Triton International Limited
Q4 2013 Earnings Call Transcript

Published: 13 Feb 2014

[Operator:]

Good morning, and welcome to the TAL International Group Fourth Quarter and Annual 2013 earnings release conference call. All participants will be in a 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. Now I would like to turn the conference over to Jeff Casucci, Vice President of Treasury and Investor Relations. Please go ahead.

[Jeffrey Casucci:]

Thank you. Good morning and thank you for joining us on today’s call. We are here to discuss TAL’s fourth quarter and full year 2013 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 development and other factors it believes are appropriate. Any such financial statements are not a guarantee of future performance and actual results or developments may differ materially from those projected. Finally, the company’s views, estimates, plans and outlook as described within 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 may make 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 Factor section 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 turn the call over to Brian Sondey. Brian?

[Brian Sondey:]

Thanks, Jeff. Welcome to TAL International’s fourth quarter and full year 2013 earnings conference call. 2013 was another excellent year for TAL. We achieved a record level of profitability. Adjusted pre-tax income grew 6% reaching $6.41 per share. Leasing revenue grew by 8.1% and we continue to invest in and grow our fleet. We purchased roughly 300,000 TEU of new and new and sale-leaseback containers for delivery in 2013 leading to 9.1% growth in our revenue earning assets. TAL’s strong performance in 2013 was mainly driven by our high utilization. Our utilization averaged 97.4% in 2013 and finished the year at 97.2%. Our utilization currently stands at 97.3%. 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 lease portfolio and TAL’s strong operating and remarketing capabilities. While trade growth has been less than expected for the last few years, the production of new containers has also been low. We estimate that shipping lines and leasing companies purchased only about 2.4 million TEU of containers in 2013 leading to container fleet growth of 4% or less in the same range as the growth of global container as trading. Shipping lines purchased more containers than we expected in the beginning of 2013 but their orders fell off in the second half of the year constraining overall container production and continuing the market share shift from owned to leased containers. TAL’s strong utilization is also supported by our high quality lease portfolio. Over 77% of our containers on hire are covered by multi-year, long-term or finance leases and these leases have an average remaining duration of 44 months. TAL’s disciplined lease structuring and extensive global operating and marketing capabilities also support our high utilization and provide us with a sustainable advantage against smaller and newer leasing companies. We are highly focused on ensuring that a large majority of our containers that are leased have returned to locations with good leasing demand. And currently over 90% of our depot inventory of used leasing containers are in Asian locations. We are also highly effective in the small batch marketing that is essential for maintaining older container utilization. In 2013, we leased used containers from 40 countries to more than 150 customers. We also sold used containers in 78 countries to more than 900 customers. The market for new investments was challenging in 2013. Containerized trade growth was less than expected and market forecasters are now estimating that global containerized trade growth was less than 4% last year. Low cost debt financing has become widely available to smaller and mid-sized leasing companies. And many leasing companies continue to hold on to aggressive investment and growth ambitions despite the difficult investment environment. This mix of factors led to deterioration in the pricing and quality of new lease transactions in 2013 and we passed on an unusually large number of deals. The aggressive lease rates being offered for new containers has also increased the headwinds we faced upon lease renewals. Fortunately though our strong customer relationships and extensive supply capability still provide us with a solid volume of good business opportunities. We purchased $640 million of new and sale-leaseback containers for delivery in 2013 and our leasing revenues increased over 8% in the year. We finished 2013 with a solid fourth quarter, we generated $1.52 of adjusted pre-tax income per share which continues to represent a very attractive return on our assets and equity. However, our adjusted pre-tax income per share was down approximately 5% from the fourth quarter 2012 mainly due to lower disposal gains. As we’ve discussed used container selling prices have been trending down since reaching record levels in 2011. And our average used container selling prices were down 14% from 2012 to 2013. We expect used container selling prices and our disposal gains will continue to moderate. We are entering 2014 in very good shape. Our utilization remains high and the global supply and demand balance per containers remains generally tight. Trade growth is expected to remain relatively low in 2014 at least compared to the long-term historical growth rate in our industry. But again the production of new containers was also fairly low last year and factory stocks of new containers are well down from peak levels reached in 2013. In addition, our leasing activity in January was much stronger than expected. We generated a solid amount of new leasing commitments and saw a sizeable net pickup activity in a month where we usually see net container returns. New container prices and market lease rates have also increased since the end of last year. And we have already invested about $160 million in containers for delivery in 2014. It is still unclear whether January’s good performance was due to the one-time factors such as an early Lunar New Year in 2014 is the first indication that trade growth this year might be more than expected. As mentioned in the press release we are increasing our dividend again this quarter to $0.72 per share. We have been increasing our dividends steadily for several years to catch up to the jump in our pre-tax income that occurred in 2010 and 2011. The $0.72 quarterly dividend represents a 47% payout of our adjusted pre-tax income in the fourth quarter. With this latest increase we believe we are getting close to our target balance between returning a large portion of our cash flow to investors and retaining sufficient equity to fund the growth in our business. As a result, we expect to change the dividend less frequently in the future. I now hand the call over to John Burns, our CFO.

[John Burns:]

Thank you, Brian. As we noted in our earnings release, TAL posted a record adjusted pre-tax income for 2013 of $216 million or $6.41 per share. 2013 record results were driven by strong revenue growth ongoing investment in our container fleet and continued high levels of utilization. In addition, we benefited from improved margins reflecting the full year effect of our change in depreciation residual assumptions in the fourth quarter of last year and lower effective interest rate on our debt. These positives were partially offset by a significant reduction in disposal gains as sale prices continued to moderate from their historical highs of 2011. Although the full year was a record adjusted pretax income per share for the fourth quarter was down 5% from the prior year and significantly lower disposal gains more than offset strong leasing revenue increases and improved margins. The three key drivers to the fourth quarter results were; one, a 5.8% increase in leasing revenue from the prior year as we benefited from 640 million of investment in new and sale leaseback containers during 2013 together with continued high utilization averaging 97% for the quarter down only seven cents of the percent from the prior year quarter. Two, a $2 million reduction in interest expense from the prior year quarter as we benefited from a 57 basis point reduction in our effective interest rate which more than offset the higher debt balances supporting the 9% growth in our container fleet. The reduction in our effective interest rate is due to the refinancing of several credit facilities and the placement and extension of most of our swap portfolio at low market rates early in 2013. The third key item impacting the fourth quarter results was the $5 million decrease and our gain on sale versus the prior year largely due to the ongoing moderation of disposal prices as supply and demand normalizes from the peak levels. Also contributing to the lower gains was lower disposal volume with high margin original TAL Units. We purchased few new containers in late 1990s and early 2000s and as a result we have few original TAL units still of age. In addition these original TAL units have somewhat higher book values reflecting the increases in residual value assumptions made in 2010 and 2012. We have made up for the lower volume of original TAL units with a sale of older units purchased through sale-leaseback transactions. However, these units typically generate lower per unit gains than the original TAL units because they were purchased for prices higher than the net book value of white vintage original TAL units. In addition to the pressure on disposal prices, market lease rates have been under pressure. At year end, we estimate that the current market lease rate a roughly 10% to 15% below our portfolio average reflecting low newbuild prices, widely available debt financing and aggressive competition. However, because of the long-term nature of the lease portfolio and almost no investment in 2009 we have limited lease expirations in 2014. As shown in our updated investor presentation available on our website, the gap between current market lease rates is much higher for our 2010 and 2011 vintage units reflecting the high price of new containers purchased in those years. Lease expirations for these units will generally begin in 2015 and expirations are spread fairly evenly through 2020. Therefore, market lease rates would need to remain at current low levels for many more years to impact the large portion of this portfolio and even then the impact would be gradual and spread out over a long period of time. As we noted, interest expense for the fourth quarter was actually down from the prior year quarter, despite the increase in our container assets reflecting our lower effective interest rates. Looking forward, if market interest rates stay where they are, we could see some further limited improvement in our overall effective interest rate as we refinance certain facilities but our overall effective rate is approaching current market levels. In addition to lowering our effective interest rate, the actions taken in 2013 to re-finance certain debt facilities and re-balance our swap portfolio increased the portion of our debt portfolio with fixed interest rates to more than 85% with a weighted average remaining term of over 60 months. This position protects us from the risk of increasing interest rates for some time. As Brian noted, we have increased our quarterly dividend to $0.72, representing a relatively high payout ratio on adjusted net income but representing only 47% payout of adjusted pre-tax income. We base our dividend payout and pre-tax income as we have not paid cash taxes and do not expect to pay cash taxes for a long time because of the accelerated tax depreciation on our container fleet. I will now return you to Brian for some additional comments.

[Brian Sondey:]

Thanks John. As I mentioned before, we are entering in 2014 in good shape. Out utilization remains very high and our long-term lease portfolio will continue to provide us with a great deal of revenue and cash flow stability. Leasing demand in January was better than expected and the factory inventory of new containers is well down from peak levels reached last year. Overall, we expect our financial performance to remain strong. The first quarter is almost always our weakest quarter of the year. It represents a slow season for our dry container product line and while January was usually strong, leasing demand in February will be the impacted by the Lunar New Year slowdown and Asian business activity. In addition, the first quarter has the fewest number of days which lowers our revenue. We also loose seasonal revenue from our domestic storage business and incur a variety of compensation expenses at peak in the first quarter. In all, the first quarter effects usually impact our pre-tax income by about $2.5 million. It’s important to note that in the first quarter of 2013 these negative factors were offset by an unusual $2.5 million gain resulting from one of our customers declaring a large number of containers lost. We do not expect a similar one-time benefit this year. In addition, we expect our first quarter results in 2014 to continue to be impacted by moderating disposal gains and market pressures on lease rates. As a result, we expect our adjusted pre-tax income to decrease from the fourth quarter of 2013 to the first quarter of this year. After the first quarter, we expect improved seasonality and ongoing growth in our fleet to lead the sequential growth in our profitability from the first quarter through the rest of the year. For the full year, we believe it will be difficult for our fleet growth to fully overcome the pressures on our disposal gains and lease rates, and we expect our adjusted pre-tax income to be down from our record year in 2013. Nonetheless, we expect our operating performance to remain at a high level in 2014 and expect we will continue to achieve outstanding results for our shareholders. I will now open up the call for questions.

[Operator:]

(Operator Instructions). And out first question is from Michael Webber of Wells Fargo. Please go ahead.

[Michael Webber:]

Hi. Good morning. How are you?

[Brian Sondey:]

Good, Mike. Thanks.

[Michael Webber:]

Just a couple of questions and Brian you mentioned earlier in your remarks your utilization rate was off a bit but certainly better than your peers this quarter, you talked a bit about a smaller bench market hitting and things like that. I am just curious if you could get may be a breakdown competitively, how you are able to keep your utilization rate significant better right now than a number of competitors and is it a function of the that fact you don’t have managed fleet, is that part of what’s driving that or are you guys giving something else and something better that’s allowing you to keep more of those units employed?

[Brian Sondey:]

I think it’s really a variety of factors. Actually the main factor is the way that we structure our leases. We have always has view that we are willing to be competitive on lease rate doing business, but we are always quite conservative when it comes to going for long lease durations and in particular we are focusing on making sure that we get the vast majority of our equipment back in Asia when it comes off lease. And so, by focusing on duration and being very careful on logistics, we minimize first of all how much equipment can come back because of long durations and secondly because it has to come back where we have good demand, we can re-lease equipment fairly easily, and that allows us even in weaker markets to keep our equipment moving and keep utilization high. I think also as I mentioned in the comments, we do have a very extensive international operation which allows us to keep our operating expenses low for equipment that’s higher but also gives us access to smaller customers, say regional customers in non-Asian locations. We have been in business now for 50 years. We have very long roster of clients and I think also some of the bigger companies like us, we tend to be the first call that a lot of our customer make when they need small batches of equipment you don’t want to send a tender out to 10 leasing company, you just want to talk to those that you are comfortable working with. And I think it’s really those variety of factors I think partly because we have our owned equipment, we are very careful on our lease logistics and may be perhaps for you have managed fleet you are willing to be a bit less careful but I don’t really know the reason for it.

[Michael Webber:]

Got you, that’s helpful. I did want to touch on this bump in per diem rates and there is a slight improvement we have seen in January which seems to have gone a bit against the grain and you guys were very clear that you expected that to be an anomaly and the normal season Q1 factor should kick-in with Lunar New Year. But I am just curious as to when you really get back and you look at what drove that kind of modest improvement in January, can you point to one or two factors that really did that? I mean especially considering the fact that there is shelf that is not out of whack, it is still $0.5 million TEU that would be out there that you think we kind of keep per diems down in an otherwise kind of softer seasonal period. What do you think is a primary driver behind that kind of anomaly?

[Brian Sondey:]

Well, first thing I would say is the January improvement was actually pretty dramatic. Our results in January especially in terms of net pick up activity was probably the best January we have ever had. And so, it was really quite a good month for us. I think what I was trying to say in the comments is that, despite the fact that January was really good we still have a lot of headwinds in the first quarter in particular just a fact that Asia kind of shuts down for two weeks around Chinese New Year no matter how good the market is, you are going to have those two weeks kind of missing from your pick-up activity as well as the variety of other factors that I mentioned for accounting profitability. In terms of trying to read into the market, it’s very difficult to know and so our hope is and I think probably the hope of everyone in the shipping industry is that a strong January was perhaps an indication that, maybe we are finally going to have a year where trade growth overall surprises to upside. It seems that demand for cargo into Europe and in to the States was stronger than expected and it drove not just leasing transactions in terms of generating commitments but it actually drove pick-ups of containers in January, which is actually quite a good sign. That said, at least when I talk with our customers they still remain somewhat cautious with their outlook, yeah January was strong and that’s great but they are not yet ready to sort of commit to the fact that the year in general is going to be significantly better than last year. I think there is a consensus that it’s going to better than 2013 in terms of trade growth but I wouldn’t say there is a view that it’s going to get back to that kind of 8% to 10% growth that we were used to historically.

[Michael Webber:]

Okay. That is helpful. Just a couple from me and then I’ll turn it over. You mentioned passing on an abnormal number of deals I forget the timeframe I think you said last six to nine months but it could be shorter in terms of what’s in the market, can you talk to where the yield or spreads were on the deals that you guys are passing and just how low that pricing got and obviously it’s below your return hurdle I am just trying to get a sense on exactly how low some of that pricing actually moved?

[Brian Sondey:]

Yeah I mean, what we think when we evaluate a deal, we look at a bunch of things and certainly yield is one, the relationship of the lease revenue to the equipment cost but as I mentioned earlier we are really also are very focused on what’s the duration of the lease, what are the logistics, are we going to get the equipment back to places where we wanted or not and so we mix all those ingredients in. And what we were seeing in 2013 I’d say it really started maybe sometime in the second quarter is that we saw the yields come down and I don’t know remember exactly where they bottomed out but certainly below 10% in terms of the relationship between the leasing revenue compared to the equipment cost. But we also saw pressure on the quality of the lease structure with some leasing companies willing to accept lots of returns of equipment into North America and Europe in some cases lease length getting shorter. And to us that maybe is even something we run away from faster than the lower rates. All-in-all, we did a decent amount of investment last year, we coupled together a reasonable amount of new investment in new containers together with sale leasebacks and some finance leases to get to a reasonable place. I’d say in terms of what we’ve seen recently that the pricing and structuring on the deals that you did in January was better partially because I think a lot of the small guys had run out of equipment and realize they had to rebuy it at higher prices. It’s going to be again something of an open question in terms of just how that discipline plays out going forward.

[Michael Webber:]

Great, okay. And then just kind the last question related to that softer pricing and a modicum of improvement. When you think back and then you mentioned it earlier that you guys have been doing this for 50 years now, if you think about where pricing and be it either on a yield basis or on a spread basis is right now or even hovering for the better part really it seems like it’s been softening for about a year, year and a half. Where does that stand historically relative to other cycles and if you think back across the last two or three or four cycles where there isn’t lot of public data out that is available, how long were those troughs and then where do you think we stand right now within the current drop? I know it’s a very broad question but an historical context I think would be pretty helpful?

[Brian Sondey:]

Sure no problem. I’d say when it comes to the yield again the relationship between the leasing rate and the cost of equipment I don’t think it’s ever been lower. And as you mentioned it’s probably been the last 12 or 18 months where we have seen these just very low capitalization factors and being driven I think primarily just by how cheap that is for so many leasing companies. In the past, one just everybody’s interest rates were higher and then in addition and probably more importantly there was a greater differentiation between the borrowing cost and leverage available to big players like us and what the smaller and mid-sized players to do and so we tend to take a longer view on our investments I think that a lot of smaller players and the fact in the past they were constrained by having less access to capital just created a better market for discipline and I am hopeful that, that will return. I think certainly I can’t understand the way that some of these small companies are getting their deals rated kind of completely separating the capability of manager and experience from the rating of the container portfolio it makes no common sense to me I can’t understand why capital market investors are accepting very limited spreads for what seems to me to be very risky bets. I think it tends to play out overtime and people realize they made some mistakes and we can only hope that happens quickly.

[Michael Webber:]

Well I have got one more along those lines are you seeing other major players in the space backing off of deals that are either coming with spreads that are too wide or durations that are too shallow, are you seeing the group as a whole start to maybe command some pricing power that’s even possible?

[Brian Sondey:]

I think you tend to see that the bigger players be a little more disciplined usually we do tend to get the first look and last look and a lot of deals and because of the fact that we can be selective and still generate investment opportunities, I think you do find more discipline, again we also have more history. What could happen if you are little too aggressive out there. That said I think there is pretty wide spread growth ambitions in our business I listen to some of the other people in our industry talk and they talk about wanting to sort of invest in high quality deals but they also talk about their ambitions to continue to grow and invest and how big the numbers are, so I’d say it’s better for the big companies but it’s still aggressive out there.

[Michael Webber:]

Great, alright thanks guys. That was very helpful. I appreciate it.

[Operator:]

Your next question is from Art Hatfield of Raymond James. Please go ahead.

[Art Hatfield:]

Hey Brian. Good morning Brian, John and Jeff. Just real quick I kind of want to follow-up on the pricing thing because Brian I want to see that – I mean that the metrics that we see with pricing, you talked about we’ve been trending for year, year and a half towards weakness in per diem rates and some of the metrics would indicate that maybe we are heading towards an oversupply situation. But I don’t hear you saying that or expressing concern about that in the near term. One, am I hearing that right and then I would like to follow-up with couple of questions really from the presentation that Jeff sent out this morning?

[Brian Sondey:]

Yeah sure Art thanks. One of the funny things about the current environment is that there is not an oversupply situation. In fact I’d say as I talked a few times in my comments, that we actually think this demand balance for containers is still pretty tight as evidenced by high utilization in leasing companies and the fact that the factory inventory of new equipment also is pretty small probably less than 2% of the existing container fleet, which given the combination of containers exiting business and trade growth it’s pretty small there. And so given that backdrop naturally you’d expect pricing to be holding up pretty firmly. But I really think again it is this combination of widely available cheap debt capital coupled with continued high growth and investment ambitions from a lot of companies that’s keeping pricing on new deals low even though supply and demand balance is in our favor.

[Art Hatfield:]

Okay. That’s helpful. But can I ask and I don’t know if you have this handy but on page 13 of the presentation titled disciplined logistics management you got start of off-hire containers and the trend goes to show a build in inventory in those high export locations and the chart is starting to look somewhat similar to what we saw in the late ‘ 08 and early ‘ 09. And looking at that and help me understand how I should interpret this appropriately given what you just said that would seem to be somewhat counter intuitive to the fact that we’re not in somewhat of an oversupply situation?

[Brian Sondey:]

Actually a couple of things. First if you look at where we are today compared to 2009, our fleet is literally twice as big. So that if we have say a little more than half maybe the inventory off-hire that we had back in that year, relative to our fleet it’s actually about a quarter of the size, which is why I think in 2009 we bottomed out somewhere maybe in the low 90% of utilization and so with 30,000 TEU on the ground today we are still running in over 97%.

[Art Hatfield:]

Okay. That commentary on percentage of fleet, that helps me out a lot. Two last things real quick and I really appreciated John’s commentary on how we should look at the 2010 fleet and when it will re-price relative to where pricing is today and where pricing was that was extremely helpful. Can you talk a little bit about this year as I look at slide 26, it would appear to me as I look at that, that a very small percentage of your fleet will be renewing in ‘ 14. One, is that correct and if not, can you give us kind of what percentage of fleet should renew this year?

[Brian Sondey:]

That is correct. It’s a very low number of leases that expire this year and so we have very little need to re-price the containers this year. That’s said we always sometimes going ahead of our expirations a little bit and to try to cut deals with customers to extend leases early and we may start to look at that. But again that’s something we can do if we think it makes sense but there is very few dry containers especially expiring this year.

[Art Hatfield:]

Is that number below 5% of the fleet?

[Brian Sondey:]

To be honest we didn’t calculate it, but it’s a small number.

[Art Hatfield:]

Okay. And then finally and I’ll turn it over, can you just comment on where new container prices are today and kind of where they have trended over the last few months?

[Brian Sondey:]

Sure. The container prices, they finished last year probably in the low 2,000s maybe just over $2,000 for a 20-foot dry container. The most recent pricing we are hearing is somewhere in the middle of 2,200, so up $200 to $250 from the end of last year till today.

[Art Hatfield:]

And have per diem rates kind of moved in lockstep with that change?

[Brian Sondey:]

They have increased I’d say, maybe they haven’t increased quite as much and so we are getting, most of the containers we have on order right now were ordered at the lower price. And so the per diem rates represent a greater return against historical investments. That said I think we tend to see often is that the per diem rates lag a little bit price jumps as the leasing companies aren’t willing to bet a 100% that the higher prices are going to last and so are willing to accept maybe, I don’t know what it is three quarters or something of the increase on then inventory profits. And then pricing turns all the way once all the when people get confident that new prices are here to stay.

[Unidentified Analyst:]

Okay that’s helpful and thanks for your time this morning.

[Brian Sondey:]

Thanks [inaudible].

[Operator:]

Our next question is from Doug Mewhirter of SunTrust. Please go ahead.

[Doug Mewhirter:]

Hi, good morning. My first question on box prices, obviously you and couple of your competitors have confirmed the same thing about the new nice bump, welcome bump in new box prices and it also looks like I have heard that factories seem to be going in line in the $2000 per TEU and shutting down for the whole month of February. And I know that used box prices have not seemed to follow. Is there usually a lag or are the dynamics between new and used somewhat disconnected because the markets are actually different because the end buyer of the used box maybe have been running on their own cycle because it sounded like you don’t have a hugely favorable outlook for 2014 in terms of the recovery in used box prices. Do you see any kind of following so if new box prices rise would use box prices follow or is there some other dynamic that works?

[Brian Sondey:]

Yeah so I will say a couple of things. You know firstly the manufacturers through the line recently had more like 2200 and above and so it’s a little bit higher than I think you mentioned 2000. You know secondly what we see we see playing out is we do think there is a pretty strong connection between the general price for disposing used containers and the current price of new containers. But right now it’s slightly unusual situation in a sense that the relationship between used prices and new prices got out of whack over the last couple of years where typically for example we might sell 24 container on an average for about 50% of the cost of a new one when it’s used that got up to maybe 60%-65% and so we are selling used containers for unusually high amounts relative to the cost of new. That ratio has been coming down. In addition in 2013 the price of new containers was coming down and so both of those things are driving used prices down. We have seen as I mentioned a welcome increase in the cost of new containers but we think that relationship between the cost of the used containers and the cost of the new containers still has further to go to normalize. And so if new prices rise far enough yes we would expect to see the used prices start trending up also but we still think the net effect even at 2200 the net effect is probably still some pressure on used prices.

[Doug Mewhirter:]

Thanks. So it’s a very comprehensive answer. My second and final question is regarding yield and dynamics of your portfolio so it’s been no secret that yield have dropped steadily over the course of 2013 and it showed up in what I would call your blended portfolio yield sort of the cash and cash return of your revenue versus your entire portfolio book value. That blended yield seemed to stabilized over the last couple of quarters even though I imagine your so called new money yields continue to drop. Is that because there is more you are doing more non-traditional like sale leaseback transactions that might have a higher current yield that maybe of shorter duration or is there something else at work?

[Brian Sondey:]

No that’s actually a good insight. I think that probably is some of what’s happening that the yields on the new investments remain relatively low but if you are just looking at the ratio of revenue to the cost of equipment that tends to be higher for older assets whether we existing containers in our fleet or sell leaseback that we purchase and they tend to have a higher just straight ratio of revenue to net asset value of the equipment. Given that we reduced our new container purchases last year and got to our investor numbers to a higher combination of sale leasebacks and finance leases that probably contributed to the effect that you are talking about.

[Doug Mewhirter:]

Okay, thanks. That’s all my questions.

[Brian Sondey:]

Thanks.

[Operator:]

Our next question is from Sal Vitale of Sterne, Agee. Please go ahead.

[Sal Vitale:]

Okay, good morning gentlemen. First just a quick question on looking at – by the way thanks for providing this level of detail on your lease expirations. On number 27 we talked about your lease expiration stretching out basically to 2019 to 2023.

[Brian Sondey:]

Yeah.

[Sal Vitale:]

I guess the question I have there is I am actually little surprised that it stretches out that long. I thought the longest leases you were writing back in 2010 or ‘11 were roughly eight years. So that would have implied, I guess 2019 being your latest expiration. How much of that last 2019 to 2023 block is say 2019 and how much of it is ‘21 and ‘23?

[Brian Sondey:]

You know I think it actually extends pretty evenly out and couple of things you know first we actually always do leases that range all the way from the day to day lease out 12 years, 13 years for some customers and so it’s not that unusual that we would see leases longer than eight years. In addition we knew in 2010 and 2011 that we were investing in awful lot of equipment and that we are also investing in equipment at high prices with high lease rates and that we didn’t want to have a lot of that stuff expiring at the same time. So the dynamics in those years was very much in the favor of lessors and we actively sought our customers and deals with long lease durations.

[Sal Vitale:]

Okay that’s very helpful. And then just looking at the guidance you gave for the full year, it sounds like the biggest headwind really is the lease disposal gains. Can you put any numbers behind that because if I look at the full year ‘13 that came out to what was that $27 million is it the kind of thing where if I look historically say six, seven and eight or rather five, six and seven it ranged between $6 million to $12 million. Is that a good guide historically or you are just in uncharted territory given the book value of what you plan to sell in ‘14?

[Brian Sondey:]

Yeah you know we are always a little hesitant to give specific guidance in general but really specifically on disposal gains because they do bounce around a lot. Used prices change in the market pretty quickly based upon supply and demand changes and I think as you are alluding to that the book value of the equipment can be unpredictable. We don’t know exactly the mix of TAL units versus sale lease back units that we are going to sell. So it’s you know it’s tough number to predict. The one way to think about it though if you look at the first part of the year, the first quarter of 2013 we generated gains just over $10 million and that did include that unusual of $2.5 million sort of lost container gain I mentioned but that compares to just $4 million in the fourth quarter of the year. We do expect to see some further pressure from the fourth quarter number. I just gave you sort of an indication of how to think about it. In terms of just the overall outlook I think one point I would make is that you know we do expect market conditions in general probably to be better in 2014 than they were in 2013. And so I think we saw some in the early notes that came out some sort of questions around why would then do we think the earnings are going to go down when they were up this year. But I think if you think through the dynamics in 2013 we faced again a pretty heavy drop in disposal gains, about $15 million from 2012 to 2013. But we made up for it with growth in our fleet and in particular we got a lot of efficiency in our interest expense, by all the refinancing activity we did and also depreciation expense was lower from the change in residuals at the end of 2012. We expect those benefits to carry through. So we expect to still benefit from lower depreciation expense 2014 and also lower interest expense but we don’t expect the incremental change from 2013 to be as significant. So that basically we expect to see ongoing pressure on disposal gains but we don’t have those other elements again this year to offset that.

[Sal Vitale:]

Okay, that’s helpful. And then just in terms of I guess your top line for the year, without getting into specifics, if I am thinking of some revenue earning asset, average revenue earning asset growth in ‘14, somewhere in the mid-single digits you know is that a reasonable estimate at this point given what you have done so far?

[Brian Sondey:]

Yeah I mean I think again we are off to a pretty good start that we have already invested about $160 million for containers for delivery this year. I think that certainly gets us up and running. It really just depends what you think about trade growth, if trade growth is strong we are going to get to a big number again. If trade growth is weak it’s we are going to have to be creative to get to a good number again.

[Sal Vitale:]

Okay then just the last question I think you touched upon this, it sounds like a lot of 160 million you’ve done thus far was purchased at closer to say that $2,000 level and may be the lease rate at which you planned to lease them out once they picked up is going to be at a lease rate more commensurate with let’s say $2,200 box level is that the right way to think about it?

[Brian Sondey:]

If container prices and lease rates stay high, yes there would be some inventory profit and good accounting returns on a lot of that equipment.

[Sal Vitale:]

Okay, great thanks very much.

[Operator:]

Our next question is from Rick Shane of JPMorgan. Please go head.

[Rick Shane:]

Hey guys thanks for taking my question. My third question is going to be on slide 26. I just want to give everybody a chance to flip to that. Wanted to first follow up on the question that Sal just asked, when I look at it and we sort of lump both trading revenues, or net trading revenues and gain on sale together what we’ve basically seen is as that’s moved during the year from about a quarter of pretax income to about 10% of pretax income. Is that a reasonable way to look at it and is that about the right ratio headed into 2014 and should we think about that in terms of what you sort of need to overcome to achieve growth?

[Brian Sondey:]

I wouldn’t think those things necessarily as a ratio. Our leasing profitability is driven by growth in our container fleet and utilization and rates, all of that changes very slowly. And quite frankly we actually like the change in mix of our profitability being less reliant on gains this year and going forward than it was for the last few years because it is lot more sort of durability and stability to that leasing margin. The gain number bounces around and so I think the answer we think that we forecasted somewhat separately and the gain numbers is very heavily influenced by what happens to be the sale price for used containers at the moment and we’re seeing go up and down pretty quickly where that leasing margin trends changes very slowly over time.

[Rick Shane:]

Got it. Okay that makes sense in a lot of ways and thinking a bit more on an absolute dollar basis sort of that $5 million or $6 million in aggregate per quarter as a jumping off point into 2014?

[Brian Sondey:]

We don’t like to give specific numbers there other than to say it came down a fair bit during the course of ‘13 and we think that there could be even more pressure from there.

[Rick Shane:]

Got it okay. Second question you have been very specific about the strength of January and not having – people trying to have make sure people don’t draw too many conclusions about what that means for February. I would love to roll that back was this something that turned on January 1 or did you guys start to see some inclination of this in November or December what did those months look like?

[Brian Sondey:]

Yeah to be honest it was something of a surprise. I think a surprise to us I think a surprise to our customers that all a sudden and I don’t remember exactly when it started but sometime around the turn of the year. But all of the sudden everyone was short.

[Rick Shane:]

Got it okay. And then the last question in terms of slide 26 I would like to go through this just in a little bit more detail to make sure that we fully understand some of the different lines on this chart. So when we look at the dotted blue line, the fleet average per diem that is the blended average for your entire fleet?

[Brian Sondey:]

Yeah it takes a little off the new of course because of the different container types and different sizes. But we try to sort of normalize it on a kind of the cost equivalent unit basis, so that we could get an average rate that would make sense given the mix of 20s and 40s and high cubes and reefers and drys and so on.

[Rick Shane:]

Got it and so what I am really trying to makes sure I understand is there is this red line that suggests is supposed to quantify each vintage in the relative if we were to, again I realize we never had these numbers but is the blue line the fleet average per diem the blend of the red weighted for your portfolio size?

[Brian Sondey:]

Yes.

[Rick Shane:]

Okay, great. That’s all we needed. Thank you guys very much.

[Brian Sondey:]

Thanks, Rick.

[Operator:]

Our last question is from Ken Hoexter of Bank of America. Please go head.

[Ken Hoexter:]

Great, good morning. Just a follow-up on that slide 26 I just wanted to ask a quick one on the lease rate. I don’t know if you mentioned this, sorry if I missed it. But is there a reason why we saw a spike in the finance leases versus term leases?

[Brian Sondey:]

In 2013?

[Ken Hoexter:]

In ‘13 yeah.

[Brian Sondey:]

Yeah it actually just goes with the investment climate that really as we got into March and April we to some extent pulled back on ordering new dry containers for ourselves and chasing every deal in the marketplace and just because just the economics on the deals were starting to fall pretty far below our thresholds, and so that dark blue shaded portion of the term leases was a little smaller than it had for a number years. Fortunately though we are always chasing ideas to get new business and then find a pretty good opportunity to help one of our big customers get equipment through a finance lease that we think again is a nice investment for us.

[Ken Hoexter:]

Wonderful and Brian I guess in your opening remarks you made a comment about the new dividend policy. May be can you just flush that out a little bit. It sounded like you’ve felt like you will running it up and you fell like your payout is enough at a certain level I just want to make sure I understood that because I presume you are still looking at asset growth over time, asset growth what would sit there?

[Brian Sondey:]

So I think we’ve been talking for a while that basically if you think about the way our dividend has changed relative to our income it’s going to change in the lagging sort of way that our income effectively doubled between 2010 and 2012 as we sort of that full year’s benefits of the very high utilization and continued to grow and invested in the fleet. And we didn’t have a dividend double over the course of those years just because one we want to make sure that we didn’t overdo it. So we kind of wanted to feel our way with the dividend up to about the right balance of paying out some of our cash flow and making sure we’re keeping up the funded growth. So effectively our payout ratio versus pretax income was pretty low for a while historically, say before the crisis we kind of typically been in that kind of 50% payout ratio of pretax income felt that wasn’t about the right range to allow us to grow our fleet and self-fund the equity and also returning cash flow to investors. The payout ratio fell well below that in 2011-2012 and we’re slowly catching up in 2013. Now it’s getting back to that point where it’s getting into that kind of balance range of again keeping enough equity to fund our growth but also returning cash. And because we’ve now found our way back we don’t think we need to look at it and adjust it every quarter. We’ll look at it on perhaps on an annual basis or something like that.

[Ken Hoexter:]

Okay. Just to recall though about a year ago didn’t you mention that would look it on an annual basis again and then returned to the floor, I just want to

[Brian Sondey:]

We did. I think it was actually in 2012 and quite frankly what happened is the business was better than we expected and we realized that we had more room to go. And so we restarted the quarterly increases even though we had thought we would stop for a while.

[Ken Hoexter:]

It makes total sense and I thought you remembered you are saying that. Last question I have is you mentioned the spike in buys from the liners that we saw at the beginning of last year and then it kind of returned to normal. Anything you are hearing from your customers as far as what changed that, was there just a spike just because of near term demand on the airport or any reason for that shift and anything that could bring that back?

[Brian Sondey:]

Yeah I mean it’s hard again to know exactly what motivated them to increase purchasing at the beginning of last year. My belief is that it was motivated by the low container prices. That container prices fell quite a bit towards the end of 2012 into early 2013 and shipping lines just saw an opportunity to buy at a good time and jumped in and purchased and we saw them back off later in the year not because container prices rose but really just because trade growth was disappointing and the capacity wasn’t needed. My guess is we’re certainly seeing some shipping lines purchase but I just do think will be in a year this year we are leasing companies continue to make up the majority of purchases as we’ve been talking about container prices have jumped by about 10% shipping lines are still struggling with excess capacity and weak freight rates. I don’t think it’s a compelling story for shipping lines to want to buy right now but we’ll have to see.

[Ken Hoexter:]

Appreciate the comments. Thank you.

[Brian Sondey:]

Thanks.

[Operator:]

(Operator Instructions). And showing no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Brian Sondey for any closing remarks.

[Brian Sondey:]

Thank you. Just want to thank everyone for your continued interest and support of TAL. And we’re looking forward to catching up with you in the future. Thanks.

[Operator:]

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