U.S. Markets closed

Edited Transcript of CAI earnings conference call or presentation 31-Jul-18 9:00pm GMT

Q2 2018 CAI International Inc Earnings Call

San Francisco Aug 6, 2018 (Thomson StreetEvents) -- Edited Transcript of CAI International Inc earnings conference call or presentation Tuesday, July 31, 2018 at 9:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Timothy B. Page

CAI International, Inc. - CFO

* Victor M. Garcia

CAI International, Inc. - President, CEO & Director

================================================================================

Conference Call Participants

================================================================================

* Brian Dean Hogan

William Blair & Company L.L.C., Research Division - Associate

* Helane R. Becker

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

* Michael Webber

Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst

* Michael Brown

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, Ladies and gentlemen, and welcome to the CAI Q2 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would like to introduce your host for today's conference, Timothy Page, CFO. You may begin.

--------------------------------------------------------------------------------

Timothy B. Page, CAI International, Inc. - CFO [2]

--------------------------------------------------------------------------------

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 our 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.

Finally, we remind you that the company's views, expected results, plans, outlooks and strategies as detailed in this call, might change subsequent to this discussion. If this happens, the company is under no obligation to modify or update any of the statements of the company made during this discussion regarding its views, estimates, plans, Outlook or strategies for the future.

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

--------------------------------------------------------------------------------

Victor M. Garcia, CAI International, Inc. - President, CEO & Director [3]

--------------------------------------------------------------------------------

Thank you, Tim. Good afternoon, and welcome to CAI's Second Quarter 2018 Conference Call. Along with the earnings release today, we have also posted on our website under the Investor section a presentation on our results and overview of the state of our company and industry. We will not be going through specific slides in the prepared remarks, but can address any questions related to the presentation on this call.

For the quarter, we reported record total and lease-related revenue of $106 million and $77 million, respectively. Total revenue for the second quarter of 2018 increased 28% compared to the second quarter of 2017 and 11% compared to the first quarter of 2018. Container lease revenue increased 24% compared to the second quarter of 2017, while rail -- excuse me, while rail lease revenue and logistics revenue increased 12% and 44%, respectively, over the same period.

Net income attributable to common shareholders was $19.1 million or $0.97 per fully diluted share compared to $12.6 million or $0.65 per fully diluted share in the second quarter of 2017, a 52% increase in net income attributable to common shareholders.

Included in our results is approximately $1.4 million of income related to insurance recovery -- recovery proceeds from the Hanjin bankruptcy. Each of our business units reported improved results and revenue in the second quarter. The Container segment benefited from ongoing new investment and average utilization of 99.3% for the quarter.

During the first half of 2018, we have invested or committed to invest $630 million in container equipment, of which $208 million was placed on lease during the second quarter and $290 million will be placed on lease during the third quarter.

This year's container investment has an average lease life of approximately 9 years, which will provide our company with strong committed cash flow for several years. We've -- we also continue to benefit from a strong secondary sales market, and we were able to report a $2.7 million gain on sale of equipment for the quarter.

As can be seen by our container investment during the current year, we have benefited from a very strong demand for lease containers. And with our commitments for the third quarter, there will be continued demand for the remainder of the year. The impact of the discussions regarding tariffs has not had an impact on container demand to date, but has created some uncertainty around future global trade growth. If tariffs were to be permanently implemented and overall tariff levels were to increase, we would expect supply chain disruption as international companies adjust their supply chains.

Some level of export-oriented manufacturing would likely move to other countries not affected by the tariffs, such as countries in Southeast Asia. These changes in supply chain are a positive for CAI, as our customers will need more equipment to adjust for the supply chain inefficiencies created by sourcing changes.

We believe that CAI remains well positioned to operate during this time of uncertainty, with 91% of our on-lease and committed owned container fleet being on long-term leases with an average remaining lease term of 56 months.

In addition, we have worked with our customers over the past several years to improve redelivery terms, ensuring that equipment is returned to high-demand locations, which will provide us with better opportunities to release the units.

Our Rail segment continues to experience positive momentum during the second quarter of 2018. We had net lease outs of 316 railcars during the second quarter, and have commitments to lease approximately 750 railcars over the coming quarters.

We expect utilization of our total railcar fleet, including new railcars, to improve from 78% in the second quarter to approximately 90% by the end of the year. We continue to experience increased lease activity for railcars across various equipment categories, and lease rates are generally improving for many railcar types.

Demand for tank railcars has been particularly strong, and lease rates have doubled from last year's level. Ongoing economic growth in the U.S. and slowing rail velocity among class 1 railroads has led to an increase in demand for leased equipment. We continue to be more optimistic about the opportunities for our Rail segment due to the improving utilization and trend in lease rates over the past few months. We expect those trends to continue over the remainder of 2018.

Our logistics business is gaining strong momentum, with a growing customer portfolios leading to record logistics revenue for our company this quarter. During the quarter, we reported logistics revenue of $28.3 million, an increase of 31% compared to the first quarter of 2018 and a 44% increase compared to the second quarter of last year.

Similarly, gross margin in logistics has increased 32% during the second quarter compared to the first quarter of 2018. The logistics business was cash flow positive despite the ongoing recruitment efforts we have been making to position the company for future growth.

The overall domestic logistics market remains very strong, with high demand relative to available equipment capacity. We expect that strong demand to continue through the remainder of the year due to the strong U.S. economy. Specifically, we are gaining significant customer wins in our truck brokerage and intermodal services. We have recently consolidated all of our services under the CAI logistics brand, which we expect will create more customer awareness for our logistics capabilities, and allow us to continue to recruit personnel to maintain our current momentum.

During the quarter, we also successful -- successfully issued 600,000 or $14.7 million of 8.5% Series A fixed or floating-rate perpetual preferred stock. In -- the addition of preferred stock to our capital structure is of great benefit to our company. It allows us to increase our investment in equipment without issuing new common equity, while at the same time lowering our overall cost of capital.

So in summary, we have strong momentum in each of our businesses, including record quarterly lease and logistics revenue. Our container investments for the first half of 2018 have already exceeded last year's level, and is a record for our company. The vast majority of this investment is on leases or committed to be leased in the third quarter.

Rail utilization is increasing and lease rates are improving. Our Logistics segment is experiencing very strong quarterly momentum and we expect continued double-digit year-over-year growth in revenue and gross margins from this segment.

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

--------------------------------------------------------------------------------

Timothy B. Page, CAI International, Inc. - CFO [4]

--------------------------------------------------------------------------------

Thanks, Victor. Good afternoon, everyone. Total revenue in the quarter was a record $106 million, an increase of 11% compared to the first quarter of 2018, 28% compared to Q2 of last year. Lease-related revenue was also a record in the quarter at $77 million versus $74 million in Q1 of 2018, an increase of 5%, and 23% compared to Q2 of last year. Driving the increase in total revenue in the quarter was both strong growth in container lease revenue, up 6% as compared to the first quarter of this year, and 24% compared to the second quarter of last year, and strong top line growth in our logistics business. Q2 logistics revenue up 31% versus the first quarter and 44% versus the second quarter of last year.

Q2 was also a record quarter for CAI in terms of operating income. Operating income in the quarter was $40 million, an increase of 15% versus Q1 of this year and up 61% versus Q2 of last year. Our overall operating income margin in the quarter was 38%, and in our Container business, our operating income margin was 55%.

Net income in the quarter was $19.1 million, with a net income margin of 18%. The net income margin for our container-leasing operations was 29%. Consolidated ROE on average equity in Q2 was 13.2%. The ROE for our container business was 15.7% in the quarter.

During the quarter, we received a payment from our insurers related to the 2016 bankruptcy of Hanjin. As a result of that payment, we had a net credit to operating expenses, which had a positive impact of $1.4 million on pretax income and $1.3 million on after-tax income. This credit arose because we have recognized expense for recovery efforts over the past 21 months in excess of the amount we have recorded as insurance proceeds receivable.

Consistent with the trends that began in Q1 of 2017, the strong container lease market has been the primary driver of our bottom-line performance. The trends established in 2017 of high utilization, record levels of investment, attractive pricing and investment returns and a strong resale market have all continued through the second quarter of 2018. And while there is some uncertainties surrounding the impact the potential tariffs may have, we expect the positive market conditions that have driven the container-leasing market will continue in the coming quarters as overall global trade remains buoyant.

During Q2, we leased out approximately 105,000 TEU of factory containers, a new long-term and finance lease representing approximately $208 million of investment. We have forward lease commitments for approximately $200 million of new equipment lease outs, which represents most of the container equipment we will have available for lease out this year. Average CEU utilization in the second quarter was 99.3%, up slightly from the 99.2% in Q1 of this year.

The average lease tenure for equipment we have already leased out or have commitments to lease out this year is approximately 9 years. When you combine this long-dated 2018 leasing activity with the fact that our average lease tenure on over $400 million of new equipment lease outs last year was over 7 years, we have significant predictable and very long-term committed cash flow on almost half of our container book value.

Rail lease revenue in Q2 was $9.1 million, flat with Q1, but up 12% versus Q2 of 2017. We have a strong pipeline of prospective lease opportunities, and I expect our overall utilization to be at or above 90% by year-end.

Our logistics business strong -- experienced strong revenue growth in the quarter, up 31% versus Q1 of this year and 44% versus Q2 of last year. The logistics business was EBITDA positive in the quarter despite the significant investment we have made in new personnel. Gross margin dollars increased 32% versus Q1 and 34% versus Q2 of last year. Gross margin percentage was basically flat with Q1.

We've made a significant investment in personnel and technology over the past several quarters and benefited from that investment in the quarter. We expect that the momentum established in this quarter will continue, and we are focused on continuing to grow revenue aggressively, while maintaining positive EBITDA going forward.

Depreciation expense increased $0.6 million from $28.8 million in Q1 to $29.4 million in Q2 of 2018. This increase is in line with what we expected given the high-level of lease-out activity we had in the quarter. We expect to see similar quarter-over-quarter increases in depreciation expense in the coming quarters, commensurate with our strong backlog of customer bookings.

Excluding the net insurance proceeds of $1.4 million I discussed earlier, storage handling and other operating expenses decreased $0.1 million or 3% in the quarter, primarily as a result of increase in container and rail utilization. We would expect to see this expense increase modestly in future quarters as the expected high levels of container lease-out activity will result in increased handling cost, and the increased number of railcars on-lease will result in some additional maintenance expense.

In Q2, we had a gain on the disposition of rental equipment of $2.7 million, compared to $2.2 million in Q1. Going forward, we would expect our gain on sales to be more in the range of the level we saw in Q1 of this year. The sales prices are stable, but our inventory of equipment available-for sale is somewhat limited by exceptionally high levels of utilization we are experiencing.

G&A expense in Q2 of 2018 was $12.2 million, an increase of $0.9 million compared to Q1. $0.3 million of the increase was timing related, the remaining $0.6 million is related to the investment in logistics-related headcount I mentioned earlier, which I would again point out was self-funded as logistics was EBITDA positive in the quarter. We would expect G&A to increase approximately 3 to -- $0.3 million to $0.4 million in the next several quarters related to cash flow neutral planned headcount growth in logistics. As we expect the logistics business to continue to be EBITDA positive going forward.

Interest expense in the quarter increased to $18.4 million from $16.9 million in Q1, an increase of $1.5 million. $0.8 million of the increase is related to an increase in the average debt balance, Q1 -- Q2 versus Q1. The remainder of the increase in quarter-over-quarter interest expense is related to an approximately 25 basis point increase in our average funding cost during the quarter.

We expect an increase in interest expense in Q3 similar to what we experienced in Q2, as our average debt balance will increase in line with the level of new equipment lease outs and because of Fed-driven rate increases.

Our average funding cost in Q2 was 3.61%. As of the end of the second quarter, 52% of our debt was fixed rate. We intend to increase the proportion of fixed-rate funding in the coming months.

Our effective tax rate in Q2 was 3.8%, current estimate for our full 2008 (sic) [2018] year tax rate. We recorded $1.1 million of preferred dividend expense in this quarter, and $55 million of liquidation value of preferred stock.

During the quarter, our owned container fleet increased approximately 82,000 fleet used as compared to the end of Q1 2018. An increase of 6% and is 296,000 CEU larger -- CEUs larger than it was at the end of Q2 of 2017, an increase of 28%. On a dollar basis, our container revenue assets were $2.1 billion at the end of Q2, an increase compared to the end of Q1 2018 and Q2 2017 of 8% and 31%, respectively.

At the end of Q2, we had $457 million of railcars versus $450 million at the end of Q1. Rail assets represent 8% of our total revenue earning assets.

During the quarter, we completed an amendment and expansion of our primary container revolving credit facility. Among other things, this amendment extended the maturity of the facility to June 2023, increased overall bank commitments from $960 million to $1.1 billion, modified the freight points and the leverage grid that controls the spread we pay above LIBOR, which will effectively reduce our net interest cost and modified a number of definition covenants to provide us with more flexibility.

In the quarter, we sold approximately 600,000 shares of preferred stock from net proceeds of $14.7 million. In total we now have 2.2 million shares or $55 million of liquidation value preferred stock outstanding. The dividend rate is 8.5%, and as I mentioned earlier, we recorded $1.1 billion in preferred dividends during the quarter.

At the end of June, the undrawn amount available to us under our container secured revolving credit facilities was $782 million; undrawn rail revolving credit facility commitments were $195 million. At the end of the second quarter, we had total funded debt net of restricted cash, cash held in variable interest entities, of approximately $1.8 billion, an increase of approximately $100 million from the end of Q1 2018.

We expect the container market to remain solid in the coming quarters, stable container cost and adequate pricing and returns on new equipment. Given the high industry-wide utilization, we expect a continuation of the strong resale market. Additionally, the rail market continues to recover, lease rates are improving and we have a backlog of customer orders to deliver in the coming quarters. We expect to continue to invest in experienced senior-level sales and marketing talent to drive double-digit logistics revenue growth while maintaining positive EBITDA.

That concludes our comments, operator. Please open the call for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And our first question comes from the line of Brian Hogan from William Blair.

--------------------------------------------------------------------------------

Brian Dean Hogan, William Blair & Company L.L.C., Research Division - Associate [2]

--------------------------------------------------------------------------------

Lots of positive things running across the -- across your business. I guess, I'll start with the biggest parts, containers. What do you see in terms of competitive standpoint? And then secondly, obviously demand is really strong, net utilization being 99.3%. Maybe what are you hearing from your customers? Are they saying it's a pull forward of demand, this is why it's so strong? Or is it just overall it's being just global economic strength? Can you, kind of, comment on those 2 things, please?

--------------------------------------------------------------------------------

Victor M. Garcia, CAI International, Inc. - President, CEO & Director [3]

--------------------------------------------------------------------------------

Okay. So the marketplace is consistent with what we saw in the first quarter. The -- there's been continued steady demand, outpacing what we saw last year. We're seeing more customers coming in for equipment, and we're seeing really the same level of competition that we were seeing earlier in the year. So that hasn't really changed very much. What we're seeing that might be a little bit different is when customers are coming in, they are wanting equipment right away, almost just in time. So having equipment availability has been more at a premium and has been an advantage for us in terms of being able to get our equipment leased out. So I would say that's probably -- the most noteworthy thing is that we're seeing many more customers, they come in asking for equipment and literally, over the next 2 days, they're picking it up, and everything being negotiated that quickly. So I've done a run through our customers in Europe and Asia, and I would say there is a little bit of a question mark but there's a little bit of a pull forward of demand. But that pull forward of demand would've been related to the transpacific trade, which has been very strong. But they're also seeing strength in inter-Asia trade and European trade. So I think it's probably much more general economic growth than it is a push forward of demand and can turn over trade.

--------------------------------------------------------------------------------

Brian Dean Hogan, William Blair & Company L.L.C., Research Division - Associate [4]

--------------------------------------------------------------------------------

All right. And very helpful. The 15.7% ROE of your container business in the quarter, does that include the $1.4 million insurance benefit?

--------------------------------------------------------------------------------

Victor M. Garcia, CAI International, Inc. - President, CEO & Director [5]

--------------------------------------------------------------------------------

Yes, it does.

--------------------------------------------------------------------------------

Brian Dean Hogan, William Blair & Company L.L.C., Research Division - Associate [6]

--------------------------------------------------------------------------------

And so I guess, I haven't done the math of that, but excluding that, would it be more in the 15% -- 14%, 15% range is that...

--------------------------------------------------------------------------------

Victor M. Garcia, CAI International, Inc. - President, CEO & Director [7]

--------------------------------------------------------------------------------

About that.

--------------------------------------------------------------------------------

Brian Dean Hogan, William Blair & Company L.L.C., Research Division - Associate [8]

--------------------------------------------------------------------------------

Yes. And so is that where you're leasing containers at today? Is that mid-teens range? Or is -- how do you...

--------------------------------------------------------------------------------

Victor M. Garcia, CAI International, Inc. - President, CEO & Director [9]

--------------------------------------------------------------------------------

I'd say, when we look at our investments that we have today, and again, we have -- just like we did last year, very long-term leases. But we have a little more certainty in our returns. We're expecting, kind of, mid-teen ROEs 15-ish, kind of, percentage, which is around in the range where long-term average would be. So we think that's a pretty healthy return, particularly when you're talking about long-dated leases, so there's less uncertainty around releasing risk. So we're pretty happy with the investment and the returns that we're getting.

--------------------------------------------------------------------------------

Brian Dean Hogan, William Blair & Company L.L.C., Research Division - Associate [10]

--------------------------------------------------------------------------------

All right. Then one last one for now, I was going to switch over to the logistics business. You've made a lot of headcount changes there and key adds, obviously consolidating there. What is the long-term strategy for your logistics business? Do you need more scale? Obviously it's helping your other businesses too from more than just logistics as a whole, but can you talk about the long-term strategy there? Is there more M&A in the future in that business?

--------------------------------------------------------------------------------

Victor M. Garcia, CAI International, Inc. - President, CEO & Director [11]

--------------------------------------------------------------------------------

Well, the strategy has been that we think that there is a significant opportunity, particularly in the domestic side between intermodal services and brokerage, to really have a significant impact there. I think there, as we've said, it's a people business. We've recruited a number of different people both on the sales side as well as on the operational side and building the infrastructure. And we're really now just starting to hit our stride. And I think the idea there is -- independent of what we're doing on the asset earning side, we are self-funding the growth in that business. As we're bringing in people, we're supporting those people with additional business. And we're continuing to get our name out there. I mean, the rebranding that we're doing puts a -- one company name out to the marketplace. And we think its high-value opportunity. We think it's -- not only is a fee-oriented business like that growing at double digits a significant value opportunity for us. Gives us many more inroads into other things that we're doing. We would expect over time to -- as we hit more customers and have more volume, we will potentially put some specific efforts related to that. But it's a high-growth, very large industry. And, again, it's a -- telling this quarter, we're growing 30-odd percent, and we're doing that and we're investing in people and we're still cash flow positive as we're doing that. So we're pretty excited about the momentum we're doing it. And we're just now, I would say, starting to hit our stride. A lot more to do, a lot more infrastructure to build out, a lot more customers to bring in, but it is gratifying to see that the effort that we -- our team has made is paying off and we're seeing very good strong results.

--------------------------------------------------------------------------------

Brian Dean Hogan, William Blair & Company L.L.C., Research Division - Associate [12]

--------------------------------------------------------------------------------

Agreed. And sorry, one last more on the -- going back to ROE and shipping to rail. What are you -- obviously, you're seeing improving demand and trends there. What is the ROE that you're writing through there? And how do you get from 78% utilization to 90%? Is it just demand or are you giving up some rate concessions and terms?

--------------------------------------------------------------------------------

Victor M. Garcia, CAI International, Inc. - President, CEO & Director [13]

--------------------------------------------------------------------------------

Well, we're not giving up rate concessions. We're actually pushing the other way, we're looking rate increases. There, I think the market is just improving. We've been saying for the last 2 quarters that we're seeing more increase and better opportunities. That trend has continued and actually, I would say, has picked up. So we are seeing more and more car types being inquired for. Part of it is there's -- another factor is increased economic activity in the United States, increased energy-related shipments, which is slowing down overall rail velocity, and third, the backlog that we were seeing from -- that started in 2015 down further, where people were switching into other car types and oversupply in the market is largely now gone away. And there is a much stronger supply demand balance. Our name has been out there. We've been talking to a number of customers. We have a number of different car types, and we're starting to get a lot of customers coming in and looking for equipment. So as far as returns, where we are -- returns in rail, it's a very long life asset, it's like a real estate business, if you will. Returns over time increase. When you're leasing out a railcar, and it's a 40-plus year asset, the returns appear low at first but grow over time. Our view is to continue to get similar type returns that we would get in the rail business. I would say our long-term target is to get a 10% to 12% ROE in that business, and when we look at our existing investment, we've gone through a period of downturn, everybody has. We've put stuff on short-term leases. We're looking at opportunities now to roll those over into higher rates. That's our -- I would say utilization is our first priority. Second is rolling over into higher rates and improving the returns as best we can in what capital we already have in that business.

--------------------------------------------------------------------------------

Operator [14]

--------------------------------------------------------------------------------

And our next question comes from line of Michael Webber from Wells Fargo .

--------------------------------------------------------------------------------

Michael Webber, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [15]

--------------------------------------------------------------------------------

So Victor, I wanted to start off just on, maybe I want to say exclusively on the dry van side B. $630 million year-to-date in 2017 in terms of invested capital, big number for you guys definitely. Would you say relative to the rest of the market, you think you're gaining share? Or is that indicative of just how strong demand is, kind of across the board, when you think about the different players that are also in there competing for that business? It's a big number. So the -- first thought would be that you're picking up a bit of share here, but just a little bit of color around that would be helpful.

--------------------------------------------------------------------------------

Timothy B. Page, CAI International, Inc. - CFO [16]

--------------------------------------------------------------------------------

Right. We're picking up a lot of share. And we're picking up a lot of market share, not as the focus. We've said many times before, that we have as good a relationship with customers as any other player in this business. We're well-known brand, and we have very experienced people. It's a matter of the capital you have available too. And we put a lot of capital available in the marketplace, and we've been very successful. And actually I'll tell you, our customers welcome it. Our customers welcome a greater participation in their business. And so we haven't tried to wedge other way in, we've had an open door to come in. And we're just focused on the opportunity. And we're not interested in gaining share and price discount, that's not how we're looking to increase value. We're looking for good opportunities with good customers, having equipment available when the customer needs it and consistently doing that, and that's what we've done. And that's what we've done really for the last 2 years. And I think we'll continue to have good wins in that. But clearly, I mean if you look at $630 million of investment, we're talking about 25%, 30%, kind of, annual growth. I don't think anybody else is growing at that, kind of, pace.

--------------------------------------------------------------------------------

Michael Webber, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [17]

--------------------------------------------------------------------------------

All right. So I'm trying to narry up -- just kind of, the narrative from the last few quarters -- last year, 1.5 year really of just, kind of, the market normalizing, some dormant players making more noise. And then, kind of, narrying that up with the, kind of -- with that, kind of $630 million number. Is it fair to say that you're sized now where you're participating in some larger deals? I'm just trying to make sense of that relative to the idea that there are technically more players competing for this business than there were last year, and you've already surpassed that number we're sitting here in July?

--------------------------------------------------------------------------------

Timothy B. Page, CAI International, Inc. - CFO [18]

--------------------------------------------------------------------------------

I think we are hitting on all the cylinders on our container business. We have the highest utilization in the industry. We're generating a tremendous amount of cash flow. We have a backdrop of committed long-term leases that give us a lot of assurance that, that cash flow will be consistent, which gives us a confidence level that we can put more capital to work and we're executing. And I'd like to tell you that it's miraculous work -- it's not miraculous work, it's focused work. We've been focused just like we were in 2016 when we were seeing a marketplace that was acting, in my view, irrationally. We pulled back. The last 2 years we've seen an opportunity to put good business to work, and we've continued to execute. And we continued that. We are -- we came out of the last downturn as a stronger company because of the efforts that we made in realigning how we look at our business. And what you're seeing today is the aftereffects of all of that work.

--------------------------------------------------------------------------------

Michael Webber, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [19]

--------------------------------------------------------------------------------

Okay. And then, as we think about the rest of the year, obviously, there is a degree of seasonality associated with this, but if we kind of look at the trajectory you're on now, given that you're off of an elevated base now, is it fair to kind of layer in a degree of seasonality here, where the base slows down a bit in the back half of the year, but doesn't -- certainly, doesn't -- shouldn't fall off a cliff in Q3?

--------------------------------------------------------------------------------

Victor M. Garcia, CAI International, Inc. - President, CEO & Director [20]

--------------------------------------------------------------------------------

Well, the investments that we've made today, I mean, as I reported in the press release, we already have close to $300 million kind of locked and loaded coming into the third quarter. So our third quarter is pretty much set in terms of what we're going to give to our customers. To put that in perspective, again, $290 million expected to go out in the third quarter, that's 10% -- over 10% of our total investment in containers. I mean, we're talking some serious momentum in terms of quarterly growth, and that's done. Clearly, when we're now looking in the third quarter and we're looking into the fourth quarter, that's usually when the traditional dry van side of the business slows down a little bit. But the seasonality aspect is not what it used to be. As the Asian economies have grown and the Chinese New Year has become more prominent and as prosperity around Asia has increased, some of that seasonality has gone away. So if the -- third quarter continues to be probably the strongest quarter, but the peaks and valleys are much more diminished. So we would expect that there will be more opportunities out there in the marketplace.

--------------------------------------------------------------------------------

Michael Webber, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [21]

--------------------------------------------------------------------------------

More spread out on the shoulders. All right, just -- a couple of more and I'll turn it over. Just -- and I don't think I heard you referenced it, forgive me if you did, but just a ball park number around where our new box prices are today, and then a rough percentage on used box prices?

--------------------------------------------------------------------------------

Victor M. Garcia, CAI International, Inc. - President, CEO & Director [22]

--------------------------------------------------------------------------------

Sure. New box prices, it's interesting, it's pretty consistent pretty much all year. It has been flatlining around high $2,100 to $2,200 depending on locations. So, kind of, say $2,170 to $2,200 on a 20-foot equivalent. Secondary prices have largely also been stable. It really depends on the market. But let's just say on average, $1,400 on a 20-foot. So if you compare a brand new unit at $2,200, and you're going to get a 13, 14-year-old unit and you're going to get $1,400. That's not bad.

--------------------------------------------------------------------------------

Michael Webber, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [23]

--------------------------------------------------------------------------------

Yes, yes. And that's -- I think looking at Slide 7, you actually referenced the $1,427 number in terms of used prices. It's a helpful chart. And it's interesting when I -- going back to the previous question around your ROE, if you think about the ROE expansion and contraction trade in the space when you moved into the 20s from an ROE perspective, it's been when you've been monetizing some of the more opportunistic purchases on the container side. So you've got firm secondary pricing right now, obviously you've got that utilization and you're selling less than 1% of your fleet into the market. What would you need to see to start hitting that a bit more?

--------------------------------------------------------------------------------

Timothy B. Page, CAI International, Inc. - CFO [24]

--------------------------------------------------------------------------------

You mean, higher ROEs?

--------------------------------------------------------------------------------

Michael Webber, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [25]

--------------------------------------------------------------------------------

Just start selling more of your boxes into the market.

--------------------------------------------------------------------------------

Timothy B. Page, CAI International, Inc. - CFO [26]

--------------------------------------------------------------------------------

Well, I will tell you, it's nice to monetize those assets (inaudible). If you look at the numbers, you can see what the implied ROE is on a 10 to 12-year-old box, it's pretty attractive. So our ability to keep people moving as long as you can. And when the customer returns it, We'll end up selling it. One of the things I made reference to during the press release -- again, I referenced back to 2015. We did a lot of work in making sure we would realign our contracts. So we have equipment, most of our equipment, the vast majority of our equipment is coming back to high-demand areas. That allows us not only to potentially release it, but if we have to sell it we can position it into what we believe is the best market. And so all of those things give us a lot of confidence that we will be able to do better in the future, relatively speaking, than what we would have done in the past because of how well we've aligned our fleet.

--------------------------------------------------------------------------------

Operator [27]

--------------------------------------------------------------------------------

(Operator Instructions) And our next question comes from line of Helane Becker from Cowen and Company.

--------------------------------------------------------------------------------

Helane R. Becker, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [28]

--------------------------------------------------------------------------------

Victor, as I think about the CapEx for the year, I suppose you won't have any issues getting to $500 million (inaudible) Is that correct, A. And B, if I think about bringing the equipment on middle of the quarter, beginning of the quarter, end of the quarter how should -- or throughout the quarter evenly, how should I think about that?

--------------------------------------------------------------------------------

Victor M. Garcia, CAI International, Inc. - President, CEO & Director [29]

--------------------------------------------------------------------------------

Okay. So far, year-to-date, we've invested $630 million -- invested or committed to invest. So we're already exceeding the $500 million. We invested -- actually equipment that came on and had leased or was on lease was about $208 million. The third quarter is scheduled to have $290 million. So between this quarter and next quarter, we're almost at $500 million. We also had -- that's -- those -- that $500 million didn't include what we put out on lease during the first quarter. So when you actually look at the $630 million that we've already invested, what we have uncommitted is actually a fairly small number. So we're -- as I mentioned before, we've already outpaced what we did last year, which was about $500 million.

--------------------------------------------------------------------------------

Helane R. Becker, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [30]

--------------------------------------------------------------------------------

Right, okay. So that make sense and demand is obviously there, which you've talked about. The other thing too is the double-digit logistics revenue growth that -- I'm sorry if I missed this, does that continue in the second half of the year?

--------------------------------------------------------------------------------

Victor M. Garcia, CAI International, Inc. - President, CEO & Director [31]

--------------------------------------------------------------------------------

We expect that -- when you compare year-over-year, we'll continue to have a double-digit growth. And we expect that will be an ongoing process. So we're gearing up with -- we're getting multimillion dollar customer wins every quarter. So -- and we're adding additional personnel to increase that pace. So yes, we're pretty pleased with the sequential growth that we've got. We're expecting to continue to grow sequentially. And we're able to make the investments that we're making in personnel to and still be cash flow positive, when you know it's taking some time get people to be at full speed is pretty pleasing. But to have 30-odd percent quarter-over-quarter growth and not have to invest capital into it to be capital-positive is pretty exciting proposition from our standpoint.

--------------------------------------------------------------------------------

Helane R. Becker, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [32]

--------------------------------------------------------------------------------

Yes, I would think so. And then, just one last question, in terms of regions and equipment -- or 2 last questions actually. One, is 9-year tenure that's -- it's been increasing. You guys have moved that up from I think when I first met you it's was like 5 years and then it was 6, 7. Now you're expecting slightly 9, which is not an insignificant increase in terms of timing. So is that your desire to put that forward? Or are your customers just thrilled to have boxes for that length of time? And how are you and they thinking about that length?

--------------------------------------------------------------------------------

Victor M. Garcia, CAI International, Inc. - President, CEO & Director [33]

--------------------------------------------------------------------------------

Over the last couple of years, as we've continued to -- I think for a lot of customers, when they saw that in 2017, that we were one of the few companies out there that they could rely upon to get access to equipment, that built a strong relationship with our customers. So we're getting much more closely involved in some of the strategic opportunities with our customers. And so that has meant some investments that they would've considered maybe to do on their own, we're working closely with them to do much longer-term leases. In general, I would say we're always going to look for longer-term leases in order to get revenue stability or revenue certainty. And when we have 8-plus year leases, that gives us confidence to be able to then make the next investment. So we're always going to be trying to work with our customers to get as long a lease as possible.

--------------------------------------------------------------------------------

Helane R. Becker, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [34]

--------------------------------------------------------------------------------

Got you. And then, one just last question with respect to the 2020 debt maturity. That's like a key-ish kind of deal for you on Slide 16. Are you thinking at some point in the next 1.5 or so of refinancing that and pushing it out?

--------------------------------------------------------------------------------

Victor M. Garcia, CAI International, Inc. - President, CEO & Director [35]

--------------------------------------------------------------------------------

Yes, I think the number you're talking about is -- a significant part of that I believe is our debt revolver.

--------------------------------------------------------------------------------

Timothy B. Page, CAI International, Inc. - CFO [36]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Helane R. Becker, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [37]

--------------------------------------------------------------------------------

Yes, that's what it looks like here.

--------------------------------------------------------------------------------

Victor M. Garcia, CAI International, Inc. - President, CEO & Director [38]

--------------------------------------------------------------------------------

Yes. And that's just normal course. We do expect that facility to be extended. Our revolving credit facilities are bread-and-butter facilities and they continue -- we continue to look at refinancing those well prior to maturity. And just our container revolver, we've just completed -- we actually got an increase from $960 million to $1.1 billion, highly supported by the -- by our lenders and we'll expect the same thing out of our rail facility.

--------------------------------------------------------------------------------

Helane R. Becker, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [39]

--------------------------------------------------------------------------------

Got you. And then is there anything geographically we should know? I mean, I know you guys were going into Asia in a bigger way, but I mean, anything else around the world that you're seeing in terms of demand for containers?

--------------------------------------------------------------------------------

Victor M. Garcia, CAI International, Inc. - President, CEO & Director [40]

--------------------------------------------------------------------------------

No, I think what is most gratifying is that we're seeing that customers are seeing demand not only on the transpacific trade, but also inter-Asia, which is the largest block, and inter-Europe. And it's so it's well balanced. I think the U.S. economic growth and some other growth that we've seen in Europe continues to be there. I think there is a little bit of wait and see on how the effects of tariffs will affect some decision making. But the thing I would point out related to the whole tariff discussion is again, a lot of our cash flow and revenues are already locked in. So we're talking a matter of whether or not there's going to be investment opportunity, but also any time that there is disruptions to trade flows, everything -- everybody tries to run as efficient -- efficiently as possible. And what we've seen from our customers in terms of their buying habits this year, it's almost just-in-time purchasing. Everybody's trying to run with as minimal of a fleet as they can. So when you have these disruptions where if somebody's going to announce -- not ship from one region and is going to try to produce in another, the ship size, the transit times, a number of factors come in that make it inefficient, which means that you probably have to take on more equipment than you originally planned. And so over the long run, that balances out. But certainly, we see in the short to medium term that there will be more opportunities related to that.

--------------------------------------------------------------------------------

Operator [41]

--------------------------------------------------------------------------------

And our next question comes from the line of Michael Brown with KBW.

--------------------------------------------------------------------------------

Michael Brown, [42]

--------------------------------------------------------------------------------

Just a quick one on the insurance recovery. So at this point, is there really any other potential insurance benefits that could come through? And if so, what is then the potential impact of that net of insurance? Are you potentially fully indemnified?

--------------------------------------------------------------------------------

Victor M. Garcia, CAI International, Inc. - President, CEO & Director [43]

--------------------------------------------------------------------------------

I think, we largely have been through the amount. We have -- we had receivables related to an expected recovery, those receivables for this quarter have been repaid. And we've gotten some income above that on items that we hadn't booked a receivable on. So I would say that's largely in the history books. The way these insurance recoveries work, you have to go through the recovery process; that takes you well, over a year, and then you have to account for it all, then you have to give it to the insurance company. So we're on the tail end of that for the most part.

--------------------------------------------------------------------------------

Michael Brown, [44]

--------------------------------------------------------------------------------

Okay. And then, on the utilization rates in the rail business, I appreciate the color there on the -- your expectations that will increase to 90%, but is that really just the 746 cars that you leased out, is that really just all of those, you know, being leased out. So that is really how that utilization rate moves up to 90%? And does that mean you have to take on a lot more new cars through to rent?

--------------------------------------------------------------------------------

Victor M. Garcia, CAI International, Inc. - President, CEO & Director [45]

--------------------------------------------------------------------------------

Yes, so it is. It's -- those 750 cars going through the system. We have largely -- if you recall, we had a 3 -- year (inaudible) manufacturing agreement for rail. We're largely (inaudible) so we've a few cars that we need to place, but the vast majority of cars have already (inaudible) that. So a lot of it is just (inaudible) through that equipment. What's gratifying is that with the equipment that we have being delivered now, we're back to lease rates that make those investments look attractive. So we're going to bring those in, put them -- we're extending the leases whenever we have an opportunity, given that the lease rates are much improved. And our next order of business will be -- more than a priority on investment will be to try and maintain that high utilization and also try to find opportunities on lease expiration.

--------------------------------------------------------------------------------

Michael Brown, [46]

--------------------------------------------------------------------------------

Okay. And then I just spin it another way, you said today that the rail business represents about 8% of the revenue. Does that -- do you kind of expect it to remain stable at that level or do you -- where do you see that going longer term?

--------------------------------------------------------------------------------

Victor M. Garcia, CAI International, Inc. - President, CEO & Director [47]

--------------------------------------------------------------------------------

So it represents about 18%, and I would expect it to, as a percentage of the total asset-base, to continue to decrease as a percentage because we're clearly outpacing on terms of container investment over rail. So even -- I would say we're probably more on a maintenance mode in rail. As I said before, we're more focused on getting more return on the invested capital we already have there. And we expect to be putting our discretionary capital into the Container segment.

--------------------------------------------------------------------------------

Operator [48]

--------------------------------------------------------------------------------

And that concludes our question-and-answer session for today. I'd like to turn the call back over to Victor Garcia for closing remarks.

--------------------------------------------------------------------------------

Victor M. Garcia, CAI International, Inc. - President, CEO & Director [49]

--------------------------------------------------------------------------------

Great. I appreciate everybody being on the call. We're very pleased with our results for this quarter. We think we have great momentum going into the rest of the year and we look forward to reporting our next quarterly call. Thank you very much.

--------------------------------------------------------------------------------

Operator [50]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone, have a great day.