Textainer Group Holdings Ltd (TGH) 2013 Q4 法說會逐字稿

Welcome to the Textainer Group Holdings fourth-quarter 2013 earnings conference call. My name is Chirstine, and I'll 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 call over to Executive Vice President and Chief Financial Officer, Hilliard Terry. You may begin.

Thank you, and welcome to our 2013 fourth-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 and A.

Before I turn call over to Phil, I'd 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 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.

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 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 now like to turn the call over to Phil for his opening comments.

Thank you, Hilliard. I would like to welcome all of you to Textainer's fourth-quarter 2013 earnings conference call.

Both the fourth quarter and 2013, as a whole, were periods of significant revenue and fleet growth for Textainer. Total annual revenues increased 9% to $529 million. Not with standing declines in rental rates and a 2.4% lower level of average utilization, lease revenues increased at an even faster rate, rising 15% quarter to quarter and 22% year to year. Adjusted EBITDA increased 9% for the year to $430 million.

The increase in our fleet size was equally impressive. Textainer invested $950 million in containers for delivery in 2013, comprised of $752 million invested in new and used containers during 2013, following $198 million invested in new containers in the fourth quarter of 2012 for lease-out in 2013. We believe, among lessors, we were the largest buyer of dry-freight containers in 2013 and among the top investors in dry specials and refrigerated containers.

Adjusted net income for 2013 was $175 million, representing a return on average equity of 17.3%. We announced a dividend of $0.47 per share, which brings our total 2013 dividend to $1.85 per share. This continues our tradition of maintaining or increasing our dividend every quarter since going public in 2007. Our focus is to pay a dividend, which is sustainable, and which provides the proper mix between rewarding shareholders and maintaining capital for future investments.

Our year-end fleet stands at 3 million CEU, an increase of 9.6% compared to the end of 2012. We are the first and only lessor with a 3 million TEU fleet. Achieving economies of scale are critical to success in the container-leasing industry. We believe our size, operating efficiency, and industry lowest cost-per-container per day provides us a competitive advantage.

In January, we acquired 30,000 TEU of standard dry-freight containers from our manage fleet for $35 million. The portion of our fleet which we own, grew by 4% from the end of 2012 to 77% currently, the highest level in our history. At 2.3 million TEU, we believe our own fleet itself is as large as or larger than any of our competitors.

We have invested, or committed to invest, more than $10 million in tanks under our joint venture with Trifleet. We've had a sole supplier contract with the US Department of Defense since 2003, covering the program management, leasing transportation, and repair of intermodal equipment. The contract was subject to renewal and open for bids last year. Textainer won the bidding and, in December, entered into a new contract with the US Military.

At this point, 2014 is difficult to predict. The year started out on a positive note. Prior to Chinese New Year, we saw an increase in utilization and an improvement in lease terms, with higher rental rates and fewer free days for new container lease-outs.

We've also seen an increase of approximately 10% in new container prices. As we had anticipated this increase, we've already invested $165 million in new and used containers in 2014. New container inventories at factories today are estimated to be 575,000 TEU, of which approximately 83% are for lessors.

While it is clear that the container manufacturers are pushing for higher prices, it is too early to tell whether prices will remain at this level. Higher new container prices and/or higher interest rates should result in higher rental rate and higher used container prices, which would improve gains on sale of trading and in fleet containers.

Used containers prices today are approximately 25% below their level of one year ago. We did not expect to see an improvement in used container prices until the second quarter at the earliest.

We continue to operate in a very competitive industry. The container ship fleet is expected to grow 7% to 8% during 2014. Trade growth of 4% to 5% is predicted, higher than the approximately 3% growth witnessed last year. This increase in growth is expected to increase the demand for containers but will not be sufficient to absorb the increase in containership capacity without increased vessel scrapping or lay-ups.

The shipping lines will find it difficult to maintain increases in freight rates. We believe they will also continue to rely on leasing companies to provide at least 50% of the containers they require. Regardless of whether new container prices remain at their new level, rise further, or fall, we believe spreads on new container lease-outs will remain under pressure in 2014 due to the financial pressures faced by our customers and the easy access to liquidity afforded all container lessors.

While we will continue to remain selective in the deals that we pursue, we are also focused on maintaining or growing our market share. We expect that market conditions in 2014 will be similar to those in 2013.

With 84% of our fleet subject to long-term and finance leases and only 4% of our leases are expiring in 2014, we expect utilization to remain at or near its current level. We expect to continue to see attractive purchase lease-back opportunities. Our financing costs have declined, and we believe we have sufficient access to new financing if needed. We are conservatively levered with a 2.3 debt-to-equity ratio. We have the largest fleet at more than 3 million TEU, and the lowest operating costs in the industry. We believe we are well-positioned to take advantage of market developments during 2014.

I will now turn the call over to Hilliard.

Thank you, Phil.

Turning to the quarterly results, we recorded $137.5 million of total revenue. Revenues were 8%, compared to the year-ago quarter. The primary driver of our revenue growth was a 15% increase in lease-rental income, as a result of the 21% increase in the size of our own fleet when compared to last year.

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 and a decrease in the average sales proceeds per container. As we mentioned in prior calls, we've seen a newer trend where shipping lines execute PLB's for containers near the end of their marine life, instead of selling via direct trading deals.

We've secured a number of these PLB's and depreciate these containers while they are on lease, unlike trading containers which are not depreciated. The result is higher depreciation expense and fewer containers flowing through the trading container line item. Over time, you'll see more of these PLB containers flowing through our gains on sale of containers instead of through sales of trading containers.

Gains on sale of in-fleet containers decreased 27%, due to a decrease in average sales proceeds, partially offset by an increase in the volume of containers sold.

Total operating expenses were up 23% year over year, primarily due to increased appreciation expense, which was the largest component of operating expenses. Additionally, direct container expenses, increase in storage costs, and handling and maintenance expenses increased, due to lower utilization in the quarter compared to last year.

Depreciation expense was $40 million for the quarter, up $6.5 million, or 19% year over year, largely as a result of our larger owned fleet. However, there are several additional factors affecting our depreciation expense.

Number 1, as I mentioned earlier, POB's have become a primary source of supply for our resale business, meaning we now have depreciating assets compared to trading containers, which do not depreciate. Number 2, the older in-fleet units we sell are often fully depreciated, while they are replaced by higher costs, new units with higher depreciation. We've seen the percentage of fully depreciated containers in our fleet decline, due to changes in our residual policy. Number 3, when compared to dry containers, a higher percentage of refrigerated containers' prices depreciated annually. We first comprised 11% of the owned fleet on a CEU basis in 2013, compared to 9% in 2012 and only 6% in 2011. As the percentage of reefers in our fleet increases, depreciation expense, as a percent of original equipment cost, also increases.

Lastly, as container prices have increased, compared to the average OEC per CEU in our own fleet has increased, resulting in increased depreciation expense per unit.

If you look at our overall annualized depreciation expense as a percent of average gross container asset value, it is 4.2% this quarter. Over the past two years, our annualized depreciation has range between 3.5% and 4.5% of gross value -- container value. Given the above mentioned factors, we expect depreciation expense to trend toward the higher end of this range.

Bad debt expense was $1.3 million, or about 1% of revenue. We continue to be very vigilant in our credit and collections processes, and in fact, we saw a five-day improvement in our DSL versus last year. We continue to believe the normalized run rate for bad-debt expense should be around 0.5% to 1% of revenue.

Our interest expense for the quarter was $23 million versus $20 million in the year-ago quarter. While our debt balance increased by 18% from Q4 of last year, interest expense was only up by 12%, due to our ability to lower the Company's funding costs. Our average effective interest rate, which includes swaps, is currently 3.74%, or down 69 basis points when compared to the year-ago quarter. Under our interest rate hedging policy, we matched the fixed-rate term of our debt, including the duration of our hedging contracts, with the minimum remaining lease terms. The average weighted remaining term of our debt, including hedges, is slightly under five years.

Income taxes for the quarter were a little less than $1 million, compared to a benefit in 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. Our overall effective tax rate for the full year was 3.5% and similar to our historical rates.

Adjusted EBITDA was $109 million in Q4, a clear indication of our continued strong cash generation. Adjusted net income, which excludes unrealized gains on interest-rate swaps for the quarter was $43 million, resulting in adjusted EPS of $0.76 per quarter. The prior year's financial results included the one-time $9.4 million non-cash bargain purchase gain from Textainer's acquisition of the majority of TAP Funding. Excluding this unusual item, adjusted net income decreased 11% from the prior year quarter.

Turning to the balance sheet, as of the end of the year, our cash position was $120 million. Our total assets were $3.9 billion, and our leverage was 2.3 to 1.

Thank you for your attention, and now I'd like to turn the call open for questions. Operator, can you inform the participants of the procedures for the Q&A?

(Operator Instructions)

And our first question is from Donald McLee of Wells Fargo. Please go ahead.

Hey, this is Donald on for Michael.

Hi, Donald. How are you?

Doing pretty well. My first question is around your Q4 CapEx. It was slightly higher than your last couple of quarters, and we've heard some commentary that indicates that deals remain under pressure. How does that competition affect your approach to deals in the current market, and are you more focused on new container deals or used containers?

I'm sorry. I didn't get quite the last part of your question. Could you repeat it, please?

Sure. It's just how does that competition effected your approach in the current market, and are you going to be focused more on new containers or used containers?

The market conditions over the entire 2013 were pretty similar, which was very tight pressure on yields on every opportunity we looked at. We did see a slight increase in rental rates coming into 2014.

Our CapEx last year was down from the previous year. I think we've explained, but our CapEx in 2014 year to date, as we mentioned, was $165 million, of which $35 million was for the purchase of a managed fleet. But right now, we're looking at a very strong start to our CapEx for 2014.

Got you, and then, just kind of another question around the ABS. Have you seen any tightening in that market, or are the spreads still pretty wide -- or have you seen any widening in that market, or are the spreads still pretty tight?

As you probably know, it really depends on what's going on with the five-year swap, which has been a little volatile lately, but I think the pricing is about the same as it was probably towards the end of last quarter, although there's been volatility within the quarter.

All right. Thanks, guys. That's all my questions.

Thank you.

Thank you. Our next question is from Justin Yagerman of Deutsche Bank. Please go ahead.

Hi, everyone. This is Taylor Mulherin on for Justin. How are you?

Good morning, Taylor. We're fine, thank you.

Great. I wanted to jump in to the guidance that you gave for 2014 and just try to clarify a few points. You mentioned the performance is expected to be roughly flat. Is that to mean that earnings, or EPS, or net income, or however you want to judge that, is expected to be flat? Or are you talking to utilization, or just, sort of, more general performance things?

Really, we are talking about market conditions.

Okay.

Right now, we see the utilization's likely to remain around where we -- we expect utilization range very similar to where it is right now. Rental rates may go up and down. That would, of course, depend on container prices.

We've seen rental rates step up slightly as we've seen container prices go up, but yields on transactions are likely to remain very similar to the way they were in 2013. Yields were under tremendous pressure last year, and I think that's going to remain the case this year.

Certainly, though, if rental rates step up, that does increase our ability to lease out [depot] containers. I think, right now, the used container prices are likely to stay around where they are currently, at least through the first quarter and perhaps partly into the second quarter.

Ultimately, that will depend on what happens to new container prices. We do see, positively, the trade growth is projected to increase in 2014 over 2013. That is certainly a positive, and we do expect that the shipping lines will continue to rely on us to provide -- rely on our industry to provide more than half of the containers that they need.

We also expect the total container production in 2014 is likely to be slightly higher than it was in 2013.

Great. That's helpful. And on the container pricing environment, I wanted to ask about sort of the dichotomy between the 10% increase in new container prices over the last few months, and then you mentioned how used prices are at the lowest levels of the last three years, and so, I know, over time, as you just mentioned, they're going to be correlated, but what's been driving that for the last, you know, short-term, three months-type thing?

What's driving used container prices?

What's driving the difference -- why are new container prices up 10% while there is a lingering weakness in the used container prices?

This time of year is always a very slow time of year for used container prices right after year end. You see there is demand going into the Christmas season, but after Christmas, we always see a slowdown in demand for used containers.

So even if new container prices step up slightly, you are unlikely to see that having an effect on used container prices right now. That's why I think that we won't see anything happen on used container prices until the second quarter as the manufacturers are closed, so new container prices are unlikely to show any real change for the next several weeks.

We'll have a much clearer picture of used container prices once the manufacturers reopen early March. At that point, I think we will have a better view into what happens to used container prices.

This is Robert here. Let me just add, I think that some of those are residual values of disposable prices are more correlated to utilization than they are to new building prices actually. There is some delay factor toward the new building price, and clearly they have an influencing effect, but I think you should compare that more to utilization levels than new building prices.

That's fair. Great. And then one last question.

I just wanted a clarification on the gains on container sales for the quarter. How did the units sold, and I think you gave these numbers, but I might not have written them down in time. The units sold in the quarter versus the pricing, how did that compare to, let's say, sequentially, Q3?

The trend continued because what we had said was, basically, the pricing was down, but the volume partially offset it. So it was sort of a similar trend to Q3.

Okay, great. Thanks for your time.

Thank you.

Thank you. Our next question is from Tulu Yunus of Nomura Securities. Please go ahead.

Hi, gentlemen. Thanks for taking my question.

Just wanted to dimensionalize how higher new box prices, as well as the continued pressure on yields from the new entrance of easy access to capital, how is that really affecting the returns on new business? However you want to sort of quantify that, whether it's cash-on-cash or some other metric, just the returns on the new leasing business right now.

I was trying to explain earlier, but perhaps if I didn't do a good job, I apologize. Container prices go up and down. Rental rates will go up and down similarly to container prices, but the yield, the returns that we actually receive on that asset, on that investment and that asset, has remained pretty stable over the recent past. And we expect yields to remain very similar to where they were towards the end of last year going into 2013, even though the absolute per diem rate on the container may increase as container prices rise.

I see. Okay. Well, thanks. That's helpful.

And then I guess, Hilliard, looking into next year, a lot of moving pieces, obviously, in terms of what will impact your P&L, but the utilization that will stay flatish from current levels but on a year-over-year basis that will likely be some pressure. D&A sounds like it's going to remain elevated, maybe pick up a little bit on a year-over-year basis. This seems to be some CapEx momentum that's building, but I guess when you put it all together, is it fair to see some earnings growth in 2014?

Again, we think while the market and the environment will be similar, we could see some potential growth.

Okay. Thank you very much.

Thank you.

Thank you. Our next question is from Ken Hoexter of Bank of America. Please go ahead.

Good morning. Hilliard, you were -- just revisiting the manufacturing, you said liners are slowing a bit in growth. The manufacturers are making more. Can you give a little insight on to inventory levels right now at the producers and compare that to historic levels?

Yes, this is Robert here. We believe new production inventories at factory is about 575,000 CEU, which is actually pretty low in relative terms.

At the same time last year, inventories were more than 1 million CEU, and we correlate 575,000 CEU to something that equals about three months consumption in a normal environment. So that's not bad at all for this time of year when people are normally stocking up for what would normally be the start of the peak in the end of the second quarter.

Wonderful. And looking at your $140 million, I think you said you spent already year to date. How do you see that accelerating, I guess, versus the economy and demand before and after, I guess, underlying demand around the Chinese New Year?

Well, I would say, right now, we are sitting on less uncommitted new production than we did a year ago. So we have a bunch of recently placed orders. A lot of our inventory is not even being built yet, so we certainly see a constant replenishment as we continue to close deals.

It is correct. The market had a very nice peak up to the Chinese New Year, which was early this year. It started on the 30th of January. Clearly, the market will slowdown in February and March, but we expect the market to come back alive probably towards the end of April again.

Wonderful. And just a clarification on the last answer. Phil, you were saying in the returns, despite the prices of the boxes going up, your returns aren't changing in terms of -- but then you kind of counter that by saying yields were coming down.

I guess, maybe, can I just get a clarification on what you meant by the -- if the yields are coming down, but yet the costs are going up, wouldn't your yields need to go up to keep the returns at the same level?

I thought I said yields were stable, but if I didn't say that, that's what I meant to say. What I meant to say is that, and I believe I said, that rental rates may go up or may go down.

The actual dollar rental rates, $0.50 a day, $0.52, $0.54, whatever that is, may change depending on the container price, but the actual return on our investment in net assets remains pretty stable over time.

So increases in rental rates don't mean necessarily that the yields we earn increases. Yield is likely to remain stable. It's because the underlying asset cost increase or interest rates increase.

All right. That's a great clarification. I appreciate that. Yes, I think as long as they're moving in the same direction that -- I get that one.

And then lastly, Hilliard, on the direct costs, obviously you saw a some big jump. But you mentioned there was increased handling costs and changes in utilization. I guess I'm a little confused on that because he said utilization is similar to where we've been. What's driving that?

Ken, if you look year over year, our utilization is down 2.8% or 2.9%, so if you just look at that, that really drives increased handling costs and storage costs and things of that sort. That's the driver on that one.

And you were saying, go forward, it shouldn't change much just given the fact that you don't have many contracts coming up for deal.

Correct. We think utilization will be stable and in the range where it is for now.

I mean as a percentage of our fleet, the percentage of contracts coming up for renewal in 2014 is the smallest in percentage basis that we've seen in quite a while. And it is directly related to the fact that five years ago, as you know, most of our leases are five year leases, was 2009, which was one of our lowest levels of investments ever.

Furthermore, and I think this is particularly important, the leases we entered into in 2009 were actually -- generally had pretty low per-diem rates. So those leases that are coming up for renewal this year, the rates on those leases are not that far off from where current market pricing is. So we don't see a lot of exposure in terms of those leases that are coming up for renewal in 2014.

Appreciate the insight. Thanks for your time.

Thank you.

Thank you. Our next question is from John Mims of FBR Capital Markets. Please go ahead.

Hey, good morning, guys. Thanks for taking my call.

Thank you, John. Good morning.

Good morning. So Hilliard, let me start with you on the dividend. A couple quarters in a row where you've been above 60% in terms of the payout ratio. I know that's the long-term commitment to dividend and confidence in the model and all of those statements are great, but how long -- if 2014 looks a lot like 2013, how long can you be comfortable at that high payout ratio level?

John, we are pretty committed to our dividend, and we are very comfortable with the current level, if market conditions remain as they are. Now, I will say that the Board does take a fresh look every quarter at balancing the opportunities for the Company with returning capital to shareholders.

But again, we believe in a consistent dividend, and we're very comfortable with the level currently. I recognize that it is above sort of our stated payout, but you have to take a longer-term view.

Yes, absolutely. But just for the sake of argument, if EPS was flat and you didn't raise the dividend, but let's say it still came in at this kind of high-50%s to 60% payout for the year. From what you know right now, the Board would be comfortable with still paying the same $0.47 a quarter?

Again, John, I don't want to speak for the Board, but I think, you know, they have shown consistency and commitment to the dividend. I think if I was to look at how we forecasted things, we're very comfortable with the current dividend levels.

Okay. That's fair.

Robert, on the manufacturing side, can you compare or provide any sort of parameters around container input costs this year versus last year? I know the manufacturers are pushing hard for margin, but how much are they making up on a COGs basis versus what they need to get from a new box price level?

Well, that's a good question. I think what happened was, in the fourth quarter, prices dropped to such a level, plus minus $2000, which is really just about production costs, maybe below if the manufacturers allocate a normal SG&E to each box that they produce.

In November, we got the hint that they were probably looking at doing something about that, probably shutting down production for a while and simply all four agreeing that prices have to go up to a higher-level. It so happens all four manufacturers decided to shut down mid January and stay closed until at least end February, some even the beginning of March, to stimulate both demand but also to avoid the downward pressure continues.

So they decided, hey, we've got to go out. They all came out at a certain level and have been pretty consistent on that level. I think we all buy into this market. Shipping lines are out, those that have budget for it right now in the early part of the year. Leasing company has been out buying.

As Phil says, since we have just pricing based on what we pay for containers, it doesn't hurt us actually. In some ways, it's actually good for us, in as much it makes our [detco] inventory more attractive to lease out at a higher price level.

Okay.

So I would say that at this price level there is a nice contribution margin for the manufacturers, but there was none in the fourth quarter last year.

Right, but looking at first quarter of last year, is there -- are materials costs, all the input costs, generally up, down, flat now versus where they were a year ago?

Labor cost has clearly risen since last year. Oil price, as you know, the paint content, the flooring prices is pretty stable, fuel prices are, you know, they go a little bit up and down, but there's no big competition for the steel right now, so this was not -- this increase has nothing to do with increase of material costs. It's some compensation for increased labor costs, but it is simply getting back to trying to manifest a suitable contribution margin.

Okay.

If I could just add, I think that perhaps underlying your question is the fact that steel has gone down recently, and so isn't it obvious steel prices going down and container prices going up, but as Robert pointed out, there's a lot of other factors that go into the cost of the container, including an industry with a few players who are trying very hard to push the price up.

Yes. That's really helpful. And just two quick ones, and then I will turn it back either for Robert or Phil.

The CapEx to date, the $130 million, $140 million. What percentage of that is used versus new? And of the used containers you're buying now, are you putting those out? Is that five year duration still applicable to those, or are the used containers that you are putting into service today, are those on shorter lease terms? Thanks.

I think we mentioned that we invested $165 million in 2014 year to date, of that $35 million was for purchase of containers from our fleet. The rest was for new containers.

Right. Okay, sorry. I was unclear that. Of the 130, excluding the managed, the 130 is all new.

Yes.

Okay. And are those for March or April delivery?

Yes.

Okay.

Some containers have been -- I think about 20% of the containers have been produced and the rest are coming out March, April.

Okay. All right. Thanks for the clarification. Thanks for the time.

Thank you.

Thank you. Our next question is from Sal Vitale of Sterne Agee. Please go ahead.

Good morning, gentlemen.

Good morning, Sal.

So just a quick question. Phil, you mentioned that you believe that container production in 2014 will be higher than last year. What do you estimate last year was? Was 2.5 million, is that about right?

I think that's about right, yes.

Okay.

I think it was about 2.3 of dry, probably 200,000 of reefers.

2.4 million last year dry containers, 220,000 CEU of reefers is what we estimate.

So it is 2.62 altogether. Okay. So when you expect 2014 will be -- I guess do you expect 2014 will be slightly higher, because it seems like, given that the factories are shut down for a couple months here, and that they are intent on raising prices, that you probably don't get 3 million CEU's, or is that what you believe?

No, I think that's probably a stretch. If we have 2.4 last year, we are probably talking about 2.5, maybe slightly higher than that, but it's a module increase on the dry. They can easily make up for the six weeks they close. Let's face it, last year most manufacturers were producing about 50% of theoretical capacity.

Right. Okay. So there is plenty of -- they can easily ramp that up if they needed to.

Oh, absolutely. If the orders are there, they'll kick the containers out.

Okay. So when you mentioned the 10% increase in the box price, so that's 10% off of roughly $2,000. So it's about $2,200 right now you'd say?

The average is a little higher than that.

Okay. That's useful.

And I guess then, if I looked at big picture, if I looked at this year, or if I look at the current situation and just contrast it with the year-ago situation, I remember last year, you and a lot of your peers were very positive about the year ahead. And there was a significant amount of ordering activity, would you say that, even though you've done some CapEx thus far, and your competitor that reported yesterday has also done some CapEx, would you say that there's more caution this year relative to last year?

Yes. I think that's fair to say, I think for two reasons. Last year -- sorry, in 2012 in the fourth quarter, basically, all leasing companies went out and bought big numbers. I mean, we certainly bought very big numbers during that period, I think, in the range of $200 million or so and continued buying into the first quarter.

Chinese New Year was later last year, so we can still get more deliveries before that downturn, which always happens at the Chinese New Year. So since there was activity in the fourth quarter, and we see more lines probably going toward leasing rather than buying as part of their own fleet renewal plan and they start the process pretty early, I think more deals have been committed in the early part of the year than we saw last year. To a very large extent, we had bought for inventory.

So, what we're seeing right now, I think everybody has been pretty prudent out there. We have seen some shipping lines go out and purchase, but it's basically fewer shipping lines then we saw last year, but the ones that are buying are repeat buyers from last year.

Okay. So you are seeing -- I guess in general, you are seeing fewer interest by shipping lines in direct purchases relative to last year.

I'm sure when the [stats] come out for first quarter, we will see the same as we did last year. The shipping-line percentage will be higher. A lot of shipping lines get their budget approved, they buy, and that's the only time they buy in the year, while the leasing industry, we buy all year.

So I think you're going to see exactly the same as last year, but probably to a smaller extent. Shipping lines will buy marginally more in Q1, and then leasing companies will come back and probably end up buying 50%, 55% of the containers over the year.

Okay. And then just the last question was, and I think, Hilliard, you mentioned that you -- I guess it would be reasonable to expect that utilization would, for the rest of the year, would be about at current levels.

Just given the fact that peak season really hasn't begun yet, it seems like Asia-to-Europe trade flows have improved, should it just seasonally -- I guess seasonally and also the fact that the economies are improving, the global economies are improving, shouldn't we see a significant uptick in utilization I guess into 2Q and into 3Q?

Robert mentioned earlier that we do expect to see demand later this year, starting probably late April. Obviously, we'd like to hope the utilization picks up at that time. It will depend quite a bit on the level of production and whether inventories build up at the factories prior to the pickup in demand later this year.

Okay, that's fine. And then just the last question.

On the CapEx you have done thus far, I assume that, just trying to get a sense for the level at which you purchased the containers relative to what you actually leased them out at. I assume that some of what you bought was at that, I guess, closer to $2,000 price, and now maybe you can lease them out at a lease rate commensurate with, say, a $2,200, $2,300 price?

That is certainly what we are attempting. (laughter) As I said, we knew from the end of November that there was going to be shut down, so we basically started adjusting our pricing already then. So, clearly, our spreads are considerably better on the batches we bought last year and the beginning of this year.

That's helpful. Thank you very much.

Thanks, Sal.

Thank you. Our next question is from Doug Mewhirter from SunTrust. Please go ahead.

Hi, good morning. I just had two quick questions. The first is regarding pickup patterns.

I heard some commentary last night that some of the customers actually elected to pick up their boxes a little bit more promptly than expected, and that was -- doesn't necessarily mean it's telegraphing anything for the rest of the year, but it implies that maybe some of the lines were cut short by unexpected strength in shipping demand. I didn't know if you had seen -- if that has followed through to your book or not in January?

Yes, Doug, we've seen exactly the same. There's no doubt that the period between production and on higher, or for that first movement from depo's from booking to lease out had been much shorter than it was last year.

I think last year some of the terms that the leasing industry were agreeable to were the shipping lines of operating extended build-up periods. Probably hurt everybody a little bit, and I think right now when we are in a little bit better position, prices are a little bit higher, inventories are a little bit lower, I think we all are going to try to tighten up a little bit on offering two long build-up periods for these transactions.

It so happened that, I agree. I think some of the lines, probably more so the deep-sea operator, were surprised about that dramatic uptick in January. Everybody is used to seeing an uptick before lunar new year, but this was pretty extreme, this one here. And we saw small, midsize operators and global carriers, they all got caught short at that particular time, and quite frankly, [on-high] the containers right away.

Clearly, on a net-term, that debt has stimulated our utilization in a more positive manner in January than we had expected. Yet as we always see, utilization does tend to drop after Chinese New Year for 4 to 6 weeks.

Thanks a lot for that, a very detailed answer. Second question is maybe a little more general.

Could you compare -- I will just use a yield measure to keep everything apples-to-apples --I guess dry versus non-dry yields? Reefers, specials, tanks, any difference in attractiveness in those broad terms?

Well, we can't speak for the market, but we are seeking higher returns for reefers and dry specials than we are for standard dry containers. So clearly, there is a difference. Our walk-away -- our line in the sand is certainly higher on reefers and dry specials than they are on dry standards.

Okay. Thanks. That's all my questions.

Thank you.

Thank you. Our last question is from Michael Webber of Wells Fargo. Please go ahead.

Hey, good morning, guys. How are you?

Hi. Thanks, Michael. How are you?

I'm good. Sorry if I'm muffled. I'm actually on a plane getting ready to fly over Robert's homeland.

I wanted to hop on and ask a couple questions around some bigger picture issues. You guys, and The Street and in the sector in general have been talking to the slowing incremental for quite a while now, and it's really been in place for the majority of the last, probably, 12 to 14 months. And the idea to have narrower yields and narrower spreads has certainly been, kind of, beaten to a pulp on this call, but maybe -- and Robert or Phil, I know you guys have been around this market for a long time.

When you look at where those metrics stand today and you take a step back and you look at the last 20 or 30 years, how close to a bottom do you see current yields and spreads just relative to the last couple cycles? And certainly, where would you handicap the risk in terms of incremental downside from current levels, or were you at a trough and noticeable risk will remain to the upside in terms of improvements in pricing and an improvement in returns?

Mike, that's a great question, but it's difficult to answer. But I kind of compare it a little bit to the container manufacturers and the action they took.

I think when we look at the last half of last year, we certainly don't see spreads going lower than that. Our intention and desire is to try to see if we can improve our margins. We think it's fully justified to the service we provide. We buy containers in speculation. We sit on them for a while. We get some delayed pickups.

We should be able to get better terms when we lease out. It doesn't just go for dry containers. It goes for basically all the equipment sites we operate.

Michael, I would even add something to that, too. First, I'd like to say that I really appreciate your desire to listen to our earnings call, that you are calling in from a plane somewhere over Europe it sounds like. Thank you very much for your commitment.

Having noted that, I would also say that I think something that's lost here in the discussion is our industry has gone through a period of tighten spreads, re-appraisals of the returns we were getting, and yet I know one of our competitors reported yesterday and we're reporting today, and we're still see ROE's that are in the very high teens. I think that's extremely impressive in an industry that's gone through a period of, let's say, revaluation of their assets and repricing of their assets. So sometimes I think we lose sight of how attractive, in fact, this industry really is.

Thanks for that. Robert, actually one for you, and then I will have one more bigger picture question for Phil.

But Robert, I know there has been some talk of the peak reliance running into some issues in terms of the capacity need perspective and in terms of demand for boxes. Do you see that as having any material impact on demand for new boxes?

If you're not -- if those three major lines are not able to kind of share capacity and rationalize capacity along those long haul, Asia-to-Europe routes, is that going to be a source of incremental demand for boxes? Or are we looking just a bit too hard to find that?

Well, Mike, we discuss that a lot internally. I think, certainly, my view is that the rental capacity and isolation does not increase or reduce the demand for containers. It's the cargo volume.

A lot of these vessels right now are operating at 80%, 90% slot utilization. The lines are doing the right thing. They've got to take capacity out. However, at the same time of taking capacity out, they are adding 16,000, 18,000, 19,000 TEU vessels, so clearly when we look at 2014, the net capacity even after demolitions is going to increase.

You know, what we see is that, if trade volume increases as we have read from 3% to 3.5% to 4% to 5%, that will have an impact on box demand much more than whether all these containers are being shipped in alliances that have 18,000 TEU vessels or whatever. So we don't see that as an impact at this stage here. It is purely the trade volume that would have an impact on our demand.

Got it. That makes sense. And then just one more, and Phil, I know we talked about incremental and they seem to be somewhat mixed and ourselves and a number of other people remain on the sidelines here. But you think something last quarter that was pretty salient and there was around new growth. And when you start to see that new growth, it's not necessarily going to be a number. Do you agree?

The number of deals is not necessarily going to move higher, but it's going to be the size of the deals that start to increase. In terms of what you guys have come across thus far in 2014 or even late 2013, have you noticed an uptick in the size of deals, even on the margin? And forgive me if you have already mentioned this, but just curious as to whether you will be or are starting to see that kind of incremental change?

I mean -- it's Robert again. Yes, we did see an uptick in yields in December and January, but I don't think it was so much the result of fundamentals. It was more a result of the fact that we were aware that container prices were going to increase, and we -- (multiple speakers)

The size of the deal, rather. The number of TEU, whether that's the size of the deal that's gotten bigger?

Sorry. No, the deal sizes are still relatively small. I would say even the bigger ones are some that we would call mid-size deals. We have seen many of the micro deals at this stage yet.

The bigger deals that have been out there have actually been a few shipping lines going out tendering for new production themselves, which was expected. And the leasing right now, I think a lot of the lines are looking at what is going to happen after Chinese New Year and how quickly is the market going to pick up after this and how strong is that peak season going to be?

Clearly, if they believe in 4% to 5% total growth in 2014, then there will be significant transactions originating out there because there has been ongoing scrappage. And if you have more than 1 million CEU of scrappage, those containers need to be replaced. So there's certainly sufficient demand for new production ahead of us. I'm particularly pretty certain about that.

Okay. Great. Well, I'm pretty close to (inaudible). Thank you guys very much for the time. I appreciate it.

Thank you, Michael.

Thank you. We have no further questions. I will now turn the call back over to Executive Vice President and Chief Financial Officer, Hilliard Terry.

Well, thank you, everyone, for joining us for our Q4 earnings call. We wish you the best, and we will speak with you soon.

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