GATX Corporation Q1 2023 Earnings Call
Please standby were about to begin.
Good morning, ladies and gentlemen, and welcome to the J E. T X 2023, our first quarter earnings call. At this time all participants are in a listen only mode and please be advised that this call is being recorded after the speakers' prepared remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press.
Star one on your telephone keypad and you would like to withdraw your question press the pound key and now at this time I'll turn things over to Shari Hellerman head of Investor Relations Sherry. Please go ahead.
Thank you Bob.
Everyone and thank you for joining Gatx's 2023 first quarter earnings call.
I'm joined today by Bob Lyons, President and CEO .
And Tom Ellman, Executive Vice President and CFO .
Please note that some of the information you'll hear during our discussion today will consist of forward looking statements.
Actual results or trends could differ materially from those statements or forecast.
For more information please refer to the risk factors included in our earnings release.
As discussed in Gatx's Form 10-K for 2022.
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.
Like to remind everyone that our annual shareholders meeting is scheduled on Friday April 28 at nine a M central time.
Will be held in a virtual only meeting format.
Earlier today.
G. A T X reported 2023 first quarter net income of $77 4 million or $2.16 per diluted share.
This compares to 2020 to first quarter net income of $75 8 million or $2.10 per diluted share.
2023 and 2022 first quarter results included net negative impact of four cents per diluted share and 24 cents per diluted share respectively from tax adjustments and other items.
These items are detailed on page 11 of our earnings release.
Now I'll briefly address each segment.
At rail North America fleet utilization remained high at 99 point something percent.
And our renewal success rate was 77, 9%.
Reflecting continued strong demand for railcars currently in our fleet.
The lease rate environment for existing railcars remain favorable.
As evidenced by the renewal rate change of Gatx's lease price index was positive 34, 3% for the quarter.
We remain focused on our objective of lengthening lease terms and locking in attractive rates.
Additionally, we continue to successfully place new railcars from our committed supply agreements with a diverse customer base.
We've placed over 4600 railcars from our 2018 Trinity supply agreement.
And we have placed all 7650 railcars from our 2018 Greenbrier supply agreement.
In addition, we've placed nearly 1500 railcars from our 2022 we're trying to get supply agreement.
Our earliest available scheduled delivery under our supply agreements is in November 2023.
In our North American maintenance network, we continue to operate safely while achieving high levels of productivity across the shops in our network.
We will continue to drive the vast majority of work on our specialty freight and tank cars for our own network.
Where we believe our experienced workforce gives us superior safety quality and cost metrics.
The secondary market for railcars remains robust.
Well North America generate a remarketing income approximately $45 million for the quarter.
As mentioned in the earnings release, we also identified attractive investment opportunities in the quarter.
And acquired over 1000 cars in the secondary market.
These cars are on long term leases with attractive rates.
Well international demand for railcars remains very strong and.
We continue to experience success in pushing up renewal lease rates for most car types.
Well International's first quarter investment volume was over $81 million as we took deliveries of nearly 1000 new cars in the quarter.
Turning to portfolio management.
First quarter performance was driven by higher share of affiliates earnings from Rps, Our aircraft spare engine joint venture with Rolls Royce.
Consistent with our expectations.
The operating environment for Rps is steadily improving reflecting the ongoing recovery in international passenger air travel.
Yeah.
With the first quarter environment very much in line with our expectations coming into the year.
We continue to expect full year earnings to be in the range of $6 50 to $6.90 per diluted share.
Excluding any impact from tax adjustments and other items.
And that concludes our prepared remarks.
I'll hand, it back to both so we can open it up for questions.
Thank you very much ladies and gentlemen at this time. It is do you have any questions or comments simply press star one and again just a reminder, if you would like to remove yourself from the queue. You can press the county, we will take our first question. This morning from Justin long of Stephens.
Thanks, and good morning.
I guess to start on the quarter, if you said remarketing income.
Would you say the performance was relatively in line with what you expected I think Sharon.
Mentioned that and in terms of the outlook going forward.
Is that relatively in line from a fundamental perspective versus what you had thought at the beginning of the year. It seems like maybe the first quarter beat relative to the street was mainly.
Fair enough.
The timing of some of this remarketing income, but I'd love to get your thoughts.
Good morning, Jonathan It's Bob and that's a fair assessment as you know remarketing income can be pretty volatile quarter to quarter.
So that does move around quite a bit as the year progresses.
I would say fundamentally the environment is very much in line with what we expected coming into 2023.
And that goes across.
Rail North America Rolls, right, probably a little bit stronger there than we anticipated, but try fleet rail rail international business is all very much in line with what we expected.
Yeah.
Got it thanks, Thanks, Bob and to your point on Rolls Royce the contribution from that JV was fairly significant in the first quarter is there any way to help us think through that $28 million contribution and how much of that came from remarketing income and if I look at the full year guidance.
You gave before on portfolio management, I think you were expecting.
$10 million to $15 million of improvement and we saw something north of that just from the JV alone in the first quarter. So any updated thoughts there.
Yes, Justin I'll break that down for you. So the remarketing piece was about $16 million of that 28 and about $12 million operating income.
As you already noted and Bob confirmed.
Even in the Rolls Royce JV that remarketing piece moves around quite a bit so while we continue on that trend that we've been talking about for a couple of years of expecting to get back to pre COVID-19 levels in the 2020 for 2025 timeframe, we're still on that trajectory.
Maybe things are moving a little bit quicker than anticipated, but at this point, we're not really ready to change that full year guidance for the JV.
Got it and I guess last one from me is just on that absolute.
Lease rate trends sequentially in the first quarter curious what you saw and any updated thoughts on how lease rates on an absolute basis trend going forward.
So as you know we've been discussing steadily improving lease rates for about the past two and a half years. When you get to this quarter in particular, most tank car types were up around 5% or so most freight car types were relatively flat.
Energy related freight car types, we're probably down about 10%, but it is important to put that in context. If you compare to a year ago. Most tank car types are up around 20%. Most freight car types are up around 30% and those energy related freight car types that are down sequentially. Even those are up 30.
Percent or more versus a year ago. So it still remains a strong lease rate environment and we've talked about this a little bit last quarter. Just as time goes on and you have more and more quarters of those improving lease rates.
The comparison gets a little bit harder so we're not totally surprised to see this trend happening and as Bob mentioned on the very first question everything is very much in line with our expectations.
Great very helpful. Thanks for the time.
Thank you.
Thank you we'll take our next question now from Matt Alcott of TD Cowen.
Good morning. Thank you just a quick follow up on the lease rate environment and the continued strength in it are you guys a bit surprised I mean is it is it time to be surprised by how resilient the lease rate strength has been given the fact that.
Rail volume is down four or five firsthand intermodal is down 9%.
And rail network fluidity is improving so in the near term you would think those two factors would be headwinds still lease rates or is that has that been more more than offset by.
Interest rates being higher and tempering builds.
Well, it's a combination not just interest rates, it's also new car costs.
Yes.
You have to keep that in mind.
Regards to the alternatives for the customers out there so as those new car cost have continued to rise and it stayed relatively heightened levels.
And that gives leeway and latitude to kind of take up the lease rates on the existing cars and they need to go up they need to go up for interest rates and they need to go up as a reflection of the new car.
Alternative.
So not particularly surprised.
And again I think it speaks to what we have seen in terms of a very bifurcated market, where the existing cars that are in place customers are very keen to hold on to those.
And so as we move rates up.
To reflect high utilization.
So overall fleet attrition over the course of the last couple of years as you mentioned rising interest rates.
New car costs.
They are holding on to those cars, placing new cars.
Under the supply agreement, particularly on the tank car side is a bit more challenging.
But fortunately, we have a big commercial network and a big customer base, and we're able to do that but that is a heavier lift than renewals.
And Matt.
It always starts with that supply demand dynamic.
That remains favorable for most car types industry cars in storage are under 18% and then if you look at the demand side industry carloads are up about two 5% versus a year ago. So there are some.
Positive factors offsetting some of the things you mentioned.
Yes.
Makes sense and then just maybe kind of a longer term question I know you guys have only.
Repriced I don't know, maybe 25 or one third of your fleets since the lease rate recovery began.
Just over two years ago.
So is it safe to assume then we should see at least revenue growth for <unk>.
A couple of years to come at least given the fact that more repricing will happen and more of your fleet will be at higher levels.
So so as you know we always give guidance for the current year and we don't give too much beyond that but what I would say is the trends.
<unk> strong lease rate environment, and the comparisons getting continuing to get a little bit better as you get a little further away from some of the up market those are positive trends and the.
A big part of the reason, we express confidence in the lease rate environment in 2023, yes, and I'd add Matt.
Yes, we're very encouraged by the fact that we're able right now to put a lot of the renewals.
Into the portfolio and attractive returns are attractive rates right now at longer terms and thats embedding a lot of high quality strong cash flow into the portfolio.
That will pay dividends for years to come.
Yes, and then just finally.
Bob and Tom.
Secondary market valuations I know they've been very strong but.
Theres been some very slight cracks.
Suddenly in certain car types I think.
Maybe related to housing and maybe slightly a consumer center beams.
So on and so forth, what's the what's the environment like from your perspective on the secondary market evaluations.
So I would say the secondary market remains strong and we expect that to continue positive feelings about the market appear to be offsetting any negative impacts from higher interest rates.
It's interesting you mentioned some of the individual car types because one of the things we always point to is that we have the most diverse fleet in the industry. So there's always a piece of our fleet that's going to be relatively attractive even if there might be pockets, where that's less true.
And the follow on that to them at a point Sherri mentioned in the opening comments is we had a very strong quarter on the buy side and the secondary market one of the strongest I can recall in recent years and again that goes to the point and Tom mentioned that we can selectively identify opportunities when we see.
<unk> for sale from other leasing companies.
We will bid individually in a very targeted basis on the car types that we want and we've seen as evidenced in the first quarter, some really attractive opportunities to add a lot of card north of 1000 cars.
To the fleet that we bought in the secondary market.
No. That's good to see that you are still seeing pockets of opportunity.
Pretty expensive secondary market now.
Do you guys think that there might be some.
Bigger.
Our acquisition targets I mean, I would imagine that if you're if you are a lessor right. Now. This is an opportune time to look into if you. If you want to exit the market to look into selling because valuations are high.
And if you have any kind of debt refinancing needs in the future you would probably want to get out before that happens so because we see larger fleets go for sale.
It's always a possibility, matt or well dialed into most of the portfolios that are out there.
And the owners of those portfolios so.
We are trying to stay abreast of what's happening in the market. So it's always a possibility and we will.
We will always look I think we'll always be in the mix in terms of those opportunities but.
We've also had the question as it relates to the banking industry right now where there are portfolios that are owned by banks those portfolios aren't core to the bank and given some of the pressures in that sector might some of those portfolio shake loose.
Certainly a possibility we haven't seen it yet.
But you would you would be interested in those and joining at a bid for those fleets right now.
It all comes down to the poor quality of the portfolio.
And valuation those two things.
Makes sense, Bob Tom Sherri. Thank you very much I appreciate it.
Thank you.
Thank you we'll go next to Allison <unk> at Wells Fargo.
Hi, good morning.
Can we talk about maintenance expense it seemed a little bit more of a sequential uplift than we were expecting is there anything unusual there I know you guys were thinking it would be up year on year, but it just seemed like a higher lift in that first quarter.
Yes, so the maintenance expense is up as you mentioned about 7 million Bucks, but it's very much in line with our expectation just like everything else.
<unk> from the prior year is primarily due to the mix of repairs and a higher volume of repairs.
Calling that exactly the way those that volume is going to come in and that mix is going to come in quarter to quarter is challenging. So we really focus on the full year and we continue to believe that for the full year net maintenance expense will be up $5 million to $10 million versus that 2222 range.
Got it and then this is housing really think EBIT the renewal success rate dropped a tad.
Anything in terms of the customer means that you see are changing.
Very strong in the market, but are you starting to see maybe some incremental pockets at this point.
Yes, we really don't read anything into that single quarter again.
You kind of look at the whole year and on a historical context, even this quarter is a pretty strong number.
And if you look at where the utilization is what's going on with lease rates. The trends are again not to repeat myself, but very much in line with expectation.
Perfect. Thank you.
Thank you we'll go next to basketball majors at Susquehanna.
Hmm.
Yes.
Can you talk a little bit about the cyclical versus the structural drivers of your lease pricing power by that and by that I guess, what we mean here is your railroad volumes certainly from the railroad outlook.
Being a bit more muted.
From the class ones as we look forward in the next few quarters, albeit.
Maybe more concentrated in intermodal, which you don't have a ton of exposure to but your pricing power being quite strong from a combination of high asset prices.
Reducing excess car supply high interest rates just.
Could you talk a little bit about how those come together in your view of the market and and how that impacts your strategy as you look forward over the next 234 quarters. Thank you.
Sure <unk> I'll start in.
As we've talked about over the course of the last couple of years as there has been fleet attrition in general across the North American network.
The recovery in rates has really been more of that one that's been driven by the supply side than it has on the demand side.
So as we've seen total fleet counts come down utilization go up.
That along with interest rates and the price of a.
New cars has been the primary driver to the rate lift what we havent seen as material carload growth.
And that would certainly be welcome.
And we think about carload growth potentially coming from a couple of areas one just from economic activity.
And the other being.
The customers moving more product by rail and shifting from truck and hopefully service levels improve.
We believe there is freight on the sidelines that can go from truck to rail we hear that from our customers. All the time that they would move more by rail.
Service levels improved so we think there is some pent up demand there.
So today to date I would break in and kind of.
<unk> things into two levels, it's been a supply side recovery so far.
And we're looking forward to the demand side of it kicking in as well.
Thank you for that.
That's all for me.
Thank you we'll go next now to Brendan Mccarthy at Sidoti.
Hi, Yes. My question has actually already been answered just now thank you.
Thank you Mr Mccarthy.
We'll go next now to Justin Bergner Gabelli funds.
Hi, Bob Hi, Tom Hey, Sherri.
Hi.
Hey, guys good morning.
I think I heard you mentioned that maybe within your unchanged EPS guidance, you expect North American rail to be a touch better did I hear that correctly and if so what would be the driver there.
Actually we referenced more RP app kind of fundamentally being a little bit of rolls Royce being a little bit better than we anticipated.
And maybe thats more fundamental.
Rest of the business as well, but rather its rail North America rail Europe , India and try fleet kind of all performing as planned.
Okay. Thank you and that would be sort of on the non gains on asset sales side that.
12 ish million number for the quarter that Tom correctly, right, let's just kind of looking.
Yes.
<unk> business.
Okay.
I think some of the rail spoke to improving productivity if not during the whole first quarter is sort of we came out of the first for us.
We came out of the first quarter.
Are you seeing that and how is that impacting.
Lease rates sequentially is it starting to constrain them in any way.
Yes, so most of the shippers that we talked to remain skeptical about near term improvements in rail service.
Most shippers as Bob mentioned.
We'd like to ship a little bit more by rail service improved but they havent seen the levels of sustained improvement to make that happen I would say they are encouraged by some of the talking points from the railroads, but I would like to see more action, particularly on the first mile and last mile.
Okay. That's helpful and then lastly.
There was sequential and sort of year on year increase in the profitability of the other segment.
Mostly on the other income and expense line is there anything.
That you know we should be aware of there thats driving that is that likely to continue.
Yes, yes, so that other.
Segment includes both try fleet and true other items that arent any part of the.
Any part of any other segment. So try fleet was up a little bit it was up a little over half a million dollars.
And thats rough and Thats basically due to some improvements in utilization and lease rates. So the majority of it was the true are there other and that's about about $2 million each from two different things. One is the interest allocation that we do we allocate that to our various search.
<unk> based on their target leverage and when when we do that you can end up with a slight over or under allocation and the remainder goes in that other piece.
It gets in this case interest income associated with it the other part of it is pension accounting.
When you when you look at pension accounting Youre looking at interest expense and you are looking at net expected return on pension assets. When you do that that again can go either direction.
So together those things are about a little over $4 million of positive that is not something that I would look for a particular trend to occur because it can go any direction.
Okay, Thanks for clarifying and nice quarter.
Thank you.
Thank you, we'll take a follow up question now from basketball and agents.
Thanks for taking the follow up here.
As we look out if we get to mid year in.
And it feels like there is some upward sort of momentum to the guidance can you talk about the most likely drivers of what could give you the comfort to raise that.
Where you sit today and.
And.
Specifically to the cadence do you have any visibility into the lumpiness of the North American gains on sale, whether the books will be more concentrated into Q3 Q4, <unk> as we think about modeling going forward. Thank you.
Yes, so bascom purely as a mathematical exercise the item next smoke most likely to provide a material upside or downside to guidance does relate to those secondary market activities, just because of the scale and the lumpiness, but what we really tend to focus on due to the law.
Long term nature of our business is what's going on with utilization, what's going on with lease rates.
And there we would see any kind of variance from expectation show up in the operating statistic before it would show up in the financial results.
Having said all of that as we've mentioned several times on the call. After those operating statistics are performing in line with expectations.
And as it relates specifically to the secondary market, we expect that to continue to be strong for the reasons, we've given calling a cadence or timing on that.
Repeatedly noted is is very challenging and we don't really try to do it.
Thank you.
And the supplement it appears we have no further questions. This morning, I'll turn the conference back to you.
I'd like to thank everyone for their participation on the call. This morning. Please contact me with any follow up questions. Thank you.
Thank you Ms Hullermann again, ladies and gentlemen that will conclude this morning's gatx's 2023 first quarter earnings call, we'd like to thank you all so much for joining us and wish you all a three day goodbye.
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