[Victor Garcia:]

It’s very much an IMC, so that’s exactly what they do. They do about 12,000 moves today a year. They’ve used the rail boxes for the most part, haven’t owned any domestic containers. We’ll evaluate as our business develops whether to put a mix of our own boxes into that service, but even for somebody like a Hub Group, there are a lot of rail related boxes that are utilized. But we look and model after those types of companies and try to build strategies around that type of company. What we believe is that we bring a different element to the table with the assets and reach that we have. So we’ll not only try to bring financial resources to that business, but we think we provide customers a strategic alternative that some of the other companies in that business today don’t have.

[Kevin Sterling:]

So does ClearPointt have contracts with all the class one rails, or do they utilize one western rail partner and one eastern rail partner? How should we think about that?

[Victor Garcia:]

They have contracts with all of the railroads.

[Kevin Sterling:]

And just sticking on ClearPointt, I think this is pretty interesting, because we are seeing a lot of M&A activity in the logistics space. What’s their breakdown of employees versus agents?

[Victor Garcia:]

Seventeen employees, five agents.

[Kevin Sterling:]

Their agents, are they required to use, within the ClearPointt networks, contracts with the class one rails? Or the agents, they have the freedom to say maybe use a JB Hunt or a Hub Group for intermodal moves or outside. How does that work?

[Victor Garcia:]

Work through ClearPointt.

[Kevin Sterling:]

And you mentioned logistics acquisitions. You continue to evaluate that and look at that. I assume you probably like the asset light model that ClearPointt brings and it seems like that’s what you’re targeting. Is that your goal, as you think about acquisitions, to stay asset light?

[Victor Garcia:]

Asset light is a great mode that people like to discuss, but having to borrow all of the elements to serve a customer is not only difficult, but hard to do over time. We think that we’re looking to build a franchise that has some strategic advantages, and having assets and the availability of assets is a key part of that. That’s why I think that if you look at many of the logistics companies that are out there, they’ve come from a trucking background into that. We’re coming at it from an international background into the domestic. So there are a lot of advantages that people who have trucking histories coming into the space and we recognize those, but we also think that we provide, to certain customers, better alternatives. And I don’t want to get into the specifics of it, but when we discuss it internally with people like ClearPointt, they get it very quickly, about the opportunities in the marketplace that a company like ours presents. And that’s why, as excited as we are for making this acquisition, I would tell you, our colleagues at ClearPointt see the value proposition and are very excited to be part of the CAI group.

[Kevin Sterling:]

I think that’s an interesting viewpoint. Thank you, Victor. And I guess lastly, along those lines, you guys obviously specialize in international, but here, a lot of those international boxes are trans loaded to 53 foot boxes, domestic boxes. With the acquisition of ClearPointt, do you see this kind of maybe giving you a leg up or an advantage as you think about the trans loading market and that opportunity?

[Victor Garcia:]

Again, it’s hard in a call like this to talk about, but we’ve looked at the supply chain of how cargo is being transported. There are trends in the marketplace whether you look at it from the truck to rail, what’s going on with shipping lines. We think that there are a number of trends in the marketplace that will benefit us over time. And not just benefit us to manage our own utilization, but to make with our own resources, with our own containers, be able to add a lot of value to be able to provide services where we actually get paid for our services in moving boxes around. And so we’re focused on that, it’s part of our strategy. There are other elements to it that we’re going to be looking to complement this with, and we’re looking for those kind of opportunities similar to this, where it can be used as a platform and fits nicely with the direction we’re going.

[Operator:]

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

[Doug Mewhirter:]

Maybe a general question about ClearPointt. They’re obviously a small player in the industry, and it is somewhat fragmented. There’s other small players. But I guess could you maybe summarize how they’re able to effectively compete with the big players like JB Hunt Group? JB Hunt Group definitely have huge advantages in terms of their current availability and negotiating power with customers, and with the rails. I just wondered how they’ve been able to thrive with their size for so long, and why you think that’s a good asset to be competing against these big guys with.

[Victor Garcia:]

I think there are a very large number of customers that are moving cargo around the United States. I don’t want to intimate that we are planning on going head to head with JB Hunt or a Hub Group. And actually, many times, we’ll work together with some of those companies on specific opportunities. There are smaller, middle market companies that are moving cargo in the United States who have varying degrees in multiple different lanes. So it’s really a customer selection. There are certain customers where if you focus on them and you provide them the right service, and you can give them something else in addition, which we think we can, that we’ll be able to expand on it. But they’ve been able to profitably manage their business and to grow their overall operation over the last 12 years and compete with some of these other companies.

[Operator:]

And our next question comes from Helane Becker of Cowen & Company.

[Helane Becker:]

I think you mentioned that you thought that there would be a pickup in container demand later this year as we start getting more into the peak shipping season, and I’m just kind of wondering, are you seeing something that leads you to that conclusion? Or is it still just you’re hoping that we get to that point?

[Victor Garcia:]

I think what we’re expecting in the container business is that there normally is… When you look at the economic environment out there, generally speaking, I would say we’re seeing some demand, but not the kind of vibrant growth that would give us an increasing demand for containers. And what we’ve seen in the second quarter is just that things have been relatively steady to slightly more units coming back. But it would be surprising to us if the whole season played out like that. If we get into the fall season, that it wouldn’t happen. But we’ll have to see. We were surprised this quarter. But if we don’t see anything in the third quarter, then we’d have to look at where the economic conditions are, and we don’t see that kind of weakness out there.

[Helane Becker:]

How should we think about capex now for the year, because you didn’t spend as much in the second quarter? Are you going to catch up? Or should we think about bringing our capex forecasts down?

[Victor Garcia:]

We’ve invested actually more in rail than we had expected, so when we look at our capex for the year, and we have invested in a fair amount of specialized equipment, so I don’t want to say that we haven’t invested in containers. We have invested in it, but we’ve been selective on the types of containers we’ve invested in. So I would say our capex goal for the year overall is about the same as what we have.

[Timothy Page:]

I think from a timing perspective, absent a pickup in standard dry container demand, our capex will be lower in the second half of the year than it was in the first half.

[Helane Becker:]

Will you have a separate line item, then, for purchase transportation or ClearPointt, or something that will show up somewhere other than in these other three line items for revenue?

[Timothy Page:]

We’ll have a revenue item for transportation services and then we’ll have an expense for transportation costs.

[Operator:]

And I’m showing we have a follow up question from Brian Hogan from William Blair.

[Brian Hogan:]

Back to the ClearPointt real quick, are there incentives for the employees in the earn outs associated with those? I know you had noncompetes, but anything…?

[Victor Garcia:]

No earn outs, but in this business, it’s an incentive based business, because it’s largely service oriented, so there are performance incentives at the company which we will look to continue to enhance to stimulate growth.

[Brian Hogan:]

Are those based on growth of new business?

[Victor Garcia:]

Growth and the margin that is obtained on the new business.

[Brian Hogan:]

And then going to the container prices and residual values, with the drop in the China steel prices and new container prices, how long does it have to stay down at these levels before you would actually change your residual value assumptions and impact depreciation and that?

[Victor Garcia:]

When we look at residual values, we have to look at not what we’re getting today, but what we expect to get over the longer term period. And whether that’s three years, four years for a midlife asset, or for a new asset, 10-plus years. So with this kind of situation, we would have to look on a longer term basis and evaluate do we think that there is a long term change in what we think we can realize and not something that is just a current market situation. So we do have to evaluate that every once and a while, but I would say at this point, we’re not looking to change our residual value assumptions.

[Timothy Page:]

I think if you look back at the history of container prices, since 2000, there have been a couple of times when new 20 foot containers were below the levels they’re at today. And so looking at residual values and depreciation isn’t kind of a mark to market situation. As Victor says, you have to look at long term trends of what you’re actually selling used containers for and where you’re selling them, etc., etc. So while prices are certainly down, we’re not at a point yet where we think this is a long term, five, 10, 15 year kind of a trend.

[Victor Garcia:]

And just as kind of a final point, because as we’re aligning ourselves to be more capable on the logistics side, which we spent some time today talking about, container prices and what you sell a container for is not the same price across every region. It’s also not the same price across every city. So even within the United States, there’s significant variance in market to market, what you can get a container for. That’s why the ability to manage, to control our own equipment, to move our equipment around, to extend the life of the asset, to find more customers for these assets, we should be able to, on an apples to apples basis, realize more on our containers than otherwise. So we don’t feel like we’ll have to sell containers, because that’s where the market price is, we can look at where the broad market is and how we can move equipment into where we need to. That’s why part of this is very exciting, is that not only do we benefit from the services we provide, but on the base business that we do have, we can strategically position equipment to where we’re going to realize the most value.

[Timothy Page:]

And get paid for doing that.

[Brian Hogan:]

And then one last one. The manufacturers, obviously container prices being depressed, what is demand, I think it’s kind of low for new containers. Are they kind of talking about shutting down, reducing capacity sort of thing?

[Victor Garcia:]

They have been slowing down. They haven’t shut down yet, and this would be a very odd time of year to be shutting down, because it’s typically when you are in your strongest point. But as a reflection of the overall environment, I would say they are stretching out their production capabilities just to keep the factories from being shut down. But at this point, we haven’t heard that anybody has actually formally said that they’re going to shut their factories.

[Brian Hogan:]

And then what’s the depot inventory levels currently, roughly?

[Timothy Page:]

Are you talking about new factory? Roughly off lease, we’ve got about 7% of our fleet is off lease.

[Brian Hogan:]

From an industry perspective.

[Victor Garcia:]

We’ve got about, roughly speaking, I believe about a million CEUs of factory equipment out there. We have very little of factory equipment out there, but when I make the comment that we expect the marketplace to continue to be competitive, we look at that amount of inventory that’s out there and we see that box prices have come down. So we would expect over the next three to six months, on a standard dry van container, for things to continue to be pretty competitive. That could change, but that would generally be the feeling. Fortunate from our standpoint, we have very little, and we have in certain locations no equipment available. So we’re focused on other areas where we think today we can get better returns and not have to wait around for that part of the market to return.

[Operator:]

[Operator instructions.] And at this time, I’m showing that there are no further questions in the queue. I would like to turn the call over to Victor Garcia, president and CEO, for any closing remarks.

[Victor Garcia:]

Just like to thank everybody for being on the call today. Look forward to speaking again when we report our third quarter results. Thank you.