GATX Corporation's CEO Discusses Q4 2012 Results - Earnings Call Transcript

Jan.24.13 | About: GATX Corp. (GATX)

GATX Corporation (GMT) Q4 2012 Earnings Call January 24, 2013 11:00 AM ET

Executives

Jennifer Van Aken – Director, IR

Brian Kenney – Chairman, President and CEO

Bob Lyons – EVP and CFO

Tom Ellman – SVP and Chief Commercial Officer

Analysts

James Ellman – Ascend Capital

Mike Baudendistel – Stifel Nicolaus

Matt Brooklier – Longbow Research

Steve Barger – KeyBanc Capital Markets

Art Hatfield – Raymond James

Steve O’Hara – Sidoti & Company

Gregory Macosko – Lord, Abbett

Kent Mortensen – Thrivent Asset Management

Operator

Good day everyone, and welcome to the GATX Fourth Quarter and Full-Year Earnings Conference. As a reminder, today’s conference is being recorded. At this time, I would like to turn the conference over to Ms. Jennifer Van Aken, please go ahead ma’am.

Jennifer Van Aken

Thank you, Sarah, and good morning everyone. Thanks for joining us for the fourth quarter and 2012 year-end conference call. With me today are Brian Kenney, President and CEO of GATX Corporation; Bob Lyons, Executive Vice President and Chief Financial Officer; and Tom Ellman, Senior Vice President and Chief Commercial Officer. Tom is joining us to provide additional insight on questions you may have regarding the North American rail industry.

As a reminder, 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 maybe outside the control of the company. For more information, refer to our 2011 Form 10-K for a discussion of these factors. You can find these reports, as well as other information about the company on our website, www.gatx.com.

I’ll keep my remarks brief this morning and then Brian will provide some comments on key focal points for GATX in 2013 and beyond. After that we’ll take questions. Today we reported 2012 fourth quarter net income of $29.7 million or $0.62 per diluted share. This includes a benefit of $2.8 million or $0.06 per diluted share from tax adjustments and other items which are detailed on page 13 of this morning’s press release.

This compares to 2011’s fourth quarter net income of $31.6 million or $0.67 per diluted share, which includes a benefit from tax adjustments and other items of $1.9 million or $0.05 per diluted share.

For the full-year 2012, net income was $137.3 million or $2.88 per diluted share, including a benefit of $3.5 million or $0.07 per diluted share from tax adjustments and other items. Again, these items are detailed on page 13 of this morning’s press release.

By comparison, 2011 net income was $110.8 million or $2.35 per diluted share, including a benefit of $15.8 million or $0.34 per diluted share from tax adjustments and other items. The fourth quarter and full-year 2012 results are reflective of the strong demand for tank cars in North America.

Rail North America maintained strong utilization, achieved lease rate increases and longer terms on renewals, while the renewal success rate averaged over 80% during the year. In the fourth quarter, the renewal rate change of GATX’s Lease Price Index improved to 32.3% resulting in the full-year renewal rate change of the LPI of 25.6%, stronger than what we initially anticipated.

Throughout 2012, we continued to take delivery of railcars ordered under our five year supply agreement. The lease rates on those new car deliveries are very favorable and the lease terms average about seven to 10 years. 2012 was also a record investment year in Europe as we added over 1,500 new railcars to the wholly-owned fleet.

American Steamship Company operated 14 vessels and carried 29.7 million net tons of cargo in 2012 compared with 28.4 million in 2011. Portfolio management also had a solid year as asset remarketing income was favorable and the Rolls-Royce and Partners Finance affiliate had continued strong performance. In the coming years, leases on about 22,000 railcars are scheduled for renewal in North America, and we expect the renewal rate change of the Lease Price Index to be in the same range as the strong 26% experienced in 2012.

Due to an increase in scheduled compliance work in North America, we expect the maintenance expense to increase materially in 2013. In addition to railcars scheduled to deliver under the five year supply agreement in North America, we expect opportunities for additional investments in both new and used equipments. We also anticipate continued asset remarketing opportunities although the ultimate level of income from this activity will be dictated by market forces.

We expect another solid year from Rail International and they are optimistic about our investment opportunities in this market. ASC may see a slight downtick in demand, primarily due to competitor capacity availability and as noted in the release, the low water levels will present operating challenges. In portfolio management, we anticipate another strong year from the Rolls-Royce affiliates and stable remarketing opportunities.

Considering these items, we currently expect 2013 earnings to be in the range of $3.10 to $3.20 per diluted share.

And with that overview, I’ll turn it over to Brian.

Brian Kenney

Thanks Jennifer. So between the press release and Jennifer’s opening comments, you should have a good understanding, what drove 2012 outstanding operating and financial performance, as well as what will drive our 2013 earnings outlook. But what I want to do, is take a few minutes to address some of the issues and opportunities that shareholders ask me about on a consistent basis and how that may affect our tactics in 2013 and beyond.

First issue is that GATX is operating in a very mixed railcar leasing market globally. In both North America and Europe, the tank car market remains stable to very strong. There is many new investment opportunities but on the other hand, certain freight car types on both continents remain relatively weak and that drives somewhat different tactics when I talked about in this call a year ago.

So on one hand in our global tank car fleet, especially for those cars in petroleum service, our tactics will be very similar to last year, so we’ll try to continue to push lease rates higher, we’ll attempt to extend lease terms. And we’re going to deploy new cars from our committed multiyear supplier contracts in both North America and Europe. On the other hand and in contrast, for many freight car types such as coal and grain in North America, or intermodal in Europe, the objective is simply to keep cars deployed.

We’re going to try to increase utilization, and to the extent possible, we’ll shorten lease terms in order to more effectively capitalize when the market does improve. So while it’s common for various car types to operate in different types of market condition, I don’t remember such a stark difference and the relative strength of tank and freight worldwide, but we have adjusted our commercial and car procurement strategy accordingly and we will take advantage of the market opportunities that we see along the way.

Second issue, I’d like to address is what we have referred to in the past is our maintenance bubble in North American rail. That’s our term for the increased compliance maintenance expense that we will experience over the next few years related to our tank car fleets in North America. Now part of being a market leader in full service tank car leasing involves performing a wide variety of FRA, AAR and other mandated maintenance programs on your tank car fleet.

Now these programs are generally triggered by age, and/or time and that means the genesis of this compliance bubble we’re entering started with a relatively large buying of cars we purchased 15 years ago. But to size that compliance bubble for you, in 2012 GATX had approximately 4,700 cars that were due in schedule for at least one compliance program. In 2013, that number of cars increases to almost 7,500, so that was increase of about 60%.

And in addition, in 2013 each car that comes in has an average of three different compliance programs to do, so that drives a lot of expense. You’ve heard us talk about in the past our HM 201 compliance program. Now HM 201s are the periodic qualification and inspection of the tanks. That’s a very comprehensive inspection program and very expensive and the number of HM 201s due in 2013 is increasing 20% over 4,000 cars.

So we use the term compliance bubble because the number of compliance cars due as I said increases in 2013, increases even more in 2014, in fact peaks in 2014. Then it starts to come down in 2015 and it’s actually lower than this year’s level by the 2016 to 2017 timeframe. In addition to the start of that compliance bubble in 2013, maintenance expense will increase for other reasons mainly due to a lower planned renewal success ratio than in 2012, lower renewal success percentage is likely due both to some weak freight car types that I already mentioned, as well as our concern that the 80% plus renewal success ratio that we experienced in 2012 is likely not sustainable longer term.

Now these are the two main factors that will combine to drive maintenance expense higher by as much as 10% in 2013. So what are we doing? Well we have been responding actually for a while in order to meet that increased car volume and deal effectively with our compliance bubble, we’ve made major strides in increasing our own shaft efficiency over the last few years and we have contractually locked up space in our third-party repair network, so we believe we’re pretty well equipped to handle the bubble.

The last topic I want to address is one of growth and investment. As you know we have two committed supplier agreements, one in North America for 12,500 cars over five years and one that we executed in Europe in 2012 for up to 3,000 cars over the next three years. In North American agreement, as we said before all cars delivered to-date have been successfully placed at very attractive rates at relatively long-term. In fact we have placed cars with customers that we’ll deliver under this agreement all the way up to the third quarter of 2014.

Now the European agreement is just underway but both agreements are cost advantage relative to market prices and we believe it will create significant value for the shareholders for decades to come.

Now while I’m pleased with the way our committed investment is progressing, I am even more encouraged that we’ve found other ways to grow the worldwide fleet. And a few examples, in North America, our commercial team identified almost a 140 million of non-supply agreement investments. Now these opportunities range from secondary market purchases of cars and fleets to additional orders with existing customers to sell lease backs on customer fleets, but in a very competitive market with rapidly rising asset prices that we’re seeing today, and if you layer GATX’s disciplined investment philosophy on top of that, generating that level of investment is pretty difficult but our team did a great job last year.

Another example is starting our railcar leasing business in India in 2012. Now India is a growing market, full of potential and GATX was the first market participant to gain a leasing license in India. Now our first cars are just delivering in India at the end of 2012. And I am sure this effort is going to have bumps and stops and starts along the way but once again it will prove to be an attractive market in the long run.

We’ll continue those investment efforts in 2013. We’re going to explore other avenues as well and that’s all with the primary objective as always of serving our customer base more efficiently. And while we’re on the topic of investment I should not neglect to mention that we’ll also consider our own shares as an investment as well.

And that brings me to my final point about the long-term value which I believe is GATX. We stay of course just in the early stages of realizing the benefits of the outstanding investments in railcar orders that we placed from the late 2008 where the rail market collapsed to early 2011 when it started to pick up again. And although 2013 earnings growth will not match the 40% growth we saw in 2012, we’re confident that the company has been positioned to outperform the prior peak earnings per share from 2008 and we’ll generate tremendous cash flow and record return on equity for our shareholders in the future.

We’re highly focused on that mission and actually we’ve never been more optimistic about our future. So with that, I would like to open it up to questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We’ll pause for just a moment to allow everyone a chance to signal. We’ll hear first from James Ellman with Ascend.

James Ellman – Ascend Capital

Thank you very much for taking my question. I’ve got two, first one, is just a question about your annual forecasting. Is there anything different in the process this year for 2013 versus the process you used to forecast your expected range of earnings for 2012 and 2011?

Bob Lyons

Well the business is very similar today structurally and operationally to where it was a year ago. Obviously we take into account all of the market activities that has taken place during the course of the past year and try to layer in some reasonableness test and but no significant change in terms of the methodology or process.

James Ellman – Ascend Capital

All right. And I appreciate under-promising and over-delivering but in January of 2011, you gave us a midpoint of earnings of $1.75, you did $2.01, so 15% surprise. And generally ‘12, you had a midpoint of $2.50, you had a great year and you did $2.81, so 12% surprise, what’s different about 2013 that we shouldn’t expect that you are using the same level of conservatives in the expectations that you are giving out to the street?

Bob Lyons

Well I mean it’s fair question I think a couple of things I’ll comment and I don’t know, if Brian wants to jump in he can as well, but one issue he touched on – Brian touched on during his opening comments was the maintenance side of the equation here. We got a significant unexpected benefit from that in 2012, as our renewal success rate being north of 80% had a very positive impact on the maintenance profile for this year. Now we’re not assuming we can maintain above 80% renewal success rate, and in fact in prior years anything close to that would have been outstanding, to average that for the full-year was well beyond our expectation.

And so when we look at this year – in 2013, we have that issue plus the fact we have the maintenance or the compliance cars coming out. So from a cost standpoint, I think there is some very high level of certainty around some of the challenges we’ll face.

Brian Kenney

Yes, I can even get a little more granular on that and say compared to a year ago, if you look at certain freight car types, they are definitely not getting any better and we have more renewals and expirations coming up. So we pretty much know what’s going to happen in coal and grain and weather is not cooperating. So also in Europe it is weaker environment than it was a year ago facing our business, so there are some differences between now and a year ago.

James Ellman – Ascend Capital

Okay. Thank you. One other quick question would just be, could you tell us what’s the differential in the actual dollars of lease rates in the U.S. versus Europe for the comparable tank car, and what might be the cost actually to move a tank car from Europe to the U.S. to lease it in the U.S. instead?

Bob Lyons

Well moving cars from one region to another is cost prohibitive. It’s a question we do get from time to time and certainly we look at it and others do too but it’s really not a economical decision long-term and with regards to lease rates, I don’t know if Tom if you want to add anything to that? It’s kind of hard to compare the cars are – markets are very different.

Tom Ellman

That’s just exactly what I was going to say Bob, that it’s really not comparing apples to apples, so it’s not something differential in absolute rate between the two geographies, it’s not something we’re focused on.

Bob Lyons

Right, but if you look at it, lease rates on a monthly basis if you were to convert the European rates which are really quoted daily to monthly, it’s going to be much higher in Europe but the terms are going to be much lower. So as Tom said its apples and oranges.

James Ellman – Ascend Capital

All right, thanks so much for taking the questions and thanks very much for actually taking the questions from investors, much appreciate it.

Bob Lyons

Thank you.

Operator

Next we’ll hear from Mike Baudendistel with Stifel Nicolaus.

Mike Baudendistel – Stifel Nicolaus

Thanks very much. The railroads earlier this week have been talking about essentially using fewer cars online by running the trains faster with less terminals well et cetera, Canadian Pacific specifically has been talking about using a lot fewer asset as far as rolling stock, I know that most of your customers are shippers rather than railroads but is that having an impact with just railroads using the cars more efficiently or is that weakness that you were describing more related to just the traffic volumes are being down in certain segments?

Brian Kenney

Great question and both factors are in play and coal is a great case study there. You’re seeing challenges in coal both because of decreased underlying demand because of things like low natural gas prices, relatively mild weather but then in addition to that issue you are seeing the fact that the railroads are moving the cars more efficiently and more quickly, so to move the same volume of coal, you don’t need as many cars when they’re moving more quickly.

Mike Baudendistel – Stifel Nicolaus

Okay.

Tom Ellman

In 2012, I think on average they did pickup velocity and reduced dual time [ph] but recently though that’s moved the other direction actually.

Mike Baudendistel – Stifel Nicolaus

Great. And the capital spending that you talked about outside of the committed orders that you take from Trinity, is that capital spending is going to come online in ‘13 and ‘14 or is that something that is more longer term in nature?

Tom Ellman

What’s going on overall with any kind of incremental cars that we purchased, if there are new – backlogs are kind of in the four to six months range for a freight car and they are out into deep into 2014 roughly third quarter of 2014 for tank cars. The investment that Brian talked about had both new cars which will deliver according to that schedule and the acquisition of existing cars which you obviously take possession of right away.

Bob Lyons

Mike, okay. This is Bob Lyons. I’d like to add to that just one other point of clarification to you. This year we had about $770 million of investment volume in total across GATX which is one of the highest years we’ve had in recent memory. And coming into 2013, we actually have committed about $450 million already between the order – the North American order here with Trinity and also in Europe. So a very good order book coming into the year at advantage prices and then we’ll look to supplement that along the way.

Mike Baudendistel – Stifel Nicolaus

Okay, good. Just a couple of questions on India, I appreciate the comments there, just wondering, I think you mentioned that you have some railcars there already in the press release, you know, how many do you have currently and how many would you expect to have other the next three to five years, and what sort of the ultimate goals, do you have the market share in mind and do you have sense of how fast that market is growing?

Brian Kenney

All good questions, they just started to deliver. The initial order was for 10 rigs or about 450 cars and literally we just have one or two rigs delivering by the end of the year. The ultimate goal there is – right now we have essentially a 100% market share because it’s a brand new market, we’re leasing more than allowed until recently and we are the first participant. Obviously that will change over time as we expect other people to coming in the market.

Our goal there is to have I would say an aggressive goal would be to have a few hundred million dollars in investment in India over the next three to five years. As I said also there will be fits and starts because it’s certainly a different operating environment. And there is a lot of construction of rail network underway.

Mike Baudendistel – Stifel Nicolaus

Great, those were the questions I had. Thank you.

Bob Lyons

Thank you.

Operator

Our next question today will come from Matt Brooklier with Longbow Research.

Matt Brooklier – Longbow Research

Thanks, good morning. Wanted to try to dig in a little bit more on expected 2013 maintenance expense for the tank cars, is there any way to provide a little bit more color with respect to the potential magnitude of that expense on a dollar basis maybe in total or per car?

Brian Kenney

Probably the best way to look at is it could be up as high as 10% in 2013 from 2012.

Matt Brooklier – Longbow Research

Okay, so a 10% increase in your total maintenance expense line?

Bob Lyons

That’s in the North American maintenance line, correct.

Matt Brooklier – Longbow Research

Just in the N.A. line, okay.

Bob Lyons

And remember that number actually from 2011 to 2012 went down a little bit.

Matt Brooklier – Longbow Research

Right, okay.

Bob Lyons

So that gives some idea of the – certainly we have around the operating challenge coming our way this year.

Brian Kenney

That was actually something we could – should have used to respond an earlier question, we did not expect maintenance expense to be down in 2012. We tried very hard to essentially smooth out this bubble by pulling cars forward for compliance for 2012 completely unsuccessful with that because cars have been in such high demand so that’s why it’s a little tough to forecast, it’s like based on what to do, it could be up in the range of 10%.

Matt Brooklier – Longbow Research

Okay, so that’s the upper end of the range or is that kind of the middle?

Bob Lyons

That’s kind of what we’re expecting.

Brian Kenney

Yes.

Bob Lyons

Somewhere there.

Matt Brooklier – Longbow Research

Okay. Can you reference or discuss a prior maintenance bubble, maybe in the last cycle where you’ve had a greater number of your cars that needed these particular checks?

Brian Kenney

Not really in terms of the compliance. There was a mini bubble in 2008, that was driven more commercially but in fact we had, you know, it was a very challenged market and we were seeing cars get returned a lot more, so I would say that was more commercially driven, this is the first really compliance driven maintenance bubble at least I’ve seen. And as I said you make the bet for this thing back when you invested in a lot of cars back in literally 1998 and they are all coming due for structural inspections and other inspections this year.

Matt Brooklier – Longbow Research

Okay.

Tom Ellman

I’d add to that there are others in the industry that will have the same challenge that’s why I think it’s important to refer back to the comments that Brian made, steps over the course of the last couple of years to lock up some of that third-party capacity because other competitors of ours will be looking for space to do their compliance work as well and we feel we’re in an advantage position.

Matt Brooklier – Longbow Research

Okay. It’s a good point. The lease renewal rate running at I think 80% through the year, what are your expectations for lease renewals as we turn to corner and progress through 2013?

Bob Lyons

Sure, well we came into 2012 kind of expecting that number to be in the 70% to 75% range and we’re completely positively surprised by that. So when we look at 2013, we’re still expecting a very strong environment overall particularly on the tank car side, but we are kind of back in that 70% to 75% range in terms of renewal success which is still very healthy but it is down from the record year we just have had.

Brian Kenney

Getting more granular and I’ll actually let Tom answer. It’s a different – radically different for tank and certain freight car types.

Tom Ellman

Yes, specifically we’ve talked a couple of times about coal and grain and those are going to make up a material portion of the total cars that we have up for renewal in the year. So while we’ll do better than that 70% to 75% range for tank cars, coal and grain will be significantly challenged which leaves us to the expectation of 70% to 75% overall.

Brian Kenney

And that’s an important point because we don’t want to – anybody to think that we’re forecasting a weaker tank market in 2013 because we’re not.

Matt Brooklier – Longbow Research

Okay, so the function of stepping down from an 80% to 70%, 75% range is a greater number of relative renewals for coal and grain cars versus tank and you think you can retain the current high and renewal rate on tank cars this year?

Bob Lyons

Yes.

Matt Brooklier – Longbow Research

Okay. Okay, that’s all I got. Thanks for the time.

Brian Kenney

Thank you.

Operator

We’ll take our next question from Steve Barger from KeyBanc Capital Markets.

Steve Barger – KeyBanc Capital Markets

Good morning.

Brian Kenney

Good morning, Steve.

Steve Barger – KeyBanc Capital Markets

To follow up on that question on renewals, you expect that that will continue to be strong in 2013, do you expect tank car lease rates can continue to go up so you can push price higher or does it feel like that’s stopping out to some degree?

Brian Kenney

As long as demand remains as strong as it is and new car backlogs are out 18 months, we’re going to have – we’re going to be well positioned to execute on our strategies, increasing lease rates and lengthening lease terms. So we expect the tank car dynamics to continue in 2013.

Tom Ellman

And the other thing to add there is on that comparison, the expiring rate on average actually comes down a little bit again in 2013.

Steve Barger – KeyBanc Capital Markets

Got it. And in terms of the OEMs, I know they’re up to mid-14 right now, are you seeing any change in terms of pricing on tank cars, if you’ve been making inquiries, are they up, down or flat sequentially from 3Q?

Brian Kenney

Yes, much like the situation we’re facing, as long as those dynamics continue, the builders are well positioned to continue up to price their product attractively. So as long as those dynamics continue, we should see them continue to push up their sale prices.

Steve Barger – KeyBanc Capital Markets

Got it. And you talked about tougher conditions for coal and grain cars, that certainly has been reflected in the industry order activity but you guys are good at taking a long view, do you see any opportunities to supply new or used cars and those other types where pricing maybe getting more competitive from the OEMs or in the secondary markets?

Tom Ellman

One important thing to note is we have done that to a degree. Some of the incremental opportunities that Brian has talked about both this year and in past years have been doing exactly that. What we do every time where we have a potential investment opportunity is do exactly what you said, take the long view. So the challenge is can you – you are going to get an attractive price for those assets and you have an expectation about what will happen long-term but in the near term, can you put the car to work and get the rates that you need to just find that investment. And we absolutely will look at those asset classes and make that evaluation.

Brian Kenney

Yes, as an example the 18,000 plus cars we took into the fleet from 2008 to 2010 a lot of those were coal at very attractive prices.

Steve Barger – KeyBanc Capital Markets

All right, okay.

Tom Ellman

Very radical [ph] too, I’d add.

Steve Barger – KeyBanc Capital Markets

And kind of on the flip side of that question, are you getting inquiries, are you seeing opportunities to potentially sell tank cars into the market given how elevated prices are, or does it just make more sense to take the rate and terms right now?

Tom Ellman

We look at exactly the same thing on the other side of the equation and our sales activities that you see includes a number of tank cars that we feel are priced at pretty attractive levels relative to the expectation about what you could get for leasing those cars over the rest of their life. So we do both all the time and have indeed sold tank cars this year.

Steve Barger – KeyBanc Capital Markets

Got it. And you said that in terms of your expirations for 2013, there is a material amount of coal and grain, but to try and get a little more granular, is the mix of expiring cars about the same as the fleet overall or is it skewed one way or the other?

Tom Ellman

Yes, I can give you some numbers for order of magnitude if that will be helpful. In coal, we expect around a little under 3,000 coal car expirations and in grain, a little under 1,000.

Steve Barger – KeyBanc Capital Markets

Got it. And in terms of the LPI, 32%, I mean amazing number, does that typically includes everything that came off from the quarter, right, was the mix dramatically different in the LPI from what you were seeing earlier in the year or I guess did it include coal and grain cars or sand cars?

Bob Lyons

The mix really has not changed that much.

Tom Ellman

Well the mix doesn’t change in the LPI.

Bob Lyons

And again the other thing too is keep in mind some of those coal cars that are scheduled for renewal and come back and go idle, they are not picked up in that LPI number.

Steve Barger – KeyBanc Capital Markets

Some of the cars that came back but don’t go back out, is that what you said?

Bob Lyons

Correct, right.

Steve Barger – KeyBanc Capital Markets

Okay, right. So yes, my understand is the LPI is a representation of the mix of renewals in each quarter, right?

Brian Kenney

No, it’s a static mix of our most common car types. So as Bob said sometimes you can get a little bit of a weird answer if no cars renew in that quarter or if a car – very little number of cars renew at some rate that’s either very high or very low due to specific customer reason but in general it’s a pretty good representation of our fleet on a constant basis over time.

Steve Barger – KeyBanc Capital Markets

Got it. Okay, thanks.

Bob Lyons

Yes, I was just going to mention Steve too is we’ve talked about in the past, you know the LPI is a good barometer. It can give you a little bit of an odd reading from quarter to quarter depending on what transpires but it’s a good directional indicator.

Steve Barger – KeyBanc Capital Markets

Very good, thank you.

Operator

And we’ll take our next question today from Art Hatfield of Raymond James.

Art Hatfield – Raymond James

Morning everyone. Just on the coal car expirations, I think the number was given that you have 3,000 in 2013. What was the total number of coal cars in your fleet?

Tom Ellman

We have little under 7,500 coal cars in the fleet.

Art Hatfield – Raymond James

And can you talk a little bit about what your kind of long-term view of the coal market is and if at this time I mean given some of the secular trends in that market, wouldn’t expectations be that that’s not going to turn for a while and if so, what are some of the things you can do with these cars at this point in time, is it – you had mentioned you had bought a bunch [ph] a few years ago that were very young, do you start to turn to think about becoming more of a seller out of the fleet or is it possible that you could be making money scrapping these cars in some sort of fashion if in fact the long-term trends aren’t as favorable as you’d like them to be?

Tom Ellman

Yes, one great thing about all the markets we operate in is they will ultimately sell correct. And even when you look at the North American coal car fleet, last year there were 275,000 cars, this year there is 266,000 cars. So the total number of cars in the fleet comes down. So even with a decreased demand – at some point supply and demand will come back in to balance.

In addition, the weather should moderate, the differential between the price of natural gas and the price of coal will be more favorable at some point, so all those factors lead us to realize that coal will get better. The great question is when and to what extent? And in the meantime what we’re going to do is exactly what Brian said at the beginning, focus on utilization and focus on keeping those cars at work.

The scrapping alternative can absolutely become attractive on older assets, but it’s not very realistic in the younger to mild life portion of the cars but we’ll do that evaluation on the fleet all the time.

Art Hatfield – Raymond James

Okay, I appreciate that answer and I apologize I unfortunately got on the call several minutes late. And I know you touched on the maintenance expense line item and their guidance for 2013. But historically Brian, you’ve always said any time these cars come in for a maintenance event, I think the term you use is they tend to attract dollars. So when we think about your guidance for the year, is that safe to assume that you guys are taking in a very conservative view of yes, these things are coming in, we know what’s expected but we’re also kind of adding to that a little bit based on kind of what we’ve seen historically how – as these things come in we’ve had incremental dollars go into maintenance expense?

Brian Kenney

Yes, that’s absolutely factored in and I’d say it’s a realistic expectation as opposed to conservative one. It’s based on our experience and what’s due on the car. As I said I don’t know if you call it earlier, there is more than one program due generally on a car when it comes in, in fact in 2013, they are averaging three programs when they come in. So it’s more expensive than in a lot of cases than just an HM 201 as you said it attracts, you’re going to do what’s necessary for that car when you get a hold of it. The good news is in the market for tank cars, it’s tough to get a hold of it right now because there is such high demand. So when you do get it, you do what’s necessary.

Art Hatfield – Raymond James

Great. And then finally just with that in mind, you talked a little bit about the pricing and supply and demand for tank in 2013, but is it reasonable to think with all these maintenance events coming up and cars coming out of the market that we could – if demand doesn’t change, see incremental upside pressure on pricing as demand tightens up with these maintenance events going on?

Bob Lyons

Yes, it’s a great question but the underlying dynamics are so strong in terms of what it means for net demand for tank cars, could maintenance make that even stronger, that’s certainly possible but I think as far as what we’re trying to do in terms of taking rates up and lengthening lease terms that would just make that strategy even more successful.

Art Hatfield – Raymond James

Great, and then one last…

Brian Kenney

And we’re trying to…

Art Hatfield – Raymond James

Go ahead.

Brian Kenney

Art, I’m sorry, we’re also trying to do more cars out in the field. We’ve been trying to do that over the last decade really but we’re really trying to accelerate that and you’ll see that in 2013 just for that reason trying to get them back to customers as fast as we can.

Art Hatfield – Raymond James

Thanks, that’s helpful. And then final last question, the demand that we’ve seen for petroleum product over the last few years has really driven demand for that high capacity roughly 30,000 gallon tank car but some of our conversations with some of the rails and people up north of the border, there is talk about the Canadian, what do you call, tar sands or oil sands, that heavier crude just coming out of there, has a different car that would be used to transport that product, do you starting to see or have you seen changes in the demand makeup of some of the cars that would be some of the smaller coil cars that would be used to move that product?

Brian Kenney

Yes, and you’re absolutely right and the difference is that the cars are little bit smaller and it has coils and insulation, the car that serves the oil sands in Canada. And right through this uptick, we have seen demand for both car types, both the 30,000 gallon family of cars for the Bakken and the coil and insulated car for the oil sands.

Art Hatfield – Raymond James

Has demand or pricing for one or the other outpaced the other one, are they pretty much been in lock step?

Brian Kenney

They are both on pricing and leased strong, so.

Art Hatfield – Raymond James

Okay, fair enough and thanks for your time.

Bob Lyons

Thank you.

Operator

Steve O’Hara of Sidoti & Company has our next question.

Steve O’Hara – Sidoti & Company

Yes, I think most of the questions have been answered but in terms of the 30,000 gallon cars, did you say what portion of your fleet is devoted to that type and you operate kind of under the same type of contract signings and do you look for any different balance sheet strength on the point of your customers there or do you see that market as stable as general? Thanks.

Tom Ellman

Yes, first of all as far as the fleet goes, the 30,000 gallon family of cars represents about 10% of our tank car fleet and I’ll let Bob comment more fully if he wants on the customer credit quality but in general in this market just like we’re in a position to command the lease rates and the terms that we’re after, we’re also very selective on their credit quality?

Bob Lyons

Yes, I would just very quickly support that comment that anytime the market is this strong we’re always looking to move where we can, our cars into the hands of the strongest customers we have. We already start from a good base because we have an excellent customer base and we rarely ever have a credit issue but we certainly don’t pass the opportunity to – just continue strengthening it.

Brian Kenney

And if I could add my two sense and let Tom on expand on it, the other thing we do here it’s a little different from other market participants is we try to maintain a diversified fleet from a customer and product perspective. So you might think in this market we’re trying to dump every car we can into crude service and that’s not what we’re doing.

Tom Ellman

Yes, that’s absolutely right. As we’ve populated the cars in our supply agreement, we look to maintain a mix of both the growth opportunities that you’re seeing in crude, but also to serve our traditional customer base in the chemical food and other petroleum markets. And one thing we’re pointing out is in addition to the demand for crude cars, where crude being produced period helps all petroleum products and if you look at our tank car fleet in one way or another about a third of that tank car fleet serves the petroleum market, so this strength in crude and the underlying strength that provides to all the derivative products is something we get to participate in with the expiration of the cars and the renewal rates and (inaudible) that fleet of cars.

Steve O’Hara – Sidoti & Company

Okay, and then just if you go back to the maintenance quickly, does this material increase depend on getting them back for customers of your renewal rate increases, does that has an impact or these things that just have to be done and then you have to bring them in anyway?

Brian Kenney

They are scheduled in different compliance so we have to get them in. It’s tougher to get them in, you might have missed earlier I said we tried to smooth the bubble a little bit by bringing cars in early in 2012 and had very little success of doing that because they’re in such high demand but they are due, what I’ve thrown out there is what is due in 2013.

Bob Lyons

And Steve just to be clear, if we got north of 80% renewal success rates in 2013, we’ll do a little bit better but really the big driver in ‘13 is the compliance side of the equation here and those are scheduled.

Steve O’Hara – Sidoti & Company

Okay, thank you very much.

Operator

We’ll take our next question from Gregory Macosko of Lord, Abbett.

Gregory Macosko – Lord, Abbett

Yes, thank you, just a few brief points. Just on a general basis, if I look at a coal and a grain car versus a tank car, in general terms it would be fair to say that a profitability – the dollar profit on a tank car would be in general higher, relative to the lease term et cetera?

Brian Kenney

Well what the real difference would be in general, now I am not talking about today’s crude market, but in general tank cars tend to have less volatility than various freight car types and it has to do with the – primarily the amount of manufacturing capacity that has been devoted to the tank cars versus other freight car types but the overall profitability over the life of the car in general I don’t think you could see a material difference, you would see a difference in the volatility of the earnings stream.

Gregory Macosko – Lord, Abbett

But on a near term basis, I would assume just that would be the case given the demand. Okay, then with regard to – you didn’t talk really much about remarketing, I guess the number of cars sold was somewhat down, what is kind of your expectations going forward on a general basis?

Bob Lyons

Well on remarketing overall we had a incredibly strong year across GATX on a consolidated basis with about $65 million in remarketing income. As we look to 2013, our expectation is we’ll be in that range again, but really more because we see some opportunities within our portfolio management area with some schedule or hopefully planned sales here in 2013, rail remarketing income at this point we’re assuming is going to come down just a little bit in 2013.

Gregory Macosko – Lord, Abbett

I’m sorry, I meant scrappage, excuse me, I didn’t mean…

Bob Lyons

It would be in the same range as 2012 on the scrapping side.

Gregory Macosko – Lord, Abbett

Okay, thanks very much.

Brian Kenney

Okay.

Bob Lyons

Thank you.

Operator

Next we’ll hear from Kent Mortensen with Thrivent Asset Management.

Kent Mortensen – Thrivent Asset Management

Good morning. I wanted to ask about – I wanted to get a – have you just expand a little bit on your buyback comments. If I have it, correct my model, it looks like last time you guys really did a large share repurchase back kind of ‘07 timeframe, so just want to get your thoughts on that and the parameters associated around the buyback?

Bob Lyons

Well we also were active in the spring of 2009 Ken, after the financial crisis hits and all stocks took a significant dip, we bought a – we were active in the market at that point in time. So we have 70 million left under an existing authorization. And as Brian mentioned in his opening comments, we’ll continue to look at our stock as an investment opportunity right along with all the other opportunities we have in front of us in hard assets. And if you look back to 2006 and beyond, in total we’ve repurchased about $450 million worth of stock over that period of time. So we’re certainly not adverse doing it.

Kent Mortensen – Thrivent Asset Management

Is there something that’s kind of triggering that comment today though? I don’t remember you bringing it up in the kind of previous calls like last year?

Brian Kenney

No, we actually – I think if you look back we’ve referenced it every year, but I think it is a little different for me right now based on the investment we’ve made over the last few years, the market conditions we’re looking at especially in the tank car side going forward as well as the challenge of investing into such a difficult high asset price markets, I think – I always view the stock is undervalued but I just think it’s – in my view it’s heightened to continue to consider share repurchase as an alternative here.

Bob Lyons

And Ken I pointed up before in response to a different question but with roughly $770 million of investment volume this year that was a very strong year and it was a challenge really to find some of those opportunities in the secondary market and to the extent we don’t find as many robust opportunities in ‘13 we’ll look for other alternatives for deploying capital.

Kent Mortensen – Thrivent Asset Management

Very good. And then I want to ask you about this, can you give a little more detail on those $14.8 million charge on the gas compression business and just I would think that would be a pretty strong market right now, is that an asset that you’ve had a quite a long time, can you just kind of tell us a little bit about it?

Bob Lyons

Sure, it was actually a joint venture with two other parties that we made the initial investment in 2008. As we do from time to time, we invested in that business because it was a equipment leasing business with a service component attached to it. And as we saw the business develop over time, it became clear to us that the service element which is what we like was not as critical in that marketplace and we weren’t sufficient (inaudible) just kind of a financing business and one with some par scale [ph].

And so we saw an opportunity to exit. The joint venture itself was a bit of a challenge with two other parts, so we saw an opportunity to wind that up and exit this year and that was the right long-term economic decision for GATX.

Kent Mortensen – Thrivent Asset Management

I can also appreciate you kind of harvesting a loss in a really otherwise strong year the timing seem good. Are there other losses like that out there in the portfolio that you could potentially be harvesting going forward?

Bob Lyons

Certainly not planning to, there is really – when I look across the asset classes that we’re right now, the one that longer term would be a candidate for potential sale would be some of the ocean-going marine investments that we have, and we’ll continue to look at those. They are not core to GATX and we don’t necessarily need to be in those markets and we’ll look for the right exit point on those, but would hopefully do so on a better basis than exiting our investment (inaudible) recently.

Kent Mortensen – Thrivent Asset Management

Great, thank you.

Operator

And we have no further questions at this time.

Jennifer Van Aken

Okay, I’d like to just thank everyone for your participation on the call this morning, and I will be available this afternoon to answer any additional questions. Thanks.

Operator

Ladies and gentlemen that does conclude today’s conference. Again thank you all for joining us.

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