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Edited Transcript of CAI earnings conference call or presentation 5-May-20 9:00pm GMT

Q1 2020 CAI International Inc Earnings Call

San Francisco Jun 12, 2020 (Thomson StreetEvents) -- Edited Transcript of CAI International Inc earnings conference call or presentation Tuesday, May 5, 2020 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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* Chris Tsung

Webber Research & Advisory LLC - Analyst

* Michael C. Brown

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

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2020 earnings conference call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to turn the call over to your host, Timothy Page, Chief Financial Officer. Please go ahead, sir.

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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 Victor Garcia, our President and Chief Executive Officer.

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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 First Quarter 2020 Earnings Conference Call. I would first like to thank our employees for working tirelessly during this uncertain time period, transitioning quickly to working remotely and doing so while continuing to keep a focus on serving our customers.

The first quarter of 2020 has been supported by the continued strong utilization of our fleet. The average utilization of our owned container fleet during the first quarter was 98.4% as compared to 98.5% during the fourth quarter and stands currently at 98.1%. We reported container lease revenue of $69 million in the first quarter, a 1.6% decrease from the fourth quarter due to limited investment during the quarter and the ongoing sale of equipment.

During the first quarter, we received commitments for 80% of our unbooked container equipment at the factories that will be leased out during the second quarter. Overall, we have less than 5,000 TEUs of equipment unbooked, which places us in a strong position to purchase equipment and invest when the market outlook improves.

For the first quarter, we reported net loss of $3.5 million or $0.20 per fully diluted share attributable to CAI common stockholders compared to $0.87 in the first quarter of 2019. The loss is primarily attributed to a charge of $19.2 million for the impairment of our railcar fleet. Adjusted net income, including this impairment charge and a $1.1 million of costs related to our ongoing strategic review, was $12 million or $0.67 per fully diluted share.

The container division continues to perform well, and we expect that we will continue to report strong utilization and cash flow over the coming quarters. Storage and handling costs remain low by historical standards of $4.4 million for the container division and below the fourth quarter amount of $4.9 million.

Used container prices have declined slightly during the first quarter but remain at strong levels by historical standards. We continue to proactively manage our container fleet and have reduced our sale of inventory of equipment in the U.S. and Europe. We expect that with the supply disruptions that have occurred during the first quarter and the ongoing blank sailings by our customers to the U.S. and Europe, that secondary prices of containers outside of Asia will remain strong.

Last quarter, we reported that we were recovering equipment from one of our lessees and that we were not recognizing revenue until actual receipt of cash. Based on our discussions with the customer, we expect that their restructuring efforts will progress and payments will improve during the second half of the year. The customer has continued to make partial payments during the quarter.

Due to market conditions, we have decided to terminate the sales process of our rail division. As a result, we will again account for rail as part of our ongoing operations. However, our strategy is to find opportunities to reduce our overall investment in rail and look for ways to monetize our investment in the asset with the future exit of the business when the market outlook is more conducive to a sale. As part of valuing the railcar assets, at the end of the quarter, we recognized a $19.2 million pretax noncash impairment charge, which includes a decision to scrap 420 off-lease cars, older cars primarily tied to the energy markets.

During the first quarter, our railcar operating performance remained stable with utilization of 85% during the quarter compared to 84% in the fourth quarter of 2019. The overall market for railcars is weak due to the economic downturn. However, despite this weak demand environment, we have ongoing inquiries for many of our off-lease railcars, and we have minimal lease expirations during the remainder of 2020, which we expect to provide support for the ongoing cash flows of the business. Many of the cars we have remaining to lease are in specialized areas where we have targeted customers that we have been in dialogue with. Although the pandemic has delayed some decisions, we expect to be able to make progress in leasing out additional cars over the course of the next several weeks. Credit profile of our rail customers is strong and diversified, so we do not expect ongoing payment concerns with the portfolio.

The revenue and gross margin of the logistics segment was strong during the first quarter, including during March, the first month where domestic trade was impacted by the COVID-19 pandemic. In March, we experienced a change in the mix of our customer shipments, an increase in shipments of goods deemed essential being offset by a drop-off in demand for nonessential shipments. We are in the process of making some cost reductions in the segment to bring costs in line with expected revenues. Logistics revenue in the first quarter of 2020 grew to $30.1 million compared to $27.7 million in the first quarter of 2019.

The COVID-19 pandemic and the global reaction to it has created an unprecedented level of uncertainty in the business and increased credit risk with our shipping line customers. Our results for the remainder of the year will be driven by the performance of the container division and the contractual performance of our customers. Despite limited incremental container demand in the second quarter, we expect utilization to remain strong due to the long-term nature of our contracts with our customers and the disciplined management of our off-hire container fleet. With our ongoing focus on managing utilization, we are well positioned to manage through this uncertain period.

Credit remains a key focus area for us. Through March and April, our customers have met their payment terms with us. We believe that we will be able to work collaboratively with our customers over the next few months and that the contractual obligations our customers have to us will be met. We are in a strong liquidity position with over $150 million of cash available and -- on hand and credit available under our credit facilities without any need for additional collateral. Overall, we have $537 million of unused credit lines that we can use to purchase equipment.

Although there is no certainty that our customer will be able to receive outside financial assistance over the coming months, we are encouraged by reports of financial support being considered to some of our Asian customers. Some of our larger Asian customers are already partly government-owned, and thus, we are expecting that there will be continued support for their operations.

The European shipping carriers are some of our biggest customers. We believe that because of their market share, expansive scope of operations and importance to the global supply chain, they will be able to gain sufficient financial support from the financial community to manage through this expected contraction in container shipping demand. As with all our customers, we will remain in close discussion with them and look to manage through this uncertain period.

With that, I'll turn the call over to Tim Page, our Chief Financial Officer, to review the financial results in the quarter in greater detail.

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

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Thank you, Victor. Good afternoon, everyone. Consolidated revenue in Q1 was $105 million compared to $106 million in Q4 of 2019, the difference primarily relating to container revenue. Container revenue in Q1 was $69.1 million, $1.2 million less than Q4. The reduced revenue was primarily due to the cash basis revenue recognition associated with the shipping line customer Victor discussed in his remarks and because there's 1 less calendar day in the first quarter than in the fourth quarter. Based on dialogue with customers and our April results and because the vast majority of our revenue is tied to long-term contractual lease commitments, we are anticipating that Q2 container revenue should be flat with Q1. There's 1 more billing day in the quarter, offsetting a slight expected decrease in utilization.

Rail revenue in Q1 was $5.8 million, which was $0.1 million less than Q4. We have lease contracts in place whereby additional cars are expected to begin generating rental income in Q2. Consequently, we expect rail rental revenue to be slightly higher in Q2 than Q1.

Logistics revenue in Q1 was $30.1 million as compared to $29.9 million in Q4 and was 8.6% higher than the $27.7 million we recorded in Q1 of last year. The results were in line with our expectations for Q1, a quarter which is typically a seasonally weak time. We were encouraged with the year-over-year increase we saw in the quarter, particularly in light of the significant reduction in head count we undertook at the end of Q2 of last year and in a quarter where we began to deal with the impact of COVID-19 on economic activity.

Overall, gross margin increased by $0.1 million as compared to last year with a slight decline in gross margin percent.

EBITDA in Q1 of this year was a loss of $0.3 million as compared to a loss of $1.6 million in Q1 of last year. The improvement in EBITDA was largely a result of the reduction in employee costs I just discussed. We began to see some declines in volume towards the end of Q1 and during the month of April. At the same time, margin percent has increased so that overall performance has not seen much impact. The impact on the remainder of Q2 and the balance of the year is difficult to predict. But we feel, with the number of states beginning to return to work, the logistics business should be able to operate somewhat close to breakeven EBITDA next quarter and improve marginally during the rest of the year.

Excluding the $19.2 million impairment charge that Victor discussed earlier, depreciation expense for the first quarter was $27 million, all container-related. Given the low level of container investment and the impact of ongoing container sales, we would expect a slight decrease in container-related depreciation expense. However, rail depreciation will be approximately $2.1 million per quarter as rail is now accounted for as an ongoing operating segment.

Gain on sale of containers was $1.6 million in the first quarter. We expect approximately $1 million in the second quarter. Storage and handling costs were $5.7 million in Q1 as compared to $5.9 million in Q4 of last year. We'd expect Q2 to be in the $5.7 to $6 million range.

Administrative expense was $11.8 million in the first quarter, a decrease of $3.5 million as compared to Q4. Most of the decrease is a result of a $5.2 million accounts receivable reserve charge we took last quarter related to one of our container customers. Adjusting for that charge and several other nonrecurring items, G&A expense in Q1 was approximately $0.7 million higher than Q4, most of which were professional fees related to our ongoing strategic review process. We'd expect G&A in Q2 to be in the range of $12 million to $12.5 million.

Interest and other expense was $20.6 million in Q1 as compared to $22.1 million in Q4, a decrease of $1.5 million. The decrease in interest expense was primarily due to a 25 basis point decline in the average interest rate across all of our credit facilities caused primarily by the significant drop in LIBOR rates that occurred during the quarter. We expect interest costs in Q2 will decline again but at a somewhat lower rate than what we experienced in Q1.

The total book value of our container revenue assets -- revenue-earning assets at the end of Q1 was $2.4 billion, a decrease of $27 million as compared to 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 $2.1 billion, flat with Q4 of last year. Our unrestricted cash balances increased approximately $68 million during the quarter. As of today, total cash and liquidity available under our credit facilities is approximately $155 million.

Based on our current outlook for the second quarter, we would expect liquidity to increase during the quarter as a result of strong committed contractual cash flow and no investment commitments. While it's difficult to predict the certainty, based on various scenario modeling we have undertaken and an expectation of limited investment in equipment, we believe we will continue to have adequate liquidity in future quarters to deal with issues related to COVID-19. Furthermore, we believe our liquidity position will allow us to be favorably positioned to take advantage of an expected uptick in container demand as the global economies and world trade recovers.

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 your first question is from Michael Brown of KBW.

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Michael C. Brown, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [2]

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I appreciate the color on the second quarter and your expectation on container leasing specifically. Could you give a little bit more color as to how you're thinking about the second half of the year? It sounds like you are expecting a recovery and you want to be positioned for that. So what are your thoughts on how the second half relative to the first half could look? As we stand today, obviously, there's not a lot of visibility, but any color there would be helpful.

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

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Well, we certainly don't -- the normal peak season would be happening in the second quarter. Right around this time, we would start seeing demand for equipment increase. We're not expecting that. So -- and we expect that although it's really uncertain, probably and not until we get into the September kind of time frame that we'd start seeing demand start to pick up. There is going to be a fair amount of equipment available in the depots we expect by that time. And so then for new equipment, it will probably be somewhat delayed.

But overall, I think our results, as we said, we expect to continue to have strong utilization. We have a lot of contract cover. We have strong redelivery provisions. So we think we'll continue to generate good cash flow during this uncertain period. But investment this year will likely be much more reduced and much more delayed because of the interruption during the second quarter.

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Michael C. Brown, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [4]

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Got it. And then if we could shift to customer credit, I appreciate all of the helpful commentary you guys gave in the press release and on the call. What I'm interested to hear about, from your perspective, is, how do you think about how customer credit could differ in this downturn versus the financial crisis? And then if you could layer on how your view of the shipping lines going into these downturn differs than kind of going into the financial crisis? And I guess kind of what are the puts and takes as to how to consider their financial strength this time around?

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

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Yes. It's a good question. I was here and we managed through that period of time. We went public in '07, so it was really '08, '09 that we had to deal with the financial crisis. And I remember there was a lot of concern at that time that we had about potential bankruptcies of shipping lines. And there was a lot of government support that came in that saved a lot of shipping lines.

The major difference between, I think, 2008, '09 and what we're dealing with today is not the severity of the problem because it may be more severe this time around. But the difference is, when you look at what happened with the Hanjin bankruptcy in 2016, the follow-on of that was that a lot -- there was a lot of consolidation amongst the different shipping lines. And so there are a lot fewer carriers now, and the people who would -- may have gone into more financial distress would have likely -- they've all been consolidated into bigger companies. And so there are fewer companies out there, and they have significantly more capital. Many of them, as I said before, have some form of government support already in their capital structure.

So the major difference that we see is that I think that the customers that are out there have the wherewithal to withstand this downturn. And as I mentioned about the European carriers, they've been some of the most successful of all of the shipping lines in terms of growth and profitability. And I'm confident that they'll be able to work through this period of time and manage through.

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Michael C. Brown, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [6]

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Okay. Great. If we shift gears to the rail business, could you share a little bit more color as to why the kind of the decision to move it back to continued operations? Is there any reason why it just cannot say in discontinued operations for the foreseeable future? And it sounded like in the press release, you're still committed to eventually selling the business. I just wanted to confirm that that's true. So at some point when the market shows more stabilization, can you confirm that you're still planning to sell the railcar leasing business?

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

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No. I think we said it -- we've terminated the process because with all of the uncertainty, it's just not the right time to be selling any business like that. So it doesn't make sense for us to continue to -- and we'd have to be -- to keep that accounting treatment, we'd have to be continuing to commit to marketing that portfolio. And it just doesn't make sense in this kind of environment.

But longer term, we are looking to find opportunities to reduce our exposure in rail. We'll continue to look at opportunities of selectively selling assets. And as we noted in the press release, we sold $10 million of assets in April at a slight gain, and we'll continue to look for other opportunities to reduce our exposure there. And then longer term, yes, we will look to exit the business in some time in the future.

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Timothy B. Page, CAI International, Inc. - CFO [8]

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Michael, there's very specific GAAP requirements, a list of them, that -- for something to remain in the held-for-sale category. And we weren't able to meet all of those specific requirements. So we didn't have a lot of choice other than -- to do anything other than to remove it from that and account for it as an ongoing business segment.

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Michael C. Brown, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [9]

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Okay. Great. Maybe just one last one if I could just sneak one more in. So it looks like you're kind of running with higher cash levels than you have historically. Sounds like you're looking to run with little more liquidity in this environment. Just as we think about modeling going forward, is that kind of the right level over the next couple of quarters? And I guess what would kind of be the right run rate going forward?

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

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We'll be looking to maintain about the same level of cash on hand. Our view is just to have a little bit more liquidity on the balance sheet as we kind of go through these more uncertain periods of time. But we'll continue to have -- we expect to continue to be generating excess cash flow, and we'll be looking to pay down some debt as we go through the next just few months.

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Operator [11]

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(Operator Instructions) Your next question is from Chris Tsung of Webber Research.

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Chris Tsung, Webber Research & Advisory LLC - Analyst [12]

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Thanks so much for your good first quarter, and thanks for all the color on what I think is a very topical issue right now regarding counterparty risk in all the container lines. And I know you guys touched on this earlier, and Michael has asked a question about this. But perhaps maybe if I can just dig in a little bit more, just the discussions that you're having with the customers, are you seeing any of them requesting some sort of like, I guess, payment plans? Or are you guys working with them to kind of help them get through this sort of pandemic that we're seeing? Or is it just more, everything is okay, and there should be -- I mean you guys are kind of insured and covered through your -- I guess, your insurance plan for insolvency. Sorry, that was like 2 questions in one.

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

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So -- look, we have a lot of customers, big and small, regional customers as well as global customers. I would say that -- Chris, I think you're typing, and I think it's coming through. So we've had some modest requests, and from a customer relationship standpoint, we're working with customers. But we don't have anything that we're dealing with, that we would deem to be kind of an indicator of distress. We're comfortable with our collections process. Actually, in some of our segments, our collection process has been improving because we've been putting extra focus on collections. So I think we feel good about the cash generation of the business, and there's no issue of distress that we're dealing with right now.

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Chris Tsung, Webber Research & Advisory LLC - Analyst [14]

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Okay. And I guess on to the insurance for insolvency, I note that the $5 billion that you guys were referring to in Q4 that it was a question that was put up that CAI is insured in those instances. Like have you guys expanded on that protection or kept it the same or...

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Victor M. Garcia, CAI International, Inc. - President, CEO & Director [15]

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Yes. It's an annual policy. We usually don't change it until renewal time. So the next renewal time is November, so we won't expect any change in our policy.

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Chris Tsung, Webber Research & Advisory LLC - Analyst [16]

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I see. Okay. And I guess you guys touched on in your presentation that second box prices have been remaining strong. Are you guys looking to kind of procure additional boxes? And your utilization has been incredibly high. Are you guys seeing at the moment to kind of lean in a bit and purchase some containers later this year?

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Victor M. Garcia, CAI International, Inc. - President, CEO & Director [17]

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Yes. I think the factor for us is we don't expect in the very short term to be a lot of demand. And so to be purchasing containers where we're not sure what the price will be, say, 3 months from now, so we're holding back in making an investment. I think we're really pleased with the fact that we've leased out what we believe are attractive rates the -- most of the equipment that we had coming into the year that was in the factory. So not only do we have very strong utilization of our depot equipment, but our factory inventory is significantly below where we would normally be. And so that really puts us in a good position to evaluate the market and when and at what level the returns are.

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Chris Tsung, Webber Research & Advisory LLC - Analyst [18]

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I see, okay. And I guess I mean the reason why I asked is because I've been reading that some customers, container lines are stockpiling due to the supply chain disruption, where blank sailings are preventing certain containers from going from one location to the other. And some container lines may actually stockpile to -- containers to kind of buffer against an uncertainty down the supply chain. And I guess this is not something you're seeing.

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Victor M. Garcia, CAI International, Inc. - President, CEO & Director [19]

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We saw a little bit of -- because of the supply chain disruption, we saw a little bit of the demand that came in around March. And it was largely because that box is in the wrong places or countries that were in lockdown, and they couldn't get the equipment evacuated back to where they needed it, so they had to lease some equipment. So we had that opportunity. But that was transitory. I don't expect, given the level of equipment that's out there, that there'll be an initial rush just to try to stockpile equipment. I don't think our customers are worried about not having access to equipment because of dislocation. I think they'll continue to reposition equipment as best they can, and I don't see that as a big factor.

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Operator [20]

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And you have a follow-up from Michael Brown of KBW.

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Michael C. Brown, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [21]

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I have 2 quick follow-ups. On the rail business, I guess how much of the remaining business is tied to the energy markets? Does -- the railcars that you scrapped, does that really account for most of it? And were those tanks or railcars related to fracking? And what was the age of those railcars? Were they purchased as used railcars?

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

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Sure. Most of the cars that we are scrapping, we had some old coal cars that we -- we're scrapping. We also have some cars that were tied to the fracking industry that were old cars that we didn't think would be in demand and were off-hire. Overall, we have less than $30 million in exposure to the energy market. We don't have any tanks that are tied to oil trade. We have some that are tied to propane and stuff like that, but that's a different -- whole different category and issue.

So we don't have any, what I would term energy exposure in the tank side, and we have less than $30 million of exposure to energy-related shipments. And some of that, I'm including in that some of these cars reversal between being in the construction cement trade. A significant amount of our exposure is actually in cement and not in the fracking side, and it's under long-term contracts that we think customers will renew.

So we're -- relative to the industry on rail, we are underexposed to the energy sector. And I think if you looked at our -- although we've taken some charges related to rail, our mix of portfolio, what we have is actually a better mix than, I think, what you would see in most of the rail portfolios out there. There's a lot more energy exposure that people have that we don't have, and I think we're dealing with the exposure we do have, but it's a much more balanced fleet.

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Michael C. Brown, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [23]

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Great. Just one other follow-up on my last question about kind of your liquidity levels, and you mentioned that as you generate more cash flows, you'll look to take down some of your debt levels. Do you have, as part of your authorization, the ability to buy back any of your preferred shares? Do you have any desire to do that in the open market?

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Victor M. Garcia, CAI International, Inc. - President, CEO & Director [24]

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We have -- our authorization didn't have the contemplation of buying back preferred. So that's something that the Board would have to approve.

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Operator [25]

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(Operator Instructions) And there are no further questions in queue. I will now turn the call over to Victor Garcia for closing remarks.

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Victor M. Garcia, CAI International, Inc. - President, CEO & Director [26]

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I appreciate everybody being on the call and look forward to talking about our next quarter's results and appreciate the interest. Thank you.

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Operator [27]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.