Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

GATX Corp. (NYSE:GMT)

Q3 2008 Earnings Call

October 23, 2008 11:00 am ET

Executives

Rhonda Johnson - Director of IR

Brian Kenney - President and CEO

Bob Lyons - SVP and CFO

Analysts

Bob Napoli - Piper Jaffray

John Hecht - JMP Securities

Jordan Hymowitz - Philadelphia Financial

Rick Shane - Jefferies & Company

Paul Bodner - Longbow Research

Kim Lockhart - Lockhart Research

Art Hatfield - Morgan Keegan

Gregory McKasco - Lord Raven

Gregory DiMarzio - Century Capital Management

Operator

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

At this time, I would like to turn the conference over to Rhonda Johnson, Director of Investor Relations. Please go ahead, ma'am.

Rhonda Johnson

Thank you, Gabriella, and good morning everyone and thanks for listening in to our third quarter conference call.

With me today are Brian Kenney, President and CEO of GATX Corporation and Bob Lyons, Senior Vice President and Chief Financial Officer.

I will provide a brief overview of the results highlighted in our press release earlier this morning and then we'll open up for your questions.

First, I would like to remind you that any forward-looking statements 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, I refer you to our 2007 Form 10-K filing.

Now, let's review the numbers. Today we reported net income from continuing operations of $74 million, or $1.46 per diluted share, for the third quarter of 2008, which included $16.2 million, or $0.32 per diluted share, income from the sale of real estate and the reversal of certain environmental reserves in Poland.

In the third quarter of 2007, we reported net income from continuing operations of $63.9 million, or $1.21 per diluted share, including a $9.4 million, or $0.17 per diluted share benefit from a change in statutory tax rates in Germany.

Year-to-date, we reported net income from continuing operations of $167.1 million, or $3.31 per diluted share, including the benefits in Poland I just mentioned as well as a reversal of tax reserves in the first quarter this year. These benefits totaled $23 million, or $0.45 per diluted share. This compared with $144.4 million, or $2.63 per diluted share in the same period in 2007, which includes $10.3 million, or $0.18 per diluted share, in tax benefits.

Our third quarter results were excellent despite a very difficult environment. The rail market, particularly in certain freight car types, remains challenging, but our core market, general service tank cars, continues to provide stable demand and attractive lease rates and terms.

Utilization remained very high, thanks in part to high scrap steel prices and active scrapping, but also due to the diligence of our commercial and operations teams in placing cars with customers.

As we anticipated at the beginning of the year, the lease price index, which measures the change from expiring lease rate to renewal lease rate, was essentially flat in the third quarter, down from a nearly 6% increase in the second quarter.

It's important to note, however, that nominal renewal lease rates remained steady between second and third quarter. Also, due to our efforts to extend lease terms, we have relatively fewer cars up for renewal in the coming months, compared to prior years, which will help buffer performance in what will likely be a challenging market.

Regarding investment opportunities, as those of you who followed us know, we're focused on remaining disciplined in our valuation analysis, regardless of where we are in the economic cycle.

To the extent that opportunities become available we will maintain this valuation discipline while looking to capitalize on the advantageous position we have today.

With year-to-date results exceeding our expectations, thanks to strong year-to-date remarketing income, significant scrapping gains and increased contribution from our European operations, we now expect 2008 full year earnings to modestly exceed the $3.15 to $3.35 per diluted share range previously announced. This guidance excludes the $0.45 per diluted share benefits year-to-date that I mentioned earlier.

Volatility in the markets has been unprecedented in recent months, and the impact of volatility and weakening economic news may have on our customers in the longer term has yet to be determined. However, steps we have taken in recent years to position the company for steadier performance through cycles, including extending lease terms to reduce renewal exposure in any given year, selling more volatile car types and attractive valuations, and refraining from placing large speculative railcar orders at high valuations, those items should serve us well going forward.

Additionally, the committed long-term nature of our leases provides stable cash flows and support for our operations. And we believe GATX is not only positioned to manage through a challenging cycle, but to capitalize on investment opportunities that provide attractive returns for our shareholders.

And with that quick overview, I would like to open up for your questions. Gabriella?

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Bob Napoli of Piper Jaffray. Please go ahead, sir.

Bob Napoli - Piper Jaffray

Thank you, nice quarter and congratulations for positioning the company for just this kind of an environment. Question on share count. What is the end of period share count?

Rhonda Johnson

The share count is that, we show the average share count and that's 50.9 million for the third quarter.

Bob Napoli - Piper Jaffray

Right. And what was the September 30th share count?

Rhonda Johnson

It should be somewhere around 49 million or 50 million shares.

Bob Napoli - Piper Jaffray

Okay.

Rhonda Johnson

We don't give the exact number. That's not a public number until the Q comes out in the next couple weeks.

Bob Napoli - Piper Jaffray

Okay.

Bob Lyons

Bob, if you're inquiring about whether or not we repurchased any stock during the third quarter, the answer to that was no, we were not active.

Bob Napoli - Piper Jaffray

Okay. Just following in line with that is, given that you have been very diligent on your pricing metrics for the opportunities that are out there and your leverage is low in this very stressed capital markets environment. But with the low leverage you have, do you intend to re-enter the market on buybacks at this time or will you wait?

Bob Lyons

We still have the authorization in place, as you might recall. It was a $200 million authorization under which we completed approximately $75 million in the first quarter. We haven't been active in the last couple of quarters and we're trying to preserve some of that capital for investment opportunities and I don't think that position will change here in the near term, Bob.

We still believe there's going to be some opportunities out there and it's prudent to maintain that capital discipline at this point in time.

Bob Napoli - Piper Jaffray

Okay. In Europe, what changes are you seeing in Europe and how much of an effect does currency have?

Bob Lyons

Currency impact, Bob, if you are talking '07 to '08, it's been quite favorable. Until recently, obviously the euro was up in the 140, 150 range for quite a period of time and we had versus '07 roughly a $6 million pickup from that income, from that currency, the weak dollar in 2008. Obviously, that's reversed here recently with the dollar strengthening quite a bit.

Brian Kenney

I'd add that Europe overall on the rail side is performing very well. We still are close to 100% utilization on the freight car side. Tank car side is going well. Rates are strong. Utilization is strong. So we haven't seen the weakness in Europe yet that we've seen in the states, but we're watching it closely.

Bob Napoli - Piper Jaffray

What do you expect? I mean, do you expect that to change?

Brian Kenney

The early return there is I think on the freight car side, because we're heavy intermodal there, so far most of the impact appears to have affected over-the-road as opposed to the rail. But eventually, a weak economy will catch up in Europe as well. We just have not seen it yet. Pricing is strong, utilization is strong.

The reason we watch it so closely, that's what we're supposed to do, but also the term over there is generally a lot shorter than the states. So if it does affect it, it will hit it quicker on the financial results than it does in states. But as of yet, really haven't seen much weakness.

Bob Napoli - Piper Jaffray

What is the average term in Europe?

Brian Kenney

Two years.

Bob Napoli - Piper Jaffray

Two years. Yes.

Brian Kenney

And on the freight car side, probably averages less.

Bob Napoli - Piper Jaffray

Okay. Just a question, in the affiliate earnings, how much of that, of the affiliate earnings is from remarketing, I guess? If you're looking, if you're thinking about a weaker environment, where remarketing may be less attractive or may be less opportunities, within specialty and within rail, how much of that is asset remarketing-based?

Rhonda Johnson

Actually, very little of it is asset remarketing this year, Bob. We have had maybe around 5 million in specialty in this quarter. What you do see there in rail is what we've talked about in the past and the AAE has a hedge in place. Last quarter, it was a drag on affiliate earnings by about $6 million. This quarter it was positive of $9 million, and I think that's already reversed in this quarter.

Bob Napoli - Piper Jaffray

Okay.

Bob Lyons

To follow up on that point, Bob, the last year we had much more substantial remarketing income through the affiliate line. This year, it's been very moderate, so probably more of a normalized comparison, normalized look this year.

Bob Napoli - Piper Jaffray

Okay. And you had a huge growth in specialty assets this year. What is driving the growth in specialty?

Bob Lyons

There's a couple things within there, Bob, mostly in the industrial equipment side but also in some marine equipment, integrated tug/barge and other inland marine equipment. We've had seen a real attractive investment profile and opportunity there, so it's picked that asset number up materially year-over-year.

Bob Napoli - Piper Jaffray

And you still feel good about that going into next year?

Bob Lyons

I think one interesting point, number of the competitors in that business that do industrial equipment leasing have pulled back dramatically from the marketplace.

Bob Napoli - Piper Jaffray

Okay.

Bob Lyons

There's indefinitely opportunity there and we're being diligent about where we're going to put the capital work specific transactions. But I think the outlook there for opportunities is very positive.

Bob Napoli - Piper Jaffray

Thank you.

Operator

Our next question comes from John Hecht of JMP Securities. Please go ahead.

John Hecht - JMP Securities

Good morning, guys. Thanks for taking my questions. Can you guys explain where the one-time benefits, the tax benefit and the real estate gains, where were they in the P&L this quarter?

Rhonda Johnson

Sure. You can find the real estate is in other income, at rail and then the reversal of the environmental reserve in Poland is an offset in other expenses, also in rail.

John Hecht - JMP Securities

Okay.

Rhonda Johnson

And then on the year-to-date, we had that reversal of a state tax reserve back in the first quarter, so on the year-to-date that's a benefit in the tax line.

John Hecht - JMP Securities

And it is sort of normalized tax rate, is that going to be in the 33% range going forward?

Bob Lyons

It will be right in that range, which we anticipated coming into the beginning of the year, John.

John Hecht - JMP Securities

Okay. Bob, can you give us just sort of a quick illustration or review of the liquidity in terms of obligations coming due in '09, how much you guys have available on your unsecured revolver, what kind of commitments you have, in terms of equipment purchases and just step us through that as simply as you can?

Bob Lyons

Sure. We have about $150 million debt maturity coming up in November. That's the most significant item here in 2008. In 2009, we have about $375 million that comes mature between May and June. Sitting today we have substantial availability under our revolving credit facility, which is a $550 million facility. Yes, that runs all the way through 2012.

We renewed that last year for a five-year term in the spring of 2007 so the timing on that was positive and we locked up that capacity as I mentioned into 2012. At the end of the quarter, we had about $150 million in commercial paper outstanding. So, we feel like we're in a good position. We have a lot of alternatives in terms of financing capability that we have and the near-term obligations are not too difficult

John Hecht - JMP Securities

And on the revolver, what is the interest rate terms?

Bob Lyons

Well, we put that in place back as I mentioned in the spring of 2007. So the timing was fortuitous, I guess, and the spread on that is quite low. It would be a LIBOR-based borrowing if we ever utilized it and you can actually pull the full credit agreement is on our website and you can pull it and there's a pricing grid in there and it's about right now if we borrow today at the credit rating we have, essentially LIBOR plus 30 basis points.

John Hecht - JMP Securities

Okay. Thanks very much. Then last question is, I wonder if you guys can comment on where you see, well, in terms of your US leasing book, how much of the portfolio turns over next year and where do you see incremental pricing going, given some of your competitors' behavior and excess capacity on the market?

Bob Lyons

The number of cars exposed for renewal in 2009 is similar to what we had in 2008, going to be in that 15,000 to 17,000 car range, which is just by comparison John, two years ago that number was 25,000 plus.

So that will give you some idea of the benefit we're going to see for an extending term. The cars exposed for renewal next year are quite substantially lower than we've seen in the past. In terms of rate, kind of directionally where we see things going, Brian will weigh in on that.

Brian Kenney

Yes, it's kind of hard to talk specifically about next year since it's kind of early, but I don't see the trends changing so far which is on the freight car side, anything construction related is having a rough go right now, so center beams, covered hoppers that carry around cement, roofing granules, plastic pellet cars, all very rough pricing and that will continue for a while.

The other thing I would add to that list in the last quarter or two would be intermodal cars, very tied to economic activity and imports and exports, so those are also experiencing rough pricing.

On the other side, though, on freight, there are some positives. We've talked about coal and grain being weak over the last year. That's reversed itself. There was a lot of the oversupply on coal cars. That's worked its way through the market, and our fleet and the national fleet pretty much is 100% utilized at this point. Pricing is increasing. Same is true for grain, pricing increases there.

There are actually bright spots on the freight side. On the tank car side, the main concern continues to be ethanol. Still thousands of idle cars in the industry and pricing has decreased dramatically there. There are still cars being delivered. We look at that continuing for a couple years.

But other than that, on the tank car side, especially on the general service cars, pricing remains strong and we're trying to extend terms because pricing remains strong. So anything specialty chemical related, LPG, different assets, they're all doing fine right now.

As far as any question marks on the tank car side, I would say we're watching fertilizer a little closer than we have in the past. But in general, tank car side is very strong. So I anticipate that all to continue into 2009.

John Hecht - JMP Securities

Okay. Thank you very much.

Operator

Our next question comes from Jordan Hymowitz of Philadelphia Financial. Please go ahead.

Jordan Hymowitz - Philadelphia Financial

Hi, guys. Most of my questions have been answered. The real estate you said is in the other income line, in the rail segment?

Rhonda Johnson

Yes.

Jordan Hymowitz - Philadelphia Financial

And how much dollar amount was that?

Bob Lyons

$12 million.

Jordan Hymowitz - Philadelphia Financial

Okay. That's the difference there. Asset remarketing income was also higher than expected in the quarter, was that the scrap steel in that number?

Rhonda Johnson

No, scrap steel is also in other income.

Jordan Hymowitz - Philadelphia Financial

How much was scrap steel?

Rhonda Johnson

Scrap, as we said in the press release, was $11 million in the quarter versus $4 million last year.

Jordan Hymowitz - Philadelphia Financial

And did you accelerate dispositions in anyway or is that a normal run rate?

Brian Kenney

I would say we did. I mean scrap prices earlier in the year were over $500 a ton for a while there. Now it's around $200 a ton. But you saw us take advantage of that $500 price along with a weaker rail market to scrap more cars. So we scrapped this year over 3,000 cars, I believe. So, yes, we did and I'm glad we did.

Jordan Hymowitz - Philadelphia Financial

Okay. So what if you are making a model, you said $4 million to $5 million is a run rate?

Bob Lyons

It's a tough call because that scrap price is so volatile.

Jordan Hymowitz - Philadelphia Financial

If scrap stayed where it is today?

Bob Lyons

Maybe drop in half here in about a two-month period.

Brian Kenney

Well, there's two effects of that. One is obviously the proceeds and the gain you realize on cars you scrapped. The other is, older cars will tend to stick around longer, if that scrap price stays at $200 per ton. So if it stays there at $200 per ton, you will see a large decrease. I don't know if we have a number yet for instance for 2009, but we would expect to see lower scrapping activity and lower proceeds per car scrapped.

Jordan Hymowitz - Philadelphia Financial

Did you scrap the same number of cars as you expected and just got more gains or did you actually increase the number of scrapped cars?

Brian Kenney

We did both. We increased the number.

Jordan Hymowitz - Philadelphia Financial

If you had not increased the number of cars more than your targeted number, whatever that was, how much of that was the utilization rate, per se? See I'm growing here.

Brian Kenney

Yes. And I would say if you didn't scrap any cars, utilization would have dropped over a point.

Jordan Hymowitz - Philadelphia Financial

That's it?

Brian Kenney

Yes.

Jordan Hymowitz - Philadelphia Financial

Okay.

Brian Kenney

Just from fleet activity, you would have seen over a point drop in utilization. Scrapping enabled is to stay level.

Jordan Hymowitz - Philadelphia Financial

Yes, but that's nothing objectively.

Brian Kenney

Yes.

Bob Lyons

That's scrapping and sales.

Brian Kenney

That's true, yes.

Bob Lyons

Because we did sell a number of cars during the first nine months of the year too, but it's about a point.

Jordan Hymowitz - Philadelphia Financial

Okay. Thank you.

Operator

Our next question comes from Rick Shane of Jefferies & Company. Please go ahead.

Rick Shane - Jefferies & Company

Thanks, guys. Most of my questions have been answered too. I do want to have one clarification related to John Hecht's question. Did you say that the $550 million revolver you're not drawn at all on that currently?

Bob Lyons

That's correct, Rick.

Rick Shane - Jefferies & Company

Great. Thank you. The other question, I realize that there are a lot of variables here, but if we were basically just to take a standard tank car, sort of middle of the road tank car, where is pricing now, spot pricing for purchase and where did it peak and when? Just want to get a sense of.

Brian Kenney

Sure. I'll talk in percentage term because there are so many different car types and really not to like talk about our specific costs. But it peaked probably, I don't know, I guess would be 18 months ago and after years of run-up in pricing due to both manufacturing margin increasing and steel price increasing, so it probably peaked 18 months ago.

I would say it's down around 15% from that peak, due both to a reduction in manufacturing margin and recent steel price decreases.

Rick Shane - Jefferies & Company

Great. Perfect. That answers all my questions, guys. Thank you very much.

Operator

Our next question comes from Paul Bodner of Longbow Research. Go ahead, sir.

Paul Bodner - Longbow Research

Kind of a follow-up question here. In terms of the current renewal rates with customers not on the pricing side, but just what frequency is the same customer keeping the car at this point? And kind of where do you see that headed in the future here?

Bob Lyons

Paul, I can handle that. It's Bob. We have seen that number come down. I think if we go back in the past earnings calls, we have seen that number anywhere between 50% and 80%, kind of at its peak.

In terms of customers that are keeping the existing cars on renewal, I'd say right now that number is coming down into the low end of that range, but utilization is hanging in there because assignments have been particularly robust.

Our commercial group has been very adept at being able to take cars off lease and that are coming off lease and put them with new customers. So we've seen virtually no utilization impact from that decline, but that's not unexpected in this type of environment.

Brian Kenney

Complete the loop there. Obviously you would rather renew a car because the other thing about a lot of assignment activity is your maintenance costs can increase as those cars go.

Unless they go service-to-service and the exact same commodity, they usually come into the repair network and you prepare them for the next customer. So you can see some short-term cost increase there.

Paul Bodner - Longbow Research

Beyond that, I was talking into '09, I mean last time during a downturn you had went to about 90% utilization. I know you've done a lot of things to prepare for yourselves. So that is not necessarily the case this time around. But, where do you see trough utilization type rates, normally I know what the [best treatment approach status]?

Brian Kenney

Yes. We haven't laid out any long-term utilization expectations yet, Paul. I think as we typically do at the beginning of the year and fourth quarter earnings release, we'll lay out the expectations for '09 and we'll get into some detail on utilization at that point. We certainly hope if there's the significant or extended term, downturn, we'll do better than we did last time around.

As you mentioned, we have taken number of steps, including extending terms. We don't have a big order book which we did the last time around, as we were going into a downturn. We sold a lot of cars that are high utilization volatility in the last two years. So we feel confident we'll do substantially better than that number that was posted last time around. But I wouldn't at this point give any specifics on exactly where we see it going.

Paul Bodner - Longbow Research

Okay. I guess in the ASC segment over there, but I know you've had a lot of things come up for renewal this year and looks like you're getting some good price realization over rates from last year. But directionally, how much more is still available there in terms of your contracts up for renewal and with the potential softening in the steel market? Is that going to impact the potential renewal rates you get on those contracts?

Bob Lyons

Well, there's at least a couple or a few big contracts that roll each year. It's not like rail where you noted 16,000 cars a year. There's the spot in that business and each year there's a few substantial contracts that come up for renewal.

We still feel that given where those rates are going to be coming off of, the number of those will put on place in early 2000-2001 when it was extremely challenging; that will do fine. Maybe not as robust as we've been the past year but we still feel that comfortably in positive territory there.

Paul Bodner - Longbow Research

One last question too, just on the new railcar side. Has pricing come down enough to make it attractive at all to enter there? If you were looking to buying cars, I mean would you look to enter into one of these multi-year purchase agreements or is there a certain car type that you see is attractive right now for some additional investment?

Bob Lyons

Prices have come down like I said 15%. There is not a point where we want to do that, but we're constantly examining where we are. That is a big objective of ours, is to place that big, long-term order in the down cycle. I don't think we're there yet.

I think you're going to look at a number of things. You're going to look at how aggressive the manufacturers are. You're going to look at steel pricing. You're going to look at what's your runway out there, what's sign of recovery, or at least bottoming out is there. I don't think it's all lined up in our view yet. But it's a lot closer than it was 18 months ago.

Paul Bodner - Longbow Research

Great. Thanks a lot.

Operator

Our next question comes from [Kim Lockhart of Lockhart Research]. Please go ahead.

Kim Lockhart - Lockhart Research

Good morning. Number of my questions has been answered as well. But my one question, the credit environment is tightening up, asset utilization is strong and the volumes are lower for the US rail market. What do you see car building looking like in 2009 and 2010?

Bob Lyons

I think right now, there are others out there who forecast that information publicly, quarterly, we take a close look at that. Right now, obviously the backlog we believe will continue to come down in terms of new car orders, it doesn't appear that there's a lot of activity out there right now for new car orders as you would expect. It looks like that will persist indefinitely into 2009. But I can't comment specifically on what the '10 number will look like.

Brian Kenney

Yes. The latest forecast we saw for instance on tank cars is probably half in 2009 of what was produced in 2008, so I believe the numbers was in the low 20s in 2008. It's looking like it will probably be about half of that in 2009 for instance. Beyond that, as Bob said we'll just have to see.

Kim Lockhart - Lockhart Research

Okay. Thank you.

Operator

Our next question comes from Art Hatfield with Morgan Keegan. Go ahead, sir.

Art Hatfield - Morgan Keegan

I apologize. I got on about 10 minutes late but some of the questions I had had been answered.

Let me ask the outlook a little bit differently. If you look at the current backlog and how it looks like it's going to be delivered. Do you think if those deliveries occur without any cancellations, do you think that could put some kind of short-term unusual pressure on pricing over the next few quarters or three to four quarters?

Bob Lyons

I think that's an insightful comment and one that I think is very true. If those cars are built and they come into the marketplace, there will be pretty aggressive competition to get those placed and that will have an effect on rates.

Art Hatfield - Morgan Keegan

Okay. Bob, when that pricing bottom out, in which quarter did pricing bottom out in the last cycle?

Bob Lyons

We actually have a lease price index that goes back, provides historical data going back quite a long period of time. We really crossed the line back in the positive territory in 2004.

Brian Kenney

I would say in mid-2004.

Bob Lyons

No, it's probably in '03 when you really hit the low point of the renewal rate, because we slowly started to work our way back within territory and then crossed that line in '04.

Art Hatfield - Morgan Keegan

Okay. Do you recall, and this may be a little bit difficult to remember, but at the bottom last time, how short lease terms, average lease terms got to?

Rhonda Johnson

When back then we weren't publicly quoting a renewal lease term, but if you looked at the overall lease portfolio right now for the whole portfolio we're at about a little above 4.5 years. We were probably below 4, heading towards 3.5 at the downturn. You never really get that far away from a 4, though.

Art Hatfield - Morgan Keegan

Okay.

Brian Kenney

But if you looked just at what we were doing incrementally, it was probably 3 or less back then and it was up to 6 or 7 in the last two years. If you talk about term management in general, I made a point earlier, you may not have been on for and I think it's important that we're still trying to stay long at a lot of especially tank car types, because rates are very attractive still.

Art Hatfield - Morgan Keegan

Okay.

Brian Kenney

There are certain car types where we're trying to push it down and those are car types, I don't really want to mention it and get too much into competitive. But generally if you think there's going to be a short-term recovery, or it already is recovering, you're going to try to stay a little bit short and our term has come down over the last year.

But we won't take because in a lot of cases customers are also asking for a shorter term, because they don't have a clear view of their commitments either. But it's very car-type by car-type in terms of your strategy on that.

Art Hatfield - Morgan Keegan

Okay. That's very helpful, Brian. Thanks. And then finally, and I hate to ask this because it shows that I don't do math very well. But I just want to make sure. If I look at the guidance, the comments you made about guidance and where you're at for the year, excluding the $0.45, the high end of your range that you gave this year would put your number in Q4 of approximately $0.50. Am I correct in thinking that way?

Bob Lyons

That math works. And as we said in the press release, we expect to be moderately above the high end of that range.

Art Hatfield - Morgan Keegan

Right. I just wanted to make sure I was. When we think about Q4, though, given what scrap steel prices have done, the scrap rates should be less and usually you guys are pretty conservative on how you look at expectations for asset remarketing gains. Is that fair to say?

Bob Lyons

Yes. And I think that definitely has guided our thinking in terms of the fourth quarter. Not anticipating any material or big remarketing activity. There will be some but it's not going to be huge numbers by any stretch, and with scrap steel prices where they're at, that number will dive back a bit as well.

Art Hatfield - Morgan Keegan

Is there a number and if this is getting too close to anything competitive, just say so, but is there a number of scrap steel in the current environment where you kind of cross that threshold where you want to accelerate your scrapping?

Bob Lyons

Well, what we do, Art is, first of all, regardless of where the scrap steel price is we're always going to be scrapping at some level.

Art Hatfield - Morgan Keegan

Okay.

Bob Lyons

When you think about the age profile of the fleet cars that roll-off in a given year. So even at lowest many scrap steel prices, you're going to have cars that just reach the end of their life. You're always going to be scrapping some cars every year.

What we do is, we look at what we call an economic repair limit on a car in terms of where it is in its age profile, what reinvestment needs to be made in the car to put it back out to work and what kind of rate it's going to get when it goes back out to work and then you compare that again to what the return would be from scrapping the car.

With scrap prices incredibly high, like they were through the first three quarters, you have more cars that kind of flip into the scrap bucket. Now, you have more cars that will stay and that will continue keep on lease.

Art Hatfield - Morgan Keegan

Okay. So that's just a simple modeling procedure given the current environment that you're looking at, you just plugged the numbers in.

Bob Lyons

Yes, the model hasn't changed over the years. It's just the inputs definitely have.

Art Hatfield - Morgan Keegan

Just a couple last things and I'll get off. Did you mention earlier what the average age of the fleet was here in North America?

Bob Lyons

About 16 years at around that.

Art Hatfield - Morgan Keegan

Yes, that's pretty consistent. And given the environment we're in with the capital markets doing what they're doing and the economy really showing some signs of continued weakening. Do you see any monumental changes going on in the competitive landscape today? And is there anything else that you anticipate occurring over the next six or 12 months?

Brian Kenney

It's a good question. I think everybody's very aggressive out there. A lot of others have more cars delivering that they're going to have to place, so as Rhonda, said earlier and Bob, reiterated, that can get challenging from a pricing perspective.

As far as structural, there's been a lot of stuff for sale out there. It hasn't changed hands yet, so I don't know that it will. So it could be just the same environment we're looking at now.

Art Hatfield - Morgan Keegan

Okay.

Bob Lyons

One positive on that front too is I think there will be an absence of new entrants into the market from kind of just from a fundamental buy cars and growth portfolio, which is normal and typically what you see during more challenging times.

Art Hatfield - Morgan Keegan

Okay. Thank you very much. Thanks for your time as always.

Bob Lyons

Thank you.

Rhonda Johnson

Gabriella?

Operator

Our next question comes from [Gregory McKasco of Lord Raven]. Please go ahead.

Gregory McKasco - Lord Raven

Yes, thank you. I had a simple math question too. Relative to the lease price index, I just want to understand that better. That's the expiration divided by the renewal rate.

Bob Lyons

The renewal rate, it's the percentage increase over the expiring rate, so if you had a car that went on at $500 three years ago and you renewed it at $550 that would be 10%.

Gregory McKasco - Lord Raven

Okay. Thank you. Clearly that's moderating and coming down and relative to the expirations, you said that they were reasonable in '09. Are those older, longer leases, shorter leases, or are they pretty average in terms of that expectation there?

Bob Lyons

That's a fairly normal rollover profile. The number in terms of cars that's going to roll over is lower than what was seen back in '04-'05. There isn't any particular one car type of mix or anything that's skewing that pool of cars that will renew in 2009.

One thing to backup on the renewal rate that I think is very important to point out is; between the second quarter and the third quarter, the rate at which we renewed cars essentially stayed flat. It was consistent between the second and third quarter, which is an encouraging performance and the reason the LPI compressed was because the expiring rate went up, pretty simple mathematical endeavor.

But I think more from a market perspective what's encouraging is those rates held in between second and third quarter, phenomenal lease rates.

Gregory McKasco - Lord Raven

Okay, yes, I understand. And then also with regard, I think I believe you said you had an approximately $5 million of negotiating costs in your SG&A line relative to possible acquisitions of railcars. Is there also in other areas, perhaps in the shipping area or any other areas where there is opportunities that have been considered and discussed for acquisition?

Bob Lyons

No, it hasn't really been a priority in that area and I think asset prices are still extremely high, although it certainly looks to be coming down, but no, we really haven't focused on that in the shipping area.

Gregory McKasco - Lord Raven

Okay. Thank you very much.

Operator

Our next question comes from Gregory DiMarzio of Century Capital Management. Please go ahead.

Gregory DiMarzio - Century Capital Management

Hi, guys. I apologize if this has already been asked. But relative to some of the questions surrounding the utilization rate, and as we look at it, can you guys tell us what a 1% move in the (inaudible) effect that has?

Bob Lyons

Well, if you think about the number of cars on lease in a given year, that would be 1100 cars, a 1% drop in utilization. Just for benchmark sake you can use $500 per month.

Brian Kenney

Yes. It's about $6.5 million, $7 million of revenue a year.

Bob Lyons

Okay. And then you do the simple math on that, you're in that ballpark.

Gregory DiMarzio - Century Capital Management

Okay. But I guess my question is, what about margin effects, do we have to add on in effect because of other items?

Bob Lyons

No, not really. It's pretty clean.

Gregory DiMarzio - Century Capital Management

Pretty clean.

Bob Lyons

And a pretty easy number to zero in.

Gregory DiMarzio - Century Capital Management

Okay.

Rhonda Johnson

As we talked about earlier, your maintenance costs can go up a little bit because you're having to bring the cars in and clean them and put them into storage that you see a little bit of additional impact there, but by as far the bigger impact is on your revenue.

Gregory DiMarzio - Century Capital Management

Okay. But, there are no real expense items to take down?

Bob Lyons

Apart from running repairs comes down, there are items that comes down but it's overwhelmed by that revenue growth.

Gregory DiMarzio - Century Capital Management

Got you. The second thing, and again, I apologize to the extent it's been asked. Is there a time period by which if you can't utilize your capital, I know you were disappointed or at least you suggest in your press release that you were significantly below what the sellers wanted to sell for? Is there a time period by which you would shift to more aggressively use capital to buy back stock?

Bob Lyons

I have no specific time frame. I don't feel there's any clock ticking. I think if anything, as the prices weaken and it may continue to do so, but I have no specific time frame under which we need to use X amount of capital by such date.

Gregory DiMarzio - Century Capital Management

Great. Okay. Thanks, guys.

Operator

Our next question comes from Bob Napoli of Piper Jaffray. Please go ahead.

Bob Lyons

Bob, that's really pushing it given what you did yesterday to come on twice.

Bob Napoli - Piper Jaffray

Sorry about that. I appreciate your responses.

Bob Lyons

That's okay.

Bob Napoli - Piper Jaffray

There are some opportunities in the aircraft leasing industry at pretty attractive valuations, any interest in getting back into that business?

Bob Lyons

None.

Brian Kenney

Trying to think, how to answer that more dramatically.

Bob Lyons

We've been there as you know, and it's an asset class that we don't have any intention of pursuing.

Brian Kenney

Not with this management team here.

Bob Napoli - Piper Jaffray

Half-kidding on that. Three quarters kidding on that question. With regards to credit quality and credit risks, generally you've had very little exposure, a little bit more in specialties than in rail. But where are you most focused on the credit side today, where do you have the most risk and concerns?

Brian Kenney

It's a good question. You're focused on your more highly levered, I think in this downturn more than others, since it's so credit driven, you're more focused on your higher levered customers, that have near-term maturities in the financial trouble, that they are being encounter. But you're still not worried about it unless they're really in a car type that you will have trouble putting back to work.

So it's kind of a double trigger there. You're looking at some of your weaker credits but you're looking at especially the ones that have car types that might come back and sit. So that's the general way to answer it.

Bob Lyons

On the industrial equipment side, Bob, where the transactions are smaller and the credits tend to be, sometimes can be smaller names but our focus there when we do that business, obviously, very much focused on the assets. So not that you are going to bypass the credit issues but there are substantial hard assets sitting behind the transactions themselves.

Bob Napoli - Piper Jaffray

Are you seeing more stress today, as you monitor those things or you seeing much higher level of stress or not?

Bob Lyons

We always pay attention to it and we're keenly focused on it, but we haven't seen any material developments today.

Bob Napoli - Piper Jaffray

Okay. The LPI index, if prices were to moderate somewhat from here which is probably a reasonable expectation. As you start looking at next year, where do you see that index going to?

Brian Kenney

Even if rates stay the same as where they are today, that index will go into negative territory because that expiring rate will continue to increase.

Bob Napoli - Piper Jaffray

And as car types and car prices are down 15% or lease rates never went up as much as car prices did, are lease rates down 10 or something like that from peak?

Brian Kenney

A lot of car types they're not down at all.

Bob Napoli - Piper Jaffray

On average?

Brian Kenney

On average? You know, we never really throw out that absolute rate.

Bob Lyons

We haven't really disclosed that absolute number, but all in all as we look through the course of this year, it's actually been a nominal rate. It's held up pretty solid. And it actually rolled in better than our expectation in reality.

Bob Napoli - Piper Jaffray

Okay. And then just a last question.

Bob Lyons

And a big part of that is that stable tank car side which has continued to perform very well.

Bob Napoli - Piper Jaffray

Last question on the deal side. Now, you guys have been very disciplined, but are there still a lot of potential transactions out there that you're reviewing or have you reviewed all of the major ones at this point and are waiting to see what happens, I guess?

Bob Lyons

We really can't comment and won't comment specifically about any particular opportunity or any discussion that might be under way. But, typically there are portfolios per se and in this type of environment there's more so, and we're an active participant in market, so we'd be in the communication flow or traffic flow on opportunities.

But we can't really speak to anything more than that at this point. The main thing is we are very focused on making sure that we use our capital wisely and we do so (inaudible) to preserve our very solid credit rating and our access to priced capital. That's helped us and been a big benefit to us to-date and we're not going to divert from that view or that concept of how we pursue things.

Bob Napoli - Piper Jaffray

Okay. Thank you.

Operator

Our last question comes from Jordan Hymowitz of Philadelphia Financial. Please go ahead.

Jordan Hymowitz - Philadelphia Financial

My questions actually had been completed. So thank you, very much.

Bob Lyons

Thanks, Jordan.

Rhonda Johnson

All right. Well, thanks to everyone for participating in the conference call. And if you have any additional questions, you can contact me. I'll be around all afternoon. Thanks.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: GATX Corp. Q3 2008 Earnings Call Transcript
This Transcript
All Transcripts