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CAI International Inc. (NYSE:CAP)

Q2 2011 Earnings Call

July 26, 2011 5:00 PM ET

Executives

Tim Page – Chief Financial Officer

Victor Garcia – Chief Executive Officer

Analysts

Sameer Gokhale – Keefe, Bruyette

Greg Lewis – Credit Suisse

John Stilmar – Suntrust

Sal Vitale – Agee

Daniel Furtado – Jefferies

Helane Becker – Dahlman Rose

John Denosky – Borderline Capital

Operator

Good day, ladies and gentlemen. And welcome to the CAI International Q2 2011 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instruction on how to participate will be given at that time. (Operator instructions)

And as a reminder, today’s conference call is being recorded. Now, I would like to turn the conference over to your host Chief Financial Officer, Mr. Tim Page.

Tim Page

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, 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.

I would now like to turn the call over to Victor Garcia, our CEO.

Victor Garcia

Good afternoon. We are very pleased with our results for this quarter and for the first half of this year, with quarterly year-over-year revenue growth of 66% and earnings per fully diluted share up 77% to $0.55 per share.

In line with our expectations, market demand for our service was strong in the second quarter as equipment that was ordered by the shippers in the fourth quarter of last year and first quarter of this year was picked up.

Utilization rates remain robust at 98%, the average per diem rates of our own fleet increased 31% over last year and our average owned fleet on lease to customers during the second quarter of this year increased 37% as compared to the second quarter of last year. All these factors contributed to strong top and bottom line results for the quarter.

Year-to-date, we have leased out 61,000 TEUs of new equipment, including 13,000 picked up so far this month. We have commitments from our customers to pick up an additional $86 million of equipment during the remainder of the third quarter.

Our investment level so far this year has exceeded our original plans and exceeds our 2010 investment level. Our owned fleet now represents 47% of our total fleet, as compared to 34% at the end of the second quarter last year.

We expect that by year end the ratio of owned versus managed fleet will be 50-50. This increase in the size of our owned fleet is one of the primary factors driving our earnings growth. We expect to continue investing in our fleet but we’ll seek opportunities to also grow our managed fleet.

Besides our commitment to invest in our owned fleet we believe there are strong macro forces that have been and will continue to be positive for the container leasing industry in general and CIA in particular.

Clarkson’s Research has forecasted 2011 global containerized trade volume to grow by 9%, with Asia, the Middle East and South America growing at relatively higher rates than the U.S. and Europe. Growth in trade volume drives growth in container usage and has the need for container investment.

Growth in trade volume is also positive factor in utilization rates. During the 2008, 2009 recession utilization rates fell as trade volume decreased. Declining trade volume is not the case today, trade volumes are increasing. Consequently, we expect continued demand for new containers and for utilization rates to remain robust.

A second macro trend is that in spite of increased volumes of freight shippers are facing earnings pressure as a result of fuel cost and an oversupply of ship capacity. This earnings pressure may translate into opportunity for the container leasing industry as shippers look towards lessors to provide a greater proportion of their total container needs.

We do not expect the recent decline in container box prices to have an adverse impact on our earnings. While new lease rates will reflect lower per diem on the incremental investment the overall returns will be relatively unchanged from the recent period of higher box prices, because lower box prices result in correspondingly lower depreciation and lower interest expense per unit.

As we look out to the third quarter and into next year, it is important to understand that 87% of our own fleet on a TEU basis is on long-term leases, which are not subject to market based per diem rate adjustments or equipment churn. As a result, our container rental revenue and associated expense profile from existing leases is relatively locked in over the short to medium-term.

In summary, the expected growth in global trade volumes, our planned investment levels and the high percentage of our fleet that is on long-term leases all combine to lead us to believe that we can expect continued strong revenue and earnings growth at CAI.

I’ll now turn the call over to Tim Page, our Chief Financial Officer to review the financial results for the quarter.

Tim Page

Thank you, Victor. Earlier today we reported 2011 second quarter net income attributable to common shareholders of $10.9 million, an increase of 92%, compared to the second quarter of 2010.

Net income per fully diluted share increased $0.77, 77% to $0.55 per fully diluted share on an average share count of 19.8 million shares, which is an increase of 9% in the average share count compared to the second quarter of 2010.

For the six months ended June 30, 2011 net income attributable to common shareholders was $23.7 million, compared to $8.7 million for the same period last year, an increase of 171%.

Earnings per fully diluted share increased from $0.48 per share in the first six months of 2010 to $1.20 per share for the same period this year, an increase of 150%.

Total revenue in the second quarter was $28.8 million, compared to $17.4 million for the same period last year, an increase of 66% and 4% higher than in the first quarter of 2011.

Container rental revenue was $24.7 million this quarter, compared to $14 million in the second quarter of last year, an increase of 77% and 10% higher than in the first quarter of this year. This increase in container rental revenue is the result of a 31% increase in our average per diem rate per TEU for the quarter compared to the same period last year and a 37% increase this quarter in the number of TEUs in our owned fleet on lease to customers compared to the second quarter of last year.

Management fee income during the second quarter was $3.3 million, an increase of 29% compared to the same quarter last year, again resulting from higher per diem rates, as well as higher disposition gains on the sale of investor owned used container equipment.

Total operating expenses in the second quarter was $11.8 million, compared to $9.8 million in the second quarter of last year, an increase of 20%. This $2 million increase in operating expense is attributable to $3 million increase in depreciation expense as a result of our increased investment in our own fleet, partially offset by lower storage and handling costs, higher gain on sale of used container equipment and a positive variance and currency exchange.

Marketing, general and administrative expenses at $5.5 million for the quarter were flat with the second quarter of last year.

Marketing, general and administrative expenses were $915,000 higher than the first quarter of this year but as we noted in our first quarter earnings conference call the first quarter included a bad debt reserve release of about $900,000. So adjusting for that bad debt release marketing, general and administrative expenses for the first and second quarters of 2011 are basically at the same level.

Net operating margin in the first six months of 2011 was 63%, as compared to 38% for the same period last year. This 25 percentage point improvement in operating margin can be attributed to the increased investment we have made on our owned fleet, higher average per diem rates, as well as the leverage we gain by holding marketing, general and administrative expenses relatively flat during a time that revenue increased 74%.

Interest expense in the quarter was $3.5 million, an increase of $2.6 million over the same period last year and reflects the investment we have made in our own fleet.

This concludes our comments. Operator, please open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Sameer Gokhale from Keefe, Bruyette. Your line is open.

Sameer Gokhale – Keefe, Bruyette

Thank you. I guess, I just open it up with the first question which is that, when your share price is off something like 40% from its peak and yet when you’re reporting the results, I mean, I don’t see any significant weakness, in fact, it looked like pretty good results to me.

So in your discussions with the shipping companies is there like, you reference their weakness, just given the excess capacity but in your view are they at risk of bankruptcy, that what’s being priced into your stock that saying something calameters happens there and then there’s a big glut of containers coming back to you and the other companies because it just seems like there’s something that’s I don’t think. So your thoughts here would be appreciated? Thank you.

Victor Garcia

What I would -- hi, Sameer. What I would say is that our receivables position in terms of outstanding days with our customers has continued to improve overtime. Although, we do recognize that there are earnings pressures, I think the situation we have today is very different than we had in 2009. And that, in 2009 we had not only freight rates going down but volumes of containers going down and so the magnitude of losses with the shipping lines were much more significant.

We don’t know or we’re not going to comment on what expectations are in terms of the stock price activity. What we can tell you is that right now credit quality is not a concern for us. We don’t have any indicators that would indicate that there is stress in our receivables base and so, I’m not sure that that is a reason to attribute it to the stock price movement.

Sameer Gokhale – Keefe, Bruyette

Okay. So, thanks for that Victor. But like in ‘09 for example, arguably it was, well, not much argument there, but it was much worse environment, I would say, based on the factors you referenced. And it seems like at that point in time, based on my discussion with investors, investor were worried that a lot of these shipping companies could go bankrupt. And then I think in several cases you had governments coming in to bail out some of the shipping companies?

In your view, the shipping companies, at least from what you’re seeing, it suggest that they are in better shape than they were back then even though they are under pressure. So, do you have a view on that as far as government coming to aid them or do they need the aid at this point in time, are you willing to comment on that?

Victor Garcia

Yeah. I don’t have comment on – our customer base is doing in terms of government support and things like that. After a record last year in 2009, they had a record profit year in 2010. So they – and during that process also capitalize themselves significantly. So, I’m going to stick with the comment that had before which was that as we see the situation through our discussions with our customers and what we are seeing in our collections, we are not seeing anything that would indicate stress in the system.

Sameer Gokhale – Keefe, Bruyette

Okay. And, that’s helpful. I guess the other thing I was wondering is that given what’s happened to the share price. Can you comment on your thoughts about share buybacks relative to investing in acquisition if new containers or would you still prefer to acquire new containers rather than buyback shares at least in the near-term?

Victor Garcia

Share buyback program or anything like that is a discussion that had at the Board level and the Board has not had – the decision at the Board level has not been made on any share buybacks or anything like that. What I would tell you is, the activity in the stock recent has been – is not just our stock, but overall for the sector has been relative short-term over the last say three months. And we would consider, we will, if the share price activity continues to be as it is and we view that the best return on investment for our shareholder is to purchase shares then that the discussion that we will have at the Board level.

Sameer Gokhale – Keefe, Bruyette

Okay. And then just my last question on this container prices, just a little bit confuse, prices had come down and I thought, I read somewhere that prices had come back up again. So could you just give us an absolute dollar term, what the price of a box is right now, is it kind of at the $2,700 level or so roughly, could you just, you’ll compare and contrast compared to Q1?

Victor Garcia

I think we’re looking at the beginning of the year $2,850 for a 20-foot container and in somewhere around $2,600.

Sameer Gokhale – Keefe, Bruyette

$2,600, okay.

Victor Garcia

Yeah.

Sameer Gokhale – Keefe, Bruyette

Great. Okay. Thanks Victor.

Victor Garcia

Yeah.

Operator

Thank you. Our next question in queue comes from Greg Lewis of Credit Suisse. Your line is open.

Greg Lewis – Credit Suisse

Thank you and good afternoon.

Victor Garcia

Hi Greg.

Greg Lewis – Credit Suisse

Victor, you mentioned the $86 million of equipment willing to be picked up in the third quarter. If we sort of just back into that $2,600 price you gave us, is that the right way to think about it in terms of TEUs, so what maybe that’s 30, 32, 33,000 TEU of equipment weight that we picked up?

Victor Garcia

No. Because in that equipment is a mix of standard drydock containers, as well as refrigerated containers, so on a TEU basis, I guess, I wouldn’t look at it that way. It’s a combination of those two. So on a TEU basis it wouldn’t get to the right calculation.

Greg Lewis – Credit Suisse

Okay. Are you able to provide any sort of rough estimate into what the TEU is going to look like?

Victor Garcia

I could follow-up after the call, I don’t have the figure right -- front of me right now, but if you wanted to follow-up we could try to follow-up after the call.

Greg Lewis – Credit Suisse

Okay. Great. And then, actually brings me to my next question. Would you say over the last call it one to two months? I mean, I sort of get this sense that maybe there’s not as much demand for the standard dry boxes as there are for reefers, in other words from what I’m gathering is it’s the reefer market kind of has been, I guess to say relatively outperforming the standard boxes, is that a sort of a safe assumption?

Victor Garcia

Let’s say in general we’ve seen the reefer market over the summer it’s a relatively quiet period, so that’s not the seasonally strong period. So we’re actually over the next few months we’ll actually start going into the strengthening part of the reefer market. I’d say that the outlook on the reefer market seems to be pretty positive, more ships coming on with reefer capability. So I think we’re positive on that and some of the opportunities we have in the third quarter relate to refrigerated containers.

I would say within the overall standard drydock containers we’ve seen relatively more demand for 20-foot containers versus 40-foot where standards are (inaudible) and I think that that is reflective of in general the higher growth rate in the Asia, Middle east and Latin America. So, whereas, Europe and U.S. is growing at a slower pace but that’s – s there is standard dry and containers.

Greg Lewis – Credit Suisse

Okay. Great. And then just my last question would be regarding the ability of CAI to continue to generate gains on sales of containers, I mean, clearly, utilization has remained high in that 98% range for a while now. Just given that backdrop do you expect to have opportunities to continue to book gains on sales over the next couple quarters?

Victor Garcia

Absolutely, absolutely. The secondary market remains still very strong. The average gain that we’re reporting this year -- this quarter as compared to last year is up. We have not seen any decline in the average sales price for the containers that we’re disposing up, so there’s nothing to indicate and when we’re talking about new box prices, we’re still talking about new box prices is around the rate of what I said around $2,600. So that will continue to provide good strong support for secondary prices.

Greg Lewis – Credit Suisse

Okay. Great. Thank you very much for the time.

Victor Garcia

Sure.

Operator

Thank you. Our next question in queue is from John Stilmar of Suntrust. Your line is open.

John Stilmar – Suntrust

Good afternoon or evening, Victor and Tim. Thank you for letting me ask my question. I’m just trying to triangulate the comments, I guess, Victor, you had made with regards to your level of capital expenditures and I was going back to the cash flow statement and it looks like you spent $101 million in the first quarter.

I was wondering first of all if you could give us what that cash flow number is maybe for the second quarter and maybe help kind of characterize for me the level of capital that you’ve put to work? And then I have a follow-up question with that and kind of how that compares to your statement of exceeding your 2010 total investment level?

Victor Garcia

Sure. Well, through the -- for the first six months total investment or total purchases $261 million, will be paid for in the first quarter of this year, in that first quarter the first six months of this year.

John Stilmar – Suntrust

Okay. And then so and of that how much of that $261 million had been committed to, so as you had mentioned in your press release pick up, clearly, excuse me, have been occurring, the question is how much of those pick up have – how much is, excuse me, how much of those pick up have come as part of your planned pick up versus those parts that were not planned respect to the orders?

Victor Garcia

Okay. I guess you tell me if I’m answering your question correctly? If you look at the equipment paid for in the first quarter because we had ordered it in the fourth quarter or the equipment that we ordered in the first quarter the vast majority has already gone out on lease.

So we had the first quarter conference call, we talked about how during that period the first quarter we saw very little activity and then most of the customer booking for the second quarter. As the second quarter came together we saw the pick ups occurring and the level of pick-ups were very strong. So we did almost 40000 TEUs in the second quarter. July continued to be strong, we’re going to do at this point we did 13000 TEUs, that month is not out yet, so we expect to be at a number above that.

So we could translate between dollars and TEUs, but I would characterize it as most of the investment that we have made has already come on-stream and is already earning revenue on long-term leases.

John Stilmar – Suntrust

Okay. I’m sorry for my poor way of asking the question before. But just to put a final point on it, you guys have made some investments that have been not previously committed but you haven’t had any problems being able to place those boxes that you’ve purchased and so you’re comfortable at the level of uncommitted amounts potentially now in your future orders coming for the third quarter?

Victor Garcia

Yeah. I’d say our unbooked inventory position is relatively low and we will be looking at opportunities of increasing our investment as the market develops. So I think from where we are today as we look at where we are, I think we feel very good with the amount of business we’ve already done.

We feel very good about the fact that we’ve already exceeded our initial expectations and what we did last year and we still have a good part of the year to go, obviously, we want to put together attractive business and we think the market will be there to do more attractive business.

John Stilmar – Suntrust

Thank you, guys.

Operator

Thank you. (Operator instructions) Our next question comes from Sal Vitale of Agee and your line is open.

Sal Vitale – Agee

Can you hear me okay?

Victor Garcia

I just heard you, Sal.

Sal Vitale – Agee

Okay. Sorry. I probably had you unmute, I apologize. Good afternoon, Victor. Good afternoon, Tim. Thanks for taking my question. The first question is just a clarification. I think you had said that so far year-to-date 67000 units have been put out on TEU have been put out on leases, is that right?

Victor Garcia

61000 TEUs.

Sal Vitale – Agee

61000 TEUs. So that means that I think you said 13 so far this quarter, 40 in 2Q, so that would imply what about seven for 1Q, so 1Q was really light in that regard?

Victor Garcia

1Q was very light, somewhere in that order of magnitude, I think you’re correct.

Sal Vitale – Agee

Okay. So you’ve really seen a ramp up in the pickups, which is a real positive. So the $87 million or the $86 million worth of equipment is committed to be picked up in the third quarter, is that included in the $261 million of purchases in the first half, I assume so correct?

Victor Garcia

No. There is some equipment – what was -- the $261 million is what we’ve actually paid for…

Sal Vitale – Agee

Right.

Victor Garcia

… we have a trade credit that we have that gives us some payment terms, so there’ll be some additional payments that we’ll have to make in the third quarter.

Sal Vitale – Agee

Okay. So just to, if I can get an idea for, so $261 million was paid for in the first half. Last year’s full year of investment was what $204.6 million, is that the way I’m going to go with?

Victor Garcia

Yeah.

Sal Vitale – Agee

So you’ve already exceeded that, do we then in terms of the second half, because I know that your goal, one of your objective is to increase your reefer CapEx and that usually happens in the second half. Is it fair to say that we can double that $261 million for the full year that you can do a comparable amount in the second half of the year?

Victor Garcia

I don’t think we want to suggest that we’re going to do another $260 million. I think certainly we think that this will be our biggest CapEx year of any year. This will be our most profitable year of any year in the history of the company. We’re already at something like 87% or some like that of last year’s profit level.

From where we stand, I would say two things. We like what we’ve done already this year, we are optimistic about our opportunities for the remainder of the year and we have the financial wealth to continue to invest in our business. Our leverage is still low and we think that we can continue to take advantage of good long-term business opportunities as they come up this year.

Sal Vitale – Agee

Okay. And then on the in terms of the, you said that your unbooked inventory is currently very low. I remember it was a little bit more significant on the last conference call. So that’s all been picked up and are you at this point going to be ordering a lot of uncommitted, so you going to be ordering additional containers that are not necessarily committed or I guess ordering on speculate -- on spec if that’s the question?

Victor Garcia

I think, it (inaudible) term spec. We have now the opportunity because the investment in containers has slowed down in terms of new ordering by everyone in the industry that we have the ability to order equipment and get it delivered to us fairly quickly.

So the amount of timing risk that we might have between new opportunities and when we would be able to get that equipment delivered is pretty small. So, yeah, yeah, we will look at additional investment, but as far as inventory risk, we have an ability to get inventory fairly quickly to meet our customer’s demands.

Sal Vitale – Agee

Okay. And then, if I could, just a last question on the new box prices, I think you had said $2,600, is that type of deceleration from say the early part of the year to the middle of the year. Is that usually seasonally the direction of new box prices?

Victor Garcia

Well, I think the summer is usually when demand for new box production increases, so you would actually expect in any year a slight increase. So but we had such an acceleration in the first half and -- really first couple of months of this year that it’s come down, we would have expect it -- we were expecting a firmer box price than the decline that we’ve had.

But that being said the fact that we have already put out a lot of our equipment on long-term lease and the box price come down little bit is a real opportunity for us to continue to invest at -- with equipment prices at a lower price.

Sal Vitale – Agee

Okay. And then in terms of the re-pricing opportunity you have, it seems that if the new container price has come down a bit than the new lease rate have come down a bit as well. I think you had said that the cash-on-cash return has been relatively stable. So just back of the envelope, I calculate something like in the low $0.90s -- low $0.90 range for new lease rate on a 20-foot dry. Does that -- how much does that impact your re-pricing opportunity?

Victor Garcia

Re-pricing of our existing fleet?

Sal Vitale – Agee

Yeah. Re-pricing on the containers that come off lease that have renewed?

Victor Garcia

I would say all of the containers that we would be having an opportunity to be re-priced are still somewhere in the order of 50% below where a new box price is.

Sal Vitale – Agee

Okay. That’s fair enough.

Victor Garcia

We have -- we still have an opportunity to re-price or discuss with customers, re-pricing of leases based on where the new box price and new lease rates are.

Sal Vitale – Agee

And Victor, have you seen a lot of that this quarter in the second quarter?

Victor Garcia

No. I think we, well, we haven’t had as many -- we did a lot of activity already a couple quarters back with customers, trying to be proactive in trying to extend leases. So we already had done a lot of that activity but every quarter, certain leases come back up…

Sal Vitale – Agee

Okay.

Victor Garcia

… we do it normally.

Sal Vitale – Agee

Okay. Thanks. That’s very helpful.

Victor Garcia

Yeah.

Operator

Thank you. Our next question in queue comes from Daniel Furtado of Jefferies. Your line is open.

Daniel Furtado – Jefferies

Thanks, Victor, and another nice quarter. Just two quick questions, I just kind of want to get a general sense of how you have seen market lease rates trend from March 31 to today, just kind of in broad terms?

Victor Garcia

Well, as I think we’ve said, our average per diem, our cost roughly is higher this quarter than last year and if you look at what we’d have because of all the deals that we have done in the first quarter and that equipment now going out, lot of the equipment that’s coming out is at a higher per diem rate.

Now as in the second quarter as container prices come down the new lease rates will have come down accordingly, so that incremental will be on a purely nominal basis will be down but that will not have a material affect on our average per diem rate given that it’s a -- what we have even the investment in the third quarter is relatively small to our total fleet, particularly our total owned fleet.

So, we -- this all gets blended into the total, I’d say overall, we’re still going to see average per diem rates across the whole fleet expected to be certainly on a year-over-year basis even on quarter-to-quarter basis to likely be higher than lower.

Daniel Furtado – Jefferies

Got you. And when you see or when we see the kind of the weakness in performance of the carriers, how does that kind of relate to like requests for concessions or I mean do these guys approach you and say we are having a tough time, can you help us out or is this something that once you sign a lease it’s pretty much locked in, there is really no wiggle room on their end?

Victor Garcia

All of our customers have met their obligations on their contracts. I don’t have a conversation with a customer about renegotiating lease terms. We are not in that environment right now, but the other thing that I would note is we are focusing a lot on equipment coming out of China which is where the manufacturing is. We get a lot of inquiry today for any depot equipment that we still have available.

We get inquiry all the time asking to take whatever equipment we have in Europe or Asia, I’m sorry, Europe or United States because customers still have strong demand in those areas and the inventory levels in those areas are pretty small. So, demand for containers continues to be very strong globally and as depicted by our 80%, I’m sorry, 98% utilization rate.

Daniel Furtado – Jefferies

Great. And I was thinking from Sameer’s first question about this concern of the health of the shipping companies, you know, you get a bankruptcy or something like that? I mean wouldn’t it be reasonable to expect a shipping company or a carrier who was under severe duress -- the first step they would do is reach out to you and their other leasing counterparties on both the container and the ship side first and so you would kind of get a little bit of a heads-up that, hey, these guys are wounded as opposed to just a surprise one day?

Victor Garcia

Sure, well, like I said, we haven’t had discussions with customers about re-negotiating leases because of financial stress. What I would say in discussions with customers and even what you read in the common press is the actions that shipping lines are taking is that they chartered in too many ships when new ship deliveries were coming in and they are returning those ships back to the owners as the charters expire so that they can better bring into balance their ship capacity versus demand overall. So that’s what they are trying to do to rectify their situation.

Volumes of containers moving have continued to grow. It has not been a similar situation that we had in 2008, 2009. The market is growing, the market is growing at the typical annual pace and that’s why we are seeing our equipment go out. What matters to us is trade growth because that translates into demand growth for containers.

Daniel Furtado – Jefferies

Excellent. Thank you so much for the answers. Have a great day.

Operator

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

Helane Becker – Dahlman Rose

Thank you very much, operator. Hi, gentlemen. Thanks for the time and thanks for answering most of my questions, but I did have just one or two balance sheet questions. I think you may have mentioned the amount of capacity you have to still borrow to finance equipment orders or maybe that was another company and I got confused?

Victor Garcia

Let me -- hi, Helane. What I said is if you look at our debt capacity in terms of our debt relative to our equity position we have still a very strong position. So, we have committed facilities available to us today to continue investing, but that’s not really the governor of how much we can do.

We continue to talk to other lenders about other credit facilities to continue our expansion plans. So, we don’t view that we will be stymied in our ability to meet the market demand and the opportunity there because of our leverage position. So we think we will be able to access the capital necessary to meet good opportunities that we may have in the marketplace.

Helane Becker – Dahlman Rose

Okay. So would you then in terms of second -- well, in terms of second half capacity growth would you be back in the market to do -- to raise capital then? Would that be an option?

Victor Garcia

I think we’re looking at -- the only thing I would say is we are continuing to look at debt capital. As I said, we’re underleveraged relative I would say to our peer group and we think we have an opportunity to continue to take advantage of this upturn in the market to invest in long-term leases, containers with long-term leases on it. So our focus right now is on continuing to use our capital efficiently and to grow the business.

Helane Becker – Dahlman Rose

Okay. And then I know it’s a Board decision, but, anything out of the Board new about establishing a dividend?

Victor Garcia

Those are just like the share buyback those are discussions -- the Board is always looking at how we can best create shareholder value. So we look at a Return of Capital in the form of a dividend, a share buyback in the same thing or the new investment opportunities and we look at what the best opportunity is for our shareholders.

Where we are right now is where we continue to see the investment opportunities, we’re growing the business, but clearly if there’s a compelling situation in the stock market where our stock doesn’t reflect what we and the Board believe is fair value for the stock we’ll certainly have to consider that.

Helane Becker – Dahlman Rose

Okay. And then thank you for that and then can I just ask one clarification question on the balance sheet, where you have the revolver at $256.6 and term loans at $170.6, so then the way I interpret that is in the second half or in the first half of the year the aircraft -- sorry, the containers that you check are being used, are being bought using the revolver? Is that how I would look at that?

Victor Garcia

During the quarter we use largely the revolver to fund most of our purchases. I think you may recall that in the summer of last year we put together a $300 million term loan commitment that we had funded at that time, $185 million. We have already moved some of our funding from the revolver over to the term loan. So we’ve now funded a greater portion of the term loan since this date. So we have availability on our revolver to continue to make additional purchases.

Helane Becker – Dahlman Rose

Okay. That’s perfect. Thank you. Thank you for your answers.

Victor Garcia

Sure.

Operator

Thank you. Our next question is from John Denosky of Borderline Capital. Your line is open.

John Denosky – Borderline Capital

Hi, guys. Great quarter. Congratulations.

Victor Garcia

Thanks, John.

John Denosky – Borderline Capital

Just one question for me. I got a little confused on the CapEx of $261 million in the first half and then $86 million more committed so far Q3, that’s correct?

Victor Garcia

$260 million is the first half if you look on what we paid for equipment. The $86 million of equipment is a combination of equipment that’s already included in that number, as well as equipment that we haven’t paid for. So it’s a combination of that.

John Denosky – Borderline Capital

I think ballpark what would be kind of the total paid uncommitted so far?

Victor Garcia

You’ll be looking at a number of around 360.

John Denosky – Borderline Capital

360 so far. All right. Great. Thanks so much. Appreciate it.

Victor Garcia

Sure.

Operator

Thank you. (Operator instructions) Our next question is from John Stilmar of Suntrust. Your line is open.

John Stilmar – Suntrust

Thank you very much. I’ll try to get through this without choking this time. Just very quickly, Victor, you had talked about a pull back in industry at least recently when you were answering a question with regards to the time period that you could get a box. What do you attribute that to?

Is that lessor potentially taking market share where you have shipping companies pulling back? Are there changes in the dynamics of the market to where you potentially could be taking a greater portion of the leasing market? I was wondering if you might be able to put kind of a finer point on that and that’s my follow-up question. Thank you.

Victor Garcia

Okay. I’m not completely clear on the question. Maybe can you just repeat it one more time because I want to make sure that I answer it correctly?

John Stilmar – Suntrust

Yeah. I think you alluded to that you had said that there was a recent pull-back in the industry for new orders. And in terms of your ability to get new boxes and the time period in which you could bring those new boxes online.

And my question was whether you -- what is the driver of that? Is it normal seasonality, is it the fact that shippers are now coming out of the order books, is it certain lessors that are backing away such that you’re taking a bigger portion of the leasing market? Wondering what you can attribute that dynamic to?

Victor Garcia

Sure. Okay. Our view is that we had our customers taking -- using their own inventory including leased boxes that they had returned to China in the fourth quarter. They used that to meet their incremental demand in the first quarter and they had -- because they had that stock of inventory they were ordering for the second quarter to make sure that in case the market was strong that they would have access to equipment.

Having come through a strong period of time, I think the view had been that the market in 2011 is going to be a very strong year. So everybody wanted to make sure they had equipment. That -- so those orderings continued and now we are seeing in the second quarter the pick-up of equipment in that second quarter.

I think there continue to be overall, if you look at the industry statistics about what has been ordered, there was still significant ordering that was occurring even into the early part of the second quarter because there’s a view that again they will be some where in the order of 3 million to 3.5 million TEUs to be built this year and so and this is going to be a growing market opportunity. I think what we see now is that the pull-back in investment is because of people are waiting for equipment to be picked up.

You know, there is plenty of equipment already waiting to be picked up. So there isn’t a need to be investing and it’s one of the things that we’ve always spoken about is the ability of the container leasing industry to recalibrate its purchases because if demand isn’t picking up quite as fast as you want you can slow down for a month or two until you see more signal that the equipment is going out. Certainly, we are seeing a strong signal that the equipment is going out.

As I said before, we leased out 40,000 TEUs, some of our best lease-out months. And so, we feel we are in a very good position about where we stand in terms of our inventory and the opportunity we have for additional investment. So, it’s just I think a slight slowdown in purchasing given that there was already a fair amount of equipment given relative to the demand of inquiry that we were seeing.

John Stilmar – Suntrust

Very helpful answer. Thank you.

Victor Garcia

Sure.

Operator

Thank you. And at this moment I have no other questions in queue. (Operator instructions) I do show a follow-up question from Sal Vitale. Your line is open.

Sal Vitale – Agee

Hi, Victor. Just one follow-up question following up on what you just said. So, you are saying that because there was some equipment that was waiting to be picked up there was a little bit of a slowdown in ordering activity. But it seems that for your company, anyway, that pick-ups are really occurring, they have occurred in the second quarter and they are occurring in the third quarter, as well.

So does that mean that you saw a lull in ordering activity maybe in the second quarter and now in the third quarter it’s picked up again and it’s going to be accelerating further? I’m just trying to get a read for the other container leasing companies.

Victor Garcia

I guess what I -- you know, every company is in a different position in terms of what they’ve had picked up. What I would say is in general if you look at all the stocks, they have come down a little bit and which is reflective. So as we -- I assume that we are not going to be atypical. So we saw our pickups pick up. We see the level of ordering come down.

So there will be a drop in stocks and we still have the months of August, September, October and even Chinese New Year is in early, is very early this year. So we would expect maybe even a better November, December than it has traditionally been.

So there is still a big part of the year ahead of us and this would be the level of procurement estimated so far is less than 2 million TEUs. So we are significantly less than what we would have normally expected for the full year to be, so there will be more ordering of equipment because the demand will be there for equipment.

Sal Vitale – Agee

But that 2 million, I’m sorry, that 2 million is through the end of -- through now, is through the end of July?

Victor Garcia

At least through the end of June.

Sal Vitale – Agee

Through the end of June. And then -- so do you still have an expectation that full-year production by the manufacturers of containers will be about 3.5 to 4 million TEUs?

Victor Garcia

I think that number sounds high.

Sal Vitale – Agee

So more, 3.5, is that it?

Victor Garcia

Probably, you know, it really depends on how the market develops in the second half, but somewhere, you know, around 3 million TEUs for the year is probably still a reasonable -- reasonable guess.

Sal Vitale – Agee

Okay. Thank you.

Victor Garcia

Sure.

Operator

Thank you. And I’m showing no other questions in queue.

Victor Garcia

Well, I appreciate all of the interest in our company and for the robust discussion. And we look forward to speaking again at our next quarterly earnings call. Thank you very much.

Operator

Ladies and gentlemen, thank you for joining today’s conference. This does conclude the program and you may now disconnect.

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