Q3 2019 Earnings Call
Good day and welcome to the G. T X third quarter Conference call. Today's conference is being recorded at this time I would like to turn the conference over to Jennifer Mckenna. Please go ahead.
Good morning, everyone and thank you for joining Gtx is 2019 third quarter earnings call.
I'm joined today by Brian Kenney, President and CEO , Tom and Executive Vice President and CFO and go changes out executive Vice President and President Rail International.
Please note that some of the information you'll hear a during our discussion today will consist of forward looking statements.
Actual results or trends could differ materially from those statements are forecast.
For more information please refer to the risk factors discussed in GHX its Form 10-K for 2018.
GHX assumes no obligation to update or revise any forward looking statements to reflect subsequent events or circumstances.
Earlier today GHX reported 2019 third quarter net income of 45.1 million or dollar 25 per diluted share.
This compares to 2018 third quarter net income of 47 million or $1.22 fertility chair.
Year to date 2019, we reported net income of 154.6 million or for 22 per diluted share.
This compares to 862.1 million or for 21 per diluted share for the same period in 2018.
2019 year to date results included a net deferred tax benefit of 2.8 million or seven cents per diluted share related to the an after tax rate reduction in Alberta, Canada.
2018 year to date results included in that negative impact of 5.8 million or 15 cents per diluted share attributed to cost associated with the closure of a railcar maintenance facility in Germany.
In terms are detailed on page 12 of our earnings release.
Now I'll briefly address each segment.
The operating environment. It around North America has been challenging given carload volumes relative to 2018 and the continued oversupply of certain car type. However, we produced strong financial results in the quarter.
Due to excellent execution by our commercial team rail North American fleet utilization remains strong at 99.2% at the end of third quarter, our renewal success rate was 75.2%.
During the quarter the renewal rate change of GXS lease price index was negative, 7.7%, which is inline with our full year LPI expectations.
The average renewal term associated with the LPI was 40 months.
Absolutely afraid across our fleet were relatively flat quarter to quarter with lease rates for most tank car types remaining near long term average head and lease rates for most freight car types remaining relatively weak.
We continue to successfully placed new railcars from our committed supply agreements with a diverse customer base.
I've already placed 8450 railcars from our 2014 Trinity supply agreement and over 1000 railcars from our 2018 Trinity supply agreement.
Additionally, we have placed over 2000 railcars from our 2018 Greenbriers supply agreement.
Our earliest available schedule delivery under our supply agreements in the third quarter of 2020.
The secondary market for railcars in North America remained active in the corner.
Well North America's Remarketing income was 4.5 million during the quarter, bringing total remarketing income for the year to 41.2 million.
[laughter] within real International GHX rail Europe is seeing strong demand across the fleet with utilization increasing to historic high 99.4% export correct.
During the third quarter rail International's investment volume was approximately 51.8 million as Gtx rail Europe , and GHX rail, India continues to take delivery of new cars and grow the fleet.
Portfolio management results were primarily supported by the excellent performance other Rolls Royce and partners finance affiliates.
Demand across engine types remains strong and the market for engine sales is robust.
American Steamship company is performing well and it's benefiting from continued high water levels.
Yes. He is currently operating 11 vessels.
Finally.
T X repurchased nearly 616000 shares for approximately 46.7 million during the third quarter.
Year to date, we have repurchased over 1.7 million shares for approximately 130 million.
[noise] those are our prepared remarks, I'll hand, it over to the operator, so we can open it up for Q1 night. Thank.
Thank you if he would like to ask a question. Please signaled by pressing star one on your telephone keypad, if you're using a speakerphone. Please make sure. Your mute function is turned off to a lot of your signaled to recharge equipment again press star one to ask a question that.
After just a few moments to allow everyone an opportunity to signal for questions.
And we'll take our first question from Allison Poliniak with Wells Fargo.
Hi, guys my money [noise].
Good work on maintenance and did you mention maintenance expense up in North America for US I think if I remember correctly was supposed to be up 7% to 10%. It seems like it's trending a little bit below that just wanted to see if there's like a Q4 that or if it's just running a little later, thank you expected.
Sure. So it's Brian and you're right. We did say made this expense would be up 7% the 10% entering 2019, it's only up about 3.5% gross through the third quarter.
Looking ahead, we do expect more take compliance work versus last year, the fourth quarter, we expect a little more commercial churn in the fleet that could drive more maintenance expense, but having said that we're still running favorable to expectations in other areas that dry maintenance spending. So it doesn't look like gross maintenance expense will increase as much as when.
Anyway. So for example road repairs are running Favorables expectations.
Realizing savings from closing so far less efficient make dislocation and actually were more productive in our own network. So in addition, and and it does it probably doesn't get enough attention. We tend to look at maintenance on a net maintenance basis.
Big positive factors or repair revenue the mix of repairs were seeing in 2019.
Such that we can contractually charge more for the work that we're doing.
And we've got more efficient from assistants perspective in identifying that liability work and collecting on it as well so.
While we expect gross maintenance to be up or certainly not as much as we originally expected for the reasons I said and when you combine that with favorable experience and repair revenue.
We anticipate understanding underspending or original maintenance expectation.
<unk> maintenance as well and that's really a good news story this year.
That's great and I guess on line with that it's the other revenue I'm, assuming that's like similar corridors that repair revenue coming and which is elevating that number a little bit.
Correct.
Okay, and then last same thing with remarketing income seems like it's trending a little bit below what you anticipated and again as it sort of a true up in Q4 or is that just coming in a little bit less than you thought I think we had thought 65 million Miss that number.
Well, we said we could approach I believe coming in the are we said we could approach last year's number and that's why I hate talking about a quarter to quarter, because we don't vessel they control the timing and it doesn't fall easily you know the story yeah yeah.
But we do expect some in the fourth quarter, what I would say, we probably won't get to what we thought the original expectation was I don't think we'll get that close to last year's number, but they'll still be a healthy number given the market.
Great. Thanks, so much.
Well take our next question from Justin long with Stephens.
Thanks, and good morning, So I wanted to follow up on your comment about absolute lease rates remaining pretty stable sequentially.
Just wondering if you could provide a little bit more color on tank versus freight and if that comment when applied to both of those markets just kinda stable trends sequentially and then going forward as we think about Fourq you and an early next year any reason to believe that this kind of stable trend will not continue.
[noise] Justin this is Tom and I'll I'll take that so as you know we entered 2019 cautiously optimistic and despite a variety of challenges, including PSR tariffs decreased railcar loadings increase railroad velocity or the year has generally played out is we'd we'd expected and as we.
You talked about in the last couple of earnings calls the tank car market has been a little bit stronger than we originally expected in the freight car market spend a little bit weaker specifically addressing lease rates.
The tank car lease rates for most tank car types warrants were about the same this quarter as they were last quarter, but those spot lease rates are up about 10% to 15% versus a year ago.
Hi, It's one exception to that same exception, we talked about last quarter is the legacy flammable liquid tank cars, where our Q3 lease rates are flat versus Q2, but down about 15% to 20% versus Q3 2018 and as we discuss this is primarily due to customer preferences for the new.
We were Geo T 117 tank car.
Freight cars.
The weakness that we've seen all year is persisting and on average they were down about another 5% to 10% versus Q2 and around 20% versus a year ago. However, it it's worth noting that theres a lot of variability among individual freight car types in some individual car types like.
Small cube covered hoppers for Frac sand center beams for lumber or down even more than that 20% on a year over year basis.
As we approach.
Q4.
The the macro trends are pretty consistent with what we've seen so far this year.
Railcar loadings for Q3, Oh were down 4.3%, a 2.6% if you exclude coal a significant declines in a variety of freight car types.
Relatively more positive where some of the Q1 0 car types like chemical and petroleum products.
They had a more favorable comparison than those freight car types I mentioned, so we would expect the environment to be similar in Q4.
Okay that that's really helpful. Tom Thanks, and I know one item that you're watching pretty closely as the tank car backlog and it's a little tricky looking at the industry data because there are some multi year orders in there and I know.
You had some multiyear orders and that backlog, but can you just share what you're seeing on tank cars lead times today and your view on the lead time, that's needed in order to sustain lease pricing that we're currently seeing in the market.
Yep. So as you know that the actual backlog numbers are expected to come out. This week. The Q2 backlog was 69000 railcars about half of which were tank.
The tank car lead time has moved around a little bit over the course of the year right now I would say for most tank car types. It's between about nine in 12 months.
Freight cars has been.
Somewhat shorter.
In general I would still call it around nine months, but there's pockets of availability or even earlier, depending on what what production run and given builders doing.
That that sorta nine to 12 month range for the tank cars appears to be enough to keep things stable.
To get them to go up you'd want to see some get over a year and shortening much beyond where it is now we'd look for a more challenges.
Okay that makes sense and then one just fine on modeling question on Remarketing income just curious did your expectation for 2019 changed versus what you were expecting last quarter.
If you'll recall on last quarter's call. We mentioned we might be a little short above the 2018 total so our guidance.
Reflects that expectation.
Okay perfect I appreciate the time.
Well take our next question from Matt Elkott with Cowen.
Good morning. Thank you Tom you mentioned customers preference for the deal with you in 17 tank car.
Is that strictly for the deal do you want 17, Jay the newly built variety because we're hearing that union Pacific or may be may start demanding the use of.
The only 17, Jay specifically for a highly filed the liquids like BNSF did a while back.
Is that something you guys are hearing and.
And does it mean that you know this makes you had its.
Yes, any retrofitted variety of that you'll see what seven.
[laughter] yeah.
Those are great points. So first of all it's it's a it's a sequence you're absolutely correct that the general customer preferences for the 117, Jay followed by the 117 are followed by the legacy car type as you know GHX early on announced that we had no intention of retrofitting any of the low.
Legacy flammable liquid cars, because we're very confident that customer preference would go with ultimately go away from that as far as the your T. 117, Jay versus the our there's two different ways that you can retrofit depending on whether or not the car is already jacketed.
Yeah kicks has participated in the relatively inexpensive retrofit just a couple of thousand dollars to to retrofit CPC 12, 32 cars that were jacketed, we have stayed away from them much more expensive retrofit for cars that were non jacketed.
For exactly the reason, you're highlighting and it isn't it just went when this first started we indicated that we would definitely be retrofitting doing the inexpensive retrofit and we had to evaluate further the more expensive or retrofit of the CPC 12, 32, non jacketed car.
In exactly the items that you're talking about has made us.
Barry unlikely that we would pursue that.
And I know a lot of our competitors have but then area that you, Texas stayed away from.
Oh, that's very helpful can you remind us how many deal T 117, I guess, both our Jay you have in your fleet right now.
But we have about 3200 de 117, Jade and we have.
Probably less than 100 D O T 117, ours and those are really as Tom had mentioned that says very inexpensive retrofit [noise].
Got it thanks and.
My other question is.
You guys had about 18000 cars total renewing in 2019 can you give us a number for next year.
[laughter], we're actually not going to give that to you and tell our Q4 call, but directionally you can assume that it's gonna be closer to where we were at this year versus you know the last few years, where it and I'm at a low at a lower level.
Okay, and and any <unk> <unk> is the.
A percentage of cars renewing.
It doesn't have any outside.
Pieces to certain markets next year or is it pretty diversified.
I would assume that it's a fairly diversified as it has been you know the one area that we've dealt with that we've talked about publicly has been our coal car.
Renewals, just because we've been going short on those outside of that though I wouldn't anticipate anything it's gonna be very diversified and renewing.
Okay.
And then you guys talked about you know part of the reason why your fleet utilization has stayed.
Strong despite rail traffic declines and worsening utilization in the industry.
Part of the reason is displacing competitors does that apply to both operating less stores and financial owners of railcars or is it.
Are you more effectively competing with one or what are the other.
[laughter] well I mean overall utilization has been above 99% all year long. So work, we're doing a pretty good job regardless of.
Who were competing against.
Great. Thank you very much.
Well take our next question from Matt well Sleeker with Buckingham Research.
[noise] warnings.
Yes right.
Just wanted to follow on you know if we look at asset disposition gains. It sounds like you came in just just a little bit below your expectations still still very solid number, but you know considering the trajectory of the market where we're at now you have a directional sense where.
They are asset disposition gains could be in 2020.
[laughter].
Yes, so a in general just like the last question about the explorations will provide guidance on a 2020 in next quarter's call.
Okay Fair enough and and then if we look at the change of the LPI within the range you originally provided for the year down seven edge.
Was it.
Like we called this out there had been anything but does that kind of reflective of the current market.
You know extraordinary and the number this quarter.
Yes, so as you know, we always caution people not to look to closely at an individual quarter for the three quarters Q1. We were positive 5.2 Q2 negative 2.8 in Q3, a negative 7.7 at the beginning of year, we expected the full year to be somewhere between negative 10.
And positive five a and obviously those those three numbers indicate that we'll be right in that range. So I wouldn't read anything in particular in to the the this given quarter versus the other two.
Okay helpful. And then and then just lastly on on the S. Teenage side I don't know if you touched on that but it looks like you know that the you had a targeted savings of I think about $10 million as we went into the year.
It's still trending down, but maybe not as much as the original number maybe give us a little bit of an update in terms of thoughts there maybe where the port.
Thanks.
Up you're you're absolutely correct coming into the year, we said, we expected to be about $10 million lower than 2018 total of 191 million and we also commented on this briefly on last quarter's call.
Year to date through the first three quarters were at 136 million, which is oh it roughly in line with our expectations, but we continue to feel that we might fall a few million dollar short of the goal for the year, partially due to higher than expected sales incentive compensation related to our commercial success on lease renewals.
And as we mentioned we've also restructured our maintenance organization.
In 2019 to improve our capabilities and more of those savings will end up in maintenance cost than NSG news, we originally thought.
And just in general the fourth quarter tends to be a little bit higher than the first three so up for all those reasons up although we'll be down we probably won't achieve our $10 million Gulf.
Well take our next question from Justin Bergner GE research.
Good morning.
Alright.
Uh huh.
Oh, the clinical questions here first off or maybe.
Jennifer Tom you could just remind us what the with purchases where the third quarter I think you provide them, but they came out a little faster.
Sure. So just to highlight an overall the stock buyback. Our current authorization is for $300 million 170 million of which are remaining through the first three quarters. We've done 130 million earlier in the year, we indicated an intention to do approximately 150 million.
In in 2019, and we still expect to do that.
Okay, Great and then in the third quarter wasn't 616000 stats were 47.6 million or Tonight.
Sure that.
You did hear that right Jonathan 616000, Jerry <unk>, Okay, I think on the last call.
There was more of an interest looking for taking advantage of the a you know weaker.
Market to do you know.
Our purchases in the primary or secondary markets can you sort of update us on how that works what are the sort of opportunities you're seeing about see.
How the competitive nature of that stands.
[noise], yeah, so anytime that theres a downturn in the market, we certainly oh look to to purchase Opportunistically.
If you look at or how the year has played out so far I'm, we haven't been able to find a enough of those opportunities that economics.
At our attractive to us so our capex looks like it's going to be in the sort of mid to higher end of the range that we've been at the last several years between six and 800 million.
Other than years, or where we do something extraordinarily like the element transics transaction last year or the GE boxcar transition transaction a couple of years before that so certainly on the look out for those opportunities, but right now we'd expect our capex absent something like that much.
So you're realizing to be in the historical range.
Okay. Thank you and then.
In terms of the sequential lease rates are there any car categories washing machine sequential discretes curbing I think maybe last quarter.
Highlights.
Yes, smaller categories will pay claims that were scenes.
Case.
Yeah I the strongest part of the market is really the non flammable tank cars and its strongest in that they're staying flat. So there's no particular car types that I would highlight as a having any kind of material spot rate increases.
Okay understood and then lastly.
The.
Well, it's John wholesale.
Just.
Probably the smaller about you know, what's transpired strong and cell sites, that's a third party or engine sales.
Is that sort of the driver the primary driver of the year on year improvement or is it more the lease rates on the existing engines being leased.
Yeah. So when you look at Rolls Royce just because of the timing of those remarketing gains in certain maintenance expenses, while we tend to vary much look at.
Year to date comparisons because they're more meaningful than quarter to quarter and the year to date comparisons for roles. Both on a just the leasing of the engines and on remarketing gains are up slightly.
Okay, and you would expect that to continue or is there anything that is sort of.
On the horizon that could change that dynamic.
That does the underlying fundamentals are continued to be very good for that business and we expect strong performance.
Great. Thanks for taking my questions.
Well take our next question from Steve O'hara, with Sidoti and co.
Hi, good morning.
Morning.
Just on a in terms of the.
Revenue within rail North America.
Down you know like think like 2% sequentially.
You know average number of cars was down a it looks like you know.
About 1% sequentially with revenue I guess Im just wondering about the revenue decline there was that you do.
You know more locomotives boxcars that more of it or you know it.
The timing of like you've got cars in and so forth.
Yeah, well when you look at revenue moves on relatively short periods of time like that [noise], just given the long term nature the leases.
You're not going to be able to tie any kind of revenue moved to a change in lease rates. So short term moves like that are because of the total number of active cards on leagues.
Okay. All right. Thank you didn't make sense and they just on the or yeah.
So if there's any immediate term yeah issues is the Max fleet has there been any.
You know benefit or you know that do that fleet being you know out longer than expected as you know the your portfolio benefited anymore or has it been just you know not really factor for the for that business.
No there really hasn't been any impact short term on that business is 3100% utilize virtually so there's there's nothing to be had there.
Okay, Okay, and just looking at the.
When you when you're talking about the maintenance expense earlier.
And you're talking about the you know I guess you know but.
Gross versus net a is that he was primarily the other revenue line is that so you're getting the revenue on the maintenance in in that line and that's kind of helping offset some of the maintenance expense on the within the income statement line below.
That's correct.
Okay and then so it was this a a newer phenomenon or is that you know there's something different that.
Where you're able to get you know more [noise].
Customer currency then thank for more maintenance or is this just outside maintenance work done a that you guys because you've taken more maintenance in house now or.
Is that why that is like you know, it's not really third party maintenance revenue is with the existing leases, but its customer liability revenue so whether it be.
You know damaged lining or corrosion or certain things that customer has a liability for we're getting much more efficient about identifying that and charging for it and just the nature of the work has has changed the sharing last where we kept were able to charge more of that contractually.
Okay. Okay, and then maybe lastly, I'm just you mean you guys have a pretty good you know base for.
The economy in terms of you all your touch points I mean, you have what's your outlook on the general economy are you guys. You know maybe more bullish on the economy are expected to maybe you see <unk> recession on the horizon, just kind of curious where you stand.
Well you know I say it all the time I don't have that Crystal ball I'm, a pretty lousy economist, but we do track what our customers are saying at how they're acting.
And you can see demand still good it's reflecting are extremely high fleet utilization, but I will say in the last quarter. So it's starting to feel like it's losing some steam you know obviously railcar loadings down every quarter. This year year over year basis, it's not a good thing if you look at AMC [noise].
They benefited short term for the steel tariffs when they went on last year in terms of higher steel demand as a imported steel went down.
This year, there also benefiting actually even more between that and favorable operating conditions, but you're starting to see some things happen there as well U.S. steel close to blast furnace that we serve a another one of our customers asked for a little bit of or at least on delivery not enough to change our estimates, but there's a little more us settled feeling in the economy out there.
And you're starting to see some of that in some of the stats and that's what we quoted in our press release. So I don't know for a second is coming out you know I'll say that and then in three weeks, we'll have a trade deal. It could go the other way. So I'd just say, it's very uncertain out there.
And and its as Tom said earlier, we'd like to see the tank car backlog increase but it's just sits there around this level and people are getting more hesitant to make long term decisions still so it's still that turn until that turns around.
It's hard to be bullish on the economy.
Okay, all right. Thank you [laughter] [noise].
Once again, it's either [noise].
Justin Please press star one.
Well pause for just a few moments to allow everyone opportunity to signal for question [laughter].
[noise] when we have no questions in the queue at this time I would like to turn back over to Jennifer.
[laughter] I'd like to thank everyone for their participation on the call. This morning. Please contact me with any follow up question. Thank you.
This concludes today's call. Thank you for your participation you may now disconnect.