GATX Corp (GATX) 2010 Q3 法說會逐字稿

Good Day ladies and gentlemen. Welcome to the GATX third quarter earnings conference call. Today's conference is being recorded. At this time I would like to turn things over to Ms. Jennifer Van Aken, Director Investor Relations.

Thank you Erin and good morning everyone. Thanks for joining us for the third 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 will give a brief overview of the results provided in our press release earlier this morning and then we'll open up for your questions.

First I'd like to remind you that any forward looking statement made on this call represents our best judgment as to what may occur in the future. 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 circumstances. The Company's actual results will depend on the 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 and the second quarter 2010 10Q filings. Today we reported 2010 third quarter net income of $21.1 million or $0.45 per diluted share. This includes a net impact of negative $0.06 per diluted share related to the fair value adjustments of certain interest rate swaps at our European rail affiliate AAE cargo partially offset by a tax benefit of $0.04 per diluted share from the reduction of statutory tax rates in the UK. This compares to 2009 third quarter net income of $19.6 million or $0.42 per diluted share. Year to date 2010 we reported net income of $61.3 million or $1.31 per diluted share.

The year to date results include a net benefit of $0.04 per diluted share related to a combination of the aforementioned tax benefits due to a change in tax rates, the favorable resolution of a litigation matter and tax accrual reversal that occurred in the second quarter and the negative fair value adjustments of the interest rate swaps at AAE. These results compared to net income year to date 2009 were $59.9 million or $1.24 per diluted share which included a negative impact of $0.38 per diluted share and fair valued adjustments of the AAE interest rate swap.

The third quarter results are reflective of our slowly improving operating environments. The North American fleet utilization ended the third quarter at 96.8%. The renewal rates in the lease price index were 15.7% below expiring lease rates and lease terms remained relatively short at an average of 36 months for renewals in the quarter. The success rate on renewals improved to approximately 61% during the quarter. The marine environment for a joint venture specialty remains challenging as charter rates persist at low levels. However, we are experiencing year over year improvement in tonnage volumes at American Steamship Company.

Solid demand for iron ore shipments continues as steel manufacturing production is relatively strong. While we expect shipping volumes to remain stable through the end of the year, carry over into 2011 is unclear, as our customers are in the early stages of formulating their forecast. We are seeing more opportunities to purchase assets resulting in increased investment activity.

Investment volume was approximately $113 million during the quarter, our highest quarterly volume year to date. Given our year to date results and the current operating environment, we continue to expect 2010 full year earnings in the range of $1.50 to $1.70. This guidance excludes the impact from items I laid out earlier.

On a final note, last week we announced the transaction that makes GATX the manager and part owner of approximately 5, 350 freight cars. The cars are owned by a new company called Adler Funding LLC which GATX owns with a group of financial institutions. This transaction is reflective of our strategy to use GATX's market leadership position and strong balance sheet to grow our North American rail fleet at attractive valuations. It also enables GATX to fully leverage its management capabilities and earn an attractive return for our share holders and our partners in Adler. With that overview, we'll open up the call for your questions. Erin?

Thank you. (Operator Instructions). We'll hear first from John Hecht with JMP Securities.

Good morning and thanks for taking my questions. Real quick with respect to the earnings, in affiliate revenue line that you have as about $5.7 million, were there any one-time non-recurring losses from your affiliates? And if so, can you give us a sense of what the core run rate excluding that type of event would have been in the affiliate line item?

Sure. Well, John, it's Bob Lyons. The main item in the third quarter was the AAE derivative for $2.8 million. That was a negative. That would flow through that line. So that would be the only adjustment.

Okay. So is it normalized run rate then closer to $8-ish million or-? $8 million to $9 million, in that line item?

Normalizing this quarter, that's correct. But keep in mind, too, there's also from time to time some remarketing income that flowed through at that level so that number can all bounce around a bit

Do you have that remarketing this quarter that flowed through that line item?

There were no remarketing events of any significance this quarter

So 8 to 9 plus upside for remarketing using this quarter as a basis.

Sure.

On the capital deployment side, you highlighted in the prepared remarks that you see more opportunities. Can you characterize these? I mean, are they small, across various geographies? Are there any large opportunities? Can you characterize it by asset type, anything of that nature?

It's Brian. I can do that. On the rail side, we're seeing new car opportunities we've seen through the second half, probably starting at the end of the first quarter. Seeing more new car opportunities on the rail side. That's pretty broad based, post freight, (inaudible) covered hopper, some tank. We closed Adler in the third quarter which is an investment, once again a rail investment of a distressed fleet. In general we're seeing more opportunities across the board as secondary markets improve, the economy improves slightly and people are finally willing to part with the (inaudible).

So its generally across the board in various geographies?

Yes

On the Adler transaction, is -- what it said is that you guys put in equity? Is there levered return that we should be thinking about or is it unlevered returns that were attractive enough given the pricing to get you guys interested?

Well, what this really comes down to is -- sorry, we're having a little problem. What it comes down to is we purchased about-- it was a $36 million stake about 12.5% of a new company. As Jennifer said, 5,300 rail cars. The way we look at it is, with the troubled fleet where we can add significant value. So we don't do it for the management fee at all. We don't think we can earn a decent return there.

What we do is take advantage of the situation where the fleet's struggling, we think we can enhance the fleet's future performance considerably from a utilization perspective, a rate perspective, maintenance cost, free marketing, all of that. Our return really will come from three sources. The obvious one is the share of the on going earnings of Adler. The second would be the fee that we earn for managing the fleet. Third and most importantly is we can earn an incentive fee upon successful liquidation or residual realization of that portfolio. So that's really why we do it because we think we can add value to the fleet and capture that upside in an outsized manner

Okay. Final question. What was the renewal success rate during the quarter?

It was approximately 61%.

So that's an improvement from the last few quarters?

It is. It's been running around the mid 50s

Okay, great. Thank you very much.

Our next question comes from Art Hatfield with Morgan Keegan.

Morning, everyone. Just a couple questions. Just so I'm clear on this. On the earnings guidance, the $1.50 to $1.70 you talked about, that being based on what you reported today, excluding the items noted above. So we should be using a $0.47 number in Q3, is that correct?

That's right

Okay. Moving on to Adler real quick, is that -- you talked -- Brian, you talked about being able to sell stuff out of the fleet, but is there an instance where Adler would grow and you may have additional capital injections into that company?

No, that's not the objective. The objective is improve the performance of the fleet and eventually get the residual realization to an attractive level

Okay

There may be a point in the future, Art, where select cars out of that portfolio GATX might buy. It's more a static portfolio that we'll manage pro-actively and liquidate over time

Got it. That's helpful. As you think about this going forward and you've talked a lot about these opportunities, like you've been able to do here with Adler and that there could be more opportunities if the market improves are enough of these portfolios in bad enough shape that they're really not in a position where they will ever recover and they will need to sell out at some point? Or can the market recover and get these guys in good enough health where these opportunities will go away as things get better?

You know, the way I think about it, if you looked two years ago, we took down the Alco portfolio as the market was descending. Now we're starting to have a little bit more success, this would be an example, as the market recovers. I think people didn't want to let go at the bottom because they didn't like the valuations they were seeing. Not many people -- they didn't think many people would show up at their sales process. I think more opportunities will come up and they'll probably come up as the market recovers

Okay. Would you characterize this -- you may not want to answer this, but I'm going to ask it anyway. The valuation on this, do you think you got a better deal here or on Alco?

Probably shouldn't answer it. I think it's an attractive valuation in both cases

That's fair enough. Thanks for your time, as always.

And next we'll go to Mike Grondahl with Northland Capital Markets

Couple questions, guys. First on the $1.50 to $1.70, can you just give us the comparable year to date number, where you are so far, just so we know we're talking about apples and apples? And then secondly, Brian, can you help us think about lease income? It was $216 million, a little bit of a lift in the September quarter. Kind of how you're thinking about that in the next several quarters. What's the pluses and the minuses?

Yeah, Mike, your first question, the comparable year to date number that we're looking at is $1.27.

Okay, great. That's where I was at. Thanks.

As far as thinking about leasing income going forward, let's face it, it's driven by rail. That's close to 90% of our portfolio and revenue pressure continues in the rail business. You saw the LPI in the quarter. If you look even ahead to 2011 as far as the expiring rate on all these leases that we're renewing it's very similar to the 2010 levels. Remember we're now in the process of renewing leases or assigning cars as leases renew to-- really from cars that were put on at the peak of the market. That will be the case throughout 2011 and therefore that revenue pressure will continue, Mike.

I mean, can you give us some sense of magnitude? $216 million is not the floor, is that what you're saying?

That pressure that Brian referenced, Mike, it's hard to quantify because we don't know what's going to happen in the marketplace. Those negative comps are going to continue well into 2011 and then it should start to abate. You know, the hurdle rates should start to come down, so to speak. But, you know, the last couple quarters we've been right in around that $214 million, $215 million range

The reason it's hard to answer also is we don't know what additions to the fleet we'll be making. I'd say on the existing fleet the revenue pressure continues in 2011. It will be off set by how successful we are in growing the fleet.

Got you. And it's fair that you feel better about growing the fleet today in October than you did at the beginning of the year, correct?

Well, we're definitely, as I said earlier, we're definitely starting to see more opportunities to grow the fleet. So from a market perspective, commercial perspective, yes

I would also add to that, Mike though that one of the reasons there is more secondary market activity is because the capital market environment is so strong and the potential for buyers to surface who have access to capital is better today than it was 18 months ago. So it definitely leads to more activity in the secondary market. For sellers, it gives them more confidence that if they do go out with a portfolio that more than GATX may show up

Got you. And Brian, just looking at the specialty business a little bit, there was a comment in the press release just about pressure on the charter rates. How are you thinking about that business as we head into 2011? Do you think there will be more remarketing in some of those portfolios or growth or is it just getting as much rate as you can?

I think -- well, as far as specialty portfolio, we're looking at it two ways. One is the marine joint ventures -- the joint ventures in general both marine and Rolls Royce. On the marine joint ventures it really depends on the type of asset we're talking about. For the dry bulkers, for the gas and ethylene carriers, they've had a pretty good 2010 in terms of rate. They recovered nicely from the bottom at the end of 2008. But on the chemical joint ventures, chemical tankers, they haven't performed that well in 2010. We really don't see an end in sight to that one. It's a very tough market and a lot of capacity is coming on. On the IAF side I think you'll see that portfolio grow. We're starting to see more opportunities there

Okay. Thank you.

Next we'll go to Bob Napoli with Piper Jaffray

Thank you. Good morning. With the -- it seems -- I mean you guys seem more optimistic than I have heard you in awhile. Not saying that you're -- by no means wildly optimistic, but given some improvement in the market, your residual income has still been really low especially in the rail market. Are you seeing more opportunities to do a little more traditional buying and selling than you have? Should we see that you think you're going to start seeing residual income move up as you possibly adjust portfolio a little, in a little more liquid basis than you have over the past couple years?

On the rail side we're seeing more opportunities to buy and sell, yes. That market is recovering. On the specialty side, looking ahead to -- let's see, last part of 2010 and into 2011, I don't see a whole lot of scheduled lease terminations so I don't know that there will be significant remarketing proceeds in specialty going forward. But in rail, focused on growing the fleet. Those opportunities are increasing. And, will you see remarketing in rail? Yes, because that -- the secondary market has improved as Bob said.

Have rail car prices -- have you seen an incremental improvement in rail car price? I guess it depends whether you are a buyer or seller but are rail car prices moving up off the bottom?

Are you talking about in the secondary market, Bob? Or used equipment?

Both, I guess

Okay. Well, I can tell you in the secondary market, yes. Buyers are doing well because in 2009 really nothing cleared the market. There just was very little activity. So any discussion around prices for specific rail cars were more hypothetical than anything else. But the market is more robust in the secondary market today. So that would obviously lead to a little bit of improvement in valuations on new cars.

Yeah, the new cars, it's not speculation any more as it was when I answered that question in prior quarters because we have ordered some cars both on the tank and freight side. Generally prices are down 20% to 25% from the peak on both tank and freight. They really haven't moved up. There's some noise in the industry that component suppliers are trying to push price increases through. I don't really have actual data as far as that goes so it's been fairly steady in 2010.

Okay. And on the lease rates, have the lease rates moved off the bottom or are they --

Lease rates have, across the board almost, moved off from the bottom in almost every category or car type. Except for anything construction related like a center beam, where they're still struggling mightily. But in general rates -- absolute rates are improving across the board

Like 5% or something --?

Where they sit today, Bob, is still well below --

I understand

I mean if you look at say a general service tank car where it was down 35% or more from peak to the bottom, and it's recovered but it's only recovered about halfway. So still well off the peak.

But that's significant pretty significant recovery on the bottom.

It's going in the right direction, but it's going slowly.

Your balance sheet, the rating agencies are always pretty tough on you guys as far as -- I mean, your leverage. How much room do you have today to leverage up the balance sheet to take advantage of the opportunities or do you need to raise some hybrid type capital? Maybe give a little feel for your ability to invest and whether or not you need any new capital of any type, if you were to significantly increase the amounts you're investing?

In the ordinary course of business, standard investment volumes, even increased activity, we may see on the horizon here, I don't see any needs to raise additional capital. The type of transactions you might be talking about, a mega portfolio, something on the order of magnitude of our size, that could possibly trade at some point in the future. Then we would have to look at the appropriate capital structure for the Company, if you were to pursue something like that.

If you went up a half a turn in leverage, do you have the ability to -- how much capital do you have -- how much -- what ability do you have to increase leverage without any new capital today?

It's always a bit of a dance, as you know, with the rating agencies but half a turn is probably manageable. From there it's really all speculative and a little bit difficult to comment on, Bob

Right. Thank you.

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

Good morning, guys. As I look at the industry numbers there are about 9200 cars ordered in the quarter. I think I heard you say that you ordered a few, but I don't think the lessors have really come in yet. Last cycle you guys were one of the first to place a big order. Is there any change in market dynamics where the railroads are buying more direct or is there a -- is it a car type issue? Any commentary on the market?

Yeah, you're right lessors haven't come in a major way. I don't think there's really any trend out there or anything to suggest that it's different from the past than who's ordering cars or what types.

Okay. I think in terms of the specialty segment, you said a little bit about IAF, but I would expect the mining equipment, the oil and gas guys, construction, would really be strengthening right now if customers are still facing tight credit. Can you talk through some of the specific drivers in that specialty segment there?

We haven't done a whole lot in those sectors that you mentioned. They're very competitive sectors and especially -- there's a lot of banks that are coming in aggressively in that sector. Some of that business doesn't make sense. But we have seen opportunities for example, inland marine, and those type of assets that makes a lot more sense for GATX, where the assets we know very well. It's long lived, it's widely used and it's -- we have some pretty decent relationships

Okay. And last question. Just trying to understand guidance a little bit better. If you look at normal seasonality, 4Q EPS has typically been down 25% or 30% from 3Q levels. Is there anything unusual that we should be thinking about with respect to 4Q that would cause your earnings to be stronger or weaker than that seasonal pattern would suggest?

Well typically what causes that pattern, Steve, is re-marketing income. Just across the equipment industry there is always less activity in the fourth quarter. Typically purchases and sales, more so for sales, that are going to occur in a given year. Most of those occur during the first three quarters so you don't see a lot of re-marketing income typically in the fourth quarter and that would be the swing factor for GATX

You expect that normal seasonal pattern will hold this quarter?

I don't see anything on the horizon right now that would change that pattern and we'd expect re-marketing to be down from where we were in the third.

Got it. I understand. Thanks.

Next from Jefferies we'll go to Daniel Furtado.

Good Morning. Thank you for the time. First question is did you disclose the investment in rail this quarter? How it breaks down between U.S. and European assets?

Sorry we're having problems with the phone here. We don't have it broken out. It will be broken out in the Q. I can say the majority of the investment in the quarter was in North America

Okay. And then what percent of the fleet was -- has been released or are you expecting will be released through 2010? Like, if you looked at the beginning of the year to the end of the year?

It was about 17,000 cars that we had scheduled for renewals this year

And do you mind telling me what your renewal expectation in terms of number of cars is for next year?

It will go up from that number, Daniel, from the 17,000. Some of that depends a little bit on what occurs here in the fourth quarter but it will more likely be in the 19,000 plus range for 2011

All right. Well, thank you very much. Take care.

Next we'll hear from Brad Evans with Heartland.

Yes. Good morning

Good morning

Just -- most of my questions were answered. I was just curious whether you would give us your thoughts in terms of the sequential rate of change in terms of lease rate into the early part of the fourth quarter, has the improvement you saw in the third quarter, has that continue into the fourth quarter?

Generally, yes, in absolute rates

Okay. And just secondarily from an investment perspective, could you just qualitatively discuss the opportunities that you see to put capital to work today versus what you saw maybe six months ago on the use side?

Talk more about this a year ago. It's been pretty constant over the last six months. We've seen some opportunities on the rail side and the industry has as well. The best example being small (inaudible) covered hoppers for Frac sand has been a car type that a lot of people have been ordering, both owned and leased. But we've all seen some opportunities in tank cars general service. It's just getting a little bit better. Our customers are starting to finally put on some new capacity and they hadn't been willing to do that nine months, a year ago

Some of the larger players who may have had some stress with the financial crisis, who seem to have been a little less active in growing their fleets and I think there's been some speculation of their commitment to the business longer term. Are we getting closer to a tipping point, do you feel, in terms of where rates are right now and asset values that you might start to see some movement of some larger portfolios that -- of some folks who have been in the business but may not have an interest in longer term to be in the business?

Yeah. We --That's a good question. We think that there's a portfolio or two out there that is still likely to come loose but it's hard to talk about when.

Okay. And I hate to ask a question that's probably obvious but in terms of availability on the credit side -- on the debt side. I realize the debt markets are wide open. I would imagine that is the case for you at this point as well in terms of your ability to tap the debt markets. Is that a fair statement?

Yes. Absolutely. Capital markets are very strong right now and that market would be easily accessible and open for GATX without a doubt, at very attractive coupon.

Great. Congratulations on performance. Thank you

Thank you.

Our next question comes from Zahid Siddique with Gabelli and company.

Hi. Good morning. I have a couple of questions. The first is on share buy back. What's your strategy? Did you buy any shares? What's your plan going forward?

We have an authorization in place that has approximately $70 million remaining under it. There was no activity on that during the third quarter

Okay. You talked about the idle cars being an issue. What is the number of cars that are idled and what percentage of that is of the total portfolio within the industry?

Within the industry there's about 331,000 idle cars

You have to be careful about what you -- GATX talks about idle cars in terms of the percentage of our fleet that is not leased. The industry talks about idle cars in the percentage of cars or the number of cars that haven't moved for some period of time, usually 60 days. So it's a little bit of a different statistic

Of the 331,000 is the number that has not moved?

Exactly

That number peaked at over 500,000 late -- early 2009 and has steadily marched down to 331,000 today.

And that's one-third of the total cars? Is that a fair assessment?

Like 22%

Oh, 22%. Okay. My next question is on a deal where you recently had ACL. You probably saw that, American Commercial Lines. Would you have any comments on that? How do you see that changing the industry especially within your specialty segment?

We don't anticipate any significant change from that announced transaction

Okay. You said there may be a portfolio coming loose at some point. Do you know the size of that?

I don't think we can speculate on that

Don't want to talk about names or specifics. It just seems from -- we spend a tremendous amount of time talking to other lessors about their fleets and the likely outcome. It's just our feel from talking to the entire industry that there's still one or two that will come loose of a decent size. But going into detail beyond that does not serve us well

Thank you so much.

(Operator Instructions). We'll go next to Mario Gabelli with Gabelli and Company.

I didn't mean to double-team you. Zahid asked a couple questions, just to hitchhike on one of them. Did you not buy stock because of economic or legal reasons?

Mario, it's Bob. We have not been active under the repurchase authorization this year

I just always love to ask. There was a company that did something interesting recently. Of the size of a buy back, assuming you bought a billion dollars of fleet, just picking any number the size of your company, what would be your expected unleveraged cash on cash return on that?

It depends on the fleet, Mario. If it's a distressed fleet, you look at probably a double digit return.

Okay.

If it's buying cars -- if it's a huge order, you're going to get a lot less because that will be one of those things where you'll hold it until the end.

As you know, I have always been pitching for you to use OPM, other people's money and an MLP where you're the GP on an MLP that kind of -- even half of that return would attract a lot of interest, particularly if there's some long-term benefits on it. Looking at the sources of capital, obviously, I'm not going to pitch somebody else's investment banking services, but lot of money out there.

Understood.

And you guys have the management expertise, no point in having some L -- some private equity firm or some hedge fund do it.

Right but we're going to pay the right price.

Always. Even if it's OPM. Got it. Thanks very much

Thank you.

At this time there are no further questions in the queue. One final opportunity. (Operator Instructions). It appears we have no further questions.

Okay. Thank you Erin. And thank everyone, for participating. We'll be available this afternoon to answer any additional questions.