GATX Corp (GATX) 2006 Q2 法說會逐字稿

Good morning, my name is Kelly and I will be your conference operator today. At this time I would like to welcome everyone to the GATX Second Quarter Earnings Conference call. [OPERATORS INSTRUCTIONS] Thank you Miss Johnson, you may begin your conference.

Thank you Kelly and good morning everyone. Thanks for listening in to our second quarter conference call. With me today are Brian Kenney, President and CEO of GATX Corporation and Bob Lyons, VP and CFO. I hope you all have had an opportunity to review our press release. I’ll provide just a brief overview of the numbers and then we’ll open up to your questions.

But 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. For a discussion of these factors, I refer you to the 2005 Form 10-K-A filing.

Now let’s review the numbers. Today we reported net income of 40.3 million or $0.70 per diluted share for the second quarter 2006. These results include three items, which are outlined in the press release. In the second quarter of 2005, we reported net income from continuing operations of 34.5 million or $0.62 per diluted share, which included expenses related to our liability management. Year to date we reported net income of 88.2 million or $1.53 per diluted share compared to 62.9 million or $1.14 per diluted share in the same period 2005. I’d also point you to our release or summary of key items set in these figures.

Our second quarter and first half results of 2006 reflect continued strong markets and Rail related amplifies that strength. Operationally, utilization remained at 99% and we continue to have great success in renewing Rail cars with existing customers. The renewal lease rates on a basket of our most common car type improved 15% over the expiring rates and lease terms were extended to an average of 69 months, a move that is expected to temper future volatility in Rails financial results. Rail’s 2006 second quarter net income excluding the Canadian tax benefit outlined in the press release improved more then 27% over 2005 and we were able to add more than 1200 cars to the fleet. We also took advantage of current high asset prices taking the opportunity to improve the quality of the overall fleet by selectively selling assets during this quarter achieving remarketing gains in the process.

Air has made good progress in the sale of aircraft previously targeted for sale, selling or signing 25 of the 36 aircraft letters in intent and selling the Pembroke portfolio to management in mid-July. Part of that progress is reflected in the asset impairment loss of 11.7 million in the quarter, which is expected to be more then recovered as the final asset sales occur through the reversal of maintenance reserves and gains on sale. Apart from that affects of aircraft previously targeted for sale Air’s financial results reflect higher fees, nearly double year to date over 2005 and lower SG&A expenses. And you can see more details on our Air portfolio and the quarterly presentation available on our website.

Specialty continue to grow lease income in each of 2005 and 2006 year to date, had exceptionally strong remarketing income. Specialties 2006 results also reflect as expected a slow down in joint venture income from the Marine portfolio down from the record levels in 2005 but at levels that continue to generate an outstanding return. Our Great Lakes shipping operation, ASC, completed the acquisition of six vessels from Oglebay Norton in early June. All the vessels have been re-flagged and are in full operation in our fleet. ASC continues to see robust demand in its market as well.

Turning to guidance, we increased our full year earnings outlook. Our previous expectations were $2.60 to $2.70, which included $0.20 of benefits from tax items and aircraft previously targeted for sale. We now expect earnings of $3.10 to $3.20 per diluted share on a GAAP basis. That estimate included approximately $0.40 per diluted share from those tax and Air related benefits I mentioned earlier. The primary drivers behind our improved operational outlook are the strong performance at Rail and Specialty year to date and an expectation that the market environment will remain favorable.

And with that brief overview, I would like to turn it over to you for your questions. Kelly.

[OPERATOR INSTRUCTIONS] We’ll pause for just a moment to compile the Q&A roster. You’re first question comes from the line of Bob Napoli with Piper Jaffray.

Morning, thank you. Like what you guys are doing here, although the market isn’t reacting the way you might think it would. Couple of questions, first of all, I guess on the, just to try to understand the guidance, essentially the increase of the guidance from core earnings, would you characterize that as a $0.30 increase in the guidance from core earnings? You had, it seems to be and that includes the $0.11 of impairment charge? Would that be the way --

It would just be $0.30, Bob, in core operations if you look at it that way. And that’s really, this is Bob Lyons by the way, that’s really driven equally by Rail and Specialty, both doing significantly better then we had anticipated coming into the year.

Okay.

Primarily, I mean there’s the number of items related to that, remarketing income is up substantially, we’re taking advantage of high asset prices in the market place for some selective portfolio sales and so that’s having a big and positive affect on our net income for the year.

And just to be clear, Bob, that $0.11 on the Air impairments is in the $0.40.

Okay. Okay, that makes sense.

It’s related to those Air assets targeted for sale.

Okay. So $0.30 in the core is the way, I had that right. And the lease income, the Air sector, two things, the Air sector lease income was up a lot more then I thought it would be, like 7% quarter-over-quarter, but the Rail lease income was up less then I thought it would be, but it looks like your pricing came in as good or better then I thought it would, so I don’t know, just am I missing anything? What am I missing on the lease income lines? Did you have much better then expected price increases in Rail or was there something non-recurring in the last quarters’ numbers and what’s going on with the, as we try to analyze the lease income for Rail in the lease margins, if you will?

Well, lease income, this is Brian, Bob, lease income is up substantially in Rail year over year, we are realizing 15% type of price increases, rate increases over a couple of years ago. In Air, a lot of that increase in the lease line is due to interest rates being higher and that’s offset down in the ownership cost line by interest, expense getting higher because those are floating rate leases, so there’s a little bit of that going on. And in Speciality we’re increasing lease income because we’re starting to invest a little more heavily in some of our traditional markets.

Okay. Now with the pricing, I was kind of surprised, your out almost 6 years on your average lease term for Rail, this quarter, which, that's pretty impressive, and your still getting the 15% price increase. If you were going at a shorter-lease term, what are you giving up? What is the give and take for the longer-lease term on the lease rates?

Well, as Jim was on the call last time and as he said, we're not really giving up a whole lot, that there are some car types where you are giving up a little bit of rate, but in general, because of the tight supply in the markets, your not giving up substantial, it’s a relatively flat curve to go out, and in a lot of cases, people have no choice, but its not like we're not giving up some, in certain car types, but in general, I mean you see the 15% increases, so not a lot.

Okay, and then just my last question before I open up for others is just, what is your feeling about the economy and what you’re seeing in the economy and the demand as you see it over the next several quarters and in regards to that, and if the economy holds up, do you still have these types of price improvements built in in Air and Rail through 2007?

Okay, well I can't predict when the economic cycle is going to turn down, or start to turn down any better than all the economists that publish, but I can tell you what’s going on in the business and what we monitor to see where things may be headed. It certainly does feel, internally, when you look at a 100% utilization in Air and near 100% utilization in Rail and 15% rate increases and strong re-marketing gains, and continued very strong Marine market that we'd be approaching the peak. And even the qualitative signs are out there that we may be approaching the peak with there’s some new interests into our businesses that haven't been in before and you see people that have been in the business starting to exit through IPO or at least take some money off the table. So all those signs are there saying, geez we must be getting close to the peak.

But at the same time I can argue the other way. For instance, Rail lease rates, although they’re up substantially as you know, and we've reported and discussed, they are still not up to the degree that new car prices have increased over the last couple years, and in the long run those things should be in equilibrium. So you can make an argument that lease rates have quite a runway left here. So you can drive yourself crazy trying to figure that out. All I could tell you is what we are seeing in our business.

So there’s broad economic indicators that suggest there’s some weakness in the economy, but those have multi-layered affects on our business. Fuel prices, while they affect the chemical customers, and they are, if you look at their earnings that have been announced lately. So far they’ve been reluctant to return cars, because the car supply is so tight, and you see that in the manufacturing backlog at the railcar manufacturers.

So it’s multi-layered affects, high natural gas prices is good for the coal market, so it’s hard to look at general economic indicators and say, oh Bob, look out, it is coming into our fleet. So we tend to look at things closer to our business. And you see us report on that stuff, railcar loadings, chemical shipment, manufacturers backlog, it makes us continue to be strong and if you look even closer to our business and even into down to the different car types of our fleet, we really don't see any weakness yet, so once again it's on a car type by car type basis, but if you look at renewals success and what we just talked about, our ability to extend term, things are still very strong and we don't see anything yet that directly affects our business.

Having said that, we're still a cyclical company, in cyclical markets and extended downturn would eventually be reflected in our earnings, but we still have the insulation of being a term business as well. So to sum it all up, we're not seeing any weaknesses that would suggest a trend that things are to come down here in the short-term, so yes, I would say, you could project these lease rate increases for the rest of 2006 and into 2007.

Bob, this is Bob Lyons, the other point I would add too, you also questioned about Air, and we do have 15 aircraft up for renewal next year, a good number of those are the 737-800s, and A320-200s that are in the newer vintage that we layered in for renewal in 2007 by design, so we feel we’ll do well on those turn overs in 2007.

Your next question comes from the line of K.C. Ambrecht with Millennium.

Hi, thank you very much for taking my question. Think I’m actually quoting, I’m surprised how the stocks been acting as of late. Just a question then, can you kind of address how you think about capital utilization? The Company continues to de-leverage, I was just wondering if you thought about increasing or executing a buy back at all?

We get questioned quite often about whether a dividend increase or a share re-purchase makes sense and as we've always said we didn't increase the dividend back in January, February of this year and on a share re-purchased front, we would consider anything in the context of one of our overall goals, which is to increase our credit rating. So, do we consider those things, yes we do, we haven't actually executed anything obviously, but to the extent it would make sense and the overall plan of moving the ratings up, that would come into consideration. As for where we sit on the leverage scale today, it is down from where we have been historically, consistent with where we have been in the last year, but down substantially from a number of years ago, and we think the portfolio of acids is far more stable than it was a number of years ago. But, one of the things we're also, keenly focused on is making sure that we maintain that flexibility to invest aggressively when the opportunity presents itself. Acid prices are very high in today's market, we are investing selectively, but our investment profile really should be somewhat counter cyclical to the acid market and so we want to maintain that flexibility and some of that dry powder to invest aggressively when the acid prices makes the most sense.

Okay. And, tell me if I'm mistaken, but how I think about the Company is, just thinking about a cycle, I still from your numbers and from the improvement and the extension, the improvement of the Rail rates and the extension of the terms, it still seems like the Company is on the upswing in this cycle, is that just how the economy's laying out, is that fair?

We certainly have a number of -- a lot of assets in the portfolio that haven't turned yet, haven't renewed yet in this better environment. If we look at Rail, we see cars that’ll be rolling over in the balance of this year and into 2007. Many of those leases were put on at a very difficult time, and we haven't had the opportunity yet to take the bite at that apple and renew those in this better environment, and we will. So we still feel that the momentum is on our side.

Yes, we said that in the call before, that even if lease rates have capped out, which we haven't seen yet, we’d still be realizing revenue increases for the point that Bob just made.

Okay. Great. Thank you very much.

Your next question comes from the line of John [Hesch] with JP Morgan Securities.

Thank you, John Hecht with JMP. Could you guys give me the details on the Canadian statutory tax rate and how many, obviously you're going get the benefits the remaining part of this year, is that something we should see extended into next year as well?

The tax rate, John, that was enacted will actually be rolled in over the course of the coming four years. The statutory overall Canadian statutory tax rate went from 22% to 19%. We also do quite a bit in Saskatchewan where they had their own tax rate reduction from 17% down to 12 and those, well the actual rates will be rolled in over the course of the next few years. So the impact looking out right now on our bottom line, just from the tax rate change won’t be material. What flips and what you saw this quarter was actually the deferred tax being affected at the lower tax rate. That’s a one-time event. The 5.9 million.

Okay. What about the, if you can give me some color on the $0.12 charge for, associated with the liability management?

Yes, last year in 2005, you talking about?

Oh was that what, oh yes, that was. Sorry it was last year.

That was a 2005 event when we went out, we had a substantial amount of debt that renewed in December of 2006 and we had a bit of a maturity bubble and so we address that through a number of mechanisms and in 2005 we kind of took the last step in that process by tendering for about I think it was $185 or $188 million of that debt and to remove that maturity bubble. So the cost associated with that with the 7 million after tax $0.12.

Okay. And looking at the Rail division, you guys had the stroke we’ve talked about, ROE’s, or at least peak ROE’s settling in the low 20s, 20% range. It looks like this quarter you’ve, if my numbers are right, you entered that zone but you still have a large component of leases that are remaining to turn the table rates and you’ve been very careful in investing. Are we to think that potentially our lease could bust that low-20 zone and actually get to the mid-20 zone as the business improves?

Yes, I wouldn’t want to sit here today, John and make a prediction on that, but clearly the business is doing well. Part of that strength in the returns this year also is driven by the fact that we’ve taken advantage of some of the re-marketing opportunities that we’ve seen. And so I’m not going to draw a line in the sand on an exact number but it’s a very strong environment for us right now.

Yes, I’d add that yes it could but that depends on how we invest. And to your point, actually to your questions, if we invest heavily you won’t see that kind of increase if you just sat on the existing fleet and watched lease rating [inclusions] roll through, for sure it could cap out. But from my perspective I’d still like to invest and invest heavily especially if the market turns down. So it’s a balance, I’m pretty happy with return with the way it is and I certainly would like to balance with investment. And a lot of that investment depends on whether you’re investing in new cars or older cars, what the maintenance profile is and all that. But to answer your question in isolation, if you just looked at an existing group of cars and watch lease rates go up, sure that’s possible, but that’s unlikely to happen.

Okay and then two quick questions related to the, two final questions related to the Rail portfolio. First is of the orders you took this quarter, how many were related to the forward agreement you made, I believe, in 2002? And the second question, is you referred to a large component of leases that need to be turned, can you give us what specific percentage of your portfolio still remains to be turned?

Sure, well under the committed purchase program, we take delivery of about, of 1500 cars a year total, that’s the program that we put in place a number of years ago. And we still have, so we have roughly half of that 1500 to go this year and then the full 1500 next year and then that program expires in early 2008. And we’re taking delivery of those cars at a very cost advantage position versus anybody else who’s buying in the spot market today. So it’s a nice benefit for us and we’re seeing the effects of that, putting those cars out at very nice rates and the returns on those are excellent.

And in terms of the portfolio turn, we turn about 25,000 cars a year roughly. And that would be the same in 2007 and a good number of those cars would have been put on lease back when the environment was really at it’s most challenging. So we’ll see -- we got about half of that left to go this year and about the full amount, 25,000 or so, next year in 2007.

Okay that gives me enough information. Thanks very much.

You’re next question comes from Art Hatfield with Morgan Keegan.

Morning everybody. I know, Brian, that you already touched on this, but I’m going to ask you again and hopefully the point will get across to everybody out there, but a lot of feedback that we hear is if you look at your business and particularly the core Rail business, you’re operating at these extremely high utilization levels and you’re getting this great renewal on your leases but yet at this point in time you’re not aggressively investing in new equipment as much as you could be. I guess the question is, how do we look at growth going forward and at what point given the fact that you’re able to get these extended lease terms of upwards of six years does it make sense at some point, even given current prices of cars, to start to invest again?

Well I do think people need to listen a little more carefully because we say we’re being disciplined but at the same time we’ve invested over $900 million in Rail over the last two years. This year I would be surprised right now if we don’t do even a little better then last year. So we’re investing heavily in Rail, it’s just not -- it’s just still with a very disciplined attitude about where spot price is on certain car types and where lease rates need to go. And a lot of these investments right now for certain car types, you’d have to make the assumption that rates start where they are today and go up for 30 years. And as I said earlier in the call, we’re in a cyclical business and that’s not going to happen. So we’re tying to be a little more disciplined and then when we do invest in the spot market for instance, it works a lot better if we can extend the initial lease out 10, 15 years or so at a very higher rate in today’s market to justify that investment. And we’re doing some of that. We’re doing some of that on freight cars for instance. We’ll also protect our position with certain customers in the spot market. So there’s a lot of instances we’ll invest in the spot market but it all has to make economic sense. And the only point I’d make is like I said we didn’t stop investing in Rail, we’ve invested $900 million over the last two years.

And speaking of investment this year, I’m pretty pleased with the quality of our investment in Rail and especially the investment we’re starting to see in Europe. They’ve identified some very attractive investment in the petroleum market and the LPG market and it’s probably the first significant growth we’ve seen over there in a few years. So I’m actually pretty happy with the amount and quality of our investment in Rail right now. When it turns down, would we like to turn it up, absolutely.

The point that Bob made earlier is pretty important for this Company, which was, when we went to the last downturn, we were at our peak in leverage of almost 6 to 1. You know I’d like to be a lot lower as we enter the next one. That’s the strategy you see us taking.

Right, that's helpful. I just got a few kind of financial questions, in the other segment in the quarter, you had leasing come at 0.1 million, that’s the first time that that’s popped up. Can you talk about what that is and what that may look like going forward?

Sure. That relates to a vessel at AFC that’s out on a charter lease, so we would expect to see a small amount of lease income in Other going forward.

All right. Secondly, in the Rail segment, operating lease expense was down about $5 million versus Q1 of 2006, is that converting to owned assets?

Exactly. That was another one of the operating leases that we had, as that we had an early opportunity to take that out, and so you'll see that depreciation and interest expense goes up and so all three of those are related to taking out that synthetic, the operating lease in the second quarter. We had another operating lease that we took out in the first quarter, so now we've completed both of those.

And then, finally, the Canadian tax benefit, how did that fall out by segment?

That's all related to Rail.

Okay, its all in Rail?

Yes.

Yes. You see that reflected in the numbers.

Yes. That’s what we thought, we just wanted to confirm that. Great. That’s all I have, thank you.

Your next question comes from Jordan Hymowitz with Philadelphia Financial.

Hey guys, couple questions. One, what is the tax rate going forward or another way to look at it is, what is the net reduction from the Canadian tax reduction going forward, is it a half a percent or is it a percent, or --?

The full Canadian statutory tax rate, Jordan, I just mentioned a minute ago, will go from 22 to 19%.

Right, so what does it do to your overall tax rate as a Company?

It won't have a material effect on our overall tax rate going forward.

Okay, so not even like a half a percent or a percent or anything?

It's minor.

Okay, Second is, you added a couple new ships to your Great Lakes fleet in the quarter, were they fully in during the quarter or they were only partially in?

They came in for about 20 days.

Okay, and the next question is, how much would they have added to the quarter were they in the entire quarter?

Well I can tell you what they added in terms of–

Twenty days, do it that way.

Yes in terms of revenue, it was about 6 million, total.

In 20 days, and what type of margin does that run at?

We don't break that out specifically, Jordan, but the expense line would have been, given the integration costs and everything else, would have been in the similar vein, not a substantial amount, some spread from the new investment, but --

But that have fully hit next quarter?

We'll see the benefit and we are, I am surprised, I would have hoped we would have had a question or two about American Steam Ship during the call, because, that acquisition that we made while American Steam Ship for years has kind have been a little bit off the radar screen at GATX overall, that acquisition that we made fits the profile of what GATX wants to do long term, which was very long lived assets. We were essentially the operator of those vessels through a pooling agreement over the course of the last 4 years, so nobody knows those vessels better than we do. We have a market leading position on the Lake. The integration was quite simple, maybe the folks at AFC might not agree with that, but it was very straight forward, bringing six additional vessels into the fleet and we got them at a very attractive price. That really fits the profile of selective investment in a hot asset market.

When is the next time that S&P or Moody’s gives you a, I know you’re awaiting an upgrade watch list.

From Moody’s that’s correct. From S&P they have already upgraded us.

Right. Right

This year on the day I believe we did our fourth quarter earnings, so, Moody’s has us on Positive Outlook and we've been on that for coming up on about a year right now, and I think they have been pretty clear about what their looking for and continued execution on the plan that we've laid out, execution of the sale of the targeted aircraft. We're making very good progress on that.

And final question, for us long-term share holders any update on more interest in nuclear power plant residuals or anything in that regard?

Well I am glad you’re a long-term share holder, Jordan, because as we have noted before, we do have the residual interest in some facilities, but it is fairly well out there in the time spectrum, so when it hits --

We hope to be talking to you when it hits.

-- we'll be talking to you when that occurs.

[OPERATORS INSTRUCTION]. Your next question comes from Barry Haimes with Sage Asset Management.

Had a question, a couple questions just related to tank cars. First could you just remind me what percent of the Rail fleet is tank cars versus other car types? And then secondly, I wonder if you could just talk a little bit about the tank car market, given on the one hand there is some increased demand from ethanol with more plants being built over the next year or two, you have the American Rail Car Facility out for a while, and I guess there is some scrappage rigs coming up, so I am just kind of wondering if, how that particular market feels to you in terms of rates and so on? Thanks.

Just to give you an idea that tank cars make up 65% of our fleet, but you have to be careful when you think about tank cars, because despite the fact that we have put those all together, and maybe from laymen's perspective, they may look very similar or even the same, there is about 60 different types of tank cars and ethanol itself is carried in a 30,000 gallon tank car which is actually a very large tank car, it is larger than what you would consider a typical tank car. It's a car that is very adaptable to carrying other commodities as well, and we currently have about 5,200 of those 30,000 gallon cars in our fleet, a little less than half of those are currently in ethanol service and maybe I can let Brian talk a little bit more to the sort of tank car market.

Yes, the tank car market as I said earlier remains very strong in terms of anything that we are looking at. But its interesting that you ask that in connection with ethanol, because we talk about tank car backlogs being very strong, and that's had a great influence on our rates and our ability to extend term because of the inability of customers to get cars elsewhere. The interesting part about that tank car backlog, which has increased is while they don't give us exact statistics on it, we believe that anywhere from 60 to 80% of the current backlog at the manufacturers is actually ethanol. So, people are being very aggressive on the ethanol orders and if there’s any risk in the tank car market right now, it would probably be with that commodity. Once again with the price of oil at $74 a barrel, it doesn’t seem like there is much risk, but most of that backlog does appear to be ethanol.

Your next question comes from the line of Vincent Daniel with FrontPoint.

Good morning guys, my questions have been answered, I just wanted to personally thank Jordan for the questions that he asked. Thank you.

Thank you.

There are no further questions at this time.

Okay, thanks everyone for joining us and we’ll be available this afternoon if you have any additional questions.

Thank you for participating in today’s conference. You may now disconnect.