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CAI International, Inc. (NYSE:CAP)

Q4 2007 Earnings Call

March 4, 2008 5:00 pm ET

Executives

John Nishibori - Chief Executive Officer

Victor Garcia - Chief Financial Officer

Analysts

Bob Napoli – Piper Jaffray

David Long - William Blair

Jason Arnold – RBC Capital Market

Rick Shane - Jefferies and Company

Operator

Good day and welcome to the CAI International fourth quarter earnings conference call. Today’s conference is being recorded. At this time I would like to turn the conference over to Mr. John Nishibori, Chief Executive Officer. Please go ahead sir.

John Nishibori

Thank you for calling in today to our 2007 fourth quarter earnings call. I am John Nishibori, CEO of CAI International, Inc. and we have here also Victor Garcia, our Chief Financial Officer.

Before we get started Victor is going to make some Safe Harbor statements and then I will discuss our results. Victor.

Victor Garcia

Good afternoon and thank you for joining us today. Certain statements made during this conference call may be forward-looking and are made pursuant to the Safe Harbor provisions of section 21E of the Securities Exchange Act of 1934 and involve risks and uncertainties that could cause actual results to differ materially from current expectations including but not limited to economic condition, customer demand, increased competition and others.

We will refer you to the documents that CAI International has filed with the Securities and Exchange Commission including its registration statement on Form S-1 and the quarterly reports filed on Form 10-Q. 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. John.

John Nishibori

We have just finished our first year reporting as a public Company and it proved to be an excellent year for us. We accomplished many things this year starting with our IPO followed by our successfully launching our effort into refrigerated containers and growing our dry box fleet by 13%. The price for all this work was a historically record quarter and year in terms of profitability for the Company.

For the full year, we reported net income of $19.2 million and this past quarter was the first quarter we have ever reported $6 million in profits. For reasons I will explain we remain even more optimistic for 2008 despite all the uncertainties surrounding the United States.

Our utilization for the fourth quarter of 2007 increased to 96% compared to 92.5% in the fourth quarter of 2006. The first quarter historically has been our weakest quarter but just as we witnessed last year, so far this year, we have not seen any material redelivery of equipment.

As much as we would like to take full credit for the high utilization, we think there are some economic factors that are supporting our utilizations. As a result of increase in raw materials particularly steel, container prices have been increasing since the fourth quarter of 2007. We believe this trend will continue into the second quarter of this year. As a result some shipping lines have decided to cancel significant boarders with container manufacturers while demand for containers has not declined. New ships continue to be delivered and global trade is still growing at double digits in many regions.

Clarkson's research forecasts 9% to 10% growth in containerized trade for 2008 and 2009. That has meant that our customers have maintained or extended their leases of our containers as a cheaper alternative to buying new boxes and we believe our customers will return to leasing for additional new container needs. Therefore, we are optimistic about utilization and new lease-outs for our industry in 2008.

We also know that we are operating in a more restrictive global credits environment. Hence, leasing offers an attractive alternative to buying for the shipping companies. Thanks to our longstanding relationships with the banks, we have increased our line of credit twice in the last two months under favorable terms and conditions. With total bank line of $265 million and out standings under which was $148 million at the end of 2007, we believe we will be able to meet our container investment objectives for this year.

The margins in our business have stabilized and we believe that they will improve over the course of the year given the higher container price, credit environment, and the forecasted demand. Nothing is guaranteed but we feel very good about the prospects for this year.

Our secondary sales activity has also continued to be very strong and we have received good prices on the sale of some of our older containers. Because we do not have a lot of equipment to sell as a result of our current high utilization levels, we will be more focused on the opportunities to profitably trade older equipment that are owned by some of our customers.

As I mentioned in our press release, we have not seen a material slowdown in overall demand for containerized cargo. 2007 US trade growth has been negative. Estimates are that the inbound trade on the trans-Atlantic was down about 5% and on West Coast about 1% but Asia remains very strong.

The combined value of Chinese exports grew approximately 21% and imports about 26%. The story of China just being an exporting nation is no longer the case. Trade from Asia to Europe increased by nearly 20% and exports from Europe to Asia by 5%. Other areas such as The Middle East and Africa have also seen double digit increases in trade volume.

With that, I will turn it over to Victor to discuss the quarter in greater detail.

Victor Garcia

Thanks John. For the fourth quarter of 2007, our fully diluted earnings per share was $0.36 on an average share count during the quarter of 17.1 million shares. This compares to $0.36 a share for the same quarter in 2006 with fewer shares outstanding equaling 16.3 million.

On a fully diluted basis earnings per share for the whole of 2007 was $0.85 on an average share count of 16.3 million. Full year EPS analysis is difficult to share because of the differences in our capital structure before and after the IPO. Prior to the IPO, we had convertible subordinated debt and preferred stock outstanding which had material impacts on calculated EPS during the first and second quarters of this year.

Total revenue for the fourth quarter was $18.9 million, an increase of $259 or 1.4% above the amount reported in the fourth quarter of 2006. Our quarter-over-quarter revenue growth breaks down as follows: our container rental revenue increased 26.2% to $11.8 million from $9.4 million. This resulted from new lease-outs from our owned fleet that we had during this quarter as well as the benefit of equipment leased out from factory during the third quarter.

On the revenue side, this year was a transition year. If you recall from our results in 2006 we were looking at year-over-year revenue declines in our container leasing segment as compared to 2005. We have consciously taken a more balanced growth approach in our owned and managed fleet which resulted in our showing the 26% revenue growth in the container rental segment this past quarter.

We expect 2008 versus 2007 quarter-over-quarter total revenue comparisons to show more accelerated revenue growth than the same comparisons this past year.

Management fee revenue declined by $786,000 or 22% this quarter compared to the fourth quarter of 2006 despite the increase in the managed fleet. Just as in the third quarter of this year, the reason is due to lower fee income on disposition of equipment in the managed fleet because our current utilization level leaves us with few units that to dispose of.

As for the revenue associated with new container portfolio sales, there was a decrease in gain on portfolio sales of $1.5 million or 27.5% to approximately $3.9 million this past quarter compared to $5.4 million in the fourth quarter of 2006.

We sold approximately 17,000 TEUs of containers during this past quarter compared to $28,000 TEU in the fourth quarter of 2006. Positive gain on sale revenue comparisons this quarter was made difficult because of the high number of units that we had sold in the fourth quarter of 2006. Again, this past quarter we made the decision to continue to maintain balanced growth in our owned and managed fleet.

On the expense side, first depreciation for the fourth quarter of 2007 was $3 million compared to $2.4 million in Q4 2006. This is the first quarter-over-quarter comparison where 2007 depreciation has exceeded the 2006 level and is reflective of the growth in our overall owned fleet. We expect depreciation to continue to increase in absolute terms in 2008 as we continue to invest in our owned fleet.

Impairment costs on equipment had been immaterial this past quarter and during the fourth quarter of 2006 just as they have been in the prior quarter. Gain on disposition of used container equipment was $1.1 million this past quarter compared to a gain of 727,000 during the fourth quarter of 2006. The gain is due to a higher average gain per unit sold than it is to an increase in sales volume. This quarter result approximately 24% UR TEU from our own fleet that we have sold in the same quarter in 2006. Borrowing any dramatic change in the industries utilization rate, the sales price for all the boxes are expected to remain firm.

Quick move down to storage handling and repair expenses, they were 790,000 for the quarter, largely unchanged despite the year-over-year fleet growth. The storage and handling and repair expense category has been low but historical standards as a result of the high utilization environment.

Marketing general and administrative cost were $4 million for the fourth quarter of 2007 compared to $3.4 million for the same quarter last year, an increase of $0.6 million or 16.8%. The increase relates to a number of factors including higher employee related cost from increased head count and higher incentive compensation. Also a factor was the weak dollar which contributes to higher quarter overhead cost, relative to prior quarters when translated back into U.S. dollars. Despite the weakening U.S. dollar we are pleased that we have been able to reduce quarterly MG&A cost by about 500,000 this quarter compared to the amount we recorded in the third quarter of 2007. We will contain a focus on restraining overhead expenses relative to overall fleet growth.

Net interest expense was $2.3 million for the fourth quarter of 2007 compared to $3.7 million for the fourth quarter of ’06. In the fourth quarter of ’06 we had just completed our major buy out and had the additional senior and subordinated debt cost associated with that transaction. As John had mentioned at the end of 2007 we had a $147.6 million of debt outstanding. Income tax for the quarter was $3.4 million resulting in an effective tax rate for the quarter of 35.7% compared to an effect tax rate of 37.3% for the fourth quarter of last year. We have now staffed our Barbados operation and have begun purchasing and leasing through our subsidiary. Given this change in our operating structure we expect our effective tax rate to reduce from the full year effective tax rate level in 2007 to approximately 28% to 30% in 2008.

All of that rate reduction is expected in the second half of this year. The bottom line result of all this is that net income for the three months ended December 31, 2007 was $6.1 million an increase of 883,000 or 16.9% compared to $5.2 million for the three months ended December 31, 2006 and with that, operator please open the line for questions.

Question-and-Answer Session

Operator

Thank you sir. (Operator instructions)We will take our first question from Bob Napoli with Piper Jaffray.

Bob Napoli – Piper Jaffray

Thank you good afternoon. Congratulations on the great quarter.

Victor Garcia

Thank you Bob, thank you.

Bob Napoli – Piper Jaffray

The question I guess on how -- what was the dollar amount. Looks like your gain on the container that you sold this quarter was a lot higher $229 per TEU, I just wondered what was the dollar amount of containers that you sold this quarter into the funds?

Victor Garcia

The total proceeds that we received were $30 million 068 for this quarter.

Bob Napoli – Piper Jaffray

Okay. So the cost would be just that left again.

Victor Garcia

Yeah.

Bob Napoli – Piper Jaffray

Okay, the outlook for 2008, just trying to understand a little bit on when you reduced your -- you’ve been reducing your managed portfolio as a percentage of the total and it seems like -- it doesn’t seem like it’s because the height of demand given the gain, very high gains your getting. So it seems like your trying to look for a more predictable revenue stream, is that kind of what you are doing and what is -- in 2008 broadly, what you expect, what percentage, what would the mix of containers own versus managed kind of gravity to.

Victor Garcia

I think you’re absolutely right. That is our intention. It is a trade off between predictability versus profitability with volatility and now that we have the funds from our IPO, we can afford to give a more balanced composition between managed and owned. As of December of 2006, our owned units comprised only 28% of our total portfolio. That increased as of December 2007 to 34% in terms of TEU’s from 186,000 TEU’s to 254,000 TEU’s which the 37% increased and this increase does represent the added predictability of our revenue stream. Going forward by the end of 2008, we are shooting for -- going a little higher than 34% and in the long run targeting at this time of about 40% owned and 60% managed.

Bob Napoli – Piper Jaffray

Okay and last question. I’ll let others ask questions. On the tax rate, the 28 -- what would the tax rate be in the back half of the year? So you’re saying that there are full tax rate in the first two quarters.

Victor Garcia

Yeah. We started operations in the middle of the first quarter. So it takes some time to get equipment to release and everything, so when we are looking at our business and we modeled that out, we are not expecting any tax benefit from the operation until really we get into the third quarter, so we are expecting the same kind of full tax rate. We had an effective tax rate of 36.6% in 2007. We would expect in the first half of this year to have a similar kind of number and normally in the second half of the year would we see a change.

Bob Napoli – Piper Jaffray

And then as a full year average would still -- would come out to 28 to 30?

Victor Garcia

That’s correct, but as the years go by that number would continue to decrease.

Bob Napoli – Piper Jaffray

To what level? And you have text here at around 10%.

Victor Garcia

We could certainly see getting down to we expect 3% to 4% points a year to decline in our effective tax rate. As we can forecast of it.

Bob Napoli – Piper Jaffray

Great thank you.

Operator

Thank you. Moving on from William Blair, David Long will have our next question.

David Long - William Blair

Hi guys.

Victor Garcia

Hi David

David Long - William Blair

With your guidance of $1.32 and $1.35 does that include expected amortization expense related to the repurchase of shares from Innerpool.

Victor Garcia

Yes it includes the recurring about a $1 million or $2 million of amortization cost a year and so we are using that GAAP EPS number.

David Long - William Blair

Got you and as far as you mentioned briefly the refrigerated containers. Can you provide a little bit of color on the success you had this quarter.

Victor Garcia

We had a number of units that we’ve already gotten two customers who have taken on some refrigerated containers from us on a long term contract. The receptivity has been very good, we are optimistic of continued growth in that business. The impact in the fourth quarter was not that significant given the number of units that we had but from a market acceptance stand point where I think we are pretty pleased with the acceptance that we have had.

John Nishibori

Let me say something about the background to this strategy of going into Reapers. There is a trend a macro trend in the industry where there is less and less demand for Reefer ships. These are ships that has refrigerating capability and the fruits and so forth are packed in bulk. Now that’s -- the demand for that kind of ships have been declining however the containerized Reapers, the Reefer containers have been increasing inversely and therefore we do see a lot of opportunities in this area. That is the back drop.

David Long - William Blair

Okay. And then lastly Mayersk Mediterranean ship being in CMA. A fewer clients announced the partnering and the China route to the U.S. Do you see that impacting you guys at all?

John Nishibori

Not really. Unless they emerge as two companies in which case we may have a bit of a fall out, but this type of thing occurs almost weekly, where shipping companies got an alliance offer, form alliances and then they get out of alliances and they join another alliance, it happens all the time and I do not see any kind of impact on the demand for our lease containers.

David Long - William Blair

Alright thanks guys.

Operator

Thank you. Moving on Jason Arnold from RBC Capital Markets will have our next question.

Jason Arnold – RBC Capital Market

Hi good afternoon guys. I just wondering to can you offer us maybe a little bit of color on container investor demand trends and maybe specifically update us on your effort at looking at growing services in Japan and may be elsewhere.

John Nishibori

Sure. I think as we said in prior calls there continues to be a lot of investor interest in looking at container investments. That is in Europe in particular there is a big, a larger market that invest in industrial assets. So we are not concerned about there being overall demand. I think as in any environment is worried about as margin and what the return requirement are, so yes, there is a lot of demand and we continue to get enquiries all the time about new portfolios that we can put together for new investors but it all depends ultimately on what the returns of these investors can expect to achieve.

Victor Garcia

You also asked about Japan. We had done our first one back last year in August I think it was and since then, there hasn’t been any new deal. However, more recently, there has been flurry of possibilities and we are now in the midst of negotiating one and probably a fairly large one should come in very soon.

Jason Arnold – RBC Capital Market

Alright, okay wonderful and then I guess maybe just one quick one. I think you maybe touched on few different points but what are per diem rates looking like right now. I meant like….

Victor Garcia

Okay. Yes, long-term rates during the last quarter of last year had kind of stabilized at a low point because of very strong competition. However, because the container prices are increasing quite rapidly right now we are seeing firming up of the long-term rates. On the other hand, the short-term rates during the fourth quarter of last year has actually gone up and is -- I think we see that not just firming, but will continue to slowly rise.

Jason Arnold – RBC Capital Market

Okay, perfect. Nice job this quarter, thank you.

Victor Garcia

Thank you.

Operator

Thank you. We do have a follow-up question from Bob Napoli with Piper Jaffray.

Bob Napoli - Piper Jaffray

Thank you. I was wondering if you guys had an outlook on kind of a range of CapEx that you would expect for 2008 and to what portion of that would be [reapers]?

Victor Garcia

We have a similar budget plan that we had last year overall. We haven’t really focused -- we have our capital expenditures really focused towards where we think we are going to find the best opportunities. So we haven’t really focused on specific percentages that would be reapers versus drives. We are going to wait and see how the market develops. We will be having inventory in each of the categories but it really would be market driven as opposed to sticking to a fixed amount that we want to invest.

Bob Napoli - Piper Jaffray

Would that be 10% to 20% or I don’t know if you can give kind of a broad ..?

Victor Garcia

Somewhere in that range, that’s fine.

Bob Napoli - Piper Jaffray

Okay. And then what is your un-leased inventory at year end, the inventory not the --?

Victor Garcia

You mean the depots.

Bob Napoli - Piper Jaffray

Right, yeah it’s in the depots. Purchased but not -- brand new but not yet on lease.

Victor Garcia

Oh, at the manufacturers’ level?

Bob Napoli - Piper Jaffray

Yes, it’s on your balance sheet.

Victor Garcia

Yeah, that’s an item that I think in past quarters we have disclosed and I think for competitive I think we are -- we prefer not to disclose it. Our competitors don’t disclose their inventory situation. So I think we as a policy would prefer not to disclose. But I will say we have obviously enough inventory to meet demand and secondarily with the rise in price of containing the way they have been going we wish we had more because certainly it has been a significant escalation in container prizes over the course of the last six to eight weeks.

Bob Napoli - Piper Jaffray

Are you now, are you buying new containers at the current prices?

Victor Garcia

Yeah we are looking at demand and depending on what the customer opportunity is, yes we’ll buy them. We are going to -- we are going to have to average into the market wherever it is, so we will try to opportunistic about how we purchase it. We are fortunate that we don’t feel like we have to dig deep into the market at this point.

Bob Napoli - Piper Jaffray

And given that your core market is so strong, I know you have talked about -- I mean your adding reapers, so that’s a new product line and you guys have talked about some other opportunities. I just wondered if you’re progressing along on some of the other opportunist or if the core market is so strong that you need to put all your focus there right now.

Victor Garcia

No we are very proactively looking at other opportunities, other product lines.

Bob Napoli - Piper Jaffray

Can you discuss that at all, in which areas or…

Victor Garcia

I would rather not at this time.

Bob Napoli - Piper Jaffray

Okay. And are you seeing any portfolios for sale and do you have interest in portfolios or would you rather stick to primarily to organic?

Victor Garcia

We are looking at acquisition candidates, either be it portfolio or on an equity or company basis.

Bob Napoli - Piper Jaffray

Company acquisitions would be in the same sector or in a new product?

Victor Garcia

I think its both. I mean I think that’s a public call because we are not interested in talking about exactly what our strategy is. I would say -- I think as our IPO document indicated, our strategy is to continue to grow organically and we think that’s the best opportunity for growth and we have growth there. When we can complement our business, I think we’ll look for those opportunities as long as it makes sense and adds share holder value, but in a call like this I don’t think we are interested in getting into a granular aspect of what our strategy is.

Bob Napoli - Piper Jaffray

Okay thank you.

Operator

Thank you. Next question will come from Rick Shane with Jefferies and Company.

Rick Shane - Jefferies and Company

Thanks guys for taking my question. Now one of the trends that has been discussed over the last year through conference calls is the competition from smaller leasing companies and the pricing pressure that they are bringing especially on first leases of containers. Are you seeing with credit starting to tighten up, are you seeing any shifts there and how is that impacting lease pricing on the initial leases.

Victor Garcia

The answer to the first question is that yes earlier last year there were a lot of smaller companies using KG funds and so forth, but they have pretty much disappeared during the latter half of last year and the competition is coming -- very strong competition now is in the form of from large container leasing companies. Going forward we believe as I said pricing would firm up because of increased demand from shipping companies. Increase in container prices and -- but because of the tightening of the credit we do not see the smaller leasing companies coming back into the fray.

Rick Shane - Jefferies and Company

And presumably the larger leasing companies like your self have more infrastructure because you’re interested in managing the containers over the entire lives, so I would assume that that impacts pricing as well, that you’re dealing against -- your dealing with competition whereas cost structures that reflects your own.

Victor Garcia

Exactly

Rick Shane - Jefferies and Company

Now are you increasingly seeing opportunities to buy some of these portfolios as they reach three or four years of lives, three or four years of into there useful lives from the smaller KG back players?

Victor Garcia

Oh yes we are seeing them.

Rick Shane - Jefferies and Company

Is that a strategy you guys would consider in terms of being able to add containers in slightly largest chunks.

Victor Garcia

If the portfolio makes sense economically. If it’s a fleet well we certainly will look at it.

Rick Shane - Jefferies and Company

And is your sense -- and last question. Thank you for entertaining all these questions. Is your sense that any of the smaller players who would be exiting the market, do you think they are feeling pricing pressure? Do you think that there is an opportunity to -- I mean your response suggest under the right circumstances. Doesn’t seem to me that you’re saying “Gee these guys are distressed and really dumping containers at this point.” It’s that fair?

Victor Garcia

No, they just don’t have a credit line to buy new containers and compete at the price level that the market is demanding. In other words it has to be over certain return in order to for them to get the proper funding from the KG fund and at today’s rates it’s very difficult for them to get the KG funding. We can do that because we can mix the portfolio with short term leases with high yields, where as they cannot. They cannot simply because they do not have the infrastructure to put on short term leases.

Rick Shane - Jefferies and Company

Right, that’s it. Very helpfully answered guys. Thank you very much.

Victor Garcia

Okay.

Operator

Thank you (Operator instructions) and it does appear we have no further question at this time. would like to turn the call back over to you sir for any further comments or closing remarks.

Victor Garcia

Than you very much for your continued interest in and support for our Company and we look forward to speaking with you again during our first quarter earnings call. Thank you.

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