GATX Corp (GATX) 2005 Q4 法說會逐字稿

Operator: Good morning, ladies and gentlemen, my name is Tina and I will be your conference operator today. At this time, I would like to welcome everyone to the GATX fourth quarter and full year 2005 earnings conference call. [OPERATOR INSTRUCTIONS] Thank you. Ms. Johnson, you may begin your conference.

Thank you, Tina and good morning, everyone. Thank you for taking time during what is a very busy earnings season to join us for our fourth-quarter 2005 year-end conference call. With me today are Brian Kenney, President and CEO 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'll turn it over to Brian to provide some comments on our strategy for 2006 and beyond. Then we'll throw it open to your questions. Before we begin, I'd like to remind you that any forward-looking statement made on this call represents our best judgment as to what may occur in the future.

The Company's actual results will depend on a number of competitive and economic factors, some of which may be outside the control of the Company. I'll refer you to the Form 10-K filing for the year ended December 31, 2004 filed with the SEC for discussion of the most important of those factors.

Now let's review the numbers.

Today,we reported a net loss from continuing operation for the fourth quarter of 2005 of $112.3 million or $2.22 per share. As we stated in the press release, this loss is a result of $2.37 per diluted share from the previously announced writedown of Air assets targeted for sale this year, and $0.19 per diluted share of expenses associated with the repatriation of foreign earnings under the U.S. Job Creation Act. In the fourth quarter of 2004, we reported net income from continuing operations of $70.9 million or $1.23 per diluted share, which included after-tax gains of $0.63 cents per diluted share from the sale of our property on Staten Island and $0.24 cents per diluted share from the tax refund.

For the full year 2005, we reported a net loss from continuing operations of $15.1 million or $0.30 per diluted share, which included the charges for the writedown of the Air assets and for foreign earnings repatriation, I just mentioned, at $2.39 per diluted share and $0.20 per diluted share respectively.

In 2004, we reported full year net income from continuing operations of $158.5 million or $2.86 per diluted share which included the $0.63 cents per diluted share for the Staten Island property, $0.52 per diluted share from insurance recoveries and $0.28 cents per diluted share of tax benefits.

As stated in the press release, we're disappointed to post the loss for the quarter and the year when we have positive momentum in our overall operations and our markets, particularly, in Rail and Specialty.

In Rail, net income improved 35% from 460 million in 2004 to $82 million in 2005. Our North American suite utilization remained at 98% for the fifth-straight quarter, and our European operations contributed improved results.

We were able to grow our fleet and increase our active car count, which Brian will talk more about, and perhaps, most importantly, the strong lease renewal rates continued to provide revenue lift. Renewal rates on the basket of our most common car types increased 14% over the expiring rate in the fourth quarter and were up 10% for the full year 2005.

We will renew an additional 25 to 26,000 cars in 2006, so we anticipate continued strong revenue growth as our fleet continues to roll over into this higher lease rate environment. As I noted at the beginning, the biggest driver of results at Air came from the writedown of the Air assets targeted for sale.

Air reported a net loss of $119 million in the fourth quarter resulting -- resulting in $109 million loss for the year. This compares to net income of $200,000 and $9.8 million in the fourth quarter and full year 2004 respectively. With a number of new aircraft management engagements, Air was able to increase C- income by more than $3 million in 2005. Lease rates improved in 2005 on the most desirable aircraft types and with 28 aircrafts, particularly our new 737-800s and A320s up for renewal in 2006, we have positioned our fleet to take advantage of improving market conditions.

Specialty Finance reported $49 million in net income in 2005, up $8.8 million from the previous year. The Marine joint ventures in our Specialty Finance portfolio continued their strong performance through the fourth quarter and full year with both high asset utilization and charter rates.

As we stated on our third quarter earnings call, as expected, there were no material remarketing gains in the fourth quarter, but for the full year we achieved $28 million in remarketing income, a $5 million increase over 2004.

Looking forward at 2006, we anticipate improved earnings at both Rail and Air, offset by a decrease at Specialty, as we do not expect to see the substantial remarketing income we achieved in 2005. Based on this outlook, we expect 2006 GAAP diluted earnings per share in the range of $2.60 to $2.70, which includes $0.20 cents per diluted share of benefit primarily from discontinuing depreciation expense on held for sale aircrafts until their sale.

Overall, while our 2005 financial results were driven by the Air-related charges, operationally, we had a very positive year. This gives us confidence as we enter 2006, and we are looking forward to the year ahead. With that, let me turn the call over to Brian for his comments on our achievements, versus our objectives in 2005, and on his expectations for 2006 and beyond. Brian?

Thanks, Rhonda. Good morning, everybody. As Rhonda said, I'm going to briefly discuss our progress towards executing our strategy.

Now when I took the CEO job last April, I said our mission was to be a Company that leases long-lived, widely used assets. Now, these assets should be characterized both by a service component and a unique understanding of the value of that asset. Now, the vision is that we're going to involve into a Company that provides our shareholders with a more attractive return. By more attractive, I mean more attractive on a risk-adjusted basis. A return that's going to be less volatile because we'll be more efficient in managing through the cycles than we have been in the past. We'll also be a more efficient operator. We'll also have a lower cost of capital.

So what progress did we make in 2005? Well, I thought we made good progress, but realistically speaking, we should have made good progress in 2005, if you look at the underlying conditions in our markets which were all improving.

So from our view, we still have a lot of work to do because this strategy needs to be measured over a number of years not one, and through a complete business cycle, and not just an improving economy. But let's get into some of the details about the groundwork we laid in 2005 to achieve this longer-term vision.

First, the growth in investments side. We've invested almost $900 million in Rail over the last two years and that's both frustrating and encouraging to me. A little frustrating because we would have liked to have grown our core franchise, our most valuable franchise at a faster pace. But also encouraging. Encouraging to me personally because I thought our Rail people invested with great discipline in 2005 in an extremely difficult and challenging investment market. And I think the investments they made will provide attractive returns for decades to come.

We always try to reinforce that the single most important decision you can make when you invest in 30 to 50-year assets is to buy the asset at an attractive and an advantaged price and that's exactly what we did in Rail for the last two years.

In our committed purchase program, we were able to buy these assets at an attractive price then we placed these cars with our best customers. When we did buy railcars in a very overheated spot rail market in 2005, we were able to generally lock them in for a long-term lease with good credit customers and at rates which justified the higher cost.

So maintaining that investment discipline is absolutely key to achieving the less volatile, long-term return that I'm talking about, and expect more of this type of Rail investment in 2006.

Let's turn to the Air business. We're also dealing with an extremely difficult investment environment in our Air business, both for new orders as well as secondary market transactions. But buying at the right price in Air is probably equally important -- probably more important than it is in Rail because Air is much more of a commodity business. It simply does not make sense for GATX to place a new aircraft order in this environment. Especially, when we're relatively disadvantaged to our larger scale competitors, as far as getting an attractive price. So what we've done is we've moved to much more of a management model.

Earlier, I had said service component is the key to GATX earning a premium return and by managing more assets for others, we're adding that service component that's been lacking into our Air business.

When we do invest in Air, we will do so in support of these managed initiatives. As far as this new strategy, the Air group responded pretty well in 2005. They had a 50 % increase in their fees versus 2004. And they earned these fees from managing our traditional partnerships and securitizations. They earned fees from selling aircraft out of troubled carriers.

They earned fees for managing aircraft that are resident in troubled carriers. So that was all good progress for their first year of a new strategy. We expect these fees to increase in 2006 as well, and due to our recent decision to sell the older under-performing aircraft, those fees will be earned on a lower-asset base, which should really improve their return.

In Specialty, as you know, that portfolio had been decreasing the last few years. As we were really running off the venture business. In 2005, we were able to invest almost a $100 million in Marines and other equipment. So we actually reversed the trend and saw lease income grow in 2005.

In this business, we have the same investment philosophy as we do in Rail and Air and that's to purchase widely used, long-lived assets at an attractive cost. I think we did that in 2005 and we'll maintain that discipline going-forward as well.

So that's the growth in investment side. So how else are we executing the strategy? Well, our recent decision to sell the $450 million of older aircraft removes a lot of volatility from our fleet and this is a volatile business. So this decision will help improve our return in the Air business. It will help lower our cost of capital in the long run.

And speaking of the cost of capital, ours has dropped dramatically over the last 18 months, making us much more competitive. And this morning our position was reinforced with S&P's announcement. They are upgrading GATX's long-term and short-term credit rating. So once again, good progress but still just the first step in lowering that cost of cap fall.

If I look at other steps taken in 2005 in support of our strategy, I'd point to Rail being able to renew a historically high percentage of our leases in 2005. They were also able to extend their lease term upon renewal significantly. Both of these actions served to reduce the volatility in revenue. Should also help us keep maintenance in track and in check as we avoid the costs associated with transitioning these cars to a new customer. So these initiatives are really what we talk about, what we mean when we talk about being a better operator.

So to summarize 2005. Saw the stock price increase nicely. Our core earnings improved significantly, apart from the charge we took connected with the strategic aircraft sale. We see earnings improving again in 2006. Our cost of capital has decreased. Our rating has increased. And these are all great developments, but as I said earlier, they're also expected developments in this type of market -- this type of environment we're dealing with. So equally important to me is the less visible groundwork we laid in 2005 to execute our strategy.

So we are excited and we'll be even more excited to continue down this path and measure ourselves a few years from now. And that's the true test of a Company in this type of business. So that's my update. Let's go ahead and operator, open it up to questions.

[OPERATOR INSTRUCTIONS]

Your first question will come from the line of Art Hatfield.

Morning, everybody. Just a couple questions. Brian, if you could, is there a way that you can quantify the S&P rating change and how that may impact your financing capabilities over the near term?

Well, I should let Bob answer, but in general, I think we were already trading reflective of this rating. So we'll see over the next couple of days how our debt trades. Bob?

Yeah, our credit spreads have come in quite a bit over the past 18 months, as Brian indicated, and currently on our five and ten year, we're down at a very competitive and attractive level, versus where we had been historically. The upgrade dividend, we were on positive outlook.

The formal step of the actual upgrade, I don't know if it will tighten the credit spreads at all, but it may. The other -- the other issue is that, in addition to the long-term rating, we got a short-term upgrade, A2, which will enhance our capabilities on the CP market, which is positive for us.

And as you know, the higher your debt rating goes, the more flexibility we have to invest aggressively when the opportunities present itself. So while there may not be a big cost pickup, there definitely is from a flexibility and opportunistic standpoint.

Secondly, you guys got a lot of aircraft that are going to roll over in '06. And all those are on post 9/11 very low lease rates. Is there any way that you can kind of quantify or give us a feel for what kind of improvements in lease rates on those aircrafts we should see going forward?

Well, I think what we saw, Art, is post 9/11, the lease rates went down on the A320s and 737s anywhere from 15 to 20, maybe even 25%. A little bit more on the A320s because of the European bankruptcies of air carriers that had primarily air bus aircraft, a little bit less on the 737, 800s. We've seen those lease rates recover in the last year to above the pre 9/11 rents. So I think, we should see a nice increase from those aircrafts that roll over this year.

The other point to make there, too, just to follow up on Rhonda, it's a little bit more difficult to generalize in Air because -- you can do that in Rail when you're talking about 25,000 leases that roll over. But in Air, where it's 25 or 30, each of those assets is really unique and so it's a little bit tougher to generalize. But overall, we see positive movement there.

Okay. Thank you.

[OPERATOR INSTRUCTIONS] Your next question will come from Bob Napoli.

Thank you, and good morning. A couple questions. First on pricing, I guess if you look at your portfolio today and stratify it, as I'm sure you do, if prices were to hold in the Rail business where they are today and the Air business -- I know the Rail business is a little easier probably to identify -- when you get into 2007, what kind of price increases would you get off of the assets rolling off in '07?

It seems to me in '06 and '07, you should have -- the leases that are rolling off should be the lowest price leases and much less of a benefit in '08, but it seems like -- if prices stay where they are today, and maybe that's a big if, that you should have material benefits not only in '06 but also '07. Is that correct or not?

I think that's generally correct, Bob. Really, the bottom of the market was the beginning to the middle of '03 in terms of pricing. So, yes, on a three-year average renewal term back then, what's rolling over in 2006 should be at a much higher rate.

Going into 2007, obviously it's cloudier. But also in 2004, lease rates were already recovering. So I think you'll see less of that phenomenon in 2007, but with your premise that railcar rates, if they had reached their peak here, you'd see increased revenue despite that for the next two years. Yes.

With the --

Also, I should add that we haven't seen any sign of those railcar lease rates topping out.

Topping out, and it doesn't seem like -- well, the backlog is up. It doesn't seem to be out of control like maybe it was in the last cycle.

No, but you did see us issue a little bit of a warning in the last two earnings releases about the price of energy and how that's affecting our customers. That's something we're watching pretty carefully and if you're looking at chemicals, in particular, in fertilizer customers, they have to be impacted by these energy costs.

And you're starting to see some of those customers issue earnings warnings for 2006, like DuPont came out with lower earnings and talked about a soft 2006. So it's out there. We're watching it carefully.

The good part is, as far as our fleet we're somewhat insulated in the near term from those effects for a number of reason. Obviously, our cars are out on term leases and they just can't return them until they roll over. And even for the ones that are experiencing weakness, they're reluctant to let those cars go upon renewal right now because they don't know that this is a long-term phenomena.

And with the tightness in the railcar market, they're reluctant to return them because if they're wrong about returning them, they're going to have to replace them at a much higher cost. So we haven't seen any returns, really, any increase in returns or renewals or a decrease in renewal success.

Another mitigating factor would be with the tightness in railcar supply, as well as, the demand in our other markets, if chemical customers did return cars, right now, we'd be able to deploy them into other service rather easily. So there are mitigating factors but still it's something we're watching constantly. And eventually it has to affect our customer base.

The other point, Bob, you raised on the backlog, which is something -- the order backlog at the railcar manufacturers, which is something obviously we watch very closely.

But you hit on a key point for us and that is we don't want to see that number escalate out of control in an undisciplined fashion, which really did occur in the late '90s, because that doesn't provide a long-term benefit for us or a good market environment long term. So a more disciplined backlog is a good thing for us.

All right. The portfolio that you're selling of aircraft, and I think that's -- I mean, I think that's the right strategic move. Can you tell me how much that group of aircraft lost on an operating basis in 2005?

Well, as we look at those aircraft, Bob, we haven't and don't bifurcate the business aircraft by aircraft . But the contribution from those aircraft overall was not material to the Air group and wouldn't be certainly going forward.

So we feel good about the aircraft we've identified, and that we are going to be taking out to market. As far as, we think we saw limited income contribution from them and probably limited upside in the future from our bases in those aircraft.

Okay. On the asset growth side, you talked about, Brian, how you were encouraged and discouraged at the same time, and I understand where you're coming from. But over the long term, in order to maintain competitive advantage, scale advantage, I think you've got to grow your business, and I don't know, are you looking at opportunities? Are you seeing any improvement in opportunities for investment? Or do you think you just need to wait out the cycle and we're not going to see any real asset growth out of GATX railcar business until we go through the next cycle, until prices come down? Is that where we're at at this point? Or are you seeing anything that would accelerate the growth trends?

Bob, let me answer real quick and then I'll turn it over to Brian, because I do want to point out one thing .And that's to reiterate the fact that we've invested in the last two years almost $900 million in Rail, which is a substantial amount of investment. If you look at total investment volume for GATX, it's come down year-over-year. Last year we did $225 million in volume in Air because we had a lot of new deliveries. This year it was 17.

That's consistent with kind of the strategy we've laid out overall as far as opportunistic investment in Air and moving more towards the managed model. But $900 million over the course of two years is a significant amount of money to put to work in Rail. We wish we could have done more and we're hopeful to do more but it will be very opportunistic. I'll let Brian follow up on that.

You're right. We have to see growth in the Rail business, we have. But I'm more interested in growing earnings than I am in growing assets and what we've done is change the mix dramatically over the last couple years by running off -- selling some of the more volatile businesses and growing the Rail business.

So even though the assets have come down slightly the earnings power has increased dramatically and in the end that's what it's all about. Having said that, yes, you're right, we have to grow the Rail business. We have invested $900 million in the last two years. It's a very overheated investment market. Fortunately, we have the committed purchase program.

As I said, fortunately, we'll be able to do some spot market business and lock in longer term returns on that business. But that will change and the market is cyclical and it comes down and the whole idea here is to maintain the drive power for when that happens and invest aggressively. So like I said I think we're growing the earnings power of our asset base and we'll be growing the asset side as things calm down in this overheated market.

All right, thank you.

Your next question will come from the line of Thomas Clett.

Good morning. Brian, we've gone through this before, but it's a two-edged sword when you say there's difficulty acquiring new railcars for lease.

I'd like -- can you make any comment on the magnitude of the replacement value of the rail portfolio if we marked it to market? And I'm asking this in light of where scrap steel prices are. And how do you look at the guidance for '06 as a return, if we marked it to the market on the rail side? What the replacement of the rail assets would be?

Well, Tom, let me answer the first part of this . This is Bob. Let me answer the first part of that. The replacement value would be difficult to gauge given the diverse asset base that we have there, but would it be higher than it is today? Certainly. But, you know, we're seeing some of that reflected in our financials as lease rates continue to go up.

Right.

Part of that does work its way into -- a lot of it works its way into our bottom line, but I'll let Brian add any additional color he has on that.

Yes, I wouldn't track the value of the rail fleet by the scrap -- by scrap prices. I mean, that's too volatile.

The last I saw was $242 in the Chicago market, well below $200 this year. But we're not scrapping our fleet. What we're doing is locking in and adding longer term leases at attractive rates. So we look at it on a cash flow basis, and as Bob said, it's manifesting itself in higher rates right now. You know, I don't look at marking to market the Rail business on a metal basis every year.

No, but on a replacement basis as far as what the returns are for '06, you would have to maybe have some of that in mind, wouldn't you, Brian or not?

Yeah, but remember through the committed purchase program, we're buying at an extremely advantaged cost right now.

Right.

So it's not -- it's relevant to me in my spot market purposes but not on the balance of my tank car purchases

But is it not relevant on the older cars as to scrap or release the cars for you?

Absolutely. That decision -- that decision gets tougher all the time.

Right.

As volatile as scrap prices are, as hot as the market is and with the short supply of cars that are in, it's getting to be a tougher decision. That's why you're seeing our scrapping come down over the last couple of years and in addition, our idle fleet is getting very small. On the maintenance side, also, you've seen an increase in the type of work we do.

We're even working that idle fleet hard, even though it's so small right now, to try to convert it into other service and do other things. So what we're trying to do is position this fleet for the long term. We always have the long term in mind. We're economic animals.

And the second question I had, you've referred to sometimes in the past that we can run this Company more efficiently, both from a capital basis and an operating headcount basis. Is that still possible from here, Bob or Brian or not?

Yes, I think, we've reduced SG&A dramatically especially at the corporate line over the last three or four years. I wouldn't look for absolute dollars to decrease, we're always looking for efficiency. But what we want to do is grow the business with the current cost structure. So we're really looking for scale now, as opposed to taking out large amounts of fixed costs.And I think we're doing that in Rail. On the Air business that's exactly what we're doing. Trying to get scale with our existing infrastructure without adding a tremendous amount of investment to the balance sheet, and we saw some success in that in 2005. So we really want to leverage our existing infrastructure.

If you look over a five-year time period, Tom, I don't want to -- as Brian said, on an apples-to-apples basis, we've seen SG&A come down in the range of $35 million. So I wouldn't say that opportunity is there on an equivalent basis over the next five. But we're always looking to operate more efficiently.

And the last question I have is depending on what your perspective is, historically or going forward, some people could say you're either underleveraged now, versus some other people.

As the cash goes up, Bob and Brian, is there ever a thought in your mind about there might be another leg to the stool to add a different business? I know the marine equipment side still retains your interest, but is there anything else you could do in terms of as the Air portfolio gets sold off a little bit and you have more room to maneuver now with the rating agencies?

Well, you heard the mission, I reinforced it again at the beginning. That's what we're going to deal with, long-lived widely used assets. So I wouldn't expect us to dive into another diverse business, as opposed to expanding our existing ones, both geographically and what we do in those businesses. But we're not going to get away from what we do best.

Thank you.

Your next question will come from the line of Kim Burkhart.

Yes, hi. Good morning. I'm calling in with a question about rail and speed efficiency across all of your customer lines. Do you see any speed efficiencies decreasing the need for railcar in the -- railcars over the next two to three years?

Well, you know, that's a topic that we occasionally -- frequently get asked about and we're in the long-term leasing business. So that's -- weather speeds, the railroads become more efficient on a short-term basis what have you. It really will not have an impact on our business longer term.

And I'll also add that this is a topic that we've heard about in the rail industry for years and years and haven't really seen any lasting impact on our business. A lot of our railcars, especially on the tank car side, are used as much for interim storage as they are for transportation. So that really -- that really doesn't affect us that much.

The other thing I would add is as train speeds increase and the rails get more efficient, that's a little apart from what they're trying to do right now, which is to raise the price. But, in general, as railroads get more efficient, there should be more traffic moving to rail and an equal demand for cars. That's something that we've seen in the past and it's something we constantly examine. That's a good question.

[OPERATOR INSTRUCTIONS] Your next question will come from Jordan Johnson.

Hi, it's actually Jordan [Hymonts]. The operator obviously got the name wrong.

I apologize.

Quick question. Is the other income which is mostly in Rail, is there anything one time in that, the $18.5 million?

Yes, there was insurance recovery in there for about $2 million. But otherwise, we saw an increase in our mileage income that we got and scrap. There's always scrap income and repair revenue in there as well.

And was scrap income -- I know it's going up as steel prices have somewhat gone up but were there more units in any way scrapped or anything? Or was this kind of a good run rate with the scrap number in there?

No, we actually scrapped fewer cars in 2005 than we did in 2004. So -- and also some of the cars differed in terms of value. So you saw -- in scrap prices overall, the scrap income that we had overall was down just a little bit in 2005, over what we had in 2004.

Okay. And then just to follow up on the returns, the returns on managed assets keeping going up in Rail mostly because of prices. In your assumption for next year, what sort of roam on the Rail business are you targeting? Is it like 2.1 and a quarter?

Jordan, that's not a number we look at specifically or target. We look at return on equity. We look at lease rates. We look at a whole host of other things.

The overall return on managed assets is something that somewhat falls out at the end of the day. But currently returns on equity in the Rail business have improved dramatically here in the last two years in the mid-teens and we still think there's upside there.

Let me go with that basis for one more question, if you don't mind that With the upgrade, is there any chance that you will be able to take your leverage up a little bit?

You know, right now, at this point in time, we -- compared to historical levels, we're obviously significantly lower than where we were. Our goal is not just to get to triple B. Our goal is to get to an A rating and that's a long-term goal and one that's obviously aggressive but we think we can get there.

Anything we do on the leveraged front, much like we do on the asset mix or other strategic decisions we make are all made in the context of trying to -- as part of that context is trying to get the rating up. So I don't have a target on leverage. We continue to manage the balance sheet prudently for a number of different reasons. Rating is one, but also the fact that we want to have that drive power that Brian talked about to invest aggressively when the opportunity presents itself. So I would say right now, we're going to continue to manage pretty prudently on the balance sheet.

I don't think that's just an absolute target. The rating agencies look at a number of factors, in addition to leverage. And I would say that it really depends qualitatively on our asset base as well.

If they saw us increase our leverage by adding $2 billion of aircraft, I don't think that would go over too well. If they saw us do it by increasing our scale in the Rail business, they'd probably be okay with it. So it really depends on how you increase your leverage.

We feel strongly that our leverage today while it has been -- and it has come down substantially, we're also changing the mix of the business to one that's less risky, less volatile. We have a long-term objective here in mind.

And finally, one last question, especially now with the upgrade, I know it's not the last of what you hope to retain. When will be the next time that a dividend increase will be up for consideration? Is there a stated board meeting or anything like that that's on the agenda for?

We always have a board meeting, Jordan, about this time of the year, shortly here at the end of January, early February. That's typically when we look at the dividend. And we'll do that just like we have every other year at the scheduled board meeting here coming up very shortly.

Thank you very much.

We have no further questions at this time, sir.

Okay. Thank you, Tina, and thank you, everyone. I will be available this afternoon if you have any additional questions.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may all disconnect.