CAI International's CEO Discusses Q4 2012 Results - Earnings Call Transcript

Feb.14.13 | About: CAI International, (CAI)

CAI International, Inc. (CAP) Q4 2012 Earnings Conference Call February 13, 2013 5:00 PM ET

Executives

Timothy Page - Chief Financial Officer

Victor Garcia - President and Chief Executive Officer

Analysts

Bob Napoli - William Blair

Gregory Lewis - Credit Suisse

Michael Webber - Wells Fargo

Doug Mewhirter - SunTrust Robinson Humphrey

Daniel Furtado – Jeffries

Steven Kwok – KBW

Helane Becker - Dahlman Rose

James Woods - FBR Capital Markets

Sal Vitale - Sterne Agee

Brian Hogan - William Blair

Operator

Good day, ladies and gentlemen and welcome to the CAI International Fourth Quarter 2012 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will have a question-and-answer session and instructions will follow at that time. (Operator Instructions)

I would now like to turn the conference over to your host for today, Mr. Timothy Page, Chief Financial Officer. Sir, you may begin.

Timothy Page - Chief Financial Officer

Good afternoon and thank you for joining us today. Certain statements made during this conference call may be forward-looking and are made pursuant to the Safe Harbor provisions of Section 21E of the Securities and Exchange Act of 1934 and involve risk and uncertainties that could cause actual results to differ materially from current expectations, including but not limited to economic conditions, expected results, customer demand, increased competition and others.

We refer you to the documents that CAI International has filed with the Securities and Exchange Commission, including its Annual Report on Form 10-K, its Quarterly Reports filed on Form 10-Q and its reports on Form 8-K. These documents contain additional important factors that could cause actual results to differ from current expectations and from forward-looking statements contained in this conference call.

I will now turn the call over to our President and Chief Executive Officer, Victor Garcia. Victor.

Victor Garcia - President and Chief Executive Officer

Good afternoon. We are very pleased with our fourth quarter and full year 2012 financial results. We continued for the 11th quarter in a row to report record quarterly rental revenue. In the most recent quarter we reported total revenue of $49.9 million and net income of $17.4 million.

Net income was 35% higher than the fourth quarter of last year. This quarter we had earnings of $0.85 per fully diluted share, representing a 29% increase from the same quarter in 2011. Excluding the effect of the equity offering in December, our return on shareholders’ equity in 2012 was approximately 24%. We are proud of these results, because we have grown our business significant during the year and have been able to do so while finding attractive investments for our shareholders with strong financial returns. Moreover, most of our new equipment purchases were placed on long-term leases which will provide ongoing revenue, cash flow, and earnings for several years.

For the full year of 2012, we reported an operating income margin of 59% and a net income margin of 36% maintaining strong margins in return on equity are what drives our strategic thinking. In terms of investment, 2012 was a record year for our company with more than $520 million invested. 90% of our investment last year was in containers, of which approximately half was on new equipment and half was on sale leaseback transactions and purchase of portfolios from our managed container fleet.

In the fourth quarter, we made our largest portfolio acquisition in which we purchased 71,000 TEUs of containers for $84 million. In the fourth quarter, we saw a typical decline in utilizations that will be expected after the peak holiday season. For the fourth quarter, we averaged 93.4% utilization on our total fleet and 92.5% at the end of the year. A significant number of the units we have received off-hire have been our older assets many of which were on expired leaseback transactions completed several years ago. Many of these units will – we will sell in the secondary market which continues to be strong with attractive sale prices. We believe that the lack of younger equipment being returned off lease is because customers are holding on to equipment as they expect to have increased activity in 2013.

Our utilization is expected to increase in the second quarter of this year and we have already been receiving increase from customers for our off-hire equipment to be picked up over the coming weeks. We are excited about the investment opportunities are already developed during the first quarter of 2013. We expect that by the end of the first quarter, we will have invested approximately $100 million in portfolio purchases and sale lease back opportunities and we will begin generating revenue and net income in the second quarter of 2013. We have also made new container purchases during the first quarter for delivery in March and April. We believe that the container prices have risen since the time we purchased the majority of our equipment. And we have been told by manufacturers that container prices will likely increase further after the Chinese New Year Holiday period, which means that per diem rates should increase over the coming weeks to reflect the rising costs of containers.

Overall, we expect rising container prices this year will increase the utilization of our existing fleet and generate better overall returns in our investment. The January issue of Clarkson Research Services container intelligence monthly predicts world container traffic volume will growth of 6% for 2013 as compared to only 4% in 2012. We believe that the increased trade growth expected in 2013 combined with relatively high utilization of lesser fleet should result in strong investment demand over the course of the coming year. We estimate the overall production of containers in 2012 to have been approximately 2.5 million TEUs of which approximately 1.2 million to 1.5 million cover the replacement of older equipment, which means that only about 700,000 TEUs were added to the fleet last year approximately 2% of the fleet total.

With container trade volumes growing at 5% to 6% per year, we think that the longer term need is approximately 3 million TEUs. And that this year may prove to be a catch up year in terms of investment with shipping lines continuing to rely on container lessors for their equipment need. As we look at the credit worthiness of our customers, we know that our customers business remains challenging due to the slower trade growth in previous years and an excess supply of ships. However, we believe that many of our shipping line customers’ financial position improved during 2012 as compared to the prior year. Many of the shipping lines implements freight rate increases during last year that are being passed on to their customers or benefiting from some level of growth in cargo volumes. As a result the collection of receivables from our customers has improved over the course of the last several quarters.

I would like to summarize by saying that we have great momentum in our business that will bring revenue and profit contribution over the coming quarters.

I will now turn the call over to Tim Page, our Chief Financial Officer to review the financial results for the quarter in greater detail.

Timothy Page - Chief Financial Officer

Thank you Victor and good afternoon everyone. Earlier today we reported our fourth quarter and full year 2012 results. For the 11th quarter in a row we achieved record quarterly total revenue. Total revenue in the quarter was $50 million, 38% higher than the fourth quarter of 2011 and 11% higher than the third quarter of 2012. For the full year total revenue was $174 million, a 38% increase from 2011. Driving the record growth in the fourth quarter was the incremental revenue resulting from investments we made throughout the third quarter primarily our acquisition of 71,000 TEU in mid-October from one of our managed portfolios. This acquisition contributed approximately $3.3 million of revenue – of incremental revenue.

Net income in the fourth quarter was also a record at $17.4 million, a 35% increase over the fourth quarter of last year and our fourth consecutive quarter of record net income. In the quarter we also achieved record earnings for fully diluted share of $0.85, a 29% increase as compared to the fourth quarter of 2011. For the full year 2012 net income was a record $63 million a 26% increase over 2011. Fully diluted earnings per share in 2012 were $3.18, 25% increase from 2011.

Compared to the end of the fourth quarter of 2011 our total container fleet has grown 15% and or own fleet has grown 54% on a TEU basis. As of the end of December, our own fleet comprised 66% of our total fleet as compared to 48% a year ago and 31% just three years ago. Our average overall fleet utilization during the fourth quarter on a TEU basis was 93.4% as compared to 94.8% in the third quarter. This decrease in utilization from third quarter levels was expected and reflects the normal seasonal shipping patterns we see in most years.

Management fee during the fourth quarter of 2012 was $2.4 million as compared to $3.1 million for the same period last year. For the full year management fee income in 2012 was $12.1 million as compared to $13 million in 2011. The decline in management fee revenue was expected and is largely a result of the reduction in the size of our managed portfolio as we purchased portfolios representing over 100,000 TEU our managed fleet during 2012.

Total operating expenses in the fourth quarter were $20.3 million compared to $15.3 million in the fourth quarter of last year, an increase of $4.9 million. The increase in operating expenses was primarily a reflection of the extent to which our (indiscernible) business has grown over the past year. Most of the increased operating expense $3.2 million was attributable to increased depreciation expense which grew in proportion to the increase in our fleet size and the increase in container related rental income.

Storage and handling expense increased 1.1 million due to overall fleet growth, more utilization in the quarter and operating expenses on full service leases in the rail segment, which is a new business for us this year. The final component of the increase in year over year operating expenses was an increase of approximately $500,000 in MG&A expenses related to our rail operations again we didn’t have that last year the overall growth of our fleet and some professional fees that we believe are temporary in nature. During 2012, we invested proximately $520 million in rental equipment, a record for us. In December, we’ve raised approximately $52 million of net proceeds from a follow-on public offering. This equity raise help us de-lever our balance sheet and has put us in a position to take advantage of market opportunities for investment in 2013.

As of the end of December, we had approximately $960 million in debt, but approximately $560 million committed availability under various credit facilities. Approximately 20% of our outstanding debt at the year end was in the form of revolving credit facilities, the balance was term debt. Approximately 65% of our year end debt was floating rate, the remaining 35% consisted of fixed rate debt with maturities ranging from two years to ten years and fixed rates from 1.1% to 4.9%.

In October we issued our first series of fixed rate asset securitize notes. These were 10-year fixed notes, 3.5%, the tightest pricing to date of any container ADS transaction. We believe there will be further opportunities in the coming months to reduce our overall borrowing cost on our floating rate debt and the fixed rates on a higher percentage of our capital structure at very favorable long term rates. As of December 31, our total consolidated funded debt to equity ratio was 2.77.

Conclusion, the fourth quarter and full year of 2012 were record periods in many respects for CAI. We invested a record amount of capital in 2012 and we generated record revenue, net income and earnings per share. As we enter 2013, we believe we are poised to take advantage of what we expect our excellent growth opportunities in our industry. And as we look beyond the end of the first quarter, we believe the remainder of the year we will see a continuation of high container utilization rates, strong secondary container resale market, as well as opportunities for sale lease back and new container investment which we rely fully will produce the continuation of the revenue and earnings growth we have achieved in the past several years.

That concludes our comments, operator please open the call for questions.

Question-and-Answer Session

Operator

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

Bob Napoli - William Blair

Thank you. Good afternoon. Nice job on the quarter. Question on the CapEx outlook I mean you sound pretty optimistic about the industry Victor going into 2013, do you expect that you will be able to have as much CapEx in ’13 as you did in ‘12. I mean it’s a record year with $500 million is that a reasonable level to shoot for ’13?

Victor Garcia

I think it’s still early in the year. I think our basic view is that as we said in the call in the prepared remarks that we think that this will be a good market, a good year so we think so because of the increase in trade growth, the CapEx movement from ownership to lessors, all those things we talked about. So, if that’s the case we think it will be a great year. We are early in the season, typically we started seeing the real demand for containers occurring around the late March-April timeframe. And so it will really depend on how much done, but we are making investments with the expectation that it will be a good year.

I am not sure if it will be at the same level as last year, the benefit we have is (indiscernible) to be flexible on our CapEx depending on where the market is and we buy throughout the year. So, more firmly is finding the right opportunities with the right returns for the capital. And in that regard I think we are pretty happy about the fact that we already have $100 million of assets that we are going to conclude on that are going to be immediately accredited to our results going into the second quarter. So, I think we feel that we have a very good start. And then the normal seasonal part will start kicking in the second and third quarters.

Bob Napoli - William Blair

Victor, that $100 million is that all sale lease back?

Victor Garcia

Combination of sale lease back and portfolio purchases from our managed fleet.

Bob Napoli - William Blair

Okay and do you expect to be able to buy more from your managed fleet through the year or is that difficult to project?

Victor Garcia

There could be another opportunity or so, but it’s hard to predict.

Bob Napoli - William Blair

Last question just one of your competitors yesterday suggested that they were seeing some pressure on yields, so what is the pricing environment competitive environment like today, currently?

Victor Garcia

As in most years, when you get into the January time period there isn’t a lot of true demand from customers. They usually are looking for our equipment in the second quarter. So, the transaction that we typically see in the first quarter are small and more often or not with small regional lines and those tend to be very competitive because a number of – the volume is small and a number of people can have equipment available for it. So, this tends to be the most competitive part of the year. And then as the certainty about demand kind of materializes, we usually find it, so I would say it is competitive last year with proved to be very competitive year.

I think we made a conscious decision to focus on other investments other than new containers particularly in the second half of the year and we are still focusing on those opportunities as higher yielding opportunities. But I – when I look at this year I actually think that it has the opportunity to be a very attractive yield opportunities for those who have capital because we have gone through about 2 to almost 3 years of fairly steady growth, everybody’s balance sheets are little bit bigger so the amount in my belief the amount of dry capital dry powder available for investment is more limited than it was when you look at 2010. I would suspect that people as they are looking at their incremental investments will be a little bit more judicious about how they use their capital. That’s how we would look at it but so we think there should be good demand and the amount of capital available could be more limited.

Bob Napoli - William Blair

Okay. Thank you.

Victor Garcia

Sure.

Operator

Our next question comes from Gregory Lewis from Credit Suisse. Your line is open

Gregory Lewis - Credit Suisse

Yes. Thank you and good afternoon.

Victor Garcia

Hey Greg.

Gregory Lewis - Credit Suisse

Victor when we think about Q4, quarter just passed I mean it looked like the own fleet had grown about 14% to 15%. In thinking about the earnings power of some of those assets that you took on in the fourth quarter, of that growth how much of the earnings of those assets acquired in the fourth quarter were realized in Q4. In other words, I guess, could there be spillover into some of those assets earning a full quarter in next quarter?

Victor Garcia

I think when you look at that our biggest asset purchase was this portfolio purchase for $84 million. That was our really only major investment that we have made. I think that contributed to the quarter the equivalent of about $0.03 a share for the quarter. I think when you look at the utilization decline in the overall fleet, this probably has offset some of that move. So, as we will look at it, what we expect is the normal seasonal decline in the that start occurring in the fourth quarter will continue in the first, but on a quarterly basis just the investment we have made in the fourth quarter should the normal quarter we would think at for full quarter of above $0.04 a share for quarter.

Gregory Lewis - Credit Suisse

Okay, great. And then in thinking about the managed fleet, clearly that’s not a core, I won’t mean it, I guess it is core, but in other words, should we just expect the continual roll off in the managed fleet similar to what we saw in 2012, where I guess it dropped roughly 100,000 TEU or do you think it kind of stabilizes at a certain point?

Victor Garcia

I think it’s going to start stabilizing. Some of the remaining orders that owners that we managed equivalent for want to own the assets right through the end of the life of the assets. So, it’s a different type of owner. And so we would expect that we’ll continue to be managing those assets for several more years. I think there still are some opportunities there, but I wouldn’t say you are going to see the same level of activity after we conclude the ones we are already looking at, much beyond that we might have another opportunity in the first half of the year, but as we go into the second half of the year we would expect that to diminish.

Gregory Lewis - Credit Suisse

Okay, great. And then just one final question for me, on the railcar business, when we think about that as you sort of filled that out in 2013, I mean, what sort of the opportunities set for that business or is it – should we be thinking about it okay, we are in the railcar business now and probably maybe we are more in steady state for a couple of quarters as we sort of look around and integrate that existing pool of assets?

Victor Garcia

I think in the railcar business as we said on prior calls, I mean we – it is going to be a small part of our investment budget as we expect this year. It’s we really are trying to gain traction there in a very consistent way. So, I would just say we will be opportunistic in terms of investments there as they arise. It’s a little bit different in nature of how we look at investments there than we do on the container side, because we are not buying new equipment, we are buying secondary assets. So, I think we will be opportunistic, but I think again last year we did about 10% of our investment in railcars we would probably would expect probably something along those lines this year.

Gregory Lewis - Credit Suisse

Okay, perfect guys. Thanks for the time.

Victor Garcia

Thank you.

Operator

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

Michael Webber - Wells Fargo

Hey, good afternoon guys. How are you?

Victor Garcia

Great Mike, how are you?

Michael Webber - Wells Fargo

I am good, I am good. Victor, I want to hop back to an earlier question and you mentioned in the release $100 million through Q1 and you talked to that being bought new purchases and sale leasebacks, can you give an approximate breakdown there of what you think will be sale leaseback and kind of hitting closer to day 1 versus new capacity?

Victor Garcia

It would be somewhere around 70% portfolio purchases, 30% sales leaseback.

Michael Webber - Wells Fargo

Okay.

Timothy Page

So, just to verify Michael, there is $100 million of transactions that will have immediate impact, but on top of that, we have also bought containers.

Michael Webber - Wells Fargo

Yeah, no, no that’s helpful. I mean, if I think about I guess, that $100 million and then whatever else you do on top of that, can you maybe give a breakdown in terms of what’s going into a foreign sub versus what’s going into your U.S. subs at this point?

Victor Garcia

All our container investments at this point continue to be paid overseas. So, all of that investors gone overseas.

Michael Webber - Wells Fargo

So 100% of that $100 million and plus anything new is going – is in the foreign sub.

Victor Garcia

Correct.

Michael Webber - Wells Fargo

Okay, great. You already talked about rail cars, just kind of in general and you guys talked about this a bit and obviously we’ve heard from some of your competitors and I suspect we will get some more reinforcement on this later on this week. But it seems in general that the group as a whole is getting just a bit more comfortable with the kind of refinance cycle and may be pulling forward a little bit more some purchases to take advantage of what should be some pretty steady box appreciation in the spring, just given your relatively low storage low to zero storage cost and your mix with this – mix of the carry on the box. In terms of translating that to where your new inventory level stand and then kind of where group wide kind of new box inventory level stand, can you give us an idea about where that number is both through CAI and then for the group as a whole?

Victor Garcia

What I will just say is based on our some of the statistics that we get from different parties. The inventory levels we believe are not excessive actually are probably in line with what you would expect for this same year. I think what is different this year than maybe several years ago is that you probably would have expected of the total factory equipment that’s out there 60%, maybe even 65% would be with shipping lines put orders in and the rest coming from the leasing community. The shipping line component is much lower than that. It’s somewhere in the – if I recall correctly it’s somewhere in the 20% range. What that means is the when demand picks up, it will all come up through the leasing side. So, probably a faster pickup cycle and more demand coming quicker because they are all becoming to the leasing community. So, they won’t be taking their equipment first and then leasing or comes straight to the lease market.

Michael Webber - Wells Fargo

Got you, then along these line this is kind of a higher level of question I mean we keep saying that kind of the box to slot ratio falling as we see larger and larger assets delivering and then fewer and fewer boxes purchased from the lines and then you guys kind of making up the difference there. Is there kind of just a baseline level of that ratio that you think would spur more investment from the container line, is there a level do you think there are just not comfortable with and they could obviously augment that to increase lease containers or buying their own, but specifically just looking at that ratio that’s obviously come down kind of sub-2 now. Is there a floor on that that you guys look at that maybe spurs more investment one way or the other?

Victor Garcia

To be honest with you, now I mean we don’t look at that. Ultimately if you look at trade flows, if trade flows are going to grow 6%, demand for containers will largely grow 6%. So, you have 30 million odd containers -- TEUs of containers out there 6% if you expect at least 1.2 million of incremental need plus replacement and as we said we think replacement is 1.2 to 1.5 so with 6% you are talking 2.5 million TEUs of basic need. That’s focusing on trade growth makes more sense than to try predict things on a slight short-term basis.

Michael Webber - Wells Fargo

Right, I am just trying to think about it from your customers’ perspective but now we can kind of follow up on it offline. I just wanted to call modeling questions from me. You talked a little bit earlier about the utilization rates slipping seasonally, which is kind of to be expected, but I believe that the blended utilization rate that includes your managed fleet, which is going to carry a lower utilization rate, you have that own fleet utilization rate handy.

Victor Garcia

Yeah, right now our own fleet utilization is running around 94.3%.

Michael Webber - Wells Fargo

Okay, perfect. And so how is that and maybe if we just kind of back up a level and just go to kind of the key mullet of utilization, how has that trended thus far in the first quarter?

Timothy Page

Consistent, that’s meeting we have largely been flat around that level in the first quarter. So, there has been about a 2% differential between total fleet and owned fleet, but the direction has largely been the same.

Michael Webber - Wells Fargo

Okay, alright that’s helpful. Just one more and we have already kind of approached to this a little bit, but just kind of going back to your managed fleet and obviously you guys continue to bring those into your own portfolio on an accretive basis. If I would give what’s left in the managed fleet is there any one customer in there that makes up a bigger chunk than others, I mean is it pretty evenly distributed or is it relatively lumpy is there anyone in there that as a bunch of boxes that kind of come to at the same - one time?

Victor Garcia

A lot of our - well we try to keep diversity amongst all of the shipping lines. So, we concentrate on that during the year just try to balance out the fleet. We have with all our customers multiple contracts with multiple termination dates and redelivery schedule, so that we don’t have all the equipment coming off at once with one of our customers.

Michael Webber - Wells Fargo

Right now I am just thinking from a managed fleet perspective is there kind of a larger opportunity in there associated with one large customer that might stick out more than others, but it seems like it’s evenly distributed.

Victor Garcia

Pretty evenly distributed, I would say is because some of these portfolios are already mid-life assets. You tend to have even a more diversified mix because they come in and out recycle they have been picked up in depots, so they might have some probably is more diversification in these than some others?

Michael Webber - Wells Fargo

Okay, alright, great that’s all I have got guys. Thanks a lot for the time.

Victor Garcia

Thank you.

Operator

Thanks. Your next question comes from Doug Mewhirter from SunTrust Robinson Humphrey. Your line is open.

Doug Mewhirter - SunTrust Robinson Humphrey

Good afternoon. You answered most of my questions. You saw that I saw that 6% world containers trade growth forecast, do your I guess it’s hard to answer really specifically but based on talking with your customers who I know don’t have perfect crystal balls either, but does their behavior seem to collaborate at kind of figure in terms of how their service is thinking about, how the year is going to unfold because here are things about Europe is still kind of weak and there wasn’t really peak season this year, I am just trying to figure out whether beyond the ground sentiment seems to be agreeing with that forecast?

Victor Garcia

I think the on the ground sentiment that we are getting from some of the people who are looking on the procurement side is that they are cautiously optimistic. I think they are optimistic, they have been cautiously optimistic really since December, probably for the same reasons that I mentioned but they even going into this Chinese New Year Holiday where things kind of stopped. When we talked to number of players they expressed that once people come back that they expect the market to be picking up over the course of next several weeks, that’s just general sentiment. I think caution is still probably that the word of the day, but with a more consistent positive term.

Doug Mewhirter - SunTrust Robinson Humphrey

That’s a very – thanks for that and very helpful answer. Just one last question for Tim I noticed your tax rate had been trending down probably due to where you are with down the shelves holding your boxes it kind of picked up at the end of the fourth quarter, was there any I guess year end accruals or catch ups with that would you resume the trend into ’13?

Timothy Page

Here we have to estimate what the full year tax rate is going to be and it’s always an estimate and if trued it up at the end of the year and in the fourth quarter we – it just was coincidence that we happened to where we made our revenue happen to be a little higher percentage in the U.S. than in the off shore entities because of sale of equipment. So, it was just phenomenally as to the ratio of U.S. income to offshore income that was driven by gains on sale who owned the containers that we sold.

Doug Mewhirter - SunTrust Robinson Humphrey

Okay, so it sounds like that trend should sort of resume going into 2013?

Timothy Page

The gradual decline in the tax rate to continue.

Doug Mewhirter - SunTrust Robinson Humphrey

Okay, thanks, that’s all my questions.

Victor Garcia

Thanks Doug.

Operator

Thank you. Our next question comes from Daniel Furtado from Jeffries. Your line is open.

Daniel Furtado - Jeffries

Good afternoon Victor and Tim. Thank you for the opportunity. I just have one question and you mentioned in the press release said some typical seasonality is causing the lower expected one quarter EPS. And my question is we haven’t really seen the typical seasonality at least reflecting the numbers for several years or so. And so should we view this supply and demand coming closer back into equilibrium and therefore we will see more seasonality in your results going forward or how should we view that commentary? Thank you.

Victor Garcia

Sure. No, I don’t think it’s say two, I think last year if you looked our utilization and dip down around this time of the year, last year if you looked at our profits quarter-to-quarter comparisons in the first quarter and you’ve taken out of account some gain from sale of portfolios, we would have had the similar trend. I think there probably have been I can say in generally speaking the utilization has been higher for a long period of time. So, I think that, that’s normal. And that’s reduced the amount of seasonality that we have. And we have a large percentage of long-term leases, but there always is some level of seasonality and we have also been disciplined in accepting equipment to be turned in if need to be, if we think that we can get a better return in matter of just a few short weeks. I don’t think we made the – we guided on the direction of the first quarter earnings more to kind of remind the investment community of the seasonality effect. I think sometimes because of the overall investment growth, the expectation is that it’s purely exactly linear. And it’s not always like that. So, there is some – but I would say modest seasonality effect.

Daniel Furtado - Jeffries

Great. Thank you for the color there Victor and congratulations on a nice quarter.

Victor Garcia

Thank you.

Operator

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

Steven Kwok - KBW

Hi, thanks for taking my questions. Most of them have been answered. I would just sort of drill down on the first quarter guidance, in terms of the net income, is that on a dollar basis or is that on a EPS basis?

Victor Garcia

The guidance we have given is on a dollar basis. Obviously, the other effect that we have is that we increased our number of shares outstanding in the fourth quarter. That happened in December. So, in most of the investment that we are making the $100 million that we are talking about is really coming in toward the end of the quarter. So, it will have a more pronounced effect on the additional shares in the first quarter. So, we will expect that as we start getting these investments coming through that we will start seeing the positive earnings momentum again.

Steven Kwok - KBW

Got it. And then if you could just provide kind of a breakdown of like where is that coming from, is it really on the revenue side or is it partially on the operating expense and then finally with regard to the net interest expense line, just wanted to drill down a little bit more into which line you are seeing sort of the decline from?

Victor Garcia

I think you said when you have your utilization come down even by a percentage or so, your story to handling costs are going to go up. And you are also going to have your overall revenue come down a little bit just because we have slightly less. None of the items I am really talking about are of such magnitude that would be what I would deem overly significant, but they do when you have some operating expenses go up and some slight revenue – seasonal revenue decline, it does have an effect on the bottom line. We do have on this quarter we had higher interest expense reflective of obviously the larger debt levels we are holding, but we also have put in some fixed rate debt that was slightly higher. So, that will be carried over into the first quarter as well.

Steven Kwok - KBW

Got it. Great, thanks for taking my questions.

Victor Garcia

Sure.

Operator

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

Michael Webber - Wells Fargo

Hey, thanks. Victor, I wanted to hop back on that one more, I couldn’t let a conference call with you guys goodbye without asking about a dividend, but as you think about 2013 and obviously looking another pretty significant year in terms of CapEx and then at least a portion of that is going to be in U.S. based revenue streams. Has there been any change in the way you guys think about that. And what do you think is a viable period or viable window that at which distribution some kind, are there return on capital, does this rate dividend becomes a more realistic possibility, is it 6 months, 12 months, 18 months, what was the realistic window for people to think about?

Victor Garcia

I think as we have kind of talked about in the past, we have seen over the last couple of years significant investment opportunity. We do expect this year to have similarly significant investment opportunity. So, the way I think the board looks at it and the way we look at it is what are the relative opportunities that we have to invest capital and how the duration of that versus distributing in back half. What I would say is we here as management and the board recognized that with a business such as ours with predictable cash flows and much more substantial cash flow than we have before. We are getting closer to consideration of where we should be initiating different one, but that decision is something is handled at the board level on several different times throughout the year. And I really don’t want to hazard or don’t want to put out a time period, because I don’t think that will be fair to my board to lock them into stuff like that.

Michael Webber - Wells Fargo

Okay. But you do think you are obviously moving closer and it’s within having that conversation is certainly realistic at this point?

Victor Garcia

Well, we have had the conversations. We will continue to have the conversations.

Michael Webber - Wells Fargo

Great, fair enough. Thanks again.

Operator

Thank you. Our next question comes from Helane Becker from Dahlman Rose. Your line is open.

Helane Becker - Dahlman Rose

Thanks very much operator. Hi guys. All of my questions except one have actually been answered. And I just wondered if you had a mix of recourse drive in your – I don’t see it in the press release?

Victor Garcia

Recourse drive in terms of investment this or what?

Helane Becker - Dahlman Rose

No. In terms of what’s in your own container fleet?

Victor Garcia

I would say in our total fleet our refrigerated containers represent, I may not have the exact percentage but I want to say on an SCU basis is something around 20% of our assets are in recourse.

Helane Becker - Dahlman Rose

Okay. And the rest of it just be drive specialists or whatever?

Victor Garcia

Primarily drives, yeah.

Helane Becker - Dahlman Rose

Okay, that’s fine. I have all my other questions have actually been answered. So, thank you very much.

Victor Garcia

Thank you, Helane.

Operator

Thank you. Our next question comes from James Woods from FBR Capital Markets. Your line is open.

James Woods - FBR Capital Markets

Hey, guys. Good afternoon.

Victor Garcia

Hello.

James Woods - FBR Capital Markets

Congratulations on a good quarter. As the last speaker has said most of my questions have been answered, but I just have one quick one for you. You were talking a little bit earlier about the relationship between rising for DM rates and increasing utilization. And on prior calls we have talked about how you held boxes out of the market in order to wait for better rates. Is that sort of the dynamic that we are seeing go on there or could you flush out the relationship as you see it happening over the coming?

Victor Garcia

Yeah. I think that our industry only has certain number of statistics that people could be measured on. One of the key statistics is utilization and it’s a very significant statistic. Utilization by itself is a number that can be addressed in the appendix. We could have if we wanted to another 3 or 4 percentage point increase in utilization, but other than just being able to come out to the market and say, hey, where we have got 97%, 98% utilization, to us what is the opportunity, what is on the assets that we have a decision on, those are coming back what is the best economic opportunity. So, we are really not as driven by that. And with the way I would characterize it is where we pride ourselves or we want to look at is where are our margins when all is certainly down in comparison to our peer group, what’s our return on equity as a comparison to our peer group. And what I would say is because those are the true ultimate measurements of how you are performing. And I would say we are proud of the fact that I think if you look down pre-tax margin, for instance, we had some of the highest pre-tax margin in our space. Our return on equity has been in the mid 20s all year. So, longwinded way of saying it, utilization is important, but it’s not the ultimate statistic that I think needs to drive the business.

James Woods - FBR Capital Markets

I understood. Just wanted to sort of I guess draw a little more color on that, so thank you very much and again congratulations on the good quarter.

Victor Garcia

Thank you.

Operator

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

Sal Vitale - Sterne Agee

Good afternoon, gentlemen. Just a few questions rail revenue for the quarter, did you talk about that earlier, rail lease revenues are?

Victor Garcia

Tim, I don’t have that number off head, I don’t know if you have it. It hasn’t been a significant increase.

Timothy Page

I don’t have in front of me either.

Sal Vitale - Sterne Agee

So, we could just follow-up offline on this, its fine. The other question is just I want to make sure I heard correctly you said your owned utilization for 4Q was 94.3 right?

Victor Garcia

Correct.

Sal Vitale - Sterne Agee

And if I remember correctly for 3Q was what 97ish?

Victor Garcia

For Q3?

Sal Vitale - Sterne Agee

Right.

Victor Garcia

The number was no, it was lower than that. It was about, I don’t want say around 95.5, 96, one of the things you also need to know is with these purchases that we made for our managed fleet, some of our owned utilization has been more of a reflection bringing in some of these fleets that might have been at lower utilization.

Sal Vitale - Sterne Agee

Okay.

Victor Garcia

I mean, it’s also X of what we are bringing in. Now, we have two-thirds of our fleet is owned. So, some of that fleet is now much more on our side.

Sal Vitale - Sterne Agee

Got it.

Victor Garcia

I also think what Victor quoted the 94.3% utilization was utilization at the end of the quarter as opposed to average utilization during the quarter which was higher.

Sal Vitale - Sterne Agee

Right.

Victor Garcia

So, a little bit of sort of mixing the apple and oranges.

Sal Vitale - Sterne Agee

Okay. And then the 70-30 split that you mentioned earlier was that for 2012 in terms of our new container investment versus other, was that for 2012 or you are anticipated for 2013?

Victor Garcia

That was response to the question of the $100 million that we have invested so far that we expect in portfolio purchase and sale leaseback. One of the component of that sale leaseback and portfolio purchases. So, approximately 70% of the $100 million in portfolio purchases, the $30 million is thereabouts is on sale leasebacks.

Sal Vitale - Sterne Agee

Got it. And then you said there is also an additional amount of new container purchases that you made and you are not quantifying that right now right?

Victor Garcia

Correct.

Sal Vitale - Sterne Agee

Good. So, I guess what I am getting is I am trying to get a sense of the $520 million of CapEx in 2012, how much was new container purchase?

Victor Garcia

Roughly speaking 50% of the container purchase we made were new container purchases.

Sal Vitale - Sterne Agee

Right. So, that’s still was roughly $50 million of rail cap backs that would leave say for 70ish, about half of that you are saying was new?

Victor Garcia

I would say there is around $240 million, $250 million.

Sal Vitale - Sterne Agee

$250 million, $240 million, okay. So, I guess what I am getting at is if that assumes given what you said earlier about 2.5 million TEUs produced in 2012, that assumes and most of my calculations are of roughly 6%, CAI bought 6% of the new containers produced in 2012 is that sound about right?

Victor Garcia

I have to look at the calculation. I think we actually are a little bit north of that.

Sal Vitale - Sterne Agee

You are little bit north of that. Okay, so I guess if I point that, that percentage which you are saying is probably north of 6% to what you think is produced in 2013. I get some number, let’s call it, something like close to $300 million if not more of what your CapEx will be just on new container purchases, and then if I lay on top of that you already did a 100, of sale combination, sale lease back and managed, so that would be close to 400 and then some real CapEx. I guess what I am getting at is it is not a conceivable to see some circle your total investment number for 2013 of $600 million to $700 million?

Timothy Page

I would characterize it this way. We think the market conditions will be good in terms of the quantities of the equipment that will be produced how much we ultimately invest is quite a function of what the return profile of those investment is and we are not here just to go get market share we are here to generate returns like we have been generating. And part of the reason there was only $225 million, $230 million, $240 million of new container purchases last year is because we felt there were better return opportunities doing sale lease backs and portfolio purchases. So, we are going to allocate our capital the way the best way we think possible we are not just driven by putting money to work.

Sal Vitale - Sterne Agee

You are not just chasing market share or even trying to maintain your market share it’s basically based on the economics of the purchases?

Victor Garcia

And just to sort out, so if the point B is that in a good market there should be a lot of investment opportunity that is correct and we believe in a good market particularly with the ownership versus leasing dynamic that we have over the last couple of years it’s a big opportunity. Last year, it was a big investment year for us but as we have been talking about we have been mostly investing we have invested a substantial amount in our – in assets other than brand new containers. When we look at 2013, we are leaning is that we think it will be a good new box investment opportunity because of the fact that the second half of last year has really kind of became muted trade growth is improving, lines are still looking more to lease. Little bit of a catch up period in terms of investment. There is an opportunity to be significant a new investment opportunity. And we are driven more by as Tim was saying, we will invest more if the returns are there. We will be more judicious in terms of our investment if the returns aren’t there. And the great thing about our business we get buys at the apple throughout the year, so we don’t feel like we have to make those decisions right now, okay.

Sal Vitale - Sterne Agee

And then just two follow up questions, your rail CapEx for the year do you expect that to be around $50 million level or I think that’s what it was in 2012 as well, correct?

Victor Garcia

Yeah, I think that’s a reasonable expectation.

Sal Vitale - Sterne Agee

Okay and then just lastly on the purchase lease back and managed deals that you have committed to that you expect to close towards the end of this quarter. Can you give any color on the economics of it, whether it is return or incremental net income to expect or however you want to answer that?

Victor Garcia

Actually, I would prefer not to…

Sal Vitale - Sterne Agee

Okay, like this is not close year, that makes sense.

Victor Garcia

It doesn’t make sense to be talking about deals to come.

Sal Vitale - Sterne Agee

Okay, thank you very much.

Victor Garcia

Thank you.

Operator

(Operator Instructions) We have a question from Brian Hogan from William Blair.

Brian Hogan - William Blair

Thanks. Question on any – are there any new competitors you are seeing as private equity you had several years ago when they were pretty active and are there new startups going on, just kind of talking about the competition?

Victor Garcia

Not really significant. There is some very small shops I would say small very few people who are tapping into the same capital sources, other people had in the past so whether you look at the capital coming and being the same or different, the way I would generally characterize is in general what we have seen in the market place is that the larger players have been more active in the overall bidding process and peculiar process, competition a month some of those were at smaller market share or may be more dependent on third-party capital to grow the business has been less impact full in the market and that’s really occurred over the last – well, over a year so, I think in certain ways has been more concentration amongst those companies that have the capital to be able to grow their own business.

Brian Hogan - William Blair

Would you say at least I think rationally any of you?

Victor Garcia

Brian, I don’t think – I think all our competition, we’ve got some smart people in all of these companies, I know them all well and their smart people. There are – as in every market, there are reasons why people at certain times feel that they just justify being more aggressive, we know that they know to calculate returns – we know that they look – they know their business, even characterized the rationale, I think the business was very competitive in certain areas, the refrigerator market last year was very competitive, we pull back from that last year because we had other places to look at the capital work. To characterize has being a rationale, you have to be the one who is making those calculations, I just know that when we look at relative opportunities, we didn’t see the best results there so, we put our capital elsewhere.

Brian Hogan - William Blair

Sure, and then one switching subjects, the – I mean, risk equity in November timeframe and I think your leverage down. I think the quarter is about 2.7 to 1 debt to equity, what as you are comfortable comfort levels in the leverage ratio?

Victor Garcia

I think we’ve always talk about on the 3 to 3.5 range when we get up to that 3.5 range to something we look at. The – as we are continuing to increase our capital base and we are – and we have no de-leverage a little bit, the amount of capital that it takes in terms of investment to move that leverage number becomes ticker and so, when we are talking about investments, it – to move the leverage needle is going actually be pretty sizable investments now, when we made a decision in the fourth quarter to then, we spoke to many of our shareholders about this, we saw opportunities which were now prior talking about and we’ve really didn’t feel comfortable that we are in a position to talk about because it was kind of the timing of them would be and the size of them would be little bit beyond what we wanted to do, we just finished the large acquisition of portfolio in the fourth quarter and looking at another $100 million of there about of investment opportunity right in the beginning of the year, I think was beyond what we would want.

Brian Hogan - William Blair

Alright, thank you.

Operator

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

Michael Webber – Wells Fargo

Hey, back on just for one more. Obviously most of the comments have been around you guys I think as a (indiscernible) assets, but you’ve recently had one-year period is roughly a tied get taken private. Have you guys been approach by anyone for something similar or do you purely be yourselves as consolidators here?

Victor Garcia

Hi guys, I think everybody can probably expect what this answer is going to be, we would never comment in a public forum like this, whether or not we would be approached by anyone it’s not appropriate on comment on something like that, I think in general what I would say is we are – we are focused really since the time when public and growing our business and delivering returns to our shareholders and fulfilling at our business that we could thought we could – this is 23-year-old company with people who have been here for last part of that time, a lot of private company and the lot of experience of this year and we are going to continue to focus on the things that we control, which is growing our business.

Michael Webber – Wells Fargo

Yeah, now, I know you can answer, but that answer details that why else and then I appreciated.

Victor Garcia

Sure.

Michael Webber – Wells Fargo

Thanks.

Operator

Thank you. There are no further questions and I’d like to turn the conference back to Mr. Victor Garcia for closing remarks.

Victor Garcia - President and Chief Executive Officer

I just want to thank everyone for joining our fourth quarter call. As we have talked about in this call we are very excited about the overall market opportunity for us. And we appreciate everybody’s interest. Thank you.

Operator

Ladies and gentlemen thank you for your participation in today’s conference. This does conclude the program and you may all disconnect at this time.

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