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Edited Transcript of CAI earnings conference call or presentation 20-Feb-19 10:00pm GMT

Q4 2018 CAI International Inc Earnings Call

San Francisco Feb 22, 2019 (Thomson StreetEvents) -- Edited Transcript of CAI International Inc earnings conference call or presentation Wednesday, February 20, 2019 at 10:00:00pm 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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* 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 C. Brown

Keefe, Bruyette, & Woods, Inc., Research Division - Associate

* Scott Jean Valentin

Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst

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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 International Fourth Quarter 2018 Earnings Conference Call. (Operator Instructions) I would now like to introduce your host for today's conference, Mr. 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, 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, 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 over to our President and Chief Executive Officer, Victor Garcia.

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

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Thank you, Tim. Good afternoon, and welcome to CAI's Fourth Quarter and Full Year 2018 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 now be going through the specific slides and the prepared remarks, but can address any questions related to the presentation on this call.

2018 was a tremendous year for our company with record revenue in our leasing and logistics businesses and record net income. For the year, we reported record lease revenue of $300.6 million, an increase of 20% compared to 2017, and record logistics revenue of $111.5 million, an increase of 38% compared to 2017. For the quarter, we reported total and lease-related revenue of $115.6 million and $85.3 million respectively. Logistics revenue for the fourth quarter was $30.2 million, an increase of 55% compared to the fourth quarter of 2017. For the year, we reported record net income of $73.5 million, or $3.71 per fully diluted share, compared to net income in 2017 of $56.2 million, or $2.87 per fully diluted share. For the fourth quarter of 2018, we reported net income of $17.2 million, or $0.89 per share.

Our results for the fourth quarter remained very strong as we continued to benefit from the container investments made in the second and third quarters of the year. Average utilization of our container fleet for the fourth quarter was 99.2% and is currently today 98.8%. We would normally expect during the seasonal weaker periods to have a 1 or 2 percentage point decline in utilization. We have witnessed a smaller decrease, and we attribute it to the strength of the overall market and to the high degree of committed leases in our container portfolio. Despite the strong momentum, interest expense in the quarter increased by $3.4 million compared to the third quarter, reflecting the increase in our proportion of fixed-rate debt as well as overall increases in both debt levels and interest rates. This represents about an $0.18 per share of additional expense in the quarter. However, we have mitigated a significant amount of interest rate risk from our balance sheet.

We continue to be optimistic regarding the prospects of our container business in 2019. We begin 2019 from a position of strength, with utilization at 99%, and 92% of our on-lease owned fleet on long-term committed leases. In the last two years, we have leased over $1 billion of new containers with an average lease term of 8.6 years. We expect our overall utilization to remain strong as we benefit from our tight contract structure and long-term lease commitments. Secondary prices of containers continue to be strong in most markets, particularly outside of Asia, where off-hire inventories remain small.

We have also made significant advances in our rail portfolio. The overall market continues to strengthen, and we continue to see improving utilization in rental rate trends in our rail segment. Our rail car utilization in the fourth quarter increased to 87% as compared to 84% in the third quarter of 2018. Rental rates for most rail car types have increased by 30% to 80% as compared to the levels in 2017, and we expect this strengthening of lease rates to bring improved overall financial returns for rail car owners. Our commitment to new rail car deliveries will be completed during the first half of 2019, when we will take delivery of $64 million of additional railcars, most of which are already on committed leases with attractive financial returns.

We remain focused on growth in our logistics business, particularly as it relates to domestic intermodal and truck brokerage, where we have had the most success in increasing our customer portfolio and volume. During the year, we have added offices in Dallas and California, and we expect to open an office in Chicago over the coming weeks. We believe we have sufficient operating support to continue to grow with minimal operating overhead, and most of our additions will be focused on marketing personnel. With the investments in people we have already made, we expect continued double-digit revenue growth in our logistics business in 2019 as we expect to expand our overall operation and gain additional customers.

As we focus on ways to maximized shareholder returns, we have continued to find the repurchase of our shares an attractive use of our capital. During the quarter, we repurchased 542,000 shares of our common stock at an average price per share of $23.83. We have approximately 2.4 million shares remaining of the 3 million share repurchase authorization we announced in Q3. We view our shares as an attractive investment for long-term shareholder value creation and expect to continue to repurchase shares in 2019.

In summary, 2018 was a tremendous year for our company as we continued to expand our businesses and reported record financial returns. As we look into 2019, we remain confident in the financial strength of our company and will make decisions that have both immediate benefits to our shareholders and enhance the long-term strategic development of our company. We continue to be very well positioned to take advantage of investment opportunities as they arise.

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 a record $116 million, an increase of 23% as compared to Q4 of last year. For the full year of 2018, revenue increased to a record $432 million, an increase of 24% versus 2017. Lease-related revenue was also a record in the quarter at $85 million, an increase of 1% compared to Q3, and 14% compared to Q4 of last year. For the full year of 2018, lease-related revenue was a record $321 million, a year-over-year increase of 20%, reflecting both the strong container lease market and a recovering rail market that we enjoyed during 2018.

Q4 and full year 2018 were also records for CAI in terms of operating income and pretax income. Operating income in the quarter was $43 million, an increase of 18% versus Q4 of last year. Operating income for 2018 was a record at $161 million, an increase of 45% versus 2017. Net income for the year was a record $73.5 million, an increase of 31% as compared to 2017 net income of $56.2 million, which is adjusted for one-time tax benefits. Net income in the quarter was $17 million, a decrease of $2.8 million versus Q3. Most of the decrease was basically attributable to increased interest costs in the fourth quarter, which I'll comment on later.

Depreciation expense in the quarter increased $0.5 million compared to Q3, primarily from the full quarter impact of the container equipment we leased out in Q3. We expect depreciation expense in Q1 to be consistent with Q4. Storage, handling and other operating expenses were $0.8 million higher in Q4 than Q3, primarily due to a $0.1 million increase in container-related storage costs and $0.3 million additional repair and maintenance cost in the container business that was timing-related. Rail had $0.4 million higher maintenance expense in Q4 versus Q3 largely because Q3 expense was lower than historical average maintenance costs. We expect storage and handling expense in Q1 to be consistent with Q4.

In Q4, we recorded a gain in sale of rental equipment of $4.2 million, $1.8 million of which resulted from the sale of 385 railcars to one of our lessees. The remaining $2.4 million gain was related to gains on disposition of containers, which was in the same range as we realized in the past several quarters. G&A expense in Q4 of 2018 was $14 million, an increase of $1.2 million compared to Q3. Most of the increase was caused by year-end-related professional fees and a true up of compensation costs. We would expect G&A to decrease modestly in Q1.

Interest expense in the fourth quarter increased to $23.2 million from $19.8 million in Q3, an increase of $3.4 million. Approximately 2/3 of the increase was related to the increase in our average debt balance in the quarter as we took delivery of and leased out over $200 million of container assets late in the third quarter. The remainder of the increase was related to an increase in our average interest rate in the quarter, resulting from increased LIBOR and the conversion of some floating rate debt to higher fixed rates.

Our average interest rate for the fourth quarter was 3.91%. We would expect the average rate in Q1 to be in the same range, and the average debt balance to decrease slightly as a result of sale assets of rail asset -- the sale of the rail assets I mentioned previously and a limited container investment in Q1. As of the end of the fourth quarter, 62% of our debt was fixed rate. Our effective tax rate in Q4 was 1%, which brought our overall 2018 tax rate to 3.5%. We expect our 2019 tax rate to be in the 5% range due to a higher percentage of expected net income from rail and logistics in 2019.

We recorded $2.2 million of preferred dividend expense this quarter on $103.9 million of liquidation value of preferred stock. Preferred stock dividends in the coming quarters will remain at $2.2 million.

During the quarter, our own container fleet increased approximately 26,000 CEU as compared to the end of Q3, an increase of 2%, and is 292,000 CEU larger than it was at the end of Q4 2017, a year-over-year increase of 24%. On a dollar basis, our container revenue assets were $2.4 billion at the end of Q4, flat with Q3. Container revenue assets grew 29% as compared to Q4 of 2017. At the end of Q4, we had $448 million of railcars, compared to $465 million at the end of Q3. Rail assets represented 16% of our total revenue assets at the end of Q4.

We had total funded debt net of restricted cash and cash held in variable interest entities of approximately $2.1 billion at the end of Q4, an increase of approximately $190 million from the end of Q3. The undrawn amount available to us under our container revolving credit facilities was $800 million.

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) Our first question comes from the line of Brian Hogan of William Blair.

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

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Question on the container rental revenue. Sequentially, you put on a lot of assets in the 2Q and 3Q. The flow throughs into 4Q, I thought it'd be a little higher, and looks like the yield came down a lot more than anticipated. Is that due to a shift to a little bit more financed leasing? Is there a shift in yield? Can you kind of walk us through some of that?

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Timothy B. Page, CAI International, Inc. - CFO [3]

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Well, the yields would have come down because the revenue assets in Q3 didn't reflect all of the containers that were on lease at the end of Q3 as we paid for them in Q4. So the assets just went up higher at a higher rate than the rental revenue went up in Q4. There wasn't much on the revenue side that changed. Really, very little changed on the average yield that the containers were earning because a lot of it's on long-term leases. And really, there weren't contract renegotiations or anything else, so it's just a timing issue in terms of when the assets came in. And we started writing it in when we recognized it on our balance sheet.

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

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Okay, it's a timing issue, okay. And then, CapEx for 2019, and obviously it's very dependent on the macro and I understand that, but you did mention the first quarter investment would be pretty light. What are you seeing out there from an investment opportunity competitively? I mean, the way I would see it right now, I don't think you could probably do another year of what you did last year in containers of 733. What do you think about from a investment outlook?

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

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Well, I think this year as we look out, it is a year that we think will continue to be a growth year given that the U.S. economy continues to expand and the world economy's expected to continue to expand. There are some uncertainties out there in terms of the trade talks and some slowing in some economies, so it's not as clear cut as it was last year. But I think we're still optimistic that there will be significant opportunities for us for additional container demand. The overall investment level, we might see good volumes. But container prices have declined, so the amount of dollars actually spent might be relatively speaking obviously less, because container prices have gone from an average of around $2,100 per 20 foot to about $1,700. So even if we did the -- even if we were doing the same amount of volume this year as we did last year, we would have less investment.

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

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Sure. The ROE in the rail business, you normally give out -- I mean, you have this probably in the 10-K, but the profitability of the rail segment, it's been around and around, slight lift and break even. I guess, do you see a visible path to getting to double digit? Are we in that business, and how soon do you get there? Obviously, you commented that the business is improving, but with the timing and...

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

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We're doing a number of things. We're trying to first and foremost get the utilization of the fleet up. We are also looking for all opportunities to increase rental rates, and that includes with the units that are available to be leased out as well as when we have rate renegotiations. The good news is that everybody in the marketplace is looking for improved returns, and so the rental rates have been increasing. So fundamentally, we see that business improving. We're on the tail end of a period where we had a lot of equipment coming on as a result of the decline in the last energy shock, where there was a lot of equipment that was changed in the orders to other types because the energy business wasn't as strong. That's reversing itself. There's a lag effect to it, so fundamentally the business is getting stronger. So that's kind of the everyday, but we are looking at different ways of expediting that and where we can put our capital. So we look at every part of our business and we're looking where we could put capital, and to bring the overall returns of the company up.

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

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And that actually goes into my last question at the moment. Do you expect the ROE expand in 2019 from the 2018 levels?

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

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Well, I think we're certainly targeting to do that. We still are looking to get mid-teen ROEs in the business, and we're looking at every aspect of our business to try and get those levels on a consistent basis. And we had a lower amount this quarter, but certainly we were in those levels earlier in the year. And I think we'll continue to strive to get those levels.

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Operator [10]

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

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

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Victor, just to start on the dry van side, can you talk to where new box prices are today? It seems like they've rolled off a bit. And maybe just an indication where points are now, and then maybe where you think margins are for manufacturers and maybe why there hasn't been more support there. It's been a little surprising, I guess, maybe the depth of where box prices have rolled in Q4-Q1.

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

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Well, as I mentioned, the box prices have declined from around $2,100 per 20-foot container to roughly $1,700. I would say the vast majority of that price decline reflects the decline in Chinese steel prices. So I think you could draw a direct correlation between the two. Even last year when there was a lot of volume for the manufacturers, they were pricing very competitively. And if you looked at their public results for those manufacturers that are public, they actually showed that they really weren't making money at the business. So it's just been a very competitive market in the manufacturing side, so I think there's still profit challenge. Obviously, we and everybody else who is buying containers is trying to get the lowest price possible, so we're always going to try to do that. But I would say that the vast majority of the reason for the decline in box prices has been the decline in Chinese steel, which has stabilized over the last several weeks. And so we don't expect, unless there's a change in those steel prices, for there to be a continued decline.

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

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Okay, no, that's helpful. It seems like there's maybe a bit of a lag or -- yes, okay. I mean, I guess along those lines, can you maybe talk to where yields are now, maybe how they've trended over the past quarter or so and year-to-date? Are we talking high single digits or low double digits? And where is that within the context of a ballpark average level for your fleet?

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

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Yes. I mean, I'd say as the box price comes down, those yields on a nominal basis, they come down just because there's less cost over the life of the asset to cover, so they come down. But I think the return expectations that we have are largely the same as we had before. The first quarter is not a time, just like last year, where you see a lot of activity. There are transactions out there, but tend to be some smaller transactions. And it's not necessarily indicative of the full year. And I'd say the way it feels right now, it feels very much like the first quarter of last year in terms of the competitiveness and the number of -- the volume. So not much different as we finish the early months of this year than it was last year. But we'll have to see. The bulk of the demand usually comes in in the second quarter -- begins in the second quarter. So I think in the next couple of months, we'll have a better indication of where competitiveness is and overall demand.

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

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Right, but if I just think about where yields are today, I mean, are we in the single digits in terms of yields on new boxes at $1,700 right now?

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

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I would say very low end of double digits.

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

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Okay, yes. It looks like just rough math on your average fleet, the average book value looks like a little over 11% on the existing fleet. So probably around -- you're saying around that area at $1,700?

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

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Well, I don't want to get into specifics, but it's come down. But the important thing is not the revenue yield, per se, it's what we think the investment yield is and what we're doing. And I think that that's been consistent. But we haven't seen a decline in the yield that we expect on the transactions we've had as compared to last year.

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

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So in ROA or in net spread, you don't think those changed year-on-year?

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

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Right, right.

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

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Okay, okay. And then, just finally, and I just want to make sure I'm interpreting this right. Towards the back end of your deck, when you entered the rail car section, you mentioned selling $15 million of the railcars in Q4, which is a decent chunk of your actual overall fleet. Can you maybe walk through whether that's a one-off? Is that something where there's an opportunity to offload more of that exposure into the market? It's starting to tighten, but how do you balance that process with the efforts to relet and ramp margins in that space?

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

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Well, I think if you recall at the last earnings call, I said that we are looking at potentially additional rail car sales. And we'll do it if it makes economic sense. I will say that with the improving market in terms of rail rates and utilization, and frankly, car prices are increasing, so if you -- the manufacturers are starting to raise car prices. Part of it the domestic steel prices are up because of the tariffs, so that's causing surcharges in car prices, but also demand particularly around tanks are pretty strong, and demand for building tank cars and, really, demand for tanks. We've seen the largest increase in rental rates coming on the tank sector, and so that's bringing a lot more interest from people and looking at existing assets. And so we'll look at that. We're continuing to look at that. We think we have a lot of attractive assets. The question for us is where our shares are trading and some of the other investment opportunities. It doesn't make sense for us to recalibrate what we have in terms of our portfolio mix, and so we are looking at that.

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Operator [23]

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Our next question comes from the line of Helane Becker of Cowen and Company.

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Helane R. Becker, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [24]

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Just a couple of questions because most of them have been answered, but thank you. But on the logistics side, you note in one of the slides that you continue to invest in experienced people. I know you had some management changes over the last couple of years. I know it's a small percentage of your business, but maybe you could just a little bit about how that's coming and how you're thinking about growth of that business going forward relative to the other two sectors?

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

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Sure. Yes, you're right. 18 to 24 months ago, we had to make some changes in some of the leadership. And the way I would describe it, and I think we've just started to hit our stride in was we really think we're doing, we've had success in growing the revenue in this quarter compared to the same quarter in 2017. We're up on a revenue basis by 55%. But that being said, in terms of our processes, our positioning in the marketplace, the quality of the team, the focus of the team, we're really just starting to had the our stride. And I think that with the infrastructure that have already in place, the leadership who's been in place now for about a year, we have a lot more opportunities still to invest in the infrastructure and to growth. But I think we have a very strong foundation that'll outpace in terms of growth the other two parts of our business.

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Helane R. Becker, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [26]

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Okay. And then the other question I had was on tank cars. So I just wanted to understand that a little more, because I think there was a point in time last year where maybe there wasn't a lot of interest in that asset. And I'm just wondering if the interest has picked up because there was an underinvestment, and so therefore when demand turned around people were unprepared. Or is it a chicken-egg thing where one came before the other? Other maybe you could just flesh that out a little for me.

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

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Sure. Well, let's talk about the energy part of the tank car market, which is probably the strongest of all of the subsets within tank car. So first and foremost, there is a lot of demand for tank cars because there's a lot more production of oil as a result of the fracking that's going on in the United States, and particularly since if you look at the spread between what you can get for Canadian crude and what you can -- if you bring it by rail to some of the refiners in the gulf, there's a pretty big spread that a lot of large oil majors and marketing companies can make. And so they are aggressively trying to maximize their volume too. And so there's been a tremendous amount of demand for tank cars to bring those crude oil shipments down to higher demand areas. The overlay into that, and there has been a push, even with some of the cars that have been retrofitted because there was an accident earlier with a retrofitted car, that the railroads are starting to implement surcharges on railcars and starting to indicate a force out of even some of the retrofitted cars. So that's causing some people to be more interested in even a car that meets all of the existing new regulations. And so there's particular demand. And we don't have any retrofitted cars or any old cars, and so anything that is new and is available is really at a very, very high demand right now.

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

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Okay, that's really helpful. And then my last question is with respect to the selling containers, I guess. Would you be more interested in selling more containers since the returns seem to be strong? How should we think about sales of containers?

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

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On an ongoing basis?

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

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I guess, yes, managing the container fleet by -- you acquire a certain amount, you sell a certain amount. Are the sales opportunistic, or were they designed because the demand was so strong for used containers I guess is how I'm thinking about that.

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

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Every month, every quarter, we're always consistently selling containers. Our focus is to try and maximize on older boxes that we want to dispose of, and really trying to maximize utilization. As demand slows down, particularly in the seasonal and weak period, and equipment becomes available, we'll try to move that out to try to continue to keep utilization as high as we can. Our strategy hasn't changed on that. That strategy will consistently be the case. During strong markets or weak markets, we're always moving boxes around, we're always trying to maximize returns. The container business requires a lot of close management, but the underlying asset is a commodity. And so we're not wedded to units. We're willing to sell them. We can always buy new units. Customers prefer new units. So we're always looking to redeploy capital. So if older equipment is idle, we'll be very focused on what we need to do with that equipment to get it out of the fleet.

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

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Okay, and then just one last sneaky question in here. I know the XPO said last week that they lost Amazon as a client. Do you think your logistics segment will benefit from that?

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

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I would like to think that we could pick up XPO's business from Amazon, but I don't think it'll affect our business. We're not really focused on large volume customers like that, like an Amazon. That's for some of the more developed, larger players. So I don't think it'll affect our business at all.

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Operator [34]

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

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Michael C. Brown, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [35]

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Just want to touch on the tariffs a little bit more. In your view, was there really any impact on the tariffs in the quarter? So was there any impact in the fourth quarter from activity actually being pulled into the third quarter in advance of the tariffs? And then did you experience any pull forward in activity -- did your customers, excuse me, experience a pull forward in activity in advance of the increase to 25% on March 1?

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Victor M. Garcia, CAI International, Inc. - President, CEO & Director [36]

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I would say we certainly saw a very strong third quarter, and we saw that continue on into the fourth quarter. For the most part, as I said in my prepared remarks, we haven't seen a lot of equipment come back. So demand overall has been pretty strong. Normally, we would expect 1 or 2 percentage points' decline in utilization. We've seen a fraction of that, so whether that was overall economic strength or a pull forward story, we've seen a strong market. There has to be some element of a pull forward, but to this point, even so far this year, we have not seen a decline in demand, as we've indicated. Our utilization even today is 98.8%, so I think that the underlying world economy still remains strong enough that it's keeping equipment utilized. And we're in the middle of February. We would expect by the middle of April the seasonal uptick to start occurring, and so that'll be a natural pull forward, even if there was a prior pull forward because of trade. Now, how those trade negotiations play out on March 1, there could be some short-term effect. But I think a lot of that has played out, and I think it has more to do with the global growth at this point that'll dictate demand.

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Michael C. Brown, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [37]

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And then could you just add a little color about how your conversations with customers has maybe changed over the course of the quarter? Has the dialogue kind of shifted from tariffs as that uncertainty continues to be out there in the market? Are they adjusting their businesses at all in 2019?

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

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No, I think there's a little bit of a wait and see, but I don't think that there has been a marked change in how we interact with them. Again, we haven't seen a large amount of new inquiry, but at the same time we haven't seen a lot of redeliveries. And their outlook is cautiously optimistic, and I think it's cautiously optimistic because of really what continues to be a really strong U.S. economy. And so I think they're looking at this year still as a growth year, and I think the expectations are for it to continue to be a growth year.

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Michael C. Brown, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [39]

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And then just wanted to shift gears and talk about the funding side. So it looks like the fixed rate debt, that proportion declined slightly to 62%. It sounds like you treat that level as it could come down in the first quarter due to the lower investment levels and the sale of some of those rail car assets. So if you couple that with the Fed's pause and potentially being done with rate hikes, how are you thinking about your funding mix in that proportion of fixed and floating debt as we look out into 2019?

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

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Well, I think if you look back into the early part of the fourth quarter, there was a lot of talk about the Fed looking at as much as four additional rate hikes. And we saw an opportunity to effectively convert floating rate debt to fixed rate debt. And by the middle of this year, if those rate hikes were to be passed, we would be paying a lower rate on a fixed rate basis than we would be paying on a floating rate basis. So we made the decision to more aggressively switch from floating rate to fixed rate. I think at one point earlier in the year, we were closer to 40%, 35% to 40% fixed, and we're now up to 62%. I would say coupled with where we are, in a normalized environment, I've said in the past that a hedge position for us is a 50-50 position where 50% likely to be right. But I think our funding needs, and in terms of stretching out maturities and cost-effective financing, we're comfortable where we are. And if we see a lot of investment as the course of this year goes on, we'll probably look to do some more fixed rate financing. But barring that, I think we feel like we're in a good position as is.

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Timothy B. Page, CAI International, Inc. - CFO [41]

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I think if we don't do anything, the percent of floating rate will creep up a little bit because we make principal payments on all the fixed rate facilities every month. And what isn't raised through operating cash flow when we make those payments basically comes out of the floating rate facility. So there's a natural decrease in fixed rate funding unless we put new fixed rate facilities in place, which then would lead to slightly lower interest costs.

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Victor M. Garcia, CAI International, Inc. - President, CEO & Director [42]

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Yes. I mean, if we look at where we had a big impact in terms of higher interest costs, it had to do with floating rates moving up. It's a roll forward of the Fed increases that we've seen over the course of last year. So we actually, when we look at our overall results, we're able to grow and maintain our results despite an ongoing effort by the Fed to increase interest rates. So I think we've managed through that well, and we'll continue to look at how best to mitigate interest rate risk and move the company forward.

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Michael C. Brown, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [43]

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Well, it certainly should be an interesting path forward from here.

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Timothy B. Page, CAI International, Inc. - CFO [44]

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Thank you.

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Operator [45]

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(Operator Instructions) Our next question comes from the line of Scott Valentin of Compass Point.

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Scott Jean Valentin, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [46]

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Victor, your comment before, I guess container prices were strong in most markets. I think you highlighted Asia as being maybe a little bit weaker. Do you think that's seasonal, or do you think that it's just a supply issue there with China slowing down economically?

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

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It's just a supply-demand issue. Everybody tries to get their equipment back to Asia, particularly China, so that's where it tends to congregate, and so there's more competition there. So we would normally expect that to be a place where as the weakens, we see the softest -- or the more significant move. But we're selling around the world, and it's a great place for us to be able to move equipment out of. So we will continue to focus our equipment to be back in China in particular. But we will look to the markets where we think we can get the best price and try to, if possible, move the equipment to those markets.

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Scott Jean Valentin, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [48]

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Okay. And then on box prices, you mentioned new box prices around $1,700, but used box prices remain strong. I guess do you foresee the new box prices increasing back to, say, the $2,000 level, or do you think used box prices will fall? It seems like that margin is very narrow right now.

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

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I think the biggest factor will be -- the biggest factor's going to be the overall demand for containers and what utilization is of the fleets. If the utilization remains in the high 90s as they are now, we would expect that secondary prices well continue to be fairly strong. There's a lot of markets that are still underserved in terms of equipment availability, and so prices, we think, will still be firm. Now, if new container prices were to decline further from here, that'll have a natural pull down further from where we are. But I think the biggest factor is going to be how much equipment is actually available on the ground, because the transportation costs -- new box prices are available in China, but a lot of the demand is throughout the globe. And so having a unit local is a lot of the value proposition as to how people price the asset.

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Scott Jean Valentin, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [50]

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Okay, and then just one final question. There's been some, I guess, media reports about smaller carriers, smaller container carriers, in Europe and China running into financial problems. Are you seeing any of that in your customer base, or any changes in the watch list at all?

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Victor M. Garcia, CAI International, Inc. - President, CEO & Director [51]

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Well, I think we've always been cautious about some of these smaller regional players, particularly in Asia, so we haven't been as exposed. Not to say that we don't have any, but we do watch them closely. We do watch them closely, particularly when we hear about the slowdown that's occurring in China as a result of some of these tariff discussions. So it is something we watch closely. We try to be conservative about it. I would say we're probably more conservative than most in exposure to those regional players, but we do have some that we do business with, and we're watching them closely.

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Operator [52]

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Our next question comes from the line of a follow up from Brian Hogan of William Blair.

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Brian Dean Hogan, William Blair & Company L.L.C., Research Division - Associate [53]

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Yes, a question on the logistics business, actually. The gross profit margin has been declining in the past several quarters and is down 300 basis points year-over-year in Quarter 2. What do you expect for the gross margin trend-wise? I mean, is it depressed, and for what reasons? And then...

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Victor M. Garcia, CAI International, Inc. - President, CEO & Director [54]

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Sure. If you actually look at the different services, the gross margin has been stable. What's changed is the mix of business -- the margin amongst the mixed businesses. So as an example, in our brokerage business, the gross margin there is 2x what it is in our intermodal business, just the way the math works. We've priced based on get a certain amount of profit for each move, but the way that the margin works out, there's 2x as much margin in the brokerage business as there is on a percentage basis, as there is in the intermodal business. We've had more very consistent and significant growth in our intermodal business, which is fantastic. There is opportunity there. We think that the brokerage business will increase in growth relative to where it was last year, so we would expect some margin improvement overall in the company in 2019 as compared to 2018. And that wouldn't be because margins in the marketplace are increasing, it's just, again, our mix will be changing to where brokerage will be a slightly higher percentage of the consolidated than the intermodal will.

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Brian Dean Hogan, William Blair & Company L.L.C., Research Division - Associate [55]

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Sure. And then, is that business having halo effects on the container business and rail business? I mean, are they actually benefiting the utilization of those other businesses?

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Victor M. Garcia, CAI International, Inc. - President, CEO & Director [56]

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I wouldn't say at this point. There have been cross opportunities in terms of opening doors for other groups, but I would say that the level of improvement in our utilization having to do with logistics, I wouldn't say it's significant at this point.

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Brian Dean Hogan, William Blair & Company L.L.C., Research Division - Associate [57]

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Sure, and then going back to the container business. Your conversations with your customers, are they leaning towards leasing more of their fleets? How has that conversation changed over time? And then a follow up to that would be the competitive environment with the three -- just everybody out there. Is anybody being irrational? How would you describe the competitive environment?

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Victor M. Garcia, CAI International, Inc. - President, CEO & Director [58]

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So generally speaking, for the last few years, we've seen a greater proportion or a greater interest by the shipping lines to lease, and we've seen a greater interest in, as you've seen in our result, a lengthening of leases. And so there is more dependence on the leasing community. It's a combination of the overall capital requirements of the shipping lines and the competitiveness of leasing. So we are seeing a larger proportion of the investment coming from the leasing community. And the competitive landscape, like I said earlier today, it feels very much like it did in the first quarter of last year. There are smaller deals that are being aggressively pursued, but not any more aggressively than they were last year.

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Operator [59]

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And I'm showing no further questions at this time. I will now turn the call over to Mr. Victor Garcia, President and CEO, for closing remarks.

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Victor M. Garcia, CAI International, Inc. - President, CEO & Director [60]

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Just want to say thank you, everyone, for joining our fourth quarter and full year 2018 earnings call. We look forward to in a few weeks just reporting our first quarter results. Thank you.

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Operator [61]

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