GATX Q3 2007 Earnings Call Transcript

GATX Corporation (GMT)

Q3 2007 Earnings Call

October 25, 2007 11:00 ET

Executives

Brian A. Kenney - President and Chief Executive Officer

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

Rhona S. Johnson - Director of Investor Relations

Analysts

Paul Bodner - Longbow Research

Tom Clegg - UBS

Michael Cohen – Sunova Capital

Bob Fitch - Abbott

Barry Haimes - Sage Asset Management

John Hecht - JMP Securities

Majid Khan - Cobalt Capital

Bob Napoli - Piper Jaffray

Rick Shane - Jefferies

P. Logan Stevens - Morgan Keegan

Phillip Walker - White Mountain

Presentation

Operator

Good morning. My name is Jennifer, and I will be your conference Operator today. At this time, I would like to welcome everyone to the GATX Q3 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session.

(Operator Instrutctions)

I would now like to turn the call over to our host, Rhonda Johnson, Director of Investor Relations. Ms. Johnson?

Rhonda S. Johnson

Thank you Jennifer, and good morning everyone and thanks for listening in to our third quarter conference call. With me today are Brian Kenney, President and CEO of GATX Corporation, and Bob Lyons, Senior Vice President and Chief Financial Officer. I’ll provide a brief overview of results highlighted in our press release earlier this morning, and then we’ll open up for your questions.

First, I’d like to remind you that any forward looking statements made on this call represents our best judgment as to what may occur in the future. We’ve 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’ll refer you to our 2006 form 10-K filing.

Now let’s review the numbers. Today we reported net income from continuing operations of $63.9 million, or $1.21 per diluted share for Q3 2007, which included a $9.4 million, or $0.17 per diluted share tax benefit from a change in statutory tax rates in Germany. In Q3 2006, we reported net income from continuing operations of $43.6 million, or $0.76 per diluted share. Year-to-date, we reported net income from continuing operations of $144.4 million, or $2.63 per diluted share, including net benefit from the German tax rate change that I just mentioned. This is compared with $122.7 million, or $2.13 per diluted share in the same period in 2006, which includes a $5.9 million, or $0.10 per diluted share tax benefit from a change in Canadian statutory tax rates.

Our third quarter results were exceptional, benefiting in particular from very high remarketing income in both rail and specialty. As noted in our press release, the areas we have highlighted in the past year, in particular the markets for construction related rail cars and ethanol tank cars, have shown continued weakness, and we’re now seeing signs of softness spread across the rail market, and to other car types.

While these market changes have not had a material impact on our rail operations in the short term, we continue to monitor these developments as they relate to longer term results. It’s also important to note that we are optimistic that any weakness in the market will provide to GATX with an opportunity to capitalize by expanding our investment activity.

Our utilization in our fleet is still high at 97.9%, and we’ve had continued success renewing cars with customers. The renewal lease rates on a basket of our most common car types improved 17% over the expiring rates, and lease terms were extended to a record average of 78 months in the quarter. While nominal lease rates generally remain high, we have seen signs of rates flattening and in some instances, beginning to decline off of recent heights. In addition, and as we’ve discussed before, as we go forward we expect average expiring rates to rise, making future comps more difficult.

Maintenance expenses were a challenge in this quarter, as both the cost and volume of repairs, especially those done by railroads, increased in the quarter. In particular there has been a market increase in the number of wheel sets changed out, typically for brand-new sets. We’re working to mitigate these driving costs by working with regional railroads to capture rail cars and undertake the change outs on our own, thereby enabling us to control this cost more effectively.

In Europe, GATX Rail Europe, our wholly-owned tank car fleet and AAE Cargo, our freight and intermodal car joint venture, have continued to advance, both operationally and financially in response to the improving market, as demand remains strong across all railcar types, and backlogs at railcar manufacturers lengthened.

Specialties marine joint ventures continued to provide outstanding returns from increasing charter and day rates, high demand in vessel utilization. We also formed a new joint venture with our current partner, I.M. Skaugen, to own and operate attractive new builds, state-of-the-art multi-gas vessels.

ASC continues to see solid demand in most of its markets, although gradually declining water levels on the Great Lakes, and September weather delays impacted vessel operations.

We were pleased to be able to complete our share repurchase program during Q3, purchasing a total of approximately 3 million shares under the $300 million program.

With the improved results and particularly with the strong year-to-date remarketing income, we expect 2007 full year GAAP earnings to be at the higher end of a range of $3.07 to $3.27 per diluted share. Operationally, our expectations are unchanged from Q2, but the updated GAAP per diluted share earnings estimates now include the $0.17 per diluted share from the change in German tax rates.

And with that quick overview, we’ll open up the call for your question. Jennifer?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from John Hecht with JMP Securities.

John Hecht - JMP Securities

Good morning guys, thanks for taking my questions. I just wanted to drill down into the pricing increase during the quarter. It was up from last quarter, and it was a pretty healthy number. In thinking about the change from last quarter, some of your comments about, you know, getting, you know I guess comps if you will, are going to become tougher. What should we expect going forward, and then also what happened in the market to cause an increase from last quarter?

Bob Lyons

John, it’s Bob Lyons. I think that it’s driven more by the 17% in Q3 versus the 14% in Q2, is actually driven a bit more by the level of the expiring rates, and was particularly low in Q3 versus Q2. So you see the percentage increase between the two quarters, that’s really the main driver of the change. Going forward, as Rhonda mentioned, you know, we expect through, as we get through 2008, the expiring rates will continue to move up, and then we’ll be renewing cars that have been put on during a better environment, so the comparables will get a bit more challenging, but you know, that’s the phenomenon we’ve been talking about for quite some time.

Brian Kenney

I’d add that if you talk about general pricing, you have to say general because it is, it does differ on a car type basis, but generally freight car absolute lease rates have been coming down over the last couple of quarters, and tank car rates are hanging in there, if you want to think about it on an absolute basis on renewal.

John Hecht - JMP Securities

And the other deep type I’d like to get from you guys on this, you know, I guess, headlines out there talking about some of the ethanol glut, and how many idle cars might be associated with that, is that taking its time, is that working through the system in an orderly fashion, or would that cause potential bit of volatility in pricing in the coming months?

Brian Kenney

I think it will cause some volatility in pricing in the coming months. If you look, if we take a minute here and look at the production and how it’s ramped up over the last five years, say, I mean, in 2001, ethanol production was 1.7 billion gallons, that’s tripled by 2006, and 2007 will be up close to 7, so a lot of production, a lot of capacity coming on, there’s another, depending on what you listen to, 120 plants under construction with another $6 billion at capacity, so a lot of supply, a lot of capacity being built, and demand certainly hasn’t kept pace for a variety of reasons, and seen the price of ethanol fall because of that.

In addition, if you look at our ethanol customers, their costs have been going up, cost of core and cost of energy, cost of building a plant for that matter has gone up. So you see the reaction of the last couple months has been for them to delay constructions of all those plants that I mentioned being under construction. And we’ve seen it with our customers, you saw some public announcements like Vera Sun canceling their plant. So yeah, it’s going to be a rocky year or two for ethanol producers, and obviously that will work its way through to the manufacturers that build the cars as well as leasers that lease them. And that’s why we’re seeing, you know our estimate about, maybe 4,000 cars in the industry are idle right now. But if you go to our fleet, which is about 5,600 cars, 30,000-gallon cars that carry ethanol, about half of those are in ethanol service, utilization is still pretty high, and in fact we only have 19 new cars that are idle right now. So we feel pretty good about our strategy, which has been to lease to the very large players in the industry, because we kind of expected there might be this shakeout. If there’s a consolidation or some kind of restructuring in the industry, I think we’ll all feel like our strategy will be in pretty good shape.

We do have cars delivering next year, though, and we have cars renewing, so, I think pricing will definitely be impacted there, but we feel pretty good about our ability to place those cars. And longer term we feel good about the market, because we do think this will work its way through.

John Hecht - JMP Securities

And on that, with respect to the idle cars and maybe some of the capacity in certain markets, are you seeing any changes with pricing for new cars, for instance if you go to (inaudible), is pricing shaken out at all or has it been pretty consistent?

Brian Kenney

On the freight car side, yes, we definitely, I could definitely say that if you go look at spot, first of all, there’s a lot of idle capacity for freight cars right now, and there wasn’t a year or two ago, and yes, those new car costs would come down if you placed an order now, but you have to put that in perspective. For most of those freight car types that we participate in, car cost was up 40% or more over the last couple of years, and now it’s probably down 10% from that peak, so it’s not as if you’d want to rush out and place a big order on freight cars. It really hasn’t come down to the extent it went up.

On tank cars much less so, because there’s more backlog there, and prices have not generally come down on the new car side.

John Hecht - JMP Securities

Even with the idle cars out there you haven’t seen any....

Brian Kenney

Yeah, you know, I don’t want to get too specific, I mean, there’s some instances of availability, and I think if you actually went out and tried to capture some of that, you’d get a better cost, but it’s nowhere near the reduction, I think, that you’ve seen on the freight car side.

John Hecht - JMP Securities

Okay, I’ll get back into the queue. Thanks very much.

Operator

Your next question comes from Rick Shane with Jefferies.

Rick Shane - Jefferies

Hi guys, thanks for taking my question. Can you help us understand a little bit better. Rhonda talked about the fact that going forward, you’re going to try to control the costs on the wheel set replacements a little bit better. Can you explain the mechanics of the way it’s working now and what you expect to do, because my understanding was these were full-service leases, and I assumed that that meant you were actually replacing the wheel sets yourselves. But it doesn’t sound necessarily that way, so can you help us understand that.

Brian Kenney

Well, it’s both. The railroads are able to replace it for us, they have a bunch of readers across their network, and if it exceeds a certain reading, they can take that wheel out themselves, and they charge us for that. And that cost of that wheel that the railroad replaces for a new wheel has gone up literally 50% over the last couple of years. You’re seeing that reflected in the volume, in the cost of wheel changes done by the railroad. So obviously we don’t like that, and what we’ve tried to do over the last couple of years is get out ahead of that, both by changing wheels ourselves and using reconditioned wheels, as well as working short line and switching railroads to get out ahead of that, and use our reconditioned wheels. So we’re attacking it that way. We’re also challenging a lot of those readings in the railroad side, but let’s be serious, that’s a pretty tough thing to do. So yeah, we are trying to proactively deal with it, but it’s been a cost that’s risen dramatically over the last couple of years, and we’re not happy with the progress there, we’re still seeing a high volume of wheels changed and costs continue to go up.

Rhonda Johnson

And just to be clear, those are not just cars re-leased to railroads that they can change out, that’s any car that’s going down their rails, no matter who it’s leased to or who owns it.

Rick Shane - Jefferies

Okay, I understand, got it. The other question is, and I just want to circle back on a comment, Bob, that you’d made, if we were to look at the, assuming that the leases that are, the cars that are being re-leased right now, based on the history were on sort of five to six year leases, and what you’re saying is that those cars are being re-leased up about 17% this quarter, and that was a good metric, especially given where it was last quarter. How much, you’ve made the comment that car prices are up about 40%, is that on sort of an apples to apples basis, because you talked about a four to five time frame, so car prices are up about 40% over that time frame, and lease rates are up about 17% or 18%?

Bob Lyons

The reference to the 40%, Rick, was a car cost number, and in general, if you’re thinking, have lease rates kept pace with car cost, the answer to that is no, they have not.

Rick Shane - Jefferies

Okay, that’s exactly what I was trying to figure out. Thank you, that’s it.

Operator

Your next question comes from Art Hatfield with Morgan Keegan.

P. Logan Stevens - Morgan Keegan

Good morning everyone, this is Logan in for Art. A lot of my questions have been answered, I just wanted to see if I could drill in on kind of the guidance, that’s kind of implied for Q4, and I know if you back into it looks like kind of a $0.44 to $0.64 number, and I know you said you expect to come into the, high into that range, so somewhere $0.60 to $0.64. Can you tell me what kind of assumptions are included in that number, what kind of asset remarketing, what kind of remarketing in your share of affiliates, because it’s been pretty high for the last couple quarters, and I just wanted to see what you’re kind of expecting for Q4.

Bob Lyons

Sure, Logan, and I think that the short answer to that is we’re anticipating very little remarketing activity in Q4, either on wholly owned assets or through our joint ventures, or through managed assets. What we see going forward we always talk about that number can be a bit volatile but based on what we see right now the balance of the year we don’t see very much remarketing activity at all.

P. Logan Stevens - Morgan Keegan

So from a kind of core earnings x3 marketing it’s kind of similar to what you saw in the third quarter.

Bob Lyons

Right. Assuming, that also assumes American steamship continues to operate fully through the fourth quarter and some of that is weather dependent. Now the big number there, the big variance number would be on the remarketing line.

P. Logan Stevens - Morgan Keegan

Okay great. Thanks guys.

Operator

Your next question comes from Paul Bodner with Longbow Research.

Paul Bodner – Longbow Research

Hey. One quick follow up to that. Why is the remarketed income going to drop off so much this fourth quarter? You see little activity in the marketplace, or kind of what’s doing on behind that?

Bob Lyons

Sure. The remarketing activity, just to remind folks too when we look at for example, you know this quarter generating almost $29 million in remarketing income, that’s from a handful of very discreet events, discreet remarketing events. We don’t undertake hundreds or thousands of remarketing events in a quarter so these tend to be lumpy and very large and based on, for example, in the third quarter some of that activity was generated to lessees exercising their purchase rights at the end of a lead, particularly on marine vessels. So we don’t, we can look forward at least a few months and see what we think may be coming up for renewal and based on what we see we don’t see that remarketing opportunities or events occurring here in the fourth quarter.

Paul Bodner – Longbow Research

Okay and secondly, on the other line just sharer affiliate areas in terms of the quarter came in but on the higher side. Is that a number to kind of look at going forward that you’re going to start operating at a higher level, is that the income for the Rolls Royce joint venture, kind of what’s going on behind that too.

Bob Lyons

Actually the largest item I wouldn’t use that as a run rate going forward because there was a remarketing event in one of our joint ventures. People who’ve been around GATX for years may remember the Pitney Bows joint venture we did years ago. That partnership is in the process of being wound down, so assets were sold out of that partnership and generated a pretty sizeable almost $9 million pre-tax gain through that partnership so that would not be a recurring item.

Paul Bodner – Longbow Research

Thanks. And I also just wanted to kind of follow up on some of the impact from the ethanol cars and the excess in the market. If you look a the backlog there’s more coming online here in the next year to eighteen months and going into a situation where there’s already excess cars, is there a threat that those cars can change from say a 30,000 gallon tanker to a car to transfer coin or something, and really spelling the weakness more broadly across tank cars. Do you see that as a real threat?

Brian Kenney

Not really. No I think it’s a good question and it remains to be seen on how people react who have these large orders outstanding for 30,000 gallon tank cars. I mean there are other uses for that car by itself. They can carry light petroleum products and some other commodities. So it doesn’t just carry ethanol but whether they have the ability with the manufacturer or the ability to place different types of cars. It remains to be seen if orders start getting cancelled or switched. You don’t really know, but it’ll be interesting to watch, which is one of the reasons why this market is a little bit unsettled and probably will remain so for the next year or two.

Paul Bodner – Longbow Research

Okay thanks a lot.

Operator

Your next question comes from Michael Cohen with Sunova Capital.

Michael Cohen – Sunova Capital

Hi thanks for taking my question. What’s the outlook in Europe for lease rates? Are you expecting those to begin to see double digit rates at some point or, I know their market tends not to be as ours through the cycle?

Brian Kenney

That’s exactly right. It hasn’t been as aggressive we are starting to see larger lease rate increases, actually on both sides, tank and freight, larger increases on the freight side. In general that market is doing outstanding. We think that the investment there, very strong across our core industries of petroleum and mineral oil and chemicals and on the intermodal side. So very good performance, very solid investment volume and rate are going up, utilization is high. It has not experienced the weaknesses that you see in the US at all. In fact it’s going in the other direction.

Michael Cohen – Sunova Capital

Right. Would you anticipate beginning to see double digit increases or is that sort of a year away or knowing just the historical dynamics to that marketplace?

Brian Kenney

We’ve seen some double digit increases I think on the freight side, but they’re a little more careful over there. This is a growing and developing market, not to alienate customers. So I can’t really answer whether we’ll have that ability to push everything to double digits.

Michael Cohen – Sunova Capital

Okay. And then not to sort of belabor the remarketing. What I was wondering, given some of the dynamics that you’re talking about in terms of to some degree lower lease rates and sort of increasing supply. Is it logical to assume that remarketing income is likely to be sort of lower over the course of the next two to three years, over the cycle, is that normally what happens?

Bob Lyons

Right now I would put this year in the extraordinary category in terms of remarketing income. Total year to date of 56+ all of last year was in the 47 48 range, unusually high and I wouldn’t anticipate that that keeps pace going forward over the course of the next couple of years.

Rhonda Johnson

The other thing that we’ve talked about in the past is the fact that in rail the asset remarketing income is coming primarily from cars that we don’t feel good about longer term. So we analyze the fleet, take a look at those cars that are at the bottom tier that we don’t feel are going to hold up during the next cycle and those are the cars that we’ve been selling over the last couple of years. Eventually you run out of those kinds of cars, so that’s where we’ve been in terms of remarking in rail.

Michael Cohen – Sunova Capital

So in addition, this is sort of a lumpy kind of cyclical high. You also have sort of the dynamic within the context of your own fleet optimization. It’s unlikely that you’ll get quite the same benefit in the future.

Brian Kenney

That’s a fair statement. A lot of what, as Rhonda mentioned, a lot of what we focused on in the last couple of years is optimizing the fleet, positioning an affluent run and taking out the cars, you know a lot of that heavy lifting is done.

Michael Cohen – Sunova Capital

Great. Thank you for taking my questions.

Operator

(Operator instructions) Your next question comes from Bob Fitch with Abbott.

Bob Fitch - Abbott

Good morning. In regards to the investment in the JV for the gas vessels can you elaborate how much has been invested, how many vessels, were they going to be put to use and what sort of returns you expect on that?

Brian Kenney

There’s four multi gas vessels being constructed with our partner. They are being constructed at a shipyard that our partner controls in China. We’re taking that risk to achieve a much more attractive vessel cost relative to other places to build it in the market. Projected returns are very high. It’s a very strong market for LPG and ethylene in the shipping industry and it looks like it’s going to be strong for quite some time. In addition these vessels have the capability to carry LNG which we think could be an interesting market over the next couple of years.

Bob Lyons

The other point I would add to that is this co investment is with an existing partner who we’ve had tremendous success and high level of confidence in Scalgan organization has been an excellent, the existing joint venture we have with them has been a tremendous return generator for GATX for many years past

Bob Fitch - Abbott

So the funding for the vessels will be when and how much?

Brian Kenney

We haven’t disclosed the total amount f the funding for the vessels, it’ll be essentially done with construction financing through the joint venture and then with equity contributions from the partners but we haven’t specifically or publicly laid that information out nor would we want to given the competitive nature right now in that marketplace for new builds.

Bob Fitch - Abbott

And how about the delivery dates?

Brian Kenney

The first one is scheduled early…

Bob Lyons

Third quarter.

Brian Kenney

I’m sorry, the third quarter of 08 and then thereafter spaced out probably three four months thereafter.

Bob Fitch - Abbott

Ok, sorry. Are they being built sequentially or are they being, in terms of

Brian Kenney

They won’t all deliver at once.

Bob Fitch - Abbott

Ok. In regards to your fleet, some expectations on your backlog of orders and deliveries over the next 12 to 18 months

Brian Kenney

In railcars?

Bob Fitch - Abbott

Yes

Brian Kenney

Well right now our committed purchase program that we’ve had in place for a number of years essentially winds down in early 08, we have layered in as we’ve announced early this year an order for 1000 cars a year with ARI with an option for more beyond that. But we have not been a big speculative order, or carry a big speculative order book right now. So if you look at the total backlog of railcars to be delivered were not a substantial piece of that by design.

Bob Fitch - Abbott

Understood. I know you folks have been talking about the cost of cars and you’ve been conservative in terms of running head on any speculative orders particularly at the prices cars have been offered at in recent periods.

Brian Kenney

The strategy there has been to place enough orders to fulfill our customers' base needs and not get speculative beyond that. To the extent we had an earlier question about car costs coming down on the freight car side and the tank car side to the extent they do come down since it looks like a weaker market. We’re certainly positioned to take advantage of that now.

Bob Fitch - Abbott

So to a degree you are out marketing aggressively for additional business or customers, would you then by definition with not much in your backlog yet to be built would you need to simultaneously go out then and purchase cars around the same time?

Brian Kenney

Right now on the freight car side that would be pretty easy to do, on the tank car side it’s a little more challenging in terms of availability although there certainly is all of a sudden in the last six months or so body availability has come about and we expect that to probably increase if that market continues. So I guess the answer is yeah, we would have, to the extent we see significant new business we’ll have to go out and order more cars.

Bob Fitch - Abbott

And on the remarketing program did that include any tank cars?

Bob Lyons

There were tank cars included in the rail cars that were sold during the course year to date, nothing of note or of particular type to discuss, the older sub optimal cars, smaller cars.

Bob Fitch - Abbott

Okay, and just an update of your fleet. How many are non tank cars?

Rhonda Johnson

It’s about 60% tank cars and about 40% other.

Bob Fitch - Abbott

And that means their ethanol is a little less than 10% of the tank cars I guess.

Bob Lyons

Actually in ethanol service would be about 5%.

Bob Fitch - Abbott

Okay. Do you see that number changing much at all in the next few years?

Brian Kenney

Part of the order we have outstanding has some ethanol cars. So depending, it’s hard to tell because it depends on what else we do in the market in terms of additional orders or secondary market acquisition but I wouldn’t expect a huge increase, no.

Bob Fitch - Abbott

Are your terms on the ethanol cars are they generally different in terms of term than your average?

Brian Kenney

I would say no, not to my knowledge, as we place new cars we try to extend everything out as we’ve talked about in such, certainly over the last year or two in the strong market we’ve tried to place them out, long ethanol cars were included in that.

Bob Fitch - Abbott

And your typical term has been rising on say the last six to nine months, the new contracts. What’s the actual length of the term that’s enabling you to increase it to your size and a half year average now?

Brian Kenney

Sorry I didn’t really understand the question. The average of each term on a renewal from the third quarter was almost 80 months, 78 months.

Bob Fitch - Abbott

Okay, so that was a renewal number

Rhonda Johnson

The overall fleet remains somewhere around four years. It’s really hard to move that needle on an 111,000 car fleet. Typically at the bottom of the cycle you'd see it below four and now it’s probably a bit above four.

Bob Fitch - Abbott

Okay, so you would still expect in the course of a cycle there’d be points in time where it’ll be difficult to get to get more than four years?

Bob Lyons

There may be points in the cycle where you want to go less than four years.

Brian Kenney

Certain of the freight car types that have become really competitive and we want to keep utilized we’ll get as aggressive as anybody but you want to keep that short.

Bob Fitch - Abbott

Okay so you don’t see any particular secular dynamics that over time ought to necessarily change the term of the average car that you’re leasing.

Brian Kenney

Well to Bob’s point we’ll try to go shorter to the extent we think that makes sense but then to Rhonda’s point it’s hard to move the needle dramatically. It didn't come out the last couple of years because we have extended so far on the renewal but it's been slow so it will be slow if you go the other direction too .

Bob Fitch - Abbott

And outside of the wheels that you have been replacing and you talked about those expenses. Are there any other foreseen expenses there somewhat out of the ordinary that you are looking at the next six to twelve months?

Bob Lyons

Well nothing on the order or the magnitude of the wheel set change outs that we have seen today. I would note that over the course of the next few years there will be a higher number of cars that are due for their ten year compliance or their fifteen year, excuse me, and that is based on the high level of cars that we bought from the mid 1990’s through the late 1990’s so a lot of those will be coming up for their compliance review over the course of the next few years.

Bob Fitch - Abbott

And if you could just remind me what was your utilization low at the last cross and do you have any expectation on where it might actually be over the course of the next twelve, eighteen months?

Rhonda Johnson

The last low at the bottom of the cycle was 90%. And that doesn’t sound too bad. And it sounds like a B+ or an A-, but it is actually 10,000 idle cars that you have to put back out on lease. So it can be a very expensive and rather painful process to do that. And all of the steps that we are trying to take right now, expanding the lease terms, optimizing the fleet by selling cars that we don’t think will hold up during this cycle, trying to capture some of the higher lease rates, are all things where we are trying not to find ourselves at 90%, at the bottom of the next cycle.

Bob Fitch - Abbott

And would you expect the next few quarters’ utilization should still continue to trend down as the last few?

Bob Lyons

Well a lot of that is dependent on the amount of cars sign up for renewal and everything else. But I would say that in general it will be a bit more of a challenge in utilization market. Over the course, certainly over the course of the next year where that plays out, we don’t know yet. But, you know as Rhonda mentioned, we have taken a lot of steps to take some of the volatility out of the portfolio, But I want to be clear and straight with everyone that as we said in the release that it is a more challenging environment right now. So it is logical that we would see some tick down on those numbers.

Bob Fitch - Abbott

Okay, then the last two questions. Number one, do you expect to be instituting a further repurchase program?

Brian Kenney

Well, we just completed here in the third quarter the authorization from earlier this year. Obviously, that’s a Board level decision and one which we will continue to look at repurchase alternatives right along with all of the other capital allocations alternatives we have in front of us. But, I would not comment any further on that right now.

Bob Fitch - Abbott

And then on American Steamship give us some comments on the pricing for that business and what do you expect the income to be up next year?

Brian Kenney

I wouldn’t comment yet on anything we are going through obviously we are in budgeting and planning process right now. So would not comment specifically where we are expecting to be next year. But generally with the environment on the lakes is very positive. In terms of demand and also it is being reflected in rates not just within ASC but I believe kind of across the Great Lake shipping industry. You are seeing rates move up You know the one challenge that Ronda alluded to is that there is the lower lake levels, water levels on the lakes and that does have an impact on American steam shipping. And anybody operating on the lakes, but in general I would state that it is a favorable environment, and we are pleased with the rate increases that we have seen today.

Bob Fitch - Abbott

Okay and actually, one more question – as far as strategic initiatives. With the gas vessels that you are in a venture with are you looking to expand your lease portfolio or your operating portfolio in other areas beyond the existing, as you plan out the next two to three years?

Brian Kenney

I would not expect a change in business mix. No. Right now, we are in long life widely used assets that have a service component – marine and rail share a lot of the same commodities, a lot of the same customers and a lot of the same service characteristics. We like that business mix. We like industrial equipment finance, and they are long life widely used assets focus. Well, I do not see getting into new asset classes. No, I see more expansion of what we do geographically.

Bob Fitch - Abbott

And remind me are these the first class vessels you have been (inaudible)?

Brian Kenney

No we have existing LPG ethylene carriers with Skaugen.

Bob Fitch - Abbott

Okay, thank you.

Operator

Your next question comes from Bob Napoli of Piper Jaffray

Bob Napoli - Piper Jaffray

Good afternoon. Well nobody asked any of my questions. I do have a few left I guess. I would like in Europe - if you can give it may give some more information in your Q’s on European business. But can you size up that business for me relative to the overall rail business?

Rhonda Johnson

In terms of the number of cars it is about it's about 25% of the overall fleet. And in terms of revenues it is starting to get closer to match what it does in terms of the overall fleet numbers.

Bob Lyons

Last year in K we also laid out European revenue which was just north a $100 million total. So it’s a sizeable, very sizeable business for us.

Bob Napoli - Piper Jaffray

What is the growth of that fleet now? What do you expect to be the growth rate to be on that fleet?

Brian Kenney

Well, the freight cars side we have been adding a couple thousand cars per year . It's been less on the tank car side. But, it was actually a lot in the last eighteen months. I mean things are pushing 1500 cars on the tank car side because we saw an opportunity there. But in general it has been a few thousand cars a year. And I would expect that to continue and hopefully accelerate. It is true that new car costs are going up over there. And we are starting to think past the issues over there. The good part is I think on both the tank car and the freight car side, we get out in front on that and we are pleased with our order growth position there.

Bob Napoli - Piper Jaffray

What do you have ordered in Europe ?

Brian Kenney

I don’t think we can disclose that. Unfortunately it is a little tougher to be fully transparent there because of partnership issues and others. But I would expect the same type growth over the next couple of years.

Bob Napoli - Piper Jaffray

I mean you see that becoming 35% of the total fleet or 50% over the next five years or what ?

Bob Lyons

You know if you had asked me that a year ago I would have probably said yes – if current trends continue because it was getting so hard to invest in the US. And it was relatively attractive in Europe. Now prices in Europe are going up in the States they are coming down as far as new cars. We will do what makes sense from a new car cost perspective and a margin perspective.. So it's kind of a non-answer but I would love to grow both fleets.

Bob Napoli - Piper Jaffray

Ok. On the marine side, I mean it seems like maybe you are ramping up investment or looking harder at that business. And obviously there has been a skyrocket in the values in that area in demand and in shipping and trade. What is your strategy on the marine business over the long term?

Brian Kenney

I would expect current market conditions to continue and most of the forecast you read which of course doesn’t mean that much. Look just that will continue. It's going to be awful difficult to invest in blue water marine. What we have done was start with these LPG ethylene and L&G carriers with a unique opportunity to get a very attractive cost by building them in China. So I was happy with that. Other investments are very difficult to do because of the asset price. And you know in most case we don’t see an end in sight there. Once again good firm operating result in upper investment.

Bob Lyons

I would add to that, coming in at the year where for we are very pleased with the Skaugen joint venture but overall the marine investment line is running well below what we thought it would because of the asset price.

Bob Napoli - Piper Jaffray

Okay. Now on the share side what did you say that you acquired during the quarter. How many shares did you buy back, and how many are left on the authorization?

Bob Lyons

The authorization is done.

Bob Napoli - Piper Jaffray

Okay and you finished at the end of the quarter?

Bob Lyons

We completed it during Q3, correct, so a full $300 for 6.39 million shares.

Bob Napoli - Piper Jaffray

Okay. Then, you talked about trying to put some size on the variable of the remarketing piece and this share obviously being well above average. But, its always been a part of your business – I mean that if you think about next year, I think some people may walk away thinking that next year is going to be 25% of what 2007 is and, I just don’t know if you can try that. Would half of this year’s level be kind of a normal level? Though it seems that the asset values you have are - if you did a mark to market it would be the good story is that the mortgage business of your asset value, so if you sell anything you are getting pretty sizeable gains.

Bob Lyons

I think the key point is, that we've talked about here is, you know, we don't just sell things to generate gain. You know, we sell things because the market opportunity presents itself and the economics are attractive for us holding the asset. And, you know, by and large in rail, a lot of that fleet optimization as we've talked about here, you know we feel good about where we have the fleet today. You know, there's likely still to be some more sales to take place there in rail, but probably not to the extent they have over the course of the last couple of years.

I don't want to put a band on where we expect remarketing gains to come in because that would be dramatically wrong one way or the other, but you're right, at some level we do generate remarketing income every year. Its core to what we do.

Rhonda Johnson

I think that the difficulty with the comparisons of the last few years is we've had some unique remarketing events in now each of the last three years, in 2005 and 2006 we had, you know, $12 million and $14 million from a single transaction in the managed portfolio and now this year we have the additional early buyout in the marine vessels, and those are large and of unusual magnitude. So that's making the comparisons a little bit difficult thinking about going forward.

Bob Napoli - Piper Jaffray

Okay and the German tax rate deal. Does that have any long term effect on your tax rate and what is, is there any change to the outlook, long term outlook for your tax rate. We're using 35.8% as kind of a long-term tax rate.

Bob Lyons

And that won't be, that's a reasonable number Bob and it won't be affected by the change in the German tax rate which is from, you know, they changed the rate from 41% to 33% effective in 2008, although we reverse part of our deferred tax liability right away. That's the impact you see here. On a go forward basis, obviously it's a benefit to us to have a lower tax rate, but I wouldn't put it in the material category.

Bob Napoli - Piper Jaffray

Okay. And on the freight cars in the weaker car types, what percentage of your portfolio is in freight cars today?

Rhonda Johnson

It's - 40% is freight and 60% tank.

Bob Napoli - Piper Jaffray

So freight is a very broad. I mean certain areas of freight are much weaker than others.

Rhonda Johnson

On each of our presentations on the website, we break out the freight car fleet and show you that we've got, you know, the majority of those, about 25% are in covered hoppers. The next largest is in open hoppers and gondolas and then you have a very small piece that's 'other.'

Bob Napoli - Piper Jaffray

Okay, and last question on the maintenance. Well actually two questions. But the maintenance expense on the, I mean would you expect maintenance expense to flatten out next year versus this year, decline because of the unusual increase you've had, or what would be your outlook for maintenance expense?

Brian Kenney

I would expect it to increase due to a larger fleet and what Bob had referred to earlier about this compliance bubble on the tank car side. So, in addition until we figure out a way to control railroad repairs more effectively, I expect that to increase too. So in general, no, I'd expect it to be up next year.

Bob Napoli - Piper Jaffray

And last question on the, I mean your leverage obviously is something we talk about every quarter. But you know, you really, your leverage even with the buy back hasn't gone up. You're still leveraged two to one and you can probably leverage four to five to one, at least four to one?

Brian Kenney

2.8 to 1 is actually at quarter end. Just shy of three to one. But you know the point is taken Bob and I think it's, you know we have had this conversation on a probably running basis for the last couple of years.

Bob Napoli - Piper Jaffray

Do you have any updated thoughts.

Brian Kenney

Our strategy has not changed and our thought on that has not changed. We have capacity obviously. We're looking to do that, to utilize the capacity in the best way long term for the shareholders, whether that be through more attractive investment opportunities, which may be presenting itself. That's why we've been holding some of that capacity obviously. We feel good about the position we're in right now, to capitalize on those.

Bob Napoli - Piper Jaffray

Thank you.

Operator

Your next question comes from Tom Clegg with UBS

Tom Clegg - UBS

We seldom talk about the electromotive LLC side and can Brian, you and Bob give me some color there about, is there a cycle there where we could increase invest there or not. And also, does the application on the electromotive side to Europe.

Bob Lyons

That answer would be no, we have some locomotive experience in Europe but there's not, you know, an overlap between those two markets. The business you're referring to, as you know we bought out our partner a couple of years ago to take 100% ownership of that fleet of locomotives. We've done some additional investment there this year and are happy about the investment level we've seen there, but there isn't any large fleet per se that we have our eye on or that would be a particularly good fit.

Tom Clegg - UBS

It's not a needle mover then, huh Bob?

Bob Lyons

No.

Tom Clegg – UBS

Thank you.

Operator

And our next question is from Phillip Walker with White Mountain.

Phillip Walker - White Mountain

Hey guys, good morning. Yeah, I'm glad we finally got the requisite question about leverage. I always get a kick out of that and you guys are doing the right thing, saving up some dry powder to hopefully get some of the best investment opportunities that you have over the next cycle in the short term. A couple of quick things I wanted to ask about is specific to the six and a half years as far as the lease is pushing out on the rail business. What outs are there available to the lessees and if they can't cancel these type of financial enumeration would GATX get?

Bob Lyons

In general Phil there is no out. It's a fixed term, monthly, payable lease rate and there aren't early outs in the leases.

Brian Kenney

I would say most of our, not most of our, some of our very large customers who are relatively sophisticated, push for those kind of outs and generally we try to make it have a decent penalty for when that happens. But I would say that's accurate, in most cases those are solid term leases.

Phillip Walker - White Mountain

Okay, that sounds good. The other thing I wanted to talk about, I think Brian, you mentioned this that , you know, new car prices, you know, from say a few years ago to last year rose by 40%, they climbed by maybe 10% in the last year or so.

Brian Kenney

On the freight car side, yeah.

Phillip Walker - White Mountain

On the freight car. And you know, the expectation is that, you know maybe there's more decline. I just want to understand as to how much real decline is there potentially given the trends in global raw materials.

Brian Kenney

That's a great question. You know, I think at some point it really depends on what you think of the price of steel and components, right, and a lot of that increase has been due to the cost of raw materials and a lot of it has been due to increasing margin at the manufacturers. I would think in this type of market that we're seeing, for instance, on the freight car side, their margin's coming down but their costs aren't necessarily coming down at all, so there's a lot of thought internally to when you capitalize on the reduced car costs and it's probably not waiting for it to go all the way down if you think the cost of raw materials is going to stay where they are. It's probably just to the point where you think the margin is at an absolute minimum.

Phillip Walker - White Mountain

Okay, gotcha. Thank you very much and good work.

Operator

Your next questions comes from Barry Haimes from Sage Asset Management.

Barry Haimes - Sage Asset Management

Yes, hi. Just had a question within rail. Do you have a number for the year projection for what the CapEx will be on new cars and do you have any thoughts as to where that number might be in '08 or what the range of possibility might be in '08? Thanks.

Bob Lyons

Well, you've got the number right, I believe for where we are year to date in the press release. You know, last year we did just north of $500 million I believe, $540 million in rail. You know we would hope to be somewhere in that same range, probably slightly below that this year and much of what happens in 2008 given that we don't have a big advance order book will be dependent on what we see in the marketplace, to the extent that Brian eluded to, if prices continue to creep down and we see opportunities, we'll capitalize on those by stepping up the investment levels.

Barry Haimes - Sage Asset Management

Just a quick follow-up. If you just took the current '08 commitments, I mean roughly how much would that be of CapEx?

Rhonda Johnson

You're only talking about, you know, like a thousand cars, so it's not going to move the needle on that.

Bob Lyons

Maybe in the $100 million range.

Barry Haimes - Sage Asset Management

Thanks very much. Appreciate it.

Operator

Your next question is from Majid Khan with Cobalt Capital.

Majid Khan - Cobalt Capital

Hi. Just to follow-up on the question about the manufacturers. What do you think a reasonable margin to pay is for the manufacturers and, you know, how far from it are you? You know, I'm just trying to get at where do things have to go before you come into the market with a big order?

Brian Kenney

That's probably a little too sensitive to talk about actually. But I think generally speaking, margins were probably double digits and you know, you want to see that, I mean I'd like to see it go away, but--

Bob Lyons

I think the other thing you can look for, the guide posts from (inaudible) is when we've announced orders, and you know you haven't seen from us yet any very big spec orders.

Majid Khan - Cobalt Capital

Also, another follow-up on ethanol. I'm wondering, you know, what's your outlook on the market in general. Like, what do you think the current situation in the market is versus how many cars are needed to serve the build out, how many cars exist?

Brian Kenney

You know, it's a great question. It's one we, everybody rustles with a lot, but as I look at all the industry data and plants under construction, and all the capacity coming on and then you see, you know, the State of the Union address which says 35 billion gallons by 2017, and different numbers thrown around, you know, it's hard to tell. So, the chart I like to look at is the one that ADM actually uses in their public presentations where they talk about gasoline consumption in the U.S. being about 140 billion gallons a year, at 10% ethanol blend, that's 14 billion gallons. And that seems like a pretty reasonable number. That's twice the capacity that's out there right now. Even if all those other plants were built, it wouldn't quite get there, so it certainly seems like this market will rationalize, it will just take a while, so that's why I think our customers still remain bullish and therefore we are too on the long term outlook.

There's a lot of noise around that. You have a lot of political pressure starting for the first time, what they call, I think, the barnyard lobby with meat and poultry producers and the cost of their feeds. I mean there are so many factors. There's Brazil and their imports and obviously we don't allow that now, but if that were to happen that would change the cost and the pattern of how ethanol flows as well. There's different ethanol types, switch grass and others that are being considered. So there's a lot of, a lot of things to consider, a lot of noise. But I come down to whatever form it takes, I come down to, you're going to need a lot more capacity than you have now and you're going, for the, for most of those options you need rail cars to transport that product.

Majid Khan - Cobalt Capital

What does 14 billion gallons mean for rail car needs?

Rhonda Johnson

The kind of difficulty that you have is that if you look at last year, we transported about 4.6 billion gallons using an ethanol fleet of 12,500 cars. You know, you can try and do the math there and calculate what that gets you up to at 14 billion gallons, but the thing to remember is that that ethanol was not being transported that efficiently by the rails. You didn't see unit trains, for example, where every single car would be an ethanol car. That's a much faster load and unload when you have that kind of a train. So there's a lot of different things that could happen that could decrease the number of cars that you need per millions of gallons. So that's another hotly debated issue in the marketplace these days.

Brian Kenney

So the answer is we don't have the perfect crystal ball view there. But what we do have, I think, is a sound strategy we've had for quite some time which is to stick with the large established producers that to the extent that there's any industry shake-out, I think they're the ones that are around and they're the ones that tend to renew leases, and they're the ones that have generally pretty strong credit quality.

Majid Khan - Cobalt Capital

Got it. So it seems like a car is turning about 12 times on average per year and you think that's not very efficiently used right now.

Brian Kenney

No.

Majid Khan - Cobalt Capital

Okay. Your strategy to stick with the big producers certainly sounds like a good one. Thank you for taking my questions.

Brian Kenney

Thank you.

Operator

Ms. Johnson. Are there any closing remarks?

Rhonda Johnson

No. Just to say thank you everyone and I'll be available this afternoon for any additional follow-up questions.

Operator

This concludes today's conference call. You may now disconnect.

Copyright policy: All transcripts on this site are copyright Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.