Textainer Group Holdings Ltd (TGH) 2009 Q2 法說會逐字稿

Good day and welcome to Textainer Group Holdings second quarter 2009 conference call. Today's call is being recorded. At this time, for opening remarks and introductions I would like to turn the conference over to Phil Brewer. Please go ahead, sir.

Thank you and welcome to our second-quarter 2009 earnings conference call. Joining me on this morning's call are John Maccarone, President and Chief Executive Officer; Ernie Furtado, Senior Vice President and Chief Financial Officer; and Robert Pedersen, Executive Vice President.

Before I turn the call over to John and Ernie, I would like to point out that this conference call contains forward-looking statements within the meaning of US securities laws. These statements involve risks and uncertainties, are only predictions and may differ materially from actual future events or results. It is possible that the Company's future financial performance may differ from expectations due to a variety of factors. Any forward-looking statements made during this call are based on certain current assumptions and analyses made by the Company in light of its experience and current perception of historical trends, conditions, expected future developments and other factors it currently believes are appropriate. Any such statements are not a guarantee of future performance, and actual results or developments may differ from those projected.

Finally, the Company's views, estimates, plans and outlook as described within this call me changes subsequent to this discussion. The Company is under no obligation to modify or update any or all of the statements that are made herein, despite any subsequent changes the Company may make in its views, estimates, plans or outlook for the future. For a discussion of such risks and uncertainties, see the risk factors included in the Company's annual report on Form 20-F for the year ended December 31, 2008, filed with the Securities and Exchange Commission on March 16, 2009.

I would also like to point out that during this call we will discuss non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of the non-GAAP measures to the most directly comparable GAAP measures will be provided either on this conference call or can be found in the Company's August 11, 2009 press release.

I would now like to turn the call over to John.

Thank you. I'll begin on slide three, welcoming everyone to our second-quarter 2009 earnings conference call. On today's call I will first review Textainer's second quarter 2009 highlights, the current market environment and our growth strategy. I will then turn the call over to Ernie to discuss our financials and quarterly dividend. Phil will then provide a summary of our recent transactions as well as information on the container sale market. And then, afterwards, we will open it up to questions.

Please turn to slide four. During a difficult time for the world economy and the container shipping industry, Textainer reported solid results which we believe were directly related to our past decision to increase the percentage of our fleet committed to long-term leases. Specifically, our success at having 70% of our container fleet secured on long-term contracts has served to lessen the effects of a severe cyclical downturn in the industry.

I will now review the second quarter highlights. During the quarter we generated net income of $25.6 million excluding unrealized gains on interest rate swaps net of controlling interest; drew upon our sizable contracted revenue stream to declare a dividend of $0.23 a share during a time in which we have maintained a conservative payout ratio, significant financial flexibility and no new build CapEx commitments.

The second-quarter dividend represents our eighth consecutive quarterly dividend since our October 2007 IPO and the fifth consecutive dividend at the increased rate of $0.23 a share. We have now distributed cumulative dividends of $1.78 per share since our IPO.

We also achieved utilization averaging 86.9% for the quarter. Utilization decreased 3.5% during the quarter to 86.3% million as of June 30. The average weekly decline in the second quarter was 0.27% per week compared to 0.35% per week in the first quarter. Utilization decreased by 1.1% in June and then increased by 0.8% in July. The increase in July was mainly due to the purchase and lease-back transaction we describe herein, which adds 28,000 containers to the fleet at 100% utilization.

Complementing our solid quarterly results, we continued to act opportunistically to capitalize on current market conditions in an effort to enhance our industry leadership.

On slide five I'll detail our recent successes. We made two accretive acquisitions in fleet management rights, taking advantage of the current cyclical downturn and adding 300,000 TEU to our fleet, which represents a 15% increase in fleet size. We'll discuss these acquisitions in more detail later in the call.

Since the end of the second quarter we are pleased to have entered into two additional transactions. Importantly, both these transactions are expected to be accretive, which is also true for our two most recent acquisitions of management rights. In July we concluded a purchase-leaseback transaction for more than 28,000 containers with a major Asian shipping line. These older containers will be sold as they are redelivered over the next few years. We believe this transaction was beneficial for both Textainer and the shipping line.

For example, the shipping line was able to raise capital during the time of extremely tight access to credit. Regarding Textainer, we believe we are well positioned to benefit from the lease-back and eventual sale of these containers.

In a transaction effective August 1, we purchased approximately 29,000 containers that we had been managing for a large institutional investor. These containers are, on average, six years old and have an estimated remaining useful life in marine service of six years before being sold into the secondary market.

Of note, we expect this transaction to produce returns that are significantly higher than the management fees previously earned on these containers.

And finally, we earned $16.3 million in the second quarter and $19.4 million so far this year by repurchasing our bonds. We'll discuss this in more detail later in the call.

Turning to slide six, I'll provide some comments on the outlook for the market. While the market continues to be very difficult for our customers, there have been no major shipping line failures. According to Container Trade Watch, it appears that container traffic for the first half of 2009 was down by 15% to 20% compared to the first half of 2008. Container consultants Drewry, Maersk Line and Kuehne & Nagel all recently announced that they expect container volumes to be down by about 10% for the year.

On the supply side there are signs that a combination of canceled or postponed vessel orders and a substantial increase in scrapping of older vessels could limit the increase in the fleet size to approximately 10% in 2009. In conjunction with this, industry sources such as Container Trade Watch believe that, if operators continue to redeliver vessels from expiring charter agreements, growth in deployed containership capacity may end up at close to zero.

In terms of an industry recovery, Container Trade Watch also predicted that the first industry sector to recover would be terminals, followed by container lessors. The reason for the publication's optimistic view of the container leasing sector is that, once container lines utilize their own idle containers, they will have little option but to pick up idle leasing company depot containers when demand increases. In terms of new containers, manufacturers are still closed, and there's a strong possibility that there will be no new production for the remainder of 2009.

As a result, the world container fleet may actually shrink by 5% this year and bring supply and demand into balance when cargo volumes improve.

Textainer's utilization averaged 86.9% for the second quarter of 2009. While average utilization decreased compared to the average of 90.7% for the first quarter, the rate of decline continues to decrease and average utilization has begun to stabilize. As I mentioned a moment ago, we actually experienced an increase in July due to our purchase-leaseback transaction. In fact, for the most recent 10-week period, utilization has averaged 86.2%, which is what it was for the week ending August 7.

It's also important to note that more than 75% of Textainer's off-hire inventory is located in Asia, where we believe that demand will likely increase when cargo volumes improved.

On slide seven I'll now review our growth strategy. With more than $350 million of liquidity, we expect to continue to take advantage of additional attractive opportunities, as we've demonstrated so far during 2009. Consistent with our recent management rights acquisitions, we'll continue to look to expand our fleet through similar accretive transactions that we believe will be available. We will also continue to actively seek to enter into the purchase-leaseback transactions, complementing our recent 28,000-container transaction. So far in 2009 we have reviewed $138 million of potential deals, and we remain optimistic that we will identify other favorable deals.

In addition, we remain vigilant in looking for further opportunities to purchase containers that we currently manage and are optimistic that we will continue to be successful in this area in the future.

Finally, we have purchased 1150 new refrigerated containers so far this year and committed 1020 of them to attractive long-term leases, and we expect to buy more reefers this year. In summary, we are very pleased with our accomplishments so far in 2009 during a challenging time for the global economy and the container shipping industry. I'd now like to turn it over to Ernie.

Turning to slide eight, I'd like to take this opportunity to review our financial performance for the second quarter and the six months ended June 30, 2009.

The fleet size at the end of the quarter consisted of 2.3 million TEU, of which 43% were owned and the remainder were managed, subleased or on finance lease. As discussed, utilization for the total fleet for the second quarter was 86.9%.

First I'll review the second-quarter results. Revenues were $54.4 million as compared to $69.6 million for the particularly period. $8.9 million of this decrease is due to a decline in the volume of container trading. Net income excluding unrealized gains on interest rate swaps net of noncontrolling interest was $25.6 million, which represents a 5% increase over the $24.5 million in the prior-year quarter.

We believe net income excluding unrealized gains or losses on interest rate swaps is a useful performance measure. These gains or losses are non-cash, non-operating items, and Textainer tends to hold its interest rate swaps until maturity. Over the life of an interest rate swap held to maturity, the unrealized gains or losses will net to zero.

Lease rental income decreased by $4.4 million or 9% compared to the prior-year quarter, primarily due to an 8 percentage point decrease in utilization and a 6.3% decrease in rental rates, partially offset by a 4.2% increase in fleet size. Management fee revenue decreased by $0.9 million or 13%, primarily due to lowered net operating income and a decrease in the size of the managed fleet other than the Amficon fleet, and the Amficon fleet contributed $0.5 million in management fees during the quarter.

Net gain on trading containers sold decreased by $2.1 million or 93%, primarily due to an 84% decrease in the number of units sold as a result of the Company concentrating on selling its own in-fleet containers instead of taking on additional trading containers. Gains on sales of containers decreased by $0.9 million or 25%, primarily due to lower sale prices, partially offset by a 46% in the number of units sold.

Direct container expense increased by $2.6 million or 38%, primarily due to increased storage expense. Depreciation expense decreased by $2.5 million or 18%, due to an increase in estimated residual values used in the calculation of depreciation expense, partially offset by an increase in the size of the owned container fleet.

Short-term incentive compensation expense decreased by $0.4 million or 38%, due to lower net income, which is the primary determinant of short-term incentive compensation.

Bad debt expense increased by $1 million or 213%, due to an increase in the allowance for doubtful accounts. Interest expense decreased by $2.3 million or 43%, primarily due to a decrease in average interest rates of 1.7 percentage points, partially offset by an increase in average debt balances, which were $51 million higher.

Realized losses on interest rate swaps increased by $2.2 million or 138%, due to a decrease in interest rates between the periods. A gain on early extinguishment of debt of $16.3 million was recorded in the quarter for the repurchase of $33.8 million of our bonds at a discount. The gain net of noncontrolling interest and income taxes was $12.9 million.

EBITDA was $50.5 million, $3.2 million higher than the prior-year quarter.

Now I'll review the results for the six months ended June 30, 2009. Revenues were $114 million as compared to $141.8 million from the prior-year period. $20.4 million of this decrease is due to a decline in the volume of container trading. Net income excluding unrealized gains on interest rate swaps net of the noncontrolling interest was $45.4 million, which represents a 3% decrease over the $47 million in the prior-year period. Lease rental income decreased by $2.8 million or 3% compared to the prior-year period, primarily due to a 5.4 percentage point decrease in utilization and a 4.5% decrease in rental rates, partially offset by a 6.2% increase in fleet size.

Management fee revenue decreased by $2.5 million or 18%, primarily due to lower net operating income and a smaller size of the managed fleet excluding the Amficon fleet and a decrease in sales commissions due to lower sale prices partially offset by $0.5 million in management fees from the Amficon fleet.

Net gain on trading containers sold decreased by $20.4 million or 85%, primarily due to an 84% decrease in the number of units sold as a result of the Company concentrating on selling its own it-fleet containers instead of taking on additional trading containers. Gains on sales of containers decreased by $2.1 million or 29%, primarily due to lower sale prices partially offset by a 23% increase in the number of units sold.

Direct container expense increased by $4.4 million or 34%, primarily due to increased storage expense. Depreciation expense decreased by $4.2 million or 16%, due to an increase in estimated residual values used in the calculation of depreciation expense, partially offset by an increase in the size of the owned container fleet. G&A expense decreased by $0.9 million or 8%, primarily due to lower travel costs and professional fees.

Short-term incentive compensation expense decreased by $0.6 million or 33% due to lower net income, which is the primary determinant of short-term incentive compensation. Bad debt expense increased by $1.6 million or 252%, due to an increase in the allowance for doubtful accounts. Interest expense decreased by $5.9 million or 48%, primarily due to a decrease in the average interest rate of 2.3 percentage points, partially offset by an increase in average debt balances, which were $83 million higher. Realized losses on interest rate swaps increased by $5.4 million or 238%, due to a decrease in interest rates between the periods.

A gain on early extinguishment of debt of $19.4 million was recorded for the repurchase of $39.9 million of our bonds at a discount. The gain, net of noncontrolling interest in income taxes, was $15.4 million. EBITDA was $92.6 million, or $1.2 million higher than the prior-year period.

Moving to slide nine, you'll see that we have maintained a strong balance sheet during the second quarter of 2009. Of note, as of June 30, 2009, our cash position was $49.5 million. Our total assets as of June 30, 2009, were $1.2 billion and leverage remains an attractive ratio of 1.1 to 1.

Turning to slide 10, Textainer's dividend for the second quarter will remain unchanged at $0.23 per share. This represents 43% of net income excluding unrealized gains on interest rate swaps net of noncontrolling interest for the quarter. Dividends have averaged 47% of net income excluding unrealized gains or losses since the IPO, enabling the Company to retain capital for growth. We have paid dividends for 20 consecutive years, and it's an important part of the total return that Textainer provides. As John mentioned, we've continued to pay dividends during a time when we have maintained a conservative payout ratio, significant financial flexibility and no new build CapEx commitments.

Textainer's Board of Directors considers dividends on a quarterly basis. Historically, Textainer has paid about 50% of net income excluding unrealized gains or losses on interest rate swaps in dividends. But the Board takes a fresh view every quarter and sets the dividend subject to cash needs for opportunities that may be available to us.

We are pleased with our second-quarter results, and now I'll turn it over to Phil.

Thank you. On slide 11, I would like to take a moment to talk about our purchase of the rights to manage the Capital Intermodal Xines Fleet, as well as the purchase of approximately 29,000 containers that we once managed. I will discuss the purchase-leaseback of 28,000 containers as well as provide a few observations about container sales and prices.

Textainer assumed management of the Capital Intermodal Xines Fleet on 1 July. The composition of the fleet is as follows -- approximately 154,000 TEU, 67% 20-foot standard, 6% 40-foot standard, 22% 40-foot-high cube, 4% 40-foot-high cube reefer and 1% other container types.

The average age of the fleet was approximately 2.5 years. As discussed during our last earnings call, we also acquired the rights to manage the 145,000 TEU Amficon fleet as of 1 May. The Amficon fleet is primarily comprised of 20-foot standard, 40-foot-high cube and 20- and 40-foot flat-rack and open-top containers with an average age of six years, and thus is older than the Capital Intermodal Xines Fleets.

Importantly, both acquisitions are expected to be immediately accretive to earnings and are consistent with our strategy of growing our fleet both organically and through acquisitions.

In August we concluded the purchase of approximately 47,000 TEU with an average age of six years from one of the owners of containers in our fleet. We are very familiar with the performance of these containers, as they have been in our fleet since they were new. Besides our familiarity with the containers' performance, purchasing containers in our fleet is attractive for other reasons including the lease-out status of the containers and the reduced rollover risk. We continue to discuss such purchases with other owners of containers in our fleet.

In July we entered into a purchase-leaseback with a major Asian shipping line for 28,000 containers. We've also had or are having discussions with many other shipping lines regarding similar transactions. We continue to believe that there is an attractive opportunity to grow our purchase-leaseback business as shipping lines are eager to strengthen their balance sheets as a result of the challenging conditions in the credit markets.

Total container sales are running at approximately the same rate as in 2008, the year during which we sold 85,000 containers. The run rate for 20-foot standard containers is approximately the same as last year, but we are selling relatively more 40-foot-high cube containers and fewer 40-foot standard containers.

Sales of containers for our fleet are up more than 10% this year, but sales of trading containers are down by more than 50%. The primary reason for the decline in trading sales is the lack of inventory. We simply do not have many trading containers to sell. Most of the trading containers sold in 2008 were sourced from deals executed in 2007 or early 2008. Once the leasing markets started to decline in the third quarter of 2008, we significantly reduced our purchases of trading containers due to the increased volatility of prices and the priority we place on selling in-fleet units. This lack of inventory is reflected in the decline in trading sales in 2009.

Container prices continued to decline worldwide. We've seen prices decline approximately 30%, $300 to $350 for 20-foot standard containers, declines of $400 to $450 for 40-foot standard containers and $600 to $650 for 40-foot high cube containers over the last 12 months, with most of that decline occurring during 2009.

I would now like to open the call for questions.

(Operator instructions). Gregory Lewis, Credit Suisse.

Regarding the announcement about the purchase and lease-back transaction with the major Asian shipping liner company, can you provide a little bit more color about the transaction? It doesn't sound like you want to get into specifics regarding who the customer is. But in other words, can you talk about was it an existing relationship? When you did due diligence on the counterparty risk, is that potentially -- does that liner company have a strong relationship with its government? What is the average life of the containers? What is the average duration of the contract on these containers? You know, things like that.

Maybe the best way to start to answer this question is to just step back a second. We've had many opportunities. We've considered several opportunities looking at purchase lease-back transactions so far this year. There's been various reasons why we haven't concluded some of the earlier transactions, but certainly credit concerns have been among the reasons. So I would point out that we certainly take the credit risk very seriously. In this case we are very comfortable with the credit risk of this particular shipping line. It has been a customer of Textainer probably since the beginnings of the establishment of the Company. The containers are of various ages. I am sorry; I don't recall the average age of the containers we've purchased at the moment. The shipping line intends to keep the containers for several years on lease, so we don't expect to see the containers coming back for sale by us in the near-term.

Does that answer the questions you had, or is there something more specific?

(multiple speakers) yes, that was sort of what I was interested in hearing. And then, just shifting gears a little bit, you mentioned in July that actually your utilization reversed and went up. That sounds primarily due to the two recent acquisitions. If you were to strip out those two acquisitions, would we have seen utilization move lower, and sort of at what level? It sounds like utilization has been sort of stabilizing where we are.

Yes, it has, Greg. In fact, I have a report in front of me that shows the week ending June 5, the first week in June, the utilization was 86.7%, and for the week ending August 7, it was 86.2%. And during that 10-week period, it averaged 86.17%. So it has stabilized. The slight jump in utilization for July was really the result of these 29,000 purchase-leaseback containers which were put into the fleet. It wasn't as a result of the acquisition of the management rights of the Amficon fleet, which was effective 1 May, or the Capital Intermodal fleet, which was effective 1 August. So it was really loading in 29,000 containers at 100% utilization had the effect of bumping up the total fleet utilization by 0.8 point.

But I think the bigger picture is that we have seen a very stable past 10 weeks, even without that particular transaction. And just in the last week, we had our best booking, lease-out booking week, in well over a year. And I think what we're seeing right now is the peak season it's probably not going to be as strong as the traditional peak season, but this is the back-to-school and the beginning of the Christmas cargo. So August and September, we are hoping, will be good months in terms of getting containers on lease and reducing the declines in utilization.

So it almost sounds more recently that you've seen a reverse. Have you been able to move idle boxes at the depots back into the fleet?

Well, Robert Pedersen is our Executive VP who doesn't usually join us on these calls. But he's here with us today. Maybe I'll ask him to comment on that.

Thank you. Yes, I think we've seen two syndromes out there. One is, there's no doubt, re-deliveries have dropped quite significantly. I think that's partly because a lot of our large global shipping lines have already releveraged so many containers that they don't really have much more to dig into. At the same time, we've started leasing out containers again and that combination has really stabilized our utilization downturn.

The question will then be, when will that turn into a positive? That's a good question, but we're very close. We're very close to that, actually, we think. And as the days go by right now, we are getting more and more inquiries both for new containers and for depot containers. And inasmuch as there are not that many new containers out there, that means that there's a good chance to activate some depot inventory.

Okay, great. And then, Ernie, my last question is just really more housekeeping. You mentioned that of the $6.3 million in early extinguishment of debt, around $3.4 million was split over the non-controlling interest and taxes. Was it primarily -- of that $3.4 million, is it primarily all non-controlling interest?

Yes.

Bob Napoli, Piper Jaffray.

Can you tell us -- tell me the price that you guys paid for the -- on the average TEU price for the 29,000 containers you bought on sale lease-back, and also the average container price for the containers you purchased out of the managed portfolio?

Bob, we spent a great deal of time debating how we were going to reply to that question. And what we would like to do -- and the reason I'm saying this is that we have some other discussions that are ongoing. So we would like to not disclose everything. But if you take the Amficon, the Capital Intermodal, the purchase-lease-back and the purchase of managed containers from an institutional investor and you add all four of them up, it comes out to exactly $60 million. And if you take the bonds that we bought back, that's another $20 million. And we've bought another $20 million of new reefers so far. So we've spent $100 million year to date. But we would actually prefer, for the reasons I just mentioned, to not necessarily enumerate each of the deals down to what it was per TEU, etc.

Okay. On the sale-leaseback, can you tell me what the -- is that immediately accretive? Did you say that that was immediately accretive? And what kind of a -- are you able to negotiate better lease rates on a sale-leaseback, since you are essentially providing capital to the shipper as well?

Well, again, rather than getting into those details, I think Ernie has done some calculations that give a much broader picture and really the impact on earnings-per-share. So maybe he can --

Yes; if you look at the four transactions that John described, we expect that the accretion to EPS in the second half of the year will be about $0.14 a share, and for the full year, since most of these transactions occurred in the latter half, it will be about $0.16 a share. So if that's helpful --

Yes, that's very helpful.

And just to answer the second part of your question, Bob; yes, we do believe we are in a much better return on purchase-leaseback transactions than we do on lease-outs of new containers or depot containers.

Okay. Given that, and you talked at the two major -- in the managed portfolio, are there more opportunities now to buy containers? Why would there be more opportunities now?

Will, there are opportunities and some of the institutions that we manage containers for are being faced with redemptions just in the normal course of business. And so it's presenting opportunities for us, and that's one of the reasons I was a little bit reluctant to get into too much detail on the deal that we just did.

So I think it's safe to say that we expect to have other opportunities in that part of the business.

So you're saying that the [KG] funds are getting redemption requests, and that is resulting --

That is correct; yes, that's right (multiple speakers)

-- in the opportunity to buy these containers back?

Yes.

-- back? Okay.

That's exactly right.

On your dividend, if you were to fall down below the 50% range temporarily, given that you're seeing signs of a real turnaround, possibly, in utilization, would you hold your dividend where it's at, assuming that earnings are on the cusp of improving, or are you going to try to be -- what are your thoughts around that?

I think Ernie stated earlier the position of the Company, which is really -- the Board reviews our position with respect to dividends on a quarterly basis. And so, we are really not in a position to comment beyond the fact that that decision will be made by the Board as we go forward.

And you already declared a third-quarter dividend of $0.23; right?

No, no, that's the second quarter.

No, that's the second quarter.

Okay, thank you very much.

Justin Yagerman, Deutsche Bank.

I wanted to get a sense on a couple of things. First of all, I guess, just some housekeeping on the two purchased transactions that you did. Can you give us TEU and CEU counts on the 28,000 and 29,000 containers?

Yes, I can do that. In the 28,000 containers that we purchased from the Asian shipping line, was 43,410 TEU; and the 29,000 containers that we purchased from the institutional investor was 47,010 TEU. I don't have CEU in front of me. I just anticipated a TEU question.

I know the CEU count on the owned containers. The managed containers that we purchased was about 40,700.

That's the 29,000 or the 28,000, just so I can keep this straight?

It's the 29.

And that was, again, 40,000 and how many?

40,700.

40,700, all right. I'll get the other one offline from you guys; I appreciate it. And I guess, as you referenced before, you guys have been talking about the potential for sale-leasebacks, and Greg kind of got at this a little bit. But I was just curious, besides credit quality, maybe what else went into this transaction that allowed it to actually happen versus a lot of the ones that you looked at that you deny? And do you think that it opens the door for a model for a lot more of these things, either with that customer or with others that are out there?

We actually have done other transactions with this particular customer, so it wasn't the first time we've worked with them. I would say the opportunity to do additional deals with them certainly exists. You know, it's hard to say that these deals are anything more than a case-by-case basis. We look at each one, we take into account the credit, the particular containers that are available, their age, their condition, what we know about that particular shipping line, and then make a decision as to whether or not there is an opportunity to bid for these containers.

And then, even if we do, sometimes we simply can't come to an agreement about price. So there's so many factors that come into play in each one of these. Plus, of course, we've got competitors in this industry, and they're also eager to do many of these types of transactions. Those that we win, we win for a variety of reasons. And I don't think I can say specifically what will lead to success in the future, other than that we feel the combination of our liquidity, where we think some of our competitors perhaps are not in as strong a position with respect -- as we are, with respect to being able to finance these transactions, plus the need that our customers have to restructure their balance sheet will lead to additional transactions in the future.

That's fair; thanks, Phil. We've heard anecdotally, and it jibes with what you guys are saying from a utilization standpoint, that at least there has been some kind of stabilization and maybe modest pickup in demand on the Asia-US routes, and more on the slot utilization standpoint than any added vessels to those loops, obviously.

I was wondering if you guys had any color on that, if you've picked up any information as you talk to your customers. Maybe, Robert, you have some color on that?

So far in the last two, three months, we've seen an improved demand for 20-foot containers, which is probably caused by demand in China. PRC stimulus package has certainly had an effect, and that has also spread over to the intra-Asia lines. Recently we've started to see some more demand for the 40-foot containers, 40-foot and high cubes. And that's traditionally when the deep sea trades start moving.

We weren't quite sure whether that was actually going to take off this year, so we are positively surprised that we have had several inquiries for significant volumes of those equipment types. And as I said, they are typically used in the Europe and trans-Pacific trades.

And do you have any sense of whether or not they are going into usage in Europe or trans-Pacific?

I don't know that for a fact; but, having seen that happen so many times, I'm positive that that's where they're going.

Okay. Is there a way of getting at -- your utilization with 70% of long-term leases obviously includes a nice, stable core that's going to keep you up. But do you guys have a sense, or do you look more granularly at the master lease utilization to get a sense of what the underlying kind of more spot type of transactions are doing in your business? And if so, can you talk a little bit about what those trends have looked like year-to-date and maybe recently?

There is no doubt that this year, when we look at most of our larger customers having surplus of inventory and their demands have been more spot-like here and they're filling out an urgent requirement here in a particular location, that a lot of those requirements have been filled by an increased degree of short-term leasing. Only recently have we started seeing increased requests for some long-term leases, some kind of hybrid long-term leases, leases that offer some flexibility without necessarily -- but with some benefit if you hold on to the containers.

So I would say that, while there is some underlying optimism about those concepts, obviously it's also hedging for the downside.

Got it. So customers are looking for leases that maybe offer an out clause if things don't pickup in the overall environment?

That's correct, yes.

Okay, but there is an increased inquiry to things that would stretch beyond maybe that one year or shorter time frame?

A lot of our shipping line customers are not forecasting to have a lot of CapEx in the next one to three years. Therefore, as they start seeing an uptick in their requirements, I think they believe that they are likely to hang on to the containers.

To hang on to their leased containers from --

To hang on to the containers they both have in their fleets and also the containers that they're picking up. I don't think that they intentionally are picking up containers right now that they think they're going to drop 60 or 90 days from now, whenever the Far East peak season is over. I actually think they're down to such a level, after having reduced their fleets both by re-deliveries, but also buying and selling old containers, that they are likely to hang onto the containers they are picking up right now.

Got it. And is that a normal kind of cyclical pattern that you will start to see in a weaker time period shorter-term leases, and then think kind of starts to go into the longer-term leases as people get more confident in the overall environment?

I would say so, yes.

All right, just trying to get a sense of what's going on there. And I guess the last question, or two more quick ones. Phil, wanted to get a sense of the cyclicality on the containers that you guys buy to trade. Obviously, that's been off materially year-over-year. And it makes sense, given what you said on sourcing deals in '07 and then playing out in '08. And given what Robert is saying about people hanging on to their fleets, you wouldn't expect there would be too much. Is that something that it's going to take a while to come back? Is that like a peak cycle event where at the peak you get a lot of trades because people are spending a lot of money renewing their fleets, and that maybe this is two to three years off before we start seeing this again? Or, how is that typically played out as we move through cycles, and how should we be expecting that to come back into your revenue and profit stream?

Justin, let me take a crack at part of that, and then maybe Phil has -- but we have not seen a lack of trading opportunities this year. In fact, there have been a couple of very, very large deals that we could have had. But we feel that our primary obligation is to sell the older containers that we already own or manage, so we deliberately backed off on buying trading containers. It's not that there were not any available; I just want to be clear on that.

And maybe, Phil, on the longer-term trend, you might have some --.

Well, I think there's another factor, Justin, and I might compare it to what's happening in the housing market in the US. Prices go down, and sellers, suddenly they haven't reconciled themselves to the new price level and thus aren't comfortable at selling at the new price level. So, as John mentioned, there have been opportunities. But, as you can imagine, for even those that we have shown some interest in, where we're willing to pay for the containers, we find that the shipping lines aren't so eager to sell.

But prices, as I've mentioned, are down significantly from last summer. And so, clearly, we're not going to offer the same prices that we did before. And I think part of what's happening, too, is that sellers are having a hard time reconciling themselves to the new price levels after having gone through a couple of years of really historically extremely high levels of prices for used containers.

So when does this change? I don't think we're going to see container prices, anyway -- speaking first about container prices -- I don't think we'll see container prices in the secondary market recover significantly until sometime next year. And as a result, I do think that's going to put a damper on sales business through the end of this year and into next year. Beyond that, it's very hard to predict, but we all recognize that this is and always has been a cyclical business.

Yes, absolutely. And in terms of the end market demand that you guys see with the people you're typically selling to, obviously some of the countries that you had been sending those containers out to were heavily exposed to commodities and what have you. Is that end market demand still there to the same extent? Or, how does that play out? Obviously, pricing is down. But at the lower pricing, is there still a healthy demand for those used containers?

Well, I think during our presentation initially, I believe I noted that our run rate for sales in fact is pretty much the same as it was in last year. And last year was a record year for sales. So it's not so much that we can't find a home for used containers. It is the case, though, that where we are selling them geographically has changed from one year ago. Last year many of -- the largest demand area was Asia, many of those containers being used for one-way trade. Asia is not such -- the demand level in Asia is not as strong as it was, and we are seeing more demand in some of the traditional markets, like North America. But we continue to see good demand in many of the emerging markets where we have been selling containers, whether that's in the Middle East or South America as well.

Got it. Is that North American demand healthy, given that -- I mean, is it helpful, given that it gets rid of some capacity, maybe, rather than repositioning in a low demand area? Does that help, from (multiple speakers) --

It does.

Absolutely.

Anything that we can get rid of that we don't have to move back to Asia is a help.

Yes, that's what I figured. And then I guess, just a last quick question on the institutional investor that you bought the containers off of. Was that a KG transaction?

Yes.

Thank you, all right. I appreciate the time, guys, as always.

Daniel Furtado, Jeffries & Company.

You had cited that container volume is expected to be down about 10% in 2009. There are some industry sources out there saying that. How would a 10% full-year decline compare to the first half of this year, and what does that imply for volumes in the second half? Would they be relatively similar to what they are? Is there going to be -- or, would that require some incremental growth? Just some color on how that would work out mathematically.

I got that figure out of one of the publications that we get, Container Trade Watch. And they had quoted three sources for that -- Drewry Consulting, Maersk Line and Kuehne & Nagel, a huge freight forwarding company. And they all said that the first half of the year they saw about a 15% to 20% decline and that for the full year they expected it to be 10%.

So -- and then, I just saw something yesterday that I was reading -- I can't remember what the publication was -- was that exports, container exports in China in July were almost the same as they were in July of '08, which would tend to indicate that the second half is coming along better than, maybe, people predicted even three or four weeks ago. Robert, do you have a thought on that -- ?

What we have been hearing from some of our global shipping line customers is that first quarter was by far the worst. They were probably down almost 20% year-on-year. June-July were considerable improvements compared to the first five months of the year. And the way it seems right now, it seems like August is going to follow that trend and actually probably be an improvement over July.

Okay, great, thank you. And then a real minor question, but just looking for some color behind the bad debt expense -- I appreciate that it is still pretty small, but up threefold quarter on quarter. Is that customer-specific, or is that just increased caution over the portfolio in general?

The way we account for bad debt, is we -- it is customer specific, but we also have a general reserve. We've increased the size of our general reserve, and then there are some cases where we have issues with some of our current customers, have also led to an increase in the bad debt reserves.

So, I don't know, Ernie, did you want to add to that?

Yes, that's exactly what I was going to say.

So nothing to be too alarmed with, is basically the take away there?

Well, I would just note that we as the senior managers of Textainer, I think jointly we would all say that one of the major concerns we have is the credit, whether there's going to be any big credit interruptions in our industry. We have been able, so far this year, to avoid that. And we are certainly hopeful that continues. We can and will likely continue to weather the smaller defaults by generally smaller Asian shipping lines. But certainly, we are concerned whether eventually we face a credit issue with one of the major shipping lines. And we are optimistic that won't happen, but it's hard to predict.

Bo McKenzie, [Lafayette] Capital.

Congratulations on a good quarter in a tough environment. You were talking -- I believe you said that you think -- I don't remember who it was that said it -- that the amount of sales within your customer base is likely to decline as a result of right-sizing down to about what they needed for their container fleet? Is that correct, or did I misunderstand that?

You're talking about, there, sales of use, of older containers out of their fleet (multiple speakers)?

Well, you know, the sale-leaseback types of -- I'm specifically -- I've been watching like Hapag Lloyd and Zim and Neptune Orient, and they're putting up what looks like just disastrous results, which I would think would probably be positioning them for more leasing and less owning going forward. Is that a fair assessment?

Yes.

Have you seen them looking to put much into the market? I guess Hapag Lloyd sold like a huge base here recently. And have those values come down to the point that they are starting to get attractive, from the bigger shipping companies?

Well, Bill, I think it's our feeling is that over the next couple of years -- and I think Robert mention the next one to three -- that because of the kind of financial results that you just mentioned being reported by virtually every shipping line, CapEx for buying new containers -- the feedback we get from our customers is that there isn't going to be very much of it, if any at all. Therefore, we are very optimistic that we not only are going to be able to lease out the containers that we currently have sitting off-lease, but that these shipping lines who would like to have cash, are going to be more and more motivated to sell some of the containers that they own.

Hapag Lloyd is probably a good example because they have a very high, traditionally, a very high percentage of owned containers. So I think we are very excited about opportunities that we see coming to us in the next couple of years.

I guess I misinterpreted what you guys had said earlier, because it does sound like the chances -- you are implying, then, the chances that they could do either a greater amount of selling their existing fleet into lease purchases or, if there is a demand for expanded containers within their fleet, going to a leasing company should be accelerating above that 45% or whatever it is historical 20-year ratio of leased containers versus owned?

That's what I think, yes.

Okay. And then have you guys tried to track the order book on the containers [shipped]? Obviously, things are kind of tough, and I would imagine there's been an awful lot of cancellations. But I think you mentioned that there's 10% left to come this year. I know, I don't know, late last year at some point that the relative order book measured in terms of the TEU capacity, I guess it would be, was almost 50%. Has the bulk of the rest of the order book been canceled, given the kind of results that the container shipping companies are putting up? Or do a lot of these guys still face fairly large capital commitments that they haven't been able to get out of, beyond the deliveries for this year?

There has been a lot of information, [Bo], on -- it's a very fluid situation. I saw something yesterday that said that some of the shipyards who have been holding out on not allowing cancellations are starting to throw in the towel because they realize there's absolutely no way that some of the shipping lines are going to be able to buy the vessels.

So we are seeing an erosion of the backlog. I read something -- and I don't want to necessarily, because I can't think of the source -- that as much as 50% of the backlog over the next three years will never get built. I don't know if that's a good number or not.

What has been happening at the moment is there have been a lot of delays. They have been able to talk the shipyards into delaying delivery, so you have a combination of several things going on. One is, scrapping is way up. It's still a minuscule portion of the total fleet, but that's expected to continue. Delays, cancellations and, notably, redelivery of chartered vessels -- so the shipping lines are doing everything humanly possible to try to keep this excess capacity off the market because that's the only way they're ever going to get the freight rates to come back.

Going through like the funds flow in the quarter, you guys spent about $19.4 million between the purchase of the containers, purchases of -- and purchases of intangible assets, which I assume would be allocated largely to the managed fleets and stuff like that. How much of that was for the reefers you purchased in the quarter?

Well, for the quarter, we just placed a big order, what, last week, right? So among the 1100 and some odd reefers that we've ordered so far, about half of them were last week. So, about $10 million, then, for this quarter.

About $10 million in the quarter. So then, the remainder of that combination of the purchased containers and then purchase of intangibles is somehow or another allocated over the two acquisitions, the Amficon and Intermodal?

Yes. I'm sure that, once you dig into the numbers, you'll find what you're looking for in there (multiple speakers).

One last question and I'll turn it over. Is there an interest of picking up things besides the containers? I know Hapag Lloyd sold like a big port recently. Are those kinds of transactions of interest to your guys? Or, given your global presence, is it just a lot easier just to integrate in the existing fleets to your lines, through your facilities?

No; the answer is we are not interested in terminals or ships or aircraft. We've looked at just about every asset class over the years. We have a strategic planning meeting almost every year with all of our Board members, and we've come to the conclusion that we should stick to our knitting. The only departure we're making is that, as you know, we elected to get into the reefer business last year. We think we've been very successful in that so far. And then, some of the transactions that we've done recently, like Amficon and the Capital Intermodal -- we had quite a large number of flat racks, open tops and refrigerated containers.

So we're becoming a player in all of those types of equipment, which I see as a natural evolution to being the largest dry container supplier.

So that $135 million of transactions you guys have looked at, then, is all containers in some variation?

Correct.

That does conclude our question and answer session. I'd like to turn the conference over to John Maccarone for any additional or closing comments.

Okay, just to say thank you to all those who joined, and we look forward to talking to you again next quarter. Thank you. Bye-bye.

That does conclude today's conference call. Thank you for your participation.