GATX Corporation (NYSE:GATX) Q4 2023 Earnings Call Transcript

GATX Corporation (NYSE:GATX) Q4 2023 Earnings Call Transcript January 23, 2024

GATX Corporation beats earnings expectations. Reported EPS is $1.74, expectations were $1.58. GATX Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, and welcome to the GATX 2023 Fourth 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. [Operator Instructions] I will now turn the conference over to Shari Hellerman, Head of Investor Relations. Please go ahead.

Shari Hellerman: Thank you, Sarah. Good morning, and thank you for joining GATX’s fourth quarter and 2023 year-end earnings conference 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 2022 and in our other filings for the SEC.

GATX assumes no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances. I’ll provide a quick overview of our 2023 fourth quarter and full year results. And then I’ll turn it over to Bob for additional commentary on 2023, as well as our outlook for 2024. After that, we’ll open the call up for questions. Earlier today, GATX reported 2023 fourth quarter net income of $66 million or $1.81 per diluted share. This compares to 2022 fourth quarter net income of $48.4 million or $1.36 per diluted share. The 2023 fourth quarter results include a net positive impact from tax adjustments and other items of $0.07 per diluted share. The 2022 fourth quarter results include a net negative impact from tax adjustments and other items of $0.18 per diluted share.

For the full year 2023, GATX reported net income of $259.2 million or $7.12 per diluted share. This compares to net income of $155.9 million or $4.35 per diluted share in 2022. The 2023 full year results include a net positive impact from tax adjustments and other items of $0.05 per diluted share. The 2022 full year results include a net negative impact from tax adjustments and other items of $1.72 per diluted share. These items are detailed in the supplemental information section of our earnings release. In 2023, total investment volume was over $1.6 billion as we increased investment in Rail North America, Rail International, and our wholly-owned engine portfolio. In the coming year, leases for approximately 19,400 tank and freight cars and approximately 1,900 boxcars in North America are scheduled to be renewed.

These renewal levels are similar to those we’ve had in recent years. Lastly, as noted in the release, we expect 2024 earnings to be in the range of $7.30 to $7.70 per diluted share. With that, I will now turn the call over to Bob.

Robert Lyons: Thank you, Shari, and thank you all for joining the call today. For those of you that follow us closely, we are generally very brief in our opening remarks. But given that we’re at year end, we thought it would be helpful to spend a little bit more time. So I appreciate you bearing with me as we go through some of the details. I’m going to provide some brief comments on 2023 performance versus the outlook we had coming into the year, and then I’ll add some additional color to the 2024 guidance that was included in today’s press release. But before diving in, first, I want to thank our employees for their focus and their effort this past year. In particular, our employees who work in our maintenance network and who work in our shops, both in North America and Europe.

Once again, they did an outstanding job in the face of very high demand for shop services. And I’m very pleased that our safety record in the shops in 2023 was excellent. Our shop management and the employees continue to strive for efficiency while focusing on safety, and that’s what matters most. So a thank you to all of our employees on the shop floor who really make this company tick. Looking more broadly at our business segment performances, I’m pleased with the contribution across the board, whether it was Rail North America, Rail Europe, India, our engine leasing activities, or Trifleet, everyone performed at a very high level this past year. And I fully anticipate continuing this momentum through 2024. Our broad goals at GATX remain unchanged and they’re very straightforward, operate safely, grow our global businesses in a disciplined manner, be a good corporate citizen, be good stewards of our shareholders’ capital, and generate an attractive risk adjusted return for our shareholders.

And on that note, I’m pleased that, in 2023, our total shareholder return was 15.2%, and very important to us, the 10 year return, because we think very long-term, the 10 year return was 11.4%. So looking back on 2023, we came into the year expecting EPS in the range of $6.50 to $6.90 per diluted share. As reported today, we exceeded that guidance, and it really boils down to a few factors. First, Rail North America’s segment profit came in below our original expectations, primarily due to increased demand and net maintenance expense in our shops. I’ll go into more detail on that in a moment. But by every commercial metric, such as the LPI, utilization, renewal success rate, and investment levels, we had a great year at Rail North America. Rail International performed in line with our positive expectations coming into the year.

And the biggest source of variance versus our expectations on the positive side were results at portfolio management, which incorporate all of our engine leasing activity. The recovery in global air travel occurred much faster than original expectations, and our results reflected that. Looking specifically at Rail North America in 2023. First, the lease rate environment for existing railcars was very favorable. Customers remain focused on holding on to the cars that they had in their existing fleets, and our commercial team did an outstanding job of working closely with our customers to meet their needs. Lease revenues came in well ahead of expectations. Importantly, we were also able to establish lease terms in excess of 60 months on renewals, meaning that we have locked in those committed, attractive, high quality cash flows for years to come.

While revenues came in ahead of our original expectations, not by a large enough margin to offset the impact of increased maintenance expense and higher interest expense. The interest expense component was actually largely driven by a positive long-term factor, that being our investment volume was well ahead of plan. We identified more attractive investment opportunities than expected. We executed on those, and I view this as continuing to build our foundation for the future. On the maintenance side, demand for shop capacity and services was north of what we planned. Key driver to that was we experienced a higher volume of cars due for regulatory service. It is always really difficult to estimate exactly when those cars are going to come into the shop because the customer oftentimes controls that decision.

And frankly, we undershot and underbudgeted for that in 2023. Additionally, and this is a net positive as reflected by our lease revenue performance this past year, we ran the fleet at extremely high utilization. So many — any cars that were returned by customer A, for example, went through our shop and onto customer B very quickly. Now, we incur a shopping event and cost when that occurs, but net-net, it’s a positive, as the car is back out on a long-term lease, earning revenue, instead of sitting idle for an extended period. In summary, versus our expectations coming into the year, Rail North America had higher lease revenue, which was offset by higher maintenance and interest. We always get questions on remarketing income, too, so I’ll just add that remarketing income came in generally in line with our expectations entering the year.

Demand for our railcars in the secondary market was very robust and we used the opportunity to continue optimizing the fleet. Looking at Rail International, segment profit was up nicely in ’23 versus ’22 and right in line with our expectations. We saw a very strong demand for existing assets in Europe and India, but we were also able to invest close to $400 million across these markets, a record level. We continue to grow our European and Indian fleets, and our teams there are operating at a very high level. As I mentioned, the largest source of outperformance in ’23 versus original expectations was within our engine leasing activities. Global air travel recovered in 2023 at a pace far quicker than anyone planned. As a result, we had higher engine utilization at our joint venture, RRPF, at higher than planned lease rates, and fewer customer issues and bad debt expense.

Importantly, we’re also seeing the income benefit from our direct investment in engines. And we made another direct investment in 2023 for $260 million. These factors led to a sharp increase in segment profit within Portfolio Management. The last comment I’ll make on 2023 is that we had a record year for investment volume, exceeding $1.6 billion with every business segment contributing. Even in a rising interest rate environment, we were able to identify very attractive investment opportunities. And I’d encourage everyone to keep in mind, we are acquiring 20, 30, and 40 year assets. And I’m confident that these investments will provide our investors with a growing global platform, with very attractive risk adjusted returns. So I’m very pleased with ’23, but I’m even more excited about where this positions us for 2024 and beyond.

So let’s get into 2024. At Rail North America, we anticipate demand for the existing fleet will be solid with utilization remaining in the 99% range. We see renewal success continuing at the high levels experienced in 2023. And we anticipate the LPI will be in the range of plus 30% in 2024, again with very attractive terms attached. Coupled with new additions to the fleet, we expect lease revenue to increase $80 million to $90 million in ’24 versus ’23. Interest expense will continue to increase, reflecting the compounding effect of rising interest rates over the past 18 months and our growing asset base. So we see interest rates increasing $40 million to $50 million at Rail North America in 2024. Net maintenance expense, we anticipate a very modest increase in 2023.

We will see some uptick in regulatory compliance work, but also a benefit from overall shop operating efficiencies. So therefore, we see net maintenance coming in flat to plus $10 million in the year ahead. As for remarketing income, we again expect a very robust demand for our assets, and in fact, we’ve seen steady inquiries from potential buyers and a lot of interest in the packages that we’ve already taken out to market. Following a very busy calendar for asset sales in the past few years, in 2024, we currently expect to market slightly fewer cars, resulting in remarketing income being $10 million to $20 million less than ’23’s level. This would place remarketing income in the $90 million to $100 million range for 2024, a very solid year.

I’ll also add a bit of a disclaimer that this is another element of our forecast that’s really hard to pinpoint. The level of sales activity is always tough to gauge coming into a year, but as I said, from where we sit today, this is the best estimate, and as we always do, we’ll try to keep you updated as the year progresses. The net result of all these factors after incorporating some minor line items is that we see segment profit at Rail North America being up between $10 million and $20 million in 2024. At Rail International, we expect segment profit up $10 million to $15 million in 2024 with the main drivers being continued growth in our European lease fleet and in India. In fact, in Europe, we will surpass 30,000 railcars in our fleet this year.

And we expect to see rising lease rates on many of those car types. While the economic outlook in Europe is muted with low-single digit GDP forecast, demand for rail services continue to be solid. In India, we have the benefit of GDP growth that’s forecast to be in the high-single digits, one of the strongest outlooks in the world. India is going to continue to build out its infrastructure, including roads, homes, hospitals, schools, government buildings, and so on. And to do so, there will be a growing need for cement, steel, and other materials that move by rail. You couple that with the focus by the Indian Railway to continue building out dedicated freight rail capacity, and we should see strong fleet growth at GATX India. In fact, in 2024, our GATX Rail India’s fleet will likely go over the 10,000 railcar mark.

Quite an achievement given that we were the first railcar leasing company in India. And 10 years ago, we had a fleet of just a few hundred cars and all the credit goes to our outstanding team in India. For our Engine Leasing investments within Portfolio Management, we expect to see strong demand as global air travel continues to recover to pre-pandemic levels and beyond. We’re expecting segment profit to be up $5 million to $15 million in 2024, a very nice performance, especially given the sharp increase we saw just this past year in ’23 over the prior year. Looking at SG&A, like most companies, we’re experiencing rising labor costs. You pair that with a slight increase in headcount, which I’ll point out as primarily to support our international growth and we’re forecasting SG&A to be up between $10 million and $15 million in the year ahead.

We’re entering the year on the heels of a record investment volume of $1.6 billion in 2023, and based — the good news is, based on committed investments and opportunities we anticipate seeing during the year, we expect to be close to the same range in 2024. That bodes very well for 2024 and the years beyond. All of the factors just discussed form the basis of our current estimate of $7.30 to $7.70 per diluted share. Before a closing comment, I’d like to mention the dividend. We routinely get asked about dividends on the January call. GATX has paid dividends continuously now for over 100 years and we understand the importance of the dividend to our shareholders. We have a regularly scheduled GATX Board meeting this Friday. So please take a look for an announcement on the dividend on that day.

Lastly, GATX celebrated a couple of major milestones this past year, most notably our 125th anniversary and the 25th anniversary of our partnership with Rolls-Royce. GATX is a very different company, a far stronger company than we were 125 years ago, 25 years ago, or even five years ago. We continue to expand our global footprint in rail, and we’re the leading global lessor of rail assets. Contributions from Europe and India in rail add diversity and stability to our cash flow and our earnings. Likewise, our investments in aircraft engines have proven to be great additions to the GATX portfolio. While the COVID era was a challenge, it proved once again that air travel is remarkably resilient. Aircraft engines are high quality, service based assets that are a great store of value.

And with our partner, Rolls-Royce, we enjoy a very unique and valuable position in the engine leasing market. So our growing international Rail businesses along with our growing aircraft engine investments are outstanding complements to the leading rail leasing franchise we have and will continue to grow in North America. So thank you all for enduring my somewhat lengthy comments on 2023 and the outlook for 2024. And with that, we will go to questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Your first question comes from the line of Justin Long with Stephens. Your line is open.

Justin Long: Thanks, and good morning.

Robert Lyons: Good morning.

Justin Long: Maybe to start, I was wondering if you could share the absolute lease rate trend sequentially that you saw in the fourth quarter. And when we think about the LPI guidance to be in that 30% range. What does that assume for how lease rates will trend over the course of the year on a sequential basis?

Paul Titterton: Sure. I’ll take that. This is Paul Titterton. Thanks for the question. And what I would say broadly to start is, lease rate performance in North America has been quite strong for quite some time right now. We are seeing an absolute sense, a relatively flat environment versus the prior quarter, but as indicated by the LPI base, relative to expiring rates, we are expecting continued positive performance. And so overall, we would say, in an absolute sense, the leasing market for most car types in North America remains quite strong.

Justin Long: Got it. Thanks. And maybe one on the RRPF contribution in the fourth quarter. There was a pretty significant step-up sequentially. I was wondering if you could break out that fourth quarter contribution between remarketing and just the core operating results. And maybe you could talk about those two buckets progressing in 2024 in terms of what you’re baking into the guidance there.

Tom Ellman: Yeah. Hi, Justin. This is Tom. So what I would tell you is that for the fourth quarter, it was about 60% operating income, about 40% remarketing. As you know, having followed us for a long time, it’s really difficult to predict exactly how that remarketing piece will move over the course of any given year. But something in the range that we saw for the full year, which was about 55% operating income and 45% remarketing, wouldn’t be unreasonable.

Justin Bergner: Okay. Understood. I’ll leave it there. Thanks for the time, and congrats on the results.

Robert Lyons: Thank you.

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

Matt Elkott: Good morning. Thank you. I was wondering, if you can talk about the additions to the fleet in 2024. Do you see the best opportunities in the secondary market or in the new car market?

Paul Titterton: So, this is Paul, I’ll take that again. And what I would say right now is, overall, we’ve seen higher quality investment opportunities in a variety of areas within Rail North America. There is certainly have been opportunities in secondary markets and syndications that we’ve taken advantage of, but I will also say, in the primary market, in our originations of new car leases, we’re also seeing pretty attractive opportunities. So really from an investment standpoint in North America, the — there are quality opportunities both in primary originations and secondary markets and syndications

Matt Elkott: Got it. Good to know. And then one question on India. You guys were basically started this market for privately held freight car lessors in India. Can you give us an update on the competitive landscape right now? Are you still the biggest operator there? Do you see interest from potential new entrants as the growth prospects proves to be strong and sustainable?

Robert Lyons: Sure, Matt. It’s Bob. We are far and away the largest private owner of railcars in India. There are some other competitors that periodically appear, but they don’t have anything of size in terms of fleet or from what we see a significant foothold in the marketplace. The one area we would compete, so I don’t want to give you the impression that it’s just unfettered prospects because there is — our customers have alternatives and one of those would be bank financing or owning the assets outright themselves. These are big, formidable, large entities so they can buy as well just like here in North America. But from a leasing standpoint, we are far and away the largest, and I think generally, recognized as the leader and certainly recognized by the Indian Railway as the most advanced in the market.

Matt Elkott: Okay. So it’s more of a question of the how much traction the business model you guys introduced into the market gets versus other ways of acquiring assets. That’s good to know. So — and I think you mentioned the — just a quick clarification, you mentioned over 10,000 cars at the end of 2024, you think your Indian fleet will be?

Robert Lyons: Yes. If we meet our investment targets for this year, that would be the expectation.

Matt Elkott: What about the overall fleet globally in Europe and in the U.S., do you expect that to grow as well at the end of ’24?