GATX Corp (GATX) 2006 Q1 法說會逐字稿

Good morning my name is Sarah and I will be your conference operator today. As this time, I would like to welcome everyone to GATX first quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. (Operator Instructions). Thank you, Ms. Johnson, you may begin your conference.

Thank you, Sarah, and good morning everyone. Thanks for listening into our first-quarter conference call. With me today are Brian Kenney, President and CEO of GATX Corporation and Bob Lyons, Vice President Chief Financial Officer. We have also asked Jim Earl, Executive Vice President and Head of Rail, to join us today to provide additional color on any rail-related questions you might have. I will provide a brief overview of the numbers which were provided in our press release this morning, and then we will throw it open to your questions.

Before we begin, I would just 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. For more information, I'd refer you to our 2005 Form 10-K filing.

And one final housekeeping issue -- tomorrow is our annual shareholders meeting. If you're in the Chicago area, we invite you to attend the shareholders meeting held at the Northern Trust Building at the corner of LaSalle and Monroe in downtown Chicago. The meeting begins at 9:00 AM Central and slides from Brian's presentation will be posted to our website tomorrow at www.GATX.com.

And with that, let's turn to the first quarter numbers. Today, we reported net income of 47.9 million, or $0.83 per diluted share, including approximately 3.4 million of after-tax benefit from lower depreciation on Air assets held for sale. By comparison, in the first quarter of 2005, we reported net income from continuing operations of 28.4 million, or $0.52 per diluted share.

As reflected in our results for the quarter, our markets remain strong. In Rail, net income improved 24% from 20 million in the first quarter of 2005 to 24.8 million in 2006. Our North American fleet utilization increased to 99% and we continue to have excellent results in renewing leases at higher rates with existing customers. Renewal rates on the basket of our most common card types increased 14% over the expiring rate in the first quarter and up from 9% in the first quarter of 2005, and we were also able to increase the lease term on many of those renewals. Rail is an inherently cyclical business and as we noted in the release, this balancing of lease rate and term is intended to reduce future earnings volatility. Overall, we're very pleased with Rail's results and the prospects for the year ahead.

Air reported net income of 11.3 million in the quarter, including the 3.4 million after-tax benefit I mentioned earlier. This is compared with 4.8 million in the first quarter of 2005. Air was again able to increase fee income in the quarter, up more than 2 million over the first quarter of 2005 thanks to the completion of air remarketing commitments. And of the 28 owned aircraft up for renewal in 2006, six remain to be released as we roll the fleet over into the higher lease rate environment. And, we have initiated the sales of the aircraft announced for sale last quarter and are encouraged by the market interest in these assets.

Specialty reported 18.4 million in net income in the first quarter of 2006, up from 10 million in 2005. The first quarter of 2006 results include significant remarketing income of approximately $14 million pretax from a transaction in the managed portfolio. In total, Specialty had nearly 20 million of remarketing income in the first quarter. To put this in context, Specialty had a total of 28 million in remarketing income in all of 2005, so the first quarter was abnormally high due in large part to the one transaction noted and we don't foresee any scheduled lease terminations that would result in gains of that magnitude again in 2006.

Regarding investing activity, Specialty invested nearly 40 million in critical use industrial equipment and the owned portfolio increased from year end in the first quarter.

As for our 2006 guidance, we remain confident in the EPS range we outlined back in January. The first quarter was an excellent start to the year and our markets are performing in line with our expectations.

Just to refresh, we anticipate $2.60 to $2.70 diluted earnings per share, which includes $0.21 per diluted share of benefit primarily from lower depreciation expense on Air assets targeted for sale and certain non-operating events. So with that quick overview, Brian, Bob, Jim and I are ready to take your questions. Sarah?

Bob Napoli, Piper Jaffray.

Question on the trend in rail pricing and kind of -- your pricing was up 14% kind of in line with the fourth quarter. One of your competitors, CIT, and I doubt if we're talking apples-to-apples, but they talked about 20 to 30% pricing increase. And I noticed you extended the term from a year ago 40 months to 60 months. I don't know -- is that having a big effect to the pricing, you're going out longer -- and giving up rate to do so? And what is the outlook? Are we going to see increasing -- that pricing gap increase through '06 and into early '07?

Let me tackle the second part of your question first and then I will let Jim Earl provide some additional color on the rail environment right now. As we have discussed before, we do anticipate that we're going to continue to see positive rate variance, certainly through 2006 and into 2007 as we roll the portfolio over from the older leases. We have not commented specifically on the magnitude of that and there is definitely an interplay between the rate increase and term. And to the extent you stay shorter term in this environment on certain car types, you could certainly boost that rate up beyond what we did in the first quarter. But our objective here is to build a balanced portfolio for the long haul. So we're trying to extend term on certain car types as noted and we're still getting very attractive rate increases at the same time. I will let Jim add some additional comment there as well.

Non, I would second Bob's comments that there are some trade-offs always when you stretch term, although we're finding in this environment pricing is very solid and our customer base is a little less sensitive to term extensions than you might see in a little softer market. The other thing just in comparing lessors and thinking about rate increases, remember what is being measured, it is the great increase over the expiring rate. That is really a function of today's rate of course, but also, you have to look back and say what is that you are replacing, what was that -- when was that prior rate put in place? What's the mix of the fleet that it applies to? And the GATX fleet is significantly different than CIT and many other lessors and one of the characteristics of a fleet as ours with a pretty heavy composition of tank cars is that pricing tends to be a little bit more stable over time. And so I think the lows are probably a little less low and the highs may be a little less high, but you have that balance re time. So I think that may be what you're seeing in that comparison.

Would you expect -- as we roll through '06, are we getting -- are the lease rates on what is rolling off lower than what we saw in the first quarter?

I think they're pretty consistent throughout the year, actually.

The beginning of '03 was like the depth of the market downturn last time. So we're renewing those leases as we speak.

Okay. Question on Air. On trying to get a handle on the run rate in Air earnings, the benefit that you have pointed out previously on lower depreciation, why is that a nonrecurring? Essentially depreciation is going to be lower permanently because those aircraft are not part of your business any longer, so why is that a nonrecurring benefit?

Because we're still recognizing revenue on those aircraft, Bob.

What is the revenue -- what is the net effect of those aircraft I guess?

Pardon me?

What is the net effect on the P&L from those aircraft then?

Well as we have indicated before I think at year end, the overall portfolio of aircraft that we've targeted for sale did not have a material impact on Air's overall P&L. There has been this additional boost on the depreciation side because under GAAP, you have either shut off depreciation on the aircraft that are held for sale. You still continue to recognize the lease income. So that lease income will not go away when the aircraft are sold obviously, so that is why we break it out.

Okay and last question is on asset growth. You did have solid asset growth this quarter for the first time in a while. Why the pickup in asset growth in Rail I guess? And Specialty I think you have been accelerating, but in Rail you have expressed concern about the spike in pricing of new railcars, yet you had some pretty solid growth in the first quarter. Did your thoughts change on that issue?

Part of that, Bob, let me just -- there is a bit of an anomaly in that number. We did exercise during the first quarter a purchase option on railcars for about $150 million. Those were rail cars that we had leased in, so they were included in off-balance sheet assets, but the way the calculation works it's not dollar for dollar. So when you bring them in and put them on the balance sheet, you're bringing in the full $160 million amount where you may have carried less when viewing them as an off-balance balance sheet asset. So that was a purchase option that was coming due here at the end of the second quarter which we accelerated into an economic benefit for us to do that. But we did also on top of that invest another $70 million in rail equipment in both rail cars and locomotive, North America and Europe. And I will let Jim talk a little bit about what he's seeing in the investment environment.

Well I think, Bob, we continue to be very cautious about investments in this market where the asset prices are so high and the backlogs are pretty long. That being said, there have been a couple of opportunities that we've been able to take a vantage of to place some orders with near-term deliveries on very attractive assets that we deploy immediately with customers. It's also worth noting that we're starting to see more favorable investment conditions develop in Europe as that market is starting to get a point in a phase that investments there look pretty attractive for our European operating lease businesses. So that, while it was not material in the first quarter, I think our expectation is we will start seeing a little more activity there as we go through this year.

The other thing I would add, Bob, is we have talked about this before on the call about being very thoughtful about how we invest at the peak of the market here and we've taken advantage of the committed purchase program, we have done spot purchases where it made sense for good customers and where we can [on term], but Jim's team has also worked very hard on trying to get to those situations which are less competitive and try to generate business with existing customers and they're starting to see some excess success there as well.

Okay. And just a numbers question. What were the managed rail assets at the end of the year and the managed rail assets at the end of the first quarter?

You looking at total Bob?

Yes, total, on- an off-balance sheet combined.

Okay, total managed assets for rail were 4.3 billion -- [4320.5].

At the end of the first quarter?

That's correct.

And what were they at the end of the year?

I have the March 31 number here in front of me, we'll get the 12/31 number for you. March 31 number was 4059.0.

Okay, thank you.

John Hecht, JMP Securities.

Good morning guys, thanks for taking my questions. I guess going back a little bit into the rail investment data, you took delivery of about 785 trains or railcars during the quarter. How much of that was related to the -- (indiscernible) the pre-purchase or the contract purchases you engaged in a couple of years ago?

I think in the first quarter, it was about a couple hundred cars. One second and I'll have that for you. About 239 cars in the first quarter came from that, the balance of the cars were quite elsewhere.

So when you take that out, it looks like incrementally you actually may be slowing or being more cautious about your purchases. And I guess that would be reflective of some of your language about being more conservative going into this part of the cycle. So that's an obvious. Is there also some also degree of difficulty of just getting delivery of certain railcars in this environment, or is it really just a conservative approach to the marketplace?

Let me answer one part of that question and then Jim can comment on the backlog. Our railcar order program in railcar order activity, it can vary quarter to quarter, so I would not read too much into any one particular quarter. As we work on transactions and we work on fleet acquisitions, they don't spread evenly quarter to third quarter. So I would not read too much into that, but Jim can talk about the backlog.

I think if you look out over the orders we have placed in the into the future, we're looking at something like 4500 cars that we have on order into the future. Certainly we are cautious about the spot orders in the pricing environment we face now, but that being said, there are some opportunities that we find attractive in selected freight car types that fit our customer mix in particular. And there are also some opportunities in our locomotive business that we will continue to invest in used assets for that locomotive business that can be refurbished and placed with a variety of customers.

Okay. And with respect to the Specialty investment portfolio, the 40-ish million in growth this quarter, are those asset similar to assets this segment's held historically, or is there a different mix, maybe some new types of assets you might be finding attractive in this market?

No, actually, it would be what we have had success in historically. To give you an example, some of the Specialty investment outside of marine, it would be in mining equipment, particularly coal mining, barges, some ethanol equipment and even natural gas equipment. All of those industries, if they sound familiar it should because those are industries that rail serves. So industries we know very well, and equipment that we know very well.

Okay, and last question is, it looks like based on maybe what you guys illustrate as target ROAs in certain segments, there was a pretty good jump in the ROA and ROE at the segment level and obviously consolidated level as well. Given where leasing rates are going and asset prices and the fact that you're taking a somewhat cautious approach to this market, do you see that you're going to hit those targets returns earlier in the cycle here, and are you seeing any potential upside to those?

I think a lot of that depends on where Air is going here. We hope to get air to a nice double-digit return in the next year or so. And I talk about return on equity, which is more what we target here, if you're looking at 13 to 15% plus being a great target for GATX overall, yes, I think we can get there in the next year or so, given the trends we see. But a lot of that depends on Air. Last year, we returned about 3%. This year, we hope to at least double that and then some, next year, we hope to be in double-digits. A lot of that is due to those older aircraft that we're now in the process of selling. Taking those out of the fleet will really help the return in the air business, as will the fees that they are generating. So the answer is, rail is going along nicely. I think last year, they were at about a 16% return. Specialties return on equity is very high, almost immeasurable because it was not something that we actually [quoted] because they were shrinking their portfolio. We finally reversed that. But long-term, you still expect a 15% return on the specialty investment as well. So if you can get Air into double digits, that gets GATX overall at a 15% type return, which is a great target for us given the mix of our assets.

Alright, thank you very much.

[Logan Stevens], Morgan Keegan.

Actually it's Art. Just a couple of questions. Any thoughts as you are able to extend these leases out five years -- does that allow you to get a little bit more aggressive about what you're willing to pay for a railcar these days?

That's a great question. As we said in the past and Jim can expand on this, we have the committed purchase program, we're going to enjoy it at a very advanced cost relative to the rest of the market, relative to spot market anyway. On spot market purchases of railcars, if you are able to get the customer to commit to a very long-term lease at today's very high rates, then yes, you can start to justify the high cost of that car in today's market. And Jim?

I think that is exactly right and we're seeing some opportunities to do that. And certainly, particularly with our best customers, we're delighted to do that. That's a good investment opportunity. And would just reiterate too, Art, that I don't want people to mistake, as we talk about being cautious in our investing, an willingness towards that. Quite the opposite, we put $1 billion to work between '04 and '05 and we're looking for another real good year this year. And we just need to make sure that when we are doing that, we are buying in the spot market, we're recapturing the excess price at a premium through an extended lease term and we've been able to do that.

That's great and that's real helpful. Just so I am reading this press release right, you're extending out to 60 months from -- you were doing 40 months a year ago?

Yes, that is correct. It's an average obviously across a lot of cars, a lot off contracts, a lot of customers, but that is right. And that's very representative of the trend.

With that said, any thoughts on -- and I don't know how closely you've paid attention to this, but the situation at American Railcar is facing with their tank car facility being shut down for I don't know it looks like four to five months, is that going to impact any deliveries that you're expecting to get?

No, we had no cars that were scheduled for delivery from that facility. We are aware of that and certainly have talked to ARI. They're somebody we obviously stay in very close contact with. Honestly, I don't think that presents much of an impact to GATX, other then there may be some customers that suffer a disruption. And to the extent that we can as assist in the interim with some cars out of -- existing cars out of our fleet, we're certainly happy to try to do that.

That is helpful. And finally, I know this is a question that it's difficult to answer, but can you gave us any sense of kind of what the lease renewals, what the magnitude of the renewals are on the aircraft you've been renewing this year?

As we have indicated, consistent with what we talked about at the end of last year, we saw rates move up back to the pre-9/11 levels for our best aircraft, our best 737s and our best A320s. We have a number of those aircraft scheduled for renewal this year/last year. We have seen from the lows, anywhere between 10 to 20% pickup in some of those lease rates we built in the our portfolio scheduled renewals. We took delivery on a lot of those post-9/11 and we layered them in with leases that will roll over this year and next. So we're going to be able to capture some of that and we feel good about that. But I also reiterate too that in the Air business, while the increasing rates are going to help us, we need to go beyond that and that is what we're striving to do with building our management business and trying to build up a fee income because just improving rates while beneficial for us won't get us to the return levels that we really need.

Thanks, and actually, Bob, I have one last question. On the $0.06 benefit in the quarter, at the beginning, you had mentioned $0.20 for the year. Is that a number that could potentially change if in fact your ability to sell the aircraft you had written off goes quicker or takes a little bit longer than expected?

Excellent question, and you're dead on. The timing of those sales will potentially adjust that number and we'll continue to break that out for you. But whether they occur later or sooner will definitely have an impact on that number.

Great, thank you.

Jordan Hymowitz, [Phil] Financial.

Congratulations on a very good quarter. A bunch of the diverse questions please. First of all on the asset remarketing income, the Specialty was 19.7., but you also had 6 million in Rail. Do you think with steel prices the way they are and the rail lease prices up so much that that 6 million could be more of a run rate number than more of a hodgepodge number; it could even go up from there?

I would not use that as a run rate number, Jordan. These are pretty opportunistic sales. Some we knew of or know of well in advance. But our typical strategy in the rail business obviously is to buy and hold and lease for long-term. Occasionally, we will step into the market and take advantage of what we think is an opportunity. We did that in the first quarter. But I would not use that as a run rate.

What we experienced in those asset remarketing activities in Rail were in a couple of cases scheduled terminations at the end of the lease where the lessee enjoyed a fair market value purchase option they exercised, we enjoyed a gain. Or, a negotiated, in one case, the sale of some locomotives; in others, a couple of sales of freight cars. They were relatively small-scale, they just happened to represent meaningful gains.

Okay, but clearly, that number is going to be trending up as things come off at lower values and the prices of new stuff come on and your stuff markets every so often?

We don't have an awful lot of transactions with the fair market value purchase option at the sale, nor do we see any significant ones on the horizon.

As a general rule, most of the assets, our expectation is we will retain them in the fleet and we will continue to remarket into this environment as opposed to sell them.

Okay. Second on the Rail, the other-other costs and expenses was down a lot this quarter to 6.2 million. Is that a lower run rate trends, or is there anything one time in there?

There was an event in the fourth quarter which was associated with our initiative to repatriate cash from foreign locations, so there was -- actually, the fourth quarter number was abnormally high by about $5 million.

On the Air, which was the biggest improvement in profitability, your return on managed assets is up to 2.7 at this point. It seems like when I talked to CIT and others that the air return on managed assets is between 3 and 3.5% on the margin. Do you think they will trend to that level as well?

That's hard for us to comment on that, Jordan, because I don't know exactly how they calculate that -- their number. I'm certain it's not apples-to-apples with the way we break it out. But we look at return on assets, but we look primarily at return on equity and the numbers we've put out as you can see through our K and year-end, where the ROE was for Air, even on a normalized basis in 2005, is substantially below where we need to get it to and we're striving to get that up into the double-digit range.

Okay. And final question is -- you guys own four nuclear power plants that mature in 2016 that I estimate is worth between [$4 and $4.50] a share in 2016 and a reasonable discount rate is about [$2.50] today. Is there any way that if you wanted to monetize that, you could sell that today, or do you have to hold until then given that nuclear power plants are increasing in demand and the prices are only going up?

Just one thing I want to clarify on that topic, Jordan, is that we do not own those nuclear power facilities. Those are in our managed portfolio. We manage the leases for the owner of those assets. So our ability to control when that gain may occur is nil. That is entirely up to the owner of asset and their negotiation with the operator of the nuclear power facilities. Yes, we do have potential for upside there in terms of residual share income that would appear in the asset remarketing line. Again, we do not own those facilities and do not control when that may occur.

Super, that clarifies things. Thank you very much.

James [Owen], [Seacliff].

Thanks for taking my questions, I have just a few. If you could tell us in terms of the lease renewals, I'm somewhat surprised that the lease renewal rates on railcars are as low as they are. Could you tell us why they haven't gone up more due to the fact that we have this increase in commodity prices over the last couple of years?

One thing I will just clarify there is we're not talking about a change in nominal lease rates. That would be different and that's a number that we don't publish externally. So, again, this is a change in renewal rate, so the difference between the prior lease rate, the lease that it's coming off of and the new rate that is going on with the same customer, and I will just kind of let Jim talk about trends that he is seeing there.

I would say in our experiences indicative of a company that has a very diversified fleet across many commodities, many customers, a lot of different industries, in a cyclical market that is doing pretty well right now, and a market that is supplied by number of competitors. So you have market forces at work that cause these rates to land where they are. We participate in the full-service lease market of these assets. We wrap extensive services around the assets. And as I mentioned with one of the earlier callers, our fleet experiences a volatility pattern that is probably a little different than some others in the industry based on its composition, the customer characteristics and the nature of the uses our customers put these assets to work at. So I would just offer that. That being said, we experienced a 14% increase which in our experiences is pretty good.

Could you give us an idea of the magnitude of the rate increases, what they would have been if you were not increasing the average tenor of new leases from 40 to 60 months?

That's not something that we break out or would be discussing externally. We go through a lot of analysis obviously internally in balancing rate and term, and we feel very good about the rate increases we're getting at the terms we're getting. But I would not break that number out.

Would it be fair to say that if you were renewing your rates at the same tenor, they would be significantly higher than that 14%?

You know, honestly, I don't think so. We see that curve pretty flat right now in this market. Again, it's driven by competitive behavior. I think other lessors are behaving in much the same way. And quite frankly, the customers are reacting in a way, a pattern that would suggest that you have a pretty flat curve right now. It's part of the reason we find it a particularly attractive time to be extending term.

It seems that inflation over the last three to four years, that 40-month period on which the leases are rolling off, has been, I don't know, 8, 9%. So 14% is only somewhat a relatively small amount overinflation during a time when commodity prices have really spiked. Why doesn't that flow through to faster rate increases on leases?

I think one of the things you have to be aware of is that our customers have been with us for an extremely long time. This is a very competitive market and you've probably seen our breakout of our competitors on the tank car side on our website. There is really only a handful of competitors in this market. And so the ability to kind of push through some of those lumpy type increases is very limited by the fact that they have other alternatives and they have been with us for years. And they know the markets as well as we do and they know what they can expect. And so there is some of that going on. And I think it's worth reiterating again what Jim has said, is the fact that these are -- we are primarily tank cars. 63% of our fleet is in tanks cars, and that is a much less volatile market than, say, something like a grain car.

When the market declined substantially a few years ago, one of the benefits of our fleet is, we didn't see in the aggregate 20 to 30% declines in lease rates. It was at its worst, probably in the mid-teens.

So in other words, once rates start to go up as they are now, the rate increases tend to be smaller in magnitude, but they continue for a longer period of time?

Compared to somebody's else's fleet who's in a more volatile car type, (MULTIPLE SPEAKERS)

That's probably a true statement.

Last question I have is, as oil prices continue to move up or if they move up, at what price and is it already taking place is there a trade-off from in demand from trucking to rail, and how does that effect your business?

I think overall, rail is a pretty fuel efficient way to move freight, and so increases in fuel prices over the last several years have actually been very good for the rail industry overall. You see gross ton miles, carloadings, all of those are up over the last, call it two or three years, and pretty significant increases. In the long run, I think that is good for the industry, and what is good for the rail industry in the long run is good for GATX. And so I think we're pretty bullish on that. There are some natural caps on what can be done, given the infrastructure in North America and the rate at which capacity is being consumed by that freight. And I think if you look at some of the railroad reporting, they're running at a pretty high percentage of their overall network capacity right now.

But it can go higher, correct?

Yes, absolutely. But, it gets to, they're making some trade-ups with their customers with respect to pricing and really how they allocate that capacity. We have to be thoughtful because those customers at the railroads are also our customers and so we want to make sure we are thoughtful in the long run thinking about which assets to invest in and how those are deployed on leases that in the long run, those assets are the ones that remain efficient to move the freight. And so that, it's with that eye that we think about our business and investments and divestitures, and all of that stuff and just the long run management of these very long-lived assets.

Very good. I appreciate the time.

(Operator Instructions). Bob Napoli, Piper Jaffray.

Thank you. In the Air business, the fee income has ramped up pretty nicely, 4.5 million, and this quarter, up from a run rate of maybe 2 million a year ago. If you could comment on the outlook for the growth in fee income and air and some of the things you're working on to build that, and kind of what your hopes are to get for that business.

Sure, Bob, and I will just give you a benchmark. For the full year last year, we had about -- just shy of $13 million in fee income in Air, so we are really kind of looking at that as our starting point to try to build from that number. And Brian can talk a little bit more about some of the objectives underway.

There's a lot of ways that they've generated fees. As you know, we manage our traditional partnerships and we manage securitizations as you know. More and more recently, we've managed aircraft that are leased to troubled carriers, as well as selling aircraft that were resident and troubled carriers, and that's some of the feedback you saw in the first quarter. Other initiative that we're working on, for instance, you know, we will underwrite aircraft. We're looking at opportunity to underwrite aircraft that's on order to an airline that we have a lot of faith in. And then when we use that to generate managed business for somebody that's new to the business, there's a lot of ways we're trying to generate these fees. It's a little hard -- I would say so far, most of this fee generation has been one transactional than contractual. So it's a little hard to say, that's our run rate. But there's a lot of different initiatives going on [about] to generate these fees, and it was up 35% last year, it will be up again this year, and it's a real key to getting us to where we need to be from a [turn] perspective.

What percentage of that is not transaction-oriented, is like kind of a run rate?

It was, in the quarter, about 2.5 I would say of the total fee income was more of the run rate nature, and about 2 million pickup in transaction-oriented management income.

Okay. Of the 30.8 million in lease revenue in Air, how much of that came from the aircraft that have been written off or written down that are for sale?

We haven't broken that number out specifically.

Is it fair to say that, I mean (MULTIPLE SPEAKERS)

The majority of the aircraft we have for sale, Bob, as you know, it's in the 10-K, there's 36 aircraft for sale in the K noted. 13 of those are wholly-owned, the majority are in joint venture aircraft.

It seems like we've confused things -- I mean, this is GAAP accounting where you have to halt depreciation on these aircraft that are held for sale. The easiest way to look at this is once these aircraft have cleared our fleet, our earnings are not going to go down very much, if at all. The fact is, that is why we're selling these aircraft. We did not see them recovering to a point that it made sense to hold them anymore versus their market value. When they're gone, and that's why the return is going to go up, they did not provide a lot of earnings to begin with. So just look at it that way. They're not earning a lot as we speak.

So the 17.7 million of pre-tax income that you have, if you had backed out the depreciation that you had to halt, which is the $0.06 per share, that gets you to a reasonable run rate for Air?

That is a fair way --.

Subject to the lumpiness possibly in the fee income?

Yes.

And just note that $0.06 is an after-tax number.

Is an after-tax, right.

I just wanted to -- before you ask your next question, I just wanted to get back to you on that, [owned] the total managed portfolio at Rail at the end of '05, it is 4.197 billion, so 4.197 versus 4.320.

At the end of the first quarter?

Yes.

The growth in Specialty that you had, you had -- you grew 7% quarter-over-quarter. Is there anything unusual in there, and which programs, what is growing in Specialty?

As I said, we're growing Marine, we're growing more the industrial equipment as I talked about earlier in the call. I said we've done barges, we've done mining equipment, we've done ethanol production (MULTIPLE SPEAKERS) things like that.

On our presentation, there's three pie slices that represent the growing part of the portfolio. The first is Marine, and then the other two are production equipment and then the mining, construction and energy-related equipment.

Which areas showed the most growth I guess? What is growing the fastest out of that group?

In the first quarter, the largest growth was in production, but is that indicative of future growth? It's going to be in all three of those pies.

I think somebody asked a question on this, on pricing in Air, and you really didn't give -- I don't think you can give some kind of better feel for the increase in lease and pricing on -- than you did earlier? I would just like a little bit better clarity.

I would still go with the same range, Bob, of in that -- rolling over from leases from a number of years ago in that 10 to 20% range.

In air?

Yes.

Okay, thank you.

[Logan Stevens], Morgan Keegan.

This is Art again. Just kind of a follow-up. I want to make sure I understand your guidance statement for this year. At the beginning of the year, you said you were going to do 260 to 270, and that includes the $0.20 of benefit from the depreciation expense. As you stand here today, does that also include the $0.17 remarketing gain in the first with in the Specialty portfolio, or would you be excluding that?

No, that's included Art. We look at, going into the year, we look at transactions likelihood, probability (indiscernible), so at some level, that gain was already in there.

Okay, thank you.

(Operator Instructions). [Dan Clerk], [Sea Trust] Capital.

Good morning, guys, good quarter. Can you just talk about possible exposure to shipping ethanol?

I can give you a little feel for GATX's fleet that is deployed in that asset, if that is helpful?

Sure. That would be great.

The ethanol happens to move in something that's -- it's a 30,000 gallon general-purpose tank car. GATX has about, right now if you drew the line in the fleet, we have about 5250 of those in our fleet that represents roughly 5% of our North American car fleet overall. Of those, about 1700 are currently in ethanol service. So they are in that business. We expect that to grow with car orders that are currently placed, so I would expect we'll be pretty close to 2000 cars in ethanol by the end of the year. That car type is used for other light, low-density petroleum products, primarily including diesel fuel, jet fuel, gasoline, stuff like that. And so we have a lot of them, they're deployed with our standard core of customers. There is some ability as leases expire and opportunities exist to move existing cars into this service. That is a very transferable car type and it can move easily into the different commodities. So you have some balance there that while we are very interested in participating actively and have been an active and early participant in the ethanol market, we also aren't putting every single egg we have in that basket right now. I think we are real interested in playing with the premium producers in that area, the very large players, the most stable players in the ethanol business. So it's an area of a lot of attention, it's certainly a very strong market right now. But it's one also that we balance with the other objectives of the business overall.

Great. I was off the call for a little bit earlier, I don't know if you already talked about it, but do you have any insights on the railcar production backlog? Is there seasonality in that?

Well there is lumpiness in it always, and you have some people that come and go that come in with very big lumps, including TTX on intermodal equipment. That being said, it's at a very high level and the backlog currently extends well into 2008 for certain car types. That's a feature of a cyclical business that was not all that long ago that total production in North America was 17,000 cars. So I think you have to -- it helps to take a long run perspective when you think about this business and you think about investment and balance. And I would say historically, many players in North America have not been particularly good at balancing long-run needs with short-run enthusiasm.

Okay, great. Thanks for the answers.

Sure.

At this time, there are no further questions.

Thank you, Sarah, and thanks everyone for listening in. I will be available all afternoon, as well as Jim and Bob and Brian. So give us a call if you have any additional follow-ups.

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