Hilliard Terry – Executive Vice President and Chief Financial Officer Phil Brewer – President and Chief Executive Officer Robert Pedersen – President and Chief Executive Officer-Textainer Equipment Management Limited

Helane Becker – Cowen & Company Doug Mewhirter – SunTrust Bob Napoli – William Blair

Welcome to the Q4 2016 Textainer Group Holdings Limited Earnings Conference Call. My name is Jason and I will be your operator. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note this conference is being recorded. I will now turn the call over to Executive Vice President and Chief Financial Officer, Hilliard Terry. Mr. Terry, you may begin.

Thank you and welcome to Textainer's 2016 fourth quarter and year-end conference call. Joining me on this morning's call are Phil Brewer, TGH President and Chief Executive Officer. At the end of our prepared remarks, Robert Pedersen, TEM President and Chief Executive Officer, will join us for the Q&A. Before I turn the call over to Phil, I would like to point out that this conference call contains forward-looking statements in accordance with U.S. securities laws. These statements involve risks and uncertainties, are only predictions and may differ materially from actual future events or results. 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 are made. Please see the Company's annual report on Form 20-F for the year ended December 31, 2015, filed with the Securities and Exchange Commission on March 11, 2016, and any subsequent quarterly filings on Form 6-K for additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements. I would also like to point out that during this call, we will discuss non-GAAP financial measures. As such measures are not prepared in accordance with Generally Accepted Accounting Principles, a reconciliation of the non-GAAP financial measure to the most directly comparable GAAP measure will be provided either on this conference call or can be found in today's earnings press release. At this point, I would now like to turn the call over to Phil for his opening comments.

Thank you, Hilliard. I would like to welcome you to Textainer's fourth quarter and full year 2016 earnings call. Given the challenges we faced last year we are very pleased that our performance during the fourth quarter showed a significant improvement over the prior quarter due to both improved market conditions and the reduced impact of Hanjin on our fourth quarter. Our fourth quarter adjusted net loss of $13.6 million represented an improvement of $38.7 million or 74%, compared to the $52.3 million net loss in the third quarter. Our adjusted net loss for the year was $56.1 million or $0.99 per diluted common share. We are also very pleased with our progress recovering Hanjin containers. To-date, we have recovered or are in the process of recovering 80% of the containers leads to Hanjin and are actively negotiating the release of another 13%. The remaining containers are being recovered in small batches. It is not possible to say whether all negotiations will be successful. We expect to recover around 90% of our containers. We have $80 million of insurance to cover unrecovered containers lost revenue and recover and repair costs, which we believe will be sufficient to cover a substantial majority of these costs. Our fourth quarter and full year 2016 results were negatively affected by several factors including not just Hanjin Shipping's bankruptcy but also ongoing impairments due to low used container prices and increased depreciation expense as a result of our decision to reduce residual values for certain equipment types during the third quarter. Let me address each factor individually. As we have stated previously the net book value of the containers in our fleet on lease to Hanjin was $280.2 million, comprised of $88.2 million of containers on finance leases and $192 million of containers on operating lease. The net book value of the containers effectively owned by Textainer was $237 million, or 85% of this total. During 2016, we’ve recognized $22.2 million of container impairments and $19 million of bad debt. Both net of estimated insurance proceeds and $12.1 million reduction in revenue resulting in a negative impact on our full year results totaling $53.3 million or $0.94 per share. Container impairments to write-down containers waiting disposal to their fair market value totaled $12.9 million for the quarter and $66.5 million for the year. On the positive side, the amount of impairments has been decreasing over the last several quarters, as a result of increases in used container prices and declines in the quantity of containers being impaired. We expect a level of such impairments to continue to decrease during 2017. The changes to our depreciation policy resulted in $10.2 million of additional depreciation expense in the fourth quarter and $25.2 million for the year, of which $4.4 million was a one-time charge for containers that were fully depreciated to their previous residual values. Utilization ended the year at 94.2%, which includes equipment on lease to Hanjin, which has not yet been recovered. Our utilization continues to benefit from the fact that 84% of our fleet is subject to long-term and finance leases of which only 7.1% will mature in 2017. Furthermore, the average rate of those expiring lease contracts is $0.62 per CEU per day, which is not only lower than the last five years but also lower than most recent new production rental rates. We invested $480 million during 2016 to purchase more than 286,000 TEU of attractively priced new and used containers. We believe we were one of the top buyers of both dry freight and reefer containers among all lessors. There's not an excess supply of containers in the world, all lessors enjoyed strong utilization currently and investment in new containers is limited. New dry freight container production last year totaled approximately $1.8 million TEU, which was only slightly higher than the $1.5 million TEU disposed. New dry freight inventories at factories are slightly over 300,000 TEU the lowest level in six years. Textainer's depot inventory is below 100,000 TEU. New container prices are currently above $2,000 which is at least $800 higher than the low point of 2016. Steel prices have increased 80% over the last year. All manufacturers are required to switch to waterborne paint in April, which is expected to add $100 to $150 to the price of a 20-foot standard container. The public container manufacturers all reported significant losses during the first half of 2016 and are focused on returning to profitability. All of these factors should help support new container prices around their current level. Used container prices have increased significantly especially in Asia, where the highest percentage of our containers are sold. Over the last six months, used container prices increased approximately 15% to 25% depending on container type. We believe that used prices have bottomed and that they will continue to strengthen especially if the increase in new prices holds. After adjusting for the Hanjin recoveries, our lease out-to-turn in ratio for the fourth quarter was 1.8:1.0, the highest level all year. New container cash-on-cash yields are in the low double-digits. Rental rates for both new and used containers have more than doubled and are at levels we have not seen in several years. Considering that on a relative basis rental rates have increased much more than the approximately 70% increase in new container prices. It is clear that margins have increased as well. We expect the container shipping industry to perform better in 2017 than it did last year. Container trade growth of 2% to 3% is projected for 2017, which are below on a historical basis is higher than the 1% to 2% growth experienced last year. Shipping lines continue to face problems of vessel over capacity, which although likely to remain for at least the next two years are not as severe as in recent years. The new vessel order book is it only 16%. Lending to shipping lines has tightened with many banks exiting the shipping industry and few if any new vessel orders being placed. Planned new build deliveries are being delayed and the idle fleet remains high at around 1.4 million TEU. Vessel scrapping reached a record 650,000 TEU last year and is expected to be at least 100,000 TEU higher this year. Average freight rates increased more than 20% over the course of last year and really is projecting 2017 freight rates to be 20% to 40% higher than 2016. The continuing consolidation among shipping lines in the formation of the three major lines is expected to result in more freight rate stability. All of these factors are expected to improve the profitability and credit worthiness of our customers. Whether these positive trends continue will depend on many factors including the continued growth of international trade, the avoidance of trade disputes the ongoing strength of container demand, the quantity of new containers purchased by shipping lines and lessors and the extent to which shipping lines reliant leasing as opposed to buying. Our earnings will continue to be negatively affected by the costs of recovering Hanjin containers, impairments of containers put to disposal, increased depreciation expense due to the recent changes to our depreciation policy and an expected increase in our average interest cost. Furthermore, the impact of new container rental rates will only be felt over time as our fleet reprices and we put new containers on lease. The combination of these factors is expected to result in continuing accounting losses over the near-term. Having said that, each day we are more encouraged by the positive signs we are seeing. Predicting cycles is more art than science but we believe that the performance of both the container shipping and leasing industries is showing material signs of recovery. I will now turn the call over to Hilliard.

Thank you, Phil. I will review the major drivers of our results this quarter and provide more color on the financial impact of the items, Phil mentioned in his comments. Lease rental income was $105.9 million, which decreased 15.3% from the year ago quarter. The loss of $7.2 million of lease rental income from Hanjin accounted for 5.8 percentage point of this decrease. The remainder of the change was due to lower per diem rates and lower utilization partially offset by an increase in fleet size when compared to this time last year. Phil commented earlier on the improvement we are seeing in used container prices. Our used container prices in a stronger resell market resulted in $4 million of gains on sale and profits in our trading business. And additional benefit of the stronger used container market is that this quarter's impairment due to write-down of containers pending disposal to their fair market value amounted to $12.9 million or $0.23 per share which was down year-over-year from the $15.4 million in the year ago quarter and down sequentially from the $16.5 million, we reported in the third quarter of last year. The monthly impairment run rate was 4.3 million per month during the quarter, compared to 5.5 million per month in the third quarter. We expect this run rate to continue to decline. Depreciation expense was $63.5 million for the quarter, up $11.8 million year-over-year. As you may recall, last quarter we made the decision to change several aspects of our depreciation policy due to an extended period of lower sales prices and longer useful lives. These changes resulted in around $10 million of additional depreciation expense in the fourth quarter consistent with our guidance last quarter. The remaining portion of the increase is due to a larger number of refrigerated containers in our own fleet. Partially offset by lower new container prices in a decrease in the size of our own fleet of dry containers. Going forward, we will have approximately $40 million or $0.70 per share of incremental depreciation expense due to these changes. If you'd like more details on the changes to our depreciation policy, we have included a table summarizing these changes in our quarterly's IR slide deck. Annualized depreciation expense for the quarter was 5.5% of average container cost. And we expect annualized depreciation expense to be roughly about 5.2% to 5.4% of average container cost. Direct container expense increased $2.9 million or 19.3% year-over-year to $17.7 million for the quarter. $2 million of the increase was due to higher repositioning expenses as a result of the Hanjin bankruptcy and the remainder of the increase down from higher handling expenses. For the quarter, our interest expense, including realized hedging costs but excluding the write-off of unamortized bank fees and unrealized losses on interest rate swaps, was $25.9 million, a $3.8 million increase compared to the year ago quarter. This increase was due to an increase in average interest rates, and a $24.3 million increase in average debt balances. Our average effective interest rate, which includes realized hedging costs, is currently 3.11%, an increase of 19 basis points when compared to the year ago quarter. We will have slightly higher borrowing costs in a go-forward basis as we believe access to financing by lessors will be more expensive this financing counterparty is now reevaluate the risk within the container leasing industry, following the Hanjin bankruptcy. And the cyclical downturn we've all experienced over the past several years. As of the end of the quarter over 77% of our debt was fixed or hedged compared to 84% of our own fleet subject to long-term and finance leases. The weighted average remaining term of our long-term and finance leases is 42 months. Turning to the balance sheet, as of December 31, 2016, our cash position was $84 million and our total assets were $3.4 billion. In spite of this year’s loss, we generated $286 million of cash from operating activities and our net cash position decreased by approximately $32 million when compared to the prior year, reflecting the cash impact of the Hanjin and advance of any settlements from our insurance companies. We expect to have significant cash expenses as we recover Hanjin containers, and in some cases reposition these containers to higher demand locations over the next several months. During the recovery period, we will continue to generate significant cash from operations, while recovering and redeploying containers and generating cash as quickly as possible. To-date we have put 28% of that recovered containers back out on lease at rates that reflect in improved market environment. Based on our experience, we expect to start receiving the cash from the insurance proceeds in the first half of 2017. The final payments may not occur until the latter part of the year. Before we move to the Q&A, I would like to turn the call back over to Phil for some additional comments.

Thanks Hilliard. I would just like to take this opportunity to note that this is Robert’s last Textainer earnings call. Robert is going to retire at the end of March, Olivier Ghesquiere will be assuming Robert’s responsibilities and we’ll join our future earnings calls. Olivier was the former CEO of Ermewa where he was responsible for Eurotainer. He has extensive experience leasing transportation assets including railcars and tank containers. Robert and Olivier have been working closely for more than a year in preparation for this transition. Fortunately, Robert will remain a part of the Textainer family, he will be joining our Board of Directors in May. And I'd like to thank Robert for his colorful and thoughtful market insights over the past many years. Operator, if you like please start the Q&A.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Helane Becker from Cowen & Company.

Thanks operator. Hi team, thanks for taking the time. Robert, congratulations I guess on your decision to retire. I hope you are not going to be bored, but you can always come back.

Thank you.

I just have – I think retirement is not all it's cracked up to be just…

Thank you, Helane.

Just mentioning that. Okay, so I just have a couple of questions. And I’m not sure why the Hanjin’s recoveries are being done quarter-by-quarter and not all at once in the third quarter. So maybe you can explain that to me?

Sure, Helane, this is Hilliard. We've actually recovered quite a bit of the Hanjin containers since the bankruptcy in September. As Phil said, we recovered about 80% of the containers. We are in negotiations for another about 13% and the way it works is, we believe we will recover about 90% of the containers, possibly more. But the last few containers we recover will be – they always take the longest. Currently we are in negotiations in some of the Chinese terminals and, depending on how those go, we will be – what I would say pretty much almost done with the Hanjin recoveries over the next month or two.

Okay, so are the prices that you are paying – like, I don't know the right word – worth it to get them back versus just leaving them out there and buying new containers?

Hi, Helane; this is Phil.

Hi, Phil.

We look at each container recovery on an individual basis. In fact, we – as part of the Hanjin recovery effort, we created our own IT tool to do exactly that analysis and determine based on the location, age, condition, et cetera of the container, what level of ransom would be justifiable to pay, given that we may also have costs to repo the container to another location. So we only recover containers when it makes sense – economic sense, for us to do so.

And, Helane, just to add, I would say we're very pleased with the progress we've made with respect to the Hanjin recoveries. And the point, I made earlier about there's going to be some impact on cash over the next quarter or two, that's really just us, if you will, fronting the money that ultimately we'll get back from our insurance companies to complete the recoveries. Once we get close to completion, we expect to file an initial claim in the next month or so, and we may even see some of the insurance proceeds flowing through over the next quarter or so.

And maybe if – this is Phil again – to just add one – another insight. Helane, the containers are all around the world, as you know. In some locations, we were able to recover them quickly because, in fact, there was little to no negotiation. The – whatever the location of the container they were willing to give them up to us very quickly. In other locations in the world, – in some other locations in the world, the locations – the terminals or depots where the containers were located were simply unwilling to even start negotiations for months. They just – because they weren't certain themselves how they wanted to proceed. So part of the delay is not really our fault; it simply this is the process that the industry is going through. I would also note that in many locations, the industry is working – the container leasing industry is working together to recover the containers. So it's not as though one lessor has received his or her containers and others have not; we are all negotiating jointly. And in many cases also, the terminals and depots where the containers are located have required that we approach them as a group.

Okay, all right. Yes, I saw your comments yesterday in the Journal of Commerce article. And then I just have an unrelated question. And I know its early days, right? We're like, what a month – not even a month into the new presidency, but the question I get from investors a lot is border adjustment taxes and how that might impact the industry and you guys, in particular. Have you given any thought to that? Do you have any insight into how you are thinking about that?

That's a very difficult question to answer, simply because we are as uncertain as to what will happen regarding international trade and potential taxation as is anybody. And I think it would be a fair assumption that if trade were taxed, it would have an impact on trade. But at the moment, we have no more insight into the likelihood of taxation or changes in taxation than does anybody else.

Yes, I know. That's what I tell investors, but it doesn't stop them from asking it. And asking again so I figured I'd ask you and see if you had any particular insight into it. All right, well thanks very much. I'll let other people ask questions and get back in line.

Thanks.

Thank you, Helane.

Thank you. Our next question comes from Doug Mewhirter from SunTrust.

Hi, good morning. I had a couple – a question on Hanjin. Just in rough, round proportions, for the recovered containers, what percentage to date have been put into the – to be leased pool versus the held for sale pool? And is it roughly similar to the proportion of your overall fleet or have you sort of accelerated the sale of some of them in excess, just sort of to get them out from under your hair and maybe that's part of a portion of this large impairment charge.

Doug, in my initial – in my comments, I commented that we had already put about 28% of the containers back out on lease. And I think the other important point is given how the market is today, we’ve been able to put those containers out on lease at today's current rates, which are very, very good rates. So, we are probably a little bit further along than we thought we would be, but I would say that's a pretty good percentage given where we are.

Doug, it's Phil. The second part of your question, I don't have the number right in front of me, but I – we were looking at this yesterday, and the level of disposals is not out of the ordinary for any figure for our fleet. So I think what you were wondering was whether we were disposing a higher percentage of these containers relative to what we're doing in the rest of our fleet, and that's not happening.

Okay. That makes sense. I appreciate the detail. On utilization, I know there is a lot – or not a lot – but there are some distortion from the fact you have Hanjin containers coming back and it's effectively increasing the denominator in your utilization calculation. But obviously, it looks like with supply being so tight, I guess would it be safe to assume that you could see utilization trending up into the peak season assuming the world doesn't come to an end over the next couple quarters?

Yes, Hi, Doug; it's Robert here. It's a good question, and we're actually positively surprised about not only how we been able to activate the Hanjin containers we've recovered, it's also how we have been able to reduce all the other depot inventory around the world that we had. The market conditions from fourth quarter last year have improved dramatically. We're talking about higher prices, we're talking about higher rates, we're talking about higher residual values. And all that makes depot containers even outside Asia much more attractive. So the effect of the Hanjin recovery and the delay we have been putting those containers on hire due to repairs and so forth has actually been mitigated by the fact that we've been really activated tens of thousands of other depot containers at good terms and thereby saving storage.

Okay, yes; that makes sense. Thanks for that. Do you have an idea of what your current sort of monthly revenue loss from Hanjin is to-date and this year in the first quarter?

For the quarter, from a revenue standpoint, there was roughly about a $7 million decrease from Hanjin.

Yes, and I guess, is that – I assume that trend has come off significantly for right now or are you actually outside of the insurance window now? Or actually it doesn't really matter because lost revenue is lost revenue?

The lost revenue, as you said, is lost revenue. I think the important point is, we are working very hard to put containers that we recover back out on lease and we're making progress there and that sort of gets the revenue back on – coming back.

And, Doug, I think you understand, our insurance covers several items, but with respect to revenue, what it covers is up to 181 days, I believe, after the date of insolvency until the date at which we recover the container.

Okay, great. Thanks. That's all my questions.

Thank you, Doug.

Thank you. [Operator Instructions] Our next question comes from Bob Napoli from William Blair.

Thank you. And, Robert, it's been great talking to you over the years, and good luck in retirement; obviously, you will still be involved. A big picture question, if I could. Looking at your results historically, for 12 years up through 2014, Textainer was able to deliver a return on equity, on average of – and relatively consistently with a little – a few bumps of over 20%, or around 20%; let's call it 20%. And, obviously, the industry has changed radically and it takes time to work into the numbers, but is there anything in the fundamentals of the industry that – do you believe prevents you from getting back to the returns that you had for those 12 years that I have the data? And I'm not sure how much before that do you expect to be able to get back to those types of returns and how long does it take?

Bob, that's an excellent question. We have said – I know I have said before in past earnings calls, that the level of return on equity that this industry enjoyed for many years, that it was unlikely to return to that level of ROE in the future, given the increased competition, the availability of capital. Frankly, like many other industries, simply the great transparency that there is, everybody knows what the cost of the container is, interest rates. All of these factors contributed to bringing down the ROE over the years. Interestingly, we now have seen the margins on container rentals increased dramatically. Personally, I think it's difficult to say whether we see this margin continue throughout 2017, but I do believe there is many forces at work to maintain a much higher margin than we saw for the last two years. Those forces include the fact that many of the container leasing companies, and as a result of Hanjin, suffered significant losses. The manufacturers themselves are selling containers below their production costs. I believe many of the actors in the industry now are, for lack of a better term, getting religion, and looking at what's happened over the past few years. And, as a result, we will see improving margins. I don't know if we will return to the level that you mentioned; I think that would be a challenge.

And when – and, obviously, I think there's been consolidation in the industry and certainly your public company peers are under pressure to get those ROEs into double-digits. How long is it – I mean by the end of 2017, if the environment holds – I know it's a big if, around current levels, would you start to see those accounting numbers improving radically by third quarter, fourth quarter? Does it – how long does it take to work through?

Bob, it's difficult to answer the question. I think there's a lot of variables, as we've said, we think the impairments will continue to wane. We still will be – sort of have more depreciation expense, so it's difficult because there are so many variables in that question, but I think the main point is that there are positive trends now, and we're on the right trajectory.

And, Bob, something else to keep in mind. Over the past several years, we had the rental rates on new containers fall as low as – less than $0.25 per CEU per day. But the average rate on our fleet didn't fall to that level. Remember that we only have 7%, 8%, 10%, and so happens this year, very low percentage, 7.2% of our fleet that's rolling over this year. But in most years, the figure is somewhere between 7% to 11%. So the repricing that happens on our fleet as the market declines is gradual. But the opposite side of that is as the market improves, you will only see the improvement over a period of time as existing leases mature and containers are put on new leases and as new containers are purchased and put out on lease. So this isn't an industry where you are going to see a dramatic turnaround in the space of a quarter or two.

And the last point, just to add to what Phil said, I think we made the point earlier, Bob, that if you look at the average per diem rate in our fleet, we are now at a point where new containers are being leased out at a higher rate. So the headwinds that we've talked about for a good little while now has really subsided and we're finally on the other side of that.

And maybe if I could jump in one more time here – and I'm sorry for bouncing back and forth between Hilliard and I, but this is a very good question that I think it deserves a thorough answer. And part of what I've said may sound somewhat negative, but I think it's important to keep in mind that the changes we've seen are hugely dramatic. I don't believe any industry observer sitting at the time that Hanjin went bankrupt at the end of August, beginning of September, would've said, you know, I foresee container prices at the $2,100 level by the end of the year. Nobody expected that, so certainly what's happened – this happened very rapidly. It's very dramatic and the improvements are significant. And I can tell you, we are extremely positive – extremely pleased to what we're seeing in the industry. Our level of impairments on containers sales has declined dramatically. We're seeing gains on sales on containers because of used container price increases. Renegotiations of existing leases has been made much easier isn't the right word, but much more effective at obtaining more attractive terms because of what's happened in the industry. So I don't want to – I'm not trying to throw any cold water on this. The changes we've seen are dramatic and hugely positive.

Right. Some pieces of that income statement will turn quick, like the gain on sale versus loss on sale, and…

That’s a good point, yes. That will be affected much more rapidly than the average rate of the – average rental rate of containers in our fleet.

And we started to see that this quarter.

And I guess I would say I mean the residual values that you are now using suddenly look pretty conservative. Is that fair to say?

Well, we've got the lowest residual values in the industry. We look at our depreciation policy every year, every quarter. I think where it is right now is an acceptable level. We're – certainly the increased depreciation expense we're facing is a challenge, but I think where we have our residual value is appropriate.

All right. Thank you very much. I really appreciate it.

Thank you very much for your time. Thank you. And we have no further questions at this time. I will turn the call back to Hilliard Terry for closing remarks.

Okay. I would like to turn the call over to Robert Pedersen just for a few final comments.

Thank you, Hilliard. As Phil mentioned, I will, indeed, be retiring at the end of March after 25 years with Textainer. I have enjoyed every minute of my time here and in the transportation industry since 1978. I have worked and trained with my successor, Olivier Ghesquiere, for more than a year and he is ready to take us to the next level. I thank Phil, the Textainer team, our Board, our customers, and all of you out there for your support during my career. I am very pleased that I have been offered to continue my association with Textainer as a director of Textainer Group Holdings starting in May. Helane Becker, Bob Napoli, thank you for your best wishes. Helane, I will try my best to make retirement as great as it is supposed to be. Thank you.

Thank you all for taking the time to join our call today. Again, thank you, Robert. We look forward to speaking to you next quarter.

Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for your participation. You may now disconnect.