CAI International, Inc. ( CAP)

Q3 2011 Earnings Call

October 27, 2011 5:00 PM ET


Tim Page – SVP and CFO

Victor Garcia – CEO


Greg Lewis – Credit Suisse

John Stilmar – Suntrust

Helane Becker – Dahlman Rose

Sal Vitale – Sterne, Agee & Leach



Good day, ladies and gentlemen and welcome to the CAI Q3 2011 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator instructions)

As a reminder, this conference call is being recorded. I would like to turn the conference over to your host, Mr. Tim Page, 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 Section 21E of the Securities Exchange Act of 1934 and involve risks and uncertainties that could cause actual results to differ materially from current expectations, including but not limited to, economic conditions, expected results, customer demand, increased competition and others.

We refer you to the documents that CAI International has filed with the Securities and Exchange Commission, including its annual report on Form 10-K, its quarterly reports filed on Form 10-Q and its reports on Form 8-K. These documents contain additional important factors that could cause actual results to differ from current expectations and from forward-looking statements contained in this conference call.

I’ll now turn the call over to our President and Chief Executive Officer, Victor Garcia.

Victor Garcia

Good afternoon. We are very pleased with our third quarter results with quarterly year-over-year revenue growth of 64% and earnings per fully diluted share of 40% to $0.70 per share. Compared to the second quarter of 2011, this past quarter resulted in revenue increasing by 15% and earnings per share increasing by 27%. For the nine months period we reported year-over-year revenue growth of 70% and earnings per fully diluted share of 91% to a $1.89 per share. Our results during the third quarter were driven by the continued strong utilization of our fleet and the new containers we delivered from the factories to our customers during the quarter.

Utilization in the third quarter remained at 98% consistent with the level achieved during the second quarter of this year. During the quarter, we leased to customers 34,000 TEUs of new equipment including of 7,400 TEUs of refrigerated containers representing a total of $101 million of investments. Most of these units have been placed on long-term leases that will generate revenue and cash flow for many years. We have been able to achieve higher average lease rates for the new containers that we leased out this year compared to the lease rates prevailing during the comparable period in 2010, and as a result, we saw our average per diem on our owned fleet increased by 19% compared to the third quarter of 2010.

Our results also continue to benefit from the secondary sales market which has remained strong throughout the year. This quarter, we generated $3.8 million in income from the disposition of containers. Our average gain on sales during the third quarter was 20% greater than in the second quarter, and we sold 13% more TEU this quarter than in the second quarter.

We expect that the secondary market will remain strong in the fourth quarter and then we should continue to report ongoing income from the disposition of containers. Our operating margins have improved as we have maintained tight control over our overhead costs and that benefited from the relatively low storage and handling expenses and ongoing income from disposition of containers.

This past quarter, our operating income margin was 56% compared to 50% during the third quarter of 2010. Year-to-date our operating income margin is 64% compared to 42% for the first nine months of 2010. Although, we have been able to benefit from leasing out most of the containers we have ordered this year, demand from our customers during the third quarter for new containers has been lower than expected during this seasonally strong period of time. We believe our customers have been focused on reducing costs by limiting new container additions whether owned or leased in light of lower freight rates compared to last year and the uncertainties around the U.S. and European economies that prevailed during the third quarter.

Therefore we believe shipping lines in containers list have reduced the level of new equipments orders during the third quarter. As a result, we estimate that total shipping companies and lesser factory inventory levels have declined from approximately 870,000 TEUs at the beginning of the third quarter to approximately 620,000 TEUs at the end of the third quarter. This represents approximately 2% of the estimated 29 million TEU of total containers in operations. The current level of factory inventory does not seem to be excessive and gives us optimism that improved economic performance in the U.S. and Europe in 2012 combined with normal container fleet attrition will result in strong overall demand for additional containers next year.

Our expectation is that we will lease out $50 million of new equipment in the fourth quarter. We do expect some of our older assets to be returned during the remainder of the year which will result in the customer decline in utilization during the fourth quarter. However, we believe overall utilization will remain strong by historical standards and that many of these units that are returned are likely to be sold into secondary market at attractive prices.

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