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TAL International Group, Inc. (NYSE:TAL)

Q1 2010 Earnings Call

May 5, 2010 9:00 am ET

Executives

Jeff Casucci - VP, Treasury and IR

Brian Sondey - President and CEO

John Burns - SVP and CFO

Analysts

Ben Hartford - Baird

Jon Langenfeld - Baird

Sameer Gokhale - Keefe, Bruyette & Woods

Derek Rabe - Morgan Keegan

Bob Napoli - Piper Jaffray

Operator

Welcome to the TAL International Group first quarter earnings results conference call. As a reminder, 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) 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. Mr. Casucci, the floor is yours, sir.

Jeff Casucci

Good morning and thank you for joining us on today's call. We are here to discuss TAL's first quarter 2010 results, which we reported yesterday evening.

Joining me on this morning's call from TAL are Brian Sondey, President and Chief Executive Officer and John Burns, Senior Vice President and Chief Financial Officer.

Before I turn the call over to Brian and John, I would like to point out that this conference call may contain forward-looking statements, as that term is defined under the Private Securities Litigation Reform Act of 1995, regarding expectations for future financial performance.

It is possible that the company's future financial performance may differ from expectations due to a variety of factors. Any forward-looking statements made on this call are based on certain assumptions and analysis made by the company in light of its experience and perception of historical trends, current condition, expected future 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 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 these risks and uncertainties, please see the Risk Factors listed in the company's Annual Report filed on Form 10-K with the SEC on March 1st.

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 2010 Earnings Call. In the first quarter of 2010, our operational and financial recovery started to pick up steam.

World trade has continued to recover in 2010 with containerized trade volumes in the first quarter, up 15% or more, compared to last year's volumes and with export volumes to major China locations returning to first quarter 2008 levels.

At the same time, global container capacity remains constrained due to complete lack of buying in 2010 and container factory production constraints in 2010.

This combination of recovering trade volumes and restricted container capacity has caused a rapid evolution in our market from a large global surplus of containers throughout most of 2009 to a severe global shortage of containers in early 2010.

This container shortage has generated strong leasing demand and we are seeing all of our major operating metrics improve rapidly.

Our improving operating performance has had strong sequential improvements on our profitability and our adjusted pre-tax or cash income increased 35% from $0.39 per share in the fourth quarter of 2009 to $0.53 per share in the first quarter of 2010.

As I just mentioned, the improved trade growth and strong leasing demand we are seeing, are leading to significant improvements in all of our key operating metrics. Our core utilization, excluding idle factory units, increased 3.1% during the first quarter to reach 93.4% as of March 31st. Our utilization increased another 1.1% in April to reach 94.5% as of April 30th, and we expect further utilization improvements through the second quarter as well.

In fact, we think it is possible that we will reach an all-time high level for core utilization this year.

We've also started to see improvements in our leasing rates. Our average dry container leasing rates during the first quarter were actually down slightly from the average for the fourth quarter of 2009, due to pickup incentives provided to certain customers. But these pickup incentives and some of the other concessions provided last year have started to expire, and we are beginning to see the benefit of units picked up on leases reflecting improved market leasing rates.

Market lease rates have increased substantially over the last few months due to the combination of limited container availability and high new container prices. Our average dry container lease rates started to noticeably move up toward the end of the first quarter and we expect they will trend up for the rest of the year.

Our lease container disposal prices are improving as well. Used container prices were roughly 20% last year, due to the build-up of excess container inventories and a reduction in demand for used containers for domestic storage in one way shipments.

This area disposal prices have been moving up steadily due to shrinking container inventories, and we are also seeing improved demand for one way boxes especially in Asia due to the increased trade volumes.

We expect our disposal prices to continue to improve perhaps back towards the 2008 level, if global container capacity remains extremely tight for the next several quarters.

In addition to benefiting from improving operating and financial performance, we have also accelerated our level of investment in growth. TAL has been ordering containers aggressively since the end of last year to create availability for our key customers and take advantage of attractive investment opportunities.

Our investment in containers this year has been further supported by a shift in the balance of owned versus leased containers. Historically, shipping lines have owned 55% to 60% of the containers they operate at least 40% to 45% from leasing companies like TAL.

This year, shipping lines have so far been a much smaller share of new container production, due to the financial constrains they are facing from ongoing challenges to their profitability and ongoing capital outlays required to fund their large vessel order books.

In addition, small leasing companies seemed to be fairly quite this year in regards to new container production, possibility due to capital limitations or the problems facing the German KG market that has traditionally funded a large portion of small leasing company investments.

The net result of these changes has been a shift in new investment share in favor of the large leasing companies like TAL. So far this year, we have ordered or are currently in the process of ordering over $425 million of new containers. This represents over 175,000 TEU of dry containers and 9,000 TEU of refrigerated containers.

We have also made significant investments this year in our new tank container product line as we are seeing strong demand for this equipment as well.

These investments had little impact in our profitability in the first quarter as only a small portion of our orders were delivered and put on hire in the first quarter. So we have already committed a very large portion of these new orders to leases. In our new productions, these are contributing more significantly to our growth and profitability as more of the units are produced and placed on hire.

While TAL has been investing aggressively, overall market investment will likely be fairly low this year. Container production capacity has been constrained this year, since the process of reopening the factories and adding back workers after the long shutdown last year has been difficult and time consuming.

In addition, the lack of active purchasing by large shipping lines has made the factories cautious about adding back capacity too quickly. So, at least, for now, we are living in the perfect world of accelerated investment for TAL, coupled with low industry-wide container capacity additions.

As indicated in the press release, we have increased our dividend to $0.30 per share this quarter. This increase reflects our improved financial performance and our current expectations that market environment will remain favorable for some time.

As discussed before, we will continue to reevaluate the size of our dividend as our performance and expectations for future market conditions evolve.

I’ll now hand the call over the John Burns, our CFO, who’ll review our financial performance in more detail.

John Burns

Thank you, Brian. As we noted in the earnings release and in prior calls, we focus on adjusted pre-tax results rather than net income, since we consider unrealized gains or losses and interest rate swaps to be unrelated to operating performance, and since we do not currently pay any meaningful U.S. income tax and do not expect to for the foreseeable future due to accelerated tax depreciation on our leasing equipment.

As Brian noted, adjusted pre-tax income jumped 35% in the first quarter to $16.2 million or $0.53 per share from $12 million or $0.39 per share in the fourth quarter 2009.

Leasing revenue for the first quarter was $72.9 million, an increase of 300,000 from the fourth quarter. Although average on-hires were up almost 23,000 units during the quarter, total leasing revenue was essentially flat for three main reasons.

First, there were two fewer building days in the first quarter versus the fourth quarter, which curtailed revenue growth by approximately $1.4 million.

Secondly, average dry container per diem rates in the first quarter were down by 1.5% compared to the fourth quarter 2009 as a substantial portion of the units placed on hire during the fourth and early first quarters were provided with initial free lease periods.

A substantial portion of these lease incentives expired by the end of the first quarter, and accordingly, we anticipate per diem rates to increase in the second quarter and for the remainder of the year.

Third, because of the container shortage, we experienced a significant reduction in redelivery volumes and correspondingly reduction in redelivery fee revenue.

As container leasing demand improved, we experienced improved sale prices and accordingly an incremental improvement in gains on sale of owned containers and trading margins. Disposal of trading and owned containers generated a combined net margin of $5.2 million in the first quarter, an increase of $2.5 million from the fourth quarter.

Sales gains in the first quarter reflect an increased in selling prices of approximately 10% over the fourth quarter, more than offsetting the normal seasonal drop in sales volume. While increasing sale prices contributed to an improvement in our trading performance in the first quarter, our trading profitability for the next few quarters will be constrained by small off-hire resale inventory levels.

Although, we have actively purchased a significant volume of shipping line units for resale, the current container shortage has led to very limited redelivery of these trading units and hence smaller off-hire inventory available for resale.

We continue to be pleased with our strong collection performance. We recorded a small net credit in bad debt expense for the first quarter and less than $200,000 of bad debt expense in the fourth quarter. However, credit risk will remain a concern until our customers return to more normal levels of profitability and financial strength.

As Brian noted, we have invested aggressively with over $425 million of new container orders so far this year, much of which will be accepted into the lease fleet during the second and third quarters. This aggressive level of investment is funded by continued strong operational cash flows and expanded credit facilities.

As of March 31st, we had over $230 million of cash and available credit lines and we further increased our credit facilities by $145 million in April to support the aggressive new container investments we have made this year.

In summary, we are pleased with our first quarter performance and looking forward, we anticipate that continued improvement in our operating metrics, the on-hire newly ordered containers, and increasing sale prices will contribute to sequential improvement in our quarterly financial performance for the remainder of 2010.

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

Brian Sondey

Thanks John, I will now finish the prepared part of the call with some thoughts on our outlook. As I mentioned before, we generally expect our market environment to remain favorable for at least the next several quarters, and we expect our operating and financial performance to continue to improve as our core utilization, lease rates and disposal prices improve, and as a larger portion of our newly ordered containers are delivered and placed on hire.

Due to these improvements, we expect our pre-tax income for the second quarter to increase 10% to 20% from the first quarter level. And we have increased our projection for our full year results in 2010, so we now expect our pre-tax income for 2010 to be 25% to 35% higher than our full year results from last year.

In summary, we are pleased with the progress of our recovery and are optimistic about the opportunities we will see over the rest of the year. Our utilization and used container disposal prices are rapidly recovering, due to the combination of recovering trade volumes, low container production in 2009, and constrained container production in 2010.

Our leasing rates are beginning to recover, as some 2009 incentive deals expire and as containers go on-hire and above average rates and our quarterly financial results are improving quickly on a sequential basis.

We are investing very heavily in new containers and expect an accelerating growth rate this year, as we take advantage of the strong market and the shift in share from direct ownership to leasing, and we have decided to increase our dividend due to our improving performance and expectations for sustained favorable market conditions.

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

Question-and-Answer Session

Operator

(Operator Instructions) The first question we have comes from Ben Hartford of Baird. Please go ahead, sir.

Ben Hartford - Baird

Just want to start I guess on the per-diem side, you talked about rates coming in about 1.5% this quarter but trending higher through the year. How does that compare relative to the prior year levels?

Brian Sondey

Yeah, we think about 2009 and 2010 are sort of mirror images of each other in a lot of ways and one of them is certainly per diem rates. Last year, per diem rates actually started fairly high after a strong year in 2008 and fell throughout the year as we provided discounts to our customers to encourage and they keep containers on hire. Occasionally even though there was weak overall demand, we sometime saw some spot requirements for particular locations and particular container types and whenever we did see those, we competed very aggressively with low rates to get our [depot] units on hire to avoid say prolonged periods of downtime.

And then we also did some lease extension deals last year to extend leases to protect against off-hires and because of all those various actions rates fell I think for our dry container product line something in the range of 8% or 9% over the course of 2009.

Rates for us bottomed in January of 2010 and that’s mainly because I think as John mentioned at the end of 2009 and early 2010, we started to see the market pickup and at the time we didn’t really know how long the conditions were going to last and we thought it was wise to try to push a lot of equipment out say prior to Chinese New Year, and we had a couple of leases that we like a lot and we had opportunities to push the containers on hire by providing those discounts.

And so even though the market started to firm a little bit in the fourth quarter of ‘09, our rates bottomed in January 2010. Since then, they moved up quite a bit from January 2010 to March 2010 and they continue to progress upwards into April and we think really progressed upwards in a monthly basis for the balance of the year really due to three things.

Initially in terms of the first quarter move a lot it is because those temporary pickup incentives we provided expired. Typically, its 30 days or 60 days free when you pick up our container and those ran out by the time that the first quarter finished. In addition some of the incentives we provided last year to control off-hire volumes expire over the course of this year. And then third is, as new containers come into the fleet, they are coming in at high much per diem. Right now, the market leasing rates for new containers are 50% or more higher than our portfolio average, and so as the new containers come in that are going to push the rates up quickly as well.

Ben Hartford - Baird

Okay. So, on balance, it sounds like you expect the average lease rate of the portfolio certainly by the end of the year to be higher than the previous year, but by the third quarter do you expect those rates to be positive year-over-year?

Brian Sondey

We don’t want to get too specific on that. Obviously it depends on exactly how things play out in terms of container pick up timing and so on. I don’t want to give a specific forecast. We think a lot of the reduction we saw in 2009 should be round back up by the time we finish this year.

Ben Hartford - Baird

Okay, I understood. On the utilization side you know the new containers that you bring into the fleet, the upper trend of utilization here in recent months, how do we think about utilization during the course of the cycle here in the near term or over the next couple quarters? Can it approach 2008 levels or are the containers that you bring into the fleet? Does that tamper utilization? Can you provide a little bit of color on that?

Brian Sondey

Yeah, sure. Most leasing companies, including us, when we talk about utilization, we exclude the factory units that haven't yet gone on hire. And so you actually don't see a dampening effect of when we buy new containers before that’s gone on hire. And so our utilization being up in the first quarter, one reason that was up is that there was no negative effect of some of the containers that we are purchased and are waiting for them to go on hire. And typically there is very little costs of those containers. We don't pay for them, typically for 60 or 90 days and there is no depreciation charges until they go on hire. And so, we just keep them out of the financials generally, until they go on hire.

In terms of our core utilization, our utilization of units excluding those idle factory units, which is what we track we talked, at the end of April was 94.5%. Pretty much the all-time high for us for core utilization, it's some where just around 96%, and I think that was reached a little bit or got close to there in 2007 during the third quarter and close to that in 2004.

Our current guess is we are going to get past that this year. That we are seeing demand for containers and locations like the U.S. and northern Europe where the typically demand is quite weak, and it takes a lot of time to move containers out of those places. We are seeing multiple customers come to try to pick up units in those locations. And so, unless something changes here over the next few months, I think we’ll see our utilization go higher than it has been pretty much ever.

Ben Hartford - Baird

Okay. Great. And to that point where the U.S. and Europe, both typically weaker demand location, is it safe to assume that you are not offering any sort of incentives to move inventory there?

Brian Sondey

We haven't provided incentives for a while. Obviously in hindsight, we wish we could have taken some of the incentives back we gave in the fourth quarter and early first quarter, but right now it is just the market that has very short containers and from almost every location, you don’t have to work too hard to get containers on hire.

Ben Hartford - Baird

Any trouble securing new containers out of China to put into lease?

Brian Sondey

Certainly the overall factory production capacity remains very much lower than it was I'd say back in the big production years like 2006 and 2007. You know, as I mentioned that the factories essentially were closed in 2009 and they started reopening the factories in the first quarter of this year, but they have been doing so on a control basis. They are taking time and effort to go out and find enough workers to fully staff the factories. Typically they've come back in most locations rather than operating two lines on two shifts a day or maybe one line or one shift a day. They are limited both by just the practical limitations of bringing capacity back up, but also by I think just some caution by the factories that not wanting to add capacity back too fast especially with the shipping lines on the sidelines for the most part for buying.

And so we’ve bought an awful lot of containers this year and that's because we are a much bigger share of new productions this year than we are of containers in the market, but quite frankly our buying would be higher than even it is if we could have gotten all the states that we wanted.

In general, it's probably a favorable thing that the factors are being cautious adding back to capacity because it is driving very strong demand for our existing containers. Again we do expect that we are going to be at very high levels of procurement this year, but we would have been even higher if we could have gotten all the containers we wanted.

Ben Hartford - Baird

It sounds like that answers my next question. I guess just from a higher level, what is the primary constraint in a very healthy leasing environment? Is it the access to containers?

Brian Sondey

It depends on who you are talking about. I think for us and probably the other major leasing companies the primary constraint is a combination of access to the containers in terms of production capacity and remaining time in the peak season for dry containers. We have to be a little cautious about how far forward we buy containers, especially at today’s container prices, just because dry container demand does at least typically tend to tail off once you get pass the September-October.

I think for smaller leasing companies, some of them, perhaps are more constrained by access to capital. A lot of them are funded by this German tax driven investor money and that market has been in a bit of disarray since last year. And so, somewhat surprised, we have seen despite the fact that it's a very high market for containers and with the absence of buying by the shipping lines, it's a good opportunity to invest in new containers for leasing companies.

We have seen the smaller leasing companies to be fairly quite so far this year at least on new production.

Operator

(Operations Instructions) The next question we have comes from Jon Langenfeld with Baird.

Jon Langenfeld - Baird

Can we talk a little bit maybe about your other businesses that had some traction before the downturn when you think of things likes the chassis business and maybe any prospect there? Or maybe even some things that weren’t on the radar like the cranes or any other things that you are thinking outside maybe the main trend?

Brian Sondey

Yeah, sure. I mean, one of the things just maybe in general than we believe we offered investors is we do operate at a fairly broad portfolio of equipment. We have got dry containers that most other leasing companies also have and we also have very long and well-established, a significant presence in refrigerated containers and special containers and then previously through our affiliated sister companies when we are part of Transamerica.

We had a big tank container business, a chassis business, invested in port equipment and I think as we discussed probably back in a (inaudible), and we have been adding those products back to our portfolio, just because we thought they were good businesses, and it gave us additional avenues for growth, so that we didn’t need to push growth at any particular product that we didn’t see the returns being attractive.

In general, it’s a strategy that we like and we intend to continue to pursue and we also think it gives us sort of greater presence with the customers and so that in years, like say in ’07, where a lot of leasing companies, especially smaller guys are chasing the customers for dry containers to the extent that we could offer them a variety of things, and handle all their equipment. It helps us again to just maintain presence with the customer.

In terms of the specific products, we have been investing pretty heavily in all our core products that drives in refrs and specials this year. And we have also have been making very sizable investments in tank containers that market carries chemicals and some other things has been coming back very nicely.

In terms our chassis product line, our utilization is drifting upwards there, but we don’t anticipate a lot of new investments there, at least probably for another year or so, just because there still is a surplus of chassis in the market. And the reason that we are seeing a surplus of chassis is that it's just slightly different dynamics than containers.

I mean, first of all, they are all here in the U.S. and so it's really driven by the Trans-Pacific trade and that’s actually been the weakest trade out there of the main trade. We are seeing more drop of growth in Asia to Europe and inter-Asia trade, and so while trade wires are coming back globally they are not coming back quite as fast for Asia to North America.

In addition, we are seeing access capacity freed up by greater pooling chassis by the shipping lines. And so there is a sort of bringing out fleet deficiencies of the chassis that’s helping to contribute to the surplus we are seeing.

And then finally chassis just have a longer life. One of the things that have really created demand for containers is that the container fleet shrunk fairly significantly from the summer of '08 through the first quarter of '10. The container fleet probably got 6% more smaller. You don’t see that same shrinkage in chassis. Typically they last 25 years or so and so it just takes longer to have that kind of capacity adjust. And so again I think that’s a product line we like, we think we are well placed to do it, but I don’t see a lot of new investment in chassis for a while.

Jon Langenfeld - Baird

And then the port equipment side any thoughts on that?

Brian Sondey

Yeah, I think that something we’ll do opportunistically. The port equipment deal that we did was really driven by -- it was a port being developed by subsidiary one of our major customers and we came into that deal through that customer. And I think if we see opportunities for things like that in the future we will. I don't see us getting real aggressive at least in the near term and standalone port equipment deals don’t have a connection to one of our core customers.

Jon Langenfeld - Baird

On the resource side that solidly had a very good run here over the last couple of years relative to the rest of the market. What’s your outlook on that if you look out over the next couple of years?

Brian Sondey

As you know we didn’t have the same down cycle in 2009 as the dry container businesses had and I think is mainly just because consumers continue to buy food through the recession as well as I think in dry containers it was a combination of decreased consumption and shrinking inventories and just given a nature of the food product they are not these to inventory and that wasn’t really that much of an inventory correction for fresh vegetables and so for refrs we never saw utilization really fall below 90% even in the depth of the summer of last year.

In terms of growth we are investing pretty heavily in our lease product line just like we are a dry container product line and I think for the same reason that capacity just on a container basis is very tight and the shipping lines because of their financial constraints and capital require to their vessels are not investing as aggressively for themselves that they used to and so just opens up a bigger window for the leasing companies like us.

Jon Langenfeld - Baird

The last question I have just, if you had to look at the various regions of the world where with the dry containers be mostly available?

Brian Sondey

Well, I tell you if you try to find 1000 containers today you could find them.

Jon Langenfeld - Baird

Really, okay and so the idea at some last week, where someone have talked about they are a lot empty containers sitting on there, who will be don’t see that near trends and in the leasing trend there are on parts of Europe or the US what we are seeing in those certainly the US, I mean Europe I guess, where excess of container?

Brian Sondey

If you drive via the port of New York you don’t see container piles there and most of it just containers and transits they are waiting to get off of the ship, but there are some inventory and a few of the most challenged locations in the world a couple of US East Coast locations continued to have some containers there, but its very small volumes on both an absolute basis and also compared what you might typically expect for those places and its amazing how quickly the global inventory containers gotten clean up this year.

Operator

The next question we have comes from Sameer Gokhale with Keefe, Bruyette & Woods.

Sameer Gokhale - Keefe, Bruyette & Woods

Here one of the questions I had related to, if you could just remind me, how you think about leverage overall in your business and I appreciate your comments, when you spoke earlier about, its sound like you’re trying to balance out several objectives. You don’t want to place too many orders for new containers because you don’t want overextend given that this can be cyclical business, but there on the other hand we’ve seen utilization rates, they’re just increasing and there does to be a demand for containers and then seem to be as many containers available for purchases you might want to purchase and so you increased your dividends.

So I mean when you balance out these various needs, how do you think about, where leverage should max out longer term and how do you think about dividends versus share buybacks and then maybe potentially evaluating a capital raise if you think about the fact this is a very favorable environment for your industry for couple of years. I know there is a lot of things in there, but essentially I’m trying to get a sense for how you think about your use of capital and your balance sheet over the next year or two?

Brian Sondey

Well, I think you crack at it and I’ll see if I can keep track of the, my answer right, but feel free obviously to follow-up by middle cycle quarter.

Sameer Gokhale - Keefe, Bruyette & Woods

Sure

Brian Sondey

In terms of leverage we think this business in general make sense to operate with a moderate amount of leverage that we have that one of great strengths of this business is that it doesn’t while the underlying business of shipping is relatively cyclical. Our business performance tends not to be that cyclical and that just because we have long-term contractual revenues, the average remaining duration our long-term lease portfolio is now over four years, relative to short asset cycle, while the ships may take three or four years to build and so you may have multiple years of excess are under capacity.

As we saw last year even in very extreme down market container capacity corrects quickly just because we stop ordering them pretty much instantaneously and they amortize or say sell lot of the fleet at 4% to 5% a year and so because we have this stable performance in this long-term contractual revenue base, again we think a moderate amount of leverage make sense and for us we look at our leverage we typically look at the ratio of our net debt to our revenue earning asset. That ratio I say for most of the time we have been public has been around 75% to 76% and so like 3 to 1 leverage against our main operating asset.

Last year that leverage came down due to two reasons. One is just we weren’t investing as much as we usually do. I think last year our total capital spending was in $50 million range or something like that and also we suspended the dividend just because we were to some extent in unchartered territories and felt we ought just kind of batten down the hatches and build capital. So the combination of those difference is to took our leverage down to about I think the high 60% like 68% or so on a net debt to revenue earning asset basis.

In terms of our dividend the way we typically think of our dividends we set it. So that it allows us to pay the dividends and sell fund the equity required for our long-term level of anticipated growth and then typically we have talked in the past there we expect our assets to grow over the long-term 10% to 12% annually as we grow with our market and hope we take a little bit of market share and maybe add some new products and the dividend again is, through the excess cash that falls out after we fund that anticipate a long-term growth internally.

In terms of what’s restricting our investment right now as I mentioned it is mainly access to the containers. We would have had opportunities to place a lot more containers in high with customers on to very good deals this year, but just the other factories themselves were constrained in how much space they could give us or willing to give us. The factories, if we went to them and say, we want all your space for July they are not going to, to do that because they need to make sure they keep themselves available for other core customers and don’t want to necessarily sell out to one.

So while again we have been a big share of new production this year just overall production has been constrained. We think we will continue to buy this year as long as the market remains active in terms of our customer wanting containers. Right now we are placing orders for the summer time and at some point our visibility in to ongoing demand gets challenges by the seasonality of the business, but we continue to see our customers having interest in securing forward access to leasing equipment and to the extend that we continue to see that, we expect to continue to buy. We found that the capital markets have been fairly open for us. We have been adding a lot of financing facilities over the last six months or so. I think we are going to continue to see that and we actively adding new facilities to allow us to continue on this rapid pace of growth, but overall we think its going to be very good investment here and probably the best investment here we had in recent memory.

I hopeful that situation also could last a little while again its very hard to our business to have too much confidence looking forward, but I think some of the drivers that are leading to really high level of investment for us this year, which is based with the combination of where new trade growth than just capital constraints for our customers are likely to persist for a while and so we are actually hopeful that, we will see this same market, maybe not quiet to this extreme, but at least same market going forward as well. I’m not sure if I answered all your questions there, but.

Sameer Gokhale - Keefe, Bruyette & Woods

No, you captured most of them. It means like the industry fundamentals are obviously very strong and then you’re looking at several alternatives for deployment of capital and use of capital, it seems like this is the high quality issues to face, given the positive fundamentals for the industry overall. So that certainly helps me to get a better sense prior to thinking about it.

Brian Sondey

Maybe just a follow-up and we believe we have access to the capital we need to support the level of growth that we can accomplish and again we do things that our growth rate this year is going to be above the long-term average, I talked about. We continue to evaluate our leverage, we think its appropriate, but we did start this year at lower than normal leverage and we will go up, if we continue to invest at the rate we are and we will make sure that we believe that moderate leverage makes sense. We don’t want to get into an over leverage situation, but again we believe we will be able to have the tools we need to keep that in check, and again the main constraint we think is going to be what we can get from the container factories.

Sameer Gokhale - Keefe, Bruyette & Woods

Great and just one quick follow-up if I may. In terms of the potential cost improvements you could experience from lower storage costs, because the improvements in utilization, could you help us quantify how much of an improvement you expect to see on your operating expense line from lower storage cost, say as we look at the next twelve months or so?

Brian Sondey

Yes, we don’t provide like line item forecast, but typically what you do see is that your operating expenses, which is container storage, container repairs and container positioning tends to be significantly inversely related to utilization. I think we did see a fairly sizeable reduction in operating expense from Q4 2009 through Q1 2010 and we’ll continue to see improvements until the business gets back to full utilization.

Operator

The next question will have comes from Art Hatfield with Morgan Keegan.

Derek Rabe - Morgan Keegan

This is actually Derek Rabe in for Art Hatfield. Just real quick most of my questions have been answered, but just on the new container market side. Can you just talk about what kind of prices you are seeing either on the dry or the refr side and how that’s trended recently and maybe where that’s going?

Brian Sondey

The refr prices have been relatively stable for this year and over the last year as well. Just basic steel doesn’t make up as much of the cost of refr that it does for dry containers and in addition dry container this year prices are getting pushed up just by the shortage of capacity. We are not really seeing the same production constraints on the refr side. Dry containers prices are up something in the 30% or more range this year. We got first orders at the end of last year, where we purchased products evenly below $2000 per 20 foot container and now we are heading into the mid-2000, not sure exactly where we are going next, but its going to be somewhere in the mid-2000s.

Derek Rabe - Morgan Keegan

That’s helpful and then on the share repurchase program, can you just remind me how much you have left there and if you have repurchased any in the end quarter?

Brian Sondey

Yes, there is a fair bit of authorization left I think it’s a more than 1 million share left maybe okay being advised a little bit 100 million shares left. We haven’t purchased significant amount of stock since the summer of last year and we will see how it goes forward, but obviously our stock prices a lot lower last summer than it is now.

Derek Rabe - Morgan Keegan

Just two more housekeeping ones, how many units did you sell in the quarter and then what was the average age on your current fleet?

Brian Sondey

Okay. Good questions. We typically in our 10-Q that comes out, we have a section we talk about I’m just turning to the page. In the average age of containers has come down because of our, we have to buying is probably just a little bit over seven years right now. In terms of how many TEU containers we sold in the first quarter? We sold about 19,000 TEU.

Derek Rabe - Morgan Keegan

Okay. It’s very helpful. I appreciate. Thanks guys.

Operator

The next question we have comes from Bob Napoli of Piper Jaffray.

Bob Napoli - Piper Jaffray

It has been I know this is the short-term discussion, but there has been some of the discussion by the industry players, the three public companies of the drop off these having a negative effect on first quarter, which obviously is good thing long-term, but I was just wondering can you quantify what drop off these typically are and how material that is in?

Brian Sondey

Yes, I mean there is a lot of bit of background typically, when containers somewhat higher, we are paid by our customers if they come up higher in locations that typically we get a logistical fee associated with the lease and also we get repairs paid by the customers.

We lease those containers typically we don't position them or repair them at least to the same level we would if they were going to be released. So there is some extra net revenue coming out of that last drop off. That can be equivalent to six to twelve month of leasing revenue, and so to the extent that your drop-off volumes down any particular quarter that has probably net effect of profitability just because the drop-off fees are much bigger than the revenue you would have gotten for that quarter, [which is] on leasing basis. John may have better number. I think the drop-off fees were down probably from I say, early last year in ‘09 where we are seeing big volumes of drops-offs down probably from I don’t 1.5 million.

John Burns

Yes, but the quarter we were down about a 0.5 million on ancillary fees from Q4.

Brian Sondey

Down a lot, but not from the Q1 to Q1.

Bob Napoli - Piper Jaffray

Just you guys have extended number of credit lines. How much I mean funding did you add over the last month or two. How much more are you paying? What are the terms from the banks? The banks are not, still I don't think are easy to get money out of, but you guys seem to be successful in that?

Brian Sondey

Well, we definitely seeing the capital markets open up for us. Over the last I would say, six months we probably added $400 million or more facilities that tends to capital remains expensive much higher than it was before the crisis. I mean quite frankly we are actually seeing the terms come in a little bit, more recently and so rather than say, having to pay more for additional facilities, where we think at least the last we were doing or getting a little bit more attractive and we think that's going to continue. Although there is no doubt its going to remain very high compare to where it was historically,

Bob Napoli - Piper Jaffray

Well, can you quantify that time?

Brian Sondey

Too much on that, we typically when we do a deal we file, we don’t want to talk about.

Bob Napoli - Piper Jaffray

Okay. Just I mean I don’t sure how affluent situation obviously in Europe and Spain and Greece and you wonder what could be rail this global recovery and the great trend you seem you have in this industry in the leasing industry right now. Do you have any thoughts around that or are you seeing any initial reaction anywhere from the European troubles?

Brian Sondey

It has been interesting so far and I can’t tell you exactly why, but despite the headlines you read about in terms of the Europe risks. The Asia to Europe trade probably has performed strongest in terms of their recovery. 2010 volumes in fleet rates compared to 2009 and again I can’t tell you exactly why that’s the case. To the extent that Europe were to drop back in to some significant recession and import demands that will be because of that. That certainly wouldn’t be good.

I typically think the effects in two different ways. One in terms of our utilization and say basic business performance, I think that we had to see a real pretty significant double dip long lasting recession to drop our utilization down for a while. This container capacity is so tight and we put containers on to, generally leases that out quite of bit stick factor, but I don’t think the euro situation again borrowing the fact that may trigger say a real big global double dip procession and hopefully that won’t happen in borrowing that I don’t think you will see a huge impact on utilization. What you will see obviously if global trade growth slows that’s going to limit our level of investment and growth for ourselves. So I think the real challenge would be to us on the growth level just how much can we make out of this market situation.

Bob Napoli - Piper Jaffray

I have a question on incremental market share. Historically, over the last several years, the shipping companies have found about 65% of containers or 55%, 45% and I was wondering, what’s your feel for the incremental market share? Are you seeing any of the shippers buying containers or as the leasing companies--?

Brian Sondey

We are seeing a couple start to buy, but in general, we are seeing the shipping lines are being very cautious about buying, and we don’t have any hard statistics that I can rely on or point to, but in general and talking with the manufacturers what we hear is that there is an expectation that maybe it is going to be 70% to 75% leasing companies this year. Again, we are historically to then maybe 40% or so.

Bob Napoli - Piper Jaffray

As far as the shippers and credit risk and most of the major shippers have raised capital or been bailed out by their governments in one shape or another. How are you concerns about credit risk around the shippers today?

Brian Sondey

As John mentioned in his comments, we still view that credit risk is elevated compared to where it was before the crisis and just because the other shipping lines lost so much money in 2009 and continue to have large future outlays required for the vessel they have ordered, and so a lot of lines are still in a more difficult place than they were historically and it does make us have some concerns.

That said I think the credit risk, as we look out at least, is down a lot from where it was last year. First of all, the shipping line profitability is much better right now than it was last year. Most of the major lines are saying they are currently profitable on an operating basis. A lot of them are saying they are profitable on a net basis and so that obviously gives us some security.

In addition, as you point out, a lot of lines that had major sort of pinches in terms of their cash flow last year, we are able to gain concessions from banks and new capital from combination of ship owners and governments and outside equity players. So, our view generally is that if those types of stakeholders are willing to double down and the worst of the worst last year they ought to be all the more so willing to write out like this one which is much better.

And then finally our big risk and recovery, we almost always get the containers back. I think our historical experience has been we get 90% to 95% of our containers back and it is sort of a rapid default situation where customers kind of go to Chapter 7.

The big risk last year was, there were too many containers in the world and so if we had to go out and recovery whole pile of containers. We were going to go up in situation where we are getting revenue in those containers to where we are sitting on them. Well that's not the case this year. If we were to see a shipping line falter due to liquidity problems, we would have a lot of takers for the containers that we recovered, and so for all those reasons we think that the risk is down a lot from where it was last year.

So that said when investors ask me or analysts ask me what are the things that worry about are we really feel good about the market place but that's the one thing where we still see some concerns.

Bob Napoli - Piper Jaffray

If I would be able to re-lease at much high rates?

Brian Sondey

Yeah, quite frankly. If we get well back in China, I would say, please.

Operator

And at this time, it appears that we have no further questions; I will now turn the conference back over to Brian Sondey for closing remarks. Mr. Sondey.

Brian Sondey

Just thank you all very much for your ongoing interest and support of TAL, and we look forward to talking with you in the future. Thank you.

Operator

Thank you gentlemen, and we thank you all very much for participating in the TAL results conference call. This concludes today’s event.

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Source: TAL International Group, Inc. Q1 2010 Earnings Call Transcript
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