CAI International, Inc. (NYSE:CAP)
dbAccess 2013 Global Industrials and Basic Materials Conference Call
June 13, 2013 9:00 am ET
Victor Garcia – President and Chief Executive Officer
Stephen Plauche – Deutsche Bank
Stephen Plauche – Deutsche Bank
Good morning, I’m Stephen Plauche with Deutsche Bank’s Industrials and Transportation Investment Banking Group. I’m pleased to introduce CAI International, who is first time participant within the Deutsche Bank conferences. With me today is Victor Garcia, who is President and CEO of CAI. He is going to have some prepared remarks and then we’ll have some time for Q&A at the end. Thank you.
Thanks Steve. Good morning. Just mentioning the Safe Harbor statement, for those who are on the webcast. On page three is an overview of our overall business, we are a primarily a marine container lessor, we’re the fifth largest marine container lessor with approximately 96% of our assets in containers, intermodal containers or standard units which are in configurations with 20-feet and 40-feet. We have 1.l million TEU of equipment, TEU is standing for 20-foot equivalent units that represents on our balance and our overall fleet above $1.7 billion assets, $1.3 billion or 72% owned by us and $400 million and is for third parties.
We have about 7% of market share which we’ve been growing over the last several years as we continue to focus and reinvest our cash flow into our business. We deal with all the major shipping lines around the world. Our top 30 represent the lion’s share of our business but we have over 300 customers worldwide and we have been serving our top 20 clients for over 15 years.
We’re publicly listed on the New York Stock Exchange under ticker symbol CAP, and we have roughly speaking about $600 million market cap, insider ownership represents about 24% which is primarily our Chairman, who is the original founder of the company in 1989. So we’re 24 year old company with still a significant insider share ownership.
Moving onto Slide 4, overall highlights of performance, we’re very focused in our business line being able to build long-term value by adding in contracts on existing contracts. So although we have lion’s share of our business with our top 30 customers, there are multiple contracts with multiple durations, multiple terms and that allows us to hopefully have a profitable, predictable and scalable business that will go through the business cycle and one of the things we’re proud of is on an operating basis even in 2009, we were profitable every quarter.
High percentage of our lease revenue is a long-term lease and we have the one of the highest percentage of the long-term lease amongst our peer group and one of the highest operating margins. So as we continue to grow and we’re looking to expand our market share, we’re not doing it in terms of sacrificing profitability. We actually are gaining efficiency as we are able to largely maintain our existing fixed overhead and putting more units on the overall platform.
We’re very proud of the fact again because of how we’re trying to manage our business that we have one of highest average return on equities of all of our peer group which is the whole industry has had actually a very good return on equity and we’ve been in the mid 20s now in terms of ROE and we’re very proud of that.
And we have historically during most of our times been not only an owner of assets, but a manager of assets, we continue to manage assets. Although, today about 72% of our fleet is owned by us.
When we look at the market, both short-term and long-term, we’re optimistic about it. We think that the way that the industry has been laid out, their leasing continues to be relative to historical terms more important to our customer base and that’s in part because of capital constraints that they have, as well as the fact that a lot of the international banks are concentrating less on shipping.
They have been primarily, shipping had been a major focus for them and that’s kind of pull back. So leasing continues to be a significant value proposition for a lot of our customers, and we continue to think that that’s going to be in place for the next couple of years.
Overall, the market has been growing. We, last year the market grew about 4%, which was below, what I would say the historical trend had been and which has been around the 8% to 10% range. But given what’s going on in Europe and the slow growth in the U.S., it was more muted last year. It’s expected to pick up somewhat this year. We had a slow first quarter, but we have seen pick up since the end of the first quarter in terms of activity levels, which bode well and we would expect going into the rest of the year.
Secondary market for equipment has remained strong. It remained strong because many of the lessors including ourselves have been enjoying almost full utilization of our equipment and there continues to be very strong demand for equipment for uses outside of our core uses. So secondary prices remain strong, we continue to report significant gain on the residual value of our assets and so that’s a positive aspect.
Okay, on to Slide 5, if you look at our results most recently in our first quarter, we reported $17 million of net income, which was an 18% increase from the $14.4 million in the first quarter of 2012. And if you look at it on a pure apple-to-apples basis, it’s actually a 25% increase in the comparison quarter that we had last year. We had some trading income that increased their earnings there. So, on a momentum basis, we certainly continue to have strong momentum. We have one of the strongest momentums amongst our peer group.
If you look at lease revenue, first quarter of last year to first quarter of this year, we’ve increased our leasing revenue by about 44%. So we continue to see good volume growth, good increases in lease revenue. And the operating margins, if you look at, we still have about 55% operating margin. We are targeting to keep something in the mid to high 50% range and we’re kind of there and I think we continue to report that as we gain efficiencies on our overhead.
When you look at the other margins for those who haven’t followed the industry very closely, we have kind of an adjusted EBITDA margin of around 90% when it sense like a very high margin, but when you think about our finance business, depreciation and interest are the primary cost, so it’s a high percentage.
But you can’t get away from the fact that when you look at profitability of the business, it’s a high profit business where we have after-tax margins about 33%. We do a lot in order to attain those kind of margins. We provide logistic support for our customers. We give them some flexibility in their network. We take their credit risk. We take the asset risk. So, we get paid for that. But we do believe that those margins are appropriate and supportable.
We as lessor of equipment obviously it’s a capital intensive business. We continue to access long-term capital at what we think is attractive rates. We try to maintain an overall debt-to-equity ratio anywhere between 3 to 3.25 times as we believe that’s kind of the efficient level to be in. We could lever up higher than that, if we chose. Many of the lenders into the market will lend at an 80% type of advance rate that will equate to about 4 to 1 leverage ratio, but we try to maintain some flexibility to react to market opportunities. Today, we’re about 2.9 times debt-to-equity and that’s a comfortable rate for us.
We have had the benefit of very strong support from many of the lenders who have done business with us. Today, we have just under about $700 million undrawn and available to us to continue to expand the business. And so, we have plenty of firepower in order to continue to expand in and give us really an edge when we look at the competitive dynamics. Although, we continue to benefit and we have access to capital that you can’t say that to everybody. And we continue to gain support from many of our lenders.
We raised some capital in December of last year in order to give us a little bit of additional headroom. We had made significant purchases in 2012. We ended up, by the end of the year, investing about $500 million. And we saw opportunities going into the first quarter that we wanted to avail ourselves of it. And so in order to feel comfortable that we should do it, we ended up raising about $52 million. And we think that the additional equity in the interest that it drew was a positive and we’ve had a significant run up in the stock since the time we raise the equity.
We did buy a couple of managed portfolios in the first quarter, with the equity proceeds and we ended up leasing about $68 million. We had, overall, an investment target of about a $100 million of investments, which mean those portfolios of sale leasebacks that that’s a time that we were looking to raise the capital.
Moving on to Slide 6 is the slide that shows our overall market share. We’re about 7% market share, fifth largest player. You could see here on the right side, many of our customers, these are many of the global shipping carriers with Maersk, MSC and CMA being the largest shipping lines of the world. But we have relationships with all the regional carriers as well as all the European global carriers.
When you look at make up of our business and I’m now on Slide 7, may investors say well your business must be very volatile because your types of shipping business, shipping business is a very volatile business. And the answer on the latter part of that is yes, the shipping business is a volatile business. And if you look at the results, if you pick up any kind of trade publication to understand where the market is on the shipping side, it’s a difficult business. Our customers have had a mixed track record of profitability, as you can see from the chart of the grey dotted line on the left hand side.
But when you look at the blue chart, which is the container lessors, it’s been a different picture, which has been much more stable. The reasons for that are pretty simple and basic. We are a contract business, we’re a finance business, we buy our assets and we put them on long-term leases typically a lease is five to eight years on an asset that’s 12 to 15 years.
So we have a lot of stability of revenue. Our customers have largely they buy 30 year assets and they’ve got a committed 30 day revenue stream, so it’s a high fixed cost business with short-term revenue.
We take about two months order equipment and we usually can get access out of it. Our customers largely have to order two to three years in advance and we have to hope that the market is as they thought it would be. So those two dynamics allow us to avoid having the kind of volatility that shipping lines have and when you look at overall supply demand of containers continues to be very much aligned with demand and so we and our peer group either increase our investments when we think that demand is there or we decrease our investments. So you don’t get the major oversupply situation, when you look at on the ship side there is a big mismatch, there is about a 7% to 8% difference between supply of containerships and demand for containerships.
That tends to put a depressing effect on freight rates which hurts their overall business. So that this kind of trend is not a unique trend, it’s a common aspect of the business.
2013 outlook which is on page eight overall depending on which forecast you look at, the market overall world trade growth is going to expand somewhere around 5% to 6% little bit better than last year but not as high as what we historically have seen in terms of world trade growth. We do think that we can get back to the 8% to 10% range, what’s going to take to do that is, really having to see Europe get out of its current economic problems and the U.S. back into more normalized growth pattern.
We continue to see significant growth and demand out of Asia, not just China, but Southeast Asia. China although has slowdown somewhat continues to grow in the mid 7% range and continues to have overall strong demand. So we believe about half of our overall equipment operates around Asia and that trend in terms of growth is going to continue. So we continue to see strong demand on Singapore, Taiwan, Indonesia, Korea, Vietnam, a lot of the different Southeast Asian areas, Middle East also very strong given the oil prices and the cash flows.
What I have depicted here on the bottom chart is container prices over time and the reason why we wanted to outline this is because container prices have an effect on rates and new container (inaudible) effect on rates as well as secondary prices. And what you can see here on the yellow line is that 20-foot container price, and what that’s been over time.
And really although that the price has been jagged up and down, we have largely been on an up cycle in terms of container prices and that’s been because steel represents a big proportion of what our container costs roughly about 65% of the container is steel. The next big cost component is lumber for the floorboard which is another 15% paint, another 10% and the rest overhead.
So with steel prices over time, we believe will raise, although steel has been coming down most recently. We do think over time steel will raise as the demand for steel will increase particularly because of the developing world. That will we believe push up new container prices.
New container prices and increase in new container price over time allows us to release our existing fleet at better than what we would otherwise be able to lease in that, because the new lease rate will be higher on a new box, which gives incentives for our customers to maintain the assets that they have in their fleet and that translate into higher utilization, coupled with that we really have higher utilization, we have high secondary prices. That is the trend that we have seen for the last several years and we think that that trend is long-term trend and it has basic incentives, because utility of mid life container is the same as utility of a brand new container.
On the reefer side, we don’t have quite as much of basic commodity cost in the reefer, refrigerator. So if you look at refrigerator container, which is much more expensive, it’s about $17,000 compared to mid $2000 for 20-foot container. There is a lot more piping installation that may impact the machinery on the equipment. So it’s not as sensitive to that and so that has been much more flat as compared to 20-foot container.
Moving onto Page 9, financial highlights; here we just want to say, I touched on it in earlier slide, we have just every quarter consistently grown our business. We’ve been able to grow our revenue. We’ve been able to grow our container rental revenue. Our cash flows and our net income margin, and we continue to get strong market acceptance from all of our customers and they view us as one of their primary suppliers of equipment.
On page 10, really outlines the overall fleet, you can see that on the chart below we have moved from primarily managing assets for third parties to primary ownership that’s the combination of things, one is we have increased our capability of purchasing assets or cash flow as increased so we reinvested.
We’ve also found significant opportunities in buying assets from investors who at this point would prefer to get capital back and then be investing on a long-term basis primarily because many of these investors were European, and because of the European crisis and what has happened in some other investments that repatriate the capital has been more important. So we’ve been able to get very attractive opportunities as we bought back number of portfolios that we have managed.
On the own fleet, I mentioned before we’re about a $1.3 billion of revenue earning assets. Income statement, there is various straight forward long-term lease revenue, depreciation interest. On the managed fleet, we get if we were to sell portfolio to third parties, we usually have a gain associated with that that’s cash upfront and we have the ongoing management fee.
Page 11 outlines our fleet between the equipment side and the lease side. So about 90% of the containers around the world are dry van containers in these configurations of 20-feet and 40-feet, so our fleet is largely consistent with what we see out there in the world. So about 95% of our equipment is on a TEU basis is dry van containers on a cost equivalent unit it’s about 84% because the refrigerated container tends to be a lot more expensive on a TEU basis.
So on a value invested, we have little bit less in dry vans. But overall still primarily a dry van business, we are largely a long-term lessor that’s where we’d like to be as a long-term leases because it allows us to focus on building the business as opposed to releasing equipment.
So between finance leases and long-term leases and long-term leases anything greater than the year, we have about 77% of our leases on long-term leases and what is advantage for our Company, we grew up as primarily a short-term lessors. We have the infrastructure in place to do short-term leases and when you’re dealing with our customers being able to take back equipment from them and having that option is a major advantage in terms of getting the most out of your assets.
Our philosophy, our capital structure on Page 12 is that we want to maintain the debt-to-equity ratio around three times. As I mentioned before, if demand is weak, we will not invest, if demand is on the up, we will invest pretty quickly in the lead time typically is about a month to two months.
And so maintaining that kind of leverage and access to capital allows us to continue to react to the market and although it’s a competitive business, availability of equipment and having equipment in the right configurations when a customer needs it is a major part of the value proposition that we provide to our customers which is primary determinant and that’s whether or not you can lease out the equipment. So although price is important, availability of equipment is even more important.
We have over the last year increased our percentage of fixed rate debt, over floating rate debt, we have been primarily floating rate. But with long-term rates coming down as aggressively as they have. We have fixed more and more. And we have our average cost of our debt on a fixed rate side is above 3.3%.
So we were able to fix on a long-term basis at basically where our floating rate cost was which so we don’t haven’t had to experience an earnings drag as a result of fixing long-term rates. And our average weighted-average life of maturity of our fixed rate debt is a little over four years. And I mentioned about the amount of liquidity we had overall in terms of committed facilities.
On Page 13 is our capital structure where primarily most of our access to capital is on revolving credit facilities. We have a five year revolving credit facility with about over $600 million available to it. But we have some securitized debt that we put in place as well as some other senior notes and some term loans with banks. We try to keep a diversity of financing vehicles in order to balance out floating rate versus fixed rate as well as the staggering of our debt maturities.
And I believe that’s the end of presentation. So if there are any questions, I’d happy to answer it.
Yeah, we saw some activity from shipping lines in tail end of last year to the first quarter of this year. I think the shipping lines that had made those purchases are traditionally shipping lines that will make purchases, 10 not to be significant lessors.
I don’t see that per se changing, where actually the most recent quarters or I’d say the most recent weeks, we’ve seen again many of the shipping lines coming back to the leasing market, instead of owning. There are also some of the shipping lines that have put in orders for themselves, turnaround and then that try to get leasing proposals for the equipment that they’ve ordered.
So it’s not necessarily because they put the order in that they’re necessarily going to be the holder of the asset. So I don’t see a big trend from what we’ve seen last year in terms of the leasing component of purchasing boxes to the shipping line community for service.
I would say the extremes will be 50% will be low, 70% will be high somewhere in the 60% range would be what we would expect.
Sure. The 58,000 fees, we bought those assets largely from two portfolios that we have managed for third-parties. So that was the portfolio, but those were assets that were already in our fleet. We changed it from management ownership. But we have bought a lot of units from shipping lines and we continue to see opportunities with that.
Many times what we’ve seen over the last couple of years is that the shipping lines has the financing structure that they have in place and a lot of their containers come up, they look to the leasing community to buy the units and then lease it back to them for a four or five year period, which allows them to get higher advance rate than they had before because lot of times the debt has been paid down. So they get more access to cash with that.
And as importantly, they are able to manage our off-hire process because by the time they finished that lease, the asset is close to the end of use for life from their perspective and so they not worry about managing an off-hire program. They can just have the leasing community have with.
For us it works out great. We tend to purchase these assets at below where disposal prices are and I’d love this to get a good income return and still in many times get the same or sometimes better price what we originally pay for it. Nothing is guaranteed, but we’ve had good results.
We try to be somewhat agnostic on interest rates. And we do that because it’s hard to predict where interest rates go, I mean you can have a view while interest rates don’t go any lower than they are. So it’s only one way from here, that’s true. But interest rates could stay low, much longer than people expect. So the way we try to manage that is we will try to be balance 50/50 between short-term rates and long-term rates. We try to be market neutral on that. If something happens that would lead us to believe we have an overexposed somewhere, we can make some decisions to change that percentage, but ideally I think we would like to be 50/50.
Well, I think the multipliers are still valid and the way they are multiplied, if you at world economic growth say 2% to 3% trade growth will be about 1.5 times explore 4% to 5% and in containerized trade growth should be about 1.5 times of that. So we’ll in the 6% to 7% sorry or 6% to 8% range.
Rates have been aggressive this year, we’ve seen people to be very competitive part of it is the low interest rate environment and the liquidity as you said, so that people have capital and also I think the biggest driver though has been that demand has been a little bit more muted than what people have thought. It’s a confident thing, when you start seeing more shipping lines coming in for equipment it tends to firm upgrades. I think that the rate environment right now reflects the fact that about a month and a month half ago. There was very little increase at all.
Today we’re seeing a lot more increase and I think as that activity level increases, we will see a firming upgrades. The, comment about where it kind of towards the end of the dry box season, we still have plenty of dry box season left we’re just in the early part of June. So July, August, September, we will still see significant demand. And if you look at some of the economic forecasts, we actually think that the second half of this year still bodes very well for the business in terms of demand. So we’ve invested a less than what we had hoped for. But we have continued to have fairly robust investment. We’re obviously at a faster pace than we were last year, but that has to do with the fact that we purchased some portfolios earlier and the beginning of this year that we manage. So on dry box investment it’s been less.
Generally speaking, we’ve said that we’d be below what we were last year with that our expectation. We’ve got two years of very heady growth where we’ve invested over $500 million. We don’t build that into our expectation. So our expectations internally are below that. But we can see a scenario where we could invest at the same level than that in containers.
I think you could see a situation where utilization as a more normal trends into the low 90s to the high 80s. That was to persistent long-term basis, because the new lease rates will be pretty compelling in comparison to some of the other ones. So you could have that. But your lease rates on the secondary side will come down to be reflective of the market opportunity. But clearly you don’t have the same tailwind that you wouldn’t have with the rising box prices. Anything else?
Stephen Plauche – Deutsche Bank
Okay. Thank you very much.
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