TAL International Group, Inc. (TAL)

TAL 
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TAL International Group, Inc. (TAL)

Q4 2012 Earnings Call

February 14, 2013, 09:00 am ET

Executives

John Burns - SVP & CFO

Brian Sondey - President & CEO

Analysts

Michael Webber - Wells Fargo

Art Hatfield - Raymond James

Sal Vitale - Sterne Agee

Ken Hoexter - Bank of America Merrill Lynch

Rick Shane - JPMorgan

Daniel Furtado - Jefferies

Doug Mewhirter - SunTrust Robinson Humphrey

Presentation

Operator

Good morning and welcome to the TAL International Group Fourth Quarter 2012 Earnings Release and Conference Call. 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 this event is being recorded.

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

John Burns

Thank you. Good morning and thank you for joining us today on today's call. We are here to discuss TAL’s fourth quarter and full year 2012 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 1995 regarding 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 perception of historical trends, current conditions, expected future development 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 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 the company makes in its views, estimates, plans or outlook. 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’ll now turn the call over to Brian Sondey. Brian?

Brian Sondey

Thanks John. Welcome to TAL's fourth quarter 2012 earnings conference call. TAL's results in the fourth quarter of 2012 provided a strong finish to another outstanding year. In the fourth quarter of 2012, we generated $1.60 in adjusted pretax or cash income per share and our operating performance remained at a very high level despite the start of the slow season for container shipping.

Our utilization averaged 97.7% for the quarter and currently stands at the same high level. Our leasing revenue increased 3% from the third quarter as we benefited from a full quarter of revenue on containers put on hire during the summer. And used container disposal prices held up well and remained well in excess of their long-term historical range.

TAL's results for the full year of 2012, reflected another year of outstanding operating performance and aggressive investment in growth. We generated $6.05 of adjusted pretax income per share. Utilization averaged 97.9% for the year and we invested almost $875 million in our container fleet leading to 20% in our revenue earning assets and 16% growth in our leasing revenue.

While we achieved record profitability for both the fourth quarter and full year of 2012, our profitability has been increasing more slowly than our asset or leasing revenue. For the first part of the year, depreciation expense was increasing as a portion of our leasing revenue. This is mainly the result of a quirk in our fleet demographics. We purchased few containers in late 1990s and early 2000, so the portion of older, fully depreciated containers in our fleet has been shrinking. This effect is mostly been played out and we expect depreciation expense to more closely follow our asset growth going forward.

Moderating used container sale prices also impacted the growth of our pre-tax income. Used container sale prices remained well above their long-term historical range, but they have been slowly moderating after reaching a peak in the summer of 2011, which is leading to a gradual drop in our disposal gains. We expect used container disposal prices and our disposal gains to continue to moderate in 2013.

Overall though, I think it is most important to note that we achieved another year of record profitability in 2012 and that we continue to generate exceptional returns on our assets and our equity. The large investments we have made in our fleet have also locked in long-term benefits from the strong markets we've seen over the last few years. The vast majority of our new container purchases have been placed on multi-year, long-term leases, significantly growing our base of recurring leasing revenue and providing a strong foundation for profitability, cash flow and dividends for years to come.

TAL’s strong performance in 2012 was supported by attractive market fundamentals. Strong growth in intra-Asia and other regional trades offset weak performance of the main East West trades and led to moderately positive global trade growth for the year. Demand for leased containers was further supported by our customers’ increased reliance on leasing. We estimate that roughly two-thirds of new containers were purchased by leasing companies in 2012 and we were also able to complete several large sale lease-back transactions where a number of our customers sold parts of their existing old container fleets to us. Unlimited direct buying by our customers in 2012 also had the effect of constraining the overall volume of new containers produced. This helped us maintain a very high level of utilization and supported our used container disposal prices.

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