GATX Corp (GATX) 2003 Q3 法說會逐字稿

Good Afternoon. My name is Latoya (ph.) and I will be your conference facilitator today. At this time, I would like to welcome everyone to the GATX Third Quarter’s earnings 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 at that time, simply press "*" then the number "1" on you telephone keypad. If you would like to withdraw your question, press the “#” key. I'd now like to turn the call over to Robert Lyons, Vice President Investor Relations, please go ahead sir.

Thank you. Good morning everyone and thank you for joining us on today’s call. With me is Brian Kenney, our Chief Financial Officer. Earlier this morning we issued our third quarter results and I hope you've all had an opportunity to review those I’ll provide a short overview of the quarter and then we will go right to Q&A. 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. At the conclusion of the second quarter, we were asked the question regarding what our expectations were qualitatively for the third quarter and at that time we said our hopes for continued stabilization with little disruption and/or unplanned events during the third quarter and that’s what we experienced.

For the 2003 third quarter, GATX reported net income of 22.7m or $0.46 per diluted share, this includes the benefit in the quarter totaling $0.13 per diluted share related to recoveries and previously expensed legal cost. This compares to net income in the 2002 third quarter of 19.1m or $0.39 per diluted share. In Rail, utilization has remained steady with second quarter levels at 93%, above the prior year level. We are managing our fleet effectively given the environment working hard to place cars into service and scrap aged cars as warranted. From a lease pricing perspective, we continue to see pressure on rate as expected due to the way in which the fleet rolls and renews overtime. We’ve discussed this pattern in the process at length on our past calls and we'll certainly be happy to do so again today during the Q&A if anyone should want additional details.

Industry news in the Rail has been generally positive with order backlog at manufacturer coming well off the bottom and holding above the 30,000 car level in recent quarter. While well below the peak year levels of 60,000 plus cars, the current state is a dramatic improvement over the past two years. Activity among the customer base has been positive and we are seeing a steady flow of order enquiries. In Air, I point out that once again concurrent with the release of our earnings this morning; we posted updated Air slides our website. Please feel free to access this information or call me directly after the call today and I will get copies to you.

Consistent with the seasonal pattern in this business, conditions stabilized in Air in the third quarter. Our fleet remains highly utilized, our order book has been effectively addressed in our 2000 renewal activity, it's close to being finalized. These are positive developments in places us in a good position as we enter the more challenging winter season.

Like all of you, we will be watching travel patterns closely in the months ahead and we will make -- we will maintain very close contact with our customers as we monitor their operating conditions. As noted in the release, we did see a slight pickup in investment volumes in our technology business during the third quarter, although the base level for the comparison is relatively low compared to peak years. We have placed added emphasis on expanded marketing programs and advisory services over the past year and we are hopeful that this will provide additional leverage point when the overall sect's spending rebound occurs.

Investment volume at GATX totaled $613m through the first nine months of 2003 compared to 887m in the prior year. 2003 investments volume has been concentrated in Rail, Air, and Technology and as expected given our plan to exit from Venture in the curtailment of Specialty. As you may recall, the 2002 aircraft delivery schedule was sizable and drove the large part of the volume in the prior year. So the decline this year is expected given a comparatively light '03 delivery schedule.

Cash from operations totaled $325m through the first 9 months of 2003 compared to $256m in the prior period. [inaudible] proceeds which totaled to $568m in the first 9 months of 2003 compared to $673m in the prior year coupled with the strong operating cash flow and the financing activity undertaken during the quarter, supported our investment activity while at the same time enabling us to reduce recourse leverage. Net charge off and asset impairments in the third quarter were well below year ago levels, both on an absolute and a percentage basis reflecting a generally improved credit environment in Rail and Tech as well as Specialty and Venture.

In closing, I would add that in preparing for this quarters release, it felt very similar to the second quarter in terms of results, events, and the environment and that in and off itself is a positive step given the volatility we experienced in 2001 and 2002. While we remain cautious on certain fronts with regards to potential challenges, particularly in Air, we feel good again post a fairly straightforward quarter. With that, we'll open it up for questions.

At this time, I would like to remind everyone, in order to ask a question, please press "*" then the number "1" on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question from Laura Kaster, Piper Jaffray.

Hi great quarter for you guys, real -- two quick questions, just I have my ducks in a row here, does your guidance include all the non-recurring charges quarter-to-date and is that $1.30 the same guidance that you had in the last quarter?

Yeah, it includes all the charges and we are not excluding anything. That would be GAAP earnings that we expect.

Okay and so that's in line with your prior quarter guidance.

Essentially, yes in the range of.

Okay, great. And I apologize, I was cut off for like 90% of your prepared remarks, can you just give me your outlook on your technology business what you are seeing there?

Well, we did see increased volume in the third quarter versus the first and second, but the numbers themselves are certainly continued to run below our targeted levels. So, we are encouraged a little bit by the pickup in activity in the third quarter, but hesitant right now to call it a trend and I guess in general we would say we are still running below where we want to be as far as tech volume is concerned.

Okay, but no catalyst to call a trend, as of yet?

Not, really.

Okay, great. Thanks Bob.

The next question comes from Arthur Winston (ph.), Pilot Advisors (ph.).

Hi, this question I mean it is a difficult question, and I don't know if you can respond whatever you can say is helpful and you probably can’t say a lot, but in terms of the liquidity from which you may or may not be able to continue, your relatively high dividend, the debt is down a fair amount, the cash is down, is your liquidity position any better or worse than it has been overall, how do you assess it?

Let's say, I would say it is about the same in that. Right now we have about 665m of committed unused bank loans as well as unrestricted cash. So, liquidity is strong and I would say it is about the same because I can look out to the end of 2004, on a committed basis, so looking at committed funding between now and then, we still would not have to range any new financing in order to meet those commitment, so I would say it is a similar strong liquidity position as to prior quarters.

And I don't know if you consider this question historically, has the board told this year [inaudible] anything about, you know, how its looking at, you know, the dividend given these, you know, very difficult environment we are in?

No. They are going to the regular quarter review; they look at cash flow investment level where we think earnings is going go when the recoveries come and the importance of the dividend to shareholders. They look at all those factors every quarter that analysis continues and you might have noticed that in the press release. We stress that again.

Thank you very much.

Your next question comes from Charles Kasparella (ph.), Claiborne (ph) Capital.

Hi guys. Just had a couple of questions, the first one is on rail, could you sort of help me understand what Rail revenues would have been like sort of on apples-to-apples basis with last year if you would take out Europe?

Sure. The -- if you look on a quarterly basis, the North American Rail revenues were only down a couple of million dollars quarter-over-quarter. Last year, at least [inaudible] was talking about revenues and saying about lease income.

Sure.

It's really the best benchmark. Last year, third quarter '02 lease income was $147m. We picked up KVG that was roughly 14m.

Right.

And then the North American revenue was -- lease income was down roughly 2m from the prior year, so that leads you to the 159 that posted, roughly 159 posted this quarter.

Okay. And so, I mean, its seems like maybe the lease rates are little bit stronger than maybe what you expected, does that seem that maybe there will be a more decline in North America considering how much rolls offs at lower rates, is that a fair statement or?

I'd say it's about a -- right about at what we expected.

Okay.

Earlier in the year. Rental rates continue to be lower on average on renewal than the prior existing lease rate and that's still the case now. Now, that's gotten better -- that trends got a little better through the year, but it's still lower so there is still pressure remaining on revenue.

Let me give you the same numbers on a year-to-date basis.

Sure.

Where ’02 lease income was 458m. We pick up KVG which is the range of 40 and then North American revenue was down $26m year-to-date. So, there is a meaningful drop in North American revenue, which we talked about at the last quarter. That’s the phenomenon when we flow [inaudible].

Okay, great. And then the next question would be on the financial services division. May be just help me on the lease income line, it was down a little bit sequentially and I don’t know is that just because of the weakness that we are seeing in air that have to do with the tech leasing. What sort of goes into that lease income line and what’s affecting it?

Sequentially from second quarter and the third quarter, would be a decrease in tech volumes. If you look year-over-year, from last year to this year the biggest driver again was the year the technology portfolio, essentially running down a bit as volumes have run lower than targeted levels.

Okay.

That’s been the biggest driver.

And the last question -- this is more of a strategic question. Just wondering what, you know, sort of targeting or I could see the franchise earning is at peak. Are we -- if you look through the cycle and just try and leave us with a more big picture. Question is what sort of the range we should think of it as a peak ROE?

You know it’s easier – this business mix is a little uncertain because of the way you know Specialty and Venture are rolling off in tech volume is little low. If you look at it business by business, you know our strong ROE in Rail at a peak is into 20.

Right.

A good Air ROE in normal times is 10% plus and tech would be also be on the low-10s. So, you know, for GATX overall looking at current business mix you would say 15% would be an excellent target, but you know really depends more on business mix going forward. But I have given the individual component.

I know, sort of those were all peak ROEs then?

Yeah.

Okay thanks.

If you will like to ask a question at this time, please press “*” then the number “1” on your telephone keypad. Please hold while we compile the roster. Next question comes from Tom Loritz (ph.), Banc of America.

Hi guys just had a question regarding the capacity additions from Burlington Northern -- another quarter or couple of days ago they kind of indicated that they are going to accelerate the delivery of 65 new locomotives into the current quarter, from early next year, they seem a little bit more bullish about freight volumes and just wondered how that would impact your leasing rates going forward and does that change anything?

With regards to Burlington Northern, I think [inaudible] also said the same thing. They’ve both mentioned freight rates being up specially in grain, both have mentioned grain and we have seen that’s what driving some of the better renewal rate experience we’ve seen is in the grain cars that we have, they are up significantly since last year but that you know if you look at rates across the board of that’s more of an anomaly. Grains coming up are of very low base from a couple of years ago. So yes our traffics up there, rates are up there, our rates are up there and that’s what driving some of our improved renewal rate experience. But speaking more generally across the portfolio its more of a mix bag I think some cars up like grain inter-modal or coal other are down or continue to be weak. So, it's really in a car-by-car basis.

I see so, some stabilization but no meaningful improvement?

Yes there has been -- definitely has been stabilization, there’s been slight improvement in our renewal rate experience as we go through the year. The other thing I will mention is that the hill we have to climb as far as renewal rates is getting lower over time, because our average expiring rate is coming down in 2003 and probably 2004 as well. So, what we would like to see the complete the equation is absolute rates go up across the board.

I see and then on the Air side with load factors, I guess it is seasonal, but what's your sense of capacity coming back in to the system on Air side?

Well you know, for us its much broader than the U.S. Majors, now the U.S. Majors are bringing in some capacity and number of them have mentioned that you know, especially in the leisure markets but yeah let's see if that sticks more broadly for our portfolio. Let see that some of the strength gained over the summer in the carriers that we leased to in Europe and France and let's see if they can hang in there in the fall and winter season, which is much more difficult. But yes I mean, things have improved, just we would like to say the same thing next spring.

Okay. Thank you.

At this time there are no further questions.

I would like to thank everybody for participating this morning. The last couple of calls we have had have been fairly short and straight forward I think that reflects the operating condition and the environment that we have been in here the last couple of quarters we are around today, Brain and I will be answering the additional questions people might have. I will also point out that next week, Wednesday, we will be at the Piper Jaffray Financial Services Conference in New York and if you are in East Coast attending that conference, hopefully we will have the opportunity to see you face-to-face as well. Thank you very much.

This now concludes today's GATX third quarter earnings conference call. You may now disconnect.