Brian Sondey - President and CEO John Burns - SVP and CFO.

Helane Becker - Cowen & Co. Art Hatfield - Raymond James Vincent Caintic - Macquarie Capital Shawn Collins - Bank of America Merrill Lynch.

Good morning, and welcome to the Third Quarter 2015 Earnings Release Conference Call for TAL International Group. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded.

I would now like to turn the conference over to Mr. John Burns, Senior Vice President and CFO. Please go ahead, Mr. Burns..

Thank you. Good morning and thank you for joining us on today’s call. We are here to discuss TAL's third quarter 2015 results, which were 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 would like to point out that this conference call might contain forward-looking statements as the term is defined under the Private Securities Litigation Reform Act of 1995. It’s possible that the Company's future financial performance may differ from expectation due to a variety of factors.

Any forward-looking statements made on 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 projected.

Finally, the Company's views, estimates, plans and outlook as described on 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 herein despite any subsequent changes.

These statements involve risks and uncertainties and are only predictions and may differ materially from actual future events or 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 third quarter 2015 earnings conference call. TAL’s financial and operating performance in the third quarter remained solid. We generated $36.4 million of adjusted pretax income in the quarter, which translates to $1.10 of adjusted pretax income per share.

Our leasing revenue increased 2.6% from last year and we generated an annualized pretax return on tangible equity of 13.8%. Market conditions in 2015 have been very challenging. Lease pricing pressure has accelerated due to a 40% drop in steel prices.

This increased pricing pressure comes at a particularly difficult time for us since the high per diem leases originated by us in 2010 and 2011 started to expire this year. Trade growth and leasing demand have also been weak this year.

Global containerized trade growth seems likely to fall well below expectations and we did not experience a typical peak season for dry containers this summer. The lack of trade growth and leasing demand has led to decreasing utilization and reduced investment opportunities.

Lower new container prices and weak leasing demand have also pushed used container sale prices and our disposal results lower. TAL was able to maintain solid performance in this very tough environment due to our strong lease portfolio.

Almost 75% of our containers on hire are on long term or finance leases and these leases have an average remaining duration of 42 months, assuming no leases are renewed.

Our lease portfolio is also protected by our lease structuring discipline, especially in ensuring the vast majority of our containers on lease must be returned to strong export locations. While down, our utilization remains high and currently stands at 94%. As outlined in our press release, we’re implementing a revised capital allocation strategy.

We are reducing our dividend to $0.45 per share this quarter or to $1.80 per share on an annual basis. This represents a 37% reduction from our recent level. The dividend reduction reflects our assessment that a strong rebound in the global economy seems unlikely to occur in the near term.

The new dividend level was set to keep our projected dividend payout ratio and our projected leverage in our historically comfortable range. Even if market conditions remain difficult for an extended period of time, we are confident that our revised dividend leap will be sustainable well beyond our five year long term forecasting horizon.

We also announced we were implementing a substantial share repurchase plan and our board has authorized up to $150 million for share repurchases. While our market environment is challenging, our cash flows are solid and durable and appear to be significantly underestimated by investors. We also have great franchise value.

We believe our shares represent a compelling investment opportunity and we plan to start aggressively repurchasing shares in the fourth quarter. Share repurchases will be financed with our existing cash flow and existing financing facilities.

We expect the share purchases will be highly accretive to our earnings per share if we are successful in accumulating a meaningful amount of shares. I will now hand the call over to John Burns..

Thank you, Brian. As we noted in our earnings release, TAL posted adjusted pre-tax income for the third quarter of $36.4 million or $1.10 per share, down 25% on a per share basis from the prior year quarter.

The $13 million decline in pre-tax income from the prior year was driven by three main items, ongoing lease pricing pressure, declining utilization and lower disposal prices. Market lease rates were at historically low levels as very low skill prices have combined with equally low interest rates and weak demand.

This low rate environment is hitting us just as the high price leases written in 2010 and 2011 begin to expire. Our average portfolio lease rate is down approximately 3.5% from the prior year quarter, negatively impacting per diem leasing revenue by over $5 million.

Looking forward, we expect this challenging lease rate environment to continue in 2016, absent a significant increase in steel prices or interest rates.

In addition to the low lease rates, the weak demand environment has resulted in lower levels of pickup activity and higher re-deliveries, especially on our sale lease-back transactions, driving a reduction in our average utilization for the quarter to 2.1% compared to the prior year quarter.

In addition to the negative impact on revenue, the increase in re-deliveries and off hire units, has also driven our operating expense up by nearly $5 million over the prior year quarter. Although utilization is down, our disciplined contract structure drives the vast majority of re-deliveries of leasable age units into strong export locations.

At the end of September, over 95% of all off hire leasable units were in Asia. Therefore, if supply and demand normalizes as expected next year, we would expect utilization to rebound quickly and operating expenses to decline.

The third major driver of the decline in our earnings is the roughly 20% drop in disposal prices which is reflected in the $2.9 million loss on sale. Disposal prices had generally declined in line with the decline in new container prices.

In addition, this year’s disposal prices are being pressured by the weak demand environment which has increased the volume of units pushed to sale as leasing companies and shipping lines dispose large numbers of idle units.

Looking forward, we expect the disposal prices to stabilize in the current range as supply and demand normalizes and new container prices remain at current levels. As Brian mentioned, we have initiated a share repurchase program for up to $150 million.

We expect to start repurchasing shares in the fourth quarter and we expect to fund this program through our strong equity cash flows and availability under our existing credit facilities. If we are successful in purchasing a large number of shares, our leverage would initially increase but remain well within our comfort zone.

Our leverage would then decrease due to significant accretion to earnings and cash flows per share that these repurchases achieve. I’ll now return you to Brian for some additional comments..

Thanks John. We expect the current difficult business conditions and our current operating trends will continue into the fourth quarter and as a result, we expect our adjusted pretax income will decrease in the third quarter of 2015 to the fourth quarter.

Looking forward into 2016, we are hopeful that the supply and demand balance for containers will improve after we get through the seasonally slow first quarter. New container production has been very low in the second half of this year and many leasing companies and shipping lines have accelerated the disposal of older containers.

We expect that much of the current excess supply of containers will be worked off by next spring. As a result, leasing demand should return to normal next year if trade growth meets expectations and our utilization should rebound nicely since the majority of our idle equipment is located in strong net export areas.

However, lease pricing pressure will remain heavy until new container prices improve and overall, we expect our adjusted pretax income will decrease from 2015 to 2016. I would now open up the call for questions..

[Operator Instructions] Our first question comes from Helane Becker with Cowen & Company..

Hi guys. Thanks for the time. I just have a question actually about the balance sheet. It's probably more a question for John. With respect to -- if I look at your debt and I look at the value of the assets at current disposal prices, it seems to me like the value of the containers might actually be below the value of the debt.

And I'm kind of wondering if you can tell me where my calculations are wrong, or why I'm being wrong in thinking that..

Maybe I’ll start Helane just from a business standpoint and then John can maybe talk through some of the financial points, but just a couple of things in the question. First, we don’t really think it makes sense to mark our portfolio to disposal prices. Most of our average age of our containers is I think something around seven years.

We typically sell containers around the time that they’re 15 years old and so our container fleet has something in the range of eight years left of leasing life. That’s why we don’t sell containers until the end because there’s significantly more cash flow value than just the sale of the equipment.

The other thing that we note, even if we were to say try to mark the containers to say something that was appropriate for both the current new price of containers and the current age of the containers, that would be a mark down just because new container prices are at a low level relative to our historical price ranges.

But also if we were going to do that, we’d have to mark the lease portfolio. Our lease portfolio again on average has remaining durations of 42 months. We actually have a very good track record of extending leases and typically if we have to mark them down we don’t usually have to mark down all the way to market rates.

So we would simultaneously in kind of this economic marking, need to significantly mark our lease portfolio up and create an asset for that. We haven’t disclosed any calculations like that to analysts or investors. It is stuff that we look at.

We feel very comfortable with the relationship of our asset values and our cash flows to our debt and interest levels, but that’s how we think about it. I don’t know John if you have any more comments..

I think that covers it and the key is that those high price leases that we wrote in 2010, 2011 as Brian notes, they have 40 plus months on average remaining with lease rates that are very high. The depreciation is bringing those units down in a more rapid price than would be if there is lower priced unit..

Okay. That's great. I appreciate that. And then, Brian for you, I guess based on your comments, you are really not -- we are really not seeing any increases in world trade. Trade looks like it's kind of low single digits rather than the higher single digits we were seeing earlier in the decade..

Yeah. Certainly trade growth is very weak. When I look at the say industry magazines that talk about trade growth like Clarkson's or Alphaliner's, I am seeing them say mark their forecast down from say original expectations of 5% or more for this year down into the maybe 3%ish kind of range.

Frankly, I think from a container demand standpoint, it’s probably closer to zero. That it’s perhaps mathematically true that liftings, that container liftings might be up 3% or 4%. But what’s really impacting us negatively from a demand standpoint is that a big trade, the Asia to Europe trade is down significantly this year.

It also happens that’s the trade that has by far the longest round trip voyage and so it soaks up a disproportionate amount of vessel and container capacity.

And so as we look at it on say this kind of demand basis, it seems to me that demand this year is about the same as it was last year so that almost zero growth in terms of increases and sort of needs for containers.

And so what happened is that we and other leasing companies and shipping lines anticipated container demand to grow by 5% or 6% like it did in 2014 and purchased a lot of containers in the first part of the year when in fact it turned out that last year’s container fleet could handle this year’s trade activity. We ended up with a surplus.

And so we’ve been seeing again very little ordering I’d say since May or June of new containers, very little production since July and accelerated disposal activity.

So we think that probably the container fleet by the time we get to the end of this year or the very first part of next year, will be back down to the same place it was basically a year ago. And so the fleet will be adjusted to the right size starting again at the first quarter this year.

And that’s why again if we think trade growth generally conforms with expectations next year, we’ll see a much more normal situation of supply and demand for containers and leasing demand..

Okay. And then just one last one.

Do you think with low oil prices more stuff is moving via air than on ocean?.

It’s a good question. We find – what drives demand for our containers are things that move in very high volumes, lots of bulk.

And so we find that the -- and this is what you’ll hear from customers, that say the cannibalization from air relative to ocean freight, it might from a dollar the value of the freight might make sense, but from a container number it’s just a pretty small impact. I think that the much bigger impact to the low oil prices has just been what caused it.

I think the slow growth in the global economy, the rapid reduction in demand in China. The same thing that’s driving oil down is what’s driving steel prices down and that’s impacting containers and our lease rates of course.

So I think -- I don’t know how much we’re affected by the actual lower fuel cost, but I think the same causes are leading to pricing pressure for us..

Okay. Great. Thanks so much for your help, guys..

Our next question is from Art Hatfield with Raymond James..

Morning Brian and John. Just a few questions here. First, you talked a little bit about getting back to -- the fleet back to the size where it was at the beginning of the year.

I had heard recently from someone that there were approximately -- and this was probably, gosh, three or four weeks ago, that there were about 800,000 TEUs on the ground in China available for pickup.

Can you confirm that or talk about where you see that number at right now?.

Sure. We probably look at some of the same sources that where your information came from. There’s a number of people out in China, a number of different vendors that collect that information and share it along with us and others.

I’d say normal -- it varies a lot of course, but I’d say normal inventory to start the year is probably something between 600,000 TEU of new containers in the factory at China and maybe 800,000 or 900,000 TEU in the factory. Anything in there is roughly normal is my assessment.

It got to the point this year where new container inventories were well over a million TEU as deliveries were continuing in the second quarter and everyone realized that they weren't needed anymore and there was very little containers getting picked up out of the factories. We do again expect that the other containers are being sold.

And so we’re now creating room for those containers in the factory in the fleets of the shipping lines. And so it’s not really a time of the year where shipping lines are picking up a lot of containers in the factory.

The peak season is finished, but we do think we’ll continue to see that idle stock at the factory dwindle to the point where again at least our expectation is it will be in a pretty normal level as we start the demand season next year.

And so again everything is reset and should be get off to a good start, assuming that we don’t see another disappointment in trade growth, but I don’t think we will. I think everyone has adjusted their expectations down quite a bit. So I think we’ll see again a good starting point for inventory and hopefully a normal supply and demand year..

And following up on that, as you kind of get to that point and you start looking at next year and looking at the difficult fundamental backdrop you've been dealing with and you are going to continue to deal with as you get lease renewals coming up, when do you just take a stand and go to your customers and say look guys, we'd love to help you but we are getting crushed here and we just don't feel it's right time for us to continue to offer more capacity to you.

Is that a discussion you can have with your customers?.

Yeah. We’re talking with our customers at multiple levels every day and I think we’ve been talking to them about renewals on existing leases. We’re always talking to them about new deals. I don’t know that we have the -- we’re an important player in the market.

We’re one of the largest container leasing players, but I don’t know that our decisions around investment or supply are really going to impact significantly the amount of containers available for our customers.

I think obviously as we look at our inventory and what’s happened to utilization, we do have a larger amount of equipment, of existing equipment idle in our depots than we did this time last year.

As we think about our CapEx, that does balance us help maybe reduce the amount that we might expect to invest otherwise just because the first containers we want to get picked up are those from our depots. But I think it’s very much an internal decision to us. I’m not sure that we’re going to influence our customers’ decisions a lot there..

Okay, that's fine and that's helpful. I appreciate that. A couple questions about the capital allocation strategy, the change in the dividend and the share repurchase. The first one, I'm struggling a little bit.

Just help me understand -- because you make the comment that as you repurchase the shares obviously the money goes out, you will -- it has an impact on the leverage ratios, but as you move forward, I think the comment was made that it will improve cash flow.

And what I'm struggling with that is the way I look at the numbers is you have $150 million going out now in a difficult environment, but yet you are only going to save approximately $35 million a year on the dividend reduction. And as a result, it really take you about four years to recoup that outflow related to the share repurchase.

Am I thinking about that right, one and --?.

Perhaps it comes down to the language we use. So certainly again we do intend to start buying shares here in the fourth quarter. We’re hopeful we can get a lot of shares in and we’ll just have to see how our share price reacts and so on. And so no doubt we’re going to see leverage push up a little bit in the near term.

Going forward, I think as you pointed out just the lower dividend just mathematically helps brings that leverage back down. But the other thing that happens is we have a very high dividend yield right now.

I think something in the range of 17% and so to some extent every share we buy back we’re retiring a dividend that we expect to pay that’s again even at the reduced level, way over 10% and replacing it with debt with an interest expense of 3% or something like that.

And so just substituting shares with a high dividend yield for low interest debt, that in itself has the ability both of improving dividend capacity per share, but also reduces leverage over time..

Okay, that's helpful. And this last question, and please don't take this personally because this is a question I know I'm going to get asked today and I have known you guys a long time.

I just want to get your thoughts on it because I've kind of heard it once already and again I think I'm going to get this -- just kind of on the surface, I think there will be some investors that will say look, they are just doing this to coddle some large institutional investors really at the expense of smaller investors who are really focused on the income.

How do you address that kind of criticism?.

Sure. We expect to get criticism too. We tried to make the right long term decision for the company, but I think probably criticism from investors big and small, just like I think we’ll have supporting comments from investors big and small. I think there will be divided opinion on it frankly.

As we thought about the dividend, we said in the past that we have plenty of cash flow and plenty of liquidity in our facilities to continue the dividend for several more years and that we didn’t expect to be forced to make any changes anytime soon and that very much is the case.

In fact we expect to return more cash to shareholders over the next year or two with the revised allocation policy given the combination of the dividends and the share buybacks that we would have under the old dividend level. I guess the thing that changed in our minds over the last quarter really is two things.

First is just I guess maybe the unending line of top economic news out there that we’ve seen over the last couple of weeks, excuse me, last couple of months where it’s just become harder for us to remain optimistic that we’re going to see say a sharp rebound in the global economy and commodity prices and trade volumes in the near term.

And so that made it seem increasingly more likely to us that we maintain the dividend at its previous level we would start to see all the metrics that we look at to evaluate our dividend, the payout ratio, our ability to fund growth CapEx while holding leverage cost and we were going to see those things deteriorate and perhaps stay in a place that was well outside of our historically comfortable range for an extended period of time.

The other thing that happened of course is just the steep drop in our share prices after the second quarter earnings release. As I’d mentioned, we think it just creates a tremendous investment opportunity that it just seems to us fundamentally disconnected with the value of our company, with our cash flow and the durability of that cash flow.

And just the idea of repurposing cash from a dividend that we’re starting to feel a little extended to share buybacks that can drive significant value for shareholders just was a better use of that incremental cash.

Again we certainly expect there are going to be a lot of questions around it and some push back, but it made sense to us and again we intended to embark on this dividend, excuse me, the share repurchase plan pretty aggressively and think we can drive a lot of value just because again we just cannot understand how our investors can understand the power of our cash flow given where the share prices are.

We just need to use that cash flow to drive shareholder value..

Brian, thanks for the time this morning and thanks for being patient with me. .

Our next question is from Vincent Caintic with Macquarie..

Good morning. So I appreciate the color on 2015 and first half of 2016. So I think that's good feedback on the market, but I'm kind of wondering how your negotiations are and if you have any kind of macro view or view from the shippers into leases into the later half of 2016.

So maybe first quarter of 2016 is weak, but are there negotiations and is there maybe more sentiment from the shippers that there would be more demand and are they going into agreements to get more containers in the later half of 2016?.

Typically, our customers don’t plan that far in advance. One of the things that helps supply and demand not get too far out of balance in our market is that container orders are easily placed anywhere from one to maybe three months prior to the delivery of those containers.

Right now leasing companies and shipping lines are really just looking into the first quarter, maybe early second quarter as they start thinking about how many containers might be needed. I’d say in terms of our -- and so we’re not having any conversations. I don’t think anyone is really about container requirements for the second half of 2016.

In terms of the conversations we’re having with our customers, I’d say in general the outlook is fairly cautious for 2016. I think hopefully we’ll see an improvement from this year especially on the Asia to Europe trade.

If it doesn’t rebound rapidly, at least hopefully it won’t be another big decrease from 2015 to 2016 and that will be a nice lift for demand. But I’d say the outlook is cautious, but I think everyone realizes that it’s uncertain..

Got it. That's helpful. And one more from me. I noticed in the press release you mentioned the high drop-off rates, but yet utilization remains very strong.

And I was just wondering how to reconcile that and maybe a bigger view is how you view keeping utilization up versus keeping your margins intact given that maybe market rates are a bit lower now? Thanks..

Sure. Just a couple of things. First we have a big fleet and most of that fleet again approaching 75% is locked up on long term leases. And so even when we say drop off volumes are high and they are much higher than they are usually relative this time of year especially, it’s still not an extraordinary level relative to our size of our fleet.

And so our fleet behaves again like a big ship that it steers pretty slowly. And so it takes a long time of very negative conditions to impact utilization dramatically.

Even in 2009 for example where we saw for I guess almost a year trade growth was down 10%, 15% sequentially from the year before, even there we didn’t see utilization fall much below 90%. And so it takes a while to accumulate. Secondly, we’re also always selling containers.

And so as containers are dropped off, even if we’re not getting pickups, we still are pushing containers out of the fleet and that also has an effect of keeping utilization from getting too battered in a tough market..

Great.

And sorry, on the point of like how you view utilization versus maintaining your margin?.

Sure. It’s always a trade-off. Utilization I think is probably our most important profitability driver because it hits you both on revenue and on your operating costs. We accumulate storage and repairs when containers come off hire.

And so we’re constantly talking with our customers in a market like this about what it would take to keep more of our containers on hire. We tend to be pretty disciplined on what we’re willing to do to get containers on hire to keep them there. I think as John pointed out, our leases are structured very well.

When they come back, they come back to good demand locations. 95% of our containers are in Asia. And so typically when we see off hires occur or utilization go down, it’s a short term phenomena and we are confident that if we see a normal environment next year, we’ll push those containers back on hire.

So we’re willing to accommodate some rate reductions, especially for leases where containers can come back in the near term and we’re always negotiating with customers to try to find win-win solutions there, but we don’t feel we have say a gun to our head to make us do something that might not make sense for the long term..

Got it. Thanks very much..

Our next question is from Shawn Collins with Bank of America..

Hi Brian. Hi John. Good morning.

Hey guys, in the current market, can you just talk about where market per diem rates are approximately, or just some range of what you are seeing out there in the market?.

The range I’ll give you is very low and we’re seeing this year it’s really a whole bunch of things conspiring to make market leasing rates really outside of something we’ve seen in a very long time. And it’s the fact that container prices are at the low end of their historical range.

Interest rates, especially for companies like us are also at the very low end of their historical range. And then this year, especially since perhaps May, we just haven’t seen an active market for new container deals.

So we’re seeing leasing companies pricing pickup opportunities not just on the cost of the equipment and the carrying cost of the equipment, but also on the idea of generating some revenue in the next quarter or two instead of no revenue in the next quarter or two from that equipment.

And so we’re seeing leasing rates for new deals pushing even below where you might expect they’d be given new container prices and low interest rates.

Our belief is at least that third element, this pricing just to get some revenue will go away next year as the fleet becomes normalized and if there’s trade growth, which again most people certainly do expect there will be, that there’s ongoing leasing demand and need for more containers.

But until container prices increase and or interest rates increase, there’s still going to be a fundamentally low level of lease rates..

Okay, understand that. That's helpful context, Brian. Thanks. Second question, I know that you guys have been very direct and candid about the fact that you have not seen any sign of peak season demand during the summer that you usually would see.

I am newer to the container space, but can you put this phenomenon into context and how unusual this is and have you ever seen this occur in the past? Like in 2011 we had global weakness or obviously 2008, 2009 was the financial crisis.

How do you put this lack of peak season demand into context?.

I’ll give you some perspective for it. One thing we look at and we actually have a slide in our investor deck that shows this, is we look at the net pickup and drop off activity for our equipment on a quarterly basis. I think we show it in the presentation over the last maybe six or seven years.

And when you look at that chart, what you see is a graph that looks very much like a heartbeat that we see net pickup activity pretty significantly in the second and third quarters of the year where we’re getting a lot more containers ticked up both out of the factory as well as out of our depots to help our customers gear up their fleets for the peak season.

And then we see a little bit of net drop off activity in the fourth quarter, in the first quarter as our customers are shedding capacity to deal with the lower seasonal volumes there.

When you look at what happened in 2015, you also see a similar pattern in 2009 where despite the typical seasonal lift, just the overall secular problem of what was going on in the market outweighed the seasonality. And we saw in both 2009 and 2015 decreased net off hire activity in the second and third quarters.

I have to go back and look, but I believe that’s probably the only two years we’ve seen that in the last 10 years..

Okay, understand.

Just my last question, Brian, John, when the Panama Canal opens, do you expect any positive impact or any particular change to trade routes or any greater demand as a result?.

I don’t think it will be dramatic. The first thing I say to investors is that the US trades, while very important, are still collectively my guess is well less than 20% of global trading volumes. And so this really affects mostly the US trades.

I’m not an expert on this, but I think what we’ll see is that more cargo will, instead of being dropped into the west coast and trained across to the east coast, will see it come all water to the east coast. That all-water route is actually slower than the drop off in the west coast and trained across.

It’s cheaper too, but for us we typically like it when things take longer. And so our guess is that it might be marginally positive to container demand, but I don’t think it’s going to have a significant effect..

Okay. That's helpful. Great. Thank you for the time and insight..

[Operator instructions]. This concludes our question-and-answer session. I'd like to turn the conference back to Mr. Brian Sondey for any closing remarks. Mr.

Sondey?.

I'd just like to thank all of our investors and analysts for your attention and look forward to talking with you again. Thank you..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..