CAI International's (CAP) CEO Victor Garcia on Q2 2014 Results - Earnings Call Transcript

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 |  About: CAI International, Inc. (CAI)
by: SA Transcripts

CAI International, Inc. (CAP) Q2 2014 Earnings Conference Call July 29, 2014 5:00 PM ET

Operator

Good day, ladies and gentlemen and welcome to the Q2 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference is being recorded.

I would like to introduce your host for today’s conference, CFO, Tim Page. Sir, you may begin.

Tim Page - Chief Financial Officer

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 our 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. Finally, we remind you that the company’s views, expected results, plans, outlook and strategies as detailed in this call might change subsequent to this discussion. If this happens, the company is under no obligation to modify or update any of the statements the company made during this discussion regarding its views, estimates, plan, outlook or strategies for the future.

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

Victor Garcia - President and Chief Executive Officer

Thanks, Tim. Good afternoon and welcome to CAI’s second quarter 2014 conference call. This quarter, we have reported a revenue increase of 4.4% from the second quarter of 2013 and rental revenue increased over the same period by 6.4%. For the quarter, we have reported $13.4 million of net income or $0.60 per fully diluted share. Included in the results was a $600,000 non-recurring, non-cash tax charge. Excluding this one-time expense, our net income attributable to CAI common shareholders was $14.1 million or $0.63 per fully diluted shares.

During the second quarter, we experienced increased demand for both new units and depot units. This past quarter, we leased out 68,000 CEU of containers, 31,000 of which were newly manufactured units. Most of the lease out activity occurred in the latter part of the quarter, the benefits of which will be more significant in the third quarter. With our marketing efforts, our utilization has continued to improve. And at the end of the second quarter, our fleet utilization was 92.1%, 1.4% higher than at the beginning of the quarter. The utilization of our total fleet is currently 92.4% and of our own fleet, utilization is 93.7%.

Our profits this quarter are lower than the same period last year due primarily to lower gains on sale of equipment and higher storage and handling costs. Our storage and handling costs have risen by $800,000 from the first quarter level to $6.8 million due to a couple of reasons. As we have been increasing our lease out activity, we have incurred handling costs at the depots to get the units to customers. This is an initial expense to have the units on lease. The other reason is that during the quarter we have focused on repositioning equipment to higher demand locations or to locations where we can achieve a better sales price.

We expect to continue focusing on getting units repositioned or sold, which means we will have some continued incremental expense related to those activities. However, our storage costs are coming down as a result of having fewer units in the depots and that will benefit us overall in the third quarter. Although demand has been stronger in the second quarter, we continue to see an aggressive pricing environment on new equipment. As such, we have been more selective in our investment in new containers and have tried to remain disciplined in our pricing and customer strategy. We expect demand for containers to remain strong in the third quarter and we will continue to find some attractive opportunities for investment.

We are excited about the continued development of our rail business. During the quarter we have committed to purchase 750 railcars for a total investment of $65 million. Most of these cars are used to move sand to serve the U.S. construction and energy markets. As a result of the growing activity in these markets we believe demand for these cars will continue to be strong and long-term. We have a number of customers interested in the cars and have ordered – I am sorry the cars we have ordered and are confident that we will be able to place the cars prior to delivery on long-term multi-year leases at attractive breaks.

The overall rail market remains very strong and we are looking for continued investment opportunities in both new and used railcars. We currently have projects in place to purchase and upgrade over 400 used railcars to be placed on 3 to 7 new leases. We are in specific discussions with certain lessees for these cars and expect these cars to be placed on these over the remainder of the year. We continue to look for additional use of railcars both on lease and off lease to purchase. However, because demand is currently very strong for rail assets there are fewer cars available.

During the quarter we have actively engaged in repurchasing our shares which we believe provides an attractive investment opportunity for our shareholders. Since the end of the first quarter we have repurchased 1.1 million shares or roughly 5% of the shares outstanding for approximately $24.9 million. We think that the long-term outlook for our business remains very positive and we expect to purchase additional shares depending on market conditions. Our outlook for the remainder of the year is for improvement in our profitability as well as benefit as we benefit from improved utilization and the leasing of additional equipment. Although we expect demand to be strong for the remainder of the year we also expect pricing our new containers to remain aggressive and so we will continue to focus on opportunities that meet our return thresholds across our entire company.

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

Tim Page - Chief Financial Officer

Thank you, Victor and good afternoon everyone. Earlier today we reported our 2014 second quarter results, was the 17th quarter in a row we achieved record quarterly total lease related revenue. Total lease related revenue in the quarter was $54 million, 6% higher than the second quarter of 2013 and was slightly higher than the first quarter of 2014. In the quarter total revenue was $55 million, 4% higher than the second quarter of 2013, 2% higher than the first quarter of 2014 reflecting the impact of incremental new equipment that was picked up during the quarter and an improving utilization.

Net income attributable to CAI common stockholders in the second quarter of 2014 was $13.4 million, $3.5 million or 21% less than the second quarter of 2013 and $0.8 million or 6% less than Q1 of 2014. Several factors impacted profitability in the quarter. First as mentioned in our earnings release and by Victor in his comments, while there is demand from a volume perspective in the market, pricing remains very competitive. Consequently the new equipment that is lease out has a lower contribution margin than you would have seen in other years.

Second factor impacting net income in the quarter was storage and handling expense. Even though we had a strong quarter from a lease out volume perspective, we didn’t realize the corresponding drop in storage and handling expense. We think a good deal of this is timing related and we do see positive indicators that the initiative we have began implementing last fall are beginning to produce some results. Most of the depot lease out activity incurred late in the quarter as a result we were incurring storage expense on this equipment for most of the second quarter, same thing to be said for sales activity. We sold approximately 40% more TEUs this quarter than last quarter and approximately 165% more than the second quarter last year.

As with lease outs in the quarter the sales activity accelerated as we moved through the quarter, but we didn’t get the full impact of the reduction in our off-hire fleet in the quarter. Storage expense accounts for about half of the total expense in this quarter in this category. Things like handling expense, maintenance and repositioning costs make up the bulk of the remaining expenses in this category and were higher than previous quarters. During the quarter we had increased repositioning costs as we actively moving equipment to favorable lease out markets and the increased level of depot and factory lease out activity we saw in the quarter has handling expense associated with it, which even though most of it’s build back to customers does temporarily drive up the absolute dollar value of handling expense.

Looking ahead to the third quarter, we did see a reduction in the run rate storage expense in June and would expect the continuation of that trend in the third quarter. And we believe the repositioning costs we are incurring will provide long-term benefit as moving equipment to strong lease out markets should ultimately increase revenue and reduce storage expense.

Finally, net income in the quarter was impacted by non-recurring, non-cash charge related to deferred taxes that impacted the bottom line by $0.6 million or about $0.03 per share. We have been seeing an encouraging steady trend in our utilization over the past couple of months. Our total fleet utilization at the end of the second quarter on a CEU basis improved to 92.1% as compared to 90.7% at the end of the first quarter. As of yesterday, utilization had further increased to 92.4%. Our effective tax rate in Q2 was 12.7% as compared to our Q1 tax – Q1 2014 effective tax rate of 9%. As mentioned earlier, our tax rate in the quarter was negatively impacted by non-recurring, non-cash deferred income tax charge. We expect our overall tax rate for the balance of 2014 to return to the 9% level we saw in the first quarter of 2014 and should slightly decrease in subsequent years.

As of June 30, 2014, our total container fleet consisted of approximately $1.2 million CEU, an increase of 3% as compared to the second quarter of 2013 and 1% more than Q1 of 2014. CAI’s own fleet is now $0.9 million CEUs comprising 80% of our total fleet. Our owned fleet grew 8% over the past year and 3% as compared to the first quarter of 2014. We ended the second quarter of 2014 with proximately $1.5 billion of container revenue assets at approximately $80 million of railcar assets.

During the second quarter, total purchases of equipment were approximately $87 million. Year-to-date capital expenditures are $158 million, of which approximately $20 million was the payment of equipment that has been delivered in 2013. Railcar acquisitions accounted for roughly 5% of our equipment purchases so far this year. At the end of the second quarter of 2014, we have total fund to debt of $1.2 billion and approximately $500 million of availability in various credit facilities. Our debt to tangible net worth leverage ratio was 2.88%.

As mentioned in our earnings release, yesterday we closed an amendment to our rail revolving credit facility with a group of banks that extended the term for another five years to increase commitments to $250 million from $85 million and reduced our average borrowing costs by 50 basis points, a 50 basis point reduction based on current outstanding amounts to an approximate $0.3 million annual decrease in interest expense. Last Friday, we also closed an amendment to one of our term loan facilities, which reduced our borrowing costs by 37.5 basis points. Over the next 12 months, we should see about $0.4 million reduction in interest expense as a result of this amendment.

In conclusion, while our operating results for this quarter didn’t meet our expectations, we do see a number of positive trends. Solid new equipment lease out volumes in the second quarter and an expectation of the continuation of new equipment lease outs through the third quarter should raise the top line. We should also get some revenue momentum from a continuation of improvement in our utilization. The trend in storage expense is moving in the right direction as utilization has improved. And we are reducing expense by repositioning equipment and increasing the velocity of sale of used equipment. Our effective tax rate for the balance of the year should return to the 9% level. All of these items should provide a balance against a competitive yield environment we are currently experiencing and should result in some positive earnings momentum in the coming quarters.

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

Question-and-Answer Session

Operator

Yes, sir. (Operator Instructions) Our first question comes from Mr. Gregory Lewis of Credit Suisse. Your line is open.

Gregory Lewis - Credit Suisse

Yes, thank you and good afternoon, guys.

Victor Garcia

Hi, Greg.

Gregory Lewis - Credit Suisse

So victor, could you talk a little bit about how the railcar business is evolving I mean clearly we are securing the additional debt capacity to build out into the railcar business, I mean clearly something has changed where this is starting to become a little bit more important to the company and you sort of just provide a little bit of an update on that?

Victor Garcia

Sure, you are right, we have been looking at the railcar segment and have been involved with it for over two years now. And with that we have focused on where we wanted to continue to expand. And although we have actually have good momentum on two front and since we feel comfortable and have really gained kind of a market acceptance of CAI as a provider of railcar assets. And customers are receptive both to what we are trying to do on giving some used equipment as well as some new equipment. So we are looking really looking at as an opportunity for investment and returns and yields. With the additional staff that we added in the years of experience we have in the company now with customers, we feel confident about expanding what we are doing and what we have seen is real resurgence occurring in the U.S. railcar market driven in great part by the need for railcar assets for the energy market, a lot of sand that’s being carried to a lot of these energy deposits. But in general, I would say that the growth in the U.S. economy and the demand for different types of commodities, we have seen a real tightening of the marketplace and the returns that we are seeing are improved as we are looking at these new investments. So it is becoming a more significant area of focus for us and we will continue to look at where we can put more capital on long-term leases. Our objective is to be looking at multi-year leases.

Gregory Lewis - Credit Suisse

Okay, perfect. And then just, I mean, clearly the second quarter was somewhat impacted by the decision to sort of longer term get utilization higher by positioning boxes from less attractive areas and you alluded to that impacting the third quarter as well, is there any sense for how far along in the process we are of having this play out and is – and should we expect that to be finished in the third quarter is this something that is actually going to be more of a multi-quarter process just given location of some of the boxes?

Victor Garcia

It’s a – I think it’s a multi-quarter process because it’s really somewhat dependent on what we see as the strength in the overall demand environment, although demand has clearly increased from the first quarter to second quarter, it has largely been defined by incremental demand coming out of China. And so we haven’t seen the expansion that we would normally expect across a number of other regions. And so as we have kind of worked through that, it’s going to be a gradual process. We do think we will have steady improvement and we are looking we are very focused on every aspect of our business of right from pricing of leases to how all parts of our contract and how we manage our relationships with our customers, but it’s not – it’s just an ongoing refinement of trying to improve results.

Gregory Lewis - Credit Suisse

Okay, guys, that’s perfect. Thank you very much.

Operator

Thank you. And our next question comes from Kevin Sterling of BB&T Capital Markets. Your line is open.

Kevin Sterling - BB&T Capital Markets

Thank you. Good afternoon Victor and Tim.

Victor Garcia

Hi, Kevin.

Kevin Sterling - BB&T Capital Markets

Can you guys touch briefly on where factory inventory levels are today?

Victor Garcia

Some of the assets that we see – we see somewhere around $0.5 million TEUs which is lower than I think we would normally expect particularly this year I think this has been a relatively subdued investment period. And I think people are more cautious because of the pricing environment particularly among leasing companies.

Kevin Sterling - BB&T Capital Markets

Got it. Okay. Thank you. Would you guys, it looks like you purchased 39,000 containers in Q2, but as Greg touched on you stepped up the railcar portfolio as well if the (acquisition sooner) fit in new cars, you expanded your railcar credit facility and so the obvious competitive challenges in a lot of the markets, how would prioritize your capital spend at the moment, is it railcars, ocean containers and buyback is it debt order or maybe you could kind of talk to us about how you are looking at your capital spending currently?

Victor Garcia

We really are looking at all three aspects of it. We are not disfavoring containers for railcars. We look at our inventory position. We look at where the rate environment is and we selectively have purchased containers to meet demand and where we think we can get attractive returns. I would say given the overall environment and where our share price has been trading, we have been focused on repurchasing shares which we think provides a very attractive relative investment opportunity for us. So there is not – it’s not that one is exclusive of the other, but we have been weighing all of those factors. We are purchasing shares as well as incremental investment.

Kevin Sterling - BB&T Capital Markets

Got it. It makes sense kind of given your stock is trading and book value to grow when you step up the buybacks and I also agree with that. Talking about demand you noted you saw significant increase in demand during the second quarter, but it’s kind of like your customers are opting to redeliver older units in favor of new units at better leasing rates, how much more leg room is there for your customers to do this, so in other words you anticipate the pace of redeliveries to continue?

Victor Garcia

That’s really hard to say. I think it depends on how strong third quarter plays out to be in terms of demand which is really the peak quarter. And it’s really hard to judge.

Kevin Sterling - BB&T Capital Markets

Okay. And then as a follow-up what’s your appetite in disposal market I know you noted you expect to aggressively reposition to sell assets during Q3, how should we think about the appetite of disposal market?

Victor Garcia

If the market prices have come down from where they were a year ago, so although we are selling twice as much as what we did before obviously our incremental income from that has not gone up to match really with it, so price have come down a little bit. But I would say demand has been fairly steady though a lot of buyers who would normally have held a lot of – a little more inventory are trying – there is a feeling that there is equipment available, so there is no need to purchase large quantities. So the average sale quantity is probably lower this time around this year than it was last year.

Kevin Sterling - BB&T Capital Markets

Okay. And then one last question and I think Greg touched on railcar business it seems to be growing and you guys seem to be excited about it, are – as you would look at your portfolio are new customers coming to you saying hey I need railcars or is it growth of the existing customers how should we think about that as you grow your business are you growing with existing customers or maybe it’s a combination of both existing and new customers?

Victor Garcia

Combination of both, we have a portfolio of customers who have already used several different car types. And we have also added additional people from the rail industry who have existing customer relationships and are interested particularly in the car types that we have ordered. And so we expect to be a combination of both.

Kevin Sterling - BB&T Capital Markets

Got it. Well, thank you so much for your time this evening. I appreciate it.

Operator

Thank you. And our next question comes from Michael Webber of Wells Fargo. Your line is open.

Michael Webber - Wells Fargo

Hi, good afternoon. Victor how are you.

Victor Garcia

Hi Michael, doing well.

Michael Webber - Wells Fargo

Good. I just have a couple of follow-ups comparing on the same teams here, but if we just talk about the repositioning versus storage, one I am great kind of fascinate but can you maybe kind of quantify here to break up that repositioning costs and what you have already incurred versus how we are looking at the back half of the year, can you kind of quantify what we are looking at for Q3 and how long a tail that will have on it. And then around the idea of having to reposition those containers can you talk to clauses in the lease structure that kind of led to having more containers in less desirable areas in the first place and is that something that you guys acquired they have the less advantageous terms and maybe just kind of talk about kind of how you are going to ride in a position of having to reposition the containers?

Victor Garcia

I think the repositioning is an ongoing, but I think the improvement that we will see in storage and storage costs will bring our overall expense down. But we will – it won’t be as charging will come down as much, because we are going to continue to be looking to move assets back to higher demand locations and provide incentives for customers to pickup the units, but overall I think we should see a gradual improvement over time in that – in that line item. As far as the reason why some equipment is in lower demand locations, it’s one of – I mean it’s really two factors, because as we mentioned before, because the pricing on new boxes out of China is so expensive, customers are deciding that it makes more sense to take advantage of what is a market opportunity today. So, it’s easy for them to just take new equipment at what historically would have been rates that used equipment would go for it. So, that’s given them an increased incentive to look at this.

The other is we have had a number of transactions over the years, where we have purchased used equipment on sale leasebacks from some customers, where we expected that equipment eventually to be coming back, but we expect to be selling into the marketplace into where there are good sale markets. And largely speaking, there are a lot of good sale markets, though it’s not. So, we had a different strategy for a lot of that equipment than we did for say new boxes out of China. And with the market being it is accelerating some of their redeliveries, because although they might have held on to it before, they are just as I said they are finding that it’s an opportunity to rebalance their portfolio.

Michael Webber - Wells Fargo

Got it. Okay, that’s helpful. Just wanted to shift into rails and maybe just kind of coming at it from a high level perspective and I mean obviously you guys are stepping up the rail purchases, can you maybe kind of give us a comp in terms of maybe on a relative basis where you see yields or even add spreads on your new railcar purchases versus what you see in the dry van market right now?

Victor Garcia

I don’t want to go into specifics about yields.

Michael Webber - Wells Fargo

Just that’s one over the other, so just noticing something on a relative basis?

Victor Garcia

Right. Well, these are very long-term assets. So, you have to look at your overall return based on the expected life of the asset, but I would say what the difference that we are seeing in the rail market is as demand has picked up, we see more and more competitors there looking to increase rates and the relative return on the asset is going up. So – and customers are willing to – are accepting the fact that demand is tight. So, we have a positive dynamic. On a pre-tax basis in particular, the returns I would say are significantly higher than what we are seeing right now on the container side. And even on an after-tax yield, we think that the returns are attractive, but it’s the trend in the returns and the overall improvement. And we think the long-term we think there is a lot of benefit. Markets will go through their cycles. Container market will go through its cycle. The U.S. railcar market will go through its cycle, where we think as an organization the more opportunities and the more customers we have, the stronger our company is. And so although right now, the rail market seems to be an attractive place for us to pursue it. We continue to be committed to what we are doing on the container side.

Michael Webber - Wells Fargo

That’s helpful. But the one that kind of leaves to my follow-up along those lines, when you think about it strategically kind of balancing the capital between rail and dry van, if were to look out two to three years and I know that it’s a way, but strategically when you think about this in terms of your invested capital, how much you think two to three years now could you be looking at this invested in rail versus dry van on a percentage basis? Does that mean that how big a portion of your total portfolio you think that could actually be?

Victor Garcia

I think for where we are right now, we would like to move it from, anywhere from up to 15% to 20% of – as we can say it’s part of it is how many assets can you actually acquire at attractive returns. There is a significant backlog for new equipment orders and there is a lot of – there is less equipment that would normally be available in the used car markets. So, it’s really – the issue has more to do with getting access to equipment than anything else.

Michael Webber - Wells Fargo

Okay, fair enough. One more and I will turn it over to just kind of housekeeping, you mentioned that the relatively you guys had buybacks, it seems like it is related to earlier in the quarter, can you remind us how much room you have left on that buyback authorization?

Victor Garcia

1.5 million shares was what the Board authorized.

Michael Webber - Wells Fargo

Okay, great, that’s all I have got. Thanks for the time guys.

Victor Garcia

Thank you.

Operator

Thank you. Our next question comes from Brian Hogan of William Blair. Your line is open.

Brian Hogan - William Blair

Thank you. And the question is I think is around pricing and pricing power and demand, whose applying the pricing pressure is it the small guys or is it the large guys or low cost of funds where is the pricing pressure coming from?

Tim Page

Well, I think given the volume of activity of what has been done, I would say it’s been you would see that most of the investments being done by the larger players of the business. So “smaller players” don’t have that much of an impact in the marketplace particularly when you are talking about large customer requirements that they wouldn’t be able to meet. So we are not going to discuss particular competitors who are there or what activity they have been doing, but I would say there is a number of people out there who have fairly large access to capital and have been very aggressive in the marketplace. I think I would assume that people are looking at their opportunities, what opportunities they have for investment. And I think most of the companies in our space, really – are really only in the container leasing business, so if they are looking for investment, they are looking for container investment. And so it becomes a decision to either invest in containers or sit by the sidelines and not many other alternatives are out there, so many of them had said I want to continue to invest in containers.

Brian Hogan - William Blair

Okay. And then just a quick question on rail, how much revenue from rail was in the quarter?

Tim Page

About $4.5 million.

Brian Hogan - William Blair

$4.5 million.

Tim Page

$2.5 million.

Brian Hogan - William Blair

Okay. And I guess that’s your second largest source of revenue, I mean, outpace of management fee and finance income that you are going to break that out at some point or?

Tim Page

We do expect to be breaking it out over the coming period.

Brian Hogan - William Blair

That will be helpful. And then I guess that it’s for right now. Thank you.

Operator

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

Steven Kwok - KBW

Great. Thanks for taking my question. In terms of the capacity to repurchase additional shares, can you just talk about that, I think your current debt to equity is about 2.9 times just wondering what are your thoughts around those levels?

Tim Page

Well, first we have just what the Board has already authorized which is the 1.5 million shares. We will continue to talk to the Board about what we want – what our recommendation is for investment as well as stock repurchase as the year plays out. We will be looking at where we are from an overall leverage standpoint and we will try to seek the right balance between repurchasing shares, investment – a new investment and overall leverage. Right now, we are in a zone in an area where we think is the normal place for a company of our nature to be.

Steven Kwok - KBW

Got it. Sure. And then in terms of there recently was an M&A activity in the space, I think when we look at Cronos that was acquired by Seaco, just what are your thoughts around M&A in the space I was curious around that? Thanks.

Victor Garcia

Well, I think this is kind of aggressive pricing environment is something that makes people look at ways of either monetizing their investment or finding some efficiencies, so I don’t have any insight into the – that particular transaction. But there has been a number of people who talked about M&A activity in the phase in the past and this is one situation where it happened.

Steven Kwok - KBW

Got it. Alright thanks for taking my question.

Operator

Thank you. And our next question comes from Helane Becker of Cowen. Your line is open.

Helane Becker - Cowen

Thanks operator. Hi guys. Thanks for the time. Most of my questions have actually been asked and answered, but I am just kind of curious on the utilization rates, do you have a target in mind where you would like to see that I mean it’s historically kind of been in the 92% to 90 - I guess 97% range, but are you thinking ways to tick that a hurdle?

Victor Garcia

I would say two years ago we were in the 95% range and there I think that is we will say for a leasing company that would be what you would normally expect and we are in that 95% range. And we are always going to try to maximize our utilization because that’s the way to maximize the return on assets, but we will continue – we are very focused on quarter-over-quarter improving that figure. We will continue to try to improve that figure both in every aspect of what we do in order to get to a point where we feel like we have done everything we can. So I think we would like to get into the 95% range plus but that’s going to largely also be dependent on how the market overall works out to be, how strong demand is and that’s difficult to judge.

Helane Becker - Cowen

Got it. And then just my follow-up question is with respect to where we are now as we kind of start to approach I guess are you noticing that there has been a slowdown versus a tick up in the peak, is it you did I mean could you like maybe give a description of it?

Victor Garcia

It’s a overall – it is in a little bit muted from what we would expect. But when we talk to customers they remain optimistic about their demand going into the rest of this quarter. So that’s I guess how a best I can describe it.

Helane Becker - Cowen

Okay. Thanks Victor. Have a nice day.

Operator

Thank you. And our next question comes from John Mims of FBR Capital Markets. Your line is open.

John Mims - FBR Capital Markets

Great. Thanks. Tim let me ask quickly it’s been kind of kicked out a couple of times but you had said the $6.8 million this quarter was half and half right, 3.4 I mean obviously is half with storage and other half is handling and repositioning, how do we think about those two moving parts there, (indiscernible) utilization picks up slowly over the next couple of quarters the storage gets down obviously but then how long should that – should we factor in sort of $3.5 million run rate for the repositioning and other handling?

Tim Page

A big chunk of that is really handling and there is a component in there that’s rail maintenance, so that’s a chunk of it. But the bigger piece of it is handling charges and that fluctuates with lease out activity. So if you are projecting lease out activity similar in the third quarter to what it was in the second quarter and you would expect that part of it to be similar as Victor said we are expecting the repositioning costs to be similar and rail maintenance should be relatively the same over the next quarter. So I guess in the third I would expect that half of the equation to look assuming the lease out activity is the same to look pretty much as it did in the second quarter. We should see a reduction in storage expense in the third quarter.

John Mims - FBR Capital Markets

Right. So the 92.4 you quoted as of yesterday is 40 basis points better than utilization year-over-year, so if that was sustainable you are talking about yes, I guess if 40 basis points of utilization improved from that but what that mean on the storage piece?

Tim Page

It’s 40 basis points from where it was at the end of the second quarter and what’s the way you would analyze that as trying to take a look at what the average number of containers that we are on or average fee use or sea use of containers that were on the lease in the second quarter and come up with an average storage rate and then you could adjust as utilization improves, you can just accordingly.

John Mims - FBR Capital Markets

Alright, yes, I will walk through that. And then just one small one, I missed what you said about the $0.4 million in interest expense improvement, when do you start to see that?

Victor Garcia

We start to see that effectively in the August 1.

John Mims - FBR Capital Markets

Okay. And that’s annual number?

Victor Garcia

It’s an annual on one credit facility and its $0.3 million on another credit facility.

John Mims - FBR Capital Markets

Okay.

Victor Garcia

So it’s a total of $0.7 million beginning in August.

John Mims - FBR Capital Markets

Alright. That’s all I got for right now. Thanks a lot.

Operator

Thank you. And our next question comes from Sal Vitale of Sterne, Agee. Your line is open.

Sal Vitale - Sterne, Agee

Good afternoon. I guess the first question is if I look at the increase in the storage handling and other expense of $800,000, if you holding utilization static, because utilization was up about 20 basis points from quarter-to-quarter, what would that number have done if I just told that a static?

Victor Garcia

Held which number static, the utilization rate?

Sal Vitale - Sterne, Agee

Yes, utilization.

Victor Garcia

The storage costs would be exactly – well, I shouldn’t say exactly, but for practical purposes it would be exactly the same if there was no change in utilization and the fleet stayed the same. The utilization rate can stay the same and the fleet could be bigger and then you would have a higher dollar number for storage, but if everything was the same storage, they are the same, but if just to make sure we are running about on a daily basis about 15% lower daily really storage charges than we were couple of months ago.

Sal Vitale - Sterne, Agee

Okay, that’s helpful. So, on a daily basis, that’s 15% that’s on the storage piece right?

Victor Garcia

Correct.

Sal Vitale - Sterne, Agee

Okay, that’s helpful. And then Tim, just to reiterate I think I heard this right you said 93.7% during the second quarter that was the utilization on your own fleet?

Victor Garcia

We didn’t say what…

Tim Page

Yes, 93.7% was the utilization on our own fleet.

Sal Vitale - Sterne, Agee

And that’s what TEU or CEU?

Tim Page

CEU.

Sal Vitale - Sterne, Agee

CEU, okay. And then just switching gears if I look at the rail business, so I see that you ordered what is a $65 million worth of cars and the delivery begins at the end of this year and stretches into ‘15, is that pretty much stretch into late ‘15?

Tim Page

We have – there is a number of different orders that we put in. I would say the bulk of it is going to start coming in, in the second quarter and then another bulk coming in, in the fourth quarter of the next year.

Sal Vitale - Sterne, Agee

So it starts in 4Q of this year and then the big pieces are second quarter of ‘15 and fourth quarter of ‘15?

Tim Page

Correct.

Sal Vitale - Sterne, Agee

And so was that by choice or is that a factor of the factory’s capacity being fairly tight?

Victor Garcia

It was a combination of different equipment types and different manufacturers, but I would say that over the course of the last couple of months factory delivery time on the railcars side has quickly gotten utilized. So from the time that we have been looking at some equipment in the second quarter quickly delivery on shorter laps of that started moving into the fourth quarter.

Sal Vitale - Sterne, Agee

Okay, that’s helpful. Okay. Thank you very much.

Operator

Thank you. And our last question comes from Doug Mewhirter of SunTrust. Your line is open.

Doug Mewhirter - SunTrust

Two quick questions, on the railcar CapEx I assume that the timing of when you actually recorded the capital equipment – the CapEx dollars you won’t actually record that in your – on your balance sheet or cash flow statement until the cars have been delivered is that – that’s correct?

Victor Garcia

On the cash flow statement that’s when we pay for him.

Doug Mewhirter - SunTrust

Yes. Okay. And thanks. And also I assume that your railcars it sounds like your railcars seem to be domiciled in the U.S. tax domicile which would affect the tax rate all things to be equal, of course there is going to be a significant tax shield, so on a cash basis it may not make a difference, but with that sort of as railcars get bigger I assume that would start to reverse to downward trend of your effective tax rate – consolidated effective tax rate?

Victor Garcia

I think over time depending on how much we invest it will, but the degree to which it will it is a little bit hard to say because it’s hard for us right now to predict what the rose of balance will be between our container investment and our railcar investment. But you are right given that we are putting more assets in the United States in terms of rail assets it will slowdown that decline that we have had in our tax rate.

Doug Mewhirter - SunTrust

And just a quick follow-up question Tim, when you mentioned that you said the tax rates would trend back to 9% for the balance of the year I assume just for the last two quarters the year won’t average 9% it’s…

Tim Page

Year won’t, no you are correct the year won’t average 9%, but the run rate tax rate is 9%.

Doug Mewhirter - SunTrust

Okay. Thanks. That’s all my questions.

Victor Garcia

Thank you.

Operator

Thank you. At this time I see no further questions. I would like to turn the call back over to management for any closing remarks.

Victor Garcia - President and Chief Executive Officer

Well, we appreciate everyone’s time on the call today and we look forward to reporting on our third quarter results in the next few months. Thank you.

Operator

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

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