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GATX Corp. (NYSE:GMT)

Q1 2010 Earnings Call

April 22, 2010 11:00 am ET

Executives

Brian Kenney – President and CEO

Robert Lyons – Senior Vice President and Chief Financial Officer

Analysts

Robert Napoli - Piper Jaffray

John Hecht - JMP Securities

Rick Shane - Jefferies and Company

Paul Bodnar - Longbow Research

Mike Grondahl - Northland Securities

Art Hatfield - Morgan Keegan

Danial Max - Trafelet

Steve Barger – Key bank Capital Market

Operator

Good day and welcome to the GATX first quarter earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Bob Lyons, Chief Financial Officer. Please go ahead.

Robert Lyons

Thank you, Lorie. Good morning, everyone. Thanks for joining us on our first quarter earnings conference call. I'm joined today by Brian Kenney, our President and CEO of GATX. I will provide a very brief over view of the results highlighted in our press release earlier this morning and I will open it up to questions.

First an administrative matter, I'd 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 2009 Form 10-K.

For the numbers, today we reported 2010 first quarter net income of $18.7 million or $0.40 per diluted share compared to net income of 27.6 million or $0.56 per diluted share for the first quarter of 2009. Please note that the 2010 and 2009 first quarter result include negative after tax share value adjustments of $0.02 and $0.23 per diluted share respectively related to certain derivates at our European rail affiliate AAE Cargo.

As noted in the press release, the first quarter operating results and environment were essentially in line with our expectations as we laid out back in January coming into 2010. The rail market remains very competitive as all lessors are working aggressively to keep their fleets fully utilized. We continue to have a negative effect on lease renewal pricing relative to expiring rates as noted by our LPI which was negative 15.2% for the quarter.

While the challenges in rail remain formidable, there are some signs of improvement all those sporadic. This dynamic is to be expected as the market has stabilized but is not yet showing consistent signs of recovery. You will also note I'm sure that re-marketing of rail was very strong in the first quarter. We sold approximately 1,300 cars, a sign that activity in the secondary market has improved versus 2009. However, I caution again annualizing the first quarter re-marketing income in rail. As many of you know re-marketing activity can be very volatile quarter to quarter and year to year for that matter. And, it's driven by many different factors, most importantly our fleet portfolio management activity.

In specialty, our marine joints ventures performed as we expected, which means the charter rates in the markets that we participate in remain well relative to prior years.

Our aircraft engine leasing joint venture with Rolls-Royce performed very well during the quarter. And American Steamship was not too much to discuss from an operational standpoint as the sailing season just got under way in the last few weeks. However, costumer inquiry has been solid and demand for iron ore along the Great Lake has increased along with the restarting of a limited number of blast furnaces at the steel manufacturing companies. We'll continue to judicious in bringing vessels back in the service but the early signs in 2010 are positive for ASC.

During the first quarter, we invested approximately $70 million dollars primarily in rail assets as we continue to seek attractive investment opportunity to add assets to the portfolio. As noted in the release, we expect 2010 full year earnings to be in the range of $1.50 to $1.70 per diluted share as we outlined for you back in January. This guidance excludes any AAE fair value adjustment.

Before we move on to questions, one last matter. For those of you who are in the Chicago area, our annual share holder's meeting is tomorrow at 9:00 am at the Northern Trust, it's at the corner of Monroe and LaSalle and you’re invited to attend. Slides will be available of Brian Kenney's presentation later in today.

And with that quick overview, let's go to questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) And we will take our first question from Bob Napoli with Piper Jaffray..

Robert Napoli - Piper Jaffray

Good morning.

Robert Lyons

Good morning, Bob.

Robert Napoli - Piper Jaffray

Couple of quick questions. The share of affiliates earnings was up substantially in the quarter and I was wondering what drove that? I mean mostly in the rail segment but it was kind of -- it's been a very pretty relatively lumpy item and are there gains from selling cars out of the joint venture or...

Robert Lyons

Well, the biggest driver, Bob, versus last year is the fact that the first quarter of 2009, recall there was a $14 million adjustment related to the AAE derivative. So, if you normalize for that, you'd be at 15.5 or 16 million versus the 18.3 that we put up in 2010. The increase in 2010, we did have some re-marketing activity at one of our joint ventures, Southern Capital. Also Rolls Royce had a very good quarter. So, those with the big drivers. But, the main difference really is that fair value adjustment non cash item.

Robert Napoli - Piper Jaffray

But, there's no fair value adjustment in this. So, this is -- that 18 million is a clean kind of...?

Robert Lyons

Yes. There's a $900,000 adjustment. That's it.

Robert Napoli - Piper Jaffray

But excluding that 17 million or so is kind of a ongoing number?

Robert Lyons

Actually, I think the first quarter, if you look at it from an annual perspective, first quarter was very strong because we did have some re-marketing activity both at Southern Capital where we had close to $4 million income item from sales of some cars in that portfolio and then also at Rolls Royce about 2 million of re-marketing activity also helped support very, very strong quarters. So, I wouldn’t annualize that number.

Robert Napoli - Piper Jaffray

Okay, then on the flip side, the other expenses were up significantly. Is there anything unusual in there, there’s two quarters in a row that the other 19 million of other expenses, the 18 million last quarter, 4 million a year ago.

Robert Lyons

Yes. Last year -- first on last year's number, we did have, if you recall, in the first quarter of 2009, we had roughly a $6 million positive litigation settlement at American Steamship. So, that drove down that other expense item by that same amount by 6 million. And, then in first quarter of this year, we had roughly $5 million impairment on some rail cars that will be coming out of service earlier than anticipated due to a industrywide AAR mandate.

Robert Napoli - Piper Jaffray

Okay.

Robert Lyons

So those two items alone right there is roughly 11 million of the difference between the years. We also had some additional storage cost of about a million dollars. Some other operating expenses were up a couple million.

Robert Napoli - Piper Jaffray

Okay, that’s helpful. Looking at the back log of rail car manufacturer back log jumped up in the March quarter for the first time. What is going on? Why -- I mean there's still a ton of unused or vehicles off lease, what’s driving the increase in the back log and does that concern you at all?

Robert Lyons

No. It doesn't really concern us. There was one large order in the first quarter from rail road for a coal cars, roughly 3,000 car orders. So, that really accounts for the full pick up of the back log. But that doesn't concern us. That obviously is a class one with a specific need for those cars. They placed the order. Aside from that there has very little order activity that we can tell.

Robert Napoli - Piper Jaffray

Thank you.

Operator

We will now take a question from John Hecht - JMP Securities.

John Hecht – JMP Securities

Morning, thanks for taking my questions. Bob, you talk about pricing and that there's some sporadic stabilization or some factors in the business that tell you it’s stabilizing but maybe too early to call, a market where you might see pricing stabilizing grow. That said, we are seeing some positive result or maybe better than expected results at some of the rail operators. And, you know historically is there ever a period where pricing is stabilizing, growing faster than other periods of time given some kind of hyper activity or renewed strength in the market?

Brian Kenney

Well, it's Brian. I'm not quite sure of what you mean by the question. I mean, as you say, as you led off, there's still 100,000 [ph] cars idle in the industry and as a car provider, we still feel that utilization of pricing pressure. Now, it's true that a lot of car types would come off the bottom and are up in pricing, but once again, still well off from the peak and well off from what see is a long term average, and there's still a lot of car types that are now at the bottom. You know, an example, construction related center beams that are more or less still very, very weak. So, well in general it looks like things are improving a little bit, it’s nothing worth jumping up and down in terms of pricing or really utilization at this point in time. Until a lot of those cars go back into service, it's tough to have any kind of pricing leverage in the market.

John Hecht – JMP Securities

Okay. Forgive me for the question, my head was spinning (inaudible) reports today but I guess then the better way to think about it is, when based on the amount of capacity and the turnover in various portfolios, when might you guys think we’d see stabilization and pricing growth given the trends you are seeing in the market?

Brian Kenney

Well, that’s the thing. It’s hard to call it a trend at this point but it certainly would not -- if this holds throughout 2010, you will still see revenue pressure in 2010 and probably in 2011.

John Hecht – JMP Securities

Okay. So, we're looking into at least the middle of next year before we might see some stabilization in growth there based on what you're seeing?

Brian Kenney

In terms of growth, yes, because remember we're still renewing leases in general but on a much higher rate. So, even as lease rates increase off the bottom, it will be a while before we revenue increases.

John Hecht – JMP Securities

Okay. And another question for the quarter is, relative to the end of life leases that occurred in Q1, how many those were sold versus re-leased?

Robert Lyons

Actually, the cars that were sold during the quarter, those are primarily on long term leases. So, they wouldn't really have been scheduled for expiry near term. As far as cars that expired in the first quarter, our renewal success rate was right around 55% which is where it’s been the last couple quarters and we're working hard to continue to try to move that number up.

John Hecht – JMP Securities

Okay. Final question, I wonder if you guys can given any color, we’ve seen some small portfolios be purchase in the marketplaces. Any update on opportunities to opportunistically acquire portfolios or pricing in the market, and where you might see some discrepancies?

Brian Kenney

No, we've really haven't seen any portfolios of any size although there’s been some secondary market sales out there. I wouldn't call them portfolio (inaudible) a particular set of cars that people are trying to get out of the portfolio. So no, there's been no portfolio to remove. There's still a lot of portfolios everybody's knows the name of that maybe moving at some point in the future but you know, it’s basically the same situation.

John Hecht – JMP Securities

Okay. Thank you guys for the detail.

Brian Kenney

Thank you.

Operator

We'll now take a question from Rich Shane with Jefferies and Company.

Rick Shane - Jefferies and Company

Hey, guys. Thanks, for taking my question. Like to talk about pricing strategy and what's going on in terms of different lessors cutting rates or you know try being motivated to keep assets in place. Brian, you alluded to the fact that there are series of well known portfolios out there that are available for sale. Are you seeing behavior from those lessors that they are being aggressive on price and I want to tie this in with the second question, which is that you've indicated at least during the decline in the cycle that your strategy was to be aggressive on pricing in order to maintain utilization levels? If we are starting to see a rebound, are you shift that strategy a little bit perhaps bring utilization down with the idea that you can drive higher prices, 6 or 12 months from now?

Brian Kenney

Okay. Well, it's a couple part question. In terms of the portfolios, I don't know that they are available for sale. It's questionable whether the parents or the larger company consider them a long term hold. I wouldn’t necessarily call them available for sale in today's market you know part of the reason that they are not sure anybody would show up or buying it. As far as pricing, you know, we don't really see anybody acting that irrational out there in pricing. Everybody's is trying to keep their cars utilized and put their idle cars to work. I wouldn’t say anybody sticks out in being irrational even the players that are theoretically you know, not long term holders, but current, in fact we've had a success the less couple of quarters displacing those competitors that are in question just because you know the costumer wants to know that they are with a long team player.

So, I would say they haven’t driven down our pricing. In some cases we have been able to realize premium pricing just because of our service capability and who we are in the market. As far as the shipping strategy in the market recovers, you know, it's certainly not there right now in terms of, you know, I wouldn’t say we’re out there aggressively raising price at all. You know, because of amount of idle cars in the industry. We want to keep cars to work but yes, if that supply demand balance gets in shape, you know, at some point you want to push price but we’re not anywhere near that right now.

Robert Lyons

And, I think one other data point to point to with regards to the strategy is again the renewal term which is steadily in March down and was 31 months in the first quarter. So, that gives you some indication that we’re proactively trying to give ourselves an opportunity to replace those cars as the recovery takes hold.

Rick Shane - Jefferies and Company

Great. guys, thank you. I apologize, it was a pretty complex question. Thank you for answering that. It really helps.

Brian Kenney

No problem.

Operator

And we'll now take a question from Paul Bodnar with Longbow Research

Paul Bodnar – Longbow Research

Hey, good morning. I wanted to get into some of the car sales I mean, how do you feel -- what types of cars you know, are you looking at selling now? I mean I would expect that at this point you guys have been more of a net adders to your fleet than net sellers. I just kind of wanted a little more reasoning behind that.

Brian Kenney

Well, were always active in the sales market. And maybe there was potentially some, a little bit pent up sales activity given that 2009 was a fairly light year. But, in the ordinary course, we’re always going to be in the market, Paul, selling some cars during the course of the year. And, it's a fleet portfolio management, ongoing fleet portfolio management activity we undertake all the time. Looking at the cars that you know in the fleet that are good cars, are on long term lease, but they may not be a fit with what our fleet or where we see it going longer term or at particular costumers. So, we you know, we look to sell certain cars.

Paul Bodnar – Longbow Research

Yes. Exactly, you manage the age of your portfolio, the costumer mix, the type of equipment and sometimes other people that are buying those cars value the length of the lease and the quality, the credit quality. There's differing needs and differing ways people value transactions in the market. Let's say we’re both costumer and equipment focused and it's very long term, it's a very long term view.

Brian Kenney

Okay. And then on remarketing income I know (inaudible) from this quarter forward, but, just as credit markets keep improving, is that something we should expect to in general maybe improve throughout the year although I mean this quarter may have a couple special things in there?

Paul Bodnar – Longbow Research

That's a really good question. That's very fair question. We've seen that as the credit market have improved people have more access to capital. You see more people showing up when there’s cars for sale on the market. So, yes, we would expect that and that was really better going into the year was reflected in our earnings.

Brian Kenney

We talked about back in January. Paul, on why you know the strengthening capital markets are important to GATX from a couple of different fronts, not just from cost of debt standpoint but to the extent buyers in the secondary market have access to equity is a good thing.

Paul Bodnar – Longbow Research

Is that going to have more of an impact on the specially business or the rail or both?

Brian Kenney

I would say both.

Paul Bodnar – Longbow Research

And then just to go back and clarify something. On the other income, it sounded like rail that wasn't something that was a onetime kind of $5 million hit that you took for those cars?

Brian Kenney

Yes, you are right Paul. And, that was another expense.

Paul Bodnar – Longbow Research

Right.

Brian Kenney

Yes. That's a onetime, it was 4.8 million.

Operator

And, we now move to Mike Grondahl - Northland Securities..

Mike Grondahl - Northland Securities

Good morning, guys. And, thanks for taking the question. If you could just give us some color into rail trends in the first quarter relative to you know future quarters in 2010. I mean, was this, did you have more cars coming up for renewal in the first quarter, was it heavy? You know how does it look relative to the rest of the year?

Robert Lyons

Sure, Mike. This is Bob. There isn’t really much seasonality to that renewal activity. We came into the year, we’re at about 17,000 cars scheduled for renewal and they really do occur evenly throughout the course of the year. And they occur -- well, that's a lot of cars you know, 17,000 in the scheme of the overall GATX fleet of 109,000. It's a very manageable number. And, they also incur in very small lots. They aren’t big, typically big, you know 2,000 or 3,000 cars renewals or anything like that. They tend to be in the 100, 200, 300 lot size. They were constantly you know -- every day we were dealing with renewal.

Brian Kenney

Yes. Mike, what I’d add to that is as you go through the year because of the term nature of the portfolio, we will see the expiring lease rate continue to increase. So, that's why we talk about the key revenue pressure. Because the leases that were renewed as we go to the year will become higher and higher.

Mike Grondahl - Northland Securities

Got you, and then on maintenance, maintenance expense, you know, that has been a challenging headwind we kind of look at it on per car basis, and as the fleet shrinking a little bit. Is there anything you can kind of do to offset some of that? Or is that just kind of a headwind that's going to continue to exist?

Robert Lyons

Well it's a two part answer. In North America, we are going through a heavy compliance period over the next couple of years. That will trend down over the next couple of years. The other big part of that North America is railroad repairs, which have increased dramatically over the past five years mostly due to wheels. We're seeing that update somewhat into 2010 but it's hard to call that a trend right now. But, in fact, we changed that a lot of -- (inaudible) the last couple of years, and we're starting to see that come down a little bit. In Europe, maintenance costs are expected to increase in 2010, that's a little hard to pinpoint to the wheel set situation over there, that looks like that’s going to last for a while, it’s an evolving situation as far as how much it will cost. So we expected continued pressure in Europe on maintenance side.

Mike Grondahl - Northland Securities

Okay, great. Thanks guys.

Robert Lyons

Thank you.

Operator

And we will now take a question from Art Hatfield with Morgan Keegan.

Art Hatfield – Morgan Keegan

Good morning guys. I'm not sure actually how to ask this, forgive me as I fumble through this but because as we kind of look on the go forward and I understand, I think there is, it seems to be a disconnect in the market and I'm talking about the acuity market, it's about expectations for the primary market for freight cars improving over the near term. But, what we're actually seen with regards to what cars are in storage and I think the optimism is based on what we're seeing with rail car loading and there is -- the trends there seem to be getting better but we're still really not back to 2008 levels. Brian, how do you think about kind of positioning yourself for the long term and making that longer term commitment and what kind of level of car loadings within the industry do you think we need to get back to before things get to a level that you really start to feel good about things?

Brian Kenney

Well, that's tough to answer Arthur. We definitely need a higher level of car loadings. We need that to continue to increase before -- need the cars to be taken out the market either back into service or scrapped. And that's why it's a little bit a wild card, how many cars will be scrapped. Scrap rates went down 350 at the end of the quarter, which is almost double of what it was a year ago, continues to increase or stays at this rate, you will continue to see high scrap rate as well, and things will improve faster. So there's a number of factors that go into that. As far as -- I assume you’re talking about when do we place an order?

Art Hatfield – Morgan Keegan

Yes.

Brian Kenney

You know, we're remain -- as I said the last couple of quarters, we remain in conversation with a variety of builders concerning longer term order. But you know, we're still looking for the right margin, the right price, the right flexibility, and the right term. And obviously the ability, if we are going to commit to a large number of cars over multi years, you want to know if it could be replaced as well and at a attractive rate, so it's -- once again it's not a great answer, Arthur. So far, it looks like an improving situation. But it's still an evolving one and a lot of different factors that affect it.

Art Hatfield – Morgan Keegan

So, it did help, that's helpful. I know, it's a difficult thing to figure out and so ...

Brian Kenney

You know, it’s fair to say we are lot more serious about it right now than we were a year ago. Because the markets look a little better and we have – there might be some light at the end of the tunnel.

Art Hatfield – Morgan Keegan

Without getting -- I know you wouldn’t want to get into specifics. But, are you seeing kind of the thought process of the builders change a little bit. Are they being more open to terms that you would consider more favorable to yourself?

Brian Kenney

Yes, I’d say in general, yes, because although you know there's a lot of you know optimism on the railroads and car loading which true, it's still, like I said, probably three times, there is still a lot of cars idle out there and back log is still very low at the manufacturers. So, I would say their concentration is on getting some orders over the next couple of years because I don't think there’s a lot of people in line right now.

Art Hatfield – Morgan Keegan

So I guess thinking about that is it fair to say -- I mean just from what -- that we should continue to see the fleet shrink over the rest of this year?

Robert Lyons

No, I don’t think that’s the case at all.

Brian Kenney

No. Ideally, this year, we both placed a long term order and you know picked up a portfolio or a number of cars that really ensures the term growth of our rail business.

Art Hatfield – Morgan Keegan

Okay. So I...

Robert Lyons

If you look out over the course of the last four or five years, we have acquired a lot of cars in secondary market.

Art Hatfield – Morgan Keegan

Right.

Brian Kenney

While you see that front and center on our numbers this quarter because we sold cars, but if that activity picks up and it appears to be, there will be other lessors out there selling various asset types that we may have an interest in.

Art Hatfield – Morgan Keegan

So, while you may see revenue degradation as you renew cars that come up for renewal come off lease you may actually grow, be growing the size of the fleet to mitigate that, and theoretically have better growth in revenue next year from what we’ve seen the last couple of years.

Brian Kenney

Yes. You know. Ideally, we're going to grow in this market. And tough so far because nothing has change hands, and the only portfolio that changed hands we got which was the OCO [ph] rail portfolio. But, as Bob said, as capital markets have improved, we talked about early in the call and you know, some people makes decisions about their fleets as we consider long term orders. We want to grow the fleet in this environment. That's not necessarily as great for accounting results but I think it will be great economic result and good for the share holder longer term.

Art Hatfield – Morgan Keegan

Absolutely, just - and then Bob you had alluded to the average renewal terms dropping to 31. Those have actually been improving the last couple quarters and it’s gotten up to 43 in Q3. Obviously, by shortening the terms on unfavorable lease rates, that's good for you. But, anything other than that or just your ability to block and tackle really well in Q1 was able to allow you to do that, to lower those renewal terms.

Brian Kenney

No, nothing significant. And the other point that I'd make on that too is, that's a two party negotiation. There's a customer on the other side of that. So, we can't arbitrarily do what we want with lease terms all the time. We have a set strategy that we've like to pursue but you know, a lot of our customers are very sharp and they have been in the business for long time. And you know, their thoughts may run counter to ours. So, it's a consonant negotiation process and I would say it's really tough to tighten that number up more than where it was in the first quarter, 31 months, it’s pretty low in terms of renewal term.

Art Hatfield – Morgan Keegan

Got it. That all I got. Thanks for taking the questions.

Brian Kenney

Thank you.

Operator

We'll now go on to Daniel Max with Trafelet.

Daniel Max - Trafelet

Hi, good morning. By how much do lease rates need to increase from current levels such that by 2011 or maybe more importantly 2012 that’s where your clustering is, the LPIs gets back to flat?

Brian Kenney

Well, that's a two -- again that has two factors at work there. One is the expiring rate and the other is the renewal rate. So the, as Brian mentioned, that expiring rate will continue to go up through 2010 and that will begin to abate as we go through 2011. And so, if rates stayed where they are at today we will continue to see that number in negative territory through the end of 2010 and into 2011. And I would, you know, we would continue on. We need some you know, material lease rate pick up to turn that negative, to turn that negative into a positive. That's going to take some time.

Daniel Max - Trafelet

Are you talking 10%, 20%, ball park?

Brian Kenney

Let's say at least 20%.

Daniel Max - Trafelet

Concurrent. Okay. That's what you are looking forward through more like 2012?

Brian Kenney

No, that's - I don't know about that but there's a lot of factors that are going to come in to play on. So, definitely into 2011, we'll continue to feel that pressure. Beyond that, we are hesitant to speculate given that the number can be driven by a lot of different things outside of our control.

Daniel Max - Trafelet

Okay. Thank you.

Operator

And we now have a question from Steve Barger with Key bank Capital Market. (Operator instructions)

Steve Barger – Key Bank Capital Market

Hi, good morning. I'm going to try and expand on that last question. You said that, you know, 10 or 20% or whatever the number is for lease rates to go up. But, from a timing perspective, if you look at past down cycles, whether it's the most recent 6 to 8 years ago, or even the early 80s, if you can speak to that time frame, how long did it take in those down cycles to generate positive comparisons in lease rates?

Brian Kenney

Well, the last cycle we had, I can't recall the number off-hand. There was at least 12 quarters of negative comparisons. And we're, you know, we're well into that right now. But I believe it's around 12 or 13 quarters in negative comparisons before we got back to breakeven. And then it began to move up from there.

Steve Barger – Key Bank Capital Market

Okay.

Brian Kenney

It takes time, Steve.

Steve Barger – Key Bank Capital Market

Sure, sure. And in terms of thinking about specific car types, we're hearing lease rate recovery has been best for certain high-capacity cars, you know, covered hoppers. Can you talk about the profile of your covered hopper fleet, or is there anything for you to do there?

Brian Kenney

There's nothing in, you know, nothing unique that I could point to you, Steve that we're got to get additional headwind versus the general market play.

Steve Barger – Key Bank Capital Market

Okay. And one last question then. Can you give us the average age of the cars you sold or scrapped, and maybe talk about what percent of your fleet you consider near the end of it useful life?

Brian Kenney

Well, the average age of the fleet is about 16 years. So you can, and it's relatively evenly spread out across that spectrum. That’s been the case for the last couple years.

Steve Barger – Key Bank Capital Market

Okay.

Brian Kenney

I don't have the average age of the cars that we sold in front of me. But they tend to be, you know, mid-life type cars that have very good lease term attached to them with a good customer. They just don't happen to be a car type that, you know, longer term that we see fitting into our portfolio or have a need to have in our mix. So, we’re not selling, typically selling cars in the secondary market that are near the end of their life. They still have a lot of years left in them. 

Steve Barger – Key Bank Capital Market

Okay.

Brian Kenney

Scrap cars typically are at near, very near or at the end of their life.

Robert Lyons

There’s been a lot of question about freight, and you mentioned covered hoppers and maybe it’s best to use as an example of an train car which was -- this is more market data, it’s probably down from the peak, was probably down 50%, just six or eight or maybe a year ago down 50% from the peak. Since we’re covered by 25%, if you do the math, that still means it is down over 35, almost 40% from the peak.

Forget about the peak. Just look at the long term average, it is still down from the long term average between 15 and 20%. So, yes. Things have recovered but when I say we’re not jumping up and down, it’s because we’re still renewing higher rate leases and it is still down from the long term average. So when it’s starts to get that long term average, that’s when you know things start to look better.

Steve Barger – Key Bank Capital Market

That’s great, that’s helpful thanks. And, just using that same math, is that recovery that you talked about for covered hoppers better than what you’ve seen in tanks so far.

Robert Lyons

You know, it sounds like we are (inaudible) car type specific, I’d say that’s typical. So, there’s some type pressure tank which look a lot better than that, general service. I’d say maybe even look a little worse than that, really depends on the car type. But then again general service was never down as much (inaudible). So, it is still car type specific.

Steve Barger – Key Bank Capital Market

It does get very granular, Steve, given that north of a hundred different car type in the fleet and sixty deferent tank car types alone.

Robert Lyons

That’s a good example.

Steve Barger – Key Bank Capital Market

Okay. I appreciate it, thanks.

Operator

And we’ll now move on to a follow up from Bob Napoli with Piper Jeffrey. Mr. Napoli, your line is Open.

Brian Kenney

Sounds like Bob may have checked out.

Operator

And we'll now move to Paul Bodnar with Longbow Research, a follow up.

Paul Bodnar – Longbow Research

Yes, a quick follow up on two things. One is, just on the car scrap all those at that point basically going to be idle and you just choose to scrap them or were there any that you kind of took back early and switched out.

Brian Kenney

No, most of the guys are at the end of their life. There may be situations where we have taking cars back from the customer and we replaced those with newer equipment that we had existing cars in the fleet. But, by and large, all of those little cars are coming at the end of their life or they are near the end of their life and the capital investment you need to make in the car to keep it running longer term doesn't make economic sense.

Paul Bodnar – Longbow Research

Yes, I guess what I was trying to get at here, as you said, you had a renewal success rate of about 55% of renewals. What percent of car I guess did you find new homes for after because you have to adjust obviously the scrap cars on that too.

Brian Kenney

Well, a vast majority of the cars given utilization …

Paul Bodnar – Longbow Research

Stayed flat?

Brian Kenney

… went up slightly, but scrap helped on their front. We did not have very many cars at all during the course of the quarter that went from active to idle. We were able to find homes for many, you know the vast majority of those cars that came back off leave.

Paul Bodnar – Longbow Research

And then just also what's your ability now? Or how is the market changing what kind of leverage you guys could do? I mean, I knew you still have – you can may be get up to four to one or beyond that on these rail cars. So, if you do go out there, want to get into the market, I mean, how far do you think you'd be able to push it in terms of your leverage ratio?

Brian Kenney

Sure, leverage at the end of the quarter is billed 3.1 to 1 or it’s been for the last five quarters and obviously it’s a very comfortable level that we are at. I would say that's more driven -- I don't have a specific leverage target in mind. It's going to be driven a lot by the opportunities that we see in the market place. We have still capacity to invest. We're eager to do that and that's why we're, you know, kind of holding on to that capacity to do so.

Robert Lyons

Yes. So, I like the position we are in. It’s a conservative one and enables us to get after a portfolio or an opportunity becomes available, and we would. We wouldn’t worry about pushing it higher if the opportunity came about.

Paul Bodnar – Longbow Research

Have you seen any transactions recently that – and whether those were levered at all in the marketplace?

Brian Kenney

You mean from a securitization standpoint?

Paul Bodnar – Longbow Research

Yes. Do you see anything out there that we can kind of look at those comparisons is what the banks would let you do.

Brian Kenney

Not really, I mean from our standpoint, it is not a question of what the bank would let us do because there people that are doing secured financing. We don't do very much of that at all. Our leverage and our view on the Capital Structure is driven by our credit rating, not what some bank will lend against from an LTV standpoint. So, I haven't, you know there was, I think, one or two secured financings that were done during the course of the last six months by others. And I'm sure the LTVs they got on those improved versus where we have been at the end of 2008 and early 2009. But I don't have specific data in front of me.

Paul Bodnar – Longbow Research

Okay. Thank you.

Operator

And we now have a follow up from Mike Grondahl - Northland Securities.

Mike Grondahl - Northland Securities

Yes, guys I think that the $5 million impairment that you mentioned I lost tract of, what was the trigger for that again?

Brian Kenney

That was the AAR, which is one of the governing bodies in the industry wide rail. They identified a specific car type, a late 1980 built aluminum hopper car where another lessor not GATX, but another lessor had some problems with that car type. And they mandated that those cars come out of the service over the course to the next few years.

They still had a lot of years, theoretically they still had a lot of years to run. But now, the life's been shortened to a just a couple a year. So, we had about 350 of those cars in our fleet.

Mike Grondahl - Northland Securities

Okay. So very one off, got you.

Operator

And there are no further questions in the queue. I would now like to turn the call back over to our speakers for any additional and closing remarks.

Brian Kenney

Thank you very much for your participation in the call this morning. And if you have any follow up questions at all, please feel free to call. Thank you.

Operator

That concludes today’s conference. Thank you all for your participation.

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Source: GATX Corp. Q1 2010 Earnings Call Transcript
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