GATX Corp (GATX) 2002 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the GATX third quarter earnings conference call. At this time, all participants are in a listen-only mode and later we will conduct a question and answer session. Instructions will be given at that time. If you should require any assistance during the call today, please press zero then star. As a reminder, this conference is being recorded and I would now like to turn the conference over to our host, Vice President of Investor Relations, Robert Lyons, please go ahead.

Thank you. Good morning everybody. Thank you all for joining us and for waiting on the line for the call to start. I have with me today, Brian Kenney, our Chief Financial Officer and Chris Bensick, our Managing Director in our Air Group.

Prior to beginning, I would like to point your attention to the forward-looking statement included in our press release. This statement will apply the details and discussions provided on this conference call. By now you should have all had an opportunity to review the press release, which went out early this morning. So. I'll be brief with my overview. Given the focus on the air industry during the past quarter, we have invited Chris to join us and provide additional insight on our portfolio and developments in the industry. He will provide his insight after my opening comments.

As you saw in the press release, our third quarter income totaled 19.1 million or 39 cents per diluted share compared to 18.8 million or 38 cents per diluted share for 2001 when excluding non-comparable items. For the nine month period, we posted income of 58.4 million or dollar $1.20 per diluted share compared to 2002 nine months income of a 100.3 million or two dollars and three cents per diluted share on a comparative basis.

Third quarter and year-to-date investment volume totaled 216 million and 887 million dollars respectively compared to 422 million and a billion five in the prior year period. The 2002 investment volume has been driven largely by investments in the air and tech sector. However, the general investment volume has been limited by relatively soft conditions in our underlying market. These conditions haven't changed significantly from past quarters this year. The rail market remains challenging from the perspective of utilization and leased pricing; however, as noted in the release, we have seen positive early indicators in this sector. While it's too early to point to certain indicators as a benchmark for a turnaround, we remain optimistic on the long-term fundamentals in the industry and believe our leading position in the tank car market will provide substantial leverage when a recovery begins in earnest.

In air, I don't need to recap all the developments in the industry as they have been well documented in the media and various analyst support during this past quarter and year. Plus we'll leave the details for Chris, who can speak with much more insight than I can. I will note that early this morning, we posted an updated air presentation in our website and I'd encourage you all to take a look at this at your leisure. You will as in past air presentations that our fleets weather this market volatility quite well and we continue to make substantial headway on placements and renewals.

In the tech sector, our experience near to that of the overall IT industry. Customers have not yet committed the sizeable IT purchase program and are stretching their use of existing equipment. This cycle will turn but the inflection point can't be predicted at this time. We continue to manage our existing portfolio while focusing on providing our customer base with excellent service. This will serve us when the IT spending cycle returned.

In summary, we are managing our business tightly during a difficult environment. We have achieved many of the objectives that we set up to tackle this year, including managing our balance sheet appropriately, reducing SG&A costs, and ensuring that we are well positioned to capitalize on our opportunities when the underlying fundamentals in our core market strengthen. We are confident, we will be able to do that and that will be our focus going forward.

I will turn it over Chris, who will provide some color on the air industry and our portfolio. I will note that while Chris may reference the other slides during his discussion in Q&A. We don't plan to formally walk through them at this point; again I'd encourage to access those at your convenience. Chris.

Thanks Bob and good morning everybody, by way of an introduction with to what I think is probably going to be mostly a Q&A type session, I'd like to review the situation about 12 months ago, when we had the first of these calls. I think it's instructive to look back at what we said at that time and what we've done in the intervening 12 months.

In October of 2001, we had just wound up our joint venture with Flight lease we had, I think two or three more airplanes yet to place in 2001 and 16 new aircrafts to place in 2002 and we said that we were confident that we would place the aircraft we had on order, as they delivered without any significant down time.

We've done that, we've placed all the aircraft that delivered in 2002, in fact we had all 16 committed by letter of intent or leased by July of 2002. We only had one aircraft that had any down time at all and that was an aircraft that was involved in a bankruptcy and we had 2 months of down time on that.

We also said that although, we didn't at the time, October 2001, have committed financing for these new deliveries, we were confident that we will secure it, and we were confident, we would have a substantial export financing component. We did that as well. We have in place two significant facilities from Ex-em Bank and European ECAs for our Boeing and Airbus deliveries, totaling over a billion dollars.

We said that in the crisis environment that we were all facing that new single-aisle aircraft would perform the best and that is proved to be the case. And if you look at one of the slides we have, when you have a chance you will see, I think it's slide number 6, you will see that graphic description of kind of where our investment dollars are invested in aircraft compared to where the stored aircraft fleets are and graphically, it shows very well that our aircraft are the ones that are flying.

More than 60 percent of our investment dollars are in new generation single-aisle aircrafts 737-800, A320 family and that is the sector that has remained the strongest in the past 12 months. We also said that we expected to face greater challenges on the older aircraft in our portfolio, but that we were confident that, our marketing organizations would find homes for them. And they did.

In our owned and managed used aircraft fleets, we placed all the aircraft that were in transition. We had 10 repossessions where we took aircraft out of previous lessees and put them with new lessees. We moved to a total of 48 aircrafts in 2002 and we now have in excess better than 99 percent utilization on our owned fleet.

We said that we expected rental levels to be depressed. For the new aircraft, we said we expected that they would be depressed by about 10 to 15 percent on a comparable interest rate basis, That is basically what has happened, you know, we are not happy with those rental levels as in terms of investment returns, but we are covering our costs and we are confident that when the market recovers, we'll get back to a decent rate of return. Older aircraft rents were also reasonable, given the very tough market conditions we face.

So in summary, I think if you compare what we thought we could do 12 months ago and what we've actually done, we've come out extremely well and the past 12 months have really vindicated not only our business model and our concentration in the new single-aisle sector, but also the skills of our marketing organization. We've been, you know very severely tested in the time of extreme pressure and we've passed the test.

Looking into the future, obviously, we don't have a crystal ball; there is continued weakness in the industry particularly in the US. There is still uncertainty ahead. But I am confident today and I am more confident than I was 12 months ago, that we can meet the challenges that lie ahead for us and that we'll be ready to exploit the good value opportunity as the industry recovers. Our task facing us in 2003 is going to be actually much less strenuous than it was in 2002. I think we expect 21 aircraft movements in total, only 6 new deliveries. We have half of those already placed with signed leases and good prospects for the other half. So with that as an introduction, I thought for the rest of the session, I would just turn it over to questions and I'll try to answer them as best as I could.

Mary, we are ready for Q&A.

Thank you. Ladies and gentlemen, if you'd like to ask a question, please press the one on your touch-tone phone.

And we do have a question from the line of Michael Freudenstein of J.P. Morgan. Please go ahead.

Yes good morning, it's John Baldy from JP Morgan. My question does not relate to Air, it's more with regards to the quarter. I was just wondering, I first off if there were any costs related to the FRA order that were incurred in the quarter and now you still expecting that 10 to 15 cent impact that you'd previously outlined? And second, if you could just provide a greater level of detail with respect to the composition of the 18 million dollars in impairment and charge off in the quarter? Thanks.

Sure John. The, we are continuing, we did continue to incur the expenses related to the FRA mandate that we have laid out earlier this year by 10 to 15 cents range for 2002, it is still accurate, will be within that range. We see it really on two fronts; one is a decrease in revenue, which would be part of that in the rail line, as we take cars back. We took cars back that was down period, rental abatement, with some of our customers and we also see it and tick up in the increase maintenance cost. So it is incurring, but it is coming in line with what we have previously outlined.

Regarding impairment charges which were down significantly year-over-year both from a quarter and a nine month basis, really with the one meaningful component within that 9.2 million dollar impairment charge was a, impairment we took with regard to a couple of Gulfstream Aircraft that we hold in conjunction with our partnership with Gulfstream. We have two aircrafts right now that were in the market selling and we took an impairment of about 4 million dollars roughly on those two. Now we have one delivery remaining in '03 and that will be the end of the Gulfstream delivery. So aside from that there wasn't any one meaningful component on the impairment line.

Okay, just quickly back to the FRA mandate, could you quantify how much of the 10 to 15 cents has already run through P&L?

It is probably about 8 cents so far, 8 to 10 cents.

Okay. Great. Thanks.

Thank you. And our next question is from Catherine Muldune from State Asset Management. Please go ahead.

Hi, it's actually Cathy Muldune. I just wanted to, if you could address - I'm hearing a lot from [Inaudible] that they are getting better utilization rates, I am just wondering how that affects your company?

Well, our utilization rates are still down considerably, in the third quarter for our basic car types, renewal rates were down a little less than 10 percent versus the prior renewal rate, not versus last year, but versus the existing [Inaudible] rate on those cars, and that's been pretty much our experience throughout 2002.

Our utilization on overall is weak, its still at 91 percent and as we indicated in the press release for that to begin this pickup we need a longer trend of improvement in the economic environment, chemical company, manufacturing factory, etc.

Also in the press release, it says your total fleet is hundred and nine thousand, how many of those are leased and how many of those are owned, do you have a mix?

That's our owned fleet, for all of those for one hundred ten thousand world cars, all those are (ph) customersation that is with the 91 percent utilization.

Okay. Thank You.

And our next question is from the line of Keith Hoppy American Express. Please go head.

Hi, I am wondering if you can go into a little bit more detail, you mentioned about the lease levels for the older aircraft and talk a little bit about your operating lease contracts that you put on or they have been shorter than usual? Do you have some options to pull back the aircraft if the demand comes back more quickly and also, you know, there is a number of things looming on the airline side and there has been a lot of talk about 757s and their depressed value, could you perhaps speak about that little bit?

Sure. As I said, we expected that older aircraft would come under more pressure, you know, there is a food chain and what we can do with our new fleet is drive out older aircraft by placing our aircraft which have maintenance honeymoons associated with them at rates that make it competitive with older aircraft. So there is a knock on effect with older aircraft. I think it's very type specific and I think the largest declines in rental rates among the common models, let's say have been in the MD-80 sector and in the 757 sector. 737 classics, by that I mean the 300, 400, 500 have also declined but not as great a magnitude of the decline.

Can you quantify, I mean, can you, what is that decline for MD-80s that 50 percent or 30?

For MD-80s, again depending on the age of the aircraft... You have a big range and but for the older MD-82s for example you have rents now well below 100,000 a month, whereas you know in the year 2000, let's say, you know, you are in the 175 to 200 range and the MD-83s are doing a little better. The MD-83s are about 100 but they would have been above 200 before all of this started.

We took a look at our own portfolio last year and we continue to take a look at our portfolio and last year we made some incurement charges on the MD-80 portfolio and on some 737-200s and that I think doesn't need to be reviewed. I think we have taken all appropriate action there. The 757 market continues to be weak and there again it depends a little bit about on where your aircraft is in its lifecycle, how old it is. We have a relatively modest investment in the 757 if you look at the slide 3, 10 percent of our portfolio by investment dollars in 757s and we are continuously monitoring the values there. I think by and large we are going to be okay there. But the rents have come down and no question about it.

And where you have been seeing rents recently with those?

Older aircraft I will give you broad range because the market is a bit unstable, older aircraft between 150 and 200, newer aircraft between 200 and 300.

Okay and then one last thing, when do your Folkers roll out at least I mean you know with American's announcement of [Inaudible] ?

Sure. The Folker aircraft are held by a company called Pembroke, which is a joint venture we have with Rolls Royce. Rolls Royce is also happens to manufactured the engines on the F100 and further they are held in a subsidy of Pembroke's called Aircraft Financing and Trading. There are 8 Folker 100 aircrafts and 22 Folker 50 aircrafts in total in that portfolio.

Our net investment, GATX's net investment, in AFT is about 19 million dollars. So, it's a very small part, you know, our investment with dollars. Having said that the Folker 100 market in particular is depressed because of the announcements by US Airways and by American they are going to retiring their fleets.

All right.

The American Airline's airplanes are not going to come on the market immediately, however, what American is doing with its 75 aircraft or they are going to be running those out until they require a major overhaul and then are going to be parking them. These aircrafts are not going to be fit to come back into commercial service without significant overhaul investment dollars. So don't really compete today or in the foreseeable, you know, two to three year time horizon, I don't think very significantly with the aircraft that we have at Pembroke. US Airways is a different matter but I think, you know, I think what we will see is a number of bulk sales may be in the US Airways fleet which will have the effect of taking significant number of aircraft off the market and I think the Folker 100 is an interesting proposition because it is a 100 seat and maybe 85 to 100 seat aircraft fits in a regional aircraft niche where other manufacturers are growing the regional aircraft size to 90 seats, [Embrair] is going to make one, Bombardier is going to make one, they are going to charge 24-25 million dollars for their versions. I think there will be an opportunity for the Folker 100 fleet as it migrate out back into the market to be a very competitive alternative to some of these regional jets.

Where are those things appraised now for a value?

As, there is a wide range if you look at the books. Base values in the appraisal books for the Folker 100s, the most recent ones, probably are in the 9 to 11 million dollar range...

Significantly lower?

Current market values if you had to do a sale today, in a distressed market, will obviously be less.

What was the name of that sub of Pembroke again?

It's called Aircraft Financing Trading, AFT.

Okay. Thank you.

Thank you. Ladies and gentlemen, if there are any additional questions, please press the one at this time. And we do have a question from the line of Erin Cohen with Kirst Capital. Please go ahead.

Good morning, guys. A question about the announcement you made yesterday about your replacement cars. What is the natural rate of replacement and why did you use Union Tank Car, I think your traditional vendor was Trinity. Did they give you any special incentives or deals?

I will take the first part of that on. Good morning. We have been scrapping about, anywhere between 2000 and 2500 cars a year recently, out of the fleet. That's why over the course of the last couple of years, the actual fleet size has really not grown, as the market has been softer, we have taken cars out of the fleet at the back end for a 30-year period and haven't really replaced them over the last couple of years. No one in the industry really has. So, the order we announced yesterday is partially to begin replacing some cars we are scrapping out of fleet, but also because we think on certain car type we are going to be able to meet a good demand. And all about Brian talked about Union Tank Car.

This is the first time we have ordered new cars from Union. We have traditionally ordered them from Trinity, as you pointed out. We are just trying to get the best deal that we can and we thought this is the right time to order cars. Obviously, we think we can replace them next year but also, it demonstrates that we think we have reached a low as far as new car crisis, coming down 15 percent from where they were a couple of years ago. And we will continue to fill up the rest of the program, talking to all the manufacturers.

Great, thank you.

Thank you. And our next question is a follow-up from Catherine Muldune, State Asset Management. Please go ahead.

I am just wondering, if there are any pension obligations or any pension issues that you know about?

Well, let me give you a little background. I think we have discussed the pension point really on the call. So it's about a 250 million dollars in assets. So it's not very large in the context GATX. On September 30th on a PPO basis on the current assumption is about 89 percent funded, it is about 60 percent equity in this plan, you know, we are committed to making sure it's funded correctly. And when we look at the assumptions and make our recommendations at the end of the year to the board directly as a retirement funds committee and that will really see any issue given contributions that we made in our commitment to make sure it's funded going forward.

Thank you.

Well, thank you everybody for participating today. Obviously over the last, course of the last few weeks and months or so, there has been a lot of focus on the Air group. So, hopefully with Chris joining the call today and the information we put out that tackled a lot of people's questions, now the quarter itself is fairly straightforward coming off in the second quarter and not a lot of change in the trend line. So, we look forward to any follow up question that anybody else has and feel free to give either myself or Brian Kenney a call and thanks for participating.

Ladies and gentlemen, this conference will be available for replay after 1:30 PM today through October 31st at midnight. You may access through AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code 656126. International participants may dial 320-365-3844. Those numbers again are 1-800-475-6701 and 320-365-3844, access code 656126. That does conclude our conference for today. Thank you for your participation and for using the AT&T executive teleconference. You may now disconnect.