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CAI International Inc. (NYSE:CAP)

Q1 2010 Earnings Call

May 4, 2010 17:00 PM ET

Executives

Victor Garcia – Chief Financial Officer

John Nishibori – President and Chief Executive Officer

Analysts

Bob Napoli - Piper Jaffray

Sameer Gokhale – KBW

David Long – William Blair

Operator

Good day, ladies and gentlemen. And welcome to the CAI International First Quarter 2010 Earnings 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 call is being recorded. I would now like to introduce your host for today’s conference, Mr. Victor Garcia, Chief Financial Officer. Sir, you may begin.

Victor Garcia

Great. 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 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, utilization rates, economic conditions, customer demand, increased competition, investment plans 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 and quarterly reports filed on Form 10-Q, and its reports on Form 8-K.

These documents contain additional important factors that could cause actual results to differ from current expectations and from forward-looking statements contained in this conference call.

I would now like to introduce John Nishibori, our President and Chief Executive Officer. John, please go ahead.

John Nishibori

Thank you. Welcome to CAI’s 2010 first quarter earnings conference call. As I indicated in last quarter’s conference call that was held in March, the demand for containers has significantly increased in 2010.

February had strong lease out demand and that was followed with continued strength in demand in March and April. We expect this strong market to continue at least for the rest of this year.

For the first quarter of 2010, we reported total revenue of $15.2 million and net income of $3 million or $0.17 a share.

Overall, the outlook for world containerized trade continues to improve and is reflected in our improving fleet utilization. Utilization of our container fleet has increased 4.4% from the fourth quarter of 2009 to 86.3% in the first quarter of 2010.

Customers are leasing containers with limited incentives in all locations and per diem rates have increased for new lease outs for depot and newly manufactured equipment as a result of strong demand and higher container prices.

Clarkson Research in March forecast that world containerized trade will grow 7.5% in 2010, and 9.5% in 2011. The 2010 growth forecast in March was compared to a 5.5% growth forecast in February.

Our bookings for future lease outs remain strong and we expect our fleet utilization to continue to increase over the next several months. As of April 30, 2010, our utilization had increased to 92.9% and approximately half of our idle equipment are booked for pick-up.

Because it’s a strong demand for containers, we have increased investment in equipment. We have ordered 32,000 TEU’s of new equipment, most of which is due to be delivered in the second quarter. We have also entered into sale lease back arrangements for some shipping lines.

On March 25, 2010, we purchased 39,000 TEU’s of containers from a major Asian shipping line and leased them back to them for up to four years. Similarly, on April 15, 2010, we purchased 7,100 TEU’s of containers from a major European shipping line and have leased the units back to them on a five-year lease.

All together, the new containers and sale lease back containers represent a total investment commitment of $88 million during the first four months of this year and we believe this will result in a significant increase in container rental revenues for the rest of the year.

Besides the increase in revenue, the financial impact of improving utilization is that our storage costs will decline as depot inventory is leased out, thus improving our operating income and net income margins.

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

We continue to speak with arrangers for container fund investments about new investment funds in Europe and we believe that as the outlook for container demand continues to improve that arrangers will be looking for new investment opportunities.

We also continue to focus on establishing container investment programs in Japan and our team continues to make good inroads in establishing additional investment programs. This effort is being done through our subsidiary, CAIJ.

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

Victor Garcia

Thank you, John. Earlier today, we reported 2010 first quarter net income of $3 million, or $0.17 per fully diluted share on an average share count of 18 million shares. This compares to net income of $4 million or $0.22 a share for the first quarter of 2009, with an average fully diluted share count of 17.9 million.

Total revenue for the first quarter was $15.2 million, a decrease of $2.4 million from the total revenue for the first quarter of 2009. Container rental revenue was $12.3 million during the first quarter, compared to $14.1 million in the same quarter last year. The container rental revenue declined as a result of operating a smaller average owned fleet this past quarter, compared to the same quarter last year.

Further, we continued to dispose the older assets in the first quarter and most of our new investment in containers will have an economic effect in the second and third quarters of 2010.

Management fee income during the first quarter was $2.2 million, compared to $2.5 million in the first quarter of 2009. As John stated, management fee income should improve in the coming quarters as a result of improving performance of our managed container fund.

Our managed container purpose have been experiencing improved utilization, which is increasing revenue and reducing storage costs, thus improving profitability for the fund. We receive a percentage of the fund’s income as a management fee.

During the quarter, we had a $266,000 gain on the sale of some older assets to an Asian fund. The gain this quarter is comparable to the gain in the first quarter of 2009.

As John mentioned, we continue to speak with arrangers of container funds and believe that as performance improves for the shipping industry and container leasing funds, there will be incremental interest for new container programs.

Our total operating expense during the first quarter of 2010 was $10.5 million, compared to $10.7 million during the first quarter of 2009. Storage and handling costs increased approximately $481,000 as compared to the first quarter of 2009 as a result of the number of -- the higher number of off-hire units this past quarter.

We expect storage and handling costs to decline in the coming quarters as a result of the higher utilization we are currently witnessing.

MG&A, which was $4.9 million, unchanged compared to the level in the first quarter of 2009. Depreciation was $4.2 million, down slightly as compared to the $4.4 million during the first quarter of 2009 as a result of operating a slightly smaller owned fleet.

Gain on disposition of container was $1.4 million, a $630,000 gain above the comparable amount in the first quarter last year. On average, we sold 63% more TEU this past quarter from our own fleet as compared to the first quarter of 2009.

Net interest expense was $825,000 for the first quarter of 2010, which represents a decrease of approximately $473,000 when compared to the same level last year.

We continue to benefit from the low floating rate interest environment that prevailed through most of the quarter. After income taxes, we reported an effective tax rate of 21.6% for the first quarter due to the increasing proportion of profitability coming from our international operations. It is our current expectation that the effective tax rate in 2010 will be approximately 21.6%.

As I stated earlier, net income for the three months ended March 31, 2010 was $3 million, compared to net income of $4 million for the comparable period in 2009.

Operator, please open the line for questions.

Question-and-Answer Session

Operator

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

Bob Napoli - Piper Jaffray

Good afternoon.

John Nishibori

Hi.

Victor Garcia

Hi, Bob.

Bob Napoli – Piper Jaffray

It looks like you’re rebounding faster than you fell, I guess, as an industry. It’s pretty amazing. Just a question, I guess, on operating leverage, operating expenses. As you’re adding, essentially the $88 million investment is almost a 33% increase in the balance sheet investment that you have currently. Would you expect -- how much would you expect operating expenses need to increase from current run rate levels to manage the containers you’re putting on?

Victor Garcia

In terms of overhead?

Bob Napoli – Piper Jaffray

Yeah.

Victor Garcia

Really, none.

Bob Napoli – Piper Jaffray

Okay.

Victor Garcia

All of these units are on long-term lease and there’s no proportionate increase in overhead.

Bob Napoli – Piper Jaffray

So we should see margins expand pretty quickly as you start getting the benefits from the new containers?

John Nishibori

Yeah. And you will have an increase in the interest rate, interest costs.

Bob Napoli – Piper Jaffray

Right. Yeah, of course.

John Nishibori

$88 million multiplied by whatever it is as a funding cost -- costs.

Bob Napoli – Piper Jaffray

Correct. The pricing, how much is pricing going up and I know it takes a while to work through the portfolio, but how much have prices increased?

John Nishibori

Well, for new containers, it’s in direct proportion to the increase in container price. During the first quarter, container prices were approximately $2,000 or even less. Now, it’s going for about $2,400 or even $2,500, and the per diems corresponding to the new containers has increased proportionately.

At the same time, that increase in new container per diems will filter through into the short-term rates as well as the renewal rates of existing long-term leases but that’s going to take some time to filter through.

Bob Napoli – Piper Jaffray

Are the renewal rates, John, are they up that 20% to 25%?

John Nishibori

It is getting the discount that we have to give on renewal rates is shrinking.

Bob Napoli – Piper Jaffray

Okay.

John Nishibori

But again, we don’t have renewals every day.

Bob Napoli – Piper Jaffray

Sure. With as many containers you have, you have quite a few renewals.

John Nishibori

In addition to that, it has the impact of increasing secondary prices, which is also good news for us.

Bob Napoli – Piper Jaffray

Just, debt capacity currently and so I forget, how much do you have available on the line and would you need -- are you looking to expand the line?

Victor Garcia

We’re going to be -- right now for our investment plans, we have sufficient line availability for what we need to between our own cash flow and what we have left. At the end of March, we had $151 million outstanding and a $290 million line. So roughly $140 million is available under the line. So we don’t think we need to raise additional funds, but we will be looking at other facilities as the markets continue to improve on the financing side.

Bob Napoli – Piper Jaffray

Last question. The KG funds and the Japanese funds, how real is that? Is that more likely 2011 or do you think -- are you getting to the point where you’re getting comfortable where you could have some utilization of those funds in the back half of this year?

Victor Garcia

In the discussions we’ve been having with some of the arrangers, I think we’re growing more confident that there may be some opportunities in the back half of this year to do something. Certainly, as we get into 2011, our confidence will even increase further.

Bob Napoli – Piper Jaffray

Thank you.

Victor Garcia

Sure.

Operator

Next question comes from Sameer Gokhale of KBW.

Sameer Gokhale – KBW

Hi. Thank you. Just a few questions. The first one was, John, in your comments and in the release also there’s a reference to the decreased drop-off fees, which seems consistent with an increase in utilization rates. Have you broken those out? I may have missed it in the release but can you break out the dollar amount of the drop-off fees this quarter versus last quarter and, say, versus the same quarter last year?

John Nishibori

I don’t have the exact numbers off-hand but we can get back to you on that. But it’s not…

Sameer Gokhale – KBW

Okay.

John Nishibori

…. a very large amount. It’s not just the drop-off fees. There are all kinds of other ancillary revenues and fees and et cetera. So I’ll have to show you the entire breakdown to show you.

Sameer Gokhale – KBW

Yeah. If that’s possible at some point, that would be helpful because I was just trying to look at the sequential decline in the container rental revenue and I was reconciling that to the significantly improved utilization rates. Obviously, there are bunch of different moving parts. It would just be helpful to see what those moving parts are just so we could model out the revenue number a little better.

John Nishibori

Okay. But financially speaking, however, the impact of this fantastic market condition is not completely reflected in the first quarter results. This whole thing, this surge in demand and the market improvement really started occurring in February and during the first quarter, we still have remnants of lower per diems or discounts that we had to give during 2009 in order to keep the containers all leased rather than being dropped off.

So we had remnants of that. It didn’t start until February. And also, the large investments we made in the sale lease back really didn’t occur until the end of the quarter and another one after the quarter ended.

As far as the new container orders are concerned, yeah, we have something in the tune of about $60 million on order, but it takes time for those containers to be built and delivered to us so then it will start earning revenue.

And obviously, if we ordered in first quarter it wasn’t going to be delivered in the first quarter. It is being delivered now during the second quarter and I think we will see the full impact of these revenue increases probably in a month, for sure in the second quarter and third and fourth quarter for the rest of the year.

Sameer Gokhale – Keefe, Bruyette & Woods

Okay.

John Nishibori

But the first quarter it didn’t really show that.

Sameer Gokhale – Keefe, Bruyette & Woods

Yeah. That’s very helpful commentary. And then in terms of the storage and handling costs, Victor, you eluded to maybe having some lower storage and handling costs going forward and that, again, seems consistent with the increase in utilization rate. But how should we think about it from a modeling standpoint?

The run rate now is a couple of million bucks a quarter. I went back and looked at your, say, the ‘05, ‘06, ‘07 period when utilization rates were very high. Of course, you had a lower fleet then, but if I try to extrapolate from the data points, are we looking at an ‘11 annual run rate in storage and handling costs in the $6 million or so range? Does that sound reasonable?

Victor Garcia

Somewhere around there -- $5.5 million to $6 million.

Sameer Gokhale – Keefe, Bruyette & Woods

Okay. That’s also very helpful. And then this last question is just more from a curious standpoint. The sale lease back you did with the large Asian carrier, it looks like those containers were fairly old and was there a specific reason for that? Or was it just the case where those are older containers, so the carrier just said it’s easier to do a transaction with you guys and the once the agreement expires it would be easier for you guys to just dispose of the containers in whatever way we saw fit? Is that the reason why or was there any other reason?

John Nishibori

Yeah. The reason why they did it was first, they needed the liquidity. That’s the primary reason. And the reason why we did it is because we saw a real profitability in the deal. The per diem itself is not that high.

But with most of these sale lease backs, which are really at the tail-end of a container’s life, we have the opportunity upon drop-offs to sell that in the secondary market. And we saw the secondary market improving and we felt that there was a very significant profit potential at the end of these leases and that is why we did it.

Sameer Gokhale – Keefe, Bruyette & Woods

Okay. That’s very clear. Thank you very much.

Operator

(Operator Instructions) Our next question comes from David Long of William Blair.

David Long – William Blair

Good afternoon, guys.

Victor Garcia

Hi, David.

John Nishibori

Hi, David.

David Long – William Blair

Going back to that last point regarding the strong secondary market and the profitability you saw on the sale lease back containers, does that mean that the -- if I’m looking at your fleet and the containers on the sale lease back, would those be running less profitable right now than the rest of the fleet?

John Nishibori

In terms of per diems…

David Long – William Blair

Correct.

John Nishibor

They are a much lower rate, but…

David Long – William Blair

Okay.

John Nishibori

The price of these containers are much lower.

David Long – William Blair

Right. Okay.

John Nishibori

Sure. A new container at this moment.

David Long – William Blair

All right. Okay. And then just to clarify the comment that you just made, also, on the containers on order to be delivered. Did you say there were $60 million of containers on order right now to be delivered expected in the second quarter?

John Nishibori

$59 million, totaling 32,000 TEU’s and they’re just starting to be delivered.

David Long – William Blair

Okay. And then, you guys did record a gain on sales of containers to investors this quarter. How many containers were sold in the quarter and where were those sold?

John Nishibori

That was in Japan.

David Long – William Blair

Okay.

John Nishibori

And I don’t know exactly what the TEU number was. Just a minute, we may have that number.

Victor Garcia

So, it was about 4,900 TEU’s of containers.

David Long – William Blair

Perfect. And then last one on the containers sold in the secondary market, do you have a number there as well?

Victor Garcia

About 10,000 TEU’s.

David Long – William Blair

Okay. Great. Thanks, guys.

Operator

(Operator Instructions) I’m not showing any further questions. Would you like to continue with any further remarks?

John Nishibori

Well, thank you for your continued interest in our company and we look forward to speaking with you at our next earnings call. Thank you.

Operator

Thank you. Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program. You may all disconnect. Everyone, have a great day.

John Nishibori

Thank you.

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