GATX Corp (GATX) 2002 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the GATX conference call.

At this time, all participants are in a listen only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Robert Lyons, Vice President of Investor Relations. Mr. Lyons you may begin.

Thank you. Good morning everyone. Thanks for taking time out to join our call today. I have with me Brian Kenney, Chief Financial Officer, of GATX Corporation.

I trust that all of you have received and had the opportunity to review our second quarter press release, therefore I'll keep our opening comments fairly brief. Following a review of the quarterly results we'll open it up for questions.

First, I point everyone to the forward-looking statement language, contained in our press release. Comments or information provided on this call is covered by that forward-looking statement.

GATX Corporation today announced 2002-second quarter results, reporting net income of 20.4 million, or 42 cents per diluted share, compared to net income of 21.6 million, or 44 cents per diluted share, in the prior year period. Excluding non-comparable items, from the second quarter of 2001, which, as you recall, related primarily to telecom, 2001-second quarter net income would have been $41 million, or 83 cents per diluted share.

For the six-month period, ending June 30, 2002, GATX reported net income of 45.5 million, or 92 cents per diluted share, compared to net income of 192.3 million, or $3.90 per diluted share in the prior year. Excluding non-comparable items, income for the six-month period, ending June 30, was 39.3 million, or 80 cents per diluted share, compared to 71.4 million, or $1.45 per diluted hare in the prior year period.

In general, we continue to be negatively affected by the soft conditions in our end markets. The rail industry is beginning to show early signs of a recovery, based on traffic and car loading data, and long term this will be beneficial for GATX. However, at this point new car orders, and lease pricing have not yet picked up for the entire quarter.

In the air business, as expected, the slow recovery in the industry has continued to on lease rates. However, I am pleased to report that many of the issues we face, regarding financing and placing 2002 new delivers are behind us. We've successfully placed all of the 2002 deliveries and renewals, and we've made excellent progress in 2003. While the aircraft leasing remains competitive, we're very pleased with the performance -- relative performance of our air portfolio.

New investment volume, across GATX, is running behind year-ago levels, due to the lingering effects of recession. We remain optimistic that as our end markets gather momentum, investment volume, within our core markets, will respond positively. Furthermore, we're pushing a number of select portfolio acquisitions.

On the expense side of the equation, we're running ahead of our plan to reduce company-wide SG&A by 15 percent, from prior year levels. This has clearly helped us that some of the effects of the weaker industry-wide conditions.

Although our 2002 EPS is expected to come in below the expectations we laid out at the beginning of the year, we are confident that in the and difficult market conditions we have, and will continue to, take the right steps to position GATX, and the shareholders, to benefit from an upturn in the cycle.

With that, I'll turn it over for questions. , we're ready for questions.

Thank you Mr. Lyon. If you have a question, at this time, please press the "one" key on your touch-tone telephone. If your question has been answered, or you wish to remove yourself from the queue, please press the "pound" key. One moment for questions.

Our first question is from Mike Vinciquerra of Raymond James.

Thank you. One of my questions is kind of a big picture question. And I'm not a railroad analyst, but I've heard some news recently that the railroads have been greatly restructuring and trying to gain a lot of operating efficiencies, out of their own fleet of cars.

Much, as you guys talked about in previous years, about the mergers between the oil companies and the rationalization they went through, and how that's created some of the issues that we're seeing today, I'm curious if you could just step back and give us the big picture perspective on what's going on with the railroad that also own cars, and whether or not you think there's any fundamental changes in the business today, versus what might have been the case say three or four years ago.

Well, there's no question they've improved their operating efficiency and rationalized their fleet.

As far as tank cars, you know, there's somewhat of an effect, but not a big effect, because they don't own tank cars. That majority of tank cars are owned privately. But there's no question, as they get more efficient and products move fast that, you know, people are rationalizing their fleets on the tank cars that they're transporting. They've also, actually, obviously rationalized their freight cars, as well.

And, you know, it is affecting utilization -- yes. That's the answer over the last few years ...

OK kenney: ... compared to when they were very inefficient, during the wave of mergers, a couple of years ago.

And how does it affect the portfolio cars you have that are non-tank? I'm not sure what that number is today. Maybe you could tell us that, and let us know if those markets have seen an impact.

There's about -- of 131,000 cars, Mike, about 75,000 of those are tank cars.

OK.

So it's still predominately a tank car fleet. And the activities of the railroad industry obviously we're very closely involved with the railroad, and have followed their activities over the past couple of years. Some of the utilization pressure, as Brian mentioned, that we've seen, a couple of years ago, was really started by the mergers of the railroads.

OK

And the question that nobody can answer yet, at this point, is if in fact the railroads are able to maintain better efficiency, during a period of stronger economic growth, when there is more traffic, can we also pull more traffic from truck to rail? And that would be a benefit, long term, as well, but that's an unknown at this point.

Sure. OK. And then one specific question off the front of your release. You talk about the hits to earnings of 10 to 15 cents for two different items, and one for holding additional liquidity.

And, number two, slipping my mind right now, without looking at it. But -- oh, for the retirement of those old cars. What kind of timing are we talking about for those? Are part of those expenses already in your numbers for the first two quarters of the year, and then there'll be a small portion through the second half? Or can you give us an idea how we should look at that from an earnings projection standpoint the next couple of quarters?

Well, very little of it has impacted the numbers year-to-date it's about ...

A million dollars ...

... a million dollars.

... on the cars.

OK

But going forward, for the year, you see in the press release we say 10 to 15 cents. The majority of that will be this year. It should be relatively immaterial after that. That's less than we originally said in the press release. When we put it out in April we thought up to 10 million after tax. We think we're going to do better than that, because a lot of the cars have stayed in service longer than we originally estimated. But most of the impact should be this year. Remember, these are very old cars, so they were going to come out of service in the next few years anyway.

And should be split it evenly, between the next couple of quarters? And, then also on the liquidity front, should we assume that that's been spread out throughout the entire year?

Liquidity definitely spread out throughout the entire year -- cars. It's a little hard to tell. It might actually be more weighed in the third quarter, but you're not going to be that far off.

OK. Thanks guys.

Thank you.

Our next question is from Wayne Cooperman of Cobalt Capital Management.

Hi guys. You said you got all your new delivers for '02 on the aircraft done, and you're working on '03. Is there anything that you have that's under lease now that's, you know, being parked? And how much of your leases come off this year, and what's the status on renewing those for next year?

Sure. As far as what's parked right now, we did have -- we have four aircraft, but they're all under letters of intent.

OK.

So there's an , a seven five -- two 757's and one MD83. Those aircraft have all been allocated to carriers, under letters of intent, so effectively we'll have no aircraft parked.

.

And, as far as what's coming off lease this year, we originally had 10, coming into the , 10 aircraft that would come off lease. All of those have been renewed.

.

And in 2003 we'll have eight aircraft coming off lease.

What are you having -- I mean I've talked to one of your competitors, and it sounded like when you're renewing the rates are coming down on the renewals. Can you give any color on that, and also any sense what the used aircraft market is like now, and if you think you need to adjust your residual value of estimates?

Well, we did adjust our residual value of estimates and took asset impairment charges, on everything that was reasonable, in the fourth quarter of last year.

Right ...

... like we're still not looking at everything very carefully, obviously with the state the air markets in, going to continue to do that. So we'll continue to look at aircraft, especially some of the older ones in our portfolio, but for right now we're OK.

As far as renewal rates -- yes they're down. It's hard to give you a general range, it really depends on the type of aircraft. 757's is an aircraft that are -- you know, is out of favor right now, so lease rates will be down dramatically on those, and on some of the older aircrafts, as compared to our new deliveries, where if you look at the -- for instance the 737's we're placing on lease now -- now versus prior to 9/11 -- it's probably down anywhere from flat 10 percent. And I would say the older aircraft are obviously much more than that.

Right. Thanks a lot.

Our next question is from of .

Hi guys, thanks. I'm just curious -- I think you mentioned, in the first quarter, that on the rail side lease rates renewal, and these rates were down about six percent. What did you actually see in the second quarter?

Second quarter they were down, in that same neighborhood, five to 10 percent. And we continued -- you know, we saw a little bit more pressure in the second quarter. Part of that is due to the mix of the car types that were coming off, in the second quarter. So, they're still under. We haven't seen a recovery yet ...

Yes. I mean the pricing people are going to tell you that the market is the same as the first quarter and the same as last year. They don't feel it's gotten worse. It's down a little more in the second quarter, but you'd expect that, as this recession extends, and you're renewing cars later. You're obviously renewing cars that had a higher lease rate, you know, prior to the recession. So you expect it to get more severe, at the longer, as the economic downtrend lasts.

And, so your expectations looking out next couple of quarters?

Once again, we don't think the markets getting any worse, so we don't expect any deterioration there.

And, then in a typical recovery type scenario, how would you describe the lag where we actually have the -- you know, the pricing power coming back?

That's an excellent question, because it's not going to snap back right away. It will take a -- it's hard to tell. It depends on the recovery, of course, but it could take a year or two, or with a slow recovery longer, for rates to get back up higher than the prior lease rate, for some of those cars that were put on toward to end of the upturn. So it will take a couple of years, because of the nature of our fleet. If there's a big snap back obviously it's going to show up in terms of new car rates, especially if we're adding new cars that will help cushion that blow of the portfolio.

That's the other component that you would hope to see in conjunction with recovery in the market, as a pickup in the new card order activity ...

Sure.

... which helps lift lease rates on your existing equipment, as well.

OK. And just on the retirement issue, is there any further exposure, looking out in '03, or is this just a onetime 10 to 15 cent hit?

The ...

It should be immaterial going forward.

Impact after '02 is immaterial.

OK. So, recognizing, obviously, the current environment's tough, if we look beyond '02, and we -- you know, we have the view that we're certainly seeing typical signs of a cycle recovery. I know that it looked like chemical rail car loads were up about six percent in the second quarter. You've certainly done a good job on the operating leverage front, and presumably today we know the businesses are comprised of higher return on invested capital business, than they have been in the past.

Can we -- can we see a repeat of historical earnings power, of about two-and-a-half dollars in '03? I mean what's your thoughts here, relative to where we are in the cycle?

Well, we haven't put any type of forecast out yet for '03. Some of that'll be dependent on that cycle recovery that you just referenced, and how real and substantial it is, during the course of the next six months, and how that impacts lease rates and investment volume. So, we haven't commented specifically about '03 yet, at this point.

We would hope that we've certainly seen the worst of it, and it through in a good financial condition, with lower leverage and the ability to put some capital to work, and benefits from that upturn. It's too early, though, at this point, to put a bracket around '03.

But you're correct in saying, you know, there is some optimism out there, because of economic fundamentals turning around. That's the first time we've seen that, not only in manufacturing utilization and chemical shipments, as you mentioned, but car loadings are turning up. So, it gives us more hope on '03 that we didn't have before, it's just too early -- you know we want to see some -- see this sustained for a while, before we can start talking about '03 numbers.

Sure. And, so given that we are seeing signs of the cycle improving here, and given that prices are as well as they are, on the rail car side, I'm just curious to your thought on, you know, possible new car order programs.

Oh, that's something that they're looking at constantly downstairs. And, you know, once we decide to do that, that would be obviously a good determination that we think the markets going to turnaround. So it's something they're looking at constantly, you know, and I don't know what else to say there. We're looking for the time when we think car prices are the lowest and it's a good time to buy. So ...

But it doesn't sound like we're there yet.

Yes. I'll also add, too, that it's probably not something we'd talk about publicly until contracts are , signed and ...

Sure. Fair enough.

... or given the limited number of competitors in the marketplace, we don't want to talk too much about what's happening.

Fair enough. And just one last question, if I may. The airline credit that resulted in the increase in the non-performing, just if you could comment on that.

Sure, I'm glad you asked. The non-performing assets, if you take out that one airline credit, is actually down from last quarter. What that was, was about $50 million of book value to a South American carrier, that represented . That's what's causing that increase. It's also a good example of how non-performing assets, in an operating lease company, can overstate our true exposure, especially for us.

Where in this case, for instance, we put -- like I said, we put the entire book value, of those three aircraft, in non-performing. But our actual exposure, in terms of overdue receivables, is quite small, in fact less than a million dollars.

So you monitor the situation. If it doesn't get better you pull the aircraft out and you release them. And, obviously, we're having very good success at releasing them. So, once again, there could be a lot of churn, in our portfolio, and it's something we're watching very closely. It's all the airline credits in our portfolio, but it's somewhat of a conservative way, in that we measure non-performing assets, in that we stick the whole book value in .

OK. Thank you.

Our next question is from of Allstate Investments. zanak: Hi. I have a couple of questions regarding your debt. The first one is how much is coming due for the rest of 2002, and how do you expect to pay for it? And, then the second question is do you expect to have net debt issuance for the rest of 2002?

Lets see, the retirements for the remainder of 2002, I'd separate that recourse and non-recourse. Recourse is about 225 million, for the remainder of 2002, the second half. Non-recouse is probably along the line of 150 million. And it really depends on -- on the non-recourse side, as far as net debt, it really depends on the volume we see there, so we like to separate. We always talk about recourse leverage.

In terms of -- I would say there would be an increase in net debt, because we continue to take deliveries of aircraft, and those are financed with and debt. As well, we're also looking at completing a conduit. So the addition of those two pieces of debt will probably result in net debt increase, for the second half of the year.

OK. Thank you.

Our next question is from of RCB Investment Management.

Good morning guys. Could you talk a little about -- you made small acquisition, rail -- and I missed the beginning of the call, so I apologize talking about it. But what was that about, and maybe a little color on actively pursuing other portfolio acquisition opportunities?

Sure. We acquired 2,700 cars in a fleet acquisition, in Mexico, earlier in the quarter, in a transaction that we think is very attractively priced, from GATX's standpoint. A good customer base, within those cars, compliments the fleet we have there, already very well. As you know, we've had a growing presence there, over the last few years, and this transaction presented a good opportunity to buy a good fleet of cars in bulk, at a very attractive price.

As far as other portfolio acquisitions are concerned, there are a number of things that we're looking at. I'll let Brian elaborate on that a little bit.

Yes, it would be the same answer the last two quarters actually. And we've done some small acquisitions and that was one of them. The problem in this market, both the air, rail and really all markets, is that people are pretty reluctant to sell into a depressed market.

And I can think of at least two or three opportunities that we are working on, where their portfolios eventually didn't get sold at all. It's not that we lost it, they just decided to either keep it and run it off, or try to do it later. So it seems to be a market where people are unwilling to sell, but we continue to pursue it, and we hope to have some in the last half of the year.

In the financial portfolio, you know, there hasn't been much new volume, and you took a lot of write offs last year. You know, are you pretty comfortable that what you have left is paying customers going forward, or is, you know, things always change or, you know, how do you feel about that?

Are you kind of asking, in general, how do we feel about portfolio quality?

Yes. You know, having -- you know, there hasn't been a lot of new volume, and you've had a lot of scrubbing last year.

Yes.

Yes, I mean, you know, it's tough to answer in an economy like this, but in general it seems to have stabilized. I mean, obviously, we haven't had any of the large write offs, or asset impairment charges, that we experienced last year. The telecom portfolio, which was a big news event in 2001, is now extremely small, and it shouldn't be an earnings issue going forward.

On the venture portfolio, obviously we continue to monitor that closely. We allocate a very conservative reserve level against those assets, and when I say conservative I mean a percentage well in excess of our average level, which was 6.5 percent in the second quarter.

But, you know, the economy's rough, and venture prices are high level of restructuring workout activity, but there's probably fewer problem credits popping up. We have better collateral positions there.

In the operating lease portfolio, obviously I already mentioned the air portfolio, we have to closely monitor the credit of lessees. And, you know, we're not going to be surprised to have to deal with a little turn in the portfolio. But as long as we're confident in our ability to keep the aircraft deployed we're doing pretty well.

In rail it usually hasn't been a lot of credit explosives in the rail side. I mean, obviously, we've seen a high level of trouble there, but it's insignificant in the overall portfolio.

And I'd say in tech obviously, once again, in this economy, probably a little higher level of workout, than problem accounts, but once again hasn't been materials to date. So, overall, it seems to have stabilized, is the way I characterize it.

And we continue to carry the allowance, well at the high end of the range of four to six-and-a-half percent that we talked about historically.

And in the air, increased and non-performing lease, and that is driven by one airline credit that you placed on non-performing status. Would you identify that?

Well, I think Brian just covered South American carrier ...

I'm sorry, I missed that one.

... primarily a 737 aircraft there.

Yes, we have interest in three seven -- three sevens down there. And, once again, that is the book value of those assets, the actual -- the reason we put it on non-accrual and non-performing, is obvious. But our exposure there, to date, in terms of overdue receivables, is extremely small.

Immaterial number.

And just lastly, just overall liquidity and, you know, financial issues -- bond spreads still up there? Any comments, or color, or any way you've changed your -- you know, your financing structure, or thinking about it, and ...

Well, we still have, you know, I'd really say excess liquidity. We have $321 million of unrestricted cash. We have $775 million of committed bank line. And one event, which didn't happen in the quarter, but happened in early July, that we'll talk about, is our 364-day facility was coming due. And we actually extended that for three years and made it a drawn facility. So it's not drawn right now, but it's structured to be drawn.

Yes, if there was any change in our financing strategy it's that we're carrying a lot of excess liquidity and obviously it's costing us, and that numbers in the press release in 2002, but it makes sense in this market.

In terms of losing access to the market, which we did in March, we've taken the strategy of have a drawn credit facility, and we were real happy to get that out in three years. I think that shows a lot of confidence in the banks and our credit.

The other thing is, I had mentioned a little earlier, is we're working on a conduit. When we get that closed that will give us access to the market. So there's a slight change in strategy, because of our rating, but in general just carrying a lot of excess liquidity.

Great. Thanks guys.

Our next question is from of PPM America.

Hey guys. My question was just on your bank lines, and I think Brian you touched on that a little bit. You had, I think, 140-million line expiring in June ...

Right ...

One hundred forty two million, of the 364 day, and what we decided was -- it got renewed for 145 million, so essentially the same amount. But we extended it for three years, and made it -- structured it to be drawn, instead of, you know, a backup line.

OK. So currently undrawn, but you can draw on it at any time ... kenney: Currently undrawn. The whole $775 million is undrawn, and obviously there's no outstanding.

OK, great. Thanks.

Our next question is from Mike Vinciquerra of Raymond James.

Just a follow up on a couple of small issues. Just looking at your cash flow statement, I noticed that you -- operating cash flow remained pretty strong, but one of the numbers that stood out was deferred taxes. You got a $26 million positive operating cash flow there, and it's much larger than previous quarters. What happened with that particular line item?

Well, part of that change, in the deferred tax line item, is really due to a couple of things. One is -- has to do with a reversal of a deferred tax receivable, carried over from the GATX terminal sale. But, more importantly, is the fact that there's a bonus depreciation -- bonus that kicks in, and kicked in this year, which is beneficial for us, that we were able to employ that, as well.

OK.

And we continue to generate some new investment volume.

OK. And, then just on the operating expense line, I'm assuming that the jump sequentially was just because of the kick in of Great Lakes Shipping business, in the quarter. Is that correct?

That is correct.

OK. Thanks very much.

Our next question is from of .

Yes. Gentlemen, can you comment on the status of your dividend going forward?

The dividend, this year, is at $1.28. We review it, at the end of the year, with the Board, and make a recommendation in January, and so -- but right now there's no change.

Thank you.

Once again, if you have a question, at this time, please press the "one" key on your touch-tone telephone.

Our next question is from of .

Thank you. Some of my questions have been answered. But I was kind of curious, in previous calls you mentioned that you were willing to make acquisitions, and as opposed to portfolio investments. And I wondered if there's been any progress on that front? And if there's any companies, since the whole market is so beat up, at the moment, whether there's some attractive opportunities for you?

Well, Dale, most of the focus, for GATX historically, has been on the portfolio acquisition side. And, you know, while we would -- while we'd be open to other possibilities, the focus is really on select portfolio acquisitions, and that's still the case today.

OK. That's all I had. Thank you.

Once again, if you have a question at this time, please press the "one" key on your touch-tone telephone.

Mr. Lyons, I'm showing no further questions at this time. I'd now like to turn the program back over to you.

OK. I'd like to thank everybody again for joining us this morning. I know with the conditions of the markets, over the past couple of weeks, it's difficult to take time out to listen to calls, so we appreciate those who joined us today.

As always, Brian and I will be available for additional questions, if anybody would like to give us a call, and we look forward to talking with you. Thank you.

Thank you Mr. Lyons.

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