GATX Corp (GATX) 2004 Q3 法說會逐字稿

Good morning. My name is Sarah and I will be your conference facilitator today. At this time I would like to welcome everyone to the GATX tHird Quarter Conference Call. All lines are placed on mute to prevent background noise. After the speakers remarks there will be a question and answer period. If you would like 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. Robert Lyons you may begin your conference.

Good morning, everyone thank you for joining us today for the third quarter 2004 conference call. I have with me today, Ron Zech, Chairman and CEO, and Brian Kenney, President of GATX. I will recap the numbers and provide some general commentary on results and market conditions. Then Ron plans to add comments on recent news at GATX, and then we will go to X&A.

Before starting I would like to draw everyone's attention to the forward-looking statement in the press release. The factors outlined in that statement pertain to today's call. I would also like to remind everyone as noted in the release, most of the assets of GATX technology have been sold, and any results of this operation or sale related items are included in discontinued operations. From here forward I will pertain to continuing operations only.

This morning we reported 2004 third quarter income from continuing operations of $48.2 million, or 90 cents per diluted share compared to $21.3 million or 43 cents per diluted share in the prior year period. During the 2004 third quarter we recognized $29 million of after-tax income or 53 cents of per diluted share from an insurance recovery. We had a similar recovery 2003 third quarter totaling $7 million after tax, or 13 cents per diluted share. For the nine-month period we reported income from continuing operations of $87.6 million, or $1.72 per diluted share compared to 439.7 million or 80 cents per diluted in the year prior period. The 2004 nine months results include after-tax insurance recoveries of $31million or 57 cents per diluted share, while the 2003 results include after-tax insurance recoveries of $10 million, or 20 cents per diluted share. I will note at this time we don't anticipate any material insurance recoveries of this nature in future periods.

The operating results in the third quarter continue to reflect the positive trends we discussed with you back in July when we announced second quarter results. The rail market is improving nicely, with industry traffic and car backlogs increasing, and showing up in our business in the form of higher free utilization and lease rates. The utilization of our North American fleet hit 917% at quarter end, a level we haven't seen in several years. Importantly, our active car count increased by nearly a thousand cars in the third quarter and has increased nearly -- over 5000 cars year to date. One of the most critical benchmarks that we discuss each quarter is lease rate trends, and we are pleased to report that this was a positive number again in the third quarter. You may recall in the second quarter renew rates on a core basket was a positive 1%. The first positive result we've seen in four-plus years. The rate increase on this same basket is nearly 4%, a very positive sign and well ahead of where we expected to be coming into this year.

The main challenge in the rail business has been rising maintenance cost as overall fleet activity increases. As we pull cars from idle inventory they need to be prepped for return to service. We are absorbing that cost and it's reflected in the results. Also in general, we have undertaken more cost in sensible repair work in 2004, and that's led to the rise in maintenance cost.

Although the equipment cost -- excuse me -- I will also touch on the rising cost of steel, something we get questions about quite frequently. It affects our business in a number of ways. First and most obvious is n the rates we receive as we scrap rail cars which have remained well above historical levels due to the demand for scrap steel. Secondly, rising will steel prices coupled with a fundamental increase in new car depend has led to much higher prices for new rail cars. On the positive side this should ultimately be reflected in increased rates for existing cars as we roll the fleet over. On the down side, the high cost of new equipment has made new car spot purchases less attractive. Fortunately for GATX, we placed a committed order with suppliers in 2002 that guarantees us a steadily baseload of equipment at prices that are advantageous to current spot prices.

Although the equipment cost is one that we're monitoring closely, we have been able to close a substantial number of investments in 2004 in rail. To date we have added over 4700 cars to the fleet, 2100 through purchase programs and spot purchases and importantly over 2500 acquired in the secondary market. This has lead to a substantial increase in volume over recent years. In air, results year to date reflect an environment characterized by improving lease rates, yet continued tenuous operating fundamentals. In select cases we have capitalized on what we believing are very attractive investment opportunities by added aircraft to the fleet. At the same time we have also selectively pulled some aircraft from the fleet through sales.

The situation in the industry, as everyone knows, is difficult. Traffic figures continue to advance at a slow and steady pace. Yields remain low and challenging, and the current fuel price is a major issue. All of our 2004 deliveries are replaced and renewal basis for the calendar is year. Furthermore, our 2005 schedule calls for no new aircraft deliveries and approximately 20 renewals, which under current conditions should be manageable. However, we are entering the winter months, which are traditionally the most challenging season for carriers. This fact, coupled with the fuel cost issue has everyone in the industry in a cautionary mode. We are as well, and as we mentioned in the press release it now appears the risks for the business have increased for the near term. We will be monitoring our own fleet very closely and also activity at our joint venture partners including Pembroke.

Specialty had a solid quarter with the results being driven mainly by higher fee income from managed assets, solid joint venture performance and a much better credit performance, which led to a loss provision reversal.

Credit quality continued its improving trend through the quarter, chargeoffs and impairments through the first nine months are running well below 2003 and 2002 levels. In certain cases we are experiencing recoveries and repayments beyond original expectations. Based on the much improved credit quality, we have reversed [loss] provisions by approximately $5 million in the third quarter and $10 million year to date.

I will touch briefly on our full year outlook as also commented on in the release. As noted, we now expect 2004 full year income from continuing operations to be in the range of $2.20 per diluted share. This includes approximately 90 cents of per diluted share of non-operating items, 57 cents of which is already been achieved in the form of the insurance recoveries. The balance of the 90 cent is expected to come in the of items such as tax benefits unique to this year. I want to clarify that as noted in the release, the 2004 outlook does not incorporate certain potential items, the most visible of which maybe the sale of GATX-owned property in Staten Island. Overall, our 2004 outlook is above the guidance that we provided in the second quarter by approximately 20 cents per diluted share and reflects the stronger than expected results in the third quarter most notably in Air, Specialty, and on the credit quality front.

With that I will turn it over to Ron who has some additional comments.

Good morning, everyone. Think Bob has provided a good overview of the financial results. You can get a feel from where the business stands from his comments, the information in the press release, itself, and the question and answer period that will follow.

Would I like to focus my comments this morning on last week's announcement. Last week the Board elected Brian Kenney President of GATX, and he is expected to assume the CEO title in April of 2005, in conjunction with our annual shareholders meeting. I would like to expand a bit on the timing, and the succession plan. First, our Board, which I might add, is comprised of outside directors except for myself and now Brian, is committed to a sound succession planning process. Not just for this role but for the senior positions throughout the company. The Board regularly reviews a wide range of management positions and digs into top performers and candidates for future leadership roles. It was through this process that I started a dialogue with the Board regarding a management transition plan I thought was in the company's best interest. I feel the time is now right for the next generation of leaders to drive GATX forward. The transition can take place through a improving environment. Our rail business is rebounding nicely, air is stable to where we were for the past few years. Our financial position is strong. We have completed several structural and strategic steps that position the company for the future.

I also let the Board know this makes sense from a personal standpoint. I have been with the company 27 years, nine at CEO. I have enjoyed each year, even some of the really challenging ones. While I will certainly miss many aspects of the GATX days, I truly forward to supporting a new team in a planned and orderly transition.

Most you know or are familiar with Brian and you hopefully understand the role he has played in our progress in recent years. Additionally you probably know him as a very straight forward person who calls it as he sees it. I don't think the change in title will change that character and that's a good thing. He has a deep financial knowledge and a keen sense of strategy. He understands all aspects of our business and I believe he will serve all of you well in the future. Over the next year, as CEO until April, and Chairman until October, I will work closely with Brian, the rest of the GATX management team, and our partners and customers to make sure the transition proceeds smoothly. Again I feel positive about the timing of the move and process that's now underway.

Let me close by adding while I'm certainly confident in the new leadership of GATX, I'm equally confident in the people across the organization. I'm sure Brian would agree with me in stating the true strength of GATX has always been in the people we have throughout the company. They're highly skilled and dedicated at every level and within every unit across the company. They have supported my predecessors, they've certainly supported me, and I am confident they will continue to do so for future leaders.

With that let's turn to your questions. Sarah, are we ready?

At this time I would like to remind everyone in order to ask a question press star and the number one on your telephone key pad. We will pause for a moment to compile the Q&A roster. Your first question comes from Marie Wartonby with LaSalle Bank.

Hello, gentlemen, my question pertains to the recent developments of at ATA and the bankruptcy reported that just came out. Where do you see this, I know you only have one lease currently to ATA. How do you feel this will impact your results going forward? Are you going to take more provisions, for losses, etcetera.

It's a operating lease asset. You're right, Marie, we lease that 757 and the present value of the lease payments is around 35-36 million. ATA did file bankruptcy earlier this week. It is a 757 we have into them. We have to see what happens to the lease there. Right now they're current on rent. They don't owe us anything at this point in time. We will have to see what happens to the lease and whether that equipment sticks there and at what rate. At this point there is no need to take anything. Obviously we are watching it weekly.

Your next question comes from David Rosen with J.H. Whitney.

Guys, I have two quick questions. I was just wondering what the sustainability of reversing the provisions for losses are? Do you still have an ability to continue in this positive trend? The second question relates to your asset re-marketing income. I was just wondering if you have additional assets to continue to sell.

Let me take the first question on the portfolio quality. Portfolio quality has improved dramatically and what you see when we reverse the provision is really the growth of the runoff from the specialty portfolio. It's just running off better than we ever had reserved it for. So, you know credit quality has improved dramatically, non-performing assets has been steady for a long time now, and that's across the company, not just specialty. As we wind down that portfolio down, some of the investment that we have curtailed, they'be just performed better from a credit perspective. So yes, I would say going forward, given the improvement in credit quality, that could continue. On the re-marketing gains that's a hallmark of GATX it's not an unusual event. There are re-marketing gains imbedded in all the portfolios.

Thank you.

Your next question come from Thomas Kelid with UBS Financial.

Brian, congratulations. Two questions, I had an ATA question too, but Marie covered that. The second question is getting our arms around this air portfolio. You know, I know it's a redundant question that you get a lot. I have asked it maybe too much, but I'm going to ask it again. Critical mass, scale and size, are we big enough and in '05 will it be addressed if we should be in the business or not, aircraft leasing?

Are we big enough. There is only two [INAUDIBLE] with what you'd call massive scale, and that's obviously GE and [ILFC] and they both have over $30 billion in assets. Every other leasing company is a distant second to that. We have a little different business model here. We're not trying to add assets to our balance sheet dramatically in the air business, we never really have. We're more of a partnering and managing mentality. So, scale -- it's important to have scale in the business, but I believe we have enough scale to be successful there. As far as addressing it -- the volatility continues in the business. As Bob mentioned -- Marie asked the question about ATA. We also have exposure to delta, which actually signed their pilot's agreement last night although I don't know if it's for the billion dollars they looked for. We have volatility in this business that's inherent as fuel prices are still high, the yields are still low, traffic is building but you know there is a a lot of carriers on the verge here, it seems. We worked our way through that. We have a hundred percent utilization in our fleet. Lease rates are coming up, and so far we have managed through the volatility. So the key, in air, I think you should get away from us getting out of the business in the short-term. It would not make sense to do that, given the values in the aircraft.

No, the question would be, Brian, what about the other fractionalizd interest that do it, isn't there in the aggregate some opportunity to get bigger, you get my point.

There is, there is consolidation that has been wanting to happen in the airline industry for years, and Pre-9-11 there were a lot of things for sale. Now what you see for sale is, Francis Bullion came up for sale, I believe in the third, and that books out, we are following that transaction closely. We are entering a period of consolidation, we'd like to take advantage of that, but not just by growing our balance sheet, but taking on more assets under management and through partnering. We are trying to take advantage of those opportunities. For the first time in the third quarter you saw us do an aircraft purchase, just two airplanes, but we are on a very opportunistic basis, that wasn't our scheduled delivery. So we're starting to participate in that. We would like to do it through out typical partnering and managing approach.

The assumption has to be there are people hurting out there on the lease side that are willing to be taken out by somebody like GATX.

We're starting to see some of that, but when they see the values, I'd still say we're at the point they're reluctant to let go. It's getting closer. The aircraft we are adding, I think we will add more in the fourth quarter, or will be an indication of people finally letting go.

The other question I had is, are there re-marketing opportunities ahead in the marine leasing. My recollection is we're the lessor on some tankers and some of the headlines you read about prices would indicate perhaps we would be a better buyer than seller there. Would you like to comment on that?

I think that's an excellent point. Our shipping, operating joint ventures where we are partners as marine operations are doing very well. If we look at how long we'll hold those investments it's possible in the next year or so we may get out of some of those. There are investment opportunities we're taking advantage of. That's a good point. We're accelerating how we're looking at some of those joint ventures as far as what the right time to get out of the market is.

Last question, Brian, is that Bob has mentioned that the lease on the Staten Island property is not a long lease. In other words, there would be some decision made perhaps by the first quarter of '05 as whether Nascar goes ahead or doesn't. Is that accurate?

It's uncertain as to timing. You see a lot in the press, especially this week, there is more opposition to that Nascar track in New York even from the borough president, from the Mayor, so it's uncertain as to whether Nascar goes forward or not. I don't think that's the only option for that property. I would hope that, around that time frame is when this finally gets resolved.

Thanks, Brian.

Your next question comes from Joe Jolson with JMP.

Hey, guys, good quarter. Congratulations. I just had a question, I don't know if I missed the beginning of the call. Did you talk about, kind of the back ended guidance for the fourth quarter. I come to a number 15 cents per share.

It would be in that ballpark. What you're looking at essentially if you look at the third quarter you would have rail roughly in the same neighborhood they came in on the third quarter. Maybe a little lower based on maintenance expectations we had for the quarter. Air would be below where they were in the third quarter because they had some nice re-marketing income in the third which we don't anticipate again in the fourth. Specialty would be lower as well. You would come to a number, it would be the low quarter for the year. That's not uncommon.

In the fourth quarter?

Correct.

So, I guess that kind of gets my question. Obviously the stock has done well since we bought it earlier this year. I'm trying to find out the core earnings power of the company right now. I was under the hope that you would have redeployed enough capitol to earning at least at a 30 cents per share level by the fourth quarter so you could get, hopefully by next year be able cover the dividend two to one.

We have talked in the past. We look at our business. We do look at it very much on an annual basis not really ever quarterly. Any given quarter I wouldn't hold out as a potential run rate, because of the --

I'm not. I'm trying to get a sense of where we are in that kind of, you know, migration.

Well, we have redeployed a lot of capital especially this year to rail as we sold GTS, that's being redeployed in rail and air as we speak. Remember, rail doesn't turn around, even though lease rates are up on an absolute and up on a renewal basis it doesn't translate into immediate financial results. Don't read too much into that run rate. For instance, this year we will renew about 25,000 cars. Lease rates started to turn up in the second half. So half of those 25,000 cars were affected. Even if lease rates were up 5% that would only be about a million dollars revenue in the second half. It starts to escalate in 2005 and we'll be providing that guidance at the beginning of 2005. Don't expect an immediate turn around in 2004 because lease rates are up --

No, I'm not. Was I wrong, when you lowered the dividend early this year and the stock got clogged, I thought that you told me that the outlook was to have the core earnings, you know, be 50% pay out on the dividend you were trying to gauge.

Right.

So, I mean, in what time frame do you think we will get to that point?

Well, we didn't lay a time frame at that point. But we said we put the dividend at a level we were comfortable that it would be covered by core earnings in time. We paid out more than a hundred percent for three years running.

I know.

We try to think of things as in long term. We didn't specify a time frame.

In 2004 with the guidance Bob laid out it would be 40 percent of GAAP earnings and 60% excluding the non-operating items, so we're getting close.

Okay. Anyways, good quarter, you guys.

Thank you.

Again, if you would like to ask a question press star and the number one on your telephone key pad. Your next question comes from Michael Lucas with Appaloosa.

How is it going guys?

Good, how about you?

You said 25,000 cars were up for renewal in '04 that you just renewed?

Probably a little more by the end of the year.

What will you renew in '05?

It averages about 25,000 per year. It's probably a little higher this year, a little lower next year, but give or take a couple thousand cars, it's around 25,000 a year.

There is a lag on that of course, in terms of picking up the revenue?

Right, exactly.

What is that lag six months?

Well, in terms of --

I think the point Brian is making that the rates picked up here in the second half of the year, so you only got that lift on half of that 25,000. In '05, that will carry over for the full year and then you will get the lift, hopefully, on the full 25,000 we renewed in '05.

Yeah, I mean, to my point, 12,500 were affected if it was across the fleet it would be half of the 25,000 affected by the higher renewal rates. And that was only on an average of three months. If you do the math on a 5% increase on say $500 per month per car it's less than a million in revenue. Next year it turns into 4 million in revenue for the same car. In addition, as we just talked about, we're renewing another 25,000. Assuming once again like at 5%, although we don't know. That would be another 4 million. So it snowballs pretty quickly. But as rates first start to turn up it's not an immediate impact. That's the point I was trying to make to the last caller.

What's the direct correlation between rates and cost control in rail car?

We talked a little bit about equipment cost, costs rising, new car prices rising. I don't think we can draw a direct correlation for you. But the higher the new car costs are, that's what the rate is that many of the customers are comparing against for existing equipment. So it ultimately works into the existing base of rail cars out there and should lift the lease rates. That's partly what we're seeing now.

If you talk of cost of goods sold the main variable is the maintenance line which has been high because of the assignment level. As we have less and less idle cars, that maintenance bump due to the assignment level will come down. Doesn't mean absolute Maintenance dollars will come down but, we would expect absolute maintenance as a percentage of revenue it will come down as revenue grows and there's less assignment activity.

I may of asked that wrong or not directed it correctly. What I meant like somebody like a gut like Trinity, as his cost of goods sold go up that's a relative amount that your lease rates will go up, IE, as a percentage of whatever his cost of go up to make a rail car, you drive that rate up and therefore would drive the lease rate up?

Yes, it should. As Bob pointed out in the introduction, if you were listening then, the price of steel, is a good example,has skyrocketed. It doesn't really affect us immediately because of the way our costs are indexed in our contracts, but it will affect us eventually and it should rise the tide on existing lease rates as well. It makes it a little tougher to buy new cars, but on the existing fleet, you're right, it should show up in lease rates.

Thank you.

Your next question comes from Erin Archer with Piper Jaffray.

Good morning, I'm filling in for Bob Napoli.

How are you?

Congratulations on a good quarter. Bob wanted me to ask if you could provide color on your expectations of growth your existing rail card base. If you could provide color on this contract. You mentioned that we're in 2002 spot rates?

Yeah, I mean, if you look at the assets in the rail this year they should grow by 8%. Over the long term that's 5% to 8%'s a pretty good growth rate in assets in rail. The challenge for us is most of the growth in the next year with theses high steel prices may come from secondary market acquisitions. They're tough to do. We have been successful this year on acquiring fleets but the new car prices on spot are pretty tough right now in terms of the cost of the cars. We would have to be pretty convinced rates are going to continue to go up and stay at that level to buy cars at the current spot rate. Getting back to your question, we will see about 8% growth this year. Over the long term rail should grow in assets, GDP plus, and I would hope in the short term it's around 8-10%.

Great, thank you so much.

Thank you.

At this time there are no further questions.

Okay. Thank you all for joining us this morning. We are happy you could make time to hear the third quarter results. As usual we will be around all day to day if there are any follow-up questions. We appreciate your interest and give us a call if you have anything else. Thank you, very much.

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