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The Motley Fool.

GATX Corp  (NYSE:GATX)
Q3 2018 Earnings Conference Call
Oct. 23, 2018, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the GATX Third Quarter Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Jennifer McManus. Please go ahead.

Jennifer McManus -- Director of Investor Relations

Good morning, everyone, and thank you for joining GATX's 2018 third quarter earnings call. I'm joined today by Brian Kenney, President and CEO; and Tom Ellman, EVP and CFO.

(Forward-Looking Cautionary Statements)

Earlier today, GATX reported 2018 third quarter net income of $47 million or $1.22 per diluted share. This compares to 2017 third quarter net income of $49 million or $1.25 per diluted share. Year-to-date 2018, we reported net income of $162.1 million or $4.21 per diluted share. This compares to $159.9 million or $4.04 per diluted share for the same period in 2017. 2018 year-to-date results included net negative impact of $5.8 million or $0.15 per diluted share, attributed to costs associated with the closure of a railcar maintenance facility in Germany. 2017 year-to-date results include a net gain of approximately $1.1 million or $0.03 per diluted share associated with the planned exit of the majority of portfolio management's marine investments. These items are detailed on page 12 of our earnings release.

Now I'll briefly address each segment. Our third quarter results are reflective of a continued improving operating environment in Rail North America. Certain rail industry metrics are favorable for lessors relative to 2017, including railroad carloads and velocity. Rail North American's fleet utilization increased to 99.2%, and our renewal success rate was 82.9% during the quarter. The renewal rate change of GATX's Lease Price Index was negative at 11.5% with an average renewal term of 33 months.

Revenue pressure continues; however, we did see quarter-to-quarter sequential improvement in absolute lease rates across the most car types in our fleet. As indicated in the earnings release, this improving environment has resulted in lower railcar maintenance expense in 2018 than we originally anticipated, especially for mandatory tank qualification as customers are holding onto and utilizing their cars. While this is a benefit in 2018, we expect this will result in higher maintenance expense in 2019 as its work has only been deferred, not eliminated.

We continue to successfully place cars from our committed supply orders with a diverse customer base. We have already placed over 7,700 railcars from our 2014 Trinity supply agreement and scheduled deliveries with customers have been placed through July 2019, meaning our earliest available scheduled delivery is in August 2019.

Additionally, we have placed 450 railcars from our 2018 ARI supply agreement, and our earliest available scheduled delivery under this agreement is in the first quarter of 2020. The secondary market remains active. Rail North America's remarketing income was approximately $7.2 million during the quarter, bringing total remarketing income for the year to $61.7 million, which is slightly above our full year expectation. While we are always active in the market, we expect any activity in the fourth quarter to be modest in size.

Within Rail International, the European railcar leasing market continues to experience gradual improvement across the chemical, petroleum and freight market. GATX Rail Europe is seeing steady demand across the fleet with utilization increasing to 98.4%. Rail International's investment volume was approximately $40 million during the third quarter with over a third of this due to investments in India. We are still on track to double our fleet count in India by the end of the year. Portfolio management's results were primarily driven by the strong performance of the Rolls-Royce and Partners Finance affiliates.

Our RPS results were driven by both higher operating performance and remarketing activity in 2018. Year-to-date segment profit in portfolio management is down from 2017, primarily due to the $8.4 million residual sharing fee earned in the second quarter of 2017. American Steamship Company continues to perform well with 10 vessels currently deployed. Higher water levels and increased\ demand for iron ore has more than offset the initial delays ASC experienced early in the season.

Finally, GATX repurchased nearly 150,000 shares for approximately $12 million during the quarter. Year-to-date, we have repurchased over 500,000 shares for $37 million. At the end of the quarter, approximately $213 million remains available under the aggregate $250 million repurchase authorization.

So those were the prepared remarks. So I'll hand it over to the operator, and we can open it up for Q&A.

Questions and Answers:

Operator

(Operator Instructions) Allison Poliniak, Wells Fargo.

Allison Poliniak -- Wells Fargo -- Analyst

On the 2019 maintenance expense, is there any way to help quantify what you expect to get pushed into 2019 for us?

Brian A. Kenney -- Chairman of the Board, President, Chief Executive Officer

Hi, Allison, it's Brian. No, not at this point. We're trying to get as many cars in as before the end of the year as we can. So we'll have an update for you obviously at end of the fourth quarter, but it really is much lower than we expected coming into the year and the reduction is both tank qualification work, which has not yet materialized. As Jennifer said, there are really reluctant to send in their cars. You're looking at a market where carloadings are increasing velocity and the railroad is slowing and trucking is untenable right now. So customers are really reluctant to give up their cars to an increasingly busy maintenance network. So we anticipate getting a lot of this backlog in the fourth quarter, but where we sit today, we're not going to get all of them that are due, we can just tell that's not going to happen. They're not going to get in in time. So what happens is our commercial teams and eventually legal teams work with the customers to get them in. And at some point, if these cars are not received by GATX, they'll be embargoed and unable to load and that's when you see them flood into our maintenance facilities. So we're trying to get as many as we can before the end of 2018, but we can tell you right now, it's not going to happen as far as what is due. So that's why, we can already see increased maintenance expense coming in 2019.

Allison Poliniak -- Wells Fargo -- Analyst

Understood. And then you talked about sequentially improving lease rates. Obviously, your term is still pretty low. Could you give us some perspective in terms of where we are relative to, say, maybe the average lease rate across your portfolio? I know it's a little bit more difficult.

Brian A. Kenney -- Chairman of the Board, President, Chief Executive Officer

Yes. I always get admonished internally about trying to get to generic with that because they have such a diversified fleet and it really does depend on car type, but ignoring that for a minute, if you look sequentially quarter-over-quarter for absolute, market lease rates probably declined a few percentage points for freight, and that's really due to small cubes having a sizable decreased in the quarter. But it increased pretty seriously for tank, I think, over 20% to 25% or more absolute lease rate increase on average for tank cars just in the quarter. So we are seeing significant strength in the market.

Operator

(Operator Instructions) Justin Long, Stephens.

Justin Long -- Stephens, Inc. -- Analyst

So I wanted to start with a question on the guidance, thinking about this quarter in the commentary. It seems like in North America, you've seen remarketing income and maintenance expense both outperform your expectations. So I was a little surprised that the full year guidance range didn't change. Can you just help us think through that and the areas of the business where you might be seeing weaker than expected trends that are offsetting some of that upside?

Tom Ellman -- Executive Vice President and President of Rail North America

Yes. This is Tom and I'll address that. So as you mention, we continue to expect full year earnings to be in the $4.90 to $5.10 range. Some of the key drivers of the quarter-over-quarter decline in Q4 will be the lower remarketing income in Rail North America that we talked about. The maintenance expense catching up from deferred maintenance that Brian just mentioned. At ASC, we have some incremental cost from putting an additional vessel into service. And historically, the fourth quarter is a more challenging operating environment, and we expect that to continue to be the case. It's also important to note that we will continue to see a drag from lease rates in Rail North America. Even though the absolute lease rates are increasing, as Brian said, we got still below, for the most part, expiring rates, as evidenced by the negative LPI. So we continue to see a drag on incremental renewals, and we see the full quarter impact of the negative drag that we had on third quarter renewals going forward. So those are some of the reasons.

Brian A. Kenney -- Chairman of the Board, President, Chief Executive Officer

The only thing I want to add there. I know what you meant by outperformance of maintenance, but really from our perspective, it's underperformance of maintenance in 2018. We'd really like to get those cars in this year because they are due. So we're not celebrating the fact we couldn't get them, it's actually not a good thing, it's just deferring maintenance to a subsequent year.

Justin Long -- Stephens, Inc. -- Analyst

Yes, that makes sense. It's all really helpful. And maybe to ask the earlier question in a different way. Do you know the -- do you have a number on the total dollar amount of maintenance expense that has been deferred year-to-date? I know it's tough to predict when this will actually be deferred or materialize in 2019, but what was the total dollar amount that was deferred?

Tom Ellman -- Executive Vice President and President of Rail North America

We don't know yet because cars are coming in now in the fourth quarter more than they were during the year. But the problem is that they start coming in now to mid-November. It's too late to turn those cars further in the year because it's not just our maintenance network, the industry's maintenance network is getting increasingly busy. So, generally, a couple of hundred cars that are due -- tank cars that are due for tank qual in a given year spill over into the next year and you work with the customers to get those in as soon as possible. Otherwise, they won't be able to load them. We see that going up multiple times in 2019, but I can't tell you how much just yet. And to give you an indication that tank qual by the time it goes to the maintenance network and attracts all the other work that may be due on that car, you may have to do on that car for other reasons, it could be well over $10,000 per maintenance event. So it's a sizable number, I just don't know the exact amount yet.

Justin Long -- Stephens, Inc. -- Analyst

Okay. And then maybe secondly, I wanted to ask about the rollout of the PSR operating model. Obviously, it's becoming more broad-based across the US with UPs announcement in September. Do you have any thoughts around how that announcement in this operational change could impact your business and just the broader railcar leasing market as well?

Brian A. Kenney -- Chairman of the Board, President, Chief Executive Officer

Yes. So other railroads have implemented PSR in the past and they have, generally speaking, shut some cars. So it's reasonable to assume that UP will look to reduce the size of their fleet. Having said that, we don't know the exact manner in which the UP will implement PSR. So it's difficult to make accurate predictions regarding any changes to the railcar needs. As with all customers, we spend a lot of effort optimizing our fleet exposure with them to achieve an attractive risk return balance. We have a strong relationship with UP, and we're comfortable with our exploration profile. A great example is boxcars, which is a car type that historically has been exposed to PSR implementation. The vast majority of our boxcars have a longer lease terms and don't start expiring for another five years. And even when they do expire, most of them are near the end of their useful life, even if returned. As it relates to UP, we think our biggest risk is other lessors getting cars returned and GATX having to compete against those idle cars in the market. And I would say that that general thing, that last item is the thing that we're most concerned about generally with PSR knowing exactly how railroads will implement it and how we might have to compete with the additional railcars in the market.

Operator

Matt Elkott, Cowen.

Matt Elkott -- Cowen -- Analyst

Tom, you mentioned that despite the sequential improvements we've seen over the last few quarters and spot lease rates renewals continue to be a drag, if we can -- if this spot lease rate improvement continues in 2019 and through 2019, can we expect that drag to turn into a tailwind in 2019?

Tom Ellman -- Executive Vice President and President of Rail North America

Yes. So basically, you're asking about when the LPI will turn positive and that is an extremely difficult thing to answer because it's a constantly moving target with additional renewals coming online. That will be something that we will update you on at the January Earnings Call. We -- it's difficult to get too far ahead of that. But at this point, it's difficult not to see continuing rate pressure in that regard in 2019.

Matt Elkott -- Cowen -- Analyst

Got it. But you still believe in the sustainability of the -- in lease rates on a spot basis for the foreseeable future?

Tom Ellman -- Executive Vice President and President of Rail North America

Yes. I mean, particularly as it relates to tank cars, we've now seen several quarters in a row of positive incremental lease rates, and we would expect that to continue.

Matt Elkott -- Cowen -- Analyst

Got it. And speaking of tank cars, I'd love to hear your thoughts on the current tightness in the DOT-117 supply. And if you can -- if you're able to tell us how many of those cars you guys have in your fleet and if you plan to add more and whether you would add newly built DOT-117Js or you would also consider adding retrofitted ones?

Tom Ellman -- Executive Vice President and President of Rail North America

Yes. So I'll start at the end of that and work my way toward the beginning. And if I miss any of that, let me know. So we are adding DOT-117 cars to the fleet, newly built cars, and Jennifer, I'll have that number.

Jennifer McManus -- Director of Investor Relations

We have about 2,100 right now in our fleet.

Tom Ellman -- Executive Vice President and President of Rail North America

As it relates to retrofit, we do not intend, and we've said this before, we do not intend to retrofit any legacy 30,000 gallon cars. What we have done is and will continue to do is retrofit of the CPC-1232 jacketed car, which, as you know, is the very inexpensive, just a couple thousand dollars to modify that car. As far as what's going on in the market, the order information just came out this morning and there were, on a net basis, a net 10,000 tank car orders. We expect that a significant portion of those are tank cars for the Canadian crude market, and we'd expect that to continue. As far as how we will invest and how we look at that market, just like we've said in the past regarding this, we will invest in a measured way being careful not to get over-exposed to a car type which ultimately will probably be oversupplied as pipelines will ultimately come in and because it's the most efficient way to move that commodity, the length of time it will take is difficult to predict. But on the scale of railcar leasing investments, it's short enough that we will not get over-exposed in that area.

Matt Elkott -- Cowen -- Analyst

Got it. That's very helpful, Tom. I just have one quick follow-up. I understand about you guys resisting the temptation to go in in a big way on the DOT-117s. But are there conversion opportunities to ethanol because the ethanol fleet has to be replaced with DOT-117s, I believe, in 2023. So even if crude by rail -- Canadian crude by rail is somewhat of a stop gap measure until more pipe comes online, are their conversion -- can you modify at least a certain variety of the DOT-117s to ethanol? And if that's the case, will that be the type of DOT-117 you would be investing in?

Tom Ellman -- Executive Vice President and President of Rail North America

Yes. And I don't want to get too much into the weeds on this, but we have and we'll continue to do some investments in DOT-117 is for ethanol. The particular car that serves Canadian crude and the car that serves ethanol, it's not configured the same way. So that particular move doesn't -- conversion doesn't really work. But certainly opportunities to place nonjacketed cars in ethanol is attractive to us.

Brian A. Kenney -- Chairman of the Board, President, Chief Executive Officer

Yes. Matt, I'd also add that, cars that are the 117's that are going into Canadian crude in our fleet anyway are 255. They are lined and they do carry other commodities. So it's different than the legacy 30s that everybody invested in years ago.

Operator

Matt Brooklier, Buckingham Research.

Matthew Brooklier -- Buckingham Research -- Analyst

So just wanted to dig a little bit deeper in terms of the commentary on lease rate improvement on the tank car side of things. I'm assuming a big portion of that is on flammable service cars, but could you maybe talk to the non-flammable service tanks in your fleet or from a market perspective that we're also seeing improvement there or is it right now, it's all kind of coming from the flammable services side of things?

Brian A. Kenney -- Chairman of the Board, President, Chief Executive Officer

Yes. Let me let me preface that by saying when I said tank increased over 25% on average in the quarter, I was excluding legacy 30s as an example. So that's not an investable car-type obviously, it's on its way out. So broad improvement across the tank car market and probably the best performer overall time would be the high pressure car in the quarter.

Matthew Brooklier -- Buckingham Research -- Analyst

Okay. And then, could you -- you talked to some weakness on the small cube covered hopper side of things, specifically what's happening in the sand market. Do you mind giving us an update in terms of what GATX's exposure is currently?

Brian A. Kenney -- Chairman of the Board, President, Chief Executive Officer

Yes. About 2% of our fleet is in sand service. We've talked about this before. With the move from the northern white sand to the Texas brown sand, this has been coming and it's impacting the industry in a significant way already and will continue to grow, which is why we kept our exposure fairly modest and what we do have has turned out pretty well.

Matthew Brooklier -- Buckingham Research -- Analyst

Okay. And just last question here on the tax rate that was up in the quarter, I think a little bit ahead of our expectations in, I think, your original guidance. Maybe you could just talk to some of the components of what drove the tax rate up in the quarter and how should we be thinking about fourth quarter?

Brian A. Kenney -- Chairman of the Board, President, Chief Executive Officer

Yes. So last year, our effective tax rate was 38.4%. We expect it to be at 25.1%, which is a little bit different percentage then the Tax Act, and those differences are primarily influenced by our mix of domestic to international business.

Matthew Brooklier -- Buckingham Research -- Analyst

And then rough guidance on where we think it actually falls for the fourth quarter?

Brian A. Kenney -- Chairman of the Board, President, Chief Executive Officer

So for the full year with that 25.1%, that's probably about the best guidance we can give for the fourth quarter.

Operator

Michael Baudendistel, Stifel.

Michael Baudendistel -- Stifel Nicolaus -- Analyst

I just wanted to ask you, is there anything to read into your average lease renewal term only being 33 months. I gather some of that is just lease rate return back to where you'd like to see, but if anything in terms of just mix of the types of railcars that were renewed during the quarter being a little bit under the weaker side?

Brian A. Kenney -- Chairman of the Board, President, Chief Executive Officer

Yes. So one of the things we've talked about in the past is it's difficult to read too much into any single quarter. Overall, as we mentioned earlier, most car types are still below their long-term averages. So we're still generally trying to go short. What everybody saw, I'm sure, is the decline from second quarter to third quarter. But if you go back three quarters before that, they were all kind of in the low to mid 30s. The 41 last quarter was the high one, and that was really driven by a couple of unique transactions that, for commercial reasons, were at long terms. The term has pretty much -- with the exception of those couple of unique transactions, the term has been pretty consistent over time. There are a couple of car types where rates are good enough that we're starting to try to push term, but at this point, it's not broad enough across the fleet that you've seen an increase in that number.

Michael Baudendistel -- Stifel Nicolaus -- Analyst

Got it. That makes sense. And then just also wanted to ask you and the long-term agreement you signed with ARI, just any additional detail you can give me sort of why now, why use ARI and is there anything in the agreement that -- it seems like it look similar to the Trinity agreement in a lot of ways, but is there anything that's significantly different there in terms of does the price of the cars change with market conditions, any of those things?

Brian A. Kenney -- Chairman of the Board, President, Chief Executive Officer

Yes. So we definitely thought it was the right point in the cycle to pursue supply agreements. As you know, we did two of them, we did one in May with Trinity and then the one in August with ARI. Part of our strategy of supplier diversification and they're both high quality builders with a great catalog and great capability. As far as the specifics of the agreement, I can't disclose a lot of details there. What we can tell you is that they're both cost plus agreements, the Trinity agreement is 4,800 cars over four years, the ARI agreement has 450,000 in 2019 and then 1,800, a year from 2020 through 2023. As Jennifer's already mentioned, those 450,000 in 2019 have already been placed.

Operator

(Operator Instructions) Justin Bergner, Gabelli & Company.

Justin Bergner -- Gabelli & Company -- Analyst

First question just relates to ARI. In light of the transaction you announced yesterday, I was curious if you had any comments on that. And just given that the price was pretty high, how does that sort of affect your capital allocation going forward in terms of repurchases versus adding to the lease fleet?

Brian A. Kenney -- Chairman of the Board, President, Chief Executive Officer

It's a multi-part question. I'll take the valuation part of that. (inaudible) manufacturer, Justin. It's a relatively small from a lessor perspective, so it's definitely not the same thing. I think it went out at two times book, so look like a good price for them. As far as the other half of that, Tom, you want to?

Tom Ellman -- Executive Vice President and President of Rail North America

Yes. So, earlier in the year, we provided guidance that our stock buyback was targeted to be in $100 million range. I think everybody knows, we were blacked out for Q2 and a portion of Q3 due to negotiations of our two supply agreements. We are back in the market, and we will try to reach that $100 million goal by year-end.

Justin Bergner -- Gabelli & Company -- Analyst

Okay. Just a quick follow-up clarification, another question. The tax rate guide, how does that compare to your earlier tax rate guide and just any rough estimate as to what the long-term tax rate is as you look out into 2019 and beyond?

Jennifer McManus -- Director of Investor Relations

So, Justin, I would say for 2018 our guide was -- the effective rate was 25% for the year and that hasn't changed.

Justin Bergner -- Gabelli & Company -- Analyst

Okay. And is it safe to sort of assume a similar rate looking out to next year?

Brian A. Kenney -- Chairman of the Board, President, Chief Executive Officer

Well, as the U.S. -- assuming the U.S. business continues to recover, let's say, at a higher tax rate though, you could say -- we don't quite know yet, but directionally, it should go up over time.

Jennifer McManus -- Director of Investor Relations

Yes. And we would provide that guidance in our Q4 call for the 2019 tax rate.

Justin Bergner -- Gabelli & Company -- Analyst

Okay, great. With respect to portfolio management, it looked like income from affiliates was down year-on-year as well as quarter-on-quarter, but you mentioned in the press release, you're very pleased with the Rolls-Royce joint venture performance. So just any comments on how to true up the decline versus the positive commentary?

Jennifer McManus -- Director of Investor Relations

So, Justin, first, I would say year-over-year, share of affiliates income's up. So it's $38 million to $47 million for the year, just so we're clear on that.

Justin Bergner -- Gabelli & Company -- Analyst

That's year-to-date?

Jennifer McManus -- Director of Investor Relations

Quarter-over-quarter --- that's year-to-date, right.

Justin Bergner -- Gabelli & Company -- Analyst

Okay.

Jennifer McManus -- Director of Investor Relations

Okay. Q3 last year versus Q3 this year, we've had higher income from operations. But in the quarter this year, we had lower remarketing income. So, generally, Rolls is performing extremely well. It was just as -- we said in the past with Rail North -- it's very similar to Rail North America with remarketing income, that it's lumpy. And so that's what we're seeing in Q3 this year.

Operator

Willard Milby, Seaport Global.

Willard Milby -- Seaport Global Securities -- Analyst

Looking at the North American fleet, and I don't know if I'm reading too much into this, but the non-box car fleet growing over the last two quarters. Is this -- could this mark the bottom, I guess, if you all being a net disposal of railcars? Do you think the market conditions are right for you to kind of grow that fleet? And tagging onto that, as you look at the open market for pools of railcars to potentially acquire, what evaluations look like now versus maybe a year ago and are those valuations attracted for fleet additions?

Brian A. Kenney -- Chairman of the Board, President, Chief Executive Officer

Yes, I can take that. I mean, that's why we placed the two orders this year. We do intend to grow the fleet going forward. As far as the secondary market, we haven't seen any slowdown there at all, pricing is still very strong, and that's why our activities been so high over the last two years. In a situation where the market's been oversupplied and lease rates were still relatively weak compared to historical levels, but prices in the secondary market have hung in there and are still very healthy. And as far as what would cause it to slowdown, I mean, traditionally access [G] Capital has been the historical governor on that. So if credit tightens, rates increase, you might see a pullback. But so far, it's quite healthy. And so I would think that you will continue to see -- as long as it's healthy, you'll continue to see us generate remarketing income.

Willard Milby -- Seaport Global Securities -- Analyst

Okay. So I guess the recent orders with Trinity and American Rail, those will be net additions rather than strictly, I guess, replacements. I'm just curious about the multiyear trend that you have been in disposal of railcars for the most part if that's starting to flip.

Tom Ellman -- Executive Vice President and President of Rail North America

Yes. So between the two orders when they get going, it will be about 3,000 cars a year. We typically scrap somewhere around 2,500. So it's a small net addition. What we really look to add is additional spot new car business and additional fleet acquisition business above and beyond that. And as Brian mentioned, we certainly have been interested in pursuing that on the fleet provision side over the last couple of years. It's just been challenging at the valuations that we've seen in the market. Historically, when we hit a down-market, those has been great buying opportunities, but there's been so much capital-seeking yield this time around that it's been harder to do that.

Willard Milby -- Seaport Global Securities -- Analyst

Right. And if I could go back to maintenance, maybe harboring too much on this, but it sounds like you're trying to get as many cars as you can through the maintenance network here in Q4. Do you have a sense of what the step up in cost might be from Q3, if things go your way and you get the cars that you're planning?

Brian A. Kenney -- Chairman of the Board, President, Chief Executive Officer

It kind of depends on how many cars we gain. We are seeing more cars come in, it will definitely trend up in the fourth quarter. Unfortunately, it sounds like I'm avoiding the answer, but the answer is we really don't know how many we can get through in the fourth quarter and how many will spill over into next year, other than it's going to be a lot more than recent years.

Operator

Stephen O'Hara, Sidoti & Company.

Stephen O'Hara -- Sidoti & Company -- Analyst

I was just curious about -- just on the -- I mean, it looks like sequentially, lease revenue in North America, I think it was a first uptick you've seen since I think 2015, and I'm just wondering, I mean, it seems like your lease rates are pretty positive. Is it more of that or is it more kind of the -- maybe the addition of cars in the fleet? I mean, is there a -- how do you think about fourth quarter on a sequential basis? I mean, assuming kind of a stable market from here, have we kind of hit the inflection point of maybe declining lease revenue on that into the North America?

Tom Ellman -- Executive Vice President and President of Rail North America

Yes. So the actual numbers for lease revenue in North America were down for the quarter, but the thrust of your question, the lift was provided primarily by having more cars. The downward pressure was the lease rates because, despite the sequential improvement that Brian talked about, it's still lower than the expiring lease rates. So rates are still a net negative on the lease revenue.

Stephen O'Hara -- Sidoti & Company -- Analyst

Okay. And then just maybe on the maintenance piece again. When you say you're trying to get cars in, you're getting more cars in in the fourth quarter. How do you -- cars coming in because customers aren't as concerned with demand this current time or is it just slower time period or is it you kind of have to call them in because you've got a -- there is a contract where you guys have to get it done by a certain period of time and you can't do that if you don't start doing that.

Brian A. Kenney -- Chairman of the Board, President, Chief Executive Officer

I mean, it's stenciled right on the side of the car. So if it's tank qualification, it is due this year. And generally, they don't like what happens when it's spilled into the next year because, as I said earlier, the other commercial team works -- obviously is working right now to get them in. Eventually, that turns over to the legal department and eventually over to AAR, if it's late and into next year. So they want to avoid that as well. So that's why you're going to see a higher load in the fourth quarter. It's just that a lot of the cars coming in now, they're not going to get turned and sent out this year. So what I can say with certainty is it's going to be much higher in the first quarter because of what's spilling over. I just have not been able to -- we don't know yet how much higher it's going to be in the fourth quarter and how many are going to spill over. So they are required to get them in before the end of the year.

Stephen O'Hara -- Sidoti & Company -- Analyst

Okay. And maybe just lastly on the last -- maybe not last call, but prior to that, you guys have been fairly vocal about the level of backlog and things like that. I know you guys have added to that somewhat, but are you comfortable with the level of backlog today given, I mean, obviously lower be better, but you are more comfortable today than you were maybe six months ago. I mean it looks like it ticked up in 2Q, it's not ready for 3Q yet.

Tom Ellman -- Executive Vice President and President of Rail North America

Yes. So one of the things we look at in addition to the numbers of cars in the backlog, it's the amount of time. And for most car types now, you're looking at something approaching a year, somewhere between nine months and 12 months to get a new car, and that is a large reason for the incremental increase in tank car lease rates that Brian talked about, is that alternative is a little harder to come by. To your direct question on the size of the backlog, it's still well above any other trough that we've seen. So we still think there is room for the backlog to come down in a full recovery scenario, but we are being helped by that length of time to get a new car increasing a little bit.

Operator

Bascome Majors, Susquehanna.

Bascome Majors -- Susquehanna -- Analyst

I know we're not into 2019 yet, but do you guys have a sense of how you might be incentivizing your sales force differently in 2019 versus 2018?

Tom Ellman -- Executive Vice President and President of Rail North America

So the sales incentive plan is something we look at every year and is tweaked a bit for where we are in the market. We're in the process of going through that right now. Certainly, as we hit inflection points, we become more interested in taking lease rates up and lengthening lease term. As I mentioned for most of the car types in the fleet, we're not at that length in lease term point yet. We'll see when we get there.

Brian A. Kenney -- Chairman of the Board, President, Chief Executive Officer

But it's a great question, one we haven't had before. I mean, all the last few years, it's all -- been all about utilization and early renewals and things like that, trying to keep that fleet utilized. So once -- what Tom says, once we start to incentivize rate and term that, that's a really good sign, not quite there yet, but hopefully, we'll get there next year.

Bascome Majors -- Susquehanna -- Analyst

All right. So getting there, but not quite there yet. I appreciate the color there guys. And just one more real high level from me here. I mean, it feels like a lot has changed since your last earnings call, at least in the marketplace. I mean, your primary suppliers laid out a strategy that could have them investing billions of dollars and growing their own lease fleet. I mean, just this week, we heard your other key suppliers changing hands to be ownership. Your largest competitor may or may not be up for sale in some capacity. With all of these changes, it feels like if certain things happened, this could be more significant than incremental to the industry. How do you guys think strategically about this market and sort of the competitive landscape perhaps being different two or three years down the road versus today? And what opportunities or risks does that create for your business model and strategy?

Brian A. Kenney -- Chairman of the Board, President, Chief Executive Officer

I mean, it's a good question. But honestly, it's more of the same. Trinity has been an aggressive lessor for a long time, I mean prior to the split. So that's nothing new. And yes, it's changed ARI, it's changing hands, but you must remember that there was another lease (inaudible) to ARL, that was heavily supplied by ARI, had ownership interest in both. So this is nothing new for us competing against lessors who also supply us from manufacturing side. So there's really not a dramatic change there. What's more concerning to us is somebody really changes in their behavior and gets extremely aggressive and like I said, Trinity has been an aggressive lessor for a long time.

Bascome Majors -- Susquehanna -- Analyst

So you haven't seen the captive manufacturing finance models become more or less aggressive in the last few quarters versus the last couple of years?

Tom Ellman -- Executive Vice President and President of Rail North America

No. I mean, as Brian pointed out, it's been aggressive, and it's been that way for a while. So can't really point to a more recent change in what we place out there -- we try to place cars.

Operator

DeForest Hinman, Walthausen & Co.

DeForest Hinman -- Walthausen & Co -- Analyst

Couple of questions. On the remarketing activity, any areas of strength that you would call out where demand has been strong?

Brian A. Kenney -- Chairman of the Board, President, Chief Executive Officer

Now, just across the Board. I mean, most of our remarketing is in freight cars because there's a limited number of tank car buyers. But I'd say it's pretty healthy across the Board for good customer credits, especially with longer lease terms.

DeForest Hinman -- Walthausen & Co -- Analyst

Okay. And earlier, you mentioned generally scrapping around 2,500 cars a year, we're not really at that pace this year, steel prices have been up. Should we expect a lot of scrapping activity in the fourth quarter, is this just going to be a lighter here on scrapping side?

Brian A. Kenney -- Chairman of the Board, President, Chief Executive Officer

Yes. So the way scrapping decisions are made is it's not a big targeted amount, we're not looking to scrap a certain amount of cars. What happens is car comes into the shop and we look at what the projected cost to repair the car is and most likely to earn over its remaining life versus the cash flows we get from scrap in the car. So, naturally, you tend to get more scrapping activity in a higher scrap environment. The 2,500 is more of a multi-year average. It's not something that we target year-to-year. As far as, how many we just scrapped, --

Jennifer McManus -- Director of Investor Relations

Yes, you know --

Brian A. Kenney -- Chairman of the Board, President, Chief Executive Officer

Scrapped less through the third quarter than we did last year, but at 20% average higher price, so the gains are higher this year by a few million, even though we scrapped a lower number of cars.

DeForest Hinman -- Walthausen & Co -- Analyst

Okay. This is more of a high-level question. You've talked about third party capital for a long period of time and now we're starting to see rates moving up. Generally, that's kind of a good thing for us, but has there been any discussions internally or even at the Board level about -- thoughts about when does that money go elsewhere and look at the different asset class? Have we had any thoughts or discussions on that?

Brian A. Kenney -- Chairman of the Board, President, Chief Executive Officer

Yes, discussions all the time because we think that's been one of the things that's driven over supply, I should say, and the market has been this third party money without really direct relationship with the shipper customer. As far as this exiting, I mean, when you talk to them, one of the reasons they've entered the market is, they talk about stable asset class and all that, but really it's been because of the yield. As been described to me, the yield in the railcar market been higher when they've been able to achieve in their traditional financial, especially in the banking investments of near to zero yield. So that's what's driven them into the market. As far as them getting out, you would -- higher interest rates, under-performance of the fleet because I do think a lot of these investments that were made were at too higher price than necessarily the best car types. So, generally, what happens is as interest rates increase and fleets underperform, people start to (inaudible). So we really haven't seen a lot of ex thing just yet other than perhaps element getting out of the -- majority of their lease fleet. But I don't know the reason that was. I think they stated they just want to constrain their core business. So I think there's a number of reasons people get in and out. But, as far as what we've heard, it's been more of the yield in our business is higher than the alternative that was traditionally available. So, we'll see what drives them out overtime. Traditionally, as I said, it's been when their fleet under-performed or interest rates go up.

Operator

Justin Bergner, Gabelli & Company.

Justin Bergner -- Gabelli & Company -- Analyst

With respect to the tank car qualifications, are the periods that that car is in the shop for service long enough, given the tightness in the market to actually have a positive effect sort of on the lease rates that you're seeing sequentially in third quarter and into the fourth quarter?

Brian A. Kenney -- Chairman of the Board, President, Chief Executive Officer

Yes, it really isn't. So just, first of all, what happens when the car is in the shop, it experiences rental abatement. So it's a draw on total revenue for us, but as far as the number of cars in the shop getting TQ at a given time, it's not enough to drive market lease rates.

Justin Bergner -- Gabelli & Company -- Analyst

Okay, great. And then just a question on your overall comments about the market and the tightening nature of the market. I think you mentioned demand, railcar velocity and a tight truck market. Maybe if you could just sort of expand a little on each of those and which of those factors is the most significant to the tightening and the leasing market that we're seeing now?

Tom Ellman -- Executive Vice President and President of Rail North America

Yes. So I would say it's actually the truck and the railroad performance. It has been more impactful to date than the uptick in demand. Uptick in demand on the bed of already tightness to the railroad supply and the trucking shortage is certainly a help and help to accelerate things in the third quarter here. But more meaningful and impactful, I think, are those first two and in particular, those are what are driving the difficulty in getting the cars in for maintenance that Brian has talked about a few times.

Brian A. Kenney -- Chairman of the Board, President, Chief Executive Officer

Yes. And on the demand side, it's the Canadian crude that's really driven a lot of demand for tank cars and as we've said repeatedly over the years, there's an ending out there for that and I think it's one of those pipelines come online just in the next couple of years, like (inaudible) line three, I guess transmountain pipeline, you got Keystone XL out there. So when that happens, that's why we've been very careful investing in crude.

Operator

Willard Milby, Seaport Global.

Willard Milby -- Seaport Global Securities -- Analyst

And maybe this gets taken offline or don't know if you might have this data in front of you, but we're going to some old data on industry wide tank car recertification levels, and I think 2018, the value I had was about 49,000 cars industry wide, stepping down to about 40,000 in 2019 and half that in 2020. Does that sound accurate, is 2018 the peak for tanker research and is 2019 Just kind of maybe a minor step down from those levels?

Brian A. Kenney -- Chairman of the Board, President, Chief Executive Officer

As far as what is due in a given year, 2019 and 2018 are pretty similar. It then trends up for us over from there. So it all depends on when a certain tank car owner purchased, what their purchasing pattern was 10 or 15 years ago. So for us, 2019 and 2018 are pretty similar and then it starts to take off after that schedule.

Operator

There are no further questions at this time. I'd like to turn the conference back over to Jennifer McManus for closing remarks.

Jennifer McManus -- Director of Investor Relations

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

Operator

Thank you. Ladies and gentlemen, this concludes today's call. You may now disconnect your lines. Have a great day.

Duration: 48 minutes

Call participants:

Jennifer McManus -- Director of Investor Relations

Allison Poliniak -- Wells Fargo -- Analyst

Brian A. Kenney -- Chairman of the Board, President, Chief Executive Officer

Justin Long -- Stephens, Inc. -- Analyst

Tom Ellman -- Executive Vice President and President of Rail North America

Matt Elkott -- Cowen -- Analyst

Matthew Brooklier -- Buckingham Research -- Analyst

Michael Baudendistel -- Stifel Nicolaus -- Analyst

Justin Bergner -- Gabelli & Company -- Analyst

Willard Milby -- Seaport Global Securities -- Analyst

Stephen O'Hara -- Sidoti & Company -- Analyst

Bascome Majors -- Susquehanna -- Analyst

DeForest Hinman -- Walthausen & Co -- Analyst

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