GATX Corp (GATX) 2011 Q2 法說會逐字稿

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

At this time I would like to turn the conference over to Jennifer Van Aken, Director of Investor Relations. Please go ahead.

Thank you, Josh, and good morning, everyone. Thanks for joining us for the second quarter conference call. With me today are Brian Kenney, President and CEO of GATX Corp and Bob Lyons, Senior Vice President and Chief Financial Officer. I'll give a brief overview of the numbers provided in our press release this morning and then we'll take questions.

First I'll 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 of the control of the Company. For more information, refer to our 2010 Form 10-K filing.

Today we reported 2011 second quarter net income of $26.4 million or $0.56 per diluted share. This includes a benefit of $6.2 million or $0.13 per diluted share related to fair value adjustments of certain interest rate swaps at our European rail affiliate, AAE Cargo. This compares to 2010 second quarter net income of $21.5 million, or $0.46 per diluted share, which includes a net benefit of $3.3 million or $0.07 per diluted share. Related to the favorable resolution of a litigation matter and a tax accrual reversal, partially offset by the negative impact of fair value adjustments related to the AAE interest rate swaps.

Year-to-date 2011 we reported net income of $46.3 million or $0.98 per diluted share. The year-to-date results include a benefit of $12.6 million, or $0.27 per diluted share, related to interest rate swaps at AAE. Year-to-date 2010 we reported net income of $40.2 million, or $0.86 per diluted share, including a net benefit of $2.5 million or $0.05 per diluted share related to the aforementioned tax and litigation matters and the interest rate swaps at AAE.

As noted in the press release, the operating results in rail are better than we anticipated earlier in the year. GATX's North American fleet utilization increased to 98.2% at the end of the second quarter. Supply is tight for many car types in the fleet. The lease price index was a positive 4.4% which is reflective of the commercial team's focus on improving lease pricing. The average renewal term is consistent with the prior quarter at 41 months. And the renewal success rate was nearly 80%. We also achieved lease rate increases on GATX's wholly-owned tank car fleet in Europe.

Specialty is performing as expected, with our engine leasing joint venture performing very well. And the marine joint venture facing rate pressure. Remarketing activity was light during the first half of the year but we expect a material pick up during the second half of the year. American Steamship Company's customer demand has been consistent with the level experienced in 2010. At the end of the quarter, ASC had 12 vessels in operation, and we expect to bring at least 1 more into service during the second half of the year.

As noted in the press release, ASC is attempting to negotiate a contract renewal with the American Maritime Officers Union. The AMO represents the licensed crew members aboard ASC's vessels, and the existing agreement is effective until August 1, 2011. ASC's objective is to reach a fair contract that will allow it to operate competitively on the Great Lakes. Contingency plans are in place to minimize the impact of a potential interruption of operations in the event of a labor dispute. While a prolonged work stoppage could negatively affect ASC's segment profit and GATX's results in 2011, we would expect to be fully operational in 2012 under any scenario.

During the second quarter we invested $164 million, primarily in rail assets. This amount does not include any portion of the 12,500 rail car order announced earlier this year. The rail cars associated with that supply agreement will begin to deliver during the third quarter. As we noted in the press release, we are raising our full-year 2011 earnings guidance to a range of $1.85 to $1.95 per diluted share. This increase is based on the strength of rail and the pace of recovery in this market which has exceeded our expectations entering the year. This excludes any impact from the AAE fair value adjustments and assumes normal operations continue at ASC.

With that overview, let us go to your questions. Josh?

(Operator Instructions) John Hecht with JMP Securities.

Good morning, guys, thanks for taking my questions. Real quick, just to make sure I have apples to apples. Is the $1.85 to $1.95 guidance you're giving, if you exclude all the non-recurring items for the first half of the year, am I hearing it right that you would be at $0.77 thus far in the year? So the $1.85 to $1.95 is just the second half of what you'd earn, the first half would have been $0.77?

Actually, John, it is $0.71. On a normalized basis in the first half of the year. And that would equate to the $1.85 to $1.95 for the full year.

Okay. And what tax rate for the second half of the year would we? Is it similar to the 30% tax rate you've had thus far?

It is right around, actually, around 28%, John. And that moves around a bit, just solely due to the different geographies that contribute to pretax income.

And where did you recognize the swap gain this quarter? Is part of it in a lower tax rate and part of it in the shared affiliate earnings?

It occurs at AAE which is taxed at a very low rate, and just normally at a very low rate, the Swiss rate of 12.5% to 13%. But the main item flows through on the share of affiliate line.

Okay. So moving on to operating conditions. Your first one is, you follow some of the general rail trends and the second part of the quarter, at a macro basis, there appeared to be some slowing of traffic in certain segments. You're clearly not seeing that. I'm wondering if you could characterize, is it really just the strength of your core tank car market that's holding it together? Or is it more just the way you structure your leases and how you work with your clients? How are you able to show price increases, strong utilization rates, when we're seeing some offsetting trends elsewhere in the market?

John, it's Brian. You're right in that the rail statistics have slowed down somewhat. Car loadings were only up 1%, I think, in the second quarter versus 2010. And still down, actually, 9% from the second quarter of 2008. But we are seeing lease rate increases. It is widespread across the fleet.

And I think to your point, our pricing success is due to a couple of things. One is the composition of our fleet. You've heard us say on past calls, we focused really hard during the upturn to optimize the fleet in terms of car type, age, customer, et cetera. And that helped us stay highly utilized during the downturn. And now that the market has strengthened, it's resulted in a fleet that is comprised of cars with very limited availability in the market. And consequently we have been able to push price aggressively. The other thing, if you look at the alternatives, as a car comes up for renewal, there are increasingly long production times at the manufacturers, production lead times. And they haven't added a lot of new capacity. So that helps, as well. Those dynamics have allowed us to really push lease rate hard.

Okay. And the maintenance expense in Europe was high. Is that a seasonal or an ongoing item?

We knew coming into the year, John, as we had indicated, that maintenance expense in Europe would be a challenge this year, just given the regulatory environment over there industry-wide. So the second quarter activity was consistent with what we would have anticipated coming into the year. Maintenance costs are up.

And was part of that driven by expiring and renewing the leases, and that you have to do some maintenance during that interim period, or is this just ongoing maintenance that we should see?

It was driven both by that and standard underframe revision which is scheduled every few years. And it happens to be a higher year for that.

And then last question would be, can you just give us a very brief update on the $800 million of owned assets in the specialty division? Can you just characterize what are the bigger exposures there and what are the trends you see?

It is broken down, actually, on our website where we have a full presentation on GATX. There is a real detailed breakdown on that $800 million in assets. But almost half of that, really, is in the marine area, half on ocean-going, half on the inland side The inland side is doing very well. And as we've talked about before, on the ocean-going investments that we have, those are primarily joint ventures. Most of those have continued to face some pretty challenging market conditions. There is a lot of excess capacity in some of the sectors in which we deal and that is continuing. We expected that coming into the year, and that has played out as we thought. The balance of the portfolio is in our industrial equipment side, and in our investment in Rolls Royce. The IF portfolio is performing fine. And I would say the performance at Rolls Royce, our joint venture which is in the spare aircraft engine leasing business, has been excellent. And the outlook remains extremely positive through the balance of this year and beyond for our JV with Rolls Royce.

Is that JV, the spare engine business, is that mostly European or is that elsewhere?

It's fairly well diverse around the globe, but there is definitely European, probably 30% of the portfolio in Europe. But in general we've seen that business, and we've been in that joint venture for 12 or 13 years, and it's performed extremely well regardless of cycle.

Art Hatfield with Morgan Keegan.

Thanks, good morning, everyone. Brian, real quick, looking at the fleet statistics in the back, the first 2 quarters of the year, the fleet shrunk a little bit from where it was at the end of last year. And seeing what pricing is doing now, is it time to start -- and I know you've made some commitments with some of the builders out there for some long-term deliveries on cars, but are you getting to the point now where you really want to more aggressively grow the fleet? Or is it still too early from where we're at in the pricing cycle?

The fleet will grow for the remainder of the year because the order we place with Trinity is starting to deliver, as we speak. We ordered 12,500 cars over 5 years. And as far as that order, it is 2,500 cars per year. The first order year there is going really well. We ordered and placed all the cars with customers that we were required to order under the contract. That's almost 1,000. And we've order and placed all cars we're allowed to order under the contract, and that's almost 1,700. So we're running almost at 1,700 in that first order year in terms of cars that have been ordered and placed. They're just now starting to deliver, however, so you'll see them hit the numbers as we go through the year.

Should we see anything as we go forward? Are pricing dynamics changing enough where it may be more beneficial to keep cars on longer as opposed to scrap? Or how can we think about scrap rates going forward?

We're over 98% utilized so there is not a lot of idle cars. I don't think you'll see the rate of scrap pick up at all. It should abate.

Is, when I think historically that 3,000 to 4,000 number of normal retirements, is about the normal level of scrap that you see on an average year?

That is the normal level of scrap. Remember, we also sell cars and try to stay active in the secondary market to optimize the fleet. And that continues as the market strengthens, especially if you see opportunities in less optimal car types. So there is always that activity, as well.

I missed part of the up-front commentary, and I apologize if you went over this, and I can go back and listen. But, obviously, the LPI is doing much better the last couple quarters. Can you talk about the competition in the marketplace and what you're seeing from a competitive standpoint with regards to pricing?

It seems to be pretty rational out there, Art. I don't see any irrational behavior but we're constantly worried about that. If you see some of the activity in the Bakken, as an example, on those crude oil moves out of the Bakken, which are 30,000-gallon tanks, Art, that is starting to feel a little speculative in nature. Ironically, it is the same car that is used to carry ethanol, and that's the last time we saw that kind of aggressive ordering. So we're watching that pretty carefully. We're using the same strategy we did back in the ethanol boom, which is only to deal with very creditworthy customers that value our service, to try and put the appropriate lease terms on. As far as our exposure there, it is actually less than 200 cars right now, but it will grow. But we're going to grow it very carefully. Little worried about what other people are doing there. For instance, you saw an order by CIT the other day. So we're watching it carefully.

And when you say, is that from existing leasing companies? I know you don't want to put a name on it but are you seeing new entrants pop up trying to get into that business in that area?

No, not really, not really.

Zahid Siddique, Gabelli & Company.

Thank you, good morning. My first question is on your portfolio within rail. Is there anything out there that is available, maybe coming available, that you may be interested in? A while ago we heard about GE. So could you also comment on that within the same context?

Sure, it's Bob Lyons. As we've indicated, the GE portfolio was for sale. They have pulled that portfolio off the market and are opting to keep it and operate it going forward. That was announced within the last couple of weeks. We had previously indicated that we were not participating in that process, for a variety of reasons. We never signed a confidentiality agreement, it is not a portfolio we opted to pursue or putting resources against going after it. We're always looking at other acquisition opportunities in the secondary market. There's nothing of that scale that we're aware of out there right now. But from time to time there are smaller portfolios that are rumored to be available and we're a known buyer. We've closed on a lot of those transactions over the course of the last few years, and we'll continue to be very active in going after those.

Okay, great. And then within the rail car industry, what is the idle cars, number of idle cars, how has that been trending?

The last number that came out by the AAR was as of July 1, and that was at 276,000. So that hasn't moved around too much the past several months.

And how does that compare against last year?

It was probably in the 350,000 range last year about this time. It is peaked at over 500,000 cars, and now it's come down to that 275,000 range. And it appears to have flattened out there. Nobody really knows what ultimately that low point will be, because it's a relatively new data point. But it seems to have flattened out here at about 275,000 cars.

Okay. And my last question is on the composition of fleet. You mentioned that that has helped you withstand the movement in the market. Could you comment on what is it in the composition that has helped, of your fleet?

Sure. Remember, it is largely tank cars. It is tank and freight but particular strength in some of the car types such as general service tank, 30,000 gallon and 23,500 gallon. So large and medium-sized general service tank. Small and medium covered hopper cars. Large pressure cars are another example of strong market right now. So it is pretty widespread across our fleet.

Okay. And just a follow-up, what industries have done well, what end markets have done well?

I would say, as Brian had mentioned, on the chemicals side for general service tank cars, we've seen pretty solid demand. We've seen good demand on the small cube covered hoppers from the energy sector, fracs and service.

Grain cars.

Grain cars. Actually demand for coal cars has picked up nicely and some of that idle inventory is being worked down. But overall what we're seeing right now in the marketplace is pretty solid demand on a broad-based level. Other than I would say cars related to construction activity. And we don't have very much exposure at all there, but where we do, on center beam cars, for example, there is still a lot of excess inventory out there of those in the industry. Fortunately we don't own too many.

Rich Fitzgerald with Jefferies Assets.

Hello, guys, good morning. Last quarter there was pretty meaningful improvement in the LPI where you were almost breaking even on your rollovers. At the time you said it was a little too early to call that a trend. Now with the increasing guidance, what is the new outlook with respect to LPI for the rest of the year?

Sure. Obviously the rate environments improved faster than we anticipated. And we're optimistic given some of the market environment factors that Brian already touched on, that that positive environment is going to be with us here for a while, which is encouraging. LPI is a good trend indicator, but it can bump around from quarter to quarter. For example, in the fourth quarter of this year, we have some cars that are coming up for renewal, that are coming off very high rates. So the bar is going to be higher in Q4. And as a result, the LPI could move around a little bit and maybe not hit the levels we've seen in this most recent quarter. So overall we feel very optimistic about the rate environment. And the most relevant fact is that it's accelerated at a pace beyond what we had anticipated and we feel that that will continue.

Okay. And then just a quick follow-up. With the increased guidance, it would appear that the second half is expected to be a lot more robust in terms of earnings generation than the first half. And just as we think in terms of modeling that out, how much of that should we think about in terms of the top line benefiting from the LPI trends, as well as new cars coming online, versus anything you guys are doing on the cost structure side of the business?

It's going to be more driven by utilization, rate activity, and also remarketing during the second half of the year. As we mentioned, we expect to be, particularly in the specialty area, significantly higher in the second half of the year than we saw in the first half. The LPI, because the cars rolled evenly during the course of the year, the cars we're renewing today, you only get a half year's benefit from that pickup, so you don't get the full impact until 2012. So it's encouraging, it's positive, but it doesn't have a huge impact right in the near term. So it's going to be a mix of really those 3 things.

Okay. And then just one more last one, if I could. If my addition is correct, I think you guys had a little over $17 million of asset remarketing revenues in the first half of the year. Do I correctly understand that that number should move up pretty significantly in the second half and that that's part of the revised earnings guidance?

That's right, Rich. That was $17 million year-to-date and we do expect more in the second half.

(Operator Instructions) At this time there are no further questions, so I would like to turn the call back over to our speakers for any closing remarks.

Thank you, Josh, and thank you, everyone, for participating. I will be available all afternoon to answer any additional questions. Thanks.

This does conclude your teleconference. Thank you for your participation. You may now disconnect.