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Transcript of cit 2004%20q2
CIT Moderator: Valerie Gerard
07-22-04/10:00 am CT Confirmation#8398137
Page 1
The following transcript has been provided by a third party transcription service for informational purposes only. The transcript has been reviewed and edited by CIT and in our opinion is the best interpretation of the statements made on the call. The actual conference call may have differed slightly.
CIT
Moderator: Valerie Gerard July 22, 2004 10:00 am CT
Operator: Good morning. My name is Andrea and I will be your conference facilitator.
At this time, I would like to welcome everyone to the CIT Second Quarter
Earnings Conference Call. All lines have been placed on mute to prevent any
background noise.
After the speakers’ remarks, there will be a question and answer period. If
you would like to ask a question during this time, simply press star then the
number 1 on your telephone keypad. If you would like to withdraw your
question, press star then the number two on your telephone keypad.
At this time, I would like to turn the call over to Valerie Gerard, Senior Vice
President Investor Relations. Thank you. You may begin your conference.
Valerie Gerard: Thank you Andrea. During this call, any forward-looking statements made by
management relate only to the time and date of this call. We expressly
disclaim any duty to update these statements based on new information, future
CIT Moderator: Valerie Gerard
07-22-04/10:00 am CT Confirmation#8398137
Page 2
events, or otherwise. For information about the risk factors relating to our
business, please refer to our quarterly and annual reports filed with the
Securities and Exchange Commission. Any references to certain non-GAAP
financial measures are meant to provide meaningful insight and are reconciled
with GAAP in the Investor Relations section of our Website located at
www.cit.com.
With that, I’d like to turn the floor over to Al Gamper.
Al Gamper: Thank you, Valerie, and good morning everyone. Welcome to our conference
call and if you’ve been following CIT you know that there’s been some
significant events reported by us recently. One was the completion of the
acquisition of GTS at the end of June. Yesterday we announced the seamless,
smooth, and wonderful - and I say bloodless transition of management around
here. And thirdly, we announced record strong earnings.
Joe will talk about financials and Jeff will talk about the business following
me. But I’d like to just look back a little bit on the progress we made since
two years ago when we went on the road and did the IPO. And I’ll start with
the balance sheet being an old credit guy.
Stronger liquidity, terrific reserve levels, strong capital position and
outstanding credit quality have been delivered over these last two years. Our
business volume is picking up and strong. Our tone of business is good.
Quality is good and we’re making market share improvements in our key
strategic businesses.
We exited, as we told you we would do, low return businesses that were not
essential to this and redeployed that capital. And we did that without making
an impairment to our capital, in doing that. We’ve made four acquisitions that
CIT Moderator: Valerie Gerard
07-22-04/10:00 am CT Confirmation#8398137
Page 3
were a fitting, good, solid as we said we were going to do two years ago. And
we have a fifth on the way, we’ll probably announce next week, of a similar
nature plugging right into a strategic plan that makes a lot of sense.
And most importantly we’ve improved the quality of earnings and the returns
on equity. And it’s interesting, we’ve reported a much better return on equity
this quarter than in the past in spite of growing equity, which means we’re
improving our return equity without leveraging it. And we’re doing it by
improving the returns on assets. Extremely important.
We’ve executed on our game plan and now we are turning the game book
over to a new coach. We’ve had a couple of good winning seasons and I
remind you that this whole team will be back for next season with the
exception of their most expensive player. And I made a little comment the
other day to Jeff that said, “While we’re turning this over to Peek, we haven’t
peaked.”
And let me tell you that may be a joke, but let me tell you how serious I am
about that. Some people may think there’s a little steam running out in this
organization. Don’t make that mistake. Don’t make that mistake. We will
continue to improve our margins, there’s still improvement to be made there
from this quarter, even though these were good ones.
Our credit quality will continue to improve. An example of that is Equipment
Finance. We still have 100 basis points to charge-off of Equipment Finance.
We’ve got to get down to 50 basis points. Our rental rates on some of our
aircraft will improve. And we have productivity improvements to make in
this organization.
CIT Moderator: Valerie Gerard
07-22-04/10:00 am CT Confirmation#8398137
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We will see some of those because we have a game plan for that too. I’m
confident that our earnings will continue to go up this year as the quarters
progress as we had in the first quarter and the second quarter. And while I’m
not in the forecasting business, I feel confident that we’re going to see
improved earnings in this organization.
So I say, once again, I’m proud to turn it over to Peek because I know we
haven’t peaked. And with that, I give you Jeff Peek.
Jeffrey Peek: Well thanks Al and good morning to everyone. I think that at the risk of
stretching this too far I think we’d all have to say, we just want to be sure to
win one for the Gamper. But I would just like to take a minute or two to make
one or two comments before I get to reviewing the quarter.
At first I just want to reflect a little bit on the accomplishments of my
predecessor and friend, Al Gamper. Al, you’ve been a terrific leader for CIT,
shepherding it through various economic cycles, five ownership changes, a
tough liquidity crisis, and all the while, continuing our spotless record of 96
years of never having an operating loss. And you’ve built a strong culture
here, one of excellence, particularly when it comes to credit risk management.
By any measure, these are considerable accomplishments - a terrific legacy.
Now I don’t know anyone else who’s built a company that’s so strong and
cohesive as CIT. As was expected, you and I worked very closely over the
last nine months to make this a seamless transition as you mentioned. And I
think we’ve succeeded. The Company is well positioned for future growth. It
has a terrific management team and it’s blessed with a dedicated employee
base. And I’m looking forward to building upon this successful, rich history.
Now for those of you out here who might be wondering how CIT will be
different without Al Gamper, let me just say this, Al and I see the world and
CIT Moderator: Valerie Gerard
07-22-04/10:00 am CT Confirmation#8398137
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CIT in much the same way. But Al and I are different people. I’ll be a
different CEO than he was. Some of those differences will be subtle, almost
invisible to the outside world and others will be obvious to you over the
coming quarters. Now what can you expect from me.
As CEO, you can expect to see us implement a series of initiatives designed to
energize the Company and also raise the bar. So that when you look at CIT,
you’ll see a dynamic world-class company with a high performance culture.
For those of you who attended our investor conference last month, you got a
glimpse of what’s in store.
Going forward, we’ll want to identify more measures to drive us to be a better,
stronger and more responsive organization for our customers, investors and
employees. Expect to see initiatives such as achieving additional operating
efficiencies, building the brand and cross selling projects. You should hold
me accountable for each and every one of these objectives.
Now in turning to my quarterly review of the businesses, you can expect to
hear a candid assessment of our business accomplishments and challenges.
You’ll hear how I look at the business and what I think is important in terms
of growing this franchise.
CIT posted an extremely solid second quarter with good momentum and
energy throughout the organization. It was quite a busy quarter. So let me
spend a few minutes on what I think are the important take aways. When
looking at our traditional performance metrics, we made tremendous progress
in the quarter.
♦ Credit statistics continue to get stronger
♦ Our borrowing costs remain at very competitive levels; and
♦ Volumes are expanding as the economic recovery takes hold.
CIT Moderator: Valerie Gerard
07-22-04/10:00 am CT Confirmation#8398137
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However, we added some new features to enhance the Company’s overall
performance. For example, our growth emphasis broadened to include
accelerating and divestiture of non-core assets, adding more bolt-on
acquisitions and portfolios and syndicating more portfolio risk - thereby
putting up capital for higher returning businesses and assets.
Accordingly, we made significant progress on the ROE front. Relative to last
June, our return on tangible equity improved more than 200 basis points,
ending the quarter at 13.7%. That’s a 60-basis point improvement from the
first quarter, only 90 days ago, of 13.1% excluding the PINES gain. Also the
quality of these earnings was very high with very little in the way of gains on
sale through securitization. Although I do want to caution you, we may
securitize somewhat more in future quarters based upon market conditions at
that point.
The major disappointment in our financial results, from my perspective, was
the further up-tick in dollars of expenses and in the efficiency ratio. Joe a
little later will break down the reasons for the OPEX growth. But let me say
this, operating expenses are too high. Each of our businesses must realize
further operational efficiency. Management is very committed to bringing
down our operating costs. As I alluded to earlier, expect to see some
programs here as part of our effort to bolster our efficiency ratio and improve
return.
Now let’s go to the businesses. Turning to the flow businesses. Returns in
Specialty Finance, Commercial Services and Equipment Finance all
improved, compared to the June 2003 quarter.
CIT Moderator: Valerie Gerard
07-22-04/10:00 am CT Confirmation#8398137
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Equipment Finance enjoyed a particularly good quarter. Volumes were up
over 20% from last year’s second quarter and 14% over this year’s first
quarter. This reflects continued strength in the construction, machinery, and
corporate aircraft sectors where collateral values continue to improve,
inventory levels are coming down, and demand is increasing. Profitability
improved nicely as return on average earning assets exceeded 1% for the first
time in two years. Gains from equipment sales were strong and credit losses
fell to 99 basis points, a level we have not seen since the second quarter of
2001. Now while there’s still a lot of work to do here, and I want to
emphasize there’s still a lot of work to do in Equipment Finance, I am very
pleased with this unit’s progress so far this year. And it feels good to deliver
such encouraging news regarding Equipment Finance.
Now our factoring business continues strong. It did have some seasonal
runoff in terms of assets, but it continues to benefit from the acquisitions we
did last year with good returns and credit quality is in better shape than it was
in the second quarter of last year.
Now let’s talk about Specialty Finance. Major vendor volumes are up some
20% over last year’s second quarter. The research firm, interestingly enough,
IDC recently reported there’s recovery in PC spending, notably in the business
sector. So we feel very good about the performance here and also our future
prospects.
Looking internationally, vendor volumes were also up 20%. We’re really
starting to realize the benefit from consolidating all our platforms in Dublin
last year. Home equity volumes are up over last year and show that we have
the ability to grow this portfolio in a moderately rising rate environment. So
for Specialty Finance, the quarter was quite busy. We completed the GTS
purchase in our small and mid-ticket leasing business. We also closed on the
CIT Moderator: Valerie Gerard
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divestiture of TRS, our former test equipment rental business. In addition,
although we’re going to book it in the third quarter, we’ll reduce our
liquidating portfolio further with the sale of our marine and recreational
vehicle portfolios. And this sale is part of our commitment to redeploying
capital into our higher returning core businesses.
Now if you look at our transaction business, the big event here was the
combination of Capital Finance and Structured Finance, as well as the transfer
of the Media and Communications portfolio to Business Credit. We made this
change to become better aligned with our customers. We want to reduce
multiple calls by CIT salespeople on the same organization and also shorten
our response time for client decisions.
Business Credit remains one of the higher returning businesses in the CIT
portfolio. Volumes for traditional asset-based loans were very strong during
the quarter and credit performance continued to improve.
Now moving on to Capital Finance. Here our rail business continues to
perform well. Utilization remains very high at around 99% and lease rates
continue to trend higher given the stronger economy, the growing congestion
on the railroads and higher new car replacement costs due to steel increases
and other.
Aerospace also had quite an active quarter. We placed seven new aircrafts
(four Airbus and three Boeing) with five airlines outside of the US. All 18 of
our 2004 deliveries are placed with two of these deliveries expected in the
third quarter. Of our 209 major jetliners, only three are temporarily on the
ground and they are all covered by pending leases.
CIT Moderator: Valerie Gerard
07-22-04/10:00 am CT Confirmation#8398137
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In addition, we closed on the sale of two thirds of our direct venture capital
investment portfolio, which we talked about at the end of the year. The
balance of our direct investments, expect to close over the next 12 months.
Also, fee income was particularly strong in the former Structured Finance
portfolio due to a very high level of syndication activity, which is very
consistent with our desire to reduce our risk profile.
So in summary, let me say again that our businesses have a lot of positive
momentum. The economy is expanding, showing real signs of improvement
and we feel that. That’s clearly reflected in the volume growth witnessed in
Equipment Finance, our vendor programs, home equity and the international
portfolio. While managed asset growth did stall this quarter, it was somewhat
self-inflicted given our deliberate capital reallocation decisions regarding the
sale of non-core assets by TRS and liquidating portfolios like RV and Marine.
I do think we will realize our 2004 target of 8% to 10% asset growth this year
although we may get there somewhat differently than we thought at the
beginning of the year.
Overall, the second quarter performance puts us firmly on a path towards
achieving the financial goals we set for ourselves this year. We do feel very
confident about the balance of the year given our business momentum and the
organization’s energy and enthusiasm. Achieving our 15% ROE target is of
paramount, personal importance to me and significant to the organization. As
we go into our traditionally stronger second half, let me assure you that our
focus will be on achieving profitable growth and success.
Now with that, let me turn the floor over to Joe Leone, our Vice Chairman and
Chief Financial Officer. Joe.
CIT Moderator: Valerie Gerard
07-22-04/10:00 am CT Confirmation#8398137
Page 10
Joseph Leone: Thanks, Jeff, and congratulations to both you, Jeff and Al, great team leaders,
managers, etc. Good morning everyone. As you can see, it was a very active
quarter with many accomplishments by all parts of this organization. And it’s
been a terrific quarter in terms of improvements in financial performance.
Once again, higher profitability, lower funding costs, better credit quality and
as Al described, a very strong balance sheet. And Jeff described a lot of
progress on strategic initiatives and progress towards our financial targets.
But I also believe we have further opportunities for accomplishments and
improvements.
I’ll give you some of my financial perspective on many of the items Jeff and
Al just described. You know the earnings 82 cents, 26% higher than a year
ago, 8% higher than a quarter ago. And, as Jeff described, a very strong ROE
performance, approaching our 15% goal.
Returns were up across the board for all segments versus a year ago and
importantly, while we expect more, as Al and Jeff described, some of the
lower performing units like Equipment Finance improved considerably.
Profitability in Consumer Finance-home equity improved again and is
approaching the corporate target. Credit remains strong in that business and
we’ve restored or are restoring the on-balance sheet asset levels to provide
scale to that business. The earnings quality was strong. It was not only a
strong earnings level but a very strong earnings quality across the board.
Jeff described the new business volume being healthy, up 4% sequentially and
8% a year ago. Equipment Finance was strong as Jeff said. Factoring volume
was down a bit, that’s seasonal. But we very successfully integrated the two
acquisitions we made last year, retaining the customer base.
CIT Moderator: Valerie Gerard
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Credit quality, very strong. Total losses for the quarter were over 100 basis
points. Core losses were 72 basis points with significant improvement in
Equipment Finance. And Equipment Finance will do better than that level as
well. Our overall charge-off level was better than we even expected this
quarter. We did benefit somewhat from a higher level of loan recoveries,
about 25 basis points this quarter versus about 13 basis points or so the prior
quarter. But overall putting it together for the first six months, 85 basis points
in core charge-offs - pretty good achievement on some of our targets and
credit metrics.
Non-performing assets were down $100 million in the quarter, 1.77% of
receivables, the lowest level we’ve seen in about five years.
Loss reserves, very solid at $621 million, a decline of $16 million. But I want
to make sure you understand this. That decline is principally reflective of
charge-offs we took against the telecom reserve and the sale of the Argentine
portfolio. Core loss provisions approximated the core charge-off level.
Net Finance Margin was flat at around 4% but funding costs continued to
improve, in the quarter. We had higher yield-related fees and we had stronger
lease margins particularly in rail. These positive factors were offset by higher
depreciation expense in commercial aerospace.
Risk Adjusted Margin is approaching our 3.5% target. It moved up to 3.3%
principally due to lower charge-off levels.
Non-spread revenues were very strong at $237 million despite lower
securitization related income. Fees and other income, particularly strong, up
from the prior quarter. Where was it? Strong fees in Capital Finance
particularly out of our former Structured Finance group including advisory
CIT Moderator: Valerie Gerard
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fees and income from the syndication of the loans, particularly project finance
loans. And we also had a gain in Specialty Finance from the sale of the small
ticket rental business Jeff described.
We did evaluate our liquidation strategies on our liquidating portfolios. And
let me give you the accounting on this. Jeff described the RV and Marine
portfolios. During the quarter, we accelerated or we decided to accelerate our
liquidation strategy and we transferred on June 30 these assets to assets held
for sale and took a write down to approximate fair value of about $12 million.
This week we signed a tentative agreement to sell these portfolios at a price
approximating that June 30 carrying value. And if you look at our liquidating
portfolios excluding this sale, we’re down to about $700 million. That’s
terrific progress from several years ago.
Securitization gains were down about $10 million sequentially. And at 4% of
pre-tax income, this quarter’s gain is lower than the level we expect to run.
Let’s move to the asset side. We have reduced our securitization strategy and
securitization levels. So, owned assets have been increasing faster than
managed assets and I think that’s a trend you’ll see for a while. Owned assets
are up about 11% from a year ago and 3% from year-end. Managed asset
growth is slower because of the lower level of securitization.
Jeff described strong origination volumes and the asset levels does include a
$500 million GATX technology asset acquisition we made and closed on in
June. We had seasonal runoff in factoring, as the second quarter is one of the
lower points of the year. We did have asset dispositions in Specialty Finance
as we’ve described and higher syndication activity principally in Capital
Finance. Jeff described those. Let me dimension those a little further for you.
CIT Moderator: Valerie Gerard
07-22-04/10:00 am CT Confirmation#8398137
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♦ The small-ticket rental business, - that was sold was a little over $100
million in operating leases, and that transaction generated about a $13
million gain.
♦ We sold about $70 million of the venture capital direct investments in
the quarter at a price approximating our carrying value.
♦ We sold the balance of Argentina that’s about $25 million, a modest
profit.
♦ And the syndications in Capital Finance reduced our hold positions by
some $150 million in the quarter and generated syndication income.
And as Al and Jeff both indicated, and I’ll reiterate, these activities reflect the
risk adjusted capital discipline we’ve been describing to you over the last
several months. We’ve implemented it, we’re redeploying capital and we’re
getting better returns.
Also, the other portfolio dynamic is, we do see strong liquidity in the credit
markets. Our customers have options and we did see some prepayment during
the quarter including a large factoring facility and an international financing
project.
Let’s move to operating expenses. Al and Jeff wanted me to fill in some of
the blanks. The efficiency ratio is 42%. The percentage of expenses to
managed assets is 2.2%, a disappointment to us. But we did have some
impact from our restructuring initiatives in the numbers. The higher expenses
this quarter was a result of restructuring charges we took on the reorganization
we did in Business Credit and Capital Finance. We announced those
reorganizations this past quarter and we put up the restructuring charge in the
CIT Moderator: Valerie Gerard
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quarter. We did have higher compensation accruals. Implementation costs
for SARBOX were higher and advertising and marketing efforts also were
higher and contributed to the increase.
But what does that mean for going forward expenses? Our overall expense
discipline will continue. The Capital Finance and Business Credit
restructuring will reduce and lead to lower expenses in the second half of the
year. The sale of the non-strategic portfolios will reduce expenses in the
second half of the year and improve returns. And as always, we are
continuing to look at platform opportunities or platform efficiency
opportunities. Jeff has us all focused on the work we have to do here and the
second quarter initiatives we put in place will pay dividends this quarter. But
we still have more work to do.
Let me move to the operating lease portfolio trends. We performed our
regular quarterly evaluation of the operating lease commercial aerospace fleet,
that’s about 160 planes in our fleet. Having seen declines in older vintage
plane rental rates on eight planes to be specific, with upcoming lease
maturities, we recorded $15 million in additional depreciation in the quarter
on this equipment. Offsetting this higher depreciation was lower depreciation
in the small-ticket operating lease portfolio principally due to the portfolio we
sold. Depreciation on rail assets was about the same, but as Jeff described, we
saw a nice pick-up in rental rates and utilization and the rail business is doing
quite well.
Looking at the right hand side of the balance sheet, liquidity improved even
further. We had $1.8 billion in cash at the end of the quarter and we stayed
ahead of our financing needs. We have plenty of capacity in our commercial
paper program and our bank facilities are both long and strong liquidity.
CIT Moderator: Valerie Gerard
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During the quarter, we issued $3.5 billion approximate of unsecured term debt
at very attractive levels ($700 million of fixed, $2.7 billion of floating), that’s
a year-to-date issuance of $6.2 billion. We’re a little ahead of - our financing
schedule. The last floater that we did in the quarter was a three-year at
LIBOR plus 22.
Let me turn to the second half in terms of maturities. We have $3.3 billion of
term debt maturing in the second half - $1.2 billion in fixed and the balance
floating, and a fixed rate debt maturity has an average spread over Treasuries
of 132 basis points and a floating has an average spread over LIBOR of 56
basis points. So you can see we still have refinancing benefits to get as we
refinance these upcoming maturities.
Securitization, $850 million this quarter, down from $1 billion. Securitization
volumes in Equipment Finance were up on strong origination volumes. And
securitization volume was down in Vendor Finance. We should see a slightly
higher securitization levels in the third and fourth quarter.
Risk management, on the right hand side of the balance sheet, remains
consistent. We’re slightly liability sensitive in the short run and asset
sensitive over the long run. We are very matched or fairly matched and we
had no significant change in interest rate sensitivity metrics since the first
quarter.
Tangible equity, almost 11% on strong capital generation. Tangible book,
about $24.50 per share. And finally, we purchased about 1 million shares this
quarter under the share repurchase program we announced last quarter We
currently have about 800,000 shares in Treasury and we will continue that
program on a regular basis.
CIT Moderator: Valerie Gerard
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With that, let me turn it over to the operator for Q&A.
Operator: At this time, I would like to remind everyone, if you would like to ask a
question, press star then the number 1 on your telephone keypad. We’ll pause
for just a moment to compile the Q&A roster.
Question: Hey. I was hoping you can drill down a little bit more on the asset growth. In
the quarter it looks like on managed basis there was some shrinkage in the
overall portfolio. And as I kind of run through the items you flagged for us it
looks like you acquired $520 million in assets, you had some dispositions but
net you acquired $330 million.
The shrinkage in the liquidity portfolio wasn’t really much more pronounced
than it was in prior quarters. I’m not quite sure how the syndication activity
compares to prior periods. But could you give us some context. We are
seeing more visible strengths in a number of the banks and you do seem to be
as optimistic as you were earlier in the year about asset growth prospects.
Maybe you could put a little more perspective around the numbers for us.
Thanks.
Answer: Let me start generally and then maybe Joe can provide some of the numbers.
I think that on our flow businesses and in Specialty we’re actually seeing
fairly good asset growth quarter over quarter and week over week. I think one
of the issues for us on our larger ticket businesses. If you drill down to some
of our businesses such as Media and Communication, they’re more than
meeting their new business plans. But the problem is that their clients have
alternatives and this wave of liquidity seems to have really shortened the
maturity of a lot of our loans. And I think that’s what we’re seeing probably
with a little bit of a seasonal fall off in the factoring business, getting ready for
the Fall ramp up and the holiday season.
CIT Moderator: Valerie Gerard
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But that’s how we’re seeing it here. I don’t know if you have some data you
want to add to that or not.
Well, I did go through some of it. GTS did add $0.5 billion but we did sell
some assets and that’s $200 million. The syndication effort in the quarter was
very high. It was much higher than we’ve seen over the last several years and
there were a few reasons for that. Higher, better liquidity in the market and
we seized on that opportunity or liquidity in the market to manage our risk
exposures on larger exposures down.
Seasonally, we saw several hundred million of run off in factoring. You could
see that in the asset table that we provide. And we had a large prepayment in
factoring of a similar size. So, when I put that all together, there were some
events, episodic as they may be, in the second quarter that offset some of the
stronger volumes.
The other thing I would add is that in our leasing businesses, the second half
of the year is traditionally the better part of the year. And the fourth quarter is
even better than the third quarter. In the weaker part of the cycle we saw a
year or so ago, that did not happen.
With the economy improving, I would expect the equipment business to be
stronger in the second half of the year and stronger in the fourth quarter of that
- of the year. That’s a little bit more color.
Question: Okay. And just maybe just a follow-up on that. The heightened prepayment
activity that’s opportunistic because of rates or that the function of the
competitive environment?
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Answer: That’s a function of liquidity. I’m not talking about consumer finance
obviously, that’s going the other way, rates are going higher. But it’s a
function of alternative liquidity being much more available in the market to
customers as they graduate up on the credit curve. So it’s in the Commercial
Finance arena and it’s a function of liquidity in the market and it’s trends
we’ve seen in former economic recoveries and not surprising to us.
Question: Gotcha. So that’s something that you expect to continue to wrestle with?
Answer: Yes, in an economic recovery. On the flipside, the pie of lending and the
demand for equipment should get stronger and that’s what I’m talking about
in the second half of the year.
I think the other thing is, I think we’re starting to get a little bit of the attention
of our sales forces. We had, for the first time in a long time, we had all of our
sales managers CIT-wide in one place last week for three days and started to
work with them just in terms of passing on some of our growth targets what
we’ve laid out as our plans for the next few years. And so this was the first
time we’ve done this in a number of years and we have a lot of assignments
coming out of that. But I came out of that with a much better feeling about
the energy of our respective sales forces and where we’re going with the other
businesses. So we’ll have to see how that plays out but it was a - I think it
was an excellent first step for us.
Question: Hi, guys. You had mentioned earlier on the call that you were going to be
announcing another acquisition some time next week. I’m just curious if there
are going to be potentially other smaller divestitures like what we saw with
the equipment testing rental business this quarter kind of coinciding with that.
CIT Moderator: Valerie Gerard
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And then separately, on the aerospace front, we’ve been hearing that orders at
both Boeing and Airbus have been up pretty recently. And I’m just
wondering if you’re seeing any impact from that on either the demand side for
future deliveries or whether there’s been any impact on your lease renewal
rates?
Answer: Why don’t I take the first one and then Joe could take the second one. I think
on what we foreshadowed about next week, this is - this will be an acquisition
much like the last four or five we’ve done. It will be right there in the same
size category. It fits in with one of our existing businesses, it gives us great
operating leverage on our existing platforms and I think you’ll be convinced
we got it at a very reasonable price given all that it does for us. Whether
we’re going to match that with the divestiture, I - we don’t have any plans in
the next 72 hours to find a divestiture to match it with.
We are more seriously, we are making a continuing effort to try and evaluate
our businesses on an ongoing basis and when we find things that don’t seem
to fit with this or aren’t of a scale where they think a year, two years from
now, their contribution of profitability is going to be meaningful, we’ll think
about divesting them. And that’s somewhat of a separate discipline away
from acquiring companies.
On the air front, I hope all that bullishness is reality. There are better rental
rates on the new planes, we see that in our portfolio clearly, but they’re not
good enough, that’s number one. Number two, I think the news is a bit
mixed. You pick up the Journal this week and it’s a bit mixed. In London it’s
positive, in the U.S. it’s not so positive.
CIT Moderator: Valerie Gerard
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So we - I still stay what I said coming into the year or we said coming into the
year where - it’s a better year for aerospace but it’s still not nearly giving us
the appropriate risk adjusted levels return that we will need given the
discipline we have on return on capital. And we hope the improvement in
rental rates continue because we need it to continue to get the returns to where
they need to be for us to put more capital up here.
I’ll make a comment on this. If they’re going to sell more airplanes and make
more airplanes from somewhere, then somebody’s going to finance them.
You’re not going to finance them with a 7% or 8% return equity. I don’t
know anybody who starting a leasing - aircraft leasing company with those
kind of returns. So I think you’re going to have to see improved returns.
And I also don’t know there’s that many airlines out there that can write a
check for an airplane these days. There’s probably not as many as there were
years ago. So I think there’s going to be pressure to finance these airplanes
and keep these airplanes. But that pressure has to definitely get good returns
otherwise capital is not going to flow, as you guys know better than I do; the
capital is not going to flow those areas. And I tell you that CIT capital is not
going to flow those areas because there’s a discipline around here. But I think
if you take a longer-range view, that will happen -- less capital flow, better
returns, and the rates will move up there if things improve throughout the
world in the airline industry. You have to be cautiously optimistic but I put
that word cautiously in there.
Question: I was just wondering if maybe you could put a little bit more color on your
comment about you’re still confident in the 8% to 10% asset growth being
intact but you might get there a little differently. What do you mean by that?
And has anything changed relative to your - the Investor Day in terms of your
outlook for asset growth?
CIT Moderator: Valerie Gerard
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Answer: I think - no. I think basically not. I think what I was alluding to is there may
be a change in mix. Some of - we may see more of it coming from Specialty
and less coming from the transaction business which would be one takeaway
probably from the second quarter.
Also, right now, we’re really I think seeing a terrific number of these small
acquisitions, all kind of $300, $400, $500 million in assets and they look like
they fit right in our sweet spot in some ways. So, I don’t think we’re going to
be good enough that we could precisely tell you exactly the zip code of where
the growth is going to come from every last month.
So there - I wasn’t really foreshadowing that other than we’ve got those goals
out there. I think we still feel confident about reaching them and - but they
may come from different sources than where we thought a month ago or two
months ago.
Question: Okay. And just to kind of a follow-up on another topic, in terms of your
philosophy or style, Jeff, relative to Al. We hear a lot about bolt-on
acquisitions. Is that really the extent of acquisitions or is there going to be a
change in the sense of the size or scope of the type of deals that CIT might do
in the future?
Answer: Well, I think in terms of one of the big differences in Al and myself is that I
don’t have a table here in front of me so my report card is - I’ll have to invent
another metaphor.
On the bolt-on acquisitions, I think those are working really well for us. So I
don’t see us doing anything in the transformational sizeable area. As I said,
CIT Moderator: Valerie Gerard
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we’re seeing a lot of things, which seem to be, very similar to the businesses
we have.
We like buying the assets. We like getting a look at the people. In GATX, we
love their sales force. I think we hired 26 out of 29 people from the GATX
sales force. So it upped the level of our professionalism on the sales side and
those seem to be working for us very, very well. So I - that’s pretty much our
focus.
If they’re in particular markets, if there are products that we think we could
extend on to our relationships, simple product extensions within a given
market, the small business market or the middle market, we would look at
that. But I think we’re pretty comfortable with this size parameter.
We’re - these seem to be pretty easy to integrate. There doesn’t seem to be
much cultural chemistry that we have to master here and they seem to be
working well for us. And they’re not so big that we distract a meaningful
percentage of our business managers from making their quarter. So, I think
we’ve been successful and they seem to be working for us.
Question: Good morning. You mentioned that there was an increased level of recoveries
in some of your net charge-offs. Is that sustainable trend and what’s driving
that?
Answer: Good morning. What’s driving is we took a lot of charge-offs over the last
few years. But seriously, I think the 25 basis points we had on this quarter
was at a higher level than we would expect. Obviously, we didn’t expect it in
this particular quarter but some of these things come along at times you don’t
expect.
CIT Moderator: Valerie Gerard
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We had a large - relatively large recovery on one loan. It’s - the magnitude of
the recovery was in the $4 to $5 million area and that helped the recovery rate
this quarter. I would expect absent anything large like that, we would revert
back to somewhere in the 15 basis points, maybe slightly higher than that.
But we did take a lot of charge-offs in 2001, 2002 and early part of 2003. We
expect to get some of that money back.
If you’ll dial back into the - in the late ‘80s, early ‘90s and then in the mid-
‘90s, our net charge-off numbers that looked so attractive in the mid-‘90s
were also helped by recoveries of charge-offs we had taken in the early ‘90s.
So we fully expect to get some of that back.
Question: Hi. Good morning. I was wondering now given your comments, how much
room CIT has under the salary cap?
Answer: That’s bumping up close to - bumping up pretty closely here.
Question: But actually, seriously, you made some comments in the press release about
taking some costs in the quarter relating to the reorganization. Can you talk
about those costs and what the benefits you’ll see going forward with them?
Answer: The costs relate to the restructuring initiatives we took in putting Structured
Finance into both Capital Finance and Business Credit and we did some
restructuring around those initiatives. The magnitude of the restructuring
charge is in the $5 million area. And we would expect to get a payback
starting in the second half. I can’t give you the specific of the payback in the
second half but we’ll get a good percentage of that $5 million back beginning
in the second half of ’04 and those returns or that efficiency will continue and
CIT Moderator: Valerie Gerard
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we’ll fully get that back in ’05. We expect about a one-year or so payback on
that restructuring initiative.
Question: A couple questions, on the asset growth side, it sounds like you’re pretty
happy with where volumes are at the midway point but a little bit disappointed
in the prepayment activity. Does that imply that your second half, if you’re
still comfortable with 8% to 10%, that prepayments will abate and volume
accelerates beyond your expectations or are on the bolt-on acquisitions
picking up that slack? I’m just sort of trying to figure out half way through
the year on the growth side, it sounds like you’re a little bit below where you
wanted to be. And what causes you to be optimistic on the second half on that
front?
Answer: Well, I think we do see some bolt-on acquisition opportunities. I also think
we’re starting to rev up the sales forces a little bit. We looked at the asset
growth both Joe and I have done some analysis on it. And most of our
businesses are meeting their volume - their volume targets - are doing better
than their volume targets. And so it’s really been the amount of liquidity in
the individual portfolios.
As you know, traditionally the second half of the year is our stronger half and
I think we go into it with a lot of energy and the economy also is in better
shape than it was last year at this time.
Question: Okay. Fair enough. On the recovery side, one more follow-up question on
that issue. Is that being driven by any firming of the equipment values or is it
all on the borrowers’ behavior and collecting on past debts? And then is there
any revenue benefits from those recoveries? Have you already booked any
revenue that you previously had deferred?
CIT Moderator: Valerie Gerard
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Answer: Let me answer the first part and then you’ll have to explain a little of the
second part of it. I think it’s just hard work. It takes a lot of hard work on a
lot of people -- collectors, workout people, etc., to stay doggedly at customers
who have defaulted on loans in many years past. So it’s just a lot of hard
work.
I guess, in some way shape or form, it’s a function of a recovery in the
economy because if businesses didn’t recover, there wouldn’t be enough cash
to pay off former lenders. So I think it’s good old fashion hard work that our
collection and workout group and credit group have very good experience at,
are very good at and obviously, we had great results this quarter and I hope
that will continue in the foreseeable future.
The revenue benefit - we had a revenue benefit, we had a lower provision, so
to speak, or a lower charge-off as a result. Sometimes, not necessarily all
times, we also collect former non-accrued interest but that would go generally
in the form of a recovery and that would generally get captured in the charge-
off line. If I weren’t so responsive to Part B, let me know.
Question: No, that’s fair. Its just - your fee income is pretty solid this quarter and I was
hope - I was wondering if there was a recovery benefit in there as well?
Answer: Well, actually, there’s some expense negative - not negative but in order to go
get recoveries and do all this work, it will cost you some money. And while
the general trend in repossession and collection costs that we’ve talked about
in the prior quarters, with a downward bias, we didn’t necessarily see that
downward bias this quarter because we got a lot more recovery and you need
to pay lawyers and people to do that.
CIT Moderator: Valerie Gerard
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I’ll make one comment on this too. Remember this in the future that is
recoveries are an indication of appropriate charge-off policies. If you don’t
have any recoveries, then you were kind of late to reap the charge-offs, so we
can see that these recoveries are an indication that CIT, over 2001, 2002 and
2003, was taking the appropriate charge-off action.
Question: One more quick follow-up if I could. The $15 million aircraft depreciation -
my hope is that’s sort of one-time in nature, is that fair to say?
Answer: Well, apparently older vintage aircraft, and I mean older, they were on a
limited number of aircraft in the seven or eight area. So $15 million on seven
or eight are - is small. The book value on those aircrafts being old were
relatively low but obviously not low enough. And when we look at similar
type aircraft to other obligors or lessees, we’re very comfortable with the
others - the rest of the aircraft we evaluated during the quarter. So that was it.
Question: Good morning. Just to - I guess a question or a follow-up on your comments
on the margin, given that you’re going - it appears you’re going to continue to
see some benefits from refinancing some of your higher cost debt. Can you
give us a little more color as to how you see the margin before credit losses
trending in the second half of the year?
Answer: Well, that’s not a metric we put out verses a 350 basis point target - we’re at
330 basis point risk adjusted, we want to get to 350 basis points, okay? That’s
one data point. The second data point charge-offs as sort of core this quarter
were 75ish basis points. And we’ve said it, - we’ve said we’re looking at 80
basis points. So charge-offs could get a little better on the margin but not a
lot. So a lot of that has to come from good old fashion making money over
money if spreads improve.
CIT Moderator: Valerie Gerard
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So I think a little bit is from the cost of funds financing and I think there was
some confusion by some over the quarter that it’s over. Well, we still think
we have a lot more debt to refinance. And we haven’t even gotten to the
expensive ones yet that we did a couple years ago that were fives and tens, if
you’ll recall. So we have a little bit more there.
So we have 20 more basis points to capture along with it a way of saying I
think most of that given with the second quarter charge-offs came out will
come from good old fashion money over money and improvement in leasing
margins.
Another factor to keep in mind is we liquidated a couple hundred million
dollars of low return margin assets and we bought a company with $500
million of assets in high margins. And so that’s a good way of improving
your margins, get rid of the low margins and put on new increasing margins.
We’ve done that twice this year already and I expect you’ll see more of that.
Question: Just a quick question, you mentioned the outlook that you would expect to see
more securitizations in the back half of the year. Is that a change to the way, I
think in the past, you talked about maybe a 15% limit of total earnings coming
from securitization gains? Is this just a bounce off of the abnormally low
levels? Or is there some change in the way you’re seeing those markets or the
way you’re approaching that?
Answer: No. Let me be clear on that. We did $850 million in securitization in Q2, a
billion in Q1, and we expected an average of about a billion a quarter. Our
securitization strategy has not changed. We think it’s a very, very important
funding tool, very important. We lived through that for two years. It’s very
important we want to keep those programs alive and well.
CIT Moderator: Valerie Gerard
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But we have narrowed the focus of our programs over the last year to
commercial finance, both equipment and vendor and that focus continues that
way. We still will on balance sheet home equity. Having said that, if you
look at assets held for sale in our balance sheet, (we give you a lot of
disclosure in this release and I’m sure you haven’t absorbed it all) but that’s
slightly higher as we end this quarter than when we ended last quarter. So a
little bit of it is timing. Second, as I said earlier, Equipment Finance volumes
generally pick up a bit in the second half of the year. And to the extent we
have higher volumes, I would expect the second half of the year for
securitization volumes to follow those higher origination volumes.
We have not backed off the 15% gain on sale; quality of earnings is still a
ceiling. This quarter was 4; that was well below any prior number we ever
printed. I am just telling you that we will do slightly higher securitization
volume in line with our financing strategy but that could move the gain on
sale up a couple of points.
Questions: A couple quick questions. One, you guys are always great in terms of the
disclosure arena and historically, you’ve always provided sort of the look back
on your Website, all the way back to 2000. Now that you’ve integrated
Structured Finance into other business units, will you be providing an update
of that?
Answer: I’ll take that. We did do that for the ’03 period in this release. So you all
have comparable - you have comparisons of Capital Finance restructured,
Business Credit restructured compared to the ’03 period. We need to think
about the prior periods.
And this - the variety of reasons that are environmental, I’ll call it, as to why
we have to think about it and not just do it, and it reflects the overall control
CIT Moderator: Valerie Gerard
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environment and how your numbers need to be supported in all the files and
all the work papers and on all the stuff you need to do today.
So we want to be very thoughtful about that before I jump in and say we’re
going to go back and restate numbers for four years because my opinion is
that I think all the benefits will be in your comparisons of ’03 and ’04 because
the prior periods have a lot of noise in the funding and other stuff that was
going on obviously in a different environment with a lot more liquidating
portfolios.
So I’m not saying I have one answer or the other, it’s just interesting you
asked the question; we’ve spent a lot of time debating it, and we made sure
our people did a lot of work to get these ’03 numbers restated for you and all
the documentation in the files that needs to be there to be audited
appropriately in this environment. The long-winded way of saying, we’re
going to look at it, we’ll let you know.
And now Valerie will push for your point of view and the accountants will
push for their point of view and I’ll be the judge.
Question: And I hope Valerie wins. I vote for Valerie. Shifting gears, just talking about
sort of aircraft leasing, as you had kind of mentioned, you depreciated eight
planes. What - can you give us any kind of nature, I mean beyond just that
these were some of your older planes? I mean what percent of your older fleet
did that represent? Or can we get some color commentaries to whether or not
you think this is likely to happen again for some of the older planes?
Answer: I think I answered that already. I mean it relates to older planes and we
looked at - we do have some other models like this with other lessees and we
looked at the carrying value of those other planes we have to other lessees.
CIT Moderator: Valerie Gerard
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They were at or below the new number we came up with on these planes.
And it’s a function of the lease market not improving, as we said over the last
few quarters. The lease market has improved on newer planes but does not
necessarily improve significant way on older planes. And it really relates to
one or two transactions so it’s not pervasive at all.
And I would reiterate, as I said in the script and I think in response to another
question earlier, we reviewed every plane this quarter as we always do in
terms of the valuation, and eight out of 160 fell out, so $15 million on eight
planes.
Question: Good morning. Could you just give us the amount of one-time employee
separation costs in the quarter and the employee counts this quarter versus
last?
Answer: Headcount I think at the end of the quarter is about 5,700 people. I think there
are 5,700; it’s down about 100-something people from the sale of TRS I
believe. And it’s been running pretty much 5,800, 5,700 for the last year, year
and a half. I think that’s the right number.
And the other part of your question, I mentioned earlier, the restructuring initiative costs during
the quarter, and I’d say is all people but it’s mostly people, but it’s about $5
million, in the area of $5 million.
Question: I hate to beat this to death but I just want to get a quick clarification on that
aircraft depreciation and then I have a real business question. Did I
understand you correctly that it’s more of a retrospective one-time catch-up to
depreciation and not a $15 million per quarter prospective adjustment?
CIT Moderator: Valerie Gerard
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Answer: No, that’s correct. Let me make sure. I’m very clear. The test requirement,
we’ve covered this in prior calls and in our filings, the test is you look at
rental rates and you compare them to your depreciation. And as long as you
have positive cash flow, you keep going; if you have negative cash flow, you
have to look at the current valuation you have versus the current valuation the
market has. And that’s what we did.
We looked at the current valuation we had on these - only on these eight
planes where it fell out and the current market value on these eight planes.
And we took the depreciation and to get those values down to where they
should be in the market, so it’s one time on those planes.
Al Gamper: We’re approaching the 12:00 o’clock hour so if we try to live with our
commitment to all of you for an hour so let’s take in one more question at
least, all right?
Question: Yeah, thanks so much. I was wondering if you could talk in a little bit more
detail about your lending methodologies in the home equity business, along
the lines of a pricing per risk and whether or not you expect to see any change
in the asset quality performance in that portfolio with gradually rising interest
rates?
Answer: Well, let me take a try at that. I don’t know if you remember the slide we put
up at Investor Day but in terms of where we are in home equity, I think the
average loan is around $91,000 and I think the average loan to value is about
71% or something like that. So maybe a little bit higher.
So we see this as being far, far away from the speculative end of some of the
real estate cycles. And we go over that portfolio, I don’t know how much
time you spend with our people, but they’re very quantitative on this and well
CIT Moderator: Valerie Gerard
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into predictive behaviors and probabilities and that type of thing. And it is
something we do in terms of looking at our portfolio and tightening up the
scores and everything, it’s something that we do on a monthly basis. So I
think we’ve been pretty happy so far as long as the interest rate increase seems
to be gradual and certainly, it’s been well telegraphed by the Chairman.
Question: Do you see the FICO scores increasing in that portfolio over time or
maintaining kind of the - where you had them in the slide of the fixed FICO
level?
Answer: The FICO score I think is in the 630 area and our guys do a to great job of
changing their scoring or adopting their scoring methodology to what they see
coming back through the front-end. But over time, with a big portfolio, I
don’t know if that moves the score all that much.
I would add additionally on the financial side is that we continue to see very
good credit performance out of the portfolio. Actually, charge-offs are flat to
down quarter to quarter from a very good level in Q1. Delinquencies are
down from a very good level in Q1. We see very positive trends on the credit
side here.
And if you are looking at an increase in charge-off rates sequentially in what
we call Specialty Finance consumer, it’s not home equity. It’s some of the
liquidating stuff that we’re either selling or we carry and liquidate. So just so
you know that, it’s not home equity - those trends are very positive.
Al Gamper I think at this point, we will say thank you to all of you for participating today.
I personally probably will not participate in any more of these calls so make
sure your questions are good and tough for Jeff and Joe going forward
CIT Moderator: Valerie Gerard
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because they’ve been pretty easy on me, I know. So I thank you all and
appreciate your coming into the call today.
Operator: This concludes today’s CIT Second Quarter Earnings conference call. You
may now disconnect.
END