Q2 2023 GATX Corporation Earnings Call
Hello, and welcome to the G. A T X 2023 second quarter earnings call.
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 one on your telephone keypad.
I'll turn the conference over to Shari Hellerman head of Investor Relations. Please go ahead.
Thank you Tara.
And thank you for joining Gatx's 2023 second quarter earnings call.
I'm joined today by Bob Lyons, President and CEO .
Tom Ellman Executive Vice President and CFO .
Yeah, Paul Tudor Jones, Executive Vice President and President of rail North America.
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 for cat.
For more information please refer to the risk factors included in our earnings release and those discussed in Gatx's Form 10-K for 2022 and in our other filings with the SEC.
G H T X assumes no obligation to update or revise any forward looking statements to reflect subsequent events or circumstances.
Earlier today G. H T actually reported 2023 second quarter net income of $63 3 million or $1 74 per diluted share.
This compares to a 2022 second quarter net income of $2 6 million or seven cents per diluted share.
The 2023 second quarter results include a net positive impact of 0.2 million or one cents per diluted share from tax adjustments and other items.
The 2022 second quarter results include a net negative impact of 34, $35 9 million or $1 per diluted share from tax adjustments and other items.
Year to date 2023, net income was $148 7 million or $3.87 per diluted share.
This compares to $78 4 million or $2.18 per diluted share for the same period in 2022.
The 2023 year to date results include a net negative impact of $1 1 million or three cents per diluted share from tax adjustments and other items.
The 2022 year to date results include a net negative impact of $444 4 million or $1 23 per diluted share from tax adjustments and other items.
These items are detailed on page 14 of our earnings release.
Now I'll briefly address each segment.
Rail North America's fleet utilization remained high at 99, 3% at quarter end.
And our renewal success rate was 85, 3%, which is reflective of the continued strong demand for our existing fleet in North America.
The renewal rate change of Gatx's lease price index was positive 33, 1% for the quarter.
With an average renewal term of 61 months.
Earlier this month, we announced a modification to the L. P I calculation.
The announcement at historical L. P. I data on a comparable basis are available on the G. H T axe Investor Relations website.
We continue to successfully place new railcars from our committed supply agreements with a diverse customer base.
We have placed all 4800 railcars from our 2018 Trinity supply agreement.
And we've placed all 7650 railcars from our 2018 Greenbrier supply agreement.
In addition, we placed nearly 2000 railcars from our 2022 Trinity supply agreement.
Our earliest available scheduled delivery under our supply agreements is in the first quarter of 2024.
The secondary market for railcars in North America remains active.
We generated remarketing income of $30 $8 million in the quarter and $75 $6 million year to date.
Consistent with our expectations.
International continues to perform well.
Well Europe fleet utilization was 96, 9% at the end of the second quarter.
Despite some weakening in the intermodal sector in Europe .
Demand for the majority of railcar types in Europe , and India remains strong.
And we continue to experience success, pushing up renewal lease rates for many car types.
Additionally, we continue to take delivery of new cars in Europe and India.
Adding a combined total of nearly 1000 cars during the second quarter.
Year to date.
International's investment volume was over $158 million.
Turning to portfolio management.
Second quarter results were solid primarily driven by the performance at the world's Royce and partners finance affiliates.
The operating environment for Rps continues to improve due.
Due to a broad based recovery in demand for international Air travel.
In addition, we.
We capitalized on attractive opportunities during the quarter.
And added nine aircraft spare engines for $239 million to our wholly owned engine leasing portfolio.
Overall.
<unk> total investment volume was over $486 million for the second quarter.
And over $873 million year to date.
Finally, as we noted in the release.
Reflecting year to date performance and our outlook for the remainder of the year.
We expect 2023 full year earnings to be in the upper end of or modestly exceed the previously announced guidance range of $6 50 to $6 90 per diluted share.
Excluding any impact from tax adjustments and other items.
Variability around this guidance will be mostly driven by the timing of marketing activity.
And those are our prepared remarks.
I'll hand, it back to the operator, so we can open it up for questions.
Thank you if you have a question. Please press star one on your telephone keypad. If you have queued up for a question and wish to withdraw you May press star one again.
Your first question comes from the line of Allison <unk> with Wells Fargo. Please go ahead.
Hi, good morning.
Would you talk to your lease fundamentals continue to remain very very strong and seems to be going against what we're hearing from the economic side.
Any perspective that you can give us on the customer as it is is it specific just to your fleet that you think is there concern about not having capacity at an inflection happens and this is softer just any thoughts that you have around that.
Sure. Yes. This is Paul Titterington speaking I'll answer that Alison. Thanks for the question, what we would say right now is that for our customers. They continue to be interested in holding on to the cars that they have I think thats. The result of the fact that the fleet. Despite perhaps some of the macro trends youre alluding to has generally speaking remain relatively tight.
We've talked about the reasons for that tightness that includes things like for example railroad velocity and includes the more limited new car production that we've seen and it's also included some of the higher scrapping that we've seen so the sip.
<unk> side of the equation has continued to be fairly tight in the North American railcar fleet as a result of that we have seen customers.
Even though they may have some degree of macro uncertainty about their businesses.
Hold onto cars and so that's been a big factor in the performance of the existing fleet.
Great that's helpful.
Then maintenance seems a little bit elevated stuff at least from Q1 and even into Q2 anything unusual going there in terms of Max at the programmatic just any color on that maintenance expense so far for the fleet. Thanks.
Sure. There are a few drivers there. So wanted to just we're seeing a higher volume of repair events than.
And then we saw last year and Thats due to a variety of reasons. Some pull forward of some of compliance. Some additional assignment work, there's sort of no one driver, but more events as well as the impact of inflation and the inflation really has come in two forms there is a higher cost of our railroad repairs and then there is also some of the higher cost internally.
And as well some of that increased volume that we're seeing is driven more use of our contract shop network, which is generally speaking a higher cost option, then going internal what I will say, though is none of that should offset the fact that the structural gains we've made in our maintenance cost structure over the last four to five years remain so really this is just a phenomenon involved.
The volume, we're seeing and this year, we continue to be very confident about our long term advantage in terms of our structural maintenance cost.
Got it. Thanks, that's helpful I'll pass it along.
Your next question comes from the line of Justin Long with Stephens. Please go ahead.
Thanks, and good morning, I was wondering if you could share the trend in absolute lease rates that you saw on a sequential basis in the second quarter and then any color on what you're expecting for the progression of rates as we move into the back half.
Yeah.
Okay. Yes. This is Paul again.
What I will say is right now rates remain across the very very strong.
Sequential production progression generally speaking was in the low single digits. So I would say a lot of the acceleration that we've seen has moderated but on an absolute basis right. Now we continue to see rates for most car types at or near all time highs and again as I alluded earlier to what I answered Allison's question.
<unk> remains tight so at this point.
Have to say.
More of the same story as the most likely outcome in the short to medium term.
Got it thanks.
Especially given the investment volume that we saw in the portfolio management segment in the quarter I was wondering if you could talk about your longer term strategy.
Terms of investing in wholly owned aircraft engines outside of the Rolls Royce JV and maybe you could just get us up to speed on how many wholly owned engines you have today and just the pace and magnitude of growth, we could be thinking about going forward.
Yeah.
Yes, Jonathan this is Bob.
And what I can tell you with regards to the investment volume and portfolio management. The wholly owned engines, we bought in the second quarter and then we closed on one additional one here in the third quarter. So 10 engines total.
So far this year for roughly $270 million for 2023, that's that's the bulk of it.
Our expectation based on rolls and delivery schedules and what have you.
Our investment for this year is largely completed under directly owned.
What we like about the flexibility here is that we have the <unk>.
Have the ability to invest direct we have the capacity to it we like the asset class obviously, we've been in for 25 plus years.
So we can invest directly and we can also invest through our RPF through the joint venture they've got about $100 million of investment volume. This year, we would expect them to be somewhere in the range of two to $2 50. This.
This year.
So it's really the decision is a bit more opportunistic I'm really what roles needs are.
Of.
Their engine production line and whether it makes sense to invest through the joint venture or directly.
We have the flexibility to do either we'd like to continue to grow the portfolio.
But somewhere in that range.
In terms of Gatx's direct investments somewhere in that $2 million to $300 million range is something we can.
We can do on an annual basis directly with no issue and I would like to.
And Justin just for sizing, where we are today as of June 30, we had 28 engines that we wholly own and as Bob mentioned, one more early in July so.
Nine, but but 28 at the end of the quarter.
In total dollar amount, that's just north of $700 million direct.
Very helpful. I appreciate the time thanks.
Thank you.
Your next question comes from the line of Matt Alcott with TD Cowen. Please go ahead.
Good morning, Thank you.
Paul just a quick follow up first you mentioned several railcar types.
Yes rates are.
Near all time highs in part obviously relay.
Related to inflation, not we're not saying underlying demand conditions are near all time highs.
Yes, I mean, we've said for a while that this is the phrase we've used as a supply led recovery in a railcar market. So the past up cycles. We've seen have been very demand driven we saw the ethanol boom, we saw the crude frac sand boom.
This tight railcar market is different than the recent.
Cycles <unk> seen recently in the sense that this really is all about tightness of supply and again the factors just to repeat myself, it's really as railroad velocity, if new car prices and availability of new cars and then its high scrap rates that we saw particularly when steel pricing was a little bit higher than it was today. So really those factors have contributed to the Titan.
Supply market and that's really what's underpinning the lease rates, we're seeing at least that's the view that we have to.
To your point too as we've mentioned in the past, we we really haven't seen carload growth supporting demand here and certainly look forward to that being the case.
But that has not been a driver today.
Yes.
And you guys would be happy to know that GM complain about railcar shortages on their call. This morning.
I don't know if they've ever mentioned railcars before.
On our calls we will have to go back and cycling Gazillions transcripts.
Can you talk about the your auto rack exposure as well as tightened absent any other alright types that you are seeing firsthand or hearing from your customers.
So I will say in general Matt we don't get into specific car types I will say, we have been a significant participant in the investment in new multilevel auto carriers, because obviously there is demand there and we have a diversified fleet. So you can expect that in any market, where there is significant demand we're going to participate as an investor So and Youre right certainly that's an area.
Where I think a number of parties are investing to try to meet the demand that's out there for multilevel auto carriers beyond that again, we really don't like to get into specific fleets in terms of the supply and demand balance other than just to say broadly speaking right now other than I would say the perennial laggards like for example, small cubes for <unk>.
And service.
Seeing strength across most parts of the fleet.
Got it and then just one last one on the secondary market are the same for says the same supply forces.
Shippers.
The desire to hold on to assets.
That are contributing to lease rates being so strong are they also.
Continuing to hold up.
Secondary market valuations or has have you seen any any easing there as interest rates are.
Hi.
So I will say this I'm not going to speculate on why because ultimately I can't tell you why buyers buy or sell or sell but what I will tell you is that <unk>.
<unk> and demand in the secondary market have remained quite strong. So in spite of interest rates in spite of other headwinds.
We continue to see a ready market in terms of buyers in the secondary market, Yes, Matt I think if you recall as we came into the year, we we actually thought with rising interest rates. There was a possibility we would see some pairing back at least among the buyer universe.
That has not been the case.
Fascinating.
Even though the strength has continued I would imagine that your opportunities to take advantage of that in the secondary market.
Naturally diminish as you taken.
Nearly full advantage of it over the past year and a half or so.
Well actually through the first six months of the year and we've had one of the biggest one of the larger year as we've had in terms of buying cars in the secondary market, we've had to be extremely selective in how we've done that.
But we are finding channels and avenues for X for us to execute better as well and I'll add to this is Paul speaking again on the sell side, we are continuing to originate a great deal of high quality business. So in terms of exhausting opportunities on the sell side Thats not the case at all we ultimately still have I would say quite.
A bit of dry powder to continue to sell as and when we see the opportunity to do so attractively.
Thank you guys very much appreciate it.
Thank you Matt.
Your next question comes from the line of Bhaskar <unk> majors with Susquehanna. Please go ahead.
Just to clarify on that last question on the secondary market in North America do you have any sense of the timing and magnitude of the books, you're putting into the market and when we might see the P&L impact from that the second half of the year between <unk> and <unk>.
It's always difficult to tell thats kind of like we do normally go to market with a book in the second half of the year, we will do that this year.
But.
As you May know.
The book itself is comprised of a lot of different transactions.
A different car types a lot of different lease riders.
And so the potential buyer universe, they can bid on all of that or they can selectively bid on individuals.
Transactions.
And that's how we go through and evaluate the hold versus sell it.
Takes a little bit of time.
And then you get into the whole closing process.
And the timing of that.
The lease.
The lease approval in terms of.
Selling the car so it takes a little bit of time, it's hard to predict.
What I can tell you is based on everything we see the market remains pretty robust.
And we'll see what the package brings here in the second half of the year.
Thank you for that.
On the buy side from some of the larger portfolios that may or may not trade.
Has this environment seem to change that.
Particularly from a large fleet perspective, I'm just curious if you see opportunities coming up over the next one or two years as a buyer that just haven't been present over the last three or four years.
Well I think we're perpetually, saying it always seems like there should be some activity on the larger portfolio side over the coming year or two and then it.
Time passes and it doesn't happen.
And even with for example, the beginning part of this year with all of the turmoil in the banking industry, we thought well maybe there is an opportunity there with some of the mid to smaller size.
Rail portfolios embedded in some of the banks might come loose we haven't seen that.
So should they happen.
Probably well they hitch.
History would say it takes a lot more time than one might anticipate.
Thank you for that.
Last for me, maybe just a bigger picture question, but.
Just looking at the quarterly stats you put out your average renewal terms over five years now it's the first time, it's been there since 2016.
When youre locking that in with an L. P I over 30%.
One of the earlier questions you talked about absolute lease rates still rising sequentially, though not as fast as they were earlier this cycle, but if I look back the last time Gatx's was in this position in North America rail and that was a really favorable four year period from the early to mid 2010.
I realize that that analogous period book ins the crude by rail Bonanza, and that's unlikely to repeat for the tank car world today, but yes.
As you step back what feels similar to that type of backdrop for gtx and what feels different as you look out to your opportunities over the next two to three years. Thank you.
Well I would say wed feel similar as we are highly confident and very enthusiastic about the platforms and positions. We have both in North America, and Europe and India.
We feel our rail business is in a great position in all of those markets to continue to grow and capitalize on opportunities.
They just don't come consistently right there is a little bit more of a stair step in terms of the opportunities that may come our way.
But anything that does we're going to be in a great position to capitalize so I feel very good about that.
I also feel very good about the fact that our business our tank container leasing business that we bought a few years ago try fleet has been an excellent addition to gtx.
One that we can continue to grow it is organically growing in the high single digits. Unlike some of the other markets. We're in from a unit perspective, so there'll be opportunities there.
The third thing I would mention is on the engine leasing business, whether it's through our joint venture with Rolls Royce.
Our direct.
There are substantial investment opportunities and I can tell you we feel very good about that asset class given the fact that we've come through a pandemic when global air travel literally went to zero.
Nobody could have anticipated that situation and yet here, we are coming out of that.
The asset sales have showed great stores of value and great resiliency.
And we have an outstanding partner Rolls Royce or we can continue to grow with.
So.
That's my General assessment with regards to North American rail I'll look to pause and see if you have anything to add in terms of the dynamics.
Not much to add Bob. Thank you I mean, as I said fundamentally we are in a tight market right now which has been very good for us in terms of pricing in term I think we've been successful so far this year, even despite high asset prices finding some attractive places to deploy capital in North American rail so.
Italy, we feel good about where we are positioned in the market right now and as we always do we can't predict the future. So the the terming out of the fleet as you've observed as our key hedge against the uncertainty that we might face so overall.
I think we feel good about the position we have in rail North America, and the only thing I'd add to that Bascom as the key difference is during that cycle that you mentioned, we knew that there was overbuilding going on in crude oil cars. We knew there was overbuilding going on in small cube covered hoppers, we don't.
Have something analogous like that going on right now.
Well that sounds pretty encouraging thank you very much for that comprehensive answer guys.
Thank you Pascal.
Your next question comes from the line of Justin Bergner with Gabelli funds. Please go ahead.
Good morning, everyone.
Good morning.
Hi, Bob Hi, Paul Hi, Tom Hi, Sherri.
First question would be on the Rolls Royce joint venture.
Maybe sometimes in the past quarters, you've sort of segregated how much of the increase in.
In this segment profit year on year was coming from.
Higher remarketing income versus.
Sort of operating.
The operation or leasing of the fleet.
Could you maybe comment on that.
Certainly so for the year to date numbers that we have about.
45% of the segue.
Segment earnings from operations and about 55% for remarketing.
Okay. That's helpful.
I got a few minutes late so I'm not sure. If this was covered early on but the guidance raised to at or above the high end of the $6 50 to 690 guide is the primary driver there the higher remarketing income or are there other material drivers we should be aware of.
Yes, so primarily if you look segment by segment things are proceeding pretty much as we anticipated coming into the year, we talked about and Paul's first answer you talked about some positive news on the revenue side in rail North America, and some offsetting higher than expected maintenance.
Primarily due to the.
The volume of activity coming into the shops. The one segment that clearly has over performed as the portfolio management segment and Thats really driven by the positive performance that we've seen at it.
At our joint venture with Rolls Royce and that tie back to your first question, we're seeing better than expected performance in remarketing income and on the operations side as well. So that's the biggest one that's been different I'd say, Justin coming into the year as we came out of the bag.
Half of 'twenty, two we were still anticipating.
Relatively slower recovery in global Air travel ban has occurred I think than everybody else, but.
Now the most recent statistics show that domestic air travel is now.
Pre pandemic levels and has exceeded pre pandemic levels anyone who has been in the airport lately I think.
Attached to that.
International travel is now already back to 90% of pre pandemic levels. So that recovery has occurred faster than we thought.
Gotcha so.
You didn't increase the guy in the first quarter, but I guess are you, suggesting then your view on sort of remarketing income in rail North America.
Is it materially higher or sort of post <unk> versus post <unk> that.
That's correct.
Got you.
Two more quick questions on the velocity side are you seeing any signs of sort of a step positive step change there.
<unk> continued to struggle with the major railroads, it's really a mixed story I would say.
In a different period of different railroad with the up and a different railroad will be down the overall trend right now I would say and really when we talk about velocity that velocity. There is dwell time and then there is also sort of first mile last mile service quality and those three things collectively are what impacts.
The competitiveness of rail service for rail shippers and what I would say there is.
The story remains mixed it would we can't say that we see any particular overall improvement across the industry and the service package being offered by the railroads.
Okay.
And then lastly.
One of the major suppliers of railcars in the industry.
Big.
Set of orders.
In recent months.
And I was just curious if you had any thoughts as to why that might have.
Suddenly occurred maybe lower steel prices.
And what that means.
If lower steel prices do lead to.
Orders for new railcars, if that could have any effect on the on the cycle as it relates to leasing and the tightness there in <unk>.
It's really hard to say because ultimately what drives an individual book of orders for a given builder, maybe just specific to the customers and then the niches they are filling so.
I really don't want to speculate on what might have driven those orders, it's really difficult for us to know.
Okay understood I appreciate you taking all my questions.
Thank you Justin.
And your final question comes from the line of Justin Long with Stephens. Please go ahead.
Thanks for taking the follow up I just wanted to circle back on one data point around the utilization rate and the European railcar fleet that step down sequentially over the last couple of quarters and I was wondering if you could provide a little bit more color on what's.
Driving that and how youre thinking about utilization in that market going forward.
Sure Justin this is Bob.
I would say broadly across the fleet utilization has held up extremely well and we're still seeing very pretty stable demand for most car types. The challenge spot has been in the intermodal market.
We have just under 2000 intermodal wagons and Europe .
And that has been the spot that has been the primary driver of that step down in utilization.
The Euro zone economic growth has been pretty benign Meg.
Negative expectations in some circles.
That overall so.
The environment for carload for carload demand on the intermodal side is low.
So that is the biggest driver now we like those assets, we like the investments. We've made there that will be great long term holds for us, but we need to drive through this period right now of of low demand for that particular car type.
Okay got it that's helpful. Thanks, Bob.
Okay.
Okay.
There are no further questions at this time I will turn the call to Shari hellerman.
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 conference call you may now disconnect your lines.
[music].
Okay.
[music].
Okay.
Okay.
[music].
Okay.