Textainer Group Holdings Ltd (TGH) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Textainer Group Holdings Ltd. third-quarter earnings conference call. (Operator Instructions). As a reminder, this conference call is being recorded.

I would now like to turn your conference over to your host for today, Mr. Ernest Furtado, CFO. Sir, you may begin.

Thank you and welcome to our third-quarter 2011 conference call. Joining me on this morning's call are Phil Brewer, TGH President and Chief Executive Officer, and Robert Peterson, TEM President and Chief Executive Officer.

Before I turn the call over to Phil, 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.

Finally, the Company's views, estimates, plans and outlook as described within this call may change, subsequent to this discussion. Company is under no obligation to modify or update any or all of the statements that are made. Please see 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 and the Form 6-K that the Company files quarterly with the SEC for additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements.

I would 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 November 4, 2011 press release.

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

I would like to start by welcoming everyone to Textainer's third-quarter 2011 earnings call and note that this is the first time since Textainer went public that John Maccarone is not delivering this part of the presentation.

As I believe most of you know, John retired at the beginning of this month. On behalf of Textainer employees worldwide I would like to thank John for a quarter-century of leadership and support and since I assume that John is listening, let me say good morning, John.

Moving to slide three, I will review Textainer's third-quarter results as well as current market conditions and outlook. Ernie will then discuss our financial results and quarterly dividend before we open up the call for questions.

Turning to slide four, as an indication of the continued strength of our industry and Textainer's strategy and execution, we achieved outstanding results for the quarter ending -- for the quarter, extending a Textainer record for profits. Our performance remains at or near all-time highs for the Company.

Net income excluding unrealized gains on interest-rate swaps, net, and gain on sales containers through noncontrolling interest was $49.3 million or $0.99 per share, a new record for Textainer. Based on our results, Textainer's Board declared a quarterly dividend of $0.35 per share, an increase of 6.1% from our previous quarter-paid payout.

Since our IPO in October 2007, we've never cut or reduced our dividend and have instead increased it 10 times including each of the past seven quarters. Utilization averaged 98.6% for the quarter. Textainer's utilization has now been at or above 98% since June 2010.

Through the end of fourth-quarter 2011, we have or will have invested almost $800 million, which is a record level of CapEx. These funds have been used to purchase 190,000 TEU of new dry freight and refrigerated containers as well as 212,000 TEU of containers from our managed fleet and purchased leaseback containers from our shipping line customers.

Through the end of fourth quarter of 2011, we have purchased and/or ordered approximately 16,000 TEU of refrigerated containers which is refrigerated containers which is our largest annual investment in refrigerated containers since reentering the market in 2008 and represents approximately 40% of our current [reefer] fleet. As we noted during our last call, in June we completed a capital restructuring of our primary asset-owning subsidiary, Textainer Marine Containers Ltd. -- TMCL.

As a result of this restructuring, our ownership of TMCL increased from 75% to 100%. The elimination of this noncontrolling interest started to benefit shareholders in third-quarter 2011 as 100% of TMCL's results flowed through to TGH.

Turning to slide five, some comments about the market outlook. Textainer achieved record results for the third-quarter 2011 aided by a total of $787 million of cash flow expenditures year-to-date, a new record. Continued high utilization and historically high sales prices for our older containers being retired from Marine Service also contributed to our results.

With 78% of our fleet committed to long-term and direct financing leases, we have a sizable contracted revenue stream which we expect will continue to provide our shareholders with attractive returns.

Demand for in-fleet containers remains strong although utilization is down marginally from 2Q '11, remains well above 98% even though the traditional third-quarter peak season was weaker than hoped for. We don't expect to manage for significant quantities of new dry freight containers to pick up until 2012. However, we still expect to maintain a very high level of utilization through year-end because 78% of our fleet is on term or finance leases. And most of the return containers we're getting back are older containers that are being sold.

We believe that the inventory of new containers at factories reached 900,000 TEU in June. Industry sources indicate that the inventory level is now below 600,000 TEU.

We've seen a similar percentage reduction in our new container inventory. Our inventory now totals one to two months of supply during normal market conditions, which is the level of inventory we typically target to hold. We've seen two years of strong demand and high utilization. As a result, the quantity of containers being dispose worldwide has declined dramatically and container fleets have gotten older.

We sold more than 100,000 containers in 2009. In 2010, and annualized 2011 we sold or have sold between 1/2 to 3/4 of that amount. We also saw significant decline in the quantity of trading and purchased leaseback containers being offered for sale.

Recently, we've seen an increased interest by shipping licenses who sell their disposal or in fleet containers. We believe this trend will continue in 2011 as shipping lines look to replace aged containers with newer containers.

Another factor favoring this trend is the recent decline in the price of new containers from over $2,800 to $2,300 or below. We believe shipping lines will depend heavily on leasing companies for this fleet renewal as many currently have limited funds for CapEx.

Due in part to this increased supply of sales containers, disposal prices have declined slightly from their peaks of July/August. However, the decline in disposal prices has been on a percentage basis about half of the approximate 20% decline in new container prices. On a historical basis, disposal prices remain very strong.

Our average days outstanding have remained remarkably steady throughout the year with no increase from 1Q '11 to 3Q '11. Nonetheless we will continue to vigilantly monitor collections as we believe credit risk is one of the primary risks faced by our industry.

Slide six, after two straight years of record CapEx totaling almost $1.4 billion, our debt to equity ratio remains very conservative. Having raised $400 million during 2Q '11 in what we believe is the largest ever non-insured container lessor bond issue, we believe we continue to enjoy the support of our bank group and the capital markets.

Textainer has the liquidity and remains focused on growing its fleet in the future, including new dry freight and refrigerated containers, managed containers and used containers. Now I will turn the call over to Ernie.

Thank you. Turning to slide seven, I would like to take this opportunity to review our financial performance for the third quarter and nine months ended September 30, 2011. Measured by total revenue, income from operations, and net income excluding unrealized losses on interest-rate swaps and gain on sale of containers to noncontrolling interest, the third quarter was the best quarter in Textainer's history trade.

As Phil mentioned, Textainer continues to benefit from historically high utilization. Our fleet utilization for the third quarter was 98.6%, which was virtually unchanged from last quarter and has averaged 98.5% for the full year to date. The high demand for containers has also created a shortage of supply in the used container market which has resulted in historically high prices for used containers as reflected in the third quarter's $7.9 million gain on sale of containers and the year-to-date gain of $23.7 million, despite a lower volume of sales compared to last year.

We also saw the benefit of a full quarter of the 171,000 TEU fleet purchased from Buss Global that was effective May 1, 2011 as well as the addition of new dry and refrigerated containers during the quarter. In keeping with our goal of owning a greater percentage of our total fleet, we now own 58% of our total fleet compared to 48% one year ago.

We also revised the residual value estimates used in the calculation of depreciation expense during the quarter. Based on our analysis of historical results and projections for future sales and new container prices, we increased residual values for our three main equipment types. This resulted in depreciation expense that was $4.8 million lower for the quarter than it would've been using the prior residual values.

Net income for the third quarter excluding unrealized losses on interest-rate swaps and gain on sales containers to noncontrolling interest was $49.3 million which is 48% higher than the third quarter of 2010 and 22% higher than last quarter.

Moving to slide eight, you will see that we have maintained a strong balance sheet during the third quarter of 2011. Of note, as of September 30, 2011 our cash position was $73 million; our total assets were $2.3 billion and leverage was 2.3 to 1 debt to equity.

Turning to slide nine, based on these continuing strong results, we have increased our next dividend by 6.1% to $0.35 per share which is our seventh consecutive quarterly increase and 10th overall increase since our IPO. Dividends have averaged 44% of net income, excluding unrealized gains or losses on interest-rate swaps, and gain on capital restructuring since the IPO, enabling the Company to retain capital for growth.

We've paid dividends for 22 consecutive years and it's an important part of the return that Textainer provides for its shareholders. Historically, Textainer has paid about 50% of net income excluding unrealized gains or losses on interest-rate swaps in dividends. But the Board takes a fresh view every quarter and sets the dividend subject to cash needs for opportunities that may be available to us.

We are very pleased with our third-quarter results and now I would like to open up the call for questions.

(Operator Instructions). Greg Lewis, Credit Suisse.

Ernie, could you provide a little bit more color around the markup in residual values sort of what they were previously and where they are today and just sort of what type of --? How many years over that are being depreciated?

Yes. So, the number of years hasn't changed. It's still 12-year useful life. And, on the 20-foot containers our previous -- to give you the old values and new value. So for 20-foot containers we increased from $950 to $1,050. For 40-foot containers we increased from $1,100 to $1,300 and for high cubes from $1,200 to $1,650 and this was based on a multiyear analysis of our historical results as well as taking a future view of where we see new container prices going in the future. That has a very strong correlation to used container prices.

Okay, great, and then just shifting gears a little bit. I guess Yang Ming was out publicly stating that they had been selling containers to Textainer and I imagine to other container lessers throughout this year, can you sort of provide some color into were these sale-leaseback transactions primarily? Were they container trading and has this has this been something that has been accelerating throughout the year or is has it just sort of been study?

Greg, this is Phil. First, I'll just talk about the Yang Ming transaction. We actually have done many trading and purchase leaseback transactions with Yang Ming over the years. Generally, most of the transactions we do with Yang Ming are trading deals where we purchase containers, they deliver them to us over a pretty short period of time. We've done well over 10 transactions with Yang Ming over the years.

Also, I believe I touched on this in my opening remarks but just a bit more color is that for the last 1.5 years up until this summer, we saw very few opportunities to buy purchase leaseback and/or trading containers. Most of what we were selling were from transactions we had entered into prior to that time.

However, over the last two or three months we've seen a much greater interest in the shipping line to sell both their older containers and trading deals and to sell containers that are eight, nine years old and purchase leasebacks where they may continue to operate those containers for a few years. And then when they return the containers the containers become disposal containers.

We expect to see that trend continue to the end of the year and into early next year for some of the reasons we've mentioned because of going through several years of few container sales. The fleets at the shipping lines are getting aged. As a result they are looking now to start renewing their fleet.

That's why one of the reasons why we believe as this process continues and they are selling off their older containers, starting probably the end of the first quarter next year we'll start to see an increased demand for new containers to replace the containers they are selling.

Okay, great. And then just one final question. I guess this year coming off Chinese New Year is a little bit earlier than from a relative basis maybe where it was last year.

In thinking about that, if there's going to be an uptick in sort of dry box container demand, when should we expect to see that? Is that something we could see in the next couple of weeks or would it be something more in terms of late December?

Greg, it's Robert here. We're going to see an uptick prior to Chinese New Year. It should really happen towards the end of December and the first three weeks or so of January. The Chinese New Year is pretty early in this year. So, I would say that with a relatively weak peak season in the third quarter, the shipping lines have probably repaired themselves pretty well inventory-wise to move equipment back in the right spots for a potential Chinese New Year peak.

Having said that, we are seeing pretty tight inventories, particularly on the 20- (technical difficulty) side, and you know we could very well see a nice uptick in 20-foot demand after Chinese New Year.

But so at this point, there really haven't been any discussions about potential CapEx opportunities. It's something that is sort of wait and see?

Very few incidents.

Perfect. Thank you very much for the time.

Justin Yagerman, Deutsche Bank.

You know, in thinking about the current state of the liner industry and, Robert, you just mentioned that there's probably been ample ability for some repositioning ahead of Chinese New Year by the liners, I guess, is a good lead-in to thoughts on CapEx in 2012. Obviously this being a record year, how are you thinking about that as we stand right now? Difficult macro outlook? Challenged container industry?

On a relative basis if you had to pencil in a number for next year do you have any thoughts of a range? It can be a wide one. I'm just curious how you're thinking about it.

We obviously can't give any specific numbers of what we think our intake will be next year; but we think it's going to be an active year. Our in-fleet utilization is very high and unallocated debt inventory for all these companies' shipping lines in China is declining probably to a stage where the inventories only will recover one to two months of nice demand.

So, overall if you include the fact that many lines are working on fleet renewal programs, they really have not turned in many containers in the last several years. There's going to be nice opportunities out there for both investments and lease-outs and that goes for both dry containers but certainly also for reefers.

The reefer market is looking like it's going to continue to boom. And certainly, the box manufacturers are producing reefer boxes at full speed.

That's interesting. Robert, that data point that you put out there, unallocated depot inventory declined to one to two months. Where is -- is that a kind of normal state or is that low? How do I put that into context of when we see demand starting to wane and when we see demand really starting to heat up?

Well, the one to two month inventory was actually new production inventory in China. Depot inventory, I just ran some stats. If you look at the last eight weeks, our depot inventory has only increased by 0.5%. So it's really insignificant.

And why is that even if we are seeing a greater number of turns? It is because the (technical difficulty) we are getting predominantly older boxes that end up as disposals. So it has not really hurt our utilization significantly and it hasn't increased our leasable inventories which means, if there are additional requirements and certainly larger requirements we would have to cover that from new production.

That's interesting. Phil, on these transactions that are starting to come up again, when you think about the economics of these deals, should we really be thinking about you guys paying the type of residual values that you put out there for these boxes and then keeping the cash flow for whatever you can trade them for in the near term? Or are you paying a premium to that type of residual value in these transactions? I guess what I'm trying to get at is, what kind of risk really exists in these deals?

Well first, I would say good morning or I guess midday for you, Justin, but anyway, thanks for joining the call.

It depends. If we're doing a transaction there's usually two types of transactions. One would be a trading deal where the shipping lines intending to redeliver the containers to us very quickly over the next few months. In that case we have a very good idea of what we will be able to sell the containers for and the prices we will pay for the containers are much closer to what today's sales prices are.

If, on the other hand, it's a transaction where there are going to be there going to be redeliver in the containers over a period of a year or it's a purchased leaseback where they remain on lease to these shipping lines, and we're not going to get them back for two or three years perhaps, clearly we are going to pay a different price and generally a lower price because of the uncertainty of residual values going forward. I'm not saying that I know for certain that sales prices will decline going forward and, in fact, it's been quite instructive to see that although there's been a significant drop in the price of new containers, it's been a much much less significant drop in the price of used containers.

We expect the used container price to still remain quite strong through year-end and into next year.

Then, last one, well, maybe one more. We'll see. In terms of -- just a signal I guess from dry box prices coming in. as well as an increase in this deal flow, you do make money off the deal flow so it's positive. But from an industry reach standpoint is this seasonal demand slowing down or because we haven't seen these deals in 1.5 years, should we read it in as something more in terms of dry demand being a bit softer here as we head into 2012?

Are you talking about because we are seeing these sales deals come up?

Yes. I mean, well, if liners are looking to offload these assets, is it more of a statement on them from a financial standpoint? Or do you think it has something to do with actual demand for the containers that they are trading?

I'm sorry. Now I understand your question.

Frankly, I think it's both reasons that we're seeing right now. Historically, this time of the year is a slower period. So the fact that we're seeing some level of turn-ins or even some level of disposal would not be, would not and is not in way in any way unusual.

However, we could all look at the performance of the liner companies and, clearly, if I were the liner company right now I would be looking around saying well, what are a few ways that I might look at right now to generate some cash flow? And one would be to sell some older containers and look to replace them next year as the market picks up. Or another one would be to take some of the assets that may be fully depreciated on your balance sheet, sell them right now and when container prices are at what are historically high very high levels but continues to operate them and then dispose of them later is. So I think it's both factors.

That's fair and the last one I will turn it over, reefer market share -- where do you think you guys are right now and, then, obviously as you it continues to be a nice opportunity for you guys, what's your ambition as you look out in terms of how much you can grow this thing?

Well, we certainly have big ambitions. We believe right now that our market share is only about 6% in total. And but if you look at 2011, we believe that we are the second largest leasing company buyer of new refrigerated containers, and we believe our market share is currently about 14% or 15% currently if you look at the new building side. So we plan to continue building market share in that sector.

John Stilmar, SunTrust.

This is Jason Futrell stepping in for John Stilmar. We saw that there is a pretty significant increase in the bad debt expense this quarter. Can you just provide some details on why that increased so significantly?

Hi, Jason, this is Phil. Ernie is looking something up right now. I don't know that we have an answer for you on that and I apologize for that. So, can you maybe get to another question and we'll have somebody look at it and see if we can get back to you shortly?

Yes. Absolutely. We went over a lot of detail already on the trading container business and how that business has improved this quarter.

However, given your commentary that you saw resale prices decline recently, do you anticipate the net profitability of that business will decline going forward?

Jason, not really. Because when we are buying used containers, we pay pretty close attention to what the current market price is and look to maintain a somewhat similar margin as we go forward. Part of the decline in prices, recently, has been frankly the strengthening of the dollar against the euro and some of our sales in Europe are actually in euros so we bring them back to dollars. And the prices end up being less than -- because of the currency exchange factor, less than the fact that the euro price of the containers hasn't really changed much.

But, I do think that as we see an increased supply of containers coming to the market we're likely to see prices continue to moderate somewhat but. We're still finding tremendous pockets of demand for used containers in developing parts of the world where -- I think we've noted this on previous calls but if you go back several years, the vast majority of our containers would have been sold in North America and in Europe.

And, these days that's not the case. We are selling far more containers in Asia and Latin America, the Middle East. Parts of the world that are -- where there seems to be very very strong demand for containers, we haven't seen that demand waning yet.

This is Ernie. Just getting back to your question. I guess I wasn't -- it didn't appear to be unusual but it's only 1.5% of revenue but, slight spike, I guess, compared to the last couple of quarters where we've had some recoveries.

We did have two smaller shipping lines default this quarter which caused a slight spike in [bad] debt expense. So it was about 1.5% of revenue for this quarter.

Okay. So we should expect that will trend lower going forward.

Well, as Phil mentioned, there is --. And I'm sure you've read in the press, there is several shipping lines that are having some difficulty but, overall, our days outstanding have not changed since the beginning of the year. So, it's a situation we continue to monitor.

And I think it's important to keep in mind that, even if you look back at 2009 I think our bad debt hit 2.5% or something like that. This is nothing like what we saw that year.

We've got -- in 2009 we had a decline in container trade of something like 7%. I haven't seen one estimate for 2011 that doesn't talk about reasonable growth in container trade. Generally, the numbers are indicated between 7% to 9% next year.

So, what we see happening next year, we still expect to be a very, very good year. But, there is also no doubt there are some cash flow pressures on some of our customers. We continue to pay attention to that. But that's why I guess your question took us a bit by surprise because, to date anyway, we haven't seen anything that concerns us.

Okay. And can you provide us with what your current level of TEU for uncommitted containers is?

I don't think we've stated that number publicly, other than to say that it's about one to two months' supply under normal market conditions.

Okay. And then I guess lastly, just a housekeeping question. Can you provide us with a TEU for your managed and owned containers?

Yes, we'll look that number up but, do you want a specific number or adjust the number right now?

Yes, if possible.

Oh, at the end of the quarter, owned was 1.430 million and managed was 1.028 million TEUs.

Michael Webber, Wells Fargo.

Just wanted to start off with a couple blocking and tackling questions. Phil, earlier on, you mentioned utilization rates in the quarter of 98.6%. Can you give a little bit more color in terms of how that's trended quarter to date maybe on a week-over-week basis and then kind of related to that in terms of pricing we've seen a couple of hundred dollars of downside on new pricing right now. Can you give a little color on how yields are trending right now? Whether they are kind of coming down at all or whether they've been kind of steady and staying in place with the -- or pretty (technical difficulty) place coming along down along with that device.

Sure, I'll let Robert speak to the container prices just as far as utilization. I mean, in the middle of the summer we were at utilization of about 98% -- 99.5%. We're at 99.5%, 98.5% more or less now and sort of big picture, that gives you a sense of the trend. That's over a several-month period.

It's -- it's not a dramatic trend yet. And, in any event, this is traditional seasonal behavior that at this time of year that we would see a slightly decline in utilization. But let me let Robert speak about container prices.

Yes. It appears that container prices have leveled plus minus $2,300 a CU. Obviously, if you went out with a very large order right now you could probably get better pricing. We don't think there's going to be a lot of additional downward pressure. We think that that has already taken place with container prices dropping from $2,800, $2,900 down to plus minus $2,300.

It could drop a little bit more but I think we've kind of reached that bottom plateau in as much as we do believe that, sooner or later, the leasing companies and some shipping lines will start resume ordering.

Fair enough. In terms of the yields I guess, you started to characterize those as being relatively steady throughout the quarter.

I mean, deal yields are certainly very competitive right now. When requirements, total requirements are pretty small, more providers can cover those requirements. So that means that rather than having two or three players compete for the business, we have seven, eight, nine players. So no doubt the yields are under pressure.

Got you. All right, that's helpful. And Robert, you mentioned earlier that you are seeing I guess velocity coming from coming through your depots picking up a little bit. And that makes sense with the lines holding on to their boxes through peak season and maybe starting to return a little bit more.

But we've heard that from some of your competitors as well. You've mentioned a lot of them being kind of basically sold.

Can you give a little breakdown in terms of I guess what you're seeing being re-let versus sold in terms of I guess the new boxes, the boxes rolling through your depots right now? And I guess how do you think those inventory levels are going to trend over the next couple of quarters?

Well, Michael, as I mentioned, our depot inventory has only increased by 0.5 percentage point over an eight-week period. That is really not significant in the bigger picture. Help supporting depot unit utilization is that most of our lease contracts for in fleet container is still cheaper than the replacement cost is for a new container.

So, in a situation right now where cash flow is important for most of our shipping line customers. They are unlikely to really go through a heavy redelivery program just because of pricing. They would go through a redelivery program if they really don't need containers. But I think as you know and we talk sometimes off-line about that, volumes are not bad. Volumes year on year have risen more than 7%.

That is really not the problem we're seeing in the environment. The environment is -- the shipping line environment is that the vessel capacity has increased by 15% to 20% in the same period and obviously in a situation like that, it is with vessels not being full out of Asia to either Europe or North America it is easier for them to turn around their equipment. They can be more efficient during those periods.

And that, of course, helps them move empties back to their demand locations and therefore probably reduces the total need of containers. But again, there is cargo growth and, if lines are not buying, we expect that utilization will remain high yet it will drop marginally.

Got you. That's very helpful and I appreciate it. Phil, you mentioned a little bit earlier and you kind of touched on the fringes of this that you guys are saying I guess more sale-leaseback opportunity and more sales opportunities I guess in the lines over the last couple of quarters. Can you give a little color without going too specific on the parcel side, the block, the containers you guys are saying in terms of overall size and you mentioned a little bit earlier that some of them are a little bit on the older side. Can you give us an idea about where they fall on the age and the lease spectrum and then maybe how attractive you view those terms right now and whether or not you think they're going to get a little bit more attractive as these guys really start to really appreciate capacity?

Well, there are lots of parts to that question so I'll try to remember them but, if I miss, please remind me. Generally these containers are either around seven, eight years old or up to say 12 years old, and then the younger containers would be ones that would generally be on the sale-leaseback builder containers would be ones that would usually be more of a trading transaction where the containers are delivered to us over a pretty short period of time.

The deal size, some have been extremely large, at least initially when the line went out with seeking a level of interest. The transactions we've done I would say vary anywhere from a few million dollars to between $20 million and $30 million for the containers. But I have seen some more recent deals coming out that are even up to two times that or larger.

I don't remember the other parts of your question now although I think there were some parts to it.

Yes well, the other part was just on the terms and it is almost like a follow-up question now. I mean, as related to the extremely large transactions that we obviously haven't seen yet, I guess. What has been the biggest sticking point there? And then, how would you characterize the terms on the transactions that you're seeing right now?

If we are buying the containers under a purchase leaseback, then the transaction is going to be subject to the same credit scrutiny that we would provide for leasing containers to a customer. So if it's a very large transaction, we may find that we're only interested in a certain portion of that transaction anyway, simply due to our credit review process, which is shipping line by shipping line.

So, even if it's a very large transaction, what often happens is, we may bid for part of it and some of our competitors may also bid for part of the transaction. There may be room for everybody to play.

You asked a bit about yields. This has been a business that's been an extremely important part of our operations and profitability for many, many years. And over those many years, the container prices have gone anywhere from a 20-foot container being sold for $700, $600, perhaps even $500 but certainly $600 or $700 to over $2,000. And, we've been profitable throughout that period.

So, I just want to point out that even though used container prices are coming down, it doesn't mean that our returns on these transactions are going to come down. We try very hard to price the transactions to earn a pretty constant margin. Keeping -- you know, we've got 16 people around the world doing nothing but selling containers and we're keeping a very close eye on that market and we're going to price our bids accordingly. So, I don't know if -- did I answer your question?

No, you did. That makes a lot of sense. That's helpful. I guess one more and this is for Ernie and you mentioned earlier, you talked about the bad debt expense and two smaller lines defaulting them on their obligations.

Obviously the small overall bump in your bad debt expense and this is more just from an industry read through perspective but, anything you tell us who they were. And you probably can't but if you can, that would be great and if not, can you give us a sense of geography and then maybe what percentage of your whole book they represent?

We wouldn't normally discuss the names of the shipping lines. I don't have that other information currently available. As I said, we didn't see that as a major issue this quarter so we didn't really --

I mean, I can add a bit more. I think that they were Asian shipping lines -- Asian-based shipping lines and generally very small. But it's important to keep in mind every year we have defaults from smaller shipping lines around the world. It's not uncommon that there will be defaults. I think you can argue that if we don't have a default maybe we're not being aggressive enough in seeking new customer business.

Obviously, we try to have a very thorough credit review but, like any financial institution, you're going to have a few instances where somebody just simply hasn't been successful. We have gone over the past two. We do have insurance policies to cover certain of our exposures in these situations.

Helane Becker, Dahlman Rose.

So, most of my questions have been asked and answered. But, I just have one question with respect to your military business. Can you just discuss a little bit about how big is it relative to the total, number one? And number two, what you're seeing now and will you -- will there be an increase with some of the troop movements that are occurring here in the fourth quarter? And how should we think about that if at all?

The military business is not significant in the bigger picture right now. There is no doubt that the containers, the total containers used by the military is probably relatively stable. But the lease containers that they use right now is on the decline.

So, relative to the shipping line business and our top 25 customer list which represents 80% of our on-hire position, it's insignificant.

Thank you. Everything else has been asked and answered. Appreciate it.

Sal Vitale, Sterne, Agee.

I just -- just on the used container sale line, the gain on sale line, how do we think about that in terms of how that will trend over the next few quarters? So, you have more containers that are coming back but you have a slight decline in used prices.

So, how do we think about which one offsets the others? So, should we expect to have a continued slight decline in the gain on sale line over the next few quarters based on that?

I think as Phil mentioned, in 2009 we sold 100,000 containers and, in the last two years, it's been as low as half of that volume. So, and as Robert mentioned, there is also a good chance the shipping lines will start to return greater volumes of older containers so that the volume of containers could increase quite a bit.

The prices, as Phil mentioned, haven't declined at the same rate that new container prices have declined. So, although it might be slightly off their peak I think we'll still see pretty healthy used sale prices. So, what exactly those numbers would be is really difficult to predict.

And how quickly could we see those as more boxes come back? How quickly could we see the used sale price trend down even further? Just as there's more supply of older boxes?

I just go back to something I said earlier. We're finding such strong demand for used containers in parts of the world that a few years ago we were selling few if any containers, that we are very optimistic that used container prices are going to moderate a bit over the end of the year.

But, I think they are still going to remain at prices that are very attractive on any type of a historical basis. And in fact, we're also thinking that new container prices are likely to hit a plateau and then perhaps start an increase -- maybe Robert might have mentioned this earlier -- but maybe first quarter or end of first quarter, beginning of second quarter next year. Should that happen, that would only be beneficial for used container prices.

Okay. Just if I could segue on that, you talked about new container prices. What is your sense of -- given the cost structure, the steel inputs and the other cost inputs into a new 20-foot box to use that as a proxy -- what is your sense of the breakeven price that the two main manufacturers what the breakeven price is currently, based on cost inputs? Just trying to get a sense for what the floor on new container prices could be.

I mean, it obviously depends on how much admin you allocate to a container. But, we generally use $2,100 as the level.

Okay. And that $2,100, that assumes that steel prices are where they are now, right?

That's correct.

I mean, we are all aware that iron ore prices have come off their peaks. But, I think you also have to keep in mind that there is labor costs, energy costs, oil, etc., that goes -- the cost of oil goes into and the wood into a container cost. And you haven't seen the moderation certainly in China in energy and labor costs are not moderating.

And then, what is your sense for the current state of the market in terms of the per diem lease rate on a new container? Just wanted to get a sense for, if the container price currently is about $2,300, what that cash on cash return -- the unlevered return and what that implies for the per diem rate?

We see market pricing about 11%, 12% cash on cash.

Okay. 11% or 12%. And, historically, I think that it peaked in late 2010, at 14%-ish or something like that?

It was actually higher than that I believe.

Okay. And then just the last question I have is, I just wanted to touch upon the replacement cycle that you mentioned. Because it seems like it would be a pretty exciting development. So, I guess what I'm trying to get a sense for is, one, if you could give any color on snapshot today of the average age of the global container fleet versus what it's been historically? And second, is there -- what is the incremental cost to a shipping line of having an old container in terms of their operating costs?

And I'm trying to get a sense for -- I understand that the, at some point they have to replace. But, given that their cash flow constrained right now, given the low rates that they are earning, can they put it off maybe another year or even two years? Or does it really start to bite in terms of their P&Ls?

Those are all good questions. The lines have stretched the useful life of their inventory, both their own inventory and also lease inventory. Some shipping lines are gone from typically 11, 12 years to 14 or 15, some even 18 years run out so you're absolutely right. The average lifecycle has been stretched considerably.

We don't -- I don't have the exact stats on global fleet. But, I would think it's fair to say that the average must have increased by one to two years over the last two or three year cycle.

You also asked a question about exact dollar amounts, how much more expensive is it to operate an older container versus a new. Well, damage is damage. Damage is the same regardless of whether the container is new or old. But, obviously there are some maintenance issues which come back which we are in charge of if the container gets returned; and if the container is not returned then in order to continue to use it, the shipping line will have to cover those costs for a while.

And what the exact threshold is and what the exact numbers are, we don't have those numbers. But, and quite frankly that decision-making I think will also be different from shipping line to shipping line depending on their situation, and the trade lines, and their individual customer situations. Some customers are more picky than others.

So it sounds like you're saying that they could potentially put off replacement of -- a little bit further. But you think it's more likely than not that, at some point, I think you said in the first half of 2012 I don't know if you said at the end of the first quarter, something in that timeframe that you will start to see more replacement than that?

Yes, I think when you look at it from a total aspect, if you are sure a shipping line right now and you're looking at your container requirements and you don't have the pull that you expected in the third quarter and you're not 100% sure what's going to happen around Chinese New Year, and you are sitting on a certain percentage of surplus inventory right now and you're not 100% certain what your loadings are going to be or what your market share is going to be, some lines will probably make the decision if there is a time to return some containers it's probably now. And if they are going to return containers they will look down in their container pools, and they will likely go for the older containers first.

And one other point to keep in mind in addition to what Robert has noted is that container prices were $2,900 or close to it. And they've come down to $2,300 or below as Robert mentioned. So, the lines are also looking at that and saying, you know if we are going to look to start refurbishing our fleet, so to speak, this is probably a good time to do it.

Because most people feel that container prices, the greater likelihood is they head back north again and not that they had further south. So the cost of replacing with containers prices around where they are today is going to be less than it will be if you delay and wait for container prices to go up.

Okay and, then, if I could just ask one last question on the CapEx, the two of your competitors that have reported third-quarter results so far have both indicated that next year is going to be a very healthy year in terms of CapEx.

Without breaking down what's going to be dry, what's going to be reefer reefer, can you give a sense for -- I think earlier you said it's still going to be a good year. Could it rival this year? I guess, this year if you take out the Buss deal, I think that was what -- $150 million? Do I have that right?

Slightly larger -- about $170 million.

$170 million. So you did close to then what -- $[7] million? So that's about 600 -- I'm sorry, about $500 million -- $550 million or close to $600 million excluding that. Could we see that type of year next year?

We are very optimistic about next year. Similar to what you said to our competitors have announced on their earnings calls. I would absolutely agree with what they said. We think next year could be a very attractive year. You look at the shipping lines and it's not hard to come to the conclusion that they may tend to rely more on leasing companies than their own CapEx for next year.

If you look at who's bought containers this year there's been one shipping line that's purchased 1/3 of all the containers that the shipping lines have purchased this year. You take them out of the equation and the leasing companies have purchased the lion's share of the containers this year. So, we think that trend is likely to continue into next year if there's going to be strong demand for containers and that much of that demand is going to be provided by the leasing companies. So we are very, very optimistic for next year.

Okay. And then just last, a clarification on the $787 million of CapEx year-to-date. Does that include what you've purchased for your managed fleet or is that all owned?

Yes, that does include some managed containers.

What should we think about? Is that historically that's been about 10% of your purchases are from managed? Is that still the case?

Next year is likely to be slightly higher than that. A little bit higher than 10%. But our focus remains on growing our own fleet. We do have a few owners that we continue to work with on a going-forward basis and by containers for those owners.

But in general, we are not looking to dramatic -- we're looking to grow our own fleet not our managed fleet.

And could we see like between now and year end --? Because I think the $787 million is for delivery through December. Could there be anything else for the year at this point?

I would say that would be smaller numbers. I don't think that's considering.

That's very helpful, thank you.

Derek Rabe, Morgan Keegan.

Thanks, good morning. Pretty much all my questions have been answered but, just kind of piggyback off of the second to last question there. As we look at your fleet, obviously you made significant headway in growing that owned portion.

How should we think about that over the next couple of years? Do you see a new target level that is well north of 60%?

First, I would just say that we don't have a specific target. We're always interested in doing transactions that we think are accretive and add to the bottom-line performance of the Company. What -- our own fleet percentage had grown for many years until we pursued several transactions over the past several years of acquiring competitors.

In some cases, we look to acquire the actual assets but some of those transactions ended up simply being management -- management of those assets. If we find such opportunities in the future, we would certainly pursue them.

So, there's no goal that the owned fleet has to be -- the managed fleet has to be wide. Having said that, though, our focus is on growing our own fleet and I think it is very likely that the number will be over 60%. We will continue to look for opportunities among our managed fleet to buy containers from the owners of the containers in our managed fleet as well as we are growing our own fleet more rapidly than our managed fleet.

Okay. And just on the managed fleet size, do you see many of those opportunities coming up over the next year?

You mean to buy containers (Multiple Speakers)?

Yes, kind of like your Buss Global portfolio position there so -- yes.

Some of those owners are German KG funds that have put together what we might think of as limited partnerships. As those partnerships reach certain ages they generally look to liquidate the assets and pay off the partners if the partners are interested in being paid off, or reinvest the proceeds for the partners in new funds. That's an ongoing process.

So, as that happens, the funds often look to sell off the assets. I believe that we'll do something that does continue going forward. I can't say with any certainty that next year there will absolutely be one of those opportunities. But, I do know that they will arise periodically over the future.

Jordan Hymowitz, Philadelphia Financial.

My question is, if I look at the acquisitions you've made year-to-date, and what's coming up next year, assuming a difficult five- to six-year scheduling, barring a major default by a shipping company, it's very difficult for you guys to have down earnings next year. And not that you guys are making any concessions. But does that logic holds sense to you?

I guess you can make your our projections for us, Jordan.

If I made that projection, would you say that you would strongly disagree with that projection that I would make?

Jordan, we don't comment on projections. You know that's the way we've been for years, and I apologize. It just really is something we don't do. We've said on this call several times that we are very optimistic about next year and we are very optimistic about next year; and I'm not sure what more I can say.

But if there was a reason that earnings would fall next year, what would be the most likely thing? A default of the shipping company?

I would say that would probably be the most likely reason. Let's put it in perspective. There will be some defaults next year. There have been this year and there were last year. There will be next year and the year after that.

The question is, who and how big? Another thing that in a few of the defaults we've had this year, we've had extremely good cooperation with the shipping line itself in recovering our containers, and in a matter of two or three months recovered virtually 100% of the assets in a strong market, often been very successful at putting them out on lease and in some cases, at higher rates than they were when they were on the previous leases. Because they had been put on a period of time when the markets were different.

So all these factors come into play as to what effect a default might have on us. So, but yes, I would say that your -- the simple answer to your question is yes.

We have no further questions in queue. I'd like to turn the conference back over to Mr. Phil Brewer for any closing remarks.

Well, I would like to just like to say thank you very much for all of you who participated in our third-quarter earnings call. We appreciate you taking the time to speak with Textainer and your interest in the Company. Have a great day. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Have a great rest of the day.