Letter From the Chairman
GATX operates in the highly cyclical markets of rail, marine and industrial equipment. This cyclicality cannot be avoided, so we strive to manage our business effectively in the current climate while simultaneously preparing for the next phase in the business cycle. Although this strategy may not always maximize earnings in the short term, we define success as reducing long-term earnings volatility while ensuring that our financial achievement is progressively higher at the peak of each successive business cycle. I will explain what we have done in the recent economic downturn to position the Company to generate maximum long-term value for our shareholders.
The downturn started in GATX’s underlying markets in 2008. Since that time, we have focused on three tactics to protect current earnings while preparing for the eventual upturn in the global economy.
First, we worked to significantly reduce costs in the short term while making certain we were not cutting any resources that would impact our ability to serve our customers or limit our growth. A measure of our success in this area is that GATX’s SG&A costs were reduced by almost 25 percent from the peak of the market, enhancing current earnings while preserving our ability to grow.
Second, we priced leases aggressively as the market turned down, sometimes sacrificing lease rates in order to keep our assets highly utilized. An example of our success is the fact that GATX’s North American rail fleet maintained at least 95.9 percent utilization during this entire period. At the same time, we worked to reduce lease renewal terms dramatically. We were successful here as well, with our average North American rail lease term dropping from 70 months at the peak of the market in 2007 to 31 months in early 2010. This will allow us to renew a disproportionate share of our fleet in a strengthening rail market as the economic recovery continues in 2011 and beyond.
Lastly, we pushed hard to grow our asset base at the greatly reduced prices available at the bottom of the business cycle. From late 2008 through 2010, we invested over $1 billion and were able to add over 18,000 cars to our owned and managed fleet. Notably, much of this growth was generated by purchasing railcar fleets of financially distressed lessors. These fleet acquisitions were completed at advantaged prices and at a time when few other industry players were investing in the rail market. The shareholder value added by these transactions should become clear in the coming years.
Turning to our recent financial performance, in 2010 we saw the global rail market begin its recovery while most blue-water marine markets continued to experience weak demand and an oversupply of vessels. The tonnage carried on the Great Lakes recovered nicely due to higher iron ore volumes required by the U.S. steel mills. Importantly, we performed financially as we expected entering 2010. While our earnings and returns reflected the tough economic environment, we are even more confident in our long-term position.
Revenue pressure will start to subside in 2011 as the global economy and our underlying markets continue to recover. We expect earnings to be up modestly as this recovery takes hold and the capital markets remain at attractive levels. In Rail, we will change our focus from preserving utilization to increasing lease rates. We will continue to grow our asset base in North America and Europe through both new railcar purchases and secondary market activity. We also intend to expand our rail presence in select emerging markets, where we can take our expertise and apply it to markets with more attractive growth characteristics.
GATX’s stock has outperformed the S&P 500 for the last one-, three-, five- and seven-year periods. With our recently announced dividend increase, GATX has now paid a dividend for 92 consecutive years, a long-term record few companies can match. It is an honor to lead a company with such a long history of performing for its shareholders. Coupled with a strategy that is long-term focused, we plan on continuing this tradition.
Brian A. Kenney
Chairman, President and CEO of GATX Corporation