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Executives

Jeff Casucci - VP Treasury and IR

Brian Sondey - President and CEO

Chand Khan - SVP and CFO

Analysts

Jon Langenfeld - Robert W. Baird

Gregory Lewis - Credit Suisse

Art Hatfield - Morgan, Keegan & Company

Richard Shane - Jefferies & Company

TAL International Group, Inc. (TAL) Q1 2009 Earnings Call May 7, 2009 9:00 AM ET

Operator

Good morning and welcome to the TAL International First Quarter 2009 Results Conference Call. For your information, all participants will be in a listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (Operator Instructions). This conference is being recorded and transcribed.

I would like to turn the conference over to Mr. Jeff Casucci, Vice President, Treasury and Investor Relations of TAL International. Mr. Casucci, please begin.

Jeff Casucci

Thank you. Good morning and thank you for joining us on today's call. We are here to discuss TAL's first quarter 2009 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 condition, 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 that is made herein, despite any changes to 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 2009 Annual Report filed on Form 10-K with the Securities and Exchange Commission.

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 first quarter 2009 earnings conference call. Overall, we are pleased with TAL's first quarter results given the tough market conditions we continue to face.

We remained solidly profitable in the first quarter and our cash level remains strong. Our leasing revenue and adjusted EBITDA were both up from the first quarter of 2008 due to our fleet growth last year.

Our annualized pre-tax return on equity was in the 20% range for the first quarter. Our operating cash flow remains well in excess of our scheduled debt service, which gives us great flexibility in our financing and investment decisions.

We continue to take advantage of unique high return investment opportunities made possible by the turbulent market conditions and we made progress in the first quarter in negotiating with our customers to slow down the rate of container returns.

Our ability to continue to deliver solid results despite the fact that we are now a few quarters into the worst ever decrease in container volumes, reflects the fact that we were in excellent shape as we entered this challenging period. And it reflects the strength of our leased portfolio and the resilience of our business model.

At the end of the first quarter of 2009 our core utilization stood at a quite respectable 88.5% and about two-thirds of our containers are still covered by long-term or finance leases.

Another factor that has mitigated the impact of the economic slowdown on TAL is the short ordering cycle for containers. As we discussed before containers are typically ordered only a few months before production.

Very few containers have been produced since the third quarter of 2008 and the container factories are essentially 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 will improve quickly once trade volumes return closer to 2008 levels.

While we are pleased with our first quarter performance and results there is no doubt that market conditions remain challenging. Trade volumes remain at a very low level and many of our customers continue to report that their container volumes are down 15% or more compared to last year.

We continue to see a high volume of container drop-offs, few container pick-ups and our utilization is continuing to fall. In addition, they are pressuring our leasing revenue decreasing utilization also leads to increased operating expenses.

The increased industry-wide inventory of idle containers is also placing pressure on our used container sales prices. And we expect our disposal gains to increasingly lag the gains we recorded in 2008 until trade volumes improved.

One area where we did not experience problems in the first quarter where we continue to have major concerns is in our customer credit risk. As we have discussed before our customers are being squeezed by the combination of increased vessel capacity and reduced trade volumes which has led to very weak freight rates on the major trade links.

Over 10 small shipping lines have seized operations since global trade volumes began to falter last year though fortunately we have not been materially affected by any defaults so far in 2009.

As we discussed in our last call the current market environment does create opportunities as well as challenges and we continue to take advantage that what we believe are unique, high return investment opportunities made possible by the severe economic and financial conditions.

Year-to-date we have invested almost $60 million in lease transactions, share buybacks and additional debt repurchase.

In the first quarter we completed a large lease transaction with one of the world’s largest shipping lines where we stepped into purchase equipment they were planning an ordering and lease the equipment back to the customer.

In 2009 we have repurchased 1.2 million shares of our common stock through the end of April at an average price well below our tangible book value per share and for a very low multiple of our free cash flow. And in April, we repurchased another tranche of our debt had a substantial discount to par value.

The effects of this transaction were not reflected in the first quarter financials. Because of the strength of our cash flow we were able to reduce our leverage in the first quarter despite the difficult market conditions and the investments we made in the large lease transaction in our share repurchases.

The leverage ratio, I focused on most closely, is the ratio of our net debt to our revenue earning assets.

In general, for the last several years, we have managed our investments and dividend policy to maintain this ratio in the mid to upper 70% range.

However, as you know we decided last quarter to effectively suspend our dividend program partially, so we could build a larger equity cushion. At the end of the first quarter, the ratio of our net debt-to-revenue earning assets was down to 73% compared to 75% as of December 31, 2008 and 77% as of March 31, 2008. We expect this ratio to continue to decrease over the next few quarters even if market conditions do not improve.

I will now hand the call over to Chand Khan our CFO.

Chand Khan

Thank you Brian, good morning. Today I will review our operating results for the first quarter ended March 31, 2009. As we have said in the past our EBITDA, pre-tax and net income were effected by unrealized gains or losses on interest rate swaps which we consider non-operational.

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 income taxes; the reason for this tax deferral is the accelerated tax appreciation 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 for the first quarter of 2009 decreased $5.2 million to $20.7 million versus Q1 2008.

Our adjusted pre-tax EPS on a fully dilutive share basis was $0.65 for the first quarter of 2009. Our EPS for the first quarter of 2009 benefited slightly versus prior periods due to our share repurchase program. So at the end of April we have repurchased approximately 1.2 million shares of our common stock for the year 2009 at a cost of $9.4 million.

Our adjusted EBITDA which includes principle payment of finance leases increased $700,000 to $74.6 million in the first quarter of 2009 versus Q1 2008.

I will now review some of the contributing factors to our first quarter 2009 results. Our leasing revenue increased $5.7 million in the first quarter of 2009 versus Q1 2008 due to several reasons.

Fleet growth contributed $4 million of additional leasing revenue. However, we experienced lower utilization in our dry container fleet that caused a decrease of $1.1 million to the leasing revenue.

This decrease was partially offset by higher utilization in our other product types. In Q1 2009, we experienced an increase of $1.5 million in repair and handling revenue resulting from the increase in fleet drop-off volumes versus Q1 2008.

In conjunction with our prior year fleet growth in the first quarter of 2009, our interest expense increased $2.7 million and our depreciation expense increased $2.3 million versus Q1 2008.

As a result of the higher drop-off activity in our dry container product our direct operating expenses in Q1 2009 increased $2.7 million versus Q1 2008.

As we experienced highest storage cost, from more idle units and high repair cost from a higher volume of units dropped-off. Gain on sale of our older assets increased $700,000 in the first quarter of 2009 as compared to Q1 2008 mainly due to lower selling prices in a weaker market for used container.

Our selling and administrative expenses increased $1.8 million in the first quarter of 2009 versus Q1 2008 for two reasons. First, as part of our efforts to streamline our operation, we terminated a number of employees and took a one-time severance charge of approximately $900,000.

Second, in the first quarter of 2008 we realized $1.2 million in foreign exchange gains which did not repeat in Q1 2009.

While we remain concerned about some of our customers' financial performance, we did not experience any meaningful customer defaults in the first quarter of 2009. We continue to focus on our collection efforts and are constantly managing our credit risks. Our days sales outstanding for April 2009 was 27 days, which was slightly lower than prior periods.

For the past 12 months, our cash inflows which consist of EBITDA plus network value of equipment sold was approximated $373 million and we estimate our debt service requirement for the next 12 months to be slightly under $200 million.

Our cash inflow for the first quarter of 2009 was approximately $87 million. Our net debt which consists of debt, plus equipment purchase payables, less cash on hand was slightly over $1.2 billion at the end of Q1 2009.

As we have said in the past, the amortization of debt matches the run-off of our assets except for $100 million of revolving credit facility which matures in 2012. We are well in compliance of all our debt covenants and expect to remain so even if market conditions remain challenging for the balance of 2009.

We ended Q1 2009 with approximately $1.7 billion of revenue earning assets. We are pleased with our first quarter 2009 results and at this time, I return it to Brian.

Brian Sondey

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

Overall, we are pleased to have delivered solid results to start 2009 despite the continuing difficult market conditions. In most years, trade volumes and leasing demand start to increase in the second quarter as we approached the summer peak season for dry containers.

We have recently heard from a number of our customers that trade volume have improved somewhat from the level in the first few months of the year but they are not yet indicating any significant recovery of volumes back to our 2008 levels.

As a result, we expect leasing demand to remain low and our utilization to continue to fall until we see more of a recovery. We believe that the rate of our utilization decrease will moderate in the second and third quarters due to the slight improvement in trade volumes, our success in extending leases and a seasonal increase in disposal volumes. But in regards to disposals, we expect that our used containers sale prices and disposal gains will be further pressured until we see a more substantial recovery in international trade.

As I indicated in the press release our financial results for the rest of 2009 will be highly influenced by the timing of a trade recovery. If trade volumes significantly improve during the 2009 summer peak season we could in fact have a very good year.

If trade volumes do not recover meaningfully 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 profitable throughout the year borrowing a Chapter-7-style default from one of our largest customers.

We also expect to further build our net worth and reduce our leverage in 2009 even if containerized trade volumes do not recover this year.

In summary, we are pleased with a solid start to the year, in spite a very challenging market conditions. We expect our utilization disposal gains and profitability to continue to decrease until trade volumes improve meaningfully.

We also expect that the strength of our lease portfolio and the resilience of our business model will continue to make this deterioration a gradual process. We believe we are well positioned to recover quickly when trade volumes improve especially since we expect very little new container capacity to be added to the industry this year.

But even if trade volumes do not improve significantly in 2009 we still expect to be solidly profitable to de-lever and to build our tangible network throughout the year.

I would now like to open the discussion for questions.

Question-and-Answer Session

Operator

(Operator Instructions). The first question comes from Jon Langenfeld of Robert W. Baird. Please go ahead.

Jon Langenfeld - Robert W. Baird

Good morning, guys.

Brian Sondey

Good morning, Jon.

Jon Langenfeld - Robert W. Baird

Yes, I did some numbers, I guess. First, what was the average utilization during the quarter?

Brian Sondey

Let me just dig it up for you, it's probably right around 90% if you exclude, if we take all of the units including the new factory units.

Jon Langenfeld - Robert W. Baird

Yes.

Brian Sondey

It was around 88%, 88.1. If you exclude the new factory units what we call our core utilization is probably just over 90%.

Jon Langenfeld - Robert W. Baird

Okay, alright. And then when you talked about slowing, you have worked with your customers to slow the return of used containers, can you just talk a little bit about how you do that, I am assuming just trying to entice somewhat better rates then they are looking at throughout the rest of their portfolio, but can you provide some color on that?

Brian Sondey

Yes, you are certainly right, we look at a couple of different tools to try to do that or couple of different ways to offer customer's incentives to keep up. In general customers' trade volumes are down, so they have excess containers in their fleets. But for them it is also dropping-off containers involve some costs they have to truck the containers to our depot, we charge them for repairs and number of customers are fairly optimistic that their volumes may improve by the time this 2009 finishes.

And so for some customers we try to convince them but it's actually more cost effective, they will hold on to our containers than at least they drop them off and we can make it even more cost effective if we say lower the rates in the containers for a period of time while we expect demand to be light.

For other customers you are just basically trying to get ahead of the competition, you say well, if you have to drop-off containers why do not you drop-off the other guy instead of us. And again the incentive there usually is either a period of time where the lease rates will be lower or perhaps we extend existing units on hire on a long-term lease or may be convert short-term lease to a longer-term lease by offering rate reductions.

So, it’s a variety of incentives to either try to get ourselves push back in the line of (inaudible) or to convince the customers that perhaps it's more cost effective to hold the containers in their fleet than it is to drop them off and maybe have to pick them up again at the end of the year.

Jon Langenfeld - Robert W. Baird

Got it. And how big of an effort have you done on the lease extensions. I know a couple of years ago you had I think a couple of big lease extensions with customers, how would you characterize it today, is it multiple customers that’s occurring on or do you have a couple of few big customers?

Brian Sondey

It's definitely fairly good chunk of our portfolio where we have had some success in either extending term leases or capping the number of containers that can come off hire in the next 12 to 18 months.

So, that’s obviously something we are quite interested in right now. Our view is that demand is fairly weak right now, but as long as we see some recovery in the next short-to-medium term we think we are going to see leasing demand improve fairly quickly when that happens.

Just given the lack of buying of new containers and the fact that 5% of containers fell-off every year. And so we do not see this like a long-term impairment issue, but we do have a fairly big interest in sort of getting ourselves from here to the time that happens.

So we have approached lot of our customers about these kinds of deals and I would say we have been successful, with quite a few of them not in all cases shutting off all our hires, but in a lot of cases reducing the number of containers available to be returned or pushing out the expiration dates to the time that we are more confident that there will be good leasing demand.

Jon Langenfeld - Robert W. Baird

And is there a need at this point, do you have a customer that has a couple of years left in there; contract is there a need to address lease extensions on some of those contracts as well?

Brian Sondey

We are doing that, I would say for those situations it were really being approached more by the customers to us. In general we are focused ourselves on trying to take containers that are available on hire in the next quarter or two. That we considered being most at risk given the current container volumes. And so we are not all that focused ourselves on trying to push out, containers expiring two years even beyond that just because we think actually there is likely to be quite a good supply demand balance of containers for us in the not too distant future.

But our customers, they are looking to save money and they have been approached by a number of them, about trying to take containers and do not expire a few years from now and push them out even further. They try to get some cost savings today and we have agreed to do that. In many cases that’s a mix where we have some, some leases that expire in the near-term and they have some, and we have some leases expire over the next year or two and we put them all together into an extension deal that protects them all and but provides savings for them as well.

Jon Langenfeld - Robert W. Baird

I know it's a lot different and it’s a vary the cost lot of different customers this time. But looking back to the '06, '07 timeframe I think at one point you have talked about maybe 15% of your fleet you had lease extension deals done with one or two customers. If you kind of aggregate this all together, is it more than that timeframe?

Brian Sondey

That’s probably in terms of volume its similar I think the big difference is back in the '06 timeframe though we see market was actually quite strong. And so we were not particularly focused on younger containers we are quite happy to have the younger containers come off hire. As we were very confident we can quickly put them back on hire.

And so in '06 we really were focusing our efforts and offering significant savings for our customers to extend very old containers on hire. That perhaps would have come off hire when the containers were 12 years old. At which point we would sell the containers and we would then try to get them extended say 14 or 15 years old to get the extra revenue life of the container.

I think the difference is in this year, we are trying to extend leases on all ages of containers just because we were not very, we are not seeing a good demand right now for lease containers. And so we would rather just keep everything on hire at least for the next few quarters.

Jon Langenfeld - Robert W. Baird

Okay, good differentiation. And then if we think about the used container sales, how should we think about that in terms of volume and price and I guess thinking about your own units as well as your equipment trading?

Brian Sondey

In terms of our owned units, we would like over the course of the year probably to sell about the same number we did last year. I would say demand in the market is down a little bit especially in Asia. Last year we sold lot of boxes in Asia for one way cargo shipments and to the Middle East, or Central or Eastern Europe, places where its very expensive to get the container back out.

This year just given the overall drop-in in international trade there is less demand for those kind of boxes. And so we are seeing some decrease in volume this year compared to last year. So that said if you look at our overall volume for Q1 2009 compared to Q1 2008 involve our own disposals in trading its not that far off. And so it really is much more of how you think about the next few quarters. We sold a lot of boxes in the summer peak season of 2008 supported by those one way shipments.

If we do not see a strong peak season in 2009 those kind of sales will be down. But I think, we will still achieve a very respectable volume I am fairly confident for our own containers.

Jon Langenfeld - Robert W. Baird

Got it.

Brian Sondey

In terms of the trading containers, we do expect the volume to be down. We still are out there in the market and did healthy amount of business in the first quarter for those. But it really is more in terms of our level of aggressiveness in committing to large, bundles of containers with our customers. Last year we were buying into rising market, which allowed us to be more aggressive at buying containers and specifically say there is a 2 to 6 month lag between the time we buy the container and sell it depending on the structure of the deal.

And now we see a market that seems unstable to us, and so we are not as confident in buying containers in it. So we expect the volume of our purchases to be down this year compared to last year, especially as we head into the second and third quarters.

In terms of price, we have seen price moved down, from the very high levels where our price was at the end of last year, although it hasn’t been, sort of a dramatic slide, estimate 10% to 15% probably across the various regions where we sell. So it's hanging in there but we will certainly like to see a better balance of supply and demand.

Jon Langenfeld - Robert W. Baird

Great, thanks for the details Brian.

Brian Sondey

Thanks Jon.

Operator

The next question comes 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

Brian, I guess my first question is regarding the transaction that you announced on the call during the first quarter. In terms of what was the size in terms of value and number of containers in that transaction and sort of what was the effective date with that (inaudible).

Brian Sondey

I don’t want to give details on that transaction, I mean, obviously customer issues and competitive issues but, in general this one lease transaction I described where we stepped into containers that the customer was initially planning on buying for themselves and then we bought them and lease them to the customer. It's something in the $25 million range. That was completed. There was a series of transactions completed really over the first quarter.

Gregory Lewis - Credit Suisse

Okay. So the effective date was sort of spread out over the quarter.

Brian Sondey

Yeah, spread out over the quarter.

Gregory Lewis - Credit Suisse

And were those primarily just standard, 20 and 40 foot boxes?

Brian Sondey

We do not want to get too much into the details of the equipment types, but it was sort of our standard type of equipment that we typically lease.

Gregory Lewis - Credit Suisse

Okay. Sure, and then just more of a general question. I mean, you announced on the call that you have sort of extended the buyback. And that comes in light of the fact that the previous quarter potentially suspended the dividend. How do you sort of balance between the decision, the pay dividends, to buyback stock and to more importantly, just given your balance sheet, repurchase that, it sounded like you did a combination of debt repurchase and share buyback. But I mean at this point, what sort of just focus of this cash pay over the rest of the year?

Brian Sondey

Alright. Well, as we continue to discuss we still generate a lot of cash flow and in fact, given our reduced capital spending and our expectations it will still be down for the rest of the year. We probably have more free cash flow now than we had in last three or four years. And so, we do have cash to make decisions with and we suspended the dividend program in the first quarter I would say, really just due to two reasons. One we felt that we were somewhat in unchartered waters in terms of the market environment, you had never seen in 40 years, trade volumes to be down. Even in the recessionary years in early 80s, early 90s and all of the sudden here we are facing trade volumes down. At least, for a period of time in the 15% or 20% range and so we just thought it made sense to build a little bit more of an equity cushion and so that’s one reason certainly while we cut the dividend to give us more ability to retain cash flow if we just thought we needed it.

In addition, we just looked at the investment opportunities that we have out there and they may not be as large in dollar terms as they were in 2007 and 2008 but probably significantly better in terms of returns. And we wanted to make sure that just given the top financing market out there that we had the opportunity to retain our cash if we felt that the returns that we can get by investing in our own debt or sale lease back transactions or even our own stock, just seemed more attractive than paying a dividend.

And then finally, it seems we weren't getting a whole a lot of credit for the dividend anyway. We are trading in a dividend yield and by the time we cut it 20% range or something like that. And so, we just felt given the value of the flexibility that we get by saying not being on programmatic distribution but having discretion ourselves to decide how many shares to buy and when and how much debt to buy and when. As well as just the returns that look like it a bit, were available to us by buying our debt and buying our stock and investing in. There is a very high margin transactions. That was just having extra cushion and extra discretion made a lot of sense for us.

Looking forward, we certainly expect given the fact that our containers are coming back primarily to Asia where we expect demand to pick up first, that we are not facing any serious long-term impairment in, I say the effects of the current market environment and we expect our performance to improve pretty quickly. Once market conditions improve and we also expect to generate quite a bit of cash flow right through this difficult period. And so we will reevaluate at every Board meeting when it make sense to go back and start paying substantial dividend.

Gregory Lewis - Credit Suisse

Okay. Great. And then you mentioned that there was debt repurchasing in Q2, are you able to provide the amount?

Brian Sondey

We don't to provide too much detail on that. I say it was in total it was I think $35 million of current face of debt and purchase at a substantial discount. The effects of that in terms of the leverage and the income that will be in the second quarter financials, I think it was purchased in April.

Gregory Lewis - Credit Suisse

Okay. Great. Thanks and congratulations on a good quarter.

Brian Sondey

Thanks Greg.

Operator

Excuse me Mr. Casucci, there are two questions remaining, do you have time to take those this morning?

Jeff Casucci

Absolutely.

Operator

Okay. The next question is from Art Hatfield with Morgan, Keegan. Please go ahead.

Art Hatfield - Morgan, Keegan & Company

Good morning. Thanks for taking some time this morning. Just a couple of things, number of things, what was the share count outstanding at the end of the quarter?

Brian Sondey

Little over $31.9 million is the average, I think 31.3 or 31.4 is the ending first quarter.

Art Hatfield - Morgan, Keegan & Company

Okay. Thank you. And then on the debt repurchase, Brian are there other opportunities out there for you to make any other like transactions to that?

Brian Sondey

We have been buying back mainly our 2006-1 notes that we originally issued in April of 2006. At the time of the issuance I think it was like $660 million or $680 million of face of that time, which means current face in the range of 450 maybe. We have repurchased current face in the range of $85 million the two transactions that we completed. So there is still a fairly substantial amount of debt out there, but we are just going to be very opportunistic that the debt has a coupon of a LIBOR plus 45 or so when we include the rep insurance premium that we pay, and so it’s a very-very cheap source of debt for us right now. And so we are only interested to repurchase it, at a real substantial discount. Debt doesn’t really actively trade, it’s not that many holders of it, they hold it in fairly sizeable chunks but when we do see chunks come available we are interested and I think people know we are interested but only at real substantial discounts.

Art Hatfield - Morgan, Keegan & Company

Great, that’s very helpful. And thinking about capacity and some of the comments that you have made that your customers are seeing their container volumes down 15% and each year about 5% of the container fleet leased in the market. If I think about that simplistically I guess throughout this year on average you could the market, is it fair to think of the market being having excess capacity of around 10%.

Brian Sondey

I think that’s a pretty good metric to go with. Right now as I mentioned our customers continue to say that their volumes are down 15% or so compared to last year, while it’s very hard to say with any degree of certainty why we are seeing trade volumes fall so much faster than global GDP. I guess that the basic economist in me said it has to be and there is an inventory de-stocking going on, and eventually that has to run its course even if economic activity doesn’t improve meaningfully. But a real question for us as we said a number of times just how long does that de-stocking take, and so if it takes the rest of this year and we still trade volumes being kind of minus 15% versus where they were in '08. Do I thinking about it is correct that, say 5% of capacity comes out every year. If there is no improvement in trade volumes for the next three years, it will take 2 to 3 years for supply and demand to become back where it was in '08, which was actually a very tight situation, there was very high utilization in '08.

And I think the real strength of our business and I talked about the resilience of our business model, is the fact that capacity gets shut off very quickly for containers and meaningful number exit the business every year. So you don’t have to, you don't rely on dramatic improvements to bring slight demand situation back in the balance.

Art Hatfield - Morgan, Keegan & Company

Is there any outlet that could create capacity coming out of the faster clip than 5% a year?

Brian Sondey

I guess the one thing that we would do that if we saw a real pickup of housing construction in the US. US used to be our biggest sale market for containers over the last two years or so, it hasn’t been. I think because a lot of used containers here due to use in construction projects. As I think you could perhaps come up with a scenario where global trade remained weak but housing construction picked up but I say certainly not a scenario that we are counting on.

Art Hatfield - Morgan, Keegan & Company

When you talked about the 15% down year-over-year, is that an average for you have seen for the first four months of the year or have you seen the trends that are improved throughout the year?

Brian Sondey

I wouldn’t point to 15% out of the specific number, I was really more for in generally we go out and talk to our customers that’s about the amount that we are hearing. Some customers are down a lot more than that, some customers have been more aggressive on pricing and down less than that, but it seems that just a simple average that maybe I have in our, sometime some of the conversations we have with our customers, is something in that range. I say, the volumes first started getting bad in November, I will say my conversations with customers got increasingly bad from November to February and then we have had some indication from customers that the situation has improved little bit for them in March and April, but not yet sort of really making up for the ground that they gave up in the fourth quarter and first quarter.

Art Hatfield - Morgan, Keegan & Company

Got it. Is there any way when we think about utilization as a 100 basis point decline or 100 basis point improvement in net utilization, is there kind of a rule of thumb impact on EPS with regards to that?

Brian Sondey

Yes I mean the way I would think about it is, one point of utilization is pretty much 1% of leasing revenue, our leasing revenue was in the 300 million range, and so 1 percentage drop on utilization. We have 3 million impact on our revenue and we now drop right to the bottom line on a pre-tax basis.

In addition, 1% drop in utilization probably increases our storage expense in the range of a $1 million and so you probably have about a $4 million overall impact, between storage expense and leasing revenue, per point drop of utilization. So, you can sort of do the math and see, if utilization is the only thing that changes and everything else stays the same. That what’s the impact would be in $4 million for us on a pre-tax basis translates to probably $0.08 or so on EPS basis. It's little bit dangerous to do these things on the fly.

Art Hatfield - Morgan, Keegan & Company

No, that’s fine. That an annualized impact right?

Brian Sondey

Exactly.

Art Hatfield - Morgan, Keegan & Company

Okay. And then the one thing I would say though does tend to be an additional correlation of utilization and sale prices.

Brian Sondey

Correct.

Art Hatfield - Morgan, Keegan & Company

To the extent that utilization falls and gets really poor, it's going to be larger amount of containers available in the world which we will make shipping lines and leasing companies both more eager to sell. And so really it can’t be looked out entirely in escalation, I said it also means, more or less you are going to get pretty low bonuses, which has S&A benefits. So, you got to be careful how you think about a little bit but that’s generally I would say.

Art Hatfield - Morgan, Keegan & Company

That’s very-very helpful. Thanks for your time this morning.

Brian Sondey

Thanks Art.

Operator

The next question comes from Rich Shane of Jefferies. Please go ahead.

Richard Shane - Jefferies & Company

Hi guys, thanks for taking my questions. Most have been asked but conceptually I am not a person or analyst who ever comes on and says nice quarter, admittedly I think the performance is exceeded my expectations. Looking of what's occurred over the last 12 months, I think that the math, it is fair to say that the macro environment has probably been worst than most of us anticipated coming into the cycle and if you had assumed for example that shipping volumes would be down 15%, I don’t think anybody would have assumed that you would exit the arguably pretty near the trop in terms of seasonality with utilization is close to 90% as it is.

What do you think is going on here, is this been a fundamental shift in the industry, has the industry as a whole, the leasing side managed capacity better this time or is there a lag here that is going to continue to drag things even as we start to see a little bit of recovery?

Brian Sondey

Well, certainly, in terms of the macro environment, it's a lot worse than I would have guessed. We used to probably said a thousand times at the investor meetings that we have never seen container volumes actually fall, even in some very difficult global economies and so, going from a worst ever plus 3% or 4% to minus 15% over the last few quarters is certainly worse than I would have guessed. That said, I think we always had a lot of confidence in the stickiness of our revenue, that we, since the last phase significant downturn in the early 2000. We have really shifted our lease portfolio to be much more oriented around long-term and finance leases. Also, even our short-term leases are structured to really limit the volume of containers that can up high and particular the location that we make sure our customers have to bring back leaseable containers primarily in locations where we see good leasing demand.

Again, as I mentioned, I think in the first question, that to the extent the customers, think that maybe they need the container over the next couple of quarters. And anyway you have to bring it back to the same place to expect they needed within couple of quarters. The incentive to drop off the containers less than perhaps it would have been back in early 2000, when they were just (inaudible) type where they had say more advantages to drop off the containers in the US or Europe and save some operating expense and the back haul.

And so, quite frankly, we are not that surprised at the way that revenue and utilization has held up. I think one of the nice thing about this business model that we have is that it is one where when things get bad, because of the lease portfolio and the stickiness of the revenue, it tends to be a pretty gradual slide. And so, we withstand a pretty extended period of weak demand before we see utilization getting to very uncomfortable place. On the other hand, when things pick up, especially in a situation like now where we expect new buying to be low even if market volumes improve. We expect our utilization to climb very fast. Just given the all of our containers most or the vast majority are in place where we expect customers to need them. And so I think to some extent it's just a basic part of our business model that gives us this kind of resilience.

Richard Shane - Jefferies & Company

Great. I appreciate the answer and you guys are doing nice job managing through all of this. Thank you.

Brian Sondey

Thanks Rich.

Operator

Mr. Casucci, I see that there are no further questions at this time.

Brian Sondey

Okay. Well, thanks everyone for your continued interest in TAL, and we look forward to talking to you as things progress over the course of the year. Thank you.

Operator

The conference has ended. You may disconnect your line. Thank you for attending. This now concludes the first quarter 2009 results of TAL International Group. Thank you.

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Source: TAL International Group, Inc., Q1 2009 Earnings Call Transcript
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