CAI International Inc. Q2 2009 Earnings Call Transcript

| About: CAI International, (CAI)

CAI International Inc. (CAP) Q2 2009 Earnings Call August 4, 2009 5:00 PM ET

Executives

Victor Garcia - CFO

John Nishibori - President & CEO

Analysts

Rick Shane - Jefferies

Bob Napoli - Piper Jaffray

David Long - William Blair

Operator

Welcome to the CAI International Second Quarter 2009 Earnings Call. Today’s conference is being recorded. Again with that I would like to turn it over to the Chief Financial Officer, Victor Garcia. Please go ahead.

Victor Garcia

Good afternoon and thank you for joining us for CAI International second quarter 2009 earnings call. Please note that today’s call is being recorded and will be available for 30 days on the Investor Relations portion of our website, www.caiintl.com. There will be an opportunity for you to ask questions at the end of today’s presentation.

Certain statements made during this conference call maybe forward-looking and are made pursuant to the Safe Harbor Provisions of Section 21-E of the Securities Exchange Act of 1934, and involve risks and uncertainties that could cause actual results to differ materially from current expectations including, but not limited to, economic conditions, customer demand, increased competition, and others.

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

I would now like to turn it over to John Nishibori, the President and Chief Executive Officer of CAI International.

John Nishibori

The first half of this year has been a challenging period of time in terms of world economic growth and containerized trade. With this backdrop in mind, we are pleased with our results for the second quarter. Although both revenue and net income were lower this quarter than the comparable quarter last year, we remain solidly profitable.

For the quarter, we reported revenue of $16.7 million and net income of $3.3 million, or $0.19 per share. Throughout the second quarter we have been focused on managing the utilization level, while remaining vigilant on mitigating credit risk.

Utilization has continued to decline in the second quarter, and for the quarter averaged 81.2%, a decline of 4.3% from the average utilization in the first quarter. We have noticed that most of the decline occurred in the first two months of the quarter, and the rate of decline began to slow, as the quarter finished. We have seen stabilization trend continuing into July.

Part of this effect we are witnessing is seasonal, since we are now entering the seasonally stronger period of the year. However, most of the lease out activity during the second quarter was from intra-Asia's carriers. Many of the Asian regional carriers are benefiting from the Chinese stimulus package put in place earlier in the year. More recently, we have begun seeing more increase from the major shipping lines, where equipment needs, that we believe relates to the longer haul Asia to US and Asia to Europe routes.

Inventory levels in certain Asian ports such as Hong Kong have begun to decline. The level of improvement to-date is moderate and we believe we still need more significant economic recovery in Europe and the United States to observe a more pronounced rebound in the utilization.

As I mentioned earlier, we are also very focused on credit risk. We believe we have sufficient diversity in our customer base and mix of owned and managed business to effectively manage through the downturn.

During the past quarter many of the shipping lines have announced recapitalization plans that will allow them to better manage the cyclical downturn. Further, many of the shipping lines have continued to release charter in vessels to make room for some of the ship deliveries they are going to receive in the shipyards.

Many shipping lines have told us that their container cargo volumes have improved in the second quarter, but they are still dealing with very low freight rate. In order to improve profitability a number of shipping lines have announced rate increases that will go into effect in August. The announced recapitalization efforts and freight rate increases are positive factors to the financial health of the container ship requirement.

On the container supply side, we are pleased that there are no significant volumes of containers being ordered or manufactured. There has been some ordering of refrigerated containers and we ourselves have bought 500 reefer containers that are on long-term lease with one of top customers.

Our investment commitment during the quarter has been limited to the 500 reefer units and we are utilizing the cash flow we have been generating to reduce debt. Since the beginning of this downturn in our business, which now dates back to almost a year, we have continue to improve the financial position of our company by strengthening our balance sheet and liquidity and improve the asset profile of our fleet by selling off our older units and minimizing our factory inventory.

Thus the container factories are not manufacturing new containers, any significant play we believe the container leasing industry will be one of the early beneficiaries of the continued improvement and demand for containerized cargo. Our company has an attractive fleet in terms of condition and age and we have the balance sheet position to take full advantage of what we believe is a coming upturn in our business.

Further we believe that because container shipping lines are not likely to purchase containers, when the market improves because of limited resources, our relative modest upturn in the container shipping industry should have a significant positive effect on the utilization of container lessor equipment.

Most of our offhire containers are in Asia and those containers are well position to be leased as demand increases in Asia. Victor Garcia, our CFO will now go over the actual results for the quarter.

Here’s Victor to report our financial results. Victor?

Victor Garcia

Earlier today we reported second quarter net income of $3.3 million or $0.19 per fully diluted share on a share count of 17.9 million. This compares to net income of $0.37 a share for the second quarter of 2008 with average fully diluted shares outstanding of 17.1 million.

Total revenue for the second quarter was $16.7 million, a decrease of $3.9 million, or 18.9% from the total revenue for the second quarter of 2008. The most significant areas of revenue decrease came in to decline and trading income from portfolio sales and management fee income.

Gain on portfolio sales declined $2.8 million, or 84.8% to $0.5 million. We did not aggressively market new container portfolio sales in light of the economic and container shipping environment. However, we did complete a small transaction with a Japanese investor group during the quarter, just as we did in the first quarter.

Management fee revenue was $2.1 million for the past quarter, $900,000 below the $3 million we recorded in the second quarter of 2008. Management fee income has declined due to the lower profitability on managed portfolios, as a result of the decline in utilization and increase in storage expenses. The decline was a result of a general trend in declining utilization amongst both the managed fleet and the owned fleet.

Finance lease income increased by 20% to $600,000, compared to $500,000 for the second quarter of 2008, as a result of having more units under finance lease during this quarter.

Our total operating expenses during the second quarter of 2009 was $11.2 million compared to $9.2 million during the second quarter of 2008.

Storage and handling cost increased approximately $1.1 million, as compared to the second quarter of 2008, as a result of the increase in the number of (AFAI) units.

MG&A decreased approximately $400,000 to $4.8 million from $5.2 million in the second quarter of 2008, primarily due to the cost containing efforts implemented during the quarter.

Depreciation increased by $500,000, or 13.5% due to our operating a larger fleet and a younger fleet as well as a full quarter of depreciation from Consent, which we acquired in April of 2008.

Gain on disposition of containers decreased by 58.5% to $600,000 compared to $1.5 million during the second quarter of 2008. Average gain per TEU sold was down during the quarter as compared to the same quarter last year, however, we sold more TEU this quarter.

Net interest expense was $1 million for the second quarter of 2009, which represents a decrease of approximately $900,000 when compared to the second quarter of 2008. We continue to benefit by the lower interest rate environment this quarter as compared to the same environment during the same period last year.

As to income taxes, we reported an effective tax rate of 25.2% this quarter compared to 33.9% during the second quarter of 2008. Our overseas operations in the second quarter represented the higher proportion of our total profitability as compared to the same period last year and we expect that trend to continue through the rest of the year.

During the quarter, our effective tax rate benefited from one-time adjustments of a $178,000 from an expected California single apportionment factor rate change and a $138,000 adjustment related to the purchase of Consent in 2008.

Excluding these adjustments, our expected tax rate for the year is estimated to be approximately 30%. Net income for the three months ended June 30, 2009, was $3.3 million, a decrease of $3 million or 47.6% compared to the $6.3 million for the three months ended June 30, 2008.

With that operator please open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions). First up in the roster from Jefferies, we have Rick Shane.

Rick Shane - Jefferies

In the press release you made the comment that utilization was impacted by the decision to accept re-delivery from some containers from lessees with whom you had credit concerns. Two questions related to that, one how many containers did you take back related to early re-delivery? How many containers do you still have to those counterparties?

John Nishibori

I don't have the exact numbers here. I wouldn't say that it was the primary factor in the declining utilization. It was just a contributing factor. A lot of the companies that were taking equipment back from tend to be some of the smaller companies where we're just not sure that they are downsizing their fleets. We know that they're having some revenue issues. So from our standpoint its better to just take some equipment back, but I don't have exact figures for you.

Victor Garcia

It is really negligible. If you look at the magnitude of decline, it was basically because of the market.

Rick Shane - Jefferies

Okay. So a couple hundred containers type of thing?

John Nishibori

I will say more in the thousands, but still from a portfolio that has some thousand to use. That is not a very large number.

Rick Shane - Jefferies

So you saw basically about a 400 basis points decline in utilization, would it be fair to say that a quarter of that came from early returns?

John Nishibori

No even, not even. I think the conceptual calculation of things I think you can pretty much disregard that. It's really because of the market downturn. However, when we say that during the past couple of months we have seen an extreme improvement in terms of utilization or the decline in the utilization rate is really stabilizing. In fact from June to July the decline has been almost negligible, and in fact the two major regional culprits of a massive turn-in in the past have been China and Europe; but now Europe as a whole has turned to a net lease-out region, while in China basically the turn-ins equal the lease-outs.

This is a big improvement. I really think that we are now seeing the bottom of things and in fact we are seeing now signs of improvement, especially as we see the 40s and high cube starting to go out. Usually, in an economic recovery situation, it starts with the 20-footers and we have seen that already. Over the past few months, as far as 20's are concerned, we were leasing out more and experiencing turn-ins. The 40's and the high cubes were very stagnant and in fact more turn-ins.

However, just recently over the past couple of weeks, we are now starting to see the 40's and high cubes starting to go out, and this is usually a harbinger of what's to come in terms of world economic recovery. So we're pretty optimistic.

Rick Shane - Jefferies

Obviously the business is very seasonal as a function of back to school and holiday shopping, etcetera. Ordinarily, when you look at it, what is your best month of the year in terms of lease outs, is it July, is it August?

John Nishibori

The best months are starting July through October, but that does not mean in this year that come October or November where we might see a rapid decline in utilization again, because I think in our case or in this industry's case, the economic recovery is going to be playing a bigger part in the improvement of the utilization rate rather than just seasonal patterns.

Rick Shane - Jefferies

Cyclicality start to overwhelm cyclical or seasonality?

John Nishibori

Yes.

Operator

Next up we have Bob Napoli at Piper Jaffray.

Bob Napoli - Piper Jaffray

I just want to be clear, I guess on the utilization rate at the end of the quarter was 81.2% or that was the average for the quarter?

Victor Garcia

Average for the quarter as you look at the beginning of the quarter it was at the end of March it was 83.7%, we finished the quarter at 80.3%.

Bob Napoli - Piper Jaffray

80.3%. Was it at the end of July?

Victor Garcia

I don't have but it's pretty close to that number.

John Nishibori

This is different.

Victor Garcia

Its a few basis points below that number.

Bob Napoli - Piper Jaffray

What was it at the end of May; just I’d like to get a feel for the trend there?

Victor Garcia

I mean I can get you those numbers.

Bob Napoli - Piper Jaffray

Okay. Yes.

Victor Garcia

I’d tell you that, I looked at the numbers and its pretty liner, but I can give you the exact percentage of that.

John Nishibori

We can say that until June or so, the utilization rate has been declining at anywhere from 1% to 1.5% every month and from June to July that become 0.4% or 0.5%.

Bob Napoli - Piper Jaffray

Okay. Now the [re-pursue box] box I mean those were leased 100% on long-term leases?

Victor Garcia

Yes absolutely. The utilization rate of re-pursue is 99.9% if I remember.

Bob Napoli - Piper Jaffray

What percentage of your portfolio can you remind me that is re-pursue space?

John Nishibori

It’s not that large. Let’s see all together 2,500 that’s about 5,000 TEUs out of a total of 740,000 TEUs.

Bob Napoli - Piper Jaffray

What about the dollars?

John Nishibori

However, in terms of dollars you got to multiply that by let’s see I would say--

Victor Garcia

Above $45 million.

John Nishibori

Correct.

Bob Napoli - Piper Jaffray

On the credit side, and we’ve seen a number of recaps or I mean which of your big customer, I’m not sure how many of those totally been completed and I think there is still some that need to happen. How are you monitoring credit and how are you feeling about, essentially you are relying on some of these recaps from a credit perspective?

Victor Garcia

We’ve looked at credit from a couple of different factors both what is the company’s overall fleet concentration and then what is the CAI’s owned fleet concentration and in both instances I think we're pretty comfortable that we've got very good diversification.

Our biggest customer is represents 7.7% and is one of the stronger shipping lines out there. So, we're feeling very comfortable with that. Some of the other ones, I’d say in our top 5, I think we feel very comfortable, and then the concentration really starts coming down significantly from there.

Bob Napoli - Piper Jaffray

Okay. Are you seeing opportunities on sale leasebacks that you're interested in or any other opportunities out there to play some offhands on the consolidation side or sale leasebacks or otherwise?

John Nishibori

Yes, Bob, there's quite a bit of sale leaseback opportunities, but we have been very, very selective and in fact I don't think we've done any during the second quarter because oftentimes these days, those companies who wants to do sale and leaseback are the very ones that are suffering liquidity. We have to very vigilant about just jumping in and doing the sale and leaseback.

Bob Napoli - Piper Jaffray

Okay. How about acquisition, are you seeing and obviously Textainer has been pretty active?

John Nishibori

As I said, we are still in search for acquisition candidates, we're taking some proactive roles, but we don't know what would materialize. Nothing really specific at this time.

Bob Napoli - Piper Jaffray

Okay. The secondary market, we're seeing steel prices bouncing back up, China steel prices bouncing back up and how is the secondary market holding up? Obviously, as you said you got lower, pretty tough comps year-over-year. You've got lower gains per container sold. How many containers are you selling and how are the prices holding up?

John Nishibori

It's not a simple answer because it has a lot of submarkets associated with it. To give you a perceptive, we sold approximately 15% more TEUs this quarter than we did last quarter. Volume lines were up. On a proceeds basis, we are going to receive about $5 million in total proceeds from the sale of disposition of containers.

When you look at the market, the U.S. market continues to hold up relatively well within those general markets. LA is getting a little bit weaker with some [ship around] equipments, but in general, I'd say we still find it to be a very attractive market. Europe continues to be a fairly attractive market although, volume wise it's a little bit slow depends on which location you are talking about, but particularly with the exchange rate between the U.S. dollar and the euro and the pound when it comes to U.S. equivalent returns still is attractive.

The trouble spots are in Southeast Asia and to some extent in China. Southeast Asia in particular because I think we and the rest of the industry have the vast majority of its idle inventory in those regions and that means there is a lot of volume. So, we've noticed some very competitive pricing in places like Singapore, Bangkok and in certain situations, I think we've looked at our fleet.

We decided to really be view what we really need to sell, what we want to sell and then repair what we need to repair, as whether or not it's a right economic decision, but it some times comes down to people have container that come back from default situation, they just try to unload those containers instead of trying to reposition or repair themselves. There are a lot of micro factors that go into it. I'd say in general, Europe and the U.S. are stronger; Southeast Asia is the weakest point.

Bob Napoli - Piper Jaffray

From an industry perspective, how do you view the competition acting as and it's nice that normally nobody is buying or manufacturing, I mean that's really helpful and scraping is got to be helping balance as well. Is the industry scraping more containers even in lower prices this year? You think that will help?

Victor Garcia

I can't talk about the others. We are I mean selling as usual. The volume hasn't declined at all. This is good. The container population is going down quite rapidly because nobody is building new containers. So that should there be a trade increase by let say even 2% globally?

That 2% would have to come mostly from the leasing companies, because the shipping companies really haven't been buying any containers and they won't be buying containers for a long time. A 2% increase in world trade for example would probably translate into many times more that in terms of utilization increase. So my personal view is that even a gradual improvement in the worldwide economy may cause a V-shape recovery for the leasing industry.

Bob Napoli - Piper Jaffray

Last question, how about lease rates? How are lease rates?

John Nishibori

Lease rates, we've been in order to keep to give incentives the shipping companies, keep the containers. We have negotiated with some of the larger shipping companies for a reduction and we have agreed to that, just so that they won't come back. This is generally the situation in the industry.

Bob Napoli - Piper Jaffray

The reductions for five years or are you shortening the terms?

John Nishibori

It depends on by customer by customer.

Victor Garcia

Bob, one of the things that we tried to do is, make the right long-term economic decision, and when we focus on utilization and we're concerned about utilization, we also have to think about, that's an immediate issue. We also have to think about on the longer term basis, if we renegotiate with shipping lines, some aggressive lease rate, that’s a long-term cost that we have to deal with.

So, in many instances we have decided that we'd rather take back the equipment than to try to put in a long-term lease that we don't view as a good economic decision. Historically, this company has always had the capability of re-marketing. Our view is that we're well into this downturn and to be locking in very aggressive lease rates for a three to five year period, is something that we have to look at closely.

Operator

(Operator Instructions). We’ll go to David Long at William Blair next.

David Long - William Blair

A couple of things, first one you mentioned the reefers that were pretty much all on lease the utilization expose to 100% there, but on the entire fleet what is your percentage on long-term lease right now, I guess at the end of the quarter?

Victor Garcia

Total it was about 76% of the equivalent on our long-term leases.

David Long - William Blair

The second question that I have is thinking about your line of credit, are there any floors on the rate there? I know LIBOR is still coming down which maybe beneficial for you, but are there any floors than we need to think about on those?

Victor Garcia

That agreement was signed into effect in 2007 and at that time people weren't putting LIBOR floors and we haven't had to revise that agreement since then.

Operator

(Operator Instructions). At this time, we appear to have no further questions. I will turn things back over to our speakers for any additional or closing comments.

Victor Garcia

Thank you very much for your continued interest in our company and we look forward to speaking with you again in our next earnings call. Thank you.

Operator

Ladies and gentlemen, that will conclude today's conference call. Thanks for joining us. Have a good day.

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