Textainer Group Holdings Ltd (TGH) 2010 Q2 法說會逐字稿

Hello and welcome to the Textainer Group Holdings Ltd. second-quarter 2010 earnings call. There will be an opportunity for you to ask questions at the end of today's presentation. (Operator instructions).

For your information this conference is being recorded. I would now like to turn the conference over to Mr. Phil Brewer, Executive Vice President. Please begin.

Thank you and welcome to our second-quarter 2010 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, 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, may change subsequent to this discussion. The Company is under no obligation to modify or update any or all of the statements that are made here in 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 20F for the year ended December 31, 2009, filed with the Securities and Exchange Commission filed on March 17, 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 financial 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 12, 2002 press release. I would now like to turn the call over to John.

I would like to start with slide 3 and welcome everyone to our second-quarter 2010 earnings conference call. I will begin today's call by reviewing Textainer's second-quarter and year-to-date highlights, as well as the current market overview and key business trends, then turn the call over to Ernie to discuss our financials and quarterly dividend and, finally, Phil will then discuss the resale business and our new securitization facility. At that point, we'll open it up for questions.

Turning to slide four, Textainer posted solid results in the second quarter of 2010 as we continue to expand our industry leadership and capitalize on the positive fundamentals in the container leasing industry. For the three months ended June 30, 2010, we generated net income of $25.1 million or $0.51 per diluted common share for the quarter. Excluding unrealized losses on interest rate swaps, net income was $29 million or $0.59 per diluted common share for the quarter.

Based on our results, Textainer's Board declared a second-quarter dividend of $0.25 a share, which was an increase of 4.2% from our previous quarterly payout. Since our IPO in October 2007, we have increased our quarterly dividend payout a total of five times, including each of the past two quarters and declared cumulative dividends of $2.73 per share.

The considerable success we have achieved during the second quarter and first six months of the year is directly related to the significant increase in our fleet utilization, which averaged 95.3% in Q2. On August 6, our fleet utilization reached an all-time high of 98.6%, which was an increase of approximately 10% compared to the end of 2009.

We also maintained our focus on fleet expansion with acquisition of 198,000 TEU of new containers to be delivered through the end of 2010. Importantly, 90% of these new containers are owned by Textainer, and owned containers are significantly more profitable than managed containers. By the end of this year, we will own about 50% of our total fleet, up from 45% at the beginning of the year.

And, finally, in support of our strong growth, we enhanced our financial flexibility by extending and increasing our securitization facility to a total commitment of $750 million over a two-year revolving period.

Slide five is next and some comments about the market. Our strong performance has been positively influenced by the favorable industry fundamentals. Currently, [total] volumes are expected to grow about 10% in 2010, compared to 2009, which is considerably higher compared to initial projections of 5.5% for the year.

One of the main drivers behind the improved market forecast is higher exports from the USA and EU countries. With more balanced trade, there were few empty -- fewer empty containers returning back to Asia for immediate use. According to our customers, it now takes an additional two weeks for a container to be made available in Asia for another load of cargo.

Also impacting the supply of containers is the increasing use of slow steaming and super slow steaming among shipping lines. It is estimated that this trend requires about 5% to 7% more containers to carry the same amount of cargo.

In addition, the lack of new production of standard dry freight containers last year, combined with normal retiring of older containers, led to the decline of approximately 4% in the world container fleet in 2009. This compares to an average 8% net growth per year from 2004 to 2008.

For 2010, we expect limited output as Chinese container manufacturers continue to ramp up production levels after shutting down plants last year. After losing most of their labor force, manufacturers have been forced to hire and train new workers, consisting of thousands of individuals.

Consequently, it is estimated that total production capacity will only be about 1.9 million TEU in 2010 versus an average of 3.2 million TEU per year from 2004 through 2008. Moreover, shipping lines have been slow to recover following the extensive losses reported in 2009, which totaled approximately $15 billion. While many companies continue to repair their balance sheets, they do not have the ability to purchase new containers. We believe container [lessors] will step in and supply approximately 70% of all new production in 2010, compared to less than 40% of all new containers from 2004 through 2008.

As a result of these factors, we expect the worldwide shortage of containers to continue through 2010 and possibly into 2011. According to Nomura International, new container production will need to be 3.4 million TEU in 2011 and 3.7 million in 2012 in order to meet expected demand.

In the second quarter, as shortages became critical, the situation complained -- sorry. Slide number six.

Turning to slide six, I want to illustrate the significant increases in our fleet utilization. As I mentioned earlier on the call, utilization reached a record high of 98.6% for the week ending August 6, 2010 after ending 2009 in the first quarter of 2010, the utilization of 88.6% and 91.8%, respectively. In addition, of the 9.7% increase in utilization during the first half of the year, 67% of this improvement occurred in the second quarter.

As we expect to realize the full benefit of our high utilization beginning in the second half of the year, I will note that every 1% improvement in utilization equates to approximately $4.4 million in pretax income on an annualized basis for Textainer.

Turning to slide seven, I want to outline all of the pieces, including new containers leased out of the factory, in-fleet container inventory reduction, and container sales during the first half of the year. Starting with new containers on the top line, as stated in our previous conference call, we purchased 70,670 TEU of new containers that were delivered in the first half. Of these new containers 50,550 or 71.5% were delivered in the second quarter.

So if we translate those into just raw container numbers, in the second quarter, 35,177 containers were placed on lease, compared to only 10,661 in the first quarter. So in the first half of the year, we put over 45,000 new containers on lease, and we expect to fully recognize the revenue for lease containers beginning in the third and fourth quarter of the year.

Building on this success, we've ordered an additional 128,000 TEU of new containers for delivery in the second half of the year, many of which are already committed to long-term leases. As these containers are picked up by our customers, we expect to further expand our contracted revenue stream.

Now a little bit further down the slide, look at depot containers. These are containers that we are already own that are in our fleet, and very interesting phenomena here. In the first quarter, we were able to reduce our off-lease inventory by 48,000 containers. This is -- reduction means containers that were leased out, minus containers that were turned in.

But among this reduction, only 2,000 of those containers were from locations outside of Asia. We worked with our customers on a trade-off plan, asking them to pick up containers in lower demand locations in return for supply in high-demand locations, mostly China. While we were able to get lower demand Asia location trade-offs -- for example, customers would pick up a container in Singapore for a container in China -- the market, at that point, did not support trade-offs outside of Asia.

In the second quarter, the container shortage became critical and the situation changed completely. We reduced our depot inventory by 90,000 containers in the second quarter. And as you see, of the 90,000, 50,000 were from Asia but 40,000 were picked up outside of Asia in locations all over the world. So we were able to achieve almost a one-to-one trade-off.

We did, however, help customers by defraying a small portion of their expense to move these 40,000 containers back to Asia.

Then, the last part of the slide, sold containers. And this is in three categories. Containers that we owned, containers that we manage, and trading containers that we buy from shipping lines to sell for our own account.

You will notice that as utilization improved and customers stopped turning in even the very oldest containers, our sales volume declined significantly on a quarter-to-quarter basis, including trading containers. Although secondhand container prices have improved dramatically during the year, lower unit sales have led to both local overall gain on disposals and [gain on] trading.

As long as utilization remains at current levels, we believe there will be fewer containers available for sale, even though residual values are in owned containers and gross margins on trading containers are above the levels of 2008. We expect net profit from our resale division to be somewhat lower in the third and fourth quarters, compared to second-quarter levels.

In summary, we are very pleased with our year-to-date performance and remain excited by our future prospects. Now I'll turn the call over to Ernie.

Thank you. Turning to slide eight, I would like to take this opportunity to review our financial performance for the second quarter and the six months ended June 30, 2010. Total revenue for the second quarter of 2010 was $74.5 million, an increase of 37% from $54.4 million in the prior year period.

For the six months ended June 30, 2010, total revenue was $143.7 million compared to $114 million for the prior year comparable period, an increase of 26%. As John mentioned earlier, net income excluding unrealized losses on interest rate swaps was $29 million for the second quarter, which is an increase of $3.4 million or 13% compared to $25.6 million for the prior year quarter.

Net income, excluding unrealized losses and straight swaps net for the six months ended June 30, 2010 was $54.5 million, an increase of $9.1 million or 20% compared to $45.4 million for the prior year comparable period.

Income from operations for the second quarter was 41.4 -- $41.1 million which is an 83% increase over the prior year quarter. And income from operations for the six months year-to-date was $75.6 million, which is a 45% increase over the prior year period.

One of the most important factors contributing to the recent success of Textainer has been a significant increase in utilization. Utilization for the second-quarter 2010 averaged 95.3% compared to 86.9% in the second quarter of 2009. Utilization for the six months year-to-date has averaged 92.7% compared to 80.7% for the six months ended June 30, 2009.

Increase in utilization, along with an increase in the size of the owned container fleet, contributed to an increase in lease rental income of 28% in the second quarter, compared to the prior year quarter, and 14% for the comparable six-month period. One of our goals has been to increase the size of our owned container fleet, which we have been able to accomplish through the purchase of new containers during the first half of the year. The owned container fleet was 1,028,000 TEU as of June 30, 2010, which represents a 13% increase compared to June 30th, 2009.

A portion of the total fleet that is owned by Textainer as of June 30, 2010, was 46% compared to 43% as of June 30, 2009. This percentage will continue to increase going forward as we take delivery of containers in the second half of 2010 that have already been ordered.

[Management] fees increased 14% in the second quarter compared to the prior year, due to a full quarter of these for the Amficon and capital and intermodal fleets as well as improved fleet performance.

Management fees for the six months ended June 30, 2010 increased by 12%, compared to the prior year period for the same reasons. And despite the increase in the size of the owned container fleet, direct container expenses declined by 16% for the second quarter compared to the prior year period. This is primarily a result of decreased storage expense as utilization has increased.

Net [gains on] trading containers sold for the second quarter increased by $0.6 million or 374% primarily due to a 107% increase in the number of units sold compared to the prior year quarter. Net gain on trading and (inaudible) sold for the six months year-to-date increase by $1.1 million or 273% primarily due to a 125% increase and the number of units sold compared to the prior year period. Gains on sales of containers for the second quarter increased by $4.5 million or 161%, primarily due to an increase in the average proceeds per unit and a $2.4 million increase in the amount of games on [sales set] leases compared to the prior year quarter.

The income sales of containers for the six months ended June 30, 2010 increased by $11.5 million or 223%, due to a 34% decrease in the number of units sold and an increase in the average proceeds per unit, as well as a $7 million increase in the amount of gains on sales type leases compared to the prior year period.

Depreciation expense increased for both the second quarter and the six-month period 2010 due to the increased fleet size. Bad debt expense decreased from an expense of $1.5 million in the second quarter of 2009 to recovery of $0.2 million in second quarter 2010 and from the expense of $2.2 million in the six months ended June 30, 20 -- 2009 to a recovery of $0.5 million in the six months ended June 30, 2010 due to collections on accounts that had previously been included in the allowance for doubtful accounts and our assessment that the financial conditions of our lessees and their ability to make required payments has improved.

EBITDA for the second quarter was -- 2010 -- was $51.6 million, $1.1 million higher than the prior year quarter. Please note that the prior year quarter included a $16.3 million gain on early extinguishment of debt.

EBITDA for the six months ended June 30 of 2010 was $97.3 million, $4.7 million higher than the prior year, which included a $19.4 million gain on early extinguishment of debt.

Moving to slide nine. You'll see that we have maintained a strong balance sheet during the second quarter of 2010. Of note as of June 30, 2010, our cash position was $59.1 million, our total assets were $1.4 billion, and leverage remains at an attractive ratio of 1.1 to 1.

Turning to slide 10, based on our strong financial results, significant contract coverage and industry outlook, Textainer's dividend for the second quarter will increase by $0.01 per share or 4.2% to $0.25 per share. This will be our second consecutive quarterly increase.

Since going public in October 20, 2007, we have increased our quarterly payout a total of five times and declared a cumulative dividend of $2.73 (technical difficulty) [$0.80] per share. Our second-quarter 2010 dividend represents 42% of net income, excluding unrealized losses on interest rates loss for the three months ended June 30 of 2010.

Dividends have averaged 48% of net income, excluding unrealized gains or losses on interest rate swaps, net since the IPO, enabling the Company to retain capital for growth. We have paid dividends for 21 consecutive years and it is an important part of the total return that Textainer provides for its shareholders.

Historically, Textainer has paid about 50% net income excluding unrealized gains or losses on interest-rate swaps and 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.

Thanks. I will talk about the container refill business for the quarter, but first I would like to discuss the successful refinancing of Textainer Marine Containers Ltd.'s $475 million warehouse facility.

As I believe you know, Textainer Marine Containers Ltd., TMCL, is Textainer's primary asset owning subsidiary. Container (inaudible) increased the size of its warehouse facility from $475 million to $750 million and extended the maturity of the revolving period until 2012. As before, if this facility is not re-financed prior to its maturity, it will amortize over a period expected to be 10 years but not to exceed 15 years.

Interest rate for the facility is 2.75% over LIBOR during the initial two-year revolving period. The facility was [syndicated] among nine banks, four of which were participants in the previous facility and five of which were new lenders to TMCL.

We believe the success of this transaction underscores Textainer's leadership position in the industry and demonstrates the participating bank's strong confidence in and commitment to Textainer. This facility complements Textainer Ltd.'s $205 million bank revolver, which matures in 2013. The almost $1 billion of capacity represented by these two facilities solidifies our ability to continue to grow both organically and through acquisitions as we have done in the past.

Regarding container sales, I mentioned during the last earnings call that container sales during the first quarter were running at a rate of more than 100,000 per year, but we expected this rate to decline as the year progressed. That is exactly what has happened. Sales have slowed to a rate of approximately 80,000 per year.

We expect the rate of container sales to continue to slow through the third quarter. The very high demands for lease containers -- lease containers has caused, one, fewer containers to be put to disposal, two, shipping lines to decrease their sales of owned containers and, three, shipping lines to continue to operate containers purchased from them by a purchase lease type transaction.

As a result, we expect to sell 20 to 25% fewer containers in 2010 than in 2009. Used container prices have increased by 25% to 35% since the beginning of the year and by 35% to 45% since sales prices reached their lowest point one year ago.

Prices continue to be highest in Asia although price increases in certain Northern Europeans and North and South American locations has (sic) been significant. There's some uncertainty regarding where used container prices will go from here. Many observers believe they have reached a high and will either remain at this level or decline somewhat over the remainder of the year.

That concludes our opening remarks. I would now like to open the call for questions.

(Operator Instructions). Justin Yagerman with Deutsche Bank.

Good morning. This is Rob on for Justin. In your prepared remarks, you guys had alluded to some of the issues facing container manufacturers currently. We have been hearing reports that the container manufacturers have been having trouble increasing production recently. Do you guys think the manufacturers are going to be able to produce enough containers to satisfy container demand industry wide this year or do you think we are going to see some slippage into next year?

Well, they certainly didn't have enough capacity to produce sufficient containers for the industry this year. However, throughout the year, they have ramped up production output. While they have not got two shifts in most locations, they have work extended hours and extended days throughout the week. So it [also tends to] gradually increase throughout the year.

One of the reasons for that is it's just that with an extreme shortage of labor, qualified labor and while manufacturers are generally trying to hire laborers from around China to come to the [maintenance] production locations they have not been as successful as they would've liked.

Got you. That's really helpful. We have seen a lot of vessels coming out of storage recently and re-entering the active containership population over the past several months. Could you give us a sense if the containership lines are planning to make any adjustments, their use of slow stream, and given the recent increase demand?

Well, from everything I read they are saying that slow steaming is here to stay. And I really can't comment beyond what we are reading.

I would support what John is saying and that is one of the reasons you have seen so many of the laid-up vessels come back into service. That is because for the vessels that were already in service, they want to continue doing slow steaming or [super] steaming.

No, that's generally in line with what we've been hearing in the marketplace as well. I just wanted to see if you guys were seeing any sort of shifts in intonations given the continued strong demand we've been seeing in the marketplace.

Shifting gears a little bit before I turn it over to someone else. Could you talk a little bit on the strategic standpoint you guys had mentioned -- that you are looking to grow both organically and the acquisitions obviously, organically, you guys have got some very strong container orders for the rest of the year. Could you give us a sense of what types of opportunities you are seeing in the M&A side of things?

Yes, that's an easy one. Zero. There really are -- there's really nothing out there that we see at the moment.

Although I just would -- this is Phil -- I would just like to add that we are always looking. So I think we've gone through this before on these calls, but clearly when opportunities arise, we pay attention.

And would it be fair for us to assume that you guys would prefer to have an ownership deal as opposed to a managed deal?

Yes.

All right. Really appreciate the time.

Robert Napoli with Piper Jaffray.

Good morning and nice job. One of the -- I mean, things, I don't think I'm aware of an industry today that is in better fundamental shape than the container leasing industry. Just you know, however.

Bob, don't jinx us.

No. There's the -- however, I guess, but you know the -- we have seen obviously looking at our stock markets and concerns about the US economy, the job market, and I think a little bit on the global economy, more slowdown in China. I mean, you've ordered a lot of containers.

And what is -- your business, I would now -- I would think of, you know, the container shipments as being somewhat of a lagging indicator, maybe even a little bit more lagging than usual in some regards because of slow steaming. Like the equipment that is being or the stuff that's being shipped was ordered a month ago and the world has changed, the sales aren't as -- retail sales aren't as strong as people thought.

What are your concerns as far as looking at your business as somewhat of a lagging indicator, having a lot of equipment on order and what do you look forward to say that the great times you have now might be, you know, that there's risk of that moderating and you need to be ready for it?

Well, I guess I would make a couple of comments. We read the same thing. We are seeing potentially a slight slowdown. We have to keep in mind that the trade to North America represents only about less than 18% of total world container trade. So it's not totally centered on North America.

But of the equipment we've ordered, a very, very large portion of the deliveries in the second half is already committed to really good quality leases. The worst thing that can happen is we end up with some containers left over and we'll be ready for the pre-Chinese New Year typical rush that starts in the first couple of months.

So we are not really concerned. Frankly, if anything, I would say that we may have a potential to order even more equipment between now and the end of the year.

And what percentage, John, are committed? The containers are committed -- have committed orders long term?

Second-half orders, well in excess of 50% of those are committed. Well in excess.

And then on the pricing side, what --? I mean, your revenue yield, we look at kind of the lease revenue yield which jumped up very nicely in the second quarter as you would expect, with utilization picking up. But it's still nowhere near the level of yields you had several years ago. I mean, what are you seeing on the pricing front and, obviously, your yields should go up [in] the third quarter as utilization of 98 plus percent.

But what are you seeing on the pricing (inaudible)? How much --?

Pricing, Robert will address that.

Well, certain (technical difficulties) containers and in the particular opportunities. So there we see rates continue to increase through, certainly through September deliveries. On the [detail] inventory, obviously that is for the -- for the modular lease ups we have seen significant increases, meaning the containers we had at that post at that post that we leased out to various customers, it's been a little bit slower on the containers that were already higher. You know, we had a very large [pipe], long-term lease ratio, a lot of those containers are sitting in kind of a limbo stage right now. Some contracts had expired are in the buildout period. For the buildout period could be extended and we don't really have any right to change or to improve rates during that period. We will then see what happens thereafter.

So most of our rate increases have come from -- these are directly from the modular lease outs. Some increases for contract rates here and now, and as I said, a lot of containers are somewhat in limbo.

What we did on the -- on the pricing side and the rate side for a longer period, we actually put a lot of emphasis on trying to excavate our containers in what we call black spots, meaning locations where we don't -- are typically not able to at lease out under regular terms. We were able to do so in this upturn.

We have also pushed extended terms so that, rather than supply a container out of Los Angeles or Rotterdam, and short-term these terms, we can get long-term lease terms for many of those containers which means you will get a revenue stream come forward.

Great. And on the expense side, I mean your expenses have -- expense ratios have improved pretty radically. You have -- I mean, do you still -- I mean with the growth that you are having, the operating, you can still continue to feel that your expense growth is going to be much lower than your asset growth? And have you or are you done -- have you seen all the improvements in the storage costs that you can see at this point?

Storage in this third quarter -- I mean, the utilization will be higher again in the third quarter than it was in the second quarter. Worldwide basis, we pay about $0.40 per TEU to store empty containers. So that will be the result. We will have even lower direct costs in the third quarter than we did in the second quarter.

And as far as operating leverage in your business?

From headcounts?

Yes. Just, I mean you are going to be -- you are going to -- you're getting some pretty strong asset growth. How much operating leverage --? As you look at your margins, I would expect your sustainable operating margins should be going up as the Company grows. Just how you think about the operating leverage that you have? How many people do you need to add as you are adding several hundred thousand containers?

Very few. Because all of these are going on long-term lease so the -- we don't have a lot. I think we have added about three net headcount so far this year.

Three. That's good operating leverage. Thank you. And last question, just on -- just on -- you guys gave a little bit of color on the gain on [sale] lines and the equipment trade, but so I mean you had $10 million between the gain on sale and equipment trading. The equipment trading assets, I think, are down close to zero. I mean, is there anything there, and I mean -- is half that level a normal level? Or some -- I don't know if there is a normal level but if you were us and you were modeling that, would you cut it in half for future periods?

I think over the remainder of the year, I'd assume that there is going to be very, very few trading containers sold. Of the trading deals that we have on the books, we have received virtually all of the containers that were expected to be delivered under those transactions have already been delivered. They're -- I'm not aware of any active transactions in the market business that we are bidding on. So the trading container business will slow a little -- will slow to a very slow trickle over the remainder of the year.

And the gain on sale? I mean, you're getting more per container, you are selling a lot less containers.

Yes. That's true, I think. As I noted in my opening comment, there are those who think that both new container prices and used container prices will moderate somewhat over the remainder of the year, which would mean that our gain on sale is going to decline somewhat. But I [don't know if] anyone to expect used container rises to decline dramatically.

Thank you.

Sameer Gokhale with Keefe, Bruyette.

Thank you. Can you just remind me or go over the end of [the] TEU that you had at the end of Q2?

Yes. The total TEU are about 2.2 million, of which a little bit over 1 million were owned in our own fleet.

Okay. And then, as far as the purchases, the 128,000 TEU that you've ordered for the remainder of the year, what is the breakdown between Q3 and Q4 deliveries, just to help us with the modeling of those?

Q3 is probably about 60% to 65% of the total of the second half.

Okay. That's helpful. And then on the tax rate, I noticed that it was a little bit higher, I think around 8.5% or so. And I think, Ernie, you had mentioned that you expected, longer term, this tax rate to be -- going forward -- 4% to 6%. So was there anything unusual going on there? Should we be modeling a 8% percent going forward? How should we think about that?

You can have fluctuations within a quarter, depending on the timing of certain tax items. I think, for the full year, it won't be that high. So I think somewhere around 6% is probably a good number.

Okay. And then just to touch on compensation expense and how you are thinking about it, I mean, obviously, there's operating leverage here. And you, like other companies, are benefiting from some very strong dynamics in the business. But when you think about compensation for employees, how do you segregate the -- just the general benefit you are receiving from the macroeconomic trends and what is going on with your container leasing sector as opposed to performance-based incentives?

I mean, do you often see companies that are experiencing strong or favorable fundamentals? And then they raise compensation a lot and then they cut it a lot when things go on a downturn. So, I mean how are you thinking about compensation at this point in time? And how do you approach that?

We have a new center based where there's a based [comp], and that typically is geared on performance and cost of living allowance, and then there is a short-term incentive plan or bonus scheme that is based on a percentage of individual-based compensation, and that bonus can be a significant part in a good year like we are having now. So we're -- I think you may be driving it, are we increasing our total compensation in a good year which we may come to regret when things slow down. And the answer is, we are not doing that. The variable part of the compensation is designed to reward everyone for a good year like this, but not raise the overall cost on a permanent basis, if that's what you're asking about.

Yes. That's what I was asking about. Because you know, you often -- I just want to get your perspective. You often see companies that they overpay employees when things are going good not because of specifically good performances, just because the industry is experiencing fundamental favorable dynamics. And then when things turn for the worse you see a large cut in expenses.

And I was wondering just to -- it's helpful to just get your perspective as how you think about that. So that that is very helpful.

(multiple speakers) visibility on that number. We report that as a separate line item in our income statement. It's shown as short-term incentive compensation expense. So, when you look at the income statement, you'll see that reported separately from the regular G&A expense. And you can see it is higher this year as you would expect in what will be -- which has been a very good year and it was much lower last year when things were not as good.

Yes. Okay. Thank you. I guess the -- just the other question I had was and you, I think, spoke about this a little bit, but I mean we have been talking about the -- or hearing about the fears about Asia and just what is going on there. And you'd referenced a balanced trade, that we are seeing more balanced trade due to increased shipments, it seems like, from Europe and North America or the US, in particular.

And I was wondering, when you look at the trade flows and what is going on there and then you read the headlines in the newspaper talking about weaker, weakness in China people are worried about. I mean, is there a disconnect here that everyone is missing? I mean, aside from just a issue of the shortage of containers, is there really a disconnect? Are you seeing any specific trends or shipments -- increased shipments -- from Europe and the US to Asia or between the US and Europe that everyone is missing here? Can you read or give us more color into that?

Well, I think there was an article in The Wall Street Journal just the other day. German exports have rebounded completely and what you're looking at is in BRIC countries and some of the other parts of the world, you are seeing an increased consumer class. And people in China and other countries are now consuming more products produced in Europe and North America.

You know I -- you know, President Obama's goal of doubling US exports in five years. You know, he's -- I think he is onto something there. We really should have the ability to improve our exports because there are more consumers in other parts of the world, looking to buy our products and products from Europe.

Okay. Well, thanks, guys. Thanks for the color.

I am not showing any other questions in the queue.

Okay. Well then, I guess we will end the call and thank all of you for participating and we look forward to talking to you again soon.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the conference. You may now disconnect. Good day.