Cai International, Inc. (CAP)

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CAI International, Inc. (CAP)

Q3 2012 Earnings Call

October 22 2012; 05:00 p.m. ET

Executives

Victor Garcia - President & Chief Executive Officer

Timothy Page - Chief Financial Officer

Analysts

Gregory Lewis - Credit Suisse

Steven Kwok - KBW

Helane Becker - Dahlman Rose

Daniel Furtado - Jefferies

Douglas Mewhirter - SunTrust Robinson

Salvatore Vitale - Sterne, Agee & Leach

Brian Hogan - William Blair

Presentation

Operator

Good day ladies and gentlemen and welcome to the CAI International, quarter three 2012 earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions).

I would now like to turn the conference over to Timothy Page. Please go ahead sir.

Tim Page

Good afternoon and thank you for joining us today. Certain statements made during this conference call may be forward-looking and are made pursuant to the Safe Harbor provisions of section 21E of the Securities and Exchange Act of 1934 and involve risk and uncertainties that could cause actual results to differ materially from current expectations, including but not limited to economic conditions, expected results, customer demand, increased competition and others.

We refer you to the document that CAI International has filed with the Securities and Exchange Commission, including its Annual Report on Form 10-K, its Quarterly Reports filed on Form 10-Q and its reports on Form 8-K. These documents contain additional important factors that could cause actual results to differ from current expectations and from forward-looking statements contained in this conference call.

I will now turn the call over to our President and Chief Executive Officer, Victor Garcia.

Victor Garcia

Good afternoon. We are very pleased with our third quarter results and year-to-date results. We continued for the ninth quarter in a row to report record quarterly rental revenue. In the most recent quarter we reported $44.9 million of revenue and net income of $16.5 million.

Net income was 21% higher than the third quarter of last year. This quarter we had earnings of $0.84 per fully diluted share, representing a 20% increase from the same quarter in 2011 and a $0.07 or 9% increase from the second quarter of this year. Year-to-date our return on shareholders equity at the beginning of the year has been approximately 27% on an annualized basis.

We are proud of these results, particularly in light of the uncertain global environment in which we operated for most of this year. We were able to achieve these results due to our strategy of having a high percentage of equipment on multi year term leases and the ongoing investment we have made during the year.

We had several significant achievements this quarter that support our results. During the quarter we were able to lease out 52,000 TEU of containers. We also completed three sale leaseback transactions for $33 million, representing 28,000 TEU and purchased 22,000 TEU of containers from two previously consolidated managed fleet portfolios for $15 million.

2012 is already a record year for us in terms of investment. With the commitments already made in the fourth quarter, we have invested or committed to invest over $500 million in equipment. We are also pleased that most of our equipment purchased from container manufacturers has already been picked up by our customers and is earnings revenue.

Our remaining uncommitted inventory is the low normal levels for this time of the year, which we are pleased about considering the decline in container prices since the end of the second quarter.

As was mentioned in our press release earlier today, demand for new containers has been below expectations for this time of the year. We believe this is a result of the economic uncertainty globally or particularly in Europe. World containerized trade is expected by Clarkson's research to grow 5% this year, a growth percentage that is below the historical level.

As a consequence of the more limited demand, production of containers has also been restrained, particularly since the end of the second quarter and we estimate that inventory level of containers to be approximately 500,000 TEU, a level that we believe to be very moderate for this time of the year. We estimate that production of containers will total approximately 2.2 million TEU this year with approximately 50% ordered by the leasing company.

There are approximately 30 million TEU containers worldwide. In the normal year to meet ongoing demand growth, we would expect 3 million to 3.5 million TEUs to be built. Annually, approximately 5% of the fleet needs to be replaced. Based on the worldwide fleet size, attritional loan requires approximately 1.5 million TEUs to be built. So as you can see, productions of container this year has largely been for replacement of expiring containers.

New container production this year has represented a smaller portion of our own capital investment compared to prior years. As I mentioned earlier, this year we will have invested over $500 million in equipment; however, only 55% has gone into new drive end containers, all of which was ordered in the first half of this year.

The reason I’m going through this analysis is that we believe that when container production is below normal for several months, as it has been this year, we expect there to be a catch-up demand for containers. We expect that kind of catch-up in demand to occur in 2013, as containerized trade growth increases, which Clarkson's researchers predict will be at a rate of 7%. Based on discussions we have had with customers, we believe shipping lines will continue to lease the majority of their container needs next year.

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