TAL International Group, Inc. (TAL)

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TAL International Group, Inc. (TAL)

Q2 2009 Earnings Call Transcript

August 5, 2009 9:00 am ET

Executives

Jeff Casucci -- VP, Treasury & IR

Brian Sondey -- President and CEO

John Burns -- SVP and CFO

Analysts

Arthur Hatfield -- Morgan Keegan

Jon Langenfeld -- Robert W. Baird

Gregory Lewis -- Credit Suisse

Rick Shane -- Jefferies & Company

Presentation

Operator

Welcome to the TAL International second quarter 2009 results conference call. As a reminder, all participants are 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 of TAL International. Please go ahead.

Jeff Casucci

Thank you. Good morning and thank you for joining us on today's call. We are here to discuss TAL's second quarter 2009 results, which we reported yesterday evening.

Joining me on this morning's call from TAL are Brian Sondey, President and Chief Executive Officer and 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 such risks and uncertainties, please see the Risk Factors listed in the company's 2009 Annual Report filed on Form 10-K with the SEC on March 2, 2009.

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 second quarter 2009 earnings conference call.

We are pleased that TAL continues to generate a solid level of profitability, despite the fact that we are now 10 months into the weakest global trade environment we have seen in decades.

Our adjusted pretax income was $70 million for the second quarter of 2009 or $0.55 per share. Our adjusted pretax or cash return on equity was 17%. We generated $71 million of adjusted EBITDA and we continue to use our cash flow to make attractive investments and de-lever our balance sheet.

Our market environment remains quite challenging. Global containerized trade volumes remain well below the level achieved in 2008, and there is little doubt that we will experience the first ever annual decrease in global containerized trade in 2009. Leasing demand remains weak, as containers remain in an oversupply situation. Container drop-offs continued to be high, pick-ups are still low, and our container utilization continues to deteriorate. In addition, the excess inventory of containers continues to create challenges for our used container disposals and container trading margins. However, we are seeing signs that the pressure we face from excess container capacity is starting to moderate.

Our core utilization, excluding factory units, decreased 2.6% in the second quarter to reach 85.9% as of June 30, but utilization fell only 0.6% in June and it fell only 0.3% in July. Our customers are reporting that they thought volumes for the last few months have improved noticeably from where they were earlier this year. And though our transport volumes remain below the level achieved in the summer of 2008, a number of our customers are reporting that their operating container fleets are approaching the right size, and several customers are starting to face container shortages.

For containers, the process of returning supply and demand situation to greater balance is helped by two important features of our business. First, as I discussed before, the ordering cycle for new containers is short. So leasing companies and shipping lines were able to rapidly shut off new container production when the market started to deteriorate last fall. In addition, we estimate that 4% to 6% of containers are sold out of ocean service each year, due to the age and condition of the containers.

Because of these two features, the global container fleet has been shrinking 1% to 2% for a quarter since last fall, and we expect this reduction to continue as long as there are excess containers on the ground in China. As a result, we should not need trade volumes to fully recover to pre-crisis levels, before we see the supply and demand situation for containers return to a more healthy balance.

In the meantime, while we remain in an excess supply situation, we should continue to get strong support from our lease portfolio. 65% of our containers are currently on long-term or finance leases. And this has ensured that the extremely weak market conditions have impacted our utilization and leasing revenue only gradually. We have also been able to extend the average remaining duration of our long-term leases this year. As of June 30, the weighted average remaining lease term of our long-term lease portfolio was 47 months, up from 38 months at the beginning of the year. This increase in the average remaining duration primarily comes from a number of lease extension transactions that we completed this year.

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