CAI International's CEO Discusses Q3 2013 Results - Earnings Call Transcript

Oct.29.13 | About: CAI International, (CAI)

CAI International, Inc. (CAP) Q3 2013 Earnings Call October 29, 2013 5:00 PM ET

Executives

Timothy Page – CFO

Victor Garcia – President and CEO

Analysts

Gregory Lewis – Credit Suisse

Steven Kwok – KBW

Michael Webber – Wells Fargo

Doug Mewhirter – SunTrust Robinson Humphrey

Salvatore Vitale – Sterne Agee

John Mims – FBR Capital Markets

Brian Hogan – William Blair & Company

Operator

Good day, ladies and gentlemen. And welcome to your CAI International Q3 2013 Earnings Conference Call. At this time all participants will be in a listen-only mode. Later there we will be a question-and-answer session and instructions will be given at that time. (Operator Instructions).

As a reminder today’s conference is being recorded. And now I would like to turn it over to your host, Tim Page, Chief Financial Officer.

Timothy Page

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

We refer you to the documents that CAI International has filed with 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 certain additional important factors that could cause actual results to differ from current expectations and from forward-looking statements contained in this conference call.

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

Victor Garcia

Thanks, Tim. Good afternoon and welcome to CAI’s third quarter conference call. Our financial results for the third quarter of 2013 showed continued revenue growth for the quarter on a year-over-year basis and sequentially from the second quarter.

This quarter we reported approximately $54 million of revenue, an increase of 20% from the third quarter of 2012 and container rental revenue increased over the same period by 25%. We are pleased that we have been able to continue our revenue growth during a period of moderate demand for containers.

We normally experience a significant increase in demand for containers during the third quarter but this year that increase in demand largely did not materialize. As a result our overall utilization for the quarter remained around 92%, largely consistent with the first quarter and second quarter.

The utilization of our owned fleet during the quarter was 93%, which results are relatively flat compared to the second quarter. Net income of $15.3 million for the third quarter of 2013 was 7% below the same period in 2012. Our net income this quarter was negatively affected by higher storage costs and lower gains on sale of equipment. Higher storage costs reflect the increase in size of our owned fleet, lower utilization compared to the same quarter last year and our purchase of some managed portfolios over the course of the past 12 months, that had a lower utilization than was in our owned fleet.

We do not have as much flexibility to sell managed equipment in low demand areas and as such utilization has been lower in the managed fleet than in our owned fleet. Over the past year we purchased a number of managed portfolios and with them we have assumed some off hire units and related storage cost as part of the overall purchase.

Gain on sale of equipment was also lower this quarter compared to the same period last year due to slightly lower sale prices in some regions and a decrease in the average age of sold containers leading to an increase in the average book value of equipment sold. We are implementing several initiatives that are expected to increase our sales volume over the coming quarters that we expect will reduce our depot inventory in low demand areas and will improve our overall utilization.

Our overhead costs remain similar to last year at approximately $6 million per quarter and we continue to benefit from the operating leverage we have of running a larger fleet. As I stated earlier, there has been a much more moderate peak season for container demand this year which we believe reflects both the slow economic growth in the United States and Europe, as well as the recent moderation of growth in China.

Since the quarter-end we have witnessed more requests for equipment, which we view as a positive development of improved container demand. Pricing however has remained overly aggressive and we have elected to not compete for many of the low return opportunities and have accordingly reduced our overall capital investment plans for this year. We have invested $288 million in new equipment through the first three quarters of 2013, balanced between new equipment investment sale and lease back transactions and portfolio acquisitions from our managed fleet. We’ll continue to look for a similar balance of investments to find the best return opportunity available to us.

We are encouraged that according to industry sources new equipment inventory at the factories has reduced materially during the third quarter of 2013. We’ll be looking to see if the lower factory inventory levels will translate into improved new equipment returns over the coming quarters.

We are beginning to look at the prospects for container demand in 2014. We think container production this year will be approximately 2.2 million to 2.3 million TEUs which is below the historical range of 2.5 million to 3 million. We expect the below trend production to support overall utilization rates over the coming quarters. Moreover, there have been many recent economic forecasts predicating an improved outlook for most of the global economy which should also support overall trade growth.

Most notably European economies appear to be stabilizing. The U.S. economy is showing signs of some improvement and of particular importance to our business, China and the rest of Asia are showing improved economic growth trends.

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

Timothy Page

Thank you, Victor. Good afternoon everyone. Earlier today we reported our 2013 third quarter results. For the 14th quarter in a row we achieved record quarterly total revenue and lease related revenue.

Total revenue in the quarter was $54 million, 20% higher than the third quarter of 2012 and 2% higher than the second quarter of 2013. Year-to-date total revenue has increased 27% as compared to last year. Lease-related revenue increased 23% as compared to the third quarter of last year and was 3% higher than last quarter as we have continued to increase the overall size of our fleet.

Net income in the third quarter of 2013 was $15.3 million, a 7% decrease as compared to the third quarter of last year and 9% lower than the second quarter of this year. On a year-to-date basis net income was $48 million this year as compared to 46 million last year, an increase of 5%. As I will discuss later in my comments the decrease in net income has been caused primarily by soft market conditions which have impacted utilization and per diem rates and the secondary equipment sale market.

Earnings per fully diluted share for the third quarter of 2013 were $0.68 as compared to $0.84 per share last year, a decrease of 19%. The decrease in EPS was attributable to the 7% decrease in year-over-year net income combined with a 15% increase in the average number of fully diluted shares outstanding as compared to Q3 of 2012.

At the end of the third quarter of 2013 our total container fleet consisted of approximately 1,150,000 TEUs, an increase of approximately 8% as compared to the third quarter of last year. At the end of the third quarter of this year we owned approximately 75% or 860,000 TEUs as compared to approximately 620,000 owned TEUs last year, an increase in our owned fleet of 39%. The size of our owned fleet increased 1% as compared to the second quarter of this year.

As of the end of the third quarter we had approximately 1.5 billion of container assets and approximately 57 million of railcars.

During the quarter we had total capital expenditures of approximately $51 million. Year-to-date our capital expenditures are $288 million as compared to $358 million for the same period last year. Approximately half of our year-to-date investment has been in new containers; the balance has been sale lease back transaction, managed portfolio acquisitions and railcar transactions.

Our average overall fleet utilization during the third quarter on a TEU basis was 92%, virtually unchanged from the first and second quarter of this year. We expect utilization levels to remain at this approximate level or perhaps decrease slightly inn Q4 as traditionally this is a seasonally weaker time of the year.

As we mentioned in our earnings release and Victor mentioned in his comments, the usual fall peak shipping season didn’t materialize this year. That fact combined with the relatively weak demand from customers in the first half of the year has resulted in somewhat tepid market for new containers and lease rates have remained very competitive.

Fortunately we have been conservative in our investment levels and have been successful in managing our inventory exposure. As of today we have what we consider to be a modest level of unleased factory inventory and relatively small forward purchase commitments, the level that we would consider to be normal for a company of our size.

At the present time we’d expect our fourth quarter capital expenditures will also be moderate in the same range as Q3. We are constantly evaluating these trends and are well positioned to be able to quickly adjust our investment in new containers if there is an indication of an improvement in the global trade outlook as most forecasts we have seen recently expect to happen.

Management fee income during the third quarter of 2013 was $1.5 million as compared to $2.5 million for the same period last year, reflecting the impact of the reduction in the size of our managed portfolio as we have purchased a number of managed portfolios during the past year. Management fee revenues also been impacted as a result of decline in the average utilization in our managed fleet and by lower gains on sale of used equipment.

Total operating expenses in the third quarter of 2013 were $27.7 million compared to $25.1 million in the second quarter of 2013, an increase of $2.6 million and $8.8 million more than the third quarter of 2012. The increase in operating expenses was primarily a reflection of four factors.

First, depreciation expense increased $1.1 million as compared to Q2 of 2013 and $4.9 million as compared to Q3 of 2012. The growth in depreciation expense over the past year is right in line with the growth in the size of our own fleet that occurred in the past year.

Second, storage and handling expense increased $0.6 million versus Q2 of this year and $2.8 million as compared to Q3 of 2012, approximately $1.5 million of the year-on-year increase was a result of the growth in our owned container and rail fleets. The remaining $1.3 million increase as compared to last year was primarily a result of a decrease in utilization rate.

We have consciously avoided relying solely on rate as a means to avoid storage costs as we feel the mid to long term outlook for utilization is strong. That said as Victor mentioned in his comments we are implementing a number of initiatives to more aggressively manage our used equipment sales and our depot inventory positions in weaker markets in order to reduce storage costs.

Third, the gain we realized from the sale of used containers was $0.5 million less this quarter as compared to last quarter and was 1.2 million less than the third quarter of last year. The overall volume of used equipment sales in the quarter was consistent with the previous quarter. However we did see a slightly decrease in our average selling price and an increase in the average net book value of the equipment sold as we have been selling newer equipment in some low demand markets in order to improve utilization rates and lower storage cost.

The final operating expense variance was the impact of the strengthening of the euro relative to the dollar and some cash balances we hold in our European subsidiary. The adverse impact was $0.2 million in the quarter.

Marketing, general and administrative expenses were flat as compared to Q2 of this year and were $0.2 million lower than Q3 of last year. At the end of the third quarter of 2013 we had a total funded debt of approximately $1.2 billion and approximately $550 million of availability in various credit facilities. Our debt-to-tangible net worth leverage ratio was 2.9 and the average interest rate on our debt was 2.8%.

That concludes our comments operator. Please open the call for the questions.

Question-and-Answer Session

Operator

(Operator Instructions). And we’ll take our first question coming from Gregory Lewis from Credit Suisse. So Gregory, please go ahead.

Gregory Lewis – Credit Suisse

Thank you and good afternoon.

Victor Garcia

Hi, Greg.

Gregory Lewis – Credit Suisse

Victor in your prepared remarks you talked about the implementation of the initiative to increase sales volumes for the benefit of I guess reducing OpEx, store channeling and potentially even increasing your gains on equipment. In terms of the timing I know you mentioned the coming quarters, what types of initiatives, does this involve hiring more staff, is it – I mean could you just provide some more color on how we should think about this unfolding over the next, call it 12 months?

Victor Garcia

$it’s a little hard to, in a public forum talk about the ideas we have of what we are trying to do to move some equipment around but suffice it to say that we are looking at the off hire equipment and looking at the prospects for leasing that out and the overall economic environment. We just think we need to have more focus on disposing of equipment and we can’t get into specifics of it in a call like this but we are, I would say anytime you are trying to increase volume or work through things it’s not as quickly as you would like. So we think it will take three or four quarters for us to get to where we would like to be. But we are focused on approaching the marketplace little bit more aggressively to dispose of equipment.

Gregory Lewis – Credit Suisse

Okay, great. And then just when I think about the fleet going forward it sounds like your inventories or boxes at the factories are appropriately sized. Do you think we could see a repeat of what we saw in the industry last year where at a certain point in the fourth quarter some of the container leasing companies order boxes ahead of 2014 just simply because the asset price are attractive. Is that kind of where the market is now, where box prices are pretty attractive?

I know you mentioned that inventories have come down a little bit. Do you think we could actually see that reverse course or do you think there is going to be a little bit more caution on your industry to ground order boxes?

Victor Garcia

Yeah, this goes into the realm of speculation and what I would just say is I think over the last couple of years there has been a trend that has occurred where box price over the course of the first half of the year have risen almost on a monthly basis. So that by the summer months box prices were up 20%-25% that’s the reason why a lot people I think felt like you know I need to buy it early to avoid the price increases.

We haven’t really seen that same trend this year and when you look at the overall demand for containers it doesn’t appear to be a big push expected to be on container prices moving up. So although I am sure there will be some continued purchasing I don’t think psychologically there is a view that you have to purchase in the fourth quarter because you are concerned about container prices being high in the second quarter of next year. I don’t think that dynamic is there.

Gregory Lewis – Credit Suisse

So I guess better way to ask, would have been to ask that question is so it sounds like there has been a lot less volatility in new box prices throughout 2013.

Victor Garcia

That’s right and it’s combination of factory capacity and then steel prices have come down pretty significantly. So there isn’t cost push to push container prices up right now and there is a significant amount of capacity available at the manufacturers. So I think people don’t feel a need that the box price is going to rise significantly in a very short period of time.

Gregory Lewis – Credit Suisse

Okay, prefect. Thank you for the time Victor. Thanks, Tim.

Operator

Okay, thank you. And our next question comes from Steven Kwok from KBW. So Steven, please go ahead.

Steven Kwok – KBW

Thanks for taking my question guys. Just first question around the competition front. Do you feel as though the leasing companies are willing to take lower rates? Is that sustainable going forward or is this more of a temporary thing in terms of just clearing out the inventory?

Victor Garcia

Yeah, I can’t tell you how long the rate environment will last but I would say that when we look at the returns that are being put on by people and we do our estimates as to what the ultimate return will be but the returns are much lower than what they have been over an extended period of time, not even the most recent cycle. So it doesn’t appear that people are getting paid for the equity that they are putting into those transactions and certainly that’s our view as we look at the market but we have come back significantly on new container investment because we have seen the rates nearly not there to justify the incremental investment at least in the short term.

Steven Kwok – KBW

Got it, and then in return of I believe last quarter we spoke a little bit about how the share you felt were trading at a discount to your peers. You know in the environment where there is not much in terms of investing for growth do you feel like there is ability to perhaps return capital back to shareholders or are there any strategies around enhancing shareholder value?

Victor Garcia

Yeah, we are looking at that. We are looking at some other opportunities in our core businesses that we want to consider before we make a decision like that but clearly we are going back on the investment in the short term on organic new investment and so if we believe that that’s going to continue to be the case where you know we will look for ways of just reducing our excess capital.

Steven Kwok – KBW

Great, thanks for taking my questions.

Victor Garcia

Sure.

Operator

Thank you. Our next question is coming from Michael Webber from Wells Fargo. So Michael, please go ahead.

Michael Webber – Wells Fargo

Hey, good afternoon, guys how are you?

Victor Garcia

We’re great. How are you?

Michael Webber – Wells Fargo

Good, good. Victor I want to kind of back up in to higher level question around pricing and you told us on this a bit briefly earlier but you know we think about the kind of the competitive pricing landscape we’re in now to kind of alleviate that in 2014 we are going to see the cost of capital widen for some of the smaller players and take just some of the pressure off or the opportunity set just needed to expand and we have really seen that, that cost of capital advantage reassert itself for the public players.

So we think about the kind of demand we would need to see in 2014 to kind of alleviate the pricing pressure you guys are seeing right now and I know again this is somewhat speculative but do you think we need to get back kind of 2012 or 2011 type demand scenario where we are closer to 3 million boxes per year new business to kind of alleviate that pricing pressure. How do you think about that assuming that cost of capital vanished doesn’t reassert?

Victor Garcia

Yeah I don’t think it’s as much of cost of capital advantage. Whether you are a small player and you are primarily being bank financed or you had a combination of bank or ABS financing you know the cost of capital the differential between one another has not been significant enough to be factor. Clearly there is debt capital available to most players and so there is capital there.

But the driver will be, have to be a change of psychology where people feel like there is opportunities for demand. If you miss this opportunity because you are looking for a better return then you confident that there will be someone else there that you can lease out your equipment to and right now I think the opportunities haven’t been large enough and as frequent to give people that kind of confidence. That’s my view. I really don’t think it’s a debt issue.

Michael Webber – Wells Fargo

No, no, no. That’s helpful. And I guess maybe a bit more specifically you think we need to get back to kind of 2012 or even a 2011 type finance scenario so the space feels like there are more opportunities out there on the space or how do you think about that?

Victor Garcia

I don’t think it has to – I mean those kind of numbers would certainly be positive and would give people confidence that demand for containers should be pretty strong but as much as anything it’s over a short period of time how many transactions are coming through that gives people confidence because we all order additional equipment based on how quickly we see the orders coming in and our success rate with orders.

So as that cycle continues to shorten and as our inventory cycles shortens because we have won more transactions I think that will give us confidence to increase pricing.

Michael Webber – Wells Fargo

Got you. Nonetheless that’s very helpful. Just a couple for Tim actually and then Tim in your remarks you mentioned part of that cost initiative and kind of trend to lower storage cost I think you mentioned that you are selling some newer equipment to keep the utilization up and I just kind wanted to dig in to that a little bit because that can mean a lot of things.

So in some of those locations where you are selling younger equipments how young are we talking and maybe just how does that impact the returns on those boxes and maybe just some clarity around it because it just struck that it is interesting?

Timothy Page

Well we are looking at – we are evaluating how we make it the decision to sell equipment in lower demand markets. In the past we might have let’s say had a seven or eight year old box, you might have left it there because you had an expectation that something could happen and over some period of time. Now we are being more aggressive in saying realistically this equipment doesn’t move very quickly in this market and let’s just sell it to get our money out of it and redeploy our capital someplace else, so not pay storage charges on it waiting for a deal that might materialize.

We also been selling some occasionally we sell some new equipment move it from one place to another and sell new equipment, the average gain on that isn’t very much but we can make a nice gain on quick sale. So on an absolute basis or an percentage basis it’s not great but on an absolute dollar basis it generates some return well beyond our carrying cost. So those things at times when you talk about averages things like that distort the averages a little bit.

Michael Webber – Wells Fargo

In terms of selling that newer equipment that’s going to be generating a slightly lower return than average can you give us an idea about the kind of the mix there and how maybe that’s do you think do you will do a bit more of that as they move through the next couple of quarters to kind of right size things? I mean how do we think about that portion of kind of the overall return profile?

Victor Garcia

This is Victor, I think it’s hard to quantify exactly what the impact would be. We are pretty more focused and we are having our marketing team putting more focus on looking at equipment and finding markets for us to dispose it.

Some transactions are fairly smaller numbers, so it’s a process. But clearly when we look at the level of equipment that some of our peers are selling versus us we do think that there is a broader market for us to dispose of equipment and relieve some of the storage cost. So we are focusing on trying to adjust more in to these markets.

Michael Webber – Wells Fargo

Got you. Okay. That’s helpful. Just one more and I’ll turn it over. And Greg touched on this a bit in terms of storage cost around new inventory levels, the asset cycles that we didn’t really see this year. Have that the manufacturers kind of caught on to that or if the space as a whole has largely been storing boxes there for a year or close to it. Is there any potential for that storage cost for newer containers at the manufacturers to start to inching up if we do see a free buy?

Victor Garcia

I think if the manufacturers started reducing the free storage period I think that would actually make people hesitate more on making the equipment purchases because not only do we have the carrying cost of the financing that we have to assume when the inventory is sitting idle but if we have to now pay storage cost I think we all become more cautious about how quickly we would purchase inventory.

Michael Webber – Wells Fargo

Okay.

Victor Garcia

So not sure that, that will be the trend. It would probably wind up being counter-productive for them because it would tend to more exacerbate the peaks and valleys they see in their manufacturing.

Michael Webber – Wells Fargo

Okay. That is helpful, guys. Thanks for the time.

Operator

Okay. Thank you. And our next question is coming from Doug Mewhirter from SunTrust Robinson. Sir, please go ahead.

Doug Mewhirter – SunTrust Robinson Humphrey

Hi. Good evening. Just had a few numbers questions and one bigger picture question. Tim I noticed – I know you said that depreciation has trended up in contrary with the growth of the fleet. I did notice that sequentially if you take depreciation as a percentage of the net book value of assets, it did bump up from maybe 4.7 or actually about 4.9. Is there I guess a change in the mix, just the big, the floods of new containers sort of moving through and increasing I guess the depreciable value of the fleet as a whole or is that just an anomaly?

Timothy Page

It’s a little bit of anomaly, that’s timing as to when assets are put in service and the depreciation starts, there’s also a little impact from rail, because it’s got different depreciation characteristics. So I would say it’s more of a function of timing and then there is a little bit of effect of when we sell off assets that are fully depreciated and they wind up going off the book value, the net book value on a percentage basis, there is a higher percentage of the fleet is actually creating depreciation expense, so there is a little effect from that also.

Doug Mewhirter – SunTrust Robinson Humphrey

Okay. And just a follow up is do you have a trend on the average ages of fleet from last quarter to this quarter?

Timothy Page

It’s pretty much the same, it’s about seven years, for the overall fleet that’s the owned and managed fleet.

Doug Mewhirter – SunTrust Robinson Humphrey

Okay. Thanks for that. And I know the tax rate was down nicely, is that expected to continue? I know that you are putting more equipment in Barbados, is that trend is there any, I guess accruals or one timers in there?

Timothy Page

No one timers, it’s a function of the fact it’s a function of the ratio of where we make our profits. So it’s more – the higher the percentage of profit coming from offshore and the offshore, the Barbados entity to lower the tax rate. The gains on sales in the U.S have been little bit lower so that’s effected the tax rate a little bit. But I would expect it to kind of stay in the same range or decrease from where it is today.

Doug Mewhirter – SunTrust Robinson Humphrey

Okay. That make sense. And my last question for Victor you mentioned in the press release that you actually saw some orders post the end of the quarter and I know that you had commented that it’s a slow market and I would definitely agree but it’s interesting the nature of that because I know you probably get orders here and there all the time. I just want to know if could you comment on those, that seem little bit of a character with the demand patterns or I guess what was the nature of those kind of orders.

Victor Garcia

Well it’s just the size of the order in particular. It’s a pretty sizable order and it’s for equipment to be delivered over several months. So that’s a positive sign in terms of what people are expecting and our customers are – they look at their business very closely and right now they see that it is a very competitive environment on the leasing side and I think they are looking at relative to past periods the box price have been low and lease rates have been low and so they are looking, we do expect that they will be coming out for more containers to take advantage of that.

It’s a continued increase in their overall demand, that would be a positive so it’s a good sign that there are some shipping lines that are looking for some significant increases and if we have more activity along those fronts we would hope that will provide some confidence that we will start seeing the yield on those transactions improve.

Doug Mewhirter – SunTrust Robinson Humphrey

Okay. Thank you. That’s all my questions.

Victor Garcia

Sure.

Operator

Okay. Thank you. And our next question comes from Sal Vitale from Sterne Agee. Sir please go ahead.

Salvatore Vitale – Sterne Agee

Good afternoon, Victor, Tim.

Victor Garcia

Thanks.

Salvatore Vitale – Sterne Agee

A few questions, you mentioned the heightened competition on the aggressive pricing in the market. Who would you say are the most aggressive competitors right now? I mean are there non-traditional leasing companies coming into the mix or there any banks entering the realm?

Victor Garcia

No, we are not seeing banks, we are not seeing anybody new. I would characterize as we look at and we try to infer on who has been active and who is one sort of transaction there is a change of at the mix of who is one transactions but largely speaking it’s the same and I wouldn’t characterize as large players versus small players. In general I would say we have seen the smaller end of the market be fairly inactive compared to several years ago.

So when we are talking about where the competition is it’s where we see it is amongst the top you know eight or so container leasing companies depending on a particular customer, a particular time of the year somebody might be more active, if somebody’s lost some business and they need to move equipment they would become more active. But I would generally say it’s been balanced amongst all the leasing companies. Everybody seems to pick and choose where they want to be aggressive but it’s not one player it’s a number of players.

Salvatore Vitale – Sterne Agee

Okay and then one of your competitors that reported last week indicated that the factory inventory is down to about 600,000 TEUs, what do you think is, number one, do you agree with that? Is that where it currently is? And number two, that implies roughly 2% of the global fleet right now. Is that about consistent with historical levels? Is it a little above, little below, any commentary?

Victor Garcia

I think it’s my belief is that it’s below what we would expect. Even with the number of 600,000 TEUs above what we expect and there is in that number included units that are already committed to customers so the actual available equipment to incrementally bid on is lower than that number.

And so I think that’s historically low and I think it’s a reflection of the things that we are talking about everybody becoming more cautious in their procurement because it’s not just a he focus on what the demand is but it’s also how confident are you even if there is demand that the returns of that incremental investment will be attractive and I think everybody has taken a closer look in trying to gauge how the market improves.

Salvatore Vitale – Sterne Agee

Any sense for that breakdown of the 600,000 how much is committed, how much is not?

Victor Garcia

I am not clearly I mean everybody we have certainly some book inventory that’s at the factories, others are. If I hazard guess I would probably guess somewhere at 30%-40% of that is good but that’s my own estimate. I don’t have an industry source for that. But if you look at also that 600,000 you know some industry sources that we have seen about 25% of that is owned by the shipping line. So 450,000 thereabout is what is in there for the leasing companies in total.

Salvatore Vitale – Sterne Agee

I’m sorry. That 30-40 percent you said is uncommitted or committed?

Victor Garcia

I wouldn’t put a lot of...

Salvatore Vitale – Sterne Agee

No, I know. That’s just...

Victor Garcia

It’s just based on our understanding of what we have in terms of book inventory in general over several periods of time in extrapolating some thoughts but I don’t have any data to support that. But let’s just use that as an estimate. The amount of equipment at the factories is not that significant and they will be continued ordering but by historical standards I think the inventory levels are low particularly for this time of the year.

Salvatore Vitale – Sterne Agee

Okay. And then just any color you can provide on the shipping lines are buying more of their own containers? Any change in that trend since second quarter?

Victor Garcia

We have seen on a percentage basis shipping lines representing a bigger share but that’s been a factor and that is also a factor because container prices by historical standards are low. I mean we are talking about container prices around 2,100 plus or minus and so that by historical standards is a pretty good price for containers. So there has been probably more activity there. But I think the factor, the bigger factor has been that just overall trade growth has not been as high as people expected and so overall container demand hasn’t been there. And so the amount that the leasing companies are investing is probably below what we would have expected it to be.

Salvatore Vitale – Sterne Agee

Okay. And then just one last question, can you give any sense just a ballpark figure on what percentage of your lease portfolio comes up for renewals say in ‘14 and ‘15?

Victor Garcia

I don’t have the exact figure there so I don’t want to hazard a guess without having the figure but I would say there is nothing that I recall in those years that will be significant from our overall trend in the past, which if you take into account short term units we probably would expect on average about 30% equipment to be available to be bought back.

Salvatore Vitale – Sterne Agee

Okay, thank you.

Operator

Okay, thank you. And our next question is coming from John Mims from FBR Capital Markets. So John, please go ahead.

John Mims – FBR Capital Markets

Hi, good afternoon guys. Just one quick one from me. Most things have been answered but Victor when you look at the boxes that you have in storage that you are holding out for pricing we did see the market materially improve in 2014. How are those positioned? I mean how quickly could you get those out of storage? I am just trying to see from the modeling standpoint how quickly you could potentially see a ramp up in utilization going up and storage costs going down.

Victor Garcia

All of our equipment is largely stored in depots that are pretty close to the ports so within a matter of a customer wanting equipment two to three days we have equipment out there ready to be loaded. So we could turn around pretty quickly. If the market demand picked up very significantly there is always a depot congestion issue that might elongate that a little bit but we are not talking about huge lags in terms of when demand is there and when we can actually get units out. If you look back coming out of 2009 recession utilizations went up 10 points in a matter of 4-5 months.

John Mims – FBR Capital Markets

Okay, that’s perfect. That’s helpful. That’s all I have got. Thanks a lot.

Victor Garcia

Sure.

Operator

(Operator Instructions). So we’ll take our final question at the moment from Brian Hogan from William Blair. So Brian, please go ahead.

Brian Hogan – William Blair & Company

Yes, thanks for squeezing me in there. Question on demand for containers in the secondary market. You mentioned the pricing is off and that’s probably because of steel prices coming down, barge prices are down lower, has demand remained stable?

Victor Garcia

I think we have seen box prices come down. We have actually seen the slowest demand for containers in Asia. There has been lack of – [I felt] that third quarter relative to prior period there was a lack of interest in container demand as the Chinese economy had slowed down. We’ve started to see that turn around a little bit. I would say on an average in the other markets we have had a more normal kind of trading pattern in terms of equipment going out.

The U.S. market has been fairly stable, the European market depending on which country we are talking about has been relatively stable. But we have seen as more, the demand that we would have gotten out of Asia has been lower than what we would have expected and we are hoping that the Asian activity improves not only for lease out demand but also that usually coincides with people requesting equipment for sale in Asia.

Brian Hogan – William Blair & Company

And along with that the discussions with the shipping lines, your customers what is their view on the economic activity and their outlook for 2014. I mean there are generally optimistic or it’s kind of status quo?

Victor Garcia

Well I think they have been struggling quite a bit with trying to get freight rates increased and they have a dual issue in terms of not only thinking about overall trade demand growth but also the influx of larger ships coming into their fleets and the cascading effect of bringing the ships that are in those operation down in to smaller markets.

So I think that kind of tempers their enthusiasm for 2014 because they continue to see a fairly significant amount of supplier ships. When it comes to our business I think you know we feel like we are much more in balance in terms of container demand. You know although we are in a lower utilization than we were this time last year overall everybody is still relatively full in terms of utilization and the factory inventory stocks have come down significantly.

So I think we – even with our customers have a more tempered view about the outlook for next year I think there is better chance of our prospects being better given that we have a better supply-demand mix right now.

Brian Hogan – William Blair & Company

With all the shipping lines with all the boats coming on board you think that they would be turning more towards leasing even though the container prices have come down. Because I think earlier this year you will be more opportunistic buying than just flat out growing their own fleet whether you concur with that or...?

Victor Garcia

Yes, no I think our basic view is that the shipping lines continue to have, are trying to manage their cash flows, the priority is that financing and capitalizing the ships that they have coming in and maintaining a sufficient liquidity buffer. And I think containers particularly when the leasing community is in a position to continue to supply them and have been actually at more attractive rates than historically I think that leasing is a better alternative for many shipping lines today than it was in prior periods.

Brian Hogan – William Blair & Company

You mentioned other opportunities that you are exploring in your core business, for use of your excess capital. Can you expand on what other opportunities?

Victor Garcia

In part I mean we are looking at a varied number of opportunities. We are looking at opportunities within our existing fleet mix. We are looking at some significant asset purchases, that we will be making outside of our existing fleet. So we are looking at some acquisitions, both within our fleet and that we manage and from outside.

Brian Hogan – William Blair & Company

As in like different asset classes or...?

Victor Garcia

We are not looking at a new asset class. But we are within our rail and container side we are looking at some asset purchases.

Brian Hogan – William Blair & Company

Does that include possible M&A activity I assume?

Victor Garcia

I won’t comment I guess further beyond that.

Brian Hogan – William Blair & Company

Sure, and then if those don’t pan out returning of capital, I mean is it – what is your time frame on that, is it you are going to wait six months and then look at returning capital, is it open ended and then what is your preference, dividend, share repurchases, a combination?

Victor Garcia

I think we have a strong view that our business and the size of our cash flow we are approaching a position of being able to pay a dividend, and it’s a discussion at the Board, we continue to have that discussion. We are looking at some opportunities right now that we think is prudent for us to consider whether or not those opportunities are going to come together, but I would say depending on how those discussions go, we will have to look at whether or not we will be re-focusing on our capital position and the issue about a dividend.

Brian Hogan – William Blair & Company

Thank for your time.

Victor Garcia

Sure.

Operator

Thank you and I am showing just one mroe question now, coming from Sal Vitale from Sterne Agee. So please go ahead.

Salvatore Vitale – Sterne Agee

Tim just a quick question for you on the finance lease income, that was down pretty significantly. How do we think about that one going forward? I noticed that the investment on the balance sheet has been down over the last two quarters, how do we think about that?

Timothy Page

Yes, we had our reclassification from financed lease to operating leases. So I would think of it on a go-forward basis that what you see on the financial statements kind of the base and it should assuming that we make new investments that it will go up from there.

Salvatore Vitale – Sterne Agee

Okay, thank you.

Operator

Okay and at the moment I am showing no further questions. So I would now like to turn the conference back to your host for any concluding remarks.

Victor Garcia

We appreciate everybody’s coming on to the call and we look forward to our next call at the end of the fourth quarter.

Operator

Okay, ladies and gentlemen this does conclude your conference. You may now disconnect and have a great day.

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