CAI International, Inc. Q2 2008 Earnings Call Transcript

Jul.30.08 | About: CAI International, (CAI)

CAI International, Inc. (CAP) Q2 2008 Earnings Call July 30, 2008 5:00 PM ET

Executives

Masaaki (John) Nishibori - Chief Executive

Victor Garcia - Chief Financial Officer

Analysts

Robert Napoli - Piper Jaffray

Richard Shane - Jefferies & Co.

David Long - William Blair & Company, L.LC.

Operator

Welcome to the CAI International second quarter 2008 earnings results conference call. (Operator Instructions) At this time I would like to turn the conference over to Chief Executive Officer, John Nishibori.

John Nishibori

I want to thank you for calling in today to our 2008, second quarter earnings call. I am John Nishibori ECO of CAI International 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 Garcia

Certain statements made during this conference call may be forward-looking and are made pursuant to the Safe Harbor Provisions of section 31-E 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 conditions, customer demands, increased competition, and others.

We refer you to the documents that CEI International has filed with the Securities and Exchange Commission including its annual report on Form 10-K 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 Nishibori

We are pleased with our performance for this quarter. We reported net income of $6.3 million which is a 53.7% increase from our net income reported in the second quarter of 2007. Our revenue for the quarter also showed strong momentum with overall revenue growing 47.1% to $20.6 million.

Our container rental revenue increased 66.9% to $13.8 million. Container rental revenue growth was helped by the acquisition of Consent Equipment AB which we acquired on April 30, 2008. In the second quarter we have two months of results for Consent which we added $2.2 million to our container rental revenue. However, excluding Consents revenue, our existing container rental revenue in the second quarter of 2008 increased by approximately 40% from the level reported in the second quarter of 2007.

These results reflect the overall strength in our business during the quarter. During the second quarter we had average utilization rate of 95.5%, an increase from 93.7% in the same period in 2007. We are now in the seasonally stronger period of our year and despite the economic weakness in the United States and potential slow down in Europe, we are seeing strong demand from our customers for new boxes.

Based on the latest estimates from containerization International, overall global containerized trade growth in 2008 is estimated to grow at 8.3%. Far East the Europe trade is estimated to grow at 12.6% and trade from the Far East to the United States is expected to contract slightly. These estimates reflect reduced growth levels as compared to the estimates we had at the beginning of the year, although overall global growth is expected to continue.

A positive development is that exports out of the United States are forecast to grow 15.7% in 2008. Further Clarkson’s research estimates the trade growth in 2009 to pick up to approximately 9.2% as the world economy is strained.

Despite the economic backdrop, we believe the demand we are seeing is a result of the increase in container prices since the beginning of the year and the overall more restrictive credit environment. Both of these factors have made leasing a more attractive alternative than in past years and have helped offset the impact of the slight decrease in the rate of growth in trade.

Shipping companies have also slowed their ships in order to conserve fuel as the ships steam across the oceans. Slower ship speed, typically results in more ships in a trading lane and a higher demand for containers since the containers are not being turned around as quickly.

New container prices have risen from approximately $1,900.00 per private container to $2,500.00. The increase is primarily due to the rising cost of steel, although labor and lumber costs have also risen. We are careful in purchasing equipment at these higher prices. So far we have been successful in leasing our newly purchased containers at per diem rates in line with the increase in new container prices.

As a final note, the prices and disposition of older containers have also remained firm.

Victor will now speak in greater depth on our results.

Victor Garcia

For the second quarter of 2008 our fully diluted earnings per share was 37/10s on an average share count during the quarter of 17.1 million shares. This compares to earnings of $0.23 per share for the same quarter in 2007 with average shares outstanding of $17.1 million. Net income quarter-over-quarter increased by approximately 53.7%. As John mentioned, total revenue for the second quarter was $20.6 million, an increase of $6.6 million or 47.1% above the amount reported in the second quarter of 2007.

Our quarter-over-quarter revenue growth breaks down as follows: Our container rental revenue increased 66.9% to $13.8 million from $8.3 million. Within that figure we have $2.2 million relating to container rental revenue from content for two months. Excluding contents revenue, rental revenue increased approximately 40%.

The container rental revenue increase reflects the larger owned fleet we had this past quarter as compared to the second quarter 2007. Our utilization was also higher this quarter than in the second quarter of 2007 by approximately 2 percentage points.

Management fee of revenue declined by $300,000 or 10% this quarter compared to the second quarter of 2007. The last few quarters we have shown a decline in management fee revenues in comparison to the previous year’s quarter due to lower fees from the disposition of managed equipment. We had the same effect this quarter; however we would not expect a decline in management fee income for the coming quarter, third quarter comparison.

Gain on sale of container portfolios was $3.3 million during the quarter compared to $2.1 million. During the quarter we sold approximately the same number of TEUs as in the second quarter of 2007, however we did sell some higher valued equipment to investors which brought the overall gain to be greater on a quarter-over-quarter basis.

Our total operating expenses during the second quarter of 2008 was $9.2 million compared to $5.5 million in the second quarter of 2007, a 66.7% increase. The most significant expense increase was depreciation due to the larger fleet we have been operating and the depreciation form the content fleet.

Depreciation for he second quarter of 2008 was $3.7 million compared to $1.8 million in the second quarter of 2007. During the quarter we recorded approximately $600,000 in depreciation related to content for the two months. We would expect depreciation to be approximately $4 million in the third quarter.

Gain on disposition of used container equipment was $1.5 million this past quarter, compared to a gain of $1 million during the second quarter of 2007. For this past quarter we sold more units than we had sold in the same quarter last year.

Storage, handling, and repair expenses increased by $0.6 million to $1.4 million, largely due to owning more equipment, the inclusion of content storage costs and higher over seas storage costs in general as they are translated to US dollars as a result of the decline in the dollar.

Marketing, general and administrative costs were $5.1 million for the second quarter of 2008 compared to $3.9 million for the same quarter last year, an increase of $1.1 million or 29.6%. The increase relates to a number of factors, including the overhead from concepts, higher employee related costs from increased headcount and higher incentive compensation. The weak dollar has also contributed to higher foreign overhead costs when translated back to US dollars. We would expect a similar expense amount in the third quarter.

Net interest expense was $2 million for the second quarter of 2008 and flat when compared to the second quarter of 2007. We had a higher average balance this quarter in comparison to the same quarter last year; however we have benefited by the decline in LIBOR over the past few months. Our interest rate as of June 30 was 3.4%.

Income tax expense for the quarter was $3.2 million resulting in an effective tax rate for the quarter of 33.9% compared to an effective tax of 36.9% in the second quarter last year. Our effective tax rate increased from the first quarter of 2008 because we increased our assumed effective tax rate for the year from 32% to 33% due in part to recognizing the effective tax rates at contents operation as well as some changes in effective tax on some of our European operations.

Net income for the three months ended June 30, 2008 was $6.3 million, an increase of $2.2 million or 53.7% compare to $4.1 million for the three months ended June 30, 2007.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Bob Napoli of Piper Jaffray.

Robert Napoli - Piper Jaffray

The global economy has been slowing down, John, as you pointed out and I just wondered as we look at some of these trends, I think in some markets there may be a little bit more concerns even as over the last couple of weeks. I just wondered what you guys are seeing trend wise on a month-to-month basis and what your expectations are. I know you gave some of the forecast from some of the industry economic forecasters, but I just wondered what you guys are seeing and I think that’s probably the biggest rift to your story is this global trade slow down.

John Nishibori

We really have not seen any impact on our business. The first reason is probably because the decline in the growth rate from 9.7% last year to 8.7% this year is so slight and that has been more than offset by the fact that the shipping companies are leasing a lot more containers than owning them these days and that is very much reflected in our high utilization rate.

So the slight decline in the growth rate, mind you trade itself is growing and it is growing at a very nice rate, even at 8.7%. That’s a lot more than you can say about a lot of other industries. So we really have not experienced that in our business, in fact for our business it has been very good. We believe this trend will continue and as the world economies recover next year, just like Clarkston’s research is saying, we believe that the world trade will go back to a growth rate of 9.7%.

All in all, all I can say is that we are not seeing any negative impact. You can see from our financials too. Our revenue is growing, our income is growing, and our utilization is growing, so I feel very comfortable with the situation.

Robert Napoli - Piper Jaffray

You acquired Consent last quarter and I think you gave, I forget what exactly the accretion was, $0.05 to $0.10 accretion on an annualized basis or so.

Victor Garcia

Seven to ten.

Robert Napoli - Piper Jaffray

Seven to ten, ah, how is consent going? Is it in line with your business plan, behind, or ahead, what did it add this quarter?

John Nishibori

It’s in line with our expectations. We don’t really want to break down our income statement by subsidiary, but I’ll say I think we’re very comfortable with what we indicated in terms of the 7% to 10%, $0.10 per share for the year. I think nothing has changed in that business or our expectation for that business that would make us feel like those numbers aren’t achievable.

Robert Napoli - Piper Jaffray

Your tax rate, you brought it up a little bit for this year. Obviously you know our Peer Text [ph] container has a tax rate in the high single digits. What is your outlook for the trend in the tax rate in 2009 over the next say five years? What would you expect generally given kind of a steady market, your tax rate would trend down to?

Victor Garcia

As we talked about in the past our expectation is that as our overseas subsidiaries become more significant in our overall profitability mix, that we would expect our tax rate to be in the say very low teens; so high single digits to low double digits.

Robert Napoli - Piper Jaffray

Over what time frame?

Victor Garcia

I would expect over the next five years.

Robert Napoli - Piper Jaffray

The gain on sale was higher than what we had modeled this quarter, so you said you sold the same number of containers. What is going on in that market, in the KG market with the, you know the credit crunch broadly. Has that affected the container market? What is you outlook for that market in the third quarter and the balance of the year?

John Nishibori

We have gone through now, a little over a year as a public company and through what we would term a difficult credit environment overall and we have said in the past that we haven’t seen any issues with raising or selling funds into there. We continue to get a lot of inquiry for those investments and we can’t predict the future, but I think we feel very comfortable right now with the ability to continue to execute in our business plan which is to own and manage equipment and growing both sides of the business.

So, there is nothing fortunate to say to you, that there is nothing new to report. I mean as we just reported again this quarter. And, still I think investors like, from what we understand, like the asset cost and use it as part of their overall investment choices. It’s one investment choice. We feed into a very, we are a very small part of a very large capital pool.

Nobody can predict the future, but I think from where we stand here today, we feel very comfortable that the market is available.

Operator

Your next question comes from Richard Shane of Jefferies & Co.

Richard Shane - Jefferies & Co.

How much did you spend on new containers this quarter?

Victor Garcia

Through the six months we have now spent $87 million.

Richard Shane - Jefferies & Co.

As I recall you spend $57 million in the first quarter, so that would imply about $30 million this quarter?

Victor Garcia

Yes there abouts. I think our buying patterns continue to be, as we go along, I think we feel, the price of the containers has gone up and so we’ve taken advantage of some of the earlier purchases that we’ve had. As we continue to work those off we will continue to invest in new equipment. If you look at the six months, we have invested $87 million and in comparison I think we were about $10 million less this time last year.

Richard Shane - Jefferies & Co.

Accelerate acquisitions in the third quarter as you sort of move into the seasonal peak?

Victor Garcia

Rick, we’re getting a lot of background noise, I don’t know if you’ve got a Blackberry phone?

Richard Shane - Jefferies & Co.

I don’t know what it is, I apologize, I’m getting the same thing.

Victor Garcia

Can you repeat the question then?

Richard Shane - Jefferies & Co.

Sure is your expectation that you are going to pick up purchases in the back half of the year?

Victor Garcia

We feel like we have enough inventory right now, based on the stuff that we had going into the beginning of the year, plus the purchases that we’ve made, but we have enough already in the pipeline that’s on our books today and still scheduled to be delivered. As we work through it over the next couple of months, we certainly will look to supplement that.

I think that the CapEx number is a little bit difficult to gauge in terms of what our lease capability is, because we do have some CapEx that we bought in the fourth quarter that we’ve leased out this year and so when you do those kind of comparisons sometimes they don’t tell the true picture of how much you’ve leased out but, we will continue to order equipment as we lease it out. So far the business is in line with what we expected.

Richard Shane - Jefferies & Co.

You said that you sold the same number of containers in the second quarter that you sold in the second quarter of last year. What was the number of containers, or could you give us at least some ballpark?

Victor Garcia

The number is approximately 11,000 TEUs.

Operator

Your last question comes from David Long - William Blair & Company, L.LC.

David Long - William Blair & Company, L.LC.

You guys mentioned that shipping companies are now leasing more than they have in the past as opposed to owning. Is that a significant change? I think in the past they’ve typically bought 60% and leased 40%. Can you quantify what they’re doing today?

John Nishibori

Yes, yes you are absolutely correct, it was about 60/40 but traditionally or historically speaking it used to be 55/45, 55 shipping companies and 45. Then because of the easy credit over the past several years, the shipping companies have increased their share from 55 to 60, but now I think the trend is changing and we forecast that over the next year or so it will probably be back to 55/45.

This is simply because of the credit tightening and the shipping companies as you may know have a huge order log of ships that they have to take delivery over the next two to three years and in this credit environment they have to allocate the loans to purchasing of those ships.

David Long - William Blair & Company, L.LC.

The percentage of containers on short-term lease increased a little bit. Can you provide any color on that? Is that a trend that you expect to continue?

Victor Garcia

I would term that [indiscernible] I don’t think there is a significant trend there.

John Nishibori

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

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!