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TAL International Group, Inc. (NYSE:TAL)

Q4 2008 Earnings Call

February 26, 2009 9:00 am ET

Executives

Jeff Casucci - VP of Treasury and IR

Brian Sondey - President and CEO

Chand Khan - CFO

Analysts

Richard Shane - Jefferies

Gregory Lewis - Credit Suisse

Mike Hallora - Robert W. Baird

Operator

Hello. This is the Chorus Call Operator. Welcome to the TAL International Group fourth quarter and year ended December 31, 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 Instructions). The conference is being recorded.

At this time, I would like to turn the conference over to Jeff Casucci, Vice President, Treasury and Investor Relations.

Jeff 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 2008 results, which we reported yesterday evening.

Joining me on this morning's call from TAL are Brian Sondey, President and Chief Executive Officer and Chand Khan, Chief Financial Officer.

Before I turn the call over to Brian and Chand, 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 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 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 factors listed in the company's Annual Report filed on Form 10-K with the Securities and Exchange Commission on March 10, 2008.

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's fourth quarter 2008 Earnings Call. 2008 was a year that had two distinct phases. For the first three quarters of the year, TAL benefited from favorable market conditions and we delivered outstanding operational and financial results. While in the fourth quarter of 2008, market conditions changed significantly, as the financial crisis turned into a deep global recession.

Our financial results remained solid in the fourth quarter finishing off a great year, but market and operating trends are negative as we head into 2009.

As I mentioned, TAL delivered outstanding results for the full year of 2008, and our financial results in the fourth quarter were also strong. For the full year of 2008, leasing revenue increased 12% from 2007, due to our strong fleet growth.

Adjusted EBITDA, including principal payments on finance leases, increased 16% due to our revenue growth, strong disposal gains and increased trading margins. Adjusted pre-tax income increased 21% from 2007, while adjusted EPS increased 25% due to our profitability growth and the impact of our share repurchases. And our adjusted pre-tax, or cash return on equity increased six percentage points to reach 28% in 2008.

Our performance in the fourth quarter of 2008 was down from more exceptional performance in the third quarter of 2008, but it was still quite strong. Adjusted EPS was $0.50, up from $0.48 in the fourth quarter of 2007 and our annualized adjusted pre-tax, or cash return on equity was 26% for the quarter.

For the first three quarters of 2008, our performance was supported by continued growth in world containerized trade, high prices for new containers, limited direct purchases of containers by our shipping line customers and strong selling prices for used containers.

This environment allowed us to make large investments in new containers, while maintaining high utilization and it facilitated strong gains in the sale of our older containers.

In the fourth quarter of 2008, many of these positive environmental factors turned negative. Containerized trade volumes dropped significantly in November. Since November, many of our customers are reporting that their cargo volumes are down 15% or more from their prior year.

This sharp decrease in trade volumes has led to a large increase in container drop-offs and virtually no demand for container pick-ups. As a result, our core utilization has been falling 1.5 to two percentage points per month.

In addition, steel prices in China have decreased significantly. While virtually no new containers are currently being produced, we estimate that based on current steel prices, implied new container prices are in the range of 1,900 to $2,000 for a 20-foot dry container, down from over $2,500 for a 20-foot dry container during the summer.

Based on this current implied price for new containers, market leasing rates for new container leases would be slightly higher than the average lease rates on our portfolio.

Another challenge created by the current environment is customer credit risk. The freight rates earned [ph] by the (6:06) customers are under severe pressure due to the combination of reduced trade volumes and a large increase in vessel capacity due to new vessel deliveries.

Many shipping lines are in the midst of major expansion programs, and vessel capacity is expected to increase 10% or more per year for the next few years despite the sharp reduction in trade volumes that we are currently experiencing.

Over 10 small shipping lines have ceased operation in the last two quarters, and the profitability of the large shipping lines has been in steep decline as well. Fortunately, we have not yet seen a general deterioration in customer payment performance, so we are monitoring our portfolio closely for potential problems.

While the current market environment has created many challenges for our business, it has also provided investment opportunities that would not be available to us in a normal market.

In the fourth quarter, we completed a purchase-leaseback transaction covering 53,000 TEU of containers with one of the world's largest shipping lines. This transaction was completed in the last few days of the year, so the impact was not really reflected in our fourth quarter results.

In addition, we repurchased a portion of our Series 2006-1 Term Notes at a highly discounted price in the fourth quarter. And since September of 2008, we have repurchased over 600,000 shares of our common stock. We are hopeful that we will continue to have opportunities for unusually high return investments, as we head into 2009.

As you can see in our press release, we have declared $0.01 dividend this quarter, effectively suspending our dividend program. Given the challenges and uncertainty in the market, we felt that it would make sense for TAL to retain our capital, build equity, and reduce leverage.

This will provide a larger cushion against the tough market conditions, and allow us to be more opportunistic in pursuing unique investment opportunities as they arrive. We will regularly reevaluate the state of the economy and global trade to determine when we should resume the dividend program.

While there is no doubt that the market and TAL's operating and financial trends worsened in the fourth quarter, there are a number of factors that will provide support for us as we head into 2009.

First, we've entered this period of stress in great shape. Our core utilization was almost 96% at the end of the third quarter. And almost two-thirds of our containers are on hire under long-term or finance leases.

Another factor in our favor is the buying and disposal cycle for containers. As we've discussed before, containers are typically ordered only a few months before production. Very few new containers have been produced over the last few quarters and the container factories are essentially currently closed. So, new container capacity is not adding to the challenge of reduced trade volumes.

In addition, about 5% of the containers in the world age out of Ocean transport each year. As a result, we expect that leasing demand to improve quickly once trade volume return closer to historical levels.

Finally, we continue to benefit from strong operating cash flow and a debt structure that amortizes gradually over the life of our containers. In 2008, our adjusted EBITDA, including principal payments on finance leases, plus the net book value of container disposals, was over $370 million.

Based on our current debt outstanding, we estimate our total debt service, including principal and interest, will be about 200 million in 2009. As a result, we expect that we will be able to fully support all of our debt service requirements and make substantial investments in our business entirely out of our operating cash flow.

We continue to actively pursue new sources of debt to maximize our investment flexibility, but we don't need to and won't except terms we find non-economic or unattractive.

I'll now hand the call over to Chand Khan, our CFO.

Chand Khan

Thank you, Brian. Good morning. Today, I'll review our operating results for the fourth quarter and full year ended December 31, 2008.

As we've said in the past, our EBITDA, pre-tax and net income, were affected by unrealized losses on interest rate swaps, which we considered non-operational. In addition, we considered the gain of $23.8 million from the debt extinguishment as non-operational. This gain resulted from the opportunistic repurchase of a portion of our Asset Backed Term Notes from the seller that we believe was due to the winding down of their operation.

During this call, we will only review our adjusted EBITDA, adjusted pre-tax and adjusted net income. Since we believe these financial measures more accurately reflect the company's operational performance. Again as a reminder, we believe that our adjusted pre-tax results are the best measure of our business.

We recorded tax provisions of approximately 36%, but do not expect to pay any significant US federal and state income tax for the foreseeable future.

In addition, we have paid very little foreign taxes. The reason for this tax deferral is the accelerated tax depreciation on our leasing equipment. For a full reconciliation between our reported financial results and our adjusted financial results, please see our press release.

Adjusted pre-tax income in the fourth quarter of 2008 remains unchanged from the prior year fourth quarter at $24.8 million. Our adjusted pre-tax income for the full year of 2008 was $107.1 million, an increase of $18.9 million or 21% versus 2007. Our adjusted pre-tax EPS on a fully diluted share basis was $0.76 for the fourth quarter and $3.28 for the full year of 2008.

Adjusted net income for the full year of 2008 increased $12.8 million or 23% to $69.5 million with EPS of $2.30 per share versus $1.70 per share for the full year of 2007. Our EPS for both the fourth quarter and full year of 2008 benefited slightly from our share repurchase program.

Our adjusted EBITDA, which include principal payments on finance leases, increased $6.2 million to $79.4 million in the fourth quarter of 2008, and increased $44 million to $311 million for the full year of 2008 versus comparable 2007 periods.

Over the next few minutes, I'll review some of the contributing factors to our favorable 2008 results. Our leasing revenue increased $6.1 million in the fourth quarter and $33 million for the full year of 2008 versus comparable 2007 periods.

Leasing revenue benefited from our fleet growth, which increased 10% on a TEU basis, while our revenue earning assets grew almost 18%. Our leasing revenue also benefited from strong utilization for most of 2008. However, we've seen some utilization weakness in the fourth quarter.

In conjunction with our fleet growth, our interest expense increased $12.9 million for 2008, and our depreciation expense increased $8.8 million for 2008 versus 2007.

With regards to our depreciation, in November another vintage year of our containers became fully depreciated. At the end of 2008, we had approximately 181,000 TEU of fully depreciated containers.

Gain on sale of our older assets increased $1.7 million in the fourth quarter and $11.4 million for the full year of 2008 versus comparable 2007 periods.

We sold a larger number of units during both periods at higher selling prices. We also benefited from higher new container prices and higher utilization for the majority of 2008. In 2008, we sold approximately 100,000 containers, of which 50% were owned and managed and the other 50% were part of our trading business.

We continue to extend the revenue generating life of our older fleet. In 2008, the average age of our units sold were 14.1 years versus 13.6 years in 2007.

Gross trading margin, which consists of equipment trading revenue and equipment trading expenses, increased $1.4 million in the fourth quarter of 2008 and $5.9 million for the full year of 2008 versus the same period in 2007. We experienced higher trading volume for both the fourth quarter and full year of 2008.

In addition, we had a slight increase in trading margins on the units sold. Our selling and administrative expenses increased $1.4 million in the fourth quarter and $6.3 million for the full year of 2008, versus similar 2007 period. Approximately $4 million of the 2008 increase was from higher incentive compensation and foreign exchange losses. We paid higher incentive compensation since actual profitability exceeded our 2008 target profitability.

In 2008, we recorded $4.4 million of bad debt expense with most of it occurring in the third and fourth quarter. We recorded a $2.7 million reserve for exposure under finance lease with one of our customers. In addition, we established an additional provision of $1.4 million as a general reserve against our finance lease portfolio.

Our days sales outstanding for January 2009 was 31 days which remained stable over the past year.

So far in 2009, we have not seen any material customer defaults; however, we are concerned given the economic environment. So we are constantly talking to our customers.

As Brian said earlier, our cash inflow for 2008 was approximately $371 million, and for 2009, we estimate our debt service requirement to be slightly over $200 million.

Our net debt, which consists of debt plus equipment purchase payable, less unrestricted cash, increased $188 million to slightly over $1.3 billion at the end of 2008 versus 2007. This represents approximately 75% of the net book value of our revenue earning assets.

In general, the amortization of our debt matches the [ph] run-off of (17:20) our assets, except for $100 million of revolving credit facilities which matures in 2012. We are well in compliance of all our debt covenants and expect to remain so, even if market conditions for 2009 remain challenging.

We have made significant investment in 2008. We purchased over $410 million of new equipment. We also purchased approximately $80 million of equipment on a purchase and leaseback transaction with one of our customers.

We received proceeds from the sale of container portfolio of slightly over $40 million, for net purchases for the year of over $450 million. We ended 2008 with almost $1.8 billion of revenue earning assets.

In 2008, we repurchased 642,000 shares of our common stock for a total of almost $11 million. So far in 2009, we have repurchased approximately 324,000 shares of our common stock for slightly over $3 million.

We are pleased with our fourth quarter and full year results and are cautiously optimistic about 2009; even in a challenging environment.

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

Brian Sondey

Thank you, Chand. I'll now finish the prepared part of the call with some thoughts on our current outlook.

Overall, we finished 2008 with a fairly strong quarter, despite the deterioration in market conditions. As we head into the first quarter, we typically experienced our weakest period of the year, given that the first quarter typically represents the seasonal low point for dry container demand and disposal volumes.

This year, the usual seasonal weakness will be compounded by the difficult market environment and we expect our operating and financial results to decrease from the fourth quarter level. However, we will continue to benefit from high starting utilization and our strong lease portfolio. So we should continue to perform fairly well in the first quarter, despite the difficult market conditions.

For the full year of 2009, our results will be mainly driven by how long the current downturn and trade volume lasts. Our customers continue to report the carrying volumes are 15% or more lower than last year, and while the industry has never experienced an annual decrease in container volumes, it seems like we could begin for the industry's first decrease this year.

For TAL, we expect drop-offs to remain high and pickups exceptionally low as long as trade volumes remain at the current depressed level.

During this period, our core utilization will continue to drop, though we expect the pace of the decrease to eventually moderate from the recent 1.5 to 2% per month decrease as the portion of our remaining units on short-term leases diminishes and as we expect disposal volumes to increase after the first quarter.

In addition, pressure on disposal prices will increase over time, if trade volumes and leasing company utilization remain low. And the risk of a major customer default also increases, the longer trade volumes remain at an exceptionally low level.

However, while we expect our results to trend down as long as trade growth remains substantially negative, we do not think the current challenges will necessarily have a permanent impact on our performance.

As I mentioned before, we expect very low new container purchases in 2009 and expect that 5% or more of the existing containers will be sold out of Ocean service this year. In addition, most of the containers being returned to us are coming back to the Asia-Pacific region and about 90% of our containers available for lease are in Asia.

As a result, we expect leasing demand and our utilization to improve quickly, once trade volumes start to improve. If trade volumes improve during the 2009 summer peak season, we could in fact have a very good year this year. If trade volumes do not recover in 2009, we expect that our earnings will steadily decrease throughout the year as our utilization falls. However, even if trade volumes remain exceptionally low for all of 2009, we expect to be substantially profitable throughout the year borrowing a Chapter 7 style default from one of our largest customers.

In addition, we expect to remain significantly cash flow positive in 2009 with or without a peak season recovery. If trade growth remains exceptionally weak throughout the year, our capital spending will be limited and most of our cash flow will be targeted to our debt reduction. As a result, we expect to build net worth and reduced leverage in 2009 even if containerized trade volumes do not recover this year.

In summary, we are very pleased with our outstanding performance and results in 2008, but we are certainly mindful of the challenges we face in 2009. With our 2008 results, we continued on our track record of providing investors with growth profitability and strong cash flow.

We expect our results in 2009 to trend down from the 2008 level as long as trade volumes remain exceptionally weak, though we could have quite a good year this year if trade volumes rebound during the 2009 peak season. And even if volumes do not recover in 2009, we expect to be significantly profitable for the year and expect that we will build net worth and reduce leverage throughout the year.

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

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. The first question is from Mike Halloran of Robert W. Baird. Please go ahead.

Mike Hallora - Robert W. Baird

Good morning.

Brian Sondey

Good morning.

Mike Hallora - Robert W. Baird

On the dividend side, could you bucket the reasons for the dividend cut, looking at whether there’s concerns over capital, whether there’s more significant investment opportunities out there in the market and then also from the standpoint of earnings uncertainty?

Brian Sondey

Sure. Well, I think we made it as a proactive decision rather than sort of in reaction to anything we are seeing right now. We’ve discussed in the past that we generate a significant level of free equity cash flow and in fact things that’s one of the real strengths of our business. We made the decision in 2006 that the best use of this free equity cash flow was to return it to shareholders in the form of a large regular dividend.

As I mentioned on the – in my comments and I think in the press release, we continue to generate a significant level of cash flow and in fact given the reduced CapEx that we expect for the year, due to the low trade growth, we probably at least right now are generating more free cash flow than we ever have. So this certainly could have maintained the dividend this quarter and probably for the foreseeable future.

But I really – I think due to the market uncertainty, the ongoing financial disruptions, as well as the unique investment opportunities we see this year, we thought the best use of our cash flow was to keep it in the business. And that’s really why we cut the dividend almost entirely, rather than reducing it to a lower level. We have the cash flow to maintain the dividend at the level that it was at least for the foreseeable future. But we thought retaining the cash flow in the business to build equity, to delever our business, and to maximize, I guess, our dry powder for unique investment opportunities just was a better use of the cash.

Mike Hallora - Robert W. Baird

And then, could you talk about that decision also relative to – and I understand that there’s a difference from a magnitude of capital – cash spend, but dividend versus starting up that share repurchase program again for the first part of this year?

Brian Sondey

Well, we’ve been sort of actively purchasing shares since September and we have – I think traditionally the Board has authorized about 2.5 million of share repurchases. I think year-to-date including our purchases in ‘07, we’ve probably bought back about 1.5 million shares. And so we still have about a million shares left under the existing authorization, and what we expect – we will see what happens as the year progresses, but we’ve been fairly active recently.

Mike Hallora - Robert W. Baird

On the CapEx for 2009 side, could you talk about what level of CapEx you’re expecting? And then, also bucket that out from the standpoint of new containers, as well as how much sale leaseback opportunity you guys are seeing on the environment?

Brian Sondey

Well, right now, just given the market uncertainty, we’re not doing any speculative procurement. And so, typically what we do is we order containers in the factories in advance of actual demand and maintain a shelf of inventory to handle customer requests as they come in. Given the drop in trade volumes and sort of the pressure on container off-hires, we obviously aren’t out there building containers on speculation. That said, there are instances like the sale leaseback for input containers and actually some refrigerator container deals as well where customers are still adding containers to their fleets where we are doing pre-negotiated transactions. We really like the sale leaseback transactions for a few reasons. One is that they – typically, we can do them with very high quality – high credit quality customers. In addition, the containers are already on hire with their customers, so there is no speculative procurement risk. Also, the leaseback term tends to be for the full remaining life of the equipment. And so, there is no really no utilization risk on the equipment like there typically is on new container purchases. And then also for used containers, when the container is a mid age or older, there is also less credit risk because more of the value of the transaction is in the residual value of the container as opposed to the leaseback for the container. And so, for all those reasons, we really like those transactions and expect to do more in 2009 and really it’s just a matter of how many opportunities we have that we find the pricing and credit and so on, makes sense for us.

Mike Hallora - Robert W. Baird

Makes sense. And then on that used container side, could you talk about what the scrap value of the container would be right now and then how much a used container would be selling for in the open market?

Brian Sondey

We rarely scrap used containers. Probably less than 5 or 10% of our total disposals go to scrap. I think we’ve talked in the past, there’s two main users. One, our domestic storage companies like Mobile Mini or Williams Scotsman that buy the containers for their domestic storage businesses, and the other are freight forwarders that typically buy old containers for one way use when they are moving cargo into places where they have very difficult backhaul logistics and they just sell the container with the cargo. Our expectation certainly has been – our experience has been over the last quarter and we expect it to be for the foreseeable future that those two buying groups will continue to be the buyers for used containers, not the scrap market. Due to the, I guess, increase in the supply of available containers, we are seeing some pressure on the resale prices. Our prices increased steadily throughout 2008 due to sort of the opposite effects, very tight utilization and high container prices and probably since the peak in September or October, we’ve seen used container prices come down somewhere in the 10% to 15% range I guess.

Mike Hallora - Robert W. Baird

Yeah. I guess, the reason I asked the question was, I was looking for something in the bottom if the used container market continues to further weaken. What would be, from your prospective, the differential between what a current price would be for to sell a used container on the open market versus what that scrap value is?

Brian Sondey

That’s a good question, we – just really because we don’t scrap a lot of containers. And in fact, I guess I’d put it slightly differently. The bottom for us I don’t think really is the scrap market. One of the nice features of the container business, as I sort of described, is that there is not this pressure coming from increased container capacity, the factories are closed, no one wants containers. And so, you don’t have new containers coming in. In addition, because of this aging out, again – and then because real after markets, we expect 5% or 6% of the world’s containers every year to go to those two primary buyers. And so, our backstop really is just waiting. If disposal prices fall to the point that we just find it’s not attractive, we can hang on to the containers for a couple of quarters or a year and even in – even if trade volumes remain kind of 15% below where they were for most of ‘08, it doesn’t take that long. We don’t think for the containers supply demand balance to come back into balance.

Mike Hallora - Robert W. Baird

And then on the leasing profitability side excluding the gains, how did that trend in the quarter?

Brian Sondey

Well, as you know, we have talked many times, we don’t like to exclude the gains, because we do think the disposal is a integral part of the business. And that said, we – I do because, mainly because you asked the question, look at the analysis. And as we compare say Q4 ‘08 versus Q4 ‘07, the profitability excluding the gains in third-party is down a little bit, mainly because of the provision for losses that we took...

Mike Hallora - Robert W. Baird

Right.

Brian Sondey

-- in the fourth quarter of ‘08. If you exclude those, it’s probably pretty similar.

Mike Hallora - Robert W. Baird

Okay. That’s fair. And then, could you just talk about the acquisition opportunities in spaces and like we have mergers with some of the larger container vessels out there?

Brian Sondey

Yeah. I think, as I mentioned before, I think the industry should consolidate and will consolidate. There is essentially almost a 100% redundant cost between the different leasing companies out there in the market and there is probably too many of them right now. Our feeling is, and this has been the feeling for the last six to nine months that the smaller leasing companies are probably under a significant amount of pressure right now. They don’t have the cash flow we have. A lot of them have – they sold off their container fleets to KG funds since they don’t have the cash flow from a base of containers on hire. In addition, the leases that they write tend to be more logistically risky and in order to get customers to do business with them and so they are probably facing not only utilization challenges, my guess would also be logistical challenges right now. And so, I think there will be a lot of pressure on the smaller end of the business. For us, we always compare the return of doing an acquisition to the return of buying more containers or doing more sale leaseback transactions or something like that. And so, we’ll be interested if – as companies become available, but we’ll be quite disciplined as well.

Mike Hallora - Robert W. Baird

That’s fair. And then, a last one was, what was the quarter end utilization number?

Brian Sondey

The quarter end – we typically look at our core utilization which excludes the...

Mike Hallora - Robert W. Baird

Yup.

Brian Sondey

-- new factory units so that we report the other number. At the end of the quarter – it was in the press release like 90 – sorry, let me just get it in there – 92.4%.

Mike Hallora - Robert W. Baird

Oh, that was quarter end? I thought that was the average for the quarter.

Brian Sondey

It’s ending.

Mike Hallora - Robert W. Baird

Okay. Perfect. Thank you. I appreciate the time.

Brian Sondey

Sure.

Operator

Thank you. The next question is from Greg Lewis of Credit Suisse. Please go ahead.

Gregory Lewis - Credit Suisse

Thank you and good morning.

Brian Sondey

Good morning.

Gregory Lewis - Credit Suisse

It looked like bad debt expense or our provision for doubtful accounts increased pretty sharply in Q4. When we look out over – first of all, what was that attributed to? And when we look out over 2009, what sort of budget are you thinking about when you look at your doubtful accounts?

Brian Sondey

Yeah. In Q4, there was really two elements of the increase. The first is, we had a customer, I think actually first defaulted in the third quarter, where we had a finance lease with a second or third-tier shipping line that ceased operation and the reserve was taken as we estimated the difference between the recovery value of the containers and the carrying value of that finance lease. And I think that was...

Chand Khan

In the third quarter $2 million.

Brian Sondey

$2 million in the third quarter and then an additional provision, as we were sort of experiencing our recovery process and as the leasing market weakened and so our estimate of the value of the containers came down a little. We took another 700,000 in the fourth quarter for that customer. And so, the total combined provision in the third quarter and fourth quarter of about 4 million in total I think. Yeah, that one customer was probably 2.5 million of that 4.

The additional fees in the fourth quarter is that we established a general provision against our finance lease portfolio. For most of our history, we hadn’t had any meaningful losses in the finance lease portfolio. And so, there wasn’t any meaningful reserve against the portfolio. And so as – since we – this customer went bad and we now have a loss in the portfolio, we also established a general reserve. I think that was 1.4 million.

Looking forward in 2009, we don’t like to give specific guidance on individual components of the income statement. As I think Chand mentioned briefly in his comments, we haven’t yet seen any material defaults yet in 2009 and so we’re hopeful. But I think we talked many times that we see a period here where default risk is higher than it’s been in a long time. And so, we’re actively monitoring our portfolio. We are aggressively taking containers back in situations where we have nervous – nervous feeling about the customer or seeing some shaky payment performance. But we’re – it’s something we’re clearly worried about in 2009.

Gregory Lewis - Credit Suisse

Okay, great. And when you’re looking at your fleet, I mean, you mentioned that the majority of your boxes are uncharted to the major top 21 companies? On a percentage basis, how much of that is to the major liners?

Brian Sondey

Yeah. We do business with everybody in the industry. And our lease portfolio was fairly reflective of the breakout of vessel capacity between the major shipping lines and the minor ones. And I think the last I looked, our top 25 lessees made up, which is probably very directly mapped during – not exactly one-to-one, but pretty close to the major shipping lines in the world – those top 25 I think made up about 80% of our lease portfolio.

Gregory Lewis - Credit Suisse

Okay, great. And then, you mentioned that you expect utilization to drop about 1 or 2% level per month. Is that something that we should think about? I mean, when I look at the market it looks like that’s going to probably persist throughout the year. So, potentially, when you’re looking at your numbers, are you thinking about utilization potentially dropping to around 80% by the end of the year?

Brian Sondey

I mean, it’s been – really, this all started in November when trade growth really kind of fell off the cliff. Since November, it’s been dropping, probably – it’s probably ranged from a little over 1% to a little under 2%, but averaged about 1.5 percentage points per month since then. In the very near term, over the next couple of months we expect that’s probably going to continue with that pace. Our – it’s very hard to predict this specifically adding to the future, but our guess is that if trade volume continues to be say, down 15% or more versus ‘08, that obviously we’ll continue to lose utilization, but that be a pace of the drop should diminish as we get into sort of mid second quarter, for two reasons. One is, just the sort of low-hanging fruit, the expired term leases and the more flexible short-term leases are coming off the fastest. And so, as we go farther away to November, more and more of that stuff has been dropped off. In addition, we typically see our disposable volume pickup some time in the second quarter and that has the effect of dampening the utilization hit you get when containers are returned or hired. And so, I think if we don’t see any recovery from kind of this minus 15% level, yeah, I don’t think somewhere in the low 80s is a bad estimate by the end of the year. But there’s, of course, a lot of assumption in there, especially the fact that your trade growth remains minus 15% for an entire year.

Gregory Lewis - Credit Suisse

Okay. Thank you very much.

Operator

Thank you. The next question comes from [inaudible].

Unidentified Analyst

Good morning.

Brian Sondey

Good morning, [inaudible].

Unidentified Analyst

What are your disposals in the fourth quarter?

Brian Sondey

Good question. Yeah, our disposals for the entire year were a little over 50,000 containers. I mean, the fourth quarter, my guess is it’s not a – it wouldn’t be a bad estimate to take a quarter of that. So we’re probably in the range of – and just in terms of owned containers, 12,000, I can say a little more, 13,000, 14,000 containers, maybe.

Unidentified Analyst

Got you. And what was that in the fourth quarter of last year to refresh my memory?

Brian Sondey

It’s a little higher than 2007 level, but not out of the ballpark.

Unidentified Analyst

Okay. Thank you.

Brian Sondey

Sure.

Operator

Thank you. The next question comes from Rick Shane of Jefferies. Please go ahead.

Richard Shane - Jefferies

Hey, guys. Thanks for taking my questions. One of the things that seems to be going on here in terms of the dividend policy is, creating dry powder to do things like repurchase debt. And during the fourth quarter you generated strong gain on the extinguishment of the asset-backed term notes. Can you walk us through that transactions where those were trading, what you paid for them, and the gain? And then the other question is that in some ways it sounds like your goals to pay down your existing facilities potentially at par are there other options out there of repurchasing debt, any other instruments, big discounts that you can do like you did this quarter?

Brian Sondey

Yeah. I mean, I think as you can imagine, our debt doesn’t trade incredibly actively out there. There were -- for those 2006 Series 1 Notes, there might have been 10 or 12 purchases initially in April 2006 for those notes. I’m sure that some of them have changed hands and we’re trying to figure out – it’s not that hard – who’s got them all. The situation was somewhat a unique situation. I think as Chand mentioned, while we don’t have tremendous insight into the thinking of the seller, our understanding is that it was an [inaudible] I think that was essentially winding down, and so was looking to sell assets and they wanted to get it done fast and we were highly interested to buy at this kind of price and I think we remain so.

Richard Shane - Jefferies

What kind of a price versus par did you pay on those?

Brian Sondey

I think you can figure it out if you dig into the financials. We’ve been – I don’t know – reluctant to disclose the exact price. But again, I’m – you can figure it out. But it’s a good question, when you say, why are we paying down debt at par, we can buy back at a discount? You are probably going to be paying down – as we generate cash throughout the year, we’re going to be paying down facilities that we can re-borrow against. And so, likely we’re not going to be repaying early the Series 2006-1 Term Notes. We’re going to be paying down our warehouse facility. So if and when we have incremental investment opportunities, we can re-borrow that in that facility.

Richard Shane - Jefferies

Okay. Since it’s not provided in that level of detail in the press release, the debts kind of lumped, so we don’t know what the outstanding, what the remaining balance is on the term notes?

Brian Sondey

I think it’s in the range of 500 million.

Richard Shane - Jefferies

Okay, great. And then we can go back and compare that to the last Q?

Brian Sondey

But it’s amortizing as well, so the delta won’t be entirely repurchase.

Richard Shane - Jefferies

Okay. We’ll wait for the Q then and we’ll see what we can pull out.

Brian Sondey

Okay.

Chand Khan

We are going to file it on Monday, so you’ll be able to get that.

Richard Shane - Jefferies

Great. Thank you.

Operator

[Operator Instructions]. Our next question comes from [inaudible].

Unidentified Analyst

Hi. You gave the utilization at the end of the fourth quarter and made comments about sort of the trend, but do you have more specific figures for either January or even now that we’re virtually at the end of February?

Brian Sondey

Sure. The utilization again, this is our – we consider our core utilization excluding new factory units was 92.4% as of December 31st. At the end of February, we think it’s going to be just a little bit below 90%. I think it’s like 89.6 or 89.7, something like that.

Unidentified Analyst

Thank you.

Operator

At this time, there are no more questions.

Brian Sondey

Okay. Well, I’d just like to thank everyone for your continued interest and support of TAL, and we look forward to providing update as the year progresses here. Thank you very much.

Operator

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

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Source: TAL International Group, Inc. Q4 2008 Earnings Call Transcript
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