GATX Corp (GATX) 2003 Q1 法說會逐字稿

Good morning, My name is [Chastity] and I will be your conference facilitator today. At this time, I would like to welcome everyone to the GATX first quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Mr. Lyons, you may begin your conference.

Good morning, everyone. This is Bob Lyons. I have with me today Brian Kenney, our Chief Financial Officer. First, I'd like to thank everyone for joining us on today's call and I'd especially like to thank those on the West Coast who are joining us very early. We wanted to host the call an hour earlier today so others could participate in other calls being held later today.

Before touching on the numbers for the quarter, I'd like to point everyone to the forward-looking statement language included in our press release. The language included therein also applies to today's call.

In the 2003 first quarter, GATX reported net income of $1.8m or 4 cents per diluted share. This includes an $11m or 22 cents per diluted share loss provision related to our air business. These results compare to a net loss of $9.8m or 20 cents per diluted share in the prior year period. The prior year period included a $34.9m or 72 cent per diluted share good will impairment charge related to the adoption of FASB 142.

To a large extent, the first quarter progressed generally as expected from an operational perspective. Rail showed signs of progress in terms of customer order inquiries and utilization, and the manufacturing backlog for new equipment is stronger than at any point in the past year. These are very positive signs. But as we indicated would be the case in last quarter's press release and conference call, pricing remains under pressure in this market.

In technology, volumes remain below plan as companies have not yet increased overall IT spending. The first quarter new investment volume for GATX was basically consistent with past quarters, but obviously we need to pick that up as the year progresses in order to build our asset base in technology.

The one area that experienced greater volatility during the quarter, and I'm sure this will be of little surprise to anyone on the call, was air. Between the war and SARS, carriers faced new operational pressures during the quarter. In addition, ongoing uncertainty over American's direction and United's proceedings kept the industry in the headlines throughout the quarter. While our portfolio continues to hold up well in terms of utilization and placements, we were not immune from the volatility. The Air Canada bankruptcy filing led us to take a provision for a note we had with this carrier, and this negatively affected our first quarter results.

I point out that in keeping with past practice, a full slide presentation on our air portfolio has been updated and posted to the Web concurrent with the distribution of this morning's press release. If you can't access the Web to obtain the information, please contact me directly and we'll get copies to you.

So in summary, while air was volatile during the quarter, the balance of our activity and developments during the quarter were fairly straightforward.

Before going to questions, which Brian and I would be happy to take, I'd like to make a brief comment on the dividend, a topic that I'm sure is on the minds of many of today's listeners. Tomorrow we will host our annual shareholders meeting followed as always by our regularly scheduled board meeting. As it normally does at this meeting, we expect the board to consider this quarter's dividend. However, I'd add that since the board carefully weighs this decision and reaches their conclusion on their own, it would be inappropriate for us to comment any further on the dividend here today. For those of you who would like some background on how we view the dividend or the factors that play into the decision, I'd encourage you to look at our January 30th press release where we discuss this information in great detail.

With that, we'll open it up for Q&A.

Thank you. At this time, I would like to remind everyone in order to ask a question, please press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster.

First call is from Bob Napoli with USA Bancorp Piper.

Good morning.

Good morning, Bob.

A nice, brief presentation. On the air portfolio, can you talk a little bit more about the write down at Air Canada and how I mean you didn't get planes back, but did you have a different loan to Air Canada? Just talk a little bit about that. And can you talk about the risks in your portfolio, in your air portfolio, to, you know, potential other airline bankruptcies like, say, for American, for example.

Sure. Bob, I'll take that. It's Brian.

Hey, Brian.

Our exposure to Air Canada consists of three A321 aircraft on lease to Air Canada as well as a note. And that note resulted from a Canadian Airlines 767 lease obligation that we restructured in a previous bankruptcy of Canadian Airlines. And then that obligation was assumed by Air Canada at the time of that merger. So this is an old deal that originated with a 767 300. But after this charge, the remaining book value of aircraft we have on lease to Air Canada is about $28m gross. And that book value of the aircraft on lease to them doesn't really represent our ongoing financial exposure to them. I mean if we can't reach agreement on these three aircraft in terms of the rents going forward, we'll repossess them and we'll redeploy them elsewhere. I mean A321s are getting leased. Our utilization is 99% fleetwide and, you know, the air group has been pretty successful at redeploying aircraft in similar situations. So that's our exposure and that's how it got started on the note part.

Bob, I'd add, too, that in the portfolio the $1.9b of aircraft that was a very unusual transaction for us. We're predominantly an operating lessor where we own the assets, as you know. That was an unusual situation.

Right. There's really no other unsecured debt in the air portfolio. I should say, you know, in prior calls, Bob, we've talked about the restructurings we've done on aircraft, the lease restructurings. We've granted restructurings, I believe, on 16 aircraft. And when we do complete those restructurings, the amount of rent that is deferred and paid back later - we formalize that with a note. And so there are other notes outstanding, but those notes are secured by the aircraft, and our share of those notes at 3/31 was about $6m.

So this was the biggest exposure, and the Air Canada situation deteriorated pretty quickly in the first quarter, so we thought it would be best to just take the whole provision at this time.

As far as other bankruptcies, other bankruptcy risk in the portfolio, the questions we get probably the most are American and United. Our exposure to American and United is concentrated in the Pitney-Bowes portfolio which we have a piece of. We took impairment in the Pitney-Bowes portfolio at the end of last year and I would say going forward our exposure to American and United is limited probably to less than $10m pre-tax going forward because of the reserves in that portfolio.

On American, you said, or both?

On both. In fact on all the aircraft in the Pitney-Bowes portfolio.

So if American and United file bankruptcy, together your charge would be limited to, you feel, to about $10m.

Probably less than $10m because there are other airlines in that portfolio.

Right.

Now, that's the direct exposure. You know, there also is the indirect exposure of what that does to lease rates. But, you know, that's difficult to quantify.

Right. As far as, I mean are you seeing any signs of, I mean is on the railcar business is this the earnings level you showed this quarter do you feel like that is a very stable earnings level with upward movement or, you know, I mean because you can see, you know, how many lease you know, I know you have lease rate pressures that you talked about on the last conference call. Is there any change to, I mean can you talk a little bit about the railcar outlook, lease rate pressures, stability of earnings and earnings growth?

OK. Well, we saw some previous revenue signs in rail in the first quarter because utilization increased...

Right.

[inaudible] percent. And that's we saw higher renewal activity, higher assignment activity, probably a little better than even we had planned and that moved to utilization. But you're right. Rates are still down and they continue down, you know, around 8 or 9%. So...

Is that better than what you thought? Because you mentioned 15%.

No. It's pretty much what we thought it would be.

The full year number for 2002, Bob, was right around 10%, and that's looking forward into '03, our assumption was that that would not get any significantly better or worse.

OK.

So it's right in that range, actually a little bit under it. But...

You know, if there is if utilization were to increase, that means a lot to short-term earnings. But if you're locking in low lease rates, that limits your upside in future years. So, you know, the best way for earnings to increase on the rail side is through a pop in utilization. Now, we saw that in the first quarter. It's too early to call that a trend. And January and February were strong. March leveled out, I think because of the war concerns. April started off fine. So we hope it's a trend. I think at this point they're reluctant to call it a trend but it's definitely positive signs in rail that we saw in the first quarter.

OK, thank you.

Thank you. Our next question comes from Athina Meehan with Morgan Stanley.

Hi, guys. A question on the lease revenue in the financial services business. Looks like there was a bit of pressure there. Can you talk about what the drivers were? Was it mainly air or some continued run off in technology leasing?

Actually, the air lease revenues were up, given the aircraft that we've added over the course of the past 18 months. The big driver, Athina, is what you just hit on which is the technology portfolio. And that portfolio continues to decrease as it has over the course of the last 18 months, and we saw that trend continue again in the first quarter. So that is really the predominant driver of that lease revenue decline.

OK, great. Thanks.

At this time, there are no further questions. Mr. Lyons, are there any closing remarks?

You might want to poll again for any more questions.

If you'd like to ask a question, please press star, then the number one on your telephone keypad. I have a follow-up question from Bob Napoli with USA Bancorp.

Yes, on the technology or on the venture leasing business, what has been the progress in that area and some of the restructured businesses what kind of what is your outlook for the disposition of those businesses or the run off of assets?

Well, in the venture business, we did have significant interest in the portfolio. We had a number of offers as well. We haven't been able to get to the finish line with a buyer yet. I would say the best assumption on venture right now is the runoff mode, Bob.

OK.

We still will entertain offers on the whole portfolio or parts of it, but we are essentially in runoff mode at this point with employees and no further investment other than committed volume. As far as the earnings projections for venture, you know, we don't really get to that level of detail, but directionally I'd say they were about as planned for what we expected in the first quarter and we don't see anything out there that suggests they'll be any worse than we expect for the year.

Specialty, which will run off over a much longer period you know, 10 years or more, will continue to contribute a significant amount of income. We're going to I would say the runoff in specialty it was about $900m in assets at the beginning of the year. Left to its own devices, it would run off at a pace of about $100m this year and another $100m the following year. It's likely that we will accelerate that run off from two perspectives. One, we're going to look at it strategically at different exposures or credits that we're less comfortable with and probably try to get rid of those, and we're going to try to look at instances where there's a nice gain to be had. And that gain may not be there in the future, and we'll take that as well. So I would expect we'll run it off a little faster than that.

OK. Given that and I know this is I don't want I know you're not going to speculate on what the board is going to do tomorrow with the dividend, but it sounds like that through the first quarter, the trends that you have seen are pretty much in line with what you had talked about on the fourth quarter. I mean you're looking to be able to get up to an earnings rate that covers the dividend over a reasonable period of time. Other than the charge you had on the aircraft portfolio in the first quarter. Is that a fair perception? I mean it seems like things what you had laid out and what has happened so far are kind of in conjunction, but we're still looking for that improvement in the economy as we move through the year.

Yeah, I'd say in general that's an accurate statement, but I wouldn't necessarily dismiss the air charge. And we have to get some stability in the air portfolio before we all feel comfortable here.

Can you talk a little bit more about the air portfolio? I know you have your presentation on. Are you seeing we just went through a war, I guess, and since we last talked and things looked dire. They look a little bit brighter today. Are you seeing anything on trends, on lease rates and talk within the industry? And how is SARS affecting your portfolio? What percentage is do you think is being affect by that or is at risk from SARS?

Well, the biggest affect of SARS, I think, in the first quarter is the charge we took.

Yeah.

Because if you read the Air Canada release, you know, it was filed April first their traffic, their performance last year was pretty strong. In fact they made more than any carrier in the Americas in the third quarter. More than Southwest. And their traffic was strong and they had great liquidity at the end of the year. And then in the first quarter they got hit hard by the war, as did all the carriers. And then the SARS outbreak hit them, especially on their traffic to and through Toronto. So that's probably the best example of how SARS affected the portfolio.

We do have other exposure in Asia. You know, at this point we only have anecdotal evidence that suggest that they're doing OK but, you know, that's obviously an ongoing concern.

Otherwise, in the airport portfolio you see the increase in non-performing assets. Now, once again we that's a conservative measure because we put the entire book value of aircraft when it's non-performing on that list and that doesn't really represent our receivables or our true financial exposure. But it still increased in the first quarter, and we have a lot of credit issues in the air portfolio, and that's what we're trying to work through.

So, you know, it's an unsettled market. We're 99% utilized. But we still continue to see issues like Air Canada pop up so it's hard to get comfortable at this point.

Right. Thank you.

Our next question comes from [Steven MacBoyle] with Lloyd Abbott.

Yes. Where would you have to see rail utilizations go to before you actually saw pricing come back into the equation?

You know, I don't know that there's any science around that, but I do know that pricing is so weak now, it's definitely not at this level, even with the increase in the first quarter. A couple of years ago, we were as high as 96%. You know, I don't know the threshold where we all of a sudden have pricing power. I think the market is still very competitive and we're going to need to see increased utilization before pricing really firms up.

And typically the lagged effect is there a method of quantifying that when looking at kind of past cycles?

Well, when we entered this downturn if you look back, you saw Bob and I talk about weakness in the rail portfolio at the end of 1999. And it actually centered around renewal rates. And people, you know, debated us on that. And it didn't show up in the financial results really until the end of 2001. So there is a year, year and a half lag, and it will be the same thing on the way out. Because we are locking in lease rates at lower levels than they were at three and five years ago. So there's a lag on the way out as well.

And presumably, just given the timing and the inflection here and utilization rates, the contracts you're signing are shorter in duration?

They're trying to push them shorter, yes. And one of the things we commented on last year is we see that tension where customers are trying to push the terms out longer. So, you know, while it's very tough for the rail salespeople in this environment, hopefully that's a signal for us that pricing has reached the bottom.

Should be a good indicator. Can you talk to what railcar loadings were in the quarter and how that's been trending?

We look at the chemical shipments for the railcars or in the rail network over the course of the you know, in 2003 in the first quarter. January and February were particularly strong, very strong. If you looked at the January cumulative chemical shipments, they were up almost 6%. Through February it was up 5%, and through March it was up 4%. So it's March, it definitely slowed down on a comparative week-to-week basis to, you know, into the 2 to 3% range. As Brian mentioned, April the first part of April looks pretty good, but there was definitely a period where things came to a bit of a halt there in March.

April kind of mid-single digits, still?

It was actually higher single digits the first week of April.

And railway results are improving as well. I mean once again, anecdotally, I saw the other day Burlington Northern posted improved results. In fact they had the first year-over-year revenue growth, I think, since 1991. So there's a lot of signs out there. Let's hope it turns into a trend.

Yeah. Can you just go through the current mix within the technology portfolio by markets served? You know, mainframe, PC and so forth?

Sure. The biggest component of the portfolio is PC client server which is right around 31% is the biggest component, and mid-range equipment is 29. Those two combined are the biggest pieces of the portfolio.

And do you have a com component to that? Telecommunications...

Yeah, it's relatively small. It's 8%.

8%? Great, thank you very much.

Thank you. Your next question comes from [Larry Schumacher] with Oppenheimer Capital.

Hi, guys. Did you address the dividend I might have missed the beginning of the call. The re-lease rates or how you're putting these planes out after you get them back what's the trend there?

Sure. We did make a comment in the opening, Larry, about the dividend, which was basically we don't really have any comment on it because the board meets tomorrow following our annual meeting and they'll consider it at that time.

As far as lease rates on aircraft, you know, the trend in the new aircraft has been consistent with what we saw last year, which is in that 5 to 15% range, depending on the aircraft type. On existing aircraft, it's much more difficult to generalize because it's very asset specific and carrier specific. But suffice it to say, the pressure is still there and it's intense.

And a last question on the railcars. In the press release it talks about scrapping cars. What percentage of the utilization rate was attributed to cars that were dumped?

Well, we in the last page of the press release you get a we actually break out the number of scrappings for you, which was 1,000 cars during the quarter. You know, that I'd have to do the math on it, but it's not inconsistent with what we did over the course of the past year. Last year we scrapped well in excess of, you know, 5,000 - 6,000 cars.

But it's a good point. It did contribute to the utilization increase. But the number of active cars increased, and that's a good sign.

OK. Thanks a lot.

Mr. [Joe Lyncher], your line is open.

Yes, good morning. Two questions. One, with respect to the increase in non-performing investments, what portion of that increase was attributable to the Air Canada portfolio? And secondly, there was an increase in costs in the rail segment. What do you attribute that increase to?

On the Air Canada note, it's $19m of that increase. And then the other component the biggest component of that increase is an A320 that we put out as well. Not an Air Canada A320, but another one. The biggest driver in those non-performings by far was putting those on. And as we've said in the past, the non-performing number is subject to move around a lot because we do put the entire net book value of the asset in. So one aircraft coming on or off can really swing that number, and it swung it up this quarter. We've seen that before, in the past.

The operating cost numbers in rail are really driven by the fact that we purchased KVG, the European tank car lessor at the end of 2002, actually closed the transaction late December. And those numbers now are incorporated into the consolidated full rail numbers.

OK, thank you.

Your next question comes from [Tim Gay] with [Cooper Ness].

Hi. I had a question regarding the aircraft. You've got six new aircraft and eight renewals, and it said that they had all been either placed on contract or under letters of intent. What's the breakout between actual under contract and letters of intent for both areas?

Sure. The new deliveries I'll have to get the exact let me give you renewals first. Of the eight renewals, two were extended with the existing customer. One was put on a renewal with a new carrier. Two are under letters of intent. That leaves your three that are still to be addressed.

And on the order book, of the five Airbus A320s, three are actually leased up, two are in letters of intent and the Boeing is leased up. So out of the six, you have two that are LOIs.

OK. And when somebody signs a letter of intent, what's their ability to back out if they needed to? They pay some type of breakout fee to you?

Yes, they do. But they. I also don't want to mislead you and say that it is so onerous a payment that they would never do it, because it happens occasionally.

Sure. And I was wondering if you could comment on the decretion in cash and cash equivalents from the end of the year until now and the increase in restricted cash and what the restricted cash is restricted for. Is it pledges? Collateral?

The increase in restricted cash, that's actually the same explanation for why our we had a decrease in our investment in affiliates. That geography changed. There was an investment in a joint venture. We withdrew that investment in the first quarter and then we used it to collateralize a loan to that same joint venture. So economically, that $47m increase in the restricted cash economically, that's still really an investment in that joint venture. It's just that the GAAP accounting treatment now it's classified as restricted cash.

OK. And then you know, are you guys feeling any pressure with CIT coming into the railcar business? And maybe, you know, it seems like it would be tough for you guys on the surface because there's maybe a cost of capital or a cost of borrowing that you guys are fighting right now, given where spreads are, and your ability to place these planes effectively and railcars effectively.

Well, on the first CIT and the rail market, they are a competitor a relatively small competitor in the tank car side at this point. And the key is, in the tank car business that's a full-service leasing business. And the cost of capital, while a component, is not as important. So we obviously compete very effectively. We're number one in the tank car leasing business.

On the air side, or on net leases for railcars, obviously cost of capital is a much bigger component and it gets challenging to compete with higher rated and lower cost of capital entities. That's why you see in the air business that we use the [ECA &X’s]. That puts us on an equal footing with our higher rated competitors except essentially triple-A type debt.

That's the debt that actually the SPE uses you know, they would actually own the assets though, correct?

Now, which are we talking about?

Are you talking about the railcars?

No, I'm talking about the air portfolio.

Well, in the air portfolio, we're talking about our own you know, 16 deliveries last year, the deliveries this year we're taking 100%. They're on our balance sheet and we're using ECA and [exant] Financing to finance those. So that's it's just right out of GATX.

OK, thank you.

Thank you. Once again, I would like to remind everyone in order to ask a question, please press star, then the number one on your telephone keypad. Your next question comes from [Erin Cohen] with [Lars Capital].

Good morning, guys.

Hey, Aaron.

A quick question. I'm trying to understand the guidance a little bit better. You guys reiterated the buck thirty. And I guess I'm trying to understand what has to happen from the run rate you're on now to get to that level?

Well, once again, you can't look at quarterly earnings at GATX. You can, to a large extent, in rail. But in general, for GATX because of remarketing gains falling unevenly from quarter to quarter, it's tough to annualize a quarterly EPS. And that's why we don't give quarterly guidance.

That's the biggest component. The other is you see the positive affect of the cost saves that we've put in place and, you know, as Brian mentioned, [inaudible] on last quarter's we continue to look at that as an opportunity for us to become more efficient and reduce costs. But the big component is the remarketing gains. If you looked last year at the way the remarketing gains laid out over the four quarters, it bounces around quite a bit. And it will again this year.

OK. Great. Thank you.

Thank you. Your next question comes from [Paul Fortaine] with [Harbor Island Capital].

Hey, guys. I've got a question on the investment landscape in rail. Are you seeing any cars available or portfolios with cars available?

Yeah. There are a number of portfolios available. Some have been available for a long time and there have been a couple of transactions done. And, you know, we don't comment on specific transactions, other than to say, you know, we'll take a look at every one. But, yes. There are portfolios available.

What's the size? I mean what would be an acquisition I mean obviously if you look at the number of cars that you guys have...

Well, last year, Paul, we actually acquired in excess of 3,000 cars in the secondary market. That's a lot of cars. And we did it fairly quietly. Now, granted, there are some out there that are bigger. You know, full portfolios that are bigger than that. And we'll certainly look at those to the extent they become available. But it's hard to peg.

OK, thanks.

Thank you. At this time there are no further questions.

OK. I'd like to thank everybody for joining us this morning. I think as Bob Napoli mentioned at the beginning, other than the Air Canada note and provision, the quarter was fairly straightforward from an operational perspective. So we're happy to answer any follow-up questions that anybody may have. Brian and I are both available all day today. And we look forward to talking with you in the future. Thank you.

Thank you for joining today's GATX first quarter conference call. You may now disconnect.