Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Call End 17:47

CAI International (NYSE:CAP)

Q2 2012 Earnings Call

July 23, 2012, 05:00 pm ET

Executives

Victor Garcia – President, CEO

Tim Page – CFO

Analysts

Gregory Lewis – Credit Suisse

Helane Becker – Dahlman Rose

John Mims – FBR Capital Markets

Sal Vitale – Stern Agee

Daniel Furtado – Jefferies

Bob Napoli – William Blair

Operator

Good day, ladies and gentlemen, and welcome to CAI International second quarter 2012 earnings conference call. (Operator Instructions) As a reminder this conference call may be recorded. I would now like to turn the conference over to Mr. Tim Page, Chief Financial Officer. Sir, you may begin.

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 the section 21E of the Securities and Exchange Act of 1934 and involve risk 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 document that CAI International has filed with 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 will now turn the call over to our President and Chief Executive Officer, Victor Garcia.

Victor Garcia

Thanks, Tim. Good afternoon. We are very pleased with our second quarter and half year results and we continue to be optimistic about the outlook for container demand for the remainder of 2012 and for container demand in 2013 which we are viewing as a global economic recovery year.

With the results just reported we continue to bring great economic value to our shareholders as we place capital to work by taking full advantage of our market reputation and knowledge of the business.

Through the end of the second quarter we have invested over $350 million in equipment of which $310 million have been on containers.

Based on the investments we have made on the first half of this year we expect our overall investment in containers in 2012 to be above the amount invested last year, which was a record level of investment at that time.

This quarter we had earnings of $0.77 per fully diluted share, which represents a 40% increase from the fully diluted earnings per share during the same quarter in 2011.

Revenue over that same period increased 38%. If you look at our net income through the first half of this year and annualize the results, we are reporting a return of equity of over 25% since the beginning of the year. That return on capital is real value we are bringing to our shareholders.

Similarly in 2011, we also returned over 25% on our equity. The returns we have achieved are particularly noteworthy considering the low interest rate environment that has prevailed over the last three years and that they are supported by long-term, multiyear leases on most of our equipment.

We had significant achievements this quarter that supported the results we reported. During the quarter we were able to lease out 45,000 TEU of containers. These units are primarily on multiyear, long-term leases across many of the largest shipping lines.

During the quarter we also purchased two managed fleet portfolios that totaled 22,000 TEU for a purchase price of $27 million.

The purchase price for these portfolios were very attractive and they immediately provided earnings to our operations during the quarter.

According to Clarkson's research containerized trade growth this year is expected to grow approximately 6%. This level of trade growth is lower than the historical trend of 9% to 10% due to the economic weakness in Europe and slow economic growth in the United States.

However, there is ongoing trade growth coming from many of the developing regions. The containerized trade growth in conjunction with full utilization of the existing worldwide leased container fleet and limited new investment that shipping line is making for containers create demand for incremental leased containers.

Specifically we see demand from customers for equipment to be picked up in Europe for (ExBark) cargo, particularly in Germany. We also see demand for the pick-up of equipment in some of the Southern European countries.

There is ongoing demand for equipment to be picked up in Asia, particularly in China. We see demand from regional shipping lines focused on inter-Asian trade.

Customers are inquiring for equipment to be picked up in August and September. We hear from some of our customers that they expect continued good freight demand over those months and are planning for some additional pick up of containers.

We expect our shipping line customers' financial position to improve over the course of this year, as we expect that they will report improved results from their first quarter losses.

Many of the shipping lines have implemented freight rate increases that are being passed onto their customers while benefitting from growth and cargo volumes and lower fuel costs. As a result we expect the financial risk within our overall customer base to improve.

With the high overall level of utilization of equipment we see continued good pricing on secondary sale of containers. Demand for used containers remains strong and we have increased prices in some of our higher demand locations. In other words we expect good momentum in our container business in the second half of this year.

I'm also pleased with the development of our rail leasing business. During the quarter we purchased $40 million of equipment on lease, with an average lease term of three years. With this equipment we have added 10 customers from a variety of industries with whom we expect to develop further business. Our focus in the rail sector is to build a portfolio of diversified equipment types with mid-life assets.

We expect that there will be a number of opportunities to buy equipment as our company builds a reputation as a reliable purchaser of assets and a solid market participant.

As I previously stated, we are very excited about the potential for rail leasing because it will balance our overall business and provide additional investment opportunities with good customers.

The rail business is a large market and we expect to use the knowledge and experience of our team to grow this business. The equipment purchases so far have been with leased assets.

However we expect to also purchase off leased equipment if we are confident we will lease out the unit at lease rates that make the purchase a long-term attractive investment.

We have great momentum in both the container and rail businesses and will bring revenue and profit contribution over the coming quarters.

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

Tim Page

Thank you, Victor, and good afternoon everyone. Earlier today we reported our second quarter results.

In the quarter we achieved record quarterly revenue of $39.7 million, 38% higher than the second quarter of 2011, record quarterly net income of $15.1 million, a 39% increase over the second quarter of last year and record earnings per fully diluted share of $0.77 per share, a 40% increase compared to the first quarter of 2011 earnings per share.

Driving this significant and profitable growth has been our continued focus on investments in our own container fleet, a continuation of robust industry-wide equipment utilization rates and a strong resale market.

Over the past 12 months our container fleet on a TEU basis has grown 14% percent, with our own fleet growing 35%. Our own fleet now comprises 56% of our total fleet as compared to 47% a year ago.

Underlying our growth over the past year is what we believe are the strong fundamentals of our business model. Overall fleet utilization during the quarter was 95% with utilization of our own fleet at 98%. Long-term leases and long-term direct finance lease now account for over 88% of all of our leases in our own fleet, leases which we expect to provide long-term sustainable cash flows and predictable earnings.

During the quarter our operating margin was 61.3% and our net income margin was 38.1% as compared to 58.8% and 37.8% respectively for the same period last year reflecting this significant operating leverage that the growth resulted from the investments we have made over the past year has brought to our results.

Container rental revenue increased 42% compared to Q2 of last year and 8% when compared to Q1 of this year. At the same time MG&A expense increased only 5% and that 5% increase is primarily related to our new rail initiative and other new initiatives which didn't have any meaningful revenue contribution in this quarter.

Basically we've seen a 42% year-over-year revenue growth in our core rental business with no change in MG&A.

Management fee income during the second quarter of 2012 was $3 million as compared to $3.3 million for the same period last year reflecting a lower utilization rate in our managed fleet and the fact that we have acquired several of our managed portfolios over the past 12 months.

We did not enter into any sales of portfolios in the second quarter of this year and as a result had no gain from the sale of container portfolios in the quarter, as compared to a gain of $300,000 in Q2 of last year and $1.3 million in Q1 of this year.

Finance leased income was $1.6 million in the second quarter, an increase of $1.1 million from the second quarter of 2011 and $100,000 higher than the first quarter of 2012 reflecting the new long-term finance lease arrangements we have entered into in the last year.

Total operating expenses in the second quarter were $15.3 million compared to $11.8 million in the second quarter of last year, an increase of 29.8%.

The vast majority of this increase was in depreciation expense which grew 49% as compared to Q2 of last year but was in line with our container rental revenue growth and was only 3.7% higher than Q1 of this year versus an 8% increase in container rental revenue during the same time.

Gains on the sales of used equipment remains strong during the quarter, outpacing Q1 2012 results by 4%.

Finally as I mentioned earlier, MG&A expenses were up 5% year-over-year but were 11% lower than in Q1 of this year, a quarter, which as we discussed in our last call where there were several one-off items. As we indicated in our last conference call, we believe the average run rate for MG&A expense will be in the $6 million range.

Interest expense in the quarter was $6.3 million, an increase of $400,000 or 4% as compared to the first quarter. As of June 30th year to date, we have purchased approximately 212 million of containers and 41 million of rail cars for a total investment of $253 million. In addition we have 99 million of new containers on order, representing approximately 36,000 TEUs.

Furthermore, we expect to close a $14 million container seal sale leaseback transaction at the end of this week.

As of the end of June, excluding the sale leaseback I just mentioned, we had commitments from customers to lease approximately 21,000 TEU representing about $58 million of containers. We expect there to be continued opportunities to lease container equipment as we enter the traditional Q3 peak fall season and in Q4 with the beginning of the peak season for refrigerated container leasing activity.

We also expect there to be continued opportunities for sale leasebacks as well as the re-purchase of container portfolios from our managed fleet.

During the second quarter we purchased approximately 1200 rail cars for $41 million. We have a commitment to close the purchase of another $10 million by the end of July and expect to make additional investments during the remainder of the year.

The rail cars we have purchased comprised portions of a number of different portfolios from a variety fleet operators and lenders with a diversified mix of equipment types.

To date, everything we have purchased has existing leases associated with them. The average remaining life of those leases is about three years.

We believe that the purchases we have made have been at attractive prices and returns and would expect that on an after-tax basis our expected earnings per share per $1 million of investments will be at a similar level as compared to how we model our new container investments.

There was not any meaningful revenue contribution in Q2 from these rail portfolio acquisitions as they were put in place late in the quarter. But in Q3 we would expect to see revenue from our rail investments to be in the $1.2 million range.

During the quarter to provide financing availability for continued growth, we close the number of financing initiatives. An $80 million five-year term notes, this facility has the potential to be expanded to $100 million. We increased our main revolver commitments from $405 million to$465 million and in July increased a further $10 million to $475 million. And we put in place an $85 million three-year revolver for our initiative.

We ended the quarter with approximately $750 million in borrowings and about $240 million available under our various lines of credit.

In conclusion we believe the remainder of the year will see a continuation of high container utilization rates, strong secondary container resale market and continued opportunities to lease out new containers as well as sale leaseback and portfolio re-purchases, along with further investment in rail car portfolios.

We've had another record quarter from both a revenue and earnings perspective and we have anticipated continuation of that trend. That concludes our comments. Operator, please open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from the line of Gregory Lewis – Credit Suisse.

Gregory Lewis – Credit Suisse

Victor – actually, Tim, you touched on utilization in the quarter. I think I missed those numbers. What did you say the owned fleet utilization was at?

Timothy Page

98%.

Gregory Lewis – Credit Suisse

So the drag or sort of the stickiness in utilization has primarily been related to the manage boxes.

Timothy Page

Yes.

Gregory Lewis – Credit Suisse

And sort of why is that? Why is that? What's sort of driving the difference between those two?

Timothy Page

It has mostly to do with a couple factors. One, we can have discretion of when we want to sell all of our equipment more readily on our own fleet than we can on our managed fleet. The other is we do – we are managing equipment that is currently being managed by another market participant.

And as some of their units come into our fleet, it comes into our – as off-hire equipment, so we have to remarket that equipment. So it has a little bit of depressant effect on our overall utilization but it's not something that financially impacts our results but more the statistics on utilization.

Gregory Lewis – Credit Suisse

And then just switching gears a little bit – when we think about the rail cars – I mean, they weren't that impactful this quarter. And how should we think about the depreciation expense sort of for those assets?

I mean, I'm sort of on the – are they mid-life assets? So when we think about the appreciation $40 million versus (say) depreciating of $40 million of a traditional draw box, how should we think about that?

Timothy Page

I think you should look at depreciation on an annual basis. It's going to depend on the age of the equipment that we buy. But if you look at on something that has about a 20-year life remaining, you'd be looking at something in the order of 4% to 4.5% depreciation of the original of the original equipment cost.

Gregory Lewis – Credit Suisse

So the second – so the residual – there is a residual market for the rail cars.

Timothy Page

There's a calculation that we do on scrap prices based on long-term prices and our view as to where they're going to be with some view as to conservatism.

Gregory Lewis – Credit Suisse

Then just as we're now in, I guess, approaching August, do you sort of have an outlook for what we should think about in terms of ordering into August? Was there opportunities to order drive standard boxes in August or at this point are sort of the – is the peak season for new dry box equipment sort of played out?

Victor Garcia

Traditionally it wouldn't have played out. What we have seen is that because of the market situation in Europe that I think customers have been more conservative in looking out and really getting equipment when they really want, so I think everybody has slowed down their purchasing activity.

So what we hear at the factories that there aren't many orders being placed for August delivery, so we view that in many ways as a positive of not seeing a lot of supply come in and which should bolster the existing utilization of the fleet.

Gregory Lewis – Credit Suisse

And then just one real quick question for Tim; Tim, I noticed on the balance sheet that the rental equipment payable sort of spiked up from I guess $2.5 million to like $71 million. What was that related to?

Timothy Page

That's just related to the purchase – to the equipment we took delivery of in late May and June. So we have a period of time to pay for it. So that's just flowing through kind of from a cash flow perspective. So it's just there's always a lag from when we receive equipment to when we pay for it.

Operator

Your next question comes from the line of Helane Becker – Dahlman Rose.

Helane Becker – Dahlman Rose

Victor, I just have a question about something that you said in your prepared remarks. You said that customers want containers in August and September and I'm just kind of wondering how that compares to prior years and are you surprised that they want those containers for that timeframe?

Victor Garcia

When I say August, September, not just for those two months but that they are looking for a pickup of containers in August and September and more often than not it'll be on long-term leases with it. That's traditionally – August and September are traditionally strong months in the container business.

Helane Becker – Dahlman Rose

And then the other question I had, as you said also, that you're seeing pickups in Southern Europe. Does that surprise you?

Victor Garcia

No, it's – actually, we've seen that for a while. What the problem in Europe has been is in imports into Europe. The Euro has been weakening and it's made a lot of European exporters, Southern European exporters more competitive.

And so we have seen customers saying that they've seen good volumes coming out of Europe, even in Southern Europe and I think in great part the exchange rate difference.

Helane Becker – Dahlman Rose

Then my other question was I noticed that steel prices have been coming down. Can you talk about the container prices that you're seeing?

Victor Garcia

I think they've come down roughly speaking about 10%. We're seeing – hearing word from 25%, 50%, thereabouts, for container prices. We have not placed a new order recently but that is kind of where the market rate discussion is.

Helane Becker – Dahlman Rose

Then I think I just had one other question and that had to do with the price you paid for the used containers that you bought. I guess it's, what, around $1200 per (QEU). How does that compare to other purchases that you might have done?

Victor Garcia

As far as from portfolios, pretty comparable. The actual mix of assets that we had here was a little bit younger than some of the other purchases we've made. But it was really done at very attractive prices. We're really pleased with the price we were able to do it and it's one of the advantages of knowing the assets and having the capital to be able to execute on transactions.

So we're able to do both of these transactions which by themselves are not extraordinarily large but really do have a benefit in terms of earnings generation.

Operator

Your next question comes from the line of John Mims – FBR Capital Markets.

John Mims – FBR Capital Markets

Can you talk, Victor, just following up on the container price question – can you comment some on how the manufacturers are viewing margins at this point? I mean, if there's weakness in ordering in August and September or if it starts to rebound in September, are you seeing them pulling – starting to pull production capacity or are they willing to let price fall lower than the 10% that you're seeing now?

Victor Garcia

It's too hard to tell right now. I would say in general in talking to manufacturers I believe the belief is that if demand is not there, price reduction doesn't really stimulate demand that much, particularly when you're talking in the $2500 range.

So and actually if you talk to them they would say it probably has a depressant effect because people would be concerned about a further decline in price. So this is just my own view that I would guess there is still more leading to limiting production than they are to price discounting.

John Mims – FBR Capital Markets

And do you have a sense of existing box inventory on the ground in China? I mean, when I've talked to some manufacturers before they've said this year versus the last couple of years there's much less inventory on the ground, so any softness can't last very long. I mean, would you agree with that or do you think there's – I guess, any color on that dynamic would be helpful.

Victor Garcia

I definitely think so. I think by comparison to the last two years, this time the inventories are significantly less. And I think that will be part of the reason why I think container prices may be firmer than people might expect because everyone is expecting that the inventory levels are not that low – not that high. And so when there is incremental demand it'll come directly into new production.

John Mims – FBR Capital Markets

On the boxes you've taken delivery of this year, of the growth in the own fleet, can you break it out by reefer and specialty versus dry?

Victor Garcia

Primarily almost – I would say the vast, vast majority of what we've invested so far has been on dry van equipment. We've invested – we've continued to invest in our specialized segment and very little in reefers.

John Mims – FBR Capital Markets

Then Tim, quickly, on the tax rate trended down I guess the 13.3% this quarter. How should we look at that for the balance of the year?

Timothy Page

I think we book a tax rate that we think – that we believe is the tax rate that's going to apply to the whole year. So if you look over the first six months, I think it's 14% whereas our …

John Mims – FBR Capital Markets

And then just one last one and I'll hop back in the queue. So you're deploying a lot of capital. I guess you ended the quarter a debt equity of 2.9 times. Are you content with the capital structure here or is this – as you get closer to three times debt equity, do you start looking at potentially issuing equity?

Timothy Page

It really depends on the investment opportunity that we have. I think we believe right now that there are a number of opportunities. As those opportunities materialize, I think we'll have to see if it's worthwhile raising capital if we were to do so.

John Mims – FBR Capital Markets

But has that sentiment changed much, I mean, over the last couple months? I mean, is this I guess the stock has worked and you're certa9inly deploying more capital than I would have thought at the beginning of the year. So is that an option that's – you're warming to, I mean, more than if I would have asked you that three months ago?

Timothy Page

No, like I said, we have a number of significant opportunities that we look at. It's hard to predict how those opportunities will come together. It really depends on really how attractive the opportunities are and the significance of it.

We generate a lot of free cash flow. If you compare the free cash flow that we generate this year in comparison to last year, we can support a lot more of our investment that we've had that we would even last year. So I think it would take a view of even more investments to look to raise the capital.

John Mims – FBR Capital Markets

But is it – sorry – and just to beat the horse – is it fair to look at that as a debt equity? Is that being kind of the trigger point of the benchmark where that's more reasonable? I mean, how do you look at it?

Timothy Page

We have looked at – I think we've said on prior calls our long-term range of where we're comfortable is in the 3% to 3.5% range.

Operator

Your next question comes from the line of Sal Vitale – Sterne Agee.

Sal Vitale – Sterne Agee

Just two quick questions, you may have mentioned this earlier. But in terms of modeling out the next few quarters of G&A expense, was there anything unusual about this quarter's $5.8 million shooting in terms of thinking about the rail car business expanding from here. Should we model a pick up in the next few quarters?

Victor Garcia

No, we said at the end of last quarter and again today that $6 million a quarter is a pretty good benchmark.

Sal Vitale – Sterne Agee

Then just on the rail car business, Victor, can you give a sense for of the current rail cars that are in the fleet what the breakdown is and any color you can provide? Are there any coal cars or are they mostly tanks and covered hoppers and any other color you can provide in terms of the type of cars?

Victor Garcia

Sure, we have – if you look at concentration I'll probably say we were looking more at combination of covered hoppers and box cars. But we have purchased some tanks, non-hazardous tanks.

We have also – we have very little exposure to the coal market. We did buy one portfolio with a long-term lease associated with it but it was not a very large amount. So I would say if you look at what we've bought so far, we're underweighted on the coal market.

Sal Vitale – Sterne Agee

And can you give some color on your exposure? I assume most of the customers are private industrial players or are there some short line railroads as well?

Victor Garcia

A lot of industrial players, some public, a lot of investment-grade type companies. We have some equipment on lease to some of the railroads. So it's really a varying portfolio. I mean, we're really pleased not only with the distribution of the customer base but also the credit quality of the customer base.

And these are all very attractive customers with significant rail needs that we hope to develop further.

Sal Vitale – Sterne Agee

Then just lastly, can you give us – and I know it's hard to say right now – but if we look forward say two to three years, can you give us a sense for the breakdown of your overall revenue, your overall invested capital between the core container business and the rail car business?

Victor Garcia

It's a little bit hard. I think we still expect over the next three to five years to be most of our investment to be coming o the container side. We continue to see, given where our market share is, the growth of the industry, the opportunities and the reach that we have that by far most of the investment we'll be making will be in the container business.

So I don't expect that the rail business will be a large percentage of our overall business. I think it will be still mostly in the container business.

Operator

Your next question comes from the line of Daniel Furtado – Jefferies.

Daniel Furtado – Jefferies

I was just curious with what appears to be a dislocation between the European and US financial markets, I was wondering if you think liners are having a greater difficulty in getting financing.

Victor Garcia

I think any comment related to that is just a broad comment that we haven't had any discussions with particular customers. I think what we would say is what we have observed is that the US capital markets, as you said, are more liquid.

Most of the financing that has been providing to shipping lines has come from European banks, particularly for European carriers. In general, those banks are having a more difficult time, as everybody knows, about getting US dollar funding.

There have been a number of banks who have publicly declared that they're either going to get (ownership) because they're shrinking their portfolio. So if you look at those aspects of it you would definitely come to the conclusion that certainly by historical standards ship financing is going to be more difficult.

And I think that's why in a great way you've seen a resurgence in the container leasing segment. I think from a value standpoint to our customers, our sector now provides much better value to our customers than maybe three or four years ago.

Operator

Your next question comes from the line of Bob Napoli – William Blair.

Bob Napoli – William Blair

Question on I guess just on market share – I mean, you seem to be growing your container fleet fast, comfortably faster than the market. What is driving your market share trends and where do you see that over the next year or two?

Victor Garcia

Well, I mean, I think we've – if you look at our purchases, we estimate that we're purchasing at about an 8% market share level. So we think that our market share will grow.

I think there is no magic tow hat we're doing. We're working on each opportunity just like our competitors are. With our increased resources that we have, we have a greater ability to provide more to our customers than we have in the past and many of our customers, because we've been around for over 20 years and a lot of the same people, a consistent strategy, are open to us playing a bigger role with them.

So there's nothing magical about it. It's just being focused in the business and competing in the same way many of our competitors do.

Bob Napoli – William Blair

Are you seeing any increased – anybody of your container competitors being more aggressive on pricing? Is there any irrational pricing going on out there/

Victor Garcia

I think there has been a fair amount of competition, particularly on the reefer side. Part of the reason why we haven't been investing on the refrigerated containers has been because we didn't view that it was the most opportune time for us to be investing heavily there.

I would say it's been a competitive environment but the interest rate environment is also lower than expected, so I think part of that is being reflected in the rates that are being quoted.

Bob Napoli – William Blair

And are you seeing any pick up at all by the shifting companies in buying containers?

Victor Garcia

No. As a matter of fact, I think there's one thing we've been surprised by the amount, the very limited amount that shifting lines have been buying (inaudible) away someone like a (inaudible) which traditionally just purchased all of its boxes. There's been very, very little purchase by any other shifting line.

Bob Napoli – William Blair

So clearly the market share is pretty rapidly still shifting towards the leasing companies.

Victor Garcia

Yes, I think we have a confluence of events. We have market share shifting over to the leasing community. I do think amongst the industry players, those with capital have taken a general market share from some smaller operators that might have been managing equipment for third parties.

So there's been even within our space a shift in market share. So there's been quite a bit. I think that's one of the reasons where people might not feel it's so apparent why our sector, particularly amongst the public company, why we continue to evolve when the broader economic landscape doesn't seem to be as bright.

And we do have market share shifts from ownership to leasing and even amongst industry players.

Bob Napoli – William Blair

The sale leasebacks, Victor, you guys have been getting, is that all out of your managed fleet?

Victor Garcia

No, the sale leasebacks are from shifting line customers. So we continue to see a steady stream of opportunities on those. We find those pretty attractive because we can pretty well quantify what the returns are going to be on those and they're immediate upon us purchasing the assets.

But we also separately from that have bought a couple of portfolios and we continue to see every year opportunities to buy equipment from our managed fleet. It has more to do with the status of those funds and where they are with their lives and a view on per se the market opportunity over the next year or two.

So as those opportunities come around we will work with the people we manage approval for it to see if there's some arrangement that we can make to purchase the assets.

Bob Napoli – William Blair

And you're seeing a steady flow of sale leaseback opportunities you said from shipping lines. I would imagine – I mean, what percentage of the deals that you're bidding on do you think you're winning?

Victor Garcia

It's hard to say. I think we have been active in looking at sale leasebacks. When we do sale leasebacks we're very conscious of the counterparty risk and so we focus a lot on who we would be buying the equipment from, both from a reputation and a financial standing.

So there are some transactions we won't bid on because we're not comfortable on it. But for those that we bid on, I would say in some ways is not as competitive as dry van containers out of the factory because not all of the market participants will focus on sale leasebacks. So you have certain relationships where you can work with the customer on a transaction.

Bob Napoli – William Blair

And just last question, the owned managed mix obviously has overwhelmingly gone towards owned. Will you continue – is there opportunity to sell containers in two funds? And many have used the Japanese fund in Japan. Is there any – or shall we continue to see growth of owned and the mix becoming much more heavily owned versus managed?

Victor Garcia

We still have, as a focus, to have managed and owned portfolio in our fleet. The – and as you mentioned, we have an initiative in Asia to try and increase our managed assets there and we've been successful in that.

The transactions have been smaller than what our – by magnitude, smaller than what our procurement has been, so you've seen a continuation of the ownership mix moving up. In Europe it's been more difficult in part because of the turmoil in Europe.

So we haven't – we just haven't seen the opportunity there and we really – despite our wanting to continue to have a managed and owned mix, we have to be aware of what the market environment is and what our customers want. So we'll continue to grow our own business.

I do expect that our ownership percentage will increase over the coming quarters as we continue to procure at a pretty significant rate. But we have, as an initiative, to continue to grow the managed and find opportunities to grow the managed fleet.

Operator

Your next question comes from the line of John Mims – FBR Capital Markets

John Mims – FBR Capital Markets

Two quick follow-ups for me; on the press release, Victor, you state that, first, you expect improvement in our customers' financial performance over the course of the year. No more reduction and credit risk.

And I was just reading how with the post (Panamex) ships scheduled to come online still over the next 18 months, it equals 15% of the existing fleet. Is that continued over capacity in that outlook? I mean, do you think the industry will be able to absorb that or do you – I mean, do you think you can, one, see freight growth pick up enough to sort of offset that or they're going to be able to absorb it without some miracle rebound in freight?

Victor Garcia

I guess the comment I made related to that is what I've already seen in place. What we've seen and not only what our customers tell us but we've seen in publications and statistics is a lot of – beginning witht eh fourth quarter last year, many of the shipping lines align themselves in conferences to try to rationalize the capacity situation as opposed to at the beginning of last year where there was a fair amount of emphasis on the market share and people taking as much capacity into their fleets as possible.

So really in the fourth quarter last year we saw a rationalization and a shift away from market share to profitability. And so a number of (great) adjustments were implemented. A number of ships that were chartered in got released and if you're a ship owner today I think it's a very tough market as opposed to container (inaudible).

I think that – my opinion – that continues to be the case. We would expect that from what we are hearing that freight rates will continue to be – try to be maintained. Volumes are increasing at a 6% or 7% rate.

And as that new equipment comes in that you mentioned, my expectation would be from everything that we read is that there will be a continued move away from chartering vessels and, again, for those who have ships chartered into shipping lines, I think it's a difficult market.

But when you take the combination of freight rate increases, volume growth and then fuel costs coming down, which they've come down materially from where they were at the beginning of the year, our customers are telling us that they're expecting improved results and I think most people are expecting it.

John Mims – FBR Capital Markets

I guess the double-edged sword of the fuel cost, if it goes down low enough for smaller operators to operate older ships, then there's more opportunity to undercut the alliances. But, no, that makes sense.

And the second question is you comment on you should see utilization improved from here on the back half of the year. And that, I mean, there's two numbers you've given out. We've talked about this some but the 98% number seems to be more telling of the owned fleet.

Can that continue to tick up above 98%? Is that what you meant or should we see that blended 94.3% number drift? And how high can that drift over the next two or three quarters?

Victor Garcia

Really it depends a little bit on how the market plays out. But clearly when our fleet is at 98% on the owned side, there is limited amount. But we continue to invest in additional containers, which any incremental investment continues to be 100%.

So I think as far as our own results, the real driver is not going to be a 0.5% or 1% increase in utilization. What's really going to be the driver is the volume of new equipment added into our own fleet.

So what I would say on our managed fleet is we continue to lease out containers. We don’t just differentiate between owned and managed assets. It's really wherever the equipment is and ready to be leased out is how our field people decide what to lease out.

But as I said, we also have more discretion on what to sell out at the fleet. So we are – I think the fact that by traditional standards the ordering for August and most likely September is below what you would expect, we would expect there to be continued demand and that we would see our utilization creep up.

If the market strengthens enough, if we're at the low point of viewing where concerns about Europe is and we start to slowly turn the quarter, certainly we could see overall utilization back into the 97%, 98% total.

John Mims – FBR Capital Markets

Then I’m looking at that right, right? It's if you're 56% owned then you're – I mean, I could do the math, but your managed fleet utilization then is somewhere around 90%?

Victor Garcia

I think it's more than that.

Timothy Page

A little bit higher.

John Mims – FBR Capital Markets

A little higher but …

Timothy Page

92%.

Operator

Thank you. At this time I would like to hand the conference back over to Mr. Tim Page for any closing remarks.

Tim Page

We'd like to thank everyone for your continued interest and support and we look forward to speaking with you again. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program for today. You may all disconnect and have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: CAI International's CEO Discusses Second Quarter Results - Earnings Call Transcript
This Transcript
All Transcripts