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Textainer Group Holdings Limited (NYSE:TGH)

Q3 2012 Earnings Call

November 6, 2012 11:00 AM ET

Executives

Hilliard Terry – EVP and CFO

Phil Brewer – President and CEO

Robert Pedersen – President and CEO, Textainer Equipment Management Limited

Analysts

Michael Webber – Wells Fargo

Justin Yagerman – Deutsche Bank

Michael Webber – Wells Fargo

Justin Yagerman – Deutsche Bank

Bill Carcache – Nomura

John Mims – FBR Capital

Salvatore Vitale – Sterne, Agee

Doug Mewhirter – SunTrust

Operator

Welcome to the Textainer Group Holdings Third Quarter Earnings Conference Call. My name is John and I’ll be you’re operator for today’s call. (Operator Instructions).

I'd now like to turn the call over to Mr. Hilliard Terry. Sir, you may begin.

Hilliard Terry

Thank you and welcome to our third quarter earnings call.

Joining me on this morning on the call are Phil Brewer, TGH President and Chief Executive Officer and at the end of our prepared remarks, Robert Pedersen TEM President and Chief Executive Officer will join us for Q&A.

Before I turn the call over to Phil, I'd like to point out that this conference call contains forward-looking statements in accordance with U.S. Securities Laws. These statements involve risk and uncertainties are only prediction and may differ materially from the actual future events or results.

Finally, the company's estimates, views, plans and outlook as described within this call may change subsequent to this discussion. The company is under no obligation to modify or update any or all of the statements that are made.

Please see the company's annual report on Form 20FA for the year ended December 31, 2011 filed with the SEC on June 27, 2012 and the Form 6Ks and the company files quarterly with the SEC for additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements.

I would also like to point out that during this call, we will discuss non-GAAP financial measures, as such measures are not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP measure will be provided either on this conference call or can be found in today's earnings press release.

Now, I'd like to turn the call over to Phil.

Phil Brewer

Thanks Hilliard. Welcome to Textainer’s third quarter earnings conference call. I would especially like to welcome all of our new shareholders. Textainer set many new and impressive records during the third quarter. All of the following are new records. Total revenues of a $122.3 million an increase of 11.7% from the prior year quarter. Adjusted EBITDA of 97.4 million an increase of 12.4% from the prior quarter. More than $1 billion of CapEx of which 818 million was invested to acquire more than 300 TEU of new dry freight and refrigerated containers.

This is clear evidence of the increased reliance of shipping line on Textainer and other leasing companies to provide the containers they need and supports our focus on organic growth. A fleet of approximately 2.7 million TEU of which 81% is subject to either long term or financed leases does increase stability and visibility of our earnings.

And ownership level have reached 69% of our total fleet more than 10 percentage points higher than one year ago doing part to more than 159 million of purchases from our managed fleet during the quarter. Not only our owned containers far more profitable than managed containers but they are already on lease unlike investments and new containers.

A declared dividend of $0.44 per share for the fourth quarter of 2012 an increase of 5% from the second quarter and an increase of 19% year-to-date. This is our 11th consecutive quarterly increase and continues our record of maintaining stable or increasing dividend every quarter since our IPO.

Other results from the quarter while not records were nonetheless impressive. Maintained an average utilization of 97.9%, utilization is 97.2% currently given the fixed rate nature of more than three quarters of our fleet we do not expect to see dramatic changes in utilization over the coming year.

Achieved net income of $50.7 million or $0.99 per diluted common share an increase of 11% or $4.9 million compared to 45.8 million in the prior year quarter. Provided and annualized 2012 return on equity of 24%. Textainer has delivered an average annual return on equity of 23% since its IPO in 2007 which is even more impressive when knowing our low leverage relative to our peers.

Year-to-date the company has completed approximately $2.4 billion of financing in the debt and equity markets resulting in over $1.3 billion of net incremental funding providing us the liquidity and flexibility to take advantage of the attractive opportunities for growth in our industry.

We are very pleased with these results. We believe the secular change to an increased reliance on lessors makes this an ideal time to grow our own fleet. We expect that the lessors may purchase more than 65% of new containers in 2012, furthermore this change is occurring at the same time the new production is restrained. Probably less than 2.5 million TEU of dry containers will be manufactured in 2012 which is less than 2011’s output.

This limited level of new production support continued high utilization levels going forward. On the other hand we have seen some tightening of returns on new container investments during the year. The effect has been greater on reefers and dry containers as a result of which we have often been out bid by competitors on reefer deals.

We believe we have been the third largest investors in reefers this year and invest less than 20% of our total CapEx. Whether dry-freight or reefers we will continue to invest only when returns are satisfactory. As we noted during our last earnings call, we have seen a significant increase in shipping line sales of containers via either purchase lease back or trading transactions.

Purchase lease back transactions are attractive to both their fully on-lease nature and the opportunity for eventually gains on sale. We have been and will continue to vigorously pursue these opportunities.

Resale prices have remain relatively study all year at historically attractive level. We expect prices to remain around those current levels for the foreseeable future. I would now like to touch on a few factors which I believe will underline Textainer performance and that of our industry over the coming year.

Since 2009 our industry has seen a dramatic shift to a much greater reliance on leasing companies to purchase and provide new containers. We estimate that leasing companies purchase 65% of new containers in 2010, 55% in 2011 and perhaps 65% this year. This shift is one of the most important factors affecting our industry and it is expected to continue in the coming years.

Ever since recovering from the meltdown of 2009 container manufacturers have been reluctant to operate multiple shifts and produce a maximum capacity. As a result annual new dry freight were up during 2010 through 2012 has not exceeded 3.4 million TEU well below estimated three ship capacity in excess of 5 million TEU and the 4.3 million TEU produced in 2007.

Production this year is estimated at total 2.5 million TEU is not expected to exceed at 2.6 million TEU or 2.7 million TEU in 2013. Container prices have performed similarly over the last two years, start the year around $2200, $2300 and increased steadily to a peak of $2700 to $2800 in the middle of the summer then decline to the starting point by year end.

Shipping line demand has mirrored the behavior of price increases. Increasing from the first quarter to a peak in the second quarter reduced demand during the third quarter and a decline during the fourth quarter.

Closed shipping lines and leasing companies are increasing to operational life of their containers and as a result the rate of annual container disposal has declined. Traditionally 5% of the world’s containers were replaced every year. During the last several years the figure declined to 3% to 4% although we have recently seen an upsurge in container sales. The problem of excess container vessel capacity remain given the inventory of container vessels existing new build orders, current scrappage rates and projected growth in container shipping excess capacity is expected to exist until at least 2014.

Slow and super slower steaming has helped to observe (inaudible) 5% to 10% of current capacity of PUC room (ph) for further benefits of slow steaming. The rate of growth at world trade is slowing, the WCTO is projecting that the global volume of trading goods will expand 2.5% this year, down from 5% last year and 14% in 2010.

The consensus projection for 2013 is 4%, from these factors we can see several that are positive for our industry. One, shift our reliance to container lessors which as I have said I believe we are one of the largest drivers of growth over the coming year. Two, restricted output of new containers which helps maintain high utilization, three maintenance of relatively high container prices which supports assets values, rental rates when releasing and gains on sale.

We believe these positive factors outweigh negative factors such as possible slowdown, a possible slowdown in the rates of growth of trade. We are certainly pleased with our results and prospects. I’ll now turn the call over to Hilliard,

Hilliard Terry

Thank you Phil. As Phil mentioned this quarter marked a number of records in terms of our performance metric. On the top line a 122 million of total revenues was a quarterly record for the company. Revenue growth was 12% above the year ago quarter. Net income was 50 million and up 11% year-over-year. The primary driver of our revenue growth was a 14% increase in lease rental income as a result of the 18% increase in the size of our own fleet.

Additional we saw a large increase in the sales of trading containers line item due to an increase in volume. However, this quarter’s revenue growth was partially offset by lower management fees because of a decrease in the size of our managed fleet and acquisition fees due to lower container purchases for our managed fleet.

Total operating expenses were up 22% year-over-year however that take into account a pretty significant increase in depreciation expense which was a large component of total operating expenses.

Adjusting for the increase in depreciation expense, operating expenses grew half as fast as our top line. Depreciation expense was $27 million for the quarter up $8 million of 43% as a result of our larger fleet, an increase in the average price of containers purchased and the retirement of less expensive containers. Our bad debt expense was $682,000 or 0.6% of revenue which is well within the normal range of 0.5% to 1% of revenue and consistency with last quarter’s run-rate.

Below the operating income line, interest expense was 19 million for the quarter versus approximately 14 million in the year ago quarter. The $5 million increase was primarily due to approximately 400 million of additional debt used to fund the expansion of our fleet and a slight increase in borrowing cost. The net benefit of 1.3 million on our income statement this quarter, the net tax benefit of 1.3 million on our income statement this quarter is a net impact of the lease of tax reserve and a change in our income sourcing allocations resulting in a change in our effective tax rate.

Adjusted EBITDA of 97 million represents another quarterly record and was up 12% year-over-year. This is a clear indication of our strong and increasing cash flow. Adjusted net income which excludes unrealized gains on interest rate swaps for the quarter was approximately 49 million. Our recent equity offering resulted in our weighted average shares outstanding increasing by 1.5 million shares saw adjusted EPS is $0.97 for the quarter.

As Phil mentioned year-to-date we have invested a record of more than 1 billion in CapEx and significantly increased our own fleet. In keeping with our goals owning a great percentage of our fleet, we now own 69% of our total fleet compared to 58% in the year ago quarter and 60% when we reported last quarter.

Much of the quarter in our own fleet occurred towards the end of the quarter so that the full effect will not be seen until the fourth quarter. The growth in not just our total fleet but more importantly our own fleet positions us well for the future.

As this year’s new container purchases mature we should see an increase in the returns on these containers and their bottom-line impact. Our financing facilities amortized principal and we depreciate our containers over 12 years of fixed residual value. As the principal is amortized, interest expense declines with our container and assuming rental rates remain relatively stable overtime as the container ages it's net income increases because of the lower interest expense. Additionally when we sell containers we often see gains on sale and healthy cash flow.

Our focus on discipline fleet growth is the foundation that positions us to continue to deliver strong total shareholder returns. We have maintained a strong balance sheet this quarter as of September 30, our cash position was a 113 million with available liquidity of about a $1 billion. Our total assets was 3.1 billion and our leverage ratio was about 2 to 1.

We have tremendous liquidity to make sure we are in a position to take advantage of what we see as the most important secular trend in our industry. The increasing reliance of shipping lines on leasing companies to provide the containers they need. As Phil mentioned the 1.3 billion in net incremental funding and most recently we increased the size of our revolver from 205 million to 600 million at extremely attractive pricing with the addition of nine banks new to Textainer. We are continuously working to optimize our capital structure for growth and opportunistically expand our financing alternatives.

In closing I would like to provide a few inputs for your model. Given the recent equity follow-on offering we expect our weighted average share count of approximately 51 million shares for the year and approximately 55 million shares in Q4. Going forward we expect to see a normalized tax rate in the low to mid-single digits.

In closing I would like to thank you for your attention and I look forward to seeing you many of you at upcoming conferences and investor meetings. Now I would like to open the call up for questions. Operator can you inform the participants of the procedures for the Q&A.

Question-and-Answer Session

Operator

And our first question comes from Michael Webber from Wells Fargo. Please go ahead.

Michael Webber – Wells Fargo

Phil I wanted to start with the growth and what you guys have been able to do on the managed side and clearly you guys have kind of found a gear here that your competitors don’t really have, can you just talk a little bit about how you think that trend over the next year. I mean you mentioned your percentage as owned versus manage is up 10% year-over-year, is that something you think is repeatable in 2013? And maybe just kind of help us think about how we should layer on this managed growth on top of whatever you guys are doing. Actually growth stemming from the managed fleet on top of whatever you guys are doing from a new box perspective.

Phil Brewer

I wish I could give you a clear road map in that area, it's very difficult because these transactions are driven not solely by us obviously, we have got an owner of assets in our fleet, they may have their own parameters and their own concerns about when they want to sell those assets. It's difficult for us to estimate when those sales might happen. Suffice it to say that we are in constant contact with the owners of the assets in our fleet in any event, clearly we report to them on a monthly basis. We are talking to them about the performance of their fleet and part of those discussions are also, would you be interested in selling those assets when we find that there is an interest level then we will talk about a sale and we compare the returns that we can get on those type of investments with the returns that we get on new containers. When we can come to it agreement where we think the return is attractive and it's also attractive for the seller then we do a transaction.

So it's very difficult for me to project when the next ones might happen but we are always looking to buy the containers the managed containers in our fleet.

Michael Webber – Wells Fargo

Right and obviously it's going to be a little lumpy and tough to quantify but maybe can you compare what, you’re talking to these guys on an ongoing basis and maybe compare where you stand today versus where you stood a year ago in those conversations and the kind of request it's come in and take out as well the managed containers. Maybe just kind of comp where you stand today versus where you stood this time last year when you are able to go out and buy 10% of them.

Phil Brewer

I wish I could say with more guidance or more direction as to what I think will happen in the future. I would say that this was a unique quarter and being able to purchase the managed fleets to extent that we have. We are certainly optimistic that over the next year in 2013 there will also be opportunities to purchase managed fleet.

Just these things are very difficult to predict.

Michael Webber – Wells Fargo

It's actually a question for Robert and just kind of the heavy level before I jump to a couple of modeling and more to your questions but you know you mentioned I think Phil in your remarks you mentioned the market share gains by this phase and the 65% that you guys are hitting right now. Is there anything that makes you think that’s not sustainable in 2013 and in between 65% and 70% and I guess what could take that kind of off the rails?

Robert Pedersen

Well we think it's very sustainable in 2013, it may actually grow from the aspect that one of the major globally shipping line has and asked they are not going an reefer containers next year, so just try that it will increase the lessor share considerably and in the dry container side we think that leasing companies will continue to source the majority of the containers.

Phil Brewer

Michael maybe I could add one thing because I think this factor is sometimes is underestimated by the analyst who cover our industry. We happen to believe it is the most important secular change we have seen over the past few years. If you just do some simple math and say let’s say next year that 2.7 million TEU are produced and let’s say assuming and I obviously don’t know but let’s say lessors purchase 70% of that. You’re talking about 1.9 million TEU being purchased by leasing companies. If we go back to when leasing companies used to purchase 45% of all output, you would have to have a 4.2 million TEU year which has happened once and more than last ten years. So this is a dramatic change and I think it's important that all of us recognize how beneficial is this for our industry.

Michael Webber – Wells Fargo

Wanted to jump into the trading side quickly and it looks like the margins there were came in a bit sequentially and looks like they are actually the lowest since ’08 can you talk a little bit obviously it's not a huge driver but talk a little bit about what’s going on there, is that just a function of just having a higher cost basis on the trading fleet and maybe just talk a little bit about what’s going on from a margin perspective there and how should we see that shape up in Q4 in ’13.

Phil Brewer

Some of the containers that we have purchased were slightly higher prices so the margins we made on the sale have come down because you’re talking about going from an environment last year where resale prices were at one level and they have come down this year about 20% to 25%.

I mean I would like to point out though that sales prices residual of containers are still at very, very attractive levels historically. I think last year was an anomaly the levels at which prices reached simply because the supply was so small. So what we have seen is we have seen a reduction in the quantity of containers being sold, many of the transactions we are entering into right now are purchase lease backs and not trading deals and then in a purchase lease back we don’t get the container back straightaway but at some point in time in the future and secondly the margins that we add were initially coming down but now obviously we are offering lower prices on containers that are offered for sale.

Michael Webber – Wells Fargo

One more for me and then I will turn it over, this is actually for Hilliard. Obviously the AVS market for the sector has been exceedingly firm and you guys have been very active in that market, you have got some of the AVS that are callable beginning part of the year, is there any thought that are trying to maybe reify in that tighter environment, maybe talk a little bit about how you balance that versus kind of keeping that investor base happy.

Hilliard Terry

We are constantly looking at that, I think just overall you’re right, the AVS market has been white hot but I would kind of point your attention to the fact that we just increased our revolver and pricing that is probably below what market pricing is today. So we have been able to achieve some really good pricing lately sort of what we do in terms of the callable nature of our AVS that is something we are constantly looking at our capital structure.

Operator

Our next question comes from Justin Yagerman from Deutsche Bank. Please go ahead.

Justin Yagerman – Deutsche Bank

In terms of the quarter you know obviously an impressive pace here with the CapEx. What do you guys think you’re going to come in for the year and then as look out to next year. I mean it sounds like this is a performance that if the market share is really shifting the way you see it you could duplicate and if things really fell the way that good, you know fell on your favor with the combination of these managed containers being up for purchase potentially and some sale lease back activity. Could be eclipsed by where you guys are this year, so how do you think about the opportunity to deploy capital and where are you guys in terms of fire power right now?

Phil Brewer

Well first that’s exactly where I was going to start with on the fire power side because fortunately we have been in the market this year, have dramatically increased the size of our facilities and right now are sitting with between 800 million to $1 billion of liquidity that we can use to pursue opportunities. We think that puts us in a really unique and strong position in our industry to take advantage of the opportunity we do have. This is a commodity business. We all know it’s a commodity business and in my mind and all the minds of those of us here at Textainer, it makes sense to take the opportunities to grow when those opportunities are present. Those opportunities were present last year and I think they will be present going into next year as well. So we are very optimistic about our opportunities for growth in the coming year. As we've already said, we think that the leasing companies will be the primary suppliers of new containers to the industry. We think trade growth will increase next year. It might not be at what the kind of rate we expected to see over the past 10 or 12 years but we do believe it will be an improvement over 2012. We think the opportunities for us next year are quite attractive and we have the financial ability to take advantage of them.

Justin Yagerman – Deutsche Bank

So sounds like you could do $1 billion or more next year without being too worried about that.

Phil Brewer

I think that's possible.

Justin Yagerman – Deutsche Bank

In terms of opportunistic types of events herewith, the price of dry boxes downward is right now, how aggressive do you guys look to get in these types of situations? Phil, you laid out I think pretty clearly the progression we've seen over the last couple of years in terms of the seasonality of price per TEU on the dry side. It’s been fairly predictable. Not necessarily going to hold next year but it would seem like its lining up that way. How aggressive do you guys get in terms of taking on inventory at these low prices and how are you thinking about that going into 2013?

Phil Brewer

Well Justin, we think that it could be an opportunity to invest a lot of CapEx during that period. It seems like the last two years have been similar in terms of the pricing pattern and as a matter of fact, and we've already started about 13% of our total CapEx right now is in the process of being built. So the process has started what we consider attractive pricing and we should be well positioned for end of year, early next year.

Justin Yagerman – Deutsche Bank

In terms of months of supply, how do you think about that in terms of how much you’re willing to go forward on inventory basis?

Hilliard Terry

Well I think in total CapEx, what we kind of our thinking, we are generally being prepared to sit on between 150-250 million of total CapEx on a speculative basis. I think that range probably still remains our comfort level.

Phil Brewer

If you think about it Justin, if you just translate in the TEUs, you’ll see maybe 3% or so of our total fleet. We feel very comfortable holding that level of inventory. Just reflecting on a comment I made earlier, that this a commodity business, the transactions where you’re going to get the better returns, so those were your prepared and maybe your competitors are not. The ones where there is plenty of advance notice, let`s face it. Everybody can compete on those deals and the yields are not going to be quite as attractive.

Justin Yagerman – Deutsche Bank

That makes a lot of sense. It’s a good segue because I would assume that if you weren't satisfied with where counterparty strength is right now, you wouldn’t be talking about potentially getting aggressive on purchases. So maybe some commentary around the counterparty side of things and has there been any major shift over the course of this year? You’ve obviously you deployed $1 billion worth of capital. It’s a lot even on your base. Has there been any major shift in your customer concentration?

Hilliard Terry

Well first it’s important to keep in mind Justin, that when we’re buying managed containers, they are probably representative of our whole fleet anyways. So that's not going to change our shift among the lessees, right. Those containers already in our fleet and probably representative on a pro rata basis of our whole fleet. So it’s only when we’re doing the new containers that you might see some shift. We actually have been successful in increasing our market share with a few customers that we felt we needed to grow, that relative to even perhaps some of our competitors, we weren't quite as strong at the beginning of the year as we wanted to be and we've been successful increasing our share with some of those competitors thus diversifying our fleet a little bit compared to the beginning of the year. But I think the bigger point really is that the counterpart risk is in our minds, clearly less than it was at the beginning of the year. When you look coming out of 2011 when they were losses, over the course of this year, clearly every shipping line is unique, but the general trend has been going from loss to profitability over the course of the year, freight rates trending up, coming down a bit maybe just recently starting to head up a little bit again. Many of the lines being recapitalized. Certainly the credit risk is lower today. The credit profile is better today than it was a year ago.

Justin Yagerman – Deutsche Bank

That's fair. And then last one, just piggy backing on one of Mike’s questions and trying to get it out at a different way. These guys that you’re managing boxes for and you’ve been successful at converting some of these into owned. I know there is no really good way of predicting the pace of that, but the guys who you have done deals with or they maybe even some of them you haven't, have any of them indicated to you that there is a considerable amount of more of the boxes that they still own or do own that they are going to be looking to sell over time. So is there an indication that we should see a continuation of this pace?

Phil Brewer

I honestly wish I could be more specific and I am not trying to be coy on this question but the reality is that we’re talking with these owners and often factors that they don't expect occur. Let`s say it’s a financial institution and there may be a balance sheet issue and they decide, you know what, right now we’d like to sell some of these assets. It’s very hard for us to anticipate that they didn’t even anticipate that. Then you’ve got third parties like the KG Funds that have their own parameters and the needs of their investors. They are somewhat challenging for us to predict. So there are so many factors here Justin. I wish we could be more specific. It’s very difficult for us to predict when these opportunities arrive. I do think it’s fair to expect that there will be more over the coming years, but I have a very hard time quantifying how much.

Operator

Our next question comes from Bill Carcache from Nomura. Please go ahead.

Bill Carcache – Nomura

So maybe I thought we may be able to start off, Phil, if you could just give us some color on any noteworthy trends that you’re seeing, I guess just by geographic region?

Phil Brewer

The big trends that we’re seeing, I think I hit on some of them when I gave my opening remarks. Breaking it down to a geographic level is pretty difficult for us to look at things on a real specific geographic level. Like for example if you’re talking about well, what's happening in Greece or maybe the disputes between Japan and China. Japan and China trade is not a big part of total overall world trade and in any event, when we’re leading out containers as you’re well aware, it’s not as though we’re leasing out for one specific trade route or another. It is fair to say as you know and all the Pacific is shown, the Asia-Europe trade has suffered over the past year. I think it’s likely that it’s difficult to predict when that trade route is likely to start showing some improvement, but trans-Pacific trade has outperformed the Asia-Europe trade. I don't know if that answers your question though.

Bill Carcache – Nomura

I guess I left it, it’s a pretty broad question, kind of intentionally, just to kind of get a sense of what some of the first things that came in to mind, that kind of is some helpful color. I guess moving more specifically, Hilliard, can you give us some sense of what percentage of your fleet is fully depreciated and how that's changed over the course of the past year or so?

Hilliard Terry

Well we've actually been pretty consistent in our purchases. So the reality is that the number has not changed dramatically over the recent period of time.

Bill Carcache – Nomura

Okay and can you guys also talk a little bit about, in thinking about CapEx, are you kind of taking it, in your outlook for CapEx, are you looking ahead and taking it a quarter at a time or do you expect to reach a point particularly as we enter the new year and maybe have some new data points that you think you’ll have a stronger sense of your CapEx outlook for longer period of time in to ’13 or is it really just kind of quarters at a time as different data points come about. Can you just give us a little bit on what are some of the things that inform your views on your CapEx deployment? And then if there is I guess some rule of thumb between that CapEx deployment and the global trade growth numbers that you threw out earlier.

Phil Brewer

Well, I'll answer the first part of your question. As you know the real strength of our industry, not just for Textainer and for all of us, is that we're able to make our capital expenditure decisions pretty quickly. We see trade suddenly to slowdown, we can stop ordering containers, we can pick it up. We can start ordering containers again. So, we’re not sitting here making CapEx decisions for the second quarter of next year, and the next third quarter of next year. We might have some expectations as to what will happen at that time based in part on what we've seen over the last two years but we’re not doing anything firm other than conserving what we might do. So our CapEx decisions are made perhaps not on an actual real time basis, but very close to it.

Secondly, there was a second part to your question there was about how it relates to the growth of trade. I believe that was the second part of your question.

Bill Carcache – Nomura

Yes, if there is any kind of rule of thumb between that level of CapEx deployment in global trade growth. Obviously you mentioned that you can make the decisions with pretty quick period of time but just any commentary you can give on relationship to the global trade environment.

Phil Brewer

I think one thing to note Bill; we've had a slowdown in global trade this year. We’ve set a record for CapEx. So trying to come up with a rule of thumb is pretty challenging. That gets back to the point I was making about the shift to container lessors for providing new containers. So I think it’s very hard to say, there is immediate one-to-one correlation there. I actually too wanted to touch on something else that you’d say about the question about depreciation earlier because I think maybe there is a little bit of misunderstanding on this point. All the container lessors have different depreciation policies, but if you take them, look at them a whole, for example, I believe we have the shortest depreciable life. So I think it’s been pointed out by somebody that we have maybe a higher residual value, average shorter life. If you look at the actual annual level of depreciation of the assets among those container lessors that we’re unable to get the data, I think you’ll see that these levels are very, very similar. We’re all depreciating our assets at a very similar rate.

Operator

Our next question comes from John Mims from FBR Capital. Please go ahead.

John Mims – FBR Capital

Phil just one for you, in the prepared comments you made the comment that your shipping lines are increasing the useful lives of containers and trying to stretch that out as far as they can. Are you viewing that as a temporary thing or more systemic that you’re getting more life out of these containers? Part of my theory, what people have been talking about for years is you have this replacement bubble, there is this demand bubble that keeps being pushed back and back because the doctors are getting older, but is that dissipating as people are using these boxes more or is it still just delayed?

Phil Brewer

There is no doubt that all of us are using containers longer than we had in the past. However if we look what's happening right now, I think all of us in the industry, myself included were inspecting to see addressing the replacement bubble happening probably a year or so earlier, but we’re starting to see it now. We are seeing shipping lines, selling containers both by a purchase lease back and trading transaction. It’s certainly been a dramatic uptick in the past I’d say three or four months. So, while the average age of disposal I believe will increase, I think we’re going to start seeing, we may have gone through a period where instead of 5% of the container fleet was being disposed on an annual basis which has historically been the number that people use historically. I think for a few years, we've fall to probably 3 or 4% of the fleet being disposed on an annual basis. I expected that number may go back up to about 5% once we reached a new equilibrium as to how long the containers will remain in the fleet.

Hilliard Terry

Maybe if I could just add there. I mean we see 2013 as a period of continued high utilization and with relatively small overall container production levels and an increase in the disposal that shipping line seems to hold on to the container longer, we see that will stimulate demand going forward. The pricing ranging from $22,000 to $27,000 is probably not considered cheap by shipping lines. Therefore they are unlike to go out and invest. If they were in a position to go out and invest, they probably wouldn’t buy huge quantities anyways. So there we feel very confident about the growth possibilities for the leasing industry. There is also new and larger vessel capacity coming into service and while the shipping lines are laying up capacity, they are laying up a lot of charter vessel capacity and at the same time taking in larger container vessels, which eventually will lead to additional container demand.

John Mims – FBR Capital

Now I know, I mean now in third quarter, fourth quarter seasonally its slow. It’s hard to really know, another question’s been asked several different ways. But, in a typical year and let`s assume, we get past some of the kind of the broader headwinds that make 2013 uncertain, but where in the process, like when will you start to get a better picture of how demand may end up shaping for ’13. I mean how far out the borders will you go?

Hilliard Terry

Well we obviously talk to a lot of customers around the world and get input about how positive they view the future or the reverse. I mean generally speaking, when you talk about the dry containers, the peak is usually in the second and the third quarter while in the reaper (ph) trade is usually the fourth quarter and the first quarter. But in total seasonality has less impact on our total utilization because we’re so protected by our long term lease ratio. But when we look at in future, depends on how positive we look. But typically we will look at two to three months out in future. And if we feel very positive, we’ll look for other than that.

Operator

Our next question comes from Salvatore Vitale from Sterne, Agee. Please go ahead.

Salvatore Vitale – Sterne, Agee

Just wanted to get a clarification on something you said earlier, so I think you had mentioned 2.5% trade of goods for 2012 and 4% for 2013. Is that total global trade or was that container trade you’re referring to?

Phil Brewer

It was total trade.

Salvatore Vitale – Sterne, Agee

Right, because that sounds a little low for container trade. I think container trade is a little higher than that, right?

Phil Brewer

I am sorry, that is what I meant yes.

Salvatore Vitale – Sterne, Agee

Right, so I think the latest (inaudible) for container trade for 2012 is maybe around 4%. It may have come down a little bit, I am not sure. But just going through some of the numbers that you mentioned earlier, it just seems pretty compelling. I mean if you have about 2.5 million to use produce this year. I think the total fleet is about 31.5 million and if you assume roughly 5% of TEUs sold this year, you get to roughly, need let`s call it for roughly 900,000 containers which comes out to about a little under 3% of the global fleet and if you have trade growing at 4%, it seems that not only will the container, supply demand remain imbalanced, but you should have an undersupply of containers developing over the next few quarters. That should continue into next year.

Phil Brewer

Well Sal, you’ve hit the nail in the head except I think you’ve actually underestimated what's happening here. That's exactly true. We’re talking about looking at the rate of growth of trade and disposals and then how many containers are being put out and saying at best, its imbalance and maybe less but that's coming from an environment where we’re all at 96% – 98% utilization. So it’s not an imbalanced situation today. There is not an excess supply of containers and if you look at what's being manufactured, it’s hard to see that we’re going to end up with an excess supply of containers in the near future. That's why we are very optimistic that utilization, while it may come down a little bit, we’re still talking about utilization remaining strong at very attractive levels.

Salvatore Vitale – Sterne, Agee

Right, and then on top of that, for you and your peers, there is the increase in market share which should provide even more growth for your industry. I think the latest estimate for lessor market share is roughly 45%. Is that your latest information?

Phil Brewer

I think its slightly higher than that now, given the high levels of lessor purchases over the past couple of years, it might be a little higher than 45 like 46. I think it’s probably 46. But it’s hard to tell.

Salvatore Vitale – Sterne, Agee

So how do we think about, if you think that this is secular, you think 150 to 200 basis points of increase in that market share per year over the next couple of years? You think that's reasonable to pick up?

Phil Brewer

We’re talking about lessors having purchased, let`s say 65% of containers output this year. But there is one shipping line that's purchased a vast majority of the non-lessor purchases, perhaps up to 20% of total output, somewhere between 50 and 20%. So, you remove them from the equation and suddenly you’re seeing that all shipping lines that one shipping line are not purchasing too many containers. I think it is very reasonable to assume that there is strong growth in the container industry level of ownership of containers worldwide.

Hilliard Terry

If I can add, if we look at 2012, there are really only three shipping lines that were buying any significant number of containers. Most of the other shipping lines really do not consider container ownership part of their core business and they are happy to go out to the leasing market and source their demands.

Salvatore Vitale – Sterne, Agee

Have you seen and I know it’s only been going on for the last month or so, you’ve seen container shipping rates start to turn back up. Are you seeing any renewed confidence on the part of container lines that they might go out and actually buy some more containers?

Phil Brewer

Well I don't think the latter, I don't think the GRIs that are being limited would stimulate additional container purchasing, but I think in line with what happened in 2012, where the lines introduced significant general rate increases in April and in May, which unfortunately some of the trades ended up giving away later on. Now even in the biggest trade, the Asia Europe trade, they are introducing a $500 per TEU increase effective November 1st. I am pretty sure that if that GRI sticks, there will be additional GRI’s coming in the spring and I think this is a test. There is no doubt that the fact that many of the shipping lines were able to turnaround their third quarter result as a result of the GRI’s they introduced in April and May, I can’t see any reason why they will not try that again. They are also reducing vessel capacity and according to Alphaliner, 268 vessels of more than 500 TEU capacity out of service, that's a total capacity of 660,000 TEU. That equals 4.1% of the total vessel fleet capacity and that's the highest it’s been since April ’12. That again confirms that they will probably try similar strategy as what they tied earlier this year.

Salvatore Vitale – Sterne, Agee

If I could just switch gears real quick, to depreciation expense, just a quick question for Hilliard, if I look at your depreciation expense, just comparing the ratio, if I look at it as a percentage of leased rental income, was 27.6% last quarter, it was 24.8%. So there is roughly 300 basis point sequential increase there. How do I think about that I guess in 4Q and going forward? Do you think it remains at around that 27.5% level?

Hilliard Terry

Again, we increase the size of our fleet. I think you look at the increase in average container prices and I think those trends will probably continue. I think you could expect it kind of at that level.

Salvatore Vitale – Sterne, Agee

And if I just think about this, the managed purchases you did during the quarter that should lower that ratio, something came out the right.

Hilliard Terry

Yes.

Salvatore Vitale – Sterne, Agee

So partially offset some of it. So if you continue to do such types of acquisitions, should we expect that to mitigate that ratio that might actually come down a little bit from that 27.5% rate?

Hilliard Terry

Well I still said earlier, I think it’s hard to kind of really estimate how much of the managed fleet purchases will do. If we continue buying new containers at the prices that you’ve seen historically, it may not mitigate it as much but if we do, do more managed purchases, then yes, it could mitigate it.

Phil Brewer

And one other factor to keep in mind Sal is, we've been a very consistent purchaser of new containers over three years. We haven't sort of bought in bubbles, sure our company has got a larger balance sheet, bigger and we might buy more. But we've been very consistent purchaser. So while I believe this question might be based part on greater volatility, depreciation as a percentage of revenues. Some of our peers, I think that volatility protects and it will be somewhat mitigated. I know Bill earlier asked the question about what percentage of our fleet is fully depreciated and right now if you look, we depreciate over 12 years. So our containers say, 2,000 or older would be fully depreciated or very close to fully depreciated. That's about 20% of our fleet. But that figure is going to change dramatically over time because of the fact that we've been a relatively consistent purchaser of containment.

Salvatore Vitale – Sterne, Agee

And then just a last question on your tax rate. Did I get that right? You said low to mid-single digit is a good rate to use going forth for modeling purposes?

Phil Brewer

Yes.

Operator

Our next question comes from Alex (inaudible) from SunTrust. Please go ahead.

Doug Mewhirter – SunTrust

Good morning guys. This is Doug Mewhirter in for Alex. Most of my questions have been answered. Just a few, maybe numbers questions. I noticed that your direct expense was fairly low. Especially relative to your growing fleet. What's driving that? Is that so because they are to your returns because your customers may be hoarding on to their fleet (inaudible) for a year or so? I would expect there would have been an offset because you are putting more of the expenses from actually getting your new leased containers out to the fleet would have popped up. So I was kind of surprised to see the direct expense line pretty favorable.

Hilliard Terry

If you look at the fleet numbers, we purchased some of the managed fleets towards the latter part of the quarter and so if you just look at overall the increase in the size of our own fleet was kind of late in the quarter if you will, so that probably kind of placed a little bit of it.

Doug Mewhirter – SunTrust

And that leads me to my next question, just to confirm your managed fleet count, fully reflects your managed portfolio purchases this, by the end of this quarter.

Phil Brewer

When we say that we own 69% of our fleet, that fully reflects the purchases that we've entered into but it is important to keep in mind that those purchasers were either at the end of the quarter or towards the middle or end of the quarter along with many of the lease outs of the new containers we've purchased over the third quarter. So the full benefit of the acquisitions of the managed fleets as well as I believe something like 50% of the containers that we purchased all year went on lease in the third quarter. Many of them towards the end of the third quarter. Those benefits are going to be much more evident in the fourth quarter than they were in the fourth quarter.

Doug Mewhirter – SunTrust

And my last question, a very quick question. You gave that share count guidance, 51 million shares outstanding for the year and 55 million for the fourth quarter. I assume those are absolute shares outstanding, not diluted shares?

Hilliard Terry

Yes, approximate. Remember, because we did the equity offering in September, you’re not going to get much waiting for the full year number but for Q4, you’re going to have the full effect of roughly 55 million share being outstanding.

Operator

(Operator Instructions). And we have a question from (inaudible) from Harvest Capital. Please go ahead.

Unidentified Analyst

You’ve addressed most of questions but from the perspective of an owner of a stock, everything you’ve talked about, the industry dynamic is positive and sounds very constructive for earnings, but we care about earnings per share and this capital raise was pretty painful. I mean you priced it I think 11% below where it was valued and it had really maintained heading into that capital rate. Can you talk a little bit more about how I need to think about your need for capital, how you think your cost of capital, obviously you went through with the deal even though the stock had really taken a hit. Was there a price or is there a price at which you say there is no way we’re selling equity or is there a price at which you want to be buying it back. Again, I appreciate the positive momentum on earnings but my concern has to be the positive return on the stocks.

Phil Brewer

Since we've gotten public, we return on equity in excess of 20%. I think the average is 23%. We maintained a stale or increasing dividend. Right now our dividend yield is I believe in excess of 5%. I think the performance of our shares since we've gotten public speaks for themselves. I believe most of our shareholders are pretty pleased with the performance they’ve got, they’ve received that effect in of shares and I hope that you are or if you are not, that you will become satisfied over time as you are a shareholder. When we are looking at running the company, we take into account lots of factors as to how we put together our capital structure. Equity, debt, we've been very aggressive in raising debt at extremely attractive prices this year. We’ve been pretty public about the fact that we are not an overly levered company.

Our leverage was getting us to around three times at the time we did the equity issue. Our board has often said that its comfortable with the leverage rate of about 2.5 to three times equity and we were towards the higher end of that rate. We felt it was an appropriate time to raise additional equity. On top of that, we as is well known, we have a large shareholder that who’s holdings were sufficiently high that they were affecting the liquidity in our shares and we had many shareholders telling us that it would be nice to see the steps we’re taking or implemented to improve the liquidity of our shares, one being that that shareholder might sell some of their shares and they did that. I can tell you that they are very happy and pleased shareholder in Textainer and do not intend at the moment to sell additional shares. We could have gone either way on even selling these shares but did it in part to help increase the liquidity and benefit, the shareholders in our company. So all these factors are what we take in to account but we believe our performance, since we've been public is pretty strong relative to frankly any company that's been listed over that same time.

Unidentified Analyst

To be clear and I apologize, I can see how my question could be, I didn’t mean this question to accuse you of running the company in any way other than the way I want you to run it. Specifically I am asking about cost to capital and the multiple of kind of current earnings at which you’d be willing to sell. I am not quite sure why it is the case amongst the container leasing companies that the market reaction is so punitive to capital raises considering how good the return opportunities are but their agency mortgage risk can raise a $1 billion at 1.5% discount to less sale and for some reason you guys aren't able to. So my question really is, how do you think about the right valuation at which you are a buyer of your stock versus potentially a seller. When you issue a dividend, that is capital that will eventually need to be raised, and so just your thought process around how you view your cost to capital.

Hilliard Terry

The thing I guess that I would add is, when we look at sort of our capital structure and our capital needs, the capital that we raise and the equity offering capital that we are as you can see deploying rather rapidly given the managed fleet acquisitions and things of that sort. So the whole idea is really to be in a position that we can grow the business, generate more cash and what have you by buying more revenue earning assets and so, we've looked at sort of a situation where we can deploy capital in a sort of relatively finite period of time and hopefully that capital provides a nice return to our owners as Phil said earlier, and further increases total shareholder return.

Unidentified Analyst

Again, don't take me the wrong way. I am an owner and buy the stock often. So I will maybe follow up with you guys offline.

Operator

We have no further questions at this time.

Phil Brewer

Thank you all for taking the time to join our third quarter earnings call. We look forward to speaking with you at the end of the fourth quarter.

Operator

Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

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