Q1 2021 GATX Corp Earnings Call
Ladies and gentlemen, good day and welcome to the G. H T X 2021 first quarter Conference call. Today's conference is being recorded at this time I would like to turn the conference over to MS. Shari Hellerman director of Investor Relations. Please go ahead ma'am.
Yeah.
Thank you David.
Good morning, everyone and thank you for joining Gatx's 2021 first quarter earnings call.
I'm joined today by Brian Kenney, President and CEO.
And Tom Ellman, Executive Vice President and CFO.
Please note that some other 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 earnings release and those discussed in Gatx's form 10-K for 'twenty 'twenty.
G H T X assumes no obligation to update or revise any forward looking statements to reflect subsequent events or circumstances.
Before I provide a quick recap of our first quarter results I'd like to remind everyone that our annual shareholders meeting is scheduled on Friday April 23rd at nine a M central time.
And we will be held in a virtual only meeting format.
Earlier today.
G H T X reported 2021 first quarter net income from continuing operations of $36 5 million or a dollar in two cents per diluted share.
This compares to 2021st quarter net income from continuing operations of $47 2 million or $8 33 per diluted share.
Our first quarter results are consistent with our expectations coming into the year.
At rail North America.
Operating environment remains competitive due to an ongoing market oversupply of railcars.
Well North America fleet utilization was 97, 8% at quarter end.
And our renewal success rate was 77 seven per cent.
During the quarter.
Rate change of G. H T X as lease price index was negative 18.1 per cent.
With an average renewal term of 30 months.
We continue to successfully place new railcars from our committed supply agreements with a diverse customer base.
We have placed all 8950 railcars from our 2014 Trinity supply agreement.
And over 'twenty 300 railcars, how about 2018 Trinity supply agreement.
Additionally, we have placed nearly 5900 railcars from our 2018 Greenbrier supply agreement.
Virtually all supply agreement deliveries for 2020, one have been plate.
As we indicated in our release.
We continue to look for opportunities to grow our north American asset base.
Order to serve our customers with high quality railcars.
Today.
Our commercial team has placed over 1000 additional railcars outside of the supply agreements can be delivered by mid 'twenty 'twenty two.
We also capitalized on a healthy secondary market to optimize our fleet through railcar sales generating remarketing income of approximately $16 $4 million in the first quarter.
Within rail International G. H T X, while Europe continues to see steady demand across the fleet with utilization remaining high at 98, 2% at quarter end.
Well International is investment volume was over $44 million during the quarter.
J T X rail Europe N G H T X Rural India continue to expand and diversify their fleet.
Turning to portfolio management.
First quarter segment profit was down year over year, primarily driven by the Rolls Royce and partners finance affiliates.
As COVID-19 continues to negatively impact global passenger air traffic.
Capitalizing on challenging market conditions to acquire assets with promising growth opportunity.
In January of this year, we commenced a program of direct investment in aircraft spare engines that will be managed by our P. F.
Our year to day investment total in this program is approximately $350 million.
All engines have been placed on long term leases with strong airline customers.
And those are our prepared remarks.
I'll hand, it back to the operator, so we can open the line for Q&A.
Thank you ladies and gentlemen at this time the floor is open for your questions. If you would like to ask a question you may do so now by pressing star one on your Touchtone phones, if you're on a speaker phone. Please make sure that your mute function is disabled to allow your signal to reach our equipment again, if you would like to ask a question. Please press <unk>.
Star one now.
And our first question comes from Allison the Pollinium with Wells Fargo.
Hi, good morning.
Just going back to the L. P. I you know I know, it's a mixed number but you did note in our really you said it was primarily due to the energy related car types is there a weighted I stuck that person is sort of energy versus others at this point or is it too challenging.
Hi, Allison this is Tom.
Now as you know when we provide information on the L. P. I, we try not to get too granular because it's really trying to.
Indicate a an overall look at what's going on from a market perspective.
And our guidance coming into the year was 5% to 15% and that remains unchanged. We always talk about not reading too much into a single quarter's LTI since a small number of unusual transaction can always cause some volatility quarter to quarter.
Our over our expectation for the remainder of the year are.
Still continues to be five to 15 per cent for the full year of course across.
L. P I market lease rates, whatever you want to talk about the energy sector continues to weigh down rates.
Got it so I mean, and maybe asking another way should we just assume that it was a little bit more energy weighted in terms of the renewals this quarter.
The balance of the year to get back up there into that five to 15.
Allison I would not necessarily draw that conclusion about the specific waiting this quarter versus the remainder of the year.
Got it got it and then just in terms of a general market trends in lease rates. You know is there any way to kind of help us understand you know how far off of normal we are today relative to what youre renewing right now.
Sure lease rates for most car types remain well below long term averages with that the non energy related tank cars down about 15% to 25% versus long term averages non energy related freight cars are down a bit more than that and then the energy related railcars continue to be down 50 per.
Were sent or more versus long term averages.
Got it thank you I'll pass it along.
Okay.
Thank you. Our next question comes from Justin long with Stephens.
Thanks, and good morning, and just to follow up on that line of questioning I know in the release you talked about sequential improvements in lease rates debt, maybe Tom could you.
Put some order of magnitude around that comment for both tank and freight and what you've seen year to date.
Certainly.
So the market lease rates for most tank and freight car types were up very modestly again this quarter I would say an increase of up to about 5% for most car types, whether it's tank or freight and as you alluded to Justin. This is the third quarter in a row that we've noted small lease rate increases in each of the.
Quarters, it's been somewhere in that five per cent range.
Okay. That's that's helpful and I know the full year guidance didn't change and the comment was made that the first quarter results were in line with your expectations coming in today to the year last quarter, you gave some fairly detailed guidance by segment.
Notable that's changed within some of those assumptions by segment either positive or negative since January.
Our adjusted no really.
The first quarter's proceeding pretty much as we expected. So there's nothing that I would point to in terms of change in our viewpoint coming into the year.
Okay, and then last one for me is on the acquisition environment I know you had stepped up debt.
Investment dollars into the spare engine business and you alluded to that but just thinking about the pipeline for deals specifically in the railcar space could you talk about what Youre seeing out there are you seeing activity pick up or are you seeing some some larger deals come to market.
A general update would be helpful.
Adjusted its Brian you know Theres never can discuss individual opportunities, obviously, but I think.
Some of the larger portfolios that would be willing to sell or still trying to come to grips with the valuation of their fleets. So I'd say, that's where the state of the market is.
Okay I'll leave it at that I appreciate the time.
Thank you. Our next question comes from Steve O'hara with Sidoti <unk> Company.
Hi, good morning, Thanks for taking the question.
I'm just curious I mean, I know you guys you redeemed the bond and the first and second quarter, but.
Cash on the balance sheet and you know, obviously, a corresponding debt increased significantly.
Is there.
Other you know things that are being worked on or is that something that.
You would expect to deploy or you do expect to deploy.
Maybe you could talk about how you expect to deploy it right now.
Yes, Steve so as we've been talking about for a while we think this is a kind of environment, where there can be attractive investment opportunities. We talked about a couple of those in our press release, specifically the debt investment in the aircraft engines and then some of the agreements we reached on placing non supply agreement.
Cars, but we did have a big cash balance at the end of the first quarter of about $960 million, but it's worth noting that this is already come down a bit as you know the capital markets have been very favorable in February we wanted to take advantage of the exceptionally low lease rates. We were seeing so we went to market with the two tranche issuance.
We issued $400 million of 10 year notes with a coupon of one 9% and 300 million of 30 year notes at a coupon of $3 one per cent.
Much of the proceeds from those issuance already have or will be used to pay off higher debt on April one we redeemed $300 million of 485% notes that were due in June. We also provided notice that we will redeem $150 million of five six to five retail notes due in 2016.
Six when they become pre payable at par on June 1st. In addition in early April we prepaid nearly a $135 million of outstanding Bank term loans. So given our planned investment volume and another $300 million of debt maturing in November will likely raise additional debt later in the year. So in addition to the investment.
<unk> It really is noteworthy some of those redemptions coming up.
Okay.
Thank you and then just like you'd mentioned in the press release about the.
Non supply agreement cars.
Can you just explain that.
To me a little bit.
Knudsen.
From what I can tell but I didn't know if there's something that maybe maybe it's something that you guys have pretty regularly.
Yeah. So there's three different ways that we add cars to the fleet. During the normal course, one is through the supply agreement a second one is through our spot business new cars, where we simply go out and get quotes from builders and then.
Award goes to.
The builder that we get the best deal from in place those with the customer and then acquiring existing fleets existing cars, usually with leases attached.
And this environment has been has been good to do that second one so we wanted to comment on some of the investment.
It's worth noting that those are all non energy related cars.
Okay. Okay.
And then maybe just on the.
On our Rps are with the direct investment.
Is that what's in the lease revenue within our.
Portfolio management now is that the direct investment and then.
You know do you still kind of think or your thoughts still the same around the portfolio management.
Guidance that you gave last quarter for the full year, given the increased investment or is there anything else kind of at play.
Yeah, Steve So we noted last quarter that we expected to do more of this type of investment. So yes. The additional investment. It was was contemplated in the guidance that we provided and as far as the financial statements. Yes. The majority of that lease revenue that you've seen in the portfolio management segment is related to those.
Engines.
Okay, Alright, thank you Brian.
Thank you again, if you would like to ask a question you may do so by pressing star one. Our next question comes from Justin Bergner with G Research.
Oh, good morning, Brian Good morning, Tom.
Good morning, good morning.
First question for me is just to build on the questions about the.
Direct engine investment so was that $3 50, all complete as of March 31st and sort of how should we think about.
Your intentions and capabilities to further expand at that level or above the current 350.
Yes, so I'll start and then let Brian add to if he has anything but.
All $350 million of that was for the first well was completed in the first quarter and as we mentioned last quarter. Our intention is to invest in the most attractive engine types with the best customers on long term leases. So it's difficult to predict exactly how much more of that we'll be able to do.
But it's certainly our intention to continue to look for that kind of business. Yeah, just where we're investing is great equipment really attractive cost of the hedges are on long term leases.
You had that hooked to the service component of the total care packets roles and this is the strongest airline credits in the world and the lease rates are attractive. There is conservative residuals. This is just great business for G. H T X. The we'll try to do as much as we can without relaxing those investment parameters.
Okay.
This might be an unusual question I'm not sure if you can answer it but I mean.
Are these investments accretive initially or is the intention more that youll lock up a lease and then.
Five to 10 years later.
The environment will have improved and.
There'll be much more accretion.
Yes, so as Brian noted these are incredibly attractive economically, but theyre also accretive from year, one from an accounting perspective.
That's a great point, that's a great point, we always look at whether it's railcars engines, whatever we'll always look at the best way to optimize the value. So.
It's a good question.
Okay, and just a quick one here no repurchases in the quarter right.
That's correct.
Okay, and then lastly, clearly theres a lot of activity going on with the tier one rails, including this morning with Canadian Nationals.
Overbid for Kansas City Southern.
How do you view.
What a transaction between either of the Canadian rails in Kansas City, Southern could mean for.
Your business and the general.
I guess railcar supply chain.
I can take that Justin from an equipment.
With respect to lets start there first on the on the.
On that level, if the deals approved the first steel our exposure to any fleet consolidation concerns as a result of the merger or very small I think between C. P. A K C. S. We have less than 900 cars on lease to the two of them combined.
Let's see and it's probably also less the 900 to them directly. So it's just not a material equipment exposure for G E checks.
I think Youre also asking about the bigger picture and.
You know one of them remain kind of neutral here, but any merger that has the potential to create new rail traffic and potential new car demand is obviously going to be a good thing for diversified less source such as G. A T X. So.
Well, we'll see what deal goes through whether it goes through and which one and we'll have to wait to see if that actually happens but.
Potentially a good thing for car demand.
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Okay. Thank you.
Yeah.
Thank you again to ask questions Star One our next question comes from Matt Alcott with Cowen.
Good morning, Thanks for taking my question can you guys talk about.
What type of markets what type of cars woods.
Benefit if theres an infrastructure bill.
Yeah. So the infrastructure Bill that's been announced that I think it's two trillion dollars. There is north of 600 billion. That's go into rail systems roads bridges imports.
But almost all of that rail spending is earmarked for passenger rail so it's public transit it's Amtrak.
And that's great greater praying highways bridges roads ports, that's that's sorely needed, but it's really how they pay for it that we'll be watching.
But there's not anything really earmarked for freight rail transportation, it's more elsewhere.
Uh-huh, but some of the building materials like I would assume that maybe there's some demand for open hoppers or even potentially conversion of the <unk>.
Frac sand cars to cement and industrial sand could could we expect any of that activity to happen.
Yes, so Matt you know it obviously, it's not the bill is not passed and not sure. What the finished form will be so it's it's speculative to think about which individual car types, but certainly if you're building steel and aggregates and.
And any other feedstocks related to those will would certainly benefit if there's increased infrastructure spending so we'll see how it plays out.
Uh-huh.
That makes sense and income just one last question on industry utilization I think the number is 77 per cent is right now as of this month.
The best it's ever been I think it was 90% at the height of the crude by rail.
That time, which was a crazy time.
Do you have a view on what full utilization.
Is I mean it is at 85 per cent is at 90 per cent is 80 per cent.
Yeah, Matt.
We've talked about this before it's really hard to to.
Hone in on exactly what that might be it's certainly lower than where it is today at you know at the end of the quarter at.
About 23%.
A good gas might be in the mid teens somewhere, but but honestly. It's it is a little bit of a guess we have to we have to see it all play out.
Mhm and then.
Just as a quick reminder, on the uncle underlying assumptions of your of your guidance.
You know the railroad cover has been mainly intermodal and grain, it's actually down ex those two.
Is that what you guys assumed and when you gave guidance last quarter.
Yes, so so what we've been talking about and alluded to it on the first question is we've seen three quarters in a row of a small improvement in spot lease rates a lot of the industry metrics. You just talked about are idle car count are improving loadings have kind of hung in there.
<unk> seen a big increase in and.
And any kind of capacity or anything like that it looks like at least right now it'll be slow and steady.
So that's that's what we modeled in an expectation that that will continue throughout the course of the year you know the uncertainties around what happens with the degree and nature of the Covid recovery as some of the reason for the the range that we provided but again as I noted through the first.
Quarter things are proceeding largely as we expected.
Got it thanks, Tom Thanks, Brian.
Okay.
Thank you. Our next question comes from Justin Bergner with G Research.
Oh, good morning, and thanks for the follow up.
One topic that I don't think it was touched on was the environment for scrapping cars I saw that you scrapped about 1000 cars leading to.
Income of about 5 million, although there might be some other small puts and takes in that category. So just maybe is that maybe comment on is that a pace that is sustainable or you mainly scrapping cars that are fully depreciate or you're scrapping some cars.
That's still have them.
Now more than sort of residual.
Value on the on the balance sheet.
Yes, so the process that we use when scrapping cars is consistent regardless of the market or or scrap prices. When a car comes into repair facility or we look at the expected remaining cash flows from continuing to operate that car in terms of what lease rate is it like.
Earn over its remaining life life, what's the cost of the repair and then compare that to the scrap proceeds so what naturally happens when scrap prices are higher is it tilts you makes you a little bit more likely to to scrap cars and scrap prices have been in the low four hundreds for most of 2021.
Versus the low to mid two hundreds for most of 2020, so certainly that increase in scrap price is making it relatively more likely that we scrap a car having said that it's important to note that this number can ebb and flow quarter to quarter simply based on what our what cars come into the repair.
<unk>.
Okay understood in terms of the income just to understand that.
I guess my.
Minor line item, which is.
Perhaps now a little bit less minor than normal.
Guess, it's non remarketing.
Net gains and so.
That $5 1 million, which probably is mostly scrappage is the gains across the thousand.
Cars are so that you scrapped in the quarter and it would be the gains relative to whatever residual book value, which I assume would include salvage estimates salvage value would be on the balance sheet.
That's correct Yep Yep, that's as you indicate that that number is primarily scrap and that's exactly how you calculate the game.
Okay, and then lastly has there been any change to your view of gains on asset dispositions in North America from when you.
You know gave your outlook.
The start of the year.
No there hasnt.
As you know from following US a long time that number can vary quarter to quarter. So we were much more look at.
What the expectation is over the course of the full year and what we outlined coming into the year that it might be $35 million to $45 million higher than last year.
Remains our expectation.
Okay. Thanks for the follow up.
Thank you. Our next question comes from Steve Barger with Keybanc capital markets.
Good morning, guys. Thanks.
Weighted question on on the steel can you talk about what you're seeing for input cost inflation for steel components or anything else and are there any issues with parts availability.
Yes, so as indicated we buy cars, both on the spot market and through our supply agreements.
The majority of which is through the supply agreement.
So certainly the increased price of steel is is increasing the cost of the car across the board as far as any kind of challenges with.
Maintaining our delivery schedule, we're receiving delivery of cars as expected.
What about parts availability in the repair shops any issues.
We're proceeding as expected there as well.
Okay and last one just any broader comments on how inflation could affect the lease fleet in terms of asset value of the installed base what that means for rates does this slow down your desire to buy cars on the spot market or.
Anything else that comes to mind.
I mean in general higher inflation is good for hard asset owners like Gatx's, it's historically been our friend.
Understood. Thanks.
Our next question comes from Steve O'hara with Sidoti <unk> Company.
Hi, Thanks for taking the follow up.
Just looking at the renewal term Ah I think it was 30 months in the quarter I mean, it seems like it's been fairly low for a while what's the typical.
How do you think about a typical cycle in terms of.
How long that last where you guys typically.
You know keep that term short versus kind of push it <unk> mean, it seems like it's been like that for a while I mean, obviously that wouldn't necessarily mean, it would have to pick up eventually or soon but I'm just kind of curious how you think about it.
Yeah. So as you point out the term is relatively short and at the short end of what we see here.
Historically during the stronger parts of the cycle, you'll see that number up over five years.
And it really has to follow.
First increasing utilization in the industry, which is followed by increasing lease rates and then the last one as you start to see that that term extend a bit.
So so calling the number of years that it stays relatively short is just another way of calling the length of the cycle and as indicated our expectation coming into the year was we'd continue to see that slow and steady improvement in lease rates that continues to be our expectation.
But given how far we are from historical averages I wouldn't expect a big change in net term over the course of this year.
We'll see you know as the recovery continues how that eventually lengthens.
Okay. Thank you very much.
Yeah.
Thank you at this time, we have no further questioners, so I'll turn it back to our speakers for 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.
Ladies and gentlemen that concludes today's presentation. Thank you for your participation you may now disconnect.
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