Q4 2019 Earnings Call

Great topics is being recorded at this time, let's turn the conference you're pretty sure Yell at me. Please go ahead.

Thank you.

Good morning, everyone and thank you for joining GHX, its fourth quarter and 29 senior <unk> earnings Conference call.

I'm joined today by Brian Kenney, President and CEO .

Alan Executive Vice President and CFO , and Bob Lyons Executive Vice President and President Rail North America.

Please note that the information you'll hear during our discussion today will consist of forward looking statement.

Actual results or trends could differ materially from those statements are forecast.

For more information please refer to the risk factors, including in our release and dose disgusting GHX its Form 10-K for 28 change.

GHX assumes no obligation to update or revise any forward looking statements to reflect subsequent events or circumstances.

I'll provide a quick overview of our 29, <unk> fourth quarter and full year results.

I will provide additional comments on 29 team that's all it looks like 2020.

After that we'll open the call up for questions.

Today, GHX reported 29, <unk> fourth quarter, net income of 56.6 million or $1.59 per diluted share.

This compares to 2018 fourth quarter net income of 49.2 million or $1.30 per diluted share.

2019 fourth quarter results include and net casual seeking an 8.1 million watch for 23 cents per diluted share related to an insurance recoveries free damage vessel at American Steamship company.

2018 results include a net benefit of 17 point, threemillion or 46 cents per diluted share related to tax adjustments and other items.

For the full year 2019.

<unk> reported net income of 211.2 million or $5.81 per diluted share.

This compares to net income of 211 point threemillion or $5.52 per diluted share in 28 chain.

The 2019 and 2018 results include net positive impact of 10.9 million or 30 cents per diluted share and 11.5 million for 30 cents per diluted share respectively associated with various tax adjustments another item.

These items are detailed on page 13 of our earnings release.

In 2019, G.H.T. actually purchased nearly 2 million shares for approximately $150 million.

This compares to watch any 18, we purchase activity of 1.5 million shares for approximately $815.4 million.

As of December 31st 29 team, we have approximately $150 million remaining under our existing repurchase authorization.

Lastly, as noted in the earnings release, we currently expect 2020 earnings to be in a range of $5 $55.80 per diluted share.

With that I was trying to call over to Brian .

Okay. Thanks, Sherri good morning, everyone.

Also do that I've listened to our earnings calls for a while no that were not a fan that was prepared comments as can slide presentation. Since the beginning of these calls.

And we like you're right to the Q when they are but if you'll indulge me for just a few minutes I'd like to give you some color behind our recent performance in more detail on our 2020 guidance and I can put into a press release, so with that let me dive in.

In 2019, again, we outperformed gardening expectations coming into the year as Sheri just said as laid out in the press release.

We earned 551 per share after deducting the that positive effect of the tax adjustments we had another item.

That compared to our original guidance of 45 to 515 per diluted share. If you look at where we outperformed it was north American rail American Steamship and our Rolls Royce joint ventures, all producing earnings in excess of our original expectations.

Looking at rail North America in 2019 lease revenue perform relatively close to our original expectations as it usually does.

The largest single driver of the segment profit outperformance was lower net maintenance expense and it was lower than expected in 2019, due primarily to higher maintenance revenue.

As we indicated on prior conference calls the mix repairs that we performed in our network in 2019 contained a higher percentage of repairs that are reimbursable from customers.

Better systems in place to identify those liability issues than we've been way more systematic and collecting for though.

In addition, we did improve the efficiency in both our fixed and still repair network and also railroad repairs were lower than we anticipated coming into the year.

Now over the last few years I realize that we've consistently overestimated, our net maintenance expense coming into the year.

And the maintenance organizations, great performance has been due to two things one the improvement it's a deficiency of I just mentioned, but also there has been great performance by our commercial team and keeping the fleet and 99% utilization and that of course helps us avoid having to spend maintenance dollars on preparing cars to move to new customers. So overall despite my.

Body record of predicting how well our commercial and maintenance organizations perform they've done a great job and I'm really pleased with the strides they've made the last few years and there's plans currently being implemented actually to continue these efficiency approval.

So quickly the other two outperforming segments first American steamship steamship operating an extremely favorable weather conditions and favorable water levels throughout the year.

So although that carries less tonnage in 2019 than we originally anticipated due to the loss in the same Claire they did so much more efficiently and they generated more segment profit than we originally planned.

And lastly at our Rolls Royce joint ventures, they had another great year for investment their volume for the second consecutive year was over $900 million.

They continue to show excellent residual realization and segment profit that exceeded our expectations. So looking at the end of 2019, despite extremely tough market here in our largest business the north American Realty performing very well.

We produced strong performance across our other businesses and we outperformed original expectations.

Our balance sheet sitting here today is very strong as is our liquidity and we have attractive investment opportunities to pursue so moving to that outlook for 2020.

You know given the general economic and political uncertainty, we see in North America today I'd best describe our outlook for North American rail is guarded.

Especially relative to what you might expect giving their segment profit outperformance in 2019.

So moving to North American rail, we do expect segment profit decreased in 2020 by approximately 30 to 40 million.

Main driver again of that decrease is continued declining revenue on the existing fleet.

As we mentioned on our call throughout last year, the positive lease rate momentum that we saw in 2018 did stall as we move through the year in 2019, and we currently expect that lease rates across most of the North American railcar fleet will move somewhat lower in 2020 net results. Obviously, a further revenue declines as leases renewed throughout the year.

We're also expecting a small decrease in fleet utilization competition is intensifying do with a continued oversupply in the market.

The net effect of all this is that we project revenue to decrease by about 25 to 35 million that's about 3%.

Moving in that maintenance expense and acknowledging what I just said about our recent difficulty in predicting it accurately we do expect an increase in 2020. So I said, we will continue to work to increase the cost efficiency of our network as we've seen over the last 18 months, but those gains are expected to be offset by higher maintenance expense that's really do.

To increase commercial churn in the fleet meeting, we expect sales and lower renewal success rate and more cars will need to be assigned to new customers to keep the fully utilized.

That drives maintenance costs higher SEC current expectation for maintenance costs increases about eight to 13 million that will contribute to the drop in segment profit.

In 2020.

Increased ownership costs as well in 2020, that's primarily due to the 2019 in 2020 investments.

And that should reduce north American rail segment profit year over year in the range of five to 10 million.

And the last major factor dimension for rail North America's asset disposition income.

We continue to optimize our fleet 2019 through scrapping sale of railcars in the secondary market and you know as we always do.

But scrapping rates did decline in 2019 and that drove most of the lower asset disposition income versus the prior year.

But the secondary market for railcar sales remained strong.

And we continue to see opportunities in 2020.

If you look at our current fleet plans our expectation for this year as that asset disposition income should exceed last year's level. The range of five to 15 million, primarily because we don't anticipate the scrapping losses, we experienced in 2019.

Well, we can also see higher gains on railcar sales as well.

Let me address international Ralph I'll start with DHX rail Europe as we discussed throughout 2019, the mineral oil LPG chemical markets are all very strong throughout the year.

We continue to see lease rate increases in those markets.

In addition, there total new car investment, especially in a certain freight car types added to segment profit in 19 and that fleet growth I actually expect to accelerate in 2020. So this segment profit growth from higher utilization increasing lease rates in the fleet growth will be offset somewhat by higher scheduled fleet maintenance.

Well, we currently expect profit a GHX rail Europe segment profit that is to be up in the $7 million to $10 million range.

Turning to GHX rail India.

The good news continues their their fleet size increased by 50% in 2019, they have almost 3700 cars and their fleet right now.

Our fleet utilization remains at 100% they continue to diversify their fleet mix there securing the Indian railways approval for and they are investing in new car types and as I've said in the past lease rate factors in India or higher relative to our other jurisdictions.

We're seeing strong profit growth for such a young fleet.

I expect similar investment in 2020 and much of that projected growth is already committed to customers. So given that outlook. We expect segment profit growth in India to increase by three to 5 million in 2020.

Combined with GRP that means that the expected segment profit growth for rail international and total should be in that $10 million to $15 million range.

At American Steamship as I said after another strong year operationally 2019 were forecasting a similar year in 2020.

Based on the current nominations for tonnage from customers they expect to carry slightly less tonnage versus last year.

But it looks like they will again be operating with favorable water levels and the full compliment of 11 vessels. So the current expectation is they will earn flat to slightly lower segment profit in 2020.

And lastly in portfolio management, we as I said, we've had two consecutive years of record investment volume at the Rolls Royce joint ventures over $900 million each year, they've had excellent fleet performance strong residual realization and we expect more of the same.

As these joint ventures in 2020, and some improving financial performance from our remaining remain a marine investments. So the net effect is that segment profit is expected to increase in the $15 million to $20 million range for portfolio management. This year. So that's what's driving segment profit each business unit. If your work your way down the income statement it look.

Could ask DNA, we did reduce our SDMA by about $3 million in 2019 from the prior year, that's actually not as much as we had originally planned but that shortfall was due primarily to stronger financial performance across the company that drove higher incentive payments and some cost savings that we did realize is around North America.

Maintenance, we had planned for the SDMA line instead, they showed up in the operating cost line. So the savings were there the geography was wrong.

In 2020, we plan on trying to hold SDMA spending constant with no 2019.

On the tax rate.

Projected to be a few points lower in 2020, do a higher percentage of our income coming from those non U.S. sources.

So the net of all this puts net income in 2020 relatively flat with 2019 at GHX then with continued share repurchase that's what gets us to our guidance of 550 to 580 per diluted share for 2020.

Before I end I do want to cost for commercial hair reminds you that 2020 marks our hundred second consecutive year of paying a dividend.

The track record that few companies can match our board doesn't meet next week, they discover discuss I should say a variety of topics, including dividends share repurchase. So we'll announce a dividend decision at that time are they the board certainly understands the importance of the dividend and I think our century long streak is a great example of our long term record.

A success and our commitment to shareholders.

And I'll close by saying you know GHX employees did an outstanding job again in 2019 executing our plan.

And I'm very pleased that we're seeing the benefits of our strategy to diversify and grow and other attractive leasing markets outside of North American rail. Unfortunately, our performance in these other markets is largely offsetting the weakness we're experiencing and it really competitive involves our north American railcar leasing market. So we continue with.

We'll continue to for this performance in 2020 and beyond them with that operator, let's go ahead and open it up the question.

Thank you [laughter], if youd like to ask your question. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function has turned off to allow your signal to reach our equipment again press star one to ask a question well pause for just a moment to allow everyone and on the signal for questions.

[noise] and our first question from Allison Poliniak with Wells Fargo.

Hi, guys good morning.

First just touch teenage thanks to the color on maintenance I'm, just looking at the efficiency side of it more specifically what are you train what have you been addressing their that's driven some of that.

Have you kind of luck. It seems like your plans are for 2023, I think you noted some more improvement on the efficiency side there.

Sure Allison This is Bob Lyons I'll take that question for you during the past year, we came into 2019 with.

20, a little over 20 locations total a within the G T X network.

We did a very detailed analysis and deep dive on the most efficient.

Facilities within that network and during the course of the year, we actually sold or closed 10 of those.

Most of those where a customer sites to those were smaller fixed locations.

And what we've been able to do.

It is essentially remove the costs associated with running that network and running those additional locations that were really inefficient.

They were never going to generate the type a car volume that was going to support owning those facilities. So we took those out of the network.

Those costs essentially have gone away, we've been able to absorb that work into the rest of the network very efficiently.

On top of that we've continued to make investments in the network in the existing network with regards to systems, how the shops are laid out.

T support behind those all the way down to the shop floor. So we're putting capital into our most important facilities are they're running more efficiently than they have historically.

And we're seeing that show up in our numbers and we're going to continue to do that where we are continuing to look at.

How the facilities are laid out the locations are those and the most efficient way to move.

The assets through the network.

Got it and then just and I'm, sorry, if I Miss it but the ability, earning I cannot pretty sizable step up can you walk us three answer that every which way CB, what's going on specifically there I know, you're calling for more earnings and free men and 2020.

Actually I understand that.

Great.

This is Tom element and I'll take that our share of earnings from the Rolls Royce JV was up by about $28 million for the quarter and about $34 million for the year virtually all of those variances were due to higher residual ruelas realization and gains on engine dispositions.

Yeah, Brian mentioned that a couple different times in his opening comments and just pointing out the games.

On asset sales and residual realization happened a few different ways.

First and foremost at the end of its life and engine can be sold for again another thing that can happen as is the engine can be broken down in parts can be sold that again and then it's also worth noting that over the life of an engine the joint venture a crews for maintenance reserves. When the engine is scrapped or sold any unused maintenance reserves are taken into.

Income and we.

So all of these in in the quarter and for the year.

Got it thank you.

Our next question comes from Justin along with Stephens.

Thanks, and good morning, <unk>, maybe to start with that last question on portfolio management. When you think about that step up related to that higher residual realizations and gain gains on asset sales can you talk about you know and what's driving that I mean is there anything related to.

The next grounding <unk>, that's driving that or something else. That's specific to 10 Rolls Royce and you know within that 2020 guidance. You know what are you assuming for the progression of residual realizations and gains on asset sales.

Right, Yes, so first of all on the on the Max grounding that that really has no impact. The JV has a total of one engine. That's a associated with that aircraft. So that that is not the source of the impact as first maybe backing off.

Since since you talked about portfolio management as a whole as well is the JV specifically some of the improvement that we expect to see next year in 2020 versus this year has to do with the other businesses and portfolio management specifically.

Two different types of marine businesses, and essentially what you're going to see there is some some challenges in 2019 that we don't expect to see in 2020, and that's what's going to drive some of the a year over year improvement specifically, we have a business.

Of platforms supply vessels that deliver supplies to offshore oil platforms and this has been really taken down over time and we now we have a total of two vessels left in that portfolio and we have in we impaired those vessels that's one of.

The items that you see I'm on the press release.

There there now down to essentially a scrap value and we also had some negative operating variance in our ocean going business.

Driven by chance oversupply situation, there and some inefficiencies, resulting from a change in control and convert commercial managers, so you're going to see improvement in 2020.

From those items coming back to normal as far as Rolls Royce specifically, we expect continued strong performance there and continue to see growth in the number of aircrafts on lease a that has continued a year to year up about 20 aircraft 2018 versus 19.

And then the continued successful residual realization.

Okay. That's that's helpful and then shifting to the North American railcar business I was wondering if you could provide some color on the sequential change in lease rates that you saw for both tank and freight just to give a sense for how the market it's trending and it's.

Sounds like in 2020, you're assuming that that lease rates are down, but maybe you could just give a little bit more color around that and what you're expecting for the LPI.

Sure just send in five lines again.

Sequentially, we saw between Q3 in Q4 bolt tank and freight car lease rates down in the low single digits, two or 3%.

On a year over year basis.

If you look at 2018 versus 2019, four year tank was tank car lease rates were up a little bit freight car rates as we've talked about in the past were down pretty sharply closer to 15% to 20%.

So the freight market continues to be the the main source of the negative impact overall on the sequential performance of lease rates.

The LPI in the fourth quarter was a negative 9%.

As we laid out in the press release as we look at 2020, the and the components of the Apple Pie.

The average renewal rate that we anticipate in 2020 is down just a little bit from where we were in 2019. So yes. We continue to expect some pressure there on lease rates, both tank and freight, but it's not that significant as with regards to the LPI.

The thing the other thing that's happening there is that the LPI renewal rate is moving up in 20 or 20 again versus 2019 as we're rolling cars that we put on leads during a very strong market 2013 2014.

So as we look at the LPI negative 9% in the fourth quarter for 2020, we would look for the LP I'd be somewhere in the negative 10, the negative 20% range.

Okay in terms of.

What that translates into and as it relates to your assumption for the sequential change in lease rates over 2020 is there any kinda order of magnitude you can you can give us around that I know you said lower but are we assuming that you know tank car and freight car rates are down.

Percent, 10% any kind of rough ballpark.

It's it's in that low single digit range, maybe in that 3% to 5% range again.

Okay very helpful. I appreciate the time.

Our next question comes from Matt El <unk> with Cowen.

Hi, Good morning, Thanks for taking my question I want to go back to the Rolls Royce question, just for a bit and ask you have.

That's a trend 1000 engine shoes at Rosebel is [noise].

Good day.

Good to spare engine demand on lease rates I think rolls Royce.

1.4 billion Youre exceptional charge.

To cover the cost of Ah compensating customers because of those engine issue. So I wonder.

How much that how much how big of a factor that was.

Yes, so you're right that trend 1000 engines have had some widely known problems with cracking into compressor in the high pressure turbine blades. Its important to note that these engines have actually performed quite well went on wing, but the issue has been they require more frequent maintenance for the engine. So its resulted in some service disruptions for.

Several airlines and it's important to note, though that those challenges with maintenance and that challenge with service through a disruption is that the rolls Royce parent level. It does not impact the JV our leases our net leases. So those are those most cost and issues are really dealt with by the.

Parent.

Hey, we would expect over time that demand for spare Trent one thousands are actually likely to increases. These issues are addressed but as far as the total performance for Rolls Royce in 2019, that's really just driven by the continuing positive trends in air traffic.

Miles the percentage of aircraft that airlines prefer to lease versus own and or just the continuing strength and growth in that market.

[laughter].

That's very helpful and then switching back to the two rail North America.

Youre starting to hear some earnings from the railroads.

Looks like Hmm, most capex budgets are flat to slight only slightly down it looks like a lot of the equipment idling has happened already a lot of equipment fleets are going to be slide in 2025.

And then not work.

And if we get a the trade war issues.

Hi, this completely in 2020, which were contributing factor to rail traffic being down so much and 29 theme.

Do you think there would be upside to your assumptions behind in North America segment guidance, meaning you maybe I assume your.

Building in very modest low single digit traffic in 2020 profitable obeisance many 19.

If we if we get three or four or 5% rail traffic increasing 2020.

But that could there be a significant upside to lease rates.

Sure, Matt It's Brian let me take that the answer is yes, we had the only way specific demand catalysts that we're assuming or that's showing up at our assumptions for 2020, but you know we don't do that's not the way. Our plan is built we don't have specific economic assumptions like GDP growth or capacity utilization forecasts or any rail industry.

High level metrics like car loadings that we used to build our plan its way more granular isn't that I think it's a more sound methodology for all of our leasing businesses.

We review with our sales force in the fleet group every writer that's coming up for renewal and every delivery and then individually determine you don't want to renewal that railcar be renewed or not if yes at what lease rate if no where do they think they can assign the car it for a new deliveries, where we think they're going into what rate. So it reflects current conversation.

Tons with existing customers I think that's more valuable so depending on the business segment. The guidance reflects what our customer is thinking about their business in 2020 and rail North America. Those conversations obviously resulted in breast projecting lower renewal rates in revenue.

You know and rail Europe , It really India, it's the opposite but.

It's not built with global assumptions, it's very granular now having said that.

I don't know I'll, let Bob comment, but I don't think Anybodys Super optimistic at this point sure I think there's still too many questions Matt I with regards to how this is all going to play out the trade agreement the China trade agreement in particular is broken down into right now at this 0.4 fairly broad categories as you know manufacturing agriculture and.

Our GE and services and how that eventually works its way down into specific commodities, whether its grain soybeans.

Crude coal what have you is yet to be determined so sure there's a little bit more positive discussion around what how this may play out in 2025, but we're not seeing that manifest itself in any change in customer behavior right now.

Got it and just one final question I think I may have brought this up or on a previous call, but if it becomes more relevant now as you know staring down a down cycle in North America. While your overall company earnings are going now I know in 2016, I think was the.

Worst demand year by as measured by railcar demand railcar orders and lease rates since probably the great recession, but you did 577 that here, which is peak earnings up for that cycle.

And now we're looking at worsening conditions at North American you're going to grow earnings again in 2020.

Materially.

I wonder how much of the guidance range that you gave the low end in my life and have to do.

Secondary market opportunities for for you know equipment for equipment sales.

And do you see your fleet in North America shrinking 2020.

Yeah, Yeah, I'm, Matt so.

Brian actually pointed out in his opening comments is the net income expectations for 2020 versus 2019 are quite similar we expected to be a relatively constant specifically addressing your question on secondary market sales.

Patients is that gain total gains on asset dispositions should be higher in 2020 than they were in 2019, maybe more along the lines of what we saw in 2018.

But that is being primarily driven by.

That the scrapping numbers that we saw in 2019 were impacted by relatively low scrap rates significantly lower than we saw in 2018, and we would expect that to more normalized so that the secondary markets sales.

Maybe a little bit better because of some of the timing impacts that we saw a late in the year 2019 as far as when things got close and then also helped by a normalization of scrapping all of which just gets you back to for GHX as a whole relatively flat net income and then as Brian mentioned.

The the pickup in NPS is more driven by buyback assumptions, yeah that I'd pile on by saying.

When the North America rail market is this week and there's this much economic uncertainty.

At least my thoughts around capital allocation shift a little bit and it's more towards investing in the core business hopefully, we'll be able to take advantage of bigger investment opportunities at more attractive prices.

And the second is they focus even more so than usual and efficient low cost access to capital. So I can achieve the first objective. So we're much more focused as the market weakens in investment. So I would not expect the railcar fleet hopefully increases dramatically in 2020, but we'll see.

[laughter] Ryan Tom Bob. Thank you very much appreciate it.

Our next question comes from Steve or harder with Sidoti <unk> co.

Hi, good morning.

Maybe just jumping back to the Rps again, and the Max I know you said there was only one engine in the portfolio.

Do you sense, there's any.

The increase in demand or stronger demand because engines are staying on wing because the Max has been out of the fleet is that the issue or it's just not.

An issue at all.

Okay, yes. So so one really important thing to note is that the rolls Royce portfolio is primarily a wide body portfolio wide body engines, and obviously 737 Max is a narrow body. So I.

Again, we we really don't think that the 737 Max's is driving thanks.

Okay. Okay. That's helpful and then.

You know just going to portfolio management.

If I look at.

He.

Let's see segment operating income.

The last doubled in 2019, if you look.

28.

Talking about going back to more around that level or are we you know moving towards an exit of enough for these businesses in assets where.

Maybe just from a segment basis.

Excluding the gains and losses and things like that it's you know it's closer to breakeven.

Yes, they are really important point with portfolio management is you've seen it happening already and over time, it's really going to be driven by what's going on it rolls Royce and Youve really should think about the remaining businesses is something that will be a smaller and smaller percentage as a total.

Okay. Okay.

And then.

Just maybe jumping back you Didnt rural or did you.

I know you know this year has been pretty strong from again standpoint.

But did you quantify you know kind of what the.

You know.

Yeah, let's say Gulf continuing earnings are versus.

You know kind of the gains in 2019 and you know if the are we expecting both to increase in in 2020.

Or is it more about you know RPF. This kinda on the flatter side versus you know is very strong 2019, and then you see you know a pretty good improvement on the.

The rest of the business.

Yes, I mean, we expect to see Rolls Royce to continue to perform strongly both in terms of.

Lease income and in terms of residual realization.

Okay. Okay, and then maybe quickly just on a India.

Is there can you kind of course.

Talk generally about the fleet make up there and then.

You know as the investment continues do you expect to keep that make up the same and maybe you know what the outlook. There is there. Thank you.

Yeah, it's probably I'll take that so let's say 3700 cars still majority is then container cars, but they've done a great job and diversifying the fleet, which we really asked them to do because you want that on leasing portfolio. So it now includes auto carriers.

Still coil rig general purpose wagons.

Gondolas cement wagon, so they're doing a nice job of diversifying and they need to continue to do that that's not as easy as just investing in it you have to get approval from the Indian railways for that car to be privately owned and leased first.

And then you have to find the customers, but they're doing a nice job diversifying and they will continue to diversify going forward.

Okay.

Thank you very much.

That concludes today's question and answer session. At this time I will turn the conference back to you for any additional or closing remarks.

[noise] [noise] I'd like to thank everyone for their participation on the call today. Please reach out to me with any follow up question. Thank you.

[noise] [noise].