Textainer Group Holdings Ltd (TGH) 2013 Q2 法說會逐字稿

Welcome to the Textainer Group Holdings Limited second-quarter 2013 earnings conference call. My name is Ellen, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Please note that this conference is being recorded. I will now turn the call over to Hilliard Terry, Executive Vice President and Chief Financial Officer. Mr. Terry, you may begin.

Thank you, Ellen, and welcome to our 2013 second-quarter earnings conference call. Joining me on this morning's call are Phillip Brewer, TGH President and Chief Executive Officer. And at the end of our prepared remarks, Robert Pederson, 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 US securities laws. These statements involve risks and uncertainties, are only predictions, and may differ materially from the 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 for the year ended December 31, 2012, filed with the Securities and Exchange Commission on March 15, 2013, and any subsequent quarterly filings on Form 6-K for additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements. Also I would 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 the 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. At this point, I would like to now turn the call over to Phil for opening comments.

Thank you, Hilliard. Welcome to Textainer's second-quarter 2013 earnings conference call. We are pleased with our second-quarter performance. We had solid revenue growth, which resulted in a new quarterly record for Textainer. Net income growth was in line with revenue growth, and we saw double-digit increase in the adjusted EBITDA demonstrating strong cash flow. These increases are a direct result of the significant investments we have made in new containers, purchase leaseback transactions and purchases of managed containers. One year ago, we owned 60% of our fleet. Today we own 74%. At 2.9 million TEU, our fleet is approximately 35% larger than the next largest lessor.

We have benefited from the refinancing of our debt. Although total debt was higher quarter to quarter, our interest expense declined due to a 34 basis point reduction in our average interest costs compared to the last quarter. Bad debt expense increased primarily due to a $1.8 million provision for the receivables of regional shipping line which declared bankruptcy. We are in the process of recovering our containers, and expect to successfully recover most units.

The rapid deterioration of this shipping line caught most in the industry by surprise. Nevertheless, we are confident in our internal credit diligence, and on the whole we have seen improvements in DSO over the past year. We have also seen a significant decline in sales of trading containers. Most shipping lines now dispose of containers in purchased leaseback transactions, instead of via trading deals. Purchased leaseback containers are considered in-fleet containers, and the sales are reflected in gain loss on sale of containers.

We increased our dividend for the 14th consecutive quarter, continuing our record of having maintained or increased our dividend every quarter since going public. Utilization averaged 95.1% year-to-date, and is 94.3% currently. Utilization has remained relatively steady, changing no more than 2% all year, and trending within 1% at its current level for the last 4.5 months. We saw an increase in container demand during June and July. In fact, during 10 of the 13 weeks of the second-quarter, we leased out more containers than were turned in. Utilization did not change significantly, however, because during that same time we added more containers to our fleet than we disposed, offsetting the increase in lease-outs. We expect a muted peak season, and that utilization will remain around this current level for the next quarter.

Total CapEx for delivery in 2013 was $692 million year-to-date. Our fleet size has grown by almost 10% over the last year. Approximately 90% of this amount was for our owned fleet. More than 80% of this new production is either already on lease, or booked for pick ups mostly prior to the end of the third quarter. We continue to see compression of returns due to the high level of liquidity among container lessors, and the ease with which containers can be purchased at factories. The competition for every lease-out opportunity is very strong here. We are selective in the deals that we pursue, but are focused on growing in line with our market share. We expect the highly competitive market conditions to continue for the near-term.

New container prices continue to decline, and today are approximately $2,100 per CEU. Containers ordered today can be delivered in less than one month. Used container prices have also declined, and are approximately 10% below where they were one year ago. We do not expect either new or used container prices to strengthen over the near-term, and further declines are possible.

We expect total container production in 2013 to be 15% to 20% below 2012. Container lessors will likely purchase 50% or slightly more of this amount. If fourth quarter 2012 purchases by lessors intended for 2013 lease-outs are included, purchases by lessors would exceed 50% of total production.

Looking at the broader shipping industry, three factors which we see affecting container lessors are one, excessive shipping line capacity increases. New containership deliveries totaled 1.3 million TEUs during the last 12 months, far offsetting the 472,000 TEU that were scrapped. Assuming a worldwide capacity of 16.8 million TEU's today, the net capacity increase over the 12 months was 5.3%. Newly-revised figures for projected growth and trade are in the region of 4%, much less than the capacity increase. The idle fleet today totals 2.7% of total capacity.

Second factor, falling freight rates. The average container freight rate ex the PRC has fallen 18% year to year. Second-quarter 2013 Far East to Europe rates are 55% below the level of second-quarter 2012. The GRIs implemented earlier this year have been largely unsuccessful, raising rates for only short periods of time. The only positive news offsetting the decline in freight rates is that bunker prices are down 9% year to year.

Number three, slower-than-expected growth in the PRC. Economic growth in the PRC closed at 7.7% during the first quarter, and 7.4% is projected for 2013. June data indicates that PRC exports and imports have declined year-to-year, and the outlook for third quarter performance is uncertain.

These factors point to the challenges faced by our customers, and the need for prudent investing by container lessors. After significant leasing company investment in new containers during the fourth quarter of last year and the first quarter of this year, leasing company CapEx declined during the second-quarter. This decline partly explains the drop in new container prices and the limited production in factories. Even assuming reduced CapEx and a subdued peak season, we are well-positioned with 82% of our fleet subject to long-term and financed leases, and continued opportunities to pursue purchase leaseback transactions. Furthermore, we are excited about our new relationship with Trifleet, and the opportunity to provide and expand into the tank market. We are already looking on several deals together. We expect third-quarter performance to be similar to the second-quarter. With our strong liquidity and cash flow, Textainer is well-prepared to take advantage of market developments in 2013. I will now turn the call over to Hilliard.

Thank you, Phil. Turning to the financials. We recorded $130 million of total revenue. Revenue grew 8% compared to the year ago period. The primary driver of our revenue growth was a 26% increase in lease rental income, as a result of the increase in the size of our owned fleet when compared to last year. The increase in lease rental income was partially offset by a decrease in utilization of our owned fleet. This quarter's revenue was also dampened by lower management fees, due to decrease in the size of our managed fleet, given the number of managed fleet acquisitions in the past year, as well as a smaller level of acquisition fees and sales commission.

We also saw a large decrease in the sales of trading containers due to a smaller number of containers we were able to source and sell. The decrease was partially offset by an increase in the average sales proceeds. Gains on sales of containers decreased 6%, due to a decrease in the average sales proceeds, and offset by an increase in the volume of containers sold versus last year. Operating expenses were up 14% year-over-year. However, 3.5 percentage points of this increase was due to the increase in our provision for bad debts resulting from a customer declaring bankruptcy during the quarter. Excluding this one item, operating expenses were up approximately 10%, roughly in line with revenue growth. The primary driver of our OpEx growth was increased depreciation expense, which is the largest component of total operating expenses. Also direct container expenses increased, as storage costs increased due to lower utilization rates in the quarter, coupled with the fact that we own a larger percentage of our total fleet versus the year ago quarter.

Depreciation expense was $34 million for the quarter, up $11 million or 48% year-over-year as a result of our larger owned fleet. During the first quarter, we increased the useful life of our non-refrigerated containers from 12 to 13 years, based on the shipping lines leasing containers for longer periods, and internal data showing the average age of containers at the time of disposal. This change resulted in approximately $7 million of lowered depreciation expense for the quarter.

A few additional points about depreciation expense. And as previously noted, PLBs are becoming a source of trading containers for us. And in most cases, we depreciate these containers over a short depreciation period, which results in higher depreciation expense initially. Additionally, older in-fleet units we sell are often fully depreciated, while they are replaced by higher cost units with higher depreciation. Lastly, when compared to dry containers, a higher percentage of refrigerated container's prices depreciated annually. As the percentage of refrigerated containers in our fleet increases, so does depreciation expense. If you look at our overall annualized depreciation expense, as a quarterly depreciation expense, as a percent of gross container asset value, it was approximately 3.8% this quarter. Over the past two years, our annualized quarterly depreciation has ranged between 3.5% to 4.5% of gross container value. As we have seen a previous quarters, depending upon the mix of dry and reefer business going forward in our new container prices, we expect depreciation to trend within this range.

Bad debt expense was $3 million of which $1.8 million was related to a single customer as Phil mentioned earlier. In spite of the provision we recorded this quarter, we continue to believe the normalized run rates should remain within 0.5% to 1% revenue on a longer-term basis. Below the operating line, our interest expense line item was $21 million for the quarter versus $19 million in the year ago quarter. The $2 million increase was primarily due to almost $800 million of additional debt used to fund the expansion of our fleet. Our debt balance increased 43% from Q2 of last year. However, our interest expense if you exclude the one-time write-off of unamortized debt costs as a result of recent refinancings, was up only by 13% due to our ability to lower our Company's funding costs.

Last quarter I mentioned that we should be able to reduce our funding costs by 20 to 30 basis points. In fact, our average effective interest rate which includes swaps is currently 3.84%, down 34 basis points compared to the first quarter, or 145 basis points when compared to the year ago quarter. Rates have backed up a bit over the past few months, however, we will continue to look for opportunities to further reduce our funding costs. Income taxes for the quarter were a little over $2 million, or roughly half of of the year ago quarter. Our effective tax rate varies from quarter to quarter, due to discrete one-time items. As a result, the effective tax rate recognized in a single quarter is not necessarily indicative of the effective tax rate for the full year. We do not expect our annual effective tax rate for 2013 to differ significantly from historical effective tax rates.

Adjusted EBITDA of $106 million was up 15% year-over-year. This is a clear indication of our strong cash generation. Adjusted net income, which excludes unrealized gains on interest rate swaps for the quarter was $46 million, resulting in EPS of $0.80 per quarter. Adjusted EPS, I should say, of $0.80 for the quarter. We have increased our dividend $0.47 per share. While we continue to target a dividend level of approximately 50% of adjusted net income, this payout is slightly however at 59%, and in line with the dividend level as a percentage of EBITDA over the past few quarters.

Turning to the balance sheet, as of June 30, our tax position was $93 million. Total assets were $3.6 billion, and our leverage ratio was 2.2 to 1. Thank you for your attention. And now I would like to open the call up for questions. Ellen, can you inform the participants of the procedures for the Q&A?

Thank you.

(Operator Instructions)

Our first question comes from Justin Yagerman with Deutsche Bank. Please go ahead.

Hi, good morning. This is actually Josh on for Justin.

Good morning, Josh, how are you?

Good I just want to jump into CapEx for the year and for the quarter. I guess with that $692 million, can you give us a sense of how much of -- or I guess maybe just the incremental since Q1, how much was sale leasebacks versus new containers?

Well, when I stated a number earlier, I mentioned that the $692 million includes investments made in the fourth quarter for last year for delivery in 2013. We have invested $192 million in new containers just for 2013. I am sorry, $198 million was invested in new containers in 2012 for 2013. I apologize for that. $494 million was invested in new and used containers year-to-date. We do not break it down further than that.

Okay. And I guess maybe, if you can give us a breakdown over the past quarter of dry versus reefer? I assume most of it was dry?

We are still maintaining the same. We are buying about 20% reefer containers and the rest dry and dry specials.

Okay. And I guess maybe going forward for the rest of the year, I guess, how should we think about your new tank JV? And whether that -- whether you expect to place to deploy some meaningful capital there, or you make some dry versus reefer heading into kind of Q3, Q4.?

Well with respect to the opportunity to invest in banks with Trifleet, while we are very excited about the opportunity, I do not think you are going to see a meaningful amount of capital invested in tanks over this year, relative to the amount of money we are investing in reefers or in dry freight containers. We are just getting started in that business. But we do think that the opportunities going forward, after this year are going to be quite attractive.

And I guess maybe dry versus reefer mix later this year, are you still expecting to see decent reefer demand for new boxes?

Yes, we are. Generally, the reefer season peaks in the fourth quarter and the first quarter. So we should see a build up to peak season.

Okay. And then, I guess maybe switching spaces a little bit. The $1.8 million charge to the, I guess, bankrupt liner -- should we expect you to be able to get any of that back? Is that just a preliminary estimate, or how should we think about that as maybe a permanent loss?

Well, first, I would note that we try to be very conservative in the actions we take, when we have a credit problem. When we noticed there was a problem here, clearly this company itself filed for bankruptcy, we reserved for the outstanding AR. With respect to the assets, and you are talking about getting it back, we do expect to recover most of the assets. In fact, we are already in the process of recovering our assets, and are able to do so. But the amount that we have reserved is related to the accounts receivable. At this point, it is uncertain whether we are going to be able to recover any or all of that. We have filed a claim with the Court, and we will just have to wait the outcome.

Okay. So you have not taken any write-down on the actual containers?

At the moment, no.

And then I guess maybe you touched upon the competition with liners that you have been seeing. I guess, it stayed pretty flat quarter over quarter. Have you seen any of these liners maybe begin to look to lease out, to do any sale leasebacks with these boxes? Or is it becoming pretty evident that they are going to keep them on their balance sheet for the near-term?

As we have noted for the past couple of earnings calls, we have absolutely seen an increase in the sale leaseback activity among shipping lines, and that continues. As I have said, when I gave my opening remarks, we don't see much in terms of trading business anymore. Very limited supply containers are simply being sold outright by shipping lines. Generally, when they look to dispose of the older containers in their fleet, they will enter into purchase leaseback transaction, and keep the containers for the next year or so. And then dispose of the containers. And we still continue -- we continue to see quite a bit of that activity.

But maybe I could add that typically we see fourth quarter being stronger for sale leasebacks, than third quarter.

Got it. And then just one more question before I turn it over. The payout ratio I guess, how do you look think about that going forward? It is now nearing 60%, and I know you have talked about historic -- I guess, historical payout ratios a bit below that. So maybe if you can provide some kind of guidance going forward, and where you expect that to trend?

Sure. We haven't necessarily changed our target around the payout. It is just, as we have looked longer-term, while this is above, in this particular quarter above that target, longer-term, we think it will fall in line.

Okay. Well, I appreciate the time. Thank you.

Thank you.

The next question comes from John Mims with FBR Capital Markets. Please go ahead.

Thank you, good morning, everybody.

Good morning, John.

So let me just start maybe just with the overall outlook. And the next couple quarters have been somewhat subdued. Looking longer-term is there anything other than just a rebound in global freight trends that kind of gets this going again? Or particularly if you look at the supply-side, are you starting to see some rationalization from container manufacturers that may kind of backstop the trends we are seeing right now?

Well, if you look what is happening on the manufacturing side, manufacturing is down significantly this year. So one characteristic of our industry that remains true and continues to remain true, is that the supply of containers tends to regulate itself quite efficiently. We are around 95% utilization, and sometimes we lose sight of the fact that 95% utilization is a very attractive level of utilization, only because we went through a few years where the utilization was in the 98%, 99% range. I don't think anyone in the industry felt that was sustainable forever, that we would remain at that level of utilization.

And you can certainly argue that in fact, that was the problem. Because it meant that at times we were not satisfied our customer needs for providing containers. So what we see happening now, is that the supply coming out of the factories has declined pretty significantly. Right now, we are looking at expected production this year of probably 2 million TEU to maybe at most 2.1 million at most, 2.2 million TEU, down significantly from last year's production. And the industry is regulating itself again, making sure that the supply of containers worldwide is appropriate for the demand. And I think that continues to be one of the most positive factors that we have seen in our industry, and we certainly see no change in that.

Right. Your comment that pick ups, your lead time was less than a month seems to be cutting it a little close for kind of what is the comfortable range for the manufacturer. So I mean, can, how much can they scale back from current levels without completely shutting down? Or are there some plants that are shutting down for the season, just kind of given where that 2,100 level or below and such short leads times?

We have not seen any of our manufacturers shut down yet. But I would venture to say that if there are not significant orders being placed in the next month by other shipping lines, the leasing companies, I think it is likely that some of the companies will shut down some of the locations.

And it is that a fairly permanent shutdown? I mean, is that a big decision, or can they bring these things off and online fairly easily if there is a pickup next year?

Yes, it is pretty easy. I mean, they can shut down, still keeps some labor there that they can get going, less than they ship. It is possible. I think that the bigger picture is, there is really no global surplus of containers. We are seeing a lot of new production activity right now. If there was a surplus of containers, we would not have been so busy the last two to three months. I think when you look at macroeconomic picture, the trade needs Europe to improve. And until that happens, we will be kind of this, more or less stagnant position.

But when Europe does improve and the trade between Asia and Europe takes off, with all those big vessels, there is going to be a huge spike in our business. And the question mark, is when is that going to happen? Well, we do not know for sure. It is certainly not happen in the next one or two quarters, but it is going to happen at some stage. And if we can kind of keep going at this pace here, we are pretty satisfied.

Sure. But again on the manufacturing, are you seeing any evidence that people are still -- I mean, there is still kind of a normal level of replacement and growth this load? Or is the box fleet generally still getting older right now, where they are still to some degree, this pent-up replacement demand that is underneath kind of the bigger theme?

There is definitely a need for replacement going forward. But I think Phil referred to the growth rate of 4% is just not enough to make a huge peak demand. There is one more issue. With the vessel capacity that is being added, and only 2.7% vessel capacity laid up, out of which none of these vessels are actually the larger vessels. Slot utilization is not as high as the shipping lines would like, but the lower slot utilization, let's say around 90% or maybe low 90%s will allow shipping lines to move their empties back to the demand locations in a much more efficient manner. If suddenly, they were sailing 90% -- 98% or 99% or even a rolling cargo, then you have got to leave some empties behind, and it creates an inefficiency that we have seen quite frankly, in more than a year.

Yes, that is helpful. So then do you have a sense of kind of where that the box slot ratio, has that shifted given this kind of load factors on the ships? Or is there -- ?

I actually do not know what it is right now, but it would definitely be lower than what we have seen in the past. And I would think it is probably 1.7% or 1.8% right now, but I do not have the exact number at this stage here. But it would have to be lower than what we have seen in the past.

Okay. No, that is really helpful. One last one may be for Hilliard, and then I will turn it back. When you look at the direct container expense, and maybe if you could remind me what all is in that? I know that is in -- and I think that is where the storage is. But up, when you look at a direct container expense per TEU, it is up fairly significantly, up as a percentage of revenue versus first quarter and last year. Can you -- any comments on storage, of where you are in terms of having depot, enough depot capacity for the fleet now? And how we should be modeling that over the next couple quarters, given kind of where we are in this environment?

Well, John, I think obviously as utilization is down year-over-year, or as it comes down you will see higher storage and expenses of that sort included in there. Obviously, to the extent that, but I do not think we are at a point now where there is a concern broadly speaking, in certain areas, there could be concern around depot space and things of that sort. But broadly speaking, we think we have a footprint and the depots necessary to handle the storage of containers for a temporary period of time.

Okay. That's helpful. So but yes, use this quarter kind of as a benchmark, and then go forward. But also on the utilization, that is one another question I had. If you were to slow the pace at which you grow the fleet in this environment, would utilization -- would you expect utilization to start to tick back up, or do you think it will still continue to settle down, kind of north of -- or south of 95%? I guess, it is kind of running that trend now, but should we model 93%, 94% for the next couple of quarters?

Utilization is, as I think I noted in my opening remarks has been surprising -- very surprisingly stable over the course of this year. Yes, we are down slightly since the beginning of this year. But over the last, almost five months, utilization has trended within a very narrow range. In fact our utilization would be up, were it not for the fact that we are buying new containers. We happen to believe that today, as container prices in the level where they are around $2,100 or in the low $2,000 are -- is going to be a price that looking back several years from now, we are going to say that was an attractive price to buy containers. So we are comfortable buying containers right now.

And if our utilization drops slightly because of the new containers coming to our fleet, we are quite comfortable with that. We really do not manage our fleet to obtain the highest utilization. I mean if we did, we could give away the shop every time there was a rollover term lease, and just to make sure the containers stay on lease. We do not do that. But we manage our fleet to maximize the cash flow that we generate off the fleet. And right now, we think it is smart to continue to buy new containers. We think utilization is going to stay more or less around this level for the immediate near-term.

And John, just to add to what I answered earlier. In addition, when you have utilization come down, you have more handling expenses and repair expenses also along with that.

Okay. No, that makes perfect sense. Thank you for all the color, and I will get back in the queue.

Thank you, John.

The next question comes from Michael Webber with Wells Fargo. Please go ahead.

Hi, this is Don McLee on for Michael Webber.

Hi, Don, how are you? Good morning.

Pretty good. Just to go back to Trifleet, I guess, what is the attraction to tanks? Is it a less competitive market, or do you just want to diversify your assets?

Well, certainly the diversification is part of the attraction. That is one of the container classes that we hadn't been in, and we felt it was -- it would be -- it was a part of the industry that we wanted to get into. But as you may well be aware, is not quite the same as dry fleet. You market it to different lessees, and you also need to have some level of technical and operating expertise that we did not simply have in-house. And so for that reason, we thought we felt the best way to proceed would be to do it, in conjunction with an experienced operator in the industry, and one that also shared our views on investing and managing your fleet. And that is what we found in found in Trifleet. So it was a very attractive opportunity for us to gain exposure to a new equipment type. And to deploy additional capital in that area.

Got it. That is definitely helpful. My second question is actually in reference to your CapEx. It looks like year-over-year your H1 CapEx has ticked up a little bit despite the muted outlook following the strong 2012. Is there any particular reason behind this higher CapEx?

Well, partly, keep in mind please, that part of the number does include investments that were made in the fourth quarter of last year for 2013. We have invested quite heavily in the fourth quarter for the last three years. We certainly did it last year. And in retrospect, we bought more equipment than was required during the first quarter. We are all aware that the demand for containers in the early part of this year was not quite what anybody had expected. We have seen an improvement in demand over the second-quarter. But that coupled with the fact, that as I just said earlier, containers at these prices we feel are very attractive investments. And we are an interested buyer of containers at these levels. We think they are going to generate strong cash flows for quite a long period of time.

All right. Thanks. That is helpful. I will turn it over.

Thank you.

The next question comes from Ken Huckster with Bank of America. Please go ahead.

Hi, great. Good morning. Phil, maybe you could just or Hilliard, just talk about with utilization falling here, do you have steps that you can take to -- I know you said it is within a percent, but are there steps you can take to curtail costs here? I know Hilliard, you said they were approximately in line. But it is still outpacing revenues, and particularly given the increased storage and other costs, so on the direct container expenses. So other moves that you can make to maybe bring down the cost growth line?

No, I think it really, Ken, goes along sort of if you will, it as a function of what goes on with utilization. So I wouldn't say there is anything specifically on the direct container expense side that we can do. We are looking to sell more containers. And you have seen sort of volumes pick up there, which sort of moves containers out, and reduces storage expenses from that standpoint

I mean, Ken, I think is -- (Multiple Speakers).

I'm sorry. Go ahead.

I was just going to say -- sorry Ken. This industry has always had this type of operating leverage where, when utilization falls some of your direct costs increase. It is inevitable. Likewise, when utilization increases, those same direct costs decrease. It has always been a factor of this industry. As Hilliard mentioned, some of things that we are doing, we have a model that determines when we sell containers. And the input to that model changes based on lease-out opportunities, container sales prices et cetera, et cetera. In conditions like this, we may be selling more containers and we would otherwise, and not incur the storage expense on those assets.

And then just to clarify that, for one step. When you say sell, is it to the liner company that they would then increase their ownership percentage? Or is this to third-party, either lessors or even just other usage inland, as they move inland?

No, it is generally not to other lessors nor to shipping lines. We generally sell our containers to third-party users outside of our industry.

Okay. And then just thinking back to the Analyst Day, I guess there is been -- you ran over those litany of kind of issues at the beginning of the call. A pretty quick change I guess, in maybe 2.5 months here. What are your thoughts here on the market now as you see it? Do you continue to see this degradation in kind of the -- on the demand side, or how are you looking at the market right now?

Well, I think it is important to keep in mind that we noted, that the second-quarter indeed has been stronger than the first quarter. Maybe we aren't emphasizing that point enough, but it certainly has been the case. As I noted, it hasn't been reflected in utilization per se, simply because we have been buying a lot of new containers that are coming into our fleet. We expect during -- going into the third quarter that we will continue to see demand for containers. But we do not expect to see a peak, a strong peak season as we might have seen in years past. We noted that this is going to be more a muted peak season.

Maybe I could just add -- I mean, when we look at the new container sector, there actually has been a new peak in demand. And there have been -- while each individual deal has not been the size we would like to see, there have been many transactions out there. But the low container prices and relatively low spreads have facilitated one of the -- to solve one of the questions that we had earlier today about frequent, well, the lines are seeing it very cheap to pick up a new containers today. And it is a window of opportunity, while rates are at the level that they are right now, get a grand new box and start a new cycle. And that is what we have seen. Clearly, that has put a little bit more pressure on the depot unit movement, where we have not had as many lease-outs as we have liked. And we have had an increase in re-liveries, simply due to the fact that the lines are using this opportunity to get complete renewal.

So just to understand your comment on inventory levels. Are you saying that the manufacturers do not have a lot of stored up inventory left to distribute? Or are you saying -- it seemed a couple of months ago they were at record levels. So what are you seeing?

That is correct, Ken. Inventory in factories was up to 1.2 million TEU, and we believe it is around 800,000 TEU now. So it has dropped considerably in the last 1.5 months.

Okay. And what does that normally need to be, to get onto a normal buying distribution cycle?

We think 800,000 TEU is about probably about two to three month consumption. So, I mean, we would like to see it below 500,000. But I doubt it is going to come there as we enter the later part of the year.

Okay. And last for me, on the bankrupt customer. Is that -- I mean, typically you recapture the assets and re- let them out to the market. So your effective impact to your accounts receivable is presumably a lot less than what you have written off that was under the contract. Am I understanding that process correctly? And then, when you go ahead and move through this bankruptcy process to go ahead and recapture those assets, and then begin that process of leasing -- re-leasing them to the market?

Well, the reserve was taken for the -- and outstanding AR balance with the lessee that declared bankruptcy. So make that clear first. Second, we have already been recovering the assets. We started that process some time ago. Generally, that is -- we don't wait, for example, the bankruptcy process to play its way out in court. Once we have determined that we -- that the lessee has defaulted, we aggressively seek to recover our assets.

Right, so just to follow that, Phil. Am I reading that right, that you can then go ahead and re-lease them and then your effective AR deficiency is not as great as what just was under contract with that customer?

I am not quite sure what you mean by that comment. (Multiple Speakers).

Well, you recapture the revenues, right?

Well, no, because those are revenues that were already -- we had already recorded those revenues because the containers were on lease to the shipping line in the previous month. So that was AR balance with that shipping line.

So that was a cash balance?

So yes, yes. We cannot recover that. But you are correct though, that once we recover the assets, we can immediately put them back out on lease, and start generating revenue on those assets. So that is correct. But with respect to the amount that we reserved against, that is a historical AR balance. Now I will note, as I think it said earlier, that we have made a claim to the Court that is hearing the bankruptcy proceeding. I have no idea at this point, how much we may be able to recover as a result of that claim. Our claim is quite a bit in excess of the amount of the reserve, because of other things that we have also claimed as cost, associated costs.

No, I understand. I thought that you were -- that was the future contract if they were on, let's say a term contract that, that the provider owed you. But thanks for the color. I appreciate the time.

Oh, no, I'm sorry. Okay, now I see. I think we are on the same page now. We both understand. But it was not a future expected payment.

Yes, thank you, Phil.

Thank you.

Your next question comes from Art Hatfield with Raymond James. Please go ahead.

Good morning. This is Derek Rabe in for Art.

Hi, Derek, how are you?

Good. You have been quite active in the credit market, and rightly so. But as we look at your debt profile as it stands today, what further opportunities do you see that are available for you, to effectively lower your interest rate even further? And as a follow-on to that, did we see the full effect of these past actions hit in the second-quarter, or should we see a flow-through into the third quarter?

So, we do have debt, fixed rate debt that is callable. And if -- although the market has backed up a bit, if I look at sort of where we are able to finance it today, it still is lower than where those bonds are, what we are paying currently. So assuming the market sort of calm down, there could be some more opportunities. But I think the refinancings that we have done, has been reflected in the reduction in the average interest rate that I mentioned earlier. So from Q1 to Q2, you saw a 34 basis point decrease. I think back in Q1, if you were to look at that sequentially, there was probably about a 20 or 24 basis decrease in funding costs there. And then obviously, I stated the year-over-year were down 145 basis points. So those numbers are already baked in.

Okay. And I think recently you mentioned something that, you could refinance for rates close to about 300 basis points. Is that still the case?

The market has backed up from there. I think it is probably in the high 3s at this point.

Okay. The other question is on the tank container market. If you could, first of all, congrats on the deal. But if you could, just kind of touch on some of the dynamics at play in that market? Maybe talk about the returns relative to the other car type -- or other container types. And then also, where new tank prices have been, and where they are trending?

Derek, I think it is important that we point out that we are new participants in the tank container market. So if we were to make general observations about the tank container market, I think they would have to be understood to be, the point of view of somebody was recently getting involved in the industry. I can see us investing in tanks, and potentially between now and the end of the year several million, perhaps $10 million or more dollars. But something in that order of magnitude. In the level of CapEx that we have, you can see that, that is not at the moment a material amount of CapEx. So I just wanted to keep that in perspective. Now moving to some of your more specific questions, tank prices at the moment as we understand it, are at what are considered if not historical lows, low prices relative to where tank prices have been over the past five years. So buying tanks today at today's prices, many consider to be very attractive prices.

Okay. And seasonally, what are the stronger times of year for the tank market?

Derek, again, we are just starting our investment in tanks. Maybe we could answer that question better a year from now, when we have had a little bit more exposure to tanks. The whole purpose for this joint venture is to be doing business with people who understand the market far better than we do, so that we can learn more about the tank container market.

Okay, fair enough. I was just tried to get at, if reefers are more heavy in 4Q than 1Q. Would this kind of fill in the gap for, other maybe weaker periods for dry containers or reefers. But understood. My last question is, at the Analyst day you had mentioned that you were seeing some cash-on-cash returns for dry containers, both in the single- and double-digit levels. As that looks today, are you seeing more in the single-digit range or in the double-digit range?

That is an easy question. The answer is yes. (Laughter)

Fair enough. All right. Thanks for the color.

Thank you.

Thanks, Derek.

The next question comes from Sal Vitale with Sterne Agee. Please go ahead.

Good morning, gentlemen.

Hi, Sal.

Just I want to touch on one of the points you made earlier. Phil, you said that your utilization would be higher if not for the recent CapEx that you have done. Which I guess implies that some of the CapEx that you have recently done is not generating revenue, or has not been picked up I should say, at this point. Can you give us a sense of what percentage, or what portion or maybe in dollars, how much of your CapEx is uncommitted at this point? I should say uncommitted and or not picked up yet?

We have actually more than half of our CapEx is already on lease, earning revenue. Our unallocated portion is not more than 18%. And besides that, we have about 28% that are in the pipeline, booked out. The majority of that, probably 75% going out during the third quarter.

Okay. Now when you say the 18%, that is the 18% of the $692 million, which includes the portion you did in 4Q, or just of the first-half amount?

I have actually separated the new production, in isolation. That amount equals about $100 million.

Okay. I am sorry, that $100 million, that is the amount that is not yet picked up?

Yes. Sal, that was actually a pretty low number compared to where we have been in the past, and the reason for that is the short lead times at manufacturers. We have not had to place as many speculative orders as we have done in the past, because the lead time is only three or four weeks.

Okay. And I guess, (Multiple Speakers). No, I'm sorry, go ahead.

So as we close deals, we can replenish inventory pretty easily. So we have not been -- typically I have mentioned in the past, that we used to maintain between $150 million and $250 million of speculative inventory. We are below those numbers now.

Okay, so that makes sense. So that -- so typically you hold $150 million to $250 million and you are below that. So if I ask you what your open inventory is now relative to say, three months ago, does it pretty much mirror that decline in the overall industry inventory at the factories of $1.2 million that declined to about $800,000? Does order of magnitude pretty much behave the same way? So I guess I am saying, did your open inventory just generally come down, at pretty much at the same pace as overall industry?

I would say yes to that question.

Okay. And then, I guess, based on what your outlook is on the container growth for, container demand growth for the rest of the year, it sounds safe to say that there probably won't be too much more CapEx on the new container side, I should say on the new dry container side?

Well, we have seen more CapEx In the third quarter this year, than we have seen in the last two years. The market has -- was definitely slower in the beginning of the year than we had anticipated. But the period from, I would say mid-May through July and probably into the beginning of this month, has actually been more hectic than we would have forecasted, certainly the beginning of the year. So it seems like, due to the vessel capacity out there, and the shipping lines relative inability to enforce GRIs early on, the shippers have more cargo right now than we have seen in the previous two years. We have also seen a very significant spike in 40 foot high cube container demand, which is a good sign for the deep sea trades, actually both to North America, but also to Europe. So we are actually seeing a more traditional pattern right now, where it looks like the late second-quarter and the third quarter could be the peak for new production for sure.

Okay. So based on that, I would I guess it will be fair to say that you should see improved utilization maybe in 3Q. I mean, we are about a third of the way through 3Q at this point. But maybe for the remaining portion of 3Q, you should see improved utilization. Is that fair to say?

On the new production side, there is no doubt about it. Our booked, to be picked up inventory is a lot less than what we have seen previous years, which means the containers are being built and they are moving out. The issue, as I mentioned before on the depot unit side, it is because of the competitive nature of both pricing and yields on the new production side, it is a little bit tougher to move big volume depot unit transactions at this stage here. And clearly, that is having some impact on utilization.

Okay, understood. And then just a last question, just to switch gears for a minute. What percentage of your fleet is coming off of lease, I guess in the -- for the rest of the year, and in 2014? Not an exact number, just ballpark.

This year about 6% of our fleet was up for renewal. If you look out the next several years, the numbers generally are between 6%, 8%, to 8% or 9% of our fleet on an annual basis.

Okay, good. That is helpful

It is actually very low next year, because 2009, most term leases are five-year terms, and 2009 was a very low production year. So we get a break on long-term lease extensions next year.

Well, that is a good point, right. So five year leases written in 2009, would come up for renewal in '14. So you are saying it is probably low single-digits next year?

Definitely, yes. So it is clearly a year where we have a chance for catching up.

Right. And then I guess, in '15 we will see something about that 6% to 8% maybe, so something higher.

No. No, that 6% or 8% is generally pretty consistent going out for a while. One thing to keep in mind, is that it a reasonable percentage of our fleet, around a quarter of our fleet is subject to what we call life cycle leases. And these are leases of containers that remain on lease, until their sell buy date. So that when we receive the containers back, we just sell them. Because of that, those containers do not reenter our depot inventory, as lease out containers. So as a result, the amount of containers in any year that are up for renewal is actually pretty moderate.

Okay. Thank you very much.

Thank you.

Your next question comes from Doug Mewhirter with SunTrust Robinson Humphrey. Please go ahead.

Hi, good morning. I just had two questions. First, give me an idea of the -- just a rough size of the tank market. I am sure you have done some background research. I mean, to use as a benchmark that there is $4 billion of $6 billion of dry boxes produced every year. Is there sort of a similar number you can apply to the tank market? Or maybe a total dollar install base size?

I am surprised there are so many questions being asked of us about the tank market. We have been investing in the tank market now for a few months, and were working with Trifleet for a few months. We really aren't in a position to give authoritative data about the industry at this point. We simply, I think if we were to, it really wouldn't be fair, because we are not as knowledgeable as other investors in the tank market.

Okay, that is fair enough. I understand you are taking small steps. The second question may be more relevant. You talked about the muted peak. All of your competitors talked about the muted peak. If I remember correctly, last year's peak was actually front-loaded. And so last year really didn't have a huge third-quarter peak either, which implies some easier comparisons. So I assume you would still assume that there would be a positive year-over-year comparison with last year's peak. But it might be similar in shape to the pattern of last year. Is that correct --? (Multiple Speakers).

Actually, both 2011 and 2012 were totally different years than this year. The peak season in both years was a three or four month event, and it started really early. One year it ended in June, and the other one ended in early July. Here, we did not see that big second-quarter spike that we saw in both '11 and '12. While definitely the bigger demand happened at the end of the second-quarter going into the third quarter, with most of the pick up activity in the third quarter. So I would say this year, unlike the two last years, is looking like a more traditional year in terms of total container demand.

I think as Robert mentioned earlier too, part of the reason the peak season came earlier in 2011, 2012, certainly in 2012, was due to the GRI's. And as the freight rates started to move up, you saw shippers ship earlier. This year we have not seen the shippers lines have success in implementing GRI's. And as a result, the shippers appear to be more willing to follow a more traditional pattern of shipping later in the year, because they are not as concerned about freight rates moving up.

Okay, thanks. Thanks for the answers. That's all my questions.

Thank you very much.

The next question is a follow up from Justin Yagerman with Deutsche Bank. Please go ahead.

This is Josh again, actually it was asked. It was already asked though and covered. Thank you. Sorry about that.

Okay. Thank you, Josh.

That is all the time we have for questions today. I will now turn the call back over to the Company for closing remarks.

Well, I would like to thank everyone for joining Textainer for our second-quarter 2013 earnings call. If you have any further questions, please feel free to contact any of us. And we look forward to speaking to you at our third-quarter earnings call. Thank you very much.

Thank you, ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.