Textainer Group Holdings Ltd (TGH) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Textainer Group Holdings Ltd. second-quarter earnings 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, Hilliard Terry, Executive Vice President and Chief Financial Officer. Sir, you may begin.

Thank you, and welcome to our 2012 second-quarter earnings conference call. Joining me on this morning's call are Phil Brewer, TGH President and Chief Executive Officer. At the end of our prepared remarks, Robert Pedersen, TEM President and Chief Executive Officer, will join us for the Q&A.

Before I turn the call over to Phil, I would like to point out that this conference call contains forward-looking statements in accordance with the 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. The 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/A for the year ended December 31, 2011, filed with the Securities and Exchange Commission on June 27, 2012, and the Form 6-Ks 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 also like to point out that during this call we will discuss non-GAAP financial measures. As such measures are not prepared in accordance with Generally Accepted Accounting Principles, a reconciliation of non-GAAP financial measures to the most directly comparable GAAP measure will be provided either on this conference call or can be found in today's earnings press release. I would now like to turn the call over to Phil.

Thank you, Hilliard. Welcome to Textainer's second-quarter earnings conference call. Building on the success of the first quarter, we continued to deliver excellent results during the second quarter. Total revenues of $120 million represents a 14% increase over the same quarter in 2011. Adjusted net income of $44.7 million, or $0.89 per diluted common share, is an increase of 11% compared to the prior-year quarter. Our annualized return on equity as of the quarter end is 26% compared to an average of 23% since we went public in 2007. We believe this is especially impressive, given both our low leverage and the low returns generated by most other asset classes over this time. Textainer declared a $0.42 per-share dividend, an increase of 5% from the previous quarter. This represents our 10th consecutive increase in dividends and continues our record of constant or increasing dividends every quarter since going public.

Year to date, we have invested more than $760 million in new and used containers. Our fleet now exceeds 2.6 million TEU. Approximately 25% of our new container CapEx this year has been in reefers. We have ordered more than 17,000 TEU of reefers, already exceeding our total 2011 reefer investment. We remain focused on growing our position in this very attractive market.

The portion of our fleet subject to term and financed leases increased from 78% to 80% over the last year. At the same time, we increased the owned portion of our fleet from 57% to 60%. We expect both trends to continue, not only providing increased stability and visibility to our earnings, but also improving bottom-line performance.

Since 2010, we have been surprised at the limited quantity of containers being sold by the shipping lines, due in large part to the prevailing high level of utilization over that time. During the last three months, we have seen a significant increase in shipping line disposals via trading deals or sale-leasebacks. These transactions are doubly attractive to Textainer. They provide the opportunity for trading profits and new lease-outs, either now or in the future.

Retail prices remained strong. After declining 15% to 20% from last summer to the beginning of the year, prices have remained steady since at levels that are extremely attractive. A very positive secular trend is that shipping lines are increasingly relying on leasing companies to provide containers. Since 2010, leasing companies have purchased more than half of all new container production and we believe they have purchased 65% or more this year. As a result, leasing companies have the opportunity to enjoy strong organic growth. Indeed, we believe the percentage of the leasing industry's new container investment purchased by Textainer exceeds our market share in both dry freight and reefer containers.

Utilization continues to improve. It was 97.6% at the beginning of the year, has been above 98% continuously since late May and is currently at 98.3%. While we expect utilization to decline slightly during the third quarter, we believe it is likely to remain high for some time. The high level of utilization we see indicates a tight supply market currently, and total container production this year is expected to be approximately 2.3 million TEU, a reduction of 15% from last year's production. We understand that the factories have limited new container orders after July. This reduction in new production, combined with the increase in sales noted above, are likely to support continued high utilization.

I just returned from a two-week trip to Asia where I met with some of our customers. The lines I met all benefited from the reduction in bunker prices and increase in freight rates that have occurred this year. In general, I would describe their attitude today as a mixture of relief that their second-quarter performance was dramatically better than their first quarter and concern that the freight rate increases that have been achieved will be maintained.

The resulting uncertainty has led to a recent slowdown in container demand. However, lease-outs of both new and depot containers continued to exceed turn-ins by a factor of more than 2 to 1, and our unbooked depot stock remains low. Furthermore, we do not expect any slowdown to be as dramatic as last year.

Even though the level of new container CapEx is slowing, we see many opportunities to increase our investment in used and managed containers. Our low leverage and the restructuring of our warehouse facility during the quarter, increasing its size from $850 million to $1.2 billion, means we have new liquidity to take advantage of the investment opportunities that we identified.

We are extremely pleased with our results. I will now turn the call over to Hilliard.

Thank you, Phil. We delivered solid results this quarter. The 13.5% growth in revenues was driven primarily by an increase in lease rental income, as a result of a 10% increase in the size of our own container fleet, which grew from an average of 1,399,000 TEU to 1,580,000 TEU. Please note these are average numbers; the actual size of our own fleet at the end of the quarter was 1.6 million TEU.

This year-over-year revenue increase was partially offset by lower management fees resulting from lower fleet performance and associated fees in spite of the 3.4% increase in the size of our managed fleet.

We also saw a significant increase in the sales of trade-in containers. Trade-in container sales proceeds were up 125% year-over-year to $12.7 million for the quarter, primarily due to an increase in volume. Although the average sales proceeds per container decreased, the average cost per unit, which I will talk more about shortly, was lower by 31%, practically offsetting the lower average sales proceeds.

We had a gain on sale of containers of $8.2 million in Q2 2012 compared to $9.4 million a year ago. The year-over-year decline was due in part to fewer containers being sold and fewer containers replaced on sales type leases versus containers in the year-ago quarter, resulting in a lower impact from the non-cash gain on sales type leases. As a reminder, the non-cash gain on sales type leases represents the difference between the fair market value of containers and their book value at the extension of the lease.

Before diving into expenses, I want to point out an unusual item included in last year's quarterly results. The net gain on sale of containers to non-controlling interest of $14.8 million for the second quarter of 2011 was a one-time non-cash gain. In short, Textainer bought out an outstanding minority interest in TMCL, and as a result of this transaction the Company now owns 100% of its TMCL subsidiary. Given the one-time and unusual nature of this item, I have excluded it from our analysis for an apples-to-apples comparison of our year-over-year performance.

Excluding the gain on sale of containers to non-controlling interests of $14.8 million, on a year-over-year basis total operating expenses grew pretty much in line with revenue, plus or minus a percentage point or two. I will walk through several of the expense line items and touch on depreciation expense and interest expense as well.

Direct container expenses increased by $1.8 million due to the increase in the size of our fleet and slightly lower utilization rates versus the year-ago quarter, which resulted in higher storage costs and other fleet expenses. As I mentioned earlier, the cost of trading containers sold increased by $1.6 million compared to the year-ago quarter, due to the increased number of containers sold. However, this was offset by a 31% decrease in the average cost per unit sold. Depreciation expense was $22.8 million for the quarter, down $1.2 million or 5% as a result of an increase in the estimated residual values used to calculate depreciation expense, but partially offset by larger fleet and an increase in the average price of containers purchased.

General and administrative expenses at $5.8 million for the quarter were down 3.7% year-over-year and consistent with the quarterly run rate on a sequential basis. Our bad debt expense was $700,000 or 0.6% of revenue, which is well within the normal range of 0.5% to 1% of revenue.

Interest expense was $18.5 million for the quarter versus $9 million in the year-ago quarter. This increase was primarily due to the additional debt used to fund the expansion of our fleet and a slight increase in borrowing cost. Adjusted net income, which excludes unrealized gains on interest rate swaps, for the quarter was $44.6 million, which is 11% higher than the second quarter of 2011.

As Phil mentioned, year-to-date we have spent more than $760 million on CapEx and significantly increased the size of our own fleet. In keeping with our goal of owning a greater percentage of our total fleet, we now own 60% of our total fleet compared to 57% in the year-ago quarter. We have maintained a strong balance sheet during the quarter. As of June 30, 2012 our cash position was $82 million with available liquidity in excess of $500 million. Total assets were $2.8 billion and our leverage ratio was 2.3 to 1.

Based on the stability of our results, we have increased our dividend to $0.42 per share, representing 47% of our adjusted net income. Dividends have averaged 43% of adjusted net income since the IPO, enabling the Company to retain capital for growth and return cash to our shareholders. We have paid dividends for 22 consecutive years and it's an important part of our total return that Textainer provides for its shareholders. Our Board has targeted a dividend payout ratio of 40% to 50% of adjusted net income, but it takes a fresh view every quarter and sets the dividend subject to the cash needs and investment opportunities that are available to us.

In closing, Q2 was another solid quarter of results for the Company. Moreover, we are very proud of the annualized return on equity we have been able to deliver as a public company over the past five years.

I would like to thank you for your attention and look forward to seeing many of you at the upcoming conferences and investor meetings. Now I would like to open the call up for questions. Operator, can you inform the participants of the procedures for the Q&A?

(Operator instructions) Gregory Lewis, Credit Suisse.

Thank you and good morning.

Good morning.

Good morning, Greg. And I would just like to apologize to everybody as well; I've -- we've never had this problem before with connections. We'll certainly look into what has caused the problem, and I appreciate everybody's patience. Thank you.

Sure thing. You've got to deal with that, right? But anyway, when I read your comments that Textainer has invested $760 million in new equipment thus far this year, and then I go back to the cash flow statement and I see that the purchase of containers and fixed assets is -- it looks like it's only about $316 million. How do I sort of -- I guess that's for Hilliard. How do I tie that out?

Well, Greg, basically the $760 million is what we've purchased or put orders in to the factories. Obviously, there's a lag in terms of the time that the containers are built, and we actually spend the cash for the containers. So you're just seeing the lag between that.

Greg, generally, we have payment terms with the factories where we don't pay the factories until a certain period of time after the containers have actually been delivered to us.

Okay, so (multiple speakers)

And the other thing is, we are also spending cash for both owned and managed containers as well.

Okay, great. So when I think about what July looked like in terms of taking delivery of equipment by your customers, can you provide any color in what that looked like? Was that a good month in terms of container pickups by customers and we'll see that sort of cash be realized, that cash out the door be realized on the cash flow statement into Q3?

Greg, this is Robert here. We put just below 10% of our total CapEx out on lease in July.

10% of total CapEx. Okay, great. And then you mentioned in the press release that, clearly, Textainer is making inroads into the reefer market. When we think about that, should we expect -- a lot of this CapEx has been orders where we are going to see those boxes get picked up in September-October? In other words, should we think about any lag in terms of reefer pickups, or could you just provide some color on that?

Greg, the reefer season is typically fourth quarter and first quarter. So it is correct; we have been building up inventory in preparation for the fourth quarter.

Okay, so it sounds like your reefer inventory is probably somewhere where you want it to be heading into the fourth quarter's?

That's correct, Greg.

Okay, perfect. Actually, that's all for me now. Thanks.

Greg, I just want to point out something. If you look at our balance sheet, you will see that there is a line item under liabilities that says container contracts payable, and that will show you what's outstanding or that will eventually flow through cash flow. I would also add that our trading containers and managed containers do not flow through the cash flow statement on that particular line item.

Michael Webber, Wells Fargo.

Just to follow up quickly on Greg's question around pickup speeds, and maybe just help us think about the math here. So you've got $316 that came through thus far in Q2, and you said 10% of your total CapEx in July. There's still a fair amount that needs to be put out there. How should we think about the pace? If you did 10% in July, can we straight-line that through the rest of the third quarter? Is it going to be a little bit more lumpy? Just kind of help us conceptually think about how that gets put out.

Yes, Mike, it's Robert here. 22% of our total CapEx is booked and will probably go on higher in August and September.

Okay.

And then we have 23% of our CapEx which is unbooked at this stage here, and we are working on that, and that's a combination of dry containers and reefers.

Right, all right, so that's helpful. Phil, you mentioned this earlier and I missed it. I want to make sure I was clear in talking about utilization. Obviously, it improved. Can you talk -- you mentioned the Q3 number potentially coming in and then recovering in Q4. Can you just maybe map that out again? I know you mentioned it; I just wanted to be clear what you said.

Yes, Mike. My point was that our utilization is up from the beginning of the year; it's also up from the end of the first quarter. We do expect to see a bit of softening in utilization in the third and fourth quarters. That's what I said.

Okay, I appreciate that. A couple of high-level questions here -- I know most of your boxes end up coming from Singamas, and they recently rolled out a new facility in July and they've got another one coming out at the end of the year. Any material changes in delivery mechanisms, costs associated there? Are you guys noticing anything there, or is it too early?

Well, I would say that the main difference is that, rather than waiting two or three months for your production, you now can get production with a one- to two-month wait period. So the lead time is down compared to what it was in the second quarter.

Got you; that's interesting. And then, Robert, just to follow up on that, just a higher-level question -- obviously, we've seen Asia/Euro volumes come in, and it doesn't look like we're seeing -- we're going to see too much of a recovery there any time soon, and you are really seeing inter-Asia and north-south trades really support the market.

As those -- specifically, those north-south trades develop, is that changing the return profiles on the boxes at all in the sense that you've got to start -- you are taking requests for re-delivery areas that might be further away from core lanes? And it might just be, too, kind of on the margin -- but have you noticed anything in terms of, as that north- south trade takes up more share of global container volumes, any -- what changes are you seeing in the return profiles of your boxes, if anything?

Well, let me just go back to the trade question. There's no doubt that in trade, the inter-Asia trade is the fastest-growing trade in the world, and that that is showing increasing significance. As to the return provisions, basically it's more or less similar for the various trades. For years, we've been trying to steer our redeliveries back into the better locations in Asia, and that is really regardless of whether it's the trans-Pacific trade or the Europe trade or the Australia trade or Middle East or whatever.

Yes.

One other thing to keep in mind is that the return provisions for our leases have generally been negotiated some time ago, and so any returns that are taking place now are taking place in accordance with terms that have been in place for a year or two, or several years.

Right, right. No, no, no; that makes sense -- just curious. And then I guess you mentioned this a little bit earlier, Phil. We saw one of your competitors, a smaller competitor, take out a big chunk of managed containers. Can you talk a little bit about what sort of managed deals you guys are seeing out there right now, just in terms of size; and then how you think about potentially bringing some more of those managed containers that are already in your network in-house? Just a little bit of color on that market?

We are always in discussion with the owners of the managed containers in our fleet. It tends to be somewhat of an opportunistic endeavor in that that they often have guidelines as to when they are able to sell their own containers. And so, even if we want to buy containers at a certain time, it may simply be that any of the owners of the managed containers don't have the ability to sell at that time.

Having said that, we have purchased a small fleet already this year, and we are speaking to owners about some other opportunities, some of them more sizable, between now and the end of the year.

Okay, that's helpful. One more, for me, quickly and I'll turn it over. This is for Hilliard. Interest expense is a touch higher than we were expecting, but I know you guys closed a pretty big underwriting during the quarter in terms of an ABS deal. Did we see any fees flow through that line item during the quarter?

Yes, there are a couple of things that -- there was the extinguishment of debt, as well, that flowed through that line item. So interest expense is probably a little higher this quarter, given some of those one-time things, in addition to just the overall slight increase in cost.

Can you guys quantify that a little bit so we can get a read in terms of where you should trend going forward, and what we should exclude from -- on a continuing basis?

Let me just -- give me a second I will come back to you.

Or, we can just follow up off-line, if that's --

Okay, no problem.

Alright, guys, thanks a lot for the time, I appreciate it.

Sal Vitale, Sterne Agee.

So I just wanted to follow up on the question about the interest expense. So if I look at that, and I understand you said that there is an extinguishment of debt amount in the current quarter -- if I look at the average interest expense rate, and again just using a simple average which I understand is a little simplistic, given the timing of when the debt actually came on, I see the interest expense rate increasing roughly 70 basis points sequentially from the first quarter. Can you just, if you don't have that extinguishment of debt item handy right now, can you just give a sense for how much of that sequential percentage increase, basis-point increase, is due to the item, the one-time item, as opposed to just the general increase in borrowing cost?

So, I would take out $1.5 million for the extinguishment of debt.

Okay.

And I'm looking year over year. I wouldn't say the increase is as high as you are projecting, so it's probably around -- I'm guessing about half as much of that.

Okay, half as much of the increase year-over-year, you said?

Well, $1.5 million of the increase sequentially is due to the debt write-off.

Got it. Okay, I can work with that. And then I just wanted to touch on a point you made earlier. You said that -- is that 10% of the total $760 million of CapEx that will be booked in July, or that will be deployed and start generating revenue in July?

10% is already being deployed and is making revenue right now.

Got it. And then, on the same basis, 22% in August and September?

That's correct.

And then, you said another 22% is unbooked; right?

That's correct.

Okay, and then, so -- I guess it seems like the dry container new investment is slowing down. You might have some opportunities on the sale-leaseback side, you might still have some reefer opportunities. So if we just tack onto that $760 million, how high could that number get between now and year-end? Could you do a $900 million, in total, investment?

Well, Sal, you know we've studiously avoided giving guidance in the past, and I would just note that it is a challenge at the moment to predict what the CapEx will be by year end. I do believe we will see more purchase/leaseback opportunities. I think we will see opportunities to purchase reasonable quantities of containers from our managed fleet and expect investments in reefers to continue through the end of the year. But the exact quantity right now is very difficult to estimate.

Okay, so let me ask you this way. I understand it's hard to estimate, but if you had some attractive sale/leaseback opportunities, what would your capacity -- what would your current balance sheet allow in terms of total CapEx for the year?

Let me put it this way. It's not our liquidity that would limit any opportunities for investment to us. It's really the investments that we are able to identify and find that we feel are attractive and provide the returns we want to generate.

Okay, that makes sense. And then I'll just leave you with one last question. On the reefer side, the returns on the reefer side have been a bit more challenged, I guess, over the last few months. Do you find the returns -- I'm sure you have an internal hurdle rate which you don't discuss, that you don't divulge publicly. But do you find the current rates of return adequate at this point, or are you going to hold back on additional reefer investment at this point?

We don't really differentiate that much between the two. We have been pretty aggressive in both the dry container sector and the reefer sector, and our view is we are competing similar to our main competitors in these transactions. And in most cases, our customers end up splitting the deals among two to five vendors at similar pricing, and we are one of them. And we have to be one of them. So we don't think that the reefer returns are as bad as it seems like it's being portrayed in some of the other calls.

Can you maybe give a sense like versus this time last year in terms of basis points, how much below it is?

No, we would prefer not giving guidance on that.

Okay, and then just one last question, if I could -- what is the current -- on the dry container, on the 20-foot dry container, what is the current per diem on the market right now?

The current per diem rate is between $0.70 and $0.73.

Okay. And the current market price, I think, is about $2500? Does that sound right?

Well, we were buying containers -- the market was up in June and July, $2600-$2700, and it's probably dropped down to the $2400 range right now.

$2400 range? Okay.

That's correct.

That's a recent development; right?

Yes, there's been a quite significant drop if you were to place orders in August.

Now, is that -- so that's over, you said $2600-$2700 a few months ago, or was it May or June; right?

No. Actually, in July, prices were about $2600.

Okay, so we're talking in a matter of weeks, the price has dropped that much?

That's correct.

And you would attribute that to just a continued slowdown in global containers; right? Or, is there any other -- seasonally, if anything, it should be kind of stable right now. Right?

No. I think everybody was buying very aggressively in the end of the second quarter and even the beginning of the third quarter, and I just think we are all just digesting our inventories right now, taking a breather before we get ready again.

Okay, so most of the dry container CapEx you've deployed is at rates, I would assume, significantly above that current $0.70 to $0.73?

That's correct. --

Any -- would you hazard a guess? It wouldn't be a guess on your end, but any estimation as to what that could be? Could it be as much as 15%-20% higher than that $0.70 to $0.73?

Rates in July were about $0.80 per 20-foot.

Okay, that's helpful. Thank you very much.

Justin Yagerman, Deutsche Bank.

Hi, good morning, it's Josh Katzeff on for Justin. Just wanted to follow up on, I guess, the total CapEx number of $760 million, and I guess the incremental Q2 commitments. Can you provide a breakdown of what was managed versus owned?

So far this year, the percentage of our CapEx that has been owned is about 88%.

Okay, and I guess in the incremental CapEx, can you talk to maybe how much was dry versus reefer?

Year-to-date -- I'm sorry (multiple speakers)

So, roughly about, let's call it, round numbers, $520 million was dry, and roughly -- a little over $150 million was reefer.

Got it, got it, I appreciate the extra color on that. I guess I just wanted to follow up on the trading containers. I know you briefly touched upon this on a year-over-year comparison, but when we look at maybe margins on a quarter-over-quarter basis, they seem to have dropped a little bit. Can you talk to, maybe, those a little bit?

That's true. Trading -- there's a few reasons for that. One, some of the trading containers we purchased are purchased under contracts that we entered into some time ago. Prices have come down over the course of last year. This year, they have been pretty stable. As a result, the margins we've earned on some of the trading deals are slightly smaller than the margins we might have earned -- might have been earning on them previously.

Having said that, we are still very, very pleased with the margins we are earning on all the trading deals that we are currently entering into. A corollary of that is that the trading business that we are pursuing at the moment -- you will see that the purchase price offers are lower than what they would have been, say, six months ago.

And I guess one more question before I turn it over -- I guess the payout ratio for the distribution increased a little bit, closer to the higher end of that 40%-50% guidance range. How should we think about that going forward?

In terms of just the dividend, we look at this every quarter, and we'll be in the 40% to 50% range, probably gravitating closer to 50% versus 40%.

Okay. So we should expect that shift between 45% to 50% maybe going forward?

Correct.

Okay, thank you for your time.

Helane Becker, Dahlman Rose.

I feel like all my questions have been asked and answered. I just have one with respect to pricing. Did you just say that you've seen the price of containers coming down in the last few weeks? I kind of missed that last comment.

Yes, that is correct. We were paying between $2600 and $2700 in July, and not many people are placing orders for August. But I'm sure, if you negotiated a big transaction out there, you would probably get pricing in the $2400 range.

Okay, and then my other question is just with respect to progress on the negotiations on the West Coast, for the West Coast ports. Have you heard anything from them about how that's going and whether or not the ports will remain open after September 30?

We are really not updated about that.

Okay, all right, thanks. Everything else was asked and answered; I appreciate the help.

John Mims, FBR Capital Markets.

Good morning, guys. Like Helane, most of my questions have been answered. Just one quick one, Phil, just on an overall industry perspective. I was reading yesterday that ships have been laid up, I think it's like four times the amount right now as were laid up at this point last year. You are seeing container lines really starting to signal that there's very little hope of a peak season. I wanted to know if you had any color you could add or comments from your -- you just got back from visiting with clients in Asia -- if you could give a little more color just on the outlook for the next two or three months?

Well, first I'd note that earlier this year, I think laid up current at that time were about 6% of the worldwide container fleet, whereas the figure today is lower than that. The last I've seen, it's in the 3% to 4% range. Many of the vessels that are currently laid up are actually vessels that are owned by the charter parties and not by the shipping lines, which, at least, is beneficial for the shipping lines themselves.

Going forward, I think most people are saying that what we do need to see is some increase in the level of scrapping, simply because we still have new builds are coming on this year and next year.

I think Robert has got a few points he'd like to add.

No, I would just emphasize what you said. We just read in Alpha Liner that 77% of the idle container vessel capacity right now is actually charter vessels. That confirms what Phil said.

Right. No; I get that. But I guess my sense, reading the same stuff in Alphaliner, was you would expect as, Phil, you said there's 6% lay-up earlier in the year. There's not as much demand. But those ships would start to roll out going into peak season. So I guess from your perspective -- I don't know, I guess it's just an overall industry question as far as if there is no peak at all, what does that do for the outlook and just the willingness for your customers to lease more containers?

I'm sorry, John. I realize you actually asked that part of your question, and perhaps we missed it. When I was meeting with the shipping lines earlier, most of them said that, to the extent there was or is a peak season this year, it appears that it occurred in May-June time frame, and that they saw a bit of a slight decline in July, although they expected that -- July's level of performance to remain constant through August. September, they were hopeful for, but beyond September, there was a lot of uncertainty and an expectation that there would be additional weakness in the fourth quarter.

Yes, perfect, that's very helpful. Great, thank you.

Daniel Furtado, Jefferies.

Thanks, everybody, for the opportunity to ask a question. I just had one, and we are hearing that some liner companies, in an effort to reduce costs, are increasingly shrinking their in-house personnel as well as infrastructure in the areas of box leasing and management, in essence preferring to outsource a growing percent of their box management functions to the leasing industry. Do you find this to be the case? And if so, would it signal a permanent or semi-permanent, as opposed to short-term, increase in the demand for your services? Thank you.

To be honest, we really have not seen huge changes in the equipment departments within the various shipping lines. It is correct that basically all the major shipping lines have cut staffing and have implemented those plans as an overall cost reduction drive. But we haven't seen -- I think the equipment divisions for years have already been very, very efficient and not highly staffed.

And will that change? I don't think they can cut much more in that field. I think, possibly in some of the back-office functions, you will see them drive more of their reductions. Equipment is a very important area for the shipping lines. If you don't have people to steer the fleet and administer in an optimal manner, you could be losing a lot of money. And they don't want to risk that. And if they were to do it, would that show any signs about the fact that we now are seeing more containers leased than being bought by shipping lines? We don't think that's the reason for it happening.

I'm sorry; just to build on what Robert is saying, I think his latter point is the change that we are seeing that is, in fact, is a very critical and positive change for the leasing company industry, which is that the percentage of containers, worldwide container production purchased by leasing companies has dramatically increased since the downturn of 2009. So, in 2010, it was perhaps 65%; 2011, maybe 55%; and then this year, again, 65%. And even that number is a little bit deceiving in that one shipping line purchased perhaps 20% of the production. So when you add up the leasing industry along with one particular line, you've got perhaps 80%-85% of total production. So we are seeing a shift to the leasing industry being the primary purchasers of marine containers.

Excellent, thanks for the clarity on that, everybody, I appreciate it.

Gregory Lewis, Credit Suisse.

I just had a quick question on tax. It looked like your tax rate was about 8.5% in the second quarter. That was, I guess, a little bit higher than it historically has been over the last couple of years. When we think about the back half of the year and into 2013, should we expect that to trend back down to that mid-single-digit type number?

Yes, Greg. The two things this quarter that were a little -- had some one-time items -- the other one you brought up was the interest expense. The other one is the tax expense. So there were some one-time-ish type things. We expect, if you look at an annualized number, it should be in the low-single digits.

And what was specific to the quarter that saw that tax rate go higher?

It was primarily some higher reserves, or what have you.

Okay, thank you very much.

Sal Vitale, Sterne Agee.

Just two quick follow-ups, one on the balance sheet. If I look at that container contracts payable account at $232 million, how do I think about that in terms of when that will actually be paid out? And I assume what I'm getting at is when is the debt draw-down on that? Would it be later in the quarter?

Well, typically, our terms are around 60 days with our manufacturers, so I would say kind of over a two-month period.

But, so I guess we should expect the debt draw-down on that to be more skewed towards the back half of the quarter, toward the end of the quarter?

Yes.

Okay. And then just a follow-up question on the comments just made on the market share -- can you give a sense for what the current global market share of containers is? What is the leased-versus-owned breakdown?

Yes, Sal, as I think you know, for many, many years, it was -- leased containers were about 45% of the worldwide container fleet. In the mid-2000s, that number shrank as the shipping lines were quite profitable and using their money to invest in containers. Since 2009, the figure has started to move the other way. I don't know what it is today except that it is north -- I'd say it's probably 46%-47%. But it's certainly heading higher as the leasing industry is purchasing a greater percentage of the world's output.

Right. So it's pretty much a reversion to the mean. I guess, just looking forward -- and I know it's hard to predict -- do you think that could get as high as, say, 55% or even north of 50%, let's say?

I absolutely think it can be higher than 50%. I would expect to see that probably within the next two years, as the leasing companies continue to buy such a large percentage of the world's output. We expect that trend of a high percentage of the world's output going through the leasing industry to continue for the foreseeable future. There's many reasons for that, including simply that the shipping lines have many demands on their CapEx and containers do not appear to be at the very top of that list -- vessels, infrastructure, ports. And furthermore, they've had challenges in simply raising the CapEx due to reductions in internal cash flow and, frankly, a more difficult borrowing environment.

So all these factors, which I don't see changing in the near-term, have led to a greater dependence upon the leasing industry to provide containers.

Okay, that makes sense, thank you very much.

Michael Webber, Wells Fargo.

I know it's been a long call, but I just had one follow-up on Robert's commentary on box pricing. Do you think you're catching a bid at $2400; and who is that aimed at? Is that really aimed at the container lines, trying to entice them to come into the market, or is it just kind of normal seasonality? And then at $2400, we're flirting with trough levels from last year. Where do you think that trough level is this go-around, to the extent that you guys have that much visibility?

Well, a lot of good questions there, Mike. I wish I had that crystal ball. When we started buying in November-December last year, we started early. We were getting very attractive pricing, $2200 level, some below, some a little bit higher. We tested the market then, and it was very clear that the manufacturers would have rather shut down the lines than actually go lower than that.

I don't know where that sensitivity is now, but I think the manufacturers' strategy generally worked very well for them last year. They were able to raise prices by $400 to $500 per 20-foot container. And I would be surprised if they don't try to repeat the same strategy. I think they will hold pretty firm. Do I think prices could go below $2400? Yes, I do. Do I know when? I don't. Obviously, we will monitor that basically day by day.

Got you. But at this point, there is nothing to suggest that last year wouldn't be a horrible comp, in terms of where -- that asset value down could potentially kind of sit?

I think that's a fair estimate, yes.

Okay, all right, thanks for the time, guys.

I'm not showing any further questions at this time. I'd like to turn the call back to management for closing remarks.

Thank you, this is Phil Brewer. I'd again like to apologize for the difficulties that we had with the phone line in the early part of the call and I appreciate your perseverance and staying and listening to our presentation. We'd like to thank you again and look forward to speaking to you at the end of next quarter. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone have a great day.