Q2 2020 GATX Corp Earnings Call
[music].
Please standby we're about to begin.
Ladies and gentlemen, thank you for standing by good Gamble Gtx Twentytwenty second quarter Conference call Today's conference is damn recall.
At this time I would like to turn the conference over to Cherry Hellermann. Please go ahead.
Thank you Paula.
Good morning, everyone I think you're joining gtx is 2022nd quarter earnings call.
Joining today by grind.
<unk> CEO.
Alan Executive Vice President and CFO.
And Bob Lyons Executive Vice President and President North America.
Oh, that's the only thing information you'll hear during our discussion today will consist of forward looking thing.
He goes or trends could differ materially from those statements.
For more information.
Please refer to the risk factors, including R&D and those disgusting Jackie exit 2019 form.
Thank you for 2020.
GHX assumes no obligation to update or revise any forward looking statements like subsequent events or circumstances.
Earlier today.
Catch reported 2022nd quarter net income from continuing operations at 37 million always five per diluted share.
Net income from continuing operations at 60 point Threemillion.
Four dollarssixty five.
In the second quarter and 29.
The other day 2020.
Reported net income from continuing operations at 84.2 million or to 38 per diluted share.
Good compared to 101.5 million once you're done we buy per diluted share for the same here yet in 29 King.
That's why 19 second quarter and year to date result included net deferred tax benefit that's true quite young dollars or eight cents per diluted share.
They try to an active foreign tax rate redemption.
These items are detailed on page 13 of our earnings release.
During the second quarter.
HM.
Yeah with American Steamship company.
Accordingly. This business segment has been important I think discontinued operation and all prior periods happening we cast to conform to back presentation.
Income from discontinued operations are detailed in our earnings release.
Now I'll briefly address each segment.
In the second quarter Kobin 19 of the associated economic downturns had a negative impact across all of our business segment.
Despite the difficult operating environment.
North America fleet utilization remains high at 19.9.
At quarter end.
However, you will see saturated with 71.8%.
Those dogs are well diversified.
Full service capability.
Excellent execution Bard commercial team.
The lease rate environment was very challenging.
Patrick only trades with considerable across all car types in commodity.
During the quarter the renewal rate change of Ghz axis lease price index was negative 28% can be average renewal term associated with the LPI.
31 month.
We continue to successfully placed new railcars from our committed supply agreement pretty diverse customer base.
Weve placed all 8950 railcars for 2014 Trinity.
And your early 1450 railcars from our 20 teams for Trinity the five agreement.
With all something close to 3400 railcars for 2018 Greenbriers supply agreement.
As mentioned last quarter.
Also piping until they reach for 2020 have simply.
Remarketing income in a quarter was $4.5 million Green rail North America total remarketing income for the year took 31.
Turning to rail international.
The lease rate environment in Europe remains strong and GHX real your opinion.
That either man constantly with utilization of 98.4% at quarter end.
Failure nationals, and that's not volume during the second quarter with approximately $50 million.
In the quarter.
Both GHX real European GHX real India experienced delays in new railcar deliveries.
I never used to call the 19 related interruptions at manufacturing facility.
In portfolio management.
Yes were driven by the solid performance, but the most important partners finance affiliates.
I don't really due to the marketing activity in the quarter.
Finally.
As noted in the earnings release.
Good shape or the economic recovery remains uncertain.
And I'd be impacted colder 19 evolved.
We expect petrone tree renewal activity and asset utilization to continue across all of our business segment.
No there aren't prepared remarks.
I'll now turn it back to the operator for Q1.
Thank you to signal for a question. Please press star one on your telephone keypad also using a speaker phone. Please make sure. Your mute button is turned off to a lot of your signal to reach our equipment voice pumped on your phone.
Okay. When your line is open once again it is star one at this time for questions.
My first question will come from Allison.
Oh linear with Wells Fargo.
Hi, guys good morning.
Could you talk to you I know you mentioned you know obviously had a significant pressure on lease rates, but me financial trends at least we treat that you I'm experiences corridor, Andrew if there's any sort of mix issues within the API that we should be Michael love.
Sure Allison this is Bob Lyons good morning.
Oh, the push through I would say frequently where are you was equally shared between tank and freight.
So if you look at Q1 to Q2, both tank and freight.
Right.
We're down call it eight or 9%.
Between Q1 in Q2.
Oh, so no real significant differential between car types.
Ah impact can be LPR you'd be second quarter.
Came into the year or the beginning of year. We said, we expected the LP I would be down anywhere between negative kind of negative 20% [laughter].
So negative 28 for the quarter, obviously outside of that they unforgiving everything that's going on with [laughter] covert 90, God the impact to your economic impact.
Knocked out that far outside the branch.
Understood.
Just a second I'm just with the amount of inflation in the secondary market over the past few years I would suspect that these oh.
I'm to market that will definitely be a lots in terms of what they'd have to take or it might fall short of what they want you've been pretty cycles before answers.
The secondary market gives us one feel different if there's something structurally different once that's one or would you expect some of these opportunities to comfort to fruition over the next few months.
Well I would say he lives in the field. The only thing I can really equated to would be the great recession 2008, nine and 10 [laughter] a word did take a little while for some of the outset owner.
Time to kinda liter point of situation.
So that may that may occur again again as you pointed out a lot of people did say relatively high.
Prices for a number of the cars in the portfolio and.
You know that there will be a formulation that you know that's not recoverable.
Yeah, Yeah, do you, what she will whether or not they're willing to do that some of that so if you're willing to do that take that pain in Milan.
Yeah, we found the opportunities significant opportunities in 2008, nine and can we.
We feel they're out there again, whether or not they happen that we do not control, but certainly there are some portfolios out there that would be about turf.
Right.
Brian.
The other thing I'd, rather than 2000, and the great first person.
I would say there wasn't good for capital Adler is today.
So in a lot of those situations that we added to our portfolio back then we were good.
No it could be more competitive since everybody seems to have access to capital. So we'll see.
Got it under said I'll pass along thanks.
And moving on we'll go to Justin long with Stephens.
Thanks, and good morning.
So maybe a follow up on lease rate commentary in North America, if we look at real volume.
[laughter] substantially year over year.
Some sequential empires <unk> here in the last month or two I'm also if you look at yards railcar delivery forecast.
[laughter] supply, it's dark contracting so [laughter] you'd think about those trends how long did those trends have to continue before you feel like we can kind of hit a bottom in always rate environment. It is that something that you think as possible.
At some point in 2020 or is that 2021 would love to just get your thoughts around that.
Oh sure Jefferson This is Bob and I'd say, it's very difficult to put a time frame on a given all of the tractors that come into play.
A weather.
The economic environments potential for second wave here of gold at 19 years.
Whole host of things that could come into play Tom has a 10th or try to put a time frame out at what I will tell you is that I think.
While the delivery schedule.
Numbers just come down in the backlog has come down.
You can't lose sight of the fact that this market was over supplied from years of yours.
That will not correct itself, what did you hear or to build out for replacement level.
There has to be a more in our view on more dramatic reduction.
And output.
Oh to help bring to market back into into balance.
Okay.
And then.
Shifting now.
You know the contribution there was only down slightly on sequential basis and held back a lot better than we anticipated.
In the prepared remarks every dimension.
Marketing their way to help us think about you know how much it.
2.6 million impact in the corner came from remarketing and anyway.
Oh that line item going forward based on the deferrals that you've seen in the market that's far and once you expect for remarketing going.
Oh, Jeff Hi, This is Tom and so for the second quarter about two thirds of that was related to games and residual realization. So silly commented in the.
In the prepared remarks.
Significant portion.
All markets that tends to be pretty lumpy. So it's difficult in any market to predict exactly how that's going to come in but you know based on what we've seen both in the second quarter and then even a year to date, because it's worth noting the year to date numbers of 4 million.
They're about 26 million of that was related to a.
James and residual realization, so it's something that that we've seen a.
The year and we would expect to see more is that going forward, but quantifying the magnitude of it is always a challenge.
Okay understood.
Maybe the last quarter on [laughter], we think about the business you know pro forma for the divestiture.
Tom is there way to think about baby.
Runrate in Threeq you win.
Much of an opportunity you have on on that.
We need to continue cutting costs on that front.
Yep Yep, so coming into the year, we noted that we expect.
To be roughly flat with 2019 number which was 100 you know again if you.
For the U.S.C. sale, that's do you need from continuing operations would have been projected to be almost 180 million a in the wake colder than we implemented certain cost reduction.
Emanated discretionary spending in areas like hiring consulting a travel and entertainment on and then over the course of your we also incentive compensation savings together. We expect these measures to result in $15 million to $20 million additional savings. So you can see that we expect more substantial asking me saving.
In the second half of your.
Okay, Great. That's really helpful color appreciate the time.
Thanks.
And next well go to Bascome majors with Susquehanna Financial group.
Yeah. Thanks for taking my questions here I wanted to go back to be earlier question.
On the M&A environment as an acquirer and then maybe take a step back.
Yeah, and you're pretty books out there actually seller can you talk about the basket that market. It's just the same bidders you typically see or is that evolving.
You know you need alluded to you may be pretty careful access to capital when you're looking out to acquire fleets being a big difference today versus you know 12 years ago. When you saw some opportunities maybe anything about you know the buys so what you're seeing you can probably.
Susan we get to that market. It is an evolving maybe versus what it looked like over the last few years. Thank you.
Sure Bascome. This is Bob Lyons and I would separate the two types of sales in the very distinct.
Pockets of the ordinary as you go secondary market activity.
Whether its G T X or somebody else who's in the market typically those packages are gonna be anywhere between call. It 500 cars to 2000 cars.
On many different leases many different riders and so it's very common to see those whether it's from lots or others in the secondary market.
That's very different than somebody going out to sell a portfolio of.
<unk> 5000, 220000 or more.
Railcars and sell it does an ongoing does not sell it as a how large asset sale.
Well, that's a different buyer universe for something of that magnitude.
On the first side.
Kinda the ordinary course sales in the secondary market we did.
I see a reduction in activity in the second quarter as you can see just from the remarketing numbers that we had a we did have some sales.
We had roughly $4 million remarketing income in the second quarter and and some of those sales and.
Transactions were agreed to post the Corona virus impact so there is activity.
But the breadth and depth to the buyer universe has declined I would say pretty materially.
There were still people looking at package is looking at opportunities that the big is the biggest issue. We here is just the general uncertainty in the marketplace, whether it's a economy or the North American rail market [noise].
'cause, making some of those buyers has a tent 10, they moved to the sidelines.
That said investor remain interested in rail assets are great assets down the appetites, there, but the ability to end up near term that's pretty limited.
And so it's very difficult to kind of predict or estimate some of the remarketing income we may see in the second half a year.
If we have a second wave of cold weather related issues in the economy remains worth that today a lot of the investors are gonna stay on the sidelines.
And if things improve you could see some of those investors come back pretty quickly.
Because there really attractive assets so the underlying customer base is solid.
And as Brian mentioned earlier capital really cheap.
And so you'll see people come back out and get back into the.
Yeah, Mark had for buying assets.
Either way weren't a good position.
Our hold cell analysis, sometimes like mild told it tends to be [noise].
Wayne's, who puts us Honda directional holding that were fine doing that will capable of doing that.
And if it begins to point to selling a little bit more we have the portfolio.
In the organization.
To make that happen so on a good spot there on the larger portfolios again different buyer universe cheap capital. So any sizable portfolio I think it's going to generate interest.
But a again given the environment. It's it's in doing the valuation work can be a bit of a challenge.
Thank you for backdrop, we're going to bad sure and yeah.
In these processes bomb the large portfolio side are you seeing an evolution and.
He said he makes it more private equity money is it.
Yeah.
Infrastructure tag investors that historically that cheaper capital rules for requirement. So yeah. You know with the answer is we just haven't she meeting upsized to attract that kind of interesting.
And in transparency in these two questions that's lodge and understand what you guys are so thank you.
Yeah, I'll take that sprint, that's what you've seen over the last.
Five or six years or financial players.
Entering the market they don't actually I have a low funding cost, but they seek railcars this passive investment because they'd like to perceive yield.
We've also seen some of the bank financial players the.
Bill platforms in big very low funding costs the industry in in our opinion, both categories of spurred excess investment.
And the industry beyond what is needed.
Oh and pull back by those players would be healthy for the markets though.
It's an obvious state when you look at the oversupply in the market in the will lease rates over the last few years, especially now.
So.
It's hard to tell if they'll show up if some of these portfolios that are troubled hit the market. There's just nothing data out there lately that suggest it will be there or not.
I suspect.
But there's still some interesting is as we've already talked about there's excellent access to capital.
Thank you.
[noise] and moving on we'll go to Matt Elkott with.
Alan.
Good morning, Thanks, guys like once it goes on to average.
Lease revenue.
Our car or North America.
Sockets that held pretty much flat.
Quarter to quarter basis.
Down slightly year over year, despite a accelerating LPI declines over the last few quarters. You know for Q2 does that mean that you guys have.
You are cars coming up for renewal in the quarter or how long how do you think about reconciling that too.
Well, Matt it's it's Bob first of all I'd say it's me.
It's a little difficult to look at the average revenue per car kind of quarter to quarter I I would be.
How does it hasn't tend to draw too much of a conclusion from that because the mix changes all the time a few what <unk> for example over the course last year old sold.
Close to 4000 cars Weve scrapped another 2000 close 3000 on top of the out over the course, the like just in the last year. So the mix changes routinely.
And that can have an impact on that average revenue per car.
Oh, Yeah that said.
No tank is tank cars in general are holding up.
You know fairly well in terms of the demand side or saying customers want to hold onto those cars.
But they're negotiating very hard on right every renewal every new car placement.
It was saying a whole lot of competition I'm more customers are very smart they know the market conditions.
While and they've got to use that to the advantage. Hence the reason we're trying to stay short because it's on the term.
The freight rates are done here to wait time freight cars have been challenged for a long time I'm. So.
Those rates went into this market already at a pretty depressed states and they've stayed down relatively low.
Got it either hopefully I decided it's about thanks for that or just one more follow question about.
The sweet or side.
What do you guys think needs to happen for the downward momentum the news rates too and then you know for us to potentially see a bottoming out.
Oh, Oh Spartan switch is it rail traffic inflecting positively about that you'd be person to core.
[laughter], a that would certainly help and I would say the economic.
Activity industrial activity in North America will be the the bigots indicator for sure.
But I'd also say the second thing and I touched on this already it was just the sheer supply of cars coming into the marketplace.
Well the backlog is dropped our view is still there too many cars being produced for those markets.
And Ah have felt very strongly but that's been the case now for a number of years.
So we need to see that spec dialed back.
That will also help lease rates going forward.
Hey, Matt injured just to add to that if if we did see an uptick in demand given what the railroads have done in terms of Ah Ah really cutting back a there is a potential that increasing traffic would would slow down the system of that and you'd have a follow on.
The man for cars because of that.
Yeah, that's a very important points Oh, so Tom I don't think we've seen an environment, where all the class long and industry wide or sometimes the P.S.. Our while rail traffic is growing at the same time, so that remains to be a plus I think.
Thanks, so much for the input.
Thank you.
And once again it is star one if you do have a question moving on we'll go to Steve O'hara with Sidoti and company.
Hi, Good morning, Thanks, taking my question.
Just talk about a in terms of deferrals that you've made pad in the quarter I guess within a diverse portfolios. You know was there a marked change and.
Lease income received.
From one Q2, Q and then maybe you can touch on you know what would have that impacted it's all the our P.S. as well. Thank you.
Yeah, it's really that I'd say, what pits, we have Bob on the call, let's let him start with rail North America will cover the rest of it.
Yes, so the thanks prime the pace of deferral requests has slowed pretty dramatically or has the quarter went along.
And really the financial impact is.
Nonexistent because many of the due for the most part of any of the deferrals.
That we granted.
HM revenue is straight line. So it's it's a cash flow, what's the timing issue and the numbers are relatively small.
Yeah, we've had approximately 15 requests customer base it was 850.
For some type of restructuring or deferral anything we do tend to be very either NPV positive there for DHX old get some other commercial benefit.
We've approved less than half of those.
So I'm not a significant number in the deferrals of done relatively straight forward.
I will add.
You know we've had some customer is that the small Q market, particularly in San service is down significantly pressure or some other customers there.
Our under a lot of strain and so we've seen a little bit more of an impact there as we've dealt with fewer restructurings of on the sand customers.
And that.
I think I've, probably turn it over to either to Tom to talk about our appeal.
I'd say what else I do real international for so.
Rail Europe would receive request for about 40 customers as you would expect the majority of the customers seeking or at least mineral old customers because it is 53% of the fleet.
Anything the drop in prices so the request.
Similar North America split between those who asked for rate reduction those rest are temporary rate holidays deferral.
GHX rail Europe's close about half of those requests isn't going up the cases at all and the other half from close with granting a few months of extended payment terms so really.
Very little economic effect, that's it's less than $100000. That's just kind of big of a few months.
Really India similar they've received number requests most looking for temporary rent deferrals rate reduction one look for a cancellation I know of.
And they reached degree with most of their customers as well and it generally the same pattern a few close with no change at all.
Some might arrest deferral or think there was one cancel delivery case, so against the economic impact those axis is well over 100000 dollar so they're hanging in there a pretty good and rail international both jurisdictions ER and after the coldest spike it related closures getting restarted I think you know it's pretty good pretty good so far.
Sure.
Yeah. So so from a trend perspective, it's it's really the same story at RPF, that's what Bob and growing both much and of course RPF started with many more deferral requests on the first quarter call, we mentioned that that between that a little over half of the airline.
In customers had made some sort of deferral requests, which was typically looking for three to six months of a deferral and as we noted on that call. A similarly, the accounting impact I'm really doesn't show up because as long as it's a deferral you continue to to accrue that rent we really see.
Hey, a slowing down in those requests and it's really the same level now as it was.
At the first quarter the thing to keep an eye on obviously with the global Global Aviation situation is good as covert continues.
Does that change and more Ah, we're keeping our eye on that but but as far as the second quarter want it a interested dramatically slowed just like the rail.
Okay. No. That's that's very helpful color and in terms of the you guys noted that.
It competitive environment was or I guess meet you know increased competition things like that are pretty kind of fighting for utilization.
Is that.
Is that it you're kinda it did that improve towards the end of two Q or is that the environment right now there's really been no change there.
Can you just talked about that quickly.
Sure and on that front I would say, they're there hasn't found a significant change when you walk month over month in the second quarter.
It's competitive very competitive anyway, you slice it whether it's a renewal.
Or a new car placement.
It's going to be extremely competitive a number a lot of stores are gonna be going after that because as much.
Cheaper G.A.T. actually is the fact that we have a highly diversified fleet.
We have a lot of flexibility on our order book in terms of the tight for cars that we can place.
And the customer base that we have a we see them consolidating the number of less or is that they're dealing with.
So time and again, we're wanting to position, where we're able to displace competitors. So hence the reason utilization of stayed 90% 90% plus.
What we've done well on renewal success is where we are displacing competitors and winning that business and a lot of the deals were wondering are relatively small.
Yeah, any any new car order for example that 2000 car order is going to there's kind of get everybody go in the industry bidding on it.
We've done very well on 50, and the 100 car type placements or handle younger customer base on the relationships and the commercial organization to make that happen.
But it's it's competitive anyway, you look at it.
It didn't work on international one so I'd say competition, probably increased during the quarter I mean, it started out with that market in much better shape relative to North America.
But its thinks continue in fact, we realized or lease rate increases in the first half for the year, including in the second quarter.
You know as it continues if things get restarted we anticipate it'll be a little tougher in the second half of the or perhaps some pressure in certain markets. So I wouldn't expect healthy lease rate increases and I think there will be somebody will cars out there and certain other markets. So competition would probably be the little bit tougher in the second half of your.
And Europe.
Okay.
And then.
Just a party goods about Beth volume for the year is your range you could give us given maybe things are sounds like restarting user arranged Catholic about.
Outside of any.
That's a person's is running about that.
Yep. So so as you know our you know our investment volume on the rail side comes both from a supply agreements from spot a new car purchases and then of course for enough food acquisition opportunities and it's that last one that's a you know the hardest to predict we've talked about that several times on the call on on one that stuff shakes lose.
But investment value or for the whole company, we would expect to be probably in the mid 800 800 million sitting here.
Okay. Thank you very much.
Next we'll hear from Barry Haimes with Sage asset management.
Hi, Thanks for taking my question could you just review the number of cars in storage at the moment and would love to just get your view that is from you know TPP Kinda got back on track and started growing normally again, you know how many quarters will it take to kind of get storage.
Back to normal levels, just to get a rough feel thanks.
Yeah, just just to be clear are you talking about the industry wide idle fleet count.
Yes, yes, exactly yeah. So that number is obviously, it's moved up sharply to 31.5% not all of those cars on storage first of all those our cars that have not had a loaded move in 60 days.
So to definitely overstates the number of those cars that are actually in storage, but it's it's what the industry data point terrorism and the one thing everybody kind of work off of.
Yeah, I'd calibrate that around data doesn't go too far back in history, but at a low point it was probably 12 or 13%.
Kind of normalize it varies you know solid market.
So you have quite a ways to go before you can get back down to that level.
Muni GDP to go up and you need some you know material scrapping activity on a number of those cars that are really in the we've done on kind of move again I'm. So I wouldn't look for that number to get back down to the 12 or 13% level for quite some time and it was only and low low twentys pre corona.
Virus.
So there's there's plenty of work to be down there to bring that number back down.
And interest one a quick follow up.
They're all of them back to use you know every 1% increase in GDP is.
Know X number of incremental demand for cars.
Not necessarily because it really not all cars are created equally.
There's hundreds of different types of cars in the fleet, we have over 160 of the G. T X fleet alone.
So it really.
But there is no easy easy math on that number.
Okay I appreciate the insight thank you.
Sure.
And we'll go to a follow up from Bascome majors and assess kinda financial group.
Yeah. Thanks for taking my follow up I, just wanted to reach out and you Nash. So you guys are thinking about.
The long term new car supply I realize you have another three and a half years delivery schedule to some years newpark suppliers. So.
Typically.
There will be some strategic extensions and things like that in down markets I'm just curious if that's something that.
Gee I should look out over the next 612 18 months sticky.
<unk>.
Oh sure that's kind of its Bob yes, both the Trinity and Green Briar agreements that we have run through 2023. So we're in good shape on those.
And I won't get into specific timing.
With regards to how we're we think about either extending knows we're putting new new agreements in place.
But we're always looking for opportunities obviously put in in challenged markets too.
Ah cut the best steel for ourselves in a in a deal that works for the manufacturers as well, but wouldn't really get into too much detail on timing of.
When we approach that and how we approach it.
Thank you.
[laughter].
And that will conclude our question and answer session I'd like to turn the conference back over to Miss Hellermann for any additional or closing comments.
I like to thank everyone for their participation on the topic.
Reach out to me with any follow up.
Thank you.
Thank you and that does conclude today's conference we'd like to thank everyone for their participation you may now disconnect.