TAL International Group, Inc. Q3 2008 Earnings Call Transcript

Nov. 6.08 | About: Triton International (TRTN)

TAL International Group, Inc. (TAL) Q3 2008 Earnings Call Transcript November 6, 2008 9:00 AM ET


Jeff Casucci – Vice President, Treasury and Investor Relations

Brian Sondey – President, Chief Executive Officer, Director

Chand Khan – Chief Financial Officer, Senior Vice President


Mike Halloran – Robert W. Baird

Greg Lewis – Credit Suisse

Rick Shane – Jefferies & Company


Hello. Welcome to the TAL International Group third quarter 2008 results conference call. As a reminder, all participants will be in listen only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (Operator's Instructions). The conference is being recorded. At this time, I would like to turn the conference over to Jeff Casucci, Vice President of Treasury and Investor Relations. Please go ahead.

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 2008 results which were reported yesterday evening. Joining me on this morning's call from TAL are Brian Sondey, President and Chief Executive Officer, and Chand Khan, Vice President and Chief Financial Officer.

Before I turn the call over to Brian and Chand, I would like to point out that this conference call my 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 conditions, expected future developments, and other factors it believes are appropriate.

Any such 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 it has made herein, despite any subsequent changes that the company may make in its views, estimates, plans, or outlook for the future. These statements involve risk and uncertainties, are only predictions, and my differ materially from the actual future events or results.

For a discussion of these risks and uncertainties, please see the risk factors listed in the company's annual report filed on form 10(k) with the Securities and Exchange Commission in march of 2008.

With these formalities out of the way, I would like to turn the call over to Brian Sondey. Brian?

Brian Sondey

Thanks, Jeff, and welcome to TAL International's third quarter 2008 conference call. TAL achieved another quarter of excellent operational and financial results in the third quarter of 2008. In the third quarter we achieved strong operational performance in all of our major product lines. Container pickups were quite strong throughout the third quarter and our core utilization, excluding new factory units, increased to 95.8% by the end of the quarter.

Used container selling prices remained high in the quarter and container trading volumes were excellent, leading to exceptional disposal gains and trading margins. We also started to see our average lease rates for dry containers begin to increase due to the pickup of new containers onto leases reflecting the higher cost of new containers which prevailed over the summer.

Financially, our adjusted pretax income increased over 37%, compared to the third quarter of 2007 and our annualized adjusted pretax or cash return on equity, increased over 30% in the third quarter of 2008.

For the nine months ending September 30th, 2008, our adjusted pretax income has increased 30% from the first nine months of 2007. We have also continued to grow our business this year. We have invested over $400 million in new containers this year and our revenue earning assets are up by about 15% from beginning of the year.

Our excellent performance so far in 2008 has been supported by a favorable market environment. Overall global trade growth has remained solid despite the economic slowdown in developed countries. And Clarkson's Research Services currently estimates our containerized trade growth will be about 7% this year.

Container leasing demand has been further supported this year by reduced direct container purchases by our shipping line customers and the slow steaming of vessels that has reduced the velocity of container flows. We have also benefited for most of this year by high steel and new container prices. High new container prices provides significant support to the release and disposal value of our existing container fleet.

Currently however, it appears that our market environment is likely to become more challenging. Expectations for global economic growth have worsened over the last few months. In response to this, Clarkson Research Studies has lowered its forecast for 2009 containerized trade growth from 10% to 7%, and several large shipping lines have already started laying up vessels to try to bring vessel capacity more in line with trade volumes.

Also, steel prices have fallen over 40% in China from the peak prices reached in the summer. There have not been any large container orders in the last few weeks due to the end of the summer peak season for dry containers, so we don't yet have a good measure for the current price of new containers, however, our analysis of the input costs for containers implies that new 20 foot dry container prices should be in the $2,000 range based on steel prices currently, down from over $2,600 this summer.

Another challenge we are increasingly concerned about is the increased risk of customer defaults. In general, we are concerned that our customers might find themselves increasingly squeezed by weak freight rates due to excess vessel capacity and tight capital markets that will make it difficult for the shipping lines to fund their committed vessel orders and any operating losses they may incur.

A number of major shipping lines are currently reporting steep decreases in their financial results for the second half of 2008 and we have already seen smaller customers being pushed out of business. Over the last few months, at least five small shipping lines have ceased operations.

We had exposure to two of these lines, and in the third quarter we established a $1.9 million reserve related to a default on a finance lease for one of them. Fortunately though, outside of these specific cases, we have not yet seen a general deterioration in the payment performance of our customers.

While our market may become more challenging, I think it is important to note that we will benefit from our strong operating momentum and that there are several features of the current market that are attractive for us. In regards to momentum, our leasing revenue should be well protected by our current high utilization and the roughly 80% of our units that are on finance leases, long-term leases, or other leases with significant drop-off protections.

In addition, while there was a lot of concern in the industry about excess vessel capacity, there is not currently a concern with an excess supply of containers. We expect the container orders will be quite low again next year due to the tight capital market and issued against the port (ph 00:08:28) the utilization of our existing fleet and lead to a larger share of new container orders going to the leasing industry.

Limited buying of new containers should also constrain the supply of these containers being sold into the aftermarket, and this should help protect the selling prices for our container disposals.

Partially because of these factors we have not seen much change in our business metrics over the last three months, despite the financial turmoil. Container pickups are down in October from the level we achieved throughout the third quarter, but this is usually the case in October and our core utilization, excluding new factory units, remained over 95% at the end of October.

Used container inventories continue to be tight and the selling prices we are getting for our used containers held fairly firm in October as well. I will now hand the call over to Chand Khan, our CFO.

Chand Khan

Thank you, Brian. Good morning, and thank you for joining us. It is my pleasure to review the results of our third quarter ending September 30th, 2008. As we've said in the past, our financial results were affected by unrealized gains or losses on interest rate swaps which we consider non operational.

During this call, we will only review our adjusted EBIDTA, adjusted pretax, and adjusted net income., since we believe these financial measures more accurately reflect the company's operational performance. For a full reconciliation between our reported financial results and our adjusted financial results, please see our press release.

We continue to remind our investors that we believe that our adjusted pretax results are the best measure of our business. Since we pay very little income taxes due to our excess tax appreciation over book depreciation.

Adjusted pretax income in the third quarter of 2008 increased $8 million or 37% to $29.9 million versus the third quarter of 2007. Our adjusted pretax EPS was $0.91 for the third quarter of 2008. Adjusted new income for the third quarter of 2008 increased $5.2 million or 37% to $19.3 million. EPS also increased 40% to $0.59 per fully diluted common share. Our EPS increased at a higher percent than the percentage increase in our pretax income due to share repurchases of the current first quarter of 2008.

Our adjusted EBITDA, which includes principle payments on finance lease for the third quarter of 2008 increased $14.2 million or 21% to $81.7 million versus the third quarter of 2007. We continue to achieve favored results from many of the items discussed on previous calls. I will visit a few of these items.

The first item is leasing revenue. In the third quarter of 2008, our leasing revenue increased $8.6 million or 12% versus the third quarter of 2007, as a result of our fleet growth. In conjunction with our fleet growth, our interest expense increased $2.8 million and our depreciation expense increased $2.4 million.

The second item is gain on sale of our used containers which remains strong through the third quarter of 2008, increasing $4.7 million to $7.6 million versus the third quarter of 2007, mainly due to strong selling prices.

We continue to increase the sale age of our containers. The average sale age of our containers during the first nine months of 2008 was 14.1 years versus 12.4 years in 2005. As a result of the increase in sale age of our containers at the end of the third quarter of 2008, we had approximately 130,000 TUs of fully depreciated containers.

The third item is gain on sales of container portfolios. Gain on sale of container portfolios is generated when we sell younger containers, most of which are on lease to customers. We continue to have ongoing involvement with these units.

In the third quarter of 2008, we recorded a gain of $2.8 million from these transactions.

The fourth item is our equipment trading margin which consists of equipment trading revenue less equipment trading expenses. Equipment trading margin increased $1.9 million in the third quarter of 2008 versus the third quarter of 2007, mainly due to an increase in the number of units sold.

Also in the third quarter of 2008, we experienced an increase of $2.9 million in selling and administrative expenses. This was partially due to an increase in incentive compensation as a result of increased profitability.

In addition, we recorded foreign currency losses on certain of our foreign denominated assets due to the recent strength of the U.S. dollar.

Given the disruption in the credit market, I would like to review our cash flow and debt. First, our cash flow. In the last 12 months, our adjusted EBITDA was approximately $305 million and the net book value of containers sold were about $60 million. The gain from the sale of these containers are included in adjusted EBITDA. Hence, our total cash inflow for the 12 months was approximately $365 million.

We estimate that in 2009 we will need slightly over $200 million to meet our scheduled principle and interest payments on our now outstanding debt. If 2009 is anything like the last 12 months, then we should have a fairly good cushion to support future container purchases, even without any new funding.

Now, let us look at our debt. Since the summer of 2007, the start of the credit crunch, we have raised slightly over $440 million in additional funding. In general, the emphasizing of our debt matches the runoff of our assets, except for $100 million of revolving credit facility which matures in 2012. We expect to end 2008 with available cash and borrowing capacity of about $100 million.

Let me make a few comments on our revenue earning assets which consists of leasing equipment, net investment and finance lease, and equipment held for sale. Through the end of October of 2008 we have purchased or have commitments to purchase approximately 142,000 TU or $421 million of revenue earning assets.

Over the last 21 months, we've acquired over $800 million of equipment which represents over 45% of the carrying value of our revenue earning assets. The majority of these units were relapsed to our customers on five to eight year operating leases. Our revenue earning assets grew approximately $217 million during the nine months ending September 30th, 2008, to approximately $1.7 billion.

I will now return it to Brian for some additional comments.

Brian Sondey

Thank you, Chand. I will now finish the prepared part of the call with some thoughts on our current outlook. As we look forward into the fourth quarter of 2008, we expect that our major business drives; our utilization, average lease rates, operating expense ratios, and used container selling prices, may be slightly down from the third quarter level, mainly due to the end of the peak season for dry containers, but also due to lower container prices and the slowing of the world economy.

In addition, in the fourth quarter, we do not expect to repeat the gain on sale of the container portfolios. However, we will see a benefit again in November when another vintage year of containers reaches the end of its depreciable life. Overall, we expect that our results for the fourth quarter of 2008 will be below the third quarter level, but we should still track ahead of our fourth quarter results from 2007.

In summary, we are very pleased with an outstanding operational performance and financial results in the third quarter and first nine months of 2008, though we clearly recognize that our market environment will be more challenging as we go forward.

For the end of September, our adjusted pretax results are up 30% from last year. Our strong operating momentum should keep us ahead of last year's results in the fourth quarter of 2008 as well, and while we are concerned about how the world economy will shape up in 2009, and in particular what this will mean for container prices and our customers' cash flow, we are not yet experiencing a sizable deterioration in our operating metrics and we believe that global containerized trade will be better than most sectors of the economy, at least in terms of volume growth, and believe that our strong equity cash flow, our good liquidity position, our focus on the largest shipping lines, and our strong lease portfolio, will put us in a good position to ride out the challenges we expect to face in the next few quarters.

I would now like to open up the discussion for any questions.

Question-and-Answer Session


(Operator's Instructions). The first question is from Mike Halloran of Robert W. Baird. Please go ahead.

Mike Halloran – Robert W. Baird

Good morning.

Brian Sondey

Good morning, Mike.

Mike Halloran – Robert W. Baird

So, when you look to next year, what sort of capital requirements are you expecting, and then in the context of that, could you discuss your free cash flow characteristics in what looks to be a weakening demand environment?

Brian Sondey

Sure. Well, I think what Chand tried to go through is that given the structure of our debt, we don't really have any capital requirements. Our debt generally pays off as our assets amortize and so for the existing business, there's not really any refinancing requirements at all and so the amount of money that we need to raise next year really is just how much do we want to spend on new containers.

We tried to lay a little bit out on our liquidity position. We estimate about 100 million left in our existing facilities. Also, if you look back over the last four quarters, we have a difference between our cash inflows and our expected next 12 months debt service of something in the $160 million range that's available for capital spending and for dividends, and so assuming our cash inflows remain something close to the last 12 month levels, that would imply about $250-$260 million available for dividends and capital spending, even if we don't raise any new money.

We are of course out there talking with banks at the moment and are hoping that we'll be able to raise more financing, probably as early as next year, but again, we don't have any obligations we need to finance, this is just is how much are we going to have available to invest in the business.

In terms of our outlook for investment for 2009, it's of course, like a lot of things these days, a little uncertain, and in general we haven't, even in the past, given specific targets for investment or for growth. But in general, as long as things don't go too far off the rails, we think it's not going to be a terrible market environment for us. Growth is currently forecast at least to be in about the same range in terms of overall volume growth as it was in 2008, and again we expect to see the same dynamic with the shipping lines reducing their purchases, wanting to save their financing for the vessel orders they have to finance, and for capital being fairly constrained or even more constrained with our smaller customers than the constraints that we're facing.

And so, obviously I don't really want to predict where the economy is going to go, but if that scenario plays out, we think we'll have good opportunities to invest next year.

Mike Halloran – Robert W. Baird

And so, from a free cash flow characteristic, it seems that potentially, at least modestly lower CapEx, does that improve the level of free cash flow you can have next year? Is that how the model would play out or would lower gains potentially offset that?

Brian Sondey

Well, certainly all else being equal in terms of our financial performance, less spending on CapEx means more equity cash flow. As we grow our business, we typically finance about 80% of the cost of any new container purchases with debt and something like 20% out of our equity cash flow. This year we've invested $400 million or so in new containers and that obviously is a big use of equity cash flow financing the equity component of that, and so if new container purchases were to decrease, that does leave more equity cash flow after capital spending, all else being equal.

Mike Halloran – Robert W. Baird

And then related to that from a dividend perspective, how secure do you guys feel the current dividend level and what sort of scenario would you have to see in order for that dividend to start coming down?

Brian Sondey

Well, I think the dividend is well covered right now by our existing equity cash flow. When we talk about our dividends we usually talk about it quarter by quarter, and every board meeting that we have prior to issuing our earnings and declaring our dividend, we talk about equity cash flow and what's available to pay the dividend and we'll continue to do that.

Mike Halloran – Robert W. Baird

And then you seem relatively confident on the growth prospects, obviously some slowing, but relatively confident on the growth prospects, and the asset under management growth in particular has been very strong this year. When does that start slowing more significantly, and do you think at some point that that stays positive through '09?

Brian Sondey

I think it all really depends on what happens in the marketplace. It's been, for 25 or 30 years, global containerized trade has grown more rapidly than world GDP by something in the range of 3-6% every year. Nothing I have seen so far indicates that's going to change, and I think when we look at what the industry forecasters are talking about, most people are talking about growth in the 6-7-8% range, just following a simple equation of world GDP growth in the 3% range for next year, down a little bit from this year, plus about 3-4% from the outperformance of containerized growth relative to global GDP growth.

I don't claim certainly to have a crystal ball better than that, and so a lot of my comments are just based upon what we've seen in the last 25, 30 years in regards to growth and what we hear from talking with our customers and reading the industry forecasts, and so my comments are mainly that if we do again see containerized trade growth in the 7% or so range in 2009 and if we see again the tight capital markets constraining new container orders by our customers, that that environment this year played out to be a very good investment year for us and if that's the environment we see again next year, I think we'll have good opportunities again.

Mike Halloran – Robert W. Baird

Fair enough. And then qualitatively, switching gears a little bit here, when you look at the aging of your box portfolio, what sort of tailwind does that create for next year from an increased profitability standpoint? Looking at it differently, when you exclude the gain side, does the benefit from the increased profitability from the aging of the fleet, does that support earnings growth for '09 and is that enough of a tailwind for that?

Brian Sondey

Well, as we look — I think we talked a fair bit last conference call about how looking at the earnings growth of the business excluding the gains, it was slower than the growth of our revenue earning assets, and we discussed part of that is due to the fact that a very large percentage, I think it was 50% or more of the dollar value of our assets were for containers in their first or second year of service and just given our heavy investment over the last few years, and just given the accounting of operating leases, those containers tend to have relatively low profitability on an accounting basis in the early years of their life.

And so that if we were to reduce our investment and the portion of our containers that are in the first few years were to decrease, that would have the effect of, assuming again all else equal, of improving the accounting returns in the business. That said, we are getting decent profitability growth from just our core leasing business.

As I look at it, say this quarter compared to a year ago, the core profitability of the business, excluding gains again which I do consider still to be part of the leasing equation, is up 7-8% this year, especially if you need to adjust S&A to take out the bonus percentages that are related to the very strong selling gains in trading margins we're getting. And so if you normalize the S&A, I think you actually do see a decent amount of just core leasing profitability growth.

Again, I don't want to give specific forecasts for how that's going to shape up next year, but to the extent that we were to invest less in new containers and everything else was to stay the same, you would see an improvement in the accounting returns.

Mike Halloran – Robert W. Baird

Great. Thanks, Brian.


The next question comes from Greg Lewis of Credit Suisse. Please go ahead.

Greg Lewis – Credit Suisse

Thank you and good morning.

Brian Sondey

Good morning, Greg.

Greg Lewis – Credit Suisse

I guess my first question is related to the increase in debt expense. I guess two questions; one is, historically, if we were to look back say to the late '90s during the Asian Financial Crisis and maybe even back into the early '90s, how challenging could the debt expense be? Or is this sort of — these are a couple of your more risky clients, you've taken a debt expense and maybe you don't expect much debt expense going forward?

Brian Sondey

I think you mean in terms of the credit provisions?

Greg Lewis – Credit Suisse


Brian Sondey

Yeah. I mean, I think certainly we saw during the late '90s during the Asia crisis, an increased level of defaults mainly relating to smaller customers; coastal traders in South America, inter-island traders in Indonesia, things like that, and over the last quarter, obviously our bad debt expense was elevated, again, really related to one customer in particular and a finance lease we had with that customer that's currently undergoing a recovery.

Certainly we think, as we mentioned in both the press release and my comments, that we do see increased bad debt pressures going forward for the next few quarters related to the combination of weak freight rates due to really vessel over expansion by the shipping lines, and just the large amount of capital spending they need to finance for those vessel orders, and the tight capital markets may be making that difficult.

Again, we don't really forecast specific line items on what we expect to see other than to note that something like 80% or more of our containers are on hire to the top 20-25 shipping lines. In general they have enjoyed very strong profitability over the last four or five years and generally have used that money to reinvest in their businesses, so that to the extent we are heading into a tough time for the shipping lines, the big shipping lines at least are starting off in quite good shape.

For the smaller customers, that sort of remaining 20% or so of our portfolio, we are very mindful of the risks there and we're trying to be quite selective in who we give our containers to and trying to be quite aggressive in taking action once we start to see payment performance slide.

But again, as I mentioned in my comments, we haven't yet seen a general deterioration in the payment performance outside of the customers that have ceased operations and so we are focused on it, we're concerned about it, but we don't think it's going to turn into a situation where the major shipping lines face defaults, but we certainly remain on guard.

Greg Lewis – Credit Suisse

Okay. Great. And just shifting gears a little bit, when I look at the fleet, clearly the majority of it is on long-term leases, but it looks like maybe around 25% of the fleet is on more of the spot master type of leases. Have you received any notifications from customers that they would not be interested in sort of re-extending those master leases? And when we think about it going forward, should we expect say, every quarter, some of those leases to potentially come off contract?

Brian Sondey

Well, we constantly see containers coming off hire. Every month of the year, even in the best month of the best year, we get something in the range of 6-7,000 containers returned by our customers off lease, for logistical reasons, or age reasons or whatever, and so we always have a constant turn of containers coming off hire and us putting them back on lease.

In terms of our portfolio, we have I think about 70% of our containers on long-term leases or finance leases, but of that remaining 30% that's not on long-term leases or finance leases, those tend to be pretty well locked up as well. In general, I think as we've discussed, we have a philosophy that we want to be relatively easy and cheap to pick up and more difficult to get out, and the majority — as a matter of fact, the vast majority of our short-term leases have significant drop-off protections and either containers can only be returned in Asia where the demand locations are or there's very large drop-off fees based upon the time of containers being on hire or the locational drop-off fees. And so, in general we feel pretty good about the portfolio.

I think the other thing that's nice about containers as opposed to vessels is there is no excess capacity of containers right now, and I don't think — we certainly don't expect there will be next year. I mean, as we've discussed many times, we order our containers only a few months in advance and so there's never more than a three or four or 5% of the world's container fleet on order, and volume growth in containerized trade has never been less than four or 5%, and as well, about 5% of the containers age out of the business every year.

And so we don't, barring the world being tremendously worse than we expect, we don't think that shipping lines in general have too many containers in their fleets, and certainly not as you get into next year, and so we don't expect to see any kind of — and again, you never know, but we don't expect to see any kind of wholesale liquidation of our containers not on long-term lease or finance lease.

Greg Lewis – Credit Suisse

Okay. Great. And then just really quick, I mean, clearly the equipment trading revenue has been a big driver over the last nine months, have you seen any sort of slowdown in October in that business?

Brian Sondey

Well, we said we haven't seen any significant change in prices that we're getting either for our used containers that we're selling or for the third party containers that we're trading. We do think that in general, if we're right that capital markets will be fairly tight again next year and shipping lines buy relatively few containers, that will certainly constrain the number of containers being sold, and it could have some limit on our volume of our third party trading business, but that was actually sort of the case again in 2008 that new purchases were fairly constrained and we just found that we were able to leverage our ability to sell containers retail and make a margin by buying them wholesale and leveraging them through our sales network to sell them to the end users of containers.

And while I don't want to take our performance in the last 12 months and straight-line it out for the last 12 months because it really has been exceptional, we do think that that's — there really is value in our retail network and we expect to be able to leverage that value again for next year.

Greg Lewis – Credit Suisse

Okay. So it sounds like over the next, say Q4, Q1, you're not really expecting a sharp decrease in equipment trading revenue, just softens?

Brian Sondey

Well, again, we don't really want to get into a specific line of forecasts, but in general we haven't seen a step function change in the container disposal market.

Greg Lewis – Credit Suisse

Okay. Great. Thank you.


Are you ready for the next question?

Brian Sondey



The next question is from Rick Shane of Jefferies. Please go ahead.

Rick Shane – Jefferies & Company

Hey, guys, thanks for taking my question, and I apologize, we have a number of calls today so I missed the first part of the call and if you addressed this, I apologize. It follows on the question on before, the previous caller's question; one of the things that we've heard is that effectively, the manufacturers in China at this point are shut down, there's really no — there are effectively no orders in place as you sort of deal with both the normal seasonal slowdown and disciplined buying by the industry given a cyclical slowdown. Is that common that the factories would shut down at this point in the year and how long does it take once orders start to come back in for them to basically retool the factories and get everything going again?

Brian Sondey

Certainly it is the case that the factories have either closed or significantly ramped back their production capacity over the last month or two. There are still some factory lines open, but it's much reduced from where we were in the summertime and where we are typically.

Quite frankly, I think that's one of the great strengths of our business that the capacity of new containers coming into the market really does very closely follow what's needed for the market and so you don't have the manufacturers building inventory or keeping their lines running. (Inaudible 00:35:35) simply stop producing and the workers in China go home, and that helps sort of maintain a pretty constant balance of the supply and demand for containers, which is why again I've mentioned a few times we don't expect to face an excess supply of containers next year.

And so overall for us, we think that's actually quite a positive feature.

In terms of how long it takes them to get up and running, most container factories close in China for three to four weeks or a month or so, around Chinese New Year, and so they're fairly used to the process of gearing back up after they've been closed for awhile. If they remain closed from now through Chinese New Year, that's certainly longer than usual and so probably would be a more lengthy ramp up time again in terms of trying to get the workers back and things after Chinese New Year.

But again, we see that as being certainly positive for us in supporting the utilization of our existing container fleet and limiting the flow of containers into the aftermarket.

Rick Shane – Jefferies & Company

Got it. Brian, do you currently have any orders on the books?

Brian Sondey

We always do. As you'll see in the queue that comes out, about 3% of our container fleet remains off hire in the factory . We have (inaudible 00:36:50) these commitments for a portion of that, but we always have some new inventory that we want available for our customers.

Rick Shane – Jefferies & Company

Got it. And last question and thank you for indulging so many, in the context — I mean, it's end of the year, normal seasonal slowdown, you've done this a long time, can you put where we stand right now headed into 2009 into context for other cycles that you've seen? What year is this most comparable to or have we never seen anything like this before?

Brian Sondey

Yeah. I think it reminds me quite a bit, so far at least — let's take the credit market aspect out of it, but in terms of the going from relatively strong growth to slower growth fairly quickly, what happened at the end of 2000 where 1999 and 2000 were fairly strong years for the shipping industry. They were relatively good years for the leasing companies in terms of container demand at least, and then trade growth slowed in 2001.

Relative to there, the leasing industry is in much better shape. Utilization for us prior to 2001 was sort of in the low 80%, now it's in the mid 90s. Back in the late '90s and early 2000s, our business was mainly a short-term leasing business, now it's very much a long-term leasing business. And so as we look in 2009, our view is if the year ends up being sort of like 2008, maybe a little bit weaker, but in the same range, we expect to have a fairly good year again with the utilization being protected by our lease portfolio and the reduced buying by our customers.

If the world falls off a cliff, you don't know what's going to happen, but hopefully that won't be the case.

Rick Shane – Jefferies & Company

Got it. Brian, Jeff, thank you very much.


(Operator's Instructions). We have a follow up from Mike Halloran of Robert W. Baird. Please go ahead.

Mike Halloran – Robert W. Baird

Just further on that last series of questions there. When you look at the previous cycles, obviously things are much stronger from the industry's perspective and also from TAL's perspective as well, but could you talk a little bit about the gain line and how low that got last cycle and if you think if it's even feasible for it to get back towards that level this cycle given some of the dynamics you've laid out in the call today?

Brian Sondey

Yeah. I think as we've talked in the past, the last time we went into this sort of a down cycle of 2000 there was a couple of things going on. One was cyclical which was sort of coming off of a relatively strong economy in '99 and 2000 and going into a recessionary environment, but the other one that was actually stronger for us and for the leasing industry was the aftermath of the Asia crisis and when the Asia crisis happened, as I think we've talked, container flows changed dramatically and leasing companies ended up with a large surplus of containers in North America in Europe, with no leasing demand in those places which actually had been different in the mid '90s.

And so, we, as a company — I think the industry in general, but we had probably 20% of our containers on the ground off hire in North America and Europe in 2001, and so we spent a lot of money moving those containers back to Asia, but also we sold very large volumes of containers at sort of wholesale liquidation prices just to get out of the storage and deterioration of those containers. And so we actually sold at losses for a couple years in 2001 and 2002, but not really related to the cycle, much more just due to the inventory of containers we had in surplus locations at that time.

When we look at our leasing inventory today, we have less than one half of 1% of our containers in North America and Europe in total available for lease, and so we don't face those same kind of pressures now heading into the cycle and so our expectation is at least that we wouldn't see the same kind of pricing effects.

But that said, we really don't forecast particular line items, but other than to note that right now we haven't seen any deterioration in selling prices, selling prices remain quite high, and we'll have to see how it shapes up.

Mike Halloran – Robert W. Baird

That's fair. And then on the utilization side, I guess a similar question. Obviously the low 80s seems like something that's positively out of reach.

Brian Sondey

Well, it's a very different business model. I always describe our utilization in two components. The first of which is the portion of our containers on long-term leases or finance leases, and the second component is what portions of the containers not on long-term lease do we have on hire. Back in 2000 we probably had say 50% or maybe slightly less than that, maybe 45% of our containers on long-term lease, and probably at the trough in 2001 we were down to maybe 50 or 55% utilization for that portion not on long-term lease, and so utilization in total bottomed out maybe at 75-76%.

This year, right now we have about 70% of our containers on long-term lease, and even if we — and as I mentioned also, a lot of our short-term lease containers are on very well protected leases. But even leaving that aside for now, even if we were to see our utilization for that remaining 30% not on long-term lease dropping into the 60% range, that still implies overall utilization in the close to 90% range.

And so, barring a significant change in our lease portfolio which actually can't happen that quickly, or real sustained prolonged down market, we think our utilization should stay pretty strong with any kind of normal market environment.

Mike Halloran – Robert W. Baird

That's very helpful. And then with valuations so low for the industry right now, why would this not prompt some sort of consolidation from a marketplace standpoint with the big players? Is it just access to capital or do you just see that there's not necessarily a lot of interest in consolidation at this point?

Brian Sondey

I think we'll have to see. Certainly we are quite aware of the valuations for ourselves as well as our competitors and it does seem to present some opportunities. Whether companies are willing to sell themselves at today's valuations is another question of course and — but as we've stated, we think consolidation makes sense. There are significant cost savings to be had in any consolidation. We think our customers would welcome it in terms of increasing the supply capabilities and operating capabilities of the surviving entities and that's really just a matter of we look at consolidation opportunities — how does the return we expect to get on that opportunity compare to the return we expect to get from investing in new containers or other transactions like sale leasebacks and things, and we'll continue to evaluate it in that way.

Mike Halloran – Robert W. Baird

Related to sale leasebacks, that was actually my next question, any opportunities there? Any interests from your standpoint on going the sale leaseback route?

Brian Sondey

Well, we're always interested. We think it's a good way to add containers into your fleet that are immediately on hire. We're hopeful at least that if our customers want to raise some capital or sort of monetize their container assets that that'll be an interesting opportunity for them. We're, like a lot of our competitors, we're having discussions right now on those things, but it's hard to say what's actually going to materialize.

We've had that as an interest of ours for a number of years now. We've done some, but nothing really that substantial and we're hoping at least that maybe 2009 will give us more opportunities, but it remains to be seen.

Mike Halloran – Robert W. Baird

And then last question; could you just discuss share buyback and your intentions there?

Brian Sondey

Well, we did a buyback I think it was in the fourth quarter and first quarter of this year when our stock traded down into the twenties which at that time seemed like an interesting investment opportunity for us and obviously we're below that now, and so it remains something of interest. I would say in general we don't want to be traders of our stock and our stock's been low now for six or eight weeks and we don't necessarily want to be in the market and out of the market in terms of buybacks, but we are mindful of where it is and we'll keep that in mind.

Mike Halloran – Robert W. Baird

Appreciate the time, Brian. Take care.


There are no more questions at this time. I would like to now turn the conference back over to Brian Sondey for closing remarks.

Brian Sondey

Thank you. And again, we'd just like to thank all of you for your continued interest in TAL and we'll be looking forward to providing updates in the future. Thanks very much.


Thank you all very much for participating in the TAL results conference call. This concludes today's events. You may now disconnect your lines.

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