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Executives

Victor GarciaCFO & SVP

John Nishibori – President & CEO

Analysts

Bob Napoli – Piper Jaffray

Rick Shane – Jefferies

Sameer Gokhale – KBW

Tyrus Bookman – Park West Asset Management

CAI International Inc. (CAP) Q4 2009 Earnings Call March 8, 2010 5:00 PM ET

Operator

Good day, ladies and gentlemen, and welcome to CAI International fourth quarter 2009 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator instructions) As a reminder, this conference is being recorded.

I would now like to turn the call over to your host, Victor Garcia.

Victor Garcia

Thank you. 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 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, utilization rates, economic conditions, customer demand, the increased competition, expected savings related to the integration of CAI constant operation 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.

In addition, during today’s call, we will be discussing certain non-GAAP items. For a reconciliation of non-GAAP items, we refer you to our 8-K filing, which was filed with the Securities and Exchange Commission earlier today. John?

John Nishibori

Welcome to CAI’s 2009 fourth quarter and full year earnings conference call. We have now concluded the worst year for containerized trade worldwide. I am pleased that during this difficult year, we have now reported solid profits in each of the four quarters.

The fourth quarter of 2009, we reported net income of $3.1 million or $0.17 a share, resulting in full year net income of $13.6 million or $0.76 per share. Utilization for us bottomed in the middle of the third quarter and in the fourth quarter we had an improvement in utilization of just under 2%.

What is even more encouraging for us is that utilization has continued to increase in the first quarter and in February; we had a utilization rate of approximately 86%.

February 2010 has been the highest lease up month we have had since August 2008, the last month before the Lehman Brothers bankruptcy, which accelerated the downturn in the capital markets, deepened the worldwide recession.

18 months later, the outlook for our industry is vastly improved. World containerized trade is again growing and is now forecasted by Clarkson Research to grow 5.5% in 2010 and 7.6% in 2011 after an estimated 9.5% decline in 2009.

Actually, in each of the past six months from September 2009 to February 2010, Clarkson Research has in each successive month increased its forecast for containerized trade growth in 2010.

We hear from our customers that they are seeing cargo volumes increase in all the major trading lanes, even the Pacific trade, which was hit the hardest, is showing signs of recovery.

According to the Japan Maritime Center, for the month of December 2009, Asia to U.S. container trade increased year-on-year by 3%, which is the first time in 27 months to register an increase. U.S. to Asia increased the fourth consecutive month in December, by 47%.

There are other factors that should also benefit our utilization in 2010. First, shipping lines continue to slow steam their ships in order to save on fuel costs. Slow steaming means the turn time of a container is extended and thus more containers will be needed by shipping lines.

Second, the container manufacturing facilities are operating only one of three possible shifts. We believe it is because of the limited availability of trained labor that left the industry when the factory shutdown in 2009. The single shift makes ordering additional equipment more of a challenge and expensive, but keeps new supply somewhat restrained for the next few months.

Third, we also believe that the major shipping lines will turn more to leasing of containers this year than in the past years because of their limited capital budgets.

Our bookings for future lease-outs remain strong and we expect our fleet utilization to continue to increase over the next several months. So, this year we have ordered 22,000 TEUs of newly manufactured containers to be delivered beginning this month.

We are also focusing on repairing some of our older assets that have minimal repairs in order to place the units back on lease. In 2009, we likely would have decided to sell those units, but now it makes more sense to repair and lease the units. We expect lease rates to improve because of the stronger demand.

The financial impact of the increasing utilization is that our container rental revenue should rise over the coming months, while at the same time our storage costs decline, thus improving our operating income and net income margins.

Moreover, our management fee income should increase, as the profitability of the managed portfolio also increases, since we get a percentage of the net operating income of those portfolios as management fee.

Because of the improving demand for containers, we are speaking with some of the container investment arrangers that we have worked with in the past about their interest in investing in containers.

The possibility of structuring some transactions during the first half of this year is unlikely. However, we believe the interest in container investments will come back and we want to work with those groups who have invested in container programs in the past.

We also continue to focus on establishing container investment programs in Japan and our team continues to make good in-roads in establishing additional investment programs. This effort is being done through our subsidiary CAIJ and as far as we know, we are the only container leasing Company that is marketing container programs to Japanese investors.

Victor Garcia, our CFO, will now go over the actual results.

Victor Garcia

Thank you, John. Earlier today, we reported fourth quarter net income of $3.1 million or $0.17 per fully diluted share on an average share count of 18 million shares. This compares to a net loss of $2.48 a share for the fourth quarter of 2008, with an average fully diluted share count of 17.9 million.

During the fourth quarter of 2009, we recorded a charge of approximately $700,000 for the integration of our Swedish office into our United Kingdom office.

While in the fourth quarter 2008, we recorded a $50.2 million charge for the impairment of our goodwill. Adjusting net income for the fourth quarters of 2009 and 2008, for those nonrecurring charges, our adjusted net income per share respectively was $0.21 per share and $0.33 per share. Please refer to the table in our press release for the reconciliation of net income to adjusted net income.

Total revenue for the fourth quarter was $15.3 million, a decrease of $7.4 million from the total revenue for the fourth quarter of 2008. Container rental revenue was $12.8 million during the fourth quarter compared to $14.8 million in the comparable quarter.

The container rental revenue decline is a result of an 8% decrease in our TEUs in our owned fleet this past quarter as compared to the same quarter last year. We sold containers to investors during the third and fourth quarters of 2008, which had reduced our own fleet as we went into 2009. We also have continued to dispose off older assets in 2009 with limited new investment during the year. Lower utilization over the comparable periods was also a material factor.

Management fee income during the fourth quarter was $2.1 million compared to $3 million in the fourth quarter of 2008. Management fee income declined due to the lower utilization, which reduced revenue in our managed portfolios and increased storage costs. Both elements have reduced profitability at the funds, which resulted in the decline in management fee income.

We did not have any portfolio sales gains during the quarter compared to a trading gain of $4.1 million in the fourth quarter of 2008. Finance lease income was $400,000 compared to $800,000 in the fourth quarter of 2008. The decline of finance lease income revenue reflected a smaller finance lease portfolio over the comparable periods.

Our total operating expense during the fourth quarter of 2009 was $10.8 million compared to $61.7 million during the fourth quarter of 2008. Excluding the impairment charge in the fourth quarter of 2008, total operating expenses were $11.5 million.

Storage and handling costs increased approximately $700,000 as compared to the fourth quarter of 2008, as a result of the increase in number of off-hire units. We expect storage and handling costs to decline in the coming quarters as a result of the higher utilization.

MG&A was $4.4 million compared to $5.5 million in the fourth quarter of 2008. The decline in MG&A was due to lower bad debt expense, lower employee-related costs and lower professional fees.

Depreciation was $4.3 million, down slightly as compared to the $4.6 million during the fourth quarter of 2008 as a result of operating a smaller owned fleet.

Gain on disposition of containers was $1.2 million and was slightly ahead of the comparable amount in the fourth quarter of 2008. On average, we sold 72% more TEUs this past quarter as compared to the fourth quarter of 2008.

As I mentioned earlier, we had unrelated nonrecurring charges of $700,000 and $50.2 million in the fourth quarters of 2009 and 2008 respectively.

Net interest expense was $1 million for the fourth quarter of 2009, which represents a decrease of approximately $1.8 million when compared to the fourth 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.

If you recall, in the fourth quarter of 2008, our interest expense increased as a result of the rise in floating rate indexes caused by the constrained liquidity in the capital markets during that period.

As to income taxes, we reported an effective tax rate of 12.5% for the fourth quarter. The effective tax rate in the fourth quarter of 2008 is not comparable because of the pre-tax loss caused by the impairment charge.

In general, however, in 2009, our international subsidiaries contributed a higher portion of our total profitability as compared to the last year. Excluding one-time tax adjustments, the effective tax rate in 2009 was 24.8%. And it is our expectation that the tax rate in 2010 will be approximately 24%.

Net income for the three months ended December 31st 2009 was $3.1 million, compared to a net loss of $44.4 million for the three months ended December 31st 2008. For 2009, net income was $13.6 million compared to a loss of $27 million.

Again, adjusting for the nonrecurring charges, full year adjusted net income in 2009 and 2008 respectively was $14.3 million and $23.3 million.

Operator, please open the line for questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question comes from Bob Napoli from Piper Jaffray.

Bob Napoli – Piper Jaffray

Thank you, good afternoon.

John Nishibori

Hi.

Victor Garcia

Hi, Bob.

Bob Napoli – Piper Jaffray

2010 CapEx outlook, I know, you mentioned in the press release that you have placed 22,000 TEU. What is your expectations for when that would be delivered and what are your other thoughts on and plans for 2010?

John Nishibori

The 22,000 TEUs represents approximately a little over $30 million in investments. We are thinking of right now, approximately, $100 million or a little over $100 million in total paybacks this year. The total $110 million may not be all new containers. It could take also the form of a sale lease back for a various shipping companies.

Bob Napoli – Piper Jaffray

Okay. The 22,000 at $30 million, are those used containers then because the prices today are $2,000?

John Nishibori

Those are all brand new containers that we placed orders for. The delivery will be this month and mostly will be in April.

Bob Napoli – Piper Jaffray

Did you just place those orders opportunistically before prices improved?

John Nishibori

Actually, we were able to place them slightly lower than an average cost of $2,000 with the view that the prices may increase. In fact, at present, the prices for May, June, July delivery has already increased to $2,200 and over. So I think it was a speculative move on our part, but I think we made the right decision.

Bob Napoli – Piper Jaffray

Okay. How is pricing? We’ve heard from your competitors that pricing has been improving. Can you give a little more color around pricing?

John Nishibori

There’s several reasons. One is the equipment prices are going up. Secondly, there is a shortage now of used containers in China. I think we’re almost pretty much out of leasable units in China, if you add the bookings that we already have. The reason is because the shipping companies are not buying new containers at all these days because of their capital restraints. So they are now turning to leasing companies. So the demand is up, which tends to firm up the prices.

Bob Napoli – Piper Jaffray

Right. John, how much have prices gone up? And are the current prices higher than the price that are running now?

John Nishibori

Very, very slightly. But the thing is, in a lease contract there are many other aspects before the per diem or the lease rates get negotiated. There are a lot of other conditions such as drop-off limitations, locations, etc., and those are the ones that we’re seeing real firm-ups, where we can get the way we would like to see it more often than not. But then we are also seeing some increase in per diems. But it is not a significant increase yet, but we are feeling the firming up.

Bob Napoli – Piper Jaffray

As far as sale leasebacks, are you close to having consummated a transaction in that area?

John Nishibori

Yes, we are right now negotiating a fairly large sale lease back transaction.

Bob Napoli – Piper Jaffray

Okay. And you would hope to have that completed this quarter?

John Nishibori

Hopefully, yes.

Bob Napoli – Piper Jaffray

Okay.

John Nishibori

There are actually quite a number of sale lease back opportunities, but we have to be very careful, because a lot of the times the sale lease back, by definition is because the shipping companies want liquidity. So we have to be very choosy about the shipping company’s credit.

Bob Napoli – Piper Jaffray

Okay, agreed. I will end it there and see if there are other questions. Thank you.

John Nishibori

Okay.

Operator

Thank you. Our next question comes from Rick Shane from Jefferies.

Rick Shane – Jefferies

One sort of big picture question and then one sort of detail to help fill in the model. John, you talked about $100 million in CapEx in 2010. You also talked about the potential reinvigoration of the investment market going forward. Does the $100 million of CapEx assume or not assume that you will find third-party investors for some of the containers? I guess the question I’m trying to figure out is –?

John Nishibori

I understand. $100 million to $110 million is a net investment, net of any sales to investors. Therefore, if we are to do, say, $30 million with investors, it could mean $140 million of CapEx followed by $30 million of sales to investors. However, it may not be that. In that if the sale to the investors are used units in the form of a sale lease back. Let’s say we do a sale lease back with a certain shipping company for $30 million, they are not new containers, and they’re used containers. But then we turn around and sell those to investors, in which case there has been no ordering of new containers as such.

Rick Shane – Jefferies

Got it. But the reality is you’re feeling good enough about the world that you are willing to put $100 million to $110 million of your liquidity into the market and then if you can find investors, you’ll go beyond that?

John Nishibori

Oh, yes.

Rick Shane – Jefferies

Okay, great –

John Nishibori

I am feeling very good about it.

Rick Shane – Jefferies

Okay, great, thank you. The second question, you had indicated that average utilization for the fourth quarter was 81.9%. You indicated that at the end of February, you were at 86%. Just so we can get a really dial in our models in terms of average utilization for the first quarter, where did you end in December so we know how much that increased over the last couple months?

Victor Garcia

We ended December at 82.3%.

Rick Shane – Jefferies

Okay, great. That’s it from me, guys. Thank you very much.

John Nishibori

Thank, Rick.

Operator

(Operator instructions) Our next question comes from Sameer Gokhale from KBW.

Sameer Gokhale – KBW

Hi, thank you. Just a couple of questions. The first one was, I know, John you referenced again the slow steaming that the shippers are doing and your competitors have referenced that as well. If you could just help me understand the slow steaming, I would assume this apply generally to spot leases, but to the extent you can quantify it, how much of a benefit would you say, you received during the quarter from this slow steaming or if you were to compare it to a year ago or any data points you have, how should we think about quantifying any sort of benefit there?

John Nishibori

That is difficult. I can quantify you from the shipping companies' point of view. When you say slow steaming, it is down; usually they steam at 23, 24 knots. It is now coming down to 13 knots, which is really half the speed and that is the minimum speed that they can operate the ship at and in which case an Asia to Europe trip they could save millions of dollars in bunker fuel.

In terms of what the benefits are to us, it is reflected in the increase in utilization. However, we’ve never calculated exactly what percentage points and utilization benefits we would get because of the slow steaming, but we are seeing the effects of that in terms of the increase in utilization rates.

Sameer Gokhale – KBW

Okay, that makes sense. I was just curious. That’s helpful. And then the other thing was just as far as the gain on disposition of used containers, it was up this quarter compared to last quarter and I believe you’d referenced in your commentary that you’re opting to actually fix older containers where otherwise you would have thought about selling them. So how should we think about this category, this revenue or negative expense line item going into 2010? Should we expect it to be kind of flattish or down compared to full year of '09?

Victor Garcia

I think the expectation will be about flat. I think two years ago we were reporting higher margins on the sale of our equipment. This year we’ve gotten comparable gain, but we’ve had a lot more volume and less margin. Our expectation would be that we would be able to get, as utilization in the whole industry goes up, that the margin will get on container sales will go up, which will partially offset the number of units that we would be able to sell.

Sameer Gokhale – KBW

Okay. And then just my last question to get some color. I know, John, you’ve given some commentary in your opening remarks. I apologize; I missed the first couple of minutes of your commentary. I know you’re feeling pretty good about the business, utilization rates are improving, part of that is because of slow steaming, part of that is an improvement in just containerized trade volumes it seems like, but how much of the improvement would you attribute to just a core underlying fundamental improvement in demand or increase in demand that’s driving these volumes? When you study this is inventory rebuilding in the U.S., perhaps, as opposed to this is going to be a sustainable rate going forward? Have you thought about it? How should we think about it?

John Nishibori

I think the biggest reason, my optimism and actual improvement is simply because the shipping companies are not in a position to purchase containers anymore. Not this year and probably not next year either. In the past, historically speaking, this industry used to produce anywhere from 3 million TEUs to 4 million TEUs per year. 60% of those new builds were done by shipping companies and only 40% by leasing companies. Last year, that number went to zero on both the shipping side as well as the container side. Very, very close to zero.

In 2010, we expect the shipping companies investments in new containers would remain extremely low because they have so much requirement to pay the delivery of new ships that they’ve ordered three years ago. So, they are now really coming to leasing companies for additional container requirements. And that coupled with the improving economies around the world. I think those are the two major reasons. And then you put on top of that the slow steaming aspects and so forth. I think we’ve got a pretty good year ahead of us.

Sameer Gokhale – KBW

Yes, thanks, John. It seems like the thesis is playing out as we had thought about it, referencing some of those issues that you just talked about, but I was just trying to isolate, if possible, the economic component of that and it just seems like so far I don’t think your competitors either have been able to really hone in on how much of it is just the broader fundamentally driven improvement that’s reflected in the lease rates as opposed to just the dynamics of the supply and demand of containers. So I was trying to get just parcel a little bit, but thank you for your commentary.

John Nishibori

Sure.

Operator

Thank you. Our next question is a follow-up from Bob Napoli from Piper Jaffray.

Bob Napoli – Piper Jaffray

Just on your tax rate. And your tax rate improved this year to I guess adjusted, about 25%, which is down from the low-30s in 2008. Victor, you’re talking about only a decline to 24% in 2010. Why would it have declined that much in 2009, but a lot less in 2010? And what are the major factors on that?

Victor Garcia

Part of the decline that we had in the tax rate was older equipment that we have, a lot of that was in the United States. And so a lot of the equipment that we had returning was from the U.S. side of the business as opposed to international side, at which point we had purchased equipment. So, as we start seeing increased utilization, our U.S. business should be improving in terms of profitability.

So it’s a balancing act between how much additional new investment and the effect of that will be on our profitability this year versus the just general profitability improvement from our older equipment in the U.S. There is a potential for the tax rate to decline further from where we’re guiding at this point. But our view is still that it will be the course of the next three years to four years for us to be targeting down to a tax rate in the low-teens.

Bob Napoli – Piper Jaffray

Okay. And John, where do you see the market share going between leasing and shipping companies? Where do you think that is now and where do you think that mix shift is going to go over the next two years?

John Nishibori

From a long-term perspective, it started out pretty much at 55% shipping, 45% leasing and then the shipping companies took over and during the past four years, five years, it was 60% shipping, 40% leasing. But we believe starting this year, I think ratio is going to turn more towards 45% leasing and 55% shipping, if not more in the shipping side, because the shipping companies really are not ordering containers any more.

Bob Napoli – Piper Jaffray

Okay. Let’s see. As far as the consent charges, is the integration totally completed? Will there be any more charges?

Victor Garcia

No, the integration is complete. Our UK office is handling all of contents business as of the end of February, so we don’t expect any additional charges.

Bob Napoli – Piper Jaffray

How is that business doing? What kind of trends are you seeing there?

Victor Garcia

It’s improving. The utilization there is also improving and it’s mimicking what we’re seeing in terms of here in the international side of the business. The improvement in utilization is pretty dramatic. I would imagine you’ve never seen anything like it, John, to have that big of an increase in January and February, and as Hero [ph] has always said, I guess, baseball season just starting. This is when we should start to get excited about the seasonality. February was a huge month of lease outs. Is March looking like February or –?

John Nishibori

Yes, it’s looking just like it and it’s going to keep on increasing at a pretty fast clip, probably, until we hit 90%, 91%. And by the time we get to 92% or 93%, that’s pretty much full utilization. We are a short-term leasing company as well. So got to have some inventory somewhere.

Bob Napoli – Piper Jaffray

If you do a sale lease back, would that be pretty much 100% leased?

John Nishibori

Yes, because we are leasing back the entire fleet back to the shipping company. That will be a 100% lease.

Bob Napoli – Piper Jaffray

Okay. Let’s see. The KG funds, what kind of conversations are you having and how many of those funds have kind of survived this downturn and what do you think the potential is for the funds to be active in the second half of this year?

Victor Garcia

I think the difference between the people who arrange the funds and the actual fund vehicles themselves. I think that our general view is that the overall KG scheme or market is going to continue to be active and that container funds will, as the profitability starts improving, start becoming a more attractive investment vehicle.

The headwinds that we have right now is our customers are the container shipping lines and I think the outlook for the shipping lines needs to improve and I think the performance of our portfolios and everybody else’s portfolios continue to improve. And I think once those two factors come together, I think it’s our view that the market will come back.

I would say that to categorize the conversations, I think we’ve had a number of conversations with people about the market and their view of it coming back. I think the confirmation has been that in their estimation, that the market will be back and that we are just continuing to talk about what kind of appetite people would have for these kinds of investments.

Bob Napoli – Piper Jaffray

Okay. And I guess as we watch your management fee revenue improve and it did improve this quarter that would be a clear sign that the funds are showing better profitability and give some sense of the overall health of those funds. Is that fair?

Victor Garcia

I wouldn’t say that the improved profitability in the management fee income this quarter would be that large a signal. But, I think certainly, over the next few quarters, as their performance starts improving, you start seeing a more significant increase in management fee income. I think there it would be more indicative of the health of those portfolios.

Bob Napoli – Piper Jaffray

Right, thank you.

Victor Garcia

Sure.

Operator

Thank you. Our next question comes from Tyrus Bookman from Park West Asset Management.

Tyrus Bookman – Park West Asset Management

Hi, Victor. How much more pretax income do you guys make for each 1% increase in utilization?

Victor Garcia

I’d have to go back. We’ve looked at doing some rough numbers and a 1% increase in utilization I will tell you on an EPS basis adds approximately $0.02 a share, thereabouts. So every 1%, so on a pretax basis you could back calculate that.

Tyrus Bookman – Park West Asset Management

Even including the decrease in storage fees?

Victor Garcia

Yes. When you calculate the impact of that it’s 1% and how we calculate, it’s about $0.02 a share to $0.03 a share.

Tyrus Bookman – Park West Asset Management

On an annualized basis.

Victor Garcia

On an annualized basis.

Tyrus Bookman – Park West Asset Management

Okay, thanks.

Victor Garcia

Sure.

Operator

Thank you. I am showing no further questions at this time. (Operator instructions) I’m showing no further questions at this time.

Victor Garcia

Well, we appreciate everyone coming on the call and we look forward to our next earnings call. Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the conference and you may now disconnect.

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