Q3 2023 GATX Corporation Earnings Call
Good morning, My name is Rob and I'll be your conference operator today at this time I would like to welcome everyone to the G. H T X third quarter 2023 earnings conference 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'd like to ask a question. During this time.
Simply press Star followed by the number one on your telephone keypad. If you would like to withdraw your question again prestige starwood.
Shari Hellerman head of Investor Relations you May begin your conference.
Thank you Rob.
Good morning, and thank you for joining Gatx's 2023 third 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 trials could differ materially from those statements or forecast.
For more information please refer to the risk factors included in our earnings release and those discussed in Gatx's Form 10-K for 2022 and in our other filings with the SEC.
G. A T X assumes no obligation to update or revise any forward looking statements to reflect subsequent events or circumstances.
Earlier today G. A T X reported 2023 third quarter net income of $52 5 million or $1 44 per diluted share.
This compares to 2022 third quarter net income of $29 1 million or <unk> 81 cents per diluted share.
The 2022 third quarter results include a net negative impact of $10 8 million or 31 cents per diluted share from tax adjustments and other items.
Year to date 2023.
Net income was 100 at $93 2 million or $5 30 per diluted share.
This compares to $107 5 million or $2.99 per diluted share for the same period in 2022.
The 2023 year to date results include a net negative impact of one 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 $55 2 million or $1 54 per diluted share from tax adjustments and other items.
These items are detailed in our supplemental information pages of earnings release.
Now I'll briefly address each of our business segments.
Oh, well North America.
Fleet utilization was 99, 3% at the end of the quarter.
Demand for the majority of cards that are existing fleet remains strong.
And we continue to extend renewals at higher rates.
The third quarter renewal rate change of Gatx's lease price index was positive 33, 4%.
With an average renewal term of 65 months.
Our renewal success rate remained very high at nearly 84% in the quarter.
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've placed over 2400 railcars from our 2022 Trinity supply agreement.
Our earliest available scheduled delivery under our supply agreements is in the third quarter of 2024.
The secondary market for railcars in North America remains active.
We generated remarketing income of approximately $13 million in the third quarter.
88 million year to date.
Within rail International well Europe continued to experience increases in renewal lease rates versus expiring rates.
Driven by stable demand for most car types.
Well Europe fleet utilization remained healthy at 96%.
Although theres continuing softness in the European intermodal sector.
Which is the primary driver for the utilization dip at rail Europe .
During the quarter.
Well Europe , Israel, India continued to take delivery of new cars and grow the fleet.
Well Europe third quarter investment volume with nearly $130 million.
Turning to portfolio management.
Third quarter results were driven primarily by the solid performance of the Rolls Royce and partners finance affiliates.
Our wholly owned aircraft engines portfolio also contributed to higher earnings.
Global demand for aircraft spare engines as robot.
National Air passenger traffic continues to recover.
As noted in the release, we continue to identify attractive investment opportunities across our global businesses in today's environment.
Total investment volume was over $360 million in the third quarter and over $1 $2 billion a year to date.
Finally.
Reflecting favorable operating performance to date and our outlook for the remainder of the year.
We expect 2023 full year earnings to modestly exceed the high end of our previously announced guidance range of $6 50 to 690 per diluted share.
Excluding any impact from tax adjustments and other items.
And those are our prepared remarks.
I'll hand, it back to the operator, 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.
And your first question comes from the line of Justin Long from Stephens. Your line is open.
Thanks, and good morning.
Maybe I'll start with a question on North American rail could you talk about the trend in absolute lease rates that you saw on a sequential basis in the third quarter and then anything you can share on your expectation for re marketing in the fourth quarter, just curious what's baked into the guidance.
Good morning, I'll take the first one and then turn it over to Bob for the second one so compared to the prior quarter. Most tank car types. We're up a couple of percentage points in terms of lease rate. Most freight car types were relatively flat the exception to that work coal and small cube covered hoppers.
Yeah, and then on <unk>.
Marketing income, Justin it's always a little bit more difficult to predict coming into the fourth quarter just because of.
A seller or I'm, sorry buyer activity in terms of timing. So it gets a little difficult through the first nine months of the year, we're close to $90 million already in remarketing income.
So we will see some more activity in the fourth quarter, but not on the same magnitude if you annualized the last three quarters.
Okay, Great. That's helpful and secondly, I wanted to ask about maintenance expense in both North America and the international business. It seems like we had at <unk>.
<unk> step up on a sequential basis and in North America. If I go back to your expectations for maintenance expense at the beginning of the year, we're tracking pretty far ahead of that so I was just curious if you could give a little bit more color on what's driving this kind of magnitude of the increase and how to think about maintenance.
<unk> expense going forward.
Justin This is Tom ill once again take the rail North America, and then turn it over to Bob for International.
As you stated maintenance costs are higher than we expected coming into the year.
This variance was driven by higher than expected volume, which was a result of a few more assignments of existing cars than we thought we would have and a little bit more compliance work coming in than we expected.
This caused the percentage of maintenance that we do on our own facilities to fall a bit from this recent history.
However, it is important to note that the unit cost per repair in our own facilities is in line with our expectations and very attractive relative to third party alternatives.
In fact, our relative advantage actually grows during times of limited industry capacity as you know we always provide commentary on 2024 or the next year during our January earnings call and we will continue to do that however, it's fair to say that one of our goals will be to increase the percentage of <unk>.
Rob: Good morning, my name is Rob and I will be your conference operator today.
Rob: At this time, I would like to welcome everyone to the GATX third quarter of 2023 earnings conference call. All lines have been placed on mute to prevent any background noise.
Maintenance performed in our own facilities.
Yes, and on the international side Justin.
Rob: 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 would like to withdraw your question, again, press the star one.
From a overall standpoint, the net maintenance expense is actually not.
It's coming in.
The range of what we had anticipated.
We had very sharp.
Inflationary impacts as you might recall during 2022, so coming into 2023, we knew we would feel the full impact of that this year, both in terms of energy costs and labor costs being the two biggest drivers there.
Shari Hellerman: Thank you, Shari Hellerman, head of investor relations.
Bob Lyons: You may begin your conference. Thank you Rob. Good morning and thank you for joining GATX's 2023 third 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 four looking statements. Actual results are trans could differ materially from those statements or forecasts. For more information, please refer to the risk factors included in our earnings release and those discussed in GATX's form 10K for 2022 and in our other filings of the SEC.
We've also had some FX headwinds as well, but overall nothing material.
In terms of a deviation from what we expected coming into the year.
Got it thanks I'll pass it on.
Your next question comes from the line of Matt Alcott from TD Cowen Your line is open.
Good morning, Thank you get to see some of the <unk>.
Wrong metrics utilization rates than even the renewal success rate, although the renewal success rate decline can you just talk a bit about this.
Bob Lyons: GATX assumes no obligation to update or revise any four looking statements to reflect subsequent events or circumstances. Earlier today, GATX reported 2023 third quarter net income of 52.5 million or $1.44 per dollar share. This compares to 2022 third quarter net income of 29.1 million or 81 cents per dollar share. The 2022 third quarter results include a net negative impact of 10.8 million or 31 cents per dollar share from tax adjustments and other items.
Yes, so Matt in terms of the given a given quarter that can move around a little bit and the degree of precision.
That's implied there is.
It was really more than exist a couple of transactions can move that the important thing I'll note is a non renewal does not necessarily mean, a non utilized car and as you noted the utilization remained very very high which means that any car that for whatever reason is not being renewed is being quickly put back to work.
Bob Lyons: Year to date 2023 net income was $193.2 million or $5.30 per dollar share. This compares to $107.5 million or $2.99 per dollar share for the same period in 2022. The 2023 year to date results include a net negative impact of 1.1 million or $3 per dollar share from tax adjustments and other items. The 2022 year to date results include a net negative impact of 55.2 million or $1.54 per dollar share from tax adjustments and other items. These items are detailed in a supplemental information pages of earnings release.
Yes, I would.
Add to that too there are times, Matt where especially in this type of rate environment.
Where certain customers may.
They know and given the diversity and diversity of our fleet and our commercial capabilities, we're comfortable taking a car back and putting on lease with the next customer.
So that would.
<unk> impact your renewal success rate, but.
In the end.
Any renewal success rate up and the ZIP code of where we're at today is really really strong.
That's very helpful. And then one more question I believe share you mentioned that the.
First available scheduled deliveries from your manufacturer suppliers.
Bob Lyons: Now I'll briefly address each of our business segments. At Real North America, fleet utilization was 99.3% at the end of the quarter. Demand for the majority of Cartesian or existing fleet remains strong and we continue to extend renewals at higher rates. The third quarter renewal rate change of GATX's lease price index was positive 33.4% with an average renewal term of 65 months. Our renewal success rate remained very high and nearly 84% in the quarter.
As for <unk> I believe last quarter, you said.
First quarter.
Am I correct or just any.
Clarification on this would be good.
Yeah, Matt So its third quarter of 2024, right now and so backlog for both tank and freight cars are about a year out and thats on our yes.
Yes, that's on our supply agreement Matt.
Okay.
Got it perfect. Thank you guys very much appreciate it.
Your next question comes from the line of Allison <unk> from Wells Fargo. Your line is open.
Bob Lyons: We continue to successfully place new rail cars from our community supply agreements with a diverse customer base. We've placed all 4,800 rail cars from our 2018 Trinity Supply Agreement, and we've placed all 7,650 rail cars from our 2018 Green Buyer Supply Agreement. In addition, we've placed over 2,400 rail cars from our 2022 Trinity Supply Agreement. Our earliest available schedule delivery under our Supply Agreement is in the third quarter of 2024. The secondary market for rail cars in North America remains active. We generated a remarketing income of approximately $13 million in the third quarter, and over 88 million year-to-date.
Hi, Good morning, just wanted to go back to Europe , just on sort of that intermodal pressures that youre seeing reflected in the utilization side is that starting to stabilize for you or does it feel like that could take another leg down just trying to get a sense of where that is today.
I don't know if its going to take another leg down Allison, but it's going to take a while to recover we only have about 2000 intermodal wagons and our fleets in Europe out of our fleet total fleet of over 29000 wagons.
So.
A small minority of our fleet.
But it's the one that's under the most significant pressure.
For example, we have roughly 1100 idle idle wagons in Europe , that's it over half of those are intermodal.
Bob Lyons: Within rail international, rail Europe continues to experience increases in renewal-ease rates versus expiring rates. Driven by stable demand for most car types, rail Europe's fleet utilization remains healthy at 96%. Although there's continuing softness in the European Intermodal sector, which is the primary driver for the utilization dip at rail Europe. During the quarter, rail Europe and rail India continue to take delivery of new cars and grow the fleet. Rail Europe's third quarter investment volume with nearly $130 million.
So the market has faced a lot of pressure as you would expect it's the most economically sensitive in the economic environment in Europe is.
Spotty across regions and pretty challenged overall.
I don't see that abating here in the next three to six months, it's going to take a while for that market to recover.
Long term, we feel very good about the assets we own are relatively new.
And in the push in Europe for more product from truck to rail.
There will be a point, where those assets are going to be fully utilized and good good assets for <unk> in the portfolio.
Bob Lyons: Turning to portfolio management, third quarter results were driven primarily by the solid performance of the Rolls Royce and Partners Finance affiliates. Our wholly owned aircraft engines portfolio also contributed to higher earnings. Global demand for aircrafts' barringence is robust. As international air passenger traffic continues to recover. Let's note in the release, we continue to identify attractive investment opportunities across our global businesses in today's environment. Total investment volume was over $360 million in the third quarter, and over $1.2 billion year-to-date.
Got it. Thank you and then we've seen pretty strong diversification in terms of investment across your assets.
Any color on how youre thinking about that going forward or does that start to shift maybe towards one asset versus another just given some of the macro concerns here or just maybe kind of walk through how youre thinking about that thanks.
Yes, we continue to think very economically Allison so we're going to deploy capital, where we have our highest return opportunities we're not pegging any particular percentage.
For Europe , or any percentage for India or our engine leasing business for example.
That falls out of where we see the best return.
Bob Lyons: Finally, reflecting favorable operating performance to date and our outlook for the remainder of the year. We expect 2023 for-year earnings to modestly exceed the high end of our previously announced guidance range of 650-690 per-delivered share, excluding any impact from tax adjustments and other items. And those are our prepared remarks.
And the best opportunities. So Fortunately right now we're seeing them across the board as you said, it's pretty well diversified.
I don't see that changing here in the near term.
Great. Thank you.
Yes.
And again, if you would like to ask a question at Star one on your telephone Keypad. Your next question comes from the line of Justin Bergner from Gabelli funds. Your line is open.
Rob: I'll hand it back to the operator 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.
Good morning, Bob Good morning, Tom Good morning Sherri.
Good morning, good morning, good morning.
Hum.
The first question I have.
Justin Long: Enter first question comes from a line up just in long from Stevens. Your line is open. Thanks and good morning.
Would just relate to.
Cleanup questions did you repurchase any shares in the quarter.
Tom Ellman: Maybe I'll start with a question on North American rail. Could you talk about the trend and absolute lease rates that you saw on a sequential basis in the third quarter? And then anything you can share on your expectation for remarketing in the fourth quarter just curious what's baked into the guidance.
We did not.
Okay.
And then.
Secondly, the other revenue in rail International could you just clarify sort of what's in it and why it's.
Been ticking up over the last year is that just commensurate with the growth.
International business, Yes, just and my guess is youre actually referring to the portfolio management segment.
Tom Ellman: Good morning. I'll take the first one and then turn it over to Bob for the second. 1. So compared to the prior quarter, most tank cart types were up a couple of percentage points in terms of lease rate. Most freight cart types were relatively flat. The exception of that were coal and small cube covered hoppers that were down about 5 to 10%. Yeah, and on remarketing income, Justin is always a little bit more difficult to predict coming into the fourth quarter just because of seller or I'm sorry buyer activity.
I guess, you can cover that as well, but I was asking about the international okay. So in portfolio management. The key driver is the gel engines. So we've noted before that we have engines that are used to.
Support.
<unk>.
The business in Rolls Royce that.
He has a.
Tom Ellman: In terms of timing, so it gets a little difficult, you know, through the first nine months of the year, we're close to 90 million already in remarketing income. So we'll see some more activity in the fourth quarter, but not on the same magnitude if you annualized the last three quarters. Okay, great, that's helpful.
That supports their total care maintenance program and this is a pool of engines that rather than being on a fixed lease to a single airline are leased to several different airlines to support that program and because of the accounting is a little bit different that shows up as other revenue rather than lease revenue.
<unk> engines, those 15 engines that support that pool have been added between the fourth quarter of 2022 and July of 2023, and Thats why you see the big step up in the portfolio management segment.
Tom Ellman: And secondly, I wanted to ask about maintenance expense in both North America and the international business. It seems like we had a decent type step up on a sequential basis. And in North America, if I go back to your expectations for maintenance expense at the beginning of the year, we're tracking pretty far ahead of that. So I was just curious if you could give a little bit more color on the market.
And then on the international side, Justin Unlike in rail North America, where other revenue primarily represents repair revenue.
Those are repairs that we filled back to the customer.
And international is a much smaller percentage of the overall <unk>.
Tom Ellman: And what's driving this kind of magnitude of the increase and how to think about maintenance expense going forward. Justin, this is Tom. I'll once again take the Royal North America and then turn it over to Bob for international as you stated maintenance costs are higher than we expected coming into the year. This variance was driven by higher than expected volume, which was a result of a few more assignments of existing cars than we thought we would have and a little bit more compliance work coming in than we expected.
Revenue line less than 5% and it's really a myriad of items some of that is.
Okay.
Damage for railcar.
Our recovery on damage for railcars, it can be billed back to customers.
We have some interest income in there as well. So there is there is a whole host of items in there, but nothing in particular and really should be no change in the trend line.
Okay.
Tom Ellman: This caused a percentage of maintenance that we do in our own facilities to fall a bit from the recent history. However, it's important to note that the unit cost per repair in our own facilities is in line with our expectations and very attractive relative to third party alternatives. In fact, our relative advantage actually grows during times of limited industry capacity. As you know, we always provide commentary on 2024 or the next year during our January earnings call and we'll continue to do that.
You had to handicap sort of what parts of your business are tracking ahead of your early in earlier guidance to allow you to come in modestly ahead, which segments of the business.
Would you pull the chip.
Yes.
I'll comment first and maybe if you want some additional color Tom can weigh in too, but the big driver has been portfolio management as the engine leasing business.
Yes, when we were in the depths of the pandemic and coming out of it last year. The expectation was for the global aerospace sector for air travel to really not fully recover.
Tom Ellman: However, it's fair to say that one of our goals will be to increase the percentage of maintenance performed in our own facilities. Yeah, and on the international side, Justin, from overall standpoint, you know, the net maintenance expenses actually not is coming in in the range of what we had anticipated. We had very sharp inflationary impacts as you might recall during 2022. So coming into 2023, we knew we would feel the full impact of that this year, both in terms of energy cost and labor cost being the two biggest drivers there. We've also had some effects headwinds as well, but overall nothing material in terms of a deviation from what we expected coming into the year. Got it. Thanks.
At the earliest until 2024.
Justin Long: I'll pass it on.
Domestic travel is above pre pandemic levels already international travels at about 90%, 97% of what it was.
Pre pandemic so the recovery there has been much faster.
So our utilization of engines.
Has been higher than anticipated bad debt expenses lower than anticipated all the things you would expect to see in a recovery just occurred much quicker than anyone anticipated and we've been able to deploy capital directly into engines at a pace above what we originally thought so youre seeing that.
Pickup in our other revenue.
Within portfolio management as Tom mentioned.
Great. Thank you if I could just get one last one in.
The higher interest rate environment.
Matthew Elkott: You are next question, comes from a line of Matt Elkott from Kedi Cowan. Your line is open.
How does that sort of affect the dynamic between higher lease rates and higher cost of capital.
Bob Lyons: Good morning, thank you. Get to see some of the, you know, strong metrics utilization and rates and even the renewal success rate. Although the renewal success rate did decline. Can you just talk a bit about this? Yeah, so Matt, in terms of the given quarter that can move around a little bit. But the degree of precision that's implied there is really more than exist. A couple transactions can move that. The important thing I'll note is a non renewal does not necessarily mean a non utilized car.
So you really got to think about that in two different ways. So for the existing fleet. The interest rate environment actually has very little impact that sort of a car type by car type.
What's the supply demand dynamic and that's really what drives.
The rate environment and any on any of those existing cars.
On a new investment where you have the <unk>.
<unk> to decide to invest or not to invest obviously higher interest rates make sure threshold, a little bit higher for total investment and a little bit more challenging to invest in that kind of an environment unless you can get the lease rate.
Bob Lyons: And as you noted, the utilization remain very, very high, which means that any car that for whatever reason is not being renewed is being quickly put back to work. Yeah, and I, I would add to that too, there are times Matt where especially in this type of rate environment where certain customers may say no. And given the diversity, diversity of our fleet and our commercial capabilities, we're comfortable taking a car back and putting on lease with the next customer. So that would obviously impact your renewal success rate. But in the end, any renewal success rate up in the zip code of where we're at today is really, really strong. Yeah, that's very helpful.
It is important to note, though that that overall dynamic is helpful. Because if it makes that new car more expensive. It makes the alternative of renewing an existing car more attractive and that's really the the <unk>.
Primary benefits that you get.
Thanks, that's very helpful. I appreciate you taking my questions.
Thank you.
Your next question comes from the line of Brendan Mccarthy from Sidoti Your line is open.
Yes, good morning, and thank you for taking my questions.
I just have a quick question on the balance sheet. It looks like recourse leverage had a very small increase to $3 two.
From $3, one where it's been in the past handful of quarters I think I recall the Companys aim is to stay under the investment grade cap of $3 five.
Bob Lyons: And then one more question, I believe Sherry mentioned that the first available scheduled deliveries from your manufacturers of liars is for three key, I believe last quarter, you said first quarter. Am I correct or just any clarification on this would be good. Yeah, Matt. So it's third quarter of 2024 right now. And so backlog for both tank and freight cars are about a year out. And that's on our, yeah, that's on our supply agreement, Matt. Okay, got it perfect.
But are you.
Comfortable with.
That metric approaching three five or how can we think about.
The debt level.
Yes, so certainly we're very comfortable with where it is one of our key criteria always is ensuring consistent access to attractively price capital. So we're in constant communication with the rating agencies about where they're comfortable on their various metrics and it's very clear that they are comfortable.
Below that three five to one level and certainly could be comfortable with something even higher for the right situation in the right environment.
Matthew Elkott: Thank you guys very much. Appreciate it.
Allison Poliniak: Your next question comes from a line of Alison Pliniac from Wells Fargo. Your line is open. Hi, good morning. Just want to go back to Europe. It's just on sort of that intermodal pressure that you're seeing reflected in the utilization side. Is that starting to stabilize for you or does it feel like it could take another leg down just trying to get access and so where that is today.
Got it. Thank you that's helpful.
Then one last one for me.
I think we've talked about this metric before in the past, but I'm wondering if you can shed light on the percent of the the percentage of the lease portfolio that has been repriced at higher rates. Since you have been able to meaningfully increase lease rates since roughly early 2022.
Bob Lyons: I don't know if it's going to take another leg down, Alison, but it's going to take a while to recover. We only have about 2000 intermodal wagons in our fleet in Europe out of a fleet total fleet of over 29,000 wagons. So it's a small minority of our fleet, but it's the one that's under the most significant pressure. You know, for example, we have roughly 1100 idle idle wagons in Europe. That's it.
Yes, so it's very difficult to precisely predict how are enough for predict but precisely indicate how much of the fleet is repriced into a more attractive environment. We've mentioned for a while now that sequential lease rates were up quarter over quarter, we're going on like three years of that situation occurring.
But that was from pretty low base and if you look at when lease rates started to get up over that long term average it was somewhere in the 2022 timeframe.
Bob Lyons: Over half of those are intermodal. So the market has faced a lot of pressure as you would expect. It's the most economically sensitive and the economic environment in Europe is spotty across regions and pretty challenged overall. I don't see that abating here in the next three to six months. It's going to take a while for that market to recover.
So looking at it from that perspective, you might say about a third of the fleet is repriced in an attractive environment, but if you wanted to go back to when the lease rates increased you'd have a higher percentage and if you wanted to say when did we we start feeling good about extending lease term you might have a slightly lower percentage.
Bob Lyons: But long term, we feel very good about the assets we own or relatively new. And in the push in Europe for more products from truck to rail, there will be a point where those assets are going to be fully utilized and good assets for GATX and the portfolio. Got it. Thank you. And then we've seen pretty strong diversification in terms of investment across your assets. Just any color and how you're thinking about that going forward.
So it's hard to really give you an absolute number there.
Yes.
Ed I would just add too in terms of the runway we have for positive differential.
We have a lot of runway.
And.
Being able to lock cars in four or five to six year terms at these rates and positive differentials. We are embedding a lot of high quality cash flow into the portfolio.
Bob Lyons: Does that start to shift maybe towards one asset versus another just given some of the macro concerns here or just maybe kind of walk through how you're thinking about that. Thanks. Yeah, we continue to think very economically, Allison. So we're going to deploy capital where we have our highest return opportunities. We're not pegging any particular percentage for Europe or any percentage for India or our engine leasing business, for example, that falls out of where we see the best return in the best opportunities. So fortunately, right now we're seeing them across the board. As you said, it's pretty well diversified. I don't see that changing here in the near term.
Yes.
Great that's very helpful. Thanks, everybody.
Allison Poliniak: Great. Thank you.
Thank you.
Your next question comes from the line of basketball majors from Susquehanna. Your line is open.
Bob to follow up on that last question what is the shape of the expiring rate of your North American portfolio. As we go forward 123 years understanding that portfolio may change and this won't hold.
Yes, so as you know we provide guidance at the January earnings call every year, and we will give some information about the exploration profile going forward.
If you looked at.
Rob: And again, if you'd like to ask a question, it's star one on your telephone keypad.
Over a long period of time.
See that in some of the lower years, it's 13% to 15000 railcars expiring some of the higher years its a little over 20000, So we will give.
Justin Berger: Your next question comes from a line of Justin Berger from Gabelli funds. Your line is open. Good morning, Bob. Good morning, Tom. Good morning, Sherry. Good morning. The first question I have would just relate to some cleanup questions. Did you repurchase any shares in the quarter? We did not. Okay.
More exact guidance in January but it that gives you some kind of range of where you might expect that.
But from a rate perspective does the expiring rate go down similar next year in the North American portfolio.
Yes, we will get into that in January Bascom, we'll lay that out for you, but as I said.
Tom Ellman: And then secondly, the other revenue in rail international, could you just clarify sort of what's in it and why it's been picking up over the last year? Is that just commensurate with the growth of the international business? Yeah, Justin, my guess is you're actually referring to the portfolio management segment. I guess you can cover that as well, but I was asking about the international. Okay. So in portfolio management, the key driver is the gel engines.
Previously in terms of my confidence level and positive differential.
There is there's a lot of runway there.
Thank you for that and we don't talk as much about that concept on the international book is there anything unique there should we think fairly <unk>.
Pro rata similar cyclical economics to kind of the tops down directional view, we just talked about North America.
Yes, the actual lease terms in Europe are much shorter.
Tom Ellman: So we've noted before that we have engines that are used to support the business and Rolls Royce that has a, that supports their total care maintenance program. And this is a pool of engines that rather than being on a fixed lease to a single airline are leased to several different airlines to support that program. And because the accounting is a little bit different that shows up as other revenue rather than lease revenue.
Typically than they are in North America, that's been the case for for decades.
It's really hard just from.
Commercial standpoint.
<unk> move the needle much.
<unk>.
Term, so you see a greater percentage of the fleet rolling over each year and.
In Europe , but also historically the lease rate variability.
Much lower than it is in North America.
That tends to be a single digit upper down percentage wise.
Good environment Bad environment, you don't see the rate swings like you do in North America.
Tom Ellman: And those engines, those 15 engines that support that pool have been added between the fourth quarter of 2022 in July of 2023. And that's why you see the big step up in the portfolio management. Management Sigma. And on the international side, Justin, unlike in rail North America where other revenue primarily represents repair revenue, those are repairs that we've filled back to the customer. And international, it's a much smaller percentage of the overall revenue line, less than 5%.
We're certainly pushing rates higher because in.
In certain car types in Europe right now.
Environments in our favor to do that but.
But nothing on the magnitude that you would see in North America for example, an LTI of plus 33%.
Sure.
Yes, a really good renewal in Europe as in the 5% to 10% plus range and a bad day has a couple of percentage points off.
Tom Ellman: And it's really a myriad of items. Some of that is damage for rail cars, recovery on damage for rail cars. It can be billbacks to customers. We have some interesting come in there as well. So there's there's a whole host of items in there, but nothing in particular and really should be no change in the trend line. Okay.
Thank you for that clarification, just just one last one.
<unk>.
You've talked pretty constructively about your momentum in a lot of your businesses, both last quarter and this quarter.
As we look into next year without necessarily going into quantitative guidance, but what keeps you up at night, what are the risks and you're continuing to deliver the kind of results. We've seen from you over the last couple of years here just curious.
Bob Lyons: If you had to handicap sort of what parts of your business are tracking ahead of your early and earlier guidance to allow you to come in modestly ahead, which segments of the business? Would you pull them? Yeah, I'll comment first and maybe if you want some additional color, time can weigh in too, but the big driver has been portfolio management. It's the engine leasing business. You know, when we were in the depths of the pandemic and coming out of it last year, the expectation was for the global aerospace sector for air travel to really not fully recover you know, at the earliest until 2024.
Where were we should watch and sharpen our pencils on downside potential. Thank you.
Sure well from a I'll go back to a question that came up previously in the call with regards to <unk>.
But one area of outperformance. This year has really been portfolio management on the engine side, but what's encouraging to me is behind that whether it's rail International rail Europe try fleet, what have you India.
We are.
<unk> to build a really solid foundation for the future here, whether it's managing the existing lease portfolio and certainly through the investment volume that we're seeing.
Last year and this year, we're putting a lot of capital to work and really attractive.
Bob Lyons: Domestic travel is above pre-pandemic levels already international travels at about 97% of what it was pre-pandemic. So the recovery there has been much faster. So our utilization of engines has been higher than anticipated, but that expense is lower than anticipated. All the things you'd expect to see in a recovery just occurred much quicker than anyone anticipated. And we've been able to deploy capital directly into engines at a pace above what we originally thought. So you're seeing that pick up in our other revenue within portfolio management, as Tom mentioned.
Returns for <unk> for our shareholders for the long term.
So I feel very good about that feel really good about where the business is today.
How it's been managed in the position we're in.
But what keeps me awake at night is the bigger macro factors that are outside of Gatx's control and we've seen a number of that was in the last couple of years, whether it's the pandemic the war in Ukraine.
Kind of the unpredictable macro things are what keeps me awake at night.
But I guess what allows me to go back to sleep at night as we've been through those for 125 years.
Bob Lyons: Great, thank you. If I could just get one last one in. The higher interest rate environment, how does that sort of affect the dynamic between you know, higher lease rates and higher cost of capital? So you really got to think about that in two different ways. So for the existing fleet, the interest rate environment actually has very little impact. That's sort of a card type by card type. What's the supply demand dynamic?
And we have the business in a really really stable strong foundation right now that we can.
Bob Lyons: And that's really what drives the rate environment in any on any of those existing cars. On a new investment where you have the ability to decide to invest or not to invest, obviously higher interest rates makes your threshold a little bit higher for total investment and a little bit more challenging to invest in that kind of environment unless you can get the lease rate. It's important to note though that that overall dynamic is helpful because if it makes that new car more expensive, it makes the alternative of renewing an existing car more attractive. And that's really the primary benefit. Thanks, that's very helpful, appreciate you taking my questions.
Respond and accordingly, whatever macro challenges are thrown our way.
Justin Berger: Thank you.
And <unk> I would say to some degree you answered your own question.
When you talked about that we've been talking constructively about each segment and then Bob Rowe.
A reminder, that the investment volume has been strong across all those segments. So one of the sources of resiliency and strength is that there is there is really some reason for optimism across all those segments.
Thank you Bob Thank you Tom.
Thank you.
And we have reached the end of our question and answer session and MS. Shari Hellerman I turn the call back over to you for some final 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 conference call. Thank you for your participation you may now disconnect.
Yes.
Brendan Mccarthy: You are next question comes from Lina, Brendan McCarthy from Sudoti. Your line is open. Yes, good morning and thank you for taking my questions.
Tom Ellman: I just have a quick question on the balance sheet. It looks like recourse leverage had a very small increase to 3.2 from 3.1 where it's been in the past handful of quarters. I think I recall the company's aim is to stay under the investment grade cap of 3.5 but are you comfortable with that metric approaching 3.5 or how can we think about the debt level? Yeah, so certainly we're very comfortable with where it is.
Sure.
Tom Ellman: One of our key criteria always is ensuring consistent access to attractively priced capital. So we're in constant communication with the rating agencies about where they're comfortable on their various metrics and it's very clear that they're comfortable below that 3.5 to 1 level and certainly could be comfortable with something even higher for the right situation in the right environment. Thank you. That's helpful.
Bob Lyons: And then one last one for me. I think we've talked about this metric before in the past but I'm wondering if you can shed light on to the percent of the percentage of the least portfolio that has been repriced at higher rates since you've been able to meaningfully increase rates since roughly early 2022. Yeah, so it's very difficult to precisely predict how or not to predict but precisely indicate how much of the fleet has repriced into a more attractive environment.
Bob Lyons: We've mentioned for a while now that sequential lease rates were up quarter over quarter we're going on like three years of that situation occurring but that was from pretty low base. And if you look at when lease rates started to get up over that long term average, it was somewhere in the 2022 timeframe. So looking at it from that perspective, you might say about a third of the fleet has repriced in an attractive environment.
Bob Lyons: But if you wanted to go back to when the lease rates increased, you'd have a higher percentage and if you wanted to say when did we start feeling good about extending lease term, we might have a slightly lower percentage. So it's hard to really give you an absolute number there. Yeah, I would just get to in terms of the runway we have for positive differential. We have a lot of runway and being able to lock cars in for five to six year terms of these rates at positive differentials, we are embedding a lot of high quality cash flow into the portfolio.
Brendan Mccarthy: Great, that's very helpful.
Bascome Majors: Thanks everybody.
Bob Lyons: Thank you.
Bob Lyons: Your next question comes from a line of basketball majors from Susquehanna. Your line is open. Bob, to follow up on that last question, what is the shape of the expiring rate of your North American portfolio as we go forward one, two, three years understanding that that portfolio may change in this one hole? Yeah, so as you know, we provide guidance at the January earnings call every year, and we'll give some information about the expiration profile going forward.
Bob Lyons: If you look at also for a long period of time, you'd see that in some of the lower years, it's 13 to 15,000 rail cars expiring, some of the higher years, it's a little over 20,000. So we'll give more that guidance in January, but it's, you know, that gives you some kind of range of where you might expect it. But from a rate perspective, does the expiring rate go down similar next year in the North American portfolio?
Bob Lyons: Yeah, we will get into that in January. Bascome will lay that out for you, but as I said previously, in terms of my confidence level and positive differential, there's a lot of runway there. Thank you for that. And just we don't talk as much about that concept on the international book. Is there anything unique there? Should we think fairly pro-Rata, similar cyclical economics to kind of the top-down directional view? We just talked about North America.
Bob Lyons: Yeah, the actual least terms in Europe are much shorter. Typically, than they are in North America, that's been the case for decades. It's really hard just from a commercial standpoint to move the needle much on term. So you see a greater percentage of the fleet rolling over each year in Europe, but also historically, the least rate variability is much lower than it is in North America. That tends to be a single-digit up or down percentage-wise.
Bob Lyons: Good environment, bad environment. You don't see the rate swings like you do in North America. We're certainly pushing rate higher because in certain car types in Europe, right now, the environments in our favor to do that. But nothing on the magnitude that you would see in North America, for example, an LPI of plus 33%. You know, a really good renewal in Europe is in the five to 10% plus range. And a bad day is a couple percentage points off. Thank you for that clarification. Just one last one. You've talked pretty constructively about your momentum and a lot of your businesses, both last quarter and this quarter.
Bob Lyons: As we look at the next year without necessarily getting into quantitative guidance, but what keeps you up at night? What are the risks in continuing to deliver the kind of results we've seen from you over the last couple of years here? Just curious where we should watch and sharpen our pencils on downside potential. Thank you. Sure. Well, from a, I'll go back to a question that came up previously in the call with regards to, you know, the one area about performance this year has really been portfolio management on the engine side.
Bob Lyons: But what's encouraging to me is behind that, whether it's rail international, rail Europe, tri-fleet, what have you, India? We have continued to build a really solid foundation for the future here, whether it's managing the existing lease portfolio and certainly through the investment volume that we're seeing. Last year, in this year, we're putting a lot of capital to work and really attractive returns for GATX for our shareholders for the long term. So, I feel very good about that.
Bob Lyons: I feel really good about where the business is today, how it's been managed in the position we're in. But what keeps me awake at night is the bigger macro factors that are outside of GATX's control. And we've seen a number of those in the last couple of years, whether it's the pandemic, the war in Ukraine. You know, kind of the unpredictable macro things are what keep me awake at night. But I guess what allows me to go back to sleep at night is we've been through those for 125 years.
Bob Lyons: And we have the business in a really, really stable, strong foundation right now that we can respond and accordingly. Whatever macro challenges are thrown our way. And Baskin, I would say to some degree, you answered your own question. When you talked about that we've been talking constructively about each segment. And then Bob reminded that the investment volume has been strong across all those segments. So one of the sources of resiliency and strength is that there's really some reason for optimism across all those segments. Thank you, Bob. Thank you, Tom. Yep, thank you.
Shari Hellerman: And we have reached the end of our question and answer session.
Shari Hellerman: And Ms. Sherry Hellerman, I turn the call back over to you for some final 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.
Rob: This concludes today's conference call. Thank you for your participation.
Rob: You may now disconnect.