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GATX Corp. (NYSE:GMT)

Q4 FY07 Earnings Call

January 24, 2008, 11:00 AM ET

Executives

Rhonda S. Johnson - Director of IR

Robert C. Lyons - Sr. VP and CFO

Brian A. Kenney - Chairman, President and CEO

James F. Earl - EVP and COO

Analysts

Brannon Cook - JPMorgan

John Hecht - JMP Securities

Carl Drake - SunTrust Robinson Humphrey

Arthur W. Hatfield - Morgan Keegan

Paul Bodnar - Longbow Research

Robert P. Napoli - Piper Jaffrey

Richard B. Shane, Jr - Jefferies & Company

Mario Gabelli - Gabelli and Company

James Kieffer - Artisan Partners

Greg Hillman - First Wilshire Securities Management, Inc.

Operator

Please stand-by. Good day and welcome to the GATX Fourth Quarter Earnings Call. Today's conference is being recorded. At this, I would like to turn the conference over to Rhonda Johnson, the Director of Investor Relations. Please go ahead ma'am.

Rhonda S. Johnson - Director of Investor Relations

Thank you, Melissa, and good morning everyone. Thank you for taking time during this busy earnings season to join us for our fourth quarter and 2007 year-end conference call. With me today are Brian Kenney, President and CEO of GATX Corporation; Bob Lyons, Senior Vice President and Chief Financial Officer; and Jim Earl, Executive Vice President and Chief Operating Officer. I will provide opening comments and then we will throw it open to your questions.

Before we begin, I would 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. 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. I will refer you to our Form 10-K for the year ended December 31st, 2006 on file with the SEC for a discussion of the most important of these factors.

As noted in the press release, we have significant tax benefits in 2007 and 2006 from an asset statutory tax rate changes in several international jurisdictions, where we operate, specifically, Canada, the United Kingdom, and Germany. To provide relevant operating comparisons, all numbers I quote in the summary will exclude these tax benefits. A reconciliation to GAAP net income including these benefits is included in the press release on page 14.

Today, we reported fourth quarter 2007 income from continuing operations of $31.6 million or $0.62 per diluted share. This compares to 2006 fourth quarter income of $28.7 million or $0.51 per diluted share. For the full year 2007, income from continuing operations was $165.7 million or $3.08 per diluted share compared to $145.5 million or $2.55 per diluted share in 2006, a 14% increase in income from continuing operations and a 21% increase in earnings per share.

As evidenced by the earnings I just highlighted, 2007 was an outstanding year at GATX both operationally and strategically, which Brian detailed in his comments included in the press release. Much of our success in both 2007 and in setting the table for longer-term opportunities is evidenced in rail.

In 2007, fleet utilization remain very high, ending the year nearly 98%, a slight deterioration from the beginning of the year. We continue to take advantage of attractive lease rates, renewing leases on average 16% higher than expiring rates in 2007. And we locked those rates in for an average of 72 months.

With our focus on extending term over the last few years, we have limited the number of leases rolling over as the market continues to soften. In 2008, we have less than 20,000 railcars up for renewal compared to over 35,000 just a few years ago. In addition to lengthening term, we continue optimizing our fleet to targeted car sales, which contributed significant remarketing income to our results, and we acquired nearly used railcars and locomotives at attractive prices.

In addition, we invested more than $90 million in Europe, where we are enjoying a strong market. All of these factors contributed to the excellent 2007 results and have positioned the company to capitalize on opportunities any market weakness may present.

Specialty segment profit in 2007 increased over 2006 as income from the marine joint continue to benefit from high vessel demand and charter rates, generating an excellent return. Once again remarketing activity contributed exceptionally strong gains reflecting the high asset values in the market.

American Steamship has just completed the sailing season. Demand on the Great Lakes continue to be very strong and all customer contracts were completed. However, challenging weather conditions and lower water levels on the lakes brought significant vessel delays late in the season resulting a fewer operating days and lower segment profits when compared to 2006. ASC continues to renew freight contracts at higher market rates and demand appears robust for the year ahead. Looking forward to 2008, we see both challenge and substantial opportunities for GATX.

As noted in the press release, segment profit of both Rail and Specialty are expected to decline marginally. Primarily the result of deliberately lower remarketing income and increasing maintenance costs at Rail from higher fleet churn and greater compliance activity. These negatives are expected to be partially offset by strong performance from Europe and improved profit at ASC. These segment expectations taken together with the benefit of the $200 million share repurchase authorization announced today results in EPS in the range of $3.15 to $3.35 per diluted share in 2008 and a positive improvement over 2007 despite a weakening market.

In closing, we are looking forward to the year ahead as we are well positioned in this market. We believe there will be opportunities to make attractive investments thereby creating substantial long-term value for our shareholders.

And with that Bob, Brian, Jim and I are ready to take your questions. Melissa?

Question And Answer

Operator

Thank you Ms. Johnson. The question-and-answer session will be conducted electronically. [Operator Instructions]. And our first question comes from Brannon Cook from JPMorgan.

Brannon Cook - JPMorgan

Good morning.

Rhonda S. Johnson - Director of Investor Relations

Good morning.

Brannon Cook - JPMorgan

So, just...I had a question around the outlook in the railcar market. It looks like the utilization hung in there to pretty solid level in the fourth quarter. And looking at your guidance it seems that you have some confidence that you are going to be able to hold the railcar utilization in North American market. Could you give a little color around kind of your expectations there relative to the guidance you gave?

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

Sure. Brannon, it's Bob Lyons, I can give you a quick summary of what we are thinking going forward. We are anticipating as we go through 2008 that there would be some deterioration in that utilization level. As the market continues to face challenges and specific car types and generally a weaker tone than what we experienced in 2007. But looking forward, we are not talking about levels that approached the early 2001, 2002 timeframe, where utilization dipped significantly. We are talking a couple of 100 basis points type.

Brannon Cook - JPMorgan

Okay. And it's kind of a follow-on to that. Can you talk a bit about...you talked about lower remarketing income in 08 versus 07. I guess in 07 you had around $61 million of remarketing income; in 06 it was $47 million. Should we think about the remarketing income coming in a bit more at the 06 level, meaningfully lower than we were in 07?

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

That's a more reasonable assumption, correct. We anticipate 2007 was exceptionally strong year as we took advantage of some opportunities in the marketplace, and we continued our fleet optimization in rail. So we are expecting some continuation of that in 2008, but not at the levels we experienced this year. So looking back at 2006, there is a more reasonable range.

Brannon Cook - JPMorgan

Okay. And just as a final question on asset purchase opportunities, clearly the overall railcar market is weakening a bit from railcar price perspective. Can you talk about...you obviously; you got the deal with Trinity, purchasing some railcars there. Could you talk a little bit about what you see in 08 in terms of opportunities? Are things getting to the point, where things are getting increasingly attractive to take advantage of some opportunistic transactions?

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

It's Brian, Brannon. Yes, you saw our volumes spike, especially in the fourth quarter. And asset prices are coming down; I think I have talked about it in the past that freight car pricing. Although we haven't placed an order, so it's hard to really cut that until you do on the freight car side. When we get quoted, prices are down probably 10% or more over the last year. On the tank car side, we would say generally it's down less. Obviously, it was down enough for us to order 2000 cars from Trinity. I would say that's a very specific tank car types that we think are still attractive in this market.

So, the general comment is freight car pricing is down double-digits, tank car pricing is down a little less. We did place the order, but I don't think if prices are down near to the point, where they will go out and place some massive order yet. The fact is that they are still not quite as attractive as they need to be for us. So, we will see what happens here. My expectations are if you look at 2008 and investment volume and investment opportunities, we would learn at least to do what we did in 2007. I hope opportunities are there to do a lot more. I think if you ask us the way that might play out in a weak market, we think that secondary market might be more attractive first as other less or as either try to generate gains or get out of certain car types that are challenging form or maybe even getting out of the business. So, we would expect to see that get attractive first, and the longer, the weakness lasts. I think you will then see new car pricing come down even further, at least that's our expectation. Right now manufacturers, if you look at what they have talked about in 2008, they still have a pretty decent order book. I don't know how that lasts if that last in the 2009. So, the longer, this weakness lasts. We would expect that maybe new car pricing is more attractive as well. Regardless, we expect to have a bigger year in 2008 than we did in 2007.

Brannon Cook - JPMorgan

Okay, great. Thanks for the time.

Operator

Our next question comes from John Hecht from JMP Securities.

John Hecht - JMP Securities

Good morning. Thanks for taking my question. Just a little bit of more questions related to the guidance. First, in terms of the rail rate, Rhonda you said, 20,000 cars in 08. Is that directly owned or does that include what you would own through affiliates as well?

Rhonda S. Johnson - Director of Investor Relations

That's our owned cars. So, those are we own directly in America.

John Hecht - JMP Securities

And going forward, I mean is it fair to assume a similar amount in 09 given these durations at this point?

Rhonda S. Johnson - Director of Investor Relations

Yes, I think that's fair.

John Hecht - JMP Securities

Okay. And you announced repurchase program. Is that something we should just kind of incorporate over the course of the year? Would you be a little bit more aggressive earlier in the year given the stock price or is there anything you can, any color you can shed on that?

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

Sure, it's...yes, I would...we don't have a set timeframe, but obviously we feel based on where the stock are end today and the announcement of the authorization that this is an attractive opportunity for us. So I would like to try to capitalize on that, but to do so diligently.

John Hecht - JMP Securities

And then you have announced that your Trinity and ARI, some committed purchase programs. Can you give us a sense for on a quarterly basis what type of delivery rates we should see in those committed programs?

James F. Earl - Executive Vice President and Chief Operating Officer

Sure. John it's Jim. They come in reasonably evenly throughout the year although the Trinity program kicks in, in the second quarter. So, basically we are looking at 2,000 cars delivering pretty evenly over the course of the year. And I would note that almost all of those cars are tank cars that will be coming from both of the programs.

John Hecht - JMP Securities

Okay. And finally what tax rate are you assuming in your guidance?

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

The tax rate we are assuming for 2008, John is this year's effective tax rate was 30...call 36%. We are assuming a lower tax rate in 2008 given the composition, the geographical composition on the income from some bigger contributions from some lower tax rate jurisdiction. So, below 35% is the assumption for 2008. We will benefit from a lot of inactive tax reductions that we have talked about.

John Hecht - JMP Securities

All right, thanks very much.

Operator

Our next question comes for Carl Drake from SunTrust Robinson Humphrey.

Carl Drake - SunTrust Robinson Humphrey

Good morning. Just wondering if you could talk a little about embedded in the guidance the type of least increases that might be embedded on expiring leases as we go through the year and when that number might directionally flatten out or go even perhaps go negative into 09?

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

Sure, we...as we have indicated previously, we felt based on the expired rates that we could see in the system coming up that even we said this even a year ago we thought it would be in good shape going into 2008 well into 2008. With 12% increase in the fourth quarter this of 2007. But the expiring rate will continue to move up as we go through 2008 as you would expect. So, the first half of the year we should be in very much in positive territory, but it will become more challenging later in the year.

Carl Drake - SunTrust Robinson Humphrey

Okay. And in later in the year perhaps it could flatten out; is that I guess depending on...

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

Sure.

Carl Drake - SunTrust Robinson Humphrey

Industryconditions...

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

Yes, a lot will depend...good point, a lot will depend on industry conditions, but that is the fair assessment.

Carl Drake - SunTrust Robinson Humphrey

And could you also talk a little bit about Europe...the stated European market? Is that still very strong with what you are seeing there in terms of the outlook on utilization and lease rate increases there?

James F. Earl - Executive Vice President and Chief Operating Officer

Yes, this is Jim Earl. The European market has remained quite strong. Actually both in our wholly owned tank car business and in our joint venture freight car business, the demand is quite high. Utilization in those fleets is very solid. And the deliveries, new cars that are coming into the fleet are being placed well in advance to delivery actually. And so the...that lease for the time being that business looks very solid and looking into 2008, I would say that continues. Our outlook there is pretty positive. The changes in that market place continue to benefit operating less or the structural changes in Europe are pretty positive for our type of business in providing full service leasing of these assets.

Carl Drake - SunTrust Robinson Humphrey

Do you expect utilization remain firm or flattish in 08 and Europe or--

James F. Earl - Executive Vice President and Chief Operating Officer

Yes, I don't expect otherwise there could be slight improvement. Now it's all predicated of course on the economy staying solid. And that of course our crystal ball is less clear, but at least the indication so far remain very solid.

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

Carl, the point I would make...it's Brian, is echo what Jim said and then say however term in Europe of our leases is a lot sure than in the U.S. So if ever the word spread over there, which once again we are not saying, but if it were you would see financial impact probably faster.

Carl Drake - SunTrust Robinson Humphrey

Okay, thanks. And a last question on the ethanol update. Maybe you can give an update on the backlog of ethanol cars coming to market. Idle cars and sure this all embedded in the guidance we discussed.

Rhonda S. Johnson - Director of Investor Relations

Sure. If you look at the market in 2007, in North America we produced about 7.3 billion gallons, that's up from about 4.8 billion in 06 and the cars...the number of cars that we are serving in the market increased substantially as well going from 12,500 cars to 19,600. Now, as you will remember, those are 30,000 gallons tank cars, and we have about 6,000 of those in our fleet, a little maybe around 40% to 45% our currently in ethanol service, and of those we have only got around 100 that are idle. So, we have definitely got a 98% utilization there.

Carl Drake - SunTrust Robinson Humphrey

Okay. Any guesstimate on the number of leases coming up for renewal in 2008 in that sector? Is that roughly around 20 or little bit less than 20%?

Rhonda S. Johnson - Director of Investor Relations

Yes

Carl Drake - SunTrust Robinson Humphrey

Okay

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

And then we will be taking 400 to 500 new 30,000 gallon cars as well.

Carl Drake - SunTrust Robinson Humphrey

Okay. And is it still roughly about 25,000 of ethanol enabled cars coming online of the backlog in the next 18 months or so?

Rhonda S. Johnson - Director of Investor Relations

That's difficult to say. The backlog numbers just came out today. And there is nearly 40,000 tank cars in the backlog. So, now the question is how many of those 40,000 tank cars are designated to be the 30,000 gallon tank car. There was...the part of that the, the reason for the jump in the backlog is the very large order that GE placed was Greenbrier of which significant number of those appeared to be for ethanol. But at this point, it is a little difficult to say.

Carl Drake - SunTrust Robinson Humphrey

Okay, thanks very much.

Operator

[Operator Instructions]. And next we will move to Art Hatfield from Morgan Keegan.

Arthur W. Hatfield - Morgan Keegan

Good morning everyone. Most of my questions have been answered, but just a couple other things. On the share repurchase you announced today, can you talk...give us some guidance on how you expect that to impact the share count throughout the year?

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

Sure. There is couple of things going on with the share count. There is the repurchase we announced this year. On an average basis there is obviously the share repurchase we undertook last year, and then the remaining convertible debt that we have outstanding, which goes away this year in 2008. So, if you look at the year end share count of the average in the third and fourth quarter, excuse me, was about 53 million shares that will come down substantially in 2008, on an average basis probably in the range of 48 million shares, given the repurchase activity in the convertible going away.

Arthur W. Hatfield - Morgan Keegan

So you are saying the average for the year 08 should be about 48 million?

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

Right. So, the impact of the share repurchase is significant on that total EPS calculation.

Arthur W. Hatfield - Morgan Keegan

Okay, and the convertible, when does that occur? Is that February?

Rhonda S. Johnson - Director of Investor Relations

August.

Arthur W. Hatfield - Morgan Keegan

August, okay, thank you. The other thing to, I would like to ask about this you talked a little bit about this, but the reason for doing the share repurchase, we have seen the market, I hate to use the word deteriorate, but we can some what likely when you talked about what asset prices are doing. Are you concerned that there is not going to be any investment opportunities in the near term and that's one of the reasons to take on this new share repurchase?

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

No, I think if you look at what we have been doing, we are balancing, investing with share repurchase and maintaining a strong balance sheet and we will continue to do that going forward, so no, that's not the case at all. In fact I hope to do more investment volume in 2008.

Arthur W. Hatfield - Morgan Keegan

Okay, and that...to hear your confidence Brian, it's helpful. The other question and this maybe hard to answer, but you...Bob, you have talked about utilization and your expectations for utilization to be down a little bit this year. Can you talk a little bit about how you guys balance price and utilization meaning a zero level on the car type to where you just you are uncomfortable going below a certain price level? And if so, how long are you willing to let a car sit before you wait for prices to come back?

James F. Earl - Executive Vice President and Chief Operating Officer

Art, it's Jim. Honestly, I mean as an operating guy, I don't like any non-utilization. And so that's important to an operating lesson. But clearly you balance a bunch of things including price, term, how long you are willing to go, how long you want to lock in at a particular price level, competitive activity of course. And then you think about transition cost to the extent cars are returned, they go into inventory and then they have to be prepared to go back out on leash. And all of those things entered into our equation and thinking about the merits of dropping price for instance to maintain utilization. Generally speaking, utilization is good, but we will always balance those things. And in some of those transitions cost supply to our customers as well, and the cost associated with preparing cars to return and then taking new cars into their fleet. All of which will effect kind of their willingness to give up cars as well. And I think with all of that in mind that, we step back and then say, what do we think going to happen in a very mixed market place, which we are experiencing today which...it's worth noting while overall there is some deterioration, there are pockets of very strong parts of that the North American rail business right now and you can look at the AAR car loading statistics to pick out some of those areas. So, we get very tactical in this stuff and very specific to our customers, their particular situation at the time and those elements of our fleet.

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

But to speak generally Art, you do manage the fleet differently as the market turns down. So, you have heard us talk a lot about pushing price higher than last two years and pushing term. And we are willing to take the risk of cars coming back as we knew they had other places to go. Now the market goes down. As Jim said, you don't like non-utilized cars, so you push price pretty hard in the other direction if you have to on certain car types. You also try to shorten the term for car types to the extent possible, whereas, before we are trying to push it out. So, it is a different way of managing the fleet that we have done in the last few years.

Arthur W. Hatfield - Morgan Keegan

Have those dynamics won dramatically or do you think there is still movements in that direction towards shorten term and more aggressive pricing?

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

Well, I think you saw the term number in the fourth quarter still being high.

Arthur W. Hatfield - Morgan Keegan

Right.

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

That we achieved. So, there has been no see change in that run, but there are packets where we will selectively look at cars.

Arthur W. Hatfield - Morgan Keegan

Okay.

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

Or if I could, the other thing I would like to add to both Jim and Brian's comment, the question hasn't come up, but it may, regarding the forecast and kind of what's been assumed on maintenance too. Maintenance has gone up materially between 2006 and 2007 as we have talked about in the past, as we continue to deal with more compliance cars and work on conversions. We are assuming, as we look forward in 2008 that number continues to move up as we also are dealing with compliance cars. And then as utilization comes down you have churned in the fleet where you have to bring those cars in and clean them and prepare them for the next user storage. So, that kind of all factors into the point Jim was talking about.

Arthur W. Hatfield - Morgan Keegan

Okay, that's very helpful. And finally, and this is kind of related to what you have been talking about, but the competitive dynamics of the industry. It's been pretty well documented over the last year. Is anything materially changed in with regards to how your competitors have been acting?

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

It remains a very competitive environment out there and as some of our competitors see their utilization dropped down, utilized some of the same tactics were talking about. And, so in certain instances, where there are pockets of ideal cars, pricing will be very aggressive. In those other areas, where there is not really a surplus of equipment, we would expect that pricing and the activity there should stay very rational, actually.

Arthur W. Hatfield - Morgan Keegan

But you would say overall based on supply and demand, pricing appears to be very rational?

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

Yes, I would say that. There are always pockets that get our attention and it can be a little disappointing at times, but overall I think that's an accurate statement.

Arthur W. Hatfield - Morgan Keegan

Okay, thank you very much. Thanks for you time as always.

Operator

[Operator Instructions]. We will now move on to Paul Bodnar from Longbow Research.

Paul Bodnar - Longbow Research

Just real quick as in 2008 how do you expect to balance your CapEx plan between Europe and North America? Do you expect more heavy investment in Europe in 08?

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

Well, we had a solid year in 2007 in terms of investment volume there. Broadly speaking, I wouldn't anticipate a major change in the mix of investment as we look at 2008. So, without getting into more details, I think the general structure will be similar.

Paul Bodnar - Longbow Research

Okay. And then secondly, just in the marketplace where are you seeing the largest targets in terms of car types in North America at this point?

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

Anything construction or housing related, so --

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

Lumber cars in particular but a quite a large surplus there, some surplus in coal, although that seems to be working through slowly. And beyond that there as Brian noted, certainly construction related equipment is suffering. Automotive is starting to...you are seeing automotive car loading stop as that market deteriorates. So, it's not unexpected, it really is a rail activity is very reflective of overall economic activity.

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

So, yes, a lot freight cars and the tank cars generally hanging in there, outside of ethanol, once you have already talked about.

Paul Bodnar - Longbow Research

Are you also seeing, I mean the coal market in terms of a lot of oil cars there recovering particularly in the steel car types or is that kind of across the board in both aluminum and steel, at this point?

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

Yeah, it's mixed. I would actually say its probably, our case is a little different than the industry, but I think actually the industry, the aluminum car types are more ideal right now. Part of that is driven by the rail roads and their lack of congest and their ability to cycle equipment pretty quickly in that service. Eastern type steel cars actually there is reasonable demand right now, because the couple of the big eastern railroads have very significant fleet replacement needs, and so there is a form of activity there as they kind of deal with their fleet some of their mechanical issues in their fleets and then increase in export coal movement as the...with the weak dollar.

Paul Bodnar - Longbow Research

Okay. Thanks a lot, guys.

Operator

Our next question comes from Bob Napoli from Piper Jaffrey.

Robert P. Napoli - Piper Jaffrey

Thank you. Good afternoon.

Unidentified Company Representative

Hi, Bob.

Robert P. Napoli - Piper Jaffrey

A few questions left. I guess Europe, would it be possible to get, this is a request to get more detailed information on Europe now in both your earnings press release. I know gave some information in your 10-Q, but I would like to get the more information even down to the profitability level within your earnings release, rail cars and...because it is becoming a much more significant piece of your business, and it's growing probably faster than most anything else. Is that possible to get that information?

Unidentified Company Representative

Bob, I think you'll see in our 10-K, we are going to expand our discussion and disclosures around Europe and then we'll roll that into to whatever level we bring that to. We will also, do we note it in a good point and we will take that in a consideration as we look at our releases in Q going forward.

Robert P. Napoli - Piper Jaffrey

Great, thank you. Your plans for Europe as far as asset growth in 08, I mean, I think you grew assets about 20% and look like you are turning to the third quarter in 07. Is that...would you expect a similar rate in 08?

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

Well, I would expect a similar investment level in 2008 than what we experience in 2007.

Robert P. Napoli - Piper Jaffrey

Okay. The...just curious on the...I mean this is...I know I am the person who is every quarter told you leverage is too low, and the return more capital to shareholders and...but we are...and this is an unusual environment and then obviously the repurchase shows your confidence in your capital structure and your leverage is very low. But I mean have you discussed the buyback at all with the rating agencies and do you feel like there is any acting shakier or on all counts these days?

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

We have had no issues on that front, Bob and yes we have discussed this with the rating agencies.

Robert P. Napoli - Piper Jaffrey

Great, thank you.

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

We feel confident about our leverages and balancing that repurchase activity with the opportunities we are seeing and we believe we will see in the marketplace.

Robert P. Napoli - Piper Jaffrey

And that's...maybe...I mean there does seem to be a lot of economic uncertainty today, certainly the market thinks so. Certainly the mortgage, the residential mortgage market if you follow that closely, it tells you there is...with the economic uncertainty, would it be prudent to be patient on the share repurchase, even given your low leverage to see where the economy maybe shakes out as we go through the year or do you think you have enough visibility and that the market is wrong about the economy.

James F. Earl - Executive Vice President and Chief Operating Officer

I wouldn't say the market is wrong about the economy, but I would say as we can undertake the $200 million share repurchase, we still have ample capacity to capitalize on what we see out there or what may be coming.

Robert P. Napoli - Piper Jaffrey

Yeah, I guess my only thought is that you may have, if the economy does continue to worsen, you might able to buy it at a cheaper price.

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

I hope not, Bob.

Robert P. Napoli - Piper Jaffrey

Okay.

Unidentified Company Representative

We feel pretty cheap already.

Robert P. Napoli - Piper Jaffrey

Yes. The maintenance expense I know you just mentioned generally that its...I mean how long...how much longer there is the additional maintenance expense need to primarily tie to the wheels, I guess and does that additional maintenance expense get completed for the wheel changes in 2008. We see a similar trend in the growth of maintenance expenses in 08 versus 07?

James F. Earl - Executive Vice President and Chief Operating Officer

Yeah and I think the key, one of the key things there is the fact that the cars that we have scheduled for compliance, federally mandated compliance goes up each year through 2009 and then begins to come down.

Robert P. Napoli - Piper Jaffrey

Okay.

James F. Earl - Executive Vice President and Chief Operating Officer

So, we will be managing that. And also as I mentioned before if utilization ticks down that factors into the maintenance expense as well as we work through that churn in the fleet.

Rhonda S. Johnson - Director of Investor Relations

And those issues, Bob, are separate from the changing of the wheel set.

Robert P. Napoli - Piper Jaffrey

Okay.

Rhonda S. Johnson - Director of Investor Relations

That's an ongoing program. I think, you are constantly changing wheels on these cars. It has been an expense that has increased for us in the last couple of years, because the railroads are now able to change those on privately owned cars and when they do they have typically done that for newer cars. That's not been as big of an issue here in the fourth quarter as these other things that Bob has already talked about. So, that's separate from this compliance and some of the other things we are talking about here.

Robert P. Napoli - Piper Jaffrey

Okay. With the credit crunch that we have today and the number of companies struggling in different areas, are you seeing any opportunities from a struggling company that are in your business, private companies? I mean, there are other portfolios out there that you maybe able to acquire in either the railcar business or in the marine area.

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

Bob, the answer is we hope so, we would never discuss any of that specifically, but that's one of the reasons we have managed the balance sheet like we have over the last couple of years to be able to take advantage of that when that does arrive.

Robert P. Napoli - Piper Jaffrey

But you are not seeing situations right now.

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

I think in general people are struggling little more, but I haven't seen anything specific as they are going to put their fleet upfront.

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

Something to consider on that, there are definitely rail fleets in the hands of people who are struggling, but the rail fleets tend to be very solid performers and as such and so while it's possible and we are hopeful that some of those may probably will...it's probably not the top priority for some of those who are challenged right now.

Robert P. Napoli - Piper Jaffrey

Okay.

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

So we are working that angle undoubtedly.

Robert P. Napoli - Piper Jaffrey

The differed tax line declined this quarter. I mean, I look at that as a kind of a source of capital over the long run, and also I was kind of confused the decline in the quarter and the year-over-year, shouldn't we expect that the differed tax line to grow generally in line with your portfolio.

Rhonda S. Johnson - Director of Investor Relations

Yes. That's true. It should grow in line with investments. The reason that you saw it contract is because of those tax rate changes. What happens is those tax rate changes that are occurring in Germany and the UK and Canada are being implemented slowly over time, but what you get in this one-time benefit is a change. You reset your portfolio to the new tax rate and that lowers your deferred taxes. So that's the impact that you are seeing there in the fourth quarter.

Robert P. Napoli - Piper Jaffrey

Okay. Let's see, last question. Thank you very much. The shipping business, the marine business...I mean you are been getting some pretty good price increases and you have made actually some more investments into the shipping business, and I just wonder what your thoughts are on that business and how much more can pricing go up on the marine business?

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

That's what we ask ourselves all the time. I think, if you look at rates on average in 2007, they were up dramatically actually from the prior year. Really, across all our blue water marine as well as prices up in the Great Lakes as well. And well in excess of what we thought when we originally made the investments. And it is tied to the world economy, so we'll have to watch that carefully. But right now, we don't see any weakness inside in 2008.

Robert P. Napoli - Piper Jaffrey

Okay. And as far as investments and additional investments into the marine sector?

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

You've seen us invest while we bought the big portion of the minority fleet at the end of 2006. We did some investments in 2007. We are building the vessels in China, LPG and ethylene vessels. We did some inland investments as well, but it's very difficult investment environment with the way asset prices are there. I think those guys did a good job finding those opportunities. If anything, we'll also look as we did in 2007, we'll look in 2008 of whether that it makes sense to sell some.

Robert P. Napoli - Piper Jaffrey

Okay. And are there any other asset classes that you are looking at that seem opportunistic that is an area for increased investment for you in 2008?

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

No, we are always looking at other long life, while these asset classes, as far as anything that we are talking about right now that would hit the radar screen, not really.

Robert P. Napoli - Piper Jaffrey

Okay. Thank you and congratulations. Doing a nice job in managing the company. Thanks

Unidentified Company Representative

Thank you.

Operator

Our next question comes from Rick Shane from Jefferies & Company.

Richard B. Shane, Jr - Jefferies & Company

Hey guys. Thanks for taking my questions. I have just a couple. You talked about 20,000 cars available for release in 2008 and you mentioned a few years ago that that was about 35,000. What was the exact number for 2007, if you have it?

Rhonda S. Johnson - Director of Investor Relations

It was about 24,000, I believe.

Richard B. Shane, Jr - Jefferies & Company

Okay great. Thanks Rhonda. You guys always talk about pricing in terms of in the context of a basket of cars and I think it's a useful way to look at it, but is outsiders, because I don't think we necessarily have a lot of insight into that. When did the value of that basket of cars peak and where are we in relation to that peak at this point?

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

In value, do you mean--

Richard B. Shane, Jr - Jefferies & Company

No, I don't mean value, I mean in terms of lease price. I apologize.

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

The absolute price.

James F. Earl - Executive Vice President and Chief Operating Officer

Absolute price was probably, second quarter maybe of 2007, right around there.

Richard B. Shane, Jr - Jefferies & Company

And how much are we down from there?

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

Not significant.

James F. Earl - Executive Vice President and Chief Operating Officer

Not significant. It has been a tick down each quarter probably from the first quarter of 2007, but not a major number.

Richard B. Shane, Jr - Jefferies & Company

Okay. So basically flat.

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

Yeah, the issues that we are showing, when we talk about lower increases there in 2008 is also because the expiring rate is moving up.

Richard B. Shane, Jr - Jefferies & Company

Okay. That's helpful.

James F. Earl - Executive Vice President and Chief Operating Officer

The other point too, Rick. While, the basket has designed to try to take some of the mixed volatility out of the equation, it's not perfect. There are still car types. I think that's why we hesitate a little bit on quarter-to-quarter, because there are still certain car types within the basket, if you have a large renewal that can have an impact, but it is a pretty good price.

Richard B. Shane, Jr - Jefferies & Company

That makes sense. And then in context to guidance, what is...I mean and again, I understand why there is a pretty wide range and that makes sense to us. When you look at the high end of that guidance and the low end of the guidance, what are the one or two factors that you think really drive the sensitivity. I am assuming that you sort of build that from a bottoms-up approach and you have...and again I realized there is probably even more bullish and more bearish scenarios in 315 and 335. But when you look at the key assumptions that drive that range, where is the real sensitivity?

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

The two biggest variables that can change earnings significantly, well, really in any year is one, fleet utilization. Pricing can change too, but that takes a while for the impact to really hit. So, utilization is number one and the second would be if large remarketing opportunity present itself and see a big gain. So, those are the two that immediately hit earnings.

James F. Earl - Executive Vice President and Chief Operating Officer

And the other I would add to kind of in that order, third on the list would be maintenance expense, to the extent there is some variability around that number that would hit you immediately.

Richard B. Shane, Jr - Jefferies & Company

Great guys. Thank you very much for your time. I appreciate the thoughtful answers.

Operator

Our next question comes from the Mario Gabelli from Gabelli and Company.

Mario Gabelli - Gabelli and Company

Hi. Just a couple of quick things from 30,000 feet. Your next door neighbor, Union Tank Car has a new owner. Any indication that you guys have been able to bisect the valuation put on that piece of the business and what it means for your enterprise value?

James F. Earl - Executive Vice President and Chief Operating Officer

No, we haven't been able to do that given that the Marmon Group is comprised of 120 some odd companies. Obviously, Union Tank is a sizable piece of that, but all and all when we look at that acquisition by Berkshire of the Marmon group. We don't see any material change in Union's operation. They always had access to fairly cheap capitals, so there won't be a change there. It's a disciplined well run company that will continue to be so. So we are not anticipating any major changes as a part of that acquisition.

Mario Gabelli - Gabelli and Company

All right, thanks. Second, you did a very interesting due at a short line. How many opportunities do you see out there for that kind of transaction? How much are you willing to talk about at the moment?

James F. Earl - Executive Vice President and Chief Operating Officer

Well, to talk about that little bit, we are actively engaged with searching for and looking for similar opportunities with other short line and regional rail roads, where it makes sense. As a customer, area for us that has been important for a number of years particularly in our locomotive business and we have a very strong relationships with the number of players in that market. So, through the extent, it makes sense and that needs to tie together the geographic and business characteristics of the railway. There are equipment needs and their desire to grow and when those opportunities kind of come together in the right combination I think there...it should be a repeatable model and then so we are actively looking forward. I think it's...I agree it's pretty interesting opportunity and one we'd like to have the opportunity to do again.

Mario Gabelli - Gabelli and Company

Too bad that and saw [ph] you there is locomotives, but I can appreciate why you like to keep those. Does a new tax stimulation build and it probably will include some benefits to business in terms of either accelerate depreciation or anything like that. How does that help you one way or the other, if that comes through or is it from what you are hearing anything special?

James F. Earl - Executive Vice President and Chief Operating Officer

Nothing material, Mario the depreciation on rail cars and other assets that we invest in is already fairly well accelerated. So...

Mario Gabelli - Gabelli and Company

So, unless it's an investment tax credit or something like that, it's not going to be a real excuse.

James F. Earl - Executive Vice President and Chief Operating Officer

Not expected.

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

Yes Mario, they were talking to rails are pushing real hard to get infrastructure included in that that didn't have and I know they are still pushing; I don't know there is any interaction.

Mario Gabelli - Gabelli and Company

Literally. The...just going to back to the tanks that you just bought. You were paying $1 once a year or two ago. What price can we assume, is that $0.80 and $1, here these opportunistic purchases?

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

No that would be too much, but I don't...it's enough where it made sense in those certain car type I don't. You are not going to pin me down on the specific. So, that...

Mario Gabelli - Gabelli and Company

All right, I would just keep echoing that notion of obviously buying some long life assets by starting your own private equity fund, but that's down the road. And thank you and just don't do an ASR, some investment bank will try to pitch you on one, but I like you are not going to do that.

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

I am writing that down. Thanks.

Mario Gabelli - Gabelli and Company

You bet. All right, thanks.

Unidentified Company Representative

Thank you.

Operator

[Operator Instructions]. And our next question comes from James Kieffer from Artisan Partners.

James Kieffer - Artisan Partners

Yes, hi guys. You already talked a little bit about the blue water assets, but wanted to sort of go back to that for a moment. As an outsider hearing about rates and values and so forth, I can't help, but think sell, sell. And so wanted to get a little more perspective from you on what would cause you to hesitate considering selling these assets, I mean I would certainly hope it wouldn't have anything to do with taking in earnings hit.

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

No. Taking in earnings hit?

James Kieffer - Artisan Partners

The earnings from that assets going away as a result of the sale.

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

No, we look at...seriously look at our entire portfolio of assets in no matter what segments in or hold versus buy only thing there is an opportunity and that's what we drive at.

James Kieffer - Artisan Partners

What's driving the whole mentality at this point; is my question?

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

Because we are in at a very attractive and we don't see rates although we have looked out at deliveries and capacity and demand. And right it still looks pretty strong. However, having said that we did do some opportunistic sales in 2007. We are going to look again in 2008, and that's why I specifically said that we may actually take some off the table.

James Kieffer - Artisan Partners

What would be the trigger point for full a exit?

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

A full exit?

James Kieffer - Artisan Partners

Yes.

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

Well, I would think it would be our view that there is a long-term decline.

James Kieffer - Artisan Partners

Wouldn't that be too late though to wait till then?

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

Well, hopefully we can be a little more forward-looking than that. But once again I would like the basis on which we are in to that business, it's a very attractive return.

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

To echo Brian's comment, when we talked about remarketing income and expectations in 2008, we are looking at some opportunities there and assume that there is some activity on that front in 2008.

James Kieffer - Artisan Partners

Okay, great. Thank you.

Operator

Our next question comes from Greg Hillman from First Wilshire Securities Management.

Greg Hillman - First Wilshire Securities Management, Inc.

Good morning. Could you talk about whether there is any opportunities to securitize like your rail fleet and whether that's being done in the industry or start your own fund and sell to institutional investors since a lot of your value added is advancing roughly rather than owning it?

James F. Earl - Executive Vice President and Chief Operating Officer

There is definitely is securitization down in the rail car industry. From time-to-time, we do utilize or secure some of our assets through long-term sale lease back financing, but that comes at a cost, because it inhibits your flexibility to actively manage your portfolio like we have done very aggressively here in the last three years. So, while we look at that and there is a number of factors that come into play including our tax position and other elements, the big thing is the flexibility you have to manage your fleet through cycle. And to the more you securitize your portfolio; the less you can do that. Plus our access to the unsecured market remains very much after ready and attractive to us. So, we are not pushed in that direction in any way.

Greg Hillman - First Wilshire Securities Management, Inc.

Okay. And then also could you just talk about your available capital to do purchases, to do acquisitions or other investment activities at this more in your lines of credit and what's on the balance sheet.

James F. Earl - Executive Vice President and Chief Operating Officer

Well, we have a $550 million backup facility, which is in place through 2012. We actually extended that and made some positive amendments to that facility back in May of 2007. So, we have locked that up for five years as our standard backup facility, which is very good to have and somewhat in excess of what we need, but it's nice to have there. Right from that we have access to the capital markets and unsecured markets as needed without any issue, so we can tap those. I think the bigger question is kind of looking into balance sheet how much you can take on in terms of an acquisition. And we have factored into our guidance here and our expectations in 2008, some pretty significant investment volume in addition to the share repurchase and feel very comfortable about the capacity we have to capitalize on what's out there.

Rhonda S. Johnson - Director of Investor Relations

And the other thing to remember is through the cycles, the portfolio continues to kick off return on cash. So, the cash generating ability of the company is significant as well as all of the credit opportunities that we have before us.

Greg Hillman - First Wilshire Securities Management, Inc.

Okay. And one final question; in terms of...are there any public companies that make rail road car wheels.

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

Not that you could look at as a stand-alone business that I am aware of.

Greg Hillman - First Wilshire Securities Management, Inc.

Okay, fine. Thank you.

Operator

[Operator Instructions].

Rhonda S. Johnson - Director of Investor Relations

Okay.

Operator

And at this time we have no further questions.

Rhonda S. Johnson - Director of Investor Relations

Thank you very much everyone. And I am available this afternoon if you have any follow-ons.

Operator

That concludes today's presentation. Thank you for attending and have a great day.

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