GATX Corp (GATX) 2010 Q2 法說會逐字稿

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 conference over to Ms. Jennifer Van Aken. Please go ahead ma'am.

Thank you William. Good morning, everyone. Thank you for joining us for 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. Before we get to questions, I'll give an overview of the numbers, which were provided in our press release this morning.

First, I would 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. We have based these forward-looking statements on information currently available and disclaim any intention or obligation to update or revise these statements to reflect subsequent events or circumstance. The Company's actual results will depend on a number of competitive and economic factors, some of which may be outside the control of the Company. For more information, refer to our 2009 Form 10K filing.

Today we reported 2010 second quarter net income of $21.5 million or $0.46 per diluted share. This includes a net benefit of $3.3 million or $0.07 per diluted share related to the favorable resolution of a litigation matter and a tax accrual reversal, partially offset by the negative impact from fair value adjustments related to certain interest rate swaps at our European rail affiliate, AAE Cargo. The breakdown of these items, is as follows - The benefit from litigation is $4.1 million or $0.09 per dilute shared. The benefit from the tax accrual reversal is $3.7 million, $0.08 per dilute shared. The negative impact from the AAE interest rate swap is $4.5 million or $0.10 per dilute shared. This compares to 2009 second quarter net income of $12.7 million or $0.27 per diluted share, which includes a negative impact of $6.7 million or $0.14 per diluted share from the AAE interest rate swap. Year-to-date 2010 we reported net income of $40.2 million or $0.86 per diluted share. The year-to-date results include a net benefit of $2.5 million or $0.05 per diluted share related to the aforementioned tax and litigation matters and the interest rate swap at AAE. Year-to-date 2009 we reported net income of $40.3 million or $0.83 per diluted share including a negative impact of $18.3 million or $0.37 per dilute shared from the fair value adjustments of the AAE interest rate swap. As noted in the press release, our operating results are consistent with our expectations at the beginning of the year.

The North American Rail market remains challenging. We continue to see some signs of improvement, although they are inconsistent. GATX's North American fleet utilization increased to 96.5% during the second quarter due primarily due to increased fleet activity. The pricing environment remains aggressive as renewal rates were well below expiring rates. GATX's lease price index was negative 18.6% for the quarter and average renewal term remained relatively short at 36 months. In specialty, asset remarketing income improved during the second quarter reflective of a more active secondary market. Our marine joint ventures continue to face challenges as the markets in which they operate remain under pressure. American Steamship Company has seen a significant increase in customer demand from the level of experience in 2009. This is particularly true in ASCs largest segment, iron ore shipments, as the steel industry has brought more capacity online this year. While ASC shipping volume has been higher than anticipated, we could see some softening in the demand for iron ore in the second half of the year.

As we noted in the press release, we continue to expect our full year 2010 earnings to be in the previously announced range of $1.50 to $1.70 per diluted share. This guidance excludes the AAE fair value adjustments as well as the adjustments related to litigation and tax matters. With that overview, let's go to your questions. William?

Absolutely. (Operator Instructions) We'll take our first question. First questions comes from John Hecht, JMP Securities.

Good morning, guys. Thanks for taking my questions. First question is, what drove the loss in the affiliate earnings in the rail division during the quarter?

That was the AAE hedge. (inaudible) That's for the hedge flow through --

Okay. Sorry about that. What was -- excluding the hedge, what is the normalized rate of return rate of earnings? What would it have been, I guess?

Actually at quarter, it would have been about break even, a little slightly positive during the quarter. In the first quarter it was higher than that due to some stronger operations of AAE. We also had within one of our North American joint ventures, we had some new marketing activity which contributed positively in the first quarter.

And is it -- I mean, I know you don't give forecasts -- is it a break even trend? Is that a reasonable trend, or is there other activities in the next couple quarters, that you have visibility into that would change that pace?

Yes, we would expect some pickup in that -- during the quarter.

Okay. Can you give a sense for what renewal success rates were during the quarter? I think they have been tracking around 55%. Is that consistent?

Yes, that's right.

Okay. What's your outlook for pricing, given the trends and capacity and idle capacity and -- it looks like you're extending your duration of your portfolio, maybe can you characterize what's occurring there and that in the context of where your outlook for pricing is?

Sure, this is Brian, John. In general in the North American Rail market pricing across the board is increasing. Remember, that's off the bottom and in many cases the bottom was pretty low. So it's a pretty general widespread increase, like I said, across the board but still very far from the peak and very much below even long-term averages. But it is improving.

-- John, I would just add that 36 months is still relatively short compared to historical norms.

Yes, you will stretch it out beyond four years and get times. So is the negative comp more of a function of just tough comps as opposed to what you're seeing in the marginal trends?

Yes, remember that negative 18% plus was because we were renewing leases that were put on at the peak of the market so that's a pretty good representation of how far we're down from the peak, is that 18%.

Great.

We came into the year, John, I think back in January, the expectation we had at that point in time when asked the question about what negative -- what the LPI would be in 2010. Our response was somewhere in the low negative 20s. And we're actually -- at the margin, we're a little better than we anticipated.

Okay. Great. Thanks for taking my questions.

We'll take our next question from Steve Barger, KeyBanc Capital Markets

Hi, good morning. Looking at the RSI order numbers, it looks like people are placing orders for small numbers of specialty car types. Are there any types that are tight enough for you to getting involved for now? Are you getting any quotes right now for opportunistic growth?

Yes, we have in the first half of 2010 and there's been some activity in the new car side, which is great because we didn't see that last year and we're not out there specing yet but we have placed customer orders on specialty hopper cars, actually.

Is that the small-cube stuff the [frac sand], or what kind of car type are you?

Exactly, most of the activity has been small-cube covered hoppers going to frac sand services, Yes.

Okay. Any other notable types where you starting to see a little tightness?

As far as new car order activity, there's some -- like there's a small cube covered hopper, there's some potash activity. There's general service tanks, we're starting to see some order there but I wouldn't call that widespread by any stretch.

Okay. Just looking at the AAR data, you are starting to see some nonintermodal carloadings flatten out. And we have seen a slow down in term of cars coming out of storage. Is this just a seasonal pause or is this something that is more worrisome in terms of a trend?

The speculation is it's a seasonal pause but after going through what we have over the last 18 months, obviously we're concerned that it could be something else. But I will tell you, in general, activity in the rail business, both in the US and in Europe, is defying any economic forecast out there. It's a little better than you would expect, given economic numbers.

Right. Well, and I guess to that point, you said in the prepared remarks that you're preparing for softness in ore loadings. Are you already seeing that or is that more a cautionary forward-looking kind of statement?

Well, specifically at GATX and to the Great Lakes in general, we have seen some blast furnaces close or going to be closed in the second half of the year. So that's why we issued that warning but it's still dramatically up from 2009. We had said earlier in the year that we weren't sure that the pickup we saw in iron ore shipments in 2010 would go into 2011 and now are seeing a good example of that. But still, it doesn't -- as far as our forecast, our earnings target for the year, we anticipated this and we're not going to change that.

Okay. Great. I'll get back in line. Thanks.

We'll move to our next question from Art Hatfield, Morgan Keegan.

Good morning, everybody. Hey, Brian, on that comment about the blast furnace shutdown, is that something that's a maintenance issue or is it a demand issue?

I understand that to be a demand issue.

Okay. When I look at some of the North American Rail statistics you put out, it looks to me, my perception, that utilization appears to have bottomed out late last year. Is there anything to read in Q2 the drop off in the number of cars that you were scrapping in the number of cars sold? Can I read into that anything about what you're seeing from a customer demand perspective?

I would say no, that's more just timing throughout the year.

I wouldn't try to slice that data too thinly.

Yes. Thought I'd ask. I didn't think so, but -- Then just on a modeling thing, the litigation benefit, where did that fall in the income statement?

It actually is a -- it's an offset to other costs. So on the income statement you will see "other costs" and within there, there's a benefit from litigation that offsets -- goes the other way.

Now, the reason I ask that because you have the different segments in the other segment. Other costs and expenses you had like a $4.5 million benefit. Is that where that was?

Yes. It was.

Okay, good. Okay, that's helpful. And then just finally, are you seeing -- we're probably -- the RSI data has gotten a little bit better but notably not where anybody would want it to be. But are you seeing any kind of increase, desperation or willingness from the car builders to commit to you to do long-term deals at prices that you would find advantageous? Or is that kind of market just dead right now?

Yes, I think the main factors have been very cooperative in talking to us this year about long-term orders. As we said in the past, it is a priority for GATX to lock in that long-term supply but when I say "priority" it's a priority to lock in the right orders so it has to be the right margin, the right price, the right mix of cars, term, flexibility -- all that. While it's a priority, I wouldn't say it's a burning issue for us to get it done immediately because of what you just said. If you look at backlog out there, it's almost nonexistent as far as the new car orders we talked about earlier in the call. We've gotten very short delivery times. They're selling pretty close to cost, so we don't feel we're certainly not in any panic mode to get the order done but it is a priority.

How does ability to finance and financing cost play into that?

Financing costs, I guess that's one of the ironies in this market, are as low as they have been in a long time on an all-in basis and coupon basis. When you look at the five-year treasury at $1.70 or whatever it is at today and spreads above that would yield -- provide really attractive financing costs. We may take advantage of some of that during the second half of the year but when I look in terms of the overall doing a longer-term order, that would just be factored into our annual funding needs and right now our committed CapEx beyond this year is really zero so we have a lot of flexibility.

Okay. And your bank line don't expire, is it 2013?

It's 2012.

2012, okay.

Spring of 2012.

So you may take advantage of the markets just to take advantage of cheap capital but not necessarily in conjunction with signing something up just being able to raise and park some capital until you decide to do something.

It's a possibility but obviously you have to weigh that against the next of carry on that.

Correct. Correct.

We're constantly looking at that.

Okay. Excellent. Thank you. I'll get back in line if I have anything else.

We'll take our next question from Bob Napoli, Piper Jaffray.

Good morning, everybody. Question, international, I know you have talked a little bit about your interest in moving into additional markets over the long run in order to make this -- to give growth opportunities in India, China. Any update on the opportunities there and I understand this is long-term in nature.

Yes. As far as India, we have established an office there and we're getting going. (inaudible) a long-term opportunity. As far as any other jurisdiction, there's really nothing to report.

Okay, so you set up an office in India just establishing relations like -- I mean -- you're not set to do business or anything like that?

No, but as attractive as that market is, we want to be in a position to do that in the next year or so.

All right. What is the ending share count on fully diluted basis? You did not buy any stock back in the quarter, did you?

No, we did not.

I know you had to convert until you paid down.

That's correct. Right around 46 million shares.

46 million shares? Okay.

46.5.

Great job on the expense control side, but just on the remarketing, obviously, I've been covering you long enough to know that's lumpy and not read too much into but are you -- are there opportunities out there on the remarketing side? Or are there -- would you expect to be more active in the back half of the year than you were and in 2011 than you have been so far this year?

During the back half of the year, I think, first and second quarters there will be some increased remarketing activity. Yes, there are definitely opportunities out there, and I think that's reflective of the fact that asset values have generally stabilized in a number of different markets and also some of the buyers have access to capital, which is critical.

Yes, I would say capital market access has improved and some traditional buyers are starting to see the trends in the rail market. It's probably looking a little more attractive. The secondary market is definitely stronger than it was a year ago, which, when it was almost nonexistent in the rail side.

How about on the acquisition front? I'm sure you must be looking -- are there opportunities on the acquisition front for portfolio acquisitions? Or have the improvements in the capital markets essentially taken the opportunities off the market for now?

We still think there's opportunities. We're still trying to get out in front of all of them that might either be going to sell or probably should sell. We'll be out in front of those opportunities but as you've seen, really nothing has changed hands over the last year and a half except the (inaudible) portfolio. But we're still getting after it. I actually expect there will be some activity. I think the increase -- if a trend in the rail market will actually motivate some people to get out there along with the recovery in the secondary market.

Last question --

It's not just purchase, it's the extent that we can control fleet through management or other opportunities. We'll pursue that as well.

Now would you expect to -- I mean, borrowing a significant acquisition, the investment dollars that we're seeing right now, do you see that kind of being not a lot of up side in the near-term to those investment dollars? If you cut a deal with a manufacturer, it's more likely to be a long-term type of deal with cars being delivered more than a year down the road?

Well, in terms of the long-term order, you're correct, but I would say probably over the last six weeks, eight weeks, the number of investment opportunities -- the activity has picked up. We would expect that to continue during the second half of the year.

The one thing I would say, though, any long-term order we place, you're going to have to take cars sooner rather than later to motivate a manufacturer.

Okay. All right. Then last question -- bigger picture question -- I mean, your return on equity is obviously well below where your targets are. But it seems -- and you have done a great job managing business through the cycle and I think your real book value is probably a lot higher than your stated book value if you mark the market -- the value of the rail cars. But how do you get -- I mean, we're kind of stuck in this low ROE or you are for it looks like almost for a couple years no matter what you do until the market comes back more strongly because -- I mean, you still have -- you going to have the negative pricing for at least another year on the lease price index and probably two years. And there's just -- unless I don't think you're going to get more aggressive buying back stock, probably, any time soon so how do you think about that? I understand you guys think longer term in nature than most companies and maybe a couple of years is not long to wait for it to get back to double-digit ROEs.

Well, I think you answer your question at the end. We have a very long-term focus as do the majority of our shareholders and what we're really focused on is not only managing the business efficiently -- I mean, we're going to need some help from the economy to -- results absolutely, but we're very focused on investment as well in this market. I think, if we can place the attractive order. If we can pick up some of those portfolios. If customer orders start to materialize, we're setting ourselves up for a return to that ROE and then some in the future.

What is the right ROE, do you think, for this Company, long term?

Traditionally, we have said 12% to 15%. I'm not going to back off that yet. It does give you some pause if you look at the developments in the capital markets over the last couple of years and the general decrease in leverage that might be expected, not at just GATX, of everybody.

Right.

But at this point we're still shooting for that.

Okay, thank you.

Our next question from Mike Grondahl, Northern Capital Market.

Yes, thanks for taking my questions, guys. Just two questions -- one, you talk about seeing kind of an uneven market out there, some positive, some negatives. Can you give us just an example of a few of the positives you're seeing and a few of the negatives you're seeing? and then secondly, can you just talk a little bit about how you're planning for 2011? Is it just -- are you planning to kind of continue to grind through the year, or are there any more significant changes that you think you can make?

Okay. As far as our planning for 2011, we're very focused right now on continue to manage through the downturn and despite the fact the rail market is recovering, as I said, it's still dramatically below the peak and dramatically below the long-term averages so it feels like a downturn to us. We're still having a lot of turn in the fleet and we still have to manage very efficiently both on a fleet and cost perspective. So there's a real focus on continuing to manage the downturn as we've had over the last year and a half.

As far as the focus in 2011, if this market continues to recover, there's going to be a lot more focus and hopefully success on the investment front. We have a lot of resources dedicated to that, both internationally as well as domestically in fleet acquisitions and possible new cars and things like that. Back to your first question on the positives and negatives, I think you have already heard them on the call, Mike. I think the rail market is seeing a pretty broad-based recovery as far, at least for the first six months of the year. Hopefully that continues to be a trend. As far as the negatives, we talked about that, too. We are seeing the Great Lakes tonnage perhaps have a little bump down in the second half of the year from where we thought it would be three months earlier. So it's very uneven out there as far as what you see as an economic recovery.

Okay.

I have to add that too, Mike, I think with regards to ASC, the results for the full year will be stronger than we anticipated coming into the year but one of the concerns we laid out for ASC very early in the year was, does the momentum continue all the way through the year and into 2011 and we would be keeping our eye on that very closely. You see a little bit of reason for some concern that there will be a tick down in activity there during the second half of the year.

That's also why there's a real focus still on operational excellence through this downtown and ASC has accomplished that. If they had gone just by what they saw and we're hearing from customers, in the March time frame, they would have probably fit out a lot more vessels to handle that tonnage. They didn't do that. They were waiting for the tonnage to materialize and sure enough, that turned out to be a wise decision based on their current forecast. So that's an example of where you still have to manage the business very tightly.

Planning for the future, too, Mike -- you see that constantly in how we think about rate and term in rail. And as we have been managing, trying to the best of our ability, manage term as we can, we are positioning the Company to have significantly more cars up for renewal in the 2013 type time frame as our expectation will be that the market will be improving by then or have improved and we can capitalize on that.

Sure. Well, hey, that's helpful. And best of luck.

We'll move to our next question from Gregory Macosko, Lord Abbett.

Yes, thank you. So, just to summarize, sequentially we saw the lease term did lengthen, I guess sequentially from 31 to 36 months. Is that correct?

From 31 to 36 months, correct.

Right. And so you're seeing -- is it fair to say you expect that trend to continue or that expectation to your ability to set the lease term that you like relative to the price to sort of improve in terms of your flexibility?

I'd say that, that number moves around a little bit. It's not an exact science, nor do we always -- we don't have complete control over that number. We have very smart, intelligent customers on the other side of the table. And at times their desire for term is different than ours so we have to manage that. So the fact that it bumps around a few months here and there from quarter to quarter is nothing too alarming or really I wouldn't read too much into that in terms of a trend, either.

Now, if I remember from previous calls and conversations, you have been saying that the lease expirations that you're seeing going forward for the rest of this year, 2010, that those maturities are increasing in rates. Correct?

That's correct.

So the fact that you did down 18% is, I think it's fair to say a fairly significant improvement from kind of what you were expecting in terms of the lease renewal rates you were previously expecting?

It's an improvement yes. I wouldn't say it's dramatic improvement, but it's an improvement. The expiring rate, if everything was renewed per schedule on lease termination, the expiring rate would increase for 2010. And because we're a little better than we thought, that just shows that absolute lease rate for the new leases are little better than we thought.

Okay. And so going forward there's still some pretty strong head winds, but -- Right?

Definitely.

And my sense is you're feeling like you can, at least, deal with them to the same extent that you have been dealing with them in the second quarter.

Exactly.

Correct.

Okay. And then just with regard to the absolute level of the fleet, which is 109,000 cars, remind me what you had in the previous quarter and what was the scrappage and what are you expecting going forward.

The car count is pretty close to what it was at the end of the previous quarter. It wasn't too much change there. The current quarter we scrapped about -- a little over 700 cars but we also added a little over 400 to the fleet.

And how many of those are new versus, from the market? Deliveries of new cars? Any new cars bought in the quarter?

There were a lot of, I don't want to say a lot of, but I think there was a pretty good percentage of that 400 was new cars.

Okay, okay. And that kind of rate you're expecting kind of relative to the scrappage, et cetera , and the deliveries you have scheduled kind of will continue kind of on this basis going forward for a couple

(inaudible) what we have on order right now and what we see (inaudible) we'd be hopeful that some of that activity we've seen on the customer front here over the last couple of months will continue. We may see some more opportunities for (inaudible).

Okay. With regard to Europe, I believe there has been some concerns that Europe and HM201 certification are driving maintenance costs up. Are you seeing that? It seems like if you are, then you're controlling it pretty well.

A couple of things on that front. Yes, the regulatory environment is increasing and changing as we speak in Europe and that's manifesting itself not just at GATX but industry-wide have increased activity on the maintenance front. I would point out that a lot of that revolves around changing out wheel sets across the industry. We're participating in that process as well. And we made the determination during the second quarter that many of those wheel sets changed out. So there's new wheel sets brought in will be capitalized versus expense. So we will be capitalizing new wheel sets on a go-forward basis and in the second quarter we actually reversed a little bit of expense compared to first quarter.

So there was --

The net of all that's in the second quarter. We will continue to face challenges on the maintenance front in Europe. That second quarter numbers (inaudible) than the normal environment.

With the reversal plus the ongoing in the second quarter, there was a reversal from the first quarter that, in other words, you capitalized some expenses from the first quarter in the second quarter?

About $3 million.

Okay. All right. And this is in North America, we're talking, on the wheel set?

It's in Europe we're talking about.

Oh, the wheel sets are Europe.

Yes absolutely.

Okay, I'm sorry, I didn't understand. And that HM201, I really don't know what I'm talking about.

That's North American issue.

And that?

That is the regulatory mandate (inaudible) tank -- on a very scheduled basis, kind of a recertification (inaudible) we do have a wave of cars that we're dealing with right now -- but those costs are being managed very much in line with what we anticipated going forward.

And that goes on for how long, do you figure?

That's not new. I think that started back in 1999 or 2000.

Oh, okay. So it's an ongoing thing. It's not something that's going to happen for a brief period -- or relatively short period of time.

Well, except that what happens it's a tank inspection either every ten or every 15 years so it comes in waves. We're actually going to be on the downside of that wave in 2011.

Okay. All right. All right, that gives me a good sense of that. All right. Very good. Thanks very much.

(Operator Instructions) We'll move to our next question. The next question comes from Ed Johnson, Green Eagle.

Yes, good morning. Thank you for taking my call. I didn't have an opportunity to go through your financial statement and I was just wondering, last quarter, there was some revenue recognized by selling off some of the capitalized leases. I think it was maybe about half the earnings. How much of that was done this quarter? Kind of realizing kind of future earning in the current quarter?

Well, I think you're talking about remarketing. Remarketing is the sale of an asset to a third party that GATX either owns or manages.

Yes.

It could be operating leases, they could be assets that GATX has owned for any number of years. And remarketing income was higher in the first quarter, it was about $14 million in the first quarter and about $4 million in the second.

Okay. Thank you kindly.

We'll move onto our next question. The question comes from Kristine Kubacki, Avondale Partners.

Good morning. My question -- is from the direction of absolute lease rates, sequentially this year, that (inaudible) I was wondering if that has really come to a end and most players are acting more rational kind of across the board in terms of maybe not raising prices but at least just, from kind of gutterball pricing out there at this point and given what you're saying in terms of lease prices.

Well, in general I don't think any of our competitors have been irrational over the last year. There's just been a lot of idle equipment out there in the industry that they're trying to put to work. I would say that most of our competitors had more idle equipment than us but I don't know that any of them were irrational economically in what they were doing. I think the increase in lease rates -- absolute lease rates you're seeing, especially in the second quarter of 2010 is just a reflection of less idle cars in the industry. And there is some renewed customer demand, as we talked about on the new car side and, in general. But, once again, I don't think anybody was acting necessarily irrational over the last year as opposed to what they might have been doing during the peak of the market.

Okay, that's fair. And then just a question on the marine joint ventures. I wanted a broad picture. You talked about difficult environment, I was wondering if it's a function of capacity coming online or is it a function of demand or both?

It's a function of both, that's actually a good question. I think there's a lot of capacity coming on certain of these markets and that will continue over the next couple years, if you believe those deliveries will happen and get financed. In addition, demand just isn't what it was a couple of years ago. If you look at our marine joint ventures, except for handy sized bulk carrier joint venture that we participate in, rates in general are just bumping along the bottom and are no better than they were a year ago. In fact, in some cases a little worse.

Do you have any insight into will those particular capacity come online? I mean, do you feel that it will come and be financed?

Indications -- maybe not as much as was originally expected but yes, there will be additional capacity coming on and therefore we don't have a -- no, once again, it's a very volatile market so it's hard to talk definitively but we don't anticipate a great recovery in rates in most of those marine joint ventures for instance, in 2011. There might be some short-term pickup that's peculiar to the asset types that we have or capacity coming online and our customers not ship capacity, but plant capacity that may change rates in the second half of the year but as far as a systemic market increase we're not seeing a lot of things to get excited about out there.

Okay, very good. Thank you.

There are no further questions at this time. At this time I would like to turn the call back over to our speakers for any closing comments.

I would just appreciate everybody's participation on the call. And if there are any additional questions this afternoon, please give Jennifer a call. Thank you.

That concludes our conference for today and we thank you for your attendance.