Textainer Group Holdings Limited
Q4 2014 Earnings Call Transcript

Published: 18 Feb 2015

[Operator:]

Welcome to the Textainer Group Holdings' Fourth Quarter 2014 Earnings Call. My name is Laura, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Executive Vice President and Chief Financial Officer, Hilliard Terry. Mr. Terry, you may begin.

[Hilliard C. Terry III:]

Thank you, Laura. And welcome to Textainer's 2014 fourth quarter and full year earnings conference call. Joining me on this morning's call are Phil Brewer, TGH President and Chief Executive Officer. At the end of our prepared remarks, Robert Pedersen, TEM President and Chief Executive Officer will join us for the Q&A. Before I turn the call over to Phil, I'd like to point out that, this conference call contains forward-looking statements in accordance with U.S. securities laws. These statements involve risks and uncertainties, are only predictions, and may differ materially from actual, future events or results. Finally, the company's views, estimates, plans and outlook as described within this call may change subsequent to this discussion. The company is under no obligation to modify or update any or all of the statements that are made. Please see the company's Annual Report on Form 20-F for the year ended December 31, 2013 filed with the Securities and Exchange Commission on March 19, 2014 and, going forward, any subsequent quarterly filings on Form 6-K for additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements. I'd also like to point out that during this call, we will discuss non-GAAP financial measures. As such measures are not prepared in accordance with Generally Accepted Accounting Principles, a reconciliation of the non-GAAP financial measure to the most directly comparable GAAP measure will be provided either on this conference call or can be found in today's earnings release. At this point, I'd now like to turn the call over to Phil for his opening comments.

[Philip K. Brewer:]

Thank you Hilliard. I would like to welcome all of you to our fourth quarter and full-year 2014 earnings call. I will begin by showing highlights about the year we just completed and then provide some thoughts about the business and industry as we move through 2015. After which, Hilliard will provide details on the quarter. We are very pleased with our 2014 performance, which was far better than what we anticipated after a slow start to the beginning of the year. Revenue for the year totaled $563.1 million, the highest in our history, an increase of 6.4% compared to 2013. Additionally, our leasing rental income totaled $504.2 million for the year up 7.6% from last year. Adjusted net income was $193.8 million for the year or $3.40 per diluted common share an increase of 10% from the prior year. This amount includes $7.9 million attributable to a settlement with a bankrupt customer and a $22.4 million one-time tax adjustment. On a normalized basis, our adjusted net income was $163.7 million, a decrease of 7.1%. Our annual ROE on adjusted net income was 16.9% or 14.3% on a normalized basis. We declared a quarterly dividend of $0.47 per share continuing our history of constant or increasing dividends every quarter since going public, resulting in total 2014 dividends of $1.88. The pickup in demand during the summer was much longer and stronger than expected, similar to the second and third quarter demand peeks we saw traditionally in our industry. We placed the large container order in April, before the pickup was apparent, placing us in a strong position to benefit from the market upturn. Our utilization increased more than three percentage points over the course of the year and our unbooked inventories saw a decline of more than 60% during 2014. Today, our utilizations stands at 97.7%. During 2014, we invested $864 million a 15% increase compared to $752 million invested in 2013. 98% of our CapEx was for our owned fleet helping increase the percentage of our fleet which we own from 76% to 79%. We were ones again the largest purchaser of dry freight containers among leasing companies, which is critical to our strategy of being the industry's most reliable supplier. Our total fleet now exceeds 3.2 million TEU at 6% increase year-over-year. 2015 looks to be as challenging as 2014 seemed at the beginning of that year. Many of the same conditions that existed last year remain today, projections for global economic growth in 2015 have been revised downwards in recent months. Freight rates are expected to remain under intense pressure as the projected growth in vessel capacity exceeds projected demand growth by several percentage points. Container lessors continued to have easy access to low-cost financing. New container prices are low, around $1,900 per CEU and manufacturers continue to produce well below capacity with around 3 million TEU believed to have been produced in 2014 and a similar quantity projected for 2015. We do not expect new container prices to increase in the near-term unless steel prices and/or demand rise unexpectedly. Similarly, we believe used container prices will not increase materially from current levels. And could decline more for the depressing gains on container sales. Leases maturing in 2015, have the highest average rental rates of any of our current leases. We expect containers subject to those leases to be re-priced downwards and/or the containers will be returned. Fortunately, only 8% of our un-hired fleet subject to long-term leases mature this year and largely in the second half of the year. We are proactively working with our lessees to renegotiate and extend these leases. Two factors, that could have a positive effect on our financial performance and increase in interest rates or an increase in new container prices seem less likely now than they did six months ago. Nonetheless, we have invested and we'll continue to invest in new containers only when the projected returns meet or exceed our investment criteria and our required return provisions. We are selective in this regard and have passed and will continue to pass on deals that do not meet these criteria. Furthermore, we believe that over a longer term horizon, returns earned on containers purchased in today's lower priced environment will benefit when container prices and/or interest rates increase and these containers re-priced under stronger market condition. 84% of our fleet is subject to long-term and finance leases. We are conservatively levered with a debt-to-equity ratio of 2.4 tons. Our average interest cost is less than 3%, demonstrating our consistent access to low-cost financing. We are the lowest cost operator among major lessors with overhead cost per CEU 40% to 50% below our public company peers. We generate a strong return on equity and offer a dividend yield of 5.5%. We believe we are well positioned for 2015 and subsequent years and expect to continue our market leading position. I'd now like to turn the call over to Hilliard.

[Hilliard C. Terry III:]

Thank you, Phil. Turning to the quarterly results. During the fourth quarter, lease rental income grew 6% year-over-year, due to an increase in the size of our own fleet and a more than three percentage point increase in average utilization, however, lower resale prices reduced gains on sale. Direct container expenses decreased 22% in spite of the 13% increase in the size of our own fleet. The increased utilization of our own fleet resulted in lower storage costs. Depreciation expense was $46 million for the quarter up $6 million year-over-year largely as a result of our larger owned fleet. The increase in the depreciation expense is largely responsible for our core operating expenses being up 6% year-over-year. Annualized depreciation expense increased from 4.2% to 4.3% of average growth container asset value. Our bad debt expense was a little less than 1% of revenue. We continue to believe the normalized run rate for bad debt expense should trend around 0.5% to a percent of revenue on a longer-term basis. We saw a nine-day improvement in DSO versus last year, reflecting continued diligence over our credit and collections processes and expect a positive direction of our DSO improvement to continue. Our interest expense, including realized hedging costs, but excluding the write-off of unamortized banks fees and unrealized losses on interest rate swaps, was $21 million for the quarter, down 13% versus the year ago quarter, in spite of a 10% increase in our average debt balance. We continue to benefit from our refinancing activities over the past year, as our average effective interest rate, which includes realized hedging cost is currently 2.98%. A decline of 77 basis points, when compared to the year ago quarter. A week ago, we announced the refinancing of our older or, I should say, more seasoned container warehouse facility, lowering the borrowing costs by 30 basis points to LIBOR plus 195 and extending the revolving period from two years to three years. The benefits of these financings will continue into 2015. Currently, the duration of our debt is closely aligned with the duration of our lease portfolio. As of quarter end, 81% of our debt is fixed or hedged, consistent with the percentage of our total fleet subject to long term and financed leases. The weighted average remaining term of our fixed or hedged debt is 49 months. The weighted average remaining term of our long term and financed leases is 38 months. Income tax expense for the quarter was $627,000. Our effective tax rate varies from quarter-to-quarter due to discrete one-time items. As we've stated last quarter, we now expect our annual effective rate to be in the low to mid-single digits. Adjusted EBITDA was $113 million for the quarter, up 4% from last year. Adjusted net income, which excludes unrealized gains and losses on interest rate swaps and the write-off of unamortized financing fees for the quarter, was $44 million, resulting in adjusted EPS of $0.77. As Phil mentioned earlier, our dividend was $0.47 per share. As a reminder, some or all of such distributions may be treated by U.S. shareholders as a return of capital rather than dividends. Finally, turning to the balance sheet, as of the December 31, our cash position was $107 million and our total assets were $4.3 billion. Thank you for your attention, and I'd now like to open the call up for questions. Laura can you inform the participants of the procedures for the Q&A?

[Operator:]

Of course. We will now begin the question-and-answer session. And our first question comes from Steven Kwok. Steven, your line is open.

[Steven Kwok:]

Hi, guys. Good quarter, thanks for taking my questions. First question, I guess, was around capital management. I believe two of your public peers are in the market, that they view their stock and they're buying back some of their stock. Just what are your thoughts around using perhaps some of your capital, in terms of buying back your stock at current levels?

[Philip K. Brewer:]

Hi. This is Phil. Good morning. How are you? I'd say, we fully understand why our competitors are buying back their shares, I think all of us in the industry look at our share price and occasionally feel that we're not being properly valued. Having said that, while we have looked at buying our shares back, we haven't done so, we will continue to look at that going forward and make a decision on a case-by-case basis depending on the share price and the other opportunities we have to invest our cash.

[Steven Kwok:]

Got it. And then just around, in terms of, I guess, competition, do you view that, is there a point where, some of the other guys out there would pull back from the market, just given the returns that are being generated? What are your thoughts on that and what will help drive for the industry to see better return?

[Robert D. Pedersen:]

Morning. This is Robert, here. We haven't really seen the competitive landscape change that much. Yes, rental rates are down, but so are container prices and interest rates. So if you look at the net return, it's not dissimilar to what we've seen in the last 12 to 18 months. We do see more competition in the beginning of the year, as everybody comes with a new CapEx budgets. And certainly, we have more competitors competing for the same transactions. But that's business as usual. If we go back 12 months, we saw exactly the same 12 months ago. So we're kind of not surprised about the competitive landscape right now.

[Steven Kwok:]

Got it. And just as a last follow up. Just – if we were just to look at the return, what are the – where are they now and how does that compared to about a year ago?

[Robert D. Pedersen:]

They're similar, they're high single-digit.

[Steven Kwok:]

And that's the same as last year as well?

[Robert D. Pedersen:]

That's correct.

[Steven Kwok:]

Okay. Great thanks for taking my question.

[Philip K. Brewer:]

Thank you.

[Operator:]

And our next question comes from Gregory Louis. Gregory, go ahead. Gregory Lewis - Credit Suisse Securities (USA) LLC (Broker) Yes. Thank you and Good morning.

[Philip K. Brewer:]

Morning, Greg. Gregory Lewis - Credit Suisse Securities (USA) LLC (Broker) Phil, you made an interesting comment about, potentially being a good time to buy simply because container prices are low. Note, if we were to flash back about five years ago, container prices were high. And so now you're seeing pricing get reset lower. Do you think – how about this, is Textainer looking at potentially buying containers today to take advantage of the fact that initial box prices today are low? Is that something that's going on in the industry, which is sort of exasperating, keeping returns in this high single-digit level?

[Philip K. Brewer:]

I wouldn't say, exactly the way you're looking at it, Greg, it's correct. When we invest in assets, we're only investing assets, because we think the business we're generating at the moment we invest in that asset is attractive business. We look at the returns, we look at the turnover time, the return provisions, of course, which are very important, and we won't buy that container unless we think it's a good investment today on the returns we're earning. Having said that, we also believe that, over time, container prices and interest rates will trend up and both of those factors will be positive for container leasing companies. Gregory Lewis - Credit Suisse Securities (USA) LLC (Broker) Okay. And then just – as we look at the company's utilization. Utilization has continued to rebound, we're in the mid, well – it's been kind of flat here in the 97% plus range. As we think about 97 – as we think about high utilization and the market environment. As you see 2015 progressing, in terms of capital spending opportunities, are you excited at the prospects for 2015? Do we think 2015 is going to be another robust year like we've seen in the last couple – for the ability to deploy capital or do you think it's sort of, we could – this is the year where we could actually say, CapEx opportunities coming from this and coming from the industry sort of take a breather?

[Robert D. Pedersen:]

Greg, this is Robert here. I think we look at this year being quite similar to last year. The only different possibility being that, there was more speculative buying in the fourth quarter 2014 for businesses that will be generated in 2015. So, everybody kind of front-end loaded their production schedule and some of the CapEx numbers for last year. Probably, slightly inflated in as much as the business is really generated this year. Having said that, Chinese New Year, which starts later this week here, was later in the year than it was last year. And that has generated more business in the early part of the year. We do expect a slight slow down here afterwards, you do – it normally takes two weeks to four weeks. And then the market comes back and I think we and other leasing companies will continue to replenish their inventories going forward. So, when we look at that, and we hear from our customers, we think it will be kind of similar year to last year. Gregory Lewis - Credit Suisse Securities (USA) LLC (Broker) Okay, guys. Hey, Thank you very much for the time and nice quarter.

[Robert D. Pedersen:]

Thank you. Greg.

[Operator:]

And our next question comes from Michael Webber. Michael, your line is open.

[Michael Webber:]

Hey. Good morning, guys. How are you?

[Hilliard C. Terry III:]

Hi, Mike. Morning. Thanks. We're fine. Thank you.

[Michael Webber:]

Hilliard, I wanted to jump in with a question for you first. You guys put out on release, I believe it is last week or even earlier, around refining your revolver. It looks like the rate came down, the tenor went up, so we're pretty positive. We're just curious, as to whether there was any sort of drop in the advanced ratios associated with that, and in general, how those converse – if there's been any incremental change in terms of the conversations around collateral value, with the lending date, I mean obviously, I don't think anyone would be too negative. I'm just curious around whether there has been an incremental tightening and if that would lead through to maybe a slightly lower long-term degree of leverage maybe within the space not even Textainer specific?

[Hilliard C. Terry III:]

Sure, Mike. First off, I think the announcement that you're referring to is not our, what I would describe as our corporate revolver, it's a smaller revolver that we use for the older containers. But I think consistent with all of the financings that we've done year-to-date, we've basically lower the cost of that facility, we've also extended the tenor of the revolving period.

[Michael Webber:]

Yeah.

[Hilliard C. Terry III:]

And actually in this particular case, because we change the depreciation that is used, we are technically borrowing a bit more on those particular assets in that revolver. So I would say that's a bit of an unusual case for that particular facility. However, you do bring up a very good point, I think many are aware that the rating agencies have gone through and looked at sort of the various facilities. And taking into consideration that there are lower yields on the leases in those facilities or lower per diem.

[Michael Webber:]

Yeah.

[Hilliard C. Terry III:]

And so, they've made some, what I would describe as adjustments in their rating assumptions and things of that sort. I can't speak for everyone, I can just speak for us. We've looked at the changes that they have proposed and there really is no impact on our facilities. So, yes, I think externally the agencies have taken into the consideration the lower per diem rates, but for us there's no impact.

[Michael Webber:]

Okay. So I guess, the way to think about it is, maybe as a marginal impact, but not at a point, it'd impact your business....

[Hilliard C. Terry III:]

Correct. The other thing I would add is, we're pretty conservative. So even if we could have, let's say a slightly higher advance rate, a couple of percentage points higher, typically what we do is we take the conservative road and we – if we could have 82, we go with 80. So we've been conservative from that standpoint, which plays to our favor.

[Michael Webber:]

Okay.

[Philip K. Brewer:]

And Mike, if I could just add something, that I think, it doesn't get quite enough attention is the fact, that we are pretty under levered, especially relative to our competitors. I think, if you look at the return on equity that we generate compared to others who are much more highly levered than us, I think, on any risk-adjusted basis. I mean, a return on equity in the mid teens, in my opinion, in this market, is extremely attractive. And then, when you consider the fact that we're only slightly over two times levered, on any risk-adjusted basis, I'd say that I think our return on equity is outstanding, and I just don't think it gets quite enough attention.

[Hilliard C. Terry III:]

I agree Phil.

[Michael Webber:]

No, I appreciate you bringing that up. That's very helpful. Actually Phil, I would like to speak with you, and then maybe kind of loop in Robert just around – within your prepared remarks and within the release, you mentioned that asset values were lower and were sub 2,000. And just both of you guys have been around this space for a very long time and in different roles, just curios, where you think a realistic floor for asset values are right now? Just given, what we're looking at in terms of pricing dynamics for Corten steel and the current rate dynamics, just so if you had to put a number on it, when you look out a year and two years, where do you think the realistic floor is? Is it back where you were in the 90s – high 90s and we were somewhere in the kind of 13.5 to 14.5 range or do you think that's off the table?

[Philip K. Brewer:]

I mean, Mike, hi this is Phil. I don't think that we're going to see prices at that level, no. But I'd say prices today are a little lower than where I believe most industry participants expected prices to be. Clearly the cost of steel is a very big factor, in determining the price of containers. We've seen the decline in the demand in many commodity prices, including iron ore, and that's driven down the cost of containers. At this point, I'd say it's difficult. I do believe that container prices can go a bit lower than where they are now. I don't think, we're going to see dramatic declines. But then again, it will depend quite a lot on the price of steel. Over time, I believe container prices do trend up. I believe energy prices, labor costs and fuel costs will all increase. That – you may be talking of a timeline of two, three years, but I do believe that, that will happen. I just – I think right now, it's very difficult to predict when.

[Michael Webber:]

Okay. Now, that's fair. And then just – we'll get maybe kind of a bit more granular in specific to the current market, given where pricing is now, in terms of where, in the pricing levels in the margins for the major manufacturers. So (24

[Robert D. Pedersen:]

Hey, Mike. It's Robert here.

[Michael Webber:]

Hey Robert.

[Robert D. Pedersen:]

I mean the interesting part, the manufacturers have not made any announcement about any extended shut-down at the Chinese New Year this year. That's kind of interesting. That, I think that says something about pricing, That means there could probably be a little bit more downward possibility, inasmuch as they really want to shut down the lines. They don't want to have to go out and have to rehire the qualified labor, welders and so forth. And having said that, and I know we've said that earlier, at slightly higher levels, but there seemed to be a floor at about $1,900, where psychologically the manufacturers really don't want to go under, and maybe they will do it for a smaller, very short term kind order, but I think for the bigger buying, I think there is a floor at that level. But a lot of the pricing and the manufacturers' overhead they allocate to each container produced, really depends on what production levels they're having. However, if the orders are not there, they're still better off producing than not producing. So I mean there is some elastic in the standard pricing. And so therefore, Phil is right, I mean, we do expect prices to increase over time, but in the short term, there's a chance they could drop lower.

[Michael Webber:]

Got you. Okay. That's helpful. Just one more from me and I'll turn it over and forgive me if you guys mentioned this already and I missed it. But you talked about the fact that we're potentially stepping into the lower asset values here, when you look at the market in the context of maybe a decade and that you could see a re-pricing catalyst, call it, five to six years out when the market improves and these current leases are up for renewal. Are you guys actually getting any shorter in terms of your lease durations to maybe pull forward some of that potential exposure, is that just – is it too early to start doing that?

[Philip K. Brewer:]

There's something – it's something we've discussed. Generally, the market still looks at five years as being the expected term over which – expected term of maturity for a lease. So, no, in general, we haven't been entering into the leases with shorter maturities on that expectation, but I will say, we've had that discussion and I suspect we'll continue to have that discussion over the course of the coming year.

[Michael Webber:]

Okay. Great. Thanks for the time guys. I appreciate it.

[Philip K. Brewer:]

Thank you.

[Operator:]

And our next question comes from Helane Becker. Helane your line is open.

[Helane R. Becker:]

Thanks very much. Hi, guys. Thanks for the time. Do you have more room to go in lowering your borrowing costs?

[Hilliard C. Terry III:]

Helane, I get asked that question, I think, every quarter and I always say no, but we squeak something out. I mean, every time we've successfully refinanced a deal or done a deal, we have lowered our borrowing costs, but each time we do that, obviously, it's going to be difficult. It just depends on how the market is going forward and what the environment looks like. We are going to be opportunistic and if we see an opportunity to issue some debt that has longer tenor at attractive pricing, we're going to do that. But I wouldn't promise it.

[Helane R. Becker:]

Okay. And then, Phil, I was just wondering if you were thinking about acquisition opportunities, given where the assets are being priced in the market. Is there opportunity for you to pick up some attractive assets at attractive prices right now?

[Philip K. Brewer:]

We'll, I'd – every quarter, I get asked that question similar to the question you just asked Hilliard.

[Helane R. Becker:]

I guess, we're really boring.

[Philip K. Brewer:]

No, no, you're not boring. That's something we're always looking at. In fact, when I made the earlier comment about our low leverage and how I think it – we don't frankly get enough benefit for the extent that we maintain a low leverage and still return a very attractive ROE, another point of being lowly levered is that, it allows us flexibility to look at opportunities, and we do. Every single quarter, we're looking at opportunities to pursue other types of business or to grow within our own industry. And I can tell you, we will continue to look at both of those types of opportunities going forward. I can't tell you when and if something will materialize, but it's certainly a very important part of our strategy is to continue to look at how we can grow the company both within our industry and potentially outside of our industry.

[Helane R. Becker:]

But outside would it be – would it still be within the same leasing purview?

[Philip K. Brewer:]

Again, it will be very difficult for me to comment on anything because – as we haven't actually secured any transactions. I think most of us believe that if we're going to pursue something, it has to have some relation, some connection with what we're currently doing that there needs to be some synergy. But as we haven't actually secured any transactions, it's pretty difficult for me to talk specifically.

[Helane R. Becker:]

Okay, well that's fair. And then I know you said that your – I think you said that 8% of your leases come up in 2015. But did you say how much in 2016?

[Philip K. Brewer:]

It's a little bit more in 2016. I think the current figures like 11% in 2016, based on our fleet size as of today. So our fleet size would grow of course or I would certainly expect it to grow over the course of 2015. In which case then, that figure will shrink somewhat.

[Helane R. Becker:]

Okay. And then I just have one last question related to the Lunar New Year. In the proximity of Easter to the factories coming back, will there be enough time to get containers into service between the late Lunar New Year and the early start of the Easter holiday? And within that context, the port issues, that are going on in the West Coast, I would think that people would need more containers, given that everything seems to be bottlenecked in lower Southern California?

[Robert D. Pedersen:]

Hi, Helane, it's Robert here. Let me just answer the last question first. Because, I think that is important, and I guess the answer is yes. We have not seen it yet to a larger extent quite frankly. I thought it was going to happen pre-Lunar New Year, that we were going to see additional pickup activity in Asia as a result of shipping lines having a slower turnaround time on their container assets. I mean, I just drove over the Oakland Bay Bridge this morning here, there are thousands of containers on vessels that are not being operated right now and more vessels laying off of the port area. So clearly, when the demand takes off in Asia, those containers will be needed out there. There will be a shortage and does that happen before, after Easter? Honestly, we don't have that information right now. But when you compare 28 ports in the U.S. West Coast, and I see what's just going on here, which is small compared to what's going down in L.A. and Long Beach. It must have the significant impact, particularly if the second quarter peak starts as early as May, like you did this year, then, there's no doubt that will have an impact on container demand.

[Helane R. Becker:]

Great. Okay. Thank you so much for your help everybody.

[Philip K. Brewer:]

Thank you, Helane.

[Operator:]

And we have Ken Hoexter with a question. Ken, go ahead.

[Ken Scott Hoexter:]

Great. Good morning. Just a follow up on Greg's question earlier. In balancing the cheap prices versus what you view as a raising interest rate at some point, versus what you talked about as reduced returns on interim – on the lower rates. So how do you think about how much you want to commit then or over commit this year, if longer term you see raising interest rates? So I guess, do you build in a long term average on your returns or are you going back to just like you mentioned solely on today's returns when you make that investment?

[Philip K. Brewer:]

Well, it's important to keep in mind that when you look at the return on an invested container, you are making projections about what's going to happen to that container after the initial lease period. We all know that the initial leases are generally five years, and the asset lasts for 14. So we're making some projections of how that container is going to perform over its entire life including what the residual value on the container is going to be. Then based on that analysis, that's what will determine how much we're going to invest in the container or not. We're not taking the view that these are low prices, so we are going to do lousy deals, for example, right now, because we're – we think that the containers, the return on this asset will improve over time. When we invest in a container today, it's because we believe that, that return that we'll earn, taking into account the assumptions I just mentioned earlier, that the return we'll earn on that asset will be attractive relative to our cost for that asset. Our cost and our cost of financing that asset.

[Hilliard C. Terry III:]

And Ken, I would just add, I think in my prepared remarks, you might have recalled that I mentioned that we're slightly over hedged. So if you look at the average remaining term, it's about 38 months. And if you look at sort of how far out we're hedged, it's 49 months, I believe.

[Ken Scott Hoexter:]

I thought, it was 38 versus 41, it was 38 versus 49.

[Hilliard C. Terry III:]

Well, let me double, double check.

[Ken Scott Hoexter:]

Because, Hilliard...

[Hilliard C. Terry III:]

Yeah 38 versus 49.

[Ken Scott Hoexter:]

49, okay. So then I guess on that, Hilliard, that was another question I was going to ask you, but is there any move to extend the durations on the fixed side given, if your belief is in raising interest rates, can you and do you want to move them or do you want to keep them as closely aligned to your lease timeframes as you can?

[Hilliard C. Terry III:]

Frankly, Ken, we have been extending duration for some time now. And as I said, we are going to opportunistically continue to do that. Right now, rates are low and we just did a debt offering, a bond offering back in the November timeframe, which was priced quite well. And we may be looking to do something similar soon to further lock in long-term rates.

[Ken Scott Hoexter:]

Okay. And if I could follow-up on with Robert, you mentioned kind of the your thoughts on the build-up on the ports and the containers, but you kind of threw in there that you were surprised you haven't seen the tightness yet. But given the backlog expected soon, can you go back to 2002 and maybe throw out thoughts on the impact to the industry. What was maybe a short-term impact and then maybe a longer-term impact in, in terms of customers' reaction on the leasing? Did it have an impact on rates and demand? Can you kind of give a, maybe a little history and in terms of what happened around that strike? That asset? (37

[Robert D. Pedersen:]

Well, we think at this stage here, buying new containers is a lot easier, and therefore, I mean, if we place a new order, we can probably get delivery within a month or so, so can shipping lines. So whether they lease or buy, they will be able to add container assets relatively fast, if they have the CapEx to do so. We also have deployment story (37

[Ken Scott Hoexter:]

Wonderful. I appreciate the insight. Thank you.

[Hilliard C. Terry III:]

Thanks Ken.

[Operator:]

And our next question comes from Sal Vitale. Sal, your line is open.

[Salvatore Vitale:]

Good morning gentlemen.

[Philip K. Brewer:]

Good morning, Sal.

[Hilliard C. Terry III:]

Good morning.

[Salvatore Vitale:]

So just – so, just a quick question for you. You mentioned earlier, when you were discussing your CapEx that you did in 2014 that your level of CapEx is what you believe is critical to your strategy of being the industry's most reliable supplier. Can you provide a little bit of more color there and how you think that provides you with a competitive advantage, vis-à-vis, some of your peers.

[Philip K. Brewer:]

If we look back, there has been a few shipping lines over the last several years, where we might not have been their number one or even number two choice. And I'm talking about some of the larger shipping lines. I mean, in general, we have a very strong position with all the top 20, 25 shipping lines worldwide. But there are a hand – a very small handful, that for whatever reason, we might not have been their first or second choice. What we found as our fleet has grown, as we become – as we have the largest fleet of any of the leasing companies that, that has put us in a stronger position in terms of discussions with those shipping lines, where they've, in some cases, come to us and said, we need to have a better dialogue between the two of us. Their ships are larger, their needs are larger, when they want containers, if a vessel of 18,000 TEU has an issue and isn't arriving port on time, the amount of containers they need is large. They don't want to have to make six different phone calls to six different leasing companies, they want to be able to call just a couple. And I believe, given the size of our fleet, given the fact that everybody knows we're a strong and consistent buyer of new containers, they also know that if they call us, we are able to satisfy their needs or certainly be one – the one or two that they'll call to satisfy their needs.

[Salvatore Vitale:]

Thank you for that. I appreciate that. And regarding what you said earlier about the returns you are seeing in the market, say, today not being materially different than what you saw a year ago, has the spread versus what your hurdle rate happens to be, and I understand commercially that's sensitive information in terms of what your hurdle rate is, but has this spread between what you're seeing and what you're willing to accept, has that degraded any, say, over the last year?

[Robert D. Pedersen:]

No, I would say, but I don't think we've seen a change in that regard there. I mean, I think what we see is the market is generally more competitive in the first quarter. That has happened every year, everybody comes out, ready to attack the business, you know, we're not just talking about two or three leasing companies having new production inventory, we're talking about eight or 10 leasing companies having inventory and, unless there's a very strong demand, the average deal size is pretty small, which means you don't have to be one of the biggest providers to actually cater that. That increases competition, and I would say that, that does reduce the average spreads. We have said no to several transactions in the early part of this year here, simply because they did not meet our criteria, either in regards to pure rate or return schedule provisions. We will not take transactions where the containers end up in the wrong spot afterwards and particularly not at these low rental rates. There's simply no room for taking containers back in London and New York and Los Angeles after a five-year term. And we will pass on those transactions if it happens. But honestly, that was the same situation 12 months ago. Certainly, from our side, we haven't seen much difference in our net spreads.

[Salvatore Vitale:]

Okay. Thank you. And then just a quick question for you, Hilliard. Depreciation expense, if I look at that as a percentage of the average PP&E, it seems to have stepped down a little bit this quarter sequentially. Can you provide any color there as to how that – you believe that will trend over the next few quarters?

[Hilliard C. Terry III:]

Well, Sal, I think, it's kind of within the relevant range that we've talked about in the past couple of the quarters, kind of around the mid 4%. Ultimately, it just depends on the mix of containers that we're adding to our fleet. And so, if we're adding more or less, let's say, refrigerated containers, that can impact the amount as a percentage, if you will, of the average gross container value. But again, it's within the relevant range that we've talked about.

[Salvatore Vitale:]

Okay. Thanks for that. And then, just one last question on the – I think you said earlier, 8% of your long-term leases mature this year. Can you give a sense for, how much of the 8% are the 2010, 2011 high-priced vintage leases?

[Philip K. Brewer:]

Most of them would be. I mean, the vast majority of our leases are five-year leases. So the leases that are going to be maturing this year or are going to largely be the 2010 leases.

[Salvatore Vitale:]

Makes sense. Thank you.

[Philip K. Brewer:]

Certainly.

[Operator:]

And our last question comes from the Doug Mewhirter. Doug, your line is open.

[Doug R. Mewhirter:]

Hi, good morning. Just a – most of my questions have been answered. Maybe a competitive environment question. How would you feel that additional consolidation would affect the competitive environment? I mean, I guess common sense would dictate that, maybe it would help, because it would take another potential seller out of the mix, but it's really – but the incumbent sellers would be twice as big, for example, so maybe they feel that they have more firepower. So two medium-sized companies look like they finally got together at the end of the year. Do you think that might help or hurt, or too early to tell?

[Philip K. Brewer:]

I believe, consolidation will benefit the industry. I think consolidation will continue to happen over time. Clearly, we look at opportunities for consolidation, I'm sure every single one of our competitors is doing exactly the same thing, I believe consolidation will be positive.

[Doug R. Mewhirter:]

Great. And thanks for that answer. And my second and final question. We've heard reports and you actually mentioned in the preamble about – you've seen some tickups, maybe early tickups, maybe shippers are getting ahead of the new year, do you think that's more just positioning ahead of the Chinese New Year, so the shippers could sort of fill the order books and make sure they have capacity, or is there a sign that maybe there's some maybe more bullish demand indicators there that maybe the macro environment had picked up marginally?

[Robert D. Pedersen:]

It's Robert here, I wish it was the latter. I don't think that is what it caused. It is purely timing. Manufacturers wanted to get their cargo out before Lunar New Year. For the entire year, we have to wait two, three months before we see that bigger demand take off. Having said that, our shipping lines, generally speaking, are quite optimistic about volume. There will be a nice volume increase in 2015, only problem they see is vessel capacity is increasing at a faster pace. So freight rates will likely be under pressure. But from our side, when we've just looked at pure movement, there will be growth this year and basically all our major customers expect that. And as we see more international movement, it always creates an increase in intra-Asia movement as well. Let's face it, intra-Asia trade is the largest single trade in the world and, basically, for every deep sea move, there's about one-third of Intra-Asia move preceding it. So if there is good trade into Europe and North America, being the main trade routes, then that will also stimulate the intra-Asia business.

[Doug R. Mewhirter:]

Great. Thanks. That's all my questions.

[Operator:]

And we have no further questions at this time. Hilliard, do you have any final remarks?

[Hilliard C. Terry III:]

I'd just like to say thank you to everyone for joining our call. And we look forward to speaking to you as we progress through the quarter. Thanks again.

[Operator:]

Thank you, ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.