Textainer Group Holdings Ltd (TGH) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Textainer Group Holdings Limited first-quarter earnings. At this time all lines are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host today, Ernie Furtado, CFO. Please begin.

Thank you, and welcome to our first-quarter 2011 earnings conference call. Joining me on this morning's call are John Maccarone, President and Chief Executive Officer; and Phil Brewer, Executive Vice President.

Before I turn the call over to John, 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 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 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, 2010, filed with the Securities and Exchange Commission on March 18, 2011.

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 May 5, 2011, press release.

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

I'd like to start with slide 3. And welcome, everyone, to our first-quarter 2011 earnings conference call. I'll begin today's call by reviewing Textainer's first-quarter highlights as well as the current market overview and strategic focus. I'll then turn the call over to Ernie to discuss our financials and quarterly dividends before we open it up for questions.

Turning to slide 4. Textainer posted solid results for the first quarter of 2011, demonstrating management's continued successful execution of its growth strategy.

Net income, excluding unrealized gains and losses on interest rate swaps, was $35.4 million or $0.71 per share. Based on our results, Textainer's Board declared a first-quarter 2011 dividend of $0.31 per share, an increase of 6.9% from our previous quarter payout.

Since our IPO in October 2007, we have increased our quarterly payout a total of 8 times, including each of the past 5 quarters, and declared cumulative dividends of $3.60 per share.

The utilization averaged 98.2% for the first quarter, compared to 90.1% for the first quarter of 2010.

We've ordered 166,500 TEU of new standard dry-freight containers, and 9,000 TEU of refrigerated containers for delivery in the first half of 2011, representing $506.5 million of capital expenditures. Approximately 90% of these containers are for our owned fleet. And as we often note, owning containers is considerably more profitable than managing them, although managing has many benefits.

And finally, we exercised an option to expand the size of the securitization facility of our principal asset owning subsidiary, Textainer Marine Containers Limited, by $100 million in the first quarter to a revolving commitment of $850 million.

Next on slide 5, some comments about the market outlook. Manufacturing in China resumed more slowly than expected after the Chinese new year holiday in February. We understand that some workers may have postponed returning to their jobs after the holidays so that they might seek better paying jobs or negotiate higher wages. As a result of the slower resumption of manufacturing in China, finished goods products production was delayed leading to delays in the on-hire of some of our new containers until late March and April. However, we are optimistic that demand will continue to improve going forward.

Similar to 2010, we believe that leasing companies will be the major container suppliers in 2011, with more than 60% market share, as forecasted by Credit Suisse, Nomura International, and other industry analysts. New container prices continue to be high due to higher steel prices, labor costs, the appreciation of the Chinese currency, and strong demand. We expect used container prices to remain strong due to the shortages caused by very high utilization. And finally, we expect utilization to remain in the mid to high 90% range, based on positive industry fundamentals.

Moving to slide 6, we provide an overview of our strategic focus on increasing net income. Several analysts feel that there's no additional earnings upside through utilization. But since Textainer's utilization averaged 95.4% in 2010, if we can maintain a 97% to 98% average utilization in 2011, that does represents a nice boost to earnings, since 1% utilization annualized is about $4.5 million of pretax income.

But fleet growth will be the main driver in 2011. Following last year's record $503.7 million in capital expenditures, we've already ordered $506.5 million worth of new containers for first half delivery. Furthermore, Textainer's Board has indicated a willingness to increase the CapEx budget as long as there's profitable business available.

We believe that we're off to a great start with orders for 166,500 TEU of dry-freight containers for delivery through the first half. We've also ordered 9,000 TEU of reefers for delivery through July, compared to 6,800 TEU that we purchased in all of 2010.

We recently hired a highly experienced refrigerated container product manager who will start on June 1, and we're confident that with his experience and contacts it will allow us to grow our reefer fleet even more quickly than we're doing at the present.

90% of all of these new containers are for our owned fleet as we continue to increase the portion of the fleet we own due to significantly higher profits on owned containers.

And finally, we continue to search for other accretive transactions, including containers we currently manage, as we did in 2009 and 2010; acquisition of competitors, as we did in 2009; and used container purchase leaseback and trading deals.

Now, I'd like to turn the call over to Ernie.

Thank you. Turning to slide 7, I'd like to take this opportunity to review our financial performance for the first quarter.

Total revenue for the first quarter of 2011 was $91.2 million, an increase of 31% from $69.6 million in the prior year period.

Net income, excluding unrealized gains on interest rate swaps net was $35.4 million for the first quarter, which was an increase of $9.9 million, or 39%, compared to $25.5 million for the prior year quarter.

Income from operations for the first quarter was $53.4 million, which is a 54% increase over the prior year quarter.

And EBITDA for the first quarter 2011 was $69.8 million, 53% higher than the prior year quarter.

Several factors contributed to this improved performance. Utilization for the first quarter of 2011 averaged 98.2%, compared to 90.1% in the first quarter of 2010. We also saw a 21% increase in the size of the owned container fleet and 8% increase in vessel rates. These increases contributed to a 46% increase in lease rental income compared to the prior year quarter.

We continue to increase the size of our owned container fleet, which we accomplished primarily through organic growth in the first quarter. The owned container fleet was 1,229,000 TEU as of March 31, 2011, which represents a 21% increase compared to March 31, 2010. The portion of the total fleet that is owned by Textainer as of March 31, 2011, was 52% compared to 46% as of March 31, 2010.

Management fees increased 20% in the first quarter compared to the prior year period, due to improved fleet performance partially offset by a decrease in the size of the managed fleet.

Gains on sales of containers for the first quarter decreased by $3.2 million, or 33%, which is primarily due to a gain on sales-type leases of $4.2 million recorded in the prior year quarter. For sold containers, we saw an increase in the average proceeds per unit, offset by a decrease in the number of containers sold compared to the prior year period.

Direct container expenses declined by 58% for the first quarter, compared to the prior year quarter. This was primarily the result of decreased storage expense as utilization has increased.

Depreciation expense for the first quarter of 2011 increased for the first quarter due to the increased fleet size.

Moving to slide 8, you will see that we have maintained a strong balance sheet during the first quarter of 2011. Of note, as of March 31, 2011, our cash position was $90 million, our total assets were $1.9 billion, and leverage remained an attractive ratio of 1.4 to 1.

Turning to slide 9, based on our strong financial results, significant contract coverage, and industry outlook, Textainer's dividend for the first quarter will increase by $0.02 per share or 6.9% to $0.31 per share, which will be our 5th consecutive quarterly increase and 8th overall increase since going public in October 2007. We are proud of our record of never decreasing our dividends.

Our first-quarter 2011 dividend represents 43% of net income, excluding unrealized gains on interest rate swaps net for the 3 months ended March 31, 2011. Dividends have averaged 46% 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 22 consecutive years, and it's an important part of the total return that Textainer provides for its shareholders.

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

(Operator Instructions). Gregory Lewis, Credit Suisse.

Yes. Thank you and good morning. John --

Hi, Greg.

Hi. You mentioned the delays to on-hire, that it has been sort of slower than maybe you might have anticipated. I guess, as we sort of moving to May, are we seeing any pickup or should I say reduction in delays to the on-hire?

We are, Greg. In fact, the first real signs of big volume came from our customers in the intra-Asia trades. They've been picking up very significant numbers of containers for the last 4 or 5 weeks. And as you know, that's the beginning because the intra-Asia trade carries a lot of raw materials, components, subassemblies to China and Vietnam, places like that where they become final products -- the iPads of the world.

And then those go out in the deep sea trades to other parts of the world, notably North America, EU, etc. So in just in the last weeks, we've seen strong inquiries from the deep sea trade. So I think it's all coming together as we had anticipated.

Okay, great. So in terms of it may be coming together, as you think about your CapEx spend over the next couple months, should we sort of expect Textainer -- or are you thinking about maybe getting in touch with the manufacturers and starting to boost your new box orders for deliveries in call it, I guess, at this point it would be July and August?

Well, we just placed our June orders Monday of last week. So where -- July orders we probably start discussing with the manufacturers about mid-May. So at this time we're still formulating our tactical plan for July.

Okay, great. And just sort of staying on the opportunity for new box orders, clearly Textainer manages -- a sizable portion of its fleet is managed for third parties. What are you sort of hearing from those customers? In other words, are they interested in ordering boxes? Where does that stand?

You mean the managed container owners?

Yes. The managed container owners, exactly.

Yes, they are. In fact, I had lunch yesterday with the chairman of one of the German funds that we do a lot of work with. He was very happy about the results of year to date and reiterated his desire to participate in CapEx for the rest of the year. So yes, we are getting -- but you have to keep in mind most of the KG funds disappeared in the recession of 2009. So there's only a couple of really strong ones that remain and they're very interested in participating.

Okay, great. Then just lastly, just I guess sort of staying on this topic. When you think about -- you highlighted in your balance sheet position debt to equity of about 1.4 times.

When we think about it, what is sort of an ideal range for Textainer in terms of what you would like to see the debt to equity look like? Is it 2 to 1? Is it 3 to 1? Is it somewhere in between there?

Well, Phil Brewer is here. Let me turn that over to him.

Hi, Greg.

Hi, Phil.

And we've said several times in the past that our current leverage is a little lower than where we would like it to be. We have made every effort to grow as rapidly as we can and continue to do that. We believe our leverage should be closer to 2.5 times, to 3 times, somewhere in that range.

Okay. So in other words in thinking about that and maybe closing that gap, just given the costs associated with reefer boxes and the fact that, I guess, you hired a new person that is going to help expand the reefer business, is that an area where you think probably that sort of helps close that gap to 2.5 debt to equity?

I don't think the reefers are the main driver. If you look at the split between the 500-and-some-odd-million in the first half, the reefers represented about $80 million. It's really going to come with the dry boxes. It's just going to come from the other sources such as buying containers that we manage, etc. So it's a combination of a lot of different things, but I think the real driver will be how many new standard dry-freight containers are we able to successfully lease this year.

Okay. Thank you very much for the time, gentlemen.

Thanks, Greg.

John Stilmar, SunTrust.

Good morning, and thank you for letting me ask a question. First of which, with regards to at least the lag that we've seen in newer pickup. Would you say it's primarily the result of the labor issue that you brought up in your press release with regards to China or is it more have to do with rising fuel costs and the shipping companies being a little bit more constrained at least in terms of capital and their desire to pick up or pay for on-leased boxes?

I was wondering if you could articulate that economy. We've heard just conflicting or various different possible solutions for maybe the lag in pickups. I'm wondering if you could offer just a little bit more color there. I would be appreciative.

Okay. Well, I spoke to an equity analyst in Hong Kong about 4 -- 5, 6 weeks ago, and he covers the manufacturing sector. He said he had just come back from a field trip from Southern China and spoke to quite a few manufacturing companies who said that they had orders for goods from Wal-Mart, and from the big buyers, and they didn't have the workers to produce the goods.

And we've heard, anecdotally, that as many as 30% of the workers did not return to their jobs after the lunar new year holiday in early February. That they were holding out for wage increases of as much as 15% to 20%.

So I can only tell you what I've heard is that the delay was more because they didn't have workers to produce the products than fuel costs or anything else. In fact, everything we read in the press, what our customers tell us, is that the volume is actually there. The latest forecast I saw couple of days ago from Alphaliner was that worldwide container volumes are expected to grow by 9% this year, so definitely the volume is there.

Okay. Then is that labor imbalance -- is that narrowing? Is there a sense that that labor imbalance is narrowing versus what it may have been just subsequent to the lunar new year?

Yes. I think that we're not hearing those same complaints and comments that we were hearing 5 or 6 weeks ago. So my suspicion is that the labor force has returned albeit at a higher cost, but they are back.

And then, finally, shifting to another topic that you brought up on your call which was in regard to acquisition of new boxes, whether they'd be buying them from your managed fleet or you also alluded to potential company acquisition. I was wondering if you could sort of lay out for us just opportunities with regards to the M&A environment, and you can read into that whether it's companies or -- and then some of the different channels.

I was wondering if you might be able to give us a little bit more color about where the opportunities most reside. You're obviously been linked to some -- the GE portfolio, potentially, and I assume you won't talk directly to that portfolio, but generally, if we could compare and contrast opportunities for portfolio acquisitions versus the larger platform acquisitions. And how we should, as analysts, be thinking about where we are in the cycle?

I think that it's fair to say that there are some potential portfolio acquisitions that we can see in the not too distant future. As far as M&A, I think really -- first of all, I cannot comment on what you've seen in the press regarding one competitor.

But I think what we've seen with the Cronos being acquired by private equity last year, Kelso; recently, Triton being acquired by 2 private equities, Warburg Pincus and Vestar -- that the valuations are pretty full right now. So I'm just not terribly optimistic that in this market an acquisition is something that would work out for us.

We tend to be very successful in the down markets. When other people are shying away, that's when we have really been able to achieve the greatest success in buying at below market prices and generating highly accretive returns immediately. So I think that probably, for us, organic growth and portfolio acquisitions in the near term represent the most realistic opportunities.

Perfect. Then just one very quick housekeeping item. I was wondering if you could give us a more refined number for the TEU for both managed and owned, if that's possible.

Okay, I think Ernie just read off --

(multiple speakers) 1,229,000 owned TEU, which represents 52% of the total.

Okay. Thank you very much.

Justin Yagerman, Deutsche Bank.

Good morning. This is Josh Katzeff on for Justin.

Good morning.

Just sticking on the acquisition theme, I noticed you disclosed that you purchased a portfolio of 16,100 TEU in a sale leaseback. If I just do the math, roughly, that's about $650 per TEU, and just given where residual rates are right now for a container that seems like a pretty attractive deal. Can you go through how that transaction worked and whether there are more opportunities like that right now in the market?

Hi, this is Phil. I would just -- I rather not comment specific on that transaction, but I will say that we are seeing more interest in both -- by the shipping lines in purchase leaseback as well as in the sale of trading containers than we've seen probably in the last year or more.

Notwithstanding the fact that utilization is so high, they finally -- maybe some of the biggest fleets are getting older, need for capital, whatever, there is more interest in purchase leaseback opportunities and trading opportunities. We're actively bidding on a few transactions. We have won some, we have lost some. And we're optimistic that there will be additional transactions through the end of the year.

Thank you for that color. Can you discuss where you're seeing your container pricing and maybe get into how yields had trended this quarter or maybe intra-quarter? Are yields still at peak levels maybe seen in December and maybe early January? Or have they trended down?

I think it's fair to say that the yields, while still very attractive, have trended down just slightly over the last 3 or 4 months. And one of the reasons for that is there's more competition. If we look at competitors who are actively buying this year, there are about twice as many as last year. I mean last year 3 leasing companies -- Textainer, Triton, and TAL -- bought as near as we can determine 50% of all the leasing company containers that were purchased.

This year, for various reasons, you have probably 6 or 7; the 3 that I just mentioned, plus 3 or 4 other ones that were reasonably inactive last year, that are actively buying new containers. So as a consequence, we have more competition and that has sharpened the -- we've had to sharpen the pencil just a little bit, but I'm still quite pleased about the yields that we're getting on the leases that we're originating now.

I guess given your cost of capital, it seems to be pretty accretive. I guess in your release you also mentioned that your renewal rates or lease extension rates have been trending significantly higher, and I guess that makes sense given the tightness in the market. But can you just remind us how much of your fleets are turning over on those types of leases?

Yes. As we stated in our Company presentation -- it's on the website -- which was just updated today to reflect the first quarter -- about 10% of our long-term lease portfolio was up for rollover this year. And we're having a very good success in renewing, and in almost every situation generating an increase.

Just a little bit more background, the situation that our customers find themselves in, and one of the reasons that utilization remains at extremely high levels, is that they are faced with replacing an older container, whether it's one that they own or one that they lease from us or one of our competitors, with a new container that they either have to purchase themselves or lease from us, and there's a very significant rate differential. So that's one of the reasons that really the only containers that we're seeing coming back are the very old ones, which go immediately into our resale division and get sold.

And then as you know, we don't count containers that have been put to disposal status in the utilization number. That's why utilization week after week after week has been so high. So the shipping lines are really in a bit of a dilemma. They've got a lot of old containers, but they don't want to turn loose of them because they know they're going to have to pay a lot more to replace them.

Understood. And just one last question before I turn it over. Should we expect you guys to be coming back to maybe the ABS market or the debt markets? When I look at [your books] that you guys have a little bit over, about $266 million in liquidity and a large container commitment that hasn't necessarily fully flown through. Are you guys thinking maybe ABS or subdebt like maybe some of your competitors?

This is Phil. We're not considering subdebt, no. But a term ABS transaction, yes, we're working on it currently.

Great, thank you. Thanks for your time.

Derek Rabe, Morgan Keegan.

Yes. Thanks and good morning, guys. I just wanted to look at the reefer business real quick. Can you -- I guess, first of all, just remind me what the current size of that fleet is for you guys?

It's about 15,000 units that are almost exclusively 40-foot high cube. So roughly, 30,000 TEU in the reefer fleet at this moment.

Okay. And then when I use that as a base, I know you guys are looking to grow quite aggressively in that business. And really the fundamentals are supporting that growth over the next couple of years. But, I guess, taking a step back, what kind of level do you guys see? I guess, from maybe a market share perspective or just an internal perspective, what kind of level are you guys expecting to get to before you start leveling off these investments?

Well, Derek, as you know from having to listen to my presentation about 20 times last week when we were traveling together, we are very bullish about the growth prospects in refrigerated containers. Both just the volume of cargo as people in the BRIC countries and other developing areas get into the consumer class and they're able to buy meat and fresh fruits and vegetables, the overall market is expanding.

We also have the conversion. Unlike dry-freight containerization, which is almost completely converted from breakbulk, still about 38% of all refrigerated cargo goes in the old style reefer vessels, which are being phased out. So we have a lot of growth potential.

We reentered the market in reefers after being out of it for quite a long time. This is our 4th year. We were pretty cautious the first 3 years. We're now building up a real momentum in that field. And as I say, we just -- after quite a long search for the right individual, we just hired a very senior individual, who starts June 1.

So we've already ordered 9,000 TEU of reefers for delivery through July. 75% of those are already either on lease or committed to lease. And with our new product manager coming on board, we don't see any real constraint to us being able to grow that part of the fleet.

We have one other advantage in that our fleet is essentially all brand new. It's all committed to 5 or more year leases. So we don't have to worry about re-marketing for quite a while. We can devote 100% of our energy to adding new containers to the fleet.

So I know I haven't specifically answered your question. We don't particularly sit around and say, well, we've got to get 12.5% market share or 14%. We look for opportunities and then we buy the equipment to meet those opportunities.

Okay. But you don't really see the growth rates leveling off for you, guys, in the next call it 2 to 3 years?

No. I think if I look at what some of our competitors bought in reefers last year, if we can come even close to what they've done we have a huge, huge growth potential ahead of us.

Okay. Great. And then just kind of changing gears here. Just a model question real quick. When I look at the incentive comp line items here, how should we think about those going forward? I know that you had a bump up in long-term incentive comp, a slight decline from Q4 in the short term, just how should we think about those going forward?

Yes, the short term will probably increase slightly as we go forward, and it's really just based on how well the Company does.

The long-term will probably peak next year because a lot of that compensation was related to share-based awards that were issued at the IPO. As those start to vest and trail off that will be a smaller number after next year. It will be some amount going forward, but not as large as it is currently.

Okay. All right. Thanks, guys.

Sal Vitale, Sterne, Agee.

Good morning, gentlemen.

Good morning, Sal.

Just a quick question. First, if I could start with a quick modeling question. The minority interest line came in a little higher than I was expecting, about $1.5 million. What should we be looking at?

Sequentially, it was up, I think, about that amount, about $1.5 million. How should we think about that line going forward? Was there anything specific that drove that up this quarter?

It's really just a function of the profit of the Company because it's the portion of Textainer Marine Containers Limited, which is owned by a third party and that third party owns probably 15% of that company. So to the extent that we're making money in that business, which we certainly made more this quarter than a year ago, that's why the number is higher than -- it's really just going to be a function of the profitability of the Company.

Okay, that makes sense. And then the other question for John is given that you're already at slightly over $500 million for new containers deliverable through June 30, I guess. Would a CapEx investment level of $800 million at this point, assuming of course that you see the pickup -- that ramp up and pickup rates that you mentioned, would that be off the table? Is it $800 million or $850 million even? Is that a reasonable number to think of?

I think it is, Sal, unless something really surprising happens in the third quarter. I really think so. And remember when we did our budget back in October of last year, a new container was $2,350. So we build our budget from the bottom up by talking to each of the 400 shipping lines determining how many containers they plan to acquire, what portion of that they plan to lease, and what our historical percentage of their business is. That translates into a number of containers or CEU; and multiply that by the current price at the time we're building the budget, and that's what we go with.

So the prices of the containers have gone up significantly since we built the budget. And we're also significantly ahead of the number of containers that we thought we would buy. So the CapEx figure is going out by -- because of higher container prices and because demand for the containers is stronger than we thought they would be when we built the budget. Combination of all of that, I think, $750 million to $800 million is not an unreasonable spend for the whole year.

And it sounds like it could potentially even be closer to $900 million, depending on what the pickup rate is, correct?

Correct.

Okay, that makes sense. And then just in terms of that second-half investment, I guess the breakdown -- and I don't need a minute number. I don't need a precise number. Just in terms of the breakdown between dry and reefer, it sounds like it's probably going to be about what it was in the first half?

Yes, because we really -- the reefer season for the fruit really starts around August, so we're planning to ramp up to have more reefers. Most of the 9,000 TEU that we've ordered has been committed. About 75% of that is already committed.

So we're planning to ramp up for the fruit season that's coming up starting about August. And then hopefully, with our new product manager on board who has extensive worldwide contacts, we'd be able to get some additional value in terms of buying from that angle. So I think it's fair to say that the second half could be very similar to the first half.

Okay. And then can you give us a sense for in the first quarter, how many TEUs were disposed of? How many were sold into the secondary market? I'm just trying to get a sense for, I guess, going forward for the rest of the quarters what kind of rate of disposal we should be thinking about, because that's going to impact the TEU count going forward.

Phil has got that figure, Sal.

Hi, Sal.

Hi.

If we're just talking about from our own fleet, I don't have it in TEUs, I'm sorry. I have it in terms of units. We sold almost 10,000 units out of our fleet. There was another percentage that were sold as a result of either lease purchase contracts where the lessee purchased the container or the container was a casualty. But as far as actual disposals out of our fleet, it was 10,000 units in the first quarter.

What would be your guess? If you don't have the exact TEU figure, what would be your guess and what percentage of the year end, I guess, owned fleet was sold in 1Q?

And I guess more importantly, what do you think that will be going forward in the next 3 quarters? Just a rough guess, I guess.

We can send you the exact figures after the call. We have all of it; we just don't have it in -- there is only so much paper we can bring into the call here. But we can send you that.

Okay, thank you. I appreciate that. And then just the last question is on the pricing side. It seems that the pricing seems to be coming in better than I had been expecting, so that's definite positive. Do you expect either -- whether you look at it sequentially or year-on-year basis, I guess in next few quarters should we see these same pricing trends that you're seeing now or maybe even a ramp up?

Are you talking about the lease rates for new containers that we're buying?

Right. I guess my question is, if I just look at the per diem rate on your overall owned TEUs, and I'm seeing that it's coming in nicely whether you look at it sequentially or year on year. I guess I'm asking going forward, do you think it will be rising at the same rate?

Well, you've got to remember that based on the price of a new container, the 5-year lease rate is significantly higher than the average rate of the entire fleet. So as we continue to add containers that cost more than $1 a day to an average fleet that is significantly less than that, yes, it's going to keep bringing up the overall fleet average as we go forward.

That makes sense. And then just on the renewals that you spoke about, can you give any additional color as to like, I guess, on containers that were -- on long-term leases that were renewed during 1Q, what type of increase that you achieved? Is that something you can divulge?

The increases are all over the map, Sal. And also, I think, we would consider that kind of a proprietary information that we wouldn't want to have out there. So I'd rather not get too detailed on that.

Okay, fair enough. Can I just ask one last question on the gain on sale of containers line? How should we look at that line next quarter or two? Pretty much sustained at that pace or maybe coming down a little bit? That $6.4 million?

Well, that number is obviously a reflection of 2 things -- the quantity of containers we're selling out of our fleet as well as the sales prices that we're getting in the containers. And of course the book value of the containers that are being sold. But the first two are really -- I don't see any reason to see that the quantity of containers we're selling out of our fleet is going to change materially.

So the second part is what's going to happen to the used container prices? Right now, they look like they're quite stable. There's been some moderation in new container prices, which can affect used container prices. The moderation has been pretty slight. There's still very strong demand for used containers.

So I expect used container prices to remain pretty much where they are. So I would see that number being consistent going forward.

Okay. Thank you for your time.

Brian Hogan, Piper Jaffray.

Yes, thanks. On the equipment trading revenue and margins and opportunities there, can we have a little more color on that? The revenues were a little bit more than what we were looking for, but the cost of those trading containers were actually a lot higher too.

So the margin went up to 87%. Historically I think the margin was around 80%. Can you give some color on opportunities and what happened in the quarter where the margin was up so high?

I can just comment simply on used container prices. The prices, as I said just a second ago, the prices we're seeing in the market right now are among the highest prices we've seen in many, many years. Certainly, 10 years or more. And right at the moment, there doesn't seem to be any moderation in the prices.

In certain rapidly -- I'll put it this way, in certain developed markets of the world, we actually see demand exceeding supply and extremely strong prices. So I don't expect to see prices come down on used containers or if they do, only very, very slightly throughout the summer.

Yes, that's understandable. This gain on sale in container, but equipment trading, you're buying, sourcing from the shipping lines and selling and trading them. The margin on that business was much lower than it historically has been. Can you provide any color on that?

No; I don't know.

I'm not sure that it was, and I'm sorry. We're not -- maybe we need to look into your question a little bit further.

Right. Just taking the cost of the trading containers sold over the equipment trading revenue, that margin was much lower, going from 80% historically over the last several, 8 quarters and then -- so now it's 87%.

Why don't we get back to you on that one?

Sure. Then you mentioned 2 times as many lessors this year in the market. Can you comment on the rationality of them? Are they being pretty rational? Are they getting any aggressive on the lease rates and trying to take market share anywhere?

Well, rather than -- I won't mention any specific competitor, but we have noticed that some of the players who have not been terribly active in the market in the last couple years suddenly have containers and seem to be very anxious to lease them out. So when we bid on a deal, we often see people that were not present coming in with the most aggressive rates.

Again, whenever you have more competition, you're always going to have someone who's willing to accept a lower rate. But I don't want to over state the magnitude. The margins from where we saw last year and this year are very, very close. So we're still seeing good margins.

Okay, thank you.

Sameer Gokhale, KBW.

I might have missed it in your earlier commentary, but I was just wondering what percentage of your -- the container orders you've leased for this year have already been committed to leases?

Sameer, about 75% of the reefers have been committed and about 60% of the dry boxes have been committed. But you have to keep in mind that May and June production are very large and they haven't even been built yet, so it's not all the same containers because we have some commitments for containers that aren't built and some that are built that are not. But generally speaking, we're pretty happy about the rate that we're getting containers committed to contracts.

Great. Thanks, John. And then the other question relates just generally -- just trying to get a sense. I know you have talked about historically the US market really not being a huge part of the world economy insofar as containerized freight goes, so you have a lot of diversification and the area seems to be doing fine.

But just to try to get a sense from you as to how -- if you are seeing any signs of continued slowdown in the US economy, the jobs numbers haven't been that great? And in your discussions with the shippers, and what's going on, I mean, if we were to try to tap into your perspective on the business, is there anything to be gleaned as far as the US economy and the direction it's headed in, just from conversations you have had with folks?

As far as anecdotally, Sameer, we hear that the volumes are quite good. It's just that what we're seeing happen in Asia, Europe, and in the transpacific, there's really 2 things. One is the new ships that are being delivered. And two, the idle vessel. Remember in 2009, something like 11% of the entire world container fleet capacity was sitting at anchor in Singapore.

There's less than 1% of the fleet is now inactive. So you have all these vessels that were idle, plus all the new. And I think that what's happening is that the shipping lines have got to consider pulling back some capacity in order to get the freight rates back up.

What's interesting for us as a leasing company is that where you have utilization of the world's fleet approaching 99%, you have the box to slot ratio down at 2.0, just dipping below. Where as recently as the year 2000, it was 3 boxes for every slot on board the ship. So there's literally no more efficiency to be gained in the use of the containers, 99% utilization and cargo volumes, but with lower profitability from the shipping lines.

So if I look at all of those factors, it's hard for me to be anything but optimistic about the future for us and our friends in the leasing business going forward.

And then just check some math with Phil, though. I mean in terms of your dividend policy and your return on equity, it seems like you're basically expecting earnings growth in the 10% to 15% range EPS growth for the foreseeable future. Is that reasonable to assume or do you think for some reason trajectory could be higher than that?

Ernie, do you --?

Well, I think, certainly, our organic growth is along those lines. And then our other opportunity, as John mentioned earlier, is -- are there portfolios within our managed fleet that we've been successful in the past in acquiring those, if we can convert those from managed to owned.

And then I think also just touching on some of Phil's points, if at some point, all these older containers are going to come back and be sold. I think we'll see additional trading opportunities available e can supplement our earnings with the increased trading business, which we've had in the past. So I think all those could be the wild cards in future growth.

And in addition, just the steady organic growth.

Terrific; that's helpful perspective. Thanks a lot, guys.

Thank you.

If I could just step in for one second here. I think I'd like to take a stab at answering the earlier question. I went and grabbed another report off my desk. The question about the margin on container sales.

In 2010, most of the container sales, most of the trading containers we bought, in fact virtually all of them were purchased in 2009 under a contract at that time, but they are often delivered over a period of time. After we enter into the contract, the container is delivered over the subsequent 6 to 8, 10 months.

So the prices that we paid for those containers would have been prices established during 2009 when container prices were lower. We then were selling in a market in 2010 when prices were more attractive. The containers that we're selling currently on a trading basis, some are still those older containers, but many of them have been purchased under newer contracts where the purchase prices are higher. And as a result, the margins have come down.

Bob Napoli, Piper Jaffray.

Hi, good morning. Have you seen out of these private equity firms that have fallen in love with your industry all of a sudden, have you seen some of the operators, have you seen them doing anything unusual or are they acting rational? I mean obviously, they want to get a return on their equity so they're going to buy these companies, and obviously, their strategy has got to be to grow them. And I know it's early with some of the players, but 1 or 2 of them have been active long enough for you to get some feel and are you worried about them?

No. Bob I'm not worried about them. But I think it's fair to say that a couple of them have been aggressive to use your term.

Okay. On the depreciation policy, a couple of your competitors have adjusted their depreciation policies. You have not and it does seem like commodity prices are rolling over a little bit here this week, and I think that's a good thing. But what are your thoughts on your depreciation policy?

I think you were using a little higher residual value than industry average maybe coming into this year and now you're probably below.

Bob, this is Ernie. We look at that every year. So usually midyear is when we look at that, so will do that again, coming up soon.

So you feel like you -- do you feel like you need to adjust and there is room --

We really need to take long-term view. I mean obviously today's prices are being influenced by the 99% utilization. But this is a 12-year, 13-year look ahead. We can't just make that assumption that these conditions are going to last forever. So the audit committee and management and our auditors have to really take a hard look at that.

Thank you.

I'm not showing any other questions in the queue. I'd like to turn it back for closing comments.

Okay. Well, thank all of you for your participation and a lot of good questions. And we'll see you next quarter. Thank you.

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.