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CAI International, Inc (NYSE:CAP)

Q1 2012 Earnings Call

April 26, 2012 05:00 p.m. ET

Executives

Victor Garcia – President, CEO

Timothy Page – CFO, IR

Analysts

Gregory Lewis – Credit Suisse

John Stilmar – SunTrust

Helane Becker – Dahlman Rose

John Mims – FBR Capital Markets

Sal Vitale – Sterne Agee

Operator

Good day, ladies and gentlemen, and welcome to your CAI International Q1, 2012 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) And as a reminder, this call may be being recorded.

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

Timothy Page

Good afternoon and thank you for joining us today. Certain statements made during this conference call may be forward-looking and are 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’ll now turn the call over to our President and Chief Executive Officer, Victor Garcia.

Victor Garcia

Thank you, Tim. Tim. Good afternoon. We are very pleased with our first quarter results and we continue to be very optimistic about the outlook for containers in 2012. For the first quarter we reported quarterly year-over-year revenue growth of 42% and an increase in earnings per fully diluted share up 12% to $0.73 per share.

Typically the first quarter is our slowest, as our customers have more limited demand after the holiday season in the fourth quarter. As we expected, our utilization declined from 97% in the fourth quarter to 94% this quarter. The seasonal decline was modest and the majority of our redelivery in Asia, where demand will be strongest over the coming weeks.

Over the past month, demand for containers has significantly improved for both new containers and depot equipment. Many of our customers are reporting cargo volume increases and due to the limited procurement in the second half of last year, are looking to lease new containers.

As a result of increased demand by the shipping lines, container prices have increased from approximately $2,300 for a 20-foot container at the end of 2011 to a current price of approximately $2,600. And it appears to us that manufacturers are looking to increase prices further over the summer months.

Premium rates on new containers have increased in line with container price increases. And we expect that trend to continue to the second quarter. With the cost of new containers increasing, premium rates on depot equipment are also improving and we have several bookings for depot equipment and we’ll improve our utilization over the coming months.

Specifically, we have seen strong bookings for depot equipment out of China as well as Northern Europe, despite the ongoing European debt crisis. According to Clarkson Research Services, exports from Europe to Asia year-on-year through February have grown 13% although Asia to Europe trade has contracted slightly during the same time period.

Demand for equipment in two and out of the United States also appears to be strengthening with throughput volume at the U.S. West coast port in March growing 7.4% compared to the same month in the prior year. Additional shipping capacity is being added to the Asia to U.S. trade resulting in more of our containers being utilized for that service.

As I mentioned, we believe demand for containers will be strong in 2012. Our view is that the current high utilization of worldwide lease fleet the limited capital budgets for purchase by shipping rights and limited new container production in the second half of 2011 along with an expected containerize trade growth of 7% forecast by Clarkson Research will result in a strong demand for containers and an increase in utilization particularly in the second half of 2012.

During the first quarter of 2012 we purchased and leased out approximately $54 million of containers. We have an additional $185 million of containers on order with manufacturers of which more than $100 million is committed to be on lease with customers during the second quarter of 2012.

We expect the remainder of our new equipment order to have lease opportunities over the next several weeks resulting in a year-to-date investment level being ahead of that achieved by us during the same period in 2011. We expect prices for containers being sold into the secondary market to be firm this year, due to the rising cost of new containers and high overall utilization of equipment, and we’re looking to increase prices in some higher demand locations.

I will conclude by restating that we have enjoyed strong revenue and earnings growth over the past several quarters with a relatively tight supply and factoring inventory, improved growth within the U.S. and Northern European economies and continued strong trade amongst less developed regions, we are expecting ongoing growth of our business in 2012.

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

Timothy Page

Thank you, Victor. Earlier today we reported our first quarter 2012 earnings, a record net income attributable to common shareholders of $14.4 million, an increase of 12% compared to the first quarter of 2011. Net income per fully diluted share also increased 12% to $0.73 per fully diluted share on a relatively unchanged average share count of $19.7 million. For the first time in our history, our total assets now exceed $1 billion.

Total revenue in the first quarter was a record $39.4 million compared to $27.7 million for the same period last year, an increase of 42% and 9% higher than the fourth quarter of 2011. As we mentioned in our earnings release effective with the first quarter of 2012, we revised the residual value and useful life estimates for our rental equipment, which reduced our depreciation expense for the quarter by $1.7 million which had an after tax impact of $0.07 per share.

In the first quarter of 2011, we recovered a previously reserved receivable of $0.9 million or $0.04 per share. In addition, there were approximately $1.2 million of other costs in the first quarter of 2012 which I’ll explain later, which had an adverse impact on the quarter.

Year-over-year revenue growth at 42% outpaced our earnings growth of 16%. There are a couple of key factors. Roughly 8% of the differential is related to lower utilization rates we experienced this year versus last year. And as Victor mentioned, we expect utilization to recover over the next couple of months so operating margins should benefit. The balance of the difference between revenue and earnings growth over the past year is tied to the nature of our earnings growth. Non-rental related revenue was a much higher percentage of total revenue in Q1 of 2011 than it is in 2012.

And that revenue has no depreciation on interest expense associated with it. We view the shift towards a higher percentage of rental revenue as a positive, and while rental revenue carries a lower margin than fee and trading base revenue, rental related revenue is contractual, stable and predictable.

As we move forward, we would expect revenue and earnings growth to track more closely as was evident in the fact that revenue grew 9% from Q4 of 2011 to Q1 of 2012 while earnings adjusted for the items I mentioned earlier roughly the same pace.

Both our operating margin and net income margin in Q1 of 2012 were roughly equivalent to the margins we experienced in the last three quarters. Container rental revenue was 32.5 million this quarter compared to 22.4 million in the first quarter of last year, an increase of 45%. Container rental revenue during the quarter increased 2% compared to the fourth quarter. As compared to the fourth quarter, the average number of owned TEU leased increased 7%.

However, this was partially offset by a reduction in the average per diem rate of 4%, as a result – excuse me – management fee income during the first quarter of 2012 was 4.2 million compared to 3.1 million in the fourth quarter of 2011, an increase of 35%. The increase was primarily due to arrangement fees earned on new investor transactions, which was partially offset by a reduction of 4% in the average number of managed to use on lease. We also recognized the gain on sale of container portfolios in the first quarter of 2012 of $1.3 million compared to $1.4 million in the first quarter of 2011.

We made no portfolio sales in the fourth quarter of 2011. Finance leased income was $1.5 million in the first quarter, an increase of – an increase from $0.3 million – excuse me an increase up $0.3 million from the fourth quarter of 2011 reflecting new financed leased arrangements that’s we have entered into in the last two quarters.

Total operating expenses in the first quarter were $16.5 million compared to $9.2 million in the first quarter of last year an increase of $7.3 million. The major components of the $7.3 million year-over-year increase in operating expenses are deprecation accounted for $3.9 million of the difference driven by a 31% increase in container rental assets, storage costs increased $0.9 million as compared to last year as a result from an approximate 2% drop in the utilization of our own fleet.

Finally, MG&A expense grew approximately $2 million. We’ve already mentioned the $0.9 million bad debt related recovery that occurred in Q1 of 2011. The remaining $1.1 million year-over-year change in M&A was partly MG&A was partially due to professional fees directly associated with the fee revenue we received from our Japanese investor transactions in the quarter and to a lesser extent to the startup costs of our rail business. On a run rate basis, we’d expect MG&A to be approximately $6 million per quarter.

Total operating expenses in the first quarter increased $1.2 million from $15.3 million in the fourth quarter of 2011. Without the impact of changed to deprecation, the increase in total operating expense in the quarter would have been $2.9 million. $1.4 million of which was due to additional depreciation as a result of increased investment in our own fleet and $1.1 million was the increase MG&A I mentioned earlier.

Interest expense in the quarter was $5.9 million, an increase of $0.6 million compared to the fourth quarter, and reflects the increased investment in owned equipment discussed earlier.

You will notice that we had an unusually high cash balance of almost $48 million at the end of the first quarter. This was simply a timing issue related to funding several transactions that closed on April 1, because of the global nature of our business, the funds were in transit at month end.

We ended the first quarter of 2012 with a total fleet of 957,000 TEUs, an increase of 11% compared to the prior year. We have added a net 94,000 TEUs to our own fleet in the last 12 months. At the end of the first quarter of 2012, our own fleet represents 51% of our total fleet compared to 46% a year ago.

The average per diem rate for our own fleet in the first quarter of 2012 was 10% higher than the same period last year and reflects not only the higher container prices and associated lease rights, but also our focus on growing our refrigerated container fleet.

During the first three weeks of April, we have made a number of changes to our credit facilities to write us with a liquidity to fund our expected growth. We closed the new five-year $60 million term loan facility and paid down our revolver with the proceeds. We have the ability to upside the facility to $100 million and are working with several banks to do that. We also amended our revolving credit facility and added an additional bank to that facility bringing our total commitments to $405 million with an accordion feature that allows us to increase the revolver to $475 million. We are in discussion with several vendors to bring our total commitments up to $475 million.

In conclusion, we’ve had another record quarter from both revenue and earnings perspective and we anticipate that trend to continue. We are seeing very strong demand from customers and our year-to-date investment level has outpaced what we did during the same period last year.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Gregory Lewis of Credit Suisse. Your line is now open.

Gregory Lewis – Credit Suisse

Yes. Thank you, and good afternoon.

Victor Garcia

Hi Greg.

Gregory Lewis – Credit Suisse

Victor, could you talk a little bit about this year versus last year in terms of, I mean it looks like there is about $85 million of containers that have yet been place down on lease and just sort of as we enter May, we are pretty much in May at this point, could you sort of talk about how you think those placement sort of what sort of the timing behind the placing the remaining $85 million?

Victor Garcia

We – this is the time of the year we started investing especially for the summer months. We’ve actually had as we have ordered equipment many of our customers have actually very quickly taken our equipment on a committed basis. The amount that we have uncommitted is really something we very, very recently ordered.

So, we believe that we won’t have any difficulty of placing that equipment on lease and actually because of the timing that we ordered it we think we’ll actually give very attractive returns because since we’ve ordered there has been some indications by the manufacturer that they have already increased price further. So, the fact that we were able to order that equipment was pretty positive in and really we are just getting into the strong demand season. So we didn’t have the equipment in place or ordered we wouldn’t be available to get it. So, I’d say this year based on what we’re seeing from our customers and lots of there discussion I think we have very high comfort level with being able to place that equipment on attractive leases.

Gregory Lewis – Credit Suisse

Okay. And just to that point I mean I think you said earlier on the call, new box pricing indications are about $2,600?

Timothy Page

No, it is really expected for June delivery but which is the last.

Gregory Lewis – Credit Suisse

Okay.

Timothy Page

Last closed that manufacturers really had. I think July delivery they are talking about a number of north of that maybe another $100 or so.

Gregory Lewis – Credit Suisse

Okay. And then just roughly speaking right now what’s the read times between CAI winning the order of new campaign and actually being able to take delivery of that container?

Timothy Page

It’s still roughly speaking two months hasn’t changed too much in terms of when we order and when we get delivery of it.

Gregory Lewis – Credit Suisse

Okay, perfect. And then just one more from me, in looking at that first quarter $0.9 million from reserve receivables, what was that related to?

Timothy Page

In the first quarter of last year, we were able to finalize a solution where the customer should pay off some finance lease that they had with us. We had previously had a reserve, so we basically recognize the income that we had reserved in 2010 so that quarter benefited by that kind of one time gain, which we noted I think in the first quarter of last year. So It was more of our rate for mentioning as more to try to give people a better idea of how our first quarter – this quarter compared to last year. I think we’re trying to do it more of an apples-to-apples basis.

Gregory Lewis – Credit Suisse

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

Victor Garcia

Sure.

Operator

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

John Stilmar – SunTrust

Thank you. Good evening, gentlemen. How are you?

Victor Garcia

Hi, John.

John Stilmar – SunTrust

Good. Quick question for you, if you – can you compare and contrast sort of 2012 to 2011 if you’re – I mean you’re talking about numbers that are greater in 2012 but 2011 was a year in which we’re coming off extreme box shortages and at least the first half burgeoning demand and very evident supply demand imbalance. And clearly this year the global economic picture is a little bit more mudded. It’s pretty surprising to me that you’re talking about having year-over-year CapEx deployment, I was wondering if you might be able to just kind of characterize what are the differences between this year and last year is it just a shipping companies are using leasing companies more or what do you think the real catalyst is that’s allowing you to get such really bullish commentary.

Victor Garcia

I think it’s a matter of psychology at the time. If you look at the fourth quarter of 2010 there we were coming off a very strong year, I think production was just ramping up and everybody was trying to catch up. Production is starting to catch up with the demand and that level of confidence meant that – I think there was a fair amount of ordering that was being done in the fourth quarter of 2010, in the early part of first quarter of 2011. Our customers at that time have seen the level of inventory that was up there agreed to commit to equipment, but had very long lead times.

This past year, as we went into 2011, there has been very little – it was almost a direct opposite, very little ordering that occurred in the fourth quarter of 2011. I think a lot of the equipment because customers were taking a long time to pick up equipment. Things seemed to be slowing down. Everybody cut back quite a bit and the container prices started coming down.

What we’ve seen in this year is not – we didn’t start off the year with the same level of inventory coming in and customers once they – once they started seeing their own demand pickup, and we ordered some equipment others and as the price of containers has increased, there has been much more of a rush to book equipment by shipping lines. So it’s a combination of our customers needing the equipment, because they haven’t ordered any equipment over the last say six to nine months and the fact that everybody can see least up to this point that container prices has been increasing and wants to pickup equipment before they further increase.

John Stilmar – SunTrust

Is it your sense or just organically pulling forward, the significant demand or we kind of on like a normal seasonal trajectory for the business?

Victor Garcia

I think to this point, it is a more of a normal trajectory to the business with the understanding that there are more shipping lines that are looking to leasing this year than in prior year. So if you take – because I understand that more is going to be leased as opposed to owned the patterns are largely the same.

John Stilmar – SunTrust

Wonderful. And then in terms of the finance lease income, just a technical question and I may have missed this in your commentary, but what led to the jump there this from quarter-over-quarter. I was wondering if you could kind of take me through – what was the driver there?

Victor Garcia

We booked a significant finance lease this quarter and we’ve been building up our finance lease portfolio over the last few quarters. So if you look at quarter – last quarter, first quarter of 2011 and first quarter of 2012, you see big jump. But you will see in these subsequent quarters we have been increasing our finance lease income.

John Stilmar – SunTrust

Should we think about this as a base level than to build off of or is this – or was there anything one-time in that number?

Victor Garcia

I wouldn’t call it one time. I think we are finding that more of our customers are looking for longer term leases as part of their core fleet. So we do expect more financed lease income overtime. So some level of growth overtime we would expect.

John Stilmar – SunTrust

Great. Thank you, guys and great quarter.

Victor Garcia

Thank you very much.

Operator

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

Helane Becker – Dahlman Rose

Thank you very much, operator. Hi, guys. Thanks for taking my question. In terms of your managed fleet, can you just talk about the direction that we should think about it? I think I might have – little surprised that it was up by so much on the year-on-year?

Victor Garcia

Our managed fleet will be continuing to look for opportunities to increase our managed fleet. I think what we found is, at the pace at which we were investing are ownership base is actually growing at a faster pace but we are as part of our strategic thinking looking at ways of increasing the growth rate of our managed fleet because we would like to have a balanced approach in terms of our fleet. So, we would expect – so we do think that – I will tell you that I expect overall this year our ownership percentage as a percentage of total TU’s we operate will continue to go up.

Helane Becker – Dahlman Rose

Okay, so I think at one point we kind of talked about it being like 60, 40 or tending to rate but now it’s like I think a 50, 50 almost.

Timothy Page

About – I think it’s about 51% right now.

Helane Becker – Dahlman Rose

Yeah okay. So, I mean, am I thinking about the rate in terms of the direction?

Timothy Page

I think that’s right. I think you could expect it to move a little bit up to 60% owned.

Helane Becker – Dahlman Rose

Okay. And then, just in terms of the rail business. Can you – is there anything, any new developments going on there or anything that you can report on in terms of how that business might be looking or going?

Timothy Page

Sure, actually we’ve spent quite a bit of time on looking at a number of different opportunities on the rail sector. We’ve booked say about – we expect to close on the next few weeks on approximately $7 million of equipment that will be on lease. And we are expecting to close on a new credit facility also in just in a few weeks to be exclusive for that rail business. So I think we’re actually making very good progress and very pleased with the team we brought in. I like the opportunities we’ve seen. They’ve been better than what we are kind of forecasting. So I think we’re pretty optimistic about our on trading to that business.

Helane Becker – Dahlman Rose

Okay. And I kind of figure that it’s a small – such a small percent of expenses at this point in time and revenues, but I mean going forward is there a time when we’re going to see like three revenue line items, or fourth – I mean like a revenue line item added for rail as well our just be all together?

Victor Garcia

I think we will we expect the rail segment at some point will be a separated segment that we will have. Also what we, how we were part on a consolidated basis I think we still – we’ll need to kind of evaluate how best to present that, but there will be enough data overtime to provide you some incentive about the performance of that business.

Helane Becker – Dahlman Rose

Okay. And then my last question really is can you say how the spending workout in the quarter. So, John I’m assuming that because of the way Lunar New Year worked, this year was in January and things didn’t really pickup to late February or maybe early March. Then most of the $54 million was kind of spent in February, as opposed to earlier in the quarter?

Victor Garcia

What I would actually say in the first quarter lot of the money that we spent in that quarter was some form of sale lease back.

Helane Becker – Dahlman Rose

Okay.

Victor Garcia

Most of equipment order rate that we’ve done, we likely will be paying it in the second quarter or early part of the third quarter.

Helane Becker – Dahlman Rose

Okay, because that kind of brings your CapEx then down for the year from it was a year ago right?

Victor Garcia

Well, what I would say is the level of investment, the pace of investment that we’re making in terms of the amount of approval we have already paid for and is on lease as well as what we have committed to and the pace of investment that we have is exceeding what we did last year.

Helane Becker – Dahlman Rose

Okay.

Victor Garcia

And....

Helane Becker – Dahlman Rose

No, I was just going to say that it’s more second-half focused.

Victor Garcia

I think when you look at the results – I think when you look at the second quarter investment levels I think you’ll see that we will be at a higher pace.

Helane Becker – Dahlman Rose

Okay. Thank you. Thank you very much.

Timothy Page

I just want to comment on the management revenue line. In the quarter we had about $1.5 million of fee related management fee income that’s more transaction-oriented than ongoing. So, you should kind of take that into consideration when you’re looking at management revenue on a go-forward basis.

Helane Becker – Dahlman Rose

Okay. Thank you. That’s very helpful.

Operator

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

John Mims – FBR Capital Markets

Thanks, thanks, good afternoon everybody. Tim, real quick, when you were doing in the prepared comments, you started telling something about per diem rate has been down 4%, but then stopped wasn’t sure if that was if you just misspoke or unless can you go back through?

Timothy Page

I started to read the wrong sentence. So, I basically misspoke, go ahead.

John Mims – FBR Capital Markets

No, no, you go ahead.

Timothy Page

Basically, the rates are basically down because of just the function of mix of what was on lease.

John Mims – FBR Capital Markets

Okay. But then later you said up 10% was what was that number – sorry I just kind of miss some of the numbers?

Timothy Page

That was the overall rental revenue.

John Mims – FBR Capital Markets

Okay. All right. When you’re talking about price increases from the manufacturers can you break down the trend of refurbishes drive from a pricing standpoint?

Timothy Page

The prices of reefer containers is more or less stabilized at this point. We haven’t purchased at this point very many additional reefers, the season is slowing down. And will start again closer to the fourth quarter, but I will characterize that’s as being more stable in the last few months and has not increased.

John Mims – FBR Capital Markets

Okay. Let’s see. In utilization where is your – now at the end of April where is utilization trended. I mean can you get back, I know it’s going to increases, demand picks up now makes sense but can you get back to that 97, 98 level quickly, I mean are you there now or does it going to take several quarters?

Timothy Page

I don’t think it will take several quarters I think we would expect to be in that range as we get into the summer months. So I would say some course of – sometime over the June, July period we would be in the 98% to 97% to 98% range. If the bookings that we have in place remained in place.

John Mims – FBR Capital Markets

Okay. Then just on blended average there in second quarter?

Timothy Page

Right.

John Mims – FBR Capital Markets

Let’s see, one more. Actually a couple of just quick ones, but going back to the finance lease income, you said you got a new big contract this year – this quarter, where in the progression of the quarter did that come in, I mean sort of you used the $1.5 million is kind of a base to build off of is – did you get credit for the big new contract for one month or two months or the whole quarter?

Timothy Page

It came out just about in the middle of the quarter.

John Mims – FBR Capital Markets

Okay. And just last one, just kind of on a bigger picture when you look at the liners and the alliances and some of the pricing activity that’s going on there, have you seen any sort of changing pattern or changing way that people are ordering boxes from you or placing leases with you?

Victor Garcia

I think the way I would characterize it, very beginning of the quarter there is very little activity, some small request of being made very competitive situation. As the quarter progresses – as the quarter ended, the bigger shipping lines have come in and look for much larger quantities and it had little bit of snowball effect. And everybody looking at each other what they are ordering. Everybody is experiencing the same thing and I would say I just keep back from a trip to Asia and spoke to a number of our customers. And I would say the mood of most of our customers, although cautious because of the situation, and I think they are all feeling much better now than they were a few months prior.

I think the rate increases that they have tried – that they have implemented really over the course of the first quarter and expected it in this quarter there is a higher confidence level of that being able to key pass through. The volumes are in many cases are improving. So I think there are a lot more – being a lot more confident about the – about their business at least that’s the perception that I got.

John Mims – FBR Capital Markets

Okay, I got it, it’s helpful. That helps a lot. Just one last one, then I will jump off. The – this goes back to the – kind of your growth rate on owned fleet. Last year, you are looking at three, well I guess two quarters in a row of 60% or plus growth you know that’s been trending down. Is that simply or kind of a lot of big number or could you go back into Q2, Q3 and Q4 like I get back to that 40% to 50% growth rate?

Timothy Page

I think it’s really obviously it depend on the market demand is, but all things will be an equal. It will be more of a driver of our capital situation and we are growing at a very pretty fast pace. We are generating a lot of free cash flow, so we can grow the business very quickly, but the level of growth, we are investing at a pace that is – that would be higher than what our earnings and relation would be. So I think we are – we will still have a – we believe it’s very attractive growth profile, but as the fleet gets larger, as the revenue base gets larger, it will moderate.

John Mims – FBR Capital Markets

All right, okay.

Timothy Page

It’s the thing that you see is that it’s just – it’s also seasonal, there wasn’t a lot of the equipment put on – put in place in the fourth, late fourth quarter and early first quarter. So some of that’s seasonal.

John Mims – FBR Capital Markets

Sure, sure that makes sense. All right Victor, Tim thanks a lot.

Victor Garcia

Sure, thank you.

Operator

Thank you. Again, ladies and gentlemen, if you do have a question at this time. (Operator Instructions) Our next question comes from Sal Vitale of Sterne Agee. Your line is now open.

Sal Vitale – Sterne Agee

Good afternoon, Victor. Good afternoon, Tim.

Timothy Page

Hi, Sal.

Victor Garcia

Hi, Sal.

Sal Vitale – Sterne Agee

So, it seems like a lot of good news that you talked about earlier. Regarding the increase in the box prices, I mean I was expecting box prices to increase bit more gradually. Were you surprised by the speed with which the box prices increased?

Victor Garcia

Yeah. I mean I got to say that we were. There seems to be a high level of confidence that the manufacturers about demand for this year. I think there is a general view that they’re going to stay to one shift or not. That’s how they increased capacity. They would rather keep their utilization and I think pricing is more important than volume for them. So we have been a little surprised at the steady progression in box prices.

Sal Vitale – Sterne Agee

At this pace, given that we’re in late April – we may now – because I think for a moment, the box prices typically peak out in late third quarter for the drive if I remember correctly. Is that right, is that about when they pick-up?

Victor Garcia

Yeah. Let’s say – I think that’s right. I think – we just looked at a normal demand pattern. Easily increase for people to pickup equipment sometime around October. That will be the end of the real demand part of the year. So we are at a pretty heavy clip, but I’d just say, I mean the manufacturers in general have – have been much more disciplined on a pricing basis the last year or so even to the point that first quarter this year where they close factories for an extended period of time due to discounting price. So we’re obviously watching the price trend and trying to be prudent about our box purchasing but we are seeing those kinds of steady increases.

Sal Vitale – Sterne Agee

So based on that I guess it would be a leaper state at all in my view to assume that box prices will rival last year’s peak prices?

Victor Garcia

It really depends. It depends on where demand is. There are some, there are uncertainties out there about what’s going on in Europe and how much demand will really be there. So ultimately it will be dependent on how much true demand there is in the global economy?

Sal Vitale – Sterne Agee

Okay. Along those lines because early you mentioned also that with the increasing box prices that the DM rates on the box prices are also going up which is a natural relationship. So can you give us a sense for I guess two questions, one, the number, the percentage of your overall owned PEUs that are coming up for renewal this year. This year and next if you could maybe 2013 again nothing two granules big ballpark and then what the average rate on those containers coming up for renewal is currently?

Victor Garcia

Yes. I don’t think we have that data right here with us. So we can try to give you that offline if you like but we prefer not to make just a guess on a call like this.

Sal Vitale – Sterne Agee

That’s fine. I understand that. I’m just trying to get a sense for what the up pricing on the renewals could be. It sounds like it’s going to probably will be a positive, but we can talk about that later. The other question I had is so 100 out of the 185 is not yet – is committed to be on lease and will be – will start generating revenue at some point in 2Q, correct?

Victor Garcia

Correct.

Sal Vitale – Sterne Agee

Should we assume more like June at this point or will start generating revenue dollars at some point in May?

Victor Garcia

I think we will get some – some in April, but I would say a lot more in May and June.

Sal Vitale – Sterne Agee

Okay, May and June. And then the remaining 85, they are on order. So they probably not delivered until what mid-July and start generating revenue in July and August, is that the right way to think about it?

Victor Garcia

I think that’s the right way to think about it.

Sal Vitale – Sterne Agee

Okay, that makes sense. So I’m just trying to get a sense because can you refresh my memory during 4Q, I think you took delivery of virtually no containers, if I remember, outside of sale lease backs? Is that right?

Victor Garcia

Yeah, I don’t think we ordered anything in the fourth quarter or late in the third quarter. The last major investment we made was primarily on the weaker side.

Sal Vitale – Sterne Agee

Right. So then was that the – if I just look at the sequential increase in container rental revenue of 1.5% from 4Q to 1Q, should we think about that as the sale lease backs, again you said the $54 million or the 33,000 TEUs, $54 million that’s all sale lease back or mostly?

Timothy Page

Mostly.

Sal Vitale – Sterne Agee

So, was that a function of the rate on that being higher than the overall rate on your book of leases?

Timothy Page

I don’t think – actually I think the overall rate is lower because we didn’t purchase new equipment, purchased mid-life equipment. So the rate would naturally be lower because we if we could get return the box prices are lower because of the age of the equipment. So, the returns for them would be lower relatively speaking.

Sal Vitale – Sterne Agee

Right. So, then I can you just and Tim you may have addressed this earlier. Can you just reconcile from is utilization pick down sequentially, why did container rental revenue increase by about 1.5%?

Timothy Page

As we had more while the percentage utilization decrease we had more absolute numbers of TEU on lease.

Sal Vitale – Sterne Agee

Right that makes sense. And then the in terms of the podium rate from 4Q to 1Q that you mentioned what that was?

Timothy Page

We didn’t mention what the rate was we set the rate was down 4%.

Sal Vitale – Sterne Agee

Yeah, 4%.

Timothy Page

As function – as I said it is a function of mix and that’s what Victor was referring to basically the TEU we put out on lease in the first quarter were sale lease back TEU is purchased at relatively, relative to new box prices that in expensive prices and consequently the average podium for TEU is lower and so that brought the overall average down.

Sal Vitale – Sterne Agee

Okay.

Victor Garcia

And I think we use podium rates and changes as normal of course that in just I guess where I would characterize is that we are seeing affirming up of podiums in general. This is what we expected. The reason why we allowed our utilization to tick down because we thought that the demand picture was going to be the matter of just a few weeks was going to be better and what we thought has come together, we were asking much better rates with some of the same customers will previously e were given some requests at much lower rates. So the market, I would say the tone of the market is firmer rate structure because of increasing demand and as a driver up from new box prices.

Sal Vitale – Sterne Agee

That really paid off for you. So that is only the right approach. Okay, that’s – and just one you may have addressed this earlier one of the response to one of the questions, the $54 million that – did that all go on lease at the same point of the quarter and was that early in the quarter?

Victor Garcia

It was mid February on that it went on the lease primarily.

Sal Vitale – Sterne Agee

Mid February, okay that’s helpful. Can you just – in the past, I think you mentioned and my numbers might be little rusty here but, the uncommitted – the global uncommitted new box inventory was about a million to use roughly I think at the end of last June and it came down to roughly 600,000 to use or so by September. And can you give us a sense for what that level is now, I have lot of boxes didn’t pick up is it very low now?

Victor Garcia

I think I don’t have the exact figure for where and that’s what is today but I would say we probably started the year with about 400,000 TPUs which is about half of what we had in the same period same point the previous year. I think a lot of the equipment that is ordered because of factory that closed down is largely going to be delivered in April. So, I think if you look at the inventory levels now there as far as factory, still probably fairly low but we will be building because customers – because of the deliveries will be coming in April, May, but I think the difference this year is that the sense we get from customers is that they will be picking up much more quickly than the same time last year.

Sal Vitale – Sterne Agee

Right, so the interval between the order being placed and the container is being picked up by the customer will be shorter?

Victor Garcia

It will be shorter and so I don’t think that the inventory at the factories will be building up at the same, in the same way that it was last year.

Sal Vitale – Sterne Agee

But, last year was more, I don’t know was timing so much less, last year was like just a lack of demand, correct?

Victor Garcia

Last year was customers committed for ordering equipment, but they had long lead times for pickup.

Sal Vitale – Sterne Agee

Right.

Victor Garcia

And what we’re seeing now is based on only on the pickup schedule that we put in place, but also from the tone of what we’re hearing from customers is as soon as the equipment is produced they want to take it out of the factory.

Sal Vitale – Sterne Agee

Right, that makes sense. Just the last question it was nice surprise to see gain on sales container portfolios, I know that can be pretty lumpy, how should we think about that over the next few quarters?

Victor Garcia

I think we are not expecting in the short-term any kind of significant gain on sale of portfolios. That gain that we had is, we have a team in Asia that continues to develop investment programs for Asian customers, where we are really pleased with how that group is developing their customer base there. So, we are -focusing as part of our strategy of increasing our management business. So, we are implementing a number of things to try to enhance that but I would say right now as you look at short to medium-term, we wouldn’t be indicating a significant number in that line item.

Sal Vitale – Sterne Agee

Okay. On the management fee side, Tim, I think earlier you mentioned there was $1.5 million I don’t know if I’m characterizing this arrangement fee, is that the way we have to look at it is that what you said?

Victor Garcia

Yeah. Basically there were series of arrangement fees that were it was fee generated as opposed to our regular ongoing management.

Sal Vitale – Sterne Agee

Right. So we should not expect that to be recurring obviously right?

Victor Garcia

Correct.

Sal Vitale – Sterne Agee

So then if I back that out it’s more like $2.7 million or so. Should we think about...

Victor Garcia

I look at what it was in the fourth quarter and...

Sal Vitale – Sterne Agee

Okay.

Victor Garcia

Too many utilizations and adjust for utilization rates.

Sal Vitale – Sterne Agee

Yeah. That makes sense. Okay. That’s all very helpful. Just a last question, the depreciation was changed the residual assumption was changed that was done I think two or three quarters ago. I’m not sure the exact quarter. Was it that so I guess you just needed to see additional evidence of the used box prices continuing to strengthen before you took it all in one false group?

Victor Garcia

We are just as about the same time last year. We decided to adjust that at the beginning of the year is we had now a slow down period. We saw container prices hold up pretty firmly and we saw the bottoming out of new box prices and we think and then we servicing our used equipment again firming up. And the asperity that – asperity between our residuals and where we’re seeing, I just think it was just further evidence to us that secondary prices are going to continue to be firmer and that will be appropriate for us to make that change.

Sal Vitale – Sterne Agee

It would seem based on the increase in the residual that the gain on sale of used equipment that was about $3.1 million in 1Q, there should be upside to that in future quarters?

Victor Garcia

I’m not sure I understand it.

Sal Vitale – Sterne Agee

I guess I’m just saying in the out quarters going forward, should we expect the gain on sales of used equipment to be greater than that $3.1 million for 1Q?

Timothy Page

No. I think what I do – we wouldn’t expect that the change in residual that we’re making is having effect primarily on equipment that we’re just buying now. So that’s not equivalent until that will (inaudible). So I think the gain on sales that we’re reporting we would expect future quarters to be somewhat comparable, based on what we are seeing right now in terms of box prices. So we wouldn’t expect to be change.

Sal Vitale – Sterne Agee

And box prices just – since your last conference call which was I guess early February, used box prices have increased commensurately with new box prices, is that fair to say?

Timothy Page

I would characterize that we saw in the fourth quarter, a little bit of softening in certain areas, very moderate. And I think what we’re seeing now is, a firming up again of secondary prices back to where they might have been somewhere closer to the third quarter.

Sal Vitale – Sterne Agee

Okay, that’s very helpful and good quarter.

Victor Garcia

Thank you.

Operator

Thank you. Our next question is a follow-up from Gregory Lewis of Credit Suisse. Your line is now opened.

Gregory Lewis – Credit Suisse

Yeah, hi thanks again for let me in. Again, I just have two quick questions already. On the SG&A, it looks like it’s spiked up in Q1, is that going to reverse down in Q2 or is that sort of an ongoing expense?

Timothy Page

What we said is that the run rate, we think the run rate for MG&A is about $6 million a quarter.

Gregory Lewis – Credit Suisse

Okay, perfect. And then where could be the follow-up I had was, utilization ticked down, but it looked like the direct container expenses sort of was flat quarter-over-quarter. So in other words it didn’t look like, you weren’t paying for having boxes in depots. Should we expect if utilization moves higher, should we expect direct container expenses to sort of tick down based on those boxes leaving the depots?

Timothy Page

The utilization rate for our owned fleet stayed relatively constant Q4 to Q1. The overall utilization went down. So the managed fleet utilization actually decreased. So, that’s why the store – that’s primarily why the storage costs stayed the same, because that’s directly tied to the owned fleet as opposed to the managed fleet.

Gregory Lewis – Credit Suisse

Okay, perfect, hey thanks Tim that was very helpful. Have a great good night.

Timothy Page

Thank you.

Operator

Thank you. At this time, I’m not showing any further questions, I would like to turn the call back to Mr. Page for any further remarks.

Timothy Page

This concludes our call and we would like to thank everyone for their support.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone have a great day.

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