CAI International, Inc. Q2 2010 Earnings Call Transcript

Aug. 3.10 | About: CAI International, (CAI)

CAI International, Inc. (CAP) Q2 2010 Earnings Call Transcript August 3, 2010 5:00 PM ET

Executives

Victor Garcia – CFO and SVP

John Nishibori – President and CEO

Analysts

Bob Napoli – Piper Jaffray

Sameer Gokhale – Keefe, Bruyette & Woods

Operator

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

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 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, container investment plans and others.

We refer you to the documents that CAI International has filed with the Securities and Exchange Commission, including its report on Form 10-K, its quarterly reports 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 second quarter earnings conference call. The market demand for our services remains very strong and we continue to benefit from this demand through increasing utilization of our fleet.

During the second quarter of 2010, our utilization increased 8.8 percentage points to 95.1% from the first quarter average utilization. Utilization increased further in July to 97.5% at the end of the month, which is effectively close to full utilization.

Considering the level of demand, our marketing team is focused on ways of improving the return we have on our existing assets and on new investment opportunities.

The second quarter of 2010, we reported earnings per share of $0.31, an increase of 63% from the $0.19 per share during the second quarter of 2009, and an 82% increase when compared to the first quarter of 2010. Our improving results and the high utilization is largely due to the improved containerized trade growth.

Since September of 2009, Clarkson Research has increased its outlook for containerized trade growth in 2010. In its July issue of Containerized Intelligence Monthly, Clarkson Research forecasts that containerized trade growth will be 10.9% in 2010, and 10.7% in 2011. We believe that Clarkson and many of our customers underestimated the level of containerized trade growth for this year, and thus containers quickly have become short on supply.

The current outlook for trade growth in 2010 and 2011 is in line with historical growth rates and indicates continued strong demand for containers over the course of this year and next. Beyond overall trade growth, we believe that shipping lines are looking to leasing companies for a greater percentage of their container needs as they focus on improving their financial flexibility and seek financing for their ship delivery needs.

Because of the strong demand, we are increasing our expected investment level for 2010 to approximately $200 million and we would expect those assets to be largely committed on long-term leases prior to delivery.

The high demand and improving utilization have meant that lease rates for equipment being newly leased have increased materially and are above the historical average, both for newer and older equipment, improving overall yield on our assets.

Our container rental revenue of $14 million during the second quarter has increased by 13% over the same figure during the first quarter of 2010, and we expect continued sequential revenue improvement as we purchase additional containers and operate it in a highly utilization environment.

Secondary prices of containers have also increased over the past three months due to the shortage of containers worldwide, resulting in our gain on disposition of containers increasing 76% to $2.5 million compared to $1.4 million in the first quarter. Gain on disposition increased despite a decrease in two TEUs sold in the second quarter as compared to the first quarter of 2010.

During this quarter, we sold approximately 7,500 TEUs of containers to investors in Asia with our subsidiary CAIJ acting as the arranger of the fund. Our personal in Asia have been actively developing the investor base for container funds in that region and we expect future sales being generated by our team.

We also continued to talk to container arrangers in Europe. Based on the improving outlook for container shipping lines and returns for container investment programs, we expect European investors to consider container funds in the coming months.

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

Victor Garcia

Good afternoon. Earlier today, we reported 2010 second quarter net income of $5.7 million, or $0.31 per fully diluted share on an average share count of 18.1 million. This compares to net income of $3.3 million or $0.19 a share for the second quarter of 2009, with an average fully diluted share count of 17.9 million.

Total revenue for the second quarter was $17.4 million, an increase of $700,000 from the total revenue for the second quarter of 2009. Container rental revenue was $14 million during the second quarter, compared to $13.5 million in the second quarter of 2009, and $12.3 million in the first quarter of 2010. The container rental increase over the comparable period is due to increasing utilization of our fleet and the additional investment in containers made during the first six months of 2010.

Management fee income during the second quarter was $2.5 million, compared to $2.1 million in the second quarter of 2009. Management fee income increased due to improved financial performance in our managed portfolios and from management fees earned by our subsidiary CAIJ.

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

During the quarter, we reported a $348,000 gain on the sale of some older assets to an Asian fund. This gain is compared to a gain of $497,000 during the second quarter of 2009. The container portfolio sales we have completed over the past 18 months have been arranged through our efforts in marketing to Asian investors.

We have not completed any sales to European investor groups, which historically have comprised the majority of our container fund sale. However, we continue to speak to arrangers of container funds and believe that as performance improves for the shipping industry and container leasing funds, there will be incremental interest in new container programs.

Our total operating expense during the second quarter of 2010 was $9.8 million, compared to $11.2 million during the second quarter of 2009. Storage and handling costs decreased approximately $663,000 as compared to the second quarter of 2009, as a result of the lower number of off-hire units this past quarter.

MG&A was $5.5 million, an increase of approximately $750,000 compared to the level in the second quarter of 2009. The increase was primarily due to a bad debt reserve we recorded against a customer account receivable. Depreciation was $4.5 million, up slightly from the compared figure of $4.2 million during the second quarter of 2009 as a result of some of the recent investments made in containers.

During the quarter, we recorded a foreign exchange loss of $230,000 due primarily to a revaluation of assets and liabilities of our European subsidiary. Most of our assets and revenue is dollar-based, but we have some revenue and assets recorded in euros in British pound.

Gain on disposition of containers was $2.5 million, was $1.9 million above the comparable month in the second quarter of 2009. Selling prices on older containers have increased over the most recent quarter and we recorded larger gain on the sale of assets. Our gain this quarter exceeded the $1.4 million gain on disposition recorded in the first quarter 2010, despite our selling fewer units.

Net interest expense was $875,000 for the second quarter of 2010, which represents a decrease of approximately $172,000 when compared to the second quarter of 2009. We continue to benefit from the low floating rate interest environment that prevailed throughout the quarter.

As to income taxes, we reported an effective tax rate of 14.6% for the second quarter due to increasing proportion of profitability coming from our international operations. It is our current expectation that the effective tax rate in 2010 will be approximately 17.2% for the year. This is a lower expected tax rate due to our current expectation of increasing contribution of profitability coming from our international subsidiaries.

Net income for the three months ended June 30, 2010 was $5.7 million, compared to net income of $3.3 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 from Piper Jaffray. Go ahead. Your line is open.

Bob Napoli – Piper Jaffray

Good afternoon, guys. Question I guess on the – if you look at the third quarter versus second quarter sequential growth of container rental revenue, did you have drop off fees in the second quarter? Could you give some color on maybe what container rental revenue was in July? How much of a ramp up do you expect in 3Q?

John Nishibori

I expect a similar ramp up that we saw from first quarter to second quarter, and possibly more. We are quite optimistic.

Bob Napoli – Piper Jaffray

Were you affected by drop off fees in the second quarter? A reduction in –

Victor Garcia

We haven’t had very much in terms of drop-off fees. That was a factor for us in the first quarter.

Bob Napoli – Piper Jaffray

Okay.

Victor Garcia

It’s not that we are getting more drop-off fees, we have experienced fewer drop-offs. And as you can see by the increasing utilization of our fleet service has more to do with the improved lease rate environment that we are seeing with the equipment that’s falling on lease and the higher utilization.

Bob Napoli – Piper Jaffray

Can you give a feel for how much lease rates are up on new equipment and on used, I guess, on rollovers when your pricing –

John Nishibori

Yes, let me start with the rollovers.

Bob Napoli – Piper Jaffray

Okay.

John Nishibori

It just means with the rollovers when the market is strong, the discount is not as steep as in other months or other times of the year. It’s very seldom that we see actual increase in the rollover lease rate after five years. So as far as rollovers are concerned we are seeing minimal discounts or much lower discounts for the next three years. As far as new containers are concerned, it has consistently increased from the first quarter to second quarter and now the container prices are approximately 27.50 [ph], and with the new leases we are – the market going rate is about 15% cash on cash, sometimes even higher.

Bob Napoli – Piper Jaffray

Okay. Then on the CapEx going from $100 million to $200 million, is that a conservative estimate or is that kind of where it would –?

Victor Garcia

That’s pretty much I think what we like to do. I think we are well on our way to meeting that target. So by the end of this year we should have invested about $200 million or even a little bit more than that.

Bob Napoli – Piper Jaffray

Okay. Then have you seen any additional competition coming into the market on the leasing side? What are you seeing on the competition front?

John Nishibori

We haven’t really seen any kind of a significant newcomer. The other side is we have seen several smaller leasing companies having kind of disappeared. They’ve been acquired in terms of management rights – giving management rights to other competitors of ours and so forth. So I think the playing field, the number of players in it has declined.

Bob Napoli – Piper Jaffray

Okay. Last question, I’ll get back in queue. They do have other questions. The improvement in the tax rate this year, 17%, I guess, last year it was 22% tax rate. Do you have kind of – would you expect that level of an improvement in 2011 and kind of bottom out in 2012?

Victor Garcia

We have run off the assumption that our tax rate would decrease 4 percentage points to 5 percentage points each year based on some forecast that we’ve done in terms of investment that we would make in our overseas subs. I think we still believe that that’s a reasonable estimate and we would see ourselves getting down to the very low single digit – inside double digits. So it’s still around 10%, 11%.

Bob Napoli – Piper Jaffray

As a trough?

Victor Garcia

As a trough.

Bob Napoli – Piper Jaffray

As a long-term rate. Okay. Great, thanks. I’ll get back in line.

Operator

Thank you. (Operator instructions) Our next question comes from Sameer Gokhale of KBW. Go ahead. Your line is open.

Sameer Gokhale – Keefe, Bruyette & Woods

Hi, thanks. In terms of purchasing containers, you gave updated guidance for the year. Can you remind me again how much you’ve spent through the first half of this year?

Victor Garcia

I would say – I can say that we are well on our way to attaining the $200 million target that we have set for this year.

Sameer Gokhale – Keefe, Bruyette & Woods

Okay. In the first quarter, I think, in your disclosure, it’s something like $33 million odd or something, $35 million. So I was just hoping to get more detail on this –

Victor Garcia

We already somewhere in probably a little over $100 million.

Sameer Gokhale – Keefe, Bruyette & Woods

Okay. That’s helpful. Thank you. Then the other question is as far as the sale of these containers where you are selling them and then managing them going forward because there is more investor interest. The sale price for those containers – is the sale price there comparable to what you would have gotten, say, where you to do similar sale on an arm’s length transaction with like an unrelated third party or do you expect maybe a slightly lower sale price because then going forward you will be receiving a management fee. How do you really start to think about the sale price relative to current market price list?

Victor Garcia

Usually, the sales price reflects the market price at that time, but it also depends on the total project or the total deal. But under normal circumstances it’s pretty much at market. We would normally tack on with new containers. We would tack on a trading income over that. So I would say market price plus whatever trading profit that we would like to realize upfront.

John Nishibori

Just to clarify the point, we are selling on arm’s length basis to third parties. (inaudible) in Asia we have arrangers who are employees of the company who are putting the deal together. The prices are based on what – and third-part arm’s length transactions are. So it’s not that we are selling to our own subsidiary.

Sameer Gokhale – Keefe, Bruyette & Woods

Okay. Yes, that’s helpful. I am just wondering – the reason I was asking was it was kind of within the context of the thought process of profitability of containers sold versus managing the containers, and I think you’ve talked in the past, some estimates say, owning the containers is three times more profitable than managing. And in the current environment where lease rates have increased so significantly, is it not still better to manage – to own the containers rather than sell them? Has that dynamic changed at all based on the current market price and market dynamics?

Victor Garcia

No, we like to keep the same kind of ratio of managed versus owned containers, at least 30% to 40% owned and the balance being managed. This is just, I believe, good balance sheet management. We just like to have a diversification in the risks.

Sameer Gokhale – Keefe, Bruyette & Woods

Then, as far as your structure of the leases go, I know some companies in your sector favor – at least the privately owned ones – favor finance leases over operating leases. And the idea behind that is that there is less residual risk. In this kind of environment, would you say there is less of an appetite toward finance leases compared to operating leases? Is that something you’ve considered expanding more into doing more of the finance type leases given the lower residual risk or how do you think about that?

John Nishibori

I think what you’ve said is true. When we do an operating lease, we’re always taking on a residual risk. But we feel very comfortable with that kind of risk. As far as the finance leases are concerned, you are correct; it’s just a matter of credit risk of the customer. Mathematically speaking, however, if you want to show quick income during the life of the lease the finance lease tends to have a higher profitability during the beginning years, whereas the operating lease, you start off at a low but then in the latter five years or so we would realize a much higher profit. So overall, the operating lease does tend to produce, in aggregate, larger income than finance leases.

But again, it all really depends on what the customer wants. And we go with whatever the customer requires. We are not against putting on finance lease or vice versa. We would do whatever the customer wants.

Sameer Gokhale – Keefe, Bruyette & Woods

Okay, thank you. Then just my last question, we talked a little bit about balance sheet management earlier. But in terms of paying a dividend, at what point would you consider paying a dividend? I know your competitors already do that. You seem to have an under-levered balance sheet and you are going to grow your assets and presumably grow leverage as well. But is there a point which you would feel that paying a dividend makes more sense than having this under-levered balance sheet? How do you think about that currently?

Victor Garcia

Currently, we have no plans. But there would be something that we will be looking at in the future. But right now our total fleet is about 800,000 TEUs and we are still in a fast-growth mode. So we have not really thought about dividends at this time. But again, once our fleet does mature and become much larger than where we are today, that is certainly something that we would have to consider.

Sameer Gokhale – Keefe, Bruyette & Woods

Okay, well, thank you very much for your commentary. I appreciate it.

Victor Garcia

Great.

Operator

(Operator instructions) Mr. Garcia, at this time I’m showing no further questions. I would like to turn the call back over to you for any closing remarks.

Victor Garcia

Okay. Thank you very much for attending our call and we look forward to having our next call for the third quarter. Thank you.

John Nishibori

Thank you.

Operator

Ladies and gentlemen, thank you for your participating in today’s conference. This concludes the program. You may now disconnect. Have a great day.

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