TAL International Group, Inc. (TAL)

TAL 
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TAL International Group, Inc. (TAL)

Q3 2012 Earnings Call

October 25, 2012, 09:00 am ET

Executives

Jeff Casucci - VP, Treasury & Investor Relations

Brian Sondey - President & CEO

John Burns - SVP & CFO

Analysts

Helane Becker - Dahlman Rose

Greg Lewis - Credit Suisse

Bill Carcache - Nomura

Art Hatfield - Raymond James

Rick Shane - JPMorgan

Sal Vitale - Sterne Agee

Michael Webber - Wells Fargo

Ken Hoexter - Merrill Lynch

Jordan Hymowitz - Philadelphia Financial

Presentation

Operator

Good morning and welcome to the TAL International Group Third Quarter 2012 Earnings 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 that this event is being recorded.

I would now like to turn the conference over to Jeff Casucci, Vice President, Treasury and IR.

Jeff Casucci

Thank you. Good morning and thank you for joining us on today's call. We are here to discuss TAL’s third quarter 2012 results, which were reported yesterday evening. Joining me on this morning's call from TAL are Brian Sondey, President and CEO and John Burns, Senior Vice President and CFO.

Before I turn the call over to Brian and John, I would like to point out that this conference call may contain forward-looking statements as that term is defined under the Private Securities Litigation Reform Act of 1995 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 condition, 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 is 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, 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 would now like to now turn the call over to Brian Sondey. Brian?

Brian Sondey

Thanks Jeff and welcome to TAL's third quarter 2012 earnings conference call. TAL had another strong quarter of operational and financial results in the third quarter of 2012. We generated a $1.48 per share in adjusted pretax or cash income for the quarter. Our container fleet continued to perform exceptionally well. Utilization averaged over 97% for the quarter. Our operating and administrative expense ratios remained very low and used container sale prices held fairly steady at historically high levels.

We also continued to invest in new and sale leaseback containers during the quarter, pushing our 2012 investment above $800 million. Because of this investment, TAL's fleet now includes over 1.9 million TEU. This represents an increase of over 17% from beginning of this year and over 70% from the start of this current strong market cycle at the end of 2009.

Our market environment continues to be favorable. Trade growth remained solidly positive despite global economic challenges. Market forecasters have reduced their estimates for global containerized trade growth in 2012 and the peak season for the major East-West trades was disappointing this year, but regional and North-South trades continued to perform well and global containerized trade growth is expected to be around 5% for the year.

The supply and demand balance for containers remains in our favor. Definitely inventories of used leasing equipment remained unusually low as evidenced by continued very high levels of utilization for the leasing industry. And the production of new containers so far this year has been limited.

We estimate that the production of new containers will drop from well over 3 million TEU in 2011; they were less than 2.5 million TEU in 2012. This level of production implies that the container fleet is likely to grow at roughly the same rate as global containerized trade volumes this year and that the current tight supply and demand balance is likely to continue.

Production of new containers has been low this year primarily because our shipping line customers continue to be very cautious about purchasing new containers directly. We estimate our leasing companies have purchased over 60% of new production so far this year, which is an even higher share than in 2010 or 2011. This combination of moderate trade growth, tight container inventories and the market share shift from owned to leased containers remains the basic formula, allowing us to achieve high utilization, strong profitability and aggressive growth at a time when global economic conditions seem difficult.

Our profitability in the third quarter of 2012 provides a great return on our assets and equity, our profitability is down slightly from the third quarter of 2011. In general, our income has been moving somewhat sideways for the last few quarters, as our financial performance has been impacted by two conflicting trends.

On the one hand, we continue to benefit from strong growth in our core leasing revenue, as we continue to take advantage of the market share shift towards leasing to rapidly grow our container fleet. On the other hand, per unit profitability is moderating, as we come off the perfect market conditions we enjoyed from the middle of 2010 through the middle of 2011. This normalizing affect is most apparent in the slow but steady moderation of our utilization and used container sale prices.

We expect to see these two trends play against each other for a while longer until our performance has fully normalized and our income starts to follow our asset growth again. But I think it’s most important to note that while our income has been holding fairly steady for a while, it is holding steady at a very attractive level.

As I mentioned earlier, you have another strong year for investments in 2012. Through October 25th we have ordered over $800 million of new or sale leaseback containers for delivery in 2012. Roughly three quarters of these containers are committed to leases with a number of the world’s largest shipping lines.

Growing our long-term lease portfolio is the primary way that TAL builds long-term value and we expect to benefit from many years of cash flow and profitability from the high level of investments we have made this year.

As mentioned in the press release, we are increasing our dividend again this quarter to $0.62 per share. This increase reflects our continued strong performance and our expectations that market conditions will remain favorable. The increased dividend also reflects the strong growth of our long-term lease portfolio and the resulting increase in our recurring leasing revenue.

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