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GATX Corp. (NYSE:GMT)

Q4 2008 Earnings Call

January 23, 2008 11:00 am ET

Executives

Rhonda Johnson - Director of IR

Brian Kenney - Chairman, President and CEO

Bob Lyons - SVP and CFO

Analysts

Robert Napoli

John Hecht

Paul Bodnar

Art Hatfield

Samuel Crawford

Rick Shane

Operator

Good day, and welcome to the GATX fourth quarter Earnings Call. (Operator Instructions).

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

Rhonda Johnson

Thank you, Magen, and good morning, everyone. Thank you for taking time during the busy earning season to join us for our fourth quarter and 2008 year-end 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'll provide opening comments and then Brian will discuss 2008 and the year ahead. Before we begin, I would like to remind you that any forward-looking statement made on this call represents our best judgment as to what may occur in the future. 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. I refer you to our Form 10-K for the year ended December 31, 2007, filed with the SEC for a discussion of the most important of these factors.

Today we reported fourth quarter 2008 income from continuing operations of $28.9 million or $0.58 per diluted share. This compares to 2007 fourth quarter income of $41.4 million, or $0.81 per diluted share, which includes a deferred tax benefit of $9.8 million or $0.19 per diluted share. For the full year 2008, income from continuing operations was $196 million or $3.89 per diluted share including $23.2 million or $0.45 per diluted share of benefits associated with the state tax reserve reversal, sale of real estate and environmental reserve reversal in Poland. By comparison, 2007 income from continuing operations was $185.8 million or $3.44 per diluted share, which includes $20.1 million or $0.36 per diluted share of deferred tax benefits. The 2008 results excluding the aforementioned items reflects a 12% increase in EPS and a 15% return on average equity.

As evidenced by the earnings I just highlighted, 2008 was an outstanding year at GATX. Despite the increasing uncertainty in the market in 2008, royal fleet utilization remained very high, ending the year at nearly 98%, on par with the previous year. Thanks to the diligence of commercial and operations teams in place in cars with customers as well as rail cars scrap and sales. On average we renewed leases at rates 5% higher than expiring rates and we locked in those rates for an average of 63 months.

In the fourth quarter, the positive LPI was the result of stable performance in our tank car fleet, which helped to mitigate lease rate pressure in our freight car fleet. With our focus on extending term over the last few years, we've limited the number of leases rolling over in a weaker market. In 2009, we have only around 15,000 rail cars exposed for renewal compared to nearly 30,000 just a few years ago.

In addition to lengthening term, we continued to optimize our fleet through targeted car sales, which contributed significant remarketing income to our results. We also purchased more than 7,500 rail cars at very attractive prices, including the more than 3,600 rail cars in the Allco fleet acquisition announced in December.

Specialty segment profits in 2008 decreased slightly compared to 2007 due to an expected decline in remarketing activity and slightly lower income from the marine join ventures due to slowing shipping demand.

For most of the sailing season at American Steamship, demand on the great rigs continued to be strong and higher lake levels led to more efficient movement of cargo on the lake. All customer contracts were completed, however demand dropped significantly late in the year as steel producers reacted to the changes in the economic environment.

As we look at the year ahead and as noted in our press release we currently expect 2009 earnings per share in the area of $2.50 per diluted share, subject to variability. Brian will discuss this in more details in his comments so I’ll turn it over to him.

Brian Kenney

Thanks Rhonda. Before we open the call to questions I wanted to make few comments on our 2008 performance, the 2009 earnings outlook and why we decided to provide guidance at all in our earnings release. So let me take that last issue first, we had considerable debate internally about whether or not to provide earnings guidance for 2009. Especially given the fact that most companies that have announced earnings have refrained from providing guidance due to the uncertain environment I mean I get that but ultimately we felt that not giving some guidance runs contrary to all the work we’ve done over the last few years to reduce that extreme earnings volatility that GATX exhibited in past downturns. You know we are a very different company now. I didn’t want to leave people guessing and actually the worst by not providing some form of guidance for 2009.

The way we are structured we should be able to provide some visibility in to 2009 so let me start by talking about what’s behind our 2008 performance and how that relates to 2009’s current estimate. Now in 2008 we had record EPS that was obviously driven by a solid business performance but it was also driven by us taking advantage of what I’ll call some market anomalies and some situations which have since disappeared.

In fact, looking back, we spent the last few years taking advantages of some of these anomalies and I’m thrilled that our operating managers acted economically as apposed to assuming that these conditions would last forever. So let me give you a few examples of that. If you look back to mid-year 2008 scrap steel prices peaked at around $500 a ton. If you listen to market forecast at that time a lot of them said that price would hold or actually increase from there, there is a variety of factors going in to that the China effect and some other ones.

As you know form our prior earnings calls however, our people stay true to our economic model which said that with $500 scrap price and the prospect of redeploying and ageing railcar into a weakening market you scrapped, and scrap we did we scrapped a record 4000 cars and had about $30 million in scrap gains in 2008. And looking back with the year end scrap price as low as $80 per ton, that was a great move. However if you look at the scrap price at least coming in at 2009 it’s rebounded slightly but it’s still below $200 a ton. So the probability of that level of scrapping going to come in 2009 is remote.

Another example on the marine side everyone is well aware the record day rate and resulting asset valuations which actually peaked in 2008 the same valuation peaks are true for a number of our cars types and the rail business. So in 2008 and 2007 as well, we monetize the number of our marine’s vessels and railcars at those record valuations. Same time we extended renewal terms in rail left in some of those peak marine charter rates through contract that will partially inflate us well in 2010. And any rate in retrospect our actions are well timed and they produced robust remarketing gains during the last two years.

Well with the rapid decline in these markets and these asset evaluations in the last few months. Once again it’s unlikely to produce that level of gain in 2009. So in 2009, as we said in press release, we do expect our core markets in rail and marine to deteriorate further to be under pressure. But as we’d discussed with you many times before we stop this deterioration with inevitable and therefore we prepare to GATX to not only withstand it but hopefully take advantage of it.

Having said that, in this market there’s a number of things we cannot predict with any level of certainty. And some of those factors are the reasons for our cautionary talks during the 2009 earnings estimates in the press release so let me discuss two of those. Our first at perhaps the most impactful to our earnings variability in 2009 our corporate credits spreads and stayed at the capital markets in general.

If you look at our committed investment in 2009, we don't have to do any financing. Our backup lines are more than sufficient, obviously that’s not the way we want to run the business. And Bob would prefer to go out and do several hundred million dollars of term financing. We certainly have the access to the market to do that as we proved in November but it is a lot more expensive now just like it is for everyone. So if the capital markets improve from today's condition that could be positive for earnings estimates if they deteriorate further it could be extremely negative. There is also a secondary effect of capital market improvement for deterioration. For instance if the capital market improves from where it is today it could allow us potential buyers of certain of our assets to access the necessary financing and then we could produce remarketing gains at levels that we aren’t anticipating today.

So a lot of the uncertainty around that estimate in the press release comes from the uncertainty and credit spreads in the capital markets. Another issue but its related actually is the uncertainty around our investment volumes particularly as it related to fleet and portfolio acquisition in the secondary market.

As you know we are going to this downturn with a strong balance sheet and we are featuring low leverage on a historical basis that was by design. The idea was to pickup attractive fleets and portfolios from those companies who are struggling in this difficult market and need liquidity. The Allco acquisition, the fleet acquisition in December was a great example. We acquired almost 3700 cars that had great valuation and that had extremely attractive consumable debt. A great transaction for a variety of reasons, there is no people over the fleet acquisition. No people, no systems, not integration. We’ll be looking to repeat that in 2009 but of course it’s difficult or impossible to tell that those kind of opportunities will be unavailable. And if they are unavailable and we are able to do it is also difficult to predict what effect they'll have on 2009 earnings.

As we have discussed many a times before even a great acquisition economically and railcar leasing can be diluted from an accounting perspective for the first few years and that would not stop GATX from making the acquisition if it made sense. So until we see what develops in terms of investment opportunities in 2009. There is more volatility around our earnings estimate. So that’s just a few examples you know if I summarize 2009, will be a year of extreme challenge but. I think it’s going to be a year of excellent opportunities as well, and we prepare the company to take advantage of a downturn, we plan on just doing that and we are also going to manage the business as efficiently as possible. So, 2009 earnings depended on a variety of factors which I just layout and some of them are beyond our control. But sitting here today, I am pretty sure we have right team, the right fleet, the right assets and the right focus to create significant value for our shareholders going forward. So I hope that help. Let's go ahead and open it up to questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the side of Robert Napoli. Your line is now open.

Robert Napoli

Thank you. Good morning. And you know nice job and guys I’ve been waiting for this time for years unfortunately that means that the economies isn’t doing so well, but few questions on first of all on pricing I know that pricing came in for the quarter better than we expected you are up 3.5% and I just wondered what because we think prices have declined in the market pretty significantly and what are you expecting in throughout 2009. Why do why was you pricing as positive as it was in the quarter?

Bob Lyons

Good morning. This is Bob Lyons.

Robert Napoli

Good morning.

Bob Lyons

Thanks for your question. The fourth quarter was stronger than we had anticipated if you recall the third quarter with the LPI was in negative 0.3% we assume going in the fourth quarter the number would be negative. Tank car pricing in particular held up stronger than we had anticipated. But as you would expect from everything going on in the marketplace, the freight car side of the equation was quite pressured. So, as we look into 2009 what occurred in the fourth quarter really doesn’t change our view on what will happen in 2009, which is rates will come under pressure as the LPI across the board in 2009, on average would be a negative performance. So, we're going to have some difficult times going into 2009.

Robert Napoli

Okay. And then the utilization side, you said you scrapped lot of cars in the fourth quarter and the acquisition that you made essentially that was 100% utilized.

Brian Kenney

Yes.

Bob Lyons

Yes

Robert Napoli

Behind your outlook for next year, how low do you expect that, are you anticipating what kind of a range would you expect for utilization to decline to?

Bob Lyons

Well, as we came in to 2008, we had expected that we would probably see a couple of hundred basis point drop in utilization, take out that stronger and all for commercial reasons but largely due to scrap. So, as we go into 2009 I think at least a couple of hundred basis points drop is not out of the question in terms of utilization for '09.

Robert Napoli

Okay. And you took a $7 million loss provision in the quarter. Is that in the affiliate earnings? Is that why the affiliate earnings went down so much?

Bob Lyons

No. Its actually would be in other costs and expenses within that line, within rail. We took that on a provision on a direct finance lease, a bit of an anomaly. We don’t have a lot of direct finance leases. So, we don’t have a lot of [resolvable] assets, but in this case we do. So, we took that reserve.

The affiliate income was down at rail more due to, if you recall in past quarters there's some volatility around the heads that’s been in place on a future financing and our affiliate AAE and that had a negative impact during the quarter. On a full year basis it was to minimus by quarter-to-quarter it bounced around a little bit.

Robert Napoli

Okay and then the loss, can you give me a little more color around the provision, move aside here?

Bob Lyons

Sure we had a customer that filed for bankruptcy, a sizable customer in the chemical industry that filed very recently. We have a number of cars out leased to them, typically under an operating lease, not a provision able assets, not something you can take a reserve again which is about 97% or 98% of what we do. In this case some of the cars we have on lease with them are under a direct financial lease. The cars themselves are checked again somewhat of a challenge car type and within a DFL, within a direct [financial] receivable and so we are able to reserve against that receivable. So we went ahead and did that in the fourth quarter.

Robert Napoli

Thank you.

Operator

And our next question comes from side of John Hecht. Your line is now, open.

John Hecht

Good morning, thanks for taking my questions. In the ASC division, you talked about rates getting weaker in the fourth quarter and then we saw the revenue drop off from Q3 to Q4, in a more sizable than prior quarters. I know some of that is rate related, some of that is weather-related historically. Can you give us a sense was this all related in this quarter, was there some of it related to your ability to move product down the great lakes.

Rhonda Johnson

John it's actually related more to a drop off in demands late in the quarter. The weather was actually in our favor this year. Whether it was generally fairly smooth out on the lakes and the lakes level were high. The rates themselves are set as you know on a more annual basis. This is not a leasing company, but an actual operating company. So what we saw happen was that the demand dropped off towards the end of the year, so any additional product that we may have shipped for people with that kind of demand fell off and that’s something that we are looking at very closely as we go in to 2009. All of the ships are laid up right now for their winter work and we will be working with our customers very closely to see what demand looks like for the 2009 sailing season that begins in March.

Bob Lyons

The other thing going on in revenue enhancing is fuel cost decreased dramatically in the fourth quarter as you know, and that is passed through on revenue.

John Hecht

Okay. That’s revenue, not a cost factor.

Brian Kenney

Well, it's both. It is included as a pass through in revenue, and it’s also down in the cost side. So we saw both of those drop as well, on a relative basis in the fourth quarter.

John Hecht

Okay. And can you guys break out the -- of your other income, the scrap component of that in Q4?

Rhonda Johnson

Sure. The scrap component of that was back to a more normal number about $3 million.

John Hecht

And then, finally in the quarter, can you give us a sense on the end of term leases, how many you -- if I pick right, you probably had about 4000 or so leases coming determined in the fourth quarter given that your utilization rate held up. Is it fair to think that you were able to release nearly 100% of those or is there something else to think about in that factor?

Bob Lyons

Well, there is a couple things to think about there, John. Utilization did hold strong even though there was fairly limited scraping activity in the fourth quarter. But not all of the cars immediately turn right back on lease with the existing customer. As you know, we look at a renewal rate percentage in terms of the number of cars that stay on lease with the existing customer. That can range anywhere between 50% during challenging times up to we saw 80% in '07, early '08. It will be right around 60% during the quarter that renewed with the existing customer, as cars they come off lease and our place with other customers. They are assigned to other customers and our commercial team did an excellent job during the quarter in terms of assignment activity. So it was a busy quarter commercially, but a very successful one. And I think it put us in a good position as we go into 2009. The other thing I would add about 2009 renewal, Rhonda mentioned about 15,000 cars up for renewal in 2009. You know, it's kind of a lot of seasonality to that. It's pretty evenly spread. And when you're thinking about '09 you can kind of think about those growing over fairly evenly throughout the area.

John Hecht

Okay, and then finally, before -- and what else happened here is, you talked about good assignment activity for the 40% of the end of term date of existing customers that may have not renewed. How are you competing there given the weakness in the environment? Is it on price? Are you gaining market share because of weakness of your competitors? How would you characterize that?

Brian Kenney

You know, the assets are fairly interchangeable. But we have great relationships, we have a great sales force and we are competing on the basis of price as I said many times over the last few years as the market was going up. We wanted to be the price leader on the way up and really pushed price and lock it in for as long as we can. On the way down we also want to be the price leader. In other words, we won't be undersold and legal assets at utilization, at a low utilization, especially for a good customer. So we are competing on price in this kind of market. There is a lot of idle cars out there.

John Hecht

Thanks very much.

Operator

And our next question comes from the site of Paul Bodnar. Your line is open.

Paul Bodnar

Yes. Just kind of a follow-up on the last thing, I mean you said there are a lot of idle cars out there. Could use a little bit of color onto the different car types and where you see some of the bigger issues, I know it is probably pretty broad based at this point.

Brian Kenney

Yeah, in general, I think if you listen to us, in 2008 we talked -- started really a year and a half ago, talking about anything related to construction and how there was some weakness there, then its spread to all freight car types, probably with the exception of coal and grain which were strong in 2008. Now you are even starting to see weakness in there, if you saw shipments recently in coal and grain, they are down as well. Although our fleet in coal and grain is pretty close to 100% utilized. We are starting to see grades drop there and they will be under pressure next year. But you all thought I was talking about the tank car side generally staying strong, especially in the General Service type of cars. I would say at this point there is weakness across the Board, and including the tank car side. So, it is pretty widespread at this point. I mean there are a few car types hanging in there, but in general, we are seeing weakness across the Board. It will be a competitive 2009.

Paul Bodnar

Now, if some of these cars come back and if you have to send it out to a new customer, you tend to do a lot of additional maintenance work, I mean I guess, so should we expect maintenance cost to increase potentially in '09 with the following utilization levels?

Brian Kenney

That's a great question. I was actually going to add that to Bob's answer. That’s exactly right. As the renewal percentage drops, your assignment percentage hopefully goes up and you stay at that utilization, but that’s going to cost you some money, because it not, I want to say it depends on the type of car and options, but it's very rare, sometimes the cars go from service to service without going through to the maintenance network. When that happens it attracts cost and your maintenance costs will go up. That's what we call turning the fleet. We will see that -- actually we saw in 2008, that’s why volumes were higher at our service centers. We will see that again in 2009. That is one of the reasons maintenance will be up in 2009. The other reason maintenance will be up in 2009 is the amount of compliance that have to be done in the tank car fleet. We have been talking about that for a while here. A lot of over building actually in the mid to late 90s in the tank car slide. A lot of those cars are coming through for the first structural inspection. That was heavy in 2008. It’s actually higher in 2009 and 2010 before that calms down. So, maintenance will be up for all those reasons.

Paul Bodnar

Okay. Thanks a lot.

Operator

And our next question comes from the side of Art Hatfield. Your line is open.

Art Hatfield

Thank you. Brian or Bob, I guess, on the right after last provision you took in the quarter, how do we think about going forward? Does that write-off take care of all the receivables that we are potentially deal and its due to bankruptcy process, I don't know if there’s a liquidation or what not, eventually could those cars be turned back to you?

Bob Lyons

Well, let me just add my point. Typically what happened in our bankruptcy scenario because they do occur from time to time and it’s possible that more may occur in 2009, but what normally happened in that situation is that operating lease assets into that particular customer, you are engaged in a dialogue with the customer, customer needs for their equipment, potentially renegotiate the lease rate; or, if the lease rate is unacceptable to us, we can take the cars back and put them on lease somewhere else. You rarely have a buildup of a large receivable because these are months to months. They are long-term leases but they pay monthly. In this particular situation, as I said it was very unique, where we had cars under a direct finance lease, but it’s not on a norm. And here there is a receivable within DSL that we have reserved again. Not fully, because we anticipate that some of the cars will remain on lease and in use. This is a big customer, they're ongoing. They're going to continue to operate. It’s a big chemical company that is not shuttling its doors. It's quite the opposite. It actually just restarted another plant. So they are going to have power needs. For all the cars in their fleet, we don’t know. It's early to tell at this point. But we’ll work hard to keep our cars fully utilized and to the extent some of those come back, we’ll look for helms elsewhere.

Art Hatfield

Okay. At this point in time, it's fair to say that you're not anticipating that happen and I say that assuming that you haven’t included any of those cars in the 15,000 up for renewal this year?

Bob Lyons

That’s correct.

Art Hatfield

Okay. Okay. Just refresh my memory, on the scrap gains, where does that fall on the income statement?

Rhonda Johnson

In other income.

Art Hatfield

Okay. And then finally, the tax rate in the quarter was a little bit lower than we were looking for. Anything you need going on there?

Bob Lyons

Yeah. We are generating a larger percentage of our income currently from foreign operations which operate in much lower tax jurisdictions. So we would expect the full year tax rate in 2009 to be low compared to historical norms of 34%, 35%. We're probably looking in the low 30 for the fourth year in 2009.

Art Hatfield

Okay. Thanks. That’s all. All my other questions were answered. Thank you.

Bob Lyons

Thank you.

Operator

Our next question comes from the side of Samuel Crawford.

Samuel Crawford

Yes. Thanks very much for taking my questions. Could you give a brief evaluation of customer credit quality across the portfolio? I know that’s kind of a hard question to answer because it requires you to generalize, but maybe if you speak to the broader quality and then to the very weakest portion of the portfolio, the one that most concerns you?

Brian Kenney

In general, customer credit quality is very strong in our rail business. Historically there has been somewhere along the area of two-tenths of 1% in terms of credit losses. The customers that we're focused on right now are the ones that are highly levered and highly levered and using cars of types that are weak right now. So for instance chemical customers that may be highly levered and as an example lease a lot of plastic pellet cars from us, you know, you have your eye on those types of customers right now as an example.

As far as if you go through our top ten, though however, I would say most of them are extremely solid credits and in fact lot of them have higher credit ratings than we do.

Samuel Crawford

All right. Okay. The second really and last question is just going back to a fleet purchase that you executed some time back, most recently. There was a description of assumption of debt and it was never quite clear to me in conversations with IR or from the press release whether that debt had been assumed at a face value or if it had been assumed at a discount that was reflective of perhaps a recovery in bankruptcy. Was it assumed at discount?

Bob Lyons

No, it’s assumed at face value. That total amount was roughly $185 million of debt, $189 million of debt I believe. Its term debt and very low cost debt, which was one of the attractive element of this acquisition. The cash contribution from GATX to execute the total acquisition was fairly low at around $30 million.

Samuel Crawford

Yes and just as a last on that if it’s not too invasive would it be possible to keep what an average coupon on that debt would have been?

Bob Lyons

About 5.5%.

Samuel Crawford

Thank you very much.

Brian Kenney

Which at the time was probably if we had to go and raise that money would have been a 300 basis point pick up so it was a great transaction.

Samuel Crawford

Understood. Thank you.

Operator

And our next question comes from the side of (inaudible). Your line is now open.

Unidentified Analyst

Good morning. I was wondering if you could just run through your liquidity at the end of the year. I noticed your cash I think is just over a $100 million. What was the availability on your revolver?

Bob Lyons

Well the revolver backs off our commercial paper outstanding. So if you look at year end I think we had roughly $124 million of commercial paper outstanding. You had that against the cash. So it’s really a net of about $25 million. We have $550 million in our primary credit facility which runs through 2013. So essentially, almost all of that is available. The other thing I’d point out Brian mentioned in his comments, the financing we did back in early November with $200 million high care security deal that we did. In December we also did a couple of others things, we did another $50 million bank term loan secured so we were able to access that market. We also layered on top of the 550, another $100 million, 364 day unsecured revolver. So, essentially we have $650 million of CP backup or short-term liquidity back up that is virtually untouched.

Unidentified Analyst

Okay and what are your maturities in 2009?

Bob Lyons

We have May maturity of a $120 million in June of $250 million.

Unidentified Analyst

Okay, I guess my last question, just being a bit new to the company, when we talk about having extended the lease terms out over 60 months, certainly that reduces the risk for renewing but in an environment like this what is the risk that customers, I don’t, did they break leases or did people walk away from these contracts, are their consequences to doing that, just for the little clarification?

Bob Lyons

Yeah in general the credit losses have been so low historically because when customers do not pay. You take back the cars and we have our as you can see 98%, probability of redeploying them right now although that we expect some pressure on utilization but generally you take back the cars in redeploying them so. That’s some significant leverage if you are shutting down a plant of a customer. So I think all that the criticality of our customers the fact that these are critical assets to their operation and the fact that we can redeploy them elsewhere has held that credit loss percentage down over time. Having said that, as we said in the press release, obviously some customers are going to run into some trouble and we’re watching it closely.

Unidentified Analyst

Okay, and if I may one more just on free cash flow in the quarter, did they generate free cash, what was CapEx and what would you say is you ability to pull back on CapEx in ’09 to generate cash?

Bob Lyons

Well we are not particularly focused on pulling back on CapEx, to generate free cash given the liquidity that we have and the investment opportunities, we think we have, and restore our leverage. We are committed CapEx in 2009 of about\ $370 million. After 2009 if drops off substantially we really have some remaining railcar deliveries in 2009 but beyond that committed CapEx was pretty wide. We are hopeful that we'll see investment opportunities in well an excess to that. But as Brian mentioned in his opening comments, that remains to be same in terms of what kind of portfolio or fleet acquisitions opportunities are out there.

Unidentified Analyst

Okay.

Rhonda Johnson

And then this one I remind you Matt too just of the cash generating abilities of the portfolio, on average, you are going to see somewhere around may be $350 million in cash from operations and portfolio proceeds. So this is not just a matter of available credit but also the fact that the portfolio generates nice cash flow, even during a downturn.

Bob Lyons

That’s a good point and for the full year of 2009 because we were very active in terms of scrapping proceeds and selling assets and attractive valuation as that cash from operations and portfolios proceeds numbers are going to collect the $500 million mark.

Rhonda Johnson

In 2008.

Bob Lyons

In 2008, 2009 it’s just a pure cash from operations so I’ll put you in the 350 to 450 range.

Unidentified Analyst

So that your committed CapEx then you are looking at basically a free cash flow neutral '09 is a direct way to look at it.

Bob Lyons

We don’t. If you just look at those two numbers, we don’t focus too much on the free cash flow, we are trying to look for opportunities to deploy capital and grow the business.

Unidentified Analyst

Understood. Thank you very much.

Operator

And our next question comes from the side of Rick Shane. Your line is open.

Rick Shane

Good morning guys. Thanks for taking my question. A couple of things, obviously what you are describing in terms of bankruptcy, for your customers a reorganization, is there and so your expectation is that you are not going to get most of the cars back. As they go through a reorganization, how much ability do they have to renegotiate lease rates. And do you have, if don't like to renegotiate the lease rates, do you have the ability to take back the cars you chose to.

Brian Kenney

Like while they have uncovered right to try to renegotiate or we could anybody who have been in any bankruptcy. They can now that’s their opening to go back to all other vendors across the board and renegotiate terms. If we don't like the rates, we can take the cars back. We are not obligated and in anyway, shape or form to enter into a contract that we are not happy with.

Rick Shane

Okay. So there is no notion of some sort of cram down or anything. You can take the price or walk away.

Brian Kenney

Yes.

Rick Shane

Great. In terms of this you obviously had more questions on credit because it's becoming a greater overall concern, in the context of the bankruptcy that you experienced and the context of what you are looking at now. Across your book were there are warning signs there. What did you see in advance? And obviously once you are in that situation, I am not suggesting that you just walk away but what were the stress indicators that you saw and you are seeing there was other parts of your book at this point that concern you?

Brian Kenney

I think the biggest thing in that one instance without getting too specific and talking about names, it’s a dramatic increase in leverage over the last couple of years. And as I said you tend to watch the customers a little more closely. If they have a car type that’s difficult to redeploy so yes, they are on the radar screen already for those two reasons. As far as we made a comment about being able to pull out of there you can't do that either if you are less or in fact these cars, the fact that Bob has tried to explain there on this direct finance lease, they were on a very long-term lease. So, we dint have the ability to just go and say give them back either.

Rick Shane

Understood. Last question please. You talked about committed CapEx of $379 million. I'm assuming that’s not budget, that’s actually committed CapEx through forward purchase agreements. Correct?.

Bob Lyons

That’s correct.

Rick Shane

And if you were to look at those four purchase agreements in the context of current market pricing, how much above or below new contractual rates would you be getting those cars? Is it 5% above market, 5% below market?

Brian Kenney

It’s a little tough to tell. I would say in general since one of the orders was placed, two plus years ago. I would say it would probably be above market if you placed it in equivalent order today. Now that order will adjust, based on changes in cost components and steel is a good example. So it will come down considerably but I am saying, since it was placed two years ago, it probably has a higher margin than an order you would achieve today if you went out there. The other one I think is probably looks pretty good still.

Rick Shane

Okay. So it's basically two orders you know they are roughly the same size?

Brian Kenney

Yeah. And it kind of takes it in a new car pricing which is, I think has come down pretty dramatically over the last few months. If you look at the steel component alone, there was this as I said all these, or at least most of these orders adjust with components and steel prices and back when scrap was $500 per ton, on a typical tank car that steel surcharge would have been $13,000 at today's prices, its more like $17,000. So, just the decrease in steel prices alone for just 13% reduction in car costs and that’s kind of keeping manufacturing margin constant. So if you ask me what is new car cost today which is why I hedged on the answer a little bit. You don't know till you got out there and place it. I got to believe manufacturing margin would pretty close to zero. Yeah they just want to keep factories open.

Rick Shane

Guys thank you very much for your answers.

Brian Kenney

Thank you

Operator

And our next question comes from the site of [Frank Fiske]. Your line is open.

Unidentified Analyst

Hi good morning. Of the $370 million of CapEx for '09 I guess most of that is for new rail cars. Correct?

Bob Lyons

Correct

Unidentified Analyst

And the new rail cars that are going to come in to, do you have leases on those yet or some of you do some of you don't, can you talk about that?

Bob Lyons

Sure we have, I think some we do, some we don’t that’s the right summary and that when we place the order like that an advanced order we typically do not have if you're placing order for 1000 cars you are typically will not have 1000 of those, leased up ahead of time. We do have a good waiting of those already placed, but we still have some that will need to work through in 2009 but it's not a unmanageable number by any stretch.

Unidentified Analyst

Okay and then I guess as you look out further and you look whether you are going to buy additional or I guess whether you buy new or buy used or do nothing, can you just talk about used prices I guess all the railroads have reported their stacking cars or they are putting them on the side, what are the returns if you buy used instead of just going to a manufacturer.

Bob Lyons

It's a little difficult to gauge right now. We look at both of those avenues for opportunity to grow the fleet. I can't sit here today and say right now that one is a better alternative than the other. It's really just constantly being in the market to see what’s available, both with the builders and cars in the secondary market. I will say the transaction we completed in December, the 3600 cars we bought there will generate substantial economic value for the shareholders long-term. We got a very, very good price on that transaction.

Brian Kenney

Yes, it’s a theoretical answer, but I would say in a lot of cases market value of cars are lower than building costs right now. If you are able to get down that "market value would probably more interactive right now."

Unidentified Analyst

Okay.

Brian Kenney

At some point the manufacturers won't build the car if they are going to take a big loan.

Bob Lyons

The other thing to point out to is that some of these cars that conceptually may be available for the market place are held by people who have been in the business a long time and understand how it works. So, it's not like there will be a flood of sellers at a low point because they know how the cyclicality of the business works. Occasionally you can get some really good opportunities like we did in December.

Unidentified Analyst

Okay. And then just one other question. Just in the segment data, I guess in other income there are scrap gains in there, what else is in there and then asset remarketing income which was $31 million for the year in rail, is that just selling -- that’s actually selling the cars to someone else not scraping them or?

Rhonda Johnson

Correct. That’s correct. So we’ve had a program in place for last few years where we’ve been just quietly selling off portfolios of real cars, kind of optimizing our fleet for this downturn. So that’s what you see there in asset remarketing income. Other income is scrap gains obviously repair revenue, so revenue from repairing cars for third parties, any kind of interest income or fee income would also be in there but that’s a very tiny part of what we do.

Unidentified Analyst

Okay, thank you.

Operator

And our next question comes from the site of Robert Napoli you line is open.

Robert Napoli

Thank you. On the debt side, you have, I'm trying to understand a similar case. You have $370 million of debt rolling over this year, your free cash flow just about pays for the committed purchases. What is the -- and you have these, the backup lines at about $600 million of available credit. Will you use those back up lines, those lines to fund that, that’s rolling over or will you refinance those and I guess, you’d rather raise capital on the market, and if you do, how much higher would spread -- what’s the incremental spread on that debt in today's market?

Bob Lyons

Well, I guess, to answer your question, we will take a piece of that. We could use those lines obviously, that’s what they are there for, but we prefer to manage our business much more in a term fashion, but we would want to go into the market and raise term debt. So, we did that back in early November, the coupon on that was 9%, and after a five year security of spreads, it probably improved a little bit since then. The treasury rates have obviously come down since then. And 9% of 300 plus basis points more than we would normally fund. That's $6 million a year of interest expense of probably beyond what we would normally incur. So it is material, and if rates stay at that level that’s kind of the spread you would have to pay. We are constantly monitoring to see where spreads are at and what the best opportunity is for us. We are in a really tight position that we are not propped at any point in time to go out and do something that’s particularly on it. So we'll be opportunistic.

Robert Napoli

Okay. And then, what is the cost of the unused lines? What is the rate on those if you were to choose to use those?

Bob Lyons

Well, actually the credit agreement for the big ones, the $550 million line is actually on our website. That one goes through 2013. That was put in place about two years ago from the cost associated with that. Very well -- if we have the dollar down and that would probably LIBOR plus, 30 basis points type or something.

Robert Napoli

Okay.

Bob Lyons

I mean we don’t typically tap at it there as a backup. The $100 million facility that was put in place that was done with the smaller group of bags and that information won't be posted anywhere, but suffice to say it was definitely more expensive than the one we did two years ago. We felt it was the right step to take just to add some additional liquidity to the mix because of the uncertainty levels going on in the marketplace right now.

Robert Napoli

Okay. Last cycle you guys placed a decent sized order right in the middle of the dire economic scenario we ran and another one of those scenarios and I think you must have said to me any times over the years that you wish you'd at least double that order. And next cycle, we're going to make a much bigger order. I guess, is it far enough into this? Are the railcar manufacturers hard up enough if you will that you can go out there and place an order that’s going to have railcars delivered a couple of years down the road at great prices or are we not at that point yet?

Brian Kenney

Well, you are right. It is one of our objectives. Not only the pick up portfolios, but to place that long term railcar order at the right time. You can't time it. You never get it perfectly right in terms of timing. Last time we hit it at the bottom. The things we’re looking at, Bob, the steel price and component pricing, how aggressive the manufacturer is getting, are you seeing some signs of a rail market recovery or at least the market bottoming out. We are looking at all that and all I say is we haven’t place the order yet.

Robert Napoli

You’re surely not bottoming out yet. How about the U.K. business? I’m getting little bit worried about that and that it’s you know shorter term average lease, much shorter average lease term, I think its like two years, right?

Brian Kenney

Well, I assume you are referring to our European rail base.

Robert Napoli

Right. That’s the European rail business. Yes.

Brian Kenney

You know, it’s a good question. Actually we spent a lot of time in 2008 saying that you're exactly right Bob. The term is shorter over there both on the tank car side and freight car side and we haven't seen any signs through most of 2008 that the recession had spread over there. Obviously it’s in recession now over there. We are starting to see some of those signs. I mean the automotive and chemical sectors have been hard hit over there. In general the housing sector is better than the U.S. But still, I’d say right now we are seeing the sign. The tank car side is hanging in there pretty well. Utilization is still really high. On the freight car side, utilization is still very high, over 99%. But we’re starting to see container volumes come down and there is some reduced demand there. So, we’ll see some weakness in Europe in 2009, and it will hit the fleet.

Robert Napoli

Okay. And with regards to the marine business, I mean, while your revenue was down much below what we had expected and I guess a combination of fuel pass throughs and lower demand, your lease income from that business was very strong. Why was the income, if you just look at the marine operating revenue minus marine operating expenses; that was several million higher than I thought it would have been given that revenue level. Was there anything unusual in there?

Rhonda Johnson

Well again, you have the offset of the fuel costs being low, which would be in marine operating expenses. So, those…

Robert Napoli

But that’s just the pass through; it shouldn’t have helped the income right?

Rhonda Johnson

Well, its not a 100% pass through. So, it would also be helping you on your expense line.

Brian Kenney

In general, volumes were strong in 2008 till the last few months and pricing was extremely strong.

Robert Napoli

Okay. The last question. Your operating expenses were and they came in across the board, I think a little bit better, now the G&A side, the maintenance expenses. Does that have to do with the move of the office on the G&A side? You did a nice job of controlling expenses and…

Brian Kenney

There is nothing unusual in there during the quarter. We are like everybody will be intently focused on SG&A expenses in 2009 and we're targeting a material reduction in our SG&A into 2009 to reflect what's going on in the marketplace. But we're going to continue to manage that lines very, very tightly.

Robert Napoli

Okay. And the jump up in interest expense was just the 9% deal that you did is primarily that in…

Brian Kenney

Also that reflecting with the fact that there was a substantial amount of volume down in the fourth quarter

Robert Napoli

Yeah.

Brian Kenney

You know I have taken that on the (inaudible)

Robert Napoli

Thank you.

Operator

And our next question comes from the side of Art Hatfield. Your line is open.

Art Hatfield

Yeah. Bob kind of touched on one of the things that I want to follow up on but, Brian looking at some of the fundamental data in the rail industry. I think there's a perverse argument to be made with regards to maybe we are getting close to a bottom. I guess protect is a wrong word, but how do you balance out, not waiting too long and if you look back at the last cycles, was there a period after the rail fundamentals bottomed where maybe 6 months or 12 months later was when car prices bottomed out? Is there a way to think about that as we look over the next year?

Brian Kenney

I think that is difficult to answer that with any certainty. I mean I don’t feel at this point if you look at the traffic in the first couple weeks, the rail volume in the first couple weeks of January? There is some pretty significant decreases there. You want to see how that rolls through before you declare okay, we are at the bottom. They are still manufacturing cars, I mean Rhonda what's the latest in terms of backlog?

Rhonda Johnson

We haven't seen the statistics yet for the end of the fourth quarter. The backlog is probably still going to be reasonably high, but it think indications are that the build is going to be pretty low this year, probably 20,000 is probably a good guess and maybe half of that is tank cars. So, definitely the orders have been drying up and it looks like it is going to be a more difficult year for the manufacturers.

Brian Kenney

Having said that, it doesn't feel as if they are beating down our door.

Art Hatfield

Okay. That’s a very fair statement. Had a issue and I hate to get back to the credit quality issue, but thinking about one area that may have built out too much over the last few years with the ethanol market, and maybe with gas prices and oil prices coming in like they have, fare of ethanol refinery, bankruptcies, I guess that risk has improved recently, can you talk about that and maybe what kind of potential exposure you have to that market?

Brian Kenney

Yeah. We're very highly utilized. We've gone through this story before, but we’ve stayed with the larger more stable credit worthy customers and ethanol for the most part in our fleet utilization.

Rhonda Johnson

98%

Brian Kenney

98% in the ethanol fleet right now. So we have, I think utilization will come down in that car type in 2009 even in GATX we do have some leases rolling over we also have I believe 300 cars delivering in 2009 but those are all play.

Art Hatfield

Okay.

Brian Kenney

So just like everything else as general weakness it might slip a little bit but I know right now it doesn’t I think the bigger impact there is lower lease rates as apposed to utilization.

Art Hatfield

Okay thank you that’s all I have.

Operator

And our next question comes from the side of John Hecht. Your line is open.

Brian Kenney

Hi this is going so long we are in the first quarter call now.

John Hecht

Everybody is taking two rounds here. Two quick questions. What’s the average here of your railcar fleet at the current time and maybe where was it a year ago?

Rhonda Johnson

It’s still around 16 years John we always try and keep it around the mid point.

Bob Lyons

With the acquisition of Allco, John those cars were average age of 2 years 3600 cars added in this fleet so the number will come down a little bit but it’s a huge fleet and a little tough to move that needle in just one year’s time.

John Hecht

Yeah. And then final question I guess for Brian I think Rhonda just talked about the backlog 20,000 cars 10,000 tank cars and you’d referred to some idleness in the market prior but we didn’t get the much specifics there just trying to get a sense do you have any of those idle car numbers who would get a sense or put this in context for what we might need to see in absorption rates for the new backlog along with your renewals?

Rhonda Johnson

For the whole market are you talking about?

John Hecht

Yeah

Rhonda Johnson

I think there was an article out yesterday that suggested that there is at least over a 100,000 railcars sitting idle at the three major railroads, getting your arms around that number is really difficult. And again, you have to go car type by car type. So, I think there is still substantial numbers as of ethanol cars that are idle. You'll probably see the backlog at in tank cars, which last we saw was 25,000 cars. At least half of that was scheduled to be 30's, that the ethanol capable tank cars. You probably are going to see that number come down. I don't think people want to be continuing to build a significant number of 30's when the market is soft and the price of ethanol is way down with the gas prices being down where they are. So, it's still kind of an influx and it's really hard to tell exactly what's out there. But anecdotally, you can say that storage prices have gone up, in particularly in certain areas of the country where there may a large number of cars that are in storage. So, that kind of implies that there's a significant number of cars out there that are being stored at this time.

John Hecht

Is that in the ideal number you’re talking about? The 100,000 idle that you red about?

Rhonda Johnson

Yes.

John Hecht

Okay. And just to give us context, finally one more question is how big did that number get in '01 or '02?

Bob Lyons

I’m not sure how large that number got. It's based on some of the comments from rail people yesterday, from some of the railroads they released, what they see stored right now is as much as they've seen in the history. Those are a big number.

John Hecht

Okay. Thanks very much guys.

Bob Lyons

Yeah.

Operator

And it appears that we have a follow-up question from the side of Robert Napoli. Your line is open.

Robert Napoli

Sorry guys just really quick. Perhaps…

Bob Lyons

Bob, you should just walk over.

Robert Napoli

I just looked at the balance sheet and I noticed the equity section, actually shareholders equity went down by $50 million in the quarter. And you certainly, you earn more than your dividends. So I would just, there must be an OCI hit of some sort or?

Bob Lyons

That’s exactly right, Bob. And the biggest piece of that is FX.

Robert Napoli

It is FX related?

Bob Lyons

Yes, that roll is good enough.

Robert Napoli

Okay, thanks. That’s it. You buying --

Operator

It appears that we have no further questions at this time.

Rhonda Johnson

Well, thank you everyone for participating. And I will be available this afternoon if you have any additional follow-up questions.

Operator

And this does conclude today's teleconference. You may disconnect at any time. Thank you and have a great weekend.

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Source: GATX Corp. Q4 2008 Earnings Call Transcript
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