GATX Corporation (NYSE:GATX) Q3 2023 Earnings Call Transcript

GATX Corporation (NYSE:GATX) Q3 2023 Earnings Call Transcript October 24, 2023

GATX Corporation misses on earnings expectations. Reported EPS is $1.44 EPS, expectations were $1.53.

Operator: 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 GATX Third Quarter 2023 Earnings Conference Call. [Operator Instructions] Thank you. Shari Hellerman, Head of Investor Relations. You may begin your conference.

Shari Hellerman: 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 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 2022 and in 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 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 $0.81 per diluted share. The 2022 third-quarter results include a net negative impact of $10.8 million or $0.31 per diluted share from Tax Adjustments and Other Items. Year-to-date, 2023 net income was $193.2 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 $1.1 million or $0.03 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 the supplemental information pages of our earnings release.

Now I’ll briefly address each of our business segments. Our Rail North America fleet utilization was 99.3% at the end of the quarter. Demand for the majority of car types and our existing fleet remains strong and we continue to extend renewals at higher rate. 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 our 4,800 railcars from our 2018 Trinity Supply Agreement and we’ve placed all 7,650 railcars from our 2018 Greenbrier Supply Agreement. In addition, we placed over 2,400 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 and over $88 million year-to-date. Within Rail International, Rail Europe continued to experience increases in renewal lease rates versus expiring rates driven by stable demand for most car types. Rail Europe’s fleet utilization remained healthy at 96% although there is 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 was 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 is robust as international 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 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 $6.90 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.

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Q&A Session

Operator: [Operator Instructions] And your first question comes from the line of Justin Long from Stephens. Your line is open.

Justin Long: 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 remarketing in the fourth quarter? Just curious what’s baked into the guidance.

Tom Ellman: 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 were up a couple of percentage points in terms of lease rate. Most freight car types were relatively flat. The exception to that were coal and small-cube covered hoppers that were down about 5% to 10%.

Bob Lyons: Yes. And on remarketing income, Justin, it’s always a little bit more difficult to predict coming into the fourth quarter just because of seller, 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’ll see some more activity in the fourth quarter, but not on that same magnitude if you annualized the last three quarters.

Justin Long: 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 a decent size 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 expense going forward.

Tom Ellman: Justin, this is Tom. I’ll 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 the result of few more assignments of the 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 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. However, it’s fair to say that one of our goals will be to increase the percentage of maintenance performed in our own facilities.

Bob Lyons: Yes. On the International side, Justin, from an overall standpoint the net maintenance expense is actually not — is 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 cost and labor costs being the two biggest drivers there. 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.

Justin Long: Got it. Thanks. I’ll pass it on.

Operator: Your next question comes from the line of Matt Elkott from TD Cowen. Your line is open.