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GATX Corporation (NYSE:GMT)

Q1 2009 Earnings Call

April 23, 2009 11:00 AM ET

Executives

Rhonda S. Johnson - Director, Investor Relations

Robert C. Lyons - Senior Vice President and Chief Financial Officer

Brian A. Kenney - Chairman, President and Chief Executive Officer

Analysts

Robert Napoli - Piper Jaffray

John Hecht - JMP Securities

Arthur W. Hatfield - Morgan Keegan

Richard B. Shane, Jr. - Jefferies & Company

Paul Bodnar - Longbow Research

Majid Khan - Cobalt Capital

Jordan Hymowitz - Philadelphia Financial

Matthew Vittorioso - Barclays Capital

Operator

Good day and welcome to the GATX First Quarter Earnings Conference Call. Today's conference is being recorded. (Operator Instructions). At this time, I would like to turn the conference over to Rhonda Johnson, Director of Investor Relations. Please go ahead ma'am.

Rhonda S. Johnson

Thank you, Chad, and good morning everyone. Thanks for listening in to our first quarter conference call. With me today are Brian Kenney, President and CEO of GATX Corporation and Bob Lyons, Senior Vice President and Chief Financial Officer.

Before we get to your questions, I'll give you a brief overview of the numbers which were provided in our press release this morning.

First, 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. We have based these forward-looking statements on information currently available and disclaim any intention or obligation to update or revise these statements to reflect subsequent events or circumstances. The company's actual results will depend on a number of competitive and economic factors, some of which may be outside the control of the company. For more information, I refer you to our 2008 Form 10-K filing.

And one final housekeeping note. Tomorrow is our Annual Shareholders Meeting to be held at The Northern Trust building at the corner of LaSalle in Monroe in Downtown Chicago. The meeting begins at 9.00 AM Central. For those of you unable to attend, slides from Brian Kenney's presentation to shareholders will be posted to our website, www.gatx.com.

Now let's turn to the first quarter numbers.

Today, we reported net income of $27.6 million or $0.56 per diluted share compared to 2008 first quarter net income of $51.8 million or $1.03 per diluted share. The first quarter of 2009 includes the negative impact of $11.6 million or $0.23 per diluted share from the fair value adjustment related to certain interest rate swaps at our AAE Cargo affiliate and the 2008 first quarter includes a $6.8 million or $0.13 per diluted share benefit from reversal of tax-related reserves.

Our markets are challenging as we expected in the first quarter. As noted in recent railroad earnings announcements and evidenced by traffic statistics on the last page of our press release, North America rail market has slowed substantially during the last six months and the slowdown has been broad based across commodities and car types.

Like everyone in today's environment, our customers are dealing with the difficulty of forecasting in this volatile economy, making fleet planning difficult. And the fact is certain customers are facing financial stress.

Fortunately, we've limited the number of cars exposed for renewal this year and our commercial team is doing a solid job of renewing and assigning cars in this environment, North American fleet utilization did decline 1.4% to 96.5% in the first quarter of 2009 and the decline generally reflects challenges in most car types, although more so in freight.

Rail cars in our Lease Price Index renewed at rates 5.5% lower than their expiring lease rates and average renewal term of 45 months.

The European rail market is also presenting challenges. However, our wholly-owned tank car fleet primarily serves the more stable and robust mineral oil or petroleum products market and therefore our utilization and renewal success has held up well. Our European team has done a great job extending or renewing the leases, already locking up a majority of the cars up for renewal in 2009.

Our affiliate AAE cargo is facing more substantial pressures as the drop in international trade and demand has impacted the need for intermodal freight wagons, which is a focal point of AAE's fleet.

Specialty reported $23 million in segment profit in the first quarter of 2009, down from $30 million in 2008. The marine markets declined in the first quarter of 2008 and remain significantly lower than the strong markets of the past few years, accounting for most of the decline in segment profit year-over-year. We have seen rate recovery in certain marine markets, but in general, they remain well below the highs of recent years.

Remarketing income was comparable to the prior year, due primarily residual sharing income from the manage portfolio. American Steamship Company began the 2009 Great Lakes sailing season in early April. As you know, the first quarter is the off season on the Great Lakes as weather and ice halt movement of ship. And as a result, any income contribution at ASC is small in the quarter.

Marine operating revenue in the first quarter of 2009 was significantly lower than 2008 as there were no operations in January this year, due to the steep decline in demand in the fourth quarter of 2008. ASC anticipates a significant drop in customer demand in 2009, particularly in its largest segment, iron ore shipments, as the steel industry has idled capacity in response to the decline in the auto and construction markets.

During the quarter, we resumed our share repurchase program under our 2008 authorization, purchasing approximately 1.7 million shares for around $30 million. We also invested $79 million in assets, primarily new rail cars in North America and Europe.

We continue to look for the right investment opportunities for GATX and we do so from a position of strength. So we are being patient.

As for our 2009 guidance, we have reiterated the EPS range we outlined back in January. Just to refresh, we anticipate net income in the area of $2.50 per diluted share in 2009 excluding fair value adjustments that I mentioned previously. There remains substantial variability around this estimate due to a number of uncontrollable factors including the price of scarp steel and asset prices and increased financing costs.

However, we remain committed to capitalizing on this uncertain market and strengthening our position for the long-term benefit of our shareholders.

So with that quick overview, Brian, Bob and I are ready to take your questions. Chad?

Question-and-Answer Session

Operator

(Operator Instructions) We'll take our first question from Rob Napoli with Piper Jaffray.

Robert Napoli - Piper Jaffray

Thank you, good morning. Did I hear that right, you guys, you bought 1.7 million shares during the quarter?

Robert Lyons

Yes, that's correct, Bob.

Robert Napoli - Piper Jaffray

At about 17.60 per share. Nice to be able to buy under book value. And what are your thoughts on with the stock having rebounded as much is it has, are you going to be more cautious on the buyback at this price, or what are your thoughts around continuing on the buyback?

Robert Lyons

Well rebound is a relative term, and we don't... doesn't feel like much of a rebound when we look back over the last couple of years to see how we have tried to position the company and where the stock has been. So we are going to continue to be opportunitistic and look at opportunities for... as we see them (ph) in our own stock as well as in rolling stock.

Robert Napoli - Piper Jaffray

Right, okay. Just on the utilization trend, down 1.4% in the quarter. There are... we've heard some of the rail car companies say that 20 to 25% of all cars are not utilized in the United States. And it seems like a very large number. So some would have suggested that you won't be able to lease another car in 2009. Can you talk about the trend in utilizations, the market a little bit with that many? Do you agree that there are that many cars that are unutilized in the market?

Robert Lyons

Absolutely. There are lots of cars unutilized in the market. The class ones report some pretty good information generally about what's parked. But you would have to remember to look more closely at the composition of those cars that are parked. A lot of them are intermodal cars, parked cars, cars geared to the auto industry et cetera. Our fleet is generally comprised of tank cars, as you know, 50... just over 60% of fleet. So we have a better mix of cars. And we saw, given the environment, fairly solid renewal success in the first quarter. Just over half of the cars are up for renewal. We were able to renew. Others went on lease to other customers on assignment. And so as we came into the year, I said utilization would come down at least a couple of hundred basis points of 98% where we started the year. And we are still looking at that in terms of being reasonable. We'll be in that... we expect to be in that mid 9% (ph) range for utilization.

Robert Napoli - Piper Jaffray

Except be in the 90% range by the end of the year?

Robert Lyons

Mid.

Robert Napoli - Piper Jaffray

Mid, okay. And just on remarketing income, the residual sharing income is... can you explain... is that a more predictable piece of remarketing income and that it's based upon future lease payments or... and the what is the lumpiness? Is there anything that is sort of non-lumpy I guess within remarketing?

Robert Lyons

Well the residual income is income that we generate on assets that are sold on the managed portfolio.

Robert Napoli - Piper Jaffray

Okay.

Robert Lyons

So it's excellent (ph) income for us because we have been managing the asset for some period of time with the expectation that at some point in the future we'll realize the upside. And so when you see residual sharing income, it's us realizing that upside because the owner is after to sell (ph) the assets. It tends to be unpredictable because we don't own the assets, we don't have interest in the assets other than the residual piece, the residual upside. So it bounces around from quarter-to-quarter, but it's very good income for us and the reason we are in the business of managing assets for third parties.

Robert Napoli - Piper Jaffray

Okay. And who is like, when you are generating remarketing income, who is actually... I mean in this market, who is active and buying rail cars from you guys?

Robert Lyons

Well it was both rail and marine, Bob.

Robert Napoli - Piper Jaffray

Yes, I understand.

Robert Lyons

I would say in probably both cases, the most of that income was generated by transactions where the user and the asset purchased the asset off lease... from off the lease.

Robert Napoli - Piper Jaffray

Okay. And last question just on the pricing trends. How much has... have prices come down just over the last few months? Like where are prices today versus the year ago? Where do you expect that gap to go to?

Robert Lyons

Are you talking lease pricing or...

Robert Napoli - Piper Jaffray

Yes, I'm sorry, lease prices on rail cars.

Robert Lyons

Actually, if you look back over a year ago, the decline has not been that dramatic. And actually, the nominal rate in the first quarter was pretty good and not that much of a drop from the fourth quarter. But you also have the phenomenon of the cars that are coming off lease, the expiring rate is going up. So that helps or also leaves us to have pressure on (ph) 5.5% that we saw during the quarter.

Robert Napoli - Piper Jaffray

And then on rail cars themselves, I mean I understand there is so many different types. But how much have rail car prices come down? Are they coming down enough that you guys are getting interested in making a purchase?

Brian Kenney

Well we are always interested in making a purchase. I would say that discussion is more theoretical at this point. But I can give you a little bit of color there because we do have a rail car order where the price of the car moves with the material component. So if you look at that particular order, our material surcharges, due to the drop in the price of steel, has come down 10 to 15%.

The other thing you look at, manufacturing margin and a couple of years ago at the peak. We estimate that was probably in the mid teens for a lot of manufacturers. So at an order right now, you wouldn't be willing to pay much in terms of manufacturing. So you put those two together, you could say that the price of a typical tank car could be down 20% or more. Once again, more of a theoretical discussion, but I don't think it's far off.

On the freight cars, it depends on the type of car. I would say it's at least that.

Robert Napoli - Piper Jaffray

Okay. And what does it take for you to make... to want to make a major order at this point, a longer term order?

Brian Kenney

It's a good question. It's obviously an objective of ours to do so that when manufacturing margins are low and there is some glimmer of a recovery in the market. You are never going to get that timing exactly right. But we are constantly examining when we think it's the right time. So we are looking at steel pricing, component pricing, how aggressive the manufacturers are getting. Are we seeing some signs of a real recovery starting or at least bottoming out? And lastly, and this is important to us, we look for some creativity on the part of the manufacturers and working with us in this type of market. We haven't seen that over the last few years. I'm starting to see that now, particularly with one where they will work with you. So it's a big objective of ours. There is nothing to announce, but we're going to work hard at it and try to get the right timing on it.

Robert Napoli - Piper Jaffray

Thank you.

Operator

And we'll take our next question from John Hecht with JMP Securities.

John Hecht - JMP Securities

Good morning guys, thanks for taking my questions. Understand the ASC division with the demand for iron ore way down that the revenues could be under pressure there. But it appears that costs are very variable in that segment. Is it reasonable to think that you could breakeven or even eek out a profit in any quarter even under severe demand constrains in that segment?

Robert Lyons

Yes, John, we will absolutely generate a profit at American Steamship this year under even the most challenging of scenarios that we're looking at right now.

John Hecht - JMP Securities

Okay. And in the rail affiliate line, you had two quarters of losses due to some fair value charge changes et cetera. What's the best way to think about a normalized earnings rate there?

Robert Lyons

Well the after-tax amount on that fair value adjustment was 11.8, I believe pre-tax is about 14.5. I would add that back to the share of affiliates' line. I think you come in at a range of about 5 million when you do that.

John Hecht - JMP Securities

Okay.

Robert Lyons

And that would be kind of normalized run rate I would look at going forward, John.

John Hecht - JMP Securities

Okay.

Robert Lyons

Also, John, if you go back a couple of quarters, you'll see that the hedge has been around for well over a year. There wasn't any in the first quarter of last year, but then it did move around a bit in second, third and fourth quarter.

John Hecht - JMP Securities

Okay. And on the hedge --

Robert Lyons

John, another point I would add too is that run rate going forward, as we indicated and Rhonda mentioned in here opening comments, particularly within rail, a big portion of their income, share of affiliate income is from AAE, which is our cargo... or cargo rail car leasing company... affiliate in Europe. And that business will be under increasing price in all likelihood as the year progresses.

John Hecht - JMP Securities

Okay. And can you give us a sense of the cars that... and forgive me if you have already stated this in another way... but of the cars which leases ended during the quarter or came up for renewal, what was the re-lease parentage of that base?

Robert Lyons

Just over 50%, John.

John Hecht - JMP Securities

And what was that in Q4, if you can remind me?

Robert Lyons

In the same range, maybe slightly higher. Strong times, it was close to 80% and we said during very challenging times, it would be of 50 or even below. So it came in just about that in the first quarter. But it's very challenging and we have to be price competitive to make that happen.

John Hecht - JMP Securities

Absolutely. And then the last question is a broader question. We have seen a little bit more mixed economic data through the media lately. And I just your guys sort of opinion or your interpretation of what you saw going on during the quarter. I mean were you see things stabilized in terms of the customer demand or the pricing as the quarter went on? Were you seeing things get worse at a more rapid pace in the three months?

Brian Kenney

That's a good question. I would say during the first quarter, we saw the bad news accelerate. It seemed as if some of our customers were waiting to see how their year would pan out before they started to make car decisions. And probably in, I don't know, mid to late February, it started to get a little worse and accelerate. Before that, I would say we were kind of running ahead of expectations and now we are running more about where we expected coming into the year. And in general, we are looking at current results, but we are also looking at what customers are saying about their business.

And as far as a recovery, I would say that customers are not seeing any general recovery out there. Now there are packets in our business, for instance, fertilizers customers are saying they are going to have a stronger second half. Surprisingly, DuPont came up this week, very weak chemical sector, and talked about their demand bottoming out in the first quarter and strong... inventories are down. Should have stronger performance as the year goes on. But I would say that's more sporadic and in general, I wouldn't say customers are saying their business is looking up going forward.

John Hecht - JMP Securities

Okay. Thank you guys so much.

Operator

Thank you. And we'll will go next to Art Hatfield with Morgan Keegan.

Arthur Hatfield - Morgan Keegan

Good morning everybody. Thanks for taking my questions. Bob, you had mentioned, I think you were talking about this renewal success rate being a little bit above 50%. I was playing with some numbers and I was getting a little bit higher number. But I was excluding the 620 cars that came back from bankruptcy. Is the number you gave including those?

Robert Lyons

No, Art, it's not. They would be on top of the cars that come back to us at the end of lease term when a customer opts not to keep the car?

Arthur Hatfield - Morgan Keegan

Okay. So the 51% or so you gave, the renewals include that 620.

Rhonda Johnson

No, exclude, Art.

Arthur Hatfield - Morgan Keegan

Okay. Okay, I am sorry. Okay, thank you. And then given the share repurchase in the quarter, at the end of the quarter, what's the appropriate shares outstanding?

Robert Lyons

Well I think if there was no more share repurchases here, and it just stopped at the end of Q1, which was not the case in terms of us continuing to look opportunistically. For the full year, the share could would be just under 49 million shares for the full year.

Arthur Hatfield - Morgan Keegan

Okay, okay. And then I was looking at... I was a little bit confused on the balance sheet. I was looking at the shareholders equity being down in the quarter. And knowing that you repurchased shares, and if you did so, correct me if I'm wrong, but given the profit and the fact that you were buying shares below book value, wouldn't it be more appropriate that shareholders equity increase in the quarter?

Robert Lyons

Well, essentially, the income that we generated during the quarter was offset by the amount of share repurchase. So just on that basis, you would be flat. And then on top of that, there is adjustments that go on every quarter, including translation... currency translation adjustments that run through the equity accounts. And that also contributed to some of the decrease in the equity base.

Arthur Hatfield - Morgan Keegan

Okay, and then finally, Brian, can you talk... you talked a little it about going into the market and making a... placing a large order. But can you just talk about what you are seeing in the secondary market, any potential fleet purchases?

Brian Kenney

Sure. I can tell you what happened in the first quarter, which is nothing. And almost as far as we could tell, maybe a few 100 rail cars changed in the market in the first quarter. So there is almost no activity. I think one thing you are seeing, there is a lot of troubled fleets out there, a lot of troubled companies that happen to own rail fleets that are doing okay. And there may be pressure for them to sell it, but on the other hand, given the state of the capital markets and the lack of buyers that would show up, I think people are reluctant to pull the trigger there.

Arthur Hatfield - Morgan Keegan

Okay.

Brian Kenney

So we are still going to pursue that pretty heavily and we are. But we're also trying to be a little more creative and do what we have already talked about in the call, which is try to approach these people and say we'll manage your portfolio for you until times are better and then we'll help you sell it. So we're pursuing that avenue as well given the state of the capital markets. And those... that process of selling somebody on that has a pretty long gestation period. But I think we could make some headway there.

Arthur Hatfield - Morgan Keegan

Are you the lone person out there with the willingness and the ability to go out into the market or are there other people they can be purchasers right now?

Brian Kenney

A little biased here. I think we're definitely the best. I don't think it's a very crowded market, but there are others that will do that, yes.

Arthur Hatfield - Morgan Keegan

Okay. Okay. Thank you, that's all I got today. Thanks.

Robert Lyons

Thank you.

Operator

And our next question comes from Rick Shane with Jefferies & Company.

Richard Shane, Jr. - Jefferies & Company

Good morning guys. A couple of questions here. So there is $446 million of debt maturing this year. Where is your debt currently trading and what are your expectations at this point in terms of how you're going to replace that?

Robert Lyons

Sure. Well our debt doesn't trade very often. So it's a little difficult to draw a real line on where debt's trading. Credit spreads are high, they have remained high. They are starting to grind in for everybody. But it's a slow process. When we look at the maturities this year, of which there are two large ones, the May one and the June one. The May one is 120, June is 250. We have ample resources available to meet that through a number of different means, whether it's term debt financing and/or the very large credit facilities we have standing behind us today that are substantially unused. We will look to do term debt, though, at some point, and that could be a combination of all secured and unsecured. In the unsecured side of that, we'll just be opportunistic and see where our spreads are and what the market sentiment is at various points during the year.

Richard Shane, Jr. - Jefferies & Company

Got it. And do you think, at this point, there would be appetite for secured debt comparable to what you did in November?

Robert Lyons

Yes.

Richard Shane, Jr. - Jefferies & Company

The comment was made about the escalators on the committed CapEx. The committed CapEx by my numbers is $356 million. It sounds like there are two transactions, there are two contracts there. One has escalators, one does not, is that correct?

Brian Kenney

Correct.

Richard Shane, Jr. - Jefferies & Company

And they are roughly the same size, so that $356 million of committed CapEx, assuming a 10% to 15% decrease in steel surcharges could come down $15 million or $20 million, is that a reasonable calculation? 10 to 15%, assuming on a $120 million deal or a $130 million deal... excuse me, $170 million deal?

Brian Kenney

I would... that's good question. I would... I'm pretty sure that most of that steel price decrease happened by the end of the year. So I would say that most of that's already reflected in that number.

Robert Lyons

The other thing I would mention Rick is that during the first quarter, keep in mind, we did... of the 350, we did about 70 of it in the first quarter.

Rhonda Johnson

And also Rick, the 350, 50 represents a specialty and 100 million is in Europe. So the North American contracts that we are talking about are the remainder.

Richard Shane, Jr. - Jefferies & Company

Okay, that's helpful. And actually, regarding the $100 million in Europe, can you talk about funding that please?

Robert Lyons

They have their own credit facilities in Europe and their funding is already flowed away (ph) for this year.

Richard Shane, Jr. - Jefferies & Company

And what's the cost on that facility?

Robert Lyons

I would say relative to what financing costs are here, very attractive.

Richard Shane, Jr. - Jefferies & Company

Okay, great, thank you. So that $100 million is fully funded out of that facility in Europe?

Robert Lyons

Yes.

Richard Shane, Jr. - Jefferies & Company

Okay. Thank you guys.

Operator

And we will take our next question from Paul Bodnar with Longbow Research.

Paul Bodnar - Longbow Research

Yes, I just wanted to see if we could find out a little bit more on the... what else to expect for the rest of the year in terms of bankruptcies and any color if it may come back on that. I don't know if the 620 cars is from one of your large chemical customers this quarter or if that's still kind of out there pending?

Robert Lyons

Actually, those were from customers that had filed in the fourth quarter of 2008. In the first quarter of 2009, there were a handful of very small accounts that did file. But we are talking customers with cars in the 100 or 150 and less in terms of the cars that they have on lease from GATX. And many of those obviously we have worked with and tried to make sure that we keep the cars on lease. So it's going to be an issue we are continuing to work with on customers that have to go that route. But we don't anticipate anything out there that would result in us kind of changing our outlook at this point in time. There was nothing major in the first quarter, no big customers.

Paul Bodnar - Longbow Research

Okay. And in terms of the... just as I'm kind of looking what your revenue per car was U.S. wise and outside, on the U.S. side, it looks like some of the renewals, or some of the cars came back, the tank cars probably stayed out there more. So just in terms of as I look at that number, it looks like it's sequentially ticked up slightly if I look at across your fleet. Would that be accurate?

Robert Lyons

Well, and also keep in mind in the first quarter, you are going to get... in 2009, you are going to get some benefit for all of the cars that you release in a strong market in 2008. They continue to work their way into our numbers in 2009.

Paul Bodnar - Longbow Research

Okay. I guess what I'm looking at, you mentioned maybe a 50% re-lease (ph) of your current customers' number. I mean how would that break down, or if you can give any kind of detail by car type. Is the chemical and tanker car significantly better than the other car type or --?

Robert Lyons

Well we don't break it down by car type, but I can tell you from a generic standpoint, the tank is continuing to hold competitive in certain (inaudible).

Paul Bodnar - Longbow Research

Okay. That's it.

Robert Lyons

Even as well when you look at the total number of cars in a given year, the mix is very similar to the overall fleet with about 60 tank and 40% freight.

Paul Bodnar - Longbow Research

Okay. Thanks a lot.

Operator

And we'll go next to Paul Streamlauser (ph) with BCC. And it's actually Jacobs Streamlauser (ph) with BCC.

Unidentified Analyst

Hi, you guys there?

Brian Kenney

Yeah, we are here.

Unidentified Analyst

Okay. Did you guys guide to utilization rate?

Robert Lyons

I said it would be in mid... expectation right now is it will be in the mid 90% range, 95% range.

Unidentified Analyst

Okay. And that's looking out for all of '09 or for --

Robert Lyons

That's correct.

Unidentified Analyst

Okay. So that's for all of '09. Are you able to give me any indication of the cars that came off lease and their kind of renewal rates?

Robert Lyons

Well that would be factored into what I said is the renewal success rate being just over 50% of cars that came up in the first quarter.

Unidentified Analyst

Got it.

Robert Lyons

But then you've got to keep in mind on top of that, some of the cars you are getting back, you are actually putting out to other customers. So it all factors into the utilization rate.

Unidentified Analyst

Got it. And to better understand the $0.23 item, that's effectively a hedge on LIBOR, correct?

Robert Lyons

There is a few different instruments, but generally AAE does all of its own financing for their own account. We don't guarantee anything there. So it's basically fixing their financing cost within a range on... planned future financing.

Unidentified Analyst

Unplanned future financing, okay. But it's not clear whether that debt on LIBOR one way or the other. It's just some sort of hedge on their financings going forward?

Robert Lyons

Correct. So they are essentially trying to fix their financing rate in the future in advance.

Brian Kenney

Right. They place the order, they try to lock in the economics by locking in it straight (ph) on the financing side.

Unidentified Analyst

Got it. And okay, so mid 90s and 50%. In mid 90s, if we look it '09, I don't know if you will guys are able to give me your industry insight into this. But if we look at '09 as being part of this cycle that we're going through, is this in saying mid 90s utilization rate, are we kind of... are we guiding to trough in '09 and perhaps a pickup in '10 or is it kind of up in the air whether it gets better or worse?

Brian Kenney

I'd say it's more up in the air. You might have heard say earlier, we go by what customers are saying. And there is not a whole lot of optimism out there on the customer front say for a few pockets. So that's the $64 question. I don't know if it's going to get better in 2010. I will say there is certainly no indication of a wide spread improvement in 2010.

Unidentified Analyst

Got it. Thanks. And the last question is for the deals that you guys did in the scrap... kind of referring to the scrap deals, were those beginning negotiations last quarter and kind of finished out this quarter? Or were those beginning this quarter and finish this quarter? I m trying to get a sense of kind of what happened in pricing between the two quarters.

Robert Lyons

Right. Well in general, on the scrap side, there really isn't much of a negotiation; it's just a spot business. So that would be what.... we don't negotiate advance scrap rates in advance. They are typically much more spot-oriented. So what happened in the quarter reflects what's happened with scrap rates during the quarter.

Rhonda Johnson

Essentially, you saw a steep decline in the fourth quarter in scrap rates and then there was some recovery early in the quarter. Net-net, you were probably on average about the same in the fourth quarter and the first quarter. But we did see the scrap rates come down again at the end of the quarter. The thing to think about is we're always scrapping cars, they're always going to age out of the fleet. Basically, we are doing straight line depreciation over 30 years to a de minimus scrap value. So whatever happens with scrap prices, there is always going to be a little bit of a gain that you see when you scrap the car.

Unidentified Analyst

Got it. Thank you.

Robert Lyons

Great. Thank you.

Operator

And we'll go next to Majid Khan with Cobalt Capital.

Majid Khan - Cobalt Capital

Hi guys. I'm sorry to keep harping on this, but could you explain the AAE charge one more time and maybe specifically like what do you expect this to look like in the future? Is this just one time and done or...

Robert Lyons

No, well, actually, it was there last year as well. It was second, third and fourth quarter last year had some volatility as well as interest rates started to move around pretty dramatically. So essentially then AAE is fixing their financing rate on future debt offers. And with interest rates dropping as dramatically as they have, there is obviously like anybody's swap portfolio, a negative mark-to-market. The difference here is that these don't qualify for hedge accounting, so they are running through AAE's P&L. And in terms of... yes, there is likely to be some volatility on that going forward.

Majid Khan - Cobalt Capital

Got it, okay. And it seems like just looking at the car balance and the utilization, just doing some rough math, if I use your 50% of the cars that came off got released. It seems like you guys lost 2300 cars worth of utilization. So is it fair to assume that you had about 4500 cars come off lease this quarter?

Robert Lyons

No, actually, the first quarter number was lower than that. We have 15, 000 for the full year. The first quarter was a little bit lighter than the balance of the quarter. So call it 3500 cars roughly. I don't have the number exactly here.

Majid Khan - Cobalt Capital

Got it. That's good enough.

Rhonda Johnson

And again, 50% is the number of cars that renewed with the same customer.

Majid Khan - Cobalt Capital

Customer, right.

Rhonda Johnson

There were additional cars that were then assigned to a new customer. So that has an impact on your calculation has well.

Majid Khan - Cobalt Capital

Got it. Okay, so that's the difference. All right. And then can you talk a little bit about release rates, like when these cars are going back? It seems like sequentially, on an average basis, I think Paul mentioned the average lease income per car has slightly picked up. So are the renewal rates pretty decent as these cars come off lease?

Robert Lyons

I'd say that relatively speaking, yes, the rates are okay, but they are down 5.5% versus the old rate.

Majid Khan - Cobalt Capital

Right.

Robert Lyons

It is extremely competitive out there and we are holding utilization in there while being very competitive on rates. And they are going to continue to move down as the year progresses; that's without doubt.

Brian Kenney

The absolute rate is coming down as well, not just the renewal rate versus the expiring rate.

Majid Khan - Cobalt Capital

Got it.

Brian Kenney

And it's pretty widespread.

Majid Khan - Cobalt Capital

Got it. And then on Norfolk Southern's call yesterday, they said things are pretty bad, but they expect hopefully volumes to stabilize sometime in the back half and to see a recovery based on stimulus flowing into the economy from the government. I am wondering what's your visibility like. If that's to happen, when do you guys start seeing some of that pick up?

Robert Lyons

Well I would say in general, to reiterate a point Brian made, we look very closely at what our customers are telling us. And that would be our indication that things have firmed up and potentially will start getting better. But right now, we are just not seeing a lot of conviction from our customer base.

Brian Kenney

Yes, if that indeed takes hold as infrastructure spending, you will see it especially in the construction-related rail cars. So center beam, cement cars, plastic telecars (ph) things like that will pick up. But right now, it's still a hope, as you say.

Majid Khan - Cobalt Capital

Good, fair enough. And then last question. On the tax rate, it moves around a lot. Like what's a sustainable... is this quarter's 30 percent-ish kind of around right for the company?

Robert Lyons

Yeah, for the full year basis, I will use maybe just a tick higher than the first quarter rate.

Majid Khan - Cobalt Capital

Got it, perfect. Alright, thank you guys. Good quarter.

Robert Lyons

Thank you

Operator

And our next question comes for Jordan Hymowitz from Philadelphia Financial.

Jordan Hymowitz - Philadelphia Financial

Hey guys, a couple of question. First of all, your utilization you said averages 95% for the year. So should I imply that to mean that you would tick down two, it's like 92 by the end of the year?

Robert Lyons

No, it would finish the year in the range of 95%.

Jordan Hymowitz - Philadelphia Financial

Finishes the year. So the average is then higher.

Robert Lyons

Yes, because we started at 98.

Jordan Hymowitz - Philadelphia Financial

Okay, okay, because you said it a little differently before. So finish at 95%. Okay.

Robert Lyons

Yeah.

Jordan Hymowitz - Philadelphia Financial

Second question is the lease versus owned in the container market today, even though containers are down a lot, the leasing companies aren't down as much because they're taking share because the container companies can't get financing. Is there a similar dynamic in your companies? In other words, are you finding that you're companies are leased to them might have bought cars before want to lease more now for capital flexibility or that's not the same dynamic?

Brian Kenney

Certainly nothing that shows up because the demand for cars overall has gone down. So if that's out there, it's not moving any numbers.

Robert Lyons

And I would say historically, Jordan, on the tank car side, it's typically been a two-third lease market and a one-third owned. And it moves around a little bit, but the needle doesn't move that dramatically on that mix.

Jordan Hymowitz - Philadelphia Financial

Okay. You have 15,000 cars coming due this year. Is there another 5000 someone mentioned to me in the manage business in Europe or no?

Robert Lyons

Well we have cars coming up for renewal in Europe undoubtedly.

Jordan Hymowitz - Philadelphia Financial

How much... first of all, did your utilization include or exclude the manage business?

Robert Lyons

It excludes the manage business.

Jordan Hymowitz - Philadelphia Financial

How many... could you say what utilization is including the manage business, how many cars are off lease?

Robert Lyons

I don't have that number here in front of me and it doesn't really affect our performance in any way.

Jordan Hymowitz - Philadelphia Financial

Okay. And my final and most important question is we are now less than seven years away from your greatest residual sharing income being on your nuclear power in 2017. Is there any way you could disclose like any more on our portfolio, what type of balance that could be so as nuclear power continues to gain share in this country, those residuals, we could quantify the balance of their value to you?

Robert Lyons

Well it can't. We don't own any of the assets there and there is restrictions on what we can disclose and can't disclose. So the short answer to that Jordan is we can't give you generally what we match, but that we can't go into an awful lot of detail there.

Jordan Hymowitz - Philadelphia Financial

But even if you would just say we own interest in seven nuclear power residuals in some --

Rhonda Johnson

We don't own them Jordan.

Robert Lyons

We don't.

Jordan Hymowitz - Philadelphia Financial

But you have residual interest in the, the same way you got this 3.1 million this quarter. Well maybe just a list of what residual interest you have in general so people could quantify, because none of this is highlighted in your balance sheet because they are just interest basically. Just what type of things without being specific your residual interest in.

Robert Lyons

Well I'll make a commitment to you, Jordan, that I'll consider what else we might be able to disclose there as long as you commit to still be a shareholder in seven years.

Jordan Hymowitz - Philadelphia Financial

Long term.

Rhonda Johnson

And Jordan, if you go to the presentation on our website, the big overview presentation, we do have a breakdown of the net book value of the managed portfolio, what the net book value is for the owners. And it shows you the rail. Basically we are in rail and power assets and a little bit of air that we manage for other owners.

Jordan Hymowitz - Philadelphia Financial

What presentation is that I'm sorry?

Rhonda Johnson

It's an overview presentation that I update annually. It's on our presentation page up at the top. It's about a 60 or 70 page. Try to give you as much information as I can on an annual basis on the operations of GATX.

Jordan Hymowitz - Philadelphia Financial

Okay, by 2016, maybe we can get a little more details on it.

Rhonda Johnson

Definitely.

Brian Kenney

Let's set it as a mutual goal.

Operator

And our next question comes from Michael Cowen (ph) with Arrowhawk.

Unidentified Analyst

Thanks for taking my question. And Jordan, I think we are (ph) all around in 2016. So my first question is somewhat broad, but have you guys done analysis of sort of, the end use of the products that you move around? And obviously, there are some that's kind of very cyclical. Some of the tank stuff is very much less cyclical. But to try to get a sense of how much of what's going on is cyclical, how much could be somewhat secular in the sense if consumers consume less, if auto manufactures manufacture 10 or 11 million cars; that's kind of the new level that they find, or what have you. I'm just trying to be broad and open ended with this. Could you provide any kind of thoughts along that process?

Brian Kenney

Sure, yes, we do. We look at what... first of all we don't move it around, but our assets moving around, our customers move it around expect at ASC. But yes, we do and that influences our behavior, especially our investment behavior. So these are very long-term assets and if you have as an example tank cars that serve the chemical industry and you've had for quite some time and you see more of that capacity going overseas, you are going to try to lock up those cars with customers on leases that are as long as you possibly can. You will try to move some of them out to other lessors if they have committed rental. There is a number of tactics you use on existing assets based on that analysis you do of what commodities they are carrying around.

As far as the investment side, that definitely determines where we invest long term. So yes, there is a lot of analysis around the commodities that are carried, what the future of those is and what that means for our assets and our investments and our tactics on our existing fleet.

Unidentified Analyst

Without sort of revealing the tactics that you are sort of employing, can you talk about sort of how that influences your view of the economy or what your kind of view on the world is in light of a lot of that?

Brian Kenney

Well, sure. I mean if you want to continue on the chemical side, obviously there is the chemical exposure. It's in a bright in different commodities and different car types. But in general, over the last 10 years, you have seen a lot of chemical manufacturing capacity move out and a lot of it into the Middle East, into Asia. So those movements are changing. And if you look at how that's influenced... forgetting about the taxes of our existing investments, how that's moved our investment. We are not investing as much in those car types obviously at all in some cases. And you've seen some of the marine investment to take advantage of those product movements that have changed as far as the global pattern. And hence, our marine joint ventures that carry some of those products out of the Middle East.

Unidentified Analyst

Okay. And then specifically is there anything that you have seen as a result of our any changes that you are making in terms of aside from the chemical side you have but sort of changes in kind of consumer behaviors or changes that might result in the amount of commercial and residential real estate construction, some of which is probably very, very cyclical, some of which may be may be secular or how you guys are kind of viewing what's going on in the economy right now?

Brian Kenney

Yeah, I mean, fortunately, we don't have a huge exposure, while it certainly influenced our result to some extent, our utilization. We don't have massive exposure to the construction market or for that matter really directly to the automobile market in terms of auto carriers and things like that. So it's in our fleet, it is diversified fleet but its not a heavy exposure.

As far as the consumer behavior and how... that gets a little too esoteric for... we making (ph) going for a long time. I would think in general how that directly affects our business is more in Europe through the AAE discussion we already had in the beginning of this conference call. So that's mostly almost predominantly intermodal.

Unidentified Analyst

Right. And last question, I guess as you think about the potential for kind of the big buy or the big order of kind of the big opportunistic investment that GATX may make, have you guys kind of wind up any type of sort of financing that is not so much committed, but sort of there that you can call on when you say to somebody okay, we've found the investment that we want to make? Can you talk about some of the discussions you've had with lenders for a hypothetical transaction for lack of a better way of saying it?

Brian Kenney

I would say for lenders, that discussion... I don't think there is a lot of discussion to have there. So I would say there hasn't been much. I can let Bob chime in. If we ever needed equity, I think there is plenty of sources for that. And I don't... not anything I anticipate right now.

Robert Lyons

On the lender front, I would say you think back to last year, we indicated in the third quarter that in association with an SG&A charge we took during that quarter that we had looked at some sizeable portfolios. And you can assume that we did that in conjunction with a number of different financial institutions who would have been the financiers of that. So we have good, stable lenders who are very well versed in how we think about acquisition opportunities. So should something develop, those conversations could be reignited fairly quickly. The cost has gone up dramatically.

Unidentified Analyst

From the fall?

Robert Lyons

Yes. From summer of '08, it started go up in the fall, but, yeah absolutely, like everything else.

Unidentified Analyst

And probably dramatically, how many 100 basis points do you think wider that expense would be?

Robert Lyons

It's difficult to say because again, part of it is a bit of a theoretical conversation. But it's in the hundred of basis points at a minimum.

Unidentified Analyst

And then last follow up associated with that. Do you think with that financing availability would be limited to kind of sponsors such as yourself, meaning who are sort of more well regarded? Or do you think that people are willing to lend against the asset class and they'll evaluate it more on a transaction by transaction basis?

Robert Lyons

Well there is always the ability to finance lots of that for rail car. As you saw in the fall, a number of companies does that. But I would say in general, given the conservative posture of lenders these days on all fronts, some body were to take a step, presence and 110 years of experience as a borrower to execute that kind of transaction is far better than to have a special purpose vehicle set up to try to buy some assets and flip them.

Unidentified Analyst

Great. Thanks guys. I appreciate you taking my questions.

Robert Lyons

Thank you.

Operator

(Operator Instructions). And we'll go next to Matthew Vittorioso with Barclays.

Matthew Vittorioso - Barclays Capital

Good morning guys. Just wondering if you could just help me out with outlining basically your specific liquidity today. So what's available on your revolver? We know what kind of cash you have. I didn't see that in your release. Could you help me out there?

Robert Lyons

Yes, if you look at the back page of the release, there is in our capital structure analysis, take you down to leverage, there is a line in there that shows commercial paper outstanding net of unrestricted cash, which is about $66 million at the end of the third quarter. We have $650 million of back up lines. So that would leave 395 roughly of fully committed undrawn back up lines.

Matthew Vittorioso - Barclays Capital

595 of availability net of cash that you have currently. So I wouldn't be adding...

Robert Lyons

Starting net of cash (ph).

Matthew Vittorioso - Barclays Capital

Okay. So $595 million of liquidity. And you have got, what, 370 of maturities coming due here in the second quarter. You will just use your facilities I guess, or did you say you were contemplating some term debt?

Robert Lyons

Well a couple of things. We first of all, don't forget we generate a lot of cash. So that will continue to come in. Last year cash from operations and portfolio proceeds was over 500 million. It won't be at that level this year, but it will still be a sizeable number. And that will come in and help fund some of that. And then, as we mentioned, yes, we will continue to work in different term alternatives. But I don't have anything concrete at this point that's going to be driven by where we think the best financing package is available.

Matthew Vittorioso - Barclays Capital

Okay. And just another sort of housekeeping. Could you tell me what... so I can kind of reconcile free cash flow, what cash from ops was for Q1 CapEx, that sort of stuff? Do you have that in front of you?

Robert Lyons

Yeah, CapEx was $79 million during the quarter, cash from operations I don't have sitting right here in front of me. But keep in mind, cash from operations is always very low in the first quarter, every year. It was about 30 million, portfolio proceeds was about 60.

Matthew Vittorioso - Barclays Capital

60?

Robert Lyons

60, right, so 90 between cash from op, the portfolio proceeds in the first quarter and then the CapEx of $79 million.

Matthew Vittorioso - Barclays Capital

Very good. And then just lastly, a bit more conceptual, but I know you guys have worked hard, as you said in the past, to get ready for this downturn. Help me understand, I think the last bottom for utilization was somewhere around 90 or 91%. Just a quick, couple of quick bullets on how this downturn, how you expect to serve better at sort of the mid 90s being the bottom, or at least the bottom for this year? What are the steps that you took that make it... make 95% the bottom?

Brian Kenney

Yeah, we did that over the last few years by extending lease term dramatically and having less remarketing events in 2009 and 2010. So that was the main thing you did. You tried to extend that lease term. You also tried to have a have a little bit of a customer shift into customers that are more, that value your service more and are more apt to renew historically. You try to do that as well. So those were two examples of how we've tried set the table for this.

Robert Lyons

The other point I would make in terms of what is different this time around than last time around, we also over the course of the last few years sold a lot of cars into the secondary market. And we did that pretty aggressively. And we have not placed any very sizable long-term orders late in the cycle. And we did have that challenge for us back in 99, 2000. We had a lot of car on order that were coming in as the market slowed, which we don't have this time around.

Matthew Vittorioso - Barclays Capital

Okay. Thank you very much.

Operator

And we will go next to Mike Marburg (ph) with Ramsey Asset Management.

Unidentified Analyst

Hey guys, I just wanted to ask one... beat the dead horse one more time. So just with a lower proportion of cars renewing in the first quarter and you commented in used isn't positive and the trends degrade a little bit. The utilization was down 1.5% in the first quarter. So to end the year around 95%, what obviously... with that backdrop, it wouldn't appear that you would only drop another 1.5% for the rest of the year. Is there something that I'm missing in terms of something to do with renewal rates, or I mean how do you rationalize this?

Robert Lyons

Well a couple of things. One is we are going to continue to renew cars and work aggressively to do that, so we are confident that will continue. The first quarter number also had about a 60 basis point downdraft from cars returned through bankruptcy. And based on what we have right now that we are working through with customers who were in that mode, we are hopeful that many of those cars would stick with the existing customers, albeit at lower rates. So we won't have that same pressure in quarters going forward.

But it's a challenge; there is no doubt about it and we're very focused on trying to make sure that we are hitting that renewal success as much as we can and we'll be competitive on rate to make that happen.

Unidentified Analyst

So basically, if the renewal rates can improve and if there are not other bankruptcy situations where they put the cars back to you, then that is what you need to accomplish. If that doesn't happen, there is nothing weird about the numbers or the amount of cars being renewed? There is nothing else I'm missing?

Robert Lyons

There is nothing beyond standard commercial activity is trying to keep the cars on lease, correct.

Unidentified Analyst

When you said renewal rates improve, which is unlikely in this environment; in fact, we're trying to protect utilization, I would expect them to deteriorate further.

Robert Lyons

Renewal lease rates?

Unidentified Analyst

Yes. Rates, right. I meant the percent of cars.

Robert Lyons

You are talking about the success rate.

Unidentified Analyst

Yeah, success rates, yes. Okay, thanks guys.

Operator

And we'll take a follow up from Bob Napoli with Piper Jaffray. Mr. Napoli, your line is live.

Robert Napoli - Piper Jaffray

I'm sorry, my questions were answered. Thank you.

Brian Kenney

Thank you, Bob.

Operator

Thank you. We have another follow up with Paul Bodnar with Longbow.

Paul Bodnar - Longbow Research

Yes, I just wanted to see if you can give a little more detail on your marine joint ventures, and particularly I guess in the quarter. It looks like I think there is some seasonality to that, but really what to expect for the rest of the year if that should tick up slightly sequentially, but obviously still below last year and what your thoughts are?

Brian Kenney

Marine joint venture income will be down in 2009 for sure because it was record rate during the third quarter of last year. In general, deteriorated dramatically in the fourth quarter almost across the board. What we've seen in the first quarter is rates actually kick up generally at most of these joint ventures.

Paul Bodnar - Longbow Research

Okay.

Brian Kenney

I wouldn't say that's a trend yet after one quarter. In fact, there are some vessels where we think we'll see further deterioration. Anything that carries clean petroleum products for instance. So it did tick up. That's just because there was awful bottom there in the fourth quarter. So rates are still very weak. I don't see any trend yet. And the good news is we got into all these vessels at a cost and with rate assumptions that in almost every case were still higher than. So I like the return on it, but it definitely is weak compared to prior years.

Paul Bodnar - Longbow Research

So if I'm thinking through Q2 to rest of the year, I mean 4Q and first quarter this year had a little $10.5 million, call it, in each quarter of affiliate earnings there. I mean would you expect that to kind of remain pretty close to those levels? So it will continue to impact that possibly going forward?

Robert Lyons

There's nothing unusual that's factored in there going forward. Picking the run rate is a little tough given what's going on in... what may be going on with rates, but it's not unreasonable.

Paul Bodnar - Longbow Research

Okay. So for each to go up, it may come in a little better than that, but --

Robert Lyons

Yes. Correct.

Paul Bodnar - Longbow Research

But not a significant 5 million shift one way.

Robert Lyons

No.

Paul Bodnar - Longbow Research

Thanks. That was it from me.

Robert Lyons

Thank you.

Operator

And we'll take our next follow up with Jacobs Streamlauser (ph) from BCC.

Unidentified Analyst

Hey guys, help me understand something and explain to me what I'm doing wrong in my math. Last quarter you guys had 112- 976,000 cars at the end of the year at a utilization rate of 97.9%. So that meant that you had 110... so you had 110.6 cars used at the end of the quarter. At end of this quarter, you guys had 112.326 at a utilization rate of 96.5%. So that gets me to 108.4 cars used.

Rhonda Johnson

Yes.

Unidentified Analyst

That would imply 2200 cars were incrementally unutilized. You guys said though that 3500 cars came off lease, which would mean to me that 63% of cars that come off lease were incrementally unutilized, which is not a 50% release rate.

Robert Lyons

First of all, I think you need to... if you just looked at the idle car count --

Unidentified Analyst

Yes.

Robert Lyons

Between 12/31/08 and 3/31/09, you are going to get about a 1600 car increase in idle cars.

Unidentified Analyst

Okay.

Robert Lyons

Okay. About 600 of those 670 I think were actually cars that we got back from bankrupt customers.

Unidentified Analyst

Okay.

Robert Lyons

The balance were cars that were up for renewal, but did not get renewed with an existing customer.

Unidentified Analyst

Okay. So that's how I make the... okay, so that gets me to.... okay. Okay.

Robert Lyons

All right.

Rhonda Johnson

Chad, I think we have time for one more question.

Operator

Thank you. And we do have one more follow up from Art Hatfield with Morgan Keegan.

Arthur Hatfield - Morgan Keegan

Good. I was hoping it was going to be me.

Brian Kenney

Thought you might have moved on to the next call by now.

Robert Lyons

So were we, Art.

Arthur Hatfield - Morgan Keegan

Actually, you are my last one of the day, but I've been going straight since seven this mornings, so. But you are the best. Just a real quick thing. On the SG&A expense line, it was kind of a sizeable drop from Q4 and from Q1 last year. Anything unusual going on there and how should we think about SG&A expense for the rest of the year?

Robert Lyons

Well, if you go back to the starting point on SG&A, on a normalized basis of about $158 million last year. If you add up some of the one-time expenses we had. And we have indicated we expect hopefully at least 10% down from that number. So that would put you in the low 140s.

Arthur Hatfield - Morgan Keegan

Okay.

Robert Lyons

And those reductions are fairly broad based across all cost types, compensation and what have you. And so your run rate will pick up a little bit as the year moves on. But we are still confident we'll be in that low 140 range.

Arthur Hatfield - Morgan Keegan

Okay. Okay. That's very helpful. Thank you again. That's all I have.

Robert Lyons

Thank you.

Operator

And at this time, I will turn the call back over to the speakers.

Rhonda Johnson

Thank you very much Chad and thanks everyone for participating. I'll be available this afternoon should you have any additional questions.

Operator

And this does conclude our conference for today. We thank you so much for your participation and please have a great day.

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