Q3 2022 GATX Corp Earnings Call
Good morning, My name is Colby and I will be your conference operator today.
At this time I would like to welcome everyone to the G. H T X 2022 third quarter earnings call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
If you'd like to withdraw your question again press the Star then the number one.
Thank you.
I will now turn the call over to the head of Investor Relations.
Sheri hellerman.
Thank you Colby.
Good morning, and thank you for joining Gatx's 2022 third quarter earnings call.
I'm joined today by Bob Lyons, President and CEO .
And Tom Ellman, Executive Vice President and CFO .
Please know that somebody information you'll hear during our discussion today will consist of forward looking statements.
Actual results or trends could differ materially from those statements are for cats.
For more information please.
Refer to the risk factors included in our earnings release and those discussed in Gatx's Form 10-K for 2021 and our other filings with the S E T.
G H T X assumes no obligation to update or revise any forward looking statements to reflect subsequent events or circumstances.
Earlier today <unk> reported 2022 third quarter net income of $29 1 million or <unk> 81 cents per diluted share.
This compares to 2021 third quarter net income of $40 1 million or $1.11 per diluted share.
The 2022 third quarter results include an impairment charge of $10 8 million or 30 cents per diluted share.
Associated with our decision to exit the wealth business in Russia.
Year to date 2022, net income was 107 5 million or <unk> 99 per diluted share.
This compares to $82 1 million or <unk> 28 per diluted share for the same period in 2021.
The 2022 year to date results, including that negative impact of $55 2 million or $1 54 per diluted share from tax adjustments and other items.
The 2021 year to date results include a net negative impact of $43 1 million or $1 20 per diluted share from tax adjustments and other items.
These items are detailed on page 13 of our earnings release.
And now I'll briefly address each segment.
Well North America fleet utilization was 99, 6% at quarter end.
Our renewal success rate was 87, 2%.
Reflective of the continued strong demand for railcars across our fleet.
Once again, we saw sequential improvement in absolute lease rates during the third quarter.
The renewal rate change of Gatx's lease price index was positive 37, 5%.
With an average renewal term of 33 months.
We continue to successfully place new railcars from our committed supply agreements with a diverse customer base.
We've placed over 4000 railcars from our 2018 Trinity supply agreement.
Additionally, we've placed on 7650 railcars from our 2018 Greenbrier supply agreement.
Our earliest available scheduled delivery under our supply agreements is in the second quarter of 2023.
Earlier this month, we announced a new multi year agreement to purchase 15000 newly built cart.
We're just committed railcar order in our history.
We are pleased to have the new agreement in place as these new cars, we will continue to strengthen our competitive position.
The secondary market for railcars in North America remains active.
Well North America is from marketing income was $9 million in the quarter and $76 7 million year to date.
Turning to Iraq International.
The railcar leasing markets in Europe , and India remained very strong and fleet utilization was above 99% at quarter end.
Furthermore, Gatx's rail Europe continues to experience increases in renewal lease rate versus the expiring rate.
In portfolio management.
The Rolls Royce and partners finance affiliates, it's performing as expected in an uncertain environment.
At borders we opened this year.
Global passenger air traffic has improved but remains below 2019 levels.
We continue to identify opportunities to make attractive investments in today's environment.
Total investment volume across our businesses with $234 million in the quarter and $887 9 million year to date.
Primarily focused on rail assets globally.
As noted in the earnings release.
Reflecting strong operating performance to date.
Outlook for the remainder of the year.
We expect 2022 full year earnings to be in the upper end of the previously announced guidance range of $5 60 to $6 per diluted share.
Fluting any impact from tax adjustments and other items.
Those are our prepared remarks.
Hand, it back to Colby. So we can open it up for Q&A.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
We'll pause just for a moment to compile the Q&A roster.
Your first question comes from the line of Allison <unk> from Wells Fargo.
Your line is open.
Hi, good morning.
Just wanted to revisit some comments you know I know you are just going back sorry, fluidity, you know certainly could impact the need for cars. You think your prior comments alluded to the fact that there is still a lot of demand that you felt that could support railcar interest you know should fluidity start to come back you know the economic environment is changing pretty.
Rapidly. It seems just are you still comfortable with that thought any changes there just would love some thoughts there. Thanks.
Yes, so a couple of different things embedded in your question.
First of all we do continue to believe that if rail performance.
Improved that there are some loads that the industry will will will.
We'll move that they are not moving right now because of some of the challenges with.
The rail network, we continue to see shippers wanting to.
Move more by rail, but they need to see the service improve before they can do that.
Also embedded in there is kind of customer sentiment about what's going on in the market.
And I think it's important to note that we continue to see a significant difference between the new car and the existing car markets.
Customers clearly feel that they need to maintain their fleet size. So they are very reluctant to return cars. This fact combined with the tight supply situation has resulted in strong existing car pricing the number of industry idle cars in storage is down around 17%.
But I want to contrast that with the new car market customers are also generally reluctant to increase their fleet size for the past couple of quarters.
We've noted that the new car market has been more competitive as builders and lessors aggressively compete for those limited new car opportunities. This dichotomy between the new and existing car market has persisted this quarter and if anything it might even be a bit more pronounced because of the macroeconomic uncertainty that you mentioned.
Allison, It's Bob I'd also add to Tom's comments Tom's comments to that.
There was a market study out very recently and indicated those customers shipping by rail.
Over 60% said they would ship more.
<unk> already fluidity and service levels would improve so we feel very comfortable that that kind of pent up demand or potential demand is still there.
Great Great color. Thanks, and then I guess in line with that no term has a weighted weighed in an average number really hasn't moved our customers pushing back a little bit more just given the uncertainty out there in terms of term is it just due to a specific car types out there just any color there would be great. Yes.
Yes, so from a goal perspective, one of the things we've been talking about is with the rate improvement, we're really look into at least in certain car types.
Got it.
Lease rates are strong start pushing that term out a little bit I'm sure you're referring to the fact that the LTI terms for the quarter was 33 months as.
As you know this is weighted based on total fleet size as you would expect some of the shorter lease terms in this group included energy related cars that carry commodities like coal ethanol in LPG. If you look at the average renewal term for all Q3 renewal activity just waited on the total activity in the quarter.
That number would be 49 months. So we are on an activity basis seeing some success taking that turmoil.
Great. Thanks, so much I'll pass it along.
Yes.
Your next question comes from the line of Matt Alcott from Cowen Your line is open.
Good morning, Thank you.
My question is on the secondary market given how strong it's been for.
A long time.
Is it safe to assume that.
<unk>, especially with interest rates rising valuations would start to moderate.
Next year.
Yes, so Matt as you mentioned the secondary market really has held up despite the rising interest rates and we expect it to remain strong for the foreseeable future.
Most any interest rate in our economic environment, the impact of inflation over time and the straight line nature of depreciation results in economic value said exceed MPV. This.
This is evidenced by the fact, if you look at rail North America over the last decade, the lowest year, we had in terms of gain on sales was $39 million.
Having said that.
This year is going to be a record year for remarketing income, we mentioned that we expected it to exceed last year's total of $80 million or decisions are always made by <unk>.
Optimizing fleet considerations and economic considerations, and we'll continue to do that going forward, but as far as.
Interest in cars with leases attached it remains very strong yes, Matt.
Adding to that we are in the market all the time.
Both on the buy and sell side.
So that frequency gives us a lot of visibility into.
Other bidders demand what the appetite level is it remains.
Very healthy at this point in time now looking into 2023, we.
We would expect given what we're seeing here in the fourth quarter for that to continue.
But as you well know, it's a pretty uncertain macro environment. So we'll update everybody on that when we get into the end of the fourth quarter.
Got it and then given the big agreements you guys just signed a supply agreement for 15000 cars.
First of all can you talk about how much of this is for <unk>.
<unk> and <unk>.
How much is it for growth and since you have this big agreement locked in now.
Does it get a free you up a little bit more too.
To do more sales rather than investments in the secondary market going forward given the strength continues even if it moderates a little bit.
Sure.
The size of the agreement is very similar in terms of the number of cars, we will take delivery of on an annual basis to the one we've had in place for the last five plus years.
And if you think about what we scrap in a given year anywhere between two and 3000 cars a year, sometimes a little bit more if the scrap environment warrants it.
You can look at the agreement that we have in place is our base load our base need.
And keeping keeping the fleet essentially emphasize its add today to your use your term it is more of a replacement order.
That said, we have a lot of flexibility inside the order in terms of what car types will take delivery of so the mix of the fleet can change over time, we will be opportunistic on that front.
And I would say we have full flexibility to continue to order on top of that and would expect to.
More in the spot market.
Meeting customer demand.
There will be deliveries in excess of 3000 cars a year that are embedded in this order.
Got it that makes sense.
And then Bob.
<unk>.
My next question I was going to be.
<unk>.
I'm, so sorry, if I missed it but did you guys quantify the.
The absolute lease rate improvement in the third quarter.
We did not but I can do that so this quarter mark.
The ninth consecutive quarter of increasing lease rates the increase this quarter versus last quarter was fairly modest less than 5% with no real material difference between tank cars and freight cars.
The percentage that percentage change is something you would expect as we continue to get longer and each quarter progresses, because the bar is the denominator is getting is rising each quarter.
Okay. So the actual real strengths of the market really hasnt changed much.
Sure.
Com.
Gets difficult because I think last quarter, you got mid to high teen level.
Remember correct correctly, yes.
Yes.
We always caution against us overemphasizing the single quarter.
To put it in context versus a year ago.
Most tank car types are up between about 15% and 25% and most freight car types are up between about 30%, 70%. So youre seeing a lot of strength. It's just as Bob mentioned and just to repeat it just as you look at a single quarter as you continue to have that level of success.
A nine quarter period each time.
Increment is youre, starting from a higher base.
Got it.
Is there a way to gauge like.
How much of the absolute rate improvements quarter over quarter.
Alright tied to just the broader inflation in the market versus dynamics specific to the railcar industry.
Well as we've said before with regards to the recovery we've seen here over the course of the last few years or last year 18 months, it's been more of a supply side driven improvement.
And again this kind of gets to the point that Tom referenced with regards to the bifurcation between the existing car market in the new car market.
So there definitely is an inflation impact there.
Still optimistic based on the dynamics right, now, which really point to customers holding on to their existing cars. That's obviously come through not only in our utilization, but are very high renewal success rate and the lease rate improvement.
That we've seen.
They're compelled to hold on to those assets, we don't see that changing anytime soon.
Especially given the replacement cost of going out and buying new assets in this environment. So we think we're in a very good position to continue to capitalize on that.
Great. Thanks, Matt Thanks, Tom.
Your next question comes from the line of Bascom majors from Seth SKU Hana Your line is open.
Thanks for taking the questions you've talked about the enduring strengths and the secondary railcar market in North America.
Can you parse that out between how some of the interested parties phase behavior seems to be evolving or or frankly, not in the books that you put out and how people seem to be bidding and what the.
The quality and depth of those bids looks like in bi.
By parties I mean.
I don't know if its financial buyers versus operating really lessors. It really anywhere you want to slice that up between the people who participate in these auctions.
Yes, Bascom, it's Bob.
The depth of the market continues to be pretty solid.
Im speaking here from the standpoint of a seller in the secondary market and as I mentioned, we're active on both sides, but as a seller or what we're seeing is the depth of the market continues to be pretty strong.
Why are they different buyers interested in the different pools of assets.
Lease transactions that we have in the marketplace and what we're seeing is the fact that if you have a law.
Longer term quality asset.
Ladies with good credit.
Youll get ample significant interest in from the secondary market from the buyer is there and it's a little bit more difficult to kind of slice them up between the financial players or other operating lessors, but we don't see a lot of new entrants, but those that are in the market today and have been for a long period of time continue to have an interest in.
Adding assets.
And thank you for that and maybe on another market participant thought can you talk about.
The quality or the implied returns in the competition from the captive OEM lessors, just just curious if youre seeing the leases put in the market by some of the builders.
All of this cycle versus prior cycles and has that changed any way in.
Either way that you operate in the market. Thank you.
It hasnt really changed over cycles.
Going to speak specifically to any one.
Oems.
Activity in the marketplace, what I will say is.
And any transaction the larger it is.
The more likely the Oems are going to be actively pursuing that particular transaction, if it's a new car deal.
If it's a 500 or 1000 car order 1500 car order thats going to garner quite a bit of interest from the Oems.
<unk> has built its business.
For decades.
More singles and doubles than that type of homerun transaction.
Not that we don't pursue those and that that we don't get them from time to time, but our bread and butter is the 100 200 300 car type order.
Where you can see very attractive returns and you have to have the infrastructure and the commercial and the sales team in place to be able to identify those deals we have that.
And Thats continue we will continue to be our focal point going forward.
Last one for me.
As you look into next year any preliminary thoughts on prioritizing lease rate or term and how that's evolving into the market. Thank you.
Well given the macro environment, we're in and the volatility we seem to face globally. It's one of the most unpredictable environment.
I think most of us around here have ever experienced.
I think we'll we'll save that one for for the fourth quarter and provide more color on that as we get into 2023.
Yes, and Baskin the only thing I would add is like always whatever we do is going to be on a car type by car type basis for EES, we talked globally on these calls, but the way we manage the fleet is what's going on in each of those individual markets.
Thank you.
Yes.
Your next question comes from the line of Justin Long from Stephens. Your line is open.
Thanks, and good morning.
Going back to the lease rate discussion, obviously, there was a lot of volatility in rates on the way down and then volatility on the way.
Could you just help us understand where absolute lease rates are today versus normalized levels and then as we move into next year any commentary you can share on what the comp from an L Pi perspective looks like.
Yes, So let me start on that so compared to long term averages. Most tank car types are up between about 10% and 20% versus those long term averages. Most freight car types are hovering right around the long term average, maybe a little above or a little below.
For both tank and freight cars the energy related car types are still well below long term averages.
And then in terms of next year, we always give guidance on both earnings and pricing the OPI on our fourth quarter earnings call.
Okay understood and maybe looking at the guidance. This year you said you feel more comfortable at the high end of the range now any.
Any color you can provide on what changed within your assumptions to drive that more optimistic commentary.
Sure Justin it's Bob and obviously with about roughly 10 weeks to go in the year.
Most things are fairly well baked at this point.
The one thing in the year in General has played out largely the way we anticipated that it would despite a lot of macro events that I already referenced whether it be the war in Europe , or economic volatility rising interest rates inflation et cetera.
General in general the market has performed very much the way we thought it would coming into the year. The one variable has been on the remarketing side and so based on transactions that we have.
Currently underway and expect to close by the end of the year.
That has been the driver to the uptick in the guidance.
Got it and last quick one from me I know you took the impairment related to Russia, but anything you can share on this segment profit impact from Russia, what we've seen historically there as we model out.
That rail international segment going forward and maybe you could just touch on your European business as well and how you think about it stress test of that business in a mild recession scenario.
So Justin I'll start with Russia, and then I'll, let Bob comment on the rail Europe business. So as you know.
That Russian business.
Pretty small part of the total and on a segment profit basis, it represents less than one half of 1%.
Yes.
And with regards to the European business.
And the potential impact of a recession there.
What we have seen historically and I think most people.
We try to stress the fact that.
In the European market the lease rates structure is very different where we tend to see pretty material swings in lease rates as you have already referenced 10.
10, 20, 30% up down in the North American market.
Our opinion market.
Is much more stable.
We're talking about single digit type.
Up or down in a lot of times low single digit up or down despite the economic environment. So it becomes much more of a focus on keeping assets utilized and our team. There has done a very good job of that.
And as the fleet at record high utilization today.
Great. Thanks, so much for the time.
Thank you.
Again, if you would like to ask a question Press Star then the number one on your telephone keypad.
Your next question comes from the line of Justin Bergner from Belly funds. Your line is open.
Good morning, Bob Good morning, Tom Good morning Sherri.
Good morning, gentlemen, Hi, Justin.
A couple of quick questions and then one.
One or two substantive questions on the quick side did you repurchase any shares in the quarter.
We did so share repurchase for the quarter was about $5 million.
Great. Thank you and then on the Scrappage side with steel prices, having come down and with <unk> and other market participants having scrapped a more material amount of cars in the last 12 months would you expect to be.
At the low end or even below the low end of that two to 3000 range as you look out sort of on an annualized basis over the next couple of quarters.
Yes, Justin we'd expect for the total year to be up pretty average not materially above or below what we normally do which is around 2500 cars a year.
Okay, Great and then you mentioned I think that the first car available for placement was the fourth quarter of 2023 or the end of 2023, so about a year out is that a longer timeframe than normal for.
Your first available placements Jeff.
And just to clarify on the with the second quarter of 2023.
Oh apologies.
Yes.
And just generally speaking we're up we're placing cars out six months or more.
Great. So you are in kind of a normal placement cadence, yes, Sir Okay, Yes, and then lastly, a big picture question I mean, if there was a big secondary market.
So I guess, if there was a big portfolio that was to come into the secondary market.
Would <unk> consider at what would you.
<unk>.
Consider be the puts and takes and evaluating an asset like that.
While we're always interested.
Unsettled times volatile times tend to bring some of those opportunities to the market and Gatx's always has a history of doing a pretty solid job of capitalizing on those when they when they come I think.
Tom and I are both been here long enough, Paul <unk>, who runs our North American rail business to remember 2009, when the world was entirely upside down I think we were one of the few buyers are big portfolios of railcars at that time.
Not that I am hoping for in 2008, 2009 repeats I'm not but if there is unsettled times, we absolutely would have an interest in the puts and takes always come down to the quality of the portfolio.
Not all portfolios are created equally we do an extremely deep dive.
When we look at portfolios literally car type by car type lease by lease.
And that will be a very big driver to our interest level as well evaluation.
So.
We don't we're not compelled to overpay I think we have a reputation in the marketplace is not overpaying, we have a great infrastructure here that is very scalable.
And we want to add assets to it.
Over time, but.
But we don't have to buy anything.
Don't have to buy anybody's customer list or team or infrastructure et cetera. It comes down to the quality of the assets in the portfolio and the valuation that we believe we can pay and generate an attractive return for the shareholder.
That's the story at the end of the day.
Great. Thank you.
Yeah.
Your next question comes from the line of <unk> majors from Susquehanna. Your line is open.
Thanks for taking my follow ups I wanted to follow up on the Europe comments from earlier.
Can you talk about the customer appetite to either grow their fleets or replace older cars with new cars in that environment, just given the economic uncertainty and to the extent that there is some appetite for new cars with the.
The general supply situation in cost of goods is are the Oems able to meet your demand their customer demand, where it's where it's needed. Thank you.
Yeah, well overall demand I am very optimistic on the European market.
Given the fact that there is a concerted push to move more product from truck to rail.
The Green deal is very real in Europe , the environmental benefits of rail are apparent.
And they are being pretty soon being pursued pretty aggressively in Europe , so very optimistic on that front.
That said the manufacturing footprint in Europe is far smaller than it is here in North America.
And so it is at this point in time its pretty strained.
The challenge I would say is not necessarily finding the next caller opportunity. The next new car opportunity, it's making sure we can get delivery on a timely basis.
And with the supply chain situations pretty strained in Europe .
Has become more challenging we came into the year expecting about 1400, new wagons to come into the fleet in Europe will come in a little shy of that.
<unk>.
Not because of demand, but because of the supply chain.
And so we'll be analyzing all of that closely as we put our expectations out for 2023, but the demand side in Europe is very strong.
Sure.
Thank you.
There are no further questions at this time I will now turn the call back over to the head of Investor Relations.
Gary Hellerman for 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.
Okay.
This concludes today's conference call you may now disconnect.
Okay.
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