GATX Corp (GATX) 2011 Q1 法說會逐字稿

Good day and welcome to GATX first-quarter earnings conference call. Today's conference is being recorded.

At this time, I would like to turn the call over to Jennifer Van Aken, Chief Financial Officer Please go ahead.

This is Jennifer Van Aken, actually Director of Investor Relations, and thank you, John.

Good morning, everyone. Thanks for joining us for the first-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 will go ahead and open up for 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 a number of competitive and economic factors, some of which may be outside the control of the Company. For more information, refer to our 2010 Form 10K.

Today we reported 2011 first-quarter net income of $19.9 million, or $0.42 per diluted share. This includes positive after-tax fair-value adjustments of $0.14 per diluted share related to interest rate swaps at our European rail affiliate, AAE Cargo. This compares to 2010 first quarter net income of $18.7 million, or $0.40 per diluted share, which includes negative after-tax fair-value adjustments of $0.02 per diluted share related to the AAE interest rate swaps.

At the end of the first quarter, the North American fleet utilization was 97.8% and utilization in Europe was 95.8%. The renewal rates in the lease price index were 0.5% below expiring lease rates and lease terms were 41 months on average for renewals in the quarter.

The success rate on renewals was approximately 69%. While this LPI data is encouraging, and better than what we expected earlier in the year, it is important to remember that the renewal rate change does move around quarter to quarter, and we have not changed our full-year expectations for the LPI.

In March, we announced an agreement to purchase 12,500 newly-built rail cars over a 5-year period, the largest committed rail car order in our history. We've been discussing the potential order for quite sometime and are pleased to have it in place as these new cars will help to strengthen our competitive position.

In specialty, the Rolls-Royce joint venture is performing well, due in part to income from additional investments made in 2010. The marine joint ventured, particularly those serving the chemical industry, continue to experience rate pressure as low demand and over supply persists in that market.

The sailing season has just recently started for American Steamship. Customer inquiries have been relatively consistent with last year, and we continue to expect slightly higher volumes in 2011 versus 2010. At the end of March, 6 vessels were already in operation.

Overall. the first quarter was consistent with our expectations and a solid start to 2011. As noted in the press release, we continue to expect 2011 full-year earnings to be in the range of $1.70 - $1.80 per diluted share as we outlined back in January.

One final note before we go to questions. Tomorrow is our annual shareholders' meeting. It will be held at the Northern Trust Building at the corner of LaSalle and Monroe in Chicago. The meeting begins at 9 AM central time, and slides from Brian Kenney's presentation will be posted to our website, www.gatx.com.

And with that quick overview, I'd like to open it up for your questions. Don

(Operator Instructions).

We'll take our first question from John Hecht from JMP Securities.

Good morning, guys. Thanks for taking my questions.

I wonder if you could just spend a moment, particularly in the domestic railcar portfolio, talking about the performance trends by type of cars, the hoppers, the tank cars and where you're seeing the greatest price trend changes and where you are seeing some kind of excess capacity overhang impact release prices?

Sure, it's Brian, John. Improvement in the fleet is widespread; improvement in the industry is widespread at this point. You've seen the car loadings are up about 4% from the first quarter of last year. Idle fleet in the industry is down from over 500,000 cars, I think beginning of 2010, down to less than 300 as of today.

Most major car types in the GATX fleet are approaching full utilization, so examples would be our general service tank cars, 30,000 gallon cars, grain cars, all approaching full utilization, so there is good rate movement up in those car types.

As far as availability, across the industry, really, it's most of the availability is anything related to construction, so center beams, aggregate hoppers. There is some availability in certain intermodal cars, 48-ft intermodal cars. And, there is still some availability in coal across the industry, although our fleet is approaching full utilization there as well.

So, generally it is widespread improvement with the only real weakness being in construction related cars.

That idle dropped pretty significantly over the past year. Do you have any statistics relevant to just the tank car component of that idle railcars?

No, not really. We don't have that data. We do know that our tank fleet, as I said, is approaching pretty close to full utilization.

And release success rate at this point?

That was 69% this quarter.

Okay. So, that is jumping pretty dramatically. Okay, and then the 5-year order, when do you expect to start taking delivery and would it be a pretty consistent schedule for delivery over the 5 years?

Yes, it is ratably over the next 5 years. Since we placed the order part of the way into this year, we don't expect this to be a full year of deliveries of 2,500 cars; it would probably be more like half of that, and our first delivery will come late second, early third quarter.

Okay, in the press release sheet, you site that some marine joint ventures continued to experience challenging market conditions. Where are you seeing that and what is it related to? Is it just related to trade patterns or is there something else that we should be considering there?

John, it is Bob Lyons.

As Jennifer mentioned in the opening, where we see the most pressure, really, is in the chemical sector. We're in the midsize and handy sized vessels there, chemical parcel tankers. And demand, while better than it was over the course of the last couple of years, there is still a lot of new vessel capacity coming into the marketplace, and therefore, there continues to be a lot of pressure on charter rates. And, we don't see that subsiding this year or into 2012. That pressure will continue.

Okay. And that pressure is distinctly different from what you experienced at the American Steamship Company.

Absolutely. Very different. Two entirely different markets.

On that note, just given commodity prices and so forth, are you seeing, in fact, maybe a little bit of the opposite at ASC or is it really just we should expect for consistency at this point?

I would say consistency at this point. We, as you know, 2009 was really the low point for volume shipments on the Great Lakes, with iron ore at that point in time at its lowest point since 1929. So, we did see a recovery last year. It's still below peak levels of 2007 - 2008, and based on customer reaction right now we're expecting a good year and one that was consistent with 2010.

Yes. I would add there might be some upside there, John, but we're being very careful in how we fit out our vessels because we thought there was higher demand, actually, in 2009 as well, and we got a little ahead of ourselves there, so I'd say there is upside, but we're going to wait to see it before we fit out vessels.

Great day appreciate that. Thanks, guys.

Thank you.

Moving on, we'll take our next question from Steve Barger with Keybanc Capital Markets.

Good morning guys.

For the lease price sequential change, have you ever seen a move that big? And just to follow up on the prior question, was that driven by any specific car type this quarter or was it broad based in your own fleet?

Yes, Steve, in the past year we have seen big great movements. Generally going into the downturn, those were on the negative side as opposed to the positive. But, like we've said, we always look at the LPI as a good directional indicator of what's going on with our lease rates and try not to get too caught up with the data for any one particular quarter. So, what we really like to see here is a trend in the movement over several quarters to really gauge if there is going to be wide-spread improvement in the environment.

So you really haven't changed sure outlook relative to when you would see sustainable positive comps? I think last call you talked about maybe early 2012. Is that still the thought process?

Yes, as Jennifer mentioned in the opening, we haven't changed our expectations to the LPI this year, Steve, for 2011. Obviously, the first quarter was better than what we expected, but nobody is declaring victory yet, so we will follow how it progresses, but as of right now, we still see the year playing out as we had indicated back in January.

Okay.

With respect to the timing of your -- the big railcar order, was that driven by increasing prices or decreasing build slots or did you care about bonus depreciation? Can you talk about the thought process relative to the timing of placing the order?

Sure, it's Brian. There's a number of factors there. It's tough to answer specifically. We've been working on it for a long time with a variety of manufacturers. Really, it was just a number of things that came together and at the same time.

The amount of risk we were willing to take on placement and the size of the order came into balance with the market improvement we were seeing and that came into balance with Trinity's desire to lock up some of their production, so I wouldn't point to any one thing. It was just a variety of factors that balanced out here in the first quarter.

And, I'd add to your point on bonus depreciation is not a driver for our investment decision. As far as customer behavior goes on that front, we really haven't seen a significant change in their buy verse lease strategy or behavior driven by any of the bonus depreciation issues.

Okay.

If the market supported it, could you move off the ratable schedule and pull delivery forward.

You know, really shouldn't talk about that. It doesn't preclude us from ordering more cars from anybody actually, including from (inaudible).

No. I -- that was a follow-up question. Do you expect a mix of cars that you ordered to cover your needs for the next few years? I know that is a very hard question to answer, but did you order an open blanket for build slots and you'll pick the mix as you go through the order?

Yes, that's true, but I will say there'll be -- the majority of the order will be tank cars, but there is considerable flexibility. That's one of the reasons we go with Trinity is their breadth of product mix, and we have the ability to order a complete menu of car types there. As far as how much we ordered, there is a speculative element to the transaction, for sure.

Okay. Great I will hop back in line. Thanks.

Thank you.

(Operator Instructions). Our next question will come from Mike Grondahl with Northland Capital Markets.

Thanks, guys. A couple of quick questions.

Bob, could you share with us again your full-year expectations for that LPI? Is it positive for the full year or negative? I don't recall.

And then secondly, Brian could you just share us what you are still worried about? What out there do you worry about that can tip the other way on you? A lot of trends seem to be getting better and even in the first quarter that pricing looked like a real improvement that's for sure.

Okay Mike. I will -- this is Bob I will handle the first part of the question on the LPI.

What we indicated back in January was that we expected the number through the course of 2011 to get less negative and to approach breakeven towards the end of the year and then, hopefully, as we move into 2012, will start to move into positive territory, so our full-year expectation really hasn't changed.

Now, obviously, the first quarter was almost break even, but as Jennifer indicated, we are not a point yet where we are willing to call that a permanent shift or trend. Definitely an encouraging start, but we need to see where it goes as the year progresses, and then we will let Brian weigh in and what's worrying him.

There's still a number of parts of the portfolio we need to improve, and we've already mentioned the marine joint ventures as an example of something that is lagging in the recovery, both from a demand and over supply perspective. And, honestly, we don't see an end coming to that in sight, so that is 1 concern.

Another concern -- generally inflation is great for our business, especially for the existing portfolio and you've seen the price of oil increase dramatically and that's been, once again, good for our results, good for car demand; here in the States, good for rates.

But, if that essentially gets too high and breaks the back of the economy, that's an issue, too. There's still things we need to improve our across our businesses. Those are 2 examples that are concerns.

Any other portfolio that you think is materially underperforming?

No. Not really. That's it.

I wouldn't (inaudible) anything, Mike.

And then, lastly, any comments on that recent deal in the marketplace?

That AIG sale?

Yes.

Not really , Mike. That is a portfolio that we would have liked the opportunity to look at. We've indicated that historically, but the way that process unfolded, GATX and other existing lessors were really not allowed to participate in the process, so don't really have any comment on the process really or the valuation because we don't really know what was in there other than a general car

You ended up being the completely precluded, then, okay. I just was wanting to verify that was still the case.

That's true. Mike, what I would add is that I don't think that is the last one and there should be some other things fleets or parts of fleets that come up for sale, and as always we are in contact with all those situations.

Okay, great. Thanks, guys.

Thank you.

Move on to our next question from Kristine Kubacki with Avondale partners.

Good morning.

Good morning.

Just a couple quick questions.

Can you talk about the timing and number of cars that come up for renewal this year, the cadence on that?

This year we have about 21,000 cars scheduled to come up for renewal. I think they are fairly evenly spaced throughout the year. The first quarter may have been a little light; I think we had about 4,200.

Okay, perfect. And then, we've seen that build slots really starting to fill up amongst the car builders and I guess we've heard capacity shortages in car types, surprisingly auto racks, I guess. Are you seeing customers shift from new -- from perhaps buying new cars to trying to procure leasing capacity and even in order to try to get capacity, even out in the year?

As far as purchasing cars as opposed to leasing or -- ?

Right. Are you seeing a shift to, perhaps -- from being a new car buyer to being a -- to try to lease in order to try to get capacity locked up for this year?

Not really, Kristine. We haven't seen a shift in traditional customer behavior. Clearly, there is shortage of cars in very specific sectors, and customers are doing what they can to try to procure the cars that they need for those particular sectors, but we are not sea change in lease versus buy.

But, it definitely has, across the industry, increased utilization as customers are searching for idle cars they can put to work, so, yes, it's definitely increased everybody's utilization.

And, there are some shortages. Backlogs have moved out. I'm thinking tank right now is probably 9 months, and that was closer to 3 - 4 months at the beginning of the year and freight 1,000 -- 9 - 12 months, actually, which is much higher than it was at the beginning of the year. Another reason why was important for us to lock in that quarter.

Very good. I appreciate the color. Thank you very much.

Thank you.

We will move to Steve O'Hara with Sidoti & Co.

Hi, good morning.

Could you just -- have you talked about the list price or maybe the range for the railcar order you placed?

No, and we really can't do that. I can give general market feel though. From peak to trough, prices for new cars -- and this has nothing to do with our order, again, but in the market were down, say, for freight cars about 25% and in tank cars, 20% plus. And they've recovered along with demand and component and steel cost to where the cost of some freight cars is almost back to the peak at what it was a few years ago.

The cost for some tank cars are still below the peak, but they're within shouting distance, say, 5% or so. So, they have come back.

Okay.

And then in terms of financing, what type of options are you exploring at this point?

Well, always Steve, our primary focus and standard financing is it's term, unsecured deal in the public market, and that would continue to be the case. Those markets right now are very strong; a lot of issuance getting done, a lot of demand in the marketplace, so our ability to go into finance railcar delivery this year is extremely high. And, as the balance of the order deliveries over the course of the next 4-plus years - 5-plus years, we will finance those cars as they come. There's no pre-delivery payments or anything that need to be made.

Okay. And, I think you addressed this, but this order doesn't preclude you from looking at other portfolios, correct?

Correct.

All right, great, thank you.

We will take Bob Napoli with Piper Jaffray.

Thank you.

How many cars do you have up for renewal in 2012 - 2013 out of your current fleet?

Well, we haven't disclosed that number yet, Bob, because actually as the year progresses, it will change a bit, but it was -- we're at 21,000 coming in to this year for 2011, and our expectation is that number will move up from the 21,000 level in '12 and '13.

By design.

Yes, that is the way we structured the portfolio. It's the flipside of what we were facing in 2009 - 2010 where the numbers were going down, also by design. As you know, we've shortened that lease term up where we can to get another opportunity to lease those cars. So, definitely by design, the number will go up in '12 and '13.

The term 41 month this quarter, is that number going -- do you expect that number to go up a fair amount over the next couple of quarters?

We don't really think so. There are very few car types -- although they are all strengthening, there are very few car types we're really looking to lock in term for a long period of time so I would say rates are to the point where we are excited about extending term dramatically.

Okay.

You scrapped a lot of cars this year? Or this quarter? 963 cars, I think. The scrap prices are obviously much higher, are you -- you actually had a shrinkage in your car count in the US. Are you still seeing an opportunity to continue this? Should we see more scrapping from here? Your utilization rate is pretty high? I can't imagine there is a ton that you have available to scrap at this point.

I would also just point out, too, I think in the last page of the press release, you can note that the car count, while it's also affected by the fact that we had sales in the first quarter.

Back to your question on scrapping. That number has ranged anywhere between 750 - 1,000 or so cars over the last four or 4 - 5 quarters, and that would be pretty consistent with what we would expect going forward. Scrap rates are stronger than we anticipated coming into the year, but we are certainly not in a position where we are banking on them staying very high.

Any change with the -- in the competitive environment. Are you seeing competitors getting more aggressive?

No. I would say it's pretty consistent, Bob.

Okay.

Then the last question, on India and other growth opportunities. I was hoping you could a give any color on your plans in India at this point, and when you expect to actually have investments in cars on the ground operating in that market?

Sure. We set up a company and got our people in place last year. We finalized the wagon leasing scheme with Indian Railways earlier this year, and we hope to be invested in cars in India in 2011.

Who are you partnering with?

Nobody. We are going it alone right now.

Okay.

Do you have government -- obviously, it is a regulatory nightmare in that country. Do you have the approvals that you need or what do you need -- what needs to happen?

That is what I meant by saying we have the wagon leasing scheme in place. The Indian Railways has approved that and that is who you have to work through in India on the rail side. That's in place. It's not just for us, it's for anyone else that wants to lease railcars in India, but that was a major hurdle that is now cleared.

What you think you can do in that market over the next 5 years?

It's hard to say, but it's a very -- potentially very high growth rate market and a fertile ground for investment, if that comes true. We would like it to be a sizable portion of our fleet in 5 years, but we will see. It's obviously, as you pointed out, it's a tough environment, a lot of bureaucracy, and we are a new player, but we are optimistic.

Where will you source cars that you will place in that market?

You know, it is a good question. It's to be determined, but I think initially it will be sale, lease backs with customers and shippers; as far as new cars, that's yet to be determined, if and how we do that.

Thank you.

Sure.

And Rich Fitzgerald with Jefferies Asset Management.

Hey, guys. Thanks for taking the question. Seems like it was a really good quarter.

Just had a quick accounting question. The fair-value adjustment on the interest rate swaps, those presumably go into the interest expense line item within the rail segment?

No, they actually come through the share of affiliate earnings. Those take place -- those derivatives are in place at AAE Cargo which is an entity we own 37.5% of.

Okay. So, when I look sequentially, it was a mild loss in that line item in Q4 to a positive $1.7 million and the majority of that was this fair tax item? Or fair-value adjustment item?

That's correct.

Okay, great. Thanks a lot. Appreciate it.

Moving on, Art Hatfield with Morgan Keegan is our next question.

Yes. Morning everybody. This is actually Derek Ribian for Art.

Morning.

I believe in last quarter you noted some further efficiencies in maintenance, but in the first quarter we saw maintenance expenses tick up a little bit. How should we think about those expenses going forward and maybe when should we see those efficiency start to flow into the P&L?

The first quarter number was higher than the fourth quarter number, if you are looking at it on a sequential basis. Not entirely unexpected, we have seen historically that the first quarter number tends to be a bit higher than the run rate for the rest of the year. A lot of that due to -- some of it's weather related and wheel set change out activity that takes place in North America.

Our full-year expectation for maintenance costs is unchanged, at this point in time. You might recall back in January, we indicated that we expected full-year maintenance to be at or a little bit below where we were for all of 2010, and -- so that our expectation is unchanged at this point.

Now, there is some risk to that number because I would say, particularly in Europe, where the regulatory environment is -- across the industry is rather intense and, I say, somewhat unpredictable. And so, we are navigating our way through the regulatory environment, but it is subject to change and could have an impact on that number.

Okay. Thanks. That's all I've got.

At this time, we have no further questions.

Okay. Well, thank you everyone for your participation. If you have any additional questions, I will be available this afternoon. Thanks.

Thank you.

Ladies and gentlemen that does conclude today's conference call. Thank you for attending.