GATX Corp (GATX) 2004 Q1 法說會逐字稿

Good morning. My name is Abel and I will be your conference facilitator today. At this time I would like to welcome everyone to the GATX first quarter 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 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, thank you for joining us for our 2004 first quarter conference call. With me today is Brian Kenney, Senior Vice President and Chief Financial Officer. I'll provide a brief recap of the numbers, which I trust you've all had the opportunity to review in our release. Following that we will go on to Q&A, Brian and I will be happy to take all your questions. Before starting I'd like to drive everyone's attention to our forward-looking statement language contained in our press release. The factors outlined in this statement pertain to today's call. One administrative note before turning into the numbers. For those of you who are wondering about the timing of our first quarter dividend announcement, as is customary we will do that tomorrow following our annual shareholders meeting and board meeting. And for those of you who happen to be in the Chicago area tomorrow, you are most welcome to attend the annual meeting at the Northern Trust by signing up. Now let's turn to the first quarter. Today we reported first quarter net income of $22.9m or $0.46 per diluted share compared to last year's net income of $1.8m or $0.04 per diluted share. I note that last year's results include an $11m after-tax of $0.22 per diluted share provision related to our air portfolio. The first quarter was probably one of the most straight forward we've experienced in some time and is indicative of what we are experiencing in our end market. A gradual improvement is fundamental and lesser operating volatility set against a rate environment that is improving at a slower pace. Ensured things appear to be playing out as we expected and discussed at the beginning of 2004. In rail, we are seeing activity in terms of order enquiries and secondary market opportunities at a pace well above where we have been in the past few years. This is a positive long-term indicative for the business. During the quarter we added 1200 cars to the fleet and this is on top of the 1300 car acquisition we did right at the close of 2003. We invested $70m in rail cars in the first quarter, more than doubled last year's comparable level and we are optimistic about growing the fleet through the balance of the year. As you note in the tables of our release we also had approximately 1700 cars come out of the fleet during the quarter with roughly evenly between scrapings and sale. As noted in numerous media reports during the quarter, scrap metal prices are very high and we benefited from this in our scrap sales during the quarter. As per lease rate renewals in rail, we noted at beginning of the year that while absolute rates would likely pickup during the year, we would still experience some revenue pressure in North America as we have renewed cars coming up, older, higher rate leases. In the first quarter looking at a basket of our most common car sizes in North America, we experienced a 3.5% reduction in lease rates versus the prior rates. This compares the reduction of 5% for all of 2003 and 10% down in 2002. So the trend is in the right direction but there is still pressure nonetheless. In air, we are nearly 100% utilized and essentially complete on the 2004 renewal in new aircraft delivery schedule. Please note that an updated air presentation has been posted into our website at gatx.com. Rates on the newer narrow-body aircraft has stabilized and we are experiencing some moderate increases on select aircraft. But in general we would still characterize this as a top rate environment and one that would likely stayed that way through 2004. The good news is that we would restructure the portfolio so that some of our newest most attractive aircraft will come up for renewal in 2005 and 2006. So hopefully we will get an opportunity to reprice these in a better environment. One of the bright spots for the quarter was clearly on the marketing front. We had some nice gains during the quarter with a marketing income of $23m compared to $10m last year. The most significant transaction occurred in the specialty portfolio where we sold last Gulf Stream aircraft again. In rail we also reported stronger re-marketing activity mostly driven by a transaction were the class one railroad that purchased equipment at the end of the lease term. The gains achieved in the first quarter are positive development but I would also strongly caution against extrapolating this gain level across remaining quarters because they never fall evenly during the year and they are by their nature opportunistic. And portfolio quality, the credit profile continues to show improvement as noted by the lowest non-performing level we've reported in quite some time and very low charge offs and impairment. Most notably we made some positive progress with certain air accounts that have been troublesome in past quarters.

Our allowance for possible losses continue to run well within our comfort range at 6.4%. While the fundamentals continue to improve, we're also cognizant of the objectives we need to achieve this year. First, as you know, we recently announced the sale of essentially all our IT leasing assets. The sale is expected to close by July 31, and our transaction team will be working diligently to ensure a smooth closing. Our net cash proceeds from the sale are expected to be in the range of $200m, which brings us to another one of our main objectives for 2004, reinvesting in our franchise businesses and growing our asset base. With liquidity strong, spread side that we have seen in recent years and ample balance sheet capacity for reinvestment, we are well positioned to aggressively pursue growth opportunity. We are looking at avenues such as portfolio acquisition, sale lease-back and organic growth, we're redeploying some of our capital. The opportunities are there and they are increasing in frequency and we're focused on making this happen. In closing, we would sum up the first quarter as a solid start to the year with little in the way of surprises. We look forward to a continuation of the stability and hopefully capitalizing on new investment opportunity. With that let's go to Q&A.

Thank you sir. 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. Your first question comes from the line of Tom Klett with UBS Financial Services.

Bob and Brian, nice quarter and nice sales as far as I am concerned. Two questions. Number one, do you think the rating agencies will take note of all this. It seems to me somewhat counterintuitive to talk about getting back on the growth track and not having on board the rating agencies to upgrade us or call us a stable credit. Have there been any conversations since the announcement of the sale or do those have to wait till after the sale is completed?

No, we have had the conversations. In fact we had our annual exhaustive meeting with Moody's towards the end of March, and I think really the actions we've taken over the last year and half as far as getting out of the venture business curtailing certain special investments and now the sale of DTS all are risk producing moves in the eyes of the rating agency. So, I think there is more ratings upside today then it was before and as far as it upgrades -- while right now we're BBB minus at S&P and D883 at Moody's with a negative outlook at Moody's. You know, last year I would've said, don't expect that to move this year given the turnaround in some of the fundamentals in our businesses as well as these risk producing moves, we are going to push on that rating. I expect to be taken off negative outlook and I think as these numbers continue to improve, we'll start pushing to upgrade so, yes.

Second question, from a strategy standpoint it is come up from some of my clients as Bob knows and Brain I'd like to hear your thoughts on this, are we big really big enough to be in the commercial aircraft leasing business. I know, we been in at 30 years, but with the event risk that has popped up, some people in my book of business have questioned, shouldn't we be in a bigger situation or you know, the question - I mean do we have enough critical mass to stay competitive in that business?

Yes, I think we have critical mass to stay competitive but to the question that beneath what you are asking, always made perfectly clear that if the opportunity presents itself and you it take it in the best interest of shareholders, it will take advantage of the ability combined with somebody else. But as far as our situation right now, we are one of the largest aircraft , we do have good cloud net market. They performed outstanding in terms of keeping the fleet utilized and getting new management opportunities over the last five years and that's how we are going to continue to pursue because that's what we have in front of us.

Thanks Brian.

Your next question comes from the line of Kevin Kroeger with .

Good morning, guys.

Good morning.

Just wondering if you could maybe go little more in detail on the aircraft outlook, how does it look right now, I guess if you look at the - I know you are exposed to the American carriers isn't this is big relative to I guess to international carriers, but just here in the States, do you expect another I guess down leg in terms of their performance, you just listen to Delta and some of the other guys that could have negative implications for maybe a supply/demand and balance?

Since Brian is a North Carolina guy, I will Iet him answer that.

Yes. it was little disturbing to see some of the recent news around Delta, also America and United cutting back capacity, which we hope, that would go in the other direction. But once again, our exposure in the US is fairly light compared to our exposure internationally. So, in general, our biggest customers aren't the big US Airlines. That's not who we lease to in general. Most of our exposure there has been acquired in the secondary market, and most of that exposure is fairly healthy in comparison, I mean, our largest exposure there in Southwest for instance. So, yes on the supply/demand side, it's frustrating to see that. We didn't expect that to be back in balance in 2004 anyway. So, I would say it was unexpected. And you see the utilization of our fleet, which is almost 100% at this point.

And I guess, when you take that over the rail cars just in terms of the supply/demand imbalance, on the car types, I am just talking to you guys that's been getting better over the past year. Would you say that that supply/demand is more unbalanced today than a quarter ago or two?

Yes. It is definitely. It is car type specific. But especially in certain car types where as a year ago, 18 months ago, customers will return cars not because of rate, but just because they had excess cars in their fleet and they didn't them at any price. And a lot of car types now that's not the case, not only did they - - are they running their fleet tied up, we don't have a lot of excess cars in inventory in a number of car types. So, when you have that renewal rate discussion with customers, you're going to push rates on certain car types now, and that's not a discussion we're having a year ago. So, in general, once again it's car-type specific rather than number of car, types for instance is Grain, or Coal, or on the Tank Car side LPG. There is high utilization in the fleet and we're going to try to push rates. That wasn't the discussion we would have had last year. So, yes things are trending up.

Just out of curiosity, I know you made the comment about the discrepancy in scrap steel prices and it's kind of

attractive to scrap some of these older cars. And what is the scrap price for rail car today versus a year ago?

It varies by geographic location. But it's as high as which is $9000 per car, depending on the car type, so, you know, three, four or five times as much it was a couple of years ago. So, to the extent that you have an older car that you don't think is going to be in service, now is the good time to scrap it.

Okay. Thanks a lot.

Again I would like to remind everyone, in order to ask a question, please press star ,then the number one on your telephone keypad. The next question comes from the line of Greg with Duprens, Grace &

Good morning.

Good morning, Greg.

Congratulations on a nice quarter. My question is with regard to the rail business. I saw on the release and from your earlier

remarks that your active car count increased by 550 cars. Is that, that is not net of what you scraped or is it?

No that's net of what we've scraped. So, we opened the quarter with roughly 105,000 cars in the fleet, we added 1269 during the quarter and we had about 1700 come out. Now that's was split almost evenly between scraping and selling. So, the fleet at the end of the quarter is 104,788 and utilization is up to 94%. So, when you apply those numbers, you get an actual increase in the active fleet of 500 cars.

Okay. Was the increase in the utilization rate based on a stable overall total car count? Is that right?

No, the increase in the utilization is a combination of two things that we talked about in the past. It is both an increase in the active car count and scarping activity. Yes, scraping once again has contributed to the increased utilization as did the sale of cars, as well as cars or new cars being put in service. They all contributed to that increase.

Okay. Thanks a lot.

At this time, there are no further questions.

Okay. We'd like to thank everybody for participating this morning. As mentioned at the outset, it's a very straightforward quarter as far as we can see it. We look forward to hopefully bringing you a few more of those in the future. If there are any additional questions, Brian and I are both available all day. And we thank you for your participation.

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