GATX Corp (GATX) 2015 Q3 法說會逐字稿

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

(Operator Instructions).

At this time I will turn the conference over to Chris LaHurd. Please go ahead sir.

Thank you. Good morning, everyone, and welcome to the GATX 3Q 2015 earnings call. I'm joined today by Brian Kenney, President and Chief Executive Officer, Bob Lyons, Executive Vice President and Chief Financial Officer, and Tom Ellman, Executive Vice President and President of Rail North America. I'll provide some prepared remarks to supplement out earnings release distributed earlier this morning, and then we will open it up for Q&A.

Before we begin, 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 2014 form 10K for a discussion of these factors. You can find this report as well as other information about the Company on our website www.GATX.com.

To date, GATX reported 2015 third-quarter net income of $39.5 million, or $0.91 per diluted share. This compares to 2014 third-quarter net income of $51.3 million, or $1.14 per diluted share. Year to date 2015, we've reported net income of $147.1 million, or $3.33 per diluted share. This compares to net income of $146.5 million, or $3.18 per diluted share, for the same period in 2014.

Third-quarter 2015 and year-to-date results include a net after-tax loss of $26.6 million, or $0.61 per diluted share, related to our decision to exit the majority of our marine investments within portfolio management. Now for a few comments on each of our segments.

Rail North America had an excellent quarter with fleet utilization of 99.2% at the end of the third quarter. During the quarter, the renewal rate change of GATX's lease price index was 25.6%. GATX's LPI continues to be weighed down by a lackluster cold market. The average renewal term for cars in the lease price index was 60 months. Year to date, our LPI was approximately 36%, in line with our expectations entering this year.

Demand for our key car types remain solid. In particular cars serving the chemical, food, aggregate, and fertilizer markets are seeing stable demand. As we indicated in prior calls, tank car renewal lease rates and terms have backed off the historical peaks experienced in 2014 and early 2015. In addition, as noted in the press release, in the tank car market we are seeing more broad-based softness and competition for new car placements and renewals. This environment, consistent with our expectations, continues.

We have positioned our fleet very well with the majority of our cars locked up on long-term leases at attractive rates, thereby providing a record level of committed lease revenues. Demand for the boxcar fleet continues to be extremely high with utilization at 96.6% at the end of the third quarter. Due to normal transactional activity, this fleet experienced a slight reduction in utilization quarter over quarter. We expect utilization to be higher in Q4 based on anticipated leasing activity.

The secondary market for railcars continues to remain active. Rail North America's asset remarketing income was $10.5 million during the quarter. There is no change in our expectation that full-year remarketing income will be in line with 2014 numbers.

Within Rail International, GATX Rail Europe continues to benefit from solid demand and quick placement of their newly built tank cars. GATX Rail Europe invested more than $38 million in the third quarter. At American Steamship Company, a decrease in iron ore volumes resulting from reduced steel production in the Great Lakes region continues to negatively impact segment profit. Favorable weather conditions, high water levels, and spot cargoes has allowed ASC to partially offset these macroeconomic headwinds.

The strategic decision to exit our marine investments within portfolio management resulted from two major factors -- earnings volatility, consequences of our ocean going vessels, and the fact that both ocean-going and inland marine investments are non-core to GATX. This sale will allow us to focus more of our attention on our core business, which is railcar leasing and services. The sale process of these investments began in the third quarter and will largely conclude in the fourth quarter of 2015.

Elsewhere within portfolio management, Rolls-Royce and Partners Finance Affiliates continue to post excellent results. Finally, GATX repurchased over 915,500 shares for approximately $43 million during the third quarter. At the end of the quarter, there was $14.4 million remaining under our $250 million repurchase authorization.

With that quick overview, Brian, Bob, Tom and I are ready to take your questions. Thank you.

(Operator Instructions)

First, Matt Brooklier from Longbow Research.

Just a question on your average renewal term on the North American fleet. It had been contracting for the past two consecutive quarters and then you had the nice move up in third-quarter so I'm just trying to get a sense for what drove that change.

For the most part, most car types are well above historical averages, so we have been trying to lengthen lease term on the majority of the fleet for quite some time, including this quarter. Quarter to quarter, you will have some variances in which particular renewals come up and in quarters where you have more coal or the exception car types that we're trying to go little bit shorter, you might see that dip a little bit.

But the overall trend you shouldn't think of anything different in terms of what we are trying to do. We continue to try to lengthen lease term on most car types.

Okay. But I guess moving up to 60 was more of a function of doing the lesser term cars versus extending lease on some of the healthier car types?

Yes, you shouldn't think about it is the terms on the strong cars were particularly longer than in the past.

Okay.

What are your thoughts on regulations and impact on the market? I'm just curious to see if there's been any movement in terms of flammable service tank cars, customers trying to position themselves? Have you seen customers starting to take action with respect to potentially replacing cars or retrofitting cars? Just trying to get an update here.

We really haven't. We haven't seen much of anything in the way of customer requests to retrofit cars. In terms of new cars, we haven't received any inquiries for new cars to move crude oil.

We are starting to see some of the ethanol players make inquiries. We have not closed any new business in that area, but overall in terms of any kind of anticipated flurry of activity in the wake of the regulations, we are not seeing that.

I guess, do you have expectations of potentially things do pick up next year, the first mandate deadline is 18 and there is still, even with crude correcting, a decent amount of crude cars in service at this point in time? I'm just curious if you have a feel for potential timing of when we could see retrofits or maybe a greater level of replacement activity? Thanks.

Yes. First of all, in terms of GATX, we've said before that we are very unlikely to retrofit any legacy cars and that remains true.

In terms of what we might retrofit on our own fleet, what you'd be most likely to see is the CPC 1232 -- what are called the good faith cars -- cars ordered after October 2011, that are jacketed because that retrofit is fairly modest in cost, maybe $3000 to $5000. But we only have about 1800 of those cars and the deadline isn't until 2025 so you'll see that on a pretty elongated basis.

In terms of others, for crude oil cars, it's hard to say what will ultimately happen, but right now, there appears to be adequate supply of cars in the industry so we don't anticipate a lot of near-term order activity in that area.

Justin Long with Stephens Inc.

You mentioned more of a broad-based slow down in tank car demand. Is there anything you could share to just help us understand the order of magnitude, maybe what you've seen in terms of market lease rates and how they've trended sequentially into the third quarter?

Sure. First of all, it's important to note that in any historical context, the tank car market remains very strong, well above long-term rates, which is why we mentioned earlier we continue to try to lengthen lease term on most car types.

Having said that, we are seeing rates come down from the very recent extremely high levels and in the last year or so for non-flammable tank car types, probably on the order of 10-15% decline in lease rates.

Great. That's helpful.

And I wanted to ask one about selling the portfolio management assets. How should we about the potential use of proceeds from that? Are there attractive opportunities in the rail sector right now?

Would you consider a step up in buybacks? What are the things you are considering?

This is Brian -- all of that is on the table. As you know we always work to maintain the right balance between investing in the business and returning capital in our track record over the last 9 or 10 years, we've invested billions in the fleet and we've paid over $500 million in dividends, had over 700 million share repurchased and we want to maintain that balance going forward.

But as far as what lever you pull harder, it really depends on where you are in the cycle and also how your balance sheet looks. For example, last year was not a very strong railcar market, you've seen us accelerate the dividend increase, you've seen us repurchase shares. Because aside from that boxcar transaction it's been difficult to find attractively priced new railcar investments at such a high market.

Now if this market is headed down or continues down, my expectation is we'll pull that investment level harder as railcar prices drop. Others struggle and lose interest and we will see more value and investment. So, we're going to continue to maintain that balance, but depending on where are you in the cycle, that will tell you what we are going to do.

And, Justin, just to frame up the magnitude there, too, it's a good question. As those assets are sold, some already were sold in the third quarter, some will go in the fourth, there may be some carryover into 2015. But we're probably looking to cash proceeds spread over that time of in the range of $250 million.

Okay, Great. That's helpful.

And Brian, maybe to just build on your point, that you stated, you think the market could become more attractive if we see this weakness in railcar orders and demand continue. Going back historically, and just looking at prior cycles, how long does it typically take for valuations in the market to become more attractive in an environment like this where we're seeing a moderation in demand?

Yes, last time we started to see the market turn down in 2007 our results were still at a record level in 2008, even though the market was declining pretty quickly. By 2010 you started to see the heavy investment by GATX in some bankrupt fleets like the old Babcock fleet and some others. So it generally took about two years for railcar prices to get at a very attractive level.

Okay. That's really helpful. I'll leave it at that.

Steve O'Hara from Sidoti & Company.

I was wondering if you could maybe touch on the GE rail transaction and maybe how it compares or contrasts to your portfolio and maybe what you think of it?

This is Brian. I can take that.

I can tell you what we can see from the public industry database that if you try to compare the two fleets they're really not that comparable. You can see from that database that GE has a higher percentage of coal cars, small-cube covered hoppers, center beams, and plastic pellets, some cars that are more volatile and challenging in an industry downturn.

GATX obviously has a much higher percentage of tank cars and they've historically been less volatile and produced a higher rate of return and have been more valuable assets. So, I would say, while we have a very diverse fleet, I would say it is not really a comparable fleet to the GE fleet.

Then, I guess that would maybe lead one to believe that maybe the valuation for GATX might be more favorable, I guess.

It's a radically different asset base, not only from a fleet composition, but we also are in other businesses. So in addition to the rail fleet being just a different type of investment, we have businesses beyond North America Rail, best example being Rolls-Royce, which has a very low book value and a very high equity value. Direct value comparisons are just not very helpful in relation to that recently announced sale.

Right. Thank you.

Just in regards to the sale and Rolls-Royce, does this help maybe highlight the impact on your financials at all? Or does that not change? I think the way you reported is below the line anyway so maybe it doesn't have an impact, but maybe it alleviates some of the pressure within the portfolio management business to begin with.

Well, I think from the standpoint of understanding what's within portfolio management this should certainly clarify things once we get the marine sales all cleaned up and obviously we're working on that. We do provide quite a bit of information in the 10-K as we have over the course of the last couple of years with expanded disclosure on Rolls.

We do want people to know the value of that business and the power of what we have there. So, we have enhanced our disclosure within the K and there's a couple of pages in there solely dedicated to Rolls-Royce and laying out what its income contribution is. So we'll continue to do that but certainly as the Marine portfolio goes away here in the near term, Rolls will be much easier to pick up just off the face of the income statement on that portfolio management segment.

Just one last one -- I think you guys have an order that the railcar maybe finishes up and you have another one that starts again I believe around the same time or maybe within six months or so. And I think there may be a little bit more ability to negotiate the terms of that than maybe the last time.

But I'm just wondering does maybe the turn in the cycle make you less apt to continue in that order because you think you possibly might see something in the market place that would be more attractive? Or maybe the valuations would be better? If you could just talk about how you think about that.

I'll start and if others wants to jump in -- just to remind you of the way the deal works. We entered a new agreement in 2011 that terminates in July of 2016. That was for 12,500 cars and we have placed over 12,000 of those already. So, that deal is nearing its completion.

We extended the deal beginning in August 2016 so we continue to take delivery of cars on an uninterrupted basis. The fundamental reason for that is we have significant demand for railcars, particularly tank cars, to replace our own fleet. So in any market environment there is significant demand that comes from our existing fleet. As far as the way that deal works, there's some ability for the conditions to change beginning in January, of 2018. So we still have some distance to go before we get there.

Mike Baudendistel with Stifel.

Just wanted to know, on the Marine assets that were sold, what makes those non-core relative to other assets that are in the portfolio management that you consider core?

Sure. I think the key component as we talk about the rail business and even within Rolls-Royce you can see assets that are long-lived, widely used, that we understand extremely well and where there's a service component associated with those assets. The Marine assets by and large tend to be more passive investments.

We are not providing any service and for example on the inland Marine, those assets have been very stores of value and very good performers over time for GATX, but competing for new business there is really a low-cost to capital and it's been an incredibly aggressive market the last few years where we see yields being bid down to levels that are unattractive for GATX. So our ability to grow that portfolio is limited, the assets are great, we'll realize nice value for them, but in terms of an area to focus on and try to grow in the future, it's not a good use of our resources.

Okay, that's helpful.

And just thinking about the mix on the model, how much were those assets contributing on a revenue or operating income basis?

From a segment profit standpoint, we'll just start there and keep it real simple -- there's essentially a breakeven proposition today when you balance out the income contributions from the inland side with some of the losses we've experienced on the ocean-going side. Net-net once everything is sold, we'll see a positive contribution, but relatively minor from the exit.

Then the last one for me is, you're not going to talk about the LPI for 2016 until about a quarter from now but when we think about the comp that in 2016 the leases that are coming off of lease and are going to have to be repriced, do the comps get more difficult there when you go into 2016?

You mean in terms of expiring lease rates?

Exactly, in terms of expiring lease rates when those were last priced.

We'll get into more details on that we get into the January call but the logical progression was that it would be would probably move up a little bit in terms of the average expiring rate versus 2015.

Got it. Thank you.

Art Hatfield, Raymond James.

Brian, I guess Bob and Tom can throw their thoughts in this. It's kind of a big picture thought, but we've recently been at all time highs in the industry backlog. We've had this unprecedented growth in investment related to the energy industry.

We still have very elevated backlogs for certain car types and, as you've mentioned, things seem to be softening and turning in the direction that could potentially get ugly, and if some of the builders don't make an adjustment -- and this is a what if question -- a big what if. What if there is consolidation in the industry, how would that affect you guys and are you prepared to potentially handle that if it occurs?

In terms of the consolidation in the industry, and if this GE sale closes, it's a good example. I should let Tom chime in. I don't think it has a big effect on GATX. We always compete against that fleet and having it change hands really isn't a competitive issue for us.

Market share is really not that important of an issue in the rail leasing business as long as you are a significant player. You can do fine. I think GATX has proven that over 115 years. I can let Tom comment on the specific competitive characteristic of it.

Yes, as far as that deal goes, part of it went to Union Tank Car, which we have competed with for 100 years on the tank car side. And our capability and their capability are largely unchanged as a result of this transaction. The rest of it going from GE to First Union -- similar characteristics between those two companies and we feel that we compete very well on service and relationship to the customer and focus on the market.

So if the question is how will GATX participate in it, I think the earlier question was a pretty good one about how long it takes for railcar prices to come down to be attractive. They're not really there yet for us so we would be a willing participant, but as you know from knowing is for a while it's all about your entry cost. It has to be historically advantaged and competitively advantaged and you've seen us back off new investments for the past couple years just for that reason. But we would absolutely participate if railcar values are at a more attractive level.

Thanks. I appreciate the color.

I'm sorry -- I wasn't clear on what I was asking. I was more concerned about your suppliers potentially being forced to consolidate if things get difficult enough. And how you would be able to handle that or if it would be disruptive to you in the case of consolidation amongst the car builders. That's kind of where I was going originally. I'm sorry.

Well, we have a number of sources on the freight car side and I wouldn't call it a fragmented market, but it's an attractive market for a purchaser. It's always been a little bit more of a issue for GATX on the tank car side, we used to be a tank car manufacturer and we're not now. There are a number of tank car builders in North America.

Most of our new cars have come from Trinity. I can't say it wouldn't be an issue but it's hard to see how that would play out and in the end GATX will find a way just like we do in Europe right now when that market is more fragmented, we actually assemble cars ourselves.

Tom, I don't know if you have anything.

The only thing I'd point out is that, on the tank car side, in recent years, it's gone in the opposite direction. You had Greenbrier and National Steel entering the market. Even some degree consolidation would put you back where you were.

That's very helpful. Thanks for your thoughts this morning.

Justin Bergner with Gabelli & Company.

First question -- just related to the book value dynamics of what you're impairing and selling in portfolio management. Outside of the aircraft leasing business, what is not being sold and is the $250 million of expected proceeds, then, sort of correspond to the written down book value from, call it like, $290 million of the portion that you're planning to sell?

That is correct. So if you think about -- within portfolio management we have about $450 million invested in Marine. About $300 million of that original net book value is targeted for sale right now. So, we'll realize roughly $250 million in proceeds off of that. We've taken obviously the sizable loss -- write-down on those assets already this quarter.

What will be left behind will primarily be our investment in five ocean-going LPG, LNG vessels that we own. We refer to those as the Norgas vessels that are managed by IM Skaugen. The reason we're not selling those right now is those are very niche assets, they're performing okay, but really there is very limited secondary market activity for those assets currently. If that were to change in the future, we would revisit that.

Good.

My second question relates to the Rolls-Royce joint venture and how it performed in the quarter. I guess if I adjust your affiliate earnings in your portfolio management segment for the portion of the impairment that went through that line item, I get an affiliate earnings of $17.4 million in portfolio management versus $17 million. Is that sort of a good indicator that the Rolls-Royce earnings were relatively flat?

You're right in the right ballpark for the 2015 third quarter. 2014 the Rolls contribution was a little bit less. We had a couple of other joint ventures that contributed last year that got wrapped up toward the end of 2014, some smaller JVs that aren't with us any longer.

So if you look at the Rolls contribution this quarter, it's about $17.5 million roughly versus $15 million last year in the third quarter.

And I would add, too, we are expecting a pretty strong quarter from Rolls in Q4, both from an operations perspective and remarketing activity there as well.

What's driving the strength in the Rolls JV performance year on year?

They continue to be invested in very attractive engine types. Utilization remains very high. They've handled placements this year extremely well. And we've had some engine sales and tear-downs -- teardowns essentially being equivalent to scrap income on the rail side of the business. But all of those are contributing across the board.

Thank you.

One final question which relates to the renewal rate. I think you've given it in past quarters. I'm not sure if I heard earlier in the call?

On the LPI?

Yes, I think it was like 84% in the second quarter.

Renewal success rate for Q3 is around 68%.

Thank you.

Jordan Hymowitz with Florida Financial.

In your segment operating profits from portfolio American Steamship, rather, what else is in that besides that, so to speak? You're saying that if you are selling the Marine, you have a net breakeven or no real effect on earnings. Where does all the profits in that segment come from?

I want to make sure we're not mixing and matching. American Steamship segment is unaffected by anything done within portfolio management, so the only Marine assets being sold are those within portfolio management. And the primary income contributor to portfolio management is Rolls-Royce. That has been the case for some period of time.

You can dig into those details if you want. They are in the K and the Q, typically.

Rolls is the big income generator there and that will become even more evident as the rest of the Marine assets are sold off or go away. You'll see that Rolls continues to be the big generator of income within portfolio management with some additional contribution from the LPG LNG vessel.

Sorry, I was mistaken, I thought the Marine was within the American Steamship segment.

No.

Thank you.

(Operator instructions)

Steve Barger with KeyBanc Capital Markets.

This is Ted Newman on for Steve.

You talked about railcar loadings -- they are done a little over 1% year to date. Just curious how customers are responding to that as well as higher velocity? Does that make them less inclined to renew all the cars that come up or do you think they are viewing this as more of a temporary situation?

Yes, when you look at the railcar loadings numbers, you have to break it down both to the impact on the customers and then, for that reason, they have different reactions. Those loading numbers by far in our fleet most impact the coal customers because those are very high mileage cars and it's one of the contributing factors to the overall weakness we've seen in coal.

At the opposite extreme, car types like most tank car types and plastic pellet cars might mix between 4 and 10 turns a year. So the change in railroad velocity is not particularly impactful to those and then you have a whole bunch of cars in the middle like a grain car or a boxcar that would be between those two extremes. Because of the long-term nature of our fleet, the only place that we are seeing it right now is in that coal fleet.

If railroad velocity continue to improve it might begin to touch some of the other parts of our fleet, but the big impact would really be most strongly felt in coal, which it is touching us in intermodal where we have are pretty small presence.

My next question -- you're obviously well positioned to take advantage of market opportunities, so between current liquidity and potential balance sheet capacity, could you talk a little bit about how much you could do?

We could do transactions of significant size. That is not a concern of mine at all from a liquidity standpoint.

From a balance sheet perspective, having any attractive investment opportunity that presented itself, we could pursue and pursue aggressively. The question gets back to Brian's earlier comment, which is the valuations available in the marketplace today and what that allows.

One last one. I know you mentioned losing money on the Marine assets and you talked a little bit about that within portfolio management. Can you talk about how old those assets were when you sold them?

Well, there's a variety of assets in there and they're still in the process of being sold, but the ocean-going vessels probably date back anywhere between 10 and 15 years. They're getting older, another reason why it's important to exit those now as we look out over the course of the next 5 and 10 years.

That's just not a business we are in really to be investing in refurbishment of those assets. They have many years to run but they are better off in the hands of others who deal with that every day than us.

On the inland side, I'd say probably between 3 and 10 years of age, somewhere in that ballpark, a lot of those are tugs, tows, and barges, good assets, they've got a lot of years left to run and we are seeing good interest in those in the secondary market.

Got it.

Sorry, just one last follow-up to that. If prices were to remain stable where you sold these assets over this quarter, are you expecting a similar type of loss that you saw this quarter into the fourth quarter as you wrap up sales?

I'm glad you asked that question. I don't anticipate any loss, actually, in the fourth quarter. As a matter of fact, the $26.6 million after-tax loss we've taken year to date I would expect in the fourth quarter that number on a year-to-date basis will come down because some of the assets teed up for sale in the fourth quarter we'll actually see some gains on.

Those are more the inland assets. And that's when all is said and done we're probably looking at an after-tax loss somewhere in the $15 million to $20 million range. But that's already inclusive of the $26.5 million taken for 2015.

Understood, thanks.

Kristine Kubacki from Avondale Partners.

My question is a little bit narrow. I know you got these assets in steel back in 2009 we heard about from the railroad abandoning or really shrinking their coal networks.

I'm wondering how you think about the coal assets that you have in your portfolio right now? Are you going to stick with them is the short question?

Yes, we've talked about coal repeatedly and the best thing to do right now is go short on term, get them locked up and that's what we're looking to do.

Sorry if I missed this but, is there any color on, it looks like sequentially a little bit better in Europe, what's the nature of the market going on over there? It seems like some of the economic indicators are getting a little bit better.

You know, the economic weakness and volatility has been there for a couple of years and then combined with the continued low crude prices has resulted in uneven demand for tank cars in Europe for quite some time.

And remember, GATX Rail Europe has about 65% of their fleet carrying petroleum products. So it's been a very rocky market but, despite those conditions, they've performed pretty well. And at the end of the third quarter I think it's further evidence of that, their utilization is 95.7 and the start of the year 95.9. At the beginning of the year we anticipated a bigger drop in utilization due to this continued weakness. So, it's been a pleasant surprise.

They've placed their new cars. They've taken close to 1000 new cars in 2015, placed virtually every one. I think they have less than 10 new cars idle. And they've been pretty successful on lease renewals as well.

Pricing is different over there than in North America. It's much less volatile, especially in the tank car side.

I think every year for the last six years they've realized average renewal rate increases in the low to mid single digits and, at the end of 2015, it'll be lower but if they have a year where it's 1%, that's a bad year for them so it's definitely a different animal over there.

So, still a very rocky market. They performed very well. The sequential increase in revenue you see there is just really from taking delivery of those new cars and replacing the older ones and scrapping them in the fleet. But in terms of business conditions, it's pretty much the same.

Then, I guess I'm going to try to ask a little bit longer term question. You talked about asset prices are still pretty high on the railcar side and I guess obviously we all know what's going on in the freight environment and lease rates have started to come down.

When do you expect that we would see some opportunities or capitulation by non-traditional players out there that have entered the market? How long do you think that that takes to play out?

It's a good question. I don't know if you heard the earlier question on that. Last time it took about two years from when we first saw the weakness in the market to where we started investing by helping some of the bankrupt lessors out there and actually towards the end of that by placing our own railcars.

So that was the timeframe last time. It's more difficult to figure that out this time. You've heard us talk about it, Kristine, for a long time. We think the crude market has been over served and a lot of the manufacturing backlog was dedicated or earmarked for crude.

We thought that was a bad idea before crude oil prices dropped. So on the tank car side it's going to be interesting to see how that works. We could see that drop faster than some of the freight car types. Potentially it could be quicker on the tank car side but we don't know until we get there.

Exactly. I appreciate the time.

Follow-up question from Justin Bergner from Gabelli and Company.

In regards to the Rolls-Royce joint venture, I was just thinking through your earlier comments about the being the right type of engines, seeing good demand for replacement leases, and then some engine sales and tear-downs. In light of everything that we're hearing in regards to there being a potential bubble in the wide body market, are you finding that your engines that are older, which normally would have been scrapped, are actually being utilized longer through the joint venture?

Not necessarily. We have our partner, who manages that joint venture obviously, has extensive asset knowledge and a very fixed view on what the lifecycle is for the various engines within the portfolio.

I would say actually many of the engines in the portfolio are in the earlier mid-stage of their life cycle, so they still have many years to operate regardless. We have been a big investor historically in the V2500 engine on the A320. That has been an outstanding engine both through its operating lease period and at the end of its lease life, and in certain circumstances we've seen those engines extended maybe a little bit longer. But they're performing under the lifecycle model that had been anticipated originally.

So there's nothing unusual that's happening either on the scrappage side or the extension of the life of engines? It's just good operating performance in the joint venture?

Yes. The engines in general, and we saw this actually if you recall, we used to be an aircraft lesser and when we exited that business in 2005, 2006 and 2007 we retained our investment here and one of the reasons we did is because of the attractiveness of the underlying assets, maintained high utilization through cycles, and it's been a great store of value through cycles as well. And we have an outstanding partner who is very adept at managing these assets through their life cycle.

A second follow-up question relates to the profitability of Rail International. Given that it declined year on year and there wasn't a meaningful change in asset dispositions, what exactly happened this quarter to cause the profit to materially come down versus steadier conditions in the first half of the year?

The other thing to keep in mind, Justin, on year over year is, we have been fighting an FX headwind with the Euro at an average of about 131 last year at this point in time versus 112 or 113 this year. We really came into the year in a bit of a hole. And when you strip away that FX component they are a little bit at or above what we anticipated they would be.

Thanks so much, Bob.

We will now take a follow-up question from Steve O'Hara from Sidoti & Company.

On the renewal success rate, it dropped pretty good year over year, I don't know if that's even comparable, but I think you said you had a decent number of coal cars. Was that it? Was part of it due to your desire to keep term high? If you could talk about that a little bit I would appreciate it.

Sure. Any time you look at a single quarter for renewal success percentage it gets a little tricky because a couple of big transactions can move the needle pretty good. In this particular case, we have one very large transaction where we had a customer exiting the segment of their business so those cars came back, but we placed them service-to-service with no interruption with somebody else who was in that business.

Also another area is we've talked about small cubes and that car type carries sand. We proactively took a piece of that business and moved it from sand to another commodity that doesn't experience the same volatility.

And when you kind of unwind for that, those transactions plus a little bit on the coal side, which we've already talked about, you'd be back in the upper 70s or low 80s, so very consistent with where we have been.

Okay.

Then on the number of cars you have coming up next year, what that looks like. It goes between 17,000 and 18,000 a quarter maybe it's a year, could you talk about that as well?

Sure. I'm not going to be able to provide a lot of detail. We will when we get into the fourth quarter earnings release as we always do. But it's probably going to come down a little bit from that number.

We'll see how some of the renewals play out here through the balance of the fourth quarter, but we would anticipate that number would come down a little bit in 2016. Reflective of the fact that obviously, for a number of years now we've been stretching term and stretching term and stretching term. The compounding effect of that, you'll start to see that with a little bit lighter renewal schedule going forward.

Yes, especially maybe going to into a peak year, it would be positive as well. Thank you very much.

We currently have no additional questions on the telephone.

I'd like to thank everyone for their participation on the call and please contact me if you have any questions. Thank you.

Ladies and gentlemen, this does conclude today's conference. We do thank you for your participation. Have a wonderful rest of your day.