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Executives

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

Michael Maffei

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

Analysts

Arthur W. Hatfield - Raymond James & Associates, Inc., Research Division

Stephen O'Hara - Sidoti & Company, LLC

Michael J. Baudendistel - Stifel, Nicolaus & Co., Inc., Research Division

Matthew S. Brooklier - Longbow Research LLC

Steve Barger - KeyBanc Capital Markets Inc., Research Division

Kristine Kubacki - Avondale Partners, LLC, Research Division

James Ellman

Kent Mortensen - Thrivent Investment Management, Inc.

GATX (GMT) Q1 2013 Earnings Call April 25, 2013 11:00 AM ET

Operator

Well, good day, ladies and gentlemen, and welcome to the GATX First Quarter Conference Call. Today's conference is being recorded. And at this time, I will turn the conference over to Mr. Bob Lyons. Please go ahead, Mr. Lyons.

Robert C. Lyons

Good morning, everybody, and thank you for joining us. As many of you know, Jennifer Van Aken, our Director of Investor Relations, is happily off on maternity leave. So in her absence, Mike Maffei, our Director of Accounting and Research, has been helping us out on the Investor Relations front and until Jennifer's return in the second quarter.

So with that, I'll turn it over to Mike, and he's going to provide a quick recap on the numbers. Mike?

Michael Maffei

Thank you, Bob, and good morning, everyone. Thanks for joining us for the First Quarter Conference Call. Also on the call today is Brian Kenney, President and CEO of GATX Corporation. I will give a brief overview of the results provided earlier in our press release, and then we'll take questions.

As a reminder, any forward-looking statement made on this call represents our best judgment as to what may occur in the future. We have based these forward-looking statements on information currently available and disclaim any intention or obligation to update or revise these statements to reflect subsequent events or circumstances. The company's actual results will depend on a number of competitive and economic factors, some of which may be outside the control of the company. For more information, refer to our 2012 Form 10-K/A for a discussion of these factors. You can find these reports, as well as other information about the company on our website, www.gatx.com.

Today, we reported 2013 first quarter net income of $27.1 million or $0.57 per diluted share. This includes the negative impact of $1.3 million or $0.03 per diluted share from the negative change in fair value of swaps at our European rail affiliate, as detailed on Page 9 of the press release. This compares to 2012 first quarter net income of $30.3 million or $0.64 per diluted share, which includes the negative impact from the same swaps of $2.2 million or $0.05 per diluted share.

At the end of the first quarter, the North American fleet utilization was 97.8%, and utilization in Europe was 95.5%. The renewal rates in the Lease Price Index were 30.8% above expiring lease rates, and lease terms were 65 months on average for renewals during the quarter. Our renewal success rate in North America remained above 80%, reflecting continued strong demand for tank cars. We have allocated our scheduled new car deliveries through 2014, and we are now working on the 2015 placements. It is unusual to have cars placed so far in advance and at extended initial lease terms and record rates, so we are working aggressively to capitalize on this demand environment.

On the maintenance front, as expected, we had a material increase in expense in the first quarter versus the prior year, as we continue addressing the compliance bubble we discussed on previous calls. The flow of cars into the shops to meet the required regulatory compliance will continue as the year progresses.

Lastly, rail remarketing activity was lower in this year's first quarter compared to last year. This is solely due to timing, and we expect a robust remarketing environment during the balance of the year.

The navigation season has just recently started for American Steamship Company. Based on customer inquiries, we expect to move modestly less volume in 2013 versus 2012. As we previously noted, the low water levels on the Great Lakes will negatively impact operating efficiency during the year.

At the end of March, 10 vessels were in operation, and we expect to operate 13 vessels during 2013. Portfolio Management segment profit was down from the prior year due to the timing of asset remarketing activity, which is expected to increase in the coming quarters. Operationally, we are encouraged by continued strong performance at the Rolls-Royce joint ventures.

Also, certain ocean-going markets, namely the LPG and mid-sized chemical trades, saw an uptick in charter rates. This is encouraging especially in the chemical markets where kept charter rates have been at low levels for the past several years.

Overall, the first quarter operating environment was generally consistent with our expectations and provides a good start to 2013. As noted in the press release, we continue to expect 2013 full year earnings to be the range of $3.10 to $3.20 per diluted share excluding any impact from tax benefits and other items.

One final note, tomorrow is our Annual Shareholders' Meeting. It will be held in downtown Chicago at the Northern Trust Building, which is at the corner of LaSalle and Monroe. The meeting begins at 9:00 a.m. Central Time. Slides from Brian Kenney's presentation will be posted to our website, www.gatx.com.

With that quick overview, let's get to your questions. Kelsey?

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to Art Hatfield with Raymond James.

Arthur W. Hatfield - Raymond James & Associates, Inc., Research Division

If I could start with the LPI, obviously, it can move around a little bit quarter-to-quarter, but do you think we're getting close to where that probably starts to roll over given where your kind of renewals will be out over the next couple of years?

Robert C. Lyons

Well, Art, we came in at the year back in January, you might recall, my indication was that the LPI would be in the mid-20% range where we came in last year. We continue to see very strong lease rate environment, and that appears to provide us with some pretty positive momentum here through the first quarter and into the balance of the year.

Brian A. Kenney

Yes, I would add tank car rates are beyond the prior peak, and they're probably better than what we expected coming into the year. The other thing to remember, Art, is that the expiring rate for that LPI actually declines in 2013 from 2012, and it doesn't exactly -- it doesn't go up dramatically at all in 2014. So still looks like there's some runway here.

Arthur W. Hatfield - Raymond James & Associates, Inc., Research Division

Okay, okay. That last comment was very helpful about '14. And with regard -- are you -- with that said, are you seeing -- are you starting to see any pushback on price or term in any of your markets?

Brian A. Kenney

Yes, I would say we're seeing a lot of pushback on term. As you know, we're pushing that aggressively in the strong market for tank cars, so I think that's probably most of the conversation, difficult conversations with customers especially on our new car orders are really pushing term. And we're trying to incent them to go longer. So we'll actually give up a little rate to go longer term. So that's probably the most difficult conversation the sales force is having.

Arthur W. Hatfield - Raymond James & Associates, Inc., Research Division

Okay. And then final question and I'll let somebody else go. But looking at the orders for railcars in the first quarter really kind of, I think, surprised most people how strong it was on the tank car side. Does that start to worry you a little bit that maybe we're -- could be getting close to a saturation point down the road? I know we've continued to see capacity coming to the manufacturing side of the market. Any concerns with regards to oversupply at this point in time?

Brian A. Kenney

Yes, if look out a couple of years, I think there's a real concern about oversupply in the crude market. I mean, there's -- currently, we estimate about 25,000 to 35,000 cars out there in crude service, but with the tank cars orders you just mentioned, first of all, 80% of the freight car backlog is in tank, which is unheard of. And if you look at the tank car backlog alone, that's 20% of the total tank car fleet. So this is all unprecedented. Most of that -- there's a lot of tank cars being produced or being promised that are earmarked for crude service. So you can see that with pipelines coming online in '14 and '15 and beyond that this market could be oversupplied out in the future, yes.

Operator

[Operator Instructions] We'll move on to Steve O'Hara with Sidoti & Company.

Stephen O'Hara - Sidoti & Company, LLC

Can you just talk about the number of coal cars that maybe came up during the quarter? Does that affect LPI in 2013? And maybe if you could talk about how you're -- other than maybe pushing term and balancing your portfolio, how do you protect yourself from that potential bubble in, let's say, crude cars down the road?

Michael Maffei

Sure. I can take the first part. We had about 1,200 coal cars come up for renewal during the first quarter with the renewal success rate of over 70% -- over 75%, sorry. We have additional 2,500 cars scheduled for renewal during the remainder of 2013. But all of those exposed cars are newer and state-of-the-art cars.

Robert C. Lyons

And Steve, I'd mention to you and just add to that, too, on the coal cars, keep in mind, we -- yes, there is definitely pressure there on rates. And unlike the rest of the fleet, that's a car type where we're really trying to stay shorter term because we believe longer term that the equipment we have will be in a very good spot. So we're doing a bit of the opposite there from the rest of the fleet. But I can turn it over to Brian to comment about the crude market.

Brian A. Kenney

Yes, in some ways, you can never be completely insulated from that obviously. But we're -- you mentioned 2 of the things we're doing. One is going very long at these high rates and for new cars, especially long. So that's one way you can kind of get through that period. The other one, as you also mentioned, I think, is maintaining a very diverse fleet, which we always try to do, so in not just from car type perspective, also from a customer perspective and a "service the car is in" perspective. And the good news about the crude-by-rail boom is that it's created tightness in supply for all tank cars, so we take advantage of that. We have a very diverse fleet. To give you some numbers, if look at the crude-by-rail phenomena, as I said, probably 25,000 to 35,000 cars are in that service in the industry, but we only have about 1,600 currently delivered cars in that service. And yes, they will go up over the next few years but not dramatically. So it all will be a small part of our fleet. And then the last tactic you use and we're using it is you -- in your sales packet as we maintain an active secondary market presence and you try to get rid of older cars, you try to get rid of smaller cars, you try to get rid of cars where you might have overexposure to a commodity type or a car type, so we do that as well.

Stephen O'Hara - Sidoti & Company, LLC

Okay. And then as a follow-up in terms of Europe, it looked like the utilization picked up a little bit if I have that right. And then can you just talk about the tank market and then maybe the freight market there as well quickly?

Brian A. Kenney

Sure. Utilization picked up, but I wouldn't get excited about it. It was very small, and there was a lot of scrapping in the quarter. Talking about Europe and generalizing that we participate in 2 ways. On the freight car side is through our joint venture in a cargo where we have a 37.5% interest, very short-term lease business. Concentration intermodal cars, that's highly dependent on container traffic and obviously, the European economy. That business turned down sharply in 2009, and honestly, it's been bumping along the bottom since then with very little improvement. And we don't expect that weakness to improve anytime soon. On the tank car side, that's our 100%-owned fleet of about 22,000 tank cars in Europe. It's performed very well through the downturn. As that market weakened in the second half of 2012 especially in the chemical side, we saw the return of older and smaller cars. And those cars generally just get scrapped. But now we're starting to see some weakness on the petroleum side as well. That's about 70% of the business over there. We also have cars, new cars delivering into that market, but despite that, GATX Rail Europe has performed very well through this weakness. They're replacing their newer cars. They're essentially helping their customers modernize and upgrade their fleets by replacing their old cars with our new ones. They actually realized rate increases over the last couple of years despite the downturn. So it is definitely a rockier market on the tank car side in Europe, but they performed very well, and we think they will in 2013.

Operator

We'll now hear from Mike Baudendistel with Stifel.

Michael J. Baudendistel - Stifel, Nicolaus & Co., Inc., Research Division

I guess, the one question is on American Steamship Company. I think you said you're going to move or expect to move modestly lower volume in 2013 relative to 2012. Is that because the demand is going to be less? Or is it the low water conditions or a combination of both?

Robert C. Lyons

Well, we moved about just under 30 million tons last year and modestly lower with -- we're talking a very small amount, maybe in the million ton range for an expectation in 2013. So it's not a dramatic change in tonnage, but it is coming out. And it will likely come out of iron ore, which tends to be our higher margin move. And yes, so that would be based on current customer feedback regarding demand levels. There's also some competing capacity in the marketplace for the tonnage that is available. Water levels, yes, as we've talked about previously, will continue to be a challenge despite all of the rain we've had here in the Midwest in the last 10 days, which should help, certainly not for those who are affected by it, but it'll help water level on the Great Lakes. But we're still anticipating a bit more challenging operating environment there this year due to that fact.

Michael J. Baudendistel - Stifel, Nicolaus & Co., Inc., Research Division

Okay. Great. That's helpful. Then, the Lease Price Index, I guess, mid-20s this year, similar to last year. When you compare the leases that were coming off this year versus last year, are the ones that are coming off that at a higher rate this year, does that makes sense to -- does the Lease Price Index have a more difficult comp than it did last year?

Brian A. Kenney

No, it has a easier comp. It actually came down a little bit from 2012.

Michael J. Baudendistel - Stifel, Nicolaus & Co., Inc., Research Division

Okay. The ones that are...

Brian A. Kenney

The expiring rate is lower in 2013 scheduled than it was in 2012.

Robert C. Lyons

And I mentioned before, in 2014, about the same.

Brian A. Kenney

Yes, I mean, you never know. You got to see what you do this year in terms of your renewals, which helps determine 2014. But looking at the beginning of 2013 and 2014, it didn't look significantly higher.

Michael J. Baudendistel - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And your comment on 2014, just the ones that are expiring in 2014 are going to be similar to 2013? Or is it...

Brian A. Kenney

Yes, scheduled to, but we have to see. For instance, Bob mentioned we're going very short in coal and some other car types, so that will also impact 2014. So we'll see as we go through the year, but looking a year ahead, it didn't look dramatically different, no.

Michael J. Baudendistel - Stifel, Nicolaus & Co., Inc., Research Division

Okay, that makes sense. And then the utilization rate on the North American cars stayed fairly high, pretty consistent with the previous quarter. Is it safe to say that some of the cars that are -- the freight cars, maybe coal and some other things, the lease rates are declining and you sort of accepted somewhat lower rates in order to keep the utilization high? Is it the strategy there?

Brian A. Kenney

In coal, you're just trying to keep the cars deployed, and rates are down from a year ago. In other car -- it really depends on the car type once you start talking about freight. It's not the same as tank where it's strong across the board. So for instance, small cube covered hoppers is a good example of a car type where the rate was declining last year, and they're just actually looking a little better this year because there's higher demand for frac sand. Grain cars is another sample of a car type that was weak last year, still is weak, but with a better harvest this year, we're cautiously optimistic those rates will go up. So you really have to go car type by car type when you talk about freight.

Robert C. Lyons

And Mike, I'd add on the coal front, too, we mentioned earlier that our renewal success rate in the first quarter was over 75%. That's better than what we had anticipated, but we are being very aggressive there on rate and staying short term.

Michael J. Baudendistel - Stifel, Nicolaus & Co., Inc., Research Division

Okay. Good. That's helpful detail. And then just one final one for me, the maintenance cost expectations that you had going into 2013, have those developed in line with your expectations?

Brian A. Kenney

I would say it has. In North America, our net maintenance cost was up about 13% in the quarter. That's just the high -- as we predicted, a higher volume of cars coming through our major shop due to compliance work on the tank car side. In Europe, it was actually down year-over-year. More cars were scrapped in Europe and avoided revision cycles because the market's a little weaker. So we didn't anticipate that necessarily coming in. But I still think, looking ahead for this year, I had mentioned that in -- at the end of the year, it would be up around 10%. That still looks like a good number.

Robert C. Lyons

Yes, and I'd point out, too, it's important to make sure now that we do break out North America from -- and Rail International separately, the compliance issue is primarily a North American issue. So when you're looking at the quarter-over-quarter or sequential change in maintenance expense, as we've talked about that 10% number really pertains to the North American number.

Operator

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

Matthew S. Brooklier - Longbow Research LLC

So I wanted to circle back to an earlier comment and try to get a feel for your North American fleet and what percentage of the fleet is currently in crude service. I heard a 1,600 railcar number, but I just wanted to dig in a little bit deeper here.

Michael Maffei

Well, that's right. We have about 1,600 railcars currently in crude service.

Robert C. Lyons

And as the scheduled deliveries we have...

Michael Maffei

We have another 1,100 scheduled for delivery that are going to be headed for crude service.

Matthew S. Brooklier - Longbow Research LLC

Okay. And of the 1,600, are these various types of tank cars, are they general service and also maybe some of the coiled and insulated and then also some of the plus-31,000-gallon heavy steel equipment? Or maybe talk a little bit about what's in that [indiscernible] number?

Brian A. Kenney

Sure. You're breaking up a little bit there. It's all 3 of those. I would say that the new 31,800 that the industry is producing, we don't have a whole lot of those. We're being cautious about that car type given the regulatory concern about and how it might change that design over time. But it's all 3 of those, yes. We have coiled and insulated cars, mainly serving the rougher climates up north. We have the general service tank cars as well in that service. So it's well distributed and with customers, as I said earlier, customers, the type of service that it's in [indiscernible] ...

Matthew S. Brooklier - Longbow Research LLC

Okay. And then with this -- I guess, with the scheduled deliveries and holding the fleet count or assuming it's flattish at 109,000, that would suggest that you're getting a little bit heavier, not doubling but a little bit heavier in terms of your exposure to crude. Do you -- Is there potential to -- I guess, if we're still on a strong environment maybe 6 months down the road, to grow the fleet a little bit more or potentially even transfer assets that are maybe in ethanol service over to crude? Or do you want to, I guess, are you more cautious on kind of your outlook for that particular service?

Robert C. Lyons

Brian has a comment here, too. Before moving onto that, Matt, I'd just point out that even at 2,500 cars roughly or so or 2,600 once the next ones are delivered, that is on a fleet of 109,000 cars. So the percentage basis is still relatively modest. And on the Trinity order that we placed to, I'd point out that given the demand, very strong for -- demand for tank cars outside of crude service. The vast majority of cars we've taken delivery of in that program have been in the service other than crude. We have put some in definitely, but we've seen good demand across the board in other commodity types. So Brian has anything...

Brian A. Kenney

Yes, it's about 2,100 cars with the supply agreement out of the, say, we're on our third year here, winding up our third year this summer of deliveries. So that'll be 7,500 cars delivered. About 2,100 have gone into crude service. As far as doubling down in the crude service, you've heard our caution earlier about the potential oversupply. It's not that we wouldn't consider it, but if we ever consider an investment like that, it will be with our best customers, and it will be very long term.

Matthew S. Brooklier - Longbow Research LLC

Okay. And then maybe we talk about non-crude tank cars and maybe just provide some commentary in terms of the supply-demand fundamentals for other equipment type outside of crude. And has there been a change or pickup in other railcar categories?

Brian A. Kenney

Strong car types are primarily in the crude service and anything touching petroleum, but high-pressure cars are in high demand as well. It's really across the board in tank because of the limited supply. When you're sold out, all the manufacturers are going in to mid-2015. Obviously, that produces a very strong market for all tank car types.

Matthew S. Brooklier - Longbow Research LLC

Right, but just -- I guess outside of tank cars, I mean, maybe you can talk about -- if there's been any shift or change in terms of demand for non-tank car equipment in first quarter?

Brian A. Kenney

Like I said earlier, small cube covered hoppers are seeing an uptick in frac sand demand. Grain cars, assuming it's better harvest this year, you should see those perform better. Center beams, which is probably the weakest part of our fleet over the last few years, is actually seeing an uptick in demand because of construction activity. Also, some attrition of box cars is driving center beam demand. So that looks better, although we wouldn't call it a strong market. It's definitely much better than it was a year ago. Those are the 3 that come to mind.

Operator

We'll move onto Steve Barger with KeyBanc Capital Markets.

Steve Barger - KeyBanc Capital Markets Inc., Research Division

The -- can you talk about pricing for new tanks in the quarter given the new demand? Has pricing moved past whatever the high water mark was in 2012?

Brian A. Kenney

Absolutely and more specifically beyond the high mark of the prior peak in 2008.

Steve Barger - KeyBanc Capital Markets Inc., Research Division

Okay. And you said you'd only go into crude with great customers on very long terms, but really, how likely is that? Are there just lots of lessors out there who are willing to do deals on terms that aren't attractive to you? Or are you seeing more of those orders come from shippers or speculators?

Brian A. Kenney

That's a good question. There are more shippers ordering tank cars definitely. Some of the big refiners and the very big customers out there are also buying cars. That shows you -- and that shows you the payback on those investments. As far as what we would -- we got to see what -- how this develops over the next couple of years, but like I said, it is very unclear in 2015 and beyond what will happen to crude by rail. I mean, right now it's 700,000 barrels a day at the end of 2012 as far as crude oil movements by rail in North America, and that's projected to go to 1.2 million in 2014. But as those pipelines come on and there's a variety of pipelines, but really, what we're talking about is Keystone XL and Pony Express in particular. If they come on in 2015, there could be an oversupply situation. Now there's a lot of other factors besides pipeline construction. There's levels of crude production, new discoveries, planned rail capacity, tank car production, railroad velocity. There's a lot of factors that affect crude by rail, but the fact is a pipeline, once built, is 35% to 45% more efficient in transporting crude. And you can't lose sight of that fact. And so that's why we're going to do what we always do in all these situations. We did it during the ethanol boom and every other boom out there, is we're going to use that strength to maintain a very diverse fleet from the perspective that I talked about earlier.

Steve Barger - KeyBanc Capital Markets Inc., Research Division

And just given how strong these prices are and if you're on the assumption that things change a couple of years out, do you talk more about selling some of your own existing fleet in the secondary market on an opportunistic basis?

Brian A. Kenney

Yes, we're constantly in the secondary market, and yes, sure, we'd offer -- we always offer cars that we think are at peak pricing and performance but especially where we might have a little higher exposure in a certain area whether, like I said, whether it be equipment type or customer type or even credit versus where we like to be. So that's what you'll always use a strong market for.

Robert C. Lyons

Steve, as you recall, we had an active year last year in terms of selling cars out of the North American fleet, which we'll again this year. But in general, that's a pretty diverse pool of railcars that we're selling.

Steve Barger - KeyBanc Capital Markets Inc., Research Division

Right. And last question, you talked about this a little bit, but pent-up demand for non-crude cars, are you seeing any shippers or traditional buyers of cars that are just unable to find non-crude capacity? And I guess, how tight is that market if there's any more detail you can give?

Brian A. Kenney

Well, yes, it's very tight because most of the cars that are being produced are going in the crude service. I will -- there's nothing really that sticks out in terms of another segment that's driving tank car demand. It's just a general shortage of cars well into 2015, so it's a good market for all tank car types as a lessor.

Robert C. Lyons

And as you know, Steve, anybody who wants to -- even if they want to order cars for non-crude service, they have to -- they're in the queue, which now extends pretty far out because of all those cars that are focused on crude.

Operator

Our next question will come from Kristine Kubacki with Avondale Partners.

Kristine Kubacki - Avondale Partners, LLC, Research Division

I was just wondering on the remarketing side, you obviously said it was going to pick up over the next 3 quarters. But I just wanted to make sure, in fourth quarter conference call, you talked about a level that was around the $65 million and what you did last year. Are you still thinking that we'll kind of see that pace for this year in 2013?

Robert C. Lyons

Yes, Kristine. No real change in the full year outlook. If you recall, last year was more heavily weighted in the first half of the year, and that's just -- there's no magic to that. It's really just driven by the timing and number of transactions we have in the marketplace. So it looks this year that it'll be a little bit more balanced potentially, a little bit more heavily weighted towards the middle part of the year.

Kristine Kubacki - Avondale Partners, LLC, Research Division

Okay. That's helpful. And then on the maintenance side, forgive me if you've answered this, but talking about the maintenance bubble and I believe you just said that it was kind of -- is running in your expectations for this year. How -- is it a 2013 phenomenon? Will it bleed into 2014? How should we think about that in times of -- in terms of duration?

Brian A. Kenney

Yes. It's a good question. It starts in 2013. It gets higher in 2014. And this is based on our current projections. Obviously, it changes as we buy and sell cars, but as looking from the beginning of 2013, looking ahead, it increases significantly in 2013 because of compliance events. It increases even more in 2014, and then in 2015, it would probably come down to the 2013 level. And then it starts to come down after that.

Kristine Kubacki - Avondale Partners, LLC, Research Division

Okay. That's helpful. And then just to -- not to beat a dead horse, but on the operating efficiency at ASC that I was wondering can you give us a little bit more how -- on a percentage basis, what the -- at current water levels, what the hit would be on an efficiency standpoint?

Robert C. Lyons

Sure. We've indicated before that for roughly each inch of decline in water level -- and this is particular, I'd say the biggest driver is the water levels at the Soo Locks where the majority of product moves either to or from. At one point, it makes its way through Soo Locks, and a drop, a 1-inch drop can any be -- anywhere between a couple hundred thousand to upwards of $400,000 of additional or lost revenue. So it's material. Each drop, each 1-inch drop is significant. And in the Soo Locks this year, coming into the year, the Army Corps of Engineers was expecting that to be down about 9 or 10 inches versus last year. And if you recall the major part of that decline in water levels happened really at the -- late in 2012, and so we're feeling the full effect of that or expect to this year.

Operator

James Ellman with Ascend Capital has the next question.

James Ellman

I was hoping you could just give us a little bit of insight into your concerns that there will be an oversupply of tank cars in a couple of years. Just with the significant amount of CapEx, it seems to be going into crude tank loadings rather than building pipelines right now. One would imagine a couple of years there'll be more demand and lower friction cost of moving crude by rail. And then also, we're getting more natural gas that's somewhat trapped near wellheads from frac-ing and relatively cheap natural gas. Doesn't that lead to more chemical industry output? And finally, if GDP is relatively, in terms of growth, is relatively weak right now and is a bit better in 2 years, doesn't that just -- will result in a greater demand for tank cars? So those seem to be strengths, if you could just tell us a little bit about your concerns about why there would be weakness or too many cars in a couple of years?

Brian A. Kenney

Too many cars in crude service is the risk in a couple of years. So on the chemical side, you're exactly right. The low price of natural gas and the abundance of natural gas discoveries is obviously leading to, instead of chemical manufacturing capacity exiting North America as it has over the last few decades, there's something like 70 to 100 plants that are under construction or on the -- are at least on the board. And so that should lead to more tank car demand absolutely. Different rail car type. The crude oil right now, the one it travels in, is that 30,000-gallon noncoiled or noninsulated general service tank car, different car type for a lot of these chemical types. So when I talk about the potential oversupply in a couple of years, at least being unclear about how much is going to be needed, it really has to do with the pipelines coming online, and once they are built, they will take capacity away from crude by rail because they're 35% to 45% more efficient. In addition, if you look at all the tank cars that are out there in order [ph] , it is more than sufficient to satisfy that demand if they were all to go to crude. So there's a concern about overcapacity in crude by rail. The chemical outlook, although it hasn't really materialized yet, we agree with you. That should be a very -- it should be a bright spot in a couple of years.

James Ellman

All right. And just some thoughts about GDP growth being better in a couple of years than it is right now?

Brian A. Kenney

That would be good for our entire business, I agree.

Robert C. Lyons

Across the board.

Operator

We'll now hear from Kent Mortensen with Thrivent.

Kent Mortensen - Thrivent Investment Management, Inc.

In terms of the cars sold in the quarter, I understand it's lumpy, but it's one of the lowest I've seen in years. And then especially if you're kind of thinking that the crude situation might be getting a little frothy, I guess I was just a little surprised it was quite so low. And on the other hand, of the scrappage side was higher than it's been at least in the last 1.5 years or so. Can you just comment on those 2 numbers and just give us a little bit more clarity there?

Robert C. Lyons

Sure. On the remarketing side in terms of cars sold, you're right. It was a low number during the quarter. That is driven by nothing other than timing of when packages went to the marketplace and when we anticipate or when we will be closing on those sales. And again, these are not just crude cars that are being sold. We're selling from across the portfolio and very targeted by asset classes for the reasons that Brian mentioned before. So the packages typically go out in fairly large buckets, and we do the right economical thing in terms of when we try to close transactions. So there's nothing of issue there. You'll see a more -- a larger number as the year progresses.

Kent Mortensen - Thrivent Investment Management, Inc.

Do you kind of expect kind of first half to equal second half roughly? Or will it be kind of lumpier than that?

Robert C. Lyons

I think it's going to be a little bit lumpier than that. I'm always hesitant to try to pin that down too much, Kent, because at the end of the discussion here, what we want to do is the right economical thing and not try to hit a particular quarterly number for sales of cars or gains, what have you. And scrapping, again, yes, a higher number than what we've seen in the last few quarters but nothing out of the ordinary there, just when we can get cars into the -- through the system for scrapping.

Kent Mortensen - Thrivent Investment Management, Inc.

And in terms of that rate for the year, what would be kind of a good number to use?

Robert C. Lyons

Well, last year...

Kent Mortensen - Thrivent Investment Management, Inc.

About 2,000?

Robert C. Lyons

Yes, we scrapped about 2,000 cars. We'll be in that same range this year.

Kent Mortensen - Thrivent Investment Management, Inc.

And the 4,500, is that still a good number for the year for cars added?

Robert C. Lyons

Much of that will depend on what happens for our ability to actually buy cars in the secondary market or any new incremental orders that we place. So we'll be taking 2,500 cars from the scheduled program from Trinity. Everything else will be incremental to that will be opportunistic. So certainly, we would -- we're hopeful to find the right opportunities in the right areas that we can put some additional capital to work in the secondary market, but some of that remains to be seen. It's really just dependent on what's available.

Kent Mortensen - Thrivent Investment Management, Inc.

Okay. So that 4,500 might be on the high side, and 2,500 would definitely be the base, somewhere in between perhaps?

Robert C. Lyons

Yes. At 2,500, it can't go less than that given the scheduled deliveries, but we're always looking for opportunities to add cars. And sometimes, just like when we're selling cars, it can be lumpy.

Kent Mortensen - Thrivent Investment Management, Inc.

The cash is building up on the balance sheet. I think you're over $300 million right now. What are you thinking about with regard to kind of deploying that cash?

Robert C. Lyons

Yes, again, that was a bit of a timing issue. We did a sizable debt offering in the first quarter that we actually went into the market to do a $250-million, 5-year deal. And if that's all we had done, our cash balance would be a lot lower than it is today. But demand for that offering was incredibly high, and we saw very good interest in doing -- tacking on a tenure. So we put on a tenure on top of that also for $250 million. So we've essentially prefunded a little bit of the rest of the year's funding needs. We do have debt maturities coming up through the balance of the year. So if CapEx plays out the way we think and maturities get taken of as scheduled, we wouldn't really need to be in the market again this year. Whereas in normally absent that one additional tenure issuance, we would have been done another one late fall probably.

Kent Mortensen - Thrivent Investment Management, Inc.

Okay. And just kind of a housekeeping item, under ASC, I didn't see a depreciation number in the press release. Any [ph] ...

Robert C. Lyons

That's correct. Yes. It's accrued and then expensed over the 3 quarters of operations.

Operator

And we have no further questions at this time. Mr. Lyons, I'll turn the conference back to you for closing or additional remarks.

Michael Maffei

Thanks everyone for your participation. I'll be available this afternoon to answer any additional questions. Thank you.

Operator

Thank you. And again, Ladies and gentlemen, that does conclude our conference for today. We thank you all for your participation.

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