Textainer Group Holdings Ltd (TGH) 2015 Q3 法說會逐字稿

Welcome to the third-quarter 2015 Textainer Group Holdings Ltd. conference call. My name is Corey and I will be your operator for today's call.

(Operator Instructions) Please note that this conference is being recorded.

I will now turn the call over to Executive Vice President and Chief Financial Officer Hilliard Terry. Mr. Terry, you may begin.

Thank you, Corey, and welcome to Textainer's 2015 third-quarter conference call. Joining me on this morning's call is Phil Brewer, TGH President and Chief Executive Officer. At the end of our prepared remarks, Robert Pedersen, TEM President and Chief Executive Officer, will join us for the Q&A.

Before I turn the call over to Phil I would like to point out that this conference call contains forward-looking statements in accordance with US securities laws. These statements involve risk 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 its statements that are made. Please see the Company's annual report on Form 20-F for the year ended December 31, 2014, filed with the Securities and Exchange Commission on March 13, 2015, and going forward 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 measure to the most directly comparable GAAP measure will be provided either on this conference call or can be found in today's earnings 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 third-quarter 2015 earnings call. Although our operating performance was solid, our results for the quarter were below expectations. Utilization remained high but lease rental income, after adjustments, was essentially flat compared to the prior-year quarter. More significantly, our performance was adversely affected by the default of a mid-sized Asian shipping line and our decision to reduce the residual value on 40-foot high-cube containers from $1,650 to $1,450.

The defaulting lessee had been under internal credit review for some time and we had been reserving overdue accounts receivable. The lessee was in discussions with a potential buyer who had plans to recapitalize the company. As a result, we believed the situation would improve. Unfortunately, the sale did not happen and the lessee ceased operations.

We have lessee default insurance in place to cover the value of unrecovered containers, the cost to recover containers, and a period of lost future rental income above a fixed deductible. The impact, net of insurance proceeds, of this default on our third-quarter results totaled $4.2 million and is reflected in container impairment and bad debt expense. We do not expect this lessee default to have a material impact on our results after this quarter.

We also changed our depreciation policy resulting in an increase in depreciation expense of $5.8 million. We depreciate our dry freight containers over 13 years to fixed residual values. Every quarter we review our residual values against not just prevailing use container prices, but also against our projections for used container prices 13-plus years in the future.

Sales prices for used containers have historically had large fluctuations with prices reaching a peak in mid-2011 and declining significantly since then. Due both to these declines and our reduced projections for future sales prices, we made the decision to reduce the residual value of 40-foot high-cube containers by $200 from $1,650 to $1,450.

We do not see the need to adjust the residual value of other container types at this time. However, we continuously monitor current and projected future sales market conditions and will make additional adjustments should our outlook change. Hilliard will provide more details on the impact of this change later.

Utilization has remained high, averaging 96.4% for the quarter and is 95.5% currently. Utilization has declined only 2.6 percentage points since the beginning of the year. Adjusted net income for the quarter was $17.7 million, or $0.31 per diluted common share.

Container demand during 2015 has been much weaker than expected. There was no demand peak during the third quarter as we have often seen in past years. Many analysts believe China will not achieve its targeted year-end growth of 7%. Drewry has cut in half its forecast for 2015 container trade growth to 2.2%. Forecasts for global trade growth for 2016 have been reduced as well, but most projections remain in the range of 4% to 5%.

Many freight rates are loss-making and are at or near their lowest levels since 2009. Each attempt to enforce a freight rate increase during 2015 failed generally after a very short period of time. We are not expecting a significant improvement in container demand through at least the second quarter of 2016.

The level of new dry container inventory at factories is now around 930,000 TEU, a decline from this year's peak of more than 1 million TEU, but still high for this time of year. During our last earnings call we mentioned that some of the major container manufacturers plan to stop production for several weeks. Manufacturers are no longer announcing factory closures, but they have few dry freight container orders and are operating at very low levels, if not being effectively closed.

New container prices continue to decline and are approximately $1,550 per TEU currently. As [seal] prices have fallen more than container prices since the beginning of the year, we believe container prices could decline further.

Textainer's resale team sold 115,000 TEU units (technical difficulty) [leaseback] containers through the end of the third quarter, a record pace of sales. This high level of sales is not being driven by (technical difficulty) using our disposal policy, but by the quantity of containers being returned from lease that qualify for disposal due to age, location, and/or condition.

Used container prices continue to decline and are down 10% to 15% over the last six months. We do not expect the used container prices to recover prior to an increase in new container prices.

We invested more than $600 million in containers for lease out in 2015. We purchased more than 230,000 TEU of new and used containers, of which 97% was for our own fleet. While we continue to grow our fleet, our rate of investment slowed during the third quarter in direct response to the slowdown in demand. Compared to previous years, this year we have invested relatively more in reefers and less in dry freight containers.

We declared a quarterly dividend of $0.24 per share, which is a reduction from last quarter's dividend of $0.47. The dividend is now set at a level that we believe is sustainable and appropriate for the longer term.

Additionally, we are initiating a share repurchase program of up to $100 million. We believe that our current share price does not properly reflect the underlying value of our containers, taking into account the cash flow expected to be generated over their lives, and the long-term growth prospects for our company. Purchasing shares at their current level will be accretive to earnings per share and will add to our return on equity, while allowing us to remain the least-leveraged container lessor.

The outlook for the remainder of 2015 and early 2016 remains challenging. Improved performance requires an increase in demand, container prices, and/or interest rates. We do not expect a significant increase in demand until at least Chinese New Year and possibly later.

Maturing leases that are extended will be repriced at lower rental rates. Container prices are not expected to increase in the near term and any increase in interest rates, if it does occur, is expected to be minor. We expect these factors combined will lead to lower financial results in 2016.

We must keep in mind that our industry is and has always been cyclical. We have been in business for 35 years and have successfully managed through many ups and downs. We have the largest fleet and lowest operating costs of any of our public competitors.

Our low leverage provides operational flexibility. We believe container prices -- containers purchased at today's prices will generate attractive returns over their lives.

I will now turn the call over to Hilliard.

Thank you, Phil. I will walk through several key factors influencing our results this quarter.

Lease rental income was $128.3 million, down 1.7%. However, if you exclude the impact of a $2.6 million settlement from a bankrupt lessee in Q3 of 2014, lease rental income was essentially flat year over year. The decrease in average per diem rental rates and the decline in utilization was offset by the increase in the size of our own fleet. It is worth noting that rental rates on new containers fell by approximately 25% over the past year, whereas the decline in our average rental rates was significantly less at 6.8%. Having a fleet of which 85% is on long-term and finance leases with an average remaining term of 40 months, mitigates the effect of some of changes to new container rental rates. Also, as leases reprice, they generally do not reprice at a rate for new container lease-outs due to repair, repositioning, and related costs. Lastly, only 6% to 8% of our term lease fleet matures in 2015 and 2016; in lower percentages in the following years.

Lower resale prices continue to result in reduced gains on container sales in spite of record sales volume.

On the expense side, direct container expenses increased $2.2 million, or 20%, to $13.3 million for the quarter. $1.2 million of the increase was due to higher storage costs due to lower utilization and increase in daily depot storage rates. Damage protection expense, repair, and recovery costs also increased.

Depreciation expense was $63.6 million for the quarter, up $16 million year over year. Included in the increase was $5.8 million resulting from a change in the residual values of our 40-foot high-cube containers of which $1.5 million is one-time as we had to also adjust for our fully depreciated containers; $2.7 million of the increase was due the impairment of containers related to the defaulted lessee, net of insurance proceeds; $5.8 million of the increase was due to our ongoing reduction (or mark-to-market) of containers held for sale, mostly in future quarters, to their net realizable value; and $1.8 million of the increase was due to the larger size of our own fleet. On a go-forward basis, we expect normalized depreciation expense to be $4.8 million higher quarterly as a result of the change in the 40-foot high-cube container residual values. Annualized depreciation expense for the quarter was 5.6% of average container costs, or 4.3% excluding the impact of the lessee default and the residual value change and mark-to-market of containers held for sale. We expect annualized depreciation expense to be 4.7% to 4.8% of average container costs.

Our bad debt expense was 1.9% of revenue, of which 1.2 percentage points was due solely to the write-off of receivables on our books from the defaulting lessee.

Our interest expense, including realized hedging costs, but excluding the write-off of unamortized bank fees and unrealized losses on interest-rate swaps, was $22.5 million for the quarter, up 7.3% versus the year-ago quarter and much less than the 13% increase in our average debt balance.

We continue to benefit from a refinancing activities over the past year. Our average effective interest rate, which excludes realized hedging costs, is currently 2.93%, a 15 basis point decline when compared to the year-ago quarter. During the quarter we completed a new five-year $190 million revolving facility to finance primarily our purchase leaseback transactions. We were able to achieve an extremely attractive financing rate at LIBOR plus 130 basis points. Our financing costs remain low and reflect the strong support we received from banks and other institutional investors and our low leverage.

As of quarter end, 80% of our debt was fixed or hedged, consistent with the percentage of our own fleet subject to long-term and finance leases. The weighted average remaining term of our fixed-rate debt is 48 months and the weighted average remaining term of our long-term and financed leases is 40 months.

Income tax expense for the quarter was $1.6 million, resulting in a higher-than-normal effective tax rate given our lower net income. As we've stated in the past, our effective rate can vary from quarter to quarter due to discrete one-time items. However, we continue to expect our annual effective rate to be in the mid-single digits.

Adjusted net income for the quarter was $17.7 million, or $0.31 per share. The change in depreciation policy resulted in our earnings per share being impacted by $0.10 and the defaulted lessee reduced our EPS by another $0.07. Adding these numbers back and normalizing the tax rate in the mid-single digits would get you to a number that is more directly comparable to your estimates for the quarter.

As stated previously, we expect the ongoing impact of a change in depreciation to result in roughly about $0.08 lower EPS going forward.

Turning to our balance sheet, as of September 30 our cash position was $94 million with standby or available liquidity of approximately $760 million. Total assets were $4.4 billion. Container contracts payable were down significantly year over year to the lower level of container purchases. And also you'll notice there is a $9 million receivable for insurance proceeds which will get smaller as time goes on as the cash from the insurance proceeds is received.

As Phil mentioned earlier, our dividend was lowered to $0.24 per share. And as a reminder, our distributions -- dividends are treated as distributions by US tax holders as a return of capital rather than dividends. We plan to start a share buyback for up to $100 million this quarter and have ample cash to support the program.

Thank you for your attention. I would now like to open up the call for questions. Corey, can you let the participants know the procedures for the Q&A?

(Operator Instructions) Mike Webber, Wells Fargo.

Phil, obviously the first question is going to be around the dividend shift and also the lowering residual values. Maybe if you could give a bit more color and walk us through the thought process around how you guys arrived at the decision this quarter, as opposed to either waiting into 2016 to see if anything changed or maybe earlier in the year. What in the long-term outlook pushed you guys to the point where you needed to make a long-term shift in terms of your cash outflows and how you guys are thinking about long-term asset values to shift the residuals?

Thanks, Mike. Obviously these are not decisions that we make in the short term. There's two separate decisions here so let me talk first a little bit about the change in depreciation policy.

That is something we look at quarter by quarter and we will continue to look at quarter by quarter. The fact that it happened at the same time that we are cutting our dividend is, honestly, a bit of a coincidence. We look at the residual values, at the performance of the assets, and of course not just simply new container or even current used container prices, because you have to look at the cash flow of the assets over the entire remaining life of the asset. But we look at that information on each container by container type, quarter by quarter, and we will continue to do so.

So that is just, at this point, looking where -- looking at the current sales prices on 40-foot high-cube containers, looking at what we project for the future, it seemed appropriate to reduce the residual value for 40-foot high-cube containers.

With respect to the dividend, obviously that was a very challenging decision for us and we take our dividend very seriously as you know. In the past we've never cut or reduced our dividend, but when we were looking at our performance for the remainder of the year and our projected performance going forward, we felt that a dividend cut was necessary and we simply decided that this would be the appropriate time to do it.

We want to make sure that our dividend policy is a sustainable policy on a go-forward basis. At the same time, we believe that our shares are dramatically undervalued, so we will also be returning cash to shareholders by implementing the share repurchase program of up to $100 million. And I would also like to make it clear that we have more than ample cash in order to pursue that program.

Got you, that's helpful. Around the residual values, you guys marked down the high cubes but your reefer residuals are still a bit higher than some competitors. Can you talk to the thought process there; I guess how that business may or may not be different and how we should think about the likelihood of a move there sometime over the next year?

I think there's a few things that need to be kept in mind. Our reefer fleet is pretty young and we haven't been selling a lot of reefer containers. Again, we are trying to project what residual prices are going to be many years in the future. We don't have a lot of experience in selling reefer containers today. We feel comfortable with our residual values for the refrigerated containers.

But again, having said that, we analyze this data every quarter and if we feel it is appropriate to make a change in any container type based on the residual value, we will do so. That's been our policy until now. We've changed residual values in the past, of course. In the past they've gone up; this is the first time we have cut them since we've been a public company.

But it's not as though this is something we just randomly choose to do. We do this every single quarter, look at -- compare the residual values to the cash flows that we expect the containers to generate over their lives along with our expected sales prices.

Got you, okay. Phil, within your comments, and forgive me, you said this and it was a bit fuzzy. I couldn't tell. In terms of new box prices here, did you say $1,550 or $1,650?

And then if you could give a bit of color around -- you mentioned steel falling more quickly than box prices, which would certainly -- could imply some more downward pressure, but you've also got wider margin for manufacturers but they are really in a rush to produce. Maybe if you could talk about what you are seeing there I guess quarter to date or (technical difficulty) and from a yield perspective if you are still seeing any pressure from some competitors trying to dispatch at any growth they can.

Well, let me talk first about the container prices. There's really not a lot of purchasing of containers going on at the moment, so to say exactly where the price on new containers are it's hard to be specific. I said $1,550. I'd say that that's a reasonable estimate as to where containers would be priced today. It could be slightly lower, but there's not a lot of aggressive purchasing of containers going on at the moment.

I also made the observation, and I think many have made it as well, that container prices haven't declined as much as the decline in steel prices, which would imply that there's still the possibility for further declines in new container prices.

As far as yields, yields remain under pressure. There has not been a lot of activity in the third quarter as we've already said earlier. We didn't see a peak demand, so the transactions that were out there you can imagine that there's been -- that they are very, very competitive, each transaction that comes to market.

Got you, okay. I had some more questions on the buyback but I will let some else handle it. I appreciate the time, guys. Thank you very much.

Amit Mehrotra, Deutsche Bank.

Good morning, guys. Noticed at the end of the slide deck you said the Company was well positioned and it had a little footnote there that said that that was as of September 30. So I just wanted to -- I'm sure you guys are running all sort of stress tests and analyses. Wanted to just try to get a sense of what those analyses are telling you in terms of what further level of asset value declines maybe you can absorb without necessarily having to put up some additional money.

Amit, this is Hilliard. So we take a look at the cash flows that our assets generate and we actually do this on a quarterly basis. If you look at the cash flows over the life of the asset, basically they are above where our current assets are on our books. But also I think one or two of the analysts have looked at us and our peers in terms of some of the debt covenants and things of that sort. And I think the thing that was noted is we are probably the Company that has the most room out of our peers to absorb any adjustment to asset values.

But, again, I go back to my first point. If you look at the cash flows that we expect to generate from our assets, it is above the book value.

Maybe I could just add to what Hilliard is saying, because while we can't comment on the situation of our peers, we have a quite significant amount of room with respect to where our covenants are, if there were any other issues with respect to our assets. We don't see that -- you're asking projecting over time; we do not see that as an issue going forward.

Right, right. Okay, yes, that makes sense. Just one follow-up with respect to your comment on a recovery or maybe a stabilization starting in the second quarter of next year. Just curious on why you think that that's the bogey.

Also, wanted to understand, just given your experience, 35 years, just want to understand what a bottom-end process actually looks like. And do you actually see some level of capitulation in asset values and then do they bounce back from there, which would maybe obviously imply some more [pain]? So I just wanted to see if you could just give us some insight based on past cycles on what really a bottom-end process looks like.

Amit, this is Robert here. Let's just look at this year first. Our shipping line customers are actually pretty surprised that shipping volumes, cargo volumes were as poor as they were. They predicted a peak prior to Chinese New Year earlier this year. They did predict a peak in the third quarter that just did not happen.

Cargo volumes have at least not dropped. The issue has more been the fact that you've had 1.6 million TEU of vessel capacity being added this year and there's been more vessel capacity compared to cargo volume growth. And that has obviously created a very competitive situation for them and caused some reduced demand for us in as much as, when the vessels are not full, obviously it is much easier for shipping line customers to bring their empties back to the demand locations and to clear out their surplus piles around the world. So that's the preface to what's going to happen next year.

Growth was a lot lower this year. As Phil mentioned in his beginning, Drewry cut the cost -- the increase to 2.2%. They are predicting 4% to 5% next year. That is a very considerable increase compared to 2.2%.

Is that going to happen? Well, we all have to cross our fingers for that, but when we talk to our biggest customers they are relatively optimistic about that. They are not totally bearish about the outlook for next year. I think we kind of look at it as slight delayed growth from what they thought was going to happen this year and, quite frankly, from what we thought was going to happen this year as well.

Maybe I could just a little bit more to that. We are seeing -- we're expecting production of dry freight containers this year of perhaps 2.3 million, maybe 2.4 million TEU. That is not -- as I'm sure you know, that is not a very big production year.

We are seeing significant disposals of the containers. As I mentioned earlier, we certainly expect to sell more containers this year than we've sold in any year in our history and we're not the only ones selling significant quantities of containers. So if there is a pickup in demand next year, as is projected, you're dealing with a situation where you could see a strong demand for containers or certainly a stronger demand for containers versus what we saw this year because of the change in the population of containers over the course of this year.

Let's hope so. One last question, if I could, just on the share repurchase. So $100 million is a really good number and in the past you talked about the limited liquidity and the restrictions that that puts on a share buyback. Hilliard, I guess is this going to be just on an automatic 10% or 20% of daily volume and you guys are just going to be an automatic, or is this going be more opportunistic? How should we think about the execution of it?

Well, I think two things. Number one, just the 10b-18 rules limit you to I think about 25% of the last four weeks of your average daily volume, so that's just one limitation. But outside of that we are going to be opportunistic when we believe our shares are trading at low levels. And so we think this is an opportunity to buy back shares and it is accretive, as Phil said earlier.

If you look at the actual dollar reduction in our dividend, we are actually looking at repurchasing 2 times as much.

Right. Okay, very good. That's all I had. Thanks very much, guys. Appreciate it.

Ken Hoexter, Merrill Lynch.

Good morning. Phil, or maybe Hilliard, you talked about rates being down 25% on new boxes and 6.5% ongoing. Can you talk about what you expect as we move into 2016? Do you look at those rates as staying at these levels or do we see accelerated on the decline side?

I'm sorry, Ken; are you talking about rental rates on new containers? I'm not certain what you're (multiple speakers).

Yes. This was your -- I though Hilliard was talking about lease rates being down 25%; not new box prices, but the per diem rate. Is that what he was talking about when he said rates are down 25% and 6% on an ongoing basis?

No, what I � specifically said I was about rental rates being down approximately 25% over the past year, but if you look at the average rental rate in our fleet, it was only down 6.8%. So our fleet was not declining as much as what I would describe as the market rate, if you will.

I think the point here, Ken, is just because sometimes people focus on what we might call the spot rate, the rental rate on a brand-new container, which has declined significantly, but that's not to say that the average rental rate on our fleet has declined to the same extent. You've got a fleet that has an average life of over 40 months. It's repricing. We only have 6% to 8% of our fleet maturing any one year.

So the impact of the lower current rental rate on our fleet are not as dramatic as the decline in, again what I will call the spot, or the brand-new container rental rate.

So if rates were to stay at these levels, so if the box prices stay at that $1,550 you talked about earlier, then you would anticipate another 6.5%. That is what I'm asking is does anything accelerate in 2016, or does it continue at this pace if -- using the assumption that rates overall stay at these levels?

If you're using that assumption, no, there's no reason to assume that things would accelerate any more rapidly in 2016. We have a slightly higher percentage of our fleet maturing in 2016 than 2015, but still these are reasonable percentages of our fleet or leases that are maturing. It's nothing out of the ordinary.

Okay, thanks, Phil. Then on the fleet itself, you mentioned you are slowing your pace of buy down to 600 -- at the $600 million and you are going to go slower going forward. Your total fleet slowed -- looked like growth slowed, so do we expect that where the owned fleet I guess came down a little bit? Do you expect to see negative growth in the fleet if you are increasing your sales or do you hold the fleet at this size?

Ken, I think it's important to keep in mind that we are going to invest when we see the opportunities -- when the market justifies that investment. We are not going to sit here and buy containers simply to buy containers. We buy containers when we feel the market conditions justify that. So if at any one time we've actually sold more containers than we've purchased, yes, our fleet could decline.

I personally think that in the fourth quarter we're not going to see real strong buying like we've seen in the last several years where the leasing companies have increased supply in the fourth quarter in anticipation of the beginning of the next year, in part because we still have some inventory at factories. So it's possible that over the fourth quarter, if you see continued strong sales, that you could see the fleet shrinking slightly.

But we will certainly buy; when the opportunities are there we're going to invest. We are not paying specific attention to the size of our fleet, but what makes sense from an economic point of view to do with respect to the cash we are generating and investing in assets.

Okay, helpful. Then, Hilliard, you went through quickly; I didn't catch it. On the direct container expenses, it jumped 30% sequentially and is up 50% from the beginning of the year. I think you gave a reason as to why, I just didn't catch it. Can you review what's going on on the direct container expense side?

Sure. It was really primarily an increase in storage expenses on the direct container expense side. With lower utilization also we've seen some of the daily depot rates increase as well and so that's what has been driving a good piece of that.

So there was nothing special in the quarter? Is that a good run rate at these levels or are we seeing that pressure continue to rise?

Again, it really depends on what happens with utilization going forward.

Okay. Michael kind of threw out there on the share repurchase to come back to later, so I want to revisit that for a second. You said the shares are undervalued if -- just want to understand that. If earnings are going down -- want to ask this in the right way; not to be too antagonistic. I just want to understand your thesis of the buyback.

So if containers are not finding the floor, why do you believe that is the right way to return cash now if you are seeing --? I think Phil mentioned before earnings are going to be down in 2016; the fleet may be down; the rate pressure is going to continue. Why is now the right time to buy back the shares then?

Well, in part because we think it is quite accretive to repurchase our shares at this time.

Okay. Is there any peak that can still occur or is the shipping side done for the season at this point?

I would say the shipping side is done for the season. Chinese New Year is I think the 7th, 8th of February next year. They are expecting a small peak before that, but if we should look at what we saw this year we could be talking about a two-, three-week period. So we don't expect to see any significant action rest of the year.

And then I just wanted a last question. I guess, Phil, from a bigger picture perspective on that then. If we didn't go through it, can you correlate what typically happens if you don't see it on the shipping side to then what can happen on the --? Is that automatic on the land when you think inland, rail, truck side, or is it not necessarily kind of a one-for-one par relationship?

I would rather go back to the international trade. If the deep-sea trades are not strong, it also influences the largest trade in the world, the intra-Asia trade. Basically as a rule of thumb (technical difficulty) move on the [TransPacific] (technical difficulty) between Asia and Europe you have one-third of [an entry to move] before that when you don't have the volume of the deep-sea moves that influences intra-Asia as well.

So for that business, for our business to turn around and get stronger, we really need more purchasing into Europe, where the big container vessels are operating. The Christmas cargo being on the ocean right now, there is not much more. All the shipping, all the shopping over here for Thanksgiving has been catered for and now the Christmas cargo is arriving. There's nothing more happening this year here that would lead us to believe that we're going to see a big peak right now.

You know, we look at it in total. One positive thing; we have always said we generally maintain between $150 million and $250 million of inventory. Right now we're pretty close in the middle of that range with a little bit more reefer inventory than we would normally have. Most of those units are not even produced on the reefer container side.

That's the beauty about our industry. We don't have to buy -- we buy on spec, but when we don't see it, we stop it. And, quite frankly, our shipping line customers have done that, too. They are not beefing up anywhere else in the fact that they committed to a lot of large-scale vessel purchases in earlier years and they are being delivered this year and next year.

Great. Robert, Phil, Hilliard, thank you very much for the time.

Doug Mewhirter, SunTrust.

Good morning, just two questions. First, Hilliard, with respect to the buyback and your balance sheet, it sounds like you have enough cash flow to do this and you're not making a whole lot of CapEx. Are you targeting any leverage to maintain -- do you expect it to drift up or down a little bit in the next couple quarters?

It could drift up a little bit, but nothing material. It will still be well below 3 times.

Okay, thanks. And my second question, is there any particular market dynamic as to why the high cubes have come under pressure relative to your residual values and not, say, the 20-foot drys or the 40-foot regulars? I know 40-foot high-cubes are the most common one these days, but I just didn't know if there was a certain wrinkle in the market which has held up values of those alternative types.

Wrinkle in the market? No. Traditionally, 20-foot standard containers have been the strongest containers in the resale market. They are the easiest to move is one reason why.

What we just have seen is that the sales prices for 40-foot high-cube containers that come down in a higher percentage than 40-foot standards or 20-foot standard containers.

Okay, great. Thanks. That's all my questions.

Vincent Caintic, Macquarie.

Great, thanks very much. I just actually have two broader questions on the industry.

First, in terms of your customer base, the shippers; have you had any conversations with them about, say, what they are expecting for the outlook of 2016 and anything kind of positive commentary you can look into that?

Well, we don't see a dramatic change in shipping line purchasing compared to leasing company purchases, so that would probably be about 50/50. If low prices continue, you may see slightly more shipping line purchases, but -- so we don't see a dramatic effect there.

They are predicting growth for next year. I think we're all just a little bit more cautious now than we were a year ago where we thought it would happen earlier. So I would suspect that their investment programs, similar to ours, would is to be somewhat delayed compared to what we started out last year. Where we really started buying in the fourth quarter 2014 for first and second quarter 2015 demand.

Since we are sitting on dry container inventory and there are 930,000 TEU in factories, new orders will be somewhat delayed. The manufacturers have prepared themselves for that. They are actually not out trying to sell their entire capacity right now. Of course, they would like to but they know it's not there, so they are just staying put for whenever this is going to happen. And when I say it is going to happen, everybody does expect there will be more growth in 2016 than we saw in 2015.

Got it. And then my second question, it might be too broad of a question but I will try asking it anyway. Just in terms of a retrospective, what did drive, say, the weakness in the demand for containers?

I guess shipping is weak, but is that because there is just less demand for inventory in the US and Europe, or is it because the cargo is getting shipped from air rather than by sea or kind of --? And the reason for this is what should I look forward to as to if there's still more demand in, say, retail inventory maybe this drives shipping demand up again and therefore container leasing demand. Thanks.

We don't really see air as the main reason for the limited growth we've seen in shipping volumes. If you look at macroeconomics, I think the Chinese slower run rate has had an impact. Certainly the situation in Europe has had an impact.

Situation in Russia has had an impact. South America has not grown to the extent that people were expecting. The TransPacific side and the US trade has actually done relatively well compared to the other trades.

But I think if you look back at the major reason, I think just by the fact that you had 1.6 million TEU of vessel capacity being delivered this year, that's 8% compared to a 2.2% growth. That has created this situation.

There is no peak; there is no peak demand there. Shipping lines haven't been in a situation where they have had to roll cargo, which basically is something that happens every year, meaning that they have -- they are overbooked and they have to put cargo on the next -- on the subsequent vessel. That hasn't had to happen. So everything has been more predictable.

In terms of the supply locations, if the vessel is only 90% full leaving Asia, they can be 100% full with empties going back, which means it's much easier for the shipping lines to redistribute all their inventory to their demand locations and get it right. Let's face it, many times where we are buying in 15 different locations if a shipping line discharges their locations in the first three or five locations then they still have demand in other locations. Well, that hasn't happened this year because they have been able to put their inventories in the right locations at the right times.

Very, very helpful. Thanks very much.

We have no further questions at this time. I will now turn the call back to Hilliard Terry for closing remarks.

Thank you, everyone, for joining us for our Q3 earnings call. As always, if you have questions, we're around to answer any questions. Thanks again.

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