GATX - Earnings Call - Q2 2020
July 21, 2020
Transcript
Speaker 0
Ladies and gentlemen, thank you for standing by. Good day, and welcome to the GATX twenty twenty Second Quarter Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Sherry Hellerman. Please go ahead.
Speaker 1
Thank you, Paula. Good morning, everyone, and thank you for joining GATX's twenty twenty second quarter earnings call. I'm joined today by Brian Kenny, President and CEO Tom Ellman, Executive Vice President and CFO and Bob Lyons, 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 forecasts.
For more information, please refer to the risk factors included in our release and those discussed in GATX's 2019 Form 10 ks and its 10 Qs for 2020. GATX assumes no obligation to update or revise any forward looking statements to reflect subsequent events or circumstances. Earlier today, GATX reported twenty twenty second quarter net income from continuing operations of 37,000,000 or $1.05 per diluted share compared to net income from continuing operations of $60,300,000 or $1.65 per diluted share in the 2019. Year to date 2020, we reported net income from continuing operations of $84,200,000 or $2.38 per diluted share. This compares to $101,500,000 or $2.75 per diluted share for the same period in 2019.
The twenty nineteen second quarter and year to date results include a net deferred tax benefit of $2,800,000 or $08 per diluted share related to an inactive foreign tax rate reduction. These items are detailed on Page 13 of our earnings release. During the second quarter, GATX completed the sale of American Steamship Company. Accordingly, this business segment has been reported as a discontinued operation and all prior periods have been recast to conform with that presentation. Income from discontinued operations are detailed in our earnings release.
Now I will briefly address each segment. In the second quarter, COVID-nineteen and the associated economic downturn had a negative impact across all of our business segments. Despite the difficult operating environment, Realm North America's fleet utilization remained high at 98.7% at quarter end and renewal success rate was 71.8%. We built out our well diversified fleet, full service capability, and excellent execution by our commercial team. The lease rate environment was very challenging, and pressure on lease rates was considerable across all car types and commodities.
During the quarter, the renewal rate change of GATX's lease price index was negative 28% and the average renewal term associated with the LPI was thirty one months. We continue to successfully place new railcars from our committed supply agreement with a diverse customer base. We've placed all 8,950 railcars from our 2014 Trinity supply agreement and nearly fourteen fifty railcars from our 2018 Trinity supply agreement. We've also placed close to 3,400 railcars from our 2018 Greenbrier supply agreement. As mentioned last quarter, all supply agreement deliveries for 2020 have been placed.
Remarketing income in the quarter was $4,500,000 bringing Rail North America's total remarketing income for the year to $31,500,000 Turning to Rail International, the lease rate environment in Europe remains strong and GATX Rail Europe continue to see steady demand across the fleet with utilization of 98.4% at quarter end. Rail International's investment volume during the second quarter was approximately $50,000,000 In the quarter, both GATX Rail Europe and GATX Rail India experienced delays in new railcar deliveries primarily due to COVID-nineteen related interruptions at manufacturing facilities. In portfolio management, results were driven by the solid performance of the Rolls Royce and Partners Finance affiliate predominantly due to remarketing activity in the quarter. Finally, as noted in earnings release, the shape of the economic recovery remains uncertain and as the impact of COVID-nineteen evolve, we expect pressure on lease rate, renewal activity and asset utilization to continue across all of our business segments. Those are our prepared remarks.
I'll now hand it back to the operator for Q and A.
Speaker 0
Thank you. And our first question will come from Allison Poliniak with Wells Fargo.
Speaker 2
Hi, guys. Good morning. Could you talk to I know you mentioned, obviously, you had significant pressure on lease rates, but maybe a sequential trends in lease rates that you experienced this quarter? And just if there's any sort of mix issues within the LPI that we should be mindful of?
Speaker 3
Sure, Allison. This is Bob Lyons. Good morning. The pressure, I would say, sequentially was equally shared between tank and freight. So if you look at q one to q two, both tank and freight lease rates were down, call it, eight to 9%, between q one and q two.
So no real significant differential between card types impacting the LPI in the second quarter. Now we came into the year at the beginning of the year, we said we expected the LPI would be down anywhere between negative 10% and negative 20%. So negative 28% for the quarter, obviously, outside of that band. But given everything that's going on with COVID-nineteen, the impact, the economic impact, not that far outside the band.
Speaker 2
Understood. Just a second. Just with the amount of inflation in the secondary market over the past few years, I would suspect that these to market that there'll there'll certainly be a loss in terms of what they have to take, or it might fall short of what they want. You've been through these cycles before, and there's obvious over the secondary market. Does this one feel different?
Is there something structurally different with this one, or would you expect some
Speaker 4
of these opportunities to come forward to fruition over the next few months?
Speaker 3
Well, I would say the the the feel the only thing I can really equate it to would be the great recession two thousand eight, nine, and ten, where it did take a little while for some of the asset owners at that point in time to kinda reach a point of capitulation. So that may that may occur again. Again, as you point out, a lot of people did pay relatively high prices for a number of the cars in their portfolio. And, you know, they have there there will be a point of realization that, you know, that's not recoverable. And get you run into the issue of whether or not they're willing to do that.
Some of the sellers are willing to do that, take that pain, and move on. You know, we found opportunities, significant opportunities in 02/2010. We feel they're out there again. Whether or not they happen, that we do not control. But certainly, there's some portfolios out there that would be of interest.
Speaker 5
Allison, the other Brian. Go ahead. The the other thing I'd add is in 2000 in the Great Recession, I would say there was wasn't the same access to capital as there is today. So in a lot of those situations that we added to our portfolio back then, we were hit. Now it could be more competitive since everybody seems to have access to capital, so we'll have to see.
Speaker 2
Got it. Understood. I'll pass it along. Thanks.
Speaker 0
And moving on, we'll go to Justin Long with Stephens.
Speaker 6
Thanks and good morning. So maybe to follow-up on the lease rate commentary in North America. If we look at rail volumes, while down substantially year over year, we have seen some sequential improvement here in the last month or two. Also, you look at FPR's railcar delivery forecasts, they're anticipating supply to start contracting. So as you think about those trends, how long do those trends have to continue before you feel like we can kind of hit a bottom in the lease rate environment?
Is that something that you think is possible at some point in 2020? Or is that 2021? We'd love to just get your thoughts around that outlook.
Speaker 3
Sure, Justin. This is Bob. And I'd say it's very difficult to put a time frame on it given all of the factors that come into play, whether it's the economic environment, potential for a second wave here of COVID nineteen issues, a whole host of things that could come into play. So I'm hesitant to try to put a time frame on it. What I will tell you is that I think while the delivery schedule, the FTR numbers have come down and the backlog has come down, you can't lose sight of the fact that this market was oversupplied for years and years.
That will not correct itself with a year or two of building below the replacement level. There has to be a more, in our view, a more dramatic reduction in output to help bring the market back into balance.
Speaker 6
Okay. Makes sense. And then maybe shifting to RRPF, the contribution there was only down slightly on a sequential basis. It held up a lot better than we anticipated. In the prepared remarks, there was a mention of remarketing.
Is there a way to help us think about how much of that $22,600,000 impact in the quarter came from remarketing? And any way to think about that line item going forward on the deferrals that you've seen in the market thus far and what you expect for remarketing going forward?
Speaker 7
Justin, hi, this is Tom. And so for the second quarter, about two thirds of that was related to gains and residual realization. So so as we commented in the the prepared remarks, a significant portion. In all markets, that tends to be, pretty lumpy. So it's it's difficult in any market to predict exactly, how that's gonna come in.
But, you know, based on what we've seen both in the second quarter and then even year to date, because, it's worth noting the year to date number, the 46,000,000 there, about, 26,000,000 of that was related to, gains and residual realization. So it's something that that we've seen throughout, the year, and we would expect to see, more of that going forward. But quantifying the magnitude of it is, always a challenge.
Speaker 6
Okay. Understood. And maybe the last question on SG and A as we think about the business pro form a for the divestiture that you announced. Tom, is there a way to think about the SG and A run rate in 3Q? And how much of an opportunity you have on that, the ability to continue cutting costs on that front?
Speaker 7
Yes, yes. So coming into
Speaker 8
the year, we noted that we expected SG and A
Speaker 7
to be roughly flat with twenty nineteen's number, which was $188,000,000 If you adjust for the ASC sale, SG and A from continuing operations would have been projected to be almost $180,000,000 In the wake of COVID, we implemented certain cost reduction measures and eliminated discretionary spending in areas like hiring, consulting, travel and entertainment. And then over the course of the year, we also expect some incentive compensation savings. Together, we expect these measures to result in $15,000,000 to $20,000,000 of additional savings. So you can see that we expect more substantial SG and A savings in the second half of the year.
Speaker 6
Okay, great. That's really helpful color. Appreciate the time.
Speaker 5
Thanks.
Speaker 0
And next, we'll go to Bascome Majors with Susquehanna Financial Group.
Speaker 8
Yeah. Thanks for taking my questions here. I wanted to go back to the earlier question on the m and a environment as an acquirer and and and maybe take a step back. You know, you're putting books out there as a seller. Can you talk about the depth of that market?
Is it the same bidders you typically see, or is that evolving? And, you know, you had alluded to maybe pretty ample access to capital when you're looking to acquire fleets being a big difference today versus, you know, twelve years ago when you saw some opportunities. Maybe anything about, you know, the buy side, you know, what you're seeing in in in processes and the depth of that market? And is it evolving any versus what it's looked like over the last few years? Sure,
Speaker 3
Bascome. This is Bob Lyons. And I would separate the two types of sales into very distinct buckets. The the ordinary as you go secondary market activity, whether it's GATX or somebody else who's in the market, typically, those packages are gonna be anywhere between, call it, 500 cars to 2,000 cars on many different leases, many different riders. And so it's very common to see those, whether it's from us or others, in the secondary market.
That's very different than somebody going out to sell a portfolio of 5,000 to, you know, 20,000 or more railcars and sell it as an ongoing business, sell it as a a large asset sale. You'll that's a different buyer universe for something of that magnitude. On the first side, kind of the ordinary course sales in the secondary market, we did see a reduction in activity in the second quarter as you can see just from the remarketing numbers that we had. We did have some sales. We had roughly 4,000,000 of remarketing income in the second quarter and some of those sales and transactions were agreed to post the coronavirus impact.
So there is activity, but the breadth and depth of the buyer universe has declined, I would say, pretty materially. There were still people looking at packages, looking at opportunities, but the biggest the biggest issue we hear is just the the general uncertainty in the marketplace, whether it's the economy or the North American rail market, is making some of those buyers hesitant, and they've moved to the sidelines. Now that said, investors remain interested in rail assets. They're they're great assets down. The appetite's there, but the ability to invest near term is pretty limited.
And so it's very difficult to kinda predict or estimate some of the remarketing income we may see in the second half of the year. If we have a second wave of COVID related issues and the economy remains where it's at today, a lot of the investors are gonna stay on the sidelines. And if things improve, you could see some of those investors come back pretty quickly because they're really attractive assets. The underlying customer base is solid. And as Brian mentioned earlier, capital is really cheap.
And so you'll see people come back out and and get back into the, you know, the market for buying assets. Yeah. Either way, we're in a good position. Our hold sell analysis sometimes like now tends to be lean puts us more in the direction of holding, and we're fine doing that. We're capable of doing that.
And if it begins to point to selling a little bit more, we have the portfolio in the in the organization to make that happen. So we're in a good spot there. On the larger portfolios, again, different buyer universe, cheap capital. So any sizable portfolio, think, is gonna generate interest. But, again, given the environment, it's it's doing the valuation work can be a bit of a challenge.
Speaker 8
Thank you for that comprehensive answer. In these processes on the large portfolio side, are are you seeing an evolution in in who's bidding? Is it more private equity money? Is it is it, you know, the infrastructure tag investors that historically have cheaper capital and lower return requirements? You know?
And and, you what the answer is we just haven't seen anything of size to attract that kind of interest and and and transparency in these types of questions. That's fine. Just wanna understand what you guys are seeing. Thank you.
Speaker 5
Yeah. I'll take that. It's Brian. That's what you've seen over the last five or six years for financial players entering the market. They don't necessarily have a low funding cost, but they see railcars as passive investments because they like to perceive yield.
We've also seen some of the bank financial players that build platforms and big very low funding costs in the industry. And in our opinion, both categories have spurred excess investment in the industry beyond what is needed. And pulled back by those players would be healthy for the market. That's an obvious statement when you look at the overspending market and the lower lease rates over the last few years, especially now. So it's hard to tell if they'll show up if some of these portfolios that are troubled hit the market.
There's just not the data out there lately to suggest they'll be there or not. I suspect that there's still some interest. And as we've already talked about, there's excellent access to capital.
Speaker 4
Thank you.
Speaker 0
And moving on, we'll go to Matt Elkott with Cowen.
Speaker 4
Good morning. Thanks, guys. My question is on the average lease revenue per car for North America. And it looks like it's held pretty much flat on a quarter to quarter basis and down only slightly year over year despite accelerating LPI declines over the last few quarters. You know, for q two, does that mean that you guys had fewer cars coming up for renewal in the quarter?
Or, you know, how do I how do you think about reconciling the two?
Speaker 3
Well, Matt, it's it's Bob. First of all, I'd say it's it's a little difficult to look at the average revenue per car kind of quarter to quarter. I I I would be hesitant hesitant to draw too much of a conclusion from that because the mix changes all the time. If you look for example, over the course of the last year, we sold close to 4,000 cars. We scrapped another 2,000, close to 3,000 on top of that over the course of the last just in the in the last year.
So the mix changes routinely, and that can have an impact on the average revenue, per car. You know, that said, you know, tank is tank cars in general are holding up, you know, fairly well, in terms of the demand side. We're seeing, customers wanna hold on to those cars, but they're negotiating very hard on rate. Every renewal, every new car placement is seeing a lot of competition. Our customers are very smart.
They know the market conditions, and they're gonna use that, to their advantage. Hence, the reason we're trying to stay short as you saw in the term. The freight rates have been rates on freight cars have been challenged for a long time. So those rates went into this market already in a pretty depressed state, they've stayed down relatively well.
Speaker 4
Got it. These are helpful insights, Bob. Thanks for that. Just one more follow-up question on the use rate side. What do you guys think needs to happen for the downward momentum in these rates to end and, you know, for us to potentially see a bottoming out of of spot lease rates?
Is it rail traffic inflecting positive? Is that would that be the first thing to look for?
Speaker 3
That would certainly help. And I would say the economic activity, industrial activity in North America will be the, the biggest indicator for sure. But I'd also say the second thing, and I touched on this already, is just the sheer supply of cars coming into the marketplace. While the backlog has dropped, our view is still there are too many cars being produced for this market And I have felt very strongly that that's been the case now for a number of years. So we need to see that spigot dialed back.
That will also help lease rates going forward.
Speaker 7
Hey, And just just to add to that, if, if we did see an uptick in demand, given what the railroads have done in terms of, really cutting back, there is a potential that an increase in traffic would, would slow down the system a bit, and you'd have a a follow on demand for cars because of that.
Speaker 4
Yeah. That's a very important point, also, Tom. I don't think we've seen an environment where all the class ones industry wide are incidental PSR while rail traffic is growing at the same time. So that remains to be addressed, I think. Thanks so much for the input.
Speaker 3
Thank you.
Speaker 0
Moving on, we'll go to Steve O'Hara with Sidoti and Company.
Speaker 9
Hi, good morning. Thanks for taking the question. Can you just talk about in terms of deferrals that you may have had in the quarter, I guess, within the various portfolios, was there a marked change in kind of lease income received from 1Q to 2Q? And then maybe you could touch on, you
Speaker 4
know, what what how that impacted, if at all, in the RRPS as well. Thank you.
Speaker 5
Yes. It's Charlie. I'd I'd say what, since we have Bob on the call, let's let him start with Rail North America, and we'll cover the rest of it.
Speaker 3
Yep. So the thanks, Brian. The the pace of deferral request has slowed pretty dramatically as the quarter went along. And really, the financial impact is nonexistent because any of the for the most part, any of the deferrals that we've granted, the revenue is straight lined. So it's it's a cash flow, but it's a timing issue, and the numbers are relatively small.
You know, we've had approximately 50 requests on a customer base of 850 for some type of restructuring or deferral. Anything we do tends to be very either NPV positive for GATX or we'll get some other commercial benefit. We've approved less than half of those. So not a significant number and the deferrals have been relatively straightforward. I will add, we've had some customers, the small cube market, particularly in sand service has been significantly pressured.
Some of the customers there are under, a lot of strain. And so we've seen a little bit more of an impact there as we've dealt with a a fewer restructurings of, on the sand customers. And then Okay. I think I'd probably turn it over to either to Tom to talk about our RRPF.
Speaker 5
Thanks. I'd say, I'll do Rail International first. So Rail Europe, we've received requests from about 40 customers. As you would expect, the majority of the customers seeking relief are mineral oil customers because it is 53% of the fleet, and you've seen the drop in prices. So the request similar North America split between those who asked for rate reduction, those were asked for temporary rate holidays, deferrals.
GHX Rail Europe's closed about half of those requests with no modification at all, and the other half are closed with granting a few months of extended payment terms. So really very little economic effect. I'd say it's less than a $100,000. It's just timing of a few months. Rail India, similar.
They've received number of requests, most looking for temporary rent deferrals, rate reduction, one look for a cancellation I know of, and they've reached agreement with most of their customers as well. And and generally the same pattern, a few close with no change at all, some minor rent deferrals. Think there was one canceled delivery case. So, again, the economic impact of those actions is well under a $100,000. So they're hanging in there pretty good in rail international in both jurisdictions.
And after the COVID spike and related closures getting restarted, I think, you know, it's pretty good pretty good so far. Tom, what about RRPF?
Speaker 7
Yep. So so from a trend perspective, it's it's really the the same story at RRPF. That's what Bob and Brian both mentioned. Of course, RRPF started with many more deferral requests. On the first quarter call, we mentioned that between that a little over half of customers have made some sort of deferral request, which was typically looking for three to six months of rent deferral.
And as we noted on that call, similarly, the the the accounting impact really doesn't show up because as long as it's a deferral, you continue to to accrue that rent. We we've really seen a a slowing down in those requests, and it's really at the same level now as it was at at the first quarter. The thing to keep an eye on, obviously, with the the global global aviation situation is as COVID continues, you know, does that change? And we're we're keeping our eye on that. But as far as the second quarter went, it dramatically slowed just like the Rail business.
Speaker 9
Okay. No, that's very helpful color. And in terms
Speaker 4
of the you guys had noted that
Speaker 9
a competitive environment was or, I guess, the increased competition, things like that, everybody kind of fighting for utilization.
Speaker 4
Is that kind of did that improve towards the end of 2Q? Or is that the environment right now, there's really been no change there? Can you just talk about that quickly?
Speaker 3
Sure. And on that front, I would say there hasn't been a significant change when you look month over month in the second quarter. It's competitive, very competitive any way you slice it, whether it's a renewal, or a new car placement. It's going to be extremely competitive. A number of lessors are going be going after that business.
Key for GATX is the fact that we have a highly diversified fleet. We have a lot of flexibility on our order book in terms of the type of cars that we can place and the customer base that we have. We see them consolidating the number of lessors that they're dealing with. So time and again, we're we're in a position where we're able to displace competitors. So hence, the reason utilization has stayed 9098% plus, and we've done well on renewal success is where we are displacing competitors and winning that business.
And a lot of the deals we're winning are relatively small. Know, any any new car order, for example, that's a thousand car order is gonna is gonna get everybody, you know, in the industry bidding on it. We've done very well on 5,100 car type placements, and we have the customer base and the relationships and the commercial organization to make that happen. But it's it's competitive any way you look at it.
Speaker 5
And in real international, I'd I'd say competition probably increased during the quarter. I mean, it started out with that market in much better shape relative to North America. But as things continue in fact, we realized release rate increases in the first half of the year, including in the second quarter. As this continues and things get restarted, we anticipate it will be a little tougher in the second half of the year, perhaps some pressure in certain markets. So I wouldn't expect healthy lease rate increases.
And I think there will be some idle cars out there in certain other markets. So competition will probably be a little bit tougher in the second half of the year in Europe.
Speaker 4
Okay. And then just how do you think about investment volume for the year? Is there a range you could give us given maybe things are sounds like restarting? Is there a
Speaker 9
range to kind of think about outside of any maybe asset purchases, anything like that?
Speaker 7
Yep. So as you know, our investment volume on the rail side comes both from our supply agreements, from spot new car purchases, and then, of course, from our food acquisition opportunities. And it's that last one that's, you know, the hardest to predict. We've talked about that several times on the call on on when that stuff shakes loose. But investment volume, for the whole company, we would expect to be, probably in the mid $800,000,000 for the year.
Speaker 4
Okay. Thank you very much.
Speaker 0
And next, we'll hear from Barry Haines with Sage Asset Management.
Speaker 3
Hi. Thanks for taking my question. Could you just review the number of cars in storage at the moment? And we'd love to just get your view that if GDP kinda got back on track and started growing normally again, how many quarters will it take to kinda get storage back to to normal levels just to to get a rough feel? Thanks.
Yeah. Just just to be clear, are you talking about the industry wide idle fleet count?
Speaker 4
Yeah. Yes. Yes. Exactly.
Speaker 3
Yeah. So that number is obviously, it's moved up sharply to 31 and a half percent. Not all of those cars are in storage, first of all. Those are cars that have not had a loaded move in sixty days. So it it definitely overstates the number of those cars that are actually in storage, but it's it's what the industry data point is and and the one thing everybody can work off of.
You know, I'd calibrate that around. That data doesn't go too far back in history, but at its low point, it was probably 12 or 13% in a in a normalized, very, you know, solid market. So you have quite a ways to go before you can get back down to that level. You need GDP to go up, and you need some, you know, material scrapping activity on a number of those cars that are really in the weeds and aren't gonna move again. So I wouldn't look for that number to get back down to the 12 or 13% level for quite some time, and it was only in the, you know, low twenties pre coronavirus.
So there's there's plenty of work to be done there to bring that number back down. And just one quick follow-up. Is there a rule of thumb you guys use every 1% increase in GDP is X number of incremental demand for cars? Not necessarily because it really not all cars are created equally. There's hundreds of different types of cars in the fleet.
We have over 160 in the GATX fleet alone. So
Speaker 5
it really
Speaker 3
there there is no easy easy math on that number. Okay. Appreciate the insight. Thank you. Sure.
Speaker 0
And we'll go to a follow-up from Bascome Majors with Susquehanna Financial Group.
Speaker 4
Yeah. Thanks for taking my follow-up.
Speaker 8
I just wanted to reach out and and ask how you guys are thinking about the long term new car supply. I realize you have another three and a half years delivery scheduled from your two new car suppliers, but, typically, there will be some strategic extensions and things like that in down markets. I'm just curious if that's something that that that GATX would look at over the next six, twelve, eighteen months. Thank you.
Speaker 3
Sure. Baskin, it's Bob. Yeah. Both the the Trinity and Greenbrier agreements that we have run through 2023, so we're in good shape on those. And I won't get into specific timing with regards to how we're we think about either extending those or putting new new agreements in place.
But we're always looking for opportunities, obviously, in challenged markets to cut the best deal for ourselves and deal that works for the manufacturers as well. But wouldn't really get into too much detail on timing of when we approach that and how we approach it.
Speaker 9
Thank you.
Speaker 0
And that will conclude our question and answer session. I'd like to turn the conference back over to Ms. Hellerman for any additional or closing comments.
Speaker 1
I'd like to thank everyone for their participation on the call today. Please reach out to me with any follow-up questions. Thank you.
Speaker 0
Thank you. And that does conclude today's conference. We'd like to thank everyone for their participation. You may now disconnect.