Textainer Group Holdings Ltd (TGH) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Textainer Group Holdings second-quarter earnings conference call.

At this time all participants 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 call is being recorded.

I would now like to introduce your host for today's conference, Ernie Furtado, Chief Financial Officer. You may begin.

Thank you and welcome to our second-quarter 2011 earnings conference call. Joining me on this morning's call are John Maccarone, President and Chief Executive Officer; Phil Brewer, Executive Vice President; and Robert Pedersen, 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 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. 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 20f 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 it can be found in the Company's August 9, 2011 press release. I would now like to turn the call over to John.

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

Turning to slide 4, Textainer achieved solid results for the second quarter of 2011 demonstrating management's continued successful execution of its growth strategy. Net income, excluding unrealized gains and losses on interest-rate swaps and gain on sale of containers to non-controlling interest, was $40.4 million in the second quarter or $0.81 per share.

Based on our results Textainer's Board declared a quarterly dividend of $0.33 per share which was an increase of 6.5% from our previous quarter payout. And since our IPO in October 2007 we've increased our quarterly payout a total of nine times including each of the past six quarters and declared cumulative dividends of $3.92 a share.

Utilization averaged 98.7% for the second quarter compared to 95.3% for the second quarter of 2010. Year to date we have ordered a total of 172,100 Twenty-Foot Equivalent Units of new standard dry freight containers for delivery through June, plus 15,000 TEU of new refrigerated containers for delivery through December and purchased 211,600 TEU of used containers, a grand total of 398,700 TEU representing $761 million of capital expenditures which is a new record for Textainer.

As our refrigerated container program gains momentum we've already ordered twice as many reefers so far this year as in each of the three prior full years. New container CapEx this year has been $556.2 million and used container CapEx $204.8 million which includes the previously announced Buss transaction of 170,000 TEU of containers that we previously managed and for which we paid $175.6 million. It also includes three purchase leaseback transactions year to date totaling 40,600 TEU at a cost of $29.2 million.

Textainer Marine Containers Ltd. issued $400 million in asset-backed notes with an interest-rate fixed at 4.7% per annum and final target and legal payment dates of June 15, 2021 and June 15, 2026 respectively. We believe this was the largest bond offering ever issued by a container leasing company and it illustrates Textainer's strong support from institutional investors.

We also completed a capital restructuring of our primary asset owning subsidiary, Textainer Marine Containers Ltd., effective June 30, 2011 whereby our wholly-owned subsidiary, Textainer Ltd., now owns 100% of TMCL. The restructuring resulted in a $19.8 million gain on sale of containers to the prior non-controlling interest holder in the second quarter and six months ended June 30, 2011.

The gain was a result of recognizing the fair value of containers and direct finance leases in excess of their book value -- exchanged for TMCL's common shares at the time of the transaction. This was a non-cash transaction.

Turning to slide 5, some comments about the market outlook. While in-fleet container utilization continues to remain at historical highs, demand for our new standard dry freight containers began to slow during the second quarter. We didn't order any new standard dry freight containers for July or August production because we had an ample supply available from new production through June.

Unless the traditional peak season occurs during August and September, which many of our customers expect it will, it's unlikely that we'll order new standard dry freight containers for the next few months. Conversely the demand for refrigerated containers remains strong.

Although the world container fleet appears to be fully utilized and cargo volumes have been growing this year compared to 2010, the reason for slower pickups of factory inventory is that shipping lines have been holding on to older owned and leased containers because of the high expense of replacing them with new containers. This has resulted in historically high utilization and secondhand container prices. But as the fleet ages higher maintenance and repair costs are being incurred by our shipping line customers.

On a recent business trip to Asia many customers I visited mentioned these expenses and stated that they would need to consider fleet renewal programs starting in the fourth quarter of this year or next year. If they follow through on their plans, demand for new containers could be strong going forward. At this point we expect that high in-fleet utilization will continue at least through the remainder of 2011.

Turning to slide 6, with a debt to equity ratio of 2.2 to 1 we're in a strong position to continue purchasing both new and used containers to meet market demand and maintain our industry leading position. And finally, we continue to search for other accretive transactions including buying containers that we currently manage and used container purchase leaseback and trading deals as we did in 2009, 2010 and also this year. Now I'll turn it over to Ernie.

Thank you. Turning to slide 7, I'd like to take this opportunity to review our financial performance for the second quarter and the six months ended June 30, 2011. Total revenue for the second quarter of 2011 was $105.7 million, an increase of 42% from $74.6 million in the prior year period. For the six months ended June 30, 2011 total revenue was $196.9 million compared to $144.3 million for the prior year comparable period, an increase of 37%.

As John mentioned earlier, net income excluding unrealized losses on interest rate swaps net and gain on sale of containers to non-controlling interest was $40.4 million for the second quarter which was an increase of $11.5 million or 40% compared to $29 million for the prior year quarter.

Net income excluding unrealized losses on interest rate swaps net and gain on sale of containers to non-controlling interest for the six months ended June 30, 2011 was $75.9 million, an increase of $21.4 million or 39% compared to $54.5 million for the prior year comparable period.

Income from operations for the second quarter was $81.3 million which is a 97% increase over the prior year quarter. Income from operations for the six months year to date was $134.7 million which is a 77% increase over the prior year period.

Utilization remains at historically high levels and for the second quarter 2011 averaged 98.7% compared to 95.3% in the second quarter 2010. Utilization for the six months year to date has averaged 98.4% compared to 92.7% for the six months ended June 30, 2010. The increase in utilization along with the increase in the size of the owned container fleet contribute to an increase in lease rental income of 46% in the second quarter compared to the prior year quarter and also 46% 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 as well as the purchase of containers we were already managing, including the 171,000 TEU fleet purchased from Buss Global effective May 1, 2011. The owned container fleet was 1,399,000 TEU as of June 30, 2011 representing a 36% increase compared to June 30, 2010.

A portion of the total fleet that is owned by Textainer as of June 30, 2011 was 57% compared to 46% as of June 30, 2010. This percentage will continue to increase going forward as we take delivery of containers in the second half of 2011 that we have already -- that have already been ordered.

Management fees increased 10% in the second quarter compared to the prior year period due to improved fleet performance and higher acquisition fees partially offset by a decrease in the size of the managed fleet. Management fees for the six months ended June 30, 2011 increased by 15% compared to the prior year period for the same reasons.

Direct container expenses declined by 46% for the second quarter compared to the prior year quarter and by 52% for the six months ended June 30, 2011 compared to the prior year period. This is primarily a result of decreased storage expense as utilization has increased.

Gains on sales of containers for the second quarter increased by $2 million or 28% primarily due to an increase in average sales proceeds of over $400 per container, partially offset by a 9% decrease in the number of containers sold and a $1.6 million decrease in the amount of gains on sales type leases due to fewer units placed on such leases compared to the prior year quarter.

Gains on sales of containers for the six months ended June 30, 2011 decreased by $1.2 million or 6.9%, primarily due to a $5.8 million decrease in the amount of gains on sales type leases due to a 93% decrease in the number of units placed on such leases and fewer containers sold, partially offset by an increase in sales proceeds of almost $500 per container sold compared to the prior year period.

Depreciation expense increased for both the second quarter and the six-month period 2011 due to increased fleet size and the increased price of new containers.

Interest expense increased by $6.2 million or 224% in the second quarter 2011 compared to the comparable prior year quarter due to an increase in average interest rate of 1.42 percentage points and an increase in average debt balances of $502 million.

Interest expense increased by $11.1 million or 204% for the six months ended June 30, 2011 compared to the comparable prior year period due to an increase in average interest rates of 1.48 percentage points and an increase in average debt balances of $396 million. The increases in interest rates are due to the renewal of credit facilities at higher interest rate spreads and higher debt balances are due to the increased amount of container purchases.

During the second quarter 2011 the Company reported a gain on sale of containers to non-controlling interest of $19.8 million. This was a result of the Company exchanging containers for the former minority ownership in Textainer Marine Containers Ltd., its primary asset owning entity.

The gain was the result of recognizing the fair value of containers and direct financing sales type leases in excess of the book value at the time of the transaction. This is a non-cash transaction. As a result of the capital restructuring, Textainer Marine Containers Ltd. is now a 100% owned subsidiary of the Company.

EBITDA for the second quarter 2011 was $86.5 million, 349 -- $34.9 million higher than the prior year quarter. EBITDA for the six months ended June 30, 2011 was $156.4 million, $59.1 million higher than the prior year period.

Moving to slide 8, you will see that we have maintained a strong balance sheet during the second quarter of 2011. Of note as of June 30, 2011 our cash position was $77 million, total assets were $2.2 billion, leverage was 2.2 to 1. Leverages increased due to the increased amount of container purchases and the restructuring of TMCL.

Turning to slide 9, based on our strong financial results, significant contract coverage and industry outlook, Textainer's dividend for the second-quarter will increase by $0.02 per share or 6.5% to $0.33 per share which will be our sixth consecutive quarterly increase.

Since going public in October 2007 we have increased our quarterly payout a total of nine times. Our second-quarter 2011 dividend represents 40% of net income excluding unrealized losses on interest-rate swaps and gain on capital restructuring for the three months ended June 30, 2011.

Dividends have averaged 45% of net income excluding unrealized gains and losses on interest-rate swaps net and gain on capital restructuring 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.

Historically Textainer has paid about 50% of net income excluding unrealized gains and losses on interest-rate swaps net 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're pleased with our second-quarter results and I'd now like to open the call for questions.

(Operator Instructions) Gregory Lewis, Credit Suisse.

Thank you and good morning. John, maybe could you shed some light or talk about the rationale for the thought process in the decision to take TMCL in-house?

You know, I could, but I think someone who could do a better job of that is Phil who is sitting right here.

Hi, Greg. There were several reasons why we wanted to take full ownership of TMCL. Frankly it just makes managing the fleet easier. While we are very wary of any conflicts of interest when we manage containers as we had a joint venture there every once that would arise and we felt it would simply be a lot easier and cleaner for both parties if we were to manage all those containers ourselves.

Some of the containers were removed from the fleet and are now owned wholly by our former joint venture partner and we manage those containers -- continue to manage those containers. So all the containers are remaining underneath Textainer's management, it's now divided into two pools, by far the vast majority of which we own and manage ourselves. The other part we do not own, the former partner owns and we manage those containers.

Okay, all right. And then just shifting gears a little bit, there's definitely been some talk in the industry; it's all about the potential for problems with customers, etc. We saw the provision for bad debt expense increase in the second quarter. Could you talk a little bit about what potentially drove that, was that some pressure on one or two customers and sort of how do you think about that in the back half of the year?

We had two small customers stop trading and the losses have been minimal on them. We recovered in one case already 98% of the containers and virtually every single one of those containers is already on lease with another customer.

The other shipping line that ceased trading, we've recovered about 70% I think and are rapidly recovering -- all of the containers from that one came back in high demand locations in Asia and they're all going back out. And we are pretty confident that we have some bank guarantees and a letter of credit that we will recover most of the money, but nevertheless we had to take a reserve against that.

I would also just add that the bad debt expense as a percentage of lease rental income is less than one-half of 1%. So I think that's still a pretty low figure.

Yes, and just -- I mean since it's such a highlight of that, Ernie; if we think about where that sort of moved in I guess in '08/'09, how high is the percentage that that ended up getting anyway? What was the max? I think that would have been in the back half of '08?

Yes, I think it was a little over 2%. If you look in the investor presentation, the appendix, we give a 10-year history of bad debt expense. And there's only -- in two years wasn't even close to being over 1%. And as Ernie points out, our revenue has gone up quite dramatically so I think it's not really an issue. Obviously you're not going to like to see any customer stop trading, but these were two very small customers and it was not a big deal.

Okay, great. And then I'll just ask one final question. In terms of supply, you kind of talked about how non-ordering boxes right now. From -- when we think about boxes at the manufacturers right now, I guess first, what types of levels are at the yards at least from Textainer's perspective? And then in thinking about that from a bigger picture, as a percentage of the fleet, where is that today and then where is that versus where it's been maybe historically?

Okay. From what we understand, that the total new containers at the factories in China, those are containers owned by the shipping lines, and containers owned by the leasing companies is around 800,000 TEU and that's considered to be roughly a three-month supply of containers.

How does that compare historically? Well, if you had looked at the first part of last year when the container manufacturers had just gone back to producing, couldn't keep up with demand, I think the low point of inventory at the factory was between 200,000 and 300,000. But it's not dramatically higher than historic.

In our case, as of last Friday, we had about 57,000 TEU at the factory and this represented about 33% of the total orders that we've purchased this year for new standard dry freight containers. So we purchased 172,000, we had about 57,000. Typically we maintain 30,000 to 40,000 TEU uncommitted at any given time at the factory. So we're a little bit higher than we normally have.

Having said that, we're working on a couple of significant transactions at the moment and we would hope that we'd be back down to our historical non-committed inventory within a short period of time.

So it's not something where you might want to have more inventory because your fleet is bigger. So for instance, it sounds like you have 57,000 TEU boxes, I mean I'm assuming what your own fleet is about 1.4 million TEU right now?

Right. Well, the total fleet -- some of the containers at the factory are managed containers, we don't own 100% and we still take a small amount of managed capital. So I'm including the new containers that we own and some of which that we manage that are at the factory. So if you base that on a total fleet size of almost 2.5 million TEU, it's not a large number of containers and we'll work that down a little bit before we buy any new standard dry freight containers.

Okay, great. Thanks, John.

Justin Yagerman, Deutsche Bank.

Good morning, guys. I wanted to follow up on just a comment you made, John, in you're prepared remarks which was that your customers are still expecting peak season. The market would tell us otherwise right now after the last week or so that we've had. What are you hearing from your customers? What are they telling you? Can you give us any more color in that? Obviously you pointed out a slowdown in demand in dry containers. So I know some of that is seasonal, but if you could talk of what's beyond seasonal in your opinion that would be helpful in terms of putting all of this into some context.

Well, I'd say that between Robert and myself we've basically visited just about every customer. Robert recently came back from a trip to Europe and the Middle East and I just came back from covering all of our customers in Asia. So maybe each of us can give the impression.

But I'll just mention that of the many customers I saw during this trip, I found that there was still a pretty strong indication by many of them that there would be a very short peak season lasting from about mid-August to mid-September and that they were optimistic that there was a lot of cargo that had not been moving.

In fact one customer specifically told me that Wal-Mart had a large amount of product that they had ordered and had told the manufacturers to keep it in the warehouses in Asia until they could determine demand and that all that cargo was going to ship in August. So there was quite a bit of optimism that there was going to be a peak season although short.

The other significant trend that I picked up is that what we've been seeing, and indeed one of the reasons that we're at close to 99% utilization, for more than a year now I might add, and that these secondhand container prices are at historic highs is that the shipping lines have been keeping very old containers in some cases that historically they would have returned if they were leased boxes or they would have sold off themselves if they owned them.

And one of the reasons they've been doing that is that the per diem on a brand-new container that was significantly higher, in some cases twice as high as what they might be paying for a 10-, 11-, 12-, 13-year-old container and conversely be priced to go out and buy a new container.

So they're currently having a fleet of a lot older containers than historically and they were saying that the maintenance and repair costs on these older containers were starting to become significant and that there were some studies going on in many customers about a fleet renewal program that would start after the peak season, i.e. the fourth quarter this year and perhaps into next year.

So those are kind of the two takeaways I had. If there is a fleet renewal then I think the demand for new containers will improve. Robert, what about your impressions of your customer visits?

Hi Justin. My impression was that there has actually been a year-on-year growth in cargo loading, but the vessel capacity has grown at a faster pace, meaning the vessels are not full. Across the board in many trades vessels are operating at 92% to 98% slot utilization, while at this time of the year which should really be the peak they should be rolling cargo, they should be more than 100% in the deep-sea trades.

The fact that the vessels are not full and many vessels are still being delivered has led freight rates to drop considerably and that's the problem when you combine that with high bunker costs. So the main challenge out there has not really so much been the loadings level, it's just been the fact that the vessel capacity has been ample.

So I guess to the point, John, you were making about the potential for renewal, where are per diems now especially in light of, Robert, the color that you just gave on slide utilization? And per diems on dry boxes for lease.

Our per diem levels four in fleet containers have remained very stable throughout all the ups and downs. We are still operating 99% utilization; those containers are still cheaper than even the reduced level you are seeing for new production out there.

No doubt that new production rates have dropped; not just as a result of the price reductions from the manufacturers, but also as a result of more competition. There is more inventory on the ground; more players are competing for the same business. That has definitely led to lower returns for the modular box.

And then I guess the natural follow-on to that is, John, if you could talk or one of you guys could talk a little bit about how much of the fleet actually rolls off contract in the second half of this year in 2012, so we get an idea of how strong that utilization is going to stay for the next six to 18 months or so.

This year it was about -- I think just under 10% was up for renewal. Next year I think it's -- I am trying to visualize the report that we produced for our Board meeting. I think it's 12%. Was it 12%? Anyway, we can look that up, Justin. But it's not significantly different this next year versus this year.

Okay. And then a last one and I will turn it over to someone else. CapEx outlook for reefers in the back half. Obviously dry is kind of up in the air in terms of whether or not we will see anything, but curious how much more CapEx we should be expecting for the refrigerated demand that you are seeing.

We have already placed a lot of orders for the second half and I would say in total, if you look at our first half intake, it's probably about 45% of what our annual intake will be. So we are ramping up.

Great. Thanks, guys. Appreciate the time.

John Stilmar, SunTrust.

Good morning, gentlemen. Thank you for allowing me to ask my question.

Following up on the topic of reefers themselves, generally speaking it has been a minority part of the container market and it seems to be on most of the container leasing companies' calls there has been an emphasis on the reefers. How do we know that that market itself, that the demand has been -- that the demand for those boxes has been outstripped or is there a mini bubble that may be forming there? Because it seems a lot of lessors have been focusing on that as an area of growth and I was just wondering if you could address sort of the supply/demand dynamics of that market.

Okay, John. There is two things happening in the refrigerated market right now. The first is that the overall number of people around the world who -- look at the BRIC countries and other developing countries where you have a large group of people who are now able to afford to buy meat and fresh vegetables and fruit. So you have a much expanded world market for refrigerated cargo.

Then the second thing that is at work is up till now I think there is still something like 37% of all refrigerated cargo is carried in the conventional reefer shipped. And that fleet of reefer ships is shrinking as it ages and as the greater efficiencies of refrigerated containers take place.

So what we have is a continued conversion. Just like in the dry box, virtually all of the cargo that could be put into dry containers has been done over the years, but in the reefer we still have about 37%. Now that is never going to go to zero, but it's going to continue to decline because they are not building new reefer ships.

Whereas the new container ships that are coming out of the shipyards these days have large numbers of what they call reefer plugs. It's the ability to power up a reefer onboard the ship, and some of these big ships have well over 1,000 reefer plugs whereas the earlier generation of container ships might have had 200 or 300.

So I think that we have growth and we also, as the reefer fleet ages we have the replacement market that gets bigger and bigger. So it is an exciting markets, it's an expanding market, and it's one that we feel that we are taking a leadership position. Even though we have only been in it less than four years, we are already becoming one of the major players in terms of new production.

Great, thank you very much. And then just in terms of thinking about sort of working through your little bit of excess inventory, you are still selling or deploying about 1,000 TEU a week. Is that still probably about the same run rate?

You mean selling?

Selling, yes.

Phil, you want to address the secondhand disposal market?

I am sorry, you said selling 1,000 TEU a week, because we are not -- by the end of the year that is probably about where we would be, yes. We are not right there now.

I think by the end of the year we will probably sell a little bit more than that, because I actually think we may see a slight step up in the level of sales between now and the end of the year than we have had over the beginning part of the year. So that is not a -- I think that is a reasonable guess or a reasonable assumption.

Okay.

It's actually units, not TEU.

Right, I am sorry. Yes, exactly, it is.

Just to put that in perspective, in 2009 we sold 101,000 units, in 2010 we sold 77,000 units, and this year, because of the shortage, because of the high utilization, there are fewer units have been coming up for sale so that we have potentially about a 50,000-unit year is what we think we are going to end up with at the moment. But we are getting much higher prices for those units than we did.

Great. And then the final dynamic is the used versus new price. We saw an article today talking about $2,500 approximately, the price of a new dry box. Obviously you are pointing towards a strength in the used market, so the convergence between new versus used, I was wondering if you could maybe provide a little bit more of a historical context of what either that ratio is as a percentage or a an absolute dollar basis.

Have we sort of reached a peak in used boxes? And where does the replacement cost and how do you think about that in terms of your outlook for selling boxes themselves? Thank you.

Okay. Well, two comments. One, I will just call your attention to the appendix page in our investor presentation that is on the website and we give a historical average, the last 11 years of the price of a new container versus the price of a secondhand container in that same year. Typically, the cash value of the secondhand container tends to run about 40% to 50% of a new container.

Well, it's actually 40% to 50% of the original equipment cost of that container, which is not the same thing as what the cost of a new container is in the same year that the container is sold.

I think to address the point here that is perhaps implicit in your question is you are correct in that we have seen new container prices declining, although we are not currently buying new dry freight containers, but certainly understand prices have come down. We haven't yet seen prices in the used container market start to decline, but we expect that they have reached a peak and should -- and we may see some level of decline going forward.

We haven't really seen it yet, though, in our statistics or in our data. I think part of the reason is because we really have identified a lot of new markets around the world that have very strong demand for used containers. So the translation of a decline in new container price into the used container price, while expected to happen, we haven't seen happen yet this year.

Perfect. That was my question. Thank you, guys.

Michael Webber, Wells Fargo.

Good morning, guys. How are you? Wanted to jump back into an earlier question on the TMCL transaction. Maybe if you can give a little color; I know you gave some rationale for why but maybe kind of specifically why now, why the second quarter.

And then maybe a little bit of detail on the mechanics. It's a non-cash deal; I mean should we see some share count creep here? Just maybe give us a little bit more color on the ins and outs of this transaction.

Mike, this is Phil. I don't know what I can add to what I said earlier as far as why it was this year. I would just note it's something that has been under discussion for some time. When we did our IPO, in fact, we used a part of the proceeds at the time to buy part of the shareholding of our -- in fact, half the shareholding of our joint venture partner. And so it has been something that has been under discussion for some time.

Just I think it was more coincidence, a matter of coming together, agreement of minds as to valuation, having the financing, and the time to do it. I don't know what more I can add there.

As far as the accounting implications, I don't know, Ernie, if there is anything you want to add from what we have already disclosed?

Yes, Ed, you mentioned it was a non-cash transaction. It's just recognizing for accounting purposes the fair value of the containers that we exchanged for the additional ownership and that has resulted in the gain that we have reported.

Okay. That is helpful, that is helpful. Some of your competitors -- kind of shifting gears here, some of you competitors have talked a little bit about sale lease back transactions in the back half of the year and it seems to be kind of an interesting way to keep the earnings momentum going for the sector as new box spend seems to slow.

Have you guys been approached by any of our customers about sale leaseback transactions toward the back half of the year? And I guess how do you think about that in terms of kind of filling the void in terms of keeping your capacity growth going toward the back half of the year?

I know we have stated already that we have entered into several sale leaseback transactions so far this year. There is without a doubt an increased interest among our customers in offering containers under sale leaseback, so we do expect that to be an opportunity for further growth through the end of the year.

There is a few opportunities that are currently now being bid on by both us and our competitors, and everything we hear is that there is going to be several additional opportunities available over the remainder of the year.

Can you give us a sense of magnitude in terms of capacity?

Well, I mentioned earlier that we have done three for a grand total of $29.2 million, representing 40,600 TEU. And we are looking at some other ones at the moment, a couple of which could be significant in size.

Okay, that is helpful. I guess in terms of -- I guess one more question and I will turn it over. In terms of funding net growth and additional growth, you guys have been pretty active in the asset-backed market and you mentioned the $400 million you guys have just done.

In terms of the context of what is going on right now within the global marketplace is there any indication that maybe spreads on kind of new ABS issues have widened to a significant degree here? You guys are talking to your bankers; has there been any indication at all that pricing there is moving higher?

Well, coincidentally last night we had dinner with our bankers, sort of a delayed closing dinner for the bond deal that we had done earlier this year. The sense I got from them at the moment is that the markets are, at the moment, very difficult to predate. So there seems to be a sense that there is going to be more clarity to the market come September, but I think none of the bankers were willing to come up with any definitive statement about spreads or access to financing right now given what is happening.

We can all see the extreme volatility in both the debt and equity markets. So you could ask a banker better perhaps than us. Our sense is that there will be opportunities to return to the asset-backed market but probably they would be September or October/November timeframe. August is certainly a challenging month.

Sure, sure, that makes sense. That is all I have got, guys. Thanks a lot for the time.

Helane Becker, Dahlman Rose.

Just two questions. One is do you have or will you publish later a detailed breakdown of all the equipment that you are currently managing? What is managed, dry, specialized, owned, and so on?

Yes, that is included in our quarterly report which will be filed later this week. I think we are going to release that on Friday. And it shows the breakdown by special, dry, owned, managed, and TEU.

Right. You don't happen to have those numbers available now?

I do as a matter of fact.

That would be helpful.

So just in summary, our owned fleet is, as I mentioned earlier on the call, 1.399 million TEU and our managed is 1.042 million TEU for a total fleet of 2.442 million TEU as of June 30.

Okay. And then my other question is with respect to something that you said earlier about capital spending, I think your year-to-date you said was something like $700 million. Are we to interpret that you can go up to $1.4 billion or --?

I was a little confused by something you said. You have slowed CapEx for the third quarter, so maybe you can give us a sense of what your budget is for the rest of the year or what you are thinking about spending for the full year?

Well, Helane, I mentioned that we had purchased a total of 398,700 TEU representing $761 million. This was a combination of new containers, 172,100 TEU of new standard dry freight containers, and refrigerated containers, 15,000 TEU of refrigerated containers, and 211,600 TEU of used containers, which consisted of the previously announced Buss Global deal for 171,000 TEU at a cost of $175.6 million and three purchase leaseback transactions combined totaling 40,600 TEU at a cost of $29.2 million.

At this point, we don't know how many more new standard dry freight containers we will buy. We haven't ordered any for July or August. We have to see how the rest of the year plays out and we pretty much ordered reefers right up through December because they are in pretty tight supply. We just literally placed December orders, what, about two weeks ago, so I don't know that we will be able to even get space for significantly more reefers than we have ordered.

That leaves used containers. These would be primarily -- the source of used containers would be purchase leaseback transactions. And as Phil mentioned, we are looking at some deals at the moment. We don't know if we are going to be successful; we don't know how much of that is going to consume. So it's hard to be more specific than that.

So just to summarize we have committed $761 million. We don't know how much more, if any, we will be able to find opportunities for between now and the end of the year.

Okay. Well, actually that was very helpful, thank you. And then I guess the Sea Containers didn't work out as -- I mean I guess you guys were looking at that. Can you discuss at all the condition of their fleet and whether they are competitive or not?

Well, I don't think we can. Yes, it has been publicly announced in the Wall Street Journal and other publications that we were one of the bidders. But we have signed some very, very rigorous non-disclosure agreements and I just don't think it would be proper for us to talk about any of the details that we were able to look at as part of the bidding group. Sorry, it just wouldn't be ethical to do that.

That is okay, I get it. That is fine. Okay, thank you very much. Your answers have been helpful, thank you.

Derek Rabe, Morgan Keegan.

Good morning, guys. Just wanted to look at your debt position real quick. Basically, how should we think about that in terms of going forward? What level are you guys going to be comfortable with?

If I recall correctly, I think debt to equity you were comfortable with something up to 2.5 times and I assume that you are probably more comfortable with even beyond that right now. But also, can you just remind us if there are any covenants which you may trigger if you go beyond a certain level?

Hi, Derek, this is Phil. We are comfortable with our debt to equity ratio somewhere in the ratio of between 2.5 to 3 times, and we don't come close to triggering any debt covenants at those levels.

Okay, okay. That is helpful. And then, not to beat a dead horse here, but I just wanted to make sure I understood this TMCL transaction. So basically you guys just transferred from the owned to the managed portfolio these containers, is that correct?

We had a fleet of containers -- TMCL, of course, was our primary -- remains our primary asset-owning entity. We had a joint venture partner involved in that entity. It held -- the joint venture partner owned 25% of the voting shares and what percentage of the --?

16% of the total shares.

Of the assets. In any event, we -- of the assets owned by the joint venture partner, we ended up taking control of half of those assets and the other half of those assets were moved out of TMCL into a new company owned wholly by the former joint venture partner and we manage those assets. In exchange, we now control 100% of TMCL.

Okay, so the uptick in your managed portfolio by about a little under 100,000 TEU, the majority of that is from this transaction, correct?

That must be. I mean it would --.

Okay. I just wanted to make sure there was nothing else.

(multiple speakers) our managed fleet, yes.

Yes, yes, okay. Just making sure I understood that correctly. So when we think about your managed fee incomes going forward this should be a good level, maybe a slight uptick going forward?

Well, also -- Derek, I mention that although we are -- our primary goal is to increase the owned portion of the fleet because we generate more net income on that, we do have two relationships that we consider to be strategic with investors, so that we are taking a relatively small portion of managed containers as part of our new CapEx. And that is just over 10% of what we buy on behalf of third-party owners going forward.

So that is part of what you saw in the increase in the managed fleet in addition to the TMCL transaction that we have talked about.

Okay, that is helpful. Sorry to beat a dead horse there. Just turning real quick to cash-on-cash returns. Can you talk about kind of where they stand today and how they have trended recently?

We typically don't really disclose that, but I can say that, probably as no surprise to you and repeating what Robert said earlier, as we have seen a little bit stiffer competition this year than in the last year the cash-on-cash returns have declined a little bit. Not dramatically, but they are still attractive.

Okay. Thanks for the help, guys.

Sal Vitale, Sterne Agee.

Good morning, gentlemen. Thank you for taking my question. I just have a few questions; one just maybe Phil could help with this. It's on the number of TEUs of containers sold for the second quarter. Did you talk about that earlier or can you provide that?

We were talking earlier about the run rate of containers that we expected to sell somewhere around 50,000 units over the course of this year and the second quarter. And that is based on the run rate of containers sold through the first six months of the year.

Okay, that is fine. And then just I guess a question for you, John, just looking at the CapEx you have done for the year thus far of $760 million. Just for argument's sake, if we assume that the peak season is kind of weak and there is not too much more in terms of dry container investment, given that the reefer investment is -- I think you said that you pretty much have ordered for delivery through December -- is it fair to say that just from say leaseback type transaction that that could maybe add as much as, say, $100 million to your total CapEx number so that the year shakes out at about, maybe call it $850 million to $900 million? And again that is assuming that there is not much more dry container investment.

That might be a little bit on the aggressive side, Sal. In the deals we are looking at that I mentioned, which there is no guarantee we will get them because other people are also looking at them, are significantly less than $100 million. But we are seeing opportunities pop up, so we just don't know how -- we still have five months to go in the year, we don't know what is going to come out of the woodwork.

But right now to say that $100 million of sale leasebacks, I think that is probably aggressive. I wouldn't want to pick a number, but $100 million seems pretty aggressive.

Okay. Then just staying on that sale leaseback question, what is the primary motivation of the customers that are presenting these types of deals to you?

Money.

Okay. Is it that they are in some type of distress or is it just basically they need the capital for taking delivery of vessels?

Well, Sal, I think one of the primary reasons they are looking at this is because everybody can see that used container prices are at historical highs. And the shipping lines are saying we actually still want to use these containers for some period of time, but we want to take advantage of the current price level.

Now obviously, when we price these transactions we take into account when we expect to get the containers back and what we think resale prices will be at that time. But nonetheless, I think that is a big motivating factor. Yes, they would like to -- they are looking for money, as John said, but they are also looking -- they are also aware that used container prices are at historically high levels.

Okay. And what is the typical age of, say -- I think, John, you said that you have done three deals thus far this year. What is the typical age profile of the fleets of containers you are buying?

These are about eight years old?

They are usually eight to 10 years old. We expect to see the containers back generally within a year and a half to several years.

So the lease that you are entering into is, I am sorry, you said 1.5 to 3-year leases?

Well, the leases are until they return the containers. There is no fixed date at which point they need to return the containers. They can return them tomorrow; they can return them any time. Generally there is not a minimum, a hire period under these leases. Some have had that, but not that many of the transactions.

Okay. Then just the last question I have is just looking at the revenue trends throughout the year, now I assume that just looking at the sequential growth in lease rental income of 15% in the second quarter that was obviously driven to an extent by the Buss Global transaction that occurred into 2Q.

How do we think about I guess going forward into 3Q? I would assume that the sequential revenue growth is going to be at a lower pace than that, but any color as to what should we expect for the rest of the year?

Well, I think you are right in that where we are going to see the sequential is how quickly we can put some of these new containers that we already own on lease. As the refrigerated -- most of the refrigerated containers that have been ordered that have not been committed have not been built yet. So as those containers get built between the months of August and December, keeping in mind that we are getting into the reefer season, that is the peak season for reefers tends to be toward the latter part of the year.

So that is where I would see as we convert dry boxes that are sitting at the factory to revenue producing leases and as the refrigerated containers get built and put out on lease. But I think it's safe to say that that is not going to give you the same kind of pop that we had in the second quarter in terms of percentage -- sequential growth.

Okay, thank you. Then just the last question is a clarification, John, on something you said earlier. I think you had said that currently that there are about 800,000 TEUs currently sitting at the factories in China and that that is pretty much in line with what the number should be historically.

No -- well, if I said that I probably misspoke.

I might have misunderstood, sorry.

What I was saying is that when I was in Asia a couple of weeks ago, they -- one of the -- I think it was Nomura, the research people in Nomura, the analysts, I met with them and they said that they cover the container manufacturers that are public. That there were -- at the end of May there were 900,000 TEU at the factory; at the end of June there were 825,000 or 830,000.

And then I just read something in Alphaliner yesterday that said there were about 800,000, which I presume would be somewhere at the end of July. So 800,000 according to the Alphaliner article said it represented about three months of consumption, which it varies. Sometimes you have got two months, sometimes you have got more.

So it's not grossly out of line but it's probably a little bit higher than we would normally have. And I think the reasons for that are twofold. One, as we talked about on this call, the shipping lines are not returning or selling old containers and, two, that the peak season hasn't really materialized to the extent that everyone thought it was going to.

So we did see it in June and July decline in the amount of production of new containers, a significant decline both by shipping lines and leasing companies. So we will work this off; this is nothing to really be alarmed about. It's something that just happens from time to time. You get a little bit over your ski tips and then people stop ordering. And then the containers disappear and then they start buying again.

Okay, thank you for your time. I appreciate it.

Sameer Gokhale, KBW.

Thanks. Just to talk a little bit about that divergence between used container prices and new container prices. It seems like one of your competitors was talking about used container prices moving higher perhaps because certain trade routes were experiencing increased demand in one-way traffic, I believe. And I can't recall which routes those were specifically.

But is that something that you have come across as well that might explain some of this divergence where new container prices have come down and used have gone up?

Sameer, I am not sure that that is a factor that I am aware of. I think the bigger driver really is that there is tremendous demand for used containers in newer markets that we have identified over the past couple of years and that demand remains.

There does still remain strong demand in Asia for used containers and generally when you are selling the used containers in Asia it is because they are used for one-way carriage of goods. So I suppose that could be a factor, but I think there are many factors.

Okay, thanks for that. Then just the other question I had was you talked earlier about how the shipping companies were thinking about retaining more containers and then using old containers, older containers and then doing studies of whether it's more cost effective to repair and maintain those versus going out and getting new containers, leasing new containers.

Based on your experience with your containers, how expensive is it to do the maintenance work on these containers? It seems like it should be a fairly straightforward calculation, so I mean are we talking about at risk there being maybe like one or two year's worth of demand that comes out of the market because the shipping companies decide to hold back and use their older containers and just stretch out how long they can use them? Or is this just like a few months we are talking about?

So just some additional detail would be helpful, given that you have your containers and have a sense for what maintenance costs would be?

Well, Sameer, I think that what we are seeing is that if you look at the year 2010, for example, there was a shortage, an extreme shortage of containers, especially in the first half of the year. Then the container prices went up to a high level, the per diem levels went up to a very high level for leasing. So because of the shortages the shipping lines returned very few containers in 2010 and then this year it was the same thing.

Everyone was originally looking at a strong peak season and they decided to hang on. So you really have almost two years of unnatural behavior by the shipping lines, keeping older containers that they would not have kept in a normal situation. So I think that that two-year period is pretty much coming to an end.

Just to give you an example, one major customer that we have told me recently that 60% of his entire fleet, that includes owned containers and leased containers, was more than 12 years old. And that he felt that he had a very significant fleet renewal program that he had to initiate, because he just -- and I think if you look -- if you repeat that with other customers, you will find that because of what has happened in 2010 and 2011 a lot of shipping lines have an older fleet profile than they would like to have.

Therefore, my theory and really anecdotal evidence from customers is that we will start seeing replacement of some of those containers going forward. Perhaps in the fourth quarter or next year.

Okay, that incremental color is very helpful. Thanks, John.

I see that we don't have any other questions left and we have gone a little bit over, so at this point we will just say thanks to all of you for dialing in. We will see you next quarter.

Ladies and gentlemen, this does conclude your conference. You may all disconnect and have a wonderful day.