Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Phil Brewer – EVP

John Maccarone – President and CEO

Ernie Furtado – SVP and CFO

Analysts

Justin Yagerman – Wachovia Capital Markets

Gregory Lewis – Credit Suisse

Rick Shane – Jefferies & Company

Brian Hogan – Piper Jaffray

Bill McKenzie – Lafitte Capital

Jordan Heimowitz – Philadelphia Financial

Ross DeMont – Midwood Capital

Mark Bishop [ph] – Boston and Company [ph]

Doug Waage – First Investors

Textainer Group Holdings Limited (TGH) Q4 2008 Earnings Call Transcript February 11, 2009 11:00 AM ET

Operator

Hello and welcome to the Textainer Group Holdings Limited fourth quarter 2008 and full year results conference call. Before we begin today’s call, I would like to note that there is an accompanying PowerPoint presentation that can be found in the Investor Relations section of the Company’s website at www.textainer.com. There will be an opportunity for you to ask questions at the end of today’s presentation. (Operator instructions) For your information, this conference is being recorded. I would now like to turn the conference over to Mr. Phil Brewer, Executive Vice President. Please go ahead.

Phil Brewer

Good morning and thank you for joining us on today’s call. We are here to discuss Textainer’s fourth quarter 2008 and full year results that were reported on February 10th, 2009. Joining us on this morning’s call are John Maccarone, President and Chief Executive Officer, and Ernie Furtado, Senior Vice President and Chief Financial Officer.

Before I turn the call over to John and Ernie, I would like to point out that this conference call contains forward-looking statements within the meaning of U.S. securities laws. These statements involve risks and uncertainties, are only predictions, and may differ materially from actual future results, events or results. It is possible that the Company’s future financial performance may differ from expectations due to a variety of factors. Any forward-looking statements made during this call are based on certain current assumptions and analyses made by the Company in light of its experience and current perception of historical trends, conditions, expected future developments, and other factors it currently believes are appropriate. Any such statements are not a guarantee of future performance and actual results or developments may differ 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 the statements that are made herein despite any subsequent changes the Company may make in its views, estimates, plans or outlook for the future. For a discussion of such risks and uncertainties, see the “Risk Factors” included in the Company’s quarterly reports on Form 6-K for the three and nine months ended September 30th, 2008 and for the three months ended March 31st, 2008, filed with the Securities and Exchange Commission on November 10th, 2008, and May 14th, 2008, respectively.

I would also like to point out that during this call we will discuss non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures will be provided either on this conference call or can be found in the Company’s February 10, 2009 press release.

Turning to Slide Three, I would like to take a moment to review the agenda for today’s call. We will begin today’s call with John reviewing Textainer’s fourth quarter 2008 and the year end results and the current market environment. We’ll then turn the call over to Ernie to review the quarter and year-end financials. Finally, I will discuss the Company’s financial position and growth strategy before taking questions.

I would now like to turn the call over to John.

John Maccarone

Thank you and welcome to our fourth quarter 2008 conference call. I will begin on Slide Four. 2008 was Textainer’s best year in almost every area of its business. In addition to generating record net income, excluding unrealized losses on interest rates swaps of $2.03 a share for the year, we secured 212,000 TEU of long-term lease originations, maintained high utilization of 95%, sold 85,000 containers through our Resale team, renewed and expanded our debt facilities significantly enhancing our financial flexibility, and increasing our available credit to $680 million, and successfully entered the refrigerated container market, which we believe offers future growth opportunity by adding $50 million to $100 million of CapEx each year.

Further, with today’s announced dividend of $0.23 a share, we have declared cumulative dividends of $1.32 per share since our IPO, while maintaining a conservative payout ratio of slightly below 50%.

As we enter 2009, which is Textainer’s 30th anniversary year, we expect to find a much more challenging environment. Operating in this environment, Textainer intends to draw upon our industry leadership and size to serve our customers as well as our financial flexibility to take advantage of the weakness in the market and seek attractive opportunities in acquisitions, sale and leasebacks, and long-term lease originations.

Then we’ll discuss these opportunities in more detail later on the call, but now I would like to review the market environment in more detail. You may turn to Slide # Five. During the second half of 2008, a global financial crisis particularly affecting the credit markets as well as equity markets accelerated and may produce a prolonged global recession. Though we cannot predict the extent, timing, or ramifications of the slowdown, Textainer believes that the current downturn in the world’s major economies and the constraints in the credit markets could cause containerized cargo volumes to slow or become negative on some trade routes.

Typically, a slowdown in containerized cargo volume growth leads to a surplus of containers, lower utilization, higher direct costs, weaker shipping lines going out of business, and reduction in the size of container fleets. Overcapacity of container ships has caused freight rates to decline on many trade lanes, especially the Asia to Europe trade line.

According to The Economist, China’s exports will decline 6% in 2009 versus 2008 with a 19% decline in the first quarter of ’09 versus the first quarter of ’08. Today, our liner customers have taken several proactive measures to react to the situation. Specifically, they’ve laid up vessels. About 800,000 TEU or 6.5% of the world container ship capacity is in lay-up at this moment, according to AXS-Alphaliner. They’ve redelivered chartered vessels at the end of their charter period. More than half of the vessels in lay-up are chartered vessels.

They have started to sell their older container or offered them to Textainer and others for sale and also offered sale and leaseback of their newer containers. Later on in the call, we’ll talk about this point in more detail and how it represents a significant opportunity for Textainer.

And finally, they’ve tried to maximize redeliveries of leased containers from short-term leases and expired long-term leases. Of course, most customers are not leasing any containers at the moment, either.

The laying up of vessels has caused our utilization to decline. The combination of more off-hires and very few new on-hires since we achieved peak utilization of 97.5% at the end of the third quarter has caused utilization to decline to 92% as of the week ending January 30th. We do not expect to see any change in this trend until the second quarter at the earliest and likely later than that. We’ve also seen a softening market in the resales.

In terms of customers, there have been about four bankruptcies and defaults among our smaller customers, totaling about 1% of our total fleet with a higher concentration in the (inaudible) containers obtained through recent acquisitions. We have recovered a significant portion of these containers and recovery efforts continue. In mind, the biggest risk is the possibility of the failure of a major shipping line as a result of lower revenue from reduced freight rates and the expected 14% increase in capacity, which is scheduled for delivery in 2009. Of note, Textainer is partially protected from this with insurance.

In annualizing the strength of the major shipping lines, the following needs to be considered. First, liner companies will benefit from lower charter rates and lower fuel costs. Second, the leading liner companies have successfully managed downturns in the past.

Finally, from our perspective, it’s important to highlight that we have 80% of our on-lease containers with our Top 25 customers. This list includes 20 of the world’s Top 25 shipping lines. I personally look at this list everyday and have not yet seen any obvious candidates for potential failure.

While industry conditions are challenging, we’d like to detail some positive trends we believe differentiate the Company and positions it well. Utilization is currently at 92%, which while lower than the record of 97.5% we achieved at the end of September, it’s still strong by historical standards. With 71% of our total fleet and 78% of our owned fleet on long-term lease, we are much better positioned than in previous cyclical downturns than when we were predominantly a short-term master lease operator.

So far, nearly 80% of the redeliveries have been to Asia, which is our customers’ demand area when the market eventually improves. It appears our reposition cost from lower demand locations in the U.S. and Europe will not be excessive.

The U.S. Military continues to require containers in the U.S.A., helping to keep our inventory there low.

There was virtually no new container production in the fourth quarter of 2008. And all factories in China are closed now until at least April.

Annual new production in the past six years has averaged about 3 million TEU. Annual retirements in the past five years have been about 1.2 million, so that we’ve had net growth in the world container fleet of about 1.8 million TEU each year.

In 2009, we expect new production to be no more than 1.5 million TEU and possibly less while retirements could be at least 1.5 million TEU, maybe more. So this means that instead of the historical average of net fleet growth of 1.8 million TEU, it could be zero in 2009.

The cumulative effect of the above means that there will not be a big surplus of containers unless things get a lot worse after the first quarter. In fact, I can see a scenario whereby lines will find that they got rid of too many container and must start to on-hire again, as they did during the last cyclical downturn. Since many lines do not have access to debt financing, and even if they do will likely need to use it for vessels, terminals, IT, and other investments, they may turn heavily to leasing, as they did in 2008.

A moment ago we discussed some major liner companies and their ability to effectively navigate through the downturn. Similar to many of the leading liner companies, Textainer has been in the container ship business for 30 years now and has developed experience, size, and scope to successfully manage the business through cycles. Specifically, it’s important to keep in mind, we have a very seasoned management team at Textainer. We’ve been there, done that before in cyclical downturns, and know how to minimize the downside effects.

We also have economy of scale, which results in an extremely low overhead per container of less than $0.03 a day. Our net operating income, cash break-even during the next 12 months for the portion of the fleet subject to redelivery is about 60% below current performance.

Additionally, despite the fact that we pride ourselves on running a lean operation, we initiated a companywide cost reduction program on January 1st, 2009, and have already identified over $2.5 million in savings in overhead, direct costs, and capital expenditures in IT and other areas. Moreover, we manage each container in our fleet over its average 12-year life span beginning with buying a new container to ultimately selling it into the secondary storage market. Unlike an airline seat or a slot on a container ship making a voyage, a container is not a perishable commodity. If we have temporary lower utilization, we can make up that lost revenue when we eventually put that container back on lease. The long-term fundamentals of the industry are positive and we expect the industry to continue to grow at about two times global GDP, a level that was achieved through several cycles between 1980 and 2007. For Textainer, the exiting aspects of our business at the moment are the potential opportunities in sale leasebacks, and acquisitions, which would make Textainer a larger and more profitable container leasing company in the years ahead.

Additionally, we believe that this downturn will create significant opportunity for industry consolidation for companies like Textainer with significant financial flexibility as smaller, less capitalized competitors are becoming increasingly affected by market downturns.

Phil will review our growth strategy in more detail later on the call, but first I will turn it over to Ernie to review our financials.

Ernie Furtado

Thank you. Turning to Slide Six, I’d like to take this opportunity to review our financial performance for the fourth quarter and the year ended December 31st, 2008. Fleet size at the end of the year consisted of 2 million TEUs of which 43% were owned and the remainder were managed, subleased, or on finance lease. Utilization for the total fleet for the fourth quarter was 95.7%.

First, I will review the fourth quarter results. Net income, excluding unrealized losses on interest rate swaps net of minority interest, was $26.3 million, which represents a 43% increase over the $18.4 million in the prior year quarter. We believe net income excluding unrealized gains or losses on interest rate swaps, net, is a useful performance measure. These gains or losses are non-cash, non-operating items and Textainer intends to hold its interest rate swaps until maturity. Over the life of an interest rate swap held to the maturity the unrealized gains or losses will net to zero.

Lease rental increased by $4.5 million or 9% compared to the prior year quarter, primarily due to a 10.6% increase in fleet size and a 1.9% increase in utilization, partially offset by 4.6% decrease in rental rates. Management fee revenue decreased by $1 million or 13%, primarily due to a net decrease in the size of the fleets managed for container investors.

Net gain on trading containers sold decreased by $1.6 million or 81% primarily due to a 78% decrease in the number of units sold due to fewer units being available for sale.

Depreciation expense decreased by $1.2 million or 10% due to an increase in estimated residuals values, using the calculation of depreciation of expense, partially offset by an increase in the size of the owned container fleet.

Bad debt expense increased by $0.7 million due to an increase in the allowance for doubtful accounts. Interest expense decreased by $2 million or 21% primarily due to a decrease in average interest rates of 1.9 percentage points, partially offset by an increase in average debt balances, which were $80.1 million higher.

Realized losses on interest rates swaps were $1.8 million compared to realized gains of $0.5 million in the prior year quarter due to a decrease in interest rates between the periods.

Income tax benefit was $4 million compared to income tax expense of $2.2 million in the prior year quarter due to remeasurement of income tax liabilities during the fourth quarter of 2008 EBITDA was $40.9 million, $0.2 million lower than the prior year quarter.

Now, I will review the full year results. Net income, excluding unrealized losses on interest rate swaps, net of minority interest, was $97.3 million, which represents a 33% increase over the $73.3 million in the prior year. Lease rental income increased by $6.3 million or 3% due to a 6.8% increase in fleet size, a $2.2 million increase in finance leased income, a 1.1% increase in utilization, and a $0.8 million increase in handling income.

These increases were partially offset by a 3.6% decrease in rental rates and a $2.4 million decrease in geography income, both of which are partially due to the decline in containers on lease to the U.S. Military.

Management fee revenue increased by $4.5 million or 19%, primarily due to a $5.7 million increase and additional management fees earned from the former Capital Lease fleet, partially offset by a $1.3 million decrease due to a net decrease in the size of the fleets managed for other container investors. Gain on container trading increased by $2.9 million or 61%, primarily due to a 16% increase in units sold.

Gain on sale of containers increased by $2.1 million or 16% due to higher sale prices, partially offset by 20% decrease in units sold. Direct container expense decreased by $7.2 million or 22% primarily due to a $6 million decrease in repossessing expense due to less military repossessioning and $1.1 million decrease in storage expense.

Depreciation expense increased by only $0.1 million as an increase in the size of the owned container fleet was offset by reduced expense due to an increase in estimated residual values used in the calculation of depreciation expense, effective July 1st, 2008.

Amortization expense increased by $3.3 million or 90% due amortization of the price paid to acquire the rights to manage the former Capital Lease fleet.

Bad debt expense increased by $2.5 million or 223% due to an increase in the allowance for doubtful accounts resulting from the default of one customer and the bankruptcies of three customers.

Interest expense decreased by $10.9 million or 29% primarily due to a decrease in average interest rates, 2.2 percentage points, partially offset by an increase in average debt balances, which were $50.4 million higher.

Realized losses on interest rate swaps were $6 million compared to realized gains of $3.2 million in the prior year due to decrease in interest rate between the periods. EBITDA was $177.7 million, $23.7 million higher than the prior year period.

Turning to Slide Seven, Textainer’s dividend for the fourth quarter will remain unchanged at $0.23 per share. This represents 42% of net income excluding unrealized losses on interest rate swaps net of minority interest for the quarter. This is lower than our target of 50%, but we did not want to raise the dividend at this time as we head into a period of uncertainty in world trade.

With the fourth quarter dividend cumulative distributions declared since going public in October of 2007 are $1.32 per share. We have paid dividends for 19 consecutive years and it’s an important part of the total return that Textainer provides. Importantly, total dividends paid during 2008 of $0.89 per share were 44% of net income excluding unrealized losses on interest rate swaps net of minority interest. Therefore, a decline in 2000 [ph] net income will not necessarily result in a decrease from the current dividend rate because we are currently well below the 50% target rate.

We are very pleased with our fourth quarter 2008 and full year results and now I’ll turn it over to Phil.

Phil Brewer

Turning to Slide Eight, I would now like to review our considerable financial strength and access to financing and specifically how this bodes well for Textainer in the current market. During our last three calls, I noted the success of our two refinancings in early 2008. Given the extreme volatility and uncertainty of the credit markets today, it is worth repeating that our credit facilities were renewed at attractive terms.

Textainer Limited’s revolver has an aggregate commitment amount of up to $205 million, of which $53 million was drawn at December 31st, 2008. The revolver matures in April, 2013, and the pricing is LIBOR plus 1.00% to 1.50%. Given that we are less than two times levered, the current pricing is LIBOR plus 1.00%.

Textainer Marine Container Limited secured debt facility has an aggregate commitment amount of up to $475 million of which $300 million was drawn at December 31st, 2008. The facility matures in June, 2010, and the pricing in LIBOR plus 1.25%.

We also have low leverage compared to both past levels and the universe of similar companies in the container, rail, aviation, and other related industries. We own 43% of our container fleet and are levered 1.4 times including minority interest as equity, and 1.8 times not including minority interest.

Compared to our two publicly traded peers, Textainer’s container ownership and leverage are extremely favorable. Importantly, we believe this combination of low leverage with high liquidity and access to financing puts Textainer in a unique position to capitalize on market conditions and industry consolidation.

Turning to Slide Nine, our long-term strategy is to grow both organically and through acquisitions. However, it is important to note that we will not grow for growth’s sake. Consistent with our past success, any future acquisitions must produce returns that exceed minimum hurdle rates, taking into consideration different minimum rates for the purchase of existing container fleets and management rights.

Acquisitions must also make strategic sense. We will not pursue acquisitions that are outside of our core expertise. Finally, we are patients and willing to wait for fair valuations and/or improved lessee demand. We have effectively purchased no containers in the fourth quarter of 2008 and currently have none on order.

Currently, market conditions are putting stress on medium and small leasing companies, which typically have little or virtually no access to financing, lack the infrastructure to support container redeliveries or master lease agreements, and have third-party container owners that are concerned about their fleet performance. This provides us with significant opportunities to acquire management rights and container fleets, both of which we would consider.

Generally, we prefer to acquire container fleets rather than management rights, but our preference depends on many factors, including, but not limited to, the type, and condition of fleets compared to the terms of management agreements.

Lastly, we are an experienced consolidator, having completed four deals totaling $1.1 million TEU over the past ten years. Most recently, we acquired the management rights to the Capital fleet of 510,000 TEU in 2007, and the Gateway fleet of 315,000 TEU in 2006. Having integrated these acquisitions in three to six weeks, we offer a seamless transition for our customers. Our 16-person in-house IT team has 150 years of industry experience and our IT system is scalable at least two times.

Another possible area for growth for Textainer is the sale and leaseback of customer-owned containers. In the current economic environment, shipping lines are having difficulty accessing credit and sale and leaseback transactions provide us with attractive returns that exceeds returns provided by new containers. These transactions carry less risk because there is little or no roll over risk. They will allow us buy attractively priced containers and place them on leases for the remainder of their marine service lives. In addition, we generally enter into these transactions with larger, more established lines.

We have examined several opportunities recently. Although we have not concluded a deal yet, due in part to credit concerns, we are optimistic we will close a deal in the near future.

We will now open it up for questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) We’ll take our first question from Justin Yagerman with Wachovia Capital Markets.

Justin Yagerman – Wachovia Capital Markets

Hi, good morning, guys, how are you doing?

John Maccarone

Good, how are you, Justin?

Justin Yagerman – Wachovia Capital Markets

Good. You know, I wanted to get a little bit of more color on the tax gain that you guys benefited from in the quarter. What was that related to and is that something that we can expect going forward?

Ernie Furtado

During the quarter we looked at the sourcing of our revenue primarily container activity in certain taxing jurisdictions and also the location of container sales, and that rate was lower than we had seen in previous years, so we – that resulted in a net decrease in our tax provision.

Justin Yagerman – Wachovia Capital Markets

Got it. So, Ernie, I mean as we look out to 2009, obviously there is variability on that line with – where you are selling the containers and I guess some of the other – the sourcing of those, but is it safe to say probably lower going in than we’ve seen in terms of run rate or should – what should we be modeling?

Ernie Furtado

It’s difficult to say. I think we can continue to expect a rate in the – close to where it’s been historically. I won't say that this year’s rate would necessarily continue to be that low, so just probably better to use the longer term historical average.

Justin Yagerman – Wachovia Capital Markets

Okay. So, kind of 5% to 7% type of range.

Ernie Furtado

I think that’s what I would expect.

Justin Yagerman – Wachovia Capital Markets

Alright. You mentioned bankruptcies in both the press release and the call, obviously tough environment for the liners right now. But bad debt looks like you guys have been pretty good at managing those credits on your P&L. Do you expect there to be residual accruals as we go into 2009 for the exposure that you’ve had thus far or is there only going to be additional stuff that we should see showing up on that line? And I guess when you look out and take your best stab, you said you are pretty confident with your Top 25, but how bad has it gotten in the past? What are you guys thinking it’s going to be like in when you are modeling that internally and look out at the 2009 landscape and do you have a sense for where this is going to go?

John Maccarone

Good question. Yes, I think the simple answer, Justin, is we really don’t know if it’s going to – I suspect in the near term we are going to continue to see a great deal of pressure on operating expenses for the shipping lines, freight rates. On the positive side, one of the things that was really killing our customers was the bunker, the fuel cost for the vessels, which had gotten up as high as I think about $800 a ton and I understand it’s now down around $200. Also, in – Robert Pedersen, our Senior – Executive VP, Sales, has just come back from an extensive trip in Asia, visiting all the customers and found some enthusiasm in that customers have had very expensive charter ships that were up for renewal that they were going to be able to either off-hire or renegotiate to significantly lower levels. So that is one mitigating factor. But there is a – you know volume, freight volume question and freight rate question that seems to be still developing as we go on. So, not trying to be evasive, but the simple answer is we just really don’t know.

Justin Yagerman – Wachovia Capital Markets

Do you customers that you are actively decreasing your credit with right now and that you are taking steps to – do any kind of damage control on at the moment besides those four customers you alluded to?

John Maccarone

Absolutely. We recently did a top-to-bottom review of many customers that were – that we could consider to be potential problems and we developed a strategy for every single one of them. Someone on the extreme was to go to the customer and say would you please give us back our containers to cutting off further supply to reducing credit risk, credit limit exposure, et cetera. So, that’s a very actively managed part of the business. I think we’ve talked in the past about our credit committee, which consists of all of the members of top management here in San Francisco. We meet as a minimum once a month, sometimes more often than that. So it’s a very intensively managed process in Textainer and perhaps one reason why we have experienced the very low level of default over the years.

Ernie Furtado

Maybe if I could just add something, Justin, a bit more specific answer is just to say that the primary problem credits we’ve had so far are – have been the – on smaller domestic Chinese shipping lines. All this can read in the press. China’s suffering equally as the industrialized economies, and we do have a few other credits that are again smaller, domestic Chinese lines, where we would not be surprised to see default issues with a couple of them over the next couple of months.

Justin Yagerman – Wachovia Capital Markets

So, but am I to infer from that comment then that it’s not any of your major customers or you feel that there is any credit worry at the moment?

John Maccarone

I think that’s a fair statement.

Justin Yagerman – Wachovia Capital Markets

Okay, alright. And then another interesting comment in the release and in our commentary was that the manufacturers of these containers are currently closed. When you think about your CapEx budget for the year, and originating new leases this year what kind of impact is that going to have, do you have any sense of when you are going to be able to take delivery of new containers? Would you even be able to originate leases if you did take delivery of new containers? Or do you just kind of expect that most of the originations at least for now are going to take place because of the sale and leaseback transactions that you’ve kind of spoke about in your commentary?

John Maccarone

Well, yes, I think we are seeing a lot of activity, as Phil mentioned, in that area. We haven’t closed any deals yet, but watch this space. Also, we have a growing pile of in-fleet containers and our first priority will be to lease those out once demand starts to pick up again. And we had a great deal of success during 2008 with a couple of very large long-term leases on in-fleet containers, which were more attractive to customers than paying pretty [ph] amount of brand new container over five years based on the $2600 container. So, our primary focus will be to get idle inventory off the ground and into good leases once we see some uptick in the market and not really new containers. We do have new containers at the factory, the leftover from last year, so when the market for new containers starts to show some signs of life, we are ready to supply. But I think –

Justin Yagerman – Wachovia Capital Markets

Those at the factory for the time being or that’s something that you are going to have to take on and have container – new containers waiting in the depots, waiting to be deployed.

John Maccarone

I am sorry, can you say that again?

Justin Yagerman – Wachovia Capital Markets

Yes, if you do have containers at the factories as you just said, can you leave those at the factory right now or are you forced to take delivery of any containers that will then be kind of left at depots for the time being–?

John Maccarone

No, we can leave them at the factory and we don’t pay storage, so that’s–

Justin Yagerman – Wachovia Capital Markets

Oh it’s that way?

John Maccarone

Yes.

Justin Yagerman – Wachovia Capital Markets

But I guess and this last question, I will turn over to someone else, but reading into the commentary, I mean the net effect would be that you are going to have organic decline in your container fleet this year, outside of an acquisition. I mean is that how we should be thinking about this right now?

John Maccarone

I wouldn’t think that way if I were you.

Justin Yagerman – Wachovia Capital Markets

Okay. So between sale and leasebacks and strategic acquisition potential, you guys would expect to end the year with more containers than you began?

John Maccarone

Yes.

Justin Yagerman – Wachovia Capital Markets

Thanks a lot for your time, guys, appreciate it.

John Maccarone

Thank you, Justin.

Operator

We’ll take our next question from Gregory Lewis with Credit Suisse.

Gregory Lewis – Credit Suisse

Yes, thank you and good morning. I just wanted to follow-up on some comments from Justin and actually thought you made some at the end. When you are talking about opportunities whether it be in sale and leasebacks and/or actual box owners, where do you expect this growth in ’09 and potentially in ’10 to come from? Do you think it’s going to be – do you think you’ll actually be able to take on new containers or do you think it’s going to be more on the managed side where you are going to see this growth?

John Maccarone

On acquisitions?

Gregory Lewis – Credit Suisse

Yes.

John Maccarone

I think it’s going to be a combination of both, Greg. I think we are going to see some opportunities on the managed side and some opportunities where there might be a combination of managed and owned containers.

Gregory Lewis – Credit Suisse

Okay. So in other words, it sounds like maybe even some of the larger players in this space might be looking to exit the market at this point?

John Maccarone

Well, I really can't be specific, but I would not disagree with that statement.

Gregory Lewis – Credit Suisse

Okay, great. Just moving on to – you mentioned that the depots in Europe and Asia are now – it sounds like for the most part the fall in your loss freight other alternatives given that these depots are full is that cost in your bottom line increasing, in other words are depots applying pressure, upward pressure on pricing as these depots are full?

John Maccarone

Well it’s – we’ve had an interesting phenomenon. I think what’s happened, the reading in the press, in the industry press is that shipping lines typically when they – bulk of the cargo is going from Asia to other parts of the world, North America, Europe, the two main trade routes, and there is very little container cargo coming back from those areas. So, over time, shipping lines have developed a system whereby as soon as the container is empty, they put it back on the ship, bring it back to Asia for another load. And what we suspect has happened in the last few months is that they’ve done what they always did except when they got back to China and other parts of Asia, there was no cargo. So, at the moment, we have a crisis in that there is no depot space to handle this huge influx of containers that have been brought back to Asia by the shipping lines. And we’ve had our operations people working day and night for months. We have secured quite a bit of additional storage space, but it still is a big – it’s a big problem for everybody and hopefully we’ll start to see some improvement in freight volumes, which will suck up some of these containers.

To specifically answer your question where we have seen an increase in storage is where a depot operator has gone out secured more land and has said to us, look, I can get this land, but it costs more, are you willing to pay more? And the answer is yes because we really have no choice. But that has been a relatively small part. Our storage for all of our regular depots is fixed by contracts. So they can't just arbitrarily raise the rates, so it’s only this incremental space that they have secured where they’ve asked us to help pay more of storage.

Gregory Lewis – Credit Suisse

Okay, great. And I guess Phil this is for you. The Container Resale division, when we look at ’09 I mean – has that basically come to a halt or are there still old containers leaving the fleet that are – in other words, is there still sam [ph] market for these?

Phil Brewer

Well, there has certainly been no halt. I am not sure if you are – what part of the business specifically you are referring to when you say a halt, but we are disposing off container from our own flee, number one, and we continue to do that. As far as trading containers, we found a slowdown in the availability of trading containers over the latter part of last year, while certainly the middle part of last year, finding trading containers was difficult because of the high utilization. But as utilization has started to decline, we’ve seen an increase in the interest of shipping lines to sell containers. We have, on the other hand, seen container prices falling in the secondary market. So, it’s quite possible that margins will come under some pressure and even just – well, we are not – the containers in our own fleet is going to decline and the sales of containers in our own fleet. But, we are continuing to sell containers until now.

Gregory Lewis – Credit Suisse

Okay, great. And then just lastly, I just wanted to touch on utilization. I mean clearly utilization has come down pretty sharply but it’s still at a healthy level at around 92%. When we think about utilization going forward, if we were to assume that as containers come off leases that they are going to have difficulties being (inaudible) what – when we look in ’09 roughly how much of the fleet is scheduled to come off of leases?

John Maccarone

We probably have around 11% or so of long-term leases that will expire during the year, but– , in that case –

Ernie Furtado

(inaudible) maturities and not all are going to expire in January. So they are spread throughout the year.

Gregory Lewis – Credit Suisse

Okay, so in other words, it’s quite possible that utilization could drop down until maybe – full utilization for your fleet could drop down somewhere into the mid-80’s?

John Maccarone

I think that’s quite possible.

Gregory Lewis – Credit Suisse

Okay, and just as a reference, when we look back in say the late 90’s like – and I realize that it’s changed, there is lot more long-term leases in the fleet than there were back then. What was sort of the utilization, full utilization in say the late 90’s?

John Maccarone

I have to go back and –

Gregory Lewis – Credit Suisse

Okay, that’s fine. Well I can follow-up with that afterwards.

John Maccarone

Yes, I don’t have that report in front of me, I guess. So you can call me later or call one of us later and we can dig that out for you.

Gregory Lewis – Credit Suisse

Okay, fair enough. Thanks for your time.

John Maccarone

Thanks, Greg.

Operator

We’ll take our next question from Rick Shane with Jefferies & Company.

Rick Shane – Jefferies & Company

Hey guys, two questions. First, in terms of the interest rate swaps, is the way that we should look at this that you are basically swapping floating for fixed, so you are locking in and the realized losses during the quarter are effectively the interest rate gain – interest rate savings that you got due to the downward move in LIBOR and the unrealized losses associated with that are the expected savings over time on the interest rate line and you are basically effectively amortizing it?

Ernie Furtado

That’s pretty close. Yes, the – we are locking in fixed rates. We borrow on a floating basis, and we are swapping that we have fixed rates to match the leases that we enter into. If you look at the realized gains and interest expense combined that we report, that’s in effect the sum total of the interest that we’ve locked in. The unrealized part is just the mark-to-market of the existing portfolio of swaps and any time you have an environment where interest rates are declining, you are going to have unrealized losses and vice versa when interest rates are in a rising environment. So, I know Phil you want to –

Phil Brewer

I mean I would just say, Rick, that the way we look at it is we are not purchasing derivatives to speculate. We are buying them solely to hedge the positions we develop by entering into terms leases and funding those term leases on a floating rate basis. Over time, as Ernie has noted before, this all nets out. So I think that would be the proper way to look at it.

Rick Shane – Jefferies & Company

Got it. And what is the notional value of your outstanding swaps at this point?

Phil Brewer

I am sorry, I don’t know, but we can get back to you with that information.

Ernie Furtado

It will be on our SEC filing next month.

Rick Shane – Jefferies & Company

Pretty close to the outstanding balance on the revolver and the warehouse?

Phil Brewer

It should be.

Rick Shane – Jefferies & Company

Okay, great.

Phil Brewer

Well, not the entire – yes, not the entire outstanding balance because we only swap the debt that’s allocable to term leases. Some of the debt that we have is allocable to master leases. So – but, we’ll get you that number.

Rick Shane – Jefferies & Company

Okay, great. That’s helpful. And then the second question, John, you had made the comment about the – and I want to elaborate on this a little bit. I am going to hopefully not mis-characterize this too much, but it was a brief comment that you said that pricing could go down on the leases that are expected to roll off this year, 60% and you would still break-even on a cash basis. Can you just sort of give us an example of that, walk through the numbers, so we understand that?

Ernie Furtado

Okay, so, what we did is for the portion of the fleet that’s not subject to renewal, we look at how low would the net operating – how low could the net operating income go on that portion that’s subject to release before we get a break-even. So if net operating income was $0.60 a day, a 60% decrease you look at the net operating income of $0.24 a day, so a $0.36 decrease that’s the level of net operating income on that portion of the fleet, and we would still be breaking even. So, going from $0.60 a day to $0.24 a day, that’s the order of magnitude.

Rick Shane – Jefferies & Company

Okay, great, that’s very helpful guys. Thank you very much.

Operator

We’ll take our next question from Brian Hogan with Piper Jaffray.

Brian Hogan – Piper Jaffray

Hello guys.

John Maccarone

Hi, Brian.

Brian Hogan – Piper Jaffray

A couple of questions one kind of a follow-up on previous ones. Just in regards to strategy, in regards to falling pricing and you got long-term leasing that – 78% of your mix and declining utilization rates, what is your strategy on that point? Are you trying to push more longer term or just whatever you can get at the moment?

John Maccarone

Well, it’s a combination of both, yes. Now, we have a strategy – Robert Pedersen’s team of sales people approach every customer well in advance of expirations of long term leases. And wet try – our primary goal is to find a way to extend those expiring leases. Full stop. That’s exactly what we try to do. In some cases, we’ve found the customer says look I’ve just got too many containers right now for the available cargo. There is nothing you could do to influence me to keep – to renew this expiring lease. Alternatively, we have a customer that says yeah I could be induced to keep that, but I want you to cut your rental rates by 50% and we say no, we are not going to do that. And so we don’t close a deal. And then we have the middle ground where we have been successful in several very significant rollovers that we’ve been able to convince the customer to extend it at reduced rates, but that are not dramatically reduced, which we felt was the right decision. And we – and that’s a process that goes on every single day and will continue to go on. Even without a recession that’s how we run our business. But if anything we are more intensively involved in those discussions right now.

Brian Hogan – Piper Jaffray

Alright. And just can you describe what’s going on with the minority interest and obviously was that a benefit this quarter or was an expense or has it been in the past, just elaborate on that?

Ernie Furtado

Minority interest or income tax, because minority interest was an expense.

Phil Brewer

Yes, I mean if you are asking abut the position of Ford who is the ultimate holder or ultimate investor reflected in the minority interest piece, we – I can only say that I know not much more than you do based on the price of Ford itself. Is that what the question was?

Brian Hogan – Piper Jaffray

Yes, that’s the question kind of I mean it was earlier this year running positive number and looked around so – I guess the other question is kind of the secondary marketing kind of alluded to earlier, falling prices there. Can you give a sense of demand, who is buying them –?

Phil Brewer

Who is buying the older containers?

Brian Hogan – Piper Jaffray

Correct.

Phil Brewer

The demand really hasn’t changed. We are still selling our containers to depots and one-way users. I mean the ultimate buyers haven’t changed. The mix probably has somewhat. Last year, we sold the majority of our containers – I am sorry, the largest portion of our containers in Asia, primarily for one-way trade. We’ve seen that market dry up very considerably. So I think what you are likely to see this year is a greater percentage of the container that we sell being sold in the – in North America and Europe, which traditionally had been the high demand locations, in which case they are often sold for onsite domestic storage.

Brian Hogan – Piper Jaffray

Sure. How many containers did you sell there in the quarter?

Phil Brewer

Well, last year, we sold about 85,000 containers.

Ernie Furtado

Brian, this is Ernie. I apologize. I want to get back to your question. I did – yes we did have minority interest benefit for the quarter, and that’s due to the unrealized losses on the interest rate swaps. So, that is in TMCL and so to the extent we had – that affected TMCL’s why there was a minority interest benefit for the quarter.

Brian Hogan – Piper Jaffray

Okay. And just kind of how would you expect to looking forward can we kind of model it?

Ernie Furtado

Well, that – the – yes, it’s – as long as the unrealized losses are swap gains are zero then that would go away. So that’s just a function of the interest rates.

Brian Hogan – Piper Jaffray

Okay.

Ernie Furtado

Normally, that’s going to be 25%of TMCL’s net profit.

Brian Hogan – Piper Jaffray

Okay.

Ernie Furtado

We certainly expect to be positive.

Brian Hogan – Piper Jaffray

And just kind of more of a big picture. Are there any shipping lanes that are actually surprising you maybe outperforming, doing quite well or is this all bad?

John Maccarone

I don’t think any of them are doing very well, unfortunately. They are all suffering from somewhat similar symptoms.

Brian Hogan – Piper Jaffray

It wouldn’t be like anything to the Middle East or is that – anything relatively outperforming or anything or is it just kind of–?

John Maccarone

Well, I would say that the Asian and Europe trade is probably – had the biggest piece. So far in the trans-Pacific trade the shipping lines have anticipated the volume declines and withdrawn enough capacity that they really have not had the precipitous declines. So, I think if you just look at the general trades, we take the North and the South trades, which is from Asia and North America, and Europe to South America and Africa, Australia, New Zealand, those have done better than the East-West trades, those being Asia to North America and Asia to Europe. I think that’s kind of a real broad brush generality.

Brian Hogan – Piper Jaffray

Okay, thanks.

John Maccarone

Thanks, Brain.

Operator

We’ll take our next question from Bill McKenzie with Lafitte Capital.

Bill McKenzie – Lafitte Capital

Hey guys, congratulations on a good quarter in a tough time. John, at the New York analyst conference you showed a slide that showed roughly a 50% increase in the TEU capacity of ships that were on order. Have you noticed a material change from what you guys watch in terms of the order book and the deliveries over the course of say the next two years?

John Maccarone

Bill, thanks for the compliment on the quarter. I think what we are seeing so far is that there have been cancellations whereby owners of vessels have forfeited the deposit. These appear to be more in the 2010-2011 delivery years, which is really great to see that happen and not that we want to see our customers losing money on deposits, but the fact that we are going to potentially decrease the increase that’s coming on board. The 2009 deliveries, again, this is anecdotal, is that in many cases, the vessels are already in the shipyards, under construction, the steel has been ordered and cut. That’s going to be harder just to impact in future years, but the positive thing is that people are taking steps to reduce the order book going out in the future years. And I don’t think anybody has been placing the orders that I’ve heard about.

Bill McKenzie – Lafitte Capital

Could that then be inferred to mean that the – even if trade were to miraculously increase at some point later in the year or early next year, that the overcapacity in the ship lines would likely keep the ship owners at really thin margins?

John Maccarone

Well, we have today, a 6.5% of the fleet, 800,000 TEU, 300 vessels idle and they are laid up at the moment. So the first order of business you have to redeploy that. And then you have about a 14% increase in capacity scheduled for delivery in 2009. So, I think you got to work off somewhere around 20% of the world’s fleet before you’ll see–

Bill McKenzie – Lafitte Capital

That’s an 8-10% GDP increase given history of the kind of 2% to 2.4% container volume versus GDP, right? Will that be about right? What do you need to see to work off with excess now and what’s for firm delivery in 2009? I guess what I am going to is it sets the stage for the scene like it’s maybe (inaudible) market way more in favor than history has been in terms of the rent versus own decision. I guess the other thing, and without just sounding too predatory, given the fact you guys have got credit available and that may not be the case all across the industry, are there opportunities to earn substantially in excess of what your hurdle rate has been? Do you see places where may be there are what I can characterize as unwilling sellers, but where certain financial circumstances are forcing sales without a large number of buyers?

John Maccarone

Yes. And we have one guy, our traffic cop that keeps us honest, and that’s Phil. And he runs around saying cash is king about ten times a day or so. He – if we are even – if Robert is even tempted to do a deal that’s not at premium rates, then Phil is there with the purse string. So, yes, we are looking for opportunities that are significantly above the traditional returns that you’ve seen in the time that you’ve been a shareholder.

Bill McKenzie – Lafitte Capital

And then finally, you know the KG funds I don’t know that market, but I got to believe that (inaudible) is going out and borrowing money to buy containers right now, probably it’s happening and that again as the ones that they’ve had come off contract, looking at the weaker, in some cases public competitors and certainly some of the private equity based ones, you might think maybe a little bit more difficult right now to raise money. Do you see material opportunities coming off of that segment that either pick up existing contracts, to pick up management fees, are there major liquidations going on in those funds like we’ve seen in the equity markets around the world that are kind of changing the competitive landscapes there?

John Maccarone

No, I wouldn’t say we’ve seen liquidations of KG funds and fleets, but I would say that we are seeing opportunities whereby we have the possibility of acquiring management rights.

Bill McKenzie – Lafitte Capital

Alright, well (inaudible) this year ultimately ends out and thank you for your time.

John Maccarone

Thanks, Bill.

Operator

We’ll take our next question from Jordan Heimowitz with Philadelphia Financial.

Jordan Heimowitz – Philadelphia Financial

Hi guys.

John Maccarone

Hi Jordan.

Jordan Heimowitz – Philadelphia Financial

Good quarter. A bunch of questions. First of all, the provision for doubtful accounts, I don’t know if there has been a period that’s comparable, but do you have any idea what the largest provision for doubtful accounts is? You’ve ever experienced any year a dollar amount? You’ve been doing this 30 years, I mean is the highest amount ever been 5 million, 10 million?

John Maccarone

Ernie is trying to look –

Ernie Furtado

Yes, I would have to go back. It was probably the year that we had the large South American shipping line. PBN [ph], which was when our fleet was much smaller. Over the last five years –

Jordan Hymowitz – Philadelphia Financial

Over the last five years there has been nothing, but I’m wondering if we go back 15 years or so. When the year the South American, , do you remember how much that was approximately?

Ernie Furtado

I’ve got to look back. That’s probably the largest single customer default we’ve had when you are looking as a percentage of our total fleet, but –

John Maccarone

We’ll get you that number, Jordan.

Ernie Furtado

Yes.

Jordan Hymowitz – Philadelphia Financial

Okay. But said another way, like each – you have 20 major shippers, each one – well, let’s just go with that. I was going to say each one, if one went bad would that be a $5 million provision for a range? Would it be like two to five or zero, you know what I’m saying? If their biggest risk is the default of a major shipper, what’s the magnitude or range of what a major shipper could be?

John Maccarone

It would depend upon a lot of circumstances. It’s really not a simple answer. Within our Top 25 customers, the range goes from less than 1% of our fleet to roughly 10% of our fleet. So it’s a big difference. It also depends upon what actually happens in the event of the default, whether the company merges with another shipping line, whether other shipping lines buy parts of their business, where the containers get returned. There’s almost an infinite number of variables and it wouldn’t really be fair or representative to pick a number out of the air. I think you and I have had this discussion recently. And maybe when you come back from your trip and you’re going to call me, we can explore that a little bit more in detail. I’ll do some prep work for your return.

Jordan Hymowitz – Philadelphia Financial

Okay. What was the number of containers sold in the quarter if you reduce the $4 million of gain?

John Maccarone

I guess we’re looking at that right now.

Phil Brewer

We’ll get that number to you in a second, but if you have another question.

Jordan Hymowitz – Philadelphia Financial

Okay. Can you give the breakout of the fleet between the refrigerated and the non-refrigerated at this point?

John Maccarone

Well, that’s very simple. We own 2,750 refrigerated containers out of a total number of containers that’s close to – that’s over 1.3 million so it’s – (inaudible)

Jordan Hymowitz – Philadelphia Financial

Okay. Why was the depreciation up this quarter, I’m confused on that, from last quarter specifically, because you’ve increased the residual value a little bit, so that should decrease the depreciation by itself, and it actually went up.

John Maccarone

Yes, Ernie – would you repeat that because Ernie is busily digging up the numbers from your first question, but he’s going to tackle that question. But can you please repeat it again, Jordan?

Jordan Hymowitz – Philadelphia Financial

Sure. The depreciation was up from $10.6 million to $11.6 million from Q3 to Q4, and you’ve increased the residual a little bit, so I would have thought the depreciation would have gone down and tied, and it actually went up. Can you explain that?

Ernie Furtado

It’s due to fleet growth. The size of the – we’ve got a lot of containers this year including a lot of refrigerated containers, so we had a large CapEx this year, and that’s offsetting the decrease from the residual value change.

Jordan Hymowitz – Philadelphia Financial

But the fleet, did it grow really from Q3 to Q4 that much?

Ernie Furtado

Lot of the containers that we purchased in the third quarter came in at the beginning of the – they were added to the fleet just towards the end of the third quarter, so didn’t have a full quarter’s impact in the third quarter and they did have a full quarter’s impact in the fourth quarter.

Jordan Hymowitz – Philadelphia Financial

So if the fleet stayed flat from here, this would be the run rate of depreciation?

Ernie Furtado

Yes, all things being equal, if that was the– that the fleet size didn’t change.

Jordan Hymowitz – Philadelphia Financial

And my last question is, what type of sale and leaseback size could a range be – I mean it depends obviously on the contract, but are we talking 5% of fleet growth. I mean if – what would be the best case and worse case? The worse case would be zero. What would be the best case the portfolio can grow from sale and leaseback?

John Maccarone

Well, we’ve seen deals so far, Jordan, that we’ve looked at that ranged upwards of 50,000 TEU being offered by a single customer. So a deal that size could be a $50 million plus transaction. We’re looking at a couple in the $20 million range at the moment, so they could vary and, obviously, the size would depend on the credit worthiness of the customer and the attractiveness of the portfolio.

Phil Brewer

Jordan, this is Phil. It occurs to us that you maybe wanting to know how many containers we’ve sold out of our owned fleet over the last quarter. And if that’s the case, we don’t have that specific number here. I can tell you that we’ve sold around 17,000 containers in the last quarter of last year, of which, 13,000 came from the fleet we owned and managed, and the rest were trading containers, but I don’t know how many of the 13,000 came actually from our owned fleet and how many came from managed. So if that’s the information you want, we don’t have it right here as we are on the call.

Jordan Hymowitz – Philadelphia Financial

The number that would produce the $4 million of gain would only be from the owned, correct?

Ernie Furtado

Correct.

Phil Brewer

Yes.

Jordan Hymowitz – Philadelphia Financial

Okay. Yes, if I could get that number that would be great, the owned number that produced the $4 million of gain.

John Maccarone

Okay, we’ll get that to you.

Jordan Hymowitz – Philadelphia Financial

And then I think that – thank you guys and congratulations on a great quarter.

John Maccarone

Thanks, Jordan.

Operator

We’ll take our next question from Ross DeMont with Midwood Capital.

Ross DeMont – Midwood Capital

Hi, guys, good morning. Just wanted to get a little more clarity on where utilization is going. It looks like it’s dropping at about 1.5% a month. I mean that takes us to the mid-80s by the middle of this summer. Is that a reasonable thing to model?

John Maccarone

You know, several of the analysts that have been coming out with reports in the last couple of weeks have been using – they said they’re going to use 85% and I think that one of the – Greg Lewis just – I think that’s probably not an unreasonable number to model. I’m hoping it doesn’t get to that level, but let’s be realistic. We’re in some uncharted waters here at the moment, so if you want to model it, getting to 85% by the middle of the year, I don’t think it’d get any real big arguments from the people here sitting around this table.

Ross DeMont – Midwood Capital

Okay. And then in terms of where you’re seeing pricing go on used containers, can you talk about, I don’t know maybe the percentage drop you’ve seen in prices over the last two, three, four months, where you see that going and where we are likely to take margins on –margins (inaudible)

Phil Brewer

We’ve seen prices down about 15%, I would say, if I would just – ballpark figure so far. Where we see it going, I honestly don’t know, again, very difficult to predict. I certainly expect prices to continue to decline for the first quarter. Beyond that, I’m not certain.

Ross DeMont – Midwood Capital

Okay. And last question, did you put any thought to eliminating the dividend completely if we’re going into an environment where there’s going to be opportunities to purchase assets to put a outsize return. Any chance you just get rid of it for a while?

John Maccarone

Well, it’s a question that we’ve certainly spend a lot of time thinking about it and at this point we feel that there is no justification for – to doing anything with the dividend. We have certainly adequate liquidity to handle any of the opportunities that we’ve seen coming our way, so it would be a pretty big step for us to consider anything in terms of lowering or eliminating dividends. Something fairly major would have to happen for us to even consider that.

Ross DeMont – Midwood Capital

Okay. But it should – but I guess it will come down by definition from the current level if utilization goes to the mid-80s?

John Maccarone

Possibly, but on the other hand, I think Ernie mentioned earlier that we only paid out 44% this year. And we have an unofficial target of 50%. That is not cast in concrete. We could conceivably look at a two-year average if we did 44% last year, we could do 56%, and say it was 50%. I think it’s just early days right now to be overly focused on the level of dividend over the next couple of quarters.

Ross DeMont – Midwood Capital

Understood. Thanks for taking my question.

John Maccarone

Thank you very much.

Operator

We’ll take our next question from Mark Bishop [ph] with Boston and Company [ph].

Mark Bishop – Boston and Company

Hi. Thanks for taking my question. I have a few questions. First of all, relating to some of your earlier comments, I think you said that if pricing fell 60% or something on the stuff that’s coming up for releasing, you would still be cash flow breakeven. Does that mean for the Company or does that mean for those particular leases? And then, I have a bunch of more questions.

Phil Brewer

It’s for the Company.

Mark Bishop – Boston and Company

The Company, okay. So – and then, on the – on your – you also mentioned that some of the containers that you’d sell this year might go to North America where they would be used for on-site domestic storage. Does that mean like not used as a shipping container? They’re in some company’s backyard for some purpose? And does that mean that the price you might get for them might be closer to a scrap price rather than what you used to get if you sold it as a shipping container?

Phil Brewer

Well, that’s a – no, that would not be the case. And, in fact, containers are sold for that purpose all the time and it has often been one of the primary markets for used containers. There’s always been some demand for used containers as one way to use to locations that generally don’t have exports. That was often not – that was not the largest component of the demand for used containers until, perhaps, the last year when we saw a dramatic shift to goods going out of Asia, often over land to Kazakhstan and the other stans and that part of the world. So, we saw an increase in the prices in Asia and decided to sell more containers in Asia that are being used for one-way trade, but prior to the last, say, two years, the majority of the containers we’ve sold were sold in North America and Europe for exactly that purpose. And it is not a scrap price, no.

Mark Bishop – Boston and Company

Okay. And then also I was wondering you own containers and then you manage other people’s containers. When you lease those out, do you have – can you just say, “Well, let’s lease ours first, then we’ll see if there’s any left that we can lease for the managed fleet?” Or do you have to lease them together contractually? Then I just have few more.

John Maccarone

Well, if we did the first thing, we’d probably all go to jail, so we don’t do that, no. We’ve never discriminated. The containers are all – they all look the same. They all say Textainer and the people in the field that do the actual day-to-day leasing have no idea who owns the container; it’s on the internal. So, we don’t discriminate and it’s really a first in-first out of the depot. When somebody comes to pick up 10 containers, it’s the first ones that came in are the first ones that go back out.

Mark Bishop – Boston and Company

And then your fleet though was 78% long-term leases and the management’s only 71%. How does that happen?

John Maccarone

No. The total fleet on a CEU basis is 71%. The portion that we own is 78% and the reason for that is a fairly large chunk of the containers that we’ve acquired for management in the last few years were at a lower level of long-term lease in those portfolios, so it really diluted it, but there is nothing to do with discrimination at all.

Mark Bishop – Boston and Company

Okay, that makes sense. And then also, I was wondering on your – what do you feel your variable costs are for leasing out a container and do you need to have depreciation covered? Or if you don’t lease a container, does it stop depreciating and last longer, or does it keep rusting and age, and end at the same date?

John Maccarone

Well, yes, I think there is a two-part question. It’s still – on the books, it depreciates whether it’s on lease or sitting in the depot, but I think it’s – you can make the case that if the container is sitting in the depot, it’s not generating the wear-and-tear that it would be. If you look at a containerized operation, containers tend to take a lot of beating when they’re moved from the ship to the truck to the train. And you don’t get that when they’re sitting in a depot. Rust is not really a major consideration because all the containers are made out of a type of steel called Corten steel, which is a rust- and corrosion-resistant, very heavily resistant. Typically, when we retire a container, it’s more for cosmetic reasons that it’s taken such a beating that the shipping lines don’t want to lease it anymore. They don’t want to bring a container to their customer’s loading dock that’s all beat up, so that’s –

Mark Bishop – Boston and Company

Okay. And then back to the variable cost question, do you have to cover depreciation then? Or do you – what are the actual variable costs of – should that you avoid if you have the thing in storage as opposed to letting someone use it?

Phil Brewer

I’m not sure if this answers your question. Let me make an effort at it because it may be that we’re looking at things slightly differently from the way you look at them. When we lease out a brand new container, generally, the per diem rate that we obtain from that container is driven purely by the container cost and the interest rates’ environment at that time. That’s for a new container. Once the container is already in our fleet, then when we lease it out, it’s often driven really by what are the market rates in that location where that container is located. We can’t sit there and say, “Well, it so happens that our cost are X or Y.” If the container is sitting in Hamburg, generally, the market’s sufficiently transparent that everybody knows what someone can get for a container coming out of Hamburg. So, again, I’m not sure if I’ve answered your question, but maybe it’s important to understand how the initial and then subsequent pricing of containers, leased containers, happens in our industry.

Mark Bishop – Boston and Company

All right. That’s what I’m trying to get to. I understand for a new container, but for a used one that’s coming off lease, that’s the whole point. I am just guessing – trying to see where I might think the pricing would go. You said it’s down 15% now, which doesn’t seem like much.

Phil Brewer

No, but that’s down 15%. I was just – that question was – that answer was in response to the price for sales containers. When we are selling a container at the end of its marine life, what’s been the decline over the past, I’d say, six months and I said 15%. I thought your question now is asking about subsequent per diem lease rates when it’s still in our fleet, am I incorrect?

Mark Bishop – Boston and Company

No, that’s correct. So, I misunderstood the last part. So, let’s say, you don’t want to rent something out for a dollar because you have some costs. So, let’s say that’s complete glut, which I guess we’re looking at for at least a little while. How – if the price was a dollar, you wouldn’t take it because you still have to pay the person on the phone who figures out where the thing is. I mean, how low could it go and still cover your incremental costs?

Phil Brewer

Again, I’m not sure I’d answer – our overhead cost per CEU per day is about $0.03 per day. CEU is an accounting measurement of containers. It’s very, very low, our overhead cost per container. So, again, the pricing on a container once it’s already in our fleet, the subsequent pricing and whether it’s – when Robert’s team renegotiates the term lease or when it’s a container at the depot, it’s driven pretty strongly by what are the conditions of the market at that time, where is the container located, what’s the age of the container; these are the factors. It’s a large market. There are many containers out there. We don’t have the ability to demand a specific price. We really are driven by what are the market conditions at that time.

Mark Bishop – Boston and Company

Okay, thanks. I just have one more. When was the last time that the industry had 16% of the containers parked? Has that happened ever in your history?

John Maccarone

Of course, yes. I mean, up until the last few years, if you could’ve averaged 85% utilization, I think everyone would have thought that they were very, very happy. We’ve had an extraordinary period of six years where utilization has been 90% or higher. Part of that is because the business model of the container leasing changed to primarily a long-term lease instead of a short-term or master-lease business. So, I think going forward, once we get through this down cycle, we – with the long-term lease model, we will expect a better than 85% utilization.

Mark Bishop – Boston and Company

So, up until six years ago, everyone kind of on average, over time was 85% utilized?

John Maccarone

Well, it varied. We’ve had higher, we’ve had lower.

Ernie Furtado

Yes. I was just looking, in 2001, our total fleet utilization averaged 74%, but in 2001, our long-term lease percentage of fleet was probably 30%. So, within two years, we are up over 90% again, so just to give you on how low it could go under the former cycle, but it was a much different mix of long-term lease and short-term lease at that time.

Mark Bishop – Boston and Company

Okay. Thanks so much for all your answers.

John Maccarone

Thank you.

Operator

We’ll take our next question from Doug Waage with First Investors.

Doug Waage – First Investors

Yes. Do you guys have any idea of the containers you have on a lease with customers that are laid up? I mean, we know what your utilization is and everything else, but how many containers sitting out there at the customer’s ships or docks, that is waiting to get returned to you, I guess?

John Maccarone

Well, we know how many containers we have on lease to every customer. We know how many are committed to long-term leases that have not expired and the eligible portion of what they can return; we have that information. Whether or not the customer will try to return any or some or all of that, we really don’t know. I think it’s going to depend upon how they perceive the market going forward. It’s pretty expensive to return a container, Doug. It’s not something that is a cost – you have trucking, handling, repair costs that are borne – drop-off charges; there’s a lot of expense. So a customer, typically, is not going to return a container that he thinks he’s going to need in any near term. I don’t know, it may be 20%. Shipping lines might have a perceived surplus of 20% of their fleets right now. I’m just pulling that number out of the air.

Doug Waage – First Investors

So, you don’t have really clear visibility into – “Okay, this guy has 1,000 containers and he’s only using actively 800 of them, there’s 200 sitting around. You don’t have that visibility for you to have some generalities, I guess? Or just you re trying to get me–

John Maccarone

No. I mean, we don’t know if a customer has 1,000 containers, if he’s, today using 800 of them or 700 or 900. That differs day by day.

Doug Waage – First Investors

I got you. I didn’t think so. Okay. All right, thank you very much.

John Maccarone

Okay. Thanks, Doug.

Operator

At this time, I’d like to turn the conference back over to Mr. John Maccarone for any additional comments or closing remarks.

John Maccarone

No, just to say thank you all for joining, those who are still on the call. This is probably the longest one we’ve had and just rest assured that we’re working very hard to try to maximize the performance of the Company in these difficult world economic times. That’s all what I have to say. Again, thank you very much.

Operator

This does conclude today’s conference. Thank you for participating.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Textainer Group Holdings Limited Q4 2008 Earnings Call Transcript
This Transcript
All Transcripts