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CAI International, Inc. (NYSE:CAP)

Q1 2011 Earnings Call

April 26, 2011 5:00 PM ET

Executives

Gary Sawka – Interim CFO

John Nishibori – President and CEO

Victor Garcia – SVP and COO

Analysts

Robert Napoli – Piper Jaffray

Gregory Lewis – Credit Suisse

Sameer Gokhale – KBW

John Stilmar – SunTrust

Helane Becker – Dahlman Rose

Salvatore Vitale – Sterne Agee

Daniel Furtado – Jefferies

Operator

Good day, ladies and gentlemen, and welcome to the CAI International First Quarter 2011 Earnings Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session with instructions following at that time. (Operator Instructions) As a reminder, this conference is being recorded.

And now I will turn it over to Interim Chief Financial Officer Mr. Gary Sawka. Please begin sir.

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 the CAI International has filed with the Securities and Exchange Commission, including its Annual Report on Form 10-K 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, Gary. Welcome to CAI’s 2010 first quarter earnings conference call. We are very pleased with our results for this quarter and we have been able to achieve over the past three months.

For the quarter we reported $12.8 million in net income, the most profitable quarter in the history of our company and a 326% increase from our net income for the same quarter of 2010. Our earnings per share this quarter was $0.65, an increase of 14% from the 57% for fully diluted shares in the fourth quarter and 280% above the $0.17 for fully diluted shares reported during the first quarter of 2010.

We remain optimistic about the prospects of Container demand for the remainder of the year and believe we are well positioned to benefit from this favorable market trend.

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 first quarter, our utilization remained strong and has averaged 98%, unchanged from the level during the fourth quarter of 2010 and a 13.6% increase from the average utilization of 86.3% reported during the first quarter of 2010. Utilization for the past two quarters has neared the full utilization level. We believe that utilization will remain at around the same level during 2011, since in the first quarter utilization has remained at near full utilization and demand seasonally increases during the second and third quarters of the year.

New container production costs have declined slightly in recently, but remain at a level high enough that we believe will support the current utilization levels because of the relatively inexpensive cost of equipment already in service as compared to costs 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 in new containers we have made and will make over the coming quarters.

During the first quarter of 2011 CAI took delivery of 55,000 TEU of containers. We and our competitors purchased containers during the fourth quarter of 2010 and first quarter of 2011, thus increasing the amount of equipment available to be leased over the last few months. During that same period of time shipping lines have requested for equipment leases to begin primarily during the second quarter.

A competitive dynamics has resulted in per diem lease rates on incremental new factory equipment declining by approximately 5% from where they were in the fourth quarter of 2010. However, we do not believe the current industry inventory level to be excessive based on our outlook for this year or by historical standards, and we believe that much of what is in inventory has committed customer orders. It is our expectation that as the seasonal demand increases over the coming weeks that lease rates will also strengthen as the stock of inventory declines.

As we look at our results for this quarter our container rental revenue increased 5% sequentially from the fourth quarter of 2010 and operating income increased 27%. The sequential growth of our operating income resulted from approximately 700,000 and reduced depreciation from our change in residual value estimates, continued strong gains on disposition of containers and approximately 850,000 of reduced bad debt expense related to one particular customer. We also benefited this quarter from better management fee revenue coming from disposition of containers in our managed portfolio and from a 1.4 million gain on the sale of container portfolios.

We expect next quarter’s management fee revenues to be below the current quarter due to lower disposition fees on the managed fleet and we do not expect a similar gain on the sale of container portfolios in Q2 2011 as we had in the first quarter.

During the first quarter we arranged a sale of 3,400 of TEU of containers and CAI simultaneously entered into a long-term management agreement for the same equipment. Our people have continued to extend our management business in Asia and we expect a percentage of TEUs being managed for Asian container investors to increase over time.

As you can see by our results this quarter, this is a good time of CAI and a container leasing industry. We are benefiting from the overall increased demand for containers as occurred from the return of world trade growth and the under investments in containers that has occurred over the past two years.

Clarkson Research estimates that world trade growth 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 of the world container fleet, is expected to provide strong support for new container investment over the next several quarters. Our expectation remains that 3 million to 3.5 million TEUs will be build this year to meet shipping company demand for containers.

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 where we sell and we expect such demand to remain strong as long as utilization for all lessors remain near current levels. However, the number of containers available to be sold is becoming lower and therefore we expect overall gain on this position of containers to be unlikely to remain at this quarter’s level.

As I said, these are good times in our business, and we expect the strong trends 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 than container demand in and around the United States.

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

Gary Sawka

Thank you, Victor. Earlier today we reported 2011 first quarter net income attributable to common stockholders of $12.8 million or $0.65 per fully diluted share on an average share count of 19.8 million. This compares to net income of $3.0 million or $0.17 a share for 2010 first quarter with an average fully diluted share count of 18.0 million.

The $0.65 per fully diluted share for 2011 first quarter included a $0.7 million pre-tax and a $0.6 million after-tax benefit due to the reduction in depreciation expense resulting from our change in residual values of our container equipment. Without this reduction in depreciation expense net income attributable to CAI common stockholders for the 2011 first quarter would have been $0.62 for fully diluted share, a 265% increase compared to the 2010 first quarter earnings per share.

This quarter we continue the sequential quarterly earnings momentum we experienced in 2010. Fully diluted earnings per share attributable to CAI common stockholders increased from $0.57 in the 2010 fourth quarter to $0.65 in the 2011 first quarter.

Total revenue for first quarter 2011 was $27.7 million, an increase of $12.5 million or 82% from the $15.2 million total revenue in the comparable quarter of 2010. The increase was $2.5 million or 10% from the $25.2 million reported in the fourth quarter of 2010.

Container rental revenue was $22.4 million during the first quarter of 2011 compared to $12.3 million in the first quarter of 2010 and $21.4 million in the fourth quarter of 2010. The 82% container rental revenue increase over the prior year quarter is due to the increased utilization of our fleet and the result of a larger fleet of containers from our container investments made in the past year. The increase over prior quarter is due to the full quarter effect of the containers put on lease in the fourth quarter of 2010.

Management fee income during the first quarter of 2011 was $3.5 million compared to $2.2 million in the first quarter of 2010 and $3.4 million in the fourth quarter of 2010 or 61% gain this quarter over the 2010 first quarter reflects the incentive share of fees on disposition of used containers as well as improved financial performance in our managed portfolios from which we receive a management fee.

Both the fourth quarter 2010 and this quarter benefited from the large incentive share of gains over a threshold amount. These incentive fees will trail off over the next quarter as we sell the remaining containers in this managed portfolio. The $1.4 million gain on the sales container portfolios this quarter compares with $0.2 million occurring in the 2010 first quarter and no gain in the 2010 fourth quarter.

This quarter’s gain came from the sale of 3,400 TEUs to an Asia investor group in which we also entered into a long-term management agreement. We have not completed any sales to European investor groups this year which historically have comprised the majority of our container fund sales. However, 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 in new container programs.

Our total operating expenses during the first quarter of 2011 was $9.2 million compared to $10.5 million during the first quarter of 2010. We had favorable results from larger gains on disposition of used containers, where we recorded $3.6 million of gains in Q1 2011, compared to $1.4 million in Q1 2010, due to higher average sales prices despite a decrease in the number of containers sold.

Storage and handling costs decreased $1.1 million or 50% in the first quarter of 2011 as compared to the first quarter of 2010 and as a result of the lower number of off-hire units this past quarter. MG&A decreased $0.3 million principally due to the reduction of $0.9 million in our bad debt provision related to one customer. Depreciation expense increased $2.5 million net of $0.7 million reduction from the residual value change over the first quarter of 2010 as a result of the substantial investment in containers.

On a sequential basis, operating expense were down $1.4 million from Q4 2010 to Q1 2011 principally due to the $1.2 million decrease in MG&A expense, which was mainly attributable to the reduction in bad debt provision referred to earlier. Depreciation was $6.7 million in both quarters, as the $0.7 million reduction in depreciation expense to the change in depreciation – to the change in residual value was offset by an increase in depreciation expense on our increased fleet.

The operating leverage of our business at high utilization levels is evidenced from these factors: Revenue up $12.5 million from Q1 2010 to Q1 2011, while operating expenses were down $1.3 million in the same period. As a result our operating income increased 294% from$4.7 million to $18.5 million year-over-year.

Net interest expense was $3.0 million for the first quarter of 2011, up $2.1 million from the first quarter of 2010 and up $0.9 million in the prior quarter. While we continue to benefit from the low floating rates interest environment that prevailed throughout the quarter, this benefit was offset by a larger amount of borrowing to fund our container purchases.

For the first quarter 2011 our effective tax rate was 16.4% versus 21.6% in the first quarter 2010. This lower ETR is due to the increasing proportion of profitability coming from our international operations. We’d expect the full-year 2011 ETR to be in this range. Finally I’d like to elaborate on the change in residual values discussed in our earnings release. CAI conducted an extensive historical disposal study and has decided to increase the estimated residual values used in its equipment depreciation calculations beginning January 1, 2011. The study looked at the historical disposal of our total fleet.

There were an excess of an 180,000 container units disposed off during the study period. As a result of the study we decided to increase the residential values for 20 foot containers by $100 to $950, 40 foot containers by $200 to $1,150, and 40 foot high-cube containers by $300 to $1,300. We changed the depreciation for refrigerated containers from a 15-year life to a residual value of 15% of original equipment cost to a 12-year life to a fixed residual value of $3,000. The methodology change with refrigerated containers reflects our increase investment in refrigerated containers.

Operator, please open the line for questions.

Question-and-Answer Session

Operator

Thank you (Operator Instructions) Our first question is from Robert Napoli of Piper Jaffray. Your line is open.

Robert Napoli – Piper Jaffary

Hi, thank you. Good morning or good afternoon. A few questions, first of all the lease rates in the quarter and, I guess the growth you expect in lease income in the second quarter, and you did have very strong growth in your containers, stronger than what we’d expected, what are you looking for, what level of growth would you expect in the second quarter in lease income?

Victor Garcia

I think we don’t have any specific percentage, but I would say that our experience in that customer pickups have been a little bit slower than we initially expected, so it’s more of a regular seasonal pattern that we’re seeing as opposed to last year where we had, I think really in the middle of February we had pick up, so we have quite a number of units that are – have already been committed to, but they have periods of time which customers can’t pick them up and we haven’t seen, although the activity is picking up a little bit, we haven’t seen the pickups quite as robust as to be able to indicate exactly what percentage of fleet growth we are going to have in the second-quarter.

Robert Napoli – Piper Jaffary

Okay. The – what was the acquisition, do you have a dollars amount of CapEx you did in the quarter? And what do you expect from, what is your best estimate of purchases through the balance of the year?

Victor Garcia

I don’t have that CapEx number right here in front of me right now on the first quarter, but a number of the equipment additions that we have this quarter relate to payments for equipment that we ordered in the fourth quarter, so we still expect overall CapEx this year to be similar to the amount that we had in the prior year, I think we view this as a continuation of the overall recovery in demand for containers and we would expect similar type of investment level.

Robert Napoli – Piper Jaffary

Any sign of shipping lines becoming more aggressive in buying containers?

Victor Garcia

There’ve been certain shipping lines that have bought containers, those who have been traditionally more buyers of the asset, we’ve seen some of those, those who have been more traditional less source have not bought in the same kind of quantity, what I will say is again as I mentioned because of the inventory level that the leasing community has I think many customers who might have purchased equipment have look to – look at what is available from the leasing community to lease out to the degree that they will then purchased their own, it’s going to be somewhat depended on how they see demand towards the end of the year.

Robert Napoli – Piper Jaffary

Thank you.

Victor Garcia

Thank you.

Operator

Thank you sir. Our next question is from Gregory Lewis of Credit Suisse. Your line is open.

Gregory Lewis – Credit Suisse

Yes, thank you and good afternoon.

Victor Garcia

Hi, Greg.

Gregory Lewis – Credit Suisse

Could you touch on sort of how the container sale and management contract sort of what the genesis behind that was, was that something they approach you, did you approach them, was there an existing relationship beforehand is there something that we could see more of them in the coming quarters?

Victor Garcia

We have as part of our business strategy to own and manage containers, so our approach on managing containers that we procure containers lease amount and then try to work with people to sell those containers to manage the assets. That’s our general business plan and what we did up until the downturn in 2000 – at the end of 2008. What we have been doing throughout even the downturn is continue to develop our business in Asia, primarily in Japan, where we are doing our own development of a customer base that is to look at making these kind of investments in containers.

So our team in Japan has been continuing to develop investment products and working with investors to try to get into these portfolios. We’ve done this for a number of years prior to 2008 and they’ve just continued to steadily work and progressive and are really developing unique position in the marketplace as they continue to grow the overall portfolios. So they work closely with us and try to set up a management agreement and developing the customer base. And we actually think over time could be a significant differentiator for us as we continue to expand our business.

Gregory Lewis – Credit Suisse

Okay. And now were those boxes already in your fleet and operating and then you lease that or are these actually new boxes that were sort of placed with them?

Victor Garcia

The boxes (inaudible) new they were largely less than a year old, so they were in our fleet on lease and we had agreed with the investors to sell that portfolio to them and manage the assets.

Gregory Lewis – Credit Suisse

And how was the price determined. I mean was it just simply the price that you paid upon the delivery with like a straight line depreciation or like how was the fair value approached on that?

Victor Garcia

Typically what we try to do is understand what the income yield or income return that investors are looking for based on the current lease rates. And so, the price is a reflection of current box prices, the underlying lease rate and what the investment yield is estimated to be for the investors. And that’s how we determine price. So it’s not simply our equipment cost, it’s really looking at what the portfolio value is on a yield basis.

Gregory Lewis – Credit Suisse

Okay, great. And then just one last question and that’s more to do with what you’re sort of seeing or hearing from your manufacturers. Could you talk a little bit about where, what it would cost the order in new box today and sort of the timing of that in terms of where the backlogs are at the manufactures?

Victor Garcia

I think the general view is that because of the equipment available there’s been a moderation in additions being put on too with the manufactures. And so we’re probably seeing the price we were seeing before on a 20-foot container 2,900 to maybe 2,950 has moderated by approximately $100. And as far as production timing, I think we believe that we could get access to production within the next two months.

Gregory Lewis – Credit Suisse

Okay. So in other words you can get delivery in July?

Unidentified Company Representative

We could probably get delivery in June.

Gregory Lewis – Credit Suisse

Get delivery in June. Okay. Thank you very much for the time gentlemen.

Victor Garcia

Thanks Greg.

Operator

Thank you. Our next question is from Sameer Gokhale of KBW. The line is open.

Sameer Gokhale – KBW

Thank you. I guess at this point most of my questions have been answered. But I just want to drill down a little bit on the rental revenue number, I think Victor you gave some commentary on that and it looks like that the sequential increase was 5% in that lease, in the rental revenue and then there was a 13% increase in owned TEU. And if I thought I heard correctly, you’d mentioned that there was a 5% drop off in lease rates in the quarter and that was kind of seasonal. So are those kind of the major movers there or the difference between the increase in rental revenue and owned TEU, the gap there is basically just a sequential drop in lease rates that’s seasonal in Q1, is that correct?

Victor Garcia

No, I want to make sure, I clarify this point, because I don’t want there to be a misconception about what I said in terms of lease rates. A lot of the leases we have in place are contractual. So, there has been no reduction in the fleet that we had in the fourth quarter resulting in having an average lease rate lower in the first quarter. Those were all contractual deals. What I stated was, if you looked at new equipment production cost and the quoted rate for that new equipment production that rates has declined for incremental equipment by about 5%. So we’ve seen maybe a $0.05 decline in what the quoted or the winning bid rate would be on new business. So that’s on a go forward basis.

As far as sequential revenue growth into the second quarter, it’s a little bit difficult to pin down to today because we do have a fair amount of equipment that is ready to be leased out. The timing of when it get leased out is somewhat dependent on when our customers pick up. So I guess we would express a little bit of caution in terms of looking at the amount of equipment that we’ve added over the course of this quarter and say well that’s going to be leased out next quarter because the pattern hasn’t – the pickup pattern has not been as fast as it was last year. And so just to assume that kind of a percentage increase in the own fleet being reflected in sequential increase in the revenue would probably be an overestimation.

Sameer Gokhale – KBW

Okay, great. Thanks.

Operator

Thank you sir. Our next question is from John Stilmar of SunTrust. Your line is open.

John Stilmar – SunTrust

Good evening gentlemen. As previous callers said most of my question have been answered. But I was wondering if, with regards to your new box placements, if there’s been any changes in the demand geographically from the types of shipping companies that are requesting boxes or any shifts? And the follow-up to that with the events that happened in Japan, is there anything that you’ve seen as in terms of potential shift and where some of that demand is coming from and how you think about that with regards to your servicing contracts and growth in that part of your business? Thank you.

Victor Garcia

We haven’t seen a global macro change in terms of growth in demand. Most of the customers that we talk to, particularly those who have equipment that is global in terms of its service as opposed to regional carrier remain optimistic and don’t see the effects of what happened in Japan having a major impact in how they look at overall demand for their product. Where we have seen I think a little bit of incremental demand is more Intra-Asian trade that would be directly related to Japan. So we have seen more activity related to for instance Korean names that call on Japan when they are picking up more equipment. And so we have seen incrementally that and their pick up pattern has been faster than I would say the general market overall.

John Stilmar – SunTrust

And if we were to kind of just generally put a bracket around what that would mean in terms of the percentage of the new boxes that we think about in the single-digits range in terms of the customer concentration?

Victor Garcia

Could you repeat the question, I want to make sure I answer it correctly.

John Stilmar – SunTrust

Yeah. So if we were kind of highlighting a potential segment that’s showing incremental demand and showing a greater pickup rate, I was trying to put some sort of context as to how material that is relative to the order book or the boxes that are to be picked up, so is there 5%, 10% if you could give you some kind of just bracketed range of what this customer segment represents in terms of the boxes that are yet to be picked up?

Victor Garcia

I would say it’s – remains to be at fairly small percentage.

John Stilmar – SunTrust

Okay.

Victor Garcia

It wouldn’t be a very high percentage.

John Stilmar – SunTrust

Okay, okay. Well, thank you guys very much. I appreciate it.

Victor Garcia

Thank you John.

Operator

Thank you sir. Our next question is from Helane Becker of Dahlman Rose. Your line is open.

Helane Becker – Dahlman Rose

Thanks very much operator. Hi gentlemen. Thanks for taking my question. Just wanted to understand one thing with respect to your CapEx, plans on that if you have small percentage equipment dealt to be picked up, would you then therefore slow your CapEx for the second quarter to later in the quarter or would you just continue to invest as you have been doing? And the second part of my question is I didn’t see your 10-Q yet, can you just say what your practice is with respect to filing that? Thank you.

Victor Garcia

Sure. First question related to our strategy in terms of investment. Our strategy in terms of investment is the cost and view as to the market place. The benefit for us in our industry is that every day we can come in and take a fresh view of where the market is in terms of increase we’re getting in lease rates and feel fairly comfortable that we can adjust our procurement upwards if we think that demand is picking up faster. So we will not continue to invest if it looks like our outlook is not as great.

So we’re not going to continue to speculate on additional investment if we don’t think that demand is there, if there’s no reason for us to do that. As far as our 10-Q, I would just say that we’re finalizing it, we expect to issue it over the next several days and our policy towards that is to try and provide a thorough announcements of the Q and do it on a timely basis. We try to get – we try to move up our earnings call to provide department data to the investment community as early as possible that means that there is a disparity between when we actually file our Q and when we actually will produce results.

Helane Becker – Dahlman Rose

Okay. Thank you very much.

Victor Garcia

Thank you.

Operator

Thank you. Our next question is from Salvatore Vitale, Sterne Agee. Your line is open.

Salvatore Vitale – Sterne Agee

Well, thank you for taking my call. I appreciate it. Nice quarter. The first question this is for Gary if you could just some clarifications on what you said earlier, I hopped on a little late. I guess the first question is could you repeat your comments on why the management fee revenue will likely decline sequentially in future quarters?

Victor Garcia

It has to do with one particular managed portfolio in which they had on leased one particular liner and they decided to put all these containers off lease, and we had a very attractive incentive gain on the sale once we hit a threshold amount, and so once we hit that threshold amount we share 85 – we get 85% of the gain. And so what that meant is that for both the fourth quarter of 2010 as well as the first quarter of 2011 we were able to book gains of 900,000 in each of those quarters. So we’ll have some additional revenue in the second quarter and may be a little bit in the third quarter, but by then that particular managed portfolio will have – all the containers will have been returned.

Salvatore Vitale – Sterne Agee

Okay, so that’s – I’m sorry so that’s why the – I apologize go ahead.

Victor Garcia

You go ahead.

Salvatore Vitale – Sterne Agee

I was just about to say, so that’s why the management fee revenue went from sequentially from about 2.2 million in 3Q up to about 3.4 in the fourth quarter and now 3.5 in 1Q and you are saying that some of that incentive will be tripling out over the next couple of quarters, so it should be trending down.

Victor Garcia

Yeah, that’s why we made that point because of that particular issue.

Salvatore Vitale – Sterne Agee

Okay, that’s a good point and thank you for clarifying that. And then just on what you said earlier when you were discussing the – I think it was the average interest expense, the average interest rate, you were discussing the ETR, what was that term you used?

Victor Garcia

The first time, ETR stands for the effective tax rate.

Salvatore Vitale – Sterne Agee

Okay.

Victor Garcia

And we were talking about the taxes and in the next few times I just abbreviated it to ETR.

Salvatore Vitale – Sterne Agee

Okay. And that effective tax rate that we should be looking at going forward, is that still around that 16ish percent?

Victor Garcia

We’ve been in the 16-17, it’s hard to predict exactly where it’s going to be at the end because in addition to the increased investment of containers in Barbados other factors may come in, but we expect it to be trending down year-over-year and on particular quarter in general we would expect it to be trending down may be a little bit of variation around the trend.

Victor Garcia

Although the 16.4% is our best estimate of the tax rate for the full year.

Salvatore Vitale – Sterne Agee

Okay.

Victor Garcia

So taken everything into account as we sit here today that is our estimated tax rate for this year.

Salvatore Vitale – Sterne Agee

Okay. And then just for you Victor just some clarifications on what you have said earlier. You had said that the new box price was about the 2,900 to 2,950 and that’s has moderated by about a $100, so that if you take 20, that implies about 3-3.5 decline and is that roughly commensurate with that 5% decline in per diem lease rates that you mentioned, is that the way to think about it?

Victor Garcia

I think they’re inter related, I don’t think that they are exactly tied together, but if you think about the underlying fundamentals, what’s happening is as there’s some available equipment there that’s ready to be leased out, customers are coming in and requesting leases, but for the second quarter and because of the amount of available equipment that may factors feel like they need to moderate their price slightly to try to and tie some people to container procures, so it is not directly correlated, but the trends that the fundamentals underlying them are consistent.

Salvatore Vitale – Sterne Agee

Okay. And now did we see just to compare that to say a year ago, was that so in 1Q, 2010 did we see similar phenomenon where the pickups were little bit later? Actually I think you said last year was more or like middle of February, this year is a little later?

Victor Garcia

Yeah, I think if you were to go back to the first quarter of 2010, the dynamic was that the market picked up very significantly in February, which was earlier than what we would have expected, seasonally it does not pick up in February, but it did that year. And at that time the factories still were not producing very much, what we saw for the subsequent say three to four months was that the existing stock of equipment start again leased out, it was really over the summer months and then into the fall that the manufacturers started producing equipment and it was really trying to catch up to demand.

Demand was picking up very quickly and container prices were going up because of the continued strong demand for picking up equipment. So the dynamic last year was different, it was a turn in the market upwards where there was a little bit of a scarcity factor, and prices went up, lease rates went up commensurately. We got into the fourth quarter, demand continued to be there, but the scarcity factor wasn’t there. And then when you look into 2011, I think most people still has a very good outlook for this year, but again everybody has been in preparation for a good year and so there is a better balance between the amount of available equipment and demand.

Salvatore Vitale – Sterne Agee

Okay. So you are saying that last year’s early pickup was the anomaly and this year’s is more normalized in your opinion?

Victor Garcia

That’s correct.

Salvatore Vitale – Sterne Agee

Okay. And then just a clarification on when customers pick up the boxes. So if a customer orders a container and you received a container, so you include it in your TEU account, but you’re saying that if it’s not yet picked up by the customer, it’s in your TEU account, but you’re not earning revenue on it, am I understanding that right?

Victor Garcia

There are different ways that we order equipment, sometimes we order with a contract in place, other times we order equipment based on our forecast of demand and then that will have the inventory in place and we will work with the customer to bid on their business and they will give us an indication of when they will pick up the equipment. And it’s typically will not be all in one month, but staggered over time based on how they view their equipment pick up needs to be. Sometimes the market turns faster and the equipment that they thought they were going to pick two or three months out gets picked up earlier, it’s really hard to forecast.

Salvatore Vitale – Sterne Agee

Sorry, go ahead.

Victor Garcia

So there is a little bit of variance there on exactly when the equipment gets picked up.

Salvatore Vitale – Sterne Agee

Okay. So if it’s contractual though then as soon as you receive it and you include it in your TEU account you start earning the revenue on that, is that correct?

Victor Garcia

No, that’s not correct.

Salvatore Vitale – Sterne Agee

Okay. That’s not correct.

Victor Garcia

It’s when they pick up the unit unless there is a specified date at which they don’t pick up by we start billing them for it. So normally we give them and allow a certain period of time to pick up the unit before we contractually start charging them per deal.

Salvatore Vitale – Sterne Agee

Okay, understood. So then how many in your current TEU account, owned TEU account, how many TEUs are not picked up, I guess, have not been picked up?

Victor Garcia

I think that that’s a number that we have a majority of I’d say a good percentage of the units that we took delivery of this year, there is probably half of them are already committed to.

Salvatore Vitale – Sterne Agee

Okay. So that’s of the 55 you took delivery of in 1Q about half of them are already generating revenue?

Victor Garcia

They’re committed to be picked up from a customer, the other is remaining to – where some marketing to additional customers.

Salvatore Vitale – Sterne Agee

Okay. Is it fair to assume over the next couple of quarters that the number of TEUs that are delivered are going to approximate that 55,000 from 1Q.

Victor Garcia

As an ongoing rate?

Salvatore Vitale – Sterne Agee

Yeah. Maybe if not for the rest of the year just maybe the next quarter or so.

Victor Garcia

I’d say we would not expect it to be going at that same pace.

Salvatore Vitale – Sterne Agee

Okay. And then let me just, if I could just switch gears here to the expense side on the bad debt expense reduction of $900,000, so that’s going to be ongoing right? So that’s going to be so essentially think about it reducing the run rate of your SG&A going forward by about $900,000 for the quarter?

Victor Garcia

No we had a recovery of bad debt reserves, so we actually had credit I guess bad debt.

Salvatore Vitale – Sterne Agee

Okay.

Victor Garcia

We had a particular customer that we had reserves against their receivables at the orders.

Salvatore Vitale – Sterne Agee

Right.

Victor Garcia

We settled the arrangement and so we were able to take back the reserves that we had against them.

Salvatore Vitale – Sterne Agee

Okay. So that it’s more of a onetime reduction in your SG&A?

Victor Garcia

Correct.

Salvatore Vitale – Sterne Agee

Okay. And then if I could just ask you one other question. So under depreciation expense you were indicating that it comes out to about $0.12 per year, which make sense about $0.03 per quarter. Okay, that makes sense. And so your view is that you expect to see that the reversal and the recent moderation in per diem rates are new boxes over the next quarter or so and is that historically that’s been the case?

Victor Garcia

I would just say that we would expect that as lease out activity picks up and more customers are coming in for requesting equipment, we don’t believe that the level of inventory that has remained un-booked for the whole industry is extremely large and we would expect that as confidence build that demand building and lease rates will likely rise along with it.

Salvatore Vitale – Sterne Agee

Okay. Thank you for your time. I appreciate it.

Victor Garcia

Thank you.

Operator

Thank you. (Operator Instructions). Our next question is from Daniel Furtado of Jefferies. Your line is open.

Daniel Furtado – Jefferies

Thanks everybody for taking the time to answer my questions. Just a quick kind of theoretic question, at what price and I appreciate that the containers are slightly cheaper over the last couple of weeks, but what price for a dry box, does it become problematic to pass the price through to your customers?

Victor Garcia

It’s not a particular box price that becomes problematic, I think it’s the change in box prices that become the bigger issue, because our customers know that before we’re going to make incremental investment we have to get incremental return. So and the cost to them whether they purchase the asset or lease the asset there’s an underlying cost of the asset. So and it has more to do with the change in price that affects the lease rate as opposed to reaching a ceiling. We would actually say that, as box prices rise, there’s probably a greater likelihood of customers leasing.

Daniel Furtado – Jefferies

Right, right. Okay, so you don’t – but okay I understand that. And then not harp on this, but the slower pickup suggests simply that there is incrementally less demand, incrementally more product available and more kind of a pre-point in the season where people take a little of breath before ramping up for the shipping season. Is that more or less worth the slow pickups, coming (inaudible)?

Victor Garcia

Yeah. I would say, there is equipment that customers have held on to because the existing equipment that they have in their fleets is that of a lower cost to renew production. So, they have some equipment there that is going to be picked up plus this is not an abnormal year. This is a normal year.

Daniel Furtado – Jefferies

Right.

Victor Garcia

And I think what we’ve always said is, our strongest quarters are the second, third quarter in terms of lease out activity. That is this – what we are seeing is would still be consistent with that.

Daniel Furtado – Jefferies

Perfect. I appreciate the clarity on that. Thanks again, and nice quarter.

Victor Garcia

Thank you.

Operator

Thank you, sir. I’m showing further questions or comments at this time. I’d like to turn the call over to management for any closing remarks.

John Nishibori

Thank you, very much for your continued interest in our company and we look forward to speaking with you again in our next earnings call.

Operator

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

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