GATX Corp (GATX) 2009 Q2 法說會逐字稿

Please stand by. Good day and welcome to the GATX second quarter earnings conference call. Today's conference is being recorded.

At this time I would like to turn the presentation over to Ms. Rhonda Johnson, Director of Investor Relations. Please go ahead, ma'am.

Thank you, Michelle 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, 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 of the quarter and then Bob will offer some comments and then we'll open up for your questions.

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 may be outside the control of the Company. For a discussion of these factors, I refer you to our 2008 Form 10-K filing.

Today we reported net income from continuing operations of $12.7 million or $0.27 per diluted share, which includes after-tax unrealized losses of $6.7 million or $0.14 per diluted share related to certain interest rate swaps at our European cargo affiliate AAE. This compares to 2008 second quarter income of $40.2 million or $0.82 per diluted share for the second quarter of 2008 which includes $4.8 million or $0.09 per diluted share in unrealized losses.

Year to date we reported net income from continuing operations of $40.3 million or $0.83 per diluted share, including after-tax unrealized losses of $18.3 million or $0.37 per diluted share related to the aforementioned interest rate swaps at the AAE affiliate. Year to date in 2008 we reported net income of $92 million or $1.84 per diluted share including $6.8 million or $0.13 per diluted share benefit from reversal of tax reserves which we reported in the first quarter of 2008 which was partially offset by $4.8 million or $0.09 per diluted share from the after-tax unrealized losses on the AAE interest rate swap.

Our markets remains challenging through the first half of 2009. Macro economic and real industry statistics noted on the last page of our press release continue to show a broad based decline across all commodities and car types. Our customers are continuing to evaluate their rail fleet needs, right sizing their fleets during this downturn and seeking the most competitive lease rates on the cars they need. Through our actions over the last few years, we have limited the number of cars exposed for renewal this year and our commercial team continues to do an outstanding job of renewing and assigning cars in this environment.

The lease renewal market is very competitive and we are focused on maintaining utilization. As a result, rail cars in our Lease Price Index renewed at rates 9.8% lower than their expiring lease rates while the average renewal term was significantly shorter than the previous quarters at 36 months. North American fleet utilization did decline 0.5% to 96% in the second quarter of 2009. Though we scrapped a similar number of cars in 2Q 2009 and 2008, gains on scrapping, found in other income on the income statement were down nearly $8 million year-over-year as average scrap prices in the second quarter of 2009 were $163 per ton compared to an average of $495 per ton in the second quarter of 2008.

Specialty reported $7.3 million in segment profit in the second quarter of 2009, down from $30.5 million in 2008. The marine markets declined in the fourth quarter of 2008 and remain significantly lower than the strong markets of the past few years, accounting for most of the decline in segment profit year over year. The marketing income was approximately $7 million lower in 2009 than in 2008, reflective of a less active secondary market in this environment.

American Steamship Company began the 2009 Great Lakes sailing season in early April and there has been a significant drop in customer demand in 2009, particularly in its largest segment, iron ore shipments as the steel industry has idled capacity in response to the decline in the auto and construction markets. Bob will discuss ASC further in his remarks.

During the quarter we repurchased approximately 1.1 million shares for around $25 million under our 2008 authorization. We also invested $111 million in assets primarily new rail cars in North America and Europe. We continue to look for the right investment opportunities for GATX and remain focused not only on managing through this difficult leg of the cycle, but on capitalizing on any opportunities that a difficult market may yield.

With that quick overview, I'd like to turn it over to Bob for his remarks.

Thank you, Rhonda and thank you all for joining us here this morning. I wanted to touch briefly on our current forecast and give you some additional color on what we're seeing in the marketplace today.

When we entered the year, we expected earnings to be in the range of $2.50 per diluted share and we highlighted some of the variables that could have a major impact on the outcome, including the general macro environment, its impact on our market's financing costs, remarketing opportunities and other items such as that. At the end of Q1, we indicated there was increased down side variability to our original estimates due to volatility in the market and we experienced some of this volatility through the second quarter as it progressed.

Today we indicated we now expect full year earnings to be in the range of $2 per diluted share. So the question obviously is what changed during recent months that's led to our current expectations? In general, rail is performing as we expected in this difficult environment and while we've had some moderate credit-related negatives, such as some accounts on nonaccrual or small impairments, none of these items would have led us to change our outlook for the full year.

So the short answer regarding the outlook change is the income from our marine activity, primarily American Steamship, but also including our marine JVs coming in materially below what we had originally expected and to really get to the heart of the matter, our earlier assumptions regarding demand levels on the Great Lakes have proven to be well off the market. To be clear, ASC is profitable year to date and we expect that to be be the case for the full year, but definitely below what we originally anticipated.

During the inactive shipping months of January through March, our customers were telling us that they were anticipating volumes of a certain level and that's what we rolled into our forecast. While [blast furnace] utilization was very low, there was some customer expectation that the macro environment would improve enough to result in some reasonable volume levels on the Great Lakes in 2009.

As the second quarter progressed, it's clear that demand levels are coming in way below the customers' original expectations and this will likely continue through the end of the year. In fact, 2009 tonnage at ASC may come in close to below 50% below 2008 levels. We expected a decline, but not one of that magnitude. Taking ASC and our marine joint ventures together, their segment profit contribution is likely to come in approximately $30 million to $35 million below our original assumption.

So while rail is performing generally as expected and we're achieving some material benefits from cost control on the SG&A front, we can't compensate for the down draft in marine. So that gives you some color on the source of the drivers behind our current expectations, our overall segment profit and EPS.

Year to date excluding the mark to markets that Rhonda mentioned, we've posted earnings per share of $1.20 per share, including $0.41 in the second quarter. So if we see similar results in Q3 and Q4 that we just posted in Q2, that puts our full year results right around the $2 mark. We're obviously working very hard to exceed that, but recognizing there continues to be some level of uncertainty in this environment.

So hopefully that gives you some back drop for where we stand today and with that, we'll go to Q&A.

Michelle?

(Operator Instructions) We'll take our first question from John Hecht with JMP Securities.

Thanks, guys for taking my questions. On the guidance, what tax rate is it in the mid--- low to mid-30s, is that the best tax rate to use?

Correct, John, right around 33% or so.

Okay. And in the quarter, what was the release percent in the rail segment and has that changed much since Q1?

It's actually very similar to Q1, John. It's about 53% of those renewed, an additional about one third were assigned. If you look at our fleet roll forward on the last page of our press release, you'll see that we add about 500 additional idle cars this quarter and that's about what we expected.

Okay. And then in the $111 million of expenditures, how much of that were related to committed orders and how much of that was related to new orders during the quarter and what type of assets are you finding at attractive prices right now?

It was essentially all on committed orders, John.

Okay.

So we haven't really placed any advanced or discretionary orders to this point.

Okay. And last question is what are you seeing in the competitive markets, the primary players are going to be GE and Union Tank Car and then if you can comment at all on the situation over at CIT and how you see that unfolding and what type of opportunities or potential challenges that might present to you as well?

It's Brian. As far as CIT and their competitive side in the rail business, you really don't see anything. Everybody is competing very aggressively in the rail market and despite what's going on in the larger parent at GE or CIT or anywhere else, you don't see it. What you see in the rail market is very aggressive competition on price and people trying to maintain utilization.

No one acting irrationally or surprisingly?

No. I don't think so at all. I think people are just trying to keep their fleet utilized and doing what they can do keep that up.

Okay. Thank you guys very much.

Thanks, John.

We'll take our next question from [Jacob Stone with BCC].

Hi, guys, you there?

Yes.

Okay. Thank you very much for the quarter. I had two questions. One is I'd noticed that the cash flow statement wasn't included in the numbers. Is that -- can we expect that out soon?

Yes. It typically comes out with our -- it always comes out with our 10-Q which will follow fairly shortly after the press release. It never comes out with the press release. It comes out with the Q.

Got it. And do you agree with stated book value? I remember previously -- I'm just trying to understand where my down side is or where my upside can be and I remember previously we talked about how last cycle taught us some lessons and this cycle we're focusing more on less leveraged business model, so ROE peak to trough is 10% to 15%. And so if I think of book as being around $20, the guidance for this year would be $2 in EPS, which is about 10% ROE.

So, I guess with that, do you agree with where stated book is? Because I know there's some contention about what happened from buying a bunch of cars over the past couple of years when they were selling in higher prices. So I'm just trying to understand that better.

Well, yes, I absolutely agree with the book. If you compare GATX today to where it was a number of years ago what we don't have today is air, telecom, and venture and businesses that were much more susceptible to asset impairment. I feel very good about the book today.

As far as assets that were purchased over the last few years, keep in mind that a big portion of those were actually ordered back in 2002 and 2003, so they were not at the peak prices that others were buying cars at in '07 and '08. We were buying cars at a substantial discount to that.

Yes. Most of our volume beyond that committed order was in the secondary market for cars that we thought were more attractive, generally older cars.

Got it. Thank you. Can you comment at all about where we are in the cycle?

It's hard to tell. I mean the rail market is still very weak. Certainly that weakness is more widespread than it was three months ago or six months ago. You saw the car loading data in our press release. It's still down across the board.

In the markets we play in, chemical is down 17%, petroleum is down 15%, so it's very weak out there and that weakness has spread beyond freight into tank this year and it's a very general weakness. Everything is getting hit.

As far as any signs that things are turning around, there's some thought that we may be nearing the bottom here just from -- if you look at certain -- it's not really hard data, but, customer requests for relief have slowed, they haven't stopped, but they've slowed. Customer inquiries for new cars has increased, but a lot of those inquiries are about 2010 and whether cars will be available once the market gets better.

We've had some recent success in some of the weaker car types, but in general, despite those encouraging signs, I would say there's hardly any customers outside of maybe fertilizer customers where they're looking to increase their fleet in the short-term. So maybe some signs we're getting near the bottom, but certainly nothing tangible suggests it's going to get better in the second half of 2009.

Thanks, guys.

Thank you.

We'll take our next question from Paul Bodnar with Longbow Research.

Question on the guidance here. Obviously you pulled it back on the joint venture as well as ASC. Any discussion or details you can give us in terms of the breakdown between those, if it's -- what percent is ASC, what's the joint ventures and also just even in the quarter, what did profitability look at in most of those, particularly I guess the blue water joint ventures?

Okay. Well, ASC's segment profit is broken out, so you can see it there. I think -- keep in mind in the comparison at ASC that last year, while it looks comparable, 2000 -- second quarter 2009 looks comparable to second quarter of 2008. Last year in 2008, we had a $2.9 million negative litigation result, so actually, the apples to apples results in 2009 are down more materially. As far as the guidance goes, that $30 million to $35 million that I mentioned in terms of drop in segment profit, the vast majority of that is coming at American Steamship.

Okay. And I guess in the second half, I mean should we look for affiliate earnings at some more levels to where we're at at this quarter or I guess the same question goes for marketing income?

I would say -- actually, the marketing income was pretty good during the quarter. That may not repeat as the year progresses, but I think JV income will probably be in the similar range to what we saw in the second quarter.

Okay. And I guess on the pricing side for the quarter, I mean you guys -- the decline over expiring rates was still pretty good. I mean how should we think of what you have coming up or what your expiring rates are going to be going forward? Is it -- did pricing start to go up mid-2004 or 2005 and we're going to start seeing large declines in the second half of the year because of that even if we maintained a flat current lease price rate or are we going to have -- is there some -- I guess is there a natural divergence there and also as a follow-up, what are you seeing right now with lease pricing, have we found the bottom or where are we at on that?

I think you answered your own question. It's Brian. We don't know where prices are going, but even if they stayed exactly where they were -- where they are in terms of lease rates today, you would see a decline in revenue because of what you just talked about, lease rates that are expiring were -- are increasing because they did start to increase around the time frame you mentioned. So yes, there's revenue pressure because of the expiring rates.

Okay. What kind of magnitude should we be thinking of, another 10% the second half of the year up or -- ?

It's, Paul, very difficult to tell at this point. I can tell you that the result we saw in the second quarter, the down 9.8%, was very consistent with what we had anticipated coming into the quarter. So there weren't a lot of surprises. So, my sense is on a percentage basis, you're going to continue to see degradation there, but I'm a little bit hesitant to make a call on that because it's so much market driven about contract to contract and transactions --.

And car type to car type -- some of the weaker car types, we'll go ahead and take a bigger reduction in rate in certain circumstances if we can put the car to work for a shorter period of time. In other words, any rent is better than no rent in this environment, especially if you can structure the lease term to be shorter and take advantage of a recovery. And that's what we're trying to do and that's one of the reasons you see our lease term on average decreasing this year.

Okay. And last question, any comments you can make on the situation in Italy and what's going on over there?

Yes, sure. Regarding that accident in Italy, on June 29, shortly before midnight, there was a freight train comprised entirely of the GATX Rail Europe tank cars and that train derailed while traveling through the station area in Viareggio, Italy.

Those cars were carrying LPG, that's liquid petroleum gas. One of the tanks after derailment was punctured and it lost its product. Shortly thereafter it caught fire and exploded. A number of people were killed, a lot of people were injured, the latest death toll as far as I know was 28. They were killed either instantly or later as a result of the injuries.

There was also significant property damage in the area. So the cause of the accident is currently under investigation. Remember, this happened less than a month ago. GATX Rail Europe wasn't given access to the accident scene and they haven't been allowed to examine any of the equipment that was involved at this point. So they're cooperating fully with the Italian authorities and European railway authorities and obviously when your car is involved in an accident like that, especially one as tragic as the one we just experienced over there, GATX Rail Europe puts the safety of their fleet as their number one priority just as we do here in North American, so we're going to work to find the cause of the accident and cooperate as fully as we can.

Now, were those cars also -- they were -- Italy effectively banned your cars from going through Italy?

Yes. There are --

Any effect on the revenue side or what's --

Yes. The other -- the most likely near term impact, there are some restrictions on GATX Rail Europe cars from moving in Italy as well as France right now. Before those cars can move freely again, we have to essentially certify that they meet certain criteria. And once again, Rail Europe is cooperating with the various regulatory bodies to address those concerns. The number affected thus far in Italy and France is relatively small, around 800. We'll monitor the situation and if it becomes more widespread or a significant number, obviously we'll disclose it.

Any cost or whatever we should assume in the second half that's associated with that inspection?

Since this thing just happened and the investigation is under way and we don't know how widespread that will become o4 for how long, we really haven't put any cost -- it's just impossible to determine at this point. Therefore, we haven't put any of that into the numbers that Bob talked about.

We'll take our next question from Rick Shane with Jefferies & Company.

Hi, guys, thanks for taking my questions this morning. Just one. I'd like to talk about the European fleet and economically what's going on there, how big that fleet is, what's up for renewal this year and are you experiencing any differential in Europe in terms of renewals or re-lease rates versus what we have for the US?

Once again, it's Brian. The recession has definitely taken hold in Europe. It took longer than in the states, but it's there and the automotive and chemical markets are particularly hard hit. As far as how it affects our business over there, you really have to look at it with our participation in the freight business and then our separate participation in the tank business.

As far as the freight car side, as you probably know, we participate through our AAE joint venture. That has around 24,000 cars. It's a very short-term business, as we said on prior calls. And although utilization has been in the high 90s, very high, actually, 40% of that fleet can roll over in a typical year. And since that freight car fleet is almost all intermodal and intermodal traffic is down significantly in Europe, the fact is AAE is receiving many more return notices from customers in this type of environment.

So so far, all the return notices they've seen, it doesn't necessarily mean the car is coming back, but a big percentage of them will. So what they're trying to do is use the same tactics we are using here in the states. So they're concentrating on their important customer, they're using rate as a tool to keep cars deployed, they're having some success in getting their competitors displaced because they do offer superior service and once again, although their utilization is high with the economic climate as weak as it is and with the type of fleet that they have, their utilization will drop quicker and more severely than it will here in North America just by the way the business is structured.

So it's under severe pressure. On the tank car side, it's the GATX Rail Europe platform. They have about 20,000 cars at the end of the quarter utilization, about 95.5%, Rhonda?

Yes, 95.5%.

And despite the downturn, especially in the chemical sector, in general that fleet has hung in fairly well this year. We've had some large renewals with important customers in Poland, for instance. We've placed a big portion of our renewals, we've placed a significant portion of our new car deliveries, but that market is getting weaker as well. It was much stronger than the freight market.

Now that weakness is spreading to tank. The mineral oil market, for instance, which is a big market for us over there would have been stable last quarter. Now that's experiencing some pressure.

So we're starting to see it over there and year to date, actually, there have been price increases in that tank car fleet, rate increases. I don't know that that will maintain through the rest of the year. So they're starting to see pressure as well. But similar to North America, it's generally a more stable market than the freight car side.

Thanks, Brian, it's very helpful. Just two clarifying questions here. One, on the tank car side, are the lease terms there shorter than in the US as well, like they are for the intermodals or is that unique to intermodal?

The 40% of the fleet rolling over in a year example, that's unique to intermodal. They do have multi-year terms on the tank car side, but they're not as long as they are here in the States. Their average lease term would be shorter.

Okay, great. And in context of the overall -- or of the fleet utilization that you give, does that contemplate the -- does that include Europe and does that contemplate the sharp decline that you're seeing or the sharper decline on the intermodal side?

Well, what you see on the back page of the release, Rick, is North American utilization, Europe utilization on our wholly-owned fleet, that would be the GATX Rail Europe platform that Brian discussed. So it does not -- and then AAE, that utilization has not picked up anywhere.

Okay. Very helpful. Thanks, guys.

Okay. Thank you.

We'll take our next question from [Mike Randall with Northland Securities].

Yes, thanks for taking my call, guys. Two questions. One, do you have any expectations, the US rail car fleet fell by about 1000, 1200 cars in the quarter, where you think that will end at year end? And also, Brian, just to clarify, would you say that things got directionally tougher as the year has gone on or has it just been a consistent challenge throughout the whole year -- throughout the full six months? How would you characterize it?

I'll take the second one first. We're talking about rail, Mike?

Rail and overall.

I'd say in rail, it's generally what we anticipated, but it has gotten worse during the year as we anticipated. On the marine side -- on rates, it's probably been better than we anticipated, but there has been some off hire and operational issues, which are worse than we anticipated. So that's the way I'd answer that one. As far as --

And I'd say in the fleet overall, Mike, we -- part of the reason the fleet has dropped is not just -- declined slightly is not just from scrapping, but we also sold a number of cars during the second quarter. So absent a secondary market acquisition, purchase of cars, existing cars, used cars, that fleet probably will come down a little bit through the end of the year.

And, Mike, if you were talking about including ASC in that, it's much -- obviously much worse than we anticipated from a volume perspective.

Got it. Okay. That helps. Thanks, guys.

Thank you.

Our next question comes from Bob Napoli with Piper Jaffray.

Good morning. A follow-up on Italy. I guess just on what types of insurance do you have there and do you have any -- has anything like this happened before with GATX and did insurance cover those situations?

We're not going to disclose the limits we have in insurance. That's just not a good idea, Bob, but we -- GATX Rail Europe carries insurance, GATX here in the States carries a global insurance policy and excess liability that's typical of a rail carrier lessor of our size and in this type of business and with this fleet mix.

Have you had situations or something like this ever happen before with deaths involved or -- I mean, I don't know.

GATX Rail Europe -- I don't think --

Or you.

GATX -- for that matter has ever experienced or been involved, had cars involved in an accident that's this severe, no.

Yes. There have been some sizable litigation matters over the years, Bob, but, primarily here in the States.

Okay. You had given an outlook at the end of last quarter for utilization expectations in the US for rail at 95% in the fourth quarter.

I'm sorry if you said this at the beginning of the call because I missed the first few minutes, but is that still your expectation -- that utilization. Can you give some feel for the rate of decline in utilization? Is 95% still a goal that's attainable for you?

It's certainly a goal and one that's attainable. We said we'd be right around the 95% range at year end, was our expectation and that is still what we're driving for, but again, it's a pretty challenging market out there. I can't guarantee anything, but that's definitely our -- somewhere in that range is what we're shooting for.

Your nonperforming assets, a new item on the -- at least the first time I really noticed it recently on the back page, nonperforming assets jumped from $19 million to $26 million.

Yes. Actually, that nonperforming one is there historically, Bob, it's just -- it doesn't move very often.

Right.

So it picked up -- the pick up in the second quarter was actually one account that we put on that within our industrial equipment group. So one transaction.

And can you talk generally about what your customer base -- are you incrementally more concerned either in the industrial side or the rail side or otherwise?

Sure. On the industrial side there's some customers in there that are involved in the mining, manufacturing business. There's -- as we pointed out before, there's companies that are involved in manufacturing down the chain related to auto. So it's definitely a much smaller portfolio, obviously, and a much smaller piece of our business, but it's one that you just naturally watch more closely than you may on the rail side.

Okay. Book value, I thought with the rebound or the weakness in the dollar I'd see a little more rebound in book value per share. Is there something -- is it just the buy back, I guess?

Well, the buy back has a big impact on that, Bob, definitely.

Do you expect to --

And the -- and obviously the dividend payments through the first two quarters of the year.

Right. Do you expect to continue to buy back shares?

We still have authorization, but can't comment on --

How much is left?

The remaining authorization, Bob, is about $70 million.

Okay.

Can't really comment on what our expectations are there.

The SG&A, the run rate for this quarter, is that a good run rate or are there still some more opportunities to improve?

I think it's a pretty good run rate, but if we achieve that run rate, you have to look at that in context of the full year versus 2008, it's almost a 20% reduction.

Yes.

We're making some serious head way on that front.

Then last question. The -- what opportunities are there? With your capital where it's at today and -- are you seeing unusual opportunities to buy assets at unusually attractive prices, I guess. Do you see IT is going to -- may have to do something with their portfolio, it's obviously massive. But are you seeing more opportunities and do you -- are you going to play some offense if you find some very attractive opportunities?

Well, we're definitely looking to play offense. As far as the opportunities that are out there, if you could just look at the secondary market in general in rail and across all markets, there's not a lot going on just because of the difficulty in cost of financing. So there's not -- there hasn't been a lot of portfolios or fleets that are moving.

Some competitors are becoming more unsettled at the corporate level, yes, but, I can't pretend to tell you what's going to go on in some of those situations, but I will tell you that to the extent anything becomes available, we will play offense and be aggressive.

Are prices coming down? I know you looked at a lot of things last year and you just -- I don't think you liked the prices.

In terms of a rail car order or in terms of the secondary market?

In terms of the secondary market.

Yes, since there's not a lot changing hands, it's hard to talk about prices. You would think that's the reason stuff hasn't moved, however.

How about the --

But if you look, Bob, a year, 12 months ago, 18 months ago, everybody had a different outlook on the magnitude of the slowdown that was likely coming. It's been far more severe than anybody expected and everybody's cost of capital has gone up far more than they would have originally anticipated. So.

And I think when we look back -- you made a comment we didn't like the price. We liked our own price, but we couldn't really get there with anybody being in agreement that that was the right price.

Are the manufacturers ready to deal at this point or -- ?

Well, I think if you look at the builders, there's an immediate production capacity available, tank car back logs, freight car back logs are very low. As we talked about in the past, steel prices are down dramatically and you've got to believe manufacturing margin would be pretty slim if you were to place an order.

But when we talk about placing an order, you obviously want to do it when costs are down and there's a glimmer of a recovery in the market, so you know you can place cars. And you never get that timing exactly right, but obviously we'll let you know when that situation exists.

All right. Thank you.

Our next question comes from [Terak Ejusafy with Rockbay Capital].

Hi, guys. How many cars are coming due from expiring leases in the second half of '09?

There's about 8,000 total, 7500 roughly.

Okay. And how many new deliveries are you guys taking in North America in the second half of '09?

A relatively small number, maybe a thousand cars.

Okay. So in total, 9,000 cars, like what percentage of these cars have to be remarketed successfully in order to maintain that 95% utilization level at year end?

The new cars are all placed.

Okay.

In terms of the renewals, if we achieve what we -- the renewals and assignments. If we achieve what we achieved in the second quarter, we'll be right in that range we talked about, renewal success, somewhere in the 50 to 55% range, about another third, roughly, placed with other customers, what we refer to as assignments. That would lead you very close to the range we talked about.

Okay. So you basically have to place around 4,000 cars in order to get that 95% at year end?

Renew.

Yes.

Keep in mind, because you're placing -- call it 50% of the cars up for renewal, that doesn't mean that the other half go idle. That's where the assignment comes into play and --.

Okay.

-- we're very successful with assignments in the second -- in the first and second quarter.

Okay. But what I want to get -- understand, if I look at your average renewal lease rate change and average renewal term, I continuously see that declining over the last few quarters. So I just want to understand, do you think that it's fair to assume that the rate of deceleration will continue or will it be relative to the second quarter?

I.e., in order to reach that 95%, you're basically saying you have to be consistent with the rate levels that you're seeing in the second quarter?

No. As a matter of fact, that rate decline may increase in the third and fourth quarter.

Okay. And you've assumed that in your 95% utilization?

That's what allows you to get to 95% or 94% utilization in that range.

Okay.

We're -- yes. As I stated before, we will be very aggressive on rate.

Okay.

That percentage number will continue to come down --

And the other question I had -- okay. No, that's fair. The other thing I wanted to know is -- I'm looking at scrap cars and cars sold and I see cars sold in the second quarter spiked up materially relative to the first quarter and the fourth quarter and so you're also selling cars at a more aggressive pace in a depressed environment to maintain that utilization level

Actually, all of those cars are utilized cars, but the cars you're selling are all on lease.

Yes, but in terms of the pie, the size of the pie, though, right, it's decreasing?

Well, if you remember look at it from a standpoint of the first half of the year, this year, the first half of the year last year, you've essentially sold the exact same number of cars, very close. We're always in the market selling cars. That is a routine strategy of GATX's, to always be in the market.

Okay. And the other -- last question. I'm sorry to take up so much time.

On the book value, you've suggested that the purchases in '08 and, obviously in '09, even possibly '07 are under water. So then why are you comfortable with the book value?

I didn't say they were under water. I said they were under the market price at that time.

Okay.

Basically we bought those at a discount to what the market price would have been.

Okay. Thank you very much.

You bet.

Our final question comes from Art Hatfield with Morgan Keegan.

Morning, everybody. Bob, when you talk about the $2 guidance for the year, what number are you using for the first half of the year?

$1.20.

And then for next year, do you have the number that -- of cars in North America that will come up for renewal in 2010?

It's very similar to what we had in 2009, Bob. We haven't put that number out there yet, but it's -- Art, it's in the range of where we were this year.

Okay.

It may go up. It may go up because as we get into the second half of the year and even a little bit in the second quarter, some of the leases we're doing, we may do on one year --

Okay.

It's not a hard number, but we may do some one-year shorter leases just to keep cars utilized.

Okay. That's fair. And then at ASC, you talked a lot about the volumes and it's understandable what's going on there, but did you say -- I didn't hear you say anything today about price and how pricing works in that business. I know you've talked about it in the past. Can you tell us how that price gets set every year, is it a one-time effort and then direction -- I would think directionally it's down this year, but can you give us a ballpark magnitude of where that's at?

And actually, pricing is up a little bit, is up a little bit this year. Some of that business is spot, but most of it is done on term contract.

The issue is the term contract sets the price, but the volume allowed -- or required under that contract, there's typically a very wide band under volume requirement and we're definitely at the low end of that band or at the bottom of that band and in some cases a little bit below it.

So it's really volume, truly volume that is causing the drop in segment profit at ASC.

Okay. That's very, very helpful. And then thinking about the specialty, the marine JVs, how do we think about seeing how that's come in below your expectations? What are the drivers that could cause that performance of those JVs to worsen as we go forward and what metrics should we look at to gauge that and get a feel for that over time?

I'll take that, it's Brian.

Generally, pricing rates have gone up from the fourth quarter of 2008 where you saw that massive decline across all vessel classes and markets. Probably the best example is a drag boat market where pricing literally went down 80% or more from the second quarter to the fourth quarter of 2008 and now it's up. But if you look at why it's up, a lot of that is due to traffic into China, especially commodity imports into China.

So a lot of the -- this is -- it's not my theory. You can -- it's just fact. A lot of the sea born traffic and a lot of the rate increases over the first half of 2009 have been Chinese imports and there's some question about the sustainability of that level. So the answer is -- a lot of it depends on what China is doing, especially across some of our vessel classes.

Okay. And then finally, Brian, to get back to you, you had mentioned earlier, you got asked the question about irrational pricing in the rail environment and you said that there weren't any real irrational prices out there right now. Is that the -- what the status quo has been for a while or is that an improvement from what you've seen in the last year or two?

I think it's more just a reflection of the market. Normally when you would see a variance in behavior, it's when people are taking delivery of a lot of cars.

Okay.

And new cars are coming in the fleet and then people have different pricing strategies. Right now, deliveries are way down and orders are way down, so everybody is dealing with their existing fleet and everybody is pursuing the same strategy which is you price to keep the car on lease.

Okay.

So it's agressive. I'm not saying it's not extremely aggressive, but it's in a sense what people are doing.

Right. That's very helpful. Then finally, I don't want to belabor this, but maybe a point of clarification could help.

You've gotten concerns about people being concerned about the book value of the Company and referencing the last two or three years of asset prices. If I look at -- if we look at '06, '07 and '08, what percentage of your fleet really comes from that period of time?

I don't know the answer to that question, Bob, but assuming we -- first of all, if we were taking delivery of call it 2500 new cars a year, that's 7500 cars, that's off of a fleet of 111,000 and the other cars that we took in and purchased during those -- that time frame, a lot of that was done in the secondary market.

I think people need to remember that we were the one lessor -- one of the lessors out there who wasn't buying aggressively. Most of our deliveries were all to the back of the order we had placed at the depth of the market in 2003. Where we did buy cars in the secondary market where you tend to be able to -- at least during that period -- glean much better economic value.

Point being that any cars bought recently, if they were below what you paid for them in the secondary market, really has a minimal impact on overall book value.

Absolutely.

Right. Okay. Thanks. That's all I have. Thanks for your time again.

Thanks, Art.

And I'd like to turn the call back over to our speakers.

Thank you, Michelle and thanks everyone for listening. I'll be available this afternoon for any follow-up questions.

That does conclude our conference. Thank you for your participation and have a nice day.