GATX Corp (GATX) 2004 Q4 法說會逐字稿

Good morning. My name is Phyllis and I will your conference facilitator today. At this time I would like to welcome everyone to the GATX year-end earnings conference call. [Operator Instructions] I would now like to turn the call over to Ms. Rhonda Johnson, Director of Investor Relations. You may begin your conference.

Thanks Phyllis, and good morning everyone. Thanks for joining us on our year-end earnings conference call. With me today are Brian Kenney, President of GATX Corporation and Bob Lyons, Vice President and Chief Financial Officer. I will provide a brief overview of the numbers which were provided in our press release this morning and then I will turn it over to Brian to provide some comments on our strategy for 2005 and beyond. Then we'll throw it open for some questions.

Before I begin, I would like to draw everyone the attention to the forward-looking statement contained in our press release as the factors outlined in that statement also pertain to today's call. One administrative note before we turn to the numbers, for those of you looking for the fourth quarter dividend announcement, we will make that announcement next Friday, February 4 following our regularly scheduled board meeting.

Now let's turn to the numbers. Today, we reported fourth quarter net income of 71.2 million or $1.24 per diluted share compared to fourth quarter net income in 2003 of 27.6 million or $0.52 per diluted share. The 2004 fourth quarter results include 38 million or $0.63 per diluted share of after tax gain on the sale of our property on Staten Island and 15 million or $0.25 per diluted share from a tax refund.

For the full year 2004, GATX reported 169.6 million or $3.04 per diluted share compared to 76.9 million or $1.53 per diluted share in 2003. 2004 net income benefited from the property gain on sale, the tax refund and insurance recoveries, which we've discussed in past calls, all of which are outlined in the press release. Similarly, the significant items impacting 2003 net income are also noted.

Also as is referenced in the press release, the fourth quarter implementation of an accounting issue related to contingent convertible securities had a dilutive effect on diluted net income per share, an impact of $0.20 in 2004 and a penny in 2003 from on continuing operations.

2004 represented a solid year of solid improvement at GATX and nowhere is that more progress more evident than in rail. Increased demand for rail cars drove utilization on our North American fleet to improve significantly through 2004, from 93% at the beginning of the year to 97% at year-end as we moved 1300 cars from inventory to active service. We acquired 6200 cars purchasing about half of those cars through the new or through our committed purchase program and about half in the secondary market. We also sold - we scrapped a little over 3000 cars during the year, about what you would except in a typical year on our fleet. But it was not so typical with the high scrap metal prices and from which we saw a benefit.

With the increase in demand, we were also able to command higher lease rates and for the first time in some years, our renewal rates were higher on average than the previous lease rate. For example in the fourth quarter, renewal rates on the basket of typical car types were up 7.8% over the previous lease rate. That's following a 3.7% increase in the third quarter and a 1.5% increase in the first quarter. For the full year, renewal rates on the basket were in total 2.8% higher than the previous lease rate and that's compared to 2003 where renewal rates were 5% lower than the previous lease rate.

As we have mentioned in the past, about a quarter of our fleet rolls over in a given year so the impact of higher lease rates on our bottom line will lag the increase in rates. But having renewed 27,000 cars in 2004 and expecting around 26,000 cars to roll over in 2005, we expect the lease rate recovery will be reflected in future results as more and more leases roll over into the higher lease rate environment.

Our European rail operations also contributed nicely this year as they further integrated and strengthened operations. Maintenance costs increased in 2004, due to our taking such a large number of cars out of inventory and putting them back into service. Both with the large fleet of cars purchased in the late 1990's coming up for their mandated regulatory inspections and required maintenance, managing maintenance costs is increasingly a focus for GATX management.

In air, the market remains volatile but our air group continues to manage the fleet and high utilization. As we have done each quarter, we posted a slide presentation on our website, www.gatx.com, updating our portfolio data. Looking at both our owned and managed portfolios, our air group completed approximately 60 aircraft transactions or placements in 2004 and did so with minimal downtime.

We have no new deliveries scheduled for 2005 and already begun to work on our renewal calendar for the year. We've seen increased demand in our aircraft lease rates and our aircraft lease rates have improved. On the newest aircraft types, the 737-800s and A-320s, lease rates are now at or above pre 9/11 levels and we expect that trend to continue into 2005.

However, we do continue to monitor the airlines in our portfolio as they continue through the more difficult winter months and cope with high jet fuel prices. While impairments were relatively insignificant in 2004, the risk of further impairments remain.

Despite the declining size of the portfolio specialty finance continue to provide a solid contribution to GATX's bottom line from spread income, credit quality improvement, re-marketing gains and strong performance at our shipping and marine joint ventures, a sector where we continue to pursue new investment, though the strength of the market makes finding new investments more challenging.

Credit quality also improved in 2004 as was particularly evident in our results at specialty. Our net charge-offs and impairments decreased dramatically in 2004 reflecting the overall improvement in our portfolio and non-performing investments declined during 2004 as we were able to make progress with previously troublesome airline accounts and saw market improvements in our specialty portfolio.

Investment volume also increased substantially in 2004, particularly in rail as we took advantage of the strong market to acquire cars both new and in the secondary market and in total, investment volume and continuing operations at GATX was $760 million, a 21% increase over 2003. We will again aggressively pursue new investment opportunities in the 2005.

We've managed our balance sheet conservatively, particularly over the last three years, as was prudent given the difficult economic conditions. We've bolstered our equity base and reduced debt and our recourse leverage has fallen from 4.4 to 1 at the end of 2003 to 3.5 to 1 at the end of 2004. We've also seen our credit spreads fall dramatically and as I mentioned earlier we expect to put our capital to work in investment opportunities to grow our business particularly in rail. We are also focused on improving our credit ratings with the major rating agencies and will work with them to determine what steps are needed to achieve a ratings upgrade as we grow and improve earnings.

We're entering 2005 ahead of where we expected to be when we were looking towards this year back at the beginning of 2004, bolstered by the strong improvement at rail. And as we look at 2005, we expect our end markets to continue to show improvement, although managing the volatility in air will continue to be a challenge.

Based on our outlook, we expect GAAP diluted earnings per share to be in the range of $1.60 to $1.70 for 2005, including $0.10 of non-operating items. So, now let me turn it over to Brian for a few comments.

Thanks, Rhonda. As she said, I'll make some quick comments about our priorities in 2005 and the near term. Specifically, I'll address our growth plans, our push to improve the return in the air business as well as our continuing efforts to improve both our cost of capital and our efficiency. So, let's start with growth.

We need to continue to capitalize on our leadership position in the North American rail market and our global brand name in rail by pursuing targeted new car acquisitions, fleet acquisitions from other lessors and banks, sale and leasebacks with our customers and organic expansion of our rail platform in Europe. That's really just a continuation of the effort that we've commenced in earnest in 2004. And it's well represented by the $0.5 billion of attractive investment that rail did execute last year.

Apart from rail and moving to specialty, we have curtailed investments in a number of asset types in the specialty portfolio over the last couple of years. But we have continued to pursue investments in areas such as marine. We want to continue that investment in 2005. We also want to determine whether there are other targeted asset types in the specialty business where we can put the strengths of GATX to work to grow that specialty asset base.

On the air business, in 2004, as you see, we earned about $10 million. And that's a low single-digit return on the internal equity that we would allocate to the air business. So, despite really outstanding work and effort put forth by the air people in earning even that small return in a very difficult continuing difficult market, everybody at GATX realizes that that return is not acceptable and the folks need to be on improving that return as opposed to just growing the asset base.

So, what we need to do is concentrate on using the air group's considerable expertise in buying, deploying, managing, re-marketing aircraft and we'll try to be very active in the market, but we'll strive to be active in a manner which minimizes the use of our balance sheet. That is a tough thing to do. It has been a tough market the last few years in which to secure new financial partners and secure new manage initiatives and it has been a tough market to try to find attractive aircraft transactions.

However, in 2004, we did see a market redevelop both for the movement of existing aircraft and portfolios as well as a sizable amount of new money looking to invest in aircraft. What we need to do is capitalize on that trend by developing those new management partner initiatives.

On the cost of capital side, since late 2001, as Rhonda referred to, we have worked hard to enhance our liquidity position, stabilize our credit rating, reduce our leverage and improve our cost of debt funding to a level that is attractive for continued investment. Earnings per share suffered during the last three years due to that excess liquidity that we carried, but we were patient and persistent and in 2004, finally, we saw tremendous progress on that effort. Our current debt spreads are as low as they've been in over five years and both S&P and Moody's improved their outlook on GATX in 2004. And that really enabled us to more than realize our rail investment goals, for instance, last year. But our work here is not finished by any stretch.

Our target on the credit rating side is A-minus A3 rating and that is a very aggressive target. But I'd like the capital market stability that would come along with that rating. And it is an aggressive goal because the rating agencies' stated concern around our percentage of assets that's devoted to the air portfolio. Although it's aggressive, I think we need to continue to reduce that cost of capital. I won't be satisfied until we get there and I expect to make further progress in 2005.

On efficiency, we have significantly reduced our SG&A over the last four years. For instance, at corporate and other, if you look at that segment, we dropped from $80 to $62 million, so about a 23% decrease. And that is despite the increase in the cost of being a public company, such as the compliance cost and 404 effort. And that's also an appropriate decrease over the last four years, given the businesses that we have exited.

We've seen a similar decrease in total SG&A and I think cost control is now an ongoing discipline at GATX and you're going to be able to track that progress as we commence reporting of efficiency measures for each segment with the 2004 10-K. So, we'll continue this effort and not just in the back office, but also in our operating side and the rail maintenance costs and our aircraft transition cost and being better operationally is a specific objective of mine and GATX.

The theme of the priorities I just laid out is really just to focus on what GATX has done best historically. We're an owner of long-lived widely used assets and we earn a strong risk adjusted return when we invest in assets in which we provide service around or where we have a unique understanding of what maximizes the value of that asset. I think if we stick to those strengths, we'll do very well for our shareholders and employees. With that, let's throw it open to questions.

Phyllis, I think we're ready.

[Operator Instructions]. Your first question comes from David Rosen (ph) of Whitney & Company.

How are you guys doing?

All right.

I had a couple quick questions and these are a little more housekeeping in nature. In your other segment, you have a fairly large other number for the year and for the quarter and I know part of that is the sale of the Staten Island real estate. Is that also your tax refund in there?

No, it's not. It's primarily the sale of the Staten Island. We also have our scrap gains in there and repair revenues.

Okay. So I want to make sure. How much of that, I think in the quarter was $69.6 million. How much of that was scrap and how much of that was repair?

Okay. In the other segment, basically you have the $68 million from Staten Island and then other is small and then in rail, you have the scrap -- sorry for the confusion on that.

Okay. But if I look -

If you look at it for the year, you have the Staten Island, the gain on the Staten Island and you also have the insurance recovery.

And how much was the insurance recovery?

It was around 48.

Okay. So, looking forward, in your guidance for next year, that other revenue in "other" -

Yes.

That would, for all intents and purposes, be fairly minimal?

That's correct.

Okay. And when we talked about that other 10 non-recurring, would that fall into that number?

It would, assuming that happens and there is a couple of things on the horizon that lead us to believe we'll get that $0.10. But still some question on that. That would be items similar to 2004 like tax reversal.

Okay. And just kind of focusing on the other just for a couple more questions and then I have -- I'll go another route. But it looks like your SG&A expense in "other" came down fairly materially in the fourth quarter, which was nice to see. Is that something -- I mean fourth quarter I think year-over-year. Is that something that we should expect to see on an ongoing basis? I think it went down to about 17 from 19?

Correct

Is that -- should we assume that 17 is the right number to look at on a quarterly basis on a forward-looking basis?

I don't want to peg a particular line item number as far as looking forward, but it probably wouldn't be unreasonable and I'd also say too, that the total SG&A line is one that we are intently focused on as we have been the last few years. There's been some additional items on the corporate side, which have come in o that SG&A, such as Sarbanes-Oxley and other costs which have bumped that up beyond what we would hope on a long-term basis.

Okay. On your balance sheet, it looks like you have an allowance -- your allowance for possible losses on your receivables and it looks like it's gone from about 8% at the end of last year to 5%. So, you know, that 3% is a fairly material dollar net amount and I'm sure most of that actually flowed to income. How are you going to replace that next year?

Well, basically you're seeing the change in the allowance because there's also a significant decrease in the size of the specialty portfolio over the last year.

Yes, but I asked you in a percent terms. It went from 8% of your receivables -

Right. What you saw was the runoff, as Rhonda said, the runoff of the specialty portfolios, specifically venture. There was relatively high reserves, put against a lot of those assets. They performed better than they were reserved for as it ran off and, therefore, that's why that percentage came down. They were -- the assets that ran off were highly reserved for, they performed better than planned. Going forward, most of the investments will be in the operating lease assets. You can't reserve for those in GAAP. So, you would expect given our investment, the nature of our investment volume going forward that that percentage will come down.

And historically we said we're comfortable. You know, this was even a year or two ago coming down into that 4% range.

So, you think you can still go from 5% to 4%?

We're very comfortable where we're at.

And that has nothing to do with being more aggressive on the reserving policy. It has more to do with what we invest in terms of operating lease assets, which you can't reserve for.

Okay. All right. On the air side, what I -- it looked like you guys did a great job on your re-marketing for the year and I was a little bit confused. Are those -- were those assets that you re-leased or you actually just sold from your portfolio?

Re-marketing income would be sold from the portfolio.

Okay. So, that --are there any other assets that you envision selling from your air portfolio?

Well, we're always active in the secondary market, you know, both looking selectively buying and selling. We did buy a few aircraft as well in 2004. But we haven't -- and we typically wouldn't going into the year earmark anything in particular.

Yes.

Much more of on an opportunistic basis.

Right. Okay. I guess -- I guess your belief is the assets that you sold last year will offset the assets that you've purchased this year so your net impact will be neutral on a net income basis?

Well, they don't always line up exactly like that. We're looking at the economics of the transaction when considering a purchase or a sale.

Right.

The long-term basis.

Right. I was just asking based on the guidance that you provided. Because the guidance you provided was that air was going to be flat year-over-year.

Yes. Right. That's correct.

And those are the only moving parts, I suspect. I guess other than any fee arrangements that you have entered into.

Correct

And it looked like, based on the press release, that it wasn't as strong as you had expected.

Yes. There was a number of opportunities that we looked at as far as Asset Management and we're continuing to look at and we did have some success during the course of the year on a couple of fronts. But as far as sizable portfolios, that we did not achieve and we're still pursuing that.

Okay. All right. I mean, I guess, I'm encouraged by the improvement in rail, although I understand that it's going to be a gradual improvement because, you know, it takes some time for your longer term contracts to roll over. But I have a hard time fundamentally believing that your air business, without adding any additional aircraft, will be flat year-over-year because of the significant asset re-marketing income that you had last year. And you also did have a reversal of a provision last year.

Right. But you're also renewing a number of aircraft in 2005.

Right. But didn't you also have five aircraft that came off from the bankruptcy?

Pardon me?

Didn't you have a number of aircraft that were returned to you as a result of bankruptcy?

Correct

I presume that those -- whatever you do with those, you'd probably negotiate--, those would be lower priced contracts.

Actually, those three of the aircraft that came out of there we'll put on lease rates. They're under letters of intent now at rates higher than what they were on the previous carrier.

Okay. So -- and what's the deal with the other two?

We're still in the market with those other two, but we're very comfortable we'll be able to put them to work. The other thing, too, is we had an impairment at Penbrook of a $4 million pretax number which knocked down the share of affiliate line by $4 million.

Oh, I see. Okay. So, there's $4 million in there.

Yes.

Okay. Okay. And then on the specialty, you did provide guidance that it was going to be down year-over-year. But how material -- how material of a decline would you guys expect?

Well, we're not going to -- I'm not going to peg exactly where we expect that to be because out of all the business units, specialty tends to be the one that's the hardest to predict.

Right.

Given its re-marketing activity and there's also some, you know, still some warrant activity in there and things that are a little bit difficult to peg. But the portfolio has declined from, you know, in the $750 million range in the 480 range at the end of 2004, now that pace should decline, and, you know, we'll get re-marketing gains in there in specialty in 2004. It is just the magnitude of which is difficult to determine at this point. You know, the income, based on where we sit today, will be down.

Right. Because it does -- if I look here, it looks like you have $41 million worth of net income from that business for the year.

Correct

That is a fairly material amount. So, to get a sense for our investment in you guys, it's -- that's a fairly material number to figure out because, you know, with that fluctuation, I mean, would that go down to 20? If that goes down to 20, that's fairly material.

I would say it was material if it goes down to 30, too.

Absolutely.

And on a net where the guidance we're providing is on a total consolidated basis where we expect the income to be up. So, what you can kind of look at is the increase in air -- I'm sorry, the increase in rail and any additional pick-up on the corporate and other lines as far as savings are concerned will more than offset the decline in specialty.

Okay. And what is your conviction level in your internal forecast on specialty?

It's always a difficult one. It's the most difficult of the ones -- the business units we have to predict. But we feel good about the income, kind of the core income at specialty given the joint venture activity and marine is performing very well. The portfolio quality is solid. You know, we're looking at some new investment opportunities there in the year ahead. So, we're not looking at, you know, a collapse of the income at specialty as a matter of fact, specialty is going to be a significant income contributor for us for many years to come.

Significant in the sense that it will still be a positive number or significant -

Oh, absolutely.

Or that it will be at a level similar to where it is today?

It will be unlikely to be at the $40 million level, but it will be a significant contributor to us for many years to come.

Right. So, but a significant would be probably a 10 to 20 million, probably as we go out, if the assets have gone from 750 to 480 and maybe down to 400 or so on and so forth. Would that be a fair statement?

No, it wouldn't be.

What would a fair statement be, then? On where longer term I should expect to see this.

Part of that is dependent on what the environment is like for re-marketing of assets. But you know, I would think that we're going to be in that $15 to $20 million plus range for the foreseeable future for years to come.

Okay, great. I will pass onto other people. Thank you very much for answering all my questions.

Your next question comes from David Chamberlin of (inaudible).

Hi, thanks for answering my questions. I have a question first on just when you look at your guidance, what do you -- the 150, 160 excluding the taxes. What do you should foresee as some of the asset re-marketing embedded there. What do you think it'll do this year?

Well the asset re-marketing expectation is that it will be down from this year, when we had a pretty solid year again both in rail and specialty. So there is less re-marketing embedded in the 2005 forecast.

Right. Would it be fair to say, you know, 50 to 60% less or...

No.

Okay. And then secondly, just on the rail what do you see is, you know, as you look down the pipeline capacity wise, in terms of investments you'd want to make this--- '05 if things were stay where they were right now.

We would like to do the investment at the same level in rail going forward, it may be more difficult for a variety of reasons. It is getting more competitive. The price of steel makes it tougher to make stock market purchases in our committed purchase program. But we'd like to continue grow rail as aggressively as we have in 2004.

Okay. And then in terms of, you know, impairments tests on the airlines before, you took a little bit of one on the G.A.V. part. Did you test the rest of the portfolio, what do you see there in terms of -- I guess you didn't take an impairment. What did you see there in terms of present value discount, present values there?

Well, we do that impairment test every quarter and it is not on one of the course of GAAP. It is not a present value base. It's actually the undiscounted cash flow.

Right.

But we -- we do run that actually every quarter on all the aircraft. So, there were no other material impairments beyond the Penbrook.

And then in the shipping business, it looks like they had a strong quarter. Is that somewhat just the unseasonably warm weather we had in the winter and how do you see that line going forward I guess in the first quarter?

Well, the results on our Great Lakes shipping business has been more driven by the fundamentals of the market there. A lot of that is driven by the steel industry and it's been recovering over the course of the last couple of years. That's been more of a driver than weather has been. And then within specialty, we've also done real well on the marine side as our -- some of our ocean-going type vessels where we have joint venture interests have done extremely well. That's been driven by rates on international shipping and that goes -- that stuff has been pretty well publicized given the demand in China, etc. So, we've done well.

And I think if you look back over the quarters as they progress with the Great Lakes shipping, you'll see that the first quarter is way down, obviously, because the ships can't work on the lakes. So you'll see sort of a seasonality in terms of a quarter run.

Okay. And then finally, I think just on the utilization, on rail, you had 97%, I think you said, do you see any further improvement there or do you fell that you've kind of hit the peak?

Well, we can probably move it up a little bit from here and I know our folks in fleet management feel good about their ability to move it up a little bit. But you do get to a point where it gets very difficult to move the needle.

Yes.

So you know, anything above 98 would be pretty challenging. But that is reflective of the -- you always have cars going through your repair network and you also always have cars in inventory to meet unexpected customer demand.

Okay. Thank you.

Your next question comes from Matt Carletti of Piper Jaffray.

Good morning. I just have a real quick question, want to go back into the specialty. I understand that you want to stay in the shipping business and that there's other assets in there running off. Can you give us a better idea of how much of those specialty assets are shipping related and then are the joint ventures included in that or not?

Yes, the marine and shipping assets in specialty are about 36% of the portfolio and that does include our fleet shipping joint ventures.

Okay. Includes the joint ventures. That's helpful. One other question. You mentioned going into '05 and possibly other targeted asset types, to make investments into specialty. Do you have anything just general area in mind, in particular that you think looks good right now or is it just kind of open?

Well, it's not completely open, but it is nothing I''d want to talk about externally until we get a better idea. There's a lot of effort internally around identifying asset types where we've done very well historically and match those strengths I talked about for GATX. But we'll probably talk further about that as we go through the year.

Okay. Thank you.

Your next question comes from David McGowan (ph) of Citigroup.

Good morning, guys.

How are you doing?

All right, thanks. Hopefully some quick ones here. First, Brian, the ratings. Very aggressive target, to use your term and it looks like from what S&P said, just the improvement in the cycle can get your ratings back up somewhat if the earnings come through in rail and air. But really what do you have to do more strategic, it sounds like, to get to an A3 A-minus level? And then a balance sheet question. I just wanted to confirm what you have maturing this year and whether you think you'll come back to the unsecured debt market.

Sure. You know, you're right. It is a very aggressive target. What we'd have to do structurally is exactly what I said initially, which is grow rail aggressively, make that a bigger percentage of our portfolio and grow air in a way that doesn't use our balance sheet and make that less of an issue and also prove to them that it is a quality portfolio and that's going to take time. We also have to continue to improve our financial performance like we are. I think leverage is down to a point where it justifies an upgrade. But obviously that is not the only thing they look at.

And a lot of that, your bigger strategic steps, as you're well aware of, we've taken over the course of the last few years and have done some very constructive things from a credit perspective. On the maturity schedule for 2005, it's fairly light. We have about $370 million that will mature during the course of this year and we're looking at -- we have ample cash flow and liquidity to be able to address that and we're also looking and will continue to during the course of the year at different longer term financing alternative to include, you know, possibly the public market obviously.

Probably safe to assume, though, Bob, that you know, as your ratings come back higher or come back up, what you're planning, then being more active on the unsecured term market is more of a part of the financing strategy going forward?

Well, certainly compared to the last couple of years, it is much more readily available market given where credit spreads are. . That's a fair statement.

All right. Thanks a lot.

Your next question comes from Glenn Shapiro of Sigma Capital.

Good morning. My questions, I have a couple of questions about rail. My first question is, can you just talk about - it looks like, I guess, the roll rates in rental have gone back to the positive so that pricing is so much stronger that you're seeing roll rates better higher than stuff that's coming off, is that correct?

Correct

Yes.

Okay. My second question was about -- you guys are running at 97% utilization right now. I'm assuming you guys are starting to hit up against capacity. How are you guys looking at orders going into '05? Do you think your orders are going to be up and are you finding that the manufacturers are hitting capacity constraints and you guys are actually going to have problems procuring cars?

First of all, I'd remind you that back when the market was really kind of at its depth, in 2002, we placed those long-term orders.

Okay.

For deliveries over the course of a five-year period. So, we have, at a minimum we'll have 1,500 cars through the advance -- through the committed purchase program that will be coming into the fleet this year. Those are secured. We're also routinely in ordering new cars as we see market opportunities or specific customer demand and we did that last year and expect to do that again this year.

A big part of our fleet growth this past year, about half of it, was really through buying cars on the secondary market and that's an area we'll continue to pursue aggressively in 2005. But we are one of the biggest tank car buyers in the country and we have good relationships with our various suppliers and we'll continue to look for opportunities to buy new but he prices have gone up pretty dramatically and it is hard to justify on certain car types making those new investments right now. A better alternative may be in the secondary market.

That current, that 1,500 that you have, none of that has steel escalation or input escalation clauses in them, so even though the manufacturer's input costs have gone up, that is not affecting you, so it is only on new orders?

No, there are cost escalation clauses and steel is a component subject to escalation. The way that contracts work, though, that current spot market price of steel has not yet caught up with, you know, our price of the contract. That will happen over time and steel will just stay at this sustained level. So as Bob said, we still have an advantaged price. We really have an advantaged price for two reasons. One, the price of steel hasn't caught up in our contract, and two, as Bob said, we placed the order at a time when we got with a better based price which was the real testament to the rail group to do that.

But as far as buying beyond a committed purchase program, the price of steel, as Bob said, makes it really hard. You have to make some very aggressive assumptions about renewal pricing and the sustainability of the price of steel and how that affects rates to invest in spot cars beyond that program. And as Bob said, the price of steel probably hasn't caught up as much as the market value of existing fleets and that's where we saw a lot of our activity in 2004.

How do you guys see demand, just CapEx expenditures from the railroads going into 2005? Does it appear to be higher than it was in '04, so you would say your demand for rail car capacity is higher in '05 than '04?

Really driven more, railroads are our customers, but we also have, most of our customers are shippers as well and really we follow their CapEx patterns and, yes, orders have been going up.

Okay. Great. I appreciate it.

Your next question comes from Jeffrey Bernstein of Schroder's.

Hi, guys. Most of my questions have been answered. Just on the leverage front, given the initiatives that you're looking at, where do you see, and have you had discussions on this, leverage ending up to attain your long-term goals?

Well, we have it right now, as I think was mentioned, at 3 1/2 to 1, which is a historically very low level and down substantially from the end of 2003 and we feel that that level is, you know, coupled with improving performance, some other initiatives we have underway with warrants moving the ratings up over time. But, you know, the flip side of that is if you're going to hold levers that low, you hope to be paid for it in terms of an improved credit rating. And we're trying to balance that, keep a close eye on that and, you know, if we're not going to get credit for that lower leverage over time, you wouldn't hold it that low indefinitely.

It's quite a delicate balance, but it -- to me, I would seem like an inordinately low level of leverage to attain many of the things that you discussed today on the call and as another caller suggested here, your rating targets are aggressive and will take time if you are to achieve them.

Yes.

Do you have enough time to keep your leverage this low? I'll ask it another way -- do you have cushion to increase the leverage perhaps not where it has been in a year or two ago, but higher than it is at this date in time?

Yes. Absolutely. I think we have some flexibility around that -

And lastly -

Remember, we're just now starting to execute on improving financial performance over the last year and that leverage is one thing that rating agencies look at, but they need to see continued, sustained financial performance improvement. We're showing that now. I don't want to sit there and take shots at the rating agencies saying we deserve an increased rating until we prove from a financial performance perspective that we're there. We're doing that now.

How much cushion would you say you have?

Well, if you look back at the beginning of 2004, we were, at the beginning of 2004, we were at 4.5 or 4.4 to1. Even that moving into a better environment is a reasonable leverage level. Historically, we've been in the 5 1/2 to 1 range, but I wouldn't envision getting back to that direction until after we've -- for quite a long time. We need to improve the rating first.

Okay. Great job. Thanks.

[Operator Instructions] Your next question comes from Tom Clett (ph) of UBS.

Hi, Brian. Hi, Bob.

Hey.

Two things. Number one, the locomotive leasing transaction from General Motors, does that play any part in the future rail marketing effort or expansion of the rail portfolio or was that just a tag end item to clean up?

No. We have every intention of growing that business and we're very positive and optimistic we're going to be able to do that. LLP has been a very solid performer as a joint venture since we entered into it back in 1995.

Do railroads, even big railroads lease rather than purchase for the most part? I don't even know.

Yes. They do both and our customers there are both big railroads and a whole host of short line railroads.

So, there's an expansion opportunity there?

Yes. Without a doubt. As a matter of fact, shortly after we closed LLP in the beginning of December, we closed another transaction later in the month for the purchase of some additional locomotives. So, that fit complements that portfolio very well. So, we think, yes, there are growth opportunities there.

That would be both here and in Europe, by the way?

No, mostly just here in North America.

Domestic. Okay. I think a quarter or two ago, Brian mentioned something about the marine assets that if there's problems because of the new building prices and the volatility in tanker rates and things that you might even -- there would be a re-marketing opportunity. The obvious is if they're too expensive to put to work right now for the rates to sell some things so there would be re-marketing there in '05, is that correct?

That opportunity is there. I think based on what we're seeing out of shipping joint ventures right now, the performance over time as a whole looks pretty attractive. But that is always an alternative.

Right. The other question I have is, on the air side, we've repeatedly talked about expanding that through the bottom of the cycle while you have cherry picked some things and picked some aircraft up. What's -- if Brian could talk about the context here, is it -- is it a lack of -- I don't even know if the Bouillon (ph) thing, transaction ever took place or not. Is it a lack of opportunities of aircraft for sale at the right places or is it combined with the lack of funds available to go into a partnership, which you guys would manage and, therefore, not have the balance sheet exposure? I'm still confused about that.

It has been both over the last few years. Very difficult to final financial partners like we have historically and tough to find aircraft opportunities because the prices are so depressed. I mentioned in my opening statement that we've seen that change somewhat in 2004. I think we'll see partners come on board shortly and we were able to pick up opportunistically at very attractive prices a couple of aircraft with which to partner towards the last half of 2004. You're right. That has been a situation that we're starting to see some change.

Now, Brian, is -- when you say -- are there big portfolios potentially for sale or are we talking about incremental things like happened in '04?

Oh, as far as our participation, we'd look at everything. But --

Like Bouillon

But you mentioned the one that's out there for sale and it's been for sale for quite some time and haven't really heard much about it. So, there is an example of what it takes to move things and that was after they took a big write-off. I don't know where that's going. I haven't heard much about it.

Okay. Thank you.

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

Sure. Thanks, Phyllis. And thank you everyone for participating on the call. Bob, Brian, and I are all available this afternoon if you have additional questions. So please don't hesitate to give us a call. Thanks.

This concludes today's GATX year-end earnings conference call. You may now disconnect.