John Burns - Chief Financial Officer, Senior Vice President Brian Sondey - Chairman of the Board, President, Chief Executive Officer.

Michael Webber - Wells Fargo Steve Kwok - KBW Sal Vitale - Sterne Agee Doug Mewhirter - SunTrust Shawn Collins - Bank of America Rick Shane - JPMorgan Helane Becker - Cowen & Company Art Hatfield - Raymond James Mike Fountaine - RBC Capital Markets.

Good morning, and welcome to the TAL International Group First Quarter 2015 Earnings Release Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Mr.

John Burns, Chief Financial Officer. Please go ahead..

Good morning and thank you for joining us on today’s call. We are here to discuss TAL's first 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 may contain forward-looking statements as the term is defined under the Private Securities Litigation Reform Act of 1995regarding expectations for future financial performance.

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 on this call are based on certain assumptions and analysis made by the company in light of its experience and expected future developments and other factors it believes are appropriate, and any such statements are not a guarantee of future performance and actual results or developments may vary materially from those projected.

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 of the statements that are made herein despite any subsequent changes the company makes in its views, estimates, plans or outlook for the future.

These statements involve risks and uncertainties, and are only predictions and may differ materially from the 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 first quarter 2015 earnings conference call. TAL's operating and financial results remained solid in the first quarter of 2015. We generated $40.5 million of adjusted pre-tax income, which translates to $1.23 of adjusted pre-tax income per share.

We grew our leasing revenue by 2.9% from the first quarter of last year and we continued to generate attractive returns for our shareholders, achieving annualized adjusted pre-tax return on tangible equity of 15.9% in the first quarter. TAL's solid performance continues to be supported by high utilization.

Our utilization averaged 97.9% in the first quarter and finished the first quarter at 97.5%. Our utilization currently stands at 97.3%.

For the first quarter it's typically the slow season for dry containers, our high level of utilization continues to be supported by several factors, including a favorable, global supply and demand balance for containers, TAL's high quality leased portfolio and TAL's strong operating and remarketing capabilities.

Most forecasters expect global containerized trade growth will remain in a 5% range in 2015, and we expect leasing to continue to take share from container ownership. TAL's container fleet, continue to be protected by long well structured lease.

Over 76% of our containers on higher are covered by multi-year long-term or finance leases and these leases have an average remaining duration of 41 months. TAL's disciplined lease structuring and extensive global operating and marketing capabilities also support our high utilization.

We are especially focused on ensuring that a large majority of our containers are on lease. They return to locations with good leasing demand. While TAL generated a solid level of profitability in the first quarter, our adjusted pre-tax income per share was down 12.8% from the first quarter of last year.

The decrease in our performance mainly reflects continued pressure from very low market leasing rates and decreasing used container sale prices. Market leasing rates have been well below our portfolio of lease rates for some time and leasing rates have reached new lows in 2015, due to decreases in steel and new container prices.

Steel prices in China has dropped roughly 20% since the fourth quarter of last year, driving new container prices below $1,800 for 20-foot dry container.

Reduced new container prices have also pushed used container sale prices lower and the dollar value of our international container disposals has been further impacted by the general appreciation of the U.S. dollar against major foreign currencies.

Our first quarter results were also negatively impacted by a large transaction with one of our core customers. The transaction combined an early extension of containers that have been placed on hire in 2010 and 2011, with the lease pre-commitment for a large number of new and used containers.

The original leases on existing containers were scheduled to expire in several years and under the terms of the deal; leases were extended for the containers' full remaining life. At least terms for the take up commitment have been fixed, but we expect that pick up will occur mostly in the second and third quarters.

While we believe this transaction will be positive for TAL in the long-term, it reduced our first quarter adjusted pre-tax income by roughly $2 million due to the early reduction in per diem rates and interest-rate hedging associated with a large lease pre-commitment. The financial impact of this transaction will improve as the containers go on hire.

The large lease pre-commitment associated with this transaction has also helped us to get off to a strong start with our 2015 investment program. Year-to-date, we have purchased over $350 million of new and sale-leaseback containers for delivery in 2015.

Competition for new lease transactions remains intense, but we continue to find opportunities that meet our return threshold by leveraging our supply capability and strong customer relationships by offering customers creative win-win solutions. I will now hand the call over to John Burns, our CFO..

Thank you, Brian. As we noted in our earnings release, TAL posted adjusted pre-tax income for the first quarter of $40.5 million or $1.23 per share, down 12.8% on a per share basis from the prior year quarter. The change in pre-tax income from the prior year was driven by a few key items.

We benefited from an increase in leasing revenue, driven by our ongoing investment in new and sale-leaseback containers. However, our leasing margin continues to be pressured by declining new container prices and related per diems and aggressive competition is.

Biggest item impacting the first quarter was $4.5 million decreased in our gain on sale, largely due to the ongoing declines in disposal prices. Leasing revenues climbed 2.9% supported by the $640 million in investment in new and sale-leaseback equipment during 2014, together with a nearly 1% improvement in average utilization.

However, the revenue growth lagged to 7.6% growth in revenue earning assets, reflecting the weak pricing environment for both, new and depot units. This lease rate pressure resulted in a nearly 5.5% reduction in our average lease rates from the prior year.

We expect our average portfolio lease rates will continue to decrease for the remainder of 2015 as the initial group of high price leases written in 2010 begin to expire.

If lease rates remain at the current low levels for an extended period of time, we expect the decrease in our portfolio average will accelerate in 2016 and 2017 as a large number of leases with high per diem rates expire.

Over the course of 2014, we were able to offset much of the impact of declining lease rates as we refinanced various debt facilities and lowered our effective interest rate.

However, in the first quarter our effective interest rate jumped 20 basis points from the fourth quarter, due to an increase in the portion of our fixed or hedged debt to about 89% as we hedge the large pre-committed lease transaction, Brian mentioned.

Looking forward, we expect our effective rate to decline in the second quarter as the fixed portion of our debt portfolio declines into a more typical range. In the first quarter, our gain on sale turned to a loss largely due to the ongoing declines in disposal prices.

Dry container disposal prices were down roughly 25% from the prior year, including a drop of approximately 5.5% from the fourth quarter. Disposal prices have declined steadily since mid-2012, reflecting the decline in new container prices and moderating utilization levels.

However, the decline in the fourth quarter to the first quarter was more than we anticipated. This was due to the steep drop in steel and new container prices and a sharp decline in foreign currencies, especially the euro, where a large portion of our containers are [indiscernible].

Sale prices are currently in the range of our accounting residuals and therefore we are roughly breaking even on the disposal of our original TAL units. However, we are experiencing losses on units purchased in sale-leaseback transactions.

The timing and structure of these transactions resulted in these units having higher book values than original TAL containers of similar age, and due to the drop in sale prices, we are recognizing losses on sale of a large portion of these containers.

However, on an overall basis these transactions remain profitable as the high purchase prices are supported by lease revenues. Looking forward, we expect the disposal prices will be more stable in the second and third quarters as we enter the typical busy season for leasing and disposals. I will now return to Brian for some additional comments..

Thanks, John. We currently expect our operating and financial performance will improve as we head toward the middle of 2015. The peak season for dry containers typically starts to gear up during the second quarter, which should drive improved demand for both, lease adds and disposals.

TAL's pickup volumes during the peak season will be further supported by our largely pre-commitments, which currently total more than $100,000 TEU.

However, our average lease rates will continue to trend down due to the very low market leasing rates in the market and we expect that aggressive competition will continue to constrain the profitability contribution from our new investments.

Overall, we expect our adjusted pre-tax income will improved slightly from the first quarter of 2015 to the second quarter and we currently expect that our financial performance will improve from the second quarter through the end of the year. I would now like to open up the call for questions..

We will now begin the question and answer session. [Operator Instructions] Our first question comes from Michael Webber with Wells Fargo. Please go ahead..

Hi. Good morning guys.

How are you?.

Good morning, Mike..

I just wanted to start off with relatively unique transaction and forgive me I joined a couple of minutes late off another call you went through it already, if you can maybe community talk through, I guess, how that deal - I mean, I want to call, kind of amend [ph] extend, but sort of negative connotation I do not think necessarily applies here.

If you can kind of talk to how that deal kind of progressed and how you came about the motivations behind it and whether there will be any bleed through into the second and third quarter. I won't imagine be much, but just curious..

Yes. Sure.

We often look for opportunities with our customers to restructure existing leases if we can rearrange the terms in a way that all pass [ph] customer find preferable, often it is the case that that involves an early extension of the lease, where we reduce per diem rate relative to what it had been and then we get long-term certainty on the unit by extending the unit in this case for the full remaining life of the containers.

In this case, we also couple the transaction with a large lease pre-commitment, so you know from our standpoint, we got certainty on the lease rates for the containers covered by existing leases, plus we are able to generate a large investment that was - it was off market in the sense that given the unique structure of the lease, there were not multiple parties offering exactly the same thing, so while it is still a difficult marketing and we are constrained and I won't think can achieve - it typically it is better than just competing in the scrum for what's out there available in the market broadly.

In terms of the analysis that we go through when we view these transactions as we try to come up with an estimate for what think lease rates could be at the time of original expiration and we compare how the cash flows look if we can enjoyed the high rate for another few years and then we market - to market when the leases expired, then we compare that stream to what we get with the early extension, so to some extent we give up a little bit extra early, but then you hope you are getting a premium relative to what market rates would be at the time of expiration.

In terms of the first quarter impact, there was really two pieces, which I think we broke out in the press release and then John talked more about here, the first was that leasing revenue was down by roughly $600,000 just due to late extension of the deal and the reduction in lease rates on the existing containers.

The bigger impact actually was an indirect one and it is that the large lease pre-commitment, there was actually a very long duration lease and we hedged the interest expense associated with that commitment, but we have not even really bought the containers yet, because pick up was supposed to happen in the second and third quarters, so we layered on some additional very long-dated swaps onto our existing debt portfolio to make sure we locked in the margin for those pickups, but again we are getting no benefit from the picks ups yet, so effectively we are carrying a lot of the fixed interest cost associated with transaction already, so that impacted we estimate our interest expense by roughly $1.5 million in the first quarter.

Obviously, the benefits of those pickups will turn around once we get the pickups and once they start generating revenue..

Okay. Just to kind of come back to I guess the underlying premise and I frame this, is this a transaction it was brought to you all by the counterparty looking to amend near-term commitments or was this something that you all kind of came with pitching for business and brings….

I would say we are constantly talking to customers about these kind of things and in this case that the customer responded with interest, so that was the start of the transaction, but always this kind of a joint interest in opening a discussion about how we rearrange terms and sometimes are interested and they are not sometimes..

Is this something you think we could see more as we move through the year?.

Certainly, in general it is something we like to do. We typically find that our focus usually is on long-term lifetime NPVs of the containers.

Most of our customers are more oriented around short-term next one, two to three years-type benefits when they have need for savings, especially in this difficult environment for them, so usually there is kind of a nice trade that that works out between us and I think this is actually the third customer now that we have already sort of fixed the 2010, 2011 expirations and certainly we have an interest in continuing to explore these kind of transactions..

Got you. Okay. It make sense, just one more and I will turn it over.

You guys gave a lot of color in the release in the deck - usually do, just wanted to touch on asset prices and where we go from here? I mean, it seems as though margins for the manufacturers are probably a bit wider down than they have been in the past just given the leasing greater decline in core channel - steel rises relative to the box prices despite the fact that box prices have obviously come in.

I guess, one do you think there is a noticeable expansion within their margins? Then two, as we look forward and we kind of look at okay where can asset values realistically trough and when we start looking back in kind of the middle part of the last decade, I am just curious as to how see that shaping up and then I have better crystal ball, but just maybe any similarities or differences between this go round to maybe the last asset value trough we saw maybe kind of early thoughts?.

Sure. Yes. Steel prices have come down about 20% from where they were in the fourth quarter of last year and there was a time especially, I would say through middle of February, where the manufacturers had been resisting drop in container prices to the level you would think they would drop to just given a change in steel.

I think, we have seen over the last month or so that that more of that drop in steel prices is getting priced in too if the prices that are being quoted for new containers, so even margin relative to steel prices is coming back down to, say, a normal range.

Also, one of the other things we look at is what time of year is it and typically, the margins, say, relative input costs usually peak for the manufacturers in the second and third quarter, because that's when leasing companies in shipping lines want to get rapid access to equipment and the margins usually compress in the late-third and fourth quarters during the slow season, so we think that that container prices are getting down into the range where they should be at this time of year versus steel prices, but you know clearly there's risk that either demand does not materialize and you could see margins compress to sort of slow season levels or we could see further decrease in steel prices.

As we look at it, and certainly we are not great experts on steel markets, but steel prices now are basically at decade lows and container prices are getting into the margin range where they should be versus those steel prices.

Our hope is that there is a opportunity for more upside than downside, but certainly we have been, I would say, negatively surprised by just how much steel has moved down this year..

Okay. I appreciate those good thoughts. Thanks for the time guys..

Thanks Mike..

The next question comes from Steve Kwok with KBW. Please go ahead..

Hi. Good morning, guys. Thanks for taking my question. The first question I have is around just the dividend. In terms of, if I look at the dividend coverage, it is now about 59% of pre-tax income.

What are your thoughts about what level of dividend are you comfortable with?.

First, I am glad that you quoted in percentage of pre-tax income that's one of the things that we have been trying to make sure everyone understands that we pay our dividend from our pre-tax income. As you point out, it is higher than where it has been historically.

Usually, we have had our pre-tax dividend in the range of 50% of pre-tax in common, and it did move up to 58% to 59% in the first quarter. I think we say a couple things.

One is, while of course we do not have a crystal ball, we do expect our financial performance to improve from the first quarter to the second quarter and then from the second quarter to the balance of the year, so if you think about it on an annualized basis, the rate should be hopefully below 59% if our expectations are correct, but even so, even at the first quarter level, we still have a fair bit of equity cash flow to support growth in our business, so even if we were to say that the first quarter income ends up being the average for the year and so our payout ratio ended up being close to 60%, that would still allow us to grow our assets at 7% or 8% and hold leverage constant.

Given that trade growth in general is expected to be about 5% and the investment climate remains just sort of broadly challenging, we still think we have got plenty of equity cash flow to support on the likely investments in our business, but certainly we would hope for correct that income improves, but we feel comfortable where it is..

Got it. That is helpful.

Then around just your comments on disposal prices being more stable, how should we think about that gain on the sale of leasing equipment going forward?.

As I think as John mentioned that sale prices fell little more than we expected from the fourth quarter into the first quarter and we think that is combination of the pressure coming from declining steel prices and declining new container prices coupled with the account translations of our sales in overseas markets back into U.S.

dollars and our expectation is that as we move from the slow season for dry containers for lease adds and for disposals into the stronger season and hopefully we have seen steel prices and foreign-exchange rates now kind of stabilize, those pressures that drove sale prices down in the in the first quarter won't continue.

Based on that, we do expect the disposal prices and gains to stabilize and I won't give too much specific guidance on that line item, but we do not expect to see the same kind of changes..

Got it, and then just finally the last question just around in terms of the large transaction that was done, how does that affect the P&L going forward, should we think in terms of the revenues that were negatively impacted is going to come back or just wanted to get greater sense..

Yes. Sure, so the revenue impact on existing containers will continue, so we renegotiated that lease a few years early and so for those particular containers, we do expect an ongoing impact of roughly $600,000 per quarter.

However, that the second impact which was larger this kind of $1.5 million increase on our interest expense that will be offset by the incremental revenue coming from the new container pickups.

I would say just roughly speaking we are currently borrowing today at a little bit over 3% for our fixed-rate ABS transactions that 3% has made up about 50% for our credit spread and 50% for the - if the interest rate duration kind of five-year swaps, so to some extent for these pickups we are already carrying half of the interest expense, because we locked in the fixed element already.

As we get the containers picked up, they are actually going to be even higher margin than usual, because we are already carrying part of the interest cost.

Does that make sense?.

Yes. Got it. Thanks for taking my question..

The next question comes from Sal Vitale with Sterne Agee. Please go ahead..

Good morning, gentlemen. Do you hear me? Yes. Hi, Sal..

All right, so just some additional color if you could on this transaction.

Can you tell us what the age of the boxes what was the average age of the boxes?.

Again, is two parts of it on the first being there was a early renegotiation of containers that have been picked up in 2010 and 2011, and my recollection is that the containers were mixed.

It was maybe something around half of the containers were new containers that were placed on hire in 2010, 2011 and again roughly half were at that time used containers that were picked up in 2010, 2011, but whether they were newer or used, but leased rates were quite attractive, because as I recall, 2010 and 2011 was a very favorable time for lease outs in the leasing industry.

The pickup commitment is going to be mostly for new containers, but there's also an element in there for the depot units as well..

Can you give a sense on the pickup commitment, the size, was it a $100 million, was it $200 million? I am just trying to get a sense for how much of your increase in CapEx was due to this one transaction..

It is always hard to isolate the effective, because we probably would have done some business with this customer anyway, so there is some incremental element to this transaction. We do not want to give too much information about it. We do not want necessarily telegraph the exact transaction to others in the marketplace, but it was sizable.

It's not majority of our CapEx, but it it's sizable element of it..

Okay. The reason I asked the question just bigger picture I am just trying to get a sense for whether the pullback in share buyback and the increase in the CapEx, does that signal shift from your thinking or is this just optimistic….

Yes. Well, I will just say a couple of thing.

Maybe first about the share buyback, we try to lay out earlier and I think at end of last year and the first part of this year that we typically think of the share buyback is kind of like a third level priority for our cash flow, so first is supporting growth on our business and making sure we continue to offer our core customers ample availability for containers when they need them.

The second use of our equity cash flow is to make sure we supporting our dividend as best possible and then to the extent that we have got cash flow left over after supporting investments and the dividend, we consider what to do with that and we felt at that time that, buying back shares was a better use of cash than deleveraging or accumulating cash in the balance sheet and that is still the way that we think of it, but it is again kind of a third order thing.

Usually, we get visibility into what our equity needs are going to be for supporting growth later in the year and my guess is we will do a similar thing that as we get through the summertime and through the peak and we assess much we invested and what profitable growth level was out there, we will decide okay whether or not we have got some extra capital left over and whether we should consider buying back more shares..

That's helpful. I am sorry, Brian..

Yes, but I would not say that. I think, this time last year we had committed to about $250 million of, so we are $100 million on top of that. That is supported by this transaction we have been discussing, and also a few other transactions, but I would not say that what ought to annualize that number.

We think that trade growth is likely going to be in the same range where it was last year and that we are going to remain very selective on our investments sort of above the market growth kind of level..

Okay. Now, next question is for you, John, just real quick on the on the U.S. impact related to the sale of our containers. Can you quantify how much of the loss was related to that the change in the U.S.

dollars from, I guess, beginning of the quarter to the end of the quarter?.

We do not give the line item breakout like that, but it is certainly in Europe is a big sale market for us, not all the units sold over there are in Europe, but large chunk of them are, so there is definitely an impact there on the sale prices, but exact amount it's not something we quantify..

Okay. Thank you very much for your time. I appreciate it..

The next question comes from Doug Mewhirter with SunTrust. Please go ahead..

Hi. Good morning. Most of my questions have been answered, especially I appreciate your detail surrounding this large transaction. I think it is sort of it slowly taking in why you did and what benefit you get from it. I actually had a just a small question or actually two sort of numbers related questions.

First, I noticed, I am not sure I am mistaken that your depreciation expense actually went down, sequentially, very slightly, but that the growth book value of your fleet went up slightly.

Is that just a natural evolution that actually the cost base of your fleet is going down as your buying more cheap boxes, is that - or was there a transaction influence to that?.

In the first quarter, like our revenue, our depreciation is day-adjusted, so that definitely is a piece of the change.

I will tell the other element is that a lot of the container acceptances that we took in the first quarter occurred towards the end of the period, so they had a bigger impact on kind of a two point average of assets relative depreciation.

Then finally, we start depreciation when containers go on hire, so typically we are building inventory of factory units at this time of year sort of anticipating the peak season that's coming. Then as the assets go on hire, that is when you start to see the depreciation expense..

Okay. That makes much more sense. It seems like a funny question given that utilization is 97%, which is almost effectively 100%, but I thought it was unusual that your utilization actually ticked down a little bit from your average in the quarter to the end of the quarter to now, that seems to be going against the seasonal pattern.

Was it just sort of how the timing of Chinese New Year, maybe there were sort of a run going into it, so it was in artificial spike that you are kind of coming off of now?.

John Burns:.

Typically, it is actually very common that the utilization will trend down across the first quarter, so typically our utilization peaks perhaps end of the third quarter, early fourth quarter as the peak season comes to a close.

Then typically drifts down from perhaps middle of the fourth quarter toward the end of the first quarter, so the fact that we saw the utilization decline throughout the first quarter really that is very difficult the one thing that is a little unusual is that we saw further decline from the end of the first quarter through now end of April.

April is one of those months that can go either way. It is at the very early end of the peak season, which typically starts building in earnest I would say more end of May into June, but typically we also have seen April as being strong as well, so far we have seen lease outs I would say in April would be a little disappointing.

We are hearing from customers that they remain fairly optimistic on trade volumes for the year and expectations remain in the 5% range, but we have not yet seen the peak season translate into pickups..

Okay. These 100,000 TEU as I recall your backlog from this transaction, I assume that that would show up in utilization figures. Of course, like you said you would have transacted them with anyway, but I assume that is sort of where when they pick up, they would go into the utilization pool..

Yes. We do not count commitment as they are on hire, so we track utilization by containers that have actually been picked up and placed on hire.

Again, normally even without these pre-commitments, we would expect utilization to start improving as we get through the second quarter and the peak season starts, but these committed containers will help with that process..

Okay. Great. Thanks. Thanks for all your..

Sure. Thank you..

Our next questions comes from Shawn Collins with Bank of America. Please go ahead..

Great. Thank you. Hey, Brian and John. Good morning. Thanks for taking my question.

On the restructure deal in the quarter, the $1.5 million in swap costs, can you just say how much that applies to and can you say where that fixes the interest rate and for how long?.

Just in general, we do not want to give exact details on the transaction or implied just the exact size of the book value, but given the size of $1.5 million. I mean, it is a sizable amount of debt. John could probably give you details on..

I would just say that $1.5 million reflects about that 20-basis point increase in the overall effective rate from the fourth quarter to the first quarter and that given the very little other activity it was the change is related to the swap we put on..

What effectively happened is that the debt level, it was unchanged by the transaction. Again, it represents future pickup for containers frankly that many of them we delivered in the future, so we increased our swap portfolio to lock in the margin on the transaction, so it had two effects.

One fraction one was layering on an additional swap to a fixed pool of debt, we increased the percentage of debt that is covered by fixed rates and it was getting pretty close to 90% in the first quarter because of this additional swap.

Then secondly, for the fixed portion, it was a long duration contract, longer than typical, so that the average duration of fixed lag actually pushed out a little bit as well and the combined impact was about 20 basis point increase in our average effective rate..

Okay. Great. I understand. Brian, did you say your fixed portion of debt is 90% or greater.

Is that right?.

Yes. What we are saying is that the combination of our fixed facilities and our hedged floating rate had moved up to almost 90% for the quarter and that's unusually high and that we said that it would trend down as we get into the second quarter back to more appropriate levels..

Yes. On average, say, over 2014, it was more like the low 80% range. .

Okay. Understood..

You got either fixed rate structures or floating debt heads with swaps into fixed..

Okay. Understand that. That is helpful.

Then a broad-based question, when you see activity in or associated with Europe, can you tell is activity picking up? Is it the same or is it decreasing?.

I mean, for lease outs, typically Europe is not a great market.

It is more of a note head [ph] trade is coming from Asia into Europe, so we try to keep our leasing inventory very small in Europe, so we never see a lot of transaction and we have heard I would tell you almost more anecdotally from customers that shipments out of Europe have been actually better than expected and perhaps given by the euro weakness, but the Europe least out market for us is a very, very small part of business..

Okay.

Then just last question, so given the market at this point remains challenging and rates are competitive, I know you are disciplined about deals and the return attributes and your market leadership position is important, but would you consider pulling back on some of your future CapEx levels at all?.

I will tell you in terms of CapEx, we certainly in general, we are more focused on doing good deals than we are doing a lot of deals and that is both, from a model return threshold, but also just kind of a risk profiles as well.

We really like to make sure that the leases we do are well structured and that really involves making sure that containers, whenever the leases expire five years or later from now will come back in Asia, where we can redeploy them easily.

We do think though that just in terms of protecting the franchise and making sure we stay relevant to our customers, that we have to have a minimum level of investment, so while obviously returns could get to a certain point, when we say this is untenable, but in general we like to invest at least the level to sort of match, say, growth in the marketplace.

Right now, we expect trade growth to be in the range of 5%, so again it is not an absolute certain priority, but generally speaking we would like to have our assets growth at least at that level. They have been growing a few points above that.

Even last year, I think we ended up growing 7% or something like that relative to 5% trade growth, but we are very mindful that we do not want to do just volume of business and we want to use our relationships and use our supply capability to generate whatever good opportunities we can, but at the margin we are not going to push growth just for growth sake..

Okay. That's very helpful commentary. I appreciate that. Thank you very much, Brian and John..

Yes. Thank you..

Our next question comes from Rick Shane with JPMorgan. Please go ahead..

Thanks, guys for taking my question. I do not want to parse things to closely, but last year when you described sort of the contour on the first quarter, you described second quarter was up slightly and the second half is up slightly from there.

This year you described second quarter is up slightly, but in your outlook for implicitly for the second half you removed the words slightly. I am curious, when you think about the contours of utilization and also in terms of lease rates, what are you seeing that is causing that change? I am curious in particular with the pre-commitments.

Is this a timing issue related to when you think those 100,000 units might be picked up?.

Yes. I guess, I would say, initially, I would not read too much into until I change the language I mean to be honest that we try to be careful with our words, I think you should just read them as it stood and I was not trying to signal frankly that we ought to expect incrementally something different than last year. It was just our expectation.

It is simply that we expect first quarter to improve slightly to second quarter. Then for the typical reasons of improved seasonality and some other things that benefit us towards at the end of the year more days and things like that that we expected that performance improvement to continue.

I certainly would not encourage you to try to put a percentage point difference on slightly versus not or anything like that, but that said, we do feel that performance will improve.

Seasonality is meaningful in our business and in addition I think we tried to point that a few extra things went into the first quarter to make the results challenging, including the early effects of these lease commitments that, the commitments were positive for TAL, but the first quarter ended up being a negative.

We saw relatively, well, actually not relative, very sharp downward moves in new container prices and steel prices and FX rates in the first quarter which we do not think and certainly hope won't be repeated, so just on the relative standpoint, if we take off some of those negatives that that helps and aids all of these sort of the general seasonal upswing.

Then finally as you point out, just having a big batch of pre-committed containers is helpful as well, and sort of to the extent that we do see the typical seasonal pickup that would be an incremental benefit on that.

Again, we think performance would improvement, but again I would not read too much into if we said slightly last year and we did not say slightly this year from third quarter and fourth quarters..

I doubt, sort of a pain question Brian.

In terms of about 100,000 containers on pre-commitment, when do they have to all be picked up by? What is the dropped data backups?.

Usually, and it is very typical for leases like this, we give customers a fair bit of flexibility, so I do not remember the exactly date that we have been in to the lease, but we expect the majority of containers will be picked up during the peak season, which typically will start sometime in the second quarter and run through the summertime and sometimes into the fall.

It just really hard to tell, I think it depends on if we see a nice upswing in the second quarter towards the peak season, I think we would see the containers picked up fast. If we see a weaker peak season or a delayed peak season, the pickups will linger, but it is all contractual. It is not sort of an estimated.

These are contractually committed pickups..

Okay. Last question.

Obviously, there is tremendous interconnectivity, but when we think about your business, how should we think about your direct exposure or sensitivity to energy?.

Yes. I think it really is mostly indirect, the exposure that I think there are some other same forces that are driving energy prices down are what is driving steel prices down and to some extent also driving containerized trade growth rates down.

I would say a lack of global growth, ongoing problems and a lot of the major economies in the world, they are driving a reduction in demand for commodities, diving low interest rates and things like that, so I think it is really the global macro issues that are leading to low fuel prices are leading to low steel prices and low container prices and low interest rates and those are the things that are making the pricing environment in our market so tough..

Got it, but realistically it is not like lagging equipment is shipping through your containers or you are seeing pull back in demand related to that?.

Very limited like perhaps such in local markets for used container sales just like in Houston or in places in the Midwest, where perhaps demand for used containers is down because drilling is down or something, but it is very localized and small for us..

Brian, thank you..

Yes. Thanks, Rick..

Our next question comes from Helane Becker of Cowen & Company. Please go ahead..

Thanks very much, operator. Hi, gentlemen. Thank you for taking the questions.

Brian, a couple of years ago, you guys adjusted your depreciation schedule?.

Yes..

Does it turnout that that was too aggressive of an adjustment?.

Yes. Well, I think John mentioned in his comments that sale prices right now are right around our residual level, and we disclosed the residuals.

We used the $1,000 for 20 foot dry container for example, $1,200 for four day and $1,400 for a high cube, and those were increased I think at the end of 2012, but frankly these were lowest accounting residuals among the public leasing companies. Not that that gives us total protection, but it is at least on a relative basis more conservative. Yes.

It is obviously hard to have total conviction of what sale prices are going to be over the next, say,13-year life of a new containers that we are buying, but right now, we do think sale prices are being battered by a lot of things. One, is the drop in steel prices and drop in new container prices.

Secondly, it is a lot of our containers are used were domestic applications in the U.S. and Europe. To the extent that housing growth is low in the U.S.

just the economies are slow in Europe that that limits demand for the local containers, and we have also seen over the last couple of years that that relationship between either price of used containers and the price of new containers just come back into line, so that to the extent that we do see, say, between now on 13 years from now, you know, some inflation-driven increase in steel prices which will translate to improvement of containers prices.

We think, we were at a pretty place, so even in this market environment we are seeing sale prices being pretty close to our residual estimates that those residuals do not seem to us to be challenged over the lifetime of our equipment..

Okay. That is unfair. Thank you very much for that.

The other things I was kind of wondering about is the second quarter of guidance, does it exclude the $2 million impact for the restructured deal or included?.

It was really supposed to be an absolute change and so.

Okay..

If you take our reported $1.23 of pre-tax income, we expect that $1.23 to improve slightly from the first quarter to the second quarter.

To some extent we are going to see the benefits of that transaction, we will be dependent on the timing of the pickups and so if the pickup happen early in the second quarter, that would incrementally improve the second quarter relative to the first to the extent that they happen later than the impacts of that transaction do not come off until the pickups occur really..

Got it.

Then I think, I probably asked you this question last quarter, but were you surprised that the port slowdown did not cause a bigger increase in pickups in the first quarter?.

You know, it is a good question.

I think, we did see for us that the port slowdown and kind of we anticipated effects of that slowdown increased demand for leased containers towards the end of 2014, so we did see customers committing to lease transactions at the end of last year, early this year and keeping containers in their fleet as we headed into the slow season in anticipation of what might happen if the port slowdown turned down on to, say, a full port strike.

One of the things that we are trying to untangle is, I think I mentioned that pickups in April were a little bit slow and we would like you to see them be a little bit more shifting from the slow season toward the peak season at this time of the year.

Whatever our thinking is, it is just that you may see a little bit of delay of the improvement in cargo volumes to improvement in lease adds, just because maybe the shipping line were over boxed a bit at the end of last year and beginning of this year in anticipation of maybe a strike on the West coast and what that would mean from operations.

I do think to some extent, again, we did see kind of for us there was the benefit of the concern about the West Coast than the actual slowdown towards the end of the year, but that I kind of quickly went away in the first quarter as the situation was resolved..

Then the later Lunar New Year did not, I guess, did it help or hurt?.

It is always hard to figure that out, because you do not see exactly what happen, why things that are happening do occur, so it was unusual and so I think it did make everyone in leasing companies and shipping lines alike scratch our heads a bit and try to figure out what it means for the timing of when we should place orders for containers, when we might see that shipping volumes pickups after Chinese New Year, but I think that tends to play out in a pretty short period of time and I do not think that should have much impact from here going forward..

Got you, then I just wondered if it impacted things in the first quarter, but it does not sound like it did..

I do not think in a meaningful way, certainly not from a financial results standpoint..

Got it. Okay. Thanks for your help. I appreciate it..

Our next question comes from Art Hatfield with Raymond James. Please go ahead..

Hey, Morning, Brian and John.

I have been playing a little bit of the conference call hag, so I got on your call a bit late, but a couple of quick questions for you and the first one, I want to ask you and if you have addressed these, I apologize, but when you look at your new deals that you are doing with the lower lease rates and the lower container prices, are you seeing a material change in your projected cash-on-cash returned on those deals?.

Yes. I guess, people talked about cash-on-cash in different ways. In a way most people in industry would talk about cash-on-cash and simply the year one lease revenue relative to the cost of the containers, and that cash-on-cash rate that has come down over the last two, three years and remains very low for two main reasons.

One is just debt is so cheap, that the amount of the lease revenue that you need to sort of the cover the debt is way down, so there tends to be kind of almost a one-for-one correlation between changes in interest rates and changes in cash-on-cash returns and those are low.

On top of that, when containers prices are cheap, there is sort of a general expectation that lease rates in the future will be better than they are today, so to some extent relative to the cost of the equipment you are willing to live with a lower initial cash-on-cash, because you expect to get that improvement in the future when containers prices returned to more normal place, so that drives the cash-on-cash down.

Then finally we are just seeing a lot of competition out there, four new [ph] transactions and that also pushes the initial cash-on-cash rates down from again that kind of measurement of year one reach revenue relative to equipment cost.

The thing we actually focus on much more it is sort of like levered equity returns over the lifetime of the equipment as we model them and there also we have seen compression, so that calculation is not really sensitive to the interest cost, because you are factoring in that benefit, but we have seen the effects of the increased competition that I think we have talked historically that we like to, generally speaking model returns for new investments in the mid-teens level and hopefully outperform our more conservative assumptions for re-leasing and resale and get towards to our, say, historical ROEs of closer to 20, but we have seen that is not going to generate on the business in this market, so we have had to take down our modeled returns and quite frankly had to push our assumptions from conservative toward base case even to get there.

You know, I would say from an equity IRR standpoint, I think we talked a bit before that perhaps we did see may be returned bottom out, hopefully bottom out in the first quarter of last year and we saw some marginal improvement in investment returns as we headed through the peak season last year.

I would say that from a new investment standpoint that still remains a little bit better than what it was this time last year, but still it is very challenging..

Great. Actually that is great color, very helpful. The other question I had is on the dividend, and I have known you guys a long time, so maybe my memory gets clouded with how I think about things, but if I go back, I always remember early on you talked about a goal eventually to be a payout ratio of roughly 50% pre-tax earnings.

Currently, in a given quarter with the newly announced dividend or continuation of the existing dividend, you are a little bit above that. Can you kind of talk about how we should think about it and look, I understand one or two quarters being above that is not something that people should get worried about from a dividend change going forward.

Am I thinking about how you have talked about that right?.

Thank you, Art, so I think, we generally when we talked about the dividend than you has been for a long time. I have said that the way we think about our dividends, we want to set it at the level that will allow us to fund the growth we anticipate in our business and hold leverage constant.

Historically, as you know that the global containerized trade growth had been in a 10% range on average for many years and we typically like to say, well, we want to be able to self fund growth a little bit above market levels without having to take leverage up or go out to the market for equity or anything like that.

It just happened that given the where we were from an ROE standpoint and where the market was from a growth standpoint, the right payout ratio in terms of pre-tax income was about 50% and that allowed us to grow our assets and kind of that low double-digit range and keep our leverage in that mid to upper 70s where we like it on a net debt to revenue earning asset basis.

Where we are now, as you point out is that the dividend has increased the share of our pre-tax income as our pre-tax income came down, but at the same time, the anticipating growth in our business has also come down for a lot of the same reasons that the income is being pressured by low container prices and lower growth rate in international trade, but those same things make it likely that our assets are not going to grow 12% or 13% anymore either, so that we still think our dividend, even in the upper 50s is a pretty good place.

That allows us to fund the growth anticipated in our market, pay the dividend and not have leverage change..

Great. That is where I was going next.

Given what you are doing now, it would appear to me at this level that you are not constrained in the level of growth that you want to have given the current environment?.

No. We are not. I mean, if we were, again, there's a lot of things to think about before you would cut the dividend. We have got a lot of dry powder in our financings against the existing assets, so you could always push leverage up a little bit, you could do some other things you could be more selective on the investments you take.

I mean, certainty, again dividend of course by its nature is discretionary to our board and to our company, but Art, I can tell you it is certainly a very high priority for us..

Excellent. Thanks for the time this morning..

Our next question comes from Mike Fountaine with RBC Capital Markets. Please go ahead..

Hey, good morning guys.

Can you talk a little bit more about the portion of sale-leaseback container versus TAL-owned units coming up at least over the next few years or quarters?.

Sure.

I think, John mentioned that, you know, from a disposal standpoint that our original TAL units are in the range of breakeven just given their sale prices are in the range of our accounting residuals and that were currently generate losses on the sale-leasebacks for disposals, because those book values are higher and book values are higher in some cases, because they bought at the time when container sale prices were higher, but really mainly because the sale-leasebacks also come with very nice lease revenue streams attached to them, so you are making money on the containers on hire, but taking losses on the ones you are selling.

Roughly speaking, I think, right now I think a slight majority of the containers we are selling are sale-leaseback, but John maybe….

…that number right on my hand, but it is somewhat it somewhat in that range..

…between TAL units and sale-leaseback and we think that will continue for a while here, but it will be determined on how many additional sale-leaseback transactions we do to sort of maintain that balance..

I would just add to that that the depreciation rate is high as the revenue is higher on the sale-leaseback units, so is the depreciation rate, so if sale prices stay where they are, the book values of those units are coming down at the faster rate than you would see it in a brand-new content..

Okay, so it is on, I guess, in actual percentage terms, just maybe a little bit more on sale-leaseback containers than TAL-owned units, right?.

It is in the range of the same, but my recollection is maybe slightly more, but it is....

Then, I guess, thinking about the depreciation you guys depreciate those to the same as the rest of your fleet $1,000 depending on the type of equipment?.

It depends on when we bought them. We typically depreciated over the time the period we think they will be on hire with the customer and that if the units do stay on longer then ultimately the depreciation would go down to the same residual..

Okay..

Initially to the point in time when we think they come off hire..

Right, so rather than being 13 years, it is driven by the expected on hire time..

Okay. That makes sense. Then I guess kind of a longer-term question, we are in period of really low lease rates right now.

What happens as these containers that you are placing come up for renewal? I know that - let's say you can keep them for a period of time at the current rate before having to roll into the rate that is closer to what the current market is.

What is the length of time that they can keep those? I guess just thinking about when containers rates to rise?.

It depends on how your structure to lease, and it is a very good point and something we try to manage real carefully, so I think to some extent leasing companies right now are justifying doing deals low ratios of current leasing revenue compared to the current equipment costs, because they do expect, say, a positive re-pricing move when the lease expire, so we find to get that positive move, it requires a few things in the structure of the lease and the first is I think we are referring to is we have a clause in our leases we call the bill-down period, which is a period of time that allows the lessee to return the units while they keep the lease rate the same.

Typically for our take [ph] from most customers that in a range of 6 months to 12 months something like that, and then when the bill-down period expires it goes into, for us at least, we call it the post-bill-down period and usually what happens in the post-bill-down period is the rate increases, the lease rate increases and sometimes the leasing company can take some other action as well, which kind of forces the customer to renegotiate at that point or to bring the containers back pretty quickly, but frankly there is another things that is required as well and that is just very tight logistical control, because one thing we have seen for our business but also for our customers that if the lease allows a lot of containers to be returned into North America and Europe, that the logistical cost benefits for the shipping line of dropping the containers in their backhaul locations can outweigh the benefit of the low lease rate.

Similarly for the leasing company, the cost of having to redeployed that asset from a place like North America, Europe back to Asia and outweigh the expected pickup and the lease rate at the time of expiration, so the other thing we are focused on in addition to making sure we have that bill-down period properly restructured and the proper incentives to get the containers back if the customers does not negotiate, we also are highly focused on making sure that the leases when they expire that the containers come back to the places we have good leasing demand.

That is the only way you are going to catch that anticipated move up..

Okay. That makes sense. Thank you..

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

I would just like to thank all of you for your ongoing interest and support of TAL, and we 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..