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Edited Transcript of CAI earnings conference call or presentation 30-Apr-19 9:00pm GMT

Q1 2019 CAI International Inc Earnings Call

San Francisco May 2, 2019 (Thomson StreetEvents) -- Edited Transcript of CAI International Inc earnings conference call or presentation Tuesday, April 30, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Timothy B. Page

CAI International, Inc. - CFO

* Victor M. Garcia

CAI International, Inc. - President, CEO & Director

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Conference Call Participants

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* Michael Webber

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

* Robert Paul Napoli

William Blair & Company L.L.C., Research Division - Partner and Co-Group Head of Financial Services & Technology

* Tyler Oliver Seidman

Cowen and Company, LLC, Research Division - Research Associate

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the CAI 2019 Q1 Earnings Conference Call. (Operator Instructions) As a reminder, today's call will be recorded. I would now like to turn the call over to Timothy Page, CFO. Sir, you may begin.

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

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Good afternoon, 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 and 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, outlook 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 the company made during this discussion regarding its views, estimates, plans, outlook or strategies for the future.

I'll now turn the call out work President and Chief Executive Officer, Mr. Garcia.

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

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Thanks, Tim. Good afternoon, and welcome to CAI's First Quarter 2019 Earnings Conference Call. Along with our earnings release today, we have also posted on our website under the investor section a presentation on our results and our view of the state of our company and industry. We will not be going through the specific slides and the prepared remarks, but can address any questions related to the presentation on this call.

The first quarter is typically our seasonally weakest quarter for the year, when we expect our container utilization to decline. However, this quarter we were able to maintain an average utilization of 98.9% as compared to 99.2% in the fourth quarter, a lower decline than we usually experience. Utilization today remains at 98.9%. During the first quarter, we recorded a 13% increase in lease-related revenue and a 28% increase in logistics revenue as compared to the first quarter of last year. We reported overall revenue of $111.1 million, an increase of 17% compared to the first quarter of last year. These revenue levels are record levels for CAI in the first quarter. Our net income for the first quarter was $16.4 million, or $0.87 per fully diluted share compared to $17.1 million or $0.83 per fully diluted share during the first quarter of 2018.

Our performance for the quarter is being driven by the container leasing segment and the stability we have experienced in our current utilization is encouraging for the remainder of the year because we are approaching the seasonally stronger months. Clarkson Research is projecting trade growth to be 3.8% in 2019, and so we expect utilization to increase as we invest and lease new and depot equipment available. We have seen in the first quarter lower than expected equipment returns and a vast majority of those returns have been to China, where we expect lease demand to be strongest. We have also observed new customer demand similar to what we experienced last year despite uncertainties around trade negotiations. We have invested or committed to invest so far this year approximately $280 million of containers. New container prices have rebounded from approximately $1,750 per 20-foot container equivalent at the beginning of the quarter to approximately $1,900 currently due to rising Chinese steel prices and ongoing demand by shipping lines and leasing companies.

Overall, secondary sale prices of containers remain strong due to the limited availability of equipment across the globe. And while our average gain on sale and units sold in certain markets declined due to a slight increase in available equipment, particularly in China, we expect prices to firm over the coming quarters as available equipment is leased out to customers. During the quarter, strong winter weather in the United States resulted in fewer units being sold in the U.S., which negatively impacted the gain on sale reported this quarter. However, we are encouraged by the recent increase in container prices, which we see as a catalyst for higher lease rates on depot equipment and higher resale values of equipment in the secondary market.

During the quarter, we entered into an agreement to sell 2,146 railcars, of which 1,946 railcars were sold during the first quarter for $165 million and 200 additional newly manufactured railcars are to be sold in the second quarter. As part of the first quarter sale, we reported a pretax gain on sale of approximately $7 million. We are using the $50 million of equity capital released by the sale to invest in higher-yielding investments and the repurchase of our shares. We are increasing our utilization of our railcar fleet and report a utilization of 90% for the quarter. Lease rates on railcars in general are higher today than compared to a year ago, and we are looking for opportunities to increase lease rates on our rail fleet. We will continue to look for opportunities to increase returns on the rail segment.

Growth in our logistics businesses is a priority particularly as it relates to domestic intermodal and truck brokerage, where we have had the most success in increasing our customer portfolio and volume. The first quarter for U.S. logistics is usually the seasonally weakest and as a result, trucking freight rates have declined in the first quarter as the tight supply of truck capacity that was prevalent in the third quarter of 2018 has eased. Many customers are using the current the decline in truck freight rates to contract in the spot market. We believe the outlook for trucking demand in the United States will be strong over the coming months, and we have already added many new customers where we will have committed new business for the year. We expect continued double-digit revenue growth in our logistics business in 2019 as we continue to expand our overall operation and gain additional customers.

In September and October of 2018, we refinanced approximately $450 million of funded debt from lower floating rate interest rates to higher fixed rates. While the higher fixed rates have increased our ongoing interest expense levels, our resulting greater percentage of fixed rates that -- has reduced our exposure to potential future hikes in floating interest rates. During the quarter, we repurchased approximately 600,000 of our common stock at an average price of $23.39. We have approximately 1.9 million shares remaining under the $3 million share repurchase authorization we announced in the third quarter of 2018. We continue to view our common stock as an attractive investment for long-term shareholder value creation and expect to continue repurchasing shares in 2019. We remain very focused on every part of our business in order to deploy or redeploy capital to maximize our shareholder returns. Central to that strategy is balancing investment opportunities with the repurchase of our shares. All of our decisions are focused on the long-term development of our business, and we believe 2019 will provide an attractive economic backdrop for the continued expansion of our company. I'll now turn the call over to Tim Page, our Chief Financial Officer, to review the financial results for the quarter in greater detail.

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

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Thank you, Victor, and good afternoon, everyone. Total revenue in the quarter was $111 million, a decrease of 3.9% versus Q4, but was a record for Q1 revenue and was an increase of 16.5% versus Q1 of last year. Container lease revenue was $75.5 million versus $76.6 million in Q4, a decrease of $1.1 million or 1.5%. However, Q1 had 2 fewer calendar billing days than Q4, which impacted revenue by approximately $1.7 million. Our container utilization decreased a very modest amount versus Q4, much less than we would normally expect for this time of the year and actually increased in the month of March. As a consequence, on a like-to-like comparable basis, Q1 2019 container lease revenue was basically flat with Q4 of 2018, compared to Q1 of last year container lease revenue increased 16.8%.

Rail lease revenue in Q1 was $7.9 million versus $8.7 million in Q4, a decrease of $0.8 million. The decrease is related to the sale of railcars, which closed in the 3rd week of February. Those cars represented approximately 30% of our on lease railcar fleet, excuse me -- 37% of our on lease railcar fleet and the sale of those costs are reduced Q1 rail lease revenue by approximately $1 million. Adjusting for the sale, rail revenue increased approximately $0.2 million versus Q1 -- in Q1 versus Q4.

Logistics revenue Q1 was $27.7 million, a decrease of 8.3% versus Q4 and was in line with the normal logistics seasonality. Compared to Q1 of last year, our logistics revenue was up 28%. We expect to continue to see year-over-year double-digit growth in the logistics business.

Operating income in the quarter was $44.1 million versus $43 million in Q4. Operating income in Q1 included the $7 million gain on sale of railcars. Q4 included a gain on sale of railcars of $1.8 million. Net of these gains on sale, Q1 adjusted operating income was $37.1 million versus an adjusted operating income of $41.2 million in Q4 of last year, a decrease of $4.1 million or approximately 10%. About 75% or $3 million of the difference in quarter-over-quarter operating income change, is related to the container business, most of what we believe is primarily a result of normal seasonality in the container business. As I discussed earlier, $1.7 million of the decrease is lower container lease revenue due to fewer billing days in Q1 versus Q4. A second factor impacting container operating income was that Q1 had a $0.9 million lower gain on a disposition of used containers in Q4. The lunar new year holidays impacted the sales and much of Asia and weather throughout the U.S. had an impact on sales in the U.S., both of which resulted in -- all of which resulted in 15% fewer containers being sold in Q1 than Q4.

Storage expense increased approximately $0.3 million as there was a 0.3% decline in average utilization in the quarter. However, as I mentioned previously, utilization picked up slightly in March and has remained at that higher level throughout today. Those factors are all related to Q1 historically being the weakest quarter of the year. Given that we saw a slight uptick of utilization in March and that Q2 has an addition billing date, we would expect to see the container business operating margins improve in the coming quarters. Beside the variances in operating income related to our container business, the remaining $1 million variance in total operating income between Q1 and Q4 is related to the logistics business and that decrease was primarily driven by the expected seasonal decline in revenue that occurred in Q1.

G&A expense across the business was slightly higher in Q1 than Q4. We would expect G&A expense to remain in the same general range going forward. Interest expense in the quarter increased $0.6 million, container and interest expense increased $1 million primarily from a higher average debt balance and to a lesser extent from a slight increase in our average borrowing rate. The net change in the rail interest expense versus Q4 was a decrease in interest expense of $0.4 million, comprised of $0.5 million savings as a result of using the proceeds from the sale of railcars to pay down rail borrowings, which was offset by $0.1 million increase in interest expense in Q1 as a result of slightly higher average rates in the quarter versus Q4 of last year.

The weighted average interest rate in our funded debt in Q1 was 3.93%. We're expecting that the average borrowing rates will remain relatively constant next quarter. Any incremental interest expense will be related to changes in average debt balances.

Income tax expense in the quarter increased $1.5 million. Q4 tax expense had a large credit related to a year-end true-up of state taxes, which resulted in a Q4 tax rate of 1%. Our Q1 tax rate is 8.2%, as impacted by a large gain on sale, which is combined at U.S. Federal and Tax Rates of 23.6%. We would expect the tax rate for subsequent quarters to remain around the level of what Q1 was.

During the quarter, our owned container fleet increased approximately 50,000 CEU as compared to the end of Q4 2018, an increase of 3% and is 289,000 CEU larger than it was at the end of Q1 of 2018, an increase of 23%. On a dollar basis, our container revenue earning assets were $2.4 billion at the end of Q1, flat with Q4. Container revenue assets grew by $450 million as compared to Q1 of last year, an increase of 23%.

At the end of Q1, we had $326 million of net book value of railcars versus $448 million at the end of Q4. Rail assets now represent 12% of our total revenue earning assets as compared to 16% at the end of Q4.

At the end of the first quarter, we had total funded debt net of restricted cash and cash held in variable interest entities of approximately $2 billion, a decrease of approximately $77 million from the end of Q4 2018. The undrawn amount available to us our revolving credit facilities was $1.2 billion.

During the quarter we repurchased approximately 600,000 shares of stock. In total as of the end of Q1, we had repurchased 1.1 million shares, which represented approximately 5.9% of the shares outstanding when we commence the repurchase program. In total, since the end of 2017, we have repurchased 2.4 million shares or approximately 11.6% of the shares outstanding at that time. We will continue to allocate capital based on investments that generate the best long-term return for our shareholders.

That concludes our comments. Operator, please open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Bob Napoli with William Blair.

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Robert Paul Napoli, William Blair & Company L.L.C., Research Division - Partner and Co-Group Head of Financial Services & Technology [2]

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My first question is on the, I mean, your target return on target equity is mid-teens. And obviously you are running lower than that right now, but is the -- is midteens ROE where you would expect to be as we move through 2019? Or at what point -- or is that midteens too high of a target? I know the railcar business has much lower ROE. Do you expect to sell the rest of the railcar assets to drive up your ROE?

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

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There is a lot of questions there. So our target is to have on -- through the cycle a mid-teens kind of return on equity. We had that last couple of quarters, this is a seasonally weaker quarter so it's below. Our container segment was for this quarter about 12.6%. So we are moving towards there. As far as the other businesses, the overall corporate results being down is that we didn't get contribution. We actually lost money in our logistics business and we lost money excluding the gain in our rail business. So we're looking at both of those segments for things to improve the results. But we are looking to move towards on a corporate basis that kind of midteens ROE.

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Robert Paul Napoli, William Blair & Company L.L.C., Research Division - Partner and Co-Group Head of Financial Services & Technology [4]

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And rest of the rail business? I mean, does it make sense to, can you be in that business? You can sell those assets for a gain or near book value if that is accretive to your earnings, right?

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

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We are looking at all aspects, I mean, the -- we believe that we have good value in the fleet that we have. So we have good value. It's a market that's been recovering. So -- but we are looking at all ways of trying to improve the result to the business, which includes potentially some additional assets sales. We are not at the decision point of selling the business. We still think that there -- it makes a lot of strategic sense. But we are looking at the business overall and what can we do to improve the results.

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Robert Paul Napoli, William Blair & Company L.L.C., Research Division - Partner and Co-Group Head of Financial Services & Technology [6]

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And then last question and I'll turn it over. The containers. You have $280 million of containers committed to be purchased for this year. What, I mean, is your -- is $500 million a reasonable target for total CapEx in containers for this year? And are those containers being put on lease at your target ROEs of midteens?

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

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The answer to the later part is, yes. The containers are being put on in our target ROEs. As far as the level of investment, it's still too early to tell. I think we would know over the next 60 days how strong demand will be coming back. We are encouraged by the utilization that we have, the numbers of inquiries that we have seen from customers and what they're telling us about their demand for this year. So we are encouraged that it will be a growth year, and we are certainly looking at every opportunity that meets our return requirements to commit to it. But I can't say here that we're going to commit to a specific dollar level.

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Operator [8]

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Our next question comes from the line of Michael Webber from Wells Fargo.

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Michael Webber, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [9]

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Victor, I wanted to start on dry vans and kind of just touch on rail again. But forgive me, I didn't see this in the deck, can you give us an indication on where new pricing actually is today? Presumably, probably a bit thin just considering it is a seasonal slow point. But any color there would be helpful, and I can follow up on that.

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Victor M. Garcia, CAI International, Inc. - President, CEO & Director [10]

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Are you talking about pricing on new containers?

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Michael Webber, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [11]

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Yes.

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Victor M. Garcia, CAI International, Inc. - President, CEO & Director [12]

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And new container costs, I just wanted to make sure I am answering you.

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Michael Webber, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [13]

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Yes, the price point per TEU, the price point per TEU. We -- it seems like it's inched up a bit to start the year. I'm just curious what you guys are seeing?

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Victor M. Garcia, CAI International, Inc. - President, CEO & Director [14]

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The prices have been inching up, started the year at $1,750. It's getting closer to $1,900. The various discussions we have had with manufacturers is that they really are looking to increase price in part because of the cost push in terms of Chinese steel cost and other costs that they have. I think this year seems to be more organized to try to get container prices up. There is potentially some more consolidation amongst manufacturers which we will have to see how that plays out and in terms of price competitiveness, but we're certainly going into a seasonally strong year, so I would think that we probably are going to at least maintain the level that we're at right now at somewhere around $1900.

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

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Now, just a follow-up, have seen -- have yields kind of moved in lockstep with that price point? I mean, the price improvement kind of cuts both ways for you guys. At a certain point you do want to pay for more boxes but it also certainly helps collateral value and everything else. Do you view that -- your comments on slightly being slightly more organized this year are pretty interesting. Do you view that as a positive for the space?

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Victor M. Garcia, CAI International, Inc. - President, CEO & Director [16]

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Yes. I mean I think we would like to see container prices be firm to slightly rising over time because it allows for us to release our assets at higher levels. It allows us to get higher resale values for our equipment. So generally speaking, an upward sloping sustainable price increase over time is good for our business. So yes, we are encouraged by seeing that. We have a significant investment in containers. So that's positive.

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

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That's helpful. Just to -- I think one more on container then I'll do a quick one on rail. But this time last year, I think it was last year, it kind of runs together, but there's a lot of conversation around competitive dynamics. It seems like things have pretty much evened out. Any changes that you're seeing in terms of competitors that were on the sidelines that may be dipping their toe back in? It doesn't seems like there's a lot of business out there to go around just seasonally, so maybe not. I'm just curious any change maybe from Q4 or middle of last year in terms of some of the people that have kind of stayed out of the market?

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Victor M. Garcia, CAI International, Inc. - President, CEO & Director [18]

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Well, I think this year has felt a lot like last year's first quarter. I think the limited -- we have more participants. I wouldn't say we see aggressiveness amongst every participant. But there's been more participants looking at transactions and so although we have seen a number of transactions, it's not at the kind of level we would see during the peak demand or what we would expect to see over the next 3 months. So there's a lot more people competing for the same opportunities. And I think people have taken advantage of having probably bought some lower box prices to try to maintain current lease rates. And so I would say it's been competitive, but not something that is irrational.

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

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Great. And that's helpful. And then finally on rail and you kind of already kind of touched on this. But there's a line in your deck, it's exploring all alternatives to improve rail ROE, and I know we focused on sales in rail lease though because you did punt on some last -- in the quarter. What else, like what other alternatives, maybe just broad strokes in terms of where you think can -- what you can do in terms of raising that ROE, whether it be other potential areas for integration? Tangential sectors? I don't know, just trying to figure out whether there's anything else kind of embedded in that kind of all alternatives line in the deck and maybe just sketching out some context there would be helpful?

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

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Sure. Well I think the comment comes from, we are looking at potentially some additional asset sales. We're looking at lease rate renewals. We have significant a number of cars that are still off hire, where we are experiencing storage cost and not getting. So we are looking at how quickly we can get the remaining units back out of lease. So we are looking at all those options. There's no magic wand, there is no new service we're going to provide. We're more focused on with the capital that we have invested, what we do to execute.

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

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All right. So there is no like more exotic option that kind of layered into that alternative statement. It's just kind of what we would think?

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

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Yes. Nothing new.

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Operator [23]

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Our next question comes from Helane Becker from Cowen and Company.

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Tyler Oliver Seidman, Cowen and Company, LLC, Research Division - Research Associate [24]

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This is actually Tyler on Helane. I have a question about the logistics segment. You guys targeted 20% top line growth for 2019, and it seems like you guys obviously were higher than that in the first quarter. But comps get meaningfully tougher as the year progresses, and I'm wondering if that full year '19, I mean, the full year 2019 growth rate of 20% is still intact?

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Victor M. Garcia, CAI International, Inc. - President, CEO & Director [25]

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I'm not sure we gave an exact number. But we do think that we do have a number of transactions that we have agreed with customers on that particularly on -- well, on the domestic side primarily, which is our domestic intermodal and our trucking. So we expect those to come in over the course of the second quarter. So we do expect continued momentum in the business. When we talk about, we've more referred to double-digit growth, but I think something in the 15% to 20% range is a reasonable, not only this year but longer-term, growth trajectory for our -- for the business. And that's certainly what we're striving for.

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Tyler Oliver Seidman, Cowen and Company, LLC, Research Division - Research Associate [26]

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Just one more. Are you guys seeing any pockets of weakness or any potential regions that are stronger than you expected. Maybe within Asia but outside of China that are notable to you guys. Or is everything pretty much similar to what you guys talked about on the last call?

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Victor M. Garcia, CAI International, Inc. - President, CEO & Director [27]

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We're going back to the container segment. So it would seem the European leg has been pretty strong despite what we hear from about Europe slowing down. Trans Pacific has been fairly steady. Southeast Asia, we have seen some good pick-up demand there. So overall, like I said, we've seen a fairly balanced, and we've been encouraged by the limited redelivery that we have seen overall.

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Operator [28]

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And I'm not showing any further questions at this time. I'd now like to turn the call back to Mr. Garcia for closing remarks.

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

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Appreciate everybody getting on our first quarter earnings call. We look forward to reporting our second quarter in just a few months. Thank you.

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Operator [30]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone have a great day.