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CAI International, Inc. (NYSE:CAP)

Q4 2010 Earnings Call

March 1, 2011 5:00 PM ET

Executives

Gary Sawka – Interim CFO

Masaaki Nishibori – President and CEO

Victor Garcia – SVP and COO

Analysts

Robert Napoli – Piper Jaffray

Sameer Gokhale – Keefe, Bruyette & Woods

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the CAI International Fourth 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 is being recorded.

I would now like to introduce your host for today, Gary Sawka, the Interim Chief Financial Officer. Sir, please go ahead.

Gary Sawka

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

Masaaki Nishibori

Thank you, Larry. Welcome to CAI’s 2010 fourth quarter earnings conference call. We are very pleased with our results for this quarter and what we have been able to achieve in December by raising additional debt and equity that will position our company well for their opportunities in 2011.

For 2010, we reported $28.4 million in net income, the most profitable year in the history of our company and 109% increase from our net income in 2009. The market demand for our services remains very strong and we continue to benefit from this demand with high utilization of our fleet. We reported $10.5 million in net income for the quarter or $0.57 per share. This represents a 235% increase over the $0.17 per share earned in the same quarter of 2009. For the full year ended December 31, 2010, we are reporting $1.56 of earnings per share, an increase of 105% over the prior year ended.

During the last three quarters of 2010, we have reported an average of 19% sequential growth in revenue, 46% sequential growth in operating income, and 53% growth in net income excluding the third quarter onetime tax benefit. We are excited about these results and expect that with a continued high utilization of our fleet and the capital investment we are making, but the financial momentum will continue in the coming quarters.

I’d like to hand it over to Victor Garcia, our Chief Operating Officer to discuss in greater detail our operating results and market environment. Victor?

Victor Garcia

Thank you, John. During the fourth quarter, our utilization remained strong and is averaged 98%, a 20% increase from the average utilization reported during the fourth quarter of 2009. Utilization for the past two quarters has near to full utilization level. We believe that utilization will remain at around the same level in 2011, since in the first quarter, utilization has remained near full utilization and demand seasonally increases during the second and third quarters of the year.

New container production costs, which are currently, approximately $2,900 for a 20 foot container will help support the current utilization levels because of the relatively inexpensive cost of equipment already in service as compared to cost of new equipment additions. Utilization is an important factor in our results; however, over the next several quarters, sequential revenue and net income growth will come from the investment commitments to new containers we have made and will make over the coming quarters.

In 2010, CAI took delivery of 142,000 TEU of containers and purchased 24,000 TEU of containers, we previously managed from various third party investors. Most of that procurement occurred in the second half of 2010, resulting in the second half accounting for 69% of full year net income.

In 2010, we purchased or committed to purchase over $365 million in containers. In the first quarter of 2011, we have committed two additional investments and expect most of that equipment to be delivered in the months from March to May 2011.

To place 2010’s container investment program in prospective, CAI’s own fleet has increased 48% in terms of TEU from the beginning of 2010 till the end of 2010. Because of our investment levels this past year and our expected investment level for 2011, we believe we should continue to grow revenue and net income at a faster pace than the industry overall.

Our container rental revenue this quarter increased 25% sequentially from the third quarter 2010 and operating income increased 44%. As John mentioned, our earnings per share for the quarter were $0.57 per fully diluted share, compared to $0.50 during the third of quarter 2010, and $0.17 during the fourth quarter of 2009.

As you can see by our results this year, this is the good time for CAI and the container leasing industry in general. This year, we are benefiting from the increased demand that has occurred from the return of world trade growth and the under investment in containers that occurred over the past two years. Clarkson Research estimated that world trade growth increased 12.1% in 2010 and will increase 9.7% in 2011. That level of growth has been consistent with the historical long-term growth in world trade. A 10% increase in world trade growth in 2011 coupled with a 5% to 6% attrition rate of the world container fleet is expected to provide strong support for new container investment over the coming several quarters.

In 2009, as I mentioned there was minimal investors in containers. In 2010, the overall production is estimated to be below to historical average production of 3.1 million TEU from 2003 to 2008. With an estimated production of 3.1 million TEUs of containers built and assuming current production cost per container, overall investment in containers could approach $8 billion this year and the leasing community’s share of that investment could be valued at $3 billion to $5 billion. Those figures give a strong confidence and the potential opportunity to continue to grow our fleet in 2011.

Because of the current high utilization, the number of containers available to be sold has declined, resulting in rising prices for older containers. We are seeing strong demand for secondary sale containers in all regions and we sell and expect such demand to remain strong as long as utilization for all lessors remains at current levels.

As I said, these are good times in our business and we expect the strong trend to continue into 2011 and beyond, as the world economies grow, particularly in emerging markets. We believe that demand for containers is more impacted by trade in and around Asia, with China in particular as a focus. We believe the growth of the Asian economies, which is a secular growth trend, is more important to demand for containers and container demand in and around the United States.

I would now – will now hand over the call to Gary Sawka, our Interim Chief Financial Officer to go over the financial results for the quarter.

Gary Sawka

Good afternoon. Earlier today we reported 2010 net income attributable to common stockholders of $28.4 million or $1.56 per fully diluted shares on an average share count of 18.2 million. This compares to net income of $13.6 million or $0.76 a share for 2009 with an average fully diluted share count of 17.9 million.

The $1.56 per fully diluted share for 2010 included a $2.1 million tax benefit due to the reduction in accrued tax liability in the third quarter of 2010. Without this tax benefit, net income attributable to CAI common shareholders for 2010 would have been $1.44 per fully diluted share, an 89% increase compared to 2009.

Sequentially, the strong momentum we experienced in the second and third quarters of 2010 continued in the fourth quarter of 2010. Fully diluted earnings per share attributable to CAI common stockholders for the four quarters of 2010 were $0.17, $0.31, $0.39, and $0.57, respectively.

The third quarter of 2010 excludes the $2.1 million tax benefit referred to earlier. These earnings per shares translate into sequential quarterly percentage increases of 82% for the second quarter, 26% for the third quarter, and 46% for the fourth quarter.

Total revenue for the fourth quarter 2010 was $25.2 million, an increase of $9.9 million from the total revenue in the comparable quarter of 2009. The increase of 5.1 million or 25% from the $20.1 million recorded in the third quarter of 2010.

Container rental revenue was $21.4 million during the fourth quarter of 2010, compared to $12.8 million in the fourth quarter of 2009, and $17.2 million in the third quarter of 2010. The container rental increase over the prior quarter is due to increased utilization of our fleet and the increase over the third quarter of 2010 is a result of a larger fleet of containers from our container investments made in 2010.

Management fee income during the fourth quarter of 2010 was $3.4 million as compared to $2.1 million in the fourth quarter of 2009 and $2.2 million in the third quarter of 2010. The sequential increase is principally due to fees on the dispositions of used containers for management programs, which we have a large incentive share of gains over a threshold amount.

Our gains in this quarter over 2009 reflects the incentive share of gains as well as improved financial performance in our managed portfolios from, which we receive a management fee.

We did not report any gains on the sale of container portfolios in this quarter with our total year 2010 gains of 600,000 occurring in the first and second quarters. The comparable figure for the total year 2009 was $800,000.

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

Our total operating expenses during the fourth quarter of 2010 was $10.7 million compared to $10.8 million during the fourth quarter of 2009. Within these figures we have favorable results from larger gains on disposition of used containers where we reported $3.4 million of gain in the fourth quarter of 2010, compared to $1.2 million in the fourth quarter of 2009, which was due to higher average sales prices despite a decrease in number of containers sold.

Storage and handling costs decreased over $1.1 million in the fourth quarter of 2010 as a result of the lower number of off-hire units this past quarter.

Depreciation expense increased $2.4 million as a result of the substantial investment in containers procured, Victor Garcia discussed earlier and MG&A increased $1.3 million.

On a sequential basis, operating expense were up $700,000 from the third to the fourth quarter of 2010. Within these figures, we had favorable variances from larger gains on disposition of used containers, where we recorded $3.4 million of gain in the fourth quarter of 2010 compared to $1.8 million in the third quarter. In this case, we had both an increase in the number of containers sold and an increase in the average sales price. Depreciation increased $1.3 million as a result of the substantial investment in containers and smaller increases were recorded in storage and handling and MG&A.

The operating leverage in our business at high utilization levels is evidenced from these figures. Revenue up $9.9 million, fourth quarter of this year versus last year, while operating dispenses were down 200,000 in the same period. As a result, our operating income increased 224% from $4.5 million to $14.6 million.

On a sequential basis the figures are similar. Revenue up $5.1 million from Q3 of this year to Q4, while operating expenses were up 700,000 in the same period. As a result, our operating income increased 45% from $10.1 million to $14.6 million.

Net income expense was $2 million for the fourth quarter of 2010, up $1.1 million from the fourth quarter of 2009 and up 600,000 from the prior quarter. While we continue to benefit from the low floating interest environment that prevailed throughout the quarter, this benefit was offset by the larger amount of borrowings to fund our container purchases.

For the calendar year 2010, our effective tax rate was 17.8% versus 22.4% in 2009. This lower effective tax rate is due to the increasing proportion of profitability coming from our international operations. The 2010 effective tax rate figure is exclusive of the $2.1 million tax benefit due to the reduction in accrued tax liability, which was recorded in the third quarter of 2010

Finally, net income attributable to common stockholders for the three months ended December 31st, 2001 was $10.5 million compared to net income of $3.1 million for the comparable period in 2009 and $7.1 million without regard to the $2.1 million tax benefit for the third quarter of 2010.

Operator, please open up the line for questions.

Question-and-Answer Session

Operator

Certainly. (Operator Instructions) And our first question comes from the line of Bob Napoli of Piper Jaffray.

Robert Napoli – Piper Jaffray

Thank you. Good afternoon and congratulations on a great quarter and year. Question, I guess you guys acquired I think was a 24,000 containers – managed containers. What drove that opportunity and do you expect to do that more and as I guess your strategy of own versus managed on a long-term basis adjusted at this point?

Gary Sawka

I’ll answer the second question first. Our strategy in terms of owned and managed hasn’t changed. I think we still want to have a balance between both segments and we think that they are complementary to our business plan in terms of how fast we can grow our market share as well as our return to our shareholders. So, I think that is as a launch of strategy remains in place. The particular decision to by some containers from some managed portfolios over the course of last year had more to do with the opportunity that was presented to us.

Occasionally some investors as the funds come to the end of their lives look to us as a potential buyer on the assets and although we are not obligated to do it. We look at the opportunity and usually it provides us a fairly good opportunity since we know the assets that were acquired. So, that’s the situation that occurred over the course of last year and we would expect similar opportunities in the future.

Robert Napoli – Piper Jaffray

Your residual values that you’re using versus what the industry looks to be low and I understand that either it’s going to come through earning and either through gain on sale of used containers or through lower depreciation. TAL reduced their – I’m sorry increased their residual values estimate this quarter, I think Textainer suggested that they may do so, what are your thoughts, why did you not make a move in that regard this quarter and do you think you’ll need to make that adjustment in the near-term in 2011?

Gary Sawka

I think we always have to look at our estimates for long-term residual value. So, it’s an ongoing process for us. We do it frequently as we look at the fleet. Clearly, the market is very strong today, but we have to look at the market today as well as what the market is going to be in the long-term future and it is something that we are reviewing and that we are evaluating. We didn’t do it this quarter because we were still in the process of our review.

Robert Napoli – Piper Jaffray

Okay. Last question, then open for others, just what are your thoughts on as we see here today on CapEx for 2011 and I know it’s very recent, but the Middle East conflict and spike in oil prices is that having any effect on your thinking at this point?

Gary Sawka

We’ve been talking – as a company we’ve been talking to our customers to see what affect they are seeing from the economic and political turmoil in the Middle East. And to this point, our customers are telling that they’re not seeing an impact, but clearly rising fuel costs are area that we are focused on, because it affects world economic activity.

So, at this point it doesn’t appear from what we’re seeing in our business nor what our customers are telling us isn’t having an effect, but it really depends on how the process evolves from here.

Robert Napoli – Piper Jaffray

And the CapEx for ‘11?

Gary Sawka

I think we’re not going to disclose a particular CapEx level, but we made significant investments in 2010 and we’re going into 2011 with similar expectation.

Robert Napoli – Piper Jaffray

Thank you very much.

Gary Sawka

Thanks Bob.

Operator

Thank you. (Operator Instructions) And our next question comes from the line of Sameer Gokhale of Keefe, Bruyette & Woods.

Sameer Gokhale – Keefe, Bruyette & Woods

Hi, thank you. In terms of the management fee income, I think you mentioned a couple of reasons why the management fee income was up sequentially based on your disposition – higher disposition of managed container and some incentive fee. So, I’m trying to get a sense for what the run rate of fee income should look like going forward, assuming you have, may be fewer dispositions, I don’t know what’s your thoughts on that, but how should we think about that line item in Q1 and going on through the rest of ‘11?

Victor Garcia

I think this past quarter we had a number of equipment that was sold on behalf of some portfolios where we took, we have different incentive programs on sale of containers and as certain programs wherein the price rises we get a larger percentage. So, I think that that occurred this past quarter. We are not forecasting per say that number remained at the current level for the rest of the year, but we would expect maybe a trailing off overtime of some of the benefits that we have had.

Sameer Gokhale – Keefe, Bruyette & Woods

Okay. Sort of maybe it doesn’t jump right back to the Q3 levels, but overtime sort of migrates to that level gradually.

Victor Garcia

Right.

Sameer Gokhale – Keefe, Bruyette & Woods

That’s fair to say. Okay. And the other question was I think in terms of the gain on sale, the containers you talked about higher prices I think and then lower number of containers but it just seem like even if you’re factoring a lower number of containers that were sold, the gain was pretty. So, you must have had a big jump in prices relative to Q3, was that because of a mix shift, I mean did you have a higher mix of newer containers in there that you sold in Q4, relative to Q3, what kind of detail can you give us there?

Victor Garcia

In that line item in general just to be clear that disposition of containers is typically really just to berry as the old containers that we’re disposing out of our fleet. So, it’s typically the not new containers. So, I would say the simple fact was we had a number of units that came back to us and given that the price had escalated in the market place because of the high utilization. We were able to get significant increases from – or gains from what we had before. So, it has more to do with the price appreciation of secondhand prices than it had to do anything else.

Sameer Gokhale – Keefe, Bruyette & Woods

Okay. That’s helpful, because I recognized that those who are used older container, I just within that maybe there is new answers as far as the mix of relatively newer containers versus relative to the older containers, but that helps stain that. And then I guess just the last question I have is the higher oil prices on your business and you talk to some of your customers saying there wouldn’t be much of an impact. I have heard maybe some of the aircraft leasing companies talking about this effect of slow steaming on the speed at which cargo is transported and then may be that suggested that there could be more of a shift to air transportation, air cargo.

And if oil prices go higher and you see further impact on the steamers and the slow steam because of that may somehow result in more of a benefit to them in terms of air cargo. I mean, have you had discussions with your customers and them talking about that aspect of it, which is that maybe the speed of transportation slows to such as extent on the seas that more folks have a mix shift towards the aircraft transportation.

Victor Garcia

Well, I will just – I’ll figure out that we haven’t had those specific conversations with our customers in terms of air freight versus freight over the maritime seas. What I will say I’ll be a little bit counter intuitive to think that air freight, which is one of the most expensive forms of transportation would increase in a time of rising fuel costs. So, maritime transportation in general has a lower cost form of transportation. And so with rising fuel costs you would expect a shift the other ways, that’s just my general view. You wouldn’t expect air freight to be taking additional portion of share now.

It is just in time need for equipment or cargo that might be a different decision. But the fuel cost by itself – a rising fuel cost should mean in general that slow steaming becomes all the more important and that the lower the cost of transportation, load of transportation becomes more important. And I think that’s maritime.

Gary Sawka

In general, no shipping company even thinks about the airline industry as competition. Just the type of product shift, the volume – those products are shift are entirely quite distant. Yes, there are some products that are – that can be sent by air, but the volume is just not there. So, I mean nobody even thinks about it, nobody talks about it, about the airline industry has competition and that is also our view. We have never considered the airline industry as being a competitive force for the shipping companies.

Sameer Gokhale – Keefe, Bruyette & Woods

Okay, that’s helpful. I mean it seems like maybe the margin they’re talking about it, but yeah I think I agree with you, it does seem like transportation – maritime transportation does seem to be a key pro forma of shipping, so their comment seem to be somewhat counter intuitive. All right guys, well, thank you very much and again a strong quarter.

Operator

Thank you. And we have a follow-up from the line of Bob Napoli of Piper Jaffray.

Robert Napoli – Piper Jaffray

Thank you. As we look into 2011 with the level of CapEx that you made is certainly in 2010 above our expectations, what’s the – what are your thoughts as far as a tax rate that we should think about in 2011?

Victor Garcia

I think as we’ve mentioned in the past our tax rate should be declining over time as we have more investment that goes overseas. So, I would probably say – we’ve had about a 3 percentage point decline in tax rate. The last few years we should expect similar tactual amount this year.

Robert Napoli – Piper Jaffray

Where can your tax rate – where do you think your tax rate bottoms out, couple of years from now.

Victor Garcia

It’s a little bit dependent; there are a lot of income streams that we focus on in terms of what kind of tax rate we have. It varies if our fleet was to move primarily to our international subsidiary, we could be in mid-to-high single digits.

Robert Napoli – Piper Jaffray

Okay. All right, that makes sense looking at tax payment. The current competitive environment, what are you seeing. I mean, it’s thoroughly days and some of these are private equity firms getting more aggressive in the space. I mean you had Kelso last year. But, I mean are you seeing any new capital coming into the market through new companies? Are you seeing more aggressive postures out of competitors, anything that is on the worrisome side or give us a little color there if you could?

Victor Garcia

I think in general we’ve seen as you mentioned a lot of interest coming from the financial community into our space, given I think the performance during the last downturn and then the performance coming out of the downturn. That interest has come in, as capital coming into existing companies and not new entrants. We haven’t seen any new companies being formed with C-capital from private equity groups, but clearly those companies that are getting new shareholders and have significant investments. Obviously they’re going to be looking to continue to grow their businesses and something that, it’s not any different than what we had before, but clearly we’re focused on our overall competitive position in our market share and our growth and we’ll continue to focus on that, but we would expect that there to be good competition as there always is.

Robert Napoli – Piper Jaffray

Understand lease rates go up with the cost of containers, but I mean are you seeing some – are you still seeing some pricing power, how much are your lease rates up? And are you able to raise lease rates on, have you continued to be able to raise, lease rates on new containers?

Masaaki Nishibori

I think that...

Robert Napoli – Piper Jaffray

I mean I’m sorry on used containers as they roll over?

Masaaki Nishibori

Sure, we have had success on renegotiating contracts that account and expire. So, we continue to work and it’s an ongoing process, because you have to have discussion with customers as the contracts expire and we’re trying to be mindful of the opportunity we have with our – in our existing fleets, as well as the relationships we have with our customers.

As to new containers, I would say you’re absolutely right that rates are based on new production costs and those have remained at what we will term at attractive levels. We don’t have quite the same situation that we had last year, where say in the summer months as equipment was being produced it was effectively being put on lease and I think with the rising cost of containers, the returns relative to our production costs at that time were pretty attractive. Here in the fourth quarter there was a fair amount of ordering by ourselves and our competitors and equipments available. And the shipping lines in order to have equipment available, we started putting request for equipments, before their needs were and more in the second quarter. So, we haven’t had the same level of – for lack of a better term frenzy that we had last year. But rates do remain at what we believe to be overall attractive, attractive terms.

Robert Napoli – Piper Jaffray

Last question, are you seeing anymore – are you seeing the shippers getting more aggressive on buying – more interested in buying equipment directly.

Masaaki Nishibori

There is certainly some shipping lines that have historically been primarily focused on ownership versus leasing. Those company continue to purchase their own equipment, I will say relatively speaking we see a little bit more purchasing than we have in last year. But I’d say we still buy – the long-term historical trend, we’re still seeing a larger percentage as we look at the marketplace coming from the leasing community relative to the overall shipping line investment. And in part the shipping community has not ordered a head of where the leasing community has and so the current cost of the container is – has risen over the course this year relative to where it was in the fourth quarter, when many of the leasing companies ordered equipment.

Victor Garcia

Traditionally, it’s been 60:40, 60% shipping companies. I think that’s going to, in terms of ordering, I think this year or last year, as well as this year I think that’s going to be like 40:60, it will be reversed.

Robert Napoli – Piper Jaffray

Yeah. Great. Thank you. Thanks Victor. Thanks John.

Victor Garcia

Yeah, thanks Bob.

Operator

I see no further questions in the queue at this time. I’d like to turn the conference back to the speakers for any further remarks.

Gary Sawka

Well, thank you for joining us today and we look forward to continuing to speak to you about the development of our company.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may now disconnect. Everyone have a good day.

Masaaki Nishibori

Thank you.

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