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Executives

Victor Garcia - CFO and SVP

John Nishibori - President and CEO

Analysts

Rick Shane - Jefferies

Bob Napoli - Piper Jaffray

Sameer Gokhale - Keefe, Bruyette & Woods

David Long - William Blair

Presentation

CAI International, Inc. (CAP) Q3 2009 Earnings Call November 5, 2009 5:00 PM ET

Operator

Good day everyone and welcome to today's CAI International third quarter 2009 earnings conference call. As a reminder, today's call is being recorded. At this time I would like to turn the call over to the Mr. Victor Garcia. Please go ahead sir.

Victor Garcia

Good afternoon and thank you for joining us for CAI International's third 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 the conference call to John Nishibori the President and CEO of CAI international.

John Nishibori

Welcome to CAI's third quarter 2009 earnings conference call. I'm pleased with our results of the third quarter. We continue to report good results with net income for the quarter of $3.2 million or earnings per share of $0.18 on an average of fully diluted share count of 17.9 million shares.

During this period of economic weakness over the past four quarters, we have been focused on ways to manage expenses, credit risk and utilization in order to position the company for both long-term profitability and growth. We remain vigilant on all these items. On the expense side, we have been implementing a cost containment program and overhead that we estimate will save us $1 million this year. We have also entered into various agreements with depots to review storage cost across our system.

On credit risk, we have remained vigilant and are please to see many of our customers, recapitalizing themselves in order to weather a current downturn. We believe we have diversity amongst our customers, which mitigates some of the credit risk in the market place.

We have also reinforced our decision to take early delivery of containers from some customers that expressed the credit concern. We reduced our credit risk with these customers despite lower utilization in the short-term. We have also worked with some of our customers in renegotiating lease terms that help their short-term financial needs. However, we have been unwilling to renegotiate leases on terms that have not been in the long-term interest of our company. In those cases, we have decided it was better to accept redelivery of equipment.

We are now experiencing increase in demand for containers and we believe our company is well positioned to benefit by the emerging upturn in the market. Our utilization for first quarter of 2009 averaged 80%, our utilization bottomed in August and improved over the course of September and October. The utilization as of November 1 was 81.2% and we are now experiencing on a daily basis more lease-outs than turn-ins which we expect to continue through the end of the year.

As I indicated in the press release issued earlier today, the recovery has been moderate so far and we expect the more pronounced upturn to occur in the second quarter of 2010. We believe this upturn will provide attractive lease opportunities with a half [tire] equipment we delivered earlier in the year.

During the quarter, we purchased a $10 million container portfolio from one of our container investors. We believe this transaction was beneficial for both parties and will provide CAI with attractive returns. During the third quarter, we entered into $10 million five year term loan facility with the Development Bank of Japan. We entered into this agreement to broaden our financing sources as we prepare for increased container investment in 2010. The Development Bank of Japan is a 9.4% shareholder in our company and we appreciate their continued support and interest in the growth and development of CAI.

Secondary container prices remain stable and we are very pleased with the average price we are receiving for our holding containers. We expect that secondary prices of containers will improve back to levels last year as demand for containers and utilization rates increase over the course of 2010. During the third quarter, we sold 43% more containers on a TEU basis than we did during the third quarter of 2008. Over the past year, we have sold many older assets from our fleet which has reduced our average number of TEU owned this past quarter as compared to the third quarter of 2008. We viewed that the secondary market offered attractive sales price levels permitting redeployment of the capital into new containers.

Since the beginning of this downturn in our business, we have continued to improve the financial position of our company by strengthening our balance sheet and liquidity and improved asset profile of our fleet by selling off our older equipment and minimizing our factor inventory. Because the container factories are not manufacturing the containers in any significant way, we are confident, that the container leasing industry will be one of the early beneficiaries of the continued improvement in demand for containerized cargo.

With the emerging upturn in our business now underway, we believe CAI's equipment fleet and balance sheet are positioned to capitalize on the improving market conditions and attractive growth opportunities.

Furthermore, given that container shipping lines are not likely to purchase containers when the market improves due to limited resources and significant ship new building commitments, we believe that a relatively modest upturn in the container shipping industry should have a significant positive affect on the utilization of container [lesser] equipment.

Most of our off-hire containers are in Asia and those containers are well positioned to be leased as demand increases in that region.

Victor Garcia our CFO will now go over the actual results for the quarter. Victor?

Victor Garcia

Thank you John. Earlier today we reported third quarter net income of $3.2 million or $0.18 per fully diluted share on an average share count $17.9 million. This compares to net income of $0.34 a share for the third quarter of 2008 with an average fully diluted shares outstanding of $17.5 million.

Total revenue for the third quarter was $15.7 million, a decrease of $6.4 million or 29% from the total revenue for the third quarter of 2008. Container rental revenue was $13.4 million during the third quarter compared to $16.4 million in the comparable quarter. The own fleet revenue reflects a 9% decrease in our own fleet TEU this past quarter compared to the same quarter last year.

We sold containers to investor during the third and fourth quarters of last year, which has reduced our own fleet as we went into 2009. We have also continued to dispose off older assets in 2009. A lower utilization over the comparable period is also a factor.

Management fee income during the third quarter was $1.8 million compared to $3 million in the third quarter of 2008. Management fee income decline due to the lower utilization with reduced revenue in our managed portfolios and increased storage cost. Both elements have reduced profitability at the funds which resulted in decline in management fee income.

We do not have any portfolio sales during the third quarter compared to a trading gain of $2.2 million in the third quarter of 2008. Finance lease income was $500,000 compared to $600,000 in the third quarter of 2008. The decline reflects the smaller finance lease portfolio over the comparable periods. Our total operating expenses during the quarter of 2009 was $10.8 million compared to $10.7 million during the third quarter of 2008. Storage and handling cost increased approximately $1.2 million as compared to the third quarter of 2008 as a result of the increase in the number of our [tire] units we had during the period.

MG&A was $5 million compared to $5.1 million in the third quarter of 2008. As John indicated we have been focused on cost containment in areas we believe we can control. Depreciation was $4.3 million, down slightly as compared to the $4.5 million during the third quarter of 2008 as a result of operating a smaller owned fleet. Gain on disposition of containers was $990,000 slightly ahead of the comparable amount in the third quarter of 2008. On average, we sold 43% more TEUs this past quarter, as compared to the third quarter of 2008.

Net interest expense was $1 million for the third quarter of 2009 which represents a decrease of approximately $1.4 million when compared to the third quarter of 2008. We continue to benefit by the lower interest rate environment this quarter, as compared to the interest rate environment during the same period last year.

As the income taxes we reported in the effective tax rate of 19.3% this quarter, compared to 35.1% during the third quarter of 2008. Our overseas operations in the third quarter represented a higher proportion of our total profitability as compared to last year and we expect that trend to continue through the rest of the year. During this quarter, our effective tax rate was positively affected by $285,000 one-time tax adjustment. Excluding one time adjustments during the year, our expected tax rate for the year is approximately 29%. Net income for the three months ended September 30, 2009 was $3.2 million compared to $5.9 million for the three months ended September 30, 2008.

Operator, please open the line for questions.

Question-and-Answer Session

Operator

Thank you. The question-and-answer session will be conducted electronically. (Operator instructions). And we'll pause for a moment to allow everyone a chance to signal. We'll take our first question from Rick Shane with Jefferies.

Rick Shane - Jefferies

The $10 million term loan from DBJ is that what shows up on the balance sheet as the related party term loan?

Victor Garcia

That's correct, Rick.

Rick Shane - Jefferies

And will it actually increase? It shows up right now as $9.2 million will you increase it to $10 million or is that just rounding or you're rounding as you're describing that?

Victor Garcia

No, we reflected a full $10 million on our balance sheet. It's a five year amortizing term loan. So it is $800,000 that is due in the next 12 months. So, its $800,000 in the current portion.

Rick Shane - Jefferies

In the second question, you say during the quarter results benefited from the purchase of a $10 million equipment portfolio from one of your container investors during the quarter? I hate to be so obtuse, but I don't understand, did you purchase it or did they purchase it?

Victor Garcia

There was a portfolio that we are managing for a third party investor and we agreed to purchase the assets under that contract.

Rick Shane - Jefferies

Okay. And so, to the extent you're saying you benefited from it. There was a slight lift in rental revenue because instead of getting the management fee, you are getting the rental income?

Victor Garcia

That's correct.

Operator

Our next question comes from Bob Napoli with Piper Jaffray.

Bob Napoli - Piper Jaffray

Any more opportunities for additional purchases of containers from the managed fleet?

John Nishibori

Yes, I think there is. Nothing specific, but there always is.

Bob Napoli - Piper Jaffray

I mean did you expect that I'd try to take advantage of some opportunities this quarter to either buy additional managed containers or to do a sale lease back or?

John Nishibori

I'm not sure if we would do one this quarter. But the possibilities are always there.

Bob Napoli - Piper Jaffray

I mean are you seeing more opportunities? You have a pretty good balance sheet or you not, is it?

John Nishibori

I think the way, I'd rephrase it is, obviously we're trying to maximize the opportunities on the investor portfolios. But to the extent that investor for whatever reason feels like they would like to monetize their assets. We're open to looking at it and we were looking at possibilities of investment, whether its sale leasebacks, buying portfolios, buying new containers and we're seeing more and more of those opportunities as the market improves.

Bob Napoli - Piper Jaffray

The $10 million, I understand diversifying funding, but $10 million such a small amount, its kind of, why do that? What are the terms? What kind of rates and I just…

John Nishibori

The rates, the terms are at least comparable to what's in the market these days, in fact better. It also solidifies in our view, relationship with the Development Bank of Japan. In that we would be dealing with two departments at the Bank, the lending department as well as the investment department, and this has been recommended also by DBJ and I think it's good for our long-term relationship of the two institutions.

Bob Napoli - Piper Jaffray

What is the KG market? What are your feelings? I mean the general feelings around the industry seem to be that that market is not viable.

John Nishibori

I would say it was dead. I would say during probably second and third quarter, but we are now seeing signs of some recovery and in fact, we have been in discussion with some of them for additional or new deals. So, as the market comes back, I do feel that that market would recover. In the meantime, the Japanese market, we are developing some very exciting new products and we're quite optimistic.

Bob Napoli - Piper Jaffray

And would that be something, John it would make sense to do a sale lease back and then sell the containers into the fund to manage?

John Nishibori

Yes. That is certainly one, as well as new containers.

Bob Napoli - Piper Jaffray

Yeah. And well that…

John Nishibori

I just came back from Japan yesterday, talking exactly about that. I don't know if it was materialized but the possibilities are there.

Bob Napoli - Piper Jaffray

Okay. I have more questions, but I am sure there are others. So, I'll come back in later. Thank you.

Operator

Our next question comes from Sameer Gokhale with Keefe, Bruyette & Woods.

Sameer Gokhale - Keefe, Bruyette & Woods

Just a few questions at and if we could ask a question review about the purchase of containers in the quarter and that's basically the geography of the revenues changes from management, the fee income into rental income. But you mentioned there was a net benefit during the quarter. How much of a benefit was there this quarter and do you expect a greater benefit next quarter?

Victor Garcia

We purchased the portfolio at the end of August. So, now the benefit this quarter was not as significant. We would expect, that it will probably add approximately $300,000 a month of rental revenue to us on a monthly basis on what we purchased.

Sameer Gokhale - Keefe, Bruyette & Woods

And then, in terms of looking at the ending TEU numbers that you have provided, if the managed fleet, it looks like the TEU declined by about 21,000 units but then if you look at the owned, they only increased to about 8,500 units. Can you talk about some of the dynamics there or did you scrap some more stuff in your own portfolio than you usually do in the quarter?

Victor Garcia

Well we have been selling containers on an ongoing basis, but I think some of the movement is the transfer of some of these assets that we purchased from a portfolio into our own fleet from our managed fleet. I might have to look at the numbers to exactly break it down. But I can tell you in general, what has happened is, during the quarter we've gone about our normal selling process of older assets and the only significant move has been buying this one portfolio from the managed portfolio to our own portfolio.

Sameer Gokhale - Keefe, Bruyette & Woods

Yeah just doesn't seem like there was like a one-for-one move from one category to the others. So it looked a little unusual so I thought I'd ask to get some clarity but we can follow-up on that.

Victor Garcia

We can follow-up with you to try to give you some more color on it.

Sameer Gokhale - Keefe, Bruyette & Woods

And then the DBJ facility, can you talk a little bit about the structure of that facility, the advance rates and the interest rate that you got in that facility?

Victor Garcia

It's a five year term loan, amortizes $200,000 a month, that the loan is approximately say 60% at the end of five years priced at LIBOR plus 240, and secured by containers at around of 85% advance rate.

Sameer Gokhale - Keefe, Bruyette & Woods

And then just last question on the taxes, you mentioned there was a one time adjustment to the taxes, what's the number again? Was it $281,000? Was that like a benefit to taxes this quarter?

Victor Garcia

The benefit of taxes was $285,000 and resulted from our closing of our accounts for 2008 prior (inaudible).

Operator

(Operator Instructions). And our next question comes from David Long with William Blair.

David Long - William Blair

Most of my questions have been answered already, but the one that I still have is, in the second quarter I recall you guys purchased some refrigerated containers and was curious if there was an opportunity to purchase any here in the third quarter, then also, what you are seeing in that market versus the dry market?

Victor Garcia

Yes. We have seen quite a bit of our opportunity in the third quarter, but we've been pretty conservative. However, we are now again looking at possibilities of purchasing some of the fourth quarter and the first quarter next year, and the prices seems to be coming down almost on a weekly basis. So, we're waiting to see where it's going to settle and we might very well get back into the procurement of wafers.

Operator

We'll take a follow-up question from Bob Napoli.

Bob Napoli - Piper Jaffray

Your utilization you guys said is 81.3 November 1, there was 80 for the third quarter. Where did it bottom? How low did it get at the very trough?

John Nishibori

I think it went down to like 80% in August time.

Bob Napoli - Piper Jaffray

And then how fast do you thinkthat can recover, like…

John Nishibori

It is recovering almost daily in small increments, and I think we would see this to continue until the end of the year. The big question is, are we going to be subjected to the normal seasonality and that is, weak winter months, January and February and I have been going around Asia a lot, recently meeting with the shipping companies and their feeling was that this year, like normal years that we may not see that seasonality because that is offset by the real ground swell in the markets created by the improvement in all the economies around the world.

So, we may be lucky not to see that dip, the normal winter dip and we're hoping that would be the case and then come March after the Chinese New Year, it will continue to in other words, the utilization to increase until December and then hopefully stabilize and then increase again and when the increase comes the second time, i.e. in the second quarter of next year, I think it might be quite strong.

Bob Napoli - Piper Jaffray

I mean getting back up into the high 80s by mid next year is would be...

John Nishibori

From mid to high 80s and this is very consistent with almost all the shipping companies that I have met just recently.

Bob Napoli - Piper Jaffray

How was the pricing? As you are releasing containers, how much is pricing down?

Victor Garcia

One of the things that we have noticed over the last four to six weeks is we have really not been under any pricing pressure. We have leased products at rates similar to what we were experiencing last year and demand was quite strong. I think in the early part of the quarter, there were some incentives to be given to customers in terms of (inaudible) but that is becoming less and less so, and the actual new line rates are becoming firmer. So, actually for the first nine months, of this year compared to the same nine months period last year, the long-term leases we have shown a 2.1% increase in per diem.

On the short term leases we saw a 10% decline compared to last year. On the finance leases, we have shown a 31% increase. So, I would say it's sold up pretty nicely and we do expect as the demand comes back next year, I do expect the rates to go up quite significantly, but that is my personal opinion.

Bob Napoli - Piper Jaffray

And question on the tax rate for 2010 kind of a ballpark feel, your tax rate looks like its dropping 400 basis points this year as that level of the decline between now and this year, somewhat in a 25ish range in 2010?

Victor Garcia

That's right. I think we still have a lots of forecast about a 4 percentage point decline in our tax rate this year until we get into a very low teens and where I think we'll be leveling out in the longer term.

Bob Napoli - Piper Jaffray

Would that accelerate if the market came back stronger and you were doing more sales there, if earnings were higher or faster?

Victor Garcia

Absolutely. As we've sold all those containers this year, most of those containers have been owned out of US fleet. So we continue to have a greater proportion of our assets being in our international subsidiary. So, that trend will continue and I think we don't see a change in that trajectory.

Operator

(Operator Instructions). And with no questions remaining, I'd like to turn the call back over to your speakers for any additional or closing remark.

John Nishibori

Thank you very much for your continued interest in our company and we look forward to our next earning call. Thank you.

Operator

Once again, that does conclude today's conference call. And we thank you for your participation.

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Source: CAI International, Inc. Q3 2009 Earnings Conference Call
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