GATX Corporation's CEO Discusses Q42011 Results - Earnings Call Transcript

| About: GATX Corp. (GATX)

GATX Corporation (GMT) Q42011 Earnings Call January 19, 2012 11:00 AM ET

Executives

Jennifer Van Aken – Director, Investor Relations

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

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

Analysts

Derek Rabe – Morgan, Keegan & Company, Inc.

Steve Barger – KeyBanc Capital Markets

Paul Bodnar – Longbow Research LLC

Steve O’Hara – Sidoti & Company

Matthew Dodson – Edmunds White Partners

Richard Fitzgerald – Jefferies Investment Advisers, LLC

Kent Mortensen – Thrivent Asset Management LLC

Zahid Siddique – Gabelli & Company, Inc.

Kyle Joseph – JMP Securities

Gregory Macosko – Lord, Abbett & Co.

Operator

Good day and welcome to the GATX Fourth Quarter Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Jennifer Van Aken, Director and Investor Relations. Please go ahead.

Jennifer Van Aken

Thank you Michelle and good morning everyone. Thanks for joining us for the fourth quarter and 2011 year-end conference call. With me today are Brian Kenney, President and CEO of GATX Corporation and Bob Lyons, Senior Vice President and Chief Financial Officer.

As a reminder any forward-looking statement made on this call represents our best judgment as to what may occur in the future. We have based these forward-looking statements on information currently available and disclaim any intention or obligation to update or revise these statements to reflect subsequent events or circumstances. The company’s actual results will depend on a number of competitive and economic factors some of which maybe outside the control of the company. For more information, refer to our 2010 Form 10-K and the second quarter 2011 10-Q filings for discussion of these factors. You can find these reports as well as other information about the company on our website www.gatx.com.

I'll keep my remarks brief this morning as Brian will provide some commentary on GATX’s performance in 2011 and what to expect in the year ahead. After that we’ll take questions.

Today, we reported 2011 fourth quarter net income of $31.6 million or $0.67 per diluted share. This includes the aggregate positive impact of $1.9 million or $0.05 per diluted share from tax benefits and other items which are detailed on page 12 of the press release. This compares to 2010 fourth quarter net income of $19.5 million or $0.42 per diluted share which includes the aggregate positive impact from Tax Benefits and Other Items of $4.5 million or $0.09 per diluted share.

For the full-year 2011 net income was $110.8 million or $2.35 per diluted share including the aggregate positive impact of $15.8 million or $0.34 per diluted share from tax benefits and other items. Again these items are detailed on page 12 of the press release. By comparison, 2010 net income was $80.8 million or $1.72 per diluted share including an aggregate positive impact of $6.2 million or $0.13 per diluted share from tax benefits and other items.

The first quarter and full-year 2011 results are reflective of our favorable operating environment. In rail, utilization was strong ending the year at 98.2% in North America and 97.1% in Europe. We maintained this utilization while achieving lease rate increases.

During the fourth quarter the lease price index improved to 13.2% resulting in a full-year LPI of 6.9% stronger than what we anticipated coming into the year. During 2011 we took delivery of more than 1,100 rail cars ordered under our five-year supply agreement.

Total investment volume across GATX was $615 million in 2011 compared with $585 million in 2010. American Steamship Company carried 28.4 million net tons of cargo in 2011 compared with 28.0 million in 2010. Due to favorable weather conditions in the fourth quarter ASC was able to make up a good portion of the volume lost due to a brief strike by the American Maritime Officers Union in August.

Portfolio management also had a solid year. Asset remarketing results were improved and Rolls-Royce and Partners Finance had strong performance. In the coming year leases on over 20,000 rail cars are scheduled for renewal in North America. We expect the lease price index to be positive, likely in the positive mid-teens and for utilization to remain steady.

We also anticipate continued asset remarketing opportunities and somewhat better demand at American Steamship Company. As we look to the year ahead, as noted in this morning's press release, we currently expect 2012 earnings to be in the range of $2.40 to $2.60 per diluted share.

With that overview, I will turn it over to Brian.

Brian A. Kenney

Thanks, Jennifer. Between the press release and Jennifer's comments you should have a pretty good understanding of what drove our financial performance in 2011 and what to expect from an EPS perspective in 2012. So what I’ll do is I'll briefly touch on a few strategic issues and then talk a little bit about how some of our GATX may change in 2012.

As we have detailed repeatedly on prior earnings calls our rail strategy during the downturn was to add rail cars at the more attractive prices that were available in the down market. And then to keep lease term short, in order to capitalize on an eventual market recovery.

And that growth strategy was successful and it culminated in the largest railcar order in GATX's history in the first quarter of 2011. It was also very because [towards] it’s timing as the recovery in the rail market accelerated beyond our expectations in 2011. And that was just as we were taking delivery in the new cars under the new committed order [Audio Gap] cars that we added to the fleet during the downturn.

So, if you combine the new deliveries, a large number of existing cars renewing and rapidly increasing lease rates, you have the reason for rails better than expected performance in 2011. These same factors will be the main drivers for rail's increased financial performance in 2012.

Since I had to offer a data point in support of that optimistic view. It’s where we stand on our committed railcar order that we placed in 2011. Not only do we place a 100% of our 2011 deliveries with customers at attractive prices and terms, we’re actually already sold out on our 2012 deliveries and we’re working on placing our deliveries well into 2013.

So, so far, so good. We’re also going to continue to push hard to increase lease rates in 2012, just as we did in 2011. However, as lease rates approach and exceed, what we believe our attractive long-term averages on various car types, we're going to pay more attention to lease term in 2012.

The desire of course is to lock-in some of these attractive rates for as long as possible. So, as we move through the year you’ll hear us talk about trading lease term, lease rate I should say for longer-term. And I want to emphasize that when I say trading lease rate for term, I'm not talking or suggesting that we expect to see lease rate decreases, I'm referring to the size of a lease rate increase we will see versus the length of the term we will try for.

So, obviously the answer as we like both much higher rates and longer term, but it's going to be a trade-off to monitor as we move through the year. Moving to growth for a minute, obviously that was an important and successful focus of ours in the weak market in the last few years. However, as the rail market continues to improve asset prices will increase, in fact they already have increased and attractive fleet growth beyond our existing committed railcar order will become more challenging.

And that's just the way our business works. Increasing railcar values are great for current results and not so great for disciplined growth. So, we’ll focus hard on growing our fleet in North America especially to support our best customers, but it's probable that our growth profits will also shift somewhat to our European tank car business where our lease rate factors are in better alignment with car cost as well as focusing on emerging rail markets where potential growth rates are generally much higher.

So, that's how we’re thinking about the rail business. I wanted to touch on American Steamship for a minute. Although they did have a solid year from a volume perspective as Jennifer already referred to, they did have to deal with the short strike from the AMO office, union in August that did impact our operations in the third quarter.

We never want to get to that point with any of our unions but in this case we really had no choice. We had a severe cost disadvantage relative to our competition on the Lakes that had different union.

The good news is we’re pleased to announce that we very recently reached an agreement with AMO that works for both sides. We will make ASC cost competitive with any competitor on the Lakes and still protect the wages and benefits of our union members.

As you’ve noticed the last few years we've had at least three vessels tied up [in our] operation and sometimes a lot more than that depending on demand and high operating cost. But with this new agreement we hope to get some of these vessels back sailing profitably in the coming years and even create some jobs in the process, so good news in American Steamship. And if North American auto demand increases at some forecast adjust it could be a strong 2012 for ASC.

I should also comment on our former specialty segment now renamed Portfolio Management. In recent years you’ve heard us talk about trying to establish a growing and diverse industrial equipment finance platform as part of that Specialty segment. The business was profitable and even in the severe downturn it generated very few losses, but despite the best efforts of the IAF team achieving consistent investment volume was challenging due to increasingly competitive landscape in this market. In particular banks aggressively pursue this market and they've driven down pricing to unattractive levels given our cost of capital.

So, we continue to pursue this type of investment and make it a significant contributor to GATX. It’s just not the best use of our resources and we've elected to seize that activity. So, going forward the Portfolio Management segment will manage our non-rail joint ventures such as the marine JVs, the JV with Rolls-Royce, our gas compression joint venture. And they’re also going to manage the leasing portfolios for our third-party customers.

You will see a case on investment in this segment, especially in the domestic marine market where we've done very well. But in general this segment’s going to be a lot more about generating profits from existing ventures and investment than it will be about generating significant growth.

And lastly, we need to continue to focus on operating efficiencies and once again with particular focus on continuing the efficiency gains we have produced in our rail maintenance network over the last few years.

In the next few years we're going to see a scheduled tank car compliance work increase, and entering that period, we want to be as efficient and as safe as possible. So there you have it. We feel we are squarely in the middle of the up part of the rail cycle. We feel we’ve put ourselves in an excellent competitive position. We are intently focused on continuing to improve profitability to a level above the prior peak and perhaps most importantly we’re looking ahead at improved strategies and tactics as market conditions change.

So, with that let's go ahead and open it up to questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from Art Hatfield, Morgan, Keegan. Please go ahead.

Derek Rabe – Morgan, Keegan & Company, Inc.

Good morning, this is Derek Rabe in for Art. How are you guys?

Brian A. Kenney

Good.

Jennifer Van Aken

Good.

Derek Rabe – Morgan, Keegan & Company, Inc.

We've seen a quicker turnaround in the lease prices index than originally you had anticipated and then, continued strength since then. Can you just talk about where the absolute lease rates stand today maybe relative to peak levels when you were signing contracts north of 60 months? And then can you speak as to how far we have to go back to get to those levels?

Brian A. Kenney

Yeah, as usual that's a car-type by car-type answer, so it’s not to frustrate you, let's talk about general service tank cars, which are the backbone of our fleet in our largest car type. Looking at the peak rates of a couple of years ago, from the peak in say 2008 down to the bottom in late 2009, lease rates had dropped over 50%. Now since then they had come back up dramatically but if I look at where they are now versus the peak, they're still well short of that, perhaps 20% or more. So, if you look at the revenue upside in our most common car type, it's still considerable moving forward. But other car types that have, and the best example and we've talked about this in the past conference calls are the 30,000 gallon tank car. There is an example where our lease rates fell 75% from the peak in 2008, to the bottom in 2009 and now they're right back up at that peak as you saw in 2008.

And that's increasingly the case for various car types and those are the car types where we're trying to push term. But still there is considerable upside in our fleet because of the composition of our fleet and the fact that we haven't reached peak in some of our most common car types. But lease rates are absolutely increasing as we move through the year.

Derek Rabe – Morgan, Keegan & Company, Inc.

Okay, great. Second question is just on the shale opportunities. Can you remind me how much you're doing currently with that business? And then what kind of interest are you seeing from your customers?

Jennifer Van Aken

Well, currently we have a few hundred cars in that service. I think what we said before is, we will likely do more but we’re certainly not looking to skew our fleet to service that particular market.

Brian A. Kenney

Yeah, we’re being very careful. There is a lot of inquiries around that market. We're trying to do business with the best customers and trying to push it out for the longest term. We're being very careful how we approach that market in some ways and we said this on prior calls, it's starting to feel little bit like the ethanol market did during the prior peak, so we’re going to be just as careful here as we were there. But it's definitely driving industry performance.

Derek Rabe – Morgan, Keegan & Company, Inc.

All right great. And then just finally on scrapping gains, you're coming off of two strong years of gains related to scrapping rail cars, what kind of level should we expect to see in 2012? Do you expect to get back to some 2009 level, closer to $10 million or 2010 closer to $18 million or how should we think about that?

Brian A. Kenney

I would say closer to the 2010 level, Derek.

Derek Rabe – Morgan, Keegan & Company, Inc.

Okay.

Brian A. Kenney

$18 million, $20 million somewhere in that range.

Derek Rabe – Morgan, Keegan & Company, Inc.

All right great. Thanks for the time guys.

Brian A. Kenney

Thank you.

Operator

Thank you. The next question comes from Steve Barger of KeyBanc Capital Markets. Please go ahead.

Steve Barger – KeyBanc Capital Markets

Hi, good morning.

Jennifer Van Aken

Good morning.

Brian A. Kenney

Good morning.

Steve Barger – KeyBanc Capital Markets

You mentioned in the release, it’s going to be hardened to find cars for growth due to rising asset prices. But if you did find a customer where the economics made sense, are built (Inaudible) available today or how long would it take you to get a car if you did order today?

Brian A. Kenney

Well, obviously in our committed purchase program we’re sold out well into 2013, we can order cars above that just in the spot market. But if you look at backlogs in the market right now, in the tank car market, it’s still over a year 12 to 15 months.

Steve Barger – KeyBanc Capital Markets

Right.

Brian A. Kenney

Freight car, it’s actually come down a little bit, I think it's more in the six to 12 months range. So, it takes a while to get those cars delivered, which is a good thing once again for current results. It’s not like we're giving up growth in the U.S., there is different tactics you can use in general even though you may not like the price you’re paying for that car, because it’s escalated considerably over the past few years.

Lease rates are also pretty high and if you can lock-in those lease rates for a very long period and then initial lease term, you can essentially amortize that cost. So that's an example of a tactic you can use to continue to make investment. You also can look increasingly at the secondary market and for, people sell cars, it’s a very active secondary market. And people sell cars for various reasons, exposures, the inability to place; they still have the same marketing capability we do. There is various reasons we can get a hold of cars at attractive valuations. So, we look at the secondary market a lot. So, definitely not giving up, but just an indication it will be more difficult as asset prices increase.

Steve Barger – KeyBanc Capital Markets

Right. And to your earlier point about focusing on term rather than rate, what kind of commitment would you need to see to have, generally speaking to have the economics make sense for, to place additional new car orders?

Brian A. Kenney

Well, you're going to hate that answer too, because once again it depends on the car type, but I will tell you, it's getting pretty long. If you place a spot order today, you’re, in a lot of cases we’re trying to push new car terms out 10 years or more to really amortize that additional cost [thing].

Steve Barger – KeyBanc Capital Markets

So, you go through 2012, we should expect the average renewal term is going to extent quite a bit beyond what you’re booking right now?

Robert C. Lyons

I think…

Brian A. Kenney

Go ahead.

Robert C. Lyons

The point Brian was making is, on a new car that’s kind of the term we're looking for, around where we have 20,000 renewals, 20,000 plus. And, yeah we won't get 10 years on those renewals. So we're looking for something, we finish the year I think, right around…

Brian A. Kenney

49…

Robert C. Lyons

48 or 49 months in the fourth quarter, it could be up from that, but it's not doubling.

Brian A. Kenney

It really depends on what's up for renewal at a given point in time and where you are in that lease rate cycle.

Steve Barger – KeyBanc Capital Markets

Okay. And one more and I'll get back in line. We all know the shale plays are strong contributors to the cycle, but just looking at your own specific fleet, can you talk about the themes or individual markets that you think are just going to be really big drivers of utilization, pricing? And maybe there aren’t any, any areas that are potentially weaker for 2012?

Brian A. Kenney

Well, anything construction related remains weak. So, aggregate half percent are [beams] things like that. But, when you talk about parts of our fleet where they were particularly strong, it’s a difficult answer because not only we’re 98.2% utilized overall, on the tank car side we’re more like 99.5%. So, the answer is everything is pretty strong right now. If you look at what's particularly strong in the industry, you already mentioned, some of those, another frac sand market, anything involving a 30,000 gallon tank car you're seeing renewed strength in auto carriers. So there are broader-based increases in demand across our fleet. But the fact is, our fleet is in high demand, period.

Robert C. Lyons

And if you think about the, Steve it’s Bob, just from the, kind of the mathematical side of the equation here, out the cars we have idle. First of all we don't have many idle cars, call it 1,800 cars or so but as we’ve indicated before about half of those are center beam. Some when you back those out of the, and they’re not going to, some of those may not go to work for a while, so when you kind of look at the rest of what's available, there is very little. And we’re trying to capitalize on that thing [amuck].

Steve Barger – KeyBanc Capital Markets

Got it. Okay, thanks. I'll hop back in line.

Operator

Thank you. The next question comes from Paul Bodnar of Longbow Research. Please go ahead.

Paul Bodnar – Longbow Research LLC

Hi, good morning.

Jennifer Van Aken

Good morning.

Brian A. Kenney

Good morning.

Paul Bodnar – Longbow Research LLC

Hey, just wanted to see if you can give a little more detail on what's the [lay of the land] in Europe both on the tank car side as well as your other business there?

Brian A. Kenney

Sure. On the tank car side it's a very strong market. As you probably know we have about 21,000 cars on our own platform which is all tank cars in Europe. They have over 97% utilization. Their primary markets, the petroleum and chemical are very strong at this point.

As we've said on prior calls, they never really experienced the downturn that we did in North America or that they did in the freight side in Europe. And so that business is chugging along. As I said investment opportunities there are actually very attractive right now and there is a big replacement cycle that’s happening here.

People are upgrading to higher capacity, more efficient cars. So we're bullish on the tank car business in Europe.

Freight car side, obviously more impacted. Traditionally that business had been a 99% utilization business. It took a beating in 2009. It's very dependent on container traffic and the economy in general. Effective utilization there right now is still probably around 90%. It has come back off the bottom, but it's been a very slow recovery. And if you look at the macro situation in Europe, it looks like it's going to be a long slog out on the freight car side.

Paul Bodnar – Longbow Research LLC

Okay. And just one another detail, anything in North America yet? I think you made some specific comments, maybe I missed this, just on the grain market and what that looks like this fall? Was it a little bit weaker than usual and do you have any expectations there going forward?

Brian A. Kenney

Well, our grain fleet, it's not a 100% utilized. It's very close, and actually, I think last quarter we talked about, that's one of the car types where current lease rates were approaching the peak. I think it probably backed off a little in the fourth quarter. I haven't got any color there, other than that could have been the timing of the harvest. So still a very strong car type for us with very strong rates.

Paul Bodnar – Longbow Research LLC

Okay. Well, thanks a lot.

Operator

Thank you. The next question comes from Steve O’Hara of Sidoti. Please go ahead.

Steve O’Hara – Sidoti & Company

Hi, good morning.

Brian A. Kenney

Good morning.

Steve O’Hara – Sidoti & Company

Can you just remind me how the sold-out cars get priced in terms of the lease rates throughout the year? If they're sold out through 2012, how do the lease prices get calculated?

Brian A. Kenney

Well, in general, we protect ourselves. As car costs increase, we make sure we're protected from a lease pricing perspective. And that's probably the best way to put it, because builders are not quoting fixed rates. Our contract, our committed purchase order with Trinity is they cost less. We place cars well in advance. Car costs could increase between the time we place the order and the time the car is delivered, so we make sure we are protected with the customer as far as indexing that lease rate to that car cost.

Robert C. Lyons

Steve, I'd also add too, we are mindful of the funding cost side of that equation too. So we take various measures to try to protect ourselves on that front. Everybody in the industry does think a little bit differently, so hence the reason we're probably a little bit not as specific in how we do that. But we're very comfortable that cars we are pricing today and putting into the fleet for committed delivery in 2013 will be a very good economics for GATX.

Steve O’Hara – Sidoti & Company

Okay, and then as a follow-up, in terms of the, let's see, you had mentioned funding costs. I mean has the dynamic changed in the industry where maybe your funding costs are more competitive to some of your biggest competitors than in the past?

Robert C. Lyons

Well, we saw the real power of having a solid credit rating like we have, and the ability to access the capital markets when we need to. We have been in the capital markets when most constrained, back in 2008, 2009 and 2010 and we were able to continue to invest and invest aggressively at times when others had to go to the sidelines.

So we were able to buy a lot of cars during that timeframe at really attractive prices, when others just couldn't access the capital to do so. Right now the capital markets are pretty accessible for everybody. It comes down to a question of coupons, but even on that front we feel we are in very good position.

Steve O’Hara – Sidoti & Company

Okay, and then just finally on the ASC contract, I mean, is this something where you have to give a little something on rate? Maybe you gained some productivity, or did you actually gain on the rate as well?

Brian A. Kenney

The major issue for us in that contract was around productivity and manning, and I think we made significant strides there.

Steve O’Hara – Sidoti & Company

Okay, thank you very much.

Operator

Thank you. Your next question comes from Matthew Dodson of Edmunds White Partners. Please go ahead.

Matthew Dodson – Edmunds White Partners

Can you talk just a little bit on the Steamship side? You talked about potentially bringing up capacity, and is that because you’re seeing stronger demand or is that because you have better terms now with your unions and you’re more competitive on a pricing standpoint?

Brian A. Kenney

Well hopefully in the short term, I think it's going to be increased tonnage. And if you believe some of the auto forecasts out there, we should see increased tonnage in 2012. Longer term, some of the older, less efficient vessels we have are now going to be more competitive and over the longer term we hope to bring them out whether it's in the same service or new service and have those profitability sailing. But in the near term in 2012 it will be more, hopefully from increased tonnage.

Matthew Dodson – Edmunds White Partners

And then just relative to pricing, are you seeing the opportunity to push price at all since there's been a lot of consolidation in the industry or is that not something that you have the ability to see?

Brian A. Kenney

Increased pricing does not stand out. It's really more tonnage driven on the Great Lake, so it's a very competitive market.

Matthew Dodson – Edmunds White Partners

Okay. And the last question I have for you just relative to that business is, longer term, is that a business that you guys want to be in, or what's the competitive advantage and how does it kind of fit with your other business?

Robert C. Lyons

Sure. Well, the asset base fits very well. We talk often about the fact that we like to invest in long life, widely used assets that have a service component that we know well. American Steamship's been in business for over 100 years. We've owned it since the early 1970s. We know the assets and the market extremely well. We have a very competitive position.

It is a bit of an outlier within GATX, because it's the one business where we actually own the assets and operate. But it's a very solid performer for GATX. Obviously we are a public company, so everything is for sale every day. But it's a solid performer for GATX and we like the position we are in there right now.

Matthew Dodson – Edmunds White Partners

Thank you.

Operator

Thank you. The next question comes from Rich Fitzgerald of Jefferies Investment Advisers. Please go ahead.

Richard Fitzgerald – Jefferies Investment Advisers, LLC

Good morning everyone. Thanks for taking my question. Just wanted to get your perspective on what you're seeing from the manufacturers, specifically their willingness to an interest in ramping up production to take advantage of what seems to be a pretty advantageous pricing environment.

Brian A. Kenney

Yeah, it's a good question. There have been some capacity increases. In particular, two manufacturers have opened up some capacity, primarily in Mexico. I don't have a great answer for how much capacity that adds. Our guess is in the range of 5000 plus cars.

So you have seen some new capacity come onboard. But on the other hand I already gave you the backlogs and they're still way out, it really hasn't had an impact on the market itself. But it's a great question because that’s something we are always going to watch.

Richard Fitzgerald – Jefferies Investment Advisers, LLC

Okay and then just a quick follow-up. Conceptually, the trade-off between pushing lease term and perhaps somewhat lower rate increases I think makes sense given the strength of the environment. I guess the question for you guys is, to what extent is that just normal through this cycle portfolio management and to what extent does it suggest that the visibility into further LPIs strengthening from here might be a little bit limited?

Robert C. Lyons

It's typical of the way we look at the marketplace. And if you look at how we have managed term over the past cycle, this is a process that we have undertaken before. We think we are fairly disciplined around when we believe the time is right to start looking at longer terms. There is quite a bit of analytics that goes behind it.

So we feel good about that strategy and it's worked for us in the past. And conversely, the end of 2008, 2009 and 2010 when the market was very weak, we stayed short. And a lot of those cars will be coming up for renewal this year and next and we feel we'll be very well on those.

Brian A. Kenney

It's a great question because it's the endless internal conflict within the GATX fleet group about when to push term and when to really push rate. And it's actually even a more complicated answer, because you're also looking at your renewal and exploration profile. And you won't have too much expiring in one time, as an example.

So it's a calculus they do very well in the Fleet Group. But right now I'd agree with Bob, it feels more like its just standard way we manage our portfolio as opposed to a view on prices.

Richard Fitzgerald – Jefferies Investment Advisers, LLC

Okay, thanks a lot. That's very helpful.

Operator

Thank you. (Operator Instructions) The next question is a follow-up from Steve Barger. Please go ahead.

Steve Barger – KeyBanc Capital Markets

Thanks for taking my question. Sorry, if I missed this, but can you give us any detail on the asset re-marketing and the current portfolio management, what do you sell there?

Brian A. Kenney

There were some marine assets that we sold within that portfolio. And then I’d say also generally some diversified equipment. There wasn't any particular transactions that stand out. If there were any, it would be on the marine side where it captured some very good economics on a few assets.

Steve Barger – KeyBanc Capital Markets

Got it, okay. And to the earlier comment on required tank car maintenance, what percentage of the fleeting's we worked on and how long does that take, what kind of work is required?

Robert C. Lyons

Well what I was referring to specifically was the HM-201, essentially tank integrity compliance work that's scheduled every 10 years to 15 years. And what we've seen is, it peaked a couple of years ago and came down 2009, 2010. It’s been pretty flat in 2011, will be flat in 2012 and it will increase in 2013. But as far as the amount of cars that we touch in a given year, that's a massive number.

Brian A. Kenney

In terms of service events in a given year, Steve that number's upwards of 80,000 service events in a given year. That doesn't mean we touch 80,000 cars, but...

Steve Barger – KeyBanc Capital Markets

Right.

Brian A. Kenney

The service end of the business is, as you know very extensive and it's an around-the-clock activity at GATX.

Robert C. Lyons

Yeah, if you look at what's driving maintenance, obviously it's the size of the fleet. It’s where you are in the regulatory cycle as we just talked about. It's the level of railroad repair activity, which has been increasing in the past couple of years, especially around rail replacements. And the thing we always try to drive home, it's also driven by commercial activity.

So in a very strong market, we have 80% renewal rate like we saw in the fourth quarter. That’s going to be less sharp. It's lower maintenance. In the weak market a couple of years ago, where there is a lot of customers returning cars and a lot of assignments, there is more shop visits and higher maintenance.

So when you look at this favorable year-over-year of maintenance comparison in North America right now, it's a relatively static environment in terms of compliance events in the tank car fleet. You see a downward trend in the volume of general repairs and that’s due to the strong commercial activities. And that's being offset somewhat by higher railroad repairs, mostly driven by wheel change-out.

So complicated answer, but in general, what people neglect to realize is, commercial activity to a large extent drives your repair activity as well.

Steve Barger – KeyBanc Capital Markets

Now, its great detail, I appreciate it, thanks.

Operator

Thank you. The next question comes from Kent Mortensen of Thrivent. Please go ahead.

Kent Mortensen – Thrivent Asset Management LLC

Good morning, guys. Maybe I missed this, but did you talk about how we should think about re-marketing income for 2012 versus 2011?

Robert C. Lyons

Kent, its Bob. Now, we have not, and happy to do so. We had a very good year in terms of re-marketing as you can see, $45 million. We are anticipating, given where asset prices are right now, liquidity in the secondary market access to capital for buyers of GATX's assets that will have another very strong year in 2012 in that range or maybe even a little bit north.

Kent Mortensen – Thrivent Asset Management LLC

Okay. And I understand that the European market for tank cars is reasonably stable, but I'm assuming that given the stress over there amongst perhaps some of the owners of those cars or just financial institutions in general, is there an opportunity there for you to be very aggressive? I mean are there potentially some large amounts of assets that could be available in Europe for you to take advantage of?

Brian A. Kenney

Yeah, that's a very perceptive question, because it's starting to feel in Europe, and probably more in the freight car side, but it’s starting to feel in Europe like it did in the U.S. back in late 2008 and 2009 where there’s a lot of distress economically and some of the competitors aren’t doing too well. And we haven't seen anything come up for sale, but it’s a good question, because we’ll be very focused on probing that very issue.

Kent Mortensen – Thrivent Asset Management LLC

And then this cycle we've had, kind of an increase with regard to manufacturers [building] their leasing operations, and I know that's something that we’ve had to kind of keep an eye on, how is that trending at this point? Are you seeing them acting rationally at this point? Any comments on that?

Robert C. Lyons

Sure, Kent. It's Bob. We definitely saw that during the real strong markets of ‘06, ’07 and ‘08, definitely less so during the downturn. And I'd say, today right now we're seeing very rational behavior from the manufacturers. Certainly haven't seen anything irrational.

Kent Mortensen – Thrivent Asset Management LLC

Okay. You talked about 20,000 cars being up for renewal in 2012. What does that number look like in 2013?

Robert C. Lyons

We disclose the year ahead, Kent. We don't go much farther out from that. It's likely we'll go up, but it's not like it's going to go from 20 to 30.

Kent Mortensen – Thrivent Asset Management LLC

Okay.

Robert C. Lyons

For example, it's not that much of a stair step.

Kent Mortensen – Thrivent Asset Management LLC

Okay, excellent. Great, thank you.

Operator

Thank you. The next question comes from Zahid Siddique of Gabelli and Company. Please go ahead.

Zahid Siddique – Gabelli & Company, Inc.

Hi, good morning.

Jennifer Van Aken

Good morning

Zahid Siddique – Gabelli & Company, Inc.

Couple of questions, first could you provide a little bit more detail on the JV with Rolls-Royce, the engine JV?

Robert C. Lyons

Sure, what type of detail would you like? I’m happy to comment on it.

Zahid Siddique – Gabelli & Company, Inc.

Meaning, maybe what was your share of income? And what is the number of engines that are part of the JV and kind of the, how the pricing works and profitability works?

Robert C. Lyons

Sure. I can't comment specifically on the profit stream from that joint venture because we don't break that out separately, but it is a, it is a very profitable investment for GATX. There is, within the Rolls-Royce and Partners Finance joint venture, there is roughly 350 spare commercial engines. It’s over $2 billion worth of engines within that portfolio. The transaction, it's the leases themselves are, they work very similar to a railcar, a full-service railcar lease.

They’re long-term and they typically are backed by a service contract with Rolls-Royce, the parent company. So, they’re effectively full-service leases, very similar to what you might see in rail. And the terms also, the length of term would be very similar. That's one of the reasons that we, when we sold our aircraft leasing business a number of years ago, we retained that piece of the business that have a very attractive income return profile, but also the asset composition feels very much like a railcar.

Zahid Siddique – Gabelli & Company, Inc.

Okay, that's helpful. And then the other question I have is on the availability of any large portfolios, is there anything out there? I know you didn’t have much in the recent quarters, have that changed in any way?

Robert C. Lyons

Yeah, in terms of the very big portfolio, I can’t really comment on that too much. But we're not aware of any significant portfolios right now that are in the marketplace. Obviously we're always looking. We look across the board at small packages that might be available in the secondary market, hundreds of cars up to thousands at a time. But the mega portfolio that people have talked about in the past. We're not aware that they’re being shopped at this point.

Zahid Siddique – Gabelli & Company, Inc.

Okay and the last question is on the orders that you have been placing for new cars, is there a chance that you potentially could overshoot if the economy slows down, and you have a backlog of cars in your orders and you may not need them, is that a concern that you have evaluated?

Robert C. Lyons

We certainly evaluated that before we placed the five-year order that we did. And we saw very comfortable at 2,500 cars a year, that that would be a very manageable supply of cars really regardless of the environment. And we still absolutely feel that way.

Zahid Siddique – Gabelli & Company, Inc.

Thank you.

Operator

Thank you. The next question comes from Kyle Joseph of JMP Securities. Please go ahead.

Kyle Joseph – JMP Securities

Good morning guys. Congrats on a good quarter.

Brian A. Kenney

Thank you.

Kyle Joseph – JMP Securities

Just a few, little follow-up questions. The ASC division not really strong revenue growth, how much of this was attributable to the favorable weather, if you could break that out? Or what would be a more normalized revenue growth year-on-year for the company or for that segment?

Brian A. Kenney

Well, it's a little bit difficult given everything that went on there this year. I will tell you the fourth quarter was extremely favorable from a weather standpoint. We tend to look at it more in terms of ton. We moved at least a million tons more this year in the fourth quarter than we did last year in the fourth quarter and that's directly due to the fact that we had a steady flow of demand coming out of the strike. We certainly had contract customer requirements to fulfill. But also the weather was unusually favorable, particularly in December when you normally would run into choppy weather and high winds and ice; we really had none of that in December. So, lead to an excellent quarter.

Kyle Joseph – JMP Securities

Okay and to put that in perspective the million tons what was the total tonnage moved in the quarter to see what percentage increase that was?

Jennifer Van Aken

It was, the fourth quarter of 2011 was 9.7 million tons

Brian A. Kenney

Fourth quarter in total.

Kyle Joseph – JMP Securities

Okay. So, yes, that's helpful, thank you. And then just to clarify, I think Jennifer said earlier, 1,100, you guys have purchased 1,100 cars on the Trinity agreement so far, is that correct?

Jennifer Van Aken

That’s how many we took delivery of in 2011.

Kyle Joseph – JMP Securities

Okay. Okay, so you guys still have a lot more to take delivery of there, just wanted to see how many were left? Okay, thank you for answering my question.

Brian A. Kenney

Yeah. And that will be on a calendar year, so we’ll typically take delivery of the 2,500 that we’re scheduled to take.

Kyle Joseph – JMP Securities

Great, thank you.

Brian A. Kenney

Thanks.

Operator

Thank you. And our last question comes from Gregory Macosko, please go ahead, from Lord Abbett. Please go ahead.

Gregory Macosko – Lord, Abbett & Co.

Yes, thank you. With regard to Europe you have basically, a 100% is tank cars, correct?

Brian A. Kenney

On the owned side, a 100% is tank cars. We also have a joint venture with a, on the freight car, which is another 25,000 cars.

Gregory Macosko – Lord, Abbett & Co.

I see.

Brian A. Kenney

We have about 37.5% of that (Inaudible).

Gregory Macosko – Lord, Abbett & Co.

Is there any, does the joint venture limit you from becoming involved in anything other than tank cars in Europe and is that possible or do you think about that?

Brian A. Kenney

We think about that but, we're a good partner and we’ve; anything we would get involved in Europe outside of tank cars, we would discuss with our joint venture partner.

Gregory Macosko – Lord, Abbett & Co.

Given the difficulty in the other part of the market, it sounds like it's tougher at this point. Does it make sense for that joint venture to growth that piece; have the joint venture add cars or anything?

Brian A. Kenney

Right now the joint venture is not adding cars, but we had earlier question about that. It's something we should definitely look at as we go forward here because I said it’s starting to feel over there like it did in the U.S. a couple of years ago where there’s a lot of economic upsets, there are some leftover struggling. And they’re about; they’re willing to sustain the business. So we will probe on the freight car side in Europe to see, similar just to how we did in North America to see if anybody would like to make a exit of that business which would be attractive to us. But right now there is nothing going on.

Gregory Macosko – Lord, Abbett & Co.

Okay. And then with regard to the Rolls-Royce joint venture, are there engines being added to that venture periodically as basically as there is growth in the airline business?

Robert C. Lyons

Yeah. There are, Greg, both within the joint venture. It’s a self financing joint venture. So it typically will be adding engines in a given year, new engines to the portfolio of finance right out of its own bank lines and cash flow. And then occasionally we look at opportunity that are large enough that will require some additional equity contributions from either ourselves or Rolls-Royce and we’ve done that in each of the last two years, and so the growth prospects there are very strong.

Gregory Macosko – Lord, Abbett & Co.

And is there, and are you both committed to each other, so you share any opportunities or does Rolls do it on its own?

Brian A. Kenney

No, this is Rolls's vehicle in the business that you referred. Spare, aircraft engine leasing business.

Gregory Macosko – Lord, Abbett & Co.

So you guys are both on the same page when it comes to growing there, right?

Brian A. Kenney

Absolutely, and whatever we've contributed and whatever Rolls has contributed we've matched dollar-per-dollar and we've been partners a long time.

Gregory Macosko – Lord, Abbett & Co.

Okay. Then finally, with regard to the railroads themselves, could you give me any sense of what your feeling from the standpoint of their maintenance and their upgrade, managing of their lines, are we going through a cycle here where we maybe have peaked down or do we expect more maintenance? I mean just as a kind of an indication of how those cars are just moving across into the network.

Robert C. Lyons

More difficult as to comment specifically on the Class I maintenance programs. But if you look at your public statements and kind of directionally what they're doing, they are continuing to invest very aggressively in their infrastructure and will continue to do so. They try to enhance efficiency of their alliance. In certain cases, they'll continue to own some growing stock and in other cases they may look to redeploy some of that capital into other projects. So we are certainly not seeing or hearing of any major change in philosophy, the Class I.

Gregory Macosko – Lord, Abbett & Co.

And you don't feel any sort of, shall we say slowness, or your customers don't feel slowness regarding just a movement relative to the maintenance or anything, or are there any issues there at all?

Robert C. Lyons

Not on the maintenance side, it's more of a traffic issue, the velocity. That’s more of a driver, but not on the maintenance side.

Gregory Macosko – Lord, Abbett & Co.

Okay.

Robert C. Lyons

We are not hearing that though.

Gregory Macosko – Lord, Abbett & Co.

Okay, thanks very much.

Robert C. Lyons

Okay.

Operator

Thank you. There are no further questions at this time. I will turn the conference back to Ms. Van Aken. Please go ahead.

Jennifer Van Aken

All right, thanks Michelle. Thank you everyone for your participation. I will be available this afternoon to answer any additional questions. Thank you.

Operator

Ladies and gentlemen, this does conclude the conference call for today. You may now disconnect your line, and have a great day.

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