GATX Corp (GATX) 2010 Q4 法說會逐字稿

Good day, and welcome to the GATX fourth-quarter earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jennifer Van Aken, Director, Investor Relations. Please go ahead.

Thank you, Ben, and good morning, everyone. Thanks for joining us for the fourth-quarter and 2010 year-end 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 provide a brief overview of the numbers, and then Brian will discuss 2010 and the year ahead.

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 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 10-K filed with the SEC for a discussion of the most important of these factors.

Today, we reported fourth-quarter net income of $19.5 million, or $0.42 per diluted share. This includes a net benefit of $4.5 million, or $0.09 per diluted share, from a tax benefit, partially offset by the negative fair-value adjustments of certain interest-rate swaps at our European rail affiliate, AAE Cargo.

This compares to 2009 fourth-quarter net income of $21.5 million, or $0.45 per diluted share. This includes a net benefit of $5.2 million, or $0.11 per diluted share, from a tax benefit, partially offset by the negative fair-value adjustment of the AAE interest-rate swaps.

For the full-year 2010, net income was $80.8 million, or $1.72 per diluted share, including a net benefit of $6.2 million, or $0.13 per diluted share, related to the favorable resolution of a litigation matter and tax benefits, partially offset by the negative fair-value adjustments of the interest-rate swaps at AAE.

The breakdown of these items is as follows. The benefit from litigation is $4.1 million, $0.09 per diluted share. The tax benefits are $11.4 million, $0.24 per diluted share. And the negative impact from the AAE interest-rate swaps is $9.3 million, $0.20 per diluted share.

By comparison, 2009 net income was $81.4 million, or $1.70 per diluted share, including a net negative impact of $13.3 million, or $0.27 per diluted share, related to the AAE interest-rate swaps, partially offset by a tax benefit.

Our 2010 results reflect our still challenging, but improving, operating environment. As we look to the year ahead, as noted in this morning's press release, we currently expect 2011 earnings to be in the range of $1.70 to $1.80 per diluted share.

We thought it would be beneficial for Brian Kenney to provide more detail about the general market environment and the opportunities we see in 2011. So with that, I'll turn it over to Brian.

Thanks, Jennifer. What I'd like to do this morning is quickly give you my thoughts on our 2010 results, both from a financial and strategic perspective, and then give you more color on what to expect in 2011.

As Jennifer detailed, our 2010 financial results ended up very close to our original expectations coming into the year, on an overall basis. The composition of those earnings, however, was a little different than we expected coming into the year.

In rail, we were able to increase utilization and realize absolute lease-rate increases. That was across the fleet, both in North America and Europe. So that was good to see. We were also able to increase our maintenance efficiency, and that was extremely important given the difficult market and the churn it caused in our fleet as we put idle cars back to work and assigned released cars to different customers.

One positive surprise in rail in 2010 was that absolute lease rates showed more strength than we originally thought. That has very little effect -- had very little effect on 2010 results, but it will benefit our longer-term results more significantly. So overall, rail performed as expected in 2010.

In specialty, however, we performed somewhat worse than originally expected, as asset remarketing opportunities were limited until very late in the year, and our marine joint ventures continued to struggle in a very difficult bluewater marine market, especially in the chemical tanker sector. Demand remains low there and the order book remains high.

Fortunately, that shortfall in specialty was offset by an unexpected positive, and that was a 30% increase in tonnage carried at American Steamship, of course driven by iron ore tonnage originating from the strong recovery in the U.S. auto market.

So, coupled with continued low interest rates in 2010 and continued prudent SG&A management, our financial results met our original estimates.

More importantly, from my perspective, if you look at our strategic moves in 2010, we executed on the strategy that we put in place a few years ago, which was to manage more effectively across the business cycle. As you may recall, in the strong market of a few years ago, we focused intensely and successfully on pushing lease rates higher, extending lease terms to insulate the business, and reducing leverage to protect our access to capital on what we thought was the inevitable downturn.

The downturn came, and during that down market of the last two years, we changed our focus to maintaining utilization, shortening our lease term to position the fleet for the eventual market recovery, and trying to accelerate our fleet growth to take advantage of the much lower prices we were seeing in that weak market. But until recently, we had experienced limited success on the last part of that strategy, which was to grow the fleet.

So I'm very pleased that in the fourth quarter of 2010, we closed on two transactions that added almost 8,000 rail cars to our owned and managed fleet at extremely attractive prices, and over the course of the last two years, that's almost 12,000 young, state-of-the-art rail cars that have been added to our fleet at, once again, very advantaged prices. This will add significant value for our shareholders over the long term, and it validates the strategy that we had put in place, and we hope to make more progress on that growth initiative in 2011.

So, speaking of 2011, let's get a little more color on our earnings estimate of $1.70 to $1.80 per share. In rail, as we said, we continue to experience pressure on lease revenue. Even with absolute lease rates increasing in the market, the expiring rates on the existing leases that we are renewing continued to increase in 2011.

Now by 2012, we expect that expiring rate phenomenon to finally reverse, but the pressure is still there in 2011. We do expect to offset that pressure by higher asset remarketing, because the secondary markets are currently much stronger than a year ago. And we also expect to be helped by continued efficiency gains in maintenance and less regulatory compliance work on our fleet. So overall, our expectation is for higher segment profit for rail in 2011.

In specialty, we do not see a meaningful recovery in our bluewater marine joint ventures. The same market dynamics are expected to continue, especially in that chemical sector. Asset remarketing opportunities may also be limited, due to the portfolio's composition and just lease termination schedules in 2011.

However, we did do some nice investment in 2010. We expect to do so again in 2011. We expect to have continued strong performance in our engine leasing venture with Rolls-Royce, and improving asset quality in the portfolio should also help offset this weakness and contribute to an increase in 2011 segment profit for specialty as well.

Now at American Steamship, at the current point we expect similar tonnage to be carried in 2011 as was carried in 2010, so we think segment profit will be relatively flat.

And lastly, we do expect increased SG&A from 2010 levels. The SG&A levels over the last two years were extraordinarily low, as our employees shared the pain with the shareholders in the form of lower compensation and reduced staffing. And I think they've done a great job of outperforming their competition in this extremely difficult market. But as the market continues to recover, and especially as we further pursue SG&A-intensive growth initiatives, we will see SG&A increase in the coming year. We are also facing the same increased pension and healthcare costs that other companies are experiencing at this time.

So all this combined leads to our EPS estimate of $1.70 to $1.80 for 2011.

So, moving to our business and strategic imperatives in 2011, it's really threefold at this point. First, with the improving market in rail, we are going to change our focus from maintaining utilization to pushing lease rates higher. We like high asset utilization, but you'll see us risk that utilization, to some extent, in order to get a higher yield on our asset base. And until we see significant rate increases, it's unlikely that we will focus on lengthening lease term. So the focus is on pushing rates.

Second, we will continue to focus on asset growth, as I said, in North America, and that can take many forms. It could be spot rail car purchases similar to what we did in 2010, fleet acquisitions, portfolio acquisitions, a committed purchase program. It can take many forms. Asset prices are starting to increase with this recovery, but they are still attractive in the context of long-term historical averages and our expected future averages, and we want to build on the success that we realized in 2010.

The last focus is we want to increase our focus on international expansion in rail. We continue to see attractive investment opportunities in our European tank car business. They have increasing success at building their business in eastern Europe, and there are also emerging freight rail markets that we feel will provide excellent opportunities over the longer term.

Now these initiatives in these emerging markets are generally very SG&A intensive and can have extremely long gestation periods, and we'll certainly encounter some bumps along the way, but we feel that we need to capitalize on our excellent global brand name in rail and export what we have done well in North America for the past 112 years. So, once again, we plan on making strides in international investment in 2011.

Overall, we are certainly going to face our share of challenges in 2011, but we feel optimistic about the building economic recovery. We feel confident about the long-term prospects for our business, and I have a very talented and highly motivated employee base eager to move the Company forward.

That's all I have, so let's go ahead and open it up to questions.

(Operator Instructions). John Hecht, JMP Securities.

Good morning and thanks for taking my questions. First question, related to Q4. If you have this handy, can you give us the numbers for the incremental revenue or the contribution from revenue and expenses associated with the Adler purchase or the late-year purchases?

The Adler purchase, as you know, John, we are a 12.5% owner of that portfolio, so in 2010, and that transaction closed mid-October, there's not a significant or any discernible impact, and pretty much the same as of right now with the 2,500 cars that we bought. That just closed November 15. So, we really only had six weeks of income off of -- or revenue off of those cars. I don't have the number handy, but not a big number or a material number.

Thanks. Then, a couple of questions on the modeling. What is -- can you give us a sense for what the tax rate should we -- we should be -- I guess the consolidated tax rate we should be considering. And then, how many cars will roll in 2011 relative to 2010?

Sure. It's Bob. I'll take the tax question. We continue to try to drive that effective tax rate down, and it was relatively low in 2010, given the mix of income from the foreign entities that are taxed at lower rates. So, for 2011 we're looking at a number, really, just below 30%. You could use 28%, 29% for the effective tax rate for 2010 -- or, I'm sorry, for 2011, and we'll let Jennifer answer the question about the cars scheduled for renewal.

John, in terms of number of cars we have coming up for lease renewals in 2011, that's going to be approximately 20,000. So, up a bit from what we had in 2010.

And is it a similar composition, U.S. and Europe, relative to 2010?

That's a North American number, and the composition is very similar. As we've talked about in the past, there is really no seasonality to that. They tend to roll evenly throughout the year. So there isn't any one car type customer or quarter where there's going to be any anomaly.

Okay. And then, the last question, I guess probably for Brian, you mentioned your focus this year would be on growth and international expansion and you're looking at potential spot orders, et cetera. Can you give us just your opinion on the markets? Of those markets, where do you see the highest opportunity? You recently -- you made some late-year acquisitions, it sounds like, at very low prices with, I imagine, good return on capital. What gives you the most hope in that regard and where do you think it's the stickiest in terms of your opportunity?

Well, I think -- it's across the board. We're always working on a rail car order as a major participant in the rail car market. We are constantly speaking to the manufacturers to see if a longer-term order makes sense.

To date, we really haven't seen an opportunity that makes sense in terms of price and flexibility for both us and the manufacturer, for that matter, but at the same time, in 2010 I believe we added almost 1,100 new cars to the fleet on a spot basis. We did it at attractive prices with short lead times, and if you look at the backlog at the manufacturers right now, it's still pretty low. Four months or less in the tank car market and six months or less in the freight car market, and most of that is driven by material delays as opposed to market delays.

So, I don't feel like it's urgent, but it's still always an objective to GATX to lock in that long-term supply. So that's one objective.

The second one is, as the secondary markets recover, we hopefully will see some secondary market volume in picking up fleets, or portions of fleets.

The third opportunity is what we did in the fourth quarter in acquiring portfolios. That's the toughest one to call because there are still opportunities out there, I believe, of fleets that may be sold in 2011 and beyond, but you can't make people sell to you, and it's very spotty, and as you know, I think our success there has been -- it's difficult to achieve and infrequent at best. So, we'll continue to pursue it, but it's just hard to tell you what's going to come when.

Arthur Hatfield, Morgan Keegan & Co., Inc..

Just a few questions. First on the -- I want to clarify the comments that were made. I think, Jennifer, going over some of the adjustments to the earnings for both, I think, fourth quarter and full year, you discussed the litigation issue. That was not a fourth-quarter issue. Is that correct?

That's right. That was earlier in the year.

Okay, I just wanted to make sure I heard that right.

The other thing, looking at fourth quarter with regards to results relative to our modeling, one of the things that kind of differed somewhat substantially was the maintenance expense in the rail group. Jumped back up to levels that we had seen in first quarter. Can you talk a little bit about what went on there, if that was kind of unique to the quarter or -- and how we can think about that going forward into 2011?

I think the -- what we're expecting overall, Art, I can answer for maintenance expense for the year 2010 came in at just under $270 million, at $267 million.

And our expectation for 2011 is that maintenance expense stays right in that level for the full year. And things do move around quarter to quarter a bit, based on cars that come in for compliance work and HM-201. So it is not a level just spread out across the year. It does bump around a little bit quarter to quarter. But full-year 2011, we are expecting to be right in the same range as we were in 2010.

Are the numbers that you're talking about, would you say -- given -- not over the life of the car but in the near term, are they unusually high or in line or lower than what you would anticipate over the intermediate term?

I think they're higher over the last two years than we expect for the next few years, mostly because of the cars that came in for compliance work, specifically HM-201. That load is lighter in 2011.

Also in 2010, and 2009, for that matter, we experienced a lot of churn in our fleet, right, because it was a difficult market. A lot of cars were coming back and getting reassigned and visiting service centers, so that churn in the fleet causes more maintenance events, causes a higher cost per car in a lot of instances, and as with higher utilization and as we are (multiples speakers) sitting here right now, we expect -- we don't expect, despite a larger fleet, for our maintenance costs to go up next year.

Okay, and if we think about it longer term, as some of these specific issues kind of dissipate and we see more stability in the market, that maybe this number flattens out or maybe even goes down going forward?

Yes, it could, but it's really hard to answer that because at the same time I'm out there trying to buy new cars and existing fleets, and until you know that mix, it's hard to tell your maintenance profile out beyond a year. So, yes, if I just had a static fleet, I would expect it to be the same or lower for the next few years, until the next compliance cycle comes through. But as we add cars, it's tough to tell you out, with any level of accuracy, out a couple of years.

So, that's fair enough. Your efficiency and maintenance costs per car should flatten out to go down.

Yes, we would expect our efficiency to increase and our cost per car to go down. It's really driven as much commercially as it is by our efficiency in the centers.

A quick question on the comment about -- you had mentioned in the press release, Brian, and I think in your comments, too, about adding 8,000 cars. Was that for the year or was that just related to the two transactions in Q4?

Art, it's Bob. That was just for the two transactions in Q4, or at the end of the year. One of them actually closed -- or they both closed in Q4.

The Adler transaction was 5,500 cars, of which we are the manager of all of those cars and we have a 12.5% interest in the entity itself. So an equity stake in the upside of those cars, and then, November 15, we closed on 2,500 cars that we bought outright in a -- through a bankruptcy/liquidation. So those are the 8,000 cars we referred to, and then Brian also mentioned, throughout the course of the year we also bought other cars in the secondary market and we bought new cars in the spot market.

Right, so when I think about the -- those 8,000 cars, the Adler are not included in your fleet statistics. Is that correct?

That's right. They're not in the owned -- wholly-owned fleet statistics.

Okay, good, okay. So when I look at Q4 numbers, you added like almost 3,500 cars. That would've been the 2,500, plus some other cars that you bought, but Adler would not be included anywhere in there.

That's right.

Exactly. And that fleet we purchased, the wholly-owned fleet we purchased, had a utilization, I think, of 97%-plus, so it's pretty similar to our existing fleet. The Adler fleet, it's not in our statistics. If it would, it would have dragged them down because that was a troubled fleet with lower utilization.

Okay, interesting. And that kind of led me to my next question. If you excluded the 2,500 cars, you still would've seen an increase. Apparently you would've still seen an increase in utilization in the quarter.

That's correct, Art.

And then, just finally, I know you've talked about your opportunities going forward, but in the context of new car prices, we're kind of hearing that some of the builders are starting to quote higher prices than they have been. How do you balance that with where lease rates are in making a decision with regards to whether or not you want to buy new or still focus on the spot market, the secondary spot market?

It's an excellent question. We are -- I said, I think, mid-year when I got the question that new car prices were probably down 20% from the peak, and those were the kind of prices we were realizing on those spot purchases, which were -- once again, I think it was close to 1,100 new cars.

We really haven't ordered any new cars recently and we are seeing some price increases out there, mostly driven by an increase in the price of steel, Art, al though there's some noise about component suppliers trying to push increases through as well. So I think most of the recent increase is due to the price of steel.

And as you look at that, once again, it's a 30-, 40-, 50-year investment, so you're looking more than just at today's lease rate, but it definitely -- you can definitely make a case that you want to add new cars enough to fill your customers' requirement for new cars, and as the secondary market improves, you can have even greater success and a higher return by buying some of those fleets and parts of fleets.

So, once again, it's a balance, and it always depends where you are in the cycle as opposed to what's more attractive. But I don't think you'll ever get away. This Company will never get away from adding new cars, just because of our customers require them.

Paul Bodnar, Longbow Research.

Good morning. A couple of follow-ups here. It sounds like, obviously, the SG&A costs are going up here in 2011. I'm just trying to get an idea on the magnitude of that. I mean, I'm guessing we're not going back to 2007, 2008 levels, but if you can kind of give us a little more clarity on that?

Sure. We finished the year at $135 million, and as you know, back in 2007, 2008, those numbers were in the $160 million, $165 million range. We are definitely not going back there, to that level, in 2011. But we are -- we'll see that number tick up to a run rate of $35 million or $36 million per quarter, I think, as a reasonable range right now.

So basically just slightly below where you came in at 4Q at?

Yes.

Another follow-up as well, just on the opportunities out there. What are used car prices looking like right now? Are we really starting to see those move up or -- or I guess, what's the status on those?

Well, if the market recovers -- I don't have any great recent data for you on the used car market, other than the two portfolios we picked up, which isn't a good representation because both of them were very motivated situations. But you would expect used car prices to increase as well as the secondary market improves, capital markets improve, and more people show up to the party when cars are up for sale. So, yes, we would expect that those prices will march up.

Okay. And just a quick follow-up on Adler as well. Is this a deal that -- initially, then, it sounds like utilization is pretty low. Is that going to be accretive here in 2011? Or is it, you've got to get utilization up to really start getting kind of real income out of that?

I would say in 2011, it's accretive but very marginally so. The real upside for GATX in this transaction is over the course of the next few years, where both we and our partners should realize quite a bit of value out of that portfolio as the cars are put back to work and as the overall environment improves, and we can start selling cars out of that portfolio in a few years. That's where you'll see more of an impact.

I would add that usually, as most of our investors know, when you add new rail cars or near-new rail cars, as these portfolios represented, it's usually dilutive for a few years as earnings, and it takes a while for earnings to really show up. In both these cases, I'd say they were much more attractive, and as Bob said, in one case it's actually slightly accretive, which is extraordinary for us in terms of what we usually face in the market.

Yes, that was surprising. We would expect you to be either flat or even a little bit -- like you said, lose a little on it.

And then, one last question, just -- as [a la soar] out there, do you guys -- the bonus depreciation we have in 2011 here, is that going to be something that really matters to you or is it you don't really end up with all your investments, probably, with the cash tax anyway in 2011? Is that something you just don't -- aren't really thinking about?

It's typically not something we would avail ourselves of. But we are keeping a close eye on what's going on in the marketplace because, obviously, different lessors or some of our customers may be in different tax position where it might be attractive to them. So we are adding an ongoing dialogue with our -- with those constituents and we'll keep an eye on that, but I can say as of right now, we haven't seen any real change in behavior at all.

So you're a little worried they may end up buying instead of leasing, basically?

Yes, but we're not -- and we're happy to have a conversation about how we might participate in that process, but, as I said, right now we're not seeing, really, any activity on that front.

Mike Grondahl, Northland Capital Markets.

Thanks for taking my calls, guys. Two quick questions. One, Brian, could you just give us a little bit more details on -- it sounds like a little bit different strategy to push rate in 2011 and give up some utilization. You were very successful keeping that utilization high in 2010, so I'd just like to hear a little bit more about that strategy.

And then, secondly, the cold winter we're having, does that affect ASC at all in the spring with getting the ice out, or can they make up for lost time if they get a slow start due to the weather in the spring?

Okay, sure. As far -- do you want to take ASC first?

Sure. ASC actually operated -- pretty much all 13 of the vessels that were in operation in 2010 worked through January 15 or so when the locks closed, and definitely there were some ice issues on those last few operating days, but we're not anticipating any issue with getting vessels back out into service. There may be a little bit of a delay here and there, but it shouldn't materially change our outlook at all for ASC for 2011.

I'm sorry, Mike, your question on rail specifically is what?

You had mentioned that (multiple speakers)

You're talking about -- yes, I didn't mean to imply that we're going to give up utilization. Obviously, we'd like to do both.

But I think when you have utilization that has climbed to 97.5% and you are seeing general in the market that the industry fleet performance is strengthening, and there is -- most of our major car types are approaching full utilization and, of course, there's always some car types that are struggling, but with that kind of situation where utilization is getting that high, it's time to start pushing rate. And you want to take some risk out there.

But, no, I don't want to utilization to drop. I'd like to do both, but I think it's time to start taking some of those risks.

[Rahid Sadiqu], [Sabelli].

A couple of questions. First one is on the lease renewal rate. I don't know if you mentioned, but what was the renewal rate in the quarter?

In terms of renewal success? Or --

That's right. I think it was 61% in Q3. And what was that number in Q4?

The fourth quarter was actually the strongest we've had all year, and that renewal success rate was up around 70%.

My next question is on the idle cars within the industry. I think last quarter, you said there are about 330,000 cars that are idle. Has that number improved, or what is the current number?

We have seen some improvement in that number. The last statistic that we saw was about 316,000 cars, and that's the number provided by the AAR.

What's the number of shares that you bought back in the quarter and during the year, and what's your strategy for 2011?

There were no shares repurchased in the quarter or the year, and the last time we had been in the market was 2009. So 2010, there was still no activity.

We still have authorization available under our existing repurchase plan, but we'll continue to be opportunistic in and weigh that option along with all of our other investment alternatives. So, I can't comment specifically about any plans for 2011 at this point.

Okay. And the last question is about the potential asset purchases. I think last quarter you said there was one or two assets that might be coming loose. What's the status of those?

We did close on two sizable transactions in the fourth quarter. Those were the 8,000 cars we referenced.

And were those parts of the ones that you thought were going to come loose?

Yes.

There is one sizable portfolio currently being offered for sale. Currently, we've been told that that process only involves those who do not have an existing presence in the North American rail market. Obviously, that would exclude us. We've certainly registered our keen interest with all the parties involved in that, and we'll stay involved and see what happens.

Bob Napoli, Piper Jaffray & Co..

A question, it seems that a number of the manufacturers, more so than historically, have expressed an interest in being in the leasing business to -- I understand the rationale behind it, to smooth out the earnings of their -- and I just wondered what your thoughts were, given that you are obviously a major customer or potential customer for all these manufacturers? Is this going to be -- are you more concerned about getting more competition from the manufacturers than you have been in the past?

As I've said in the past, obviously that's always highly annoying to me and to GATX, but you know, it's a reality of the market. As you said, it's becoming more widespread. We certainly feel we can deal with it, and it's just a reality we're dealing with. I don't see it changing.

But is it to the point where you would expect to have lower returns or longer term because of their -- that presence or --

No, because you know, when you really think about it, I think obviously we compete very effectively in the market. For the most part, everybody's pricing behavior out there is pretty rational, and we still have opportunities with almost every manufacturer that is interested in selling us rail cars at attractive prices, so, so far, there is no real effect out there. We welcome competition. I think we do pretty well.

Next question on -- big-picture question, return on equity. With your guidance, which is in line with the consensus and with our estimates, so it's not a real big surprise, but your return on equity with those numbers is in the mid to -- certainly well below 10%. You've been below there for some time, and coming through this environment, I guess that's not a shock either. But it doesn't seem like you have -- the rating agencies are pretty tough on you guys. What is the right return on equity? How do you get there? Is it simply getting rates up and driving up remarketing income, not on the leverage side, not on the share buyback side?

It's Bob Lyons. Our expectation for returns, as we've talked about in the past, on average through the cycle we believe 12% to 15% is a reasonable range to be in, and we've obviously been below that in 2009 and 2010, and -- after being up in that range for a few years prior to that. That's not surprising, as you note, given the fact that we're in a cyclical business. We knew that ROE would dip down, and it has.

But we're still highly confident that as the business -- the underlying fundamentals in the business continue to gather momentum, that will be positively reflected in our results. It takes time, as you have pointed out, and you've pointed out in your written reports accurately, there is a lag effect. But it occurs.

Remembering (multiple speakers) that we earned over 16% ROE in 2008 when the rest of the world was falling apart.

Yes, right, and our leverage was lower at that point in time as well.

Is your leverage right where it's going to be, approximately, long term or is there any opportunity on the leverage side?

It's a conversation we have, obviously internally, with the ratings agencies consistently.

If you look back a number of years, we were -- carried higher leverage than we do today. We think the business can withstand some more leverage, but we're also very conscious of the fact that the rating matters a lot to GATX, and we try to manage that appropriately and balance those sometimes competing elements. Our rating and where it has been have served us extremely well during the downturn.

Yes, I will say that I don't feel constrained at this point with anything I want to do there out there in the market. If anything that sizable came where it would impact our rating, then we'd deal with it.

Okay. On the pricing side, I think you guys laid out -- I think that you said that price is -- leases rolling off continue to get higher in 2011, so prices have gone up. So is the lease price differential -- does -- have we peaked and should we start -- should that start to improve gradually, and I know it's not a straight line quarter by quarter, but it has -- have we seen the worst and should we expect steady improvement in that metric from here?

We're very confident we've seen that the worst has passed in terms of that percentage comparison.

You know, it was up around negative 19% at the end of 2009 and it hit that mark again in the middle of 2010, and now we've seen a slow but gradual improvement in that number, getting less worse, so to speak. We expect that that will continue through 2011 to a point where, on a full-year basis, the LPI on average would still be negative, but more in the kind of mid- to upper single-digit range, and then turn positive in 2012.

Do you have in your SG&A forecast or -- a level of investment in new markets or within your guidance? I think India is a market that you've talked about in particular, but do you have investment dollars in there, and if so, can you give us a little more clarity on that?

There is expense layered in there, without a doubt. That's one of the elements that Brian touched on and is leading me to a higher SG&A number for 2011, and we want that because we're investing in the business, we're trying to grow the business, and we're capitalizing on those opportunities.

I can't break that out for you specifically, but we're also expecting just pure investment dollars to occur as well in 2011.

Exactly. I'd be disappointed at the end of the year if we had not invested in railcars in India.

Okay. And is that to a point where you can accelerate investments? Obviously, it's a long-term deal, but I would rather see more investment dollars this year and next year to get that moving, if you could.

Are we talking about India or overall?

India, I think. I mean, how real is India? Is -- have you turned the corner where, like --

It's a very real opportunity. But you answered your own question. It's also a very long-term opportunity.

You can look at what we did in Europe. We first invested there, and it wasn't really an emerging market, obviously, back in 1993, and it took a good 10 years to have a significant presence there and have it become a meaningful part of GATX. No, that would be great if India was there in a few years, but once again, you answered your own question. It's a very long-term process.

And there is really nothing to buy there, is there? Is there?

You know, not -- we know investment there eventually, hopefully, will take the form of both new cars and sale-leasebacks, just like it does here.

But different than when we entered Europe back in the early 1990s, where there was an established leasing business and there were companies that we could look to to invest in. That animal really does not exist today in India.

Okay. On the scrap side, are you -- I mean, steel prices are up. Do you expect -- are you going to scrap -- you really need to scrap a few less cars. You got better prices in the fourth quarter. Is there an opportunity to become more aggressive on the scrapping side? With (multiple speakers) and current prices?

Yes, we did scrap a little bit less in the fourth quarter. We would expect to be about, on a full-year basis, in the same range for 2011.

As far as numbers of cars?

Probably -- maybe be actually down a little bit in 2011. (Multiple speakers). Our idle inventory is pretty light today. And the market is improving. So some of those -- the economics on those cars are more appealing to keep at work.

Then, last question, 2012 rollovers, so I guess is that a -- 20,000 cars in 2011, it seems like with the shortening of the terms over the last couple of years, then the lengthening of the terms going back further, that you're going to have a convergence of some of these, so you may get -- you have -- 2012 or 2013 is going to be a huge, much, much larger rollover year? Is that (multiple speakers)

We haven't -- we don't really lay out the number beyond the year ahead. But it's very evident that that number will go up in 2012 and 2013, and that is by design. A lot of those cars are ones that we have renewed here in 2009 and 2010 when the market was very soft, and we want another opportunity to renew those cars at higher rates. And we are highly confident we will get that opportunity.

Brad Evans, Heartland Advisors.

Let me see if I can state the obvious here. I guess a combination of your renewal success, which you highlighted at 70% this quarter, on top of the sequential momentum you're seeing in lease rates is the underlying driver of your decision to move for rate as opposed to utilization as we move into fiscal 2011. Is that a good summation?

Yes.

Thanks. Okay. Your outlook for American Steamship on -- have you taken into account any impact from Australia, the floods over there and what that might mean for, I guess at the margin, iron ore demand here in the U.S.?

We have not, Brad, and we are still in dialogue with all of our customers at ASC, as we will be over the course of the next few months before we get a real firm handle on what the tonnage outlook will be. Right now, we've made the assessment that 2011 is going to look -- will look a lot like 2010. But we haven't factored in any real outside or unusual events in that market.

It's been the toughest one for us to forecast over the last two years, actually. We were surprised on the downside in 2009, surprised on the upside in 2010, and what we're seeing is our customers are reluctant to really -- or maybe they just don't know and then they don't commit until the sailing season really starts.

Okay. Well, it seems like utilization levels are moving in the right direction there, so perhaps maybe there's a little bit of a positive surprise there. Has anything changed in terms of the government-owned insurance company who has a fleet that's for sale? Has anything changed in terms of your ability to bid on that asset?

We can call them by name. We were in The Wall Street Journal commenting on that. It is AIG, for those who follow it (multiple speakers)

Yes, you know, I've registered my discontent with the process excluding strategic buyers, and we've registered our interest to anybody that will listen, both in the people handling the sale and at AIG, and we'll try to stay in touch and see what happens. But no, no change from what you may have read.

Okay, good luck. And then, just a couple of housekeeping items here. Just in terms of the European market, I know there's some concern about austerity measures in the European economy. Can you just comment on what you are seeing there from a demand perspective on the European continent?

Yes, sure, on the tank car side, so that's GATX Rail Europe, our wholly-owned business, you know, over 20,000 tank cars, they had a utilization increase in 2010 as well, as I said, up about 1% to a little over 95.7%, I think.

Yes.

Right.

And all three of their markets, petroleum, chemicals, and LPG, remain strong. They saw single-digit price increases. In fact, they pretty much powered through the downturn commercially without much of a hiccup, and they see good investment opportunities. So, don't really see a sign of weakness on the tank car side.

The freight car side, as you might remember with our partnership with AAE, was a little tougher. They have a very short-term lease portfolio, and when it hit, it hit hard because of container traffic into Europe. That is recovering, and we expect to see a stronger 2011 from them. I would say it's a little more volatile -- a lot more volatile than the tank car business has been, and a little more unsure about the pace and robustness of that recovery.

So, tanker car market continues to get better at the margin, as you said, with -- as they power through the downturn in the freight, you are expecting the freight car side of that business to show modest improvement next year as well?

Yes, we are. And to your question about some concerns about economic weakness there, it would show up on the freight car side first.

And you're not seeing that heretofore?

Not yet.

Okay. And just lastly, you guys have done a great job in terms of -- you imagined the cycle, and I realize that with earnings being depressed, the payout ratio is relatively high today, but I'm just curious as to how you are thinking about investing within the business versus, say, considering a modest dividend increase as we get closer to the inflection point from a business perspective, from a business cycle perspective for you.

Brad, it's Bob. I'll take that one. We obviously -- the dividend is extremely important to us, and we know it matters to our shareholders greatly. We look at it on an annual basis. The time for that is actually coming up here fairly shortly with our regularly-scheduled Board meeting in the next week or so. So we will revisit that with the Board and have that conversation with them, but it's important. It's certainly not lost on the management team.

Okay, keep up the good work. Thanks.

(Operator Instructions). Steve O'Hara, Sidoti & Company.

Could you just talk about your view on interest rates, and how that impacts your desire or willingness to make a large rail car purchase?

Sure, we have -- while we are not in the interest rate forecasting business, we try to manage effectively regardless of that environment.

It appears that rates will remain relatively subdued here in 2011, and importantly, credit spreads have also compressed quite nicely. The last financing we did, the last five-year financing we did, was at a 3.5% rate. Actually, it was longer than five years. We're not banking on getting that attractive a coupon again. But I think it will remain a very attractive financing market for us in 2011.

That said, I don't think there's any transaction out there right now that we would be hesitant to move on because of an interest rate view.

And is your -- if you were to issue debt or something like that, would you be leaning more towards variable or fixed rate at this point?

Typically, we keep a balance of both. But normally, our longer-term financing is done on a fixed-rate basis. We have about 27% or 28% of the debt portfolio that's floating. That's a good mix for us. I don't plan on altering that, and right now, the long-term fixed-rate markets are very attractive.

And then, just going back to acquisitions and valuations, and if you touched on this, I apologize. But in terms of the valuations, where do we stack up today versus, maybe, six months ago? Are valuations improving from a buyer standpoint or are they getting worse as the economy kind of slowly improves?

Because of the sporadic nature of our transactions, it's tough to tell what the clearing prices are for those transactions that we have been successful with as you move through time.

You would think that overall as the market recovers, you'd see prices go up. But there's just no evidence yet because these are few and far between so far.

In the more usual secondary market, there is always rail cars changing hands as people put parts of their fleet up for sale and try to optimize their fleet and their customer lists and all that. You would expect and we would expect those prices perhaps to come up in 2011, just because there's going to be more people competing for them.

All right. Thank you very much.

Bob Napoli, Piper Jaffray & Co.

Just a question on the remarketing income. What's your thought -- within your guidance, kind of what you're thinking about remarketing income? Obviously, it's about half the level it was, have to go back a couple of years ago. With your utilization so high, generally that's -- that hinders recognition of remarketing income. But what are your thoughts -- what do you have embedded within your guidance, if you could --

Sure, Bob, it's Bob Lyons. We are expecting an upward move in remarketing income in 2011. As you know, that can be a volatile number, so I'm a little hesitant to give you a specific range. But not back to the 2007-2008 levels, but up nicely from 2010.

So somewhere in between, 2009, 2010, and 2008.

You can calibrate around that.

And I guess the share of affiliates' earning, I would assume you -- from a hedging perspective, you assume a net zero.

Correct. On the derivatives, you're talking about?

Yes.

Yes, that's correct.

And within those -- the affiliates' earnings, I think the biggest piece of that in specialty, the aircraft engine leasing business, how is that -- is that steady -- is that business -- how is that business doing?

Sure. Rolls-Royce and partners finance. We're 50-50 with Rolls-Royce. Had another very strong year in 2010, and expecting their contribution to be at that level or just up slightly in 2011.

With strong investment opportunities as well.

Yes. They came through the downturn without any issue, and earnings continue to move up.

There is some thought on growing that? Because I thought that in the past, your feeling was that that business was going to kind of be steady, but you are -- Rolls-Royce is interested in growing that joint venture?

Yes (multiple speakers), yes, and we expect over the intermediate term here that there will be additional investment opportunities there, and we did -- the business essentially self-funds as it continues to grow, because it's a strong cash flow generator, but even on top of that, we made an additional equity investment in 2010 to help spur or capitalize on some investment opportunities that we saw there just above and beyond what could be funded independently.

And the Adler, does that add much to the revenue run rate in -- I know you said it was very, very nominally accretive in 2011.

Actually, Adler will not show up at all on the revenue line because we are a 12.5% owner there, so we'll get fee income and we'll get our share of the income off the portfolio. But it won't be a very large number in 2011.

Kristine Kubacki, Avondale Partners.

Most of my questions have been answered, but a little bit longer-term view on the marine business. I was wondering, as particularly you talked about the chemicals and talking about capacity coming on line, and I was just wondering, how long does it take for this market to settle out and to start to rebound? And then, I guess, what's your patience level with how long it takes to start to come back?

Our patience level is high. As far as do we see that coming in the next year or two, the answer is no, and mostly because of what you said about capacity coming on.

I question whether all that capacity will truly show up and be financed. That could be one upside to that market, but if you just take it as it's projected right now, it's going to be a few years.

On the other marine joint ventures that we had that are not in the chemical tanker sector, those have -- there is a presence in the bulker market, and that's done actually pretty well in 2011. It slid a little bit at the end of the year and it's a highly volatile market, as you know, but that's actually doing okay.

And lastly, we have a joint venture with a partner in LPG and ethylene carriers, and that's actually done very well in 2010 and is expected to do even better in 2011. So it's not all bad news. But as far as chemical tankers in particular, we really don't see that turnaround coming any time soon, but we will stick with it.

Gregory Macosko, Lord Abbett.

If you could, talk a little bit about -- the utilization was high and kind of where are we idled today? I know you've mentioned in the past methanol cars. Where are the areas where it's sort of lower utilized at this point?

You know, still really anything construction related, so center beams being the best example. Some covered hopper -- or cars that carry aggregates, for example. Some intermodal cars are out of favor right now.

Those are the main areas where it's weak. There are some very small tank car types that are weak as well, but in general it's very strong across the board, if it's not construction related. (Multiple speakers) and in particular, ethanol has made a nice recovery. That would've been a weakness a year or two ago. Our fleet is close to 100% utilized and rates have come up dramatically. And I think that's a phenomenon across the industry, not just our fleet.

So, is utilization kind of -- I would assume, then, in the cars you've mentioned, maybe the lease rates would be maybe not be as strong in those areas and you'd expect better increases in those areas where you're higher utilized.

Yes, definitely.

Then, finally, with regard to the mix, the overall mix of the fleet, did it change much with the acquisitions?

Well, it's a -- 8,000 cars added to owned and managed, added to a 110,000-car fleet didn't change the mix that dramatically. I will say that the mix for those two portfolios was heavily weighted towards coal and hoppers and grain, and very little in the way of tank cars.

Okay, okay. All right (multiple speakers)

And that coal market is actually recovering. There is still idled coal sets out there, but it's recovering nicely off the bottom so far.

And then, finally, with regard to the -- you mentioned the two acquisitions. Was there anything out there of kind of the 2,000 car more that you missed or that kind of went by you?

Well, we took -- those two portfolios we got were parts of the old Babcock & Brown fleet, and there was at least one or two other parts of that fleet that went elsewhere, but in general we've been involved and successful in all the opportunities that have changed hands so far. And there is -- there are a couple of others in that range that may come loose, and we're on them.

So, typically, that's how it works? In other words, a big fleet is broken up into pieces because there is some you don't want and others want something else? Is that (multiple speakers)

That was really driven by the fact that that fleet was in foreclosure and the lenders were running the show, the various lenders to those portfolios.

Yes, and it was a -- while it was one lessor, the portfolio was really bucketed into a number of different securitizations with different underlying lenders, so that it was easy -- that led to the parceling out.

So that's not typical?

I'd say their fleet was much more highly structured than most of the other ones out there.

Okay. All right. Thank you very much.

At this time, we have no further questions in the queue. I would like to turn it back for any additional or closing remarks.

Okay, thank you, Ben, and thanks, everyone, for your participation. I will be available this afternoon to answer any additional questions. Thanks.

Thank you.

Ladies and gentlemen, that does conclude today's conference. We thank you for your participation.