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TAL International Group, Inc. (NYSE:TAL)

Q3 2012 Earnings Call

October 25, 2012, 09:00 am ET

Executives

Jeff Casucci - VP, Treasury & Investor Relations

Brian Sondey - President & CEO

John Burns - SVP & CFO

Analysts

Helane Becker - Dahlman Rose

Greg Lewis - Credit Suisse

Bill Carcache - Nomura

Art Hatfield - Raymond James

Rick Shane - JPMorgan

Sal Vitale - Sterne Agee

Michael Webber - Wells Fargo

Ken Hoexter - Merrill Lynch

Jordan Hymowitz - Philadelphia Financial

Operator

Good morning and welcome to the TAL International Group Third Quarter 2012 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today’s presentation there will be an opportunity to ask questions. (Operator Instructions) Please note that this event is being recorded.

I would now like to turn the conference over to Jeff Casucci, Vice President, Treasury and IR.

Jeff Casucci

Thank you. Good morning and thank you for joining us on today's call. We are here to discuss TAL’s third quarter 2012 results, which were reported yesterday evening. Joining me on this morning's call from TAL are Brian Sondey, President and CEO and John Burns, Senior Vice President and CFO.

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 and any such statements are not a guarantee of future performance and actual results or developments may vary materially from those projected.

Finally, the company's views, estimates, plans and outlook as described in 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 makes 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 located in the company's Annual Report filed on Form 10-K with the SEC.

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

Brian Sondey

Thanks Jeff and welcome to TAL's third quarter 2012 earnings conference call. TAL had another strong quarter of operational and financial results in the third quarter of 2012. We generated a $1.48 per share in adjusted pretax or cash income for the quarter. Our container fleet continued to perform exceptionally well. Utilization averaged over 97% for the quarter. Our operating and administrative expense ratios remained very low and used container sale prices held fairly steady at historically high levels.

We also continued to invest in new and sale leaseback containers during the quarter, pushing our 2012 investment above $800 million. Because of this investment, TAL's fleet now includes over 1.9 million TEU. This represents an increase of over 17% from beginning of this year and over 70% from the start of this current strong market cycle at the end of 2009.

Our market environment continues to be favorable. Trade growth remained solidly positive despite global economic challenges. Market forecasters have reduced their estimates for global containerized trade growth in 2012 and the peak season for the major East-West trades was disappointing this year, but regional and North-South trades continued to perform well and global containerized trade growth is expected to be around 5% for the year.

The supply and demand balance for containers remains in our favor. Definitely inventories of used leasing equipment remained unusually low as evidenced by continued very high levels of utilization for the leasing industry. And the production of new containers so far this year has been limited.

We estimate that the production of new containers will drop from well over 3 million TEU in 2011; they were less than 2.5 million TEU in 2012. This level of production implies that the container fleet is likely to grow at roughly the same rate as global containerized trade volumes this year and that the current tight supply and demand balance is likely to continue.

Production of new containers has been low this year primarily because our shipping line customers continue to be very cautious about purchasing new containers directly. We estimate our leasing companies have purchased over 60% of new production so far this year, which is an even higher share than in 2010 or 2011. This combination of moderate trade growth, tight container inventories and the market share shift from owned to leased containers remains the basic formula, allowing us to achieve high utilization, strong profitability and aggressive growth at a time when global economic conditions seem difficult.

Our profitability in the third quarter of 2012 provides a great return on our assets and equity, our profitability is down slightly from the third quarter of 2011. In general, our income has been moving somewhat sideways for the last few quarters, as our financial performance has been impacted by two conflicting trends.

On the one hand, we continue to benefit from strong growth in our core leasing revenue, as we continue to take advantage of the market share shift towards leasing to rapidly grow our container fleet. On the other hand, per unit profitability is moderating, as we come off the perfect market conditions we enjoyed from the middle of 2010 through the middle of 2011. This normalizing affect is most apparent in the slow but steady moderation of our utilization and used container sale prices.

We expect to see these two trends play against each other for a while longer until our performance has fully normalized and our income starts to follow our asset growth again. But I think it’s most important to note that while our income has been holding fairly steady for a while, it is holding steady at a very attractive level.

As I mentioned earlier, you have another strong year for investments in 2012. Through October 25th we have ordered over $800 million of new or sale leaseback containers for delivery in 2012. Roughly three quarters of these containers are committed to leases with a number of the world’s largest shipping lines.

Growing our long-term lease portfolio is the primary way that TAL builds long-term value and we expect to benefit from many years of cash flow and profitability from the high level of investments we have made this year.

As mentioned in the press release, we are increasing our dividend again this quarter to $0.62 per share. This increase reflects our continued strong performance and our expectations that market conditions will remain favorable. The increased dividend also reflects the strong growth of our long-term lease portfolio and the resulting increase in our recurring leasing revenue.

I’ll now hand the call over to John Burns, our CFO.

John Burns

Thank you, Brian. We are pleased to report another very strong quarter of operating and financial results. As we noted in the press release, adjusted pretax income was $49.7 million or $1.48 per share for the quarter, down 5% from $1.56 per share in the third quarter of last year; as the 12% growth in leasing revenue was offset by lower utilization and disposal gains together with higher depreciation expense.

Leasing revenue increased 12% from the prior year’s third quarter as we realized the benefits of our significant ongoing investment in new and sale leaseback containers. The solid topline revenue growth is being offset by several items.

First, utilization is gradually declining from the exceptional levels reached in 2010 and 2011 as the container shortage that develop slowly eases. Our utilization remains very high averaging 97.7% for the third quarter, but it’s down nearly 4 percentage point from the prior year quarter, reducing this quarter’s pretax income at approximately $1.5 million as compared to the prior year quarter.

Secondly, used container sale prices are down about 20% from the record levels reached in the middle of last year. These lower sales prices resulted in $3.5 million lower disposal gains compared to last year’s third quarter. We expect both utilization and used container sale prices will continue to trend down overtime towards historical levels.

The third item offsetting the strong topline growth is increasing depreciation expense. Depreciation expense as a percentage of operating lease revenue increased to 39.5% in the third quarter of this year from roughly 36% in the prior year’s third quarter resulting in $5 million more depreciation expense, and the percentage have remained the same. The main reason for the increase in depreciation expense is the percentage of revenue, is the changing fleet demographics.

Depreciation has increased more rapidly than leasing revenue as the fully depreciated portion of our fleet, a strong from over 20% at the beginning of 2010 to 13% by September of 2011, and 6.5% by September of this year. This is due to the low levels of investment by TAL in the last 1990s resulting in few units becoming fully depreciated over the last two years.

The significant growth in our fleet size over the last year has also reduced the relative size of the older fully depreciated portion of our fleet. We expect the impact of these changing fleet demographics to stabilize over the next several quarters. These fleet demographic changes and related depreciation expense anomalies have no impact on our operating cash flows. Therefore, we look to adjusted EBITDA which increased 7% from the prior year’s quarter and 12.5% year-to-date is more reflective of the continued strong growth in our business.

As Brian noted, we have increased our quarterly dividend to $0.62, representing a high payout ratio based on adjusted net income, but it represents only 42% payout ratio of adjusted pretax income. To base our dividend payout on pretax income as we have not paid cash taxes do not expect to pay cash taxes for a long time because of the accelerated tax depreciation on our container fleet.

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

Brian Sondey

Thanks John. It currently seems that attractive market conditions will continue, and we expect to achieve strong operational and financial performance for the rest of the year. We expect our leasing revenue to continue to grow, as we benefit from a full quarter of revenue from the large volume of containers picked up in the third quarter and as our customers continue to pick up containers that have been committed to lease earlier in the year.

But we also expect our utilization and disposal gains to continue to moderate, due to seasonal factors and the general trend of normalization. Overall, we expect our adjusted pretax income to hold steady or decrease slightly from the third quarter of 2012 to the fourth. In summary we are very pleased with our outstanding performance so far this year. Renewed global economic challenges took some of the momentum out of the peak shipping season this summer, but trade growth remained solid and leasing market fundamentals remain highly attractive.

2012 will be another strong year for investments for TAL and our revenue earning assets are up 17% year-to-date. Our utilization and other key operating metrics are moderating slightly, but they remain at high levels and we continue to generate excellent returns, cash flow and profitability. And we've increased our dividend again this quarter to $0.62 per share.

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

Question-and-Answer Session

Operator

(Operator Instructions) the first question comes from Helane Becker with Dahlman Rose.

Helane Becker - Dahlman Rose

So this is really my question, with respect to the dividend, thanks for raising it. But the risk free rate is so low and dividend taxation will change next year, I am wondering if it doesn't make more sense to maintain the dividend for a few quarters at this new lovely level and then buy back stock.

Brian Sondey

It’s a very good question and something we talk about internally. We decided a long time ago, probably back in 2007 that we would use dividend as the primary way of returning cash to our shareholders, and that we would think about repurchasing stock but only if market conditions seems fundamentally terribly wrong. For example we did buy about 10% of our stock back in 2009, but that's when our valuation was way below our tangible book value.

We've been pushing the dividend up over the last few quarters just really due to the strength of the business and the ongoing build of our long-term lease portfolio, and it still remains. I think historically, we typically had paid about 50% of our pre-tax income, say before the crisis as a dividend and today as John mentioned, it's somewhere in the low 40% range.

We kind of have been feeling our way upwards, towards that historical range. Just because our income jumps so fast in 2010 and ’11, we didn’t want to jump the dividend all at once, and then have to take a long breather or something like that. And also we've been growing faster than our historical rate as well. The average asset growth is well over 20% over the last few years, but that said, we still have quite a bit of room and a lot of cash.

As we hear from investors about their preferences and also as you look at the relative attractiveness of buying back our stock, those decisions might change. But I think certainly for the near-term at least, we continue to focus on dividend as the primary way of returning cash to shareholders, and the other reason why dividends are attractive to us is; we talked a lot with investors in our prior calls about the fact that we don’t pay taxes, but we continue to see for whatever reason, people still talk about our income on an after tax basis. We have this big accrual but no cash outlay and just having the dividend and continuing to push it is one way to try to break through that noise and actually show people the kind of cash we actually generate.

John Burns

And just one other Helane that our distribution is almost always did with the turn of principle rather than a taxable dividend. So that’s another attractive for investors, it's another attractive feature of the dividend.

Helane Becker - Dahlman Rose

Just one question on pricing; I think you said both in your commentary and in your press release that the supply demand was tight, I don’t know if you used it exactly that way, but given the utilization rate and a perceived container shortage how has pricing been?

Brian Sondey

Yeah, we did say container supply and demand remains tight and it does. Container lease rates I think are it really depends on what product we are talking about. We find for a dry containers, special containers and tank containers and things which collectively probably make up a little less than 80% of our assets and revenue. The pricing is pretty good. It’s little lower relative to the asset value than usual, but really only because interest expense is so cheap with financing costs in the 3.5% range for a long-term financing lease rates take that into account, but the overall returns on the investment look pretty good to us.

The one place we see pricing not really reflective of a strong market conditions that we see out there is on refers, and I think we have talked about that on a few calls where there has been a couple, one in particular, aggressive entrant in refers that seems to be pricing the refer deals like dry container deals and the refers again have a shorter useful life than dry containers, they have a lower residual value relative to the initial purchase price and there’s more [age] discrimination on order refers in the leasing market just because it’s a working piece of equipment that does sort of deteriorate overtime and so you need kind of a better return upfront on those investments that we are not we are not seeing priced into the deals. So we find a backlog and there’s little bit ourselves, but as part of the refers the pricing environment looks pretty good to us.

Helane Becker - Dahlman Rose

Did you say what percent of your CapEx is refers versus dry specials and others?

Brian Sondey

No we haven’t given a specific point in time, but it’s pretty similar this year as it was in prior years, and which again I think it’s something little bit over 20% somewhere between 20 and 25% of our assets and typically 20% to 25% of our CapEx and we have done a fair bit of refer deals this year. There’s a lot of deals out there and that’s just because like in dry containers we are seeing a market share shift from owned to leasing, but in the past where our customers would buy 60% of their dry containers, they probably used to buy 75% to 80% of the refers. So that the shift and mostly lease has really expanded in the market for leasing to refers, but again just the unfortunate thing is that, it should be the best of times in the refer business, but whatever reasons for competitive reasons the pricing is worst than usual.

Helane Becker - Dahlman Rose

Okay, well, I am sorry. Thanks for the answers.

Operator

Our next question comes from Greg Lewis of Credit Suisse.

Greg Lewis - Credit Suisse

Brain, you’ve been talking about utilization and residual prices moderating for sometime. As we look in through the press release you talk about utilization in mid-October been around, I think 97.5%. Are you hearing any chatter from your customers that leads you to believe that we could see pick up in [return] boxes over the sort of the next two quarters till the traditional peak season picks up?

Brian Sondey

Interestingly we have been talking about moderating utilization and sale prices for a while, and again just trying to get people a heads up that while we expect to continuously to see very strong growth on our assets and revenue that growth and profitability is going to be lack for a while, just because it jumped so far ahead of our asset growth. Profitability more than doubled from 2008 and 2011, relative to say 65% or 60% assets growth. So now we just have little bit of a catch-up period, while per unit returns normalized a little bit.

Our view is that utilization that was going to remain historically very high for a while, that overall supply and demand is tight which means our customers need to hang on to the containers they have because one they don't really want to replace them given limited capital and just inventories are tight. And so interestingly one of the reasons we actually fell a little short in the third quarter compared to our expectations was that deliveries were very low.

We make a lot of money in the current quarter when older containers are returned just because the sale gains are so high and also we get fees from our customers for things like drop-off fees or repairs and despite the fact again that the peak season maybe ended a little earlier than expected which did impact our pick-ups but interestingly drop-offs continue to remain really, really low, and our expectation is that they likely will stay that way for a while and also utilization will it can continue to drift slowly down, its going to remain pretty strong at least for the foreseeable future.

Greg Lewis - Credit Suisse

That's a great segway into my next question in thinking about residual prices, is it safe to say that maybe we see less in terms of volume but given the fact that it sounds as if customers aren't returning boxes, we should see residual prices remain firm?

Brian Sondey

Well, I guess it all depends on what you compare to gas. So when prices were really just extraordinarily high for residuals in the third quarter of 2011 due to the combination of very high new container prices at that time coupled with just pretty much nothing on the shelf for us or any other leasing companies or shipping lines and so those buyers that needed used equipment are willing to some extent to pay up to a $1 less than the cost of a new one. And you saw that the relationship between used and new prices compressed to really tight levels where we were selling and used containers that were 14 years old, or 15 years old or 75% of the cost of the new one or something like that.

So relative to 2011 peak pricing, and we do expect used pricing to continue to slide just as the market finds some semblance of normalcy but that said, if you compare it to where used prices were for most of our experience, we do expect them to remain high just because new building has been low inventory of available equipment is very low and that's just going to keep the used market strong. So it’s going to be strong but moderating slightly.

Greg Lewis - Credit Suisse

And in terms of sort of a base line, can you give us a base line in where used container prices are right now drifting in the market?

Brian Sondey

Yeah, let's say if you think about 24 containers which is what people are typically talk about and when they talk about the new prices or used, used prices are probably a little bit below $1,500 relative to a new bill of price today of little more than $2,200. So it’s still a pretty high percentage of new build prices where historical relationship may have been more like 45% to 50% for 20 footers, it’s still kind of in that 60% range or something.

Greg Lewis - Credit Suisse

Okay, great and then just one final question in terms of your financing. I mean, at this point it look like debt to equity moved up a little higher in the third quarter but and then thinking about where the ABS market is right now is it, and it sounds like still you believe that there's some opportunities for capital deployment next year, does it make sense for TAL to maybe think about coming back to the ABS market in the next sort of two quarters?

Brian Sondey

Yeah, couple of things, one when we think about our leverage, we always look at the ratio of our net debt to revenue earning assets, let's held pretty firm at right around 75%, it might move a percentage point or two over the quarter just depending on the timing of our payments for CapEx but its held pretty steady there and the reason that, that ratio makes more sense for us opposed to say looking at straight like accounting debt-to-equity is that we’ve got a very big portion of deferred taxes that makes our again, if we just did an accounting ratio of debt-to-equity it makes our equity look low. To some extent we fund a good portion of our down payments for containers but the fact that we don’t pay taxes and so, again we just make sure people look at the right things there.

In terms of tapping the ABS markets, we remain a very active participant in the debt capital markets with full for ABS deals as well as looking for bank financing and we certainly are right now pretty active in making sure that we’ve got as much and as efficient dry powder heading into next year as we can because they got of course, the world is always uncertain but we do look at the basic fundamentals of ongoing, likely ongoing trade growth, likely continued reluctance of our customers to buy containers as providing pretty fertile ground for us again next year for investment. And so we do want to make sure and equally mindful as well to take advantage of the opportunity out there and have lots of dry powder at our disposal.

Operator

The next question comes from Bill Carcache with Nomura.

Bill Carcache - Nomura

Brain, I was hoping you could give some perspective on, just, it seems like your financials, there is some noise, from things relating to your tax situation and then on the issue of the decreasing percentage of fully depreciated units in your fleet, that seems like it's going to continue to represent a headwinds along as CapEx keeps growing and certainly as much as it has in recent years but there is no impact around cash flow and so I wonder to what extent would you kind of consider and I think you guys try to alleviate some of that noise by focusing on things like adjusted pre-tax income but I don't think that necessarily addresses the depreciation issuance. I wonder if you could consider may be shifting focus a bit more to more of a cash flow base metric or if you consider providing may be a statement of cash flows in your release just to kind of help people may be kind of more clearly look past some of the depreciation related nuances affecting your numbers?

Brian Sondey

That’s a good question. We think all the time and talk all the time about how do we get people to focus on cash flow. I think it’s we probably talk with you and a lot of people on this call, we just spend awful out of time trying to remind people and investors and that we don’t pay cash taxes and while we accrue a big tax number our competitors don’t and for whatever reason we tend to not get credit for that fact and trade a significant cash flow discount to a lot of our peers because of that.

We are certainly open to suggestions and you are limited of course on a kind of things you can really focus on in your financials, but perhaps in our press release we can always use little more creativity and focus on a few different things and we will take suggestions. When it comes down to depreciation expense, we think most of that headwind at least is mostly played out and the basic cause and its partially due to the fact that we are growing our fleet rapidly and newer units do have a higher ratio of depreciation expense than your fleet on average, but it’s mainly due to the fact that when we used to be owned by Transamerica, we didn’t buy a lot of containers from 1997 to 2002. And typically we depreciate our containers over for 12 years or dry containers 13 years and so if you add 12 years or 13 years to those numbers, you can see that we are having very few units crossing over from being currently depreciating to fully depreciating and that’s really what’s driving it.

Right now, our fully depreciated fleet is already down to something like 6% that can't really go that much lower than that, and so while depreciation expense will remain higher than it was because of that effect compare to say a year or two ago, its not going to be changing negatively so much for the next couple of years. And so while that the wind is still there, its not getting any stronger meaningfully at least.

The one thing also there on depreciation expense is that we have at least relative to our public peers, we have very conservative residuals. And so if you look for example at the ratio of our depreciation expense come to our leasing revenue, it’s a lot higher than it is for Textainer, CAI because we use lower assumptions for residual values which we do question is that makes sense we are, we think probably the best seller or one of the best sellers of used containers in the world, we operate our containers longer than most of our peers and so on and that's something else that’s going on a competitive noises as well. We are not sure what how is that going to change but we do like to be conservative, but that is adding an element of noise and again I think provide even more value about the idea on cash flow.

Bill Carcache - Nomura

All right, still then and to follow-up on that point and so there would be a difference between you and your peers and the actual depreciation expense given the different residual treatment but what about then from as far as gain and sale of containers goes where you had a lower, I guess book value because of?

Brian Sondey

Eventually most of our peers have changed their residuals over the last couple of years and so for…

Bill Carcache - Nomura

Okay.

Brian Sondey

At both ways, I think the both Textainer and CAI, they have raised their say 40 for the high cube residuals towards a $1,500 or $1,600 and where ours is down in the $1,200 range, but most of the units that they are selling today were depreciated under the old regime, so that they have the normal book values in those as well. And so you don't really see a difference on gain yet. Overtime of course depreciation is something that don't really matter, the non-cash charges that don't, the booking revenue don't affect your disposals but they can have temporary changes or differences in your accounting income.

Bill Carcache - Nomura

And then finally from me, on the topic of, you gave a lot of really helpful commentary on the dividend and can I just ask you if you could comment a little bit on the trajectory given kind of the decelerating growth environment that ran, you know you guys seem to have, you obviously generated a lot of cash flow, but is it kind of prudent to kind of expect the trajectory, the growth trajectory to slow given the decelerating growth environment that we’re in?

Brian Sondey

There are sort of two effects of that, I mean obviously we need to grow our revenue over the long term to grow our dividend and grow income as well. We are not really seeing a huge decelerating trend yet for growth, again remember probably at least half of the change in income relative to our revenue growth was due to the depreciation issue which again is a non cash issue and has nothing to do or say about our ability to pay dividend.

The other thing to note is that one reason our dividend has been a bit lower than our long-term say average of 50% of pretax is just that we've been growing well in excess of our typical long-term growth rate and so we've been to some extent keeping a little extra of our earnings to cover higher than the normal growth.

And so in a leasing business where your main cash outlay is buying more equipment and funding the down payments for those equipments, to some extent slowing deceleration at least in the slowing growth in the short-term actually increases your ability pay dividends and obviously that can't last forever, but again a large portion of our cash flow, larger than usual has been going to fund growth.

Operator

The next question comes from Art Hatfield with Raymond James.

Art Hatfield - Raymond James

Brian most of my questions have been answered, but just kind of want to follow-up on a couple of things, the issue with depreciation and the portion of the fleet that’s fully depreciated that 6% number; do you have a number of kind of what a long term average would be, I would think it would be around that 7% to 8% number given the life of these assets?

Brian Sondey

Yeah maybe a little higher than that; I mean the rough metric I gave to you is that for dry containers for example, we use about 13 year depreciation; it’s 13 year depreciation, we typically sell, or we have been selling dry containers somewhere between 15.5 to 16 years something like that. So you might get relative to our current assumptions at least an extra two to three years which I think if you just take the math on that it probably ends up being kind of 15% maybe.

Art Hatfield - Raymond James

And then given all that, is it fair to say the numbers that John gave with regards to depreciation expense as a percent of lease revenue, that that number should where you are at today hold pretty consistent for the next five to six quarters?

Brian Sondey

Yeah, we don't think its going to change dramatically. I think a lot of we've run down pretty quickly over the last call it six or seven quarters from again slightly over 20% of our units being fully depreciated and now it’s just over 6%. Again it’s not that much further to run. So I think borrowing any other changes and again there are always other things that can change whether its utilization obviously going down would change that number or if we take any action on our residual at some point that would change the number. But all else being equal, yeah we would expect that ratio to be pretty firm for a while.

Art Hatfield - Raymond James

A couple of other things; Brian you had mentioned in your comments that you know going forward at some point, given some of these metrics where you’re seeing lower used container prices and some of these other things that are impacting your numbers, lower utilization, pretty soon here you would get or at some point in the not too distant future, your earnings would grow more in line with asset growth. Is that something you think happens next year or is that more of a 2014 type of event?

Brian Sondey

It sort of really just depends on how quickly the market normalizes. I mean to some extent you would hope, it takes as long as possible because it preserves the highest level of total absolute dollars of profitability; if it takes a long time for our utilization to get down to sort of some kind of long-term normal level.

On the other hand, it's funny as part of these calls, it's almost like sometimes you had wish that it would gap down like tomorrow and then if that’s the way to stop spending so much time describing the trajectory of earnings versus trajectory of asset growth, but you know, I think it's going to take a while and whether that’s middle of next year, end of next year 2014, sometimes. It's just hard to know and really just again depends on how long it takes; the leasing business to return to normalcy. But again it's good as long as it doesn’t; we would rather have the dollars in our pockets than have to take long time to get back to normal.

Art Hatfield - Raymond James

Absolutely; but when you talk about normalcy, are you talking more like utilization in the mid-90s and those used container prices more of the 45% to 50% residual to new container prices?

Brian Sondey

Yeah, that sort of obviously, our ability to depict the future isn’t any greater than anybody else’s, but that’s so why might expect that given the mix of leases in our fleet of being 70% more long-term leases and continuing we think for quite a while here in to the medium, even long-term, I think our customers will be pretty reluctant to buy lots of new containers. We think that sets up very good dynamics for us and we do think you are going to see utilization remain real high even as we approach what we might call normal and for our guess mid 90s utilization and sale prices being down from today, but probably still higher than usual is maybe how we are thinking of normal these days.

Art Hatfield - Raymond James

And a final thing and I hate to get you thinking about the long-term but, the last couple of three years you have had tremendous growth in your lease fleet and as you think out longer term when those initial leases start to come off and you start thinking about either renewing those or putting those into shorter term leases or even further down the road when you will start retiring all those, how do you think about growth going forward, so that you can kind of balance out these little bubbles, not the right word, but these little bubbles of containers that maybe coming off lease or going into retirement and how you may deal with disposal or renewal of those assets on new leases and balancing the growth so you don’t have these periods where you may have I guess the only way to say it is imbalances within the portfolio?

Brian Sondey

Well in terms of, as you point out, we’ve made a lot of investments over the last few years and so we have a larger than usual share of new units and sort of our portfolio of containers that are three years younger it’s just proportionally large in our fleet. What that means actually is that from disposal standpoint, you don’t really see a bubble of disposals probably out until another 11, 12 years and in fact if anything disposals are likely going to be quite low for a while, because of that dynamic, and at least the portion of our fleet.

And so we don’t really, to be honest we are not really thinking 10, 12 years forward just yet. I think that the bubble that does comes sooner is that we did a lot of leasing in 2010 and 2011 and 2012, I would say at least half of our deals maybe a little more than half 60% or so are five year long term leases for new equipment. And so you do kind of have an echo later on five years down the path that when you did the leasing deals where more than usual expirations might happen.

We certainly are mindful of that and we did especially in 2010 and early 2011 make a major push about trying to get units on seven year leases or eight year leases and in some cases even 10 year leases and tried to spread those expirations. And I think we did it pretty effectively, but yeah we do have, we will have say in 2015 and ‘16 more units expiring than might typically. But the good thing for us is the business constantly grows as well and the total trade volumes in 2016 are going to be a lot bigger than they were in 2010 or ’11 and also shipping line introduction was very low in those years.

So its not like that shipping lines have a bubble of that type of equipment, it’s just that more than usual of it leased and so we don't contemplate having a big issue trying to keep those units on hire or putting them and back on hire to somebody else, but certainly there is a bit of an increase in expirations as we get to those years.

Operator

The next question comes from Rick Shane with JPMorgan.

Rick Shane - JPMorgan

One of the interesting things is that if we look at sort of the commentary on the shelf from last quarter versus where the shelf is now, there wasn’t a ton of stuff that came, it looks like that it came off the shelf and at the same time, Brian you talked about lower than expected drop offs. Are we seeing some sort of bifurcation in the market where your customers are a little bit more price sensitive and they are actually to steal a phrase that you used earlier a little bit less discriminatory or maybe even favor older boxes right now because of the favorable pricing on them.

Brian Sondey

Well, we definitely our customers much more so than in the past, are counting their pennies and nickels, and in general it’s cheaper for customers to hold on to existing containers than just to return them and pick new ones. And one of the reasons is that historically say lease rates were lower than they are or have been for the most of the last two years just because box prices were lower and so on. But also it’s fairly expensive to drop a container off, that they typically need to pay repair charges for any damages done to the box. They’ve got to truck the box from say their terminal to our depot facilities and sometimes there's logistics based fees as well and so in many cases the cost of returning the container could be half a year or even a whole year worth of rental costs in that container.

So at least in the short term there's a pretty good motivation just to hang on to it, if you are feeling pressured in your operating costs. In terms of our shelf of equipment, it didn't change dramatically. I think if you look at the mathematics and that's right, and usually when we are talking with investors at the end of July you've kind of done most of your investment for the year just because it takes say two to three months for the equipment to be delivered and so by the end of July you are already talking kind of October deliveries and that's passed the peak season. And this year in terms of the change in the shelf it was also impacted just by the fact that the peak season did end early that trade volumes fell off in say mid-August where typically you might not expect them to fall off until end of September early October. And that just sort of mitigated to some extent the need for our customers to top up equipment towards the end of the third quarter.

But one thing we are seeing and think will continue to see is that customers are already starting to talk about activity for next year, and I think while the run continues to look like slightly uncertain place, at least I don't see expectations out there for many who won that trade volumes are going to somehow be extremely weak next year and most are thinking mid to single-digits again, 5% to 6% to 7%. And they don't expect to buy containers and so they know they are going to likely be reliant in the leasing market. Container prices have come down seasonally and so we are starting to see some people talk about in our recommitting for next year, and so actually we feel pretty good about our shop of equipment right now, relative to one this is not much equipment out in the overall market because the shipping line inventories of new staff is so low, but also if anything we are feeling a little aggressive just to take advantage of current pricing in the market for new containers.

Rick Shane - JPMorgan

Just one last thing to think about, you provided some very helpful color for fourth quarter, but as we look in to the first part of 2013, it’s a little bit hard for me even to think about 2013, but the shelf is probably about 10% larger on a dollar volume basis, and again it’s a smaller percentage of the overall book. So I recognize that. But one of the accounting nuances is that containers that are rolled over from year to year, on the shelf begin the depreciation process. Is that going to create a little bit of a headwind in to the first quarter of next year, since we are now through pickup.

John Burn

Rick this is John and that a policy that we’ve been looking at and looking at not only within our industry but and other leasing industries, and I find that most people don’t start depreciation until the units are actually placed in service which is typically to find it’s going on lease. So that’s a policy that’s likely to be changed in the fourth quarter.

Operator

The next question comes from Sal Vitale with Sterne Agee.

Sal Vitale - Sterne Agee

If I could just start with a couple of quick housekeeping question. Can you please provide the end of period TEUs.

Brian Sondey

Sure. So the total owned fleet as of September 30 is 1.889 million TEU.

Sal Vitale - Sterne Agee

Is that including trading?

Brian Sondey

Including trading and of that 64,000 is trading.

Sal Vitale - Sterne Agee

On the operating lease revenue line, what was the leasing fees and other portion of that total [131.8]?

Brian Sondey

The fees in [asset] lease revenue was 5.4 million.

Sal Vitale - Sterne Agee

If I could just ask a question, I know there have been a few questions on depreciation, but it was pretty big issue this quarter. So it sounds like given that there was a window, I think you said five years from 1997 to 2002, where you didn’t do too much buying, we should see that percentage of your total container fleet that is fully depreciated, we should see that linger in that 6%, 7% range I guess for a number of, couple of years?

Brian Sondey

That’s right. It should linger where it is, but just shouldn’t get much worse is the point.

Sal Vitale - Sterne Agee

Right. So then looking forward over the next few quarters and I think one of the metrics that John spoke about was depreciation expense where D&A as a percentage of operating lease revenues and that was 39.6% this quarter. Should we expect - it sounds like you are saying that most of the headwind is behind you but that could creep up a little bit more over the next few quarters?

Brian Sondey

Well I wouldn’t say that, I think what we were saying is that number has been going up as the fully depreciated fleet has been coming down. So all else equal you would think that number would stay fairly steady, but obviously there is other thing that can change it other than just the demographics of our fleet. If utilization was to fall that number could go up because again revenue comes down, but depreciation is the same. If we were to make any changes in our residual assumptions and going to get closer to our peers that would change the number, but again it’s not certainly planned for as of today. So there’s other things that can change it, but at least that effect the channel [subscribing] the changing impact that affect is mostly played out.

Sal Vitale - Sterne Agee

Okay. One other question on depreciation, there was a question that was just asked on it, can you provide some clarification on that so at year end we should, see we could potentially see a change in the way you report depreciation and we could see a little bump up into the first quarter, did I get that right?

John Burns

No, what we are saying Sal this is John. Last year when we talked about the first quarter when our policy is to start depreciation did earlier one unit goes on higher or at the end of the calendar year in which it was purchased. So when we rolled into the first quarter of last year we talked about depreciation starting on a number of sizeable chunk of units that we are not on hire. And what we are saying is that we are continuing to look at that policy, it’s different to our competitors and that we would also look outside the container leasing industry and seeing that those people are putting units starting depreciation simply when they go on higher and that when they [day] cut off as we have been placed. So we are looking at that with the expectation that it wouldn’t affect next year, but that we might change policy by the next year.

Brian Sondey

So it depends really again who you are comparing against. So in the first quarter of 2012, we did have the negative affect as John said of starting depreciation on some units that weren’t on hire and so the first quarter of 2013 and if we make this change there would be a benefit relative to the first quarter of 2012 but there wouldn’t be a benefit relative to the fourth quarter of 2012. The same units that are a little higher aren’t being depreciated today and they wouldn’t be being depreciated in the first quarter of next year.

Sal Vitale - Sterne Agee

Right, so it will be an easier comp versus the year ago quarter but not sequentially.

Brian Sondey

That exactly.

Sal Vitale - Sterne Agee

So given next year you are going to have depreciation and again it depends on utilization etcetera and other issues, but let's call it somewhere in the near that 39.5% range give or take. How does that color you review of what your earnings growth would be next year, just basically the first couple of quarters, the first half of this year was a few hundred basis points a little less then that 39.6?

Brian Sondey

To the extent that it was a little bit lower in the first quarter and second quarter of this year does provide a little bit of a negative headwind if we are staying at this higher level. But over the next couple of quarters that headwind goes away again if all else stays equal.

Sal Vitale - Sterne Agee

Okay, if I could just switch gears a little quick to your investment. So last quarter’s conference call, you mentioned was $750 million year-to-date investment, now its $800 million. So there’s been an increase of $50 million. Could you give a little bit of color on how much I assume not much of that was new container orders, I assume it was mostly on the sale leaseback side, is that right?

Brian Sondey

No I think actually I think most of it was probably new and the one thing we talk about I think at the end of the second quarter was that the big purchases for the year especially for dry containers tend to be in the first part of the year as we are starting to gear up for the peak season. But quite frankly, our customers always have requirements in some unit types, in some locations where they just happen to be low and so while we are not building tens of thousands of TEU per month just sort of fully stock every location in China when we look for deliveries for September and October and November. There are locations where we are out of specific unit types and where customers need units and we add new units to just sort of satisfy those requirements and we continue to see containers get picked up. In addition as I mentioned, we are and customers are already starting to look a little bit towards 2013 and dry container prices have come down quite a bit over the last few months as the peak season has passed and like we do always we start to just think about where we need to add to get ourselves ready for next year.

Sal Vitale - Sterne Agee

Okay, so between now and year end, do you expect I mean are you seeing a lot of potential sale-leaseback bills in the pipeline or coming across your desk?

Brian Sondey

There's a lot in the marketplace. I think one of the odd things to me about 2010 and the first part of ’11 was that while customers didn't want to buy new containers, they weren't at that time not interested in trying to do transactions for their existing containers and I think we've seen that attitude change where a growing number of customers are saying what there are advantages in selling containers for leasing companies and leasing them back, it unlocks equity, it frees up cash and generates profitability and we would probably enhance their flexibility given our wide range of locations we can actually take the units back and sell due to our investment in disposal business and we are seeing a lot of interest in that and a lot of customers coming to market. We win some and lose some so it’s always very hard to predict how those are going to come into our business, which quarter and so on. But there's still a lot of action out there.

Sal Vitale - Sterne Agee

And then just last question I will move on, can you give any color on what whether its TEUs or millions of dollars worth of equipment were put out on lease or picked up during the third quarter and was it back-end loaded, front-end loaded around the middle of the quarter?

Brian Sondey

I don't think I can get you that off the top of my head. The pick-ups are pretty good though. I think as we talked in the press release in our call they were a little less than expected mainly just because the peak season may be wasn’t quite as much as people had hoped it would be. But that said, we had an awful lot of equipment committed to lease and again customers didn't really buy much of their own stuff. So it didn't need a tremendous amount of growth to create pick-ups for our stuff and pick-ups were good. It’s just they weren't quite as good as we thought. We come out in our investor presentation and show the pick-ups graphically that will probably be out within a week or so. But they were pretty strong.

Sal Vitale - Sterne Agee

And do you think they were more back-end loaded or pretty much throughout the quarter?

Brian Sondey

So it was a spread and some of the big sale-leaseback deals that we had done I think at the end of the second quarter and so maybe even very early in the third quarter, as that front loaded some of the revenue. I would say a lot of the leasing pick-ups that from committed units or may be more back-end loaded. And that was one reason why would you think we will see pretty good lease revenue growth from the third quarter to fourth quarter.

Operator

Our next question comes from Alex Brand with SunTrust.

Unidentified Analyst

This is Doug (inaudible) in for Alex. Most of my questions have been answered. Do you have an idea of what you are running I guess delay is between when you actually have the container delivered to you when it's put out on lease, usually a lag anywhere between 30 days and 90 days depending on conditions, do you have any idea what that lag looks like now?

Brian Sondey

It really changes all the time depending on the time of the year as well as just what's happening in the marketplace and when the market is strong, customers can be lining up and we're feeding them data from the manufacturers about when the containers are coming off the assembly line. So they go out and also line out of door. Other times, we see those periods extend. Right now, when your are buying containers especially dry containers, you’re really doing it whether it's existing shop of equipment or new order placement today is mainly geared toward next year and so in the fourth quarter that time lag between producing and expectation of pick up extends. Right now, let’s say its end of October and the big season typically starts in March, April, May. So there is, what is that four months or something like that but then the container reproduced in April, May, June, July they make go out of the door real fast and so it really just depends on what's going on.

Unidentified Analyst

I guess, I said in a different way I guess, how is that lag, say, the third quarter compared with the third quarter of ’11?

Brian Sondey

Yeah, I would say 2011 and ‘12, generally fall at a pretty similar trajectory in the sense that we had a lot of customer deals done in the first part of the year as customers look to lock in supply because of their diminished buying and then also, that pick ups may be lag a little bit longer than we had expected just because in both cases, expectations for trade growth were higher in the beginning of the year then ended up being the case which again pushed out the timing for pick-ups a little bit. But say in general 2012 was a lot like 2011.

Unidentified Analyst

Just one last question, I may have missed in the release or it might be able to actually do some math to figure it out but if you could help me out, you said you would commit it $800 million year-to-date on new container purchase and sale-leaseback, how much of that $800 million is on your balance sheet now in terms of (inaudible)?

Brian Sondey

That’s a good question. Certainly most of it is. We put stuff on our balance sheet as soon as we accept it into our fleet and then there is another lag of typically 45 days to 60 days when you actually pay for it, but it’s on the balance sheet before we pay for it. John has just mentioned that’s probably of the $800 million may be $700 million is already on the balance sheet.

Operator

The next question comes from Michael Webber with Wells Fargo.

Michael Webber - Wells Fargo

Good, it’s been a long call so I am trying to keep this quick, wanted to follow-up on Rick’s questions and you answered most of it but just in terms of may be just coming out from a pick-up speed perspective and you touched on it little bit earlier yourself too but it’s also on pick-up speeds in Q2 and then Q3 came in a touch below expectations and then in one of your earlier answers you talked about some of your customer base, already talking about 2013 which make sense. How do you think about pick-up speeds in that shelf I guess incrementally over the next few months of this year and then I guess a very early 2013 do you see that kind of carrying over a little bit and I guess is more along the lines of question on the color from your customers, do you think you are going to see this kind of slowing incremental trends kind of persist I guess in the early 2013 before picking up, just a little bit of color there would be helpful?

Brian Sondey

Yeah, I mean I think at least when I talk, I guess there is a couple of questions. And in terms of the pick-up speed, from existing committed containers there is pretty minimal impact of slower pick-up speed, the leases that we ride are they are fully committed their obligations to the customers to pick-up the units. Typically, we bake in a period of three months to six months for pick-up until the lease term doesn't start until that three month or six month period finishes and so it was not like we are shrinking the lease term either due to the delay of the pick-up. What the primary impact is just we don't get as much opportunity to reload on the CapEx and so we more than 2011, 2012 we came roaring out of the gate with CapEx. We kind of peaked pretty early and then didn't have a lot of CapEx towards the end of the year, and that clearly was the case this year. I think the main reason for that, it was really two folded.

One is just that now shipping lines in the past usually think really only for their peak and not expected requirements but using leasing for the base load requirements as well. And that probably has just the longer natural lag between committing for the deal and the pick-up.

And then on top of that in both 2011 and 2012, expectations were diminished throughout the year and so to that extend of the pick up timing as well. In 2013, again I think we will see the same effect in terms of base load capacity that is the units we are committing to now or commit to early next year, really are going to pick-up until you get towards the peak season anyway and so you have a little bit of extension there, but again, given the low cost of financing and the really no risk on the ultimate pick-up that's not that much of an issue for us.

And then when we just comes down to whether in 2013 expectations increase through the year or decrease and if expectations increased do the pick-ups are going to compress and (inaudible) fast, expectations decrease it goes the other way. So it would just depend on how it plays out. I think most of our customers I speak with, I would say they are certainly not widely over enthusiastic about 2013, but I would say most expected to kind of be maybe like 2012 and a little bit better or worse depending on who you talk with.

Michael Webber - Wells Fargo

That's fair. You mentioned 75% of what's ordered on committed to lease, did you give an actual number in terms of what's been picked up or came in CapEx, you break that out I know…?

Brian Sondey

No, we didn't. and I can't, off the top of my head get it for you, I mean certainly the unpicked up shop has gotten much smaller as third quarter pick ups actually were pretty good, but I can't give you the exact number.

Michael Webber - Wells Fargo

If I would just kind of back up from a high level view and just thinking about the secular themes that are kind of driving us all fundamental market for you guys, limited box production is certainly kind of at least one of the top two ports on that list and obviously box production is down, but the box pricing is down as well and you've got commodity costs that are probably bringing breakeven levels lower for the manufacturers. Can you talk about where you think that that bottom threshold is from a new box pricing perspective and where their margins are and how you think that impacts on what they are willing to produce next year?

Brian Sondey

Yeah, yeah sure I mean you are right in terms of what as we think about 2013, probably the same that we feel best about is the likely supply and demand of containers just because production this year was so low and while it wasn’t a great thing for the third quarter or fourth quarter that peak season ended early, but probably is a really good thing for 2013 just because it really curtailed production of new boxes, really from August onwards and that's going to have I think a very positive effect for us as we start 2013.

As we point out, as demand for new boxes fell in August and beyond, the manufacturers were sort of forced to take down pricing and peak pricing in 2012 was probably in the range of $2,700 for a 20 foot dry container and again that's down into the slightly higher than $2,200 today and most of that change, let's not say most or maybe a portion of that change was due to falling steel prices in China and a good portion due to just the inability of the manufacturers to get above normal margins now that the peak season has passed.

We've actually, say steel prices in China fell pretty steadily from the beginning of the year right through, I would say September. Since September they have actually firmed a little bit and we think that the current price of boxes pretty well reflects normal levels of margins for the manufacturers and so there always risk as steel prices fall, container prices can fall with them further, but we don't see any real risk of say further margin compression driving container prices lower.

Michael Webber - Wells Fargo

What do you think that breakeven level is for the manufacturers, say new box prices are at $2,200?

Brian Sondey

Well, I guess that might be breakeven, the commodity costs makes up 75% or so of the box costs and so I guess theoretically, if they didn't want to get any coverage of labor or coverage of investment in their factory they can probably push lower, but we found in the past that the factories typically will close while before that. And so knowing that there's only a couple of many way and so if they don't produce the box today, they are going to produce that same box later when they can actually cover their fixed costs and they can -- so we think again relative to steel prices, box prices maybe not rock bottom, but pretty close to where you might expect them to have bottom.

Michael Webber - Wells Fargo

Fair enough, just a couple of more from me, you mentioned and John I want your answers, you are talking about the market share gains in this space and then you mentioned a 60-40 slip between lessors and containers lines and we maybe just reading a little bit much into it. But I think that that was a touch higher earlier in the year and I know earlier you basically had (inaudible) and they are buying boxes and then the lessors, has that changed at all incrementally over the last couple of months, have you seen some other lines coming at least and so putting in some orders and then how do you think I guess that trends on a very kind of incremental basis as we move 2013?

Brian Sondey

Yeah, I don't think it's changed much that the point, the reason we tend to use pretty general numbers is there is no, official data service that collects everybody orders, and so we try to do is piece together anecdotes from manufacturers and people that play components and manufacturers and things. I think the point estimate that I’ve seen is something around a little less than two-thirds. You know, if we try to average all the various estimates that we've seen is being made up by leasing, which I think is actually held pretty steady through the year, I mean, maybe changed a point something like that. You know, Merck is really the only shipping line to buy substantial volumes in 2012.

Now that box prices are down, we're seeing a couple other stronger lines, stronger financial lines nose around and maybe think about placing some limited orders in anticipation for 2013. But in general we don’t see anybody coming real aggressive and in fact if you read what Merck is talking about, they’re actually talking about backing off a fair bit in 2013 from just general investment in the container shipping business, and they didn’t talk about container specifically, at least not dry containers, that would actually have a positive effect if they do.

Michael Webber - Wells Fargo

Definitely not. That’s helpful. I appreciate the clarification. And then finally, you talked a little bit about the ABS market earlier and obviously, it's been on fire. You've got some [call] by ABS in the spring. Do you think about potentially going back to the market to try to reply those? And how do you kind of balance that versus like may be ABS and rest of it.

Brian Sondey

That is a great question but we are probably going to ask your guys about it. But we're obviously aware that those things are out there, but of course we're aware that there is a limited number of investors that do invest in this space and so you may have to try a little carefully. We’ll think about it that time and have some conversations and we will see where that go.

Operator

The next question comes from Ken Hoexter at Merrill Lynch.

Ken Hoexter - Merrill Lynch

I will just ask some quick ones I think following up on some prior questions, but you mentioned as you get on used containers as they move toward a floor you mentioned there are about 1,500 now. So I just want to understand where you view the floor is and how much far do you think we have to go?

Brian Sondey

Well, that’s a good question and again historically for say 24 containers the ratio of used price relative to new price was about 50%, and so if box prices are call it 2,200 and changed today that would imply that if that relationship came back used container prices would be 1,100 and change for 24 containers.

But there is a lot things that go into forecasting where you think they are going to be in the future, including new container prices and typically we have seen that this time of year it’s typically the low point for new container prices, and so if you are going to take say a neutral view on steel prices you would expect the new prices are actually be higher from us to next year which would push that kind of floor number up for used containers.

Secondly we do see that the overall supply and demand of containers is likely going to remain tighter than usual, that while we do think our utilization for example for us and other lease [cos] will trend down continually from here for a little while, that is likely going to be, even when it does kind of find a balance point it’s going to be a higher point then was the case historically, which again would have the effect you would think of keeping that relationship a little bit stronger than usual.

So we don’t have a great crystal ball in terms of exactly how far they are going to fall and when they are going to fall to get there, but we do think it’s going to be higher than usual but lower than today.

Ken Hoexter - Merrill Lynch

Wonderful, so just about that again a couple of numerical ones, can you remind me again when you believe you start paying taxes?

Brian Sondey

It depends on future levels of investment and if you look over back last seven or eight years of independent company experienced, we’ve averaged growth like 17% a year or something. At that level of growth you probably affectively never pay taxes. As you back off from that, you start to pay taxes eventually, probably a 10% growth that's probably the point of which below, if you go less then 10% maybe you start paying taxes someday.

But its probably 15 years from now or longer. As growth get lower and say if we get some kind of measure like nominal GDP growth of plus 5% or 6%. I think our models were indicating this is all very simplified models based upon cost and asset growth and cost ROAs. I think they had paying some taxes and maybe 12 years or something, 11 or 12 years, but even when we start paying some taxes at that level of growth; it remains a small fraction of our accrual.

So they continue to build differed taxes and the cash tax rate was well lower than our statutory one. Even if we start growing at all for number of years, I think our model was showing we don’t still pay any taxes for quite a while, I think into the 20-20 or something like that. So its just pretty long and affective coverage.

Ken Hoexter - Merrill Lynch

I appreciate that and hopefully, you can keep your eye at 17% particularly? And then last one from me is on the trading markets. How low do you think they get relative to a historical? I mean it seems like you are almost pumping up against the bottom. How do you think about how active you get in those markets versus pulling back at these rates?

Brian Sondey

Yeah, the one thing I think the main point I’d make is I think when you look at our trading business; you really should focus on the margin not the revenue, because the revenue is really just the way we have to account for it, it just the full purchase full sales price for the containers that we buy and sell and the cost is the full purchase price that we pay and so it looks like it’s a pretty big impact on the business $60 million annually or something, with that margin really has just kind of bounced around maybe from a low of $3 million to $4 million in the year like 2009 or something to a high of $10 million or $11 million I think in 2011.

So while that's obviously meaningful it’s not a huge swing in the business and we've got an awful lot of units. I think I mentioned earlier to the (inaudible) that we've got a trading fleet of 64,000 TEU. And most of those equipments were on hire to customers that we do, we sort of buy batches of order containers from our customers, put them on leases that allow the customers to return the containers when its convenient for them and while we typically expect to get those kind of trading containers back pretty fast usually less than one year because of the shortage, our customers are hanging on to those containers longer than expected. In fact some of them have been on [higher] now to customers for two years to three years and typically we don't think of those as our sale-leaseback containers. Those are sort of trading containers and so to some extent the timing is a bit out of our control. Its just when the sale prices are strong, we've got a big fleet of containers that are supposed to come back to us, its just a matter of when they come back and to some extent again that's out of our control.

Operator

The next question comes from Jordan Hymowitz with Philadelphia Financial.

Jordan Hymowitz - Philadelphia Financial

The questions have been answered.

Operator

The next question comes from Sal Vitale with Sterne, Agee.

Sal Vitale - Sterne, Agee

Just another quick question, is there, if I look at your selling, your SG&A expense came down about $0.5 million, how do we think about that going forward, should we think about $10.7 million going forward, or would that creep up again?

Brian Sondey

No, I think the best thing to think about is kind of flat. I mean the majority of our SG&A expense is just the compensation expense for our people and it’s the cost of our office network and things but there's a few other things in there that make it bounce around or when does it affects flows through SG&A.

John Burns

I would say the other thing we have, we had some sale costs for the, as the Jordon company did have secondarily (inaudible) some costs from that. So it did jump around a couple of small items but in large part it.

Brian Sondey

Yeah, so I think over the last say call it five years the SG&A has been pretty flat and one of the nice things we've had in our business is as we've grown the assets and grown the revenue, the percentage of revenue being spent on an organization has gone down pretty fast.

Sal Vitale - Sterne, Agee

And then just touching upon utilization again, you said you think fourth quarter utilization might come down a little bit, if we look at into the next year given the pretty tight supply of containers and next year you might hopefully get a reacceleration in global trade growth, is there any reason to think that if I look at full year utilization or rather full year utilization for next year why it should be below this year’s?

Brian Sondey

You know its hard to say exactly how its going to play out for next year and whenever, I think one of the opportunities for upside next year and its really been there for a while now is the current supply and demand balance for containers is so tight that if we actually have a market where trade growth surprises to the upside I think the container market is very rapidly going to bounce back toward shortage.

And you could see again for whatever reason if volumes are surprising upwards, you could certainly see another year like 2010 and I think that's what our customers’ minds as they think about committing to units early, its on our minds as we think about building up our shelf but of course it depends on having a year’s prices to the upside.

I think our general view and this doesn't really have to do let’s say quarter-to-quarter changes or even for a year is that over the medium-term, it’s a longer-term that 98% or 97.5% utilization is probably unsustainably high and eventually it has to get lower, exactly the path of that drift, really just depends on how the individual market shape up year-after-year but in general, barring a real negative market for trade shrinkage and so on, we think it's going to take, it's going to be pretty gentle slope if it does sloped down.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Brian Sondey for any closing remarks.

Brian Sondey

Thank you. Just want to thank all of you again for your interest and participation in the call and your interest in TAL and we look forward to catching up with you more in our next quarter. Thank you.

Operator

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Source: TAL International Group's CEO Discusses Q3 2012 Results - Earnings Call Transcript
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