Gatx Corp Q2 FY2024 Earnings Call

Thank you for standing by. My name is Angela, and I will be your conference operator today. At this time, I would like to welcome everyone to the GATX 2024 Second Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. I would now like to turn the call over to Shari Hellerman, Head of Investor Relations at GATX. Please go ahead.

Thank you, Angela. Good morning, and thank you for joining GATX's 2024 second quarter earnings call. I'm joined today by Bob Lyons, President and Chief Executive Officer; Tom Ellman, Executive Vice President and Chief Financial Officer; and Paul Titterton, Executive Vice President and President of Rail North America. As a reminder, 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 forecasts. For more information, please refer to the risk factors included in our earnings release and those discussed in GATX's Form 10-K for 2023 and our other filings with the SEC. GATX assumes no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances. Earlier today, GATX reported 2024 second quarter net income of $44.4 million, or $1.21 per diluted share. This compares to 2023 second quarter net income of $63.3 million, or $1.74 per diluted share. The 2024 second quarter results include a net negative impact of $8 million, or $0.22 per diluted share, from tax adjustments and other items. The 2023 second quarter results include a net positive impact of $0.2 million, or $0.01 per diluted share, from tax adjustments and other items. Year-to-date 2024 net income was $118.7 million, or $3.25 per diluted share. This compares to $140.7 million, or $3.87 per diluted share, for the same period in 2023. The 2024 year-to-date results include a net negative impact of $7.4 million, or $0.20 per diluted share, from tax adjustments and other items. The 2023 year-to-date results include a net negative impact of $1.1 million, or $0.03 per diluted share, from tax adjustments and other items. These items are detailed in the supplemental information section of our earnings release. I will provide a quick overview of our second quarter results and then I'll turn it over to Bob for additional commentary on our year-to-date performance. GATX Rail North America continues to experience stable demand for railcars. Our fleet utilization was 99.3% at quarter-end and our renewal success rate was strong at 84.1%. We continue to achieve strong renewal lease rate increases while successfully extending term. The renewal rate change of GATX's lease price index was positive 29.4% for the quarter and the average renewal term was 61 months. Additionally, we continue to successfully place new railcars from our committed supply agreement with a diverse customer base. We have placed over 4,300 railcars from our 2022 Trinity supply agreement. Our earliest available schedule delivery under this supply agreement is in the second quarter of 2025. The secondary market in North America remains robust. We generated approximately $20 million in remarketing income during the quarter, bringing year-to-date remarketing income to approximately $53 million. Rail International is performing well, and Rail Europe continues to experience success in pushing up renewal lease rates from most car types. We continue to grow our lease fleets in Europe and India. In July, Rail India received the delivery of the 10,000 wagon. Within Engine Leasing, the Rolls-Royce and Partners Finance affiliates produced strong operating results due to continuing high demand for aircraft spare engines. As we have mentioned in the past, the timing of remarketing events at RRPF can be very lumpy from quarter to quarter. Year-to-date operating income makes up approximately 75% of RRPF earnings while remarketing income makes up approximately 25%. Turning to GATX Engine Leasing, our wholly-owned portfolio, we continue to increase our direct investment in aircraft spare engines. We added three engines during the second quarter, bringing the total engine count in our wholly-owned portfolio to 32 engines with a total net book value of over $750 million. The investment pipeline for engines is expected to remain robust for the remainder of this year. With that quick overview, I will now turn the call over to Bob.

Thank you, Shari, and good morning, everybody. Given that we're now past the halfway point of the year, I thought I'd add some comments to complement Shari's introduction, and I'll focus on the overall environment versus the expectations we had coming into the year. And the fact is, I can keep these comments brief because the first half of the year has largely played out as expected. It doesn't always occur this way, rarely occurs this way, but the first half of 2024 tracked very much in line with what we thought coming into the year and what we discussed with you when we gave our outlook back in January. At Rail North America, we stated that the recovery was largely a supply-side-driven recovery and we expected very little in the way of growth in carload traffic. That's what we planned for, and that is what has occurred. Demand for existing railcars is very stable, and we've been able to realize appropriate rate increases and extend term. The commercial organization continues to do an outstanding job. As a result, our financial performance at Rail North America is consistent with where we thought we would be at this point of the year, and that’s whether you’re talking about revenue growth, which has been very strong, maintenance, or interest expense, both of which are in line with where we thought, remarketing income the same, as well as segment profit. All of these are essentially coming in line with forecast, and the overall market environment from a commercial standpoint is really positive. That’s reflected in our LPI, which was 33% in the first quarter, 29% in the second quarter, and again, in line with our full-year outlook of the plus-30% range. Same for our renewal success rate, which is holding up really strong, highlighting the fact that our customers want to hold on to their existing rolling stock. And even a change in sequential lease rates, which were flat this quarter and have been for several quarters, is what we anticipated. So, we see no major issues or changes on the horizon which would lead us to adjust full-year Rail North America, and that’s a positive situation, given that we had such strong expectations coming into the year for our key performance measures. At Rail International, we have a similar story where, in general, market demand is really strong. At GATX Rail Europe, I’d only point out one caveat, and that’s as it relates to the intermodal sector where we thought there was a reasonable chance for a recovery in this market in the second half of the year, but that appears to be getting pushed out a bit. Fortunately, intermodal is a small part of our overall fleet. So, weakness there should be offset in other areas across GATX Rail Europe. And as Shari mentioned, in India, we had high expectations coming into the year, and those appear to be warranted. We’ve had excellent growth in fleet count. We crossed the 10,000 wagon mark. The country has completed their nation-wide election process. We’re seeing strong economic growth and we continue to expand our customer base and the car type offerings. Within Engine Leasing, whether it’s through our joint venture or in our wholly-owned portfolio, we see strong demand for our assets. The recovery in global air travel has occurred much faster than anticipated. It’s continuing, and that’s leading to very high utilization of our spare engines or those within our pool. And lastly, we continue to find attractive ways to put capital to work at attractive returns. We came into the year expecting full-year volume in the $1.6 billion range, and at the halfway mark, we’re just over $800 million, so very much on track. And on a positive note, we’re seeing these opportunities essentially across business units. So, overall, while there have been some twists and turns through the first half of the year, which always occur, our commercial and operational teams have navigated these extremely well, both here in North America and internationally, and the year is largely playing out as planned, and that’s a good thing. So with that, we’ll go to Q&A.

Thank you. And your first question comes from the line of Bascome Majors with Susquehanna. Please go ahead.

Hey, Bob. You started your closing remarks by discussing the supply-side-led recovery in North America. Looking ahead, even though we can't predict the future, it seems likely that both interest rates and steel price inflation could potentially decrease more consistently over the next year to two years. How do you plan to manage your business differently if those upward pressures on asset prices and lease rates begin to lessen? Also, where should we focus our attention within your business regarding this situation? Thank you.

Sure, Bascome, and thank you for the question. And since we have Paul Titterton here today, who joins us mid-year and at year-end as President of North American Rail. Why don’t I let Paul answer that question and give you his thoughts?

Sure. And I think it’s a good question. First of all, I think you’re right. Certainly, the possibility of easing interest rates and easing steel prices could have some impact on the railcar market, but I would say that a couple of things are important to consider when we think about the North American railcar market. Capacity shifts certainly have resulted in what we think of as likely a long-term reduction in new car capacity when we think back to, say, the crude boom or the ethanol boom, those were periods when the aggregate production for North American railcars got up into the 80,000 car a year range. And of course, right now, the market is struggling to, frankly, even hit the 50 range and is probably going to continue to fall short of that. So, we really think that even if some of the input costs to railcar purchasing and financing moderate, that fundamental capacity is not going to get anywhere near where it used to be and probably, frankly, given just labor availability, can’t. So, we don’t see in North America anyway, the threat of extreme oversupply, the way we saw in some of the past boom-bust cycles.

Paul, to that, I know this is not something that you can quantify with precision, but when you think about your business, do you have a sense or just sort of internal thought process on how much of the lease pricing power has been driven by new car cost inflation versus just traditional supply and demand tightness, cars, and storage utilization, however you want to frame it, in more fundamental versus asset price standpoint? Thank you.

The North American railcar leasing market is highly competitive and has always been so. There are many operating lessors competing to provide railcars in this market, and that trend is expected to continue. Reflecting on the historical periods of the ethanol boom and the crude boom, we observed significant cyclicality, where the market overshot production in response to demand increases. When that demand decreased and economic downturns occurred, we experienced excess supply of railcars. This situation impacted pricing and utilization. Currently, we are not witnessing an overshoot in supply, as production levels are more aligned with replacement needs. Therefore, we can expect more stability in pricing and utilization metrics in this environment compared to previous cyclical peaks.

Hey, Bascome, just to add to that, you pointed to the cost of a new car as being one of the drivers. It’s also worth noting that it’s the length of time it takes to get that new car. So, when Paul is talking about what we’ve seen in the past versus today, regardless of what the cost of that new car is, the fact that it’s not immediately available versus an existing car, which is an important driver.

I’ll conclude the last point, Bascome, by mentioning two things. First, regarding demand, I would like to highlight the renewal success rate. The demand for the existing assets remains strong. Customers are renewing very frequently, with a rate above 80%. This is a significant sign that customers are confident in the assets they currently have in their fleet and are committed to keeping them. This is an important aspect to note.

I’ll pass it on. Thank you.

And your next question comes from the line of Justin Bergner with Gabelli Funds. Please go ahead.

Sorry. It’s Justin Bergner with Gabelli Funds. Good morning, Bob, Paul, Tom, Shari.

Good morning.

Good morning.

Good morning.

So, I have a couple of questions. You mentioned that year-to-date for the RRPF joint venture, approximately 75% of the earnings or equity income is from the operating assets and 25% is related to the gain on sale. Previously, you indicated that historically, this has been closer to a 50-50 split over the long term. Do you anticipate that it will end up this year closer to a 50-50 distribution? Additionally, if not, are you now factoring in earnings headwinds in the guidance you are reiterating due to slower asset sales from the joint venture this year?

Yeah. Justin, this is Tom. It’s absolutely true that gain on remarketing is pretty lumpy, and we would expect the back half of the year for that piece to increase and to move much closer to the historical averages for the year as a whole.

Great. And the historical average is closer to 50-50?

Correct.

Okay. Thank you for that. And then, with respect to Rail North America, it seems like you were pretty active in terms of adding cars at sort of a pace that goes beyond what's captured by the long-term agreement with Trinity. Can you maybe just provide a little perspective as to the types of attractive opportunities you're seeing on the buy side in the secondary market?

Sure, this is Paul Titterton speaking. One of the positive aspects of the current market is that we've encountered several appealing investment opportunities beyond our committed supply agreement, including both new car syndication and the secondary market. There isn't a specific trend; the investments have varied in terms of car types and customers. Given the current market dynamics, GATX has become a favorable buyer for a range of operating lease deals. This has been especially beneficial as we take pride in our disciplined investment approach. We have successfully increased our volume without lowering our standards, employing the same pricing strategy we always use. This market aligns well for us as an investor across various car types.

Okay, great. I'll add one more point related to the previous question about leasing market dynamics. It seems you're suggesting a narrowing price gap between lease rates for existing cars and the costs of buying new cars for lease. Have you observed this trend over the past couple of years, or is this more of a temporary situation? I believe Bob talked about the increasing weight of acquiring new cars driving demand for leases on existing vehicles.

Hey, Justin, I’ll start and Paul will jump in. But we’ve said now for many quarters a couple of years that there is a bifurcation in the market where you see demand for the existing rolling stock extremely strong, which is definitely a sign of that conviction that the customers have. They’re not going to let go of the railcars that they have in their fleet today. So, we’ve seen very strong market-wide upward lift in lease rates and the opportunity to raise rates for very long periods of time, as we do when we have that opportunity. So that’s one key part of it. The second part is that the new car replacements relative to the existing renewals have been a little bit more challenging, but that’s not a new dynamic. We’ve been addressing that and really facing that over the course of the last couple of years, and our commercial team has done a really, really solid job, whether it’s tank or freight of getting new cars placed as well. Paul, if you want to...

Yeah, I’ll just add to that. I think to your question about the sort of the spread between new and existing, anytime you see a highly-utilized fleet such as we have today, that spread is going to narrow. So, you’re absolutely correct that we are seeing a narrower spread between new car pricing and existing pricing now than, say, at a time when fleet utilization is weaker. And so, that’s really just exactly what we’d expect to see in a market like this.

Okay, thanks. But just one follow on, if I may. It seems like even if the utilization were to come down a bit as rail operating metrics improve, it still seems like the, I guess, lower effective capacity in the industry is causing people to maybe reassess existing rolling stock versus new cars in sort of a different frame than they have historically. Is that fair?

Yeah, I think that is fair. I’ve been describing this as sort of a self-correcting market, which is to say that scrap prices are supportive of retiring obsolete equipment or underutilized equipment. The new car market isn’t overproducing new cars, and so, as a result, small changes on the demand side aren’t producing an excess supply of cars and aren’t putting a lot of downward pressure on rates because we don’t have that excess flow of new cars in, and we do have a fairly steady drum beat of older cars leaving the fleet. So, it’s a pretty balanced situation, which I would describe as favorable for GATX.

It’s a good spot to be in as given the size of our fleet. As a railcar owner or lessor, it’s a good spot to be in.

Okay, great. Thanks so much.

Thank you.

Thank you. Your next question comes from Bascome Majors with Susquehanna. Please go ahead.

Thanks for taking my follow up. Just to maybe close the loop on the new car versus lease renewal questions, any framing of how much, if any, the price of a new car has fallen from quotes you're getting today versus, say, six or 12 months ago? And really just trying to get at the core of the steel price impact on a new car replacement today. Thank you.

Sure. Yeah, I mean, I can’t get into specifics, obviously, because our relationships from a procurement standpoint with the builders are confidential, but I can say, generally speaking, that prices for new cars remain relatively high as compared to history, so there’s been some degree of moderation. But relative to history, this is still a fairly expensive new railcar market.

Your next question comes from the line of Brendan McCarthy with Sidoti. Please go ahead.

Hey, good morning, everybody. Thanks for taking my question. Just wanted to ask a follow-up from a previous question as it relates to the Rolls-Royce JV. Looking at remarketing income there, I know on the rail side, it’s all about just optimizing the fleet. Can you talk about what are the demand drivers with that JV as it pertains to the remarketing income?

Yeah, essentially it's the same. It's both for portfolio optimization and when the market might view the engine having greater long-term value than Rolls-Royce Partners Finance finds the value of holding on to that themselves.

They generally come based on the cost structure and the net book value of each asset. Tom has mentioned that the gains can be inconsistent. It's even more variable at RRPF compared to Rail North America, due to the size of the assets being sold. I would echo Tom's statement that the philosophy remains the same. It's about how the market values the asset in comparison to our overall view and what the optimal asset mix is for the portfolio, and those factors will influence that activity.

Got it. And that decision is ultimately up to Rolls-Royce?

Yeah, but as a reminder, the JV is 50-50 owned, and decisions like that go to the Board, both of which have 50% representation.

Okay. Got it. That's helpful. That's all for me. Thank you.

And two of the four Board members for GATX are sitting here, which is Tom and myself along with two of our colleagues and Rolls has four as well. So, we've all worked together a very long time. So, their philosophy in terms of portfolio management is very much aligned with ours when we think about our overall pool of assets and certainly the way we manage the business here at Rail North America.

Your next question comes from the line of Justin Bergner. Please go ahead.

Thanks for the follow up. Just want to clarify, any slowdown in the secondary market, or does it remain robust? I know it looks like it remains robust from the stuff you're buying and selling, but just from an overall industry perspective.

Yeah, this is Paul speaking, and, yes, that’s correct, the secondary market from where we sit continues to be strong. We’re continuing to see good breadth and depth of buyers when we put packages out.

Got you. And sequential lease rates, I know you kind of mentioned during your prepared remarks that they were flat. Is that the case for both tank and freight? Are there any variations to note?

I think freight was a bit stronger this quarter compared to the previous one, but not by a large margin. Overall, it remains at a stable level. The sequential rates are still very high, which is quite favorable for us in terms of renewals. While the rates have started to level off over the last few quarters, they are still at an appealing level.

Great. Thanks for the follow-up.

There are no further questions. I will now turn the call back over to Shari Hellerman. Please go ahead.

I'd like to thank everyone for their participation on the call this morning. Please contact me with any follow-up questions. Thank you.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.