GATX Corp (GATX) 2005 Q1 法說會逐字稿

At this time I would like to welcome everyone to the 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. [OPERATOR INSTRUCTIONS] I would now like to turn the conference over to miss Rhonda Johnson, director of Investor Relations. Ma'am, you may begin your conference.

Thank you, Marcus. And good morning, everyone.

Thanks everyone, for listening in to our first -quarter conference call, during what's a very busy earnings conference week. With me is Brian Kenney, President of GATX Corp., and Bob Lyons, Vice President and Chief Financial Officer. I'll provide a brief review of the numbers, which were provided in the press release this morning, and then we'll open it up for questions. I would like to draw everyone's attention to the forward-looking statement contained in our press release. The factors outlined in that statement also pertain to today's call.

For those of who you are looking for the fourth-quarter dividend announcement, we'll issue that announcement tomorrow, Friday, the -- April 22nd, following our regularly scheduled Board meeting and our annual shareholders meeting. If any of are you in the Chicago area tomorrow, We'd like to invite you to attend the shareholders meeting held once again at the northern trust building at La Salle and Monroe.and Monroe. The meeting begins at 9:00 a.m. Central. For those of who you are unable to attend the meeting, we'll post the slides from the presentation on our Web site.

Now, let's turn to the quarter. Today we reported first-quarter net income from continuing operations of $28.4 million, or $0.52 cents per diluted share, compared to net income of -- in 2004 of $19.7 million, or $0.38 per diluted share. The improvements we saw in 2004 continued in the first quarter of 2005.

At GATX rail, utilization on the North American rail fleet remained at 98%, the highest we've seen in many years. Lease rates on a -- the basket of typical car types were up 9% over the expiring lease rate, an improvement from the 8% we saw in the fourth quarter of 2004. Maintenance expenses increased in the first quarter, due to railroad enforcement of industry rules for wheel replacements. We expect that the timing of conversions of rail cars will result in an increase in maintenance expenses in the near term. Rail also benefited from strong remarketing gains in the first quarter, selling more than 650 rail cars in the secondary market.

If there was one disappointment in rail, it was that high steel prices and intense competition in the secondary market made it more challenging to find attractive new investments. However, we were able to acquire more than 900 new and used cars for the fleet and look to add additional cars as the year progresses.

In air, our portfolio remained highly utilized. In aircraft, lease rates continue to rebound, which, along with the improved performance in air's joint ventures, enhanced air's net income in the first quarter. As you may have seen earlier this week, we concluded the first joint venture with an international financial institution for aircraft we purchased in the secondary market last year. This is a good first step, and a strong indication of our focus on managing more aircraft and leveraging our asset knowledge. Overall conditions for lessors are improving, but airline financial health remains a challenge.

Specialty finance had another strong quarter, particularly from the performance of its marine joint ventures. The three joint ventures in LPD LNG [ph] tankers, partial chemical tankers and handy- sized boat carriers, continue to perform well, with increased demand and higher charter rates. The quarter did not compare favorably to the fourth quarter of 2004, however , as that quarter in 2004 had unusually high remarketing gains. In 2005, specialties sold its entire warrant-related position in Google, contributing a strong gain on sale of securities to the first quarter.

After the strong improvements in 2004, the credit quality of the GATX portfolio stabilized in the first quarter of 2005, with net charge-off and impairments of less than .1% of total assets and nonperforming assets of less than $50 million. As we noted in the release, we've reiterated our core guidance for 2005. We now expect GAAP earnings to be in the range of $1.45 to $1.55 for the full year 2005, which includes $0.05 net negative impact from two items noted in the release: the liability -management expense and an anticipated tax benefit.

So, overall, we had a very strong start to the year and we're encouraged by the trends in our markets. The quarter was very straightforward from an operating perspective, so rather than rehash too much of the info from the release and past conference calls, let's just go to Q&A. Marcus?

[OPERATOR INSTRUCTIONS] We'll pause for a moment to compile the Q&A roster . [OPERATOR INSTRUCTIONS] Your first question comes from Tom Clett with UBS.

Hi, Rhonda. Hi, Bob and Brian. Couple of things. On the rail side, the strong steel prices are the squeeze that you're seeing there that's kind of a barrier to earning a return for GATX. Is there not also some benefit on what's disposed of in scrap steel prices and everything that offsets the problem? In other words, on the rail cars you disposed of , don't those key off of steel prices, too?

Yeah, they do. And in general, the high steel price has been a positive for our earnings on the existing portfolio.

Absolutely. That was my question.

Specifically, you mentioned scrapping. I actually checked yesterday, and the price for scrap in Chicago is still over $200 a ton. And so we've realized as much as $2,200 more per car over the last year or so as we had compared to a couple of years before. So, you've seen that in rail's income statement. We're not scrapping as much, obviously, this year; we're still in the first quarter, but that's been a contributor.

Also, the sustained increase in the price of steel: it appears -- although we can't quantify it -- it appears to have worked its way into lease rates. Because, you think about it, a customer facing a renewal on a lease of our car is more likely to renew than buy a car at today's high market price. It 's lifting the tide on the existing fleet as well. It does make new investment tougher to do, because you have to make some pretty aggressive assumptions around the price of steel in the future, as well as renewal rates. So it makes it harder to invest, but it lifts the tide on the existing portfolio.

And even away from rail, on the shipping side as well, you saw we're seeing greater performance from ASC, our American Steamship Company on the Great Lakes because of the demand of iron ore and freight rates. We're seeing -- Rhonda mentioned the shipping portfolio performance -- some of those vessels that we have can carry scrap steel. So, in general, it helps our current earnings, but just makes it more difficult to invest.

That was going to be one of my questions. The second question, Brian and Bob and Rhonda, is American Steamship. Where is that reported in the results? In "Specialty"?

It's in "Corporate and other."

"Corporate and other."

Yes, so you can see it if you're looking at the segment data that we lay out on page nine of the press release -- marine operating revenue -- in "Other" -- that is related to to ASC, as well as the marine operating expenses below in the expense line.

Are we any closer to achieving partial or whole Monday monetization there, or is that just -- are we going to play the hand out right until the end?

I think, Tom, conditions these are real solid right now. This is an extremely well-run business for us. It 's one that generates nice cash flow and has a good position in the market.

Would we be building any new ships there or not?

No.

No.

The other thing I would point out, too, when you're looking at the quarterly statements, is in the first quarter of each year, ASC doesn't really have many operating days.

Seasonal.

It's primarily second through fourth quarter.

Last question: Is in the new joint venture with Nord Bank -- if you could, give me the risk profile of -- and by the way, Rhonda and I had a conversation about this, but the planes that we put in go in at approximately the same purchase price that we paid for them in '04?

Yes.

Okay, so that's kind of just -- Our return -- our return with that -- that -- that we project that when we partner an aircraft is much greater.

But that comes from the ongoing management fees as well as, on the upside, we'll get more return over a particular hurdle. So the real bang of the partnership isn't the return, it's the increased return on our investment.

But the assumption is we put those in and they match it with -- if it's a 50/50 joint venture. with about the same amount of capital. Right?

Well , total capital , but not as much of ours. Yeah.

So, here's my question. If planes become available in the secondary market, what would be the risk profile, if I'm asking the question right, of -- I guess what I'm asking is, is there a conflict between GATX taking it into its own portfolio or putting it in this portfolio? I'm, I'm confused about that.

No, there isn't a conflict, Tom. We treat all of our aircraft the same, whether we own 20%, 50% or 100%. Or 0%, on the managed aircraft. We view them all as owned aircraft. And there isn't --

But there is an obligation to these people now to fill up the portfolio to earn the return for them and for us, right?

The portfolio right now consists of the aircraft we put in.

I know.

There isn't an obligation to put additional aircraft in, although that would be a good situation.

Right.

So we're looking at the return and managing the existing aircraft over the life.

Oh, I get it. I get it. And last but not least, are we making headway with the rating agencies, because it is just .. annoying as ... to keep seeing where we are.

Sure. We continue to have dialogue with the rating agencies and we'll intensify that dialogue over the course of the coming months, and I think recent commentary from the rating agencies can give you a good feel about how they're looking at the credit. You know, certainly we're driving toward a higher credit rating. That's what a lot of the things that we've tried to do here in the last couple of years and currently. It's so that we can increase our credit rating. As they've indicated, their outlooks have improved and they want to continue to see that -- the trends in the business improve and work that way -- work its way into the results. So, I can't not going to commit for either Moody's or S&P 500 and what steps they may take. But it is very high on our priority list.

Thank you.

Thank you. Your next question coms from Matt Karl Carletti with Piper Jaffray.

Good morning, everyone.

Hey, Matt.

I wanted to start off on, I guess, the air segment and just get your view on -- it sounded like you're a little more -- maybe bullish is the right word, or a little more optimistic about the air segment than you have been in quarters past. If you go over how you view the air market right now and where you guys stand in it ?

Sure. Matt, it is Bob. If there's some tone of optimism coming through, I think that's fair. It's probably based on the fact there's less volatility in the marketplace today. And we've seen a nice pickup in lease rates on the most attractive equipment. So, there is -- there is reason for more optimism today. But we also always have the caveat that the situation among many of the carriers remains pretty tenuous and can change pretty quickly. So, we do feel better about where we're at today, and we've been able to do some things in the market place which improved the outlook, the return outlook , going forward ... But I think your assessment is fair.

Okay. And on -- on the lease rates, I know it is a lot harder to quantify, than say rail cars, because there's a lot fewer transactions. But are we talking mid-single-digits type of range, in terms of where aircraft lease rates are -- new versus expiring? Or is there any sort of quantification you can put on that?

Well, it is much tougher, because in rail, where we're renewing 25,000 rail cars a year, you get such a scale on a wide base from which to draw some conclusions. In air, we have 15 to 20 aircraft renewing in a given year that can be of varying types, so, it is really difficult to pay. But let me give you some color on that. If we're looking at newer A320s or 737s --- kind of the rate we're seeing today versus the rate a year ago --

Okay.

Those rates would be up around somewhere in the 10% -- in the 10% range.

Okay. That's helpful. One last air question and I'll let others ask questions. On the joint venture, we saw how much you put in to start. Just on a longer term view, over the next many years, I mean where do you see that going? How big could that be? Could that be ultimately a billion- dollar joint venture? Or is that not in the cards? Where do you see that going?

I think that would be pretty aggressive. Most of our joint ventures, if you see, have typically started in the $100- to $200- million range. So we may look to put some additional aircraft in there, or potentially bring in some additional partners as well.

Okay.

But that should give you some idea.

Okay.

Great.

I'll let others ask questions and come back.

Thank you. Your next question comes from Greg Reagan [ph] with Avenue Capital.

Hi. Thanks for taking the call. Quick question on the guidance, and maybe I missed this. You said that core is unchanged, but I see it's a negative $0.05 impact from the balance sheet restructuring. And a positive $0.10 impact , but you're actually moving the range 15 cents. What am I missing on the $0.10?

Actually, the core guidance in the first quarter, we had -- we gave you the GAAP guidance, which was $1.60 to $1.70. That included that $0.10 of tax benefit, so the core would have been $1.50 to $1.60. You take the $0.05 away from that, and you get the $1.45 to $1.55.

Thank you. I appreciate it.

Sure.

[OPERATOR INSTRUCTIONS] At this time, you do have a follow-up question from Tom Clett [ph] with UBS.

One thing I missed, and I'm sorry: Would you give me some profile of the opportunity on the locomotive side versus the rail car side? What's the magnitude of the LLC that we brought in from electromotive division, where we owned 50% of it. I know I asked that last quarter. It is just kind of a -- is this an opportunity or was it -- you know, cleanup, a bookkeeping kind of thing. I think, Bob, you said oh, no, it's an opportunity. Can you give me some context there?

Sure. It is an opportunity. We wouldn't have made that purchase if the other 50% of LLP had we not been really optimistic about the outlook for the business there. So, our 50% investment was in the range of $60 to $65 million.

Is it a major opportunity, Robert?

Well, it's tough to kind of categorize major, but we -- to give you an example, we made that acquisition, -- the other 50% -- in the early part of December.

Right.

We turned right around a few weeks later and bought another portfolio of rail, or locomotive equipment, in the secondary market. We're actively looking for other opportunities right now. So --

Secondary market opportunities, for the most part. Right?

Yes. Correct.

I think Tom, if you've seen the news in the last week or ten days, also a couple of the railroads placed new orders for locomotives, so I think that there is demand for locomotives out there. And so we're hopeful that there are opportunities where we can expand our fleet as well.

Thank you.

Thank you. At this time, you do have a follow-up question, also from Matt Carletti with Piper Jaffray.

Hey, guys, couple more. Just on kind of number items, the air segment, the share affiliate earnings, was pretty strong this quarter, I think it was $10.4 million. Is there anything in particular that was driving that?

We had some pretty strong earnings at some of our joint ventures, as well as at the Rolls Royce lease -- engine-leasing joint venture.

Gotcha.

And rail lease income was -- I guess -- down quarter over quarter. I guess we had -- I hadn't expected that. What was driving that with -- I guess with lease rates up and I guess a few cars came out of the portfolio.

Actually, right now, it is difficult to compare apples to apples to the prior quarter, because the prior quarter, our own business in Europe, KBG, which had managed cars for a third party, they had recognized that essentially what they would do is take in the lease income on those cars and offset it, dollar for dollar, with an expense. So, we have taken that out and just left in C income we earn on that.

Gotcha.

If you take that out, lease income was actually up about $4 million quarter to quarter.

Gotcha. Great. All right. Thank you very much.

Thank you. At this time, you do have a question from Vincent Daniel with Front [ph] Point.

Hey, guys, good morning. You might have said this before. How many international cars do you have outstanding at the end of the quarter?

It is about the same that we had at the end of the year. We've added a few cars in Europe in the quarter, but essentially the same, around 40,000, including owned and joint venture.

Sounds great. Thank you.

At this time, there are no further questions.

Okay. Thank you, everyone. And I'm available all afternoon if you have any questions. And we'll look forward to seeing you at the shareholders meeting. Thanks.