Q2 2021 GATX Corp Earnings Call
Today's conference is being recorded at this time I would like to turn the conference over to Shari Hellerman director of Investor Relations. Please go ahead.
Thanks, Nick.
Good morning, everyone and thank you for joining Gatx's 2021 second quarter earnings call.
I'm joined today by Brian Kenney, President and CEO.
Ellman Executive Vice President and CFO.
Paul Cheng Cheng Senior Vice President and Chief operating Officer of rail North America.
Please note that some of the information Youll 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 2020.
G H 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 2021 second quarter and year to date results.
And then I'll turn it over to Brian for additional comments on our performance and our decision to raise guidance.
Following Brian's comments, we'll open the call up for questions.
Earlier today.
<unk> reported 2021 second quarter net income from continuing operations of $5.5 million for 15 cents per diluted share.
This compares to 2022nd quarter net income from continuing operations of $37 million or a dollar of <unk> <unk> per diluted share.
Year to date 2021, we reported net income from continuing operations of $42 million or $1.17 per diluted share.
This compares to $84.2 million or $2.38 per diluted share for the same period in 2020.
The 2021 second quarter and year to date results include a net negative impact of $39.7 million or of $1.10 per diluted share related to an enacted tax rate increase in the United Kingdom and.
And a net negative impact of $3.4 million or <unk> <unk> per diluted share.
Related to debt extinguishment costs associated with an early redemption.
Both of adjustments are noncash events.
These items are detailed on page 13 of our earnings release.
And as noted in the release.
We are raising our 2021 full year earnings guidance to a range of for 30 to $4.15 per diluted share.
With that I will now turn the call over to Brian.
Yeah, Thanks, Jerry I'll spend a minute or 2 explaining why we raised our EPS guidance, even though the business conditions really haven't changed significantly from our expectations coming into the year.
The first of all of its the outlook for rail North America, that's driving the projected outperformance of our other business segments are performing largely as we expected, but I'll get to those of the meter.
Within the rail North America. We originally said, we expect relatively flat segment profit in 2021 compared to last year and the rationale was that we expected revenue to decrease by 35% to $45 million because of lease renewal rates would still be lower than expiring rates of 200 to 2021 and that has come to pass we.
You said there was a small risk the utilization due to the hyper competitive market. That's been created by the significantly lower utilization in our competitors' fleets.
Another prediction was that net maintenance expense would be up or down in that $5 million to $10 million range, depending on our ability to continue to the <unk>.
Recent operating improvements we have realized.
And that remarketing income would be substantially higher in 2021, as we continued to optimize the fleet and a strong secondary market and we expected higher scrap prices in 2021, so looking at our actual results in the first half as well as the current operating environment, it's pretty consistent with those original.
<unk> of that slow market recovery.
For the reasons for the higher guidance is that we now expect most of the items I just described to be at the positive end of the ranges we provided for.
For instance, looking at revenue both utilization and lease rates are at the higher end of the range, we predicted internally, but they are not significantly higher by any means.
Maintenance expense, we have operated safely and efficiently through the first half and we now expect spending to be at the lower end of the range, we provided and by the way of Sherri indicated Paul Tetterton Who's our Chief operating officer of rail North America. He has responsibility for rail maintenance network as well as the fleet. He is on the call and can answer any questions you may have about that.
Yes.
And then the last 2 factors our expectation of increased railcar sales in the secondary market is right on target.
And as I said, we did expect to realize higher scrap prices in 2021, but frankly, we had.
No idea they would go as high as $475 per ton and that's what we've seen recently.
So thus you can see that it's difficult to pinpoint any 1 factor that's driving the improved performance.
I'd characterize it as the slightly better market in rail North America than we anticipated across the board.
Strong commercial and operating performance on our part and so the net result is that we now expect segment profit of rail North America to not be flat, but to increase more than $20 million relative to last year.
Quickly touching on the other businesses.
<unk> rail international is meeting our expectations of significantly higher segment profit in 2021.
The COVID-19 resurgence in India has slowed them down somewhat but in general rail international is operating in favorable markets, they're seeing strong investment opportunities.
Net RPF our aircraft spare engine leasing joint venture they are operating as we expected in an extremely difficult market for international wide by the air travel.
Our expectation was that segment profit profit would be down $40 million or more from 2020.
And for now we're sticking with that estimate although I will say their performances of the most uncertain component of our guidance.
And we will likely remain that way until we start to see recovery in international Air travel.
And then lastly, the early returns on our Tri fleet acquisition of an extremely favorable take container prices utilization and lease rates are all increasing that obviously helps the performance of the existing fleet. We're also seeing strong investment opportunities there as well and we now anticipate the acquisition will perform a little bit better than we originally anticipated coming.
Into the year. So that's the rationale behind the increase in guidance. So operator, let's go ahead and open it up for questions.
Thank you if you would like to ask a question. Please signal by pressing star 1 on your telephone keypad. If you were using a speaker phone. Please make sure your mute function of turned off to allow your signal to reach our equipment.
Again press Star 1 to ask your question and we'll pause for just a moment to allow everyone an opportunity to signal.
And our first question comes from Allison <unk> with Wells Fargo. Please go ahead.
Hi, good morning.
I do want to ask about the maintenance expense it seems to be an area, where you continue to outperform the know.
Thank you, Brian you had pushed out to Paul to this but maybe kind of.
Kind of walk us through some of the changes that youre, making this NII I'm, taking the view that this isn't just maintenance getting pushed out to the right. It all of this is actually pure operational improvement just any color there.
Sure Allison this is Paul speaking and thanks for the question, we've really done a few things to try to structurally improve our maintenance cost.
We've invested in technology. So 1 of the things we put in place as an audit system, which allows us to take wasted repairs out of our processes and that's allowed us to measured on for example in hours per car basis dramatically reduce the amount of time, we're spending on each car, while maintaining safety and quality.
And we've been able to use that benefit then to create excess capacity in our shops, and we were able to drive more throughput through our shops as a result, and thus reduce our dependence on contract shops and of course, we can take advantage of that of economies of scale and the low marginal cost of production in our own shops. So I think to broaden the answer to your question those are all changes.
We can continue to capitalize on going forward, so while from year to year youre going to see different maintenance demand that's going to change the level of maintenance cost.
For a given level of demand we believe we have structurally reduced our cost.
Got it no. That's helpful. And then a question of lease term of just in terms of when I think about an improving environment you start to see that expand and that sort of stabilizes that somewhat of the mix in terms of the lease term at this point the average lease term.
Or is it still sort of just the uncertainty of that people are kind of pushing towards that lower that Laura time limit there.
So with respect to lease term ultimately lease term is the push and pull there is there is there is the what the market demand and there is what we target through our pricing.
And in general our philosophy for what we target on lease term is going to be as lease pricing rises above our long run expectation, we're going to target longer terms right now since the chunk of our fleet is still of pricing below long run expectations. We are generally very happy to keep terms relatively short.
Got it understood I'll pass it along thanks.
Okay.
Thank you. Our next question comes from Justin Long with Stephens. Please go ahead.
Thanks, and good morning, I wanted to follow up on lease rates in North America. It sounds like absolute lease rates have continued to improve sequentially here in the second quarter could you give us some more color around the magnitude of that improvement that you saw and any updated thoughts on the RPI.
For 2021.
So I'll take it in reverse order for the LTI, we're reiterating the guidance. We provided previously which is the range from negative 15 of negative 5%, but as we always talk about really thinking about absolute lease rates and how they are changing from quarter to quarter is really of a much more instructive way to think about the market conditions.
And we have seen.
From last quarter. The this quarter of sequential increase in the high single digits. Obviously, that's going to vary by car type and we do see continued momentum upward from here out as the.
The market continues to firm.
Okay, and I think the prior guidance assumed a mid single digit sequential increase in each quarter throughout the year. So would it be fair to say debt as we look forward to the back half of the year.
That expectation is higher so maybe a high single digit increase in the third and fourth quarter or how should we think about that.
Yes, Justin I think it's hard to get that precise certainly directionally, we expect to see the trend that we've seen so far continue but we've been in the mid single digits. The high single digits it'll be it'll be somewhere in there we think going forward and then as far as the LTI goes.
As you know, it's really hard to draw any conclusions from a single quarter because of a small number of transactions can move it likewise, it's really hard to predict what it does in any single quarter, which is why we still feel like that that negative 5 to negative <unk> 15 range is correct.
Okay, and then finally on the remarketing income in North America, I think the prior guidance was for an increase of $35 million to $40 million. So I just wanted to make sure. The that was still the right range, maybe the more kind of favorable end of that range is what youre expecting.
And kind of second part to the question, Brian I'm curious if you could comment on the acquisition market and where Youre seeing the best risk adjusted returns as you look at your debt different investment opportunities.
Yes, so I'll start with the guidance and then kick it over to Brian for the opportunities and we are still thinking about that same range as Brian went through in his opening comments talking about basically in rail North America. The offsetting factors were an expectation for a decrease.
Renewal revenue Im sorry <unk>.
<unk> and an increase in asset disposition gains, we haven't really moved off of that asset disposition gain number and the revenues doing a little bit better than expected. So that's the that's the offset on the.
The M&A side really depends on the region, obviously I can't discuss individual opportunities there as some of opportunities out. There. Obviously, we will look at everything or at least the attempt to look at everything but try to maintain our discipline in north American rail is probably a little bit of a change for more.
<unk> said in the past is think of it.
Fairly unlikely right now mostly due to the fact that the large portfolios that may come up for sale are likely to be of lower quality.
But people are still seeking a high price that certainly we're not willing to pay so I'm not optimistic.
<unk> about that.
The International rail share you saw the press coverage that the SNCF is apparently entered into an exclusive agreement with CDP Q and dws over the sale of our labor outside.
Outside of that deal there could still be some opportunities for smaller fleets. So we're still plugging away.
But.
Tom or Paul can chime in but over the last year or so it's been a case of the competition on portfolio acquisitions.
As much of the spend potential sellers coming to terms with the real value of their fleet I think that's the real issue.
Okay I appreciate the time.
Thank you. Our next question comes from Matt Alcott with Cowen. Please go ahead.
Good morning. Thank you I know you guys Havent changed your remarketing.
Income for the for our assumptions for the year, but.
A lot of the.
The assumptions you had coming into the year has trended towards the positive.
End of the range.
Does that bode well for <unk>.
Secondary market valuations in the scrapping income.
Isolated from your guidance, but in general as the market question do the improving fundamentals in the industry as a whole bode well for.
The secondary market sales.
So Matt I'll start with <unk>.
What were thinking of and then of Paul has any additional commentary on color on the market. You can provide that we came into the to the year expecting it to be a strong environment for secondary market sales and it is.
As you know, though the timing of the individual.
<unk> sales can be difficult to predict and historically has been pretty lumpy.
What happens in a given quarter isn't really a great proxy for what's going to happen for the year as a whole we still feel like it's a strong market our original guidance and our updated guidance both reflect that expectation.
Okay, and then Tom.
Tom.
Is it your fleet seems to be pretty close to optum.
Optimal with utilization.
The increased remarketing activity.
Even if market conditions warrant.
Net sales you have any material portions of your fleet that are.
That could be viewed as some optimal that could be candidates for all of the asset disposition.
So this is Paul I'll jump in and say.
In terms of dispositions we're always.
Making an economic value of evaluation and looking at what the whole value of our fleet is economically of versus the sale of value and so.
Quite honestly, it's not necessarily an asset attractiveness play it's simply a question of whether the market value of an asset more highly than we do and that could be true frankly of an asset that we otherwise view as attractive just as it can be true of an asset that we otherwise view as unattractive. So for us really the process of evaluating what to sell into the secondary markets just has to do with the relative.
The valuation of the of the market view versus the Gtx hold view.
That makes sense and then just 1 last question Paul and Tom.
Over the last since the larger bigger picture question over the last 5 years lease rates have really been pretty anemic.
For a couple of brief periods maybe.
And that's because we've had above the industry builds for almost a decade now and then you had declining of rail traffic and <unk> implementation all of these dynamics seem to be reversing in the favor of leasing so.
Is it unreasonable to think that we're entering a period of.
Favorable lease rate comps for the.
The next couple of years.
So what I will say is certainly some of the the favorable thing you've talked about have underpinned some of the recovery in lease rates.
But it's very difficult to project out to long term as we've seen.
In this industry.
<unk> had quite a bit of cyclicality over time with various investors entering in various kind of boom and bust cycles within the railcar manufacturing what I will say right. Now we are seeing recovery for all of the reasons, we've talked about the lease rates higher scrap prices higher car costs.
Some recovery in carload demand. So certainly we're seeing a positive trend in lease rates right now, but obviously it all depends on how those factors play out over the next few years.
To see whether that whether that trend continues and to what degree.
And Matt the other thing I'd say is particularly comparing it to the last upturn.
Last time, we had the additional catalyst of crude by rail we've talked before about how we expect this to be more of a slow and steady increase because we don't see something of that magnitude coming along the time. So directionally as Paul indicated we expect continued improvement, but probably not.
The <unk>.
Slope of that you saw on lifestyle.
Got it thanks, Tom and then just 1 final follow up.
Can you provide any more color on the lease rate improvement.
<unk> or type I think.
The freight cars were outperforming maybe tank cars, but is that still the case.
Yes, so what I would say is we're not going to get into specifics by car type.
But in general certainly certain freight cars and I would describe them as the non overbuilt and non energy related freight cars have been the leaders in the lease rate recovery.
And when I say non overbuilt the cars that didn't get built in huge numbers during the during the wave of bills that accompanied the the crude them. So so that's really where we're seeing the best lease rate performance in the laggards are really some of the more energy related car types that we've talked about.
Thank you very much.
Thank you. Our next question comes from basketball majors with Susquehanna. Please go ahead.
Thanks for taking my questions back to lease rates could you give us a little bit of a snapshot of where you're tracking across the fleet relative to your long term average and how close for getting to bad debt.
Kind of inflection point.
Sure I'll start that and other it may chime in but.
Across the fleet I would say, we're generally going to be 20% to 30% below long term rates, but again it varies a lot by car type I referred to kind of some of those non overbuilt non energy related freight cars and those are parts of the fleet, where we are frankly at or above long term.
Levels.
In contrast, some of the more energy related car types that are still challenged.
Because of historical overbuilding other factors those would be below that level, but the 20 to 30 below below long run levels is a good rule of thumb broadly right now.
And on capital deployment.
You last quarter.
You surprised us a bit with the amount of capital you're able to put to work directly in the aircraft engine leasing business.
Have we seen most of that or are there some more opportunities either with roles or with other manufacturers that you're seeing potentially attractive risk adjusted return of just any anything on that Brian.
To what you're able to gain <unk> would be helpful.
Yes, Bascom, so youre absolutely right when we talked about that we've talked about being able to deploy capital for our own account, but still managed by our ERP up for the best engine types with the bus products on long lease terms and we indicated that we continue to have appetite for that type of investment.
<unk>.
It remains to be seen how much of that is available in the market, but it's certainly something that is attractive to us and we're going to continue to pursue.
Thank you for that.
Lastly.
Similar question, but on the truck fleet acquisition are you seeing pockets of opportunity there to expand that fleet inorganically.
Could that be a needle mover midterm or long term of you still kind of in the we need to understand this business before we can get more aggressive stage of 1 of you. Thank you.
Well, it's a good question Theres no question that investment volume has picked up a.
A lot of this was just good timing on our part look I should say we bought it at the beginning of the year almost immediately take container prices started increasing you saw greater demand just as the world economy industrial production picked up utilization as the increase lease rates are starting to follow it and we are seeing really good investment opportunities there so I would.
Anticipate that we're going to outperform what we originally thought and investment this year.
And I don't think I think we said it would be 10% dilutive this year it will do better than that.
So we're very excited about and we're also very excited about the co investment opportunities, there's a lot of similar customers.
And we've had a couple of early wins on that so.
It's very pleased with that acquisition, so far but as far as the investing aggressively.
I don't think we're there yet it's just organic investments that's going very well right now.
Thank you for the time.
Thank you and our next question comes from Justin Bergner with G. Research. Please go ahead.
Good morning, Brian Good morning, everyone on the team.
Good morning.
A couple of.
The cleanup questions most of my questions have been asked.
The U K tax rate increase you indicate that was non cash, but 1 of the economic effect of that for.
The business or any of the.
Of the assets sort of on the books of business.
Okay. Justin so specifically what that is is the UK announced that the statutory tax rate would increase from 19% to 25%, but not effective until April of 2023.
So even though the tax rate will not impact current operations until 2023, we need to increase our deferred tax liability based on the new tax rate. So that's why it's a noncash item in terms of how it's going to affect our operation. The primary business that is related.
To the U K is the Rolls Royce joint venture and that continues to be an attractive business to us and doesn't really change the strategic approach to it.
Okay, Great that's helpful.
And then.
Your interest expense looks like it stepped down sequentially quarter on quarter pretty materially is that mainly just refinancing the debt stack at lower rates or was there.
Change sort of in the amount of cars debt.
Sublease.
Versus 1 directly.
Yes, so maybe what you are looking at is the operating lease expense, which had a favorable variance because we exercised.
Buyout on some of the sale leasebacks.
Okay that might be so that would that would sort of the the major driver of the lower sequential interest expense.
For the business.
Yes, Justin.
We also paid down about $500 million of debt over the course of the second quarter.
Okay.
Got it and then.
With respect to the.
Tank container business.
I guess, you're very pleased with the operating performance, which is great.
I understand the $5 million of loss.
Segment profit loss in the sort of other segment in the business.
In the second quarter, and how do I juxtapose that against sort of the strong performance in the.
Tank container I think thats the debt extinguishment costs.
Okay.
Okay, that's embedded in that segment, okay great.
Great and then.
Maybe lastly, you talked about.
The major driver of are you sort of talked about the different factors driving higher sequential lease rates and you started off with higher of sort of costs and higher steel prices of scrap prices.
So when you're trying to suggest that the.
Sequential acceleration in lease rates as being more driven by sort of the asset value of an operating cost considerations than buy.
The demand tightening considerations of the current point in time.
Sort of inferring correctly from your comments.
There are actually multiple factors so demand is rising and if you look at year over year carloads.
That can clearly indicate the demand is rising we are also benefiting from higher steel prices, which really has 2 benefits number 1 you see a greater level of scrapping activity, which means more card leave the industry fleet and you also see the price of new cars hires of the new car alternative to an existing car is higher which raises the value of an existing.
The car and then finally, there has been a bit of of velocity slowdown of the class 1 railroads and of course, we all know that as velocity slows the.
Need for cars goes up given for a given level of traffic. So all of those things are underpinning the improvement in lease rates that we've seen.
Great. Thank you.
Thank you and once again, if you would like to ask a question. Please press star 1.
Next we will go to Barry Haimes with Sage asset management. Please go ahead.
Thanks, so much for taking my question.
Actually I had 2.
1 is and you just alluded to the.
The higher new car costs because of the higher steel and the question is and I'm just sort of looking for order of magnitude how much wood lease rates have to go up to justify buying of new current and the fleet.
To make that.
Good economics for you guys and then second question is.
I'm guessing following on your earlier comments that if we were the.
2 of the storage update by car type debt.
Probably still a fair amount of excess energy related cars, but the other car types are back to normal levels. So maybe just an update on on the storage tanks.
So I'll start and then let Paul add some additional color.
In terms of attractively investing in new cars, we're doing that right now the way that we look at new investment is we have lots of experience in this industry. We have a really good handle for what's going to happen over the long term to the lease rates for a car and the cost.
Maintain the car. So we're always looking at this as a long term investment. So in this environment. There certainly is the ability to attractively invest which we've done both in inside of our long term supply agreements and outside of them you may recall in the first quarter we commented.
On reaching agreement on over 1000, new railcars outside of the supply agreement. So it's been an attractive.
Investment environment, and then I'll take this is Paul speaking I will take the storage question and you are correct that certainly the bulk of the cars that are still in storage across the industry are in some form of fashion tied to the energy markets.
The incorrect to say that there is complete full utilization of all other car types, but certainly the significant majority of the industry's idle cars or in some way tied to the energy markets.
Great. Thanks, very much appreciate it.
Thank you and that will conclude today's question and answer session. Ms. Hellerman at this time I will turn the conference back to you for any additional or closing remarks.
I would like to thank everyone for their participation on the call today. Please reach out to me with any follow up questions. Thank you.
And this concludes today's call. Thank you all for your participation you may now disconnect.
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