Triton International Limited
Q2 2013 Earnings Call Transcript

Published: 25 Jul 2013

[Operator:]

Good morning and welcome to the TAL International second quarter 2013 earnings conference call. All participants will be a listen-only mode. After today’s presentation there will be an opportunity to ask questions. (Operator Instructions). Please note this event is being recorded. I would now like to turn the conference over to Jeff Casucci, Vice President, Treasury and Investor Relations. Please go ahead.

[Jeff Casucci:]

Thank you. Good morning and thank you for joining us on today’s call. We're here to discuss TAL second quarter 2013 results which we reported yesterday evening. Joining me on this morning's call from TAL are Brian Sondey, President and Chief Executive Officer, and John Burns, Senior Vice President and Chief Financial Officer. Before I turn the call over to Brian and John, I would like to point out that this conference call may contain forward-looking statements as that term is defined under the Private Securities Litigation Reform Act of 1995 regarding expectations for future financial performance. It's possible that the company’s future financial performance may differ from the expectations due to a variety of factors. Any forward-looking statements made on this call are based on certain assumptions and analysis made by the company in light of its experience and perception of historical trends, current condition, expected future developments and other factors it believes are appropriate. Any such financial statements are not a guarantee of future performance and actual results or developments may differ materially from those projected. 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 its statements it is made here and despite any subsequent changes the company may make in its views, estimates, plans or outlook for the future. These statements involve risks and uncertainties are only predictions and may differ materially from actual future events or results. For discussion of such risks and uncertainties, please see the Risk Factor section located in the company’s Annual Report filed on Form 10-K with the SEC. With these formalities out of the way, I would now like to turn call over to Brian Sondey. Brian?

[Brian Sondey:]

Thanks, Jeff. Welcome to TAL International’s second quarter 2013 earnings conference call. TAL continues to achieve outstanding operational and financial results. In the second quarter of 2013, we generated another record quarter of leasing revenue and profitability. Our leasing revenue increased 9% from the second quarter of 2012 due to the sizeable investments we continue to make in our fleet, and our adjusted pre-tax income increased almost 8% to reach a $1.66 per share. Our record level of profitability this quarter was mainly driven by the growth in our container fleet and continued very high levels of utilization. We also received a boost this quarter from a drop in our average effective interest rate and refinancings completed in the second quarter and slower growth and depreciation expense due to changes in our depreciation calculations we implemented in the fourth quarter of last year. Our strong operating and financial performance continues to be supported by a favourable global supply and demand balance for containers. Containerized trade growth in 2013 and in the last few years has been moderate, but the growth of the container fleet has remained tightly connected to growth in trade volumes. We continue to operate at very high levels of utilization in this environment. Our utilization averaged 97.5% in the second quarter. We currently stand at 97.4%. Used container sale prices also remain high and we continue to generate sizeable disposal gains. We expect the global supply and demand balance for containers and our utilization and disposal gains. We’ll continue to gradually normalize, but they should remain favorable throughout 2013 and support continued strong financial performance for TAL. The environment for new container investment is more challenging this year and it has been recently. Expectations for global containerized trade growth are down from beginning of the year. Alphaliners for example was projecting 2013 trade growth to begin the 6% range at the end of last year and they have lowered the most recent projection to just over 4%. In addition, the leasing share of new procurement is down from recent years as more of our shipping line customers have purchased containers directly this year, perhaps to take advantage of lower new container prices and low interest rates. We currently estimate that the leasing share of new procurement is about 50% so far this year. This is still above the long-term average of 40% to 45%, well down from the estimated 65% leasing share of new procurement in 2012. Leasing rates for new container transactions are currently very aggressive. Leasing companies are competing hard for every available deal and pricing is being further stretched by the widespread availability of low cost financing. While market conditions have cooled somewhat for new container transactions, we continue to invest and grow our fleet. TAL’s deep customer relationships, our strong reputation for a liability and our expensive supply capability continue to drive new business for us. Year-to-date, we've purchased over $470 million of new and sale leaseback containers for delivery in 2013. As mentioned in the press release, we are increasing our dividend again this quarter to $0.68 per share. This increase reflects our continued strong performance and our expectations that market conditions will remain supportive for some time. Increased dividend also reflects the growth of our long-term lease portfolio and the growing share of our profitability coming from our occurring leasing revenues. Now I hand the call over to John Burns, our CFO.

[John Burns:]

Thank you, Brian. As we noted in our earnings release, adjusted pre-tax income for the second quarter was $55.9 million or $1.66 per share, up 8% from the prior year quarter. Increase in pre-tax results from the prior year second quarter was largely results of the 9% increase in leasing revenue driven by our ongoing investment in new and sale leaseback containers. In addition, we benefited from limited growth in our ownership cost of depreciation and interest. Depreciation expense grew more slowly than leasing revenue due to the change in residual values used in our depreciation calculations implemented in the fourth quarter of last year. This change reduced depreciation expense by $4.9 million for the second quarter, what would have been under the prior residual estimates and it will have a similar positive impact in the third quarter. Interest expense was essentially flat from the prior year quarter despite the significant growth in our revenue earning assets. In the second quarter we took advantage of the very low interest rate environment to refinance several of our debt facilities and extend and lower the fixed rates on our swap portfolio. Through this process, we reduced our average effective interest rate in the second quarter to just over 4%, nearly 100 basis points lower than the prior year quarter. Looking forward to the third quarter we expect the further 15 to 20 basis point reduction in our effective interest rates as we get a full quarter’s benefit from this refinancings. Historically we have looked to match the duration of our fixed long-term lease cash flows with fixed interest expense. At the end of June nearly 80% of our debt portfolio at fixed interest expense for an average remaining term of over five years. We've accomplished this through both long-term fixed rate debt facilities and through interest rate swaps for our floating rate debt facilities. Gain on the sale from disposal of used containers remains strong at $8 million, although it was down $5 million from the prior year quarter. Lower gain was largely driven by an 11% decline in disposal prices from the second quarter of last year. We expect disposal prices to continue to trend down towards historical levels as global supply and demand continues to normalize. Also contributing to the lower container disposal gains was an increase in the average book value of the unit sold, as larger portion of the unit sold came from sale-leaseback transactions which were purchased for values above those of our typical sale units. We reported bad debt provision of $1.6 million in the second quarter as a result of payment defaults and estimated recovery costs for several small regional shipping lines. These reserves were related to specific customers and currently there are no other customers in active default status. However, our customers continue to experience a very challenging operating environment due to the ongoing excess supply of vessels and accordingly credit risk levels remain historically high. Operating expense was up slightly largely due to an increase in storage expense due to slightly lower utilization and an increase in the number of all five units designated for sale. As Brian noted, we have increased our quarterly dividend to $0.68, representing a relatively high payout ratio on our adjusted net income but representing only 40% payout ratio of adjusted pre-tax income. We based our dividend payout on pre-tax income as we have not paid cash taxes and do not expect to pay cash taxes for a long time because of the accelerated tax depreciation on your container fleet. This beneficial tax position also results in our dividend distributions, typically qualifying as a return of capital rather than a taxable dividend for US tax purposes. As always, investors should consult a tax advisor to determine the proper treatment of TAL's dividend distributions. I'll now return to Brian for some additional comments.

[Brian Sondey:]

Thanks, John. We currently expect market conditions to hold fairly steady as we head into the second half of the year. Our shipping line customers are expecting the summer peak season for shipping to be muted this year. While we expect our leasing revenue to continue to grow in the third quarter as we continue to operate at a very high level of utilization, and as containers committed to lease, continue to be picked up and placed on higher. We also expect a further reduction in our average effective interest rate as we benefit from a full quarter’s effect of the refinancing transactions that were concluded throughout the second quarter. The ongoing moderation of used container sale prices and our disposal gains will offset some of these improvements but overall we expect our financial performance to remain at a very high level and expect our adjusted pre-tax income to hold steady or increase slightly from the second quarter of 2013 to the third. I'll now open up the call for questions.

[Operator:]

We will now begin the question and answer session. (Operator Instructions) Our first question is from Steven Kwok from KBW. Please go ahead.

[Steven Kwok:]

Just first question, I was wondering if you could just talk about what the trade growth has been first half of the year and just kind of what that would imply to the second half?

[Brian Sondey:]

Yeah sure, I mean. To be honest, we don’t typically look at trade growth on a say, this month to prior month basis. We typically think about what's the overall volume of shipments that are going to occur going the year and compared to what occurred last year. And this is actually I think now the third year in a row where expectations for total annual trade growth have to somewhere extent decreased over the course of the year. I think as I had mentioned in my comments initially, market forecasters and our customers were expecting trade growth in the 5% to say 7% range for 2013. We are now and that we are sort of half way through the year and into the peak season our customers and forecasters are generally talking somewhere between 3% and 5% trade growth. And I think the volume we have seen the first half of the year is consistent with that.

[Steven Kwok:]

Got it. Thanks and then often in terms of around the leasing rates, what is your outlook for the remainder of year?

[Brian Sondey:]

We think of rates in two different categories, first is the average rate of our lease portfolio and that changes very slowly. We had several years beginning 2010 and perhaps running through the middle of 2012 where our average rates were climbing as we added new containers to our fleet and were priced on leases that were well above our portfolio average. It really, since then I had say that they have been decreasing slowly as container prices have fallen and interest rates have fallen which is just naturally has caused lease rates for new transactions to decrease. But then, we've also seen perhaps in the last six months or so aggressive competition, which is push lease rates for new transactions down even a little bit further than just the drop in new container prices and interest rates would imply. We'll have to see what happens, lease rates for new transactions again, they are always very tightly connected, the new container prices and interest rates. If those things move back up that would have a supporting effect of lease rates heading into the second half of the year. I'm also hopeful that perhaps as leasing companies have taken some opportunities to perhaps trim their inventories or factory units over the last few months that perhaps will take some of the pressure off of the lease rates at the margin. But we'll have to see, I think as I mentioned, the market in some ways has been very supportive in terms of relatively tight container supply and demand balance allowing us to operate at high utilizations. But less supported this year in terms of the sort of dynamics around new investment and pricing on new investment and we just have to see how those things play out.

[Steven Kwok:]

And just one last question follow-up on around trade growth. What's kind of driving the weakness is it China or is it Europe and kind of what would need to happen for trade growth accelerate?

[Brian Sondey:]

Yeah. I mean to be honest; we don't get to see in our business a lot of what the different regional factors that are driving the overall number. Typically, most of the major trade lanes originate in Asia. And so, we don't, all we see is how many containers are booked and picked up. We don’t necessarily get any additional insight into which trades lanes are going on. Of course that we do talk with our customers and spend a lot of time listening to what’s happening in the marketplace. And I think the general impression that I get is that, let’s say the expectation for the year in the beginning was perhaps that Asia to Europe trade which is a very large trade was improved from say slightly negative performance in 2012 to maybe flat performance in 2013. Trans-Pacific from Asia to North America was supposed to say improve from relatively flat performance in ‘12 to some positive growth in ‘13 and then the regional trades were supposed to continue to be very strong, I would say averaging growth of 10%. I think the sense I get that each one of those pieces is down a point or two that Europe slightly to be negative again perhaps. And Trans-Pacific is closer to flattish type performance than positive growth and into Asia and other regional trades, perhaps again little less than expected.

[Operator:]

The next question is from Greg Lewis of Credit Suisse. Please go ahead.

[Greg Lewis:]

Brian, clearly in the environment we are in right now, it seems like there is going to be less opportunities for TAL to deploy capital and I mean onto that scenario as we look at over the next two quarters or three quarters. The company is going to be harvesting lots of cash or what should we think about uses of cash? Is this something where we could just see cash accumulate on the balance sheet until it make sense, until opportunity presents itself to really spend a lot of money or I am just trying to get a handle on what we are going to do with all the money?

[Brian Sondey:]

It’s a good question. I think the first thing I would say is as we’ve described a few times, it is a more challenging investment market this year than we've seen in the past. With that said, we continue to invest in our business at $470 million, that's going to even if we don't invest anymore throughout the second half of the year which of course we think we will, we will still going to grow our fleet this year in a market environment that's more difficult. I think it’s just an environment that's less attractive than it was for the last few years. We had been growing from 2010 through last year at probably an average of close to 20% a year as we really took advantage of the market share shift to leasing. And as that sort of real supporting factor has gone away this year, it has been less opportunity for the leasing industry to grow faster than trade growth. We've been able to finance the rapid growth over the last few years, mostly out of our cash flow and given that our financial performance continues to be very strong, yeah to the extent that our CapEx is down and growth is down from recent years, a lot more cash that is kind of fall into the company. It takes a while to accumulate and so I don't think you know there's not going to be a dramatic build up of cash or reduction in leverage over the next quarter or two, but if we were to see the slower environment to continue for some time, we’d have to think strategically what do we want to do with that cash, we want to delever, we want to try to find some other use for it, etcetera. But I would say you know I don't, I always try to resist straight lining the current situation in the market for too long. I think there's some relatively unique factors that are causing our customers to buy more containers this year, perhaps some pent-up demand from lack of purchasing in the last few years, maybe a belief that container prices are temporarily low and may increase again. And so I think just given the ongoing challenges you know among our customer base, I wouldn't be surprised to see the leasing share pop up again as we head into the next couple of years.

[Greg Lewis:]

Okay, great. And then just my follow-up question I guess it would be around utilizations. I mean, utilizations firm in the mid-97% range, but when we think about that other couple 100 basis points of container boxes that are in the fleet, where are those located, are those sort of located around the world, are those located in Asia? Is it a broader mix? I am just trying to see if we could see maybe utilizations pick up again, maybe next quarter?

[Brian Sondey:]

Yeah, for us at TAL, we’ve always had a leasing strategy of really seeking long duration in our leases and seeking tight logistical control, which primarily means getting a large majority of the containers dropped off back in to Asia and we have been willing to pay for those things through lower lease rates. You know, that in very strong markets like we've seen over the last few years can limit our peak performance, but it does really provide great support when market conditions are more normal or difficult. And so for us, the vast majority of our higher equipment are in the top demanding locations in Asia and so to the extent that we see just demand for equipment and trade growth improve or customers purchasing a little less, I think there are opportunities for that equipment to go back on hire. I think it's also why we continue to operate at such high levels of utilization in a more normal type environment just because we're kind of get ourselves towards the back of the line for drop offs because of our general approach to structuring leases.

[Operator:]

Our next question is from Bill Carcache of Nomura. Please go ahead.

[Bill Carcache:]

Brian, just as the significant increase in CapEx that we saw from you guys over the last couple of years pushed your tax liability farther out, given the significant tax benefits from the associated depreciation, it seems like fewer opportunities to deploy capital with the passage of time will bring that deferred tax liability closer. And I am just hoping that you could talk about how you think about that dynamic, I mean the market doesn’t really seem to give you guys credit for the value of that deferral and you guys, when you set the dividend you set it on the basis of pretax income. And I wondered kind of as we think about the business from a long-term perspective, I realize we are kind of many years out in the future before you are actually a taxpayer, but maybe can you remind us how far out that is and with the passage of time, how does your dividend policy or the way in which you kind of determine what the dividend is that pay out really, did you switch from pretax income to net income at some point, can you may be just talk to that and share any related [process]?

[Brian Sondey:]

Yeah, thanks for bringing that up. As you know we spend a lot of time talking about our tax position with investor especially when we are out doing say investor presentations or conferences. And to be honest, it’s something that we’ve been very surprised and to some extent disappointed by that we’ve had a hard time, I think really getting any observable value for the fact that we don’t pay our tax position currently. It doesn’t seem to show up on our share price that we’re seeing to continue to trade say at gap that didn’t compare to our peers who don’t accrue any taxes and also don’t pay any taxes, but we of course have that big accrual which seems also implies that investors are either assuming we pay it all currently or I think we are going to pay it soon. What we’ve tried to do is if you look at our investor presentation that's always on our website, we have a page in there, where we put together kind of a stylized models that looks at different levels of asset growth and cost levels of asset returns, our levered asset returns against the assets and projects then how GAAP taxes model out and how cash taxes model out. And what we find is that they are even relatively slow growth scenarios, much lower than we've had historically, slower than organic growth in containerized tray has been over recent year. Even in low slow growth scenarios we don't pay taxes we estimate for ten years or longer and in the higher growth scenarios, say for example 10% average growth which is again is well below where we've been over the last 7 or 8 years. There effectively, you deferred taxes forever as the new investment continues to sort of what more than offset projected profitability. And so we continue to use internally adjusted pretax income as really the main metric and the best metric for our cash flow and financial performance. I suppose if we go through an extended period of low investment and we say in 5 or 6 or 7 years from now start to get closer to that time or we're starting to pay some meaningful cash taxes, perhaps at that time we can consider. But again, even in very slow growth scenarios as low as we're not liquidating on sort of a permanent basis, we continue to generate pretty strong tax deferral and we continue to recommend to investors and continue to use ourselves pretax income as the right metric for us.

[Bill Carcache:]

That's really helpful. Thanks Brian. And perhaps maybe if you could just touch on how do you think about the steepening of the curve and rate at the long end of the curve, 10 years kind of having gone up. What is that mean for the business going forward for new financings and just I guess also for your existing business if could you share some perspective on that?

[Brian Sondey:]

So as we talk about on the call, we did a lot of refinancing activity in the first part of this year, where we called an existing facilities and refinance them to lower the spread, but we also took the opportunity to really extend out our interest rate durations by really extending out our interest rate swaps that we use to hedge our floating rate debt. And I think as John described the average interest rate duration for us now is out over five years, and given that that’s actually a little bit longer than our lease portfolio was out there on average, you can actually argue that we would benefit for a while if long interest rates do rise just because leasing rates tend to be driven very directly by or some interest rates, we entirely hedged our portfolio and maybe even extended the duration of the hedge a little bit beyond our lease portfolio. And so to the extent that our interest rate stay fixed for a long time and our lease rates move up over time as interest rates go up that would actually be a positive thing for us.

[Operator:]

The next question is from Doug Mewhirter of SunTrust. Please go ahead.

[Doug Mewhirter:]

As said a lot of my questions are answered. The first question was, how is your trading revenue, you had a very strong quarter there. I was wondering if there was any seasonality to that or have you guys sold one large block and could you comment on what the [mark indices] are for the balance of the year for that line item?

[Brian Sondey:]

Yeah, sure. I think the first thing to note that I think we always encourage investors to not look so much at the absolute size of the trading revenue or trading expenses but to look at the margin which was say in the range of $4 million for the second quarter which was still a very good quarter for us on the trading margin, you know typically say on average over the last five years or so, maybe it’s been half that $2 million or so, and so we did provide a little bit of a boost, but again it’s not as much of a boost as the increase in trading revenue would imply. We’re always very active in buying and selling used containers, we've got a very large and we think very capable group that focuses on only that in our business and we sell our own containers and also the containers we trade for third parties. There's a whole bunch of things that led to good performance in the second quarter. We don't want to get too much into all of these things. We would like to have some secrets I guess, but you know we do think we are going to have a few quarters coming up, you know I can't promise it’s going to be a margin of $4 million a quarter, but we do think we are going to have some strong trading quarters for a little while here.

[Doug Mewhirter:]

Thanks for that. Also the new box prices, where they stand now, I think last quarter was like $2250 to $2300, is that about where it was in the second quarter?

[Brian Sondey:]

Yeah, I mean, they are down from that now. I don't remember exactly what we said at the end of the first quarter, but I'd say now they are closer to $2100 for a 20-foot dry container. And that's reflective of I think probably on average slightly lower steel prices than we saw on average in the first quarter, although steel prices actually have picked up a little bit in the last few weeks and then just really probably a decrease in new building volumes as expectations for trade growth have gone down.

[Doug Mewhirter:]

And my last question, talking about market share of total production, is there any particular influence from mix in terms of your customers buying? In other word, the customers that buy that bought instead of leased, were they normally heavy buyers, were they constantly in the market and just maybe picked up their purchases over any customers who were heavy leasers that actually went in to the market for the first time in a while, just kind give an idea of the mix there?

[Brian Sondey:]

It’s the latter that in 2012, you know, really, I would say almost zero shipping lines purchased with the exception of [Merce] line, they bought a lot of equipment in 2012, but most of the other shipping lines leased almost all their requirements. In 2013, we've seen a number of those shipping lines start buying again. And so a lot of those companies were -- companies that in the past say before the crisis would purchase say relatively large portion of their fleet, but say in 2010 to 2012 chose to stay on the sidelines, conservative capital and also not buy containers when container prices were high. It's a number of those lines that have come in and purchased containers this year. In overall volume terms, the container purchases aren’t that large. We think again 2013 is going to be a year of relatively limited production of new containers, which allows us to continue to have this nice supply and demand balance and maintain high utilization, but in terms of the mix, leasing versus ownership, and say the growth opportunities for TAL, we're seeing again these guys that had really been very heavily reliant on leasing come in and purchase more in 2013. Our hope is, as I said, before that, as they manage to achieve some purchase this year and as they continue to face some challenges, that we will see that either move back towards leasing perhaps over the next year or so, but really that's just kind of hope and speculation we’ll have to see when we get there.

[Doug Mewhirter:]

Okay. And just very quick follow-up to that, it seems kind of curious given the poor economic condition of a lot of the shipping lines that they would try to I guess conserve a capital little bit more and going to leasing that rather than making a capital decision and there is already so much over the acquired ships and (inaudible) capital, will in terms of the customers or anything like that what do you explain I guess the psychology around that?

[Brian Sondey:]

We make the same argument to that, but I would say my impression in talk with our customers is mainly they look at it as something that's opportunistic that a lot of the shipping line, even though they are going through some challenging times and they for sure are, they are part of very big industrial groups or supported by governments or just themselves are big enough companies that they have a lot of capacity to withstand tough conditions for a while. And when they saw container prices dip down to multi-year lows and also interest rates add multi-year lows, they saw that is a good opportunity to deploy some capital into containers. That said, I agree with your basic premise though that in environment for the shipping line that remains very challenging and where capital is relatively scares that containers probably is in the best use for the cash. And again that's why we are hopeful that perhaps after they take advantage of this, I guess an opportunity to buy at multi-year lows that they may revert back toward being more align on leasing in the future, but again we’ll have to see.

[Operator:]

The next question is from Helane Becker of Cowen. Please go ahead.

[Helane Becker:]

I have just two questions. One is, I know you are very committed to the dividend and I see raising the dividend began on this quarter. Is there a time where you would also consider buyback stock?

[Brian Sondey:]

It's something we've had a lot of investor questions about and our answer has been just that. We made a decision a number of years ago to use dividend as our primary way of returning cash to shareholders since it prevents us from having to make bets on our own stock. And we've sort of reserved historically stock buybacks for times where say there is real market dislocations. Like in 2009, we bought back the shares at 50% of tangible book value. That kind we bought back about 10% of our stock. And so we've had a very -- had a few what I call a high bar or low bar in the sense of what our stock price has to be for us to get active in buying the stock back. But it's a valid question and it's something we've been discussing internally just as in this year investment returns for new containers become pressured. We continue to think we traded a pretty low multiple of our cash flow given that whole tax discussion we just went through. I think it's interesting investment, but it's something we haven't been doing and I wouldn't say we have a plan to do it anytime soon, but it's something we are discussing and we'll continue to discuss.

[Helane Becker:]

Well, I was thinking about it from the tax given your tax discussion and the fact that you don't get credit in the market for your earnings performance on a non-GAAP basis than buying back your stock seems to be another right way to go.

[Brian Sondey:]

That's exactly what we're thinking about it.

[Helane Becker:]

That makes sense. And then the other question I had was really a balance sheet question and it was, I think in your prepared remarks and also firstly as you talked about the fact that used container prices have moderated a little bit and say your gains are kind of trending to normalize levels, I think I have read down and I think you said that. So given that and given that you raise such a [perishable] way, do you think you have to look at goodwill again and make any adjustments there?

[Brian Sondey:]

No, I’d say it was sort of almost what the opposite that when we did the acquisition way back in 2004, our container residual values were really low and so you know the goodwill was calculated off of then very low container values. Even we raised the residual values at the end of last year, they still applied the sizeable spread between our residual values and sell prices, still probably in the range of 30%, 40% per unit type. And so you could have actually made an argument that we should have increased the more, but quite frankly with the trend of sell prices coming down, we prefer to take away and see approach and see where they kind of stabilize. But despite the fact that we continue to say sale prices are coming down and gains are coming down, as we can see we continue to really generate sizeable gains. It’s just they are smaller than the extraordinary gains we had a year or two ago.

[Operator:]

The next question is from Dan Furtado of Jefferies. Please go ahead.

[Dan Furtado:]

Good morning and thank you for the opportunity. I want to apologize if this question has been asked. I was a little bit late to the call. But just kind of more kind of bigger picture question here, if you took the assumption that the liners were not capital constrained at all, at some point in the future, do you think that the historical share of purchases of new containers would go back or the share would go back to the historical level or do you think there's been some type of secular shift that would likely prevent a full reversion to that historical trend?

[Brian Sondey:]

It’s a good question, the mix of ownership versus leasing held very steady for a lot of years. It’s something around 40% to 45% for leasing and 55% to 60% for ownership and that was through good time for the shipping lines, bad times for the shipping lines then you would move a little bit one way or the other depending on how the shipping lines are doing but it was really sort of remarkably stable for a long time. And so I think that occurred the shipping lines sort of found about the efficient balance of it’s like cheap per container to buy them and finance them but there's a lot of fleet wide efficiencies the flexibility of leasing provides and allows them to operate smaller container fleets and it seemed that efficient mix again was in the range of the 40% to 45% per leasing. You know, I think if we do get back to a world where the shipping lines are making money predictably and don't have to think too carefully about how to deploy their capital, yeah, that would naturally have the effect of increasing ownership and it would be great if you think it goes back to the 40% to 45% share of the leasing but you know, I think it’s going to be quite a while though before we get back to a time when there is a strong supply and demand mix for vessel capacity that the remains that kind of an extra 10% or so of ships in the world due to all the orders placed before the crisis. And the thing that I think is going to keep supply and demand challenged is that a lot of shipping lines have a need to buy these new large fuel efficient ships so that they can compete on a unit cost basis with the largest carriers. And so I think in every opportunity to add capacity, shipping lines are going to take that opportunity to buy and I think that's going to keep supply and demand in the vessels challenged for a while, keep freight rates challenged for a while. I think it's going to be unfortunately for our customers. It's going to be while before we see years of strong freight rates for them I think.

[Operator:]

Our next question is from Michael Webber of Wells Fargo. Please go ahead.

[Michael Webber:]

I joined a bit late from another conference call also my apologies if you've already touched on one or two of these but I did catch you guys talking a bit about the pricing environment and obviously you got a bit more competitive in the first quarter and this quarter maybe can you talk to the kind of sequentially from a competitive perspective, is it about as competitive as it was in Q1? Are you seeing kind of a tick up or tick down and maybe on kind of a net spread basis, have you guys seen any sort of movement in either direction?

[Brian Sondey:]

I would say, it's remained very competitive. Probably, I guess, about the same as it was in the first quarter and I think there are a number of things that are driving it. One, I think a lot of leasing companies were anticipating another year in 2013 of strong investment. Our initial expectations were that trade growth would be pretty strong or stronger than last year. We continue to see this high share for leasing and so I think there is a lot of anticipation about growth. You know, I would think, also a lot of companies raised a lot of cheap financing to help fund that anticipated growth and they also purchased perhaps more containers counter seasonally in the fourth quarter and first quarter than they had in the past, a larger number of companies did that to create perhaps a bit larger of the factory inventory and we’ve seen a lot here I think all of those different things sort of the expectations of growth, the promises of growth and the availability of low cost financing and then this sort of larger than usually factory inventory, all inspired to the pressure pricing for new transactions. My hope is as we get further away from the change in expectations that some of the pressures diminish. The inventory has been working down as probably more normal by now. I think now sort of investors and the owners of the private companies have been advised that growth is slower and hopefully leasing companies will feel pressure that they have to deliver on higher expectations. And then also as, I think the financing market as the cost have gone up a little bit of course in the last few months and I think that will provide some support as well. So we have to see how it plays out, but our hope at least is that as we progress here to the next quarter, it seems some of that pressure will come off.

[Michael Webber:]

That right. May be kind of coming in that from a different perspective, from a net spread or a from yield perspective, how closer are we to kind of just kind of floor level, where you think some of the more competitive prices in the states are kind of hitting that level where it is not going to be able to get that much lower and you are not going to see that much more downside as the yields or net spreads or maybe how far away are we from that point?

[Brian Sondey:]

It’s a good question, we can’t really talk to our peers sort of paying threshold, I mean certainly for us, we’ve walked away from a lot more deals than we usually do, especially over the last few months. And sort to some extent we've seen in a number of transactions already the pricing far below are paying threshold and again we can only hope that others are viewing things similarly and things will tighten up once leasing companies, especially the smaller guys I think take care of perhaps some excess inventory they have. But we'll have to see.

[Michael Webber:]

Okay, alright, that makes sense. Just a couple of more kind of a macro kind of questions still I'm seeing which drove about 50% of the production market or more, actually now they continue to really move into the vessel we think environment, they actually just signed another successful yesterday. When you guys look at that and considering how important that kind of restrain capacity, restrain kind of box production is to kind of long-term positive fundamentals in the space. When you look at them moving into vessel, what you think, did you think that's a positive or a negative in terms of their ability to kind of maintain, kind of rationale production levels and kind of continue to focus on margin rather than volume?

[Brian Sondey:]

I don't think it has a lot of implications for us. I think I get some questions about whether they were, they are willing to finance ships, will they finance containers? And with that sort of pressure say our ability to lease to customers. And I don't think there is a lot of connection for a couple of reasons. First is in terms of their production capacity, I think people will generally make a mistake when they look at sort of the size of the factories and trying to calculate how many containers can be produced. Really production capacity is driven by labor and how many workers are employed and how many ships are employed at the factories and the factories are pretty simple thing. And generally, they've been very successful at maintaining a pretty good balance of worker shifts relative to the current demand for containers and I don't think that they would have some kind of incentives to say over high and over produce just because the kind of standing into another sector. And that’s what similarly in terms of, do they, how cannibalize our business if they provide box financing, I don’t think so really, just in the sense that, I don’t see CIMC getting into the operating lease business whereas they have to take containers back after five years or six years or seven years and try to redeploy them. They don’t have any operating infrastructure for that. And we have always felt that the market for container financing is pretty distinct and separate from the market for container and leasing.

[Michael Webber:]

Got you, all right, that actually kind of leads into my next question, it’s actually for John. And you mentioned that operating lease model and this is a month ago kind of a changes that part of these potential changes to lease accounting kind of read or said again and this is been ongoing for six years or seven years now and I think that kind of comments on the new fancy draft for June and September. So in terms of potential changes to lease accounting, we are actually seeing some offshore leases change in the weather reporting to kind of get ready for this as it would be several years out but John, do you think that impacts, A how likely the events that is to happen and, B do you think any changes the kind of lease accounting impacts the way minds think about that mix, market share mix in terms of what they want to own versus what they want to lease, is that kind of factor your long-term view or it is too far out?

[John Burns:]

I would say right now this project has been going on with the capacity for many years much longer than any of the other any accounting changes have taken to get through, there continuous to be question as to when, if one is to get approve, when it’s going to really required to be implemented?

[Michael Webber:]

Yeah.

[John Burns:]

To me is I would suggest that it’s so far out there and so uncertain at this point to really say as, it’s just hard to really get too focused on at this stage at the end.

[Brian Sondey:]

I would say also Mike one reason obviously, I think there's a lot of work for us internally that can implement it because it does change the way our financials are going to look. But in terms of say driving demand for container leases, I don't think it’s going to have a huge impact, the container leasing usually isn't used for say balance sheet addressing by our customers, it’s mainly used for the operating flexibility that leasing gives them. And also typically container assets even if they are put on balance sheet it would still be dwarfed by the vessel investments our customers have made. And so you know, I don't think that they would look to say necessarily just adjust the mix of container owning versus container leasing to somehow to that portion of their assets off balance sheet. There's also a lot of flexibility into how we can construct our leases and so I think I don't think that from a customer standpoint is going to be still big but obviously just from if we construct our financials that's it’s something we are paying close attention to.

[Michael Webber:]

Yeah, I know that's a good point it is a way out. There's one more thing, I'll turn it over just kind of thinking big picture and a lot of noise around more competitive pricing right now and obviously you are subject to the counter party step that's very cyclical and kind of going through I guess the swelling period there but as we kind of look out longer term, at least from our perspective the biggest risk longer term I guess that the year old model is going to be basically box prices and you can kind of cross wind right now with rates moving higher but there's an expectation that iron ore prices could come down in significant amount and we can see another 10% to 15% down in steel values. You know, what's your long term view or if you have one on long-term box pricing and do we kind of, do you normal been the north of $2000 for [TEU] but not too long ago we were pretty settle in kind of that mid-teens range. If you did look out three or four years from now, five years from now, and you think we stay in this range or do you think we kind of return to that more historical normalized level? Tough question to answer I know but.

[Brian Sondey:]

I would say a couple of things. First, I think you are right, that overtime the long-term trajectory of box prices does have a big impact on us as it drives the rates that we re-lease our existing containers under as well as our resale values are connected to future box prices. Do we benefited I would say over the last 10 to 12 years by I would say secular improvement in container prices overtime, not every year or every quarter and it hasn’t been steady but it's been generally projecting upwards and it really has been, I would say, since almost a mid-90s, mid-to late 1990s, since we've seen a sustained period of pricing in the $1,500 to $1,800 range. It's been above that pretty steadily since then. I don’t have any crystal ball any more than anyone else in terms of what's happening to long-term steel prices or box prices. I would say though there are a number of things that make us somewhat optimistic that the upward trajectory will continue and I think it's really over the long-term. We don’t tend to be impacted by say quarterly changes too much and steel prices. You have to start in such a large portion of our fleets locked in a long-term lease. It's much more sort of the trend to three, five, seven years and there I think we will benefit by, all say that the activity that’s happened by all the central banks around the world of creating liquidity, I think at some point that has to continue to translate into inflation for commodity prices. Again, boxes are constructed in China. So labor is not a huge component of the box cost but it's a component. As we continue to see upward pressure on wages in China, that will help box prices and then also, if we continue to see the RMB appreciating against the dollar overtime.

[Michael Webber:]

Yeah.

[Brian Sondey:]

That will also tend to help box prices that we reprice in dollars but again they are built in China. And so in general, we are fairly optimistic about the long-term trajectory, but again don’t have any special view into it.

[Operator:]

The next question is from Sal Vitale of Sterne Agee. Please go ahead.

[Sal Vitale:]

So let me just kick it off by asking may be you can clarify because I think it’s an impressive point that in a slowing environment that your utilization has remained at such high levels, can you give us a sense, if you don’t see a turnaround in the demand environment, say in the next two to three quarters. At what point does utilization or will utilization start to decline significantly from the currently levels? Because that's one of the main questions I get from investors as in a slow environment why is utilization going down for the low 90s?

[Brian Sondey:]

Yeah, I think there are number of reasons why we’ve been successful so far in maintaining high utilization and why we don’t have any again great ability to predict our customers behaviour. We do think that utilization is likely to remain fairly strong into the next year and beyond and there is number of reasons for it. I think first as from our macro standpoint, the slowing environment for trade growth, but one of the great strengths of our business is that very quickly that gets translated into lower production of new containers. Again, the factories don’t produced to build our factories, they produce as there are orders for containers and they are going to adjust their labor forces pretty quickly and we saw very fast deceleration in container production in the second quarter this year as again growth expectations drop. And so we think even in the slower growth environment, it doesn't necessarily translate into excess supply of containers. It remains I think very tightly connected to actual demand. On top of that, if I mention briefly, we for a long time had a philosophy of really emphasizing lease duration and lease logistics and willing to pay for those things in the form of lower leasing rates. And so even when demand for new pickups of containers flows, we don't really see an increase in the level of drop-offs and I think put in our investor presentation every quarter when we change it. A picture of the pickups and drop-offs of our dry container fleet and you can see there that the drop-off volumes have, it remained quite consistent and fairly low compared to their usual or historical level. Just because it's sort of, it's a little bit complicated and expensive for customers to drop our containers off and we also tend to be relatively cheap to hold and so we just tend to find ourselves towards the back of the line when containers are dropped off. And then because of our focus on logistics which again simply means requiring containers to come back in Asia when they are off hired. Typically, it's relatively easy to get them picked up. You may have to except the market rate that's out there. But from a utilization standpoint, that gives you an awful lot of protection. And so why, as well again, we're hesitating to promise any particular level of operating performance add into the future. We do think that borrowing any really unexpected say sudden weakness or really sort of a disaster in terms of trading environment that we're going to remain at a very high level of utilization for some time here.

[Sal Vitale:]

Okay. And on that, can you comment on your pickups for the quarter did they sequentially increase from 1Q?

[Brian Sondey:]

Yeah, I mean typically the quarters for pickups usually are the second quarter and third quarter and that’s when our customers are building our fleets to handle their seasonal peak trading volumes and we did see positive on hire performance in the second quarter, as you can see on our leasing revenue. Again in that investor slide which will be updated in a week or two probably, we will show that actual number. And yeah, it’s only improved from the first quarter but the second quarter of this year wasn’t that strong as second quarters over the last few years.

[Sal Vitale:]

Okay, so sequential increase was a little bit lower than seasonally expected I guess?

[Brian Sondey:]

Yeah, it is given what the initial expectations were for trade.

[Sal Vitale:]

Okay, that makes sense. Can you talk a little bit about the container inventory at the factories? I mean, I know that was pretty high, you said it has come down a little bit, where would you take it right now, where is it right now?

[Brian Sondey:]

Well the couple of numbers that people look out, one is just what’s the overall number of containers at the factory and I think briefly that got up into the million TEU range in the second quarter. It tends to come off that number I forgot the last but maybe perhaps into the 800,000 TEU range, which actually is not too far from normal this time of the year. In addition to what I think is actually more impactful or meaningful is what portion of the leasing containers in that number have already been committed to lease and what portion are uncommitted. And our sense is that of the remaining units at the factory that an increasing portion of them have been committed to lease in the second quarter. And I think that’s really what drives the psychology of the leasing companies. It isn’t necessarily how many are sitting at the factory but how many are sitting there and not yet committed. And our analysis implies and we don’t have any again great way to look at our customers, you know what's happened with them, but we've got some ways we can take a look, is that numbers getting back into a more comfortable range or should be at least for most leasing companies.

[Sal Vitale:]

Okay. And in terms of you know let's say $470 million, that's a year-to-date CapEx for 2013 delivery. Can you maybe provide a little color how much of that is uncommitted or rather how much is committed and how much has actually been picked up and generating revenue at this point?

[Brian Sondey:]

Sure. So we've ordered say $470 million as you mentioned for delivery in 2013. We typically will have any point in time somewhere call between $150 million and a little over $200 million of containers at the factory not yet committed to lease and once we start to fall below that threshold, we would start to order more containers. And so the way I think you should think about it is probably at the end of last year we had something in the range of $150 million or maybe a little more than that uncommitted to lease. Right now we have something in the range of $200 million uncommitted to lease, so say just a growth of about $50 million in that uncommitted portion and then we've ordered $470 million on top of that. So we probably leased out in terms of committed to lease something in the same range maybe little bit less, but I think generally in the same range than what we purchased as that inventory of factory units is held relatively constant. In terms of what's been picked up already, to be honest I don't have that number handy. I would say we've seen, we've got a reasonably good pickups in the second quarter. There are still units to go that we think are going higher in the third quarter and that's why we think we will see an increase in our leasing revenue despite let's say a muted peak season in the third quarter, but we've made reasonably good progress. It's not going to be great year for CapEx, but it's not a term where you wanted [term you either].

[Sal Vitale:]

Okay. And then on the CapEx, so the year-to-date number increased about $120 million from $350 million to $470 million, I am saying relatively to the last conference call. What would say that increase was? Does that sound like it was new dry containers?

[Brian Sondey:]

It was the mix of everything. When we say the market is slower, we don’t mean it’s dead. There are investment opportunities. We still have very strong customer relationships that we think in particular we always are quite pleased with the number of customers we think that like doing business with us and give us the opportunities to win deals and we continue to buy and replace units as they go on lease.

[Sal Vitale:]

Okay. And then could you just provide a little bit of color, just a reminder. Your reefer CapEx is typically camped or seasonal relative to dry. So you typically do you reefer CapEx in the second half of the year normally, is that right?

[Brian Sondey:]

That is right, yes.

[Sal Vitale:]

Okay. So would you expect because a lot of the commentary is really on the dry side. Can you just comment on the reefer side and what do you think -- do you think your reefer CapEx this year will be without providing a concrete number, will it be about typical relative to what you have done in the past, a little bit greater or a little bit less?

[Brian Sondey:]

I would love to see how the season picks up. We have a shelf of reef equipment as we have shelves of all the other stuff and kind of again to some extent our reefer procurement in the second half of the year will be driven by how many leasing deals we do. The one thing I would say is that the leasing market for reefers is one that we've been, I would say, relatively unenthusiastic about for the last year or so as we've just seen the leasing rates for reefers in terms of say the percentage of the lease revenue relative to the cost of the equipment, typically you get a premium on reefers because there is I think a fair bit more longer-term risk in say, technology obsolescence and other types of aging pressures on reefers that as they give you lower backend cash flows and get on the dry containers relative to the purchase price as we want to get more of that, more of the investment back in the first lease. We’ve seen the first lease returns compressing towards the dry, and for that reason we’ve been kind of allocating away from reefers. Other guys have taken different views and while let’s see plays out.

[Sal Vitale:]

Okay. And then just a last question, the leasing share of procurement, now so you mentioned that there has been an increasing number of lines coming in volume, how does that relative to your comments last quarter, so sequentially have you seen that is accelerate, decelerate, about the same?

[Brian Sondey:]

Say about the same, I think at the end of the first quarter we were -- I was hopeful at least that we might have seen the end of the shipping line volume and that leasing share would actually improve again in the second and third quarters. What we’ve seen really is it continued to be kind of 50-50 mix and want to see how it goes.

[Sal Vitale:]

Okay. Have you seen any lines that purchased in 1Q enter into any leases in 2Q?

[Brian Sondey:]

Shipping lines always do a mix and when we talk about shipping lines purchasing some containers take advantage of current opportunities out there, they still have time and place and size type shortages and continue to lease just to make their operations smooth and flexible.

[Operator:]

Our next question is from Rick Shane of JPMorgan. Please go ahead.

[Rick Shane:]

I wanted to ask a little bit about the interplay between trading revenues and margins and disposal margins. Obviously, it's a very strong quarter in terms of trading volumes and actually margins were pretty good there. Is the difference in the way to think about this that on the disposal it's really, it’s your cost basis is really your residual value and so if prices come down that margin will erode but on the trading side, because you are constantly buying them that margin can actually be much more sustainable in a low price environment?

[Brian Sondey:]

Yeah. That's exactly right.

[Rick Shane:]

Okay. The other element of that is obviously, the volumes on the trading side were quite high this quarter. Did you blow inventory or would you expect that to continue to remain at those levels, just because there is more opportunity there?

[Brian Sondey:]

It's a good question. It wouldn't blow at inventory. But there are some specific reasons why it was high in the first quarter and may not remain at that same elevated level of volume in the third and fourth quarters. But again, we cannot focus too much on the revenue side. We are really focused on the margin. And obviously volume is related to margin, but not entirely and we do think as I said that for a variety of reasons, the margins are going to be pretty decent for us over the next few quarters.

[Operator:]

Our next question is from Ken Hoexter. Please go ahead.

[Ken Hoexter:]

Actually if I can just follow-up on that on the trading, your margins actually declined to about 39% about 100 basis points sequentially. How do you look at that market in terms of when you want to be more aggressive in trading, is there a certain point where you want to go out and raise the volume at a certain committed level?

[Brian Sondey:]

Yeah, absolutely we have because of our sense of releasing operations and all of the business we do for new containers as well, we got a fair better visibility into what’s happening into the other changes on container demand. And so we have a decent insight onto how this point of imbalance may change in the short-term and we can use that to buy container as well, both new containers as well as used containers and like any trading business that you want to buy at a time when you think the current sale prices relative to expectations or future sale prices are good and I don’t want to get into too much specifics of what we’ve buying and from whom and why but there have been a number of things happening out there that were good opportunities for us and we had a good trading quarter. And again, may not the always at the $4 million margin range for the next few quarters, but again we think it’s going to be attractive for the while.

[Ken Hoexter:]

Okay, thanks. And then Brian, I guess just to it’s been a lot of questions on it, but your thoughts on CapEx what makes you accelerate or pullback from the 650 level. I know you always said, you never said an annual forecast because you are always looking at real time in the market, and given what you see in the environment right now, where do you, how do you look at the capital spend going forward?

[Brian Sondey:]

Since the last couple of years, we've actually averaged I think since 2010 something around $800 million a year, from 2010, ’11 and ’12 and this year I got $470 million given where we are now and plus I'd say expectations from near to peak season we certainly do not expect to get into the range where we were the last couple of years but hopefully there will be some opportunities to do something in the second half of this year. The way we always describe it though is that we don't approach any year with an overall volume target in mind that we maintain our shop of equipment as I said between something between $150 million and $200 million in change and as we do leasing transactions and take equipment off that shop, we buy more equipment to put back on and then we get to the end of the year and just kind of see what we did. I'd say given the lack of exciting trade growth and prospects for the peak season coupled with the fact that we have walked away from say more deals than usual due to pricing, units are coming off the shelf relatively slower than we expected which is what ultimately limits the CapEx.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Brian Sondey for any closing remarks.

[Brian Sondey:]

Yeah, again just want to thank everyone for your continued interest in TAL and participation on the call and we look forward to speaking with you in the future. Thank you.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.