Q4 2020 GATX Corp Earnings Call

Okay.

Good day, everyone and welcome to the G. A T X 'twenty 'twenty fourth quarter Conference call. Today's conference is being recorded at this time I would like to turn the conference over to director of Investor Relations Shari Hellerman. Please go ahead.

Thank you Brian.

Good morning, everyone and thank you for joining Gatx's fourth quarter, and 2020 year end earnings conference call.

I'm joined today by Brian Kenney.

That's a N C E O.

Tom Ellman Executive Vice President and CFO.

Bob Lyons Executive Vice President and President of rail North America.

And go chases out.

Executive Vice President and President of rail International.

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

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

For more information.

Please refer to the risk factors included in our release and that was discussed in Gatx's 2019 form 10-K, and Twenty-twenty form 10-Q.

The E T X 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 'twenty 'twenty fourth quarter and full year results.

And then Brian will provide additional comments on 'twenty 'twenty, that's one of the start outlook for 'twenty and 'twenty one.

After that well open the call up for questions.

Earlier today.

G H T X reported 2024th quarter net income from continuing operations of $17 8 million or 50 cents per diluted share.

This compares to 2019 fourth quarter net income from continuing operations of $42 1 million or a dollar of <unk> 18 per diluted share.

For the full year 2020.

<unk> reported net income from continuing operations of 150.2 million of for 24 per diluted share.

This compares to net income from continuing operations of $180 8 million or for 97 per diluted share in 2019.

The 'twenty 'twenty of full year results include a net negative impact of $12 3 million for 35 cents per diluted share related to the elimination of the previously announced tax rate reduction in the United Kingdom.

The 2019 full year results include a net deferred tax benefit of $2 8 million or eight cents per diluted share related to it on an after tax rate reduction in Alberta, Canada.

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

In 2020, and that's been volume was one point of $6 billion.

Which reflect higher year over year investment in rail North America.

That's why was the acquisition of Tri free.

The fourth largest global tank container lessor.

And as noted in the earnings release.

We currently expect 'twenty 'twenty, one earnings to be in the range of $4 two for 30 per diluted share.

With that I will now turn the call over to Brian.

Okay. Thanks, Sherry good morning, everyone. Thanks for calling in as always I'll give you. The brief color on our recent performance, but more importantly, some more detail behind the 2021 guidance. So let's go ahead and dive in here as Sherry said and as you saw on the press release on a normalized basis and looking at continuing operations, we earned $4 59.

The per diluted share.

Remember that we suspended earnings guidance at the end of the first quarter 'twenty 'twenty, along with most others due to COVID-19.

But also remember we sold our American steamship business and day, so I realize they're trying to analyze our 2020 financial performance versus that original guidance that we put out last January was pretty difficult. It's also difficult for me to tell you with the high degree of accuracy, what the financial impact of COVID-19 was on G. H T X, but I can't tell.

Qualitatively about it and I think I need to because it's still having an impact today.

So as far as that goes around North America Covid showed its impact really in three areas.

You remember that entering 2020 of the North American railcar leasing market was already in the week and position that was due to the dramatic oversupply of railcars, but as of the pandemic set in North American railcar loadings fell at the levels really believes the bottom of what we saw in the 2008 to 10 recession.

We did see of further negative impact on what were already low lease rates. So they also had a temporary chilling effect on the secondary market. It also created inefficiencies in our maintenance network due to the frequent openings and closings of our facilities in an effort to keep the employees safe.

Moving to rail international in Europe, and India other than that secondary impact on foreign exchange rates.

Covid resulted in delayed investment in <unk>.

Both businesses and that was due to the shutdowns of delays at the railcar manufacturers.

And of course Covid had its most profound effect on our aircraft spare engine leasing partnership with Rolls Royce that was obviously due to the dramatic decline in airline traffic around the world So given that extremely negative environment.

I think G E checks of employees handle the challenges extraordinarily well. So for instance, we maintain our global railcar fleet utilization between 9800 per cent depending on the jurisdiction.

As an essential industry in North America of our maintenance employees showed up for work continuously from day one.

It helped us realize the cost savings of more fully utilizing our own network.

Our international rail businesses have resumed their growth plans.

And even at our P. F that joint venture is handling the wave of customer relief requests very efficiently and that team's now identifying new engine of investment opportunities as well.

And lastly speaking of new investments at the end of 2020, you saw that we closed on Gatx's first the adjacent acquisition and in memory actually with the purchase of the Tri fleet that's.

That's the world's fourth largest take the tighter lessor and that's a company that we believed the ATX will bring a lot of value too in the coming years. So.

Looking at US as we enter 2021 way of a strong balance sheet, we got great access to capital and we are executing our strategy of investing in the down market at attractive prices.

So, let's turn to that 'twenty 'twenty one outlook.

And I'll say that our guidance assumes a gradual easing of COVID-19 as we move through the year and.

And despite the start of the rollout of the vaccines that easing assumption looks pretty aggressive as we sit here today. So let me give you an example.

Covid infections in the secondary exposures of workers in our North American maintenance network peaked at the end of last years of the highest levels yet and they continue at a very high level and that obviously reduces our capacity in our own network.

I'm sure you're aware of the Covid Lockdowns in Europe for instance, Germany, and Austria, where we're headquartered have recently extended their restrictions.

They both say they see hard times ahead.

And obviously global Air travel remains about 50% of its pre COVID-19 level. So what we're assuming that it gets slowly better as we move through the year.

The possibility of the Covid related volatility on the outlook remains high.

Specifically by the segments, let's turn to rail North America's 'twenty 'twenty one outlook.

So towards the end of the year on the fourth quarter. We started to see very early signs of recovery. So examples of absolute lease rates were flat to slightly higher for the second consecutive quarter for many car types.

Car loadings have steadily increased off the second quarter of low we saw on 'twenty 'twenty.

In the fourth quarter certain market segments actually showed higher quarter over quarter carloadings compared to the fourth quarter of 2019. So despite those facts industry oversupply continues and although we see similar lease renewal success, and probably higher absolute lease rates versus 2020, we still think renewal of light.

So it will be.

Below expiring rates as we move through 2021. So there's also some rest of the fleet utilization the market's extremely competitive right now and that's really due to the significantly lower utilization in our competitors' fleets.

So the net effect of all of that is we expect lease revenue to decline in 'twenty 'twenty, one and the range of $35 million to $45 million of rail North America.

So let's talk about net base expense for a minute I'll acknowledge that we've had difficulty in predicting the it accurately recently.

That's actually been of good news story as we've outperformed our expectations during the last two years.

The aggressively moving more work from that was third party facilities into our own network and realizing the associated cost savings. So we do expect more of the same performance as we move through 2021.

But the Covid related disruptions. We're currently saying are hampering those efforts. So at this point, it's a little difficult, we estimate maintenance spending will be within $10 million in either direction compared to our 2020 expense.

And probably the last major factor discussed for rail North America as the asset disposition income.

As I said secondary market at the beginning of the begin to pick up at the beginning of the second at the beginning of the second quarter of little bit, but investor appetite and inquiries picked up late in the year.

We're expecting that improvement trying to continue as we move through 2021.

For some strong demand for the asset that we are taking the market.

We've also seen scrap steel prices increased significantly since the beginning of December.

So we will continue to optimize our fleet in 2021 through scrapping of the sale of railcars and the secretary of market.

Thus, we expect that asset disposition income overall could be up significantly in 2021, given our current fleet plans, but again, what we're Gonna Act economically as we always do so our disposition plans could change with the additional market volatility caused by COVID-19 or other sources. So the net effect of all of these factors is that we expect the neck.

[noise] of lease revenue variance will be offset by higher disposition gains and continued cost control.

And that drives our expectation of that 'twenty 'twenty one segment profit of rail North America will be essentially flat with 2020.

Again volatility of the market will determine whether it ends up up or down.

Moving on International rail, let's start with Gatx's rail Europe as I've discussed over the last two years of the European rail market pre COVID-19 was extremely attractive.

Arguably more so than I've seen since we entered the market in the early 19 nineties. So we expect that favorable European market again in 'twenty and 'twenty, one we've invested more into that market over the last two years, we're going to do it again in 2021, we currently anticipate.

Adding more than 300, new cars at attractive rates. So we also continue to realize small renewal rate increases on the existing fleet, we expect that to continue in 'twenty and 'twenty one.

So that new investments the strong performance on the existing fleet and hopefully less of that negative exchange rate movement, we saw last year.

As expected, resulting in increase in of rail Europe segment profit of at least $15 million in 'twenty and 'twenty one.

Israel, India, Although theyre Twenty-twenty fleet growth was constrained by manufacturing shutdowns due to COVID-19.

The rail manufacturers had been back up and running for some time now and we do anticipate significant growth in net Indian fleet. This year.

We're currently expecting to add over 1000 cars to our fleet in 2021. So they also continue to diversify their car types of their product mix.

And I think their growth is expected to increase our segment profit in the range of two to 4 million of 'twenty 'twenty, one so combined with GRE that.

As expected segment profit growth for rail international in total is expected to be as much as $20 million this year.

So let's move the portfolio management as I said earlier the R. P F joint venture sets that partnership with Rolls Royce.

Hit hard by the reduction of global Air travel and there's no forecast that we know of that for seeds of full recovery of air travel on 'twenty 'twenty. One. So you can expect that joint venture to be dealing with the severe impact on its customers through at least this year.

We also expect lower remarketing income of 2021, you might remember 'twenty 'twenty was actually a big year for remarketing of RPF, but that was due to the that gain we highlighted in the third quarter of that involved the large refinancing and sale of a group of aircraft spare engines as we said that's likely to unlikely to reoccur. So we expect our share of 'twenty.

'twenty 'twenty one profit at this JV to be down $40 million or more from last year.

However, we do expect the lower segment profit at our of P. F to be partially offset by spare engine of investment that's made directly by G. A T X in 2021. So we mentioned the initial investment of this pipe and the earnings release, let me expand on that for a minute.

They are of P. F joint venture has generally been self funding has been that way for several years for instance, they were also able to invest over 900 million of both 18 and 19 with little support from the partners.

But due to the depressed market conditions in the airline sector and the resulting extremely high funding costs for aviation related companies.

For our P. F is somewhat constrained in its ability to invest at the same elevated level. It was pre COVID-19.

But as is typical in the down market. They are identifying very attractive investment opportunity. So to take advantage of these opportunities as well as b is the it's helpful. As we can do our partner who has other uses for its capital we will invest directly in spare engine leasing transactions that we see as particularly attractive so.

Just in the past few days, we invested almost 120 million for a group of agents on long term lease to two of the strongest airlines at very attractive prices and.

And we do see more opportunities for this type of investment and we will keep you informed of this program as we move through 'twenty and 'twenty one.

So the net effect of portfolio management, we have reduced profit coming from the joint venture New income coming from our direct investment and segment profit is expected to decrease about $30 million or more in 2021.

So moving on to that recent Tri fleet acquisition now of course, we foresee the acquisition will be accretive, but in 'twenty and 'twenty, one we actually expect it to be dilutive.

About 10 cents per share and that's first year dilution is primarily due to the accounting treatment for purchase price hold backs and retention agreements that we structured into this transaction.

GAAP accounting requires that those payments the expenses SG&A in 'twenty 'twenty, one if they earn.

So after 'twenty 'twenty, one we expect try fleet to be accretive going forward.

Speaking of that SG&A, we reduced debt expense by about 5% of 'twenty 'twenty that was general expense control lower incentive compensation expense due to our 'twenty 'twenty results.

And moving to 'twenty 'twenty, one we anticipate an increase of over $20 million in SG&A now that sounds like a big increase but over half of that 11 of that $20 million increase in fact, the 11 million of it comes from the increase from the addition of Tri fleet and half of that try fleet increase is due to those transaction related expenses that I do.

Just mentioned again those will not reoccur so apart from the Tri fleet increase the remainder of the increase from 2020 of spending associated with our assumption that business gradually returned to normal and Theres also increased growth related to head count in it spending at rail international.

The last component of mentioned as the tax rate is projected to be about a point or so lower than in 2020, and that's due to a higher percentage of our income coming from non U S entities.

So the net of all of this is our expectation that net income in 'twenty and 'twenty, one will be down on that $10 million to $25 million range from last year that leaves the store guidance of four to four <unk> 30 per diluted share and albeit with a lot more uncertainty than prior guidance.

I do want to pause for a moment as I always do to remind you that 'twenty 'twenty one marks our third consecutive year of paying a dividend and that's the track record that few companies can match. The G. H ex board actually meets Tomorrow. They will discuss our 2020 plans for the dividend.

So obviously, we'll announce the decision at that time.

I'd say the board certainly understands the importance of the dividend and I think our century long streak is of Great example of our record of success.

And our commitment to the shareholders.

So I'll close by saying again G O Tex employees did an outstanding job of 'twenty 'twenty executing our plan.

And I'm confident that the investments that we're making right now on these difficult markets will prove to be rewarding ones for our shareholders going forward. So with that operator, let's please open it up for questions.

Thank you if you'd like to ask a question. Please signal by pressing star one on your telephone keypad.

If you're using a speaker phone. Please make sure. Your mute function is turned off to one of all your signal to reach all of our equipment again for any questions. Please press star one now we will pause briefly for any questions.

Yes.

We will take our first question today and that is from Allison Pollinate with Wells Fargo. Please go ahead for your question.

Hey, guys good morning.

Just turning to that overcapacity issue and it's something you know clearly you've been dealing with for a couple of years now, but as you look across your fleet are you starting to at least the a little the tightening in certain verticals and if so kind of where they were they would be that would give you a little bit more optimism that that lease we could maybe increase a little bit more there.

[laughter] Allison its Bob Lyons I'll take that question a good morning.

Ah the there are certain certain pockets right now where we are seeing some increased demand and maybe some green shoots as Brian had referenced in his opening comments.

But broadly speaking not enough to really lift overall lease rates and to provide a lot of momentum on that front.

I think customers still realize the.

The leverage is more in their favor then and ours are these days in terms of lease rates and the other issue that you touched on is the manufacturing capacity the footprint is still too large.

We we in North America, there, we can still turn out to many more cars that are needed.

Other than the extent of customer had a sizeable order, but you still have the option of talking directly with one of the manufacturers and probably getting a fairly good response in and they can use that to their advantage. So.

We need more tightening for sure.

Got it and then I guess that goes on in line with lease rates net of some improvement sequentially.

Maybe discuss the empathy broadly just there is sort of your normalized lease rate that you have any you know its hard by current because there's so many different car types, but how far off that I guess, whatever you perceive to be normal do you feel the are today.

Still pretty substantially if you look at kind of what we would view as our normalized rate for either tank or freight.

You know probably in the 25, 30% plus range versus normalized for.

Tank and maybe even more on freight.

You know that said sequentially third quarter to fourth quarter, we did see some nominal improvement in bolt the tank and freight you know kind of mid single upper single digit type of improvement quarter to quarter. So that's encouraging.

It's the start.

Perfect. Thank you I'll pass it along.

Okay.

Thank you and we'll move onto our next question and then it is from Justin long with Stephens. Please go ahead with your questions.

Thanks, and good morning, maybe the build a little bit on that last question I think for 2021, you said you expect a gradual recovery in lease rates could you quantify the the increase that you're expecting relative to where we sit today, that's baked into the guidance and then on the remarketing.

In North America, I know, Brian you said it should be up significantly, but I was wondering if you could help us with the order of magnitude there for for 'twenty and 'twenty one.

Justin its Bob I'll I'll take both of those so if we're looking at first of all of the first question regarding lease rates and we think about what's baked into the budget for 'twenty 'twenty or of the forecast for 'twenty and 'twenty one that we've provided.

On the L. P. I were looking at a range of negative five day negative 15% somewhere in that Zip code.

The average expiring of rate does come down in 'twenty and 'twenty, one versus 'twenty 'twenty.

And we're expecting the average renewal rate to move up versus.

Versus where we were in 2020.

So the combination of combination of those two factors.

We'll put it in that negative five to negative <unk> 15 per cent range versus the negative 23, and a half per cent we experienced in 2020.

If we look at remarketing as Brian mentioned in his opening comments, we expect lease revenue to be down somewhere on the range of $35 million to $45 million.

And.

That's the combination of.

The current rate environment, the utilization challenges are the.

The full effect of all of the cars that were renewed at low rates in 2020, the they have the full year effect in 2021.

So if you think about revenue being down in that range remarketing would be up basically in the same range 35 to 40 million in.

As Brian mentioned in his comments those two of essentially kind of offset each other driving relatively flat segment profit of rail North America in 2021.

Okay very helpful and one other quick one on the guidance and then I had one last question it doesn't sound like buybacks or getting factored in but I just wanted to ask on that as well.

Hey, Justin it's Tom I'll take that one as you know we have $150 million remaining on our current authorization from the board we did not buyback any stock in 2020 after purchasing $150 million in 2019.

We originally paused on our stock buyback because of the uncertainty around COVID-19, but we decided not to resume the program on market stabilized because we anticipated investment opportunities across the market and in adjacent markets. We've discussed some of those opportunities today, including the truck fleet acquisition and the direct investment in aircraft spare.

The engines, we continue to believe that there will be further opportunities for investment. So we'll be thoughtful about re initiating the buyback program.

So, we'll we'll kind of take that as it comes.

Okay, but could you clarify if that's something that's getting baked into the 'twenty 'twenty, one guidance or would any buybacks the upside to the range of game.

Yeah. So the the real key there is it it's definitely included in that range that are the $4 for 430 of them.

<unk> provided the the magnitude of it is not that material.

Okay helpful and maybe the just clubs a Brian question for you on just the investment opportunities and it seems like there's a pretty sizable opportunity set out there in various different areas and we've seen that with a couple of of the announcements that you've made here recently.

Where are you seeing the most attractive opportunities right now just from a valuation perspective and on in terms of driving long term value for shareowners.

Yeah, I think it's reflected in the two of them vestments. We recently made with the direct investment in spare engines the true.

The acquisition and General rail International is offering more.

Investment opportunities that meet our return criteria and rail North America right now I think there is there in rail North America, but to a large extent justice like beating your head against the wall.

I don't think I think there are owners that want to get out of the business.

But they havent come to grips with the value of their fleet and.

So we will still work on it but you haven't seen that stuff and we as you know we're not going to overpay.

So you know Bob and I are constantly working on this but people aren't there yet.

Understood I appreciate the time thanks.

Thank you we'll move on to our next question is from Matt Alcott with Cowen. Please go ahead with your question.

Good morning. Thank you just a quick question on the guidance.

The <unk> 10 cents dilution from the acquisition is reflected in your guidance right.

That's correct.

Okay.

And then my next question, maybe a follow up on the net gains on asset dispositions at the I think the number for the sea for 'twenty 'twenty.

It was $41 7 million that number is it the same.

Adjusted for a S C a divestiture or is it different.

Well I think of you were looking at the remarketing income component. The most the the key thing to look at Matt is the rail North America column.

Because that's how we're comparing 'twenty to 'twenty one.

And any gain or loss on the sale of ASE as a discontinued operation.

Got it up but the the remarketing income in 'twenty and 'twenty. It must have been the law of us and at least the last five or six years is that correct.

That's correct and that's really that's a reflection of the fact that given all of the uncertainty in the marketplace.

And all of the challenges in 'twenty 'twenty, we were really cautious about going to market with packages.

As you know, we do that quite frequently we didn't in 2020.

And even as things began to improve a little bit in the back part of the year, we were still a little bit cautious about going out to market.

Keep in mind that you don't go to market and generate gains the next day things take time.

We are in the market now with some packages and were seeing renewed interest for sure among the investor base.

For growing and adding assets again, so that gives us confidence some confidence in that number coming into 'twenty and 'twenty one.

Got it.

And Bob and Brian as well you know.

A lot of bigger picture question are the number of railcars in storage has declined from I think 526000 in July to just over 400000 in January.

And the manufacturing backlog is now down to below the 35000 are you surprised that lease rates have not reacted more quickly than they than they did in.

And you know what do you think needs to happen you know what what's the number of cars in storage.

On to for lease rates the start reacting.

The favorable more favorable.

Sure first.

The first of all not surprised but it hasn't had a bigger impact on lease rates, that's still a substantial number of cars in storage.

The most recent data was just over 400000 cars as you noted that's 25 per cent of the North American fleet.

And you would you would historically like you see that number more in the 12% to 15% range before you'd really start to get meaningful momentum on that lease rate number or are at least heading in that direction more aggressively.

The orders in the fourth quarter from our perspective, that's encouraging just over 3000 cars ordered.

Really just a handful of couple of hundred on the tank side. So you have the backlog now down at 35000.

But again keep in mind, our you know the market essentially belt of well in excess of replacement levels for about 10 years.

So it takes some time for that to turn around yeah. That's also the macro view you're looking at in the micro view is our competitors' fleets are still have very low utilization.

So it's one thing about cars. They haven't moved in the 60 or 90 days. It's another thing when your competitors fleets, they're really trying hard to put the fleets back to work ours is at 98% you know, it's not going to get better until you start to see utilization improve if it can at those fleets.

Yeah, one other factor I'd mentioned, Matt that I that I.

Gives me some optimism here.

Coming into the year is the fact that scrap rates have moved up so sharply here on the last two months.

One thing we need to have happened and we've said this for the last couple of years is that we need more cars the scrap out of the fleet.

Scrap rates of finally moved and they've moved pretty sharply here on the last two months.

So we're optimistic that our competitors will finally.

The start scrapping out some of that old the idle equipment will do the same to the extent of it makes the right. It's the right economic decision for G E T X for scrap some cars out of.

You know more than the ordinary course, and we're hopeful that the industry does the thing.

Mhm.

And Bob within that the 409000 of just over 400000 cars in storage isn't there of certain population that shouldn't really be affecting the AR the lease rate of dynamic because I mean, the you know there might be 40, or 50 or 60000, frac sand cars that are.

The new but you know the.

The the headwinds are going well documented on the other they shouldn't be affecting the back of the fleet.

And I would imagine there is.

A good number of outdated tank cars in that fleet debt.

You know won't come back into the service, regardless of any type of a market dynamic.

I mean is there any way to gauge what the real number the real relevant number of cars in storage is.

Well I would agree with you and I would say you know that's why I didn't say the number needs to go to zero from 25 per cent.

If it goes to that 12% to 15% range I think you'll see some real improvement in lease rates.

There is some base load of cars, that's always going to fall into that category because of the way. The calculation is done first of all of.

It's the cars that have not had of loaded move in the last 60 days and second of all yes. There is some portion of that fleet. That's just obsolete Ah, it's not going to come back to work and the owners of those cars haven't come to the conclusion, yet our faith or their day of reckoning that those cars are not kind of come back in.

They are not scrapping them out.

So they stay on the idle count hopefully with scrap rates moving up.

Some of that equation changes.

And Matt if you if you're looking for a leading indicator.

You know as as Bob pointed out it's really hard to call. The right number on those idle cars in storage of thing.

You can take a look at is the length of time to get a new car that is still pretty short.

And when that starts to lengthen that'll be your indicator of that for more and more of those car types are debt ready alternative is not available out of anyone's fleets and that's when you'll start to see some on some more pronounced improvement on the lease rate.

Yeah that makes sense, Tom and Tom and Bob mentioned that the order number was very low in Q4, you guys have any kind of you know our theory on that.

The other form of it might've been.

Acted by all of the political on pandemic uncertainty and we may actually see.

You know opportunistic buying because the pricing is still pretty low by something you know a major of about 14, putting yourselves.

Right.

I would say I don't think there was any political element to it I think there's a realization that there's a lot of excess.

Capacity in the market place today that are some investments that people have made over the course of the last few years of not turned out the way they anticipated.

Which gives people pause on ordering.

So I think it's more of market market elements that drove that number down to where it is and.

Yeah, we certainly were not disappointed to see the order of number down where it's at.

Other peoples, where [laughter]. Thanks, So I'm not sure appreciate it.

Yeah, you got to take the law it got to take the long view of it Matt right.

That's right.

Thank you we'll move on to our next question and that is from back on majors with Susquehanna. Please go ahead with your question.

Yeah. Thanks for taking my questions I wanted to go back to scrapping given the.

The incremental focus on that but with rates at multi year highs of at least for scrap steel do you guys have a good sense and your supply demand models of what North American railcar scrapping capacity could be if it were running full tilt and any sense of of however, you measure where we might be running relative.

For that.

Yeah, I can't give you a number of specifically in terms of you know it was probably up in the 30 25 to 30000 car range somewhere in that category, but you raised a very good point, which is just because of scrap rates moved up sharply here on the last couple of months doesn't mean, everybody can rush to the door and scrap.

Cars. It takes time they have to be staged oftentimes you cleaned.

Shipped.

To the scrap.

On to the Scrappers and they have to have the capacity to deal with it are they don't get the ramp up immediately.

The handle that so it will take some time for that to work its way through the system.

And perhaps the other side of high steel prices and.

And with all of the focus on scrapping and the supply response, I mean, historically high steel prices of like the high railcar prices and.

By definition or the derivation of the IRA lease rates on existing railcars and I realize you kind of maybe tangentially addressed that earlier with the fact that lead times are still quite low at manufacturers for it.

Are you feeling any inflation in steel prices, helping you and your ability to command better lease rates or is it is it really just an oversupply issue and in the rest of this is just so much circular with that.

Well there is certainly a correlation there of baskins, but I would say we're on that very early stage of that right now.

But if if scrap rates the scrap rates continue to be as high as they are.

The steel prices in general continue to be high or move higher yeah. It will work its way into the car costs for sure and that has to be recovered through lease rate.

Yeah.

Last one for me any thoughts on any more than normal rebalancing of the North American rail portfolio of yet.

The acquisitions or dispositions this year. Thank you.

Are you talking about the balance between tank and freight.

Oh, you know either between that or even within our you know maybe some more narrow categorization since you guys for Ya.

Well there are definitely some categories of car types that we're most attracted to right now.

For obvious reasons I won't divulge what the Saar I'm sitting here today on on a broad call like this but there are definitely pockets of car types that we are very attracted to where we think there's excellent investment opportunities.

And we're well positioned very well positioned to take advantage of those and we'll do so.

But in terms of a significant change in the portfolio composition I wouldn't look for anything of that magnitude.

Thank you.

Thank you and we will move on to our next question and that is from Justin Bergner with G. Research. Please go ahead with your question.

Good morning, Brian Tom and Sherry.

Good morning.

I wanted to start off on me.

Issue of your fleet size and composition of North America.

You referred to your fleet plan began the call. It seems like the dispositions that you were anticipating.

Some of them materially reduced the size of your North American fleet are you committed to keeping your north American fleet. The same size or you know if market conditions are right for dispositions would you consider allowing it to the size down some some of them materially.

Well, having scale in the business matters, so we do pay attention to that but in reality.

I'm trying we're trying to generate the best risk adjusted return we can off the portfolio might have the most cars.

I think others in the industry, who have pursued that strategy.

I have probably of regretted it.

So we are being as we always will be extremely selective about what were buying and selling.

So keep in mind, even if for example, we scrapped or sold three four of 5000 cars in 2021.

Under our committed supply agreements, we're taking delivery of 3000 cars and.

And we're always in the secondary market buying cars.

So the net fleet reduction would not be that substantial.

Okay.

With respect to the scale of issues is it assumed that you'll lose the maintenance opportunity when you sell a car or is there the opportunity to maintain third party maintenance.

We at this point are not pursuing third party maintenance, we prefer for obvious reasons to have our capacity available to maintain our cars.

Okay.

With respect to the lease rates I just it came on mute. The quick did you say lease rates were up sequentially mid single digits in the fourth quarter or was it low single digit versus the third quarter.

Well of around four of 5%.

Okay and then my last question relates to the direct investment opportunity.

The 120 million dollar of outlay.

Was this actually purchasing engines from purchasing leases from the JV and should we expect.

You know additional outlays of this size in the coming quarters or years.

Justin This is Tom so the.

This type of investment is as alluded to in the in the press release and in Brian's opening comments is attractive investment that this is the right time in the market and we will certainly look for for additional opportunities to pursue that type of investment with Rolls Royce.

The Rolls Royce JV as the manager of that investment.

Got it the car where the car is actually sold from the JV or are you picking up sort of the.

Leases in the third and the.

Net income.

On the market I don't know if you're on Liberty's right.

I'm sorry, Justin.

But but yeah, we're really it's really a question of looking at both of those avenues.

Okay.

Understood. That's it for me thank you.

Thank you as a reminder of that is star one for any questions. We'll move on to our next question and then it is from Steve O'hara with Sidoti Capital. Please go ahead with your question.

Yeah, Hi, good morning, Thanks for taking the question.

Could you talk about.

The maybe the multiple on the elite acquisition and then you.

You know what types of returns are you know typically seen in that market.

And then maybe how that compares to kind of.

I'm not as familiar with that market, but I mean, maybe you can compare it to the you know kind of high touch.

Hi, knowledge base are needed in the railcar market versus you know other kind of pure cost of capital markets.

Hi, sure I'll I'll take that this would go okay.

We don't look at EBITDA multiples, especially for the leasing businesses, we utilized the discounted cash flow methodology to evaluate the investment opportunity.

When we applied that the methodology and assumptions.

The acquisition generates an attractive long term returns for <unk> shareholders.

And then if you look at.

How do we compare those returns and just let's say compared to the rail Europe. The lease rate factors are definitely higher than our European railcar leasing business.

But when we look at the risk adjusted basis, I think we will need some more time to have firsthand experience before I answer that question, but overall, our return of predictions suggest that returns to be comparable or slightly better again.

Railcar leasing.

Leasing business in Europe.

And then I think the question that you asked about.

What's the catch.

The returns for the full service component.

<unk> does not provide direct me on maintenance services, but it does provide services in the form of technical advice.

So they do that on maintenance repair a day they do that on.

Modifications and then they're also looking for technical specifications for new orders.

So I'd say kind of.

There was a highly complex.

The management of that required because the.

Tank containers are located all around the world are there also.

Local as well as global regulations, so tightly definitely helps with the compliance aspects as well so while it's not at full service lease product.

The technical capabilities and customer service fleet.

Plays a role in the.

This business model and then finally lower cost of the capital definitely helps which we think will bring to the picture and accelerate its growth.

Okay. That's that's very helpful.

And just moving on to the.

Going back to the E R P S or the U.

Engine, our direct investment can.

Can you just talk about the makeup of the engines.

The.

P. S portfolio I think is kind of heavily weighted to wide body passenger aircraft.

And can you talk about maybe.

Is there a different.

Attack in terms of.

Looking at the aircraft types and passenger versus cargo things like that within the direct investment.

Yep.

So all of the engines that we invested in our part of the trend ex W. B family, which power of various configurations of the Airbus <unk> hundred 50, all of the engines of relatively new and around long term leases.

Okay.

And then.

Just can you just remind me does the RPF from Ford kind of.

Real time.

Is there a delay in a quarter or something of that like some J B's.

So the the RPF JV reports on a real time basis, but just.

To clarify this this investment that you just asked about is outside of the JV on but it will show up in the same segment in the portfolio management segment.

Okay, Okay, great alright, thank you very much.

Thank you as a reminder of that is star one for any final questions.

Yeah.

And at this time there are no further questions. So I'll turn the conference back over to Shari hellerman for any closing comments.

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

Okay.

Thank you. This concludes today's call. Thank you for your participation you may now disconnect.

Ooh.

Hum.

[music].

Yes.

[music].

Yeah.

[music].