GATX Corp (GATX) 2007 Q2 法說會逐字稿

Good morning. My name is Holly, and I will be your conference operator today. At this time, I would like to welcome everyone to the second quarter earnings call. [OPERATOR INSTRUCTIONS.]

I would now like to turn the call over to Ms.Rhonda Johnson. Ma'am, you may begin.

Thank you, Holly, and good morning everyone. Thanks for listening in on our second quarter conference call. With me today are Brian Kenney, President and CEO of GATX Corporation, and Bob Lyons, Senior Vice President and Chief Financial Officer. I hope you all have had the opportunity to review our press release. I'll provide a brief overview, and then we'll open up for questions.

But before we begin, I'd like to remind you that any forward-looking statements made on this call represent 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 are outside the control of the Company, and for a discussion of these factors, I refer you to the 2006 Form 10-K filing.

Today we reported net income from continuing operations of $43.5 million or $0.79 per diluted share for the second quarter 2007. In the second quarter of 2006, we reported net income from continuing operations of $41 million or $0.71 per diluted share, which included a $5.9 million or $0.10 per diluted share benefit from a statutory reduction in tax rates in Canada.

Year-to-date we reported net income from continuing operations of $80.5 million or $1.44 per diluted share compared to $79.1 million or $1.38 per diluted share in the same period in 2006. The 2006 year-to-date results also include the benefit from the change in Canadian tax rates. At the end of June, we had completed approximately $190 million of the $300 million share repurchase program announced in January buying back 4 million shares.

As Brian noted in our press release, the market for tank cars serving the petroleum and chemical sectors, which includes the fertilizer markets, remains robust. Some of the areas we have highlighted in recent quarters, in particular the market for construction related railcars, have shown continued softness. Coal cars remain in near-term oversupply as the market slowly absorbs cars purchased on spec by other leasing companies. Similarly, we saw an oversupply situation developed in ethanol related railcars this quarter. These developments have little or no impact on GATX in the near term. Our utilization is still high at 98%, and we have had continued success renewing cars with customers, nor are they expected to impact our 2007 results in any material way, but we point these issues out because they are reflective of the things that we watch internally and will continue to watch carefully going forward.

The renewal lease rates on the basket of our most common car types improved 14% over the expiring rates and lease terms were extended to an average of 70 months. The renewal rate change in the second quarter was very healthy, but also an exceptionally high 19% increase achieved in each of the last three quarters.

Average expiring rates increased slightly making comps more difficult and while nominal lease rates generally remain high, there were signs of a flattening rate environment in certain car types. Asset prices and valuations remain high and we took advantage of the opportunity to improve the quality of the overall fleet by selectively selling assets during the quarter. We also purchased more than 1,200 attractive railcars for the fleet predominantly from the secondary markets and through our 2002 Committed Purchase Program.

In Europe, demand remains strong across all railcar types and backlogs at railcar manufacturers lengthened. The strengthened European rail market is being driven not only by overall European economic conditions, but also by increasing investment in port and rail infrastructure developments all pointing toward an increasingly positive environment in this market.

Our wholly-owned tank car fleet at GATX Rail Europe and AAE Cargo, our freight and intermodal car joint venture, have continued to advance both operationally and financially in response to the improving market. The marine joint ventures in Specialty continue to provide outstanding returns as market conditions continue to advance with results of increasing charter and day rates and high vessel utilization. We saw additional investment opportunities compared to the first quarter in both industrial and marine equipment.

ASC continues to see solid demand in most of its markets, although not at the same torrid pace experienced in 2006. Following a challenging start to the year due to weather issues, ASC is experiencing high vessel demand and utilization, especially in trade routes serving the iron ore and coal markets. Industry-wide limestone movements have decreased since 2006 due mainly to the softened economic conditions in the Michigan region.

As most of you are aware, ASC completed the acquisition of six vessels from the Oglebay Norton in June 2006. As noted in the press release, the six acquired additional vessels operated less than a month in the second quarter of 2006 and their related winter maintenance expenses were not included as a part of operating costs in 2006 while similar costs are in the 2007 operating results.

Overall, DATX had an excellent first half. As we noted in the press release, we anticipate additional marketing income in the second half of the year as we continue to selectively capitalize on strong asset valuations in the marketplace and we now expect full-year earnings to be at the high end of our previously announced range of $2.90 to $3.10 per diluted share.

So with that quick overview, I'd like to turn it over to you for your questions. Holly?

[OPERATOR INSTRUCTIONS.]

Your first question is from the line of John Hecht with JMP Securities.

Thanks for taking my questions. Just a little bit more data with respect to rail trends. In the changes in pricing and the modest changing utilization, can you give us some -- I guess characterize where you're seeing the changes? I know you have about 65% of your portfolios in your core tank car business, but you have 35% in other types of railcars. You know, is there any measurable difference in trends amongst the different railcar types?

John, this is Rhonda, and I think if you look at, you know, overall we've got the bulk of our fleet in tank cars and overall that market is strong. And as I said in the press release and in the opening comments, particularly in chemical and petroleum, and fertilizer is part of chemicals, and that's very strong. You know, renewal success is also very strong, although customers are taking a little longer to make decisions and you've seen the backlog that the railcar manufacturers are still flat. The only areas where we're seeing significant softness are in areas where we still have very -- some good utilization. That is, in ethanol where 99% of our fleet there is utilized and our coal car fleet where we have more than 97% utilization.

The construction-related cars, you know, as we talked about in the last quarter, you know, it's a very small part of our fleet and that the center being lumber cars in particular are very soft right now, and that's, I think, what we see impacting the kind of freight car market at this time is really the change in the housing market.

And can you give us any data with respect to -- you know, I know you give us the basket change versus the, you know, in terms of renewal rates versus the, you know, four year ago period. Can you tell us any trends you guys saw in terms of pricing quarter-to-quarter meaning quarter one to quarter two this year?

Yeah, overall -- this is Brian -- overall you can probably best describe it as flat quarter-over-quarter. That's an absolutely lease rate, okay? Not in the change over the expiring rate. That was still at 14%. But, you know, it's always more useful to look at it in a car type by car type basis, but if I had to characterize it, I'd say flat quarter-to-quarter on a weighted average basis. I want to remind you, though, that still results in significant revenue increases since the expiring rate is still -- on average, it's still a lot less than the renewal rates we're realizing in this market.

Brian, is there anything you could characterize with respect to the car type quarter-to-quarter pricing?

Yeah, I don't know -- I don't know that I want to get too specific, but, you know, Rhonda referenced, for instance, center being probably the weakest car type right now. That's well into the double digits in terms of price decreases over the last six to nine months. Ethanol would be a lot less than that. The rest of the car types that you -- you know, general service is very strong right now and we're recognizing increases there. But, you know, I don't want to get too specific.

Okay. So that's good color. The last question I have is related to, I guess, operational expenses. I mean, on a -- I understand in the marine side it's very much tied to utilization of revenue and weather and other trends, but, you know, maintenance expenses, I saw, a larger than normal quarter-to-quarter jump than in other operating expenses, and is there some way -- these tied to revenue or anything that we can account for the quarter-to-quarter to jump in those type of expenses?

Well, one thing you have to keep in mind with some of these expenses, particularly if you look at like depreciation and maintenance expense, you'll see that ASC also has depreciation and maintenance expense. They don't have that in the first quarter when they -- when they're really not operating the vessels. So, that contributes to the main jump in maintenance expenses from Q1 to Q2. Rail was essentially flat. And you would expect to see first quarter always going to be lower than the other three quarters because ASC's maintenance expense would not be included at that time. It's spread out over the sailing season.

Okay, then I guess the last detail with respect to that is, you know, the other operating expenses, it was about $4 million or $5 million increase. Is there any noise in there?

That's basically just from a change in FX measurement.

Okay, so that -- some of that was a one-time change in foreign exchange stuff?

Yes.

Okay. All right, thanks very much for taking my question.

Sure.

Your next question is from the line of Art Hatfield with Morgan Keegan.

Hey, thanks for taking my questions. Rhonda, you're going to kill me, but just as I got on the call you were saying now we can take your questions, so I didn't hear any of our comments. If I ask you to repeat something, I do apologize. Just a couple things. On the ethanol side, I thought it was interesting that in the press release Brian had made that comment -- Brian, that you had made this comment about ethanol in the quarter, and I was just looking up my notes from your last conference call and you said at that point in time in January that ethanol was not a problem yet. Can you talk a little bit about how quickly it came about where it really wasn't an issue and now it's something that you really want to talk about and let everybody be aware of that there could be a brewing problem there?

Yeah, once again, it's more of a problem for the industry, you know, that'll eventually spread to us, obviously, if there's idle cars out there. Our best estimate is that there's 3 to 4,000 idle cars out there in the market. We have almost none of that. As Rhonda said, we're 99% utilized. And what's happening, and this is what we're hearing from customers, is that there's a lot of delay in plant construction and plants coming online. And so as lessors, and shippers for that matter, ordered cars in advance of that, they're sitting idle for a period of time. So, while it bears watching, we think that there is softness there, but that should work its way through in the next 12 to 18 months because, as you know, you know, there's 120 existing plants that I think, you know, depending on what you read, another 75 or so under construction. There's 34 plants coming online in 2007 with over $2 billion of capacity -- 2 billion gallons I should say, of capacity. So, it looks like all that will work itself through in the next 12 to 18 months, but there is -- there are cars idle in the short-term.

Okay, and that's helpful. I guess to the point then, it's not something that necessarily could ever get to you. It could result in a reduction of new ethanol car orders and other things like that that would have an impact on somebody who, say, builds the cars as opposed to you.

Well, it could -- you know, obviously with people who have idle cars, they're going to be pretty aggressive in getting those cars placed.

Sure.

So, in competitive situations, you know, we may see a lease rate impact as well. But, our guys think that it's going to work itself out over the next 12 to 18 months, but it's not like we'll be immune to that as, you know, people will get pretty competitive if they have a lot of idle cars. As you know, rent's good and more rent's better, but you want to get those cars placed. So, it's not like it won't impact us. It's just we don't think that's necessarily a long-term phenomena given the dynamics in that market.

Art, it's Bob. We -- I think it's important even though the, you know, number of ethanol cars and even the number of ethanol capable cars in our fleet is relatively small compared to the 110,000 car fleet. It's an industry issue in development that we need to keep an eye on as it affects overall pricing, and that's why we put it out there for people to read about and so we can discuss it.

And that's very helpful because it is -- it's, I think, a big driver of some of the stock prices in this industry right now, so it's helpful for us --

To your other point about the manufacturers, it's going to be interesting to watch that because as we talked about in recent quarters, we can't tell exactly, but it seems that most of that manufacturing backlog on the tank car side has been ethanol driven.

Correct.

And now that there's a surplus of cars out there and some plants are getting delayed, once again, we don't think it's a long-term phenomena, but it'll be interesting to see if some of those orders get cancelled.

And that was my point where, you know, it may not -- it could be a lot worse or other people than you if there's excess capacity in that market.

One other kind of data point to keep in mind is, you know, the backlog -- the order backlog for tank cars is still quite long, but it didn't lengthen during the second quarter, which is the first time in a while we've seen, you know, the end date for delivery kind of hold steady.

Right.

The other data point I'd mention is on, you know, we talked about weakness on the freight car side for a couple of quarters now and now it's more widespread. We're actually seeing in some cases no manufacturing backlog for freight car production. In fact, those prices, or costs I should say, are coming down if you want to order new freight cars. We're not seeing that on the tank car side yet, so it's still pretty strong.

Okay, but I guess that leads me into another thing. Does that -- does seeing all this kind of put you on your hands a little bit to try and anticipate a market that's more favorable from a capital commitment standpoint?

Well, a lot of what we've done over the course of the last few years is, as you well know, Art, is to position the company to invest most aggressively when the opportunity presents itself.

Right.

You know, we sit today with leverage, you know, below 3 to 1, 2.7 to 1 at the end of the quarter. Very low by historical standards, and that's by design so that when asset prices are more attractive to us, we can move more aggressively and, yeah, we're, you know, there's some early signs that that may be coming, but it's not -- I wouldn't anticipate that you'd expect us to run out and, you know, ramp up tomorrow.

Yeah, I'd second that. I mean, all the freight car costs are coming down [inaudible] manufacturers. It's not to the point where we'd be excited about running out and placing a big order given the weakness in the market.

Okay. Which kind of leads me into something else, the debt markets. We hear a lot about the credit markets tightening up and I saw a transaction today where a company that I followed is getting bought. They had to restructure how they were doing the debt. Can you talk about how the -- some tightening in the credit markets impacts you from a competitive standpoint, vis-a-vie some of your bigger competitors and then maybe some of your smaller, more aggressive competitors?

Sure, and I think we are at a very strong position vis-a-vie our competitors, and you know, I would mention that our credit spread, you know, like everybody else over the course of the last few weeks has widened out, but it's certainly not Earth-shattering. We've actually seem some of our competitors, including larger ones, higher rated ones, that have had spreads widen out much farther. So, we feel very good about where we're at right now from a leverage perspective, rating, our funding needs are, in the grand scheme of things, pretty de minimis, and we have a lot of flexibility in how we fund and when we fund. So, we feel very good about where we're sitting today despite the obvious changes in the capital markets that have gone on here certainly in the last few weeks.

That's an interesting comment you make about some of your larger ones widening more than you -- is that a function of where your leverage is today relative to their's?

No. I think it's a function of, you know, we're a very concentrated railcar lessor. Stable, hard assets, you know, and obviously a cyclical business, but one that, you know, over time, certainly the 108 years we've been in business, has proven to be a very good asset. Some of the other competitors we have are far more diversified in some of their portfolios away from rail have had more difficulty and that's crept into their credit spread.

Okay. Thank you. Just two last things for you and I appreciate this. Over the last like year and a half or couple years, Brian, you talked about some potential opportunities in Europe. Can you address that and tell us, kind of, if anything's evolving there for you or if the markets changed much?

It's almost -- I feel like it's bad karma to talk about a little bit, but it appears that our rail business in Europe is going in the other direction, for instance, in the freight car market in the United States. In general, everything we talked about over the last 14 years about where we wanted to be in the European rail market appears to be materializing, so the older fleet needed replacement, EU policy's favoring rail transportation over road, growth in private operators driving efficiencies, changing the manufacturing patterns, driving intermodal traffic, that's all happening now. It's increasing over the last year and our financial results over there are improving. Especially on the freight car side. Intermodal side is extremely strong. We're seeing price increases, significant ones for the first time since we've owned the business, so it's really going very well over there.

I've talked about in the last year or so investment opportunities being pretty strong over there and they have been, especially, you know, for new cars, new larger cars, in the LPG market, mineral oil market. That's going to get a little more challenging because as the market is taking off over there, backlogs are starting to increase and manufacturers' car costs are going up, so the investment side in Europe may get more challenging going forward, but I think we were an early participant. We have good orders out there outstanding, and we're also going to find some creative ways to invest in cars over there, so we feel pretty good about where that business is going.

Outside of that, it would be more taking what we do well on the rail side and trying to expand that geographically in Europe and East, and, you know, that's probably too early to talk about in too much detail, but that's what we're looking for.

All right. That's very helpful. Thank you. And then finally, on the question you had before about rates, were you commenting that sequentially from Q1 kind of absolute rates are somewhat flattish?

Yes, on a weighted average basis and it's always hard to look at it that way because, you know, freight car -- excuse me, lease rates have come down, especially certain car types. You know, ethanol's down a little bit as I said, but other tank car types are up, but on a weighted average basis, it looked pretty flat on absolute lease rate from first quarter to second quarter.

All right. And is that pretty consistent with what it's been over the last four, five quarters?

No. Actually, that's probably the first time we really saw it flatten out in the last year.

Okay, so it had been going up sequentially and is [inaudible] flat.

Pretty much, yeah.

Okay. That's helpful. Thank you very much. Thanks again for taking my questions.

Thank you.

Your next question is from the line of Rick Shane with Jefferies & Co.

Hi guys. Most of my questions have been asked, but can you just give us an update on where you are in your forward purchase agreement and given a little bit more uncertainty in the market how you're approaching that? Are you re-negotiating additional forward purchase agreements or are you going to wait this out a little bit?

Well, Rick, you know, the CPP program, the Committed Purchase Program, that we put in place back in 2002, that runs its course here at the end of the year, so we're taking delivery of those cars now and then that will be completed by the end of this year. Then we have the small Committed Purchase Program with ARI that begins in 2008, and that's for 1,000 cars per year for two years with an additional two years under our option. So, we have that sort of base load in place, but we don't feel at this point that asset prices have come down. They haven't come down on tank cars, but they haven't even come down to a level in freight cars where it would make it attractive for us to place a huge order at this point.

Got it. So, you're going to continue to wait this to a little bit?

Yes, and continue to invest opportunistically as we've done here over the last, you know, three or four years to try and get some -- we've been very successful in the secondary market as well as some of these other new car purchases for customer orders.

Great. Okay.

Rick?

Yeah, sorry. There was a strange echo. Thank you guys very much.

Thank you.

Your next question is from the line of Heiko Ihle with Gabelli & Company.

Hi. Most of my questions have been answered, as well. Just two little things. Can you give some more updates on the German marketplace?

I'm sorry. Which market?

The German market.

Well, I think Brian just answered a question about Europe in general, which would incorporate, you know, anything going on specifically in the German market, but, you know, we're extremely positive about the developments in the European rail market right now. It's a sizable income contributor for GATX overall and it's grown nicely on that front. Both tank and on the freight side we're seeing very strong demands, order backlogs, new asset prices have moved up. Concurrent with that we've also seen lease rates move up very nicely materially for, you know, the first time in years in the European market, so we feel very good about the footprint we had there and directionally where we're heading.

And also, are you guys exploring any infrastructure investments, either directly or potentially with a partner?

Well, we've obviously seen plenty of that take place and I'll reiterate our standard view on that as we're a pretty aggressive asset manager and we've used -- you know, we've partnered over the years with other people to expand our platform, but it has to be in an asset class that we understand extremely well, long lived assets, service components that we know very well. And to the extent something we didn't have profiles make sense, we'll certainly pursue it, but in terms of the GATX going out and buying a, you know, a toll road, that's not going to happen.

Okay. Thank you so much.

Your next question is from the line of Thomas [Hutt] with UBS Financial Services.

Good morning everybody. Robert, in your presentation at the Jefferies conference in Slide 12, first time I'd ever seen it in the Specialty business, the industrial equipment finance business, you actually listed target industries for perhaps new investments by GATX. Number 1, the transaction size 3 to 30 million is clear, but the term, is that the lease term you're shooting for or the life of the asset?

That's the lease term, not the life of the asset.

The lease term?

Yeah. These are typically very long lived assets.

Right. And of those industries, if you had to list -- I don't know how specific you want to get here, but if you had to list, obviously transportation and agriculture and energy is where you've been, but are there food processing, automotive, construction's probably kind of capital goods and that area, but what -- I guess I'm really asking can you put a little color on that?

Sure. And I think the --

By the way, am I right this is the first time you've ever listed in IEF what industries you were actually looking at?

Yes, but the presentation you're referring to also there's a very sizable presentation sitting on GATX's website, which is a corporate overview that's about 70 pages long that also has that same listed data in it.

Right.

Obviously, that's far too detailed to give at an equity conference, but in terms of the industries here, we list these ones because those are the ones that we feel there's equipment niches that we understand extremely well and have done well in historically.

In other words, you have some in place in food processing and automotive already?

Correct.

Okay.

And, you know, what's key to us in that business is dealing with equipment that is essential use to the customer.

Right.

So, while the end customer, you know, the credit profile, may not be optimal, but the equipment I leased to them is so critical to their operation that it will, you know, with a high level of certainty is always going to stay in place in use.

Got you.

You know, that's where GATX has done well for years within our Specialty portfolio.

And the second question I have is when I do the share count, it appears that you're most of the way through the stock by back if I'm counting right. Where are we on that, Robert?

We are two-thirds of -- essentially two-thirds of the way through.

And as we get closer to a use for dry powder on the operational side, if, in fact, we are closer to where you can put it to work on capital expenditures, does that take away from any further authorization you think or am I answering my own question?

Any -- you know, we always look at the use of capital across various alternatives, and so -- and that will always continue to be the case. You know, the buy back was done at a time where obviously we had excess -- not only significant dry powder, but some excess following the air sale.

Right.

And share repurchase with authorization for 300 million enabled us to return some of that capital to shareholders while still giving, you know, more than ample base for continued investment in hard assets. And we'll look at all -- I'll continue to look at all alternatives as we do --

Including the sensitivity to having a nice stack of dry powder if conditions are coming towards us, right?

Absolutely.

Thank you.

Your next question is from the line of Kim Burkhardt with Burkhardt Research.

Hi. Good morning. You were talking a few minutes ago about cycles of railcar leasing on a fairly micro level. I'm wondering on a macro level if you've noticed any overall market drivers for -- that identify for the Class 1 when they are -- if or how they are decide to go with leased cars versus their own fleet when the orders -- industry orders are on a decline or an upward swing? We've been on a downward swing this year, so I'm just -- I've been thinking that over.

Well, keep in mind as the majority if our fleet is in the tank car side of the business --

Okay.

-- and there the leased versed own portfolio is skewed to about two-third owned and about a third leased -- or I'm sorry, two-thirds owned by lessors like ourselves and a third owned by shippers. And while that number -- that may tend to move around a little bit, it doesn't get outside of a, you know, material band around that two-thirds lessors, one-third shipper.

Okay. Okay. Fair enough. Thanks.

Yep.

Your next question is from the line of Michael Cohen with [Sinoba].

Hi. Can you talk about the ethanol, maybe elaborate a little bit? Does this create a little bit of an opportunity for you guys in the sense that you're not highly levered to it, you're probably better capitalized than some of the other folks that are taking delivery of cars. Can you -- is there a way that you could sort of orb this, for lack of a better way of saying it?

From what perspective?

Just meaning that the -- if you have a sort of view that it's a temporary issue from a timing perspective of the plants coming online and the need for the cars is merely delayed.

Okay.

And others may have to put these cars to work or may not have the balance sheet to stomach 6 or 12 months of delay.

Yeah, I think -- [inaudible] it's a good question. I think we've done that in the past where especially new entrance to the market that get in because it looks attractive, and that probably happens to some extent in ethanol. If car prices start to come down because they didn't plan on getting these -- either not having them go to work or getting them back. If that starts to affect the price they'll accept, sure. We're not afraid of remarketing events. So, yeah, we would look towards increasing our fleet at the right price, but as I said earlier, at least on the new car side, the cost of all tank cars and even ethanol at this point have not come down. The backlog's still too strong, but we always look for those opportunities.

Great. And not to flog a dead horse, but with regards to Europe, can you talk about what types of milestones you're looking for in terms of additional liberalization of the market or additional privatization that are going to take place over the time period that we investors should look for?

But that's always gone relatively slow. There's still a lot of protectionism within the countries and it's not -- it's getting better. The market that's still very tough from that perspective is France. It's a sizable market, but still it's not that open, so that's -- there's possibly an opportunity there. There's been acquisition opportunities there in the past, but we haven't been attractive enough. The rest of the market seems to be going pretty well, actually.

The other point I'd add, Michael, too is that in terms of our condition in Europe right now or any lessor that has a substantial presence in Europe, it's not a situation of waiting for anything to happen. The biggest challenge there right now is getting cars because the backlog has gone up at the manufacturer, so the demand is absolutely there. Where we need to be creative in strategic is around how we source new cars. That's our biggest -- the biggest challenge is not putting cars out. The biggest challenge is making sure we have solid deliveries for the next years to come.

And there's no way to transfer cars across pond?

They don't travel well.

And how large is your order backlog in Europe?

We haven't disclosed exactly what that number is, but keep in mind too, we operate both on the tank side there through our wholly-owned business and then in the freight side, intermodal side, through our 47.5% AAE. But we haven't broken those numbers out, but suffice to say we have, you know, felt very good about that market for some time now and knew that demand would be going up and the backlog would be going up, so we have moved as aggressively as we can to make sure we have a pipeline of equipment.

Great. Have you disclosed what your backlog is overall for the entire company? I mean, what your entire order book for all of GATX is?

No. We've really only talked about, you know, what our backlog, if you will, looks like in the North American market, which is what we were talking about earlier, the end of the 2002 Committed Purchase Program and then the 2,000 cars that we have for the next two years with ARI.

So, it's not -- so you guys actually don't have a significant backlog in the U.S. basically or in North America.

By design.

Right.

We have an option, though. I mean, we have a couple thousand cars that we're committed to and we have option on more with ARI.

Understood. Thank you very much for taking my questions.

Thank you.

Your next question is from the line of Jordan Hymowitz with Philadelphia Financial.

Hey guys. Two quick questions please. The rate of improvement this quarter was 14%. In the past couple quarters it's been 19 and you said it was kind of flat quarter-over-quarter. I mean, given that we're now -- [inaudible] pricing is more recent so to speak than older, would it be fair to say that the re-pricing is going to continue to trend down a little bit the next couple quarters?

It's always difficult to tell, Jordan, exactly because of the -- some stuff gets renewed early and everything else, but, you know, as we have been saying, as we march forward from here and into 2008, the comps do get tougher because that expiring rate will start to move up a little bit as we start rolling cars that were put on in good times verse the last couple years. We rolled a lot of cars that were put on when things were very low. So, undoubtedly, the comps get a little bit tougher, but it's not an exact science in terms of slicing that number.

Yeah, it's definitely not a linear progression that you can see. So, there could be some movement around, you know, whether you're higher or lower than that number, but the best thing that we have is that it's still very positive and still a good number.

Okay. Second --

Can I also add to that too? We're getting term. You know, let's not lose sight of the fact we continue to get very good term on renewal.

Second question is you [inaudible] Michael Cohen's question is you said your backlog in purchases in the U.S. is very great, correct? And the reason why I ask is because Trinity, which I think is the largest manufacturer, is internalizing more and more of its own product from what I understand, so even if they do that, that wouldn't effect you guys very much because you don't have a big backlog domestically. Would that be fair?

Correct. We don't have a -- the only orders, you know, that we have in terms of spec orders would be the one we've talked about in our Committed Purchase Program, which -- and then the '08 and '09 thousand cars a year. So, those are not, you know, huge orders by any stretch. They're very good and they're very cost effective. So, you know, it's not a -- we have not, as you know, gone out and placed major speculative orders here in the last year or two.

Thank you.

Your next question is from the line of Bob Napoli with Piper Jaffray.

Thank you. Couple questions. With regards to the Trinity just, you know, maybe a strategic question, Brian, around that, with Trinity seeming to get more aggressive on, you know, retaining cars and going out to form a joint venture with, you know, probably a very large hedge fund, making all kinds of investments all over the place in these sectors, does that make you think strategically that you need to hook up with a manufacturer? Does it have any change on your thought process? You can't be overly excited about -- I mean, you're one of their bigger customers and they want to compete against you increasingly.

That's a fair question. We're not happy that they're such a big competitor of ours and one of our larger concerns is long-term access, efficient access to tank car supplies. So, there's a number of ways to address that and our last order that we announced we voted with our feet, obviously, and went to ARI, but yeah, it's something we constantly think about strategically about how to ensure that supply, so I don't think anything's out of the question there. I don't think you'll see us getting back into manufacturing, but an alliance -- you know, anywhere from putting somebody into tank car manufacturing to placing large orders with somebody else, sure.

Okay. That makes sense. With regards to the buy back, Bob, at the end of the quarter were, you two-thirds of the way through? I mean, had you bought -- it's 300 million, right, that you're buying back?

Right. Yeah, it's two -- we're just a little shy of two-thirds. We did 192 through the end of the second quarter of the 300. [Inaudible].

Just, I mean, your return on equity this quarter was 17%. I know you had maybe a little higher than normal remarketing income, but your leverage is two to one balance sheet leverage and, you know, you're generating 17% return on equity. I mean, I think -- obviously -- and you're putting on long-term leases. Your return on equity goal might be, you know, a little bit -- and I know you guys are cautious, but it seems like the return on equity goals you guys have, you know, might be a little bit cautious [inaudible] you need to raise your return on equity targets given the focus now on this one business given that you're generating -- you're already hitting your target with leverage that I know you view as extremely low.

Yeah, but remember we talked about, Bob, when we talk about returns, you know, being in the 13 to 15% range long term, you know, so this is --

Including depressions.

This is a cyclical -- well, we certainly don't want to go back to where returns were when the business was -- had air and venture and telecom and everything else. Those returns were, you know, very unattractive. We think we have restructured the Company around a much more stable return profile. So, you know -- and I'm not focused on any particular quarter, and now [inaudible] down. We continue to think, as you know, you've heard us beat the drum many times very long term at GATX.

Right. Let me just ask another question regarding return on equity and cash flow, and I'm not sure you get, you know, the people really recognize this, but it seems to me like you're not paying any taxes. Is that -- I mean, is that -- [inaudible] deferred tax asset continues to grow. I mean, there are some companies that are in sectors related to you that, you know, they're forcing people or, you know, trying to get people to focus on their pre-tax income as their, you know, as their net income because of the -- and I guess your thoughts on the -- paying taxes. What would cause that deferred tax asset to flip around and as long as you're growing, it seems to me that your probably not going to be paying a lot in the way of cash taxes.

Well, as long as we're growing the deferred tax asset, the deferred tax, obviously, would continue to move up. Whether or not your taxable in any given year depends on kind of where you are in the investment cycle or where you have been in the investment cycle. But, you know, what you say [inaudible] we are taxable. So, you know, there are cash taxes to be paid in conjunction with that. Where that plays out over the next few years will really be heavily dependent on our investment activity.

Now what -- of the taxes -- the tax rate, what would you say is your cash tax rate if you could try to --

We haven't commented or broken that out, but --

Less than 10%?

Substantially lower than the book tax rates, but I'm not going to swipe that one out right now.

Okay. And Europe, what level of profitability? I think you have that in your Qs don't you? Or your K, but what is the net income in Europe and how much has it grown?

We haven't broken out net income, Bob. We have broken out, you know, assets and revenues and it's, you know, north -- probably approaching 20% of total revenue would be coming from the European market, and you know, with income improving, you know, from a fairly low base a few years to a more material level now.

Is income below the revenue contribution at this point?

In terms of contribution overall, broadly I would say yes, but the expectation is that it's going to continue to move up. And I think in conjunction with that --

That's not a good measure to look at though because part of that's held in the joint venture and --

Right.

-- so the revenue doesn't flow through our financials.

Right. Yeah. AAE all we pick up as the income.

So, okay. Let's see. Try to think about this. The percentage of your rail income that comes from Europe is around what and where do you expect it to go, I guess?

The total -- when I talk about the -- you know, moving up towards 20%, that's total gross income, which would include AAE's share of affiliate net income.

Okay.

[Inaudible] our share of affiliate income. You can look at rail segment numbers and the largest driver of their AAE -- of their affiliate income number is AAE.

Okay. And then with regards to -- when you guys are looking at, you know, doing a nice job buying back stock and you have a great balance sheet, which is probably not a bad time to have a, you know, a great balance sheet, but you're still -- I mean, you have, you know, very little hybrid securities now that you paid off the one convert. I mean, with your leverage as low as it is, it seems to me like you can probably take the balance sheet to, you know, a little more hybrid securities or preferred or something like that and continue to buy back stock even as you have a super balance sheet and as you grow your business. Is that --

[Inaudible]. You know, I'll give my standard answer in terms of capital structure which is, you know, we look at all alternatives and, you know, we'll continue to do so, but not really going to get into a lot of detail about how we're thinking about the makeup of that capital structure going forward.

And just last question, do you see any of your competitors that you're aware of that are under stress and, you know, that bought too many cars or anybody that where you might be able to pick off portfolios or are there opportunities emerging or is it still a little bit too soon for that?

Well, it's still a little bit too soon, but yes, that's something we'll look at, especially for people that are relatively new entrance to the business that never thought cars could actually come back.

Yeah.

Those opportunities I certainly hope present themselves because we're well equipped to go after them now.

You've done a good job being cautious on ethanol cars. And I think somebody asked this question, but is there an opportunity now to, you know, to -- does it make sense for you guys to expand your ethanol exposure as prices have come down and you know that all this capacity's coming on board next year?

There's really, as I said, there hasn't been a lot of movement in the car cost there yet, but it's something we'll look at and we feel pretty good about our strategy on ethanol, which has been to stick with the very large players and try to go out for term. That's looking like it's a good move given the market that's developed [inaudible] here, but we're going to look at all those opportunities since our balance sheet's so strong.

And then asset management opportunities, is there anything interesting coming down the pike on being able to expand your asset management business? Are there any goals in that regard or --

No, not really. I think it's going to be very difficult to grow the managed portfolio given how leases are done these days. We haven't -- you haven't seen any growth on the managed portfolio in years. There's not a lot of transactions, leases done anymore with the fair market value purchase options at the end and ways to capture that upside, so it's been difficult to grow the managed portfolio. As far asset management opportunities, yes, you know, we look at that but in general with -- so far anyway with the type of assets and opportunities we see, we'd rather own it ourselves, but it's always a possibility.

Thank you.

[OPERATOR INSTRUCTIONS.]

And you have a question from the line of Gregory DiMarzio with Century Capital.

Hi, guys. I wanted to ask, if you could, I don't know if this was asked earlier, but over the last two years, when would you say you started lengthening out the terms that you were kind of locking people up for? And if you could, about what percentage do you think you've locked in over the last -- of your current portfolio do you think you've locked in for plus 60 months? And then I was going to ask another question about the cycle.

Well, I think if you -- if you looked at what we've been trying to do as rates went higher and higher over the last couple of years, we've started extending term on particular car types where we -- you know, we wanted to capture that for a longer term and then you've seen that kind of grow more and more over the last year to 18 months. If you look at, you know, but the overall GATX portfolio always runs around four years in terms of a turnover. In this part of the cycle, it would probably be a little bit higher than four years. You know, in the bottom of the cycle, it's probably going to be a little bit less than four years because you're trying to shorten those terms as much as you can to capture the upside coming out of the cycle.

But it's over the last few years you have had probably 40% of your portfolio roll off and you're rolling people on at, you know, five to six years. Is there a year where you don't have pretty much any leases rolling off where it would be very advantageous for lease prices to go down, whether it's '08 or '09?

No. I mean, you're always going to have cars rolling over. I mean, it's 111,000 car fleet, and so you're going to have cars rolling over every single day. It's just a matter of -- because they also roll over in very small increments. It's just a matter of where you're picking your spots to take those terms out longer and we've, you know, we've seen that grow to the five or six years sort of late last year and then into this year.

Okay. Is there a way to -- I think, you know, when most people look at, you know, the transports and they talk about the cyclicality, you know, certainly you're in a better position heading into the cycle. I think most people look at kind of the 2000 peak prior for your guys and they look and they say, you know, this didn't look good last time around. Is there a way to try to help us with the sensitivity because you are so under-levered and don't own the air portfolio and some other portfolios to, you know, the declines you face from '00 to '03 and if that were to happen again to lease rates, how much -- how sensitive you'd be to it?

Well, I think it's a difficult question to ask -- or to answer kind of a specific data point, but, you know, there's a few things you touched on, one that I'll reiterate. You know, the last time the market was in a, you know, kind of a very peak point, GATX was levered on a recourse basis, you know, probably close to six to one. And that included a portfolio that not only had air in it, but also had tech leasing and telecom and venture and some other things that it since then extricated. And so when we look at the portfolio today, not only are we very, very pleased with where we are from a leverage standpoint, but the quality of the portfolio far surpasses where we were a number of years ago. And the other point is our European rail business was nowhere near as a significant contributor as it is today to the overall business. So, there are definitely, you know, points that give us a lot more confidence where we stood today.

And you've also heard us talk about over the last -- you know, number of years about trying to improve not only just the overall GATX portfolio, but the rail car portfolio. As Bob likes to say, we haven't made 110,000 perfect decisions. There are going to be some car types where, you know, maybe we don't like them for the longer term and we've put those out to -- out for sale and you've seen some remarketing gains in rail in last year and then here in the first half of 2007. We've also then been extending term and so a number of these steps that we're taking is also to, you know, to try and take some of that volatility out when you know you're going to be in a cyclical business.

All right. Thanks a lot, and I'd reiterate the capital management encouragement that other people are asking about. It seems like this is a dislocation [inaudible] the last year at this time.

Okay. Thank you.

And there are no further questions at this time.

All right. Thank you everyone. We'll be around this afternoon if you have any additional questions.

Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.