John Burns - Senior Vice President and Chief Financial Officer Brian Sondey - President and Chief Executive Officer.

Helane Becker - Cowen & Company Doug Mewhirter - SunTrust Shawn Collins - Bank of America Derek Rabe - Raymond James.

Good morning and welcome to the TAL International Fourth Quarter and Annual 2015 Earnings Release Conference Call. [Operator Instructions] Please note, today’s event is being recorded. I would now like to turn the conference over to John Burns, Senior Vice President and CFO. Please go ahead, sir..

Good morning and thank you for joining us on today’s call. We are here to discuss TAL’s fourth quarter and full year 2015 results, which we reported yesterday evening. Joining me on this morning’s call from TAL is Brian Sondey, President and CEO.

Before I turn the call over to Brian, I’d like to note that our prepared remarks will follow along with the presentation that can be found on the webcast or the company presentation section of our website.

I would also like to point out that this conference call may contain forward-looking statements as that term is defined under the Private Securities Litigation Reform Act of 1995. It is possible that the company’s future financial performance may differ from expectations due to a variety of factors.

Any forward-looking statements made in this call are based on certain assumptions and analysis made by the company that it believes are appropriate and any such statements are not a guarantee of future performance and actual results may vary materially from those projections.

Finally, the company’s views, estimates, plans and outlook, as described in this call, may change subsequent to this discussion. The company is under no obligation to modify or update any or all the statements made herein despite any subsequent changes.

These statements involve risks and uncertainties are only predictions and may differ materially from actual future events and results. For a discussion of such risks and uncertainties, please see the risk factors located in the company’s annual report filed on Form 10-K with the SEC.

With these formalities out of the way, I will now turn the call over to Brian..

Thanks, John. Welcome to TAL International’s fourth quarter and full year 2015 earnings conference call. As John mentioned, we have added a presentation to go along with this call. We hope it will be useful. I will start with Slide 3 of the presentation. TAL achieved solid results in 2015 despite facing extremely challenging market conditions.

We generated a $145 million of adjusted pre-tax income in 2015. We grew our leasing revenue 2.4% from 2014 and we generated an annualized pre-tax return on tangible equity of 14%. While our full year results were solid, our profitability faced increasing pressure toward the end of the year.

We generated $25.9 million of adjusted pre-tax income in the fourth quarter of 2015. This was down 48% from the fourth quarter of 2014. TAL’s utilization remains well over 90% and we continue to generate strong cash flow despite the pressure on our earnings.

TAL invested roughly $625 million in new and sale leaseback containers for delivery in 2015, while keeping our leverage flat. And we declared a dividend of $0.45 per share this quarter. We are making good progress on our announced merger with Triton. All antitrust approvals have been received.

We have also submitted a draft S-4 registration statement with the SEC. We will need to re-file the S-4 with full year numbers when they are available from both companies. And we are targeting a shareholder vote and closing date in the middle of the second quarter. Integration planning for the merger is well underway.

Much of the senior management team for the combined company has been identified and they are working on detailed organizational and transition plans. Turning to Slide 4, you can see that the benefits from the combination of TAL and Triton will be compelling. The combined company will be the clear industry leader in operating scale and cost efficiency.

The merged company will retain Triton’s existing Bermuda domicile. And we expect the GAAP tax rate for the combined company will reduce over time with minimal impact on combined cash taxes.

We expect the merger to be significantly accretive to earnings per share for TAL’s shareholders due to the expected $40 million of annual cost savings and reduced GAAP taxes. Triton and TAL are ideal partners. Our customer and product line strengths are highly complementary.

We share a common commitment to customer service, operational excellence and investment discipline. Our merger is being completed as a 100% stock for stock preserving the balance sheet strength of each company. We plan to maintain TAL’s annual dividend of $1.80 per share.

We also plan to implement a substantial share repurchase plan when the transaction closes. The ultimate size and pace of the repurchases will depend on how the market and our share price progress. Slide 5 highlights the operating scale and cost advantages of the combined company.

The chart on the left shows that together, TAL and Triton, would be the largest lessor of intermodal freight containers, with a fleet of nearly 5 million TEU. This represents approximately 25% of the leasing industry supply.

On the right side of the slide, you can see the benefit of the combined company’s economies of scale and the $40 million of annual cost savings we expect to achieve. Our SG&A expense, as a percentage of leasing revenue, will be considerably lower than our Tier 1 peers and in an entirely different range from our smaller competitors.

This cost advantage will be particularly important, while difficult market conditions last. The cost savings will help offset some of the margin pressure we are facing from lease re-pricing. And our low cost structure will give us a large advantage to win the leasing transactions we think are the most attractive.

I will now turn to Slide 6 and talk more about the current market environment and TAL’s performance. Market conditions in 2015 were extremely challenged. The chart on the left shows the steep drop in steel and new container prices in 2015. Both are the lowest they have had in more than a decade.

Low container prices are combining with low interest rate to push market leasing rates to all-time low levels. We estimate that market lease rates are now more than 40% below the average lease rate in TAL’s portfolio. The chart on the right shows global trade growth and global GDP growth over the last 10 years.

You can see that containerized trade growth was barely positive in 2015, which was well below expected growth of 5% to 6%. The large shortfall of actual growth versus expectations caused an oversupply of containers throughout 2015 and led to increased drop-offs, decreased pickups and decreased utilization.

Leasing companies and shipping lines responded to the oversupply situation by ramping down new production in the second half of the year. This will hopefully help the market return to balance in 2016. On Slide 7, you can see that the difficult market conditions have impacted all of TAL’s critical operating metrics.

Our utilization decreased through the year, though it remains well above 90%. Our average lease rates have been steadily trending down in this very low rate environment. Net customer pickup and drop-off activity was negative through the summer peak season of 2015 for the first time since 2009.

And used container sale prices continues to decrease due to the drop in new container prices and increased disposal activity. Our leasing companies and shipping lines look to trim container capacity.

While the operating metrics are under severe pressures switching our profitability lower, our cash flow remained strong and our utilization continues to be protected by our strong lease portfolio. You can see on Slide 8 that over 76% of TAL’s on-hire containers are under multiyear, long-term or finance leases.

And these leases have an average remaining duration of 3.5 years. In addition, TAL was highly focused on lease structuring discipline, especially in ensuring that the vast majority of our containers need to be returned to traditionally strong export area.

Over 95% of TAL’s off-hire dry containers are in Asia right now, which will allow us to quickly push them back on hire when market conditions improve. I will now hand the call over to John Burns, our CFO..

decreasing lease rates, decreasing utilization and lower disposal prices. A decline in average lease rates negatively impacted our fourth quarter results by approximately $8 million versus the prior year as leases were re-priced or returned from high rate leases.

We anticipate that this lease rate pressure will continue in 2016 absent the significant increase in steel and new container prices. The weak demand environment led to declining utilizations, which negatively impacted lease revenue and operating costs by approximately $8 million.

If the trade growth is at least moderately positive in 2016, we expect that supply and demand conditions will tighten, which could lead to the recapture of this impact. The third major driver of the decline in our earnings is the roughly 20% drop in disposal prices, which has led to an approximate $8 million of the change from the prior year quarter.

We think of the change in disposal income from the prior year in two buckets. First, there is the impact of designating containers coming off higher as disposal candidates. At the time units are moved to sales status, we mark to market the unit’s book value down to the estimated disposal price.

This impairment of the book value is recorded as a loss on sale in our income statement. This marking to market of units flowing from the lease fleet into the sales fleet accounted for approximately $3 million of the negative change from the prior year.

And we expect a negative impact of this flow of units into sales status is likely to continue, the disposal prices remain in the current range. The second bucket represents the ongoing mark to market reflecting further declines in sale prices for units previously moved into the sales status, but not yet sold.

This represents approximately $5 million of the change in pretax income from the prior year quarter and is also included in the loss on sale line of our income statement. This impact will go away as soon as disposal prices stabilize.

Turning to Page 11, on Page 11 as a summary year end balance sheet as of December 2015 and 2014, the key take away is despite the challenging marketing conditions, we were able to grow our revenue earning assets by 5% and pay $86 million in dividends, all while maintaining constant leverage at 76% debt to revenue earning assets.

Turning to Page 12, table on top highlights the well structured nature of our debt facilities. We have sufficient cash flows to meet our debt service requirements and no significant near-term maturity cliffs.

We have recently been active raising incremental debt capital with the goal of maintaining our long-term debt structure and availability and also to limit our financing activities around the close of the transaction, so that we can focus on the business and the integration.

We continue to be well protected from an increase in interest rates with long-term fixed rate debt facilities and interest rate hedges covering the maturity of our floating rate debt. As previously announced, the merger with Triton is a stock to stock transaction.

So no incremental debt is required and there is no change of control issues with existing facilities. Turning to Page 13, we presented a pro forma income statement for TAL and Triton for the nine months ended September 2015. We have shown the September figures, because Triton’s year end audited financial statements are not yet available.

I will not go through the details, but point out a few key items. First, we have made adjustments to reflect the anticipated synergies. Here, we are showing $30 million or nine months of the anticipated $40 million of SG&A savings.

Secondly, we have reflected the anticipated reduction in our GAAP tax rates as we benefited from the Bermuda domicile of the merged companies. These synergies are expected to result in over 30% accretion before purchase accounting. Initially, the non-cash purchase accounting entries will reduce the level of reported earnings.

However, turning to Page 14, we show that purchase accounting adjustments will turn from negative – from a negative impact on reported earnings in initial the 18 months or 24 months to a positive impact thereafter. I will now return to Brian for some additional comments..

Thanks John. I will wrap up our presentation with Slide 15. As I mentioned earlier, TAL was able to generate solid profitability in 2015, despite facing extremely challenging market conditions. We expect market conditions will remain very difficult in 2016 as well.

We expect new container prices and market lease rates will remain very low and expect that we will continue to face margin compression as containers expire off leads and are re-priced down. However, we expect the supply and demand balance for containers will improve if trade growth is at least moderately positive.

New container production has been low since the middle of 2015 and our off hire containers are well positioned to go back on hire if leasing demand improves. We believe that TAL is well situated to manage through this difficult market environment. We will continue to rely on our strong lease portfolio to protect our cash flow.

We have the discretion to limit new container investment, while we focus on pushing our existing containers back on hire. And our debt facilities are well structured, with staggered maturities and long-term interested protection.

Given the negative seasonal pressures in the first quarter, we don’t expect any relief from last year’s tough environment and we expect our earnings to decrease from the fourth quarter of 2015 to the first quarter of this year. After the first quarter, our quarterly earnings could increase sequentially if we are successful in pushing utilization up.

Finally, we are making good progress on our announced merger with Triton. The merged company will have significant scale, cost and capability advantages compared to everyone else in our industry. We expect the transaction lead to 30% accretion to earnings per share for TAL’s shareholders.

The benefits of the merger will improve our ability to effectively manage through the current difficult environment and position us well to maximize the benefits from the eventual market recovery. I will now open up the call for questions..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Helane Becker of Cowen & Company. Please go ahead..

Thanks very much, operator. Hi guys. Thank you very much for the time.

Brian or John, did you say what percent of your containers are coming off lease this year and next year?.

No, we didn’t say, but I can give that to you..

Great..

So if you can think about our long-term lease portfolio, which again is about 76% of our on-hire containers, we estimate that about 10% of those containers are coming off-hire in 2016 and something between 10% and 12% in 2017..

Okay.

And you don’t happen to know these numbers for Triton?.

I do not. Obviously, we did a lot of due diligence when we are looking at the merger. And in general, we found that the lease profile and just sort of the pace of our leased expirations were relatively similar for both companies..

Okay. And then my other question is completely unrelated, but it’s related to the industry.

The new act in terms of measuring SOLAS supposed to take effect in midyear, do you – have you thought about that and whether that would be a positive impact for container demand apart from any change in world trade?.

To be honest Helane, I am not that familiar with that. So we haven’t factored it in..

Okay, that’s fine. Thanks very much. I appreciate the time..

Thanks Helane..

And our next question comes from Doug Mewhirter of SunTrust. Please go ahead..

Hi, good morning.

Two questions, first it looks like actually if you look at on a sequential basis, your blended our average yield on your container portfolio actually held up fairly well, did you – was there a sort of a shift in your buying pattern or did you get more fee income in there, I mean we got ironically helped by a lot of the returns, because you could charge repair fees and any detail would be helpful there?.

Sure. Certainly on the revenue side, our revenues do benefit from our container returns. We include in ancillary fees the repair payments that we received from customers when they return equipment. We also receive drop off fees for – especially for short-term leases that have logistically based drop off fees in those counter revenue.

That said, those types of things typically don’t benefit our profitability, because usually, there is an offsetting expense item. And so what you see for, especially for repairs, is that there is a revenue component, which we booked the customer payment, but then we of course have to fix the container and there is a corresponding expense..

Okay, thanks for that. That’s very helpful.

My second question obviously, everything is very quite right now, because of Chinese New Year, have you got any indication of how soon the factories were starting out not that they were really producing much anyway, but if they are going to delay the restart of the factories and also, I noticed the steel prices actually have picked up a little bit recently and if that would be – if that has been noticed at all by the people that run the box factories over there?.

Yes. So, in terms of the factories, most were closed for a few weeks. We expect most will reopen, but what’s really happening is rather than staying close, which was the case in 2009 most of the factories are open and just operating with very low staffs, very low ship capacity.

They do have some other businesses other than producing containers for shipping lines and leasing companies. They produce domestic containers. They produce containers for local rental companies and things like that. But just they are producing at very low production volumes.

There has been minimal ordering of containers so far in 2016 by either shipping companies or leasing companies. In terms of the price of steel, we certainly have noted as well on the fact that steel has sort of pushed off bottom and moved up a little bit. And we take that as good news.

We are not steel traders by any sense of the word, but we do take it as somewhat good news that prices have moved up despite continuing negative market news, which perhaps indicates that steel has found a floor. In terms of factory pricing, there just haven’t been many orders.

And so container prices over the last 12 months have been hit both by reduction in steel prices, but also by a compression in the margin that the manufacturers charge over steel prices.

And I do expect that, that margin component will come back as orders return and orders, I think will just be dependent on when trade growth and demand returns, but to be honest, there hasn’t been a whole lot of orders just had an industry mark out there for pricing with new steel prices..

Okay, thanks. And if I just want to throw one last question, merger-related question. So, I don’t know how much you can comment, it’s related to your financial leverage and the purchase accounting.

It sounds like because all of these adjustments we made at the holding company, am I right in assuming that all of the covenants on your ABS contracts and your term loans would not be affected by any of this?.

Yes. And so that the two things that we look at, that would say, for example, theoretically at least purchase accounting might impact, would one be the advance rates of the loans against the book value of the equipment and the second being as the financial ratios due to income.

And since both are at the holding company level and the tests are lower level, both the advance rate and the profitability are not impacted by the purchase accounting..

Okay, thanks. That’s all my questions..

[Operator Instructions] Our next question comes from Shawn Collins of Bank of America. Please go ahead..

Great, thank you. Good morning, Brian and John. Hope you guys are well. So first, I thought Slide 10 was a very good breakdown of fourth quarter 2015 results versus fourth quarter 2014. So, thank you.

My question is on future CapEx, I know you spent $625 million in 2015, just wanted to ask what your plans were for 2016 ex the merger? I know you remain disciplined in terms of deals and the expected return.

But I am just wondering at some point does it make sense to materially reduce future CapEx, given the current market – the current difficult market condition? Thank you..

Sure. So, just maybe one point on 2015 CapEx is our $625 million of 2015 CapEx was really made up of two quite different pieces. We spent about half of that money very early in the year in 2015 as we had done a lot of back-to-back leasing transactions as both we and our customers anticipated a year 2015 of using growth.

When it became clear that, that growth wasn’t going to materialize, we ramped back dramatically on new container CapEx. We did continue to invest in sale leaseback transactions through the course of the year. We find that there is actually quite an active level of interest from our customers to do sale leasebacks.

And we also find that these transactions are the much more customized transactions than new container investments and new leases and more leasing companies that have the operating capabilities and resale capabilities structure and manage those types of deals. And so we just like them a little better.

I think, looking forward in 2016, I think until we see demand improve, we are going to be probably spending very little on new container CapEx what we focus on just pushing the existing equipment back on hire.

I think, we will continue to look at sale leaseback transactions and have an interest in doing them when we see that they are important to our core customers and when we again just think that they are good investments for us. But again, I think, our CapEx numbers until we see the market improve will be low than they have been historically..

Okay, that’s helpful. Thank you, Brian. Appreciate it. And then a second question, I know the plan and I wanted to address share repurchase activity. I know the plan is to resume share repurchases after the Triton merger close.

I just wanted to pose the question that if market conditions continue to remain challenging, which is likely and you have been very forthright about that. Would it make sense at all to possibility de-leverage the balance sheet rather than buyback stock just in the space of a more challenging business environment? Thank you..

Thanks for the question. I mean, certainly, I think ultimately what we do with the share buybacks and I tried to mention in my comments, but the total size of the share buyback program and the pace at which we implemented will be dependent on how the market develops.

I think our basic premise for 2016 is that we will see supply and demand tighten up, which would give us an opportunity to push containers back on hire to boost our utilization and recapture a good portion of our lost profitability.

But I do think we will wait and see how the market develops that if it ends up that we are wrong with that expectation and that there is no improvement in leasing demand or just the supply and demand balance for containers, I think we will proceed cautiously.

Fortunately, if the deal closes, we think it’s going to close at least sometime in the middle of the second quarter. Usually, that’s around the time that we have got fairly good visibility about just how the market is going to develop.

And so we think given where share prices are, we do think it’s very attractive for an investment for us in their current range almost regardless of what happens with market conditions in the near to medium term.

But I think we also are mindful that it’s a very tough environment out there and we will want to see some improvement I think before we jump in real aggressively..

Okay, I understand it. That makes sense. That’s all for me. Thank you very much for the time and insight..

And our next question comes from Art Hatfield of Raymond James. Please go ahead..

Yes, thanks for the time this morning. This is Derek Rabe on for Art..

Hi, Derek..

Hey, guys. You mentioned that utilization could improve throughout the year, but pricing should continue to lag.

Now, I am just looking back at past cycles, is there a specific metric that you tend to track that you really need to see turn that would suggest a possible inflection and pricing point in that cycle?.

To be honest, we just really sort of feel our way there that we certainly are of course talking with our customers all the time about what they are expecting for trade growth for themselves and what they expect for container fleet developments and what type of containers and how much they think they will need to add over the course of the year.

But one of the nice things about our business is you can sort of take it as it comes that we don’t have to commit to CapEx or commit to marketing plans well in advance of executing them.

And so what we really watch is just the drop-offs of containers relative to the pickups of containers and which gives us a pretty clear picture probably even more than the shipping lines have individually about when the market in the whole is making a turn on inflection.

And so we are really just going to look at how are our actual transitional activities progressing. And for example, in 2009, we saw a very distinct change between say August and September of 2009, where heavy drop-off volumes shifted pretty quickly to net pickup activity and that’s the kind of thing.

I think that really is the best indication for us that market conditions are changing..

And looking at the merger, it’s been a few months now since you announced it.

What’s the early feedback been like from your customers?.

Yes, I would say customers in general have been quite supportive. I think they have noted like we have said that we feel TAL and Triton are quite complementary in terms of our product line and customer strengths and also just the way we approach business. Most customers that I have spoken with have said, yes, we see a natural fit with you guys.

I think, similarly, we haven’t heard many customers express a lot of concern about our combined size. We are going to do about 25% of the leasing industry, but keep in mind that about half of the containers are owned by the shipping lines. And so we don’t have by any stretch of the imagination a lock on the container market.

And I think also, what our customers really care about most from leasing companies is an ability to know that they can get the containers they need when and where they need them and the increased scale of TAL and Triton together really will boost our ability to provide that sort of very secure backup supply.

So in general, it’s been a pretty positive reaction..

And one last one for me, it’s the housekeeping question, do you have the owned TEU fleet at the end of the quarter?.

Good question, we do and we will dig it out there. Okay. So let’s see I hope too soon. We have got a total fleet of 2.5 million TEU, of which 99% is owned. So very close to 2.5 million TEU..

Okay.

Just curious, does that own portfolio grow sequentially?.

We did. We did a fair bit of sale-leaseback activity in 2015 and typically sale leasebacks buying the containers for lower cost than the new containers. And so there is a lot of units that you get per dollar.

And so I think in 2015, I think it was something in the range of [Technical Difficulty] significant number of units, were purchased through sale-leaseback transaction bringing us sort of 2.2 million almost 2.5 million in our leasing fleet..

Okay, perfect. Thanks guys..

And our next question is a follow-up from Helane Becker of Cowen & Company. Please go ahead..

Thanks, operator and thanks for taking my follow-up.

So I just had a couple of questions that I thought about afterwards, when you do the merger with Triton, is it possible to write down the value of all the existing containers to market value, so that going forward you would not necessarily have losses on containers held for hire?.

No, I don’t think so. The test that you use to write down existing assets outside of purchase accounting is an impairment test. And for that, what you look at is the expected undiscounted cash flows for your containers over their remaining life.

And on that basis, the undiscounted cash flows for our container fleet we model to be significantly in excess of their book value. And I think the same is true on the Triton side. So that really the only write-down we will do is the purchase accounting. And we believe that TAL will be the entity that is purchase accounted.

The one exception to that is that as John described in his note – his comments that every quarter we do mark to market both the containers coming into the sales back as well as any containers that are carried across the quarter in the sales back until that is mark to market..

Okay, got it.

And then my other question is, so your principal repayments this year or next year are fairly small on Page 12 of the deck, but 2018, you have a really big number, would you think about refinancing that, I mean most of that looks like revolver, so would you think about pushing that out or refinancing it somehow?.

Helane, it’s John. And yes absolutely, it’s part of our normal course typically with revolver type transactions. We will initiate discussions anywhere from 12-plus months before the expiration of those revolvers and extend them or renew them at that time.

So we have in the beginning part of ‘18 we have revolver that comes up, so typically in the middle of ‘16 towards the end of ‘16 we would start the discussions with the banks about the renewal..

Right.

You would do that probably as part of the Triton merger anyway I would think, right?.

No. I think initially, we actually expect at first to leave the financing facilities fairly separate and distinct that they are all connected to the specific entities or specific pools of containers. And so it actually allows us to not have to do a whole bunch of financing activity as the companies consolidated.

But clearly over time, the intention is to bring the capital structure of the companies together, so that we don’t have to run two separate financing structures, two separate financing strategies as the companies merge. But fortunately, we do have time to do that without having to get it done really quickly around consolidation..

Okay.

And then my last question promise is, with respect to CapEx can you be coordinating your CapEx with Triton now or does that have to take place after closing?.

Only after closing, we really – we have been talking with them a lot, of course on integration planning, but trying to make it very distinct and separate and confidential processes around CapEx or marketing or any of the real operations type stuff..

Great. Thank you..

Thanks Helane..

And our next question is a follow-up from Shawn Collins of Bank of America. Please go ahead..

Great. Thanks Brian and John for letting me jump back in. I just had a quick question from the Triton merger.

So when you think about the $40 million in pretax SG&A synergies, can you just talk about kind of what in that number, I think at least from my perspective I would probably think that there aren’t that many synergies between companies in your industry.

And so I am just wondering kind of what that cost, those cost takedowns are or whether there is any revenue assumption in there and at the same time, I can appreciate that this may be sensitive company disclosure, so whatever you might able to say on this $40 million would be helpful?.

Sure. The $40 million is really a target for savings of SG&A expenses. And what we found in our business as we have grown it and I think what other companies have found that they have done acquisitions in our industry is that there is actually quite a high degree of cost takeout potential. We all cover the same customers.

And so when you do a consolidation, you don’t need to duplicate the sales force and the operations infrastructure. Similarly, you don’t need to have two sets of operating systems, two sets of financial and accounting staff and then two different corporate structures.

And so again, previous mergers have shown that SG&A savings are, if not quite dollar for dollar, very close to it. TAL and Triton together, if you look back historically, had SG&A expense in total, I think of around $110 million.

And so we are expecting to save $40 million of that $110 million, so something in the range of little less than 40% of the combined amount, which represents probably 70%-ish type savings from the incremental combination.

Did that make sense?.

Okay, that actually does make a lot of sense. That’s helpful. That’s great. Thank you very much..

This concludes the question-and-answer session. I would like to turn the conference back over to Brian Sondey for any closing remarks..

Just like to thank everyone for their continued interest and participation with TAL. And we look forward to catching up with you all soon. Thank you..

And thank you, sir. Today’s conference has now concluded. And we thank you all for attending today’s presentation. You may now disconnect your lines and have a wonderful day..