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CAI International, Inc. (NYSE:CAP)

Q4 2013 Earnings Conference Call

February 10, 2014 5:00 PM ET

Executives

Timothy B. Page – Chief Financial Officer and Senior Vice President

Victor M. Garcia – President, Chief Executive Officer and Director

Analysts

Gregory R. Lewis – Credit Suisse Securities (NYSE:USA)

Michael Webber – Wells Fargo Securities LLC

Doug R. Mewhirter – SunTrust Robinson Humphrey

Steven Kwok – Keefe, Bruyette & Woods, Inc.

Salvatore Vitale – Sterne, Agee & Leach, Inc.

Brian D. Hogan – William Blair & Co. LLC

Operator

Good day, ladies and gentlemen. And welcome to CAI International Fourth Quarter 2013 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 be given at that time. (Operator Instructions) As a reminder this conference call is being recorded.

I would now like to turn the conference over to Mr. Timothy Page, Chief Financial Officer. Sir, you may begin.

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

Victor M. Garcia

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

This quarter we reported $54.6 million of revenue, an increase of 9% from the fourth quarter of 2012 and rental revenue increased over the same period by 13%. We are pleased that we have been able to continue our revenue growth during a period of generally moderate demand for containers.

Tim, will go into our overall operating results in greater detail, but for the quarter we reported $15.6 million of net income attributable to CAI common shareholders or $0.69 per fully diluted share. Our profits this quarter had lowered in the same period last year due primarily to lower gains on sale of equipment, and higher storage and handling costs. These operating costs are higher because we are operating a larger owned fleet and have a utilization rate approximately 2 percentage points lower this past quarter, as compared to the same period in 2012. Although our profits are lower this quarter, we are pleased with our performance in 2013, after taking into consideration the difficult and competitive operating conditions we have had.

For the full year we’ve reported approximately 17% average return on equity which is the indication of the strength of our companies leased portfolio and asset management. However, we are focused on improving our results and are repositioning more units into higher demand locations for lease or sale. In that regard we already seeing benefits. We had a 79% increase in our owned fleet TEU sold in the fourth quarter of 2013, as compared to the third quarter of 2013 and a 44% increase as compared to the fourth quarter of 2012.

Before discussing expectations for 2014 I would like to summarize the market conditions we had in 2013 the year just passed. I think that will better frame the coming year. And in general demand overall in 2013 was less than what we had expected. While our Clarkson Research reported that containerized trade in 2013 grew around 5%. We didn’t really see that growth translate into the level of demand for new containers that we had expected. As we entered 2013, we and many other lessors were optimistic about demand for containers. And as a result many leasing companies placed large orders for equipment at the end of 2012 and the early part of 2013.

As a result inventories at the factories increased from approximately 700,000 TEUs at the beginning of the year to almost 1 million TEU by around April, May. Initially our optimism regarding the strength of the market seen well founded as many of our customers booked equipment in the first and second quarters. Unfortunately customers delayed pickup of that equipment. Unit that were expected to be picked up in the second quarter generally speaking were picked up in the third quarter.

The third quarter is usually our highest demand quarter. However, that was not the traditional peak season demand going into the holiday season. This was not just a lack of peak season leasing demand; but cargo demand in general to our customers didn’t have the peak season. Because demand for new containers didn’t materialize at the levels expected; we began to see pricing pressure on per diem rates in the second quarter, and particularly in the later part of the year as leasing companies with large inventory positions move to reduce their high factory inventory levels.

Now going into the fourth quarter, inventory levels were coming down, but demand for new containers remain fairly tepid, which is not unusual at that time of year, as we expect a seasonal decline in utilization. Although the decline and lease for us was less than what we had anticipated, lease rates however remained very competitive. Many of the units returned to us during the fourth quarter were older units that we targeted for sale. The return of these older units was encouraging to us, the fact that many of these units that being returned to us for older units. We believe as an indication that the market tepid tempered was relatively well balanced. Further confirmation of the balance in the market came in January, when we were pleasantly surprised that there was a material increase in demand for new containers from the factories in China particularly in Southern China.

This past January, we leased out four times as many containers out of the factories that we did in January of 2013, a lot of that demand was leading up to the Chinese New Year holiday period, which began on January 31. Many shipping lines we spoke with reported having volumes particularly along the Asia/Europe trades, and they had over bookings that they are rolling over to the following weeks.

And as opposed to last year, where we had equipment that wasn’t picked up until several months after, we had done the bookings. In this January, a lot of the equipment was picked up during the same month as when we have the booking, which we view as very encouraging about demand currently in the marketplace.

As to the Container manufactures they were closed in late January and will not reopen until the first weeks of March. Many of the manufactures are quoting container prices for March and April delivery that are approximately 12% to 15% higher than quarter for December delivery. These rising container prices have tended to increase per diem rates for new equipment pickups now as compared to in the fourth quarter.

Those still early in the year all of these items are positive signs for our business, the first quarter is generally a slow quarter and unless we get positively supplies, positively surprised we would not expect demand for equipment to be more significant until mid to late April.

However, according to Clarkson, container trade growth is expected to increase to approximately 6% as a result of the improving European and U.S. economy. We expect this improvement in trade growth to drive an increased demand for containers in 2014.

Despite of the improving macro trade trends freight rates for shipping lines remain under pressure due to an over supply of ships and more ship deliveries are coming in 2014, which we believe will make leasing of containers a better choice for them than using internal resources for the purchase of the units.

In summary, we see a lot of reason for optimism going into this year a straight growth and world economies improve all of which in turn should provide for an improving profit trend in the remaining quarters of the year. In tandem with what we believe will be the improving market fundamentals, we are investing in resources to improve our utilization for discharge and operating expenses and increase our equipment sales in many markets as we speak to optimize margins.

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

Timothy B. Page

Thank you, Victor and good afternoon everyone. Earlier today, we reported our 2013 fourth quarter results for the 15th quarter in a row, we achieved record quarterly total revenue and lease related revenue.

Total revenue in the quarter was $55 million, 9% higher than the fourth quarter of 2012 and 1% higher than the third quarter of 2013. For the full year 2013, total revenue has increased 22% as compared to last year. Leased related revenue for the fourth quarter increased to 11% as compared with the fourth quarter of last year and was 1% higher than last quarter. For the 2013 year, lease related revenue increased 27% as compared to 2012. Net income attributable to CAI common stockholders in the fourth quarter of 2013 was $16 million, 2% higher than the third quarter of this year and 10% less than the fourth quarter of last year.

For the 2013 year, net income attributable to CAI common stockholders was $64 million, 1% higher than in 2012. The decrease in net income in the fourth quarter of 2013 as compared to the fourth quarter of 2012 was caused primarily by soft market conditions, which have impacted utilization rates, the secondary equipment sale market, and per diem rates. These items were offset to some extent by lower compensation related expense in the fourth quarter of this year.

Earnings per fully diluted share for the first quarter of 2012 were $0.69, as compared to $0.85 per fully diluted share Q4 of last year, a decrease of 19%. Roughly 40% of the year-over-year decrease in EPS is attributable to a 10% increase in the average number of fully diluted shares outstanding with the balance of the reduction in EPS, as a result of the decrease in net income I mentioned earlier.

For the 2013 full year, fully diluted EPS was $2.82 per share versus $3.18 in 2012, a decrease of a 11%. All of the year-over-year decrease in EPS is a result of a 14% increase in the average number of fully diluted shares outstanding in 2013, as compared to full year 2012. Our average overall utilization during the fourth quarter of 2013 on a CEU basis was 91.7% as compared to 92.8% for the third quarter.

As of the end of December, utilization was 91.3% and has remained at that level throughout January and early February. Management fee income during the fourth quarter of 2013 was $1.8 million, as compared to $2.4 million for the same period last year, reflecting the impact of the reduction in the size of our managed portfolio as we purchased a large managed portfolio at the end of the first quarter of 2013.

Management fee revenue was also been impacted somewhat as a result of decline in the average utilization in our managed fleet and by lower fees we earned on the sale of used managed equipment. Total operating expenses in the fourth quarter of 2013 were $28 million and were flat as compared to the third quarter of 2013.

During the quarter depreciation expense $0.7 million as compared to Q3 of 2013, the increase is inline with the growth of our own fleet during that time. Storage and handling expense increased $0.6 million versus Q3 of this year primarily as a result of a 1.1 percentage point decrease in our average utilization during the fourth quarter. The increase in depreciation and storage expenses in the quarter were offset by a $0.2 million increase in the gain on disposition of used containers as compared to Q3 of 2013 and by a $0.5 million decrease in MG&A expense as compared to the third quarter.

The primary factor in the increase in the gain on sale in the quarter was that we were able to significantly increase the volume of used container sales in the fourth quarter, as compared to the third quarter as the initiatives in this area that we mentioned in our last earnings call and that Victor mentioned in his comments today have begun to get traction. $0.5 million sequential reduction in MG&A expense in the fourth quarter was primarily the result of previously, excuse me of lower compensation related expenses. Interest expense in the quarter was slightly lower than the third quarter as our average debt level decreased as a result of the limited capital expenditures we had during the quarter.

The tax rate in Q4 was 8.5% bringing the 2013 full year tax rate to 9.9%. Q4 and the full year 2013 net income were also impacted by a $0.6 million charge for a minority interest, $0.4 million of which was a true up for prior periods. As of December 31, 2013 our total container fleet consisted of approximately 1.2 million CEU, an increase of approximately 8% as compared with the fourth quarter of last year.

CAI’s own fleet is now 0.9 million CEUs comprising 78% of our total fleet. Our own fleet grew 21% over the past year, 2% as compared to the third quarter of 2013. At year-end we had approximately $1.5 billion of container assets and approximately $70 million of railcar assets. During the fourth quarter total capital expenditures were approximately $24 million. Full year 2013 capital expenditures were $312 million, as compared to $524 million during 2012, a 40% year-over-year decrease in our investment level.

As Victor mentioned we entered 2013 anticipating investment level similar to 2012, but we consciously scale back those plans in the pace of the soft market demand conditions that existed in 2013. Of our $312 million in total investment in 2013, roughly a $165 million was for the purchase of new containers an investment level that we estimate is considerably less than we would have expected given our market share because of the soft market demand and particularly the per diem yield pressures that Victor mentioned in his comments. We elected to pass on many transactions that we believe do not offer the appropriate yield opportunities.

We entered 2014 with a relatively low level of factory inventory combined with the unexpectedly higher January lease out activity that Victor mentioned. Our current unbooked inventory position is at its lowest level in quite some time. We have recently placed some orders for additional new containers. This equipment for the most part will become available in the second quarter. At the end of the fourth quarter of 2013, we had total funded debt of $1.1 billion and approximately $550 million of availability in various credit facilities.

Our debt to intangible net worth leverage ratio was 2.74 and our average interest rate on our debt in the quarter was approximately 2.7%.

Looking forward fleets and revenue growth will be modest during the first quarter, as the factories are closed for an extended New Year’s holiday and while lease out activity for new equipment in January was stronger than we anticipated, we would still expect average utilization in the quarter to be slightly lower than Q4 which is the normal seasonal pattern. Consequently we would expect some increase in storage costs.

Additionally MG&A in 2014 is expected to return to an average quarterly run rate of around $6 million. As a result Q1 2014 net income will most likely be below Q4 2013 levels.

That said and as Victor mentioned we see many positives for the balance of 2014, relatively low factory inventory levels, signs of improving container trade activity, and sings of some firming in per diem rates. Combine these factors with the fact that shipping companies are scheduled to take delivery of a record level of new container capacity this year. We see a market that should be favorable for container lessors and we are very well positioned to take advantage of it. That concludes our comments. Operator, please open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from Greg Lewis from Credit Suisse. Your line is open. Please go ahead.

Gregory R. Lewis – Credit Suisse Securities (USA)

Yes, thank you, and good afternoon.

Victor M. Garcia

Hi, Greg.

Gregory R. Lewis – Credit Suisse Securities (USA)

Victor, could you talk a little bit more about the impact that the Chinese New Year had on not only your company and the pickup that you mentioned, but also has that sort of – has that sort of changed a little bit sentiment? I mean I heard you mentioned that you think it sounds like the container manufacturers are trying to push box pricing higher. I guess what I would say is Chinese New Year seems like it’s up pretty seasonal event and happens every year. Was there anything different about what happened this year than what was seen in the past?

Victor M. Garcia

Well, I think that’s the reason why we noted it, you are right, years ago we would have the fourth quarter, the post Christmas season would be kind of really weak part of year. But as the Asian economies have continued to grow, Chinese New Year or lunar New Year has become a much more significant factor and it’s really kind of taken a lot of the seasonality out of the business. So when we would normally have expected equipment to come back in the fourth quarter, a lot of that equipment has been staying on, and what we have found to be most interesting is that the – we saw lot of activity coming out of China. And this is new containers coming out of China, frankly a lot of our depot equipment, particularly high cube containers out of Southern China we’re growing very strong.

A lot of that is export driven cargo. So it wasn’t in my estimation exclusively just for delivery in Asia. I think there was a lot of cargo being moved prior to the Chinese New Year Holiday outside of Asia and into more of the developed economies. So Europe has been a positive surprise from what we’re gathering from some of our customers in terms of relative to expectations and so there has been – it is different this year than it wasn’t last two years.

And as I said, we leased out four times as many new boxes on a TEU basis this January than we did the previous January and something in the order of 10 times more than what we did two years ago.

Gregory R. Lewis – Credit Suisse Securities (USA)

Okay, great. And then I guess just following up on the manufacturing question about I guess the major manufacturers looking to push pricing. I think you mentioned anywhere from 10% plus higher. I guess in thinking about it, if we were to look at steel prices in China since December to where we are today, they are more flattish, that even you could even argue that they are down slightly. I guess when a manufacturer is approaching yourselves or someone else to talk about pushing pricing, what do you think incentivize is anyone to agree to pay pricing? I mean, it sounds like that inventory is low but there is actual real demand for boxes, I mean is that the way we should be thinking about it or is it maybe they are looking for 10% to 15% price increase and maybe what that means is maybe box pricing is more likely flat to up maybe 5%.

Victor M. Garcia

I think what we see is that for instance in the fourth quarter with the level of demand that there was, the limiting amount of new ordering that was going on in the fourth quarter. We didn’t see container prices moving below the $2,000 level. For the traditional container types for lease expect. So, we weren’t seeing, so that was a floor that a lot of the main factors wouldn’t go below. And I think part of it is although steel is still the big component a lot of costs in China are going up, labor costs, energy costs. So, and I think a lot of the manufacturers really have a hard time with profitability at those low container prices. So, what we have seen is that there the decision has been that they will close factories for a while if there isn’t a proper demand in order to just how be able to produce at a level that is more commensurate what they need from a return standpoint.

Gregory R. Lewis – Credit Suisse Securities (USA)

Okay, thank you.

Victor M. Garcia

Our ordering and anybody else is ordering, we look at what we expect demand to be. So we don’t want to speculate on a lot on box prices just – a lot on boxes just because the box price is well. We could order lot of equipment in the fourth quarter, but as we look that the demand situation there in the pricing, we didn’t think it made sense to tie up a lot of capital, but as we are now getting into the seasonally stronger part of the year for equipment delivery. And we have to look at where the best price alternative is. And per diem rates reflect that so as we’ve seen the box prices going up we’ve seen per diem rates fall.

Gregory R. Lewis – Credit Suisse Securities (USA)

Okay, great. And then just Tim real quick. It looked like in the back half of the year the tax expense, tax rate was about 8%, for the full year it was 10% last year. As you think, I mean and I realize it’s a difficult to pinpoint what the mix of business is going to be in 2014 which we kind of think of – I mean is 10% comfortable run rate for taxes.

Timothy B. Page

And I would say the back half of the year what’s happening during the course of the year is we’re always trying to peg what we think the year is going to finish from a tax perspective. So, we’re always truing up to what we think that the full year tax rate is going to be and so it round up in 2013 being 10% and that’s probably a good sort of ballpark, it theoretically as our investment level increases and a higher percent of our revenue comes from our offshore entities the tax rate should go down. But, it’s hard to say exactly where that the mix of profit is going to be. So using a 10% number is probably pretty conservative.

Gregory R. Lewis – Credit Suisse Securities (USA)

Okay, perfect guys. Thank you very much for the time.

Victor M. Garcia

Thank you.

Operator

Thank you. And our next question comes from Michael Webber from Wells Fargo. Your line is open. Please go ahead sir.

Michael Webber – Wells Fargo Securities LLC

Hey, good morning guys. How are you?

Victor M. Garcia

Doing great.

Timothy B. Page

Great.

Michael Webber – Wells Fargo Securities LLC

Again, I apologize I hopped on a bit late, so I apologize if I rehash something you mentioned in your prepared remarks. Victor or Tim, I think I’m going to Tim, towards the end of your remarks, you mentioned an uptick in yields. Just curious as to whether or not you can kind of quantify that into whether or not we are back into double-digits. And if not, what do you think it would take to get us there as we move through the first half of the year and what should be seasonally stronger portion of the cycle.

Timothy B. Page

Well, I think we are still in the early stages, what I would say is that I’m not – I wouldn’t say that necessarily that yields in general have gone up, because if per diem has gone up commensurate in percentage runs with the price of containers, the yield is probably filled up, but they have moved up, so for those – for that equipment that we might have had a little bit cheaper, the yield that have improved, I think frankly the environment for improving yields has to be a combination of people, really agreeing themselves that they have to get a certain amount of return on the capital that they have.

And I think we have to have more significant demand environment, than we’ve had over the last, say six to nine months, where it’s fairly subdued. So I think it’s really going to be demand driven, if the container demand continues as it did in January I would think that would give confidence to people that they should be able to put their cap – their assets to work at decent returns, certainly that’s…

Michael Webber – Wells Fargo Securities LLC

That makes sense, just trying to put in context behind that, that taller, in terms of where yields are right now, maybe on an average basis not necessarily cap specific, are we still talking high-single digits in terms of yields within that?

Timothy B. Page

I’m not, when you say yields in high single digits, I’m not sure what you are referring to and frankly…

Michael Webber – Wells Fargo Securities LLC

It’s just something simply revenue over loss, revenue over price of loss.

Timothy B. Page

I think it’s where it – largely speaking it’s where it was before, it’s in the high-single digits kind of range.

Michael Webber – Wells Fargo Securities LLC

Okay. No, no, no that’s fair. I just wanted some color there, and then maybe kind of sticking with box pricing and I know, when you kind of take a look back and you look at 2012, we saw pretty distinctive pattern in terms of box prices starting of the year, bit softer and then we got a bit of a run, maybe not towards $3,000 per TEU range, but certainly towards the upper too and then kind of retrenched as some of the seasonal factors abated. We certainly didn’t see that kind of a cycle in 2013, every markets is going to be the different, but we are just looking forward into 2014, and based on what you think see right now, do you think 2014 ends up looking a bit more like 2012 where we see a bit more of movement to the box prices, or do you think it looks a bit more like 2013 where we get more of a kind of a consistent pricing level.

Victor M. Garcia

I would tell you, the first thing I would just notice, although last couple of years, you are right, there is been expectation of an improving market and the market hasn’t been a strong as initially expected and the last couple of years, when people have ordered equipment, they have delayed their pickups. I mean the only difference I would say that is encouraging this year, that we could actually point to, is the fact that not only was equipment ordered, but it was actually picked up in the same month, which tells me about – it says a lot to me about the level of demand, whether that continues, we will have to see, because we are just people are just really coming back from Chinese New Year, we will have to see how the rest of the quarter works out, but certainly that was encouraging.

The other thing I would just say is this year feels a little bit different I think people have been burned a couple of times in speculating, over speculating and over estimating on equipment and having to work off that equipment over the course of the year. We haven’t seen that level of ordering going on generally speaking.

And so when you look also at the total amount of container production in the last couple of years, if you would have a more slightly more robust world economic growth, it’s actually been below the trend line. And what we would have expected from. Yes, we still think in a stronger global market we would have something in the order of 3 million TEUs, 2.8 million to 3 million TEUs built.

We have been under those markets for last couple of years. And so I think there is the opportunity for a catch up and our customers are continuing to bring on new assets, new ships on to their fleets. And so they are optimistic about ongoing trade growth or the swapping out ships, so there is an expectation at some level of continued growth.

Timothy B. Page

I would also add…

Michael Webber – Wells Fargo Securities LLC

That’s helpful.

Timothy B. Page

I also add that different from last year, the factories are shutdown pretty much for the entire month of February. So it’s a little bit harder for our people to get out ahead of the demand curve if you will by ordering or building up a lot of inventory because there is no way to do it right now. So I think that will be positive factor for entering the busier part of the year.

Michael Webber – Wells Fargo Securities LLC

Got you. That makes sense. And again to give me a matter of thought, you might have mentioned this in your prepared remarks earlier, Tim. I know you gave us a pretty thorough secular review, but along those lines and the factories they shutdown for more or less a month. Do you guys have a sense on where new container inventory stands right now? Actually, at the manufacturer, that we still hovering near kind of half-million TEU at the factory right now, or revenues off that number?

Timothy B. Page

I spoke to one of the manufacturers to get their sense for that. The sense I got was there was somewhere in the order of 200,000 TEUs built over the course of the end of December to January and those probably 200,000 TEUs that went out. So if you look at that we have about three months worth of inventory at least with the leasing companies. So which is fairly moderate amount of inventory.

Michael Webber – Wells Fargo Securities LLC

Got you, and that’s relatively consistent with where we’ve been safe in the back half of last year?

Timothy B. Page

Was that a question?

Michael Webber – Wells Fargo Securities LLC

Yes, that’s relatively consistent with where you’ve been from the back half of last year?

Timothy B. Page

Last quarter?

Michael Webber – Wells Fargo Securities LLC

Yes, last quarter.

Timothy B. Page

Last quarter, inventories continue to be drawn down, we didn’t see a lot of ordering in the fourth quarter. Yes, that was part of the reason of why the factory decided to close.

Michael Webber – Wells Fargo Securities LLC

Great, fair enough. One more from me and I’ll turn it over again, if you mentioned it earlier I apologize. In thinking about your capital structure and the way you’d essentially return value to shareholders. Any change in your thought process here around the distribution and how you think about that?

Victor M. Garcia

No, I mean its certainly something that our board is very attentive to where we are the company, our strategy, what we are trying to accomplish, where our share price is, how we return value to shareholders. So it’s a discussion topic at many of the board meetings. And so our board is very focused on shareholder value. As we look at it, we need to may think, what is our excess cash flow, what is our need for capital. We are a net borrower.

As Tim mentioned, we have for every dollar of equity we have just under 3 times the debt, so 2.7 times. So it’s not like we are sitting on billions of dollars of cash that we can’t figure out a home, what to do with it, so we have to be very mindful about what do we need to grow the business and how much capital do we need to grow to invest in, in a positive contributing assets.

So we look at our valuation, we look at on an absolute basis, we look at our relative to other metrics, So we are very positive that we – we are trying to be very thoughtful about how we use our capital, but we do look at whether this is the right time to return capital to shareholders or is there a price or what price are we looking that we think there is value in our shares that we just can’t ignore. So we talk about all of those items.

Michael Webber – Wells Fargo Securities LLC

Okay, fair enough. All right, guys, that’s enough for me. Thank you and I appreciate that.

Victor M. Garcia

Okay.

Operator

Your next question comes from Doug Mewhirter with SunTrust Robinson. Your line is open. Please go ahead.

Doug R. Mewhirter – SunTrust Robinson Humphrey

Hi, good afternoon. The first question is actually around railcar. I notice you still have another – you had another uptick in your railcar asset growth. Has your outlook changed if you give just an update on what the conditions of that market are? Are you still feeling pretty good about it? You still want to grow a little more into 2014, hold steady, you know, how does it fit with your the broader capital plan?

Victor M. Garcia

Perfect. The rail market in the United States in general is doing pretty well. Demand for railcars in most asset categories are doing really well. We don’t participate on the tank side, but that obviously is where most of the new investment activities being done, but that’s not an area where we are playing in.

I would say as we look at asset acquisitions, we are being very cautious about what it is we pay for those assets, because we are buying assets that will have another 25 years, 30 years of life on them and purchasing that asset at the right price is a big aspect is to what we can get as a return. So there has been a demand for railcars as strong, so it’s hard to find what we would say attractive opportunity. So we’ve invested less than what we would have liked, but we are trying to stay true to our disciplined approach about capital. We don’t want to – just want to put capital to work for the shake of putting capital to work.

Doug R. Mewhirter – SunTrust Robinson Humphrey

Okay, thanks for that answer. My second question Tim, more of a technical question. The $45 million of equipment payable, it seems it was definitely pretty large versus the same period of last year. Does that represent your I guess just that your CapEx? And new CapEx that you hasn’t impact that just could you I guess break that down a little bit?

Timothy B. Page

Containers that we took delivery of towards the end of the year that we get terms on them, so until that we actually pay for it, it stays on the books as a payable as opposed to an investment if you would.

Doug R. Mewhirter – SunTrust Robinson Humphrey

Okay. Does that go back two quarters or three quarters?

Timothy B. Page

I guess it would all have been in the fourth quarter.

Doug R. Mewhirter – SunTrust Robinson Humphrey

Okay. And I guess my last question, more on I guess market tone, you said you are encouraged by the number of orders and the speed of pickup in January. Was it more orders so there’s more customers knocking on your door or calling you, or is it the average order size was a little bit better than what you thought?

Timothy B. Page

It was really both. It was average order size, it was the number of customers, it was customers telling well your rate is too high you are not going to get there, and we put on the phone the next morning, they call us back and say, I will take them. That gives us encouragement that when – that there must really be demand for the boxes, when customers come back after telling you that you’re out of the game. So all of those were positive signs for us.

Doug R. Mewhirter – SunTrust Robinson Humphrey

And was there any change in, I guess the customer makeup. In other words, there is customers who usually are considered to be buyers in the market. There are customers who are usually considered lessors or lessees in the market. Is that shuffle it up any if you see more habitual buyers become a little bit more on the leasing side or vice versa?

Timothy B. Page

Well, I think a lot of the ones. We haven’t seen too many of those who are traditionally not looking people who company that lease coming into the market, there hasn’t been, that hasn’t been the biggest part. Although some of the customers may do lease, but not in great quantities. So it’s really kind of a mixture, but again when I find encouraging also above the world economy is a fact that when I hear customers saying that they had over booked on cargo and they are rolling over 20% for the following week and we see that our high cubes are going out, we were sort of high cubes in certain port areas.

That tells us that there must be some really good sustainable strength in the developed economies because they are starting to pick up. And this traditionally would not be, you know, the time of year that we would expected and I don’t want to equate it to what we saw in 2010, because I think there would be an over statement. But in 2010, we saw February, our lease out activity went through the roof and that continued right through the end of that year. I’m not saying that’s the situation here, but these early months of the year are not typically the ones where you would expect a significant amount of equipment to go out. In the fact that customers are not only booking, I mean coming in after the calendar New Year, asking for equipment and then picking it up within a week. That to is encouraging.

Doug R. Mewhirter – SunTrust Robinson Humphrey

Okay, great. Thanks. That’s all my questions.

Timothy B. Page

Sure.

Operator

Thank you. And our next question comes from Steven Kwok from KBW. Your line is open. Please go ahead.

Steven Kwok – Keefe, Bruyette & Woods, Inc.

Thanks for taking my question. I just have two quick questions. I was wondering if you could talk about the utilization rate. I know you are going to a number of initiatives to increase that. I was wondering, what’s the rate that we should think in terms of a target over time that you would like to get to. And where its still lease one for you to lease out additional containers?

Victor M. Garcia

Paul, ideally we would like to, it’s going, all of this is going to be depend on where the market is. We can’t control exactly our utilization rate and we are going to try to make prudent decisions above whether we hold on to equipment or reseller at least in fact. Ideally, we would like to be and it’s back to where we were on the last few years, which is in the mid-90s utilization, that’s where I think we’re optimizing our fleet.

We have all the equipment that realistically can be leased out and we are very, very focused on finding ways to get towards that goal. And I am not sure every year we are going to be able to get that goal, but that’s where we like to do it. Ultimately for our utilization to go up significantly over the next few months we’re going to have to have as we expect the markets to have its seasonal upturn largely beginning some time around April, May and going right through the summer. I mean but that being said we are not sitting idle saying let’s wait until April or May. I am hiring additional marketing staffs that are specific to the goals we are trying to achieve. And we are trying to think of our fleet in a very dynamic way and we are trying to move in that direction.

Steven Kwok – Keefe, Bruyette & Woods, Inc.

Got it. And it’s in terms of around via non-controlling interest, I think it’s been a couple of quarters since we saw that come through. How should we think about it going forward?

Victor M. Garcia

Well, we recorded non-controlling interest, we actually have had a, we have an investment in a company in Japan that does put together investment products for local investors, Asian investors, we own 80% of that company. Historically, the process related to that hadn’t been significant, so we hadn’t consolidated, but here we think it’s going to be more consolidated and we would expect something not a larger amount, but something plus or minus $50,000 million to $75,000 million.

Steven Kwok – Keefe, Bruyette & Woods, Inc.

Not million.

Victor M. Garcia

I am sorry, $50,000 to $75,000.

Timothy B. Page

A quarter?

Victor M. Garcia

A quarter.

Steven Kwok – Keefe, Bruyette & Woods, Inc.

Got it. Thanks for taking my question.

Operator

Thank you. (Operator Instructions) Our next question comes from Salvatore Vitale from Sterne, Agee. Your line is open. Please go ahead.

Salvatore Vitale – Sterne, Agee & Leach, Inc.

Hi, gentlemen, thanks for taking my call or my question.

Timothy B. Page

Hi, Vitale.

Salvatore Vitale – Sterne, Agee & Leach, Inc.

So, first I guess for you Tim, just to make sure that I heard you correctly, you gave directional guidance for first quarter earnings, was it, that it was going to be down year-over-year? Did I hear that right?

Timothy B. Page

That it would be the below what the fourth quarter was.

Salvatore Vitale – Sterne, Agee & Leach, Inc.

Okay, understood. Thanks. And then so I got the G&A, that’s fine. And then the other question to you Victor is in response to one of the questions earlier, you pretty much answer the question I had was that I guess you are taking the stance and you think that some of your competitors are taking the stance that they don’t want to get overly optimistic like you may have gotten last year where there was an enthusiasm, there was a lot of orders of containers. So would it be safe to say that you think that that view is shared by a lot of your competitors that lessors in generally are going to be more constrained in ordering containers until say April, May?

Victor M. Garcia

I don't know about – I can’t predict what any another company is going to do, but I think one of things that I think will go into people’s calculation, certainly goes into ours, its not just what the demand profile is, but what are the returns, where are returns today on equipment. And they are as competitive over the last several months have been as competitive as I certainly recall. And I think they’ve gone below in many cases as Tim said, we’ve passed on a lot of deals.

So what we would – yes, we think is appropriate return for the risk of our nature, the capital structure of our business. And so we’ve been unwilling to do, and we have as competitive a capital structure, as anyone. I think our interest rate, Tim said was 2.7%, so the returns just so you have to weigh that against how much capital you are going to do or how much capital you are going to deploy because, you just going to burn through capital otherwise.

Salvatore Vitale – Sterne, Agee & Leach, Inc.

That makes sense. And then on the topic, I think, Tim, you had mentioned that you place some orders for additional containers during the month of January. Can you give any color on where you are on that in terms of dollar levels?

Timothy B. Page

The problem is just because of where, it’s kind of an open forum, we like not to talk about overall investments, but TEUs and stuff like that, but we’ve done a fair amount of pretty significant order, I think I guess I’ll put a number, somewhere probably have a $100 million invested so far.

Salvatore Vitale – Sterne, Agee & Leach, Inc.

Okay, and then just a little bit more color if you could on the 2013 full year CapEx. So you said of the 312, about 165 was new. Is it safe to say that the rail was give or take that $50 million that you’ve targeted in the past?

Timothy B. Page

It was a little less than $50 million.

Salvatore Vitale – Sterne, Agee & Leach, Inc.

A little less. Okay. And do you expect – well, I guess it’s hard for us about to say, do you expect that breakdown going forward? But it’s probably going to be more geared toward new, depending on what happens with the demand environment, correct?

Timothy B. Page

As far as our…

Salvatore Vitale – Sterne, Agee & Leach, Inc.

You’re 14.

Timothy B. Page

Our overall investment level, container investments.

Salvatore Vitale – Sterne, Agee & Leach, Inc.

Right.

Timothy B. Page

I think most of our, last few years we’ve been roughly 50% has been new, we still look for opportunities within our existing fleet to take managed units into our fleet. We also just continue to look at sale lease back. So it’ll be a lot kind of opportunistically, what is the best return, but I would say, as we look into republic expecting a greater percentage of our investment to be coming from new container investment.

Salvatore Vitale – Sterne, Agee & Leach, Inc.

Okay, that answers my question.

Timothy B. Page

Whether that would be subsequently 65% I don’t know.

Salvatore Vitale – Sterne, Agee & Leach, Inc.

Okay, and then just a last thing, I think it was last quarters conference call, or might have been two quarters ago, you mentioned that you are evaluating some I think you said their managed container deals, is that something that you still evaluating any news on that front?

Timothy B. Page

I mean we’re always looking at different opportunities. So there are things that we look at we consider but, sometimes as we announced where we execute on them, sometimes its just get delayed for a period of time, because the sellers not really ready to sell and or has decided to maybe wait another year to sell. So we would rather just be patient with it. And when somebody wants to sell, we would be ready for it.

Salvatore Vitale – Sterne, Agee & Leach, Inc.

Okay, it makes sense. Thanks for your time.

Victor M. Garcia

Yep.

Operator

Thank you. And our next question comes from Brian Hogan from William Blair. Your line is open. Please go ahead.

Brian D. Hogan – William Blair & Co. LLC

Good afternoon.

Victor M. Garcia

Hey, Brian.

Brian D. Hogan – William Blair & Co. LLC

Question regarding kind of the age of your fleet. You mentioned a lot of the container that were returned to you were older. Have you the age of your fleet increase, and then and not just your fleet, the industry fleet and what are your thoughts on the equipment refreshment cycle for the entire industry as we see the age of the fleet increase?

Victor M. Garcia

With the new equipment that we add on and the sale leasebacks, the number can move a little bit. But I think the industry overall and we overall are in that kind of seven-year kind of category average age and but the models. What I really find interesting though and I will answer your question regarding what we see for the shipping lines.

But when we’ve gotten back even in the weak times, we more often than not we get back the older equipment. That tells me a lot about there is a significant amount of demand that shipping lines have for the boxes. Our market I think relatively speaking is in balance. We are not in an oversupply situation. Many times the decisions to return equipment have to do with the specific conditions of the equipment or maybe the location of the equipment in conjunction with the condition of the equipment that is the decision that people have.

But I think generally speaking the market is in balance, and it’s in balance today going into 2014, which we expect should be a better demand year. When you look at the shipping line community again, my belief, I believe that they’ve largely been holding on to their equipment more moving as it more efficiently repositioning their own equipment more, when you have a slower trade growth, that gives you some flexibility to optimizes your fleet, as they optimize the fleet.

I think incrementally speaking is probably I’ve gotten a little bit older, and I think there is an element overtime of catch up. I think there is a significant amount of new production that needs to be produced simply for the fact of attrition to offset attrition. So that will be a good base line level of demand.

Timothy B. Page

I'd also add, I think one of the phenomena that you’ve seen probably in the last couple of years is that number of shipping companies have used the sale leasebacks as a strategy to raise cash for working capital, and that tends to be older equipment that gets bought by the leasing company. So it might and the surface make could look like a leasing companies, makes it look like the leasing company’s fleets are getting older. But it’s really kind of just the shifting of loans, some of the assets. And overall our own fleets is somewhere in the six year or so average age.

Brian D. Hogan – William Blair & Co. LLC

Okay, relative…

Timothy B. Page

Relatively young.

Brian D. Hogan – William Blair & Co. LLC

Right.

Timothy B. Page

It’s kind of our average age of sale is somewhere north of 13, 14.

Brian D. Hogan – William Blair & Co. LLC

Sure. And then for the, that was produced in 2013, what was the mix between leasing companies and shippers?

Timothy B. Page

Yes, the estimates that we see is right around 50-50 with the shipping lines maybe a 1 percentage point above that. I might elaborate about 50% of the production was leasing companies, or about 38% of it was shipping companies, the other 12% is other kinds of people that are not shipping companies, but who use containers. But we did see in general, shipping lines were more active last year, than they have been in prior year. And I think in part it’s because the overall demand was down, those shipping lines that are normally always by their own containers, continue to buy their own containers, so it changes the percentage. But the backdrop when I look at the shipping line community and our customers, we’re very pleased by the fact that their financial strength has improved from where we’re in 2009, 2010.

But they still have a lot of calls on the capital, there is still – it’s a very competitive business. They are still an oversupply ships, they’re investing in larger ships which are much more expensive, building alliances to try to manage that process. So there is a real need for leasing containers, there is a real demand for leasing containers. And we provide value to our customers and we think that that will continue to be – our industry will continue to be a valuable resource to our customer base.

Brian D. Hogan – William Blair & Co. LLC

Agreed. And even that leasing companies only made up 50% of the purchases on the sale-leaseback transactions would add to that. Another question regarding pricing. Are you seeing the pricing is very competitive out there? Is that across-the-board? Is that the big guys? Is that the small guys who just need to get their fleets out there, or is it…

Timothy B. Page

Well, I have a lot of respect for our competitors and we all know each other as leaders of our businesses. I think what we’ve seen is when what I would term silly transaction, overly aggressive transactions. We haven’t seen some of the major players to us and that’s encouraging because it says that people are focused on returns. We have seen companies take a step back and not just be purely market share driven. And so again that goes to a discipline in the marketplace and so we view that as encouraging, certainly we’ve done the same, we’ve invested less than I think this past year than we might have thought we could have, but we’re very focused on returns and we continue to be very focused on returns. We know pretty well based on our history what we can expect once we put equipment on our lease and we can measure what those returns are. And in some cases and many cases, we just didn’t think it was worth employing the capital.

Brian D. Hogan – William Blair & Co. LLC

One last one is on returns and capitals actually, and historically you’ve generated the 20% plus ROE. You generate a lot of capital. Book value was up 17% year-over-year, but we’ve seen the ROE drop to 15%, part of that being competitive pressures on pricing. But what is your target for an ROE? Is it 20% plus as a story that has been or is it, what do you view are we going?

Timothy B. Page

So there is a market aspect to this obviously, but when we look at our results, if I look at a 2% improvement in utilization that puts us back into close to the 20% ROE target and that’s really we want to be that’s why we’re putting a lot of focus. I can’t go into details about exactly what we are in open forum, but there has been a lot of attention on my part on make what we can do to improve our utilization. Because we think of that elimination and storage cost are getting assets back to work or selling off assets in better demand locations is an important part in getting those goals. And so we’ve really are looking for a ways of cycling our capital taking it from equipment that’s in low demand locations. And moving into high demand location.

Brian D. Hogan – William Blair & Co. LLC

Sure, thank you.

Operator

Thank you. And I am showing no further questions at this time. I would like to hand the conference back over to Mr. Garcia for any closing remarks.

Victor M. Garcia

I appreciate that. I was just, we talked a lot about the marketplace. We look at 2014, we are optimistic about the opportunities that there are in 2014. We’re very encouraged about what we see early on, we’re very encouraged about the fact that equipment is moving out. We are encouraged that we’re seeing, customers calling back to us, accepting higher rates. So it really puts a lot, there are lot of positive signs that we see that would get our momentum back in terms of what we would like the company to be reporting. And so we look forward to our next call where we can discuss a little bit further as we get more data points. But certainly we’re going into 2014 with a fair amount of optimism. Thank you.

Operator

Thank you. Ladies and gentlemen, this concludes our program for today. You may all disconnect, and have a wonderful day. Thank you.

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