GATX Corporation (NYSE:GATX) Q1 2023 Earnings Call Transcript

GATX Corporation (NYSE:GATX) Q1 2023 Earnings Call Transcript April 25, 2023

GATX Corporation beats earnings expectations. Reported EPS is $2.16, expectations were $1.71.

Operator: Good morning, ladies and gentlemen and welcome to the GATX 2023 First Quarter Earnings Call. At this time, all participants are in a listen-only mode and please be advised that this call is being recorded. After the speakers’ prepared remarks, there will be a question-and-answer session. And at this time, I’ll turn things over to Ms. Shari Hellerman, Head of Investor Relations. Shari, please go ahead.

Shari Hellerman: Thank you, Bob. Good morning, everyone and thank you for joining GATX’s 2023 first quarter earnings call. I am 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 statement. Actual results or trends could defer 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. GATX assumes no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances. Before I provide a quick recap of our first quarter results, I’d like to reminder everyone that our Annual Shareholders’ Meeting is scheduled on Friday, April 28 at 09:00 AM Central Time and will be held in a virtual-only meeting format.

Earlier today, GATX reported 2023 first quarter net income of $77.4 million or $2.16 per diluted share. This compares to 2022 first quarter net income of $75.8 million, or $2.10 per due to share. 2023 and 2022 first quarter results included net negative impact of $0.04 per to share and $0.24 per due share, respectively from tax adjustments and other items. These items are detailed on Page 11 of our earnings release. Now I’ll briefly address each segment. At Rail North America, fleet utilization remained high at 99.3% and the renewal success rate was 77.9%, reflecting continued strong demand for railcars currently in our fleet. The lease rate environment for existing railcars remains favourable, as evidenced by the renewal rate change of GATX Lease Price Index of positive 34.3% for the quarter.

We remain focused on our objective of lengthening lease terms and locking in attractive rate. Additionally, we continue to successfully place new railcars from our committed supply agreements with a diverse customer base. We’ve placed over 4,600 railcars from our 2018 Trinity supply agreement, and we’ve placed all 7,650 railcars from our 2018 Greenbrier supply agreement. In addition, we’ve placed nearly 1,500 railcars from our 2022 Trinity Supply agreement. Our earliest available scheduled delivery under our supply agreement is in November, 2023. In our North American maintenance network, we continue to operate safely while achieving high levels of productivity across the shops in our network. We’ll continue to direct the vast majority of work on our specialty freight and tank cars to our own network where we believe our experienced workforce is a superior safety, quality and cost metrics.

The secondary market for railcars remains robust. Rail North America generated remarketing income of approximately $45 million for the quarter. As mentioned in the earnings release, we also identified attractive investment opportunities in the quarter and acquired over 1,000 cars in the secondary market. These cars are on long-term leases with attractive rates. At Rail International, demand for railcars remained very strong and we continue to experience success in pushing up renewal lease rates for most car types. Rail International’s first quarter investment volume was over $81 million as we took deliveries of nearly 1,000 new cars in the quarter. Turning to portfolio management, first quarter performance was driven by higher share affiliates’ earnings from RRPF, our aircraft spare engine joint venture with Rolls-Royce.

Consistent with our expectations, the operating environment for RRPF is steadily improving, reflecting the ongoing recovery in international passenger air travel. With the first quarter environment, very much in line with our expectations coming into the year, we continue to expect full year earnings to be in the range of $6.50 to $6.90 per diluted share, excluding any impact from tax adjustments and other items. And that concludes our prepared remarks. I’ll hand it back to Bob, so we can open it up for questions.

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Q&A Session

Operator: We’ll take our first question this morning from Justin Long of Stephens.

Justin Long: Thanks and good morning. I guess to start on the quarter, if you set remarketing income aside, would you say the performance was relatively in line with what you expected? I think Shari, you just mentioned that, and in terms of the outlook going forward, is that relatively in line from a fundamental perspective versus what you thought at the beginning of the year? It seems like maybe the first quarter beat relative to the street was mainly a function of the timing of some of this remarketing income, but I’d love to get your thoughts?

Bob Lyons: Good morning, Justin. It’s Bob and that’s a fair assessment. As you know, remarketing income can be pretty volatile quarter-to-quarter. So that does move around quite a bit as the year progresses. I would say fundamentally the environment is very much in line with what we expected coming into 2023 and that goes across Rail North America, Rolls-Royce, probably a little bit stronger there than we anticipated, but Trifleet rail international — our rail international business is all very much in line with what we expected.

Justin Long: Got it. Thanks Bob. And to your point on Rolls-Royce, the contribution from that JV was fairly significant in the first quarter. Is there any way to help us think through that $28 million contribution and how much of that came from remarketing income? And, if I look at the full year guidance you gave before on portfolio management, I think you were expecting $10 million to $15 million of improvement and we saw something north of that just from the JV alone in the first quarter. So, any updated thoughts there?

Tom Ellman: Yeah, Justin, I’ll break that down for you. So the remarketing piece was about $16 million of that $28 million and about $12 million was operating income. As you already noted and Bob confirmed, even in the Rolls-Royce JV, that remarketing piece moves around quite a bit. So while we continue on that trend that we’ve been talking about for a couple years of expecting to get back to pre-COVID levels in the 2024, 2025 timeframe, we’re still on that trajectory. Maybe things are moving a little bit quicker than anticipated, but at this point, we’re not really ready to change that full year guidance for the JV.

Justin Long: Got it. And, I guess last one from me is just on the absolute lease rate trends sequentially in the first quarter. Curious what you saw and any updated thoughts on how lease rates on an absolute basis trend going forward?

Bob Lyons: So, as you know, we’ve been discussing steadily improving lease rates for about the past 2.5 years. When you get to this quarter in particular, most tank car types were up around 5% or so. Most freight car types were relatively flat and energy-related freight car types were probably down about 10%. But it’s important to put that in context as you compare to a year ago, most tank car types are up around 20%. Most freight car types are up around 30% and those energy-related freight car types that are down sequentially, even those are up 30% or more versus a year ago. So it still remains a strong lease rate environment and we talked about this a little bit last quarter, just as time goes on and you have more and more quarters of those improving lease rates, the comparison gets a little bit harder. So we’re not totally surprised to see this trend happening and as Bob mentioned on the very first question, everything is very much in line with our expectations.

Justin Long: Great. Very helpful. Thanks for the time.

Operator: Thank you. We’ll take our next question now from Matt Elkott of Cowen.