Q3 2021 GATX Corp Earnings Call
Good day and welcome to the G. A T X 2021 third quarter Conference call. Today's conference is being recorded at this time I would like to turn the conference over to Sherri Hellerman director of Investor Relations. Please go ahead ma'am.
Thank you David.
Morning, everyone.
And thank you for joining Gatx's 2021 third quarter earnings call.
I'm joined today by Brian Kenney, President and CEO.
Tom Ellman Executive Vice President and CFO.
Bob Lyons Executive Vice President and President of rail North America.
Please note.
Now 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 earnings release.
Discussed in Gatx's Form 10-K for 'twenty 'twenty.
D. A T X assumes no obligation to update or revise any forward looking statements to reflect subsequent events or circumstances.
Earlier today <unk>.
A T X reported 2021 third quarter net income from continuing operations of $48 1 million or $1.11.
<unk> per diluted share.
This compares to 2023rd quarter net income from continuing operations of $48 2 million or $1 36 per diluted share.
Year to date 2021 net income from continuing operations was $82 1 million or $2.
Eight cents per diluted share.
This compares to $132 4 million or $3.74 per diluted share for the same period in 2020.
The 2021 year to date results include a net negative impact of $39 7 million or a dollar churn for.
Diluted share.
Later to an enacted tax rate increase in the United Kingdom.
And that negative impact of $3 4 million or nine cents per diluted share.
Attributed to debt extinguishment costs associated with an early redemption.
The 'twenty 'twenty third quarter and year to date results include a net negative.
Impact of $12 3 million or 35 cents per diluted share.
Related to the elimination of a previously announced tax rate reduction in the United Kingdom.
These items are detailed on page 12 of our earnings release.
Now I'll briefly address each segment.
The operating environment for rail North America continue to steadily improve in the third quarter.
Rail North America's fleet utilization increased to 99, 2% at quarter end.
Our renewal success rate was 84%.
Reflective of the strong execution by our commercial team, that's well, it's gradually improving demand for.
For most car types.
For the fifth quarter in a row absolute lease rates increase from the prior quarter.
The third quarter renewal rate change of Gatx's lease price index was negative eight 1% with an average renewal term of 32 months.
We continue to.
To successfully place new railcars from our committed supply agreements with a diverse customer base.
We've placed all 8950 railcars from our 2014 Trinity supply agreement.
And over 2800 railcars from our 2018 Trinity supply agreement.
Additionally, we've placed over 6100 railcars.
2018, Greenbrier supply agreement.
Our earliest available scheduled delivery under our supply agreement is in the second quarter of 2022.
The secondary market for railcars remains active.
Rail North America's third quarter Remarketing income was $14 6 million.
Causing total remarketing income for the year to $63 million.
Within rail international.
G. A T X rail Europe N G E T X Rural India maintain high fleet utilization at quarter end.
Demand for railcars remain robust.
Rail International's investment volume.
Volume was approximately $41 million during the quarter.
We continue to take delivery of new cars and grow our fleets in Europe and India.
However, the pace of fleet growth in both regions. This year, that's been negatively impacted by COVID-19 related delays a railcar manufacturers.
Our portfolio management segment is performing as expected.
The world's voice M partners finance affiliates continue to operate in a challenging environment as global air passenger volumes remained significantly below 20 and 19 levels.
Finally as noted in the release.
We continue to expect.
2021 full year earnings to be in the range of $434 50 per diluted share.
Excluding any impact from tax adjustments and other items.
And those are our prepared remarks.
I'll hand, it back to David So we can open it up for Q&A.
Thank you if you would like to ask a question. Please.
Please signal by pressing star one on your telephone keypad.
If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
Again press Star one to ask a question.
Well pause for just a moment to allow everyone an opportunity to signal for questions.
We'll take our first question from Allison Pollinium with Wells Fargo.
Hey, good morning.
A question around the lease portfolio, you know obviously at least in absolute lease rates trending in the right direction, but is there any you know is there a way to kind of quantify what percent of your fleet is still struggling with some of the overcapacity.
Capacity or just lagging recovery issues there in terms of like what's below and what's you know kind of above where you think you should be at this point.
Good morning, Allison its Bob Lyons I'll take that one yeah, Sherri referenced for the fifth quarter in a row, we had some sequential lease rates improve.
Fleet wide basis is probably in the mid single digit range tank, a little bit better or better in the third quarter than freight.
But in general things moving in the right direction.
I think yeah as you know our fleet is very very highly diversified so we're not skew.
If any one particular car type.
You know some of the more challenged car types continue to be the culprits, we've talked about in the past whether it be coal or small cube covered hoppers and quite frankly, our exposure there is low.
So as we March forward and the market continues.
<unk> move, which it is yeah, we'll take full advantage of that and we'll see the opportunity to turn more of our fleet into positive territory.
Thanks, and then just you guys have always put out that indicator of the relationship between velocity and railcars.
Is there in it being added to the network.
Doing brick you know given the challenges you know it.
Is that something we should be mindful of or is there something different in this environment that maybe that correlation doesn't hold true you know into 'twenty two.
Well I think with all the global supply chain issues. Some correlations are being broken all over the map, but in general.
That word out lower velocity tends to cause an uptick in the need to move a fixed amount of Av.
Great.
No.
The fact that the class ones are still somewhat velocity challenge, a little bit better than that in the third quarter.
Second, but still challenged on that front, yeah that does cause some uptick in demand.
What I would say is that tends to be relatively short term and what we want overall is for the railroads to operate it.
Very efficient levels. So that is the mode of choice.
For our.
Our customers.
If theres significant congestion significant problems yadkin caused an uptick in demand for cars, but that tends to be short lived.
Got it and then.
I'm sorry go ahead.
I was just going to say the rule of thumb I think you're referring to was the old one mile per hour is about 50000 cars.
Then.
But the really important thing to note there is that is going to impact.
The car types that move in unit train service more than car types that move in manifest service, which is the bulk of Gatx's fleet. So if youre thinking in terms of a return to normal.
The tank cars in the specialty covered hoppers that that make less trips would be impacted less by that than car types like intermodal that are much more active on the railroad.
Got it that's helpful.
And then just one last question on the rail pulse JV that Gtx has entered.
Dragging a lot of folks rethink.
Rethinking supply chain, just given some of the challenges you know any update in terms of where you are with that JV at this point.
Sure while we're encouraged by the involvement from our.
Partners as you know, there's five of us that were seed partners and rail pulse.
Ourselves.
You know here in Norfolk, Southern GSW Trinity in Watsco.
And we're definitely as I said encouraged by the progress made today were heavily involved in identifying the right type of platform and infrastructure to us.
Broadly between the five of us.
To continue to.
Gather all the information the data the telematics.
I would put that we that we plan to get from the joint venture.
Funding continues are ongoing and we gave a lot of interest from other potential parties. The five of US control about 20% of the North American fleet.
And there are others who are.
Very interested in joining the group so.
Good dialogue, there, but it will take a little bit of time here I Allison to really get the platform in place and get the infrastructure in place to get that.
To get the partnership up and running.
Understood.
I'll pass it along thanks.
Okay.
We will take our next question from Justin long with Stephens.
Thanks, and good morning.
I wanted to start with a question on the guidance I know the outlook from an EPS perspective didn't change for 2021, but any.
Some pieces within the guidance that have changed versus what you expected a quarter ago, and then maybe specifically on North American remarketing. It seems like we're headed for a record year potentially what's your confidence in the sustainability of this strength as we get into 2022.
Yes. So so first of all in terms of the guidance Youll recall when we went through that what we talked about was a series of areas, where the guidance, where our beginning of year range was at the positive end of the guidance so lease rate improvement was.
Does what we expected, but at the high end of the range maintenance expense was what we expected but at the lower end of the range I would say that largely has continued and across the board I wouldn't point to significant variances between our expectations last quarter and this quarter.
Hence the unchanged guidance.
When you specifically talk about the asset disposition gains.
The market remains very strong when we put out a package we get a broad.
Response to it a lot of people interested in buying we expect that to continue when you talk.
To be absolutely timing of those gains as we've discussed before it's really hard to pinpoint those too.
Given quarter.
But in general is it our expectations that a strong re marketing environment would continue into 2022.
About that yes, yes.
Yeah, Justin I would add too we laid out at the beginning of the year back in January that we anticipated. This year would be a very strong year in near record levels for remarketing income. So as you know we're on track to do that.
And as Tom mentioned, the fundamentals that underpin that.
I would place and looked like.
We will continue to be that case going into 2022.
Okay. That's helpful and secondly, I wanted to ask if there've been any notable changes in the pipeline of investment opportunities as you look across the different businesses and geographies are.
And you're still confident that you can continue to deploy capital at an elevated level as we had seen coming out of this pandemic or.
I know, we haven't been active on buybacks in a while is that something that might be moving up the priority list.
Yes, Justin it's Brian.
Great and timely.
Our questions because.
I don't want to be too repetitive on our capital allocation, but you know there's three priorities. One is investing in the business second is ensuring the access to capital and third is returning that excess capital to shareholders for your question. So on the investing side very successful this year finding investments.
Timely across our businesses.
<unk> fleet at the beginning of the year direct engine investment and some great organic rail opportunities really across our rail market. So we do anticipate that we'll invest over $1 billion again in 2021, that's pretty good in a market that has been weakened by COVID-19.
But as far as priority three.
<unk> and return of capital obviously, we have the dividend for over 100 years, and we have the existing share repurchase authority.
And I can assure you share repurchases still on the table and I think we've proven the willingness to return that capital that way over the last 15 years, but if it helps you understand where we are right now.
Even the run.
Our new asset prices really across our businesses this year.
We are approaching an inflection point, where it's getting more difficult to economically justify a new speculative investment.
So if these asset prices continue the likelihood of share repurchase becomes a greater I mean, that's always been the way our investment model.
<unk> investment philosophy work so.
Stay tuned obviously, we're going to evaluate the opportunities for both but but the scales are starting to tip, giving the run up in asset prices.
Great very helpful. I appreciate it Brian.
Yeah.
We'll take our next question from Matt <unk>.
On our <unk> with Cowen.
Good morning. Thank you for taking my question, it's good to see the fifth consecutive spot absolute lease rates improvement.
Thinking <unk> was in the high single digits I mean, <unk> was in the high single digits.
Up from mid single digits before that.
Sorry, if I missed it but did you guys quantify the magnitude in the third quarter.
Yeah, Matt I said it was mid single digits.
And again, there's there's elements of theres elements of mix that come into play and that for sure.
So it's not it's not linear.
Okay.
Okay, Okay got it.
<unk>.
All of that deceleration is not indicative of any.
Any type of demand pulled back.
No not at all and I would say.
Yeah.
The basic tenants of what we expect it to be a gradual recovery in our mark.
Market absolutely remain in place.
And as we look forward that continues to be the case.
Okay, and then I just want to go back to the.
<unk> brought or a high level of investment front.
India, you have a very small fleet there, but it's been a promising market I think.
India is coming off of some a couple of rough years 2019 was.
Broader economic pullback.
Pull back on the election, and then 2020 Covid.
Are you seeing and now they have a one four trillion dollars.
Infrastructure Bill are you seeing opportunities to further grow the fleet in.
We are meaningfully.
Yeah, It's Brian I can take that yes, we do and if you just look at what's committed with our manufacturers and placed with customers right now.
Grow the fleet by 27% over the next year or so so yeah. There are some strong investment opportunities you've already ramped them up and.
The macro environment's, improving obviously they were shut down early this year due to COVID-19, but that situation has significantly improved as you said our management team in India would say conditions or approaching normal I'll remember it doesn't really impact our results because their fleets are 100% utilized and they have long term leases.
But it did.
<unk> shut down the rail manufacturers for period, so investment is lower than we anticipated coming into the year and India, mostly due to COVID-19 delays and some customer growth conversations got stalled as well in the face of COVID-19, but with the macro environment improving strong GDP growth you know interest rates are reasonable.
We're seeing.
Seeing a recovery in traffic freight traffic container traffic, so it's coming back nicely and the opportunities are there.
Okay that makes sense and.
On the investment front in North America, you know that the share.
So maybe you know looking a bit more compelling and our future valuations continue to be.
Elevated but are you are you guys flexible to consider non railcar assets in North America, maybe you know assets with strong service components like Hollywood tankers or are all those types of assets.
Yeah, I think I mean, our traffic acquisition wasn't in North America, but Thats. An example, if we see a long lived widely use asset with the service component.
And we like the business will be willing to extend away from rail I don't see that right now in North America, but we're willing to consider it yes.
Got it thank you very much.
We will take our next question from <unk> majors with Susquehanna.
Component yeah. Thanks for taking my question can you drill down into the R. R. P. F. JV you know what drove the sequential delta in your income pick up there and.
Any thoughts on whether the renewal situation has stabilized and what that looks like.
As far as a headwind.
2022 thank you.
Yes, so in our RPF, we mentioned coming into the year that that was the part of our portfolio of businesses that was the most difficult to accurately accurately predict what was going to happen going on throughout.
Went into the year.
When we came into the year, we noted that we expected.
Earnings from that JV to be down $40 million or more in year to date pre tax earnings are $26 million versus about $93 million last year.
For the for the year to date period.
Of course, it's important to note that last year had a unique transaction that we discussed which was where we sold the group of engines to third party investors that had been put on a long term lease with Rolls Royce who are using them to support the total care program.
That that unique transaction contributed about 30.
Now, it's $8 to our pre tax share of affiliate earnings.
So if you look at the total decrease year to date versus year to date, it's $67 million increase about $32 million of it was due to that unique transaction.
Another and the remainder.
Too many other of it is about <unk>.
<unk> third due to changes in the operating business, which is the number of engines on lease.
The rates that we're earning for them the bad debt expense and about two thirds of it is due to.
Other secondary market transactions.
Okay.
As far as how do you feel about that business going forward I mean has the value and lease rates stabilized at all in the market just trying to think about what that degree of uncertainty feels like today versus six to nine months ago. When you laid out that guidance and noted that.
It could move in a couple of different directions.
So I would say overall.
We continue to focus on that same guidance, which was the $40 million or more down.
In terms of what's happened.
We've been collecting about 83% of the monthly billing that we.
With <unk> coming in so cash collections are going largely as expected.
We've been able to earn some money on the asset disposition.
So largely things continue as we expected. Obviously this is a business that is going to take some time to fully recover but were.
<unk>.
Trajectory is in line with our expectations coming into the year.
And lastly, you.
You made the comments pretty transparently that asset values were making.
Acquisitive investment pretty challenging.
Did that include.
Potential additional deals and like the direct investments you did.
Aircraft engines or or maybe expanding to try fleet platform just any thoughts on on some of these you know non rail assets and if those those valuations are getting to the point, where your stock is starting to look pretty attractive.
Thanks.
Yeah, So on Tri fleet. Another good example.
New asset prices there are increasing for the same reasons. They are increasing in rail, which is steel cost and component costs.
Manufacturer backlog so.
Looking.
As an example at a standard container.
<unk> tank container had try fleet, it's 50% more expensive recently than it was for the same tank at the beginning of the year. So.
Really across the businesses.
New asset purchases or speculative purchases are getting more difficult to justify and I don't think theres any exception, but I'll let.
Talk about aircraft values.
Yeah. So so we're a countercyclical investor So we certainly look for those types of opportunities. That's what happened in the first quarter, when we were able to make those.
Our investment in engines for our own account, which are continuing which like the joint venture engines are managed by.
Our joint venture partner, we will continue to be on the lookout for those.
As a reminder, those were the best engine types.
To the best credits.
And we'll continue to look for that kind of investment.
It's difficult to predict exactly how much of that is available right, but I think.
To say airlines spreads have come in pretty dramatically from their peak, which is when we did that investment earlier in the year.
And bad debt, it's Bob and I'll, just I'll, just add with regards to North American rail I do just want to point out that.
As you know we.
Generating.
I'd say, that's one volume there through a number of different channels, primarily through our supply agreement, but we also see opportunities outside of the supply agreement to do.
Investments.
That are basically done in conjunction with a long term lease with a customer we're going to have a really solid year on that front.
We were <unk>.
<unk> won a number of transactions winning a number of transactions.
You have to be very selective about the car type of the underlying customer and as Brian mentioned with rising asset prices you need to price them accordingly.
So we've been successful in winning some of that business and we've also taken a pass on some because.
They absolute price and the rates haven't made sense yet another great example, I'll have Tom talk about it is we've been through this drill before with very high asset prices. It pushes you to different type of investments.
Actually Tom did the boxcar acquisition, a few years ago.
So back in 2014, one of the things that we really looked at given.
Successful.
Asset prices overall were high.
Whats an asset type that we find attractive that others, maybe not as much would recognize that value and in particular, we purchased the boxcar portfolio from GE those assets were largely on per dime leases as opposed.
Even that rate leases, which was something some of our competitors really didn't have the infrastructure in place to handle so we were able to buy those assets at twice scrap value. So very attractive prices and then largely convert them relatively quickly for the most part to fixed rate leases.
Ernie.
Two.
Earn a nice return on an asset class that others were overlooking so that's the kind of thing we tried to do when asset prices are a little bit higher.
Thanks to everyone for the answer there is it really appreciate it.
We'll take our next question.
From Justin Bergner with Gabelli funds.
Good morning, Brian Good morning, Bob Good morning, Tom you weren't Cherry.
Good morning.
Just first off maybe following up on the Rolls Royce Rolls Royce joint venture.
Is it for.
Millions of affiliate income sort of.
Number that would represent.
Income sort of ex portfolio gains on sale or is there actually something unusual.
In terms of maybe losses on disposition or something else, that's weighing down that.
<unk>.
For me, yes. So so Justin that includes all of the earnings from the our share of the earnings from the joint venture and it includes both earnings from operations of the leasing of engines as well as in remarketing, where we sell an engine at the end of its life or.
<unk> set out or something along those lines. So it includes both.
Okay.
But I mean is there anything you can speak to that's unusual that would have weighed down that number.
In the quarter.
Yes, so so compared to the first half of the year.
Part of the.
Operating income line and the remarketing line are down versus the first half of the year that remarketing line is regularly.
Inconsistent.
The chance to either part out engines or sell them to a third party that happens in a lumpy fashion.
So I wouldnt really read anything in particular into that from the operating income perspective, there's two things that are driving that number down a bit one is we've been selling some engines. So each quarter you have a few less engines that are that are earning revenue. So.
That's going to that's going to take tend to take that operating income line down the second of which is some of the challenges for the airlines when an airline has an issue we reserve for all the receivables are so bad debt expense is elevated.
Great that's actually very helpful.
Thank you.
With respect to the LP I.
Okay.
Are you able to sort of.
Speak to you know what factors may have caused that to sort of nudge down was that just sort of.
Mix impact a lot of the cars that renewed for some of the weaker car.
Our types in the quarter or is there anything that you can just say to.
Survival perspective there.
Sure.
Justin its Bob and again.
Like a lot of the metrics, we've talked about today, whether it's remarketing income or sequential lease rates.
Nothing is really linear.
Helpful and our business.
When I look at the <unk> for the third quarter, while we the LTI is designed to try to take as much mix out of the equation as possible. There are occasionally some renewals that can skew the outcome.
And in the third.
We had a few renewals that were coming off extremely high rates that were put on back in 2015 2016.
And a few in a couple of challenged car types.
The good news is there are those customers renewed all of those cars.
But did so at a market rate.
And so they had an outsized impact on the MPI.
But for those few transactions the RPI would've been closer to breakeven in the third quarter.
Okay. That's helpful. Thank you.
Maybe lastly, just on the question of investment opportunities.
I guess one of your competitors recently.
And made a investment and.
Our fleet of railcars seemingly like an older fleet of railcars and you referred to the box car investment and then I guess the Andersons portfolio was sold I mean are there any.
Opportunities to sort of buy older cars.
A couple of times scrap value like you did with the boxcar transaction number years back or is that something you would do very selectively you know in a car type as you mentioned that you had a different view versus your peers.
Well what was one of the things that was unique about the boxcar transaction was that it was the transaction of size a lot of assets a lot of cars in a particular car type that could be carved out.
We've carved out from GE that doesn't really exist in.
Other portfolio.
We look at.
We we look at all the almost all the transactions that occur in the secondary market.
The ones you referenced.
We're familiar with all of those we have a voracious appetite for quality assets at the right price.
And so we do look at everything.
Against changed hands. This past year that would have worked for <unk> attractive from a portfolio quality standpoint at all and certainly not at the valuations they went off at that.
Transaction, you're specifically, referring to a lot of those cars in that fleet came from <unk>.
Nothing sells.
Selling them to the Andersons.
And for that reason I think significant M&A in rail North America.
It's fairly unlikely.
In the current environment and that's mostly due to the fact that the larger portfolios that may come up for sale.
Are likely to be of lower quality.
But theres still going to seek the high prices that are out there. So.
Probably not willing to pay.
Okay understood. Thank you just quickly could you just remind us what the.
Guidance for the gain on Aspen asset dispositions in North America was I guess.
Yes, his last updated.
Well I think we came into the year, saying that.
That we would be at a record level, which was probably the $75 million to $80 million $75 million range.
Year to date, we're in the low <unk>, so that guidance still hold.
Great. Thank you.
Once again, if you would like to ask a question. Please press star one.
Okay.
We have no more.
More questions in the queue Shari hellerman at this time I will turn the conference back to you for any additional or closing remarks.
I'd like to thank everyone for their participation on the call. This morning. Please contact me with any follow up questions. Thank you.
This concludes today's call. Thank you for.
Your participation you may now disconnect.
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Yeah.
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