GATX Corp (GATX) Q1 2021 Earnings Call Transcript

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GATX Corp (GATX 0.05%)
Q1 2021 Earnings Call
Apr 20, 2021, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, good day and welcome to the GATX 2021 First Quarter Conference Call. [Operator Instructions]

At this time, I would like to turn the conference over to Ms Shari Hellerman, Director of Investor Relations. Please go ahead ma'am.

Shari Hellerman -- Director of Investor Relations

Thank you, David. Good morning, everyone and thank you for joining GATX's 2021 first quarter earnings call. I'm joined today by Brian Kenney, 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 2020. 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 remind everyone that our Annual Shareholders Meeting is scheduled on Friday, April 23rd, at 9:00 AM Central Time, and will be held in a virtual-only meeting format. Earlier today GATX reported 2021 first-quarter net income from continuing operations of $36.5 million or $1.02 per diluted share. This compares to 2020 first-quarter net income from continuing operations of $47.2 million or $1.33 per diluted share.

Our first-quarter results are consistent with our expectations coming into the year. At Rail North America, the operating environment remains competitive due to an ongoing market oversupply of railcars. Rail North America's fleet utilization was 97.8% at quarter-end and our renewal success rate was 77.7%. During the quarter, the renewal rate change of GATX's Lease Price Index was negative 18.1%, with an average renewal term of 30 months.

We continue to successfully place new railcars from our committed supply agreements with a diverse customer base. We have placed our 8,950 railcars from our 2014 Trinity Supply Agreement and over 2,300 railcars from our 2018 Trinity Supply Agreement. Additionally, we have placed nearly 5,900 railcars from our 2018 Greenbrier Supply Agreement. Virtually all supply agreement deliveries for 2021 have been placed.

As we indicated in our release, we continue to look for opportunities to grow our North American asset base in order to serve our customers with high-quality railcars. To-date, our commercial team has placed over 1,000 additional railcars outside of the supply agreements to be delivered by mid-2022. We also capitalized on a healthy secondary market to optimize our fleet through railcar sales, generating remarketing income of approximately $16.4 million in the first quarter.

Within Rail International, GATX Rail Europe continues to see steady demand across the fleet with utilization remaining high at 98.2% at quarter-end. Rail International's investment volume was over $44 million during the quarter, at GATX Rail Europe and GATX Rail India continue to expand and diversify their fleet.

Turning to portfolio management. First-quarter segment profit was down year-over-year, primarily driven by the Rolls-Royce and Partners Finance affiliates. As COVID-19 continues to negatively impact global passenger air traffic, capitalizing on challenging market conditions to acquire assets with promising growth opportunities. In January of this year, we commenced a program of direct investment in aircraft spare engines that will be managed by RRPF. Our year-to-date investment total in this program is approximately $350 million. All engines have been placed on long-term leases with strong airline customers. And those are our prepared remarks.

I'll hand it back to the operator, so we can open the line for Q&A.

Questions and Answers:

Operator

[Operator Instructions] And our first question comes from Allison Poliniak with Wells Fargo.

Allison Poliniak -- Wells Fargo -- Analyst

Hi, good morning. Just going back to the LPI, I know it's a mixed number, but you did note in the release that it was primarily due to the energy-related car types. Is there a way to dissect up versus sort of energy versus others at this point or is that too challenging?

Thomas A. Ellman -- Executive Vice President and Chief Financial Officer

Hi, Allison, this is Tom. As you know when we provide information on the LPI, we try not to get too granular, because it's really trying to indicate an overall look at what's going on from a market perspective. And our guidance coming into the year was 5% to 15% and that remains unchanged. We always talk about not reading too much into a single quarter's LPI since a small number of unusual transaction can always cause some volatility quarter-to-quarter. Our expectation for the remainder of the year still continues to be 5% to 15% for the full year, of course, across the LPI market lease rates, whatever you want to talk about the energy sector continues to weigh down rates.

Allison Poliniak -- Wells Fargo -- Analyst

Got it. So -- and maybe asking another way, should we just assume that it was a little bit more energy-weighted in terms of the renewals this quarter versus the balance of the year to get back up there into that 5% to 15%?

Thomas A. Ellman -- Executive Vice President and Chief Financial Officer

Yeah, Allison. I would not necessarily draw that conclusion about the specific weighting this quarter versus the remainder of the year.

Allison Poliniak -- Wells Fargo -- Analyst

Got it, got it. And then just in terms of general market trends in lease rates, is there any way to kind of help us understand how far off of normal we are today relative to what you're renewing right now?

Thomas A. Ellman -- Executive Vice President and Chief Financial Officer

Sure. Lease rates for most car types remain well below long-term averages. With that, the non-energy-related tank cars down about 15% to 25% versus long-term averages. Non-energy-related freight cars are down a bit more than that. And then the energy-related railcars continue to be down 50% or more versus long-term averages.

Allison Poliniak -- Wells Fargo -- Analyst

Got it. Thank you. I'll pass it along.

Operator

Thank you. Our next question comes from Justin Long with Stephens.

Justin Long -- Stephens -- Analyst

Thanks and good morning. And just to follow up on that, that line of questioning. I know in the release you talked about sequential improvements and lease rates, but maybe, Tom, could you put some order of magnitude around that comment for both tank and freight and what you've seen year-to-date?

Thomas A. Ellman -- Executive Vice President and Chief Financial Officer

Certainly. So the market lease rates for most tank and freight car types were up very modestly again this quarter. I would say, an increase of up to about 5% for most car types, whether it's tank or freight. And as you alluded to, Justin, this is the third quarter in a row that we've noted small lease rate increases, and each of the quarters it's been somewhere in that 5% range.

Justin Long -- Stephens -- Analyst

Okay, that's helpful. And I know the full-year guidance didn't change and the comment was made that the first-quarter results were in line with your expectations coming into the year. Last quarter, you gave some fairly detailed guidance by segment. Anything notable that's changed within some of those assumptions by segment, either positive or negative since January?

Thomas A. Ellman -- Executive Vice President and Chief Financial Officer

Justin, no, really the first quarter is proceeding pretty much as we expected. So there is nothing that I would point to in terms of change in our viewpoint coming into the year.

Justin Long -- Stephens -- Analyst

Okay. And then last one for me is on the acquisition environment. I know you had stepped up the investment dollars into the spare engine business and you alluded to that. But just thinking about the pipeline for deals, specifically in the railcar space. Could you talk about what you're seeing out there? Are you seeing activity pick up? Are you seeing some larger deals come to market? Just a general update would be helpful.

Brian A. Kenny -- Chairman, Presient and Chief Executive Officer

Justin, it's Brian. There's never can discuss individual opportunities obviously, but I think some of the larger portfolios that would be willing to sell are still trying to come to grips with the valuation of their fleet. So I'd say that's where the state of the market is.

Justin Long -- Stephens -- Analyst

Okay, I'll leave it at that. I appreciate the time.

Operator

Thank you. Our next question comes from Steve O'Hara with Sidoti and Company.

Steve O'Hara -- Sidoti and Company -- Analyst

Hi, good morning. Thanks for taking the question. Just curious, I mean, I know you guys having to redeem the bond in the first and second quarter, but cash in the balance sheet and obviously corresponding debt increased significantly. Is there other things that are being worked on or was that something that you'd expect to deploy or you do expect to deploy or maybe you can talk about how you expect to employ it right now?

Thomas A. Ellman -- Executive Vice President and Chief Financial Officer

Yes, Steve. So, as we've been talking about for a while, we think this is the kind of environment where there can be attractive investment opportunities. We talked about a couple of those in our press release, specifically the investment in the aircraft engines and then some of the agreements, we reached on placing non-supply agreement cars. But we did have a big cash balance at the end of the first quarter of about $960 million, but it's worth noting that this has already come down a bit.

As you know, the capital markets have been very favorable. In February, we wanted to take advantage of the exceptionally low lease rates, we were seeing. So we went to market with a 2 tranche issuance, we issued $400 million of 10-year notes with a coupon of 1.9% and $300 million of 30-year notes at a coupon of 3.1%. Much of the proceeds from those issuance already have or will be used to pay off higher debt. On April 1, we redeemed $300 million of 4.85% notes that were due in June, we also provided notice that we will redeem $150 million of 5.625% retail notes due in 2066 when they become pre-payable at par on June 1.

In addition, in early April, we prepaid nearly $135 million of outstanding bank term loans. So, given our planned investment volume and another $300 million of debt maturing in November, we'll likely raise additional debt later in the year. So, in addition to the investment opportunity, it really is noteworthy some of those redemptions coming up.

Steve O'Hara -- Sidoti and Company -- Analyst

Okay, thank you. And then, just like you had mentioned in the press release about the non-supply agreement cars, can you just explain that to me a little bit, that's kind of new from what I can tell, but I don't if there is something -- maybe it's something that you guys do pretty regularly.

Thomas A. Ellman -- Executive Vice President and Chief Financial Officer

Yeah. So there's three different ways that we add cars to the fleet during the normal course. One, is through the supply agreement. A second one is through spot business new cars where we simply go out and get quotes from builders and then award those to the builder that we get the best deal from and place those with the customer. And then acquiring existing fleets, existing cars usually with leases attached. And this environment has been good to do that second one. So, we wanted to comment on some of the investment, it's worth noting that those are all non-energy related cars.

Steve O'Hara -- Sidoti and Company -- Analyst

Okay. And then maybe just on the -- on RRPF with the direct investment, is that within -- the lease revenue within Portfolio Management now, is that the direct investment? And then do you still kind of think -- are your thought still the same around the Portfolio Management guidance that you gave last quarter for the full year, given that increased investment or is there anything else kind of at play?

Thomas A. Ellman -- Executive Vice President and Chief Financial Officer

Yes, Steve. So, we noted last quarter that we expected to do more of this type of investment. So, yes, the additional investment was contemplated in the guidance that we provided. And as far as the financial statements, yes, the majority of that lease revenue that you see in the Portfolio Management segment is related to those engines.

Steve O'Hara -- Sidoti and Company -- Analyst

Okay. All right, thank you very much.

Operator

[Operator Instructions] Our next question comes from Justin Bergner with G. Research.

Justin Bergner -- G. Research -- Analyst

Good morning, Brian. Good morning, Tom.

Thomas A. Ellman -- Executive Vice President and Chief Financial Officer

Good morning.

Brian A. Kenny -- Chairman, Presient and Chief Executive Officer

Morning.

Justin Bergner -- G. Research -- Analyst

First question for me is just to build on the questions about the direct engine investment, so was that $350 million all complete as of March 31st? And sort of how should we think about your intentions and capabilities to further expand that level above the current $350 million?

Thomas A. Ellman -- Executive Vice President and Chief Financial Officer

Yeah. So I'll start and then let Brian add to if he has anything, but all $350 million of that was for the first -- was completed in the first quarter and as we mentioned last quarter, our intention is to invest in the most attractive engine types with the best customers on long-term leases. So, it's difficult to predict exactly how much more of that we'll be able to do, but it's certainly our intention to continue to look for that kind of business.

Brian A. Kenny -- Chairman, Presient and Chief Executive Officer

Yeah, Justin, we're investing in great equipment, really attractive cost. The engines are on long-term leases, you had that hook to the service component of the total care package from Rolls and this is the strongest airline credits in the world and lease rates are attractive there is conservative residuals. This is just great business for GATX. So, we'll try to do as much as we can without relaxing those investment parameters.

Justin Bergner -- G. Research -- Analyst

Okay. This might be an unusual question, I am not sure if you can answer it, but I mean are these investments accretive initially or is the intention more that you'll lock up a lease and then 5 to 10 years later, the environment will have improved and there'll be much more accretion?

Thomas A. Ellman -- Executive Vice President and Chief Financial Officer

Yeah, so as Brian noted, these are incredibly attractive economically, but they're also accretive from year one, from an accounting perspective.

Brian A. Kenny -- Chairman, Presient and Chief Executive Officer

That's a great point. We always look at whether it's railcars engines, whatever we always look at the best way to optimize the value. So a good question.

Justin Bergner -- G. Research -- Analyst

Okay. And just a quick one here, no repurchases in the quarter, right?

Thomas A. Ellman -- Executive Vice President and Chief Financial Officer

It's correct.

Justin Bergner -- G. Research -- Analyst

Okay. And then lastly, clearly there is a lot of activity going on with the Tier 1 rails, including this morning with Canadian National's overbid for Kansas City Southern, how do you view what a transaction between either of the Canadian rails in Kansas City Southern could mean for your business in the general, I guess, railcar supply chain?

Thomas A. Ellman -- Executive Vice President and Chief Financial Officer

Yeah, I can take that, Justin. From an equipment perspective, let's start there first on the -- on that level. If the deal is approved, the first deal, our exposure to any fleet consolidation concerns as a result of merger are very small, I think between CP and KCS we have less than 900 cars on lease to the two of them combined. With CN it's probably also less than 900 to them directly. So it's just not a material equipment exposure for GATX.

But I think you're also asking about the bigger picture and one remain kind of neutral here, but any merger that has a potential to create new rail traffic and potential new car demand is obviously going to be a good thing for a diversified lessor such as GATX. So, we'll see what deal goes through, whether it goes through and which one and we'll have to wait to see if that actually happens, but potentially a good thing for car demand.

Justin Bergner -- G. Research -- Analyst

Okay, thank you.

Operator

[Operator Instructions] Our next question comes from Matt Elkott with Cowen.

Matt Elkott -- Cowen -- Analyst

Good morning, thanks for taking my question. Can you guys talk about what type of markets, what type of cars would benefit, if there is an infrastructure bill?

Brian A. Kenny -- Chairman, Presient and Chief Executive Officer

Yeah, so the infrastructure bill that's been announced that I think is $2 trillion, there is north of $600 billion that's going to rail systems, road bridges and ports, but almost all of that rail spending is earmarked for passenger rail. So, it's public transit to stay on track and that's great. I am saying highways, bridges, roads, ports that's sorely needed, but it's really how they pay for it, that we'll be watching. But there is not anything really earmarked for freight rail transportation, it's more elsewhere.

Matt Elkott -- Cowen -- Analyst

But some of the building materials, I would assume that maybe there is some demand for open hoppers or even potentially conversion of the frac sand cars to cement and industrial sand. Could we expect any of that activity to happen?

Thomas A. Ellman -- Executive Vice President and Chief Financial Officer

Yeah. So, Matt, it's -- obviously, it's not -- the bill is not passed and not sure what the finished form will be. So it's speculative to think about which individual car types. But certainly, if you're building steel and aggregates and any of the feed stocks related to those will -- would certainly benefit, if there is increased infrastructure spending. So, we'll have to see how it plays out.

Matt Elkott -- Cowen -- Analyst

That makes sense. And Tom, just one last question on industry utilization. I think the number is 77% right now as of this month the best it's ever been, I think is 90% at the height of the crude by rail time, which was a crazy time. Do you have a view of what full utilization is? I mean, is it 85%, is 90%, is it 80%?

Thomas A. Ellman -- Executive Vice President and Chief Financial Officer

Yeah, Matt. We've talked about this before. It's really hard to hone in on exactly what that might be. It's certainly lower than where it is today at the end of the quarter at about 23%. A good guess might be in the mid-teens somewhere, but honestly it is a little bit of a guess we have to see it all play out.

Matt Elkott -- Cowen -- Analyst

And then just a quick reminder on the underlying assumptions of your guidance. The rail recovery has been mainly intermodal and grain, it's actually down ex. those two. Is that what you guys assumed when you gave guidance last quarter.

Thomas A. Ellman -- Executive Vice President and Chief Financial Officer

Yeah. So what we've been talking about and alluded to it on the first question is, we've seen three quarters in a row of small improvement in spot lease rates. A lot of the industry metrics you just talked about idle car count are improving, loadings have kind of hung in there. We're not seeing a big increase in any kind of capacity or anything like that. It looks like at least right now, it will be slow and steady.

So that's what we modeled in, an expectation that that will continue throughout the course of the year. The uncertainties around what happens with the degree and nature of the COVID recovery is some of the reason for the range that we provided. But again, as I noted through the first quarter, things are proceeding largely as we expected.

Matt Elkott -- Cowen -- Analyst

Got it. Thanks, Tom. Thanks, Brian.

Operator

Thank you. Our next question comes from Justin Bergner with G. Research.

Justin Bergner -- G. Research -- Analyst

Good morning and thanks for the follow-up. One topic that I don't think was touched on was the environment for scrapping cars. I saw that you scrapped about 1,000 cars leading to income of about $5 million, although there might be some other small puts and takes in that category. So just maybe is that -- maybe comment on is that pace that is sustainable? Are you mainly scrapping cars that are fully depreciated or are you scrapping some cars that still have more than sort of residual value on the balance sheet?

Thomas A. Ellman -- Executive Vice President and Chief Financial Officer

Yes. So the process that we use when scrapping cars is consistent regardless of the market or scrap prices. When a car comes into repair facility, we look at the expected remaining cash flows from continuing to operate that car in terms of what lease rate, is it likely to earn over its remaining life, what's the cost of the repair and then compare that to the scrap proceeds. So what naturally happens when scrap prices are higher is that it tilts you up, makes you a little bit more likely to scrap cars, and scrap prices have been in the low 400s for most of 2021 versus the low-to-mid 200s for most of 2020. So, certainly that increase in scrap price is making it relatively more likely that we scrap a car.

Having said that, it's important to note that this number can ebb and flow quarter-to-quarter simply based on what cars come into the repair facility.

Justin Bergner -- G. Research -- Analyst

Okay, understood. In terms of the income, just to understand that, I guess minor line item, which is perhaps now a little bit less minor than normal. I guess, it's non-remarketing net gains. And so that $5.1 million which probably is mostly scrap, which is the gains across a 1,000 cars or so that you scrapped in the quarter and it would be the gains relative to whatever residual book value, which I assume would include salvage -- estimate salvage value that would be on the balance sheet.

Thomas A. Ellman -- Executive Vice President and Chief Financial Officer

That's correct. Yeah, that's -- as you indicate that number is primarily scrap and that's exactly how you calculate the gain.

Justin Bergner -- G. Research -- Analyst

Okay. And then lastly, has there been any change to your view of gains on asset dispositions in North America from when you gave your outlook at the start of the year?

Thomas A. Ellman -- Executive Vice President and Chief Financial Officer

No, there hasn't. As you know from following us a long time that number can vary quarter-to-quarter. So we much more look at what the expectation is over the course of the full year and what we outlined coming into the year that it might be $35 million to $45 million higher than last year remains our expectation.

Matt Elkott -- Cowen -- Analyst

Okay, thanks for the follow-up.

Operator

Thank you. Our next question comes from Steve Barger with KeyBanc Capital Markets.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Morning, guys. Thanks. Related question on the steel, can you talk about what you're seeing for input cost inflation for steel components or anything else? And are there any issues with parts availability?

Thomas A. Ellman -- Executive Vice President and Chief Financial Officer

Yeah, so as indicated we buy cars, both on the spot market and through our supply agreements, the majority of which is through the supply agreement. So certainly the increased price of steel is increasing the cost of a car across the board. As far as any kind of challenges with maintaining our delivery schedule, we're receiving delivery of cars as expected.

Justin Bergner -- G. Research -- Analyst

What about parts availability in the repair shops, any issues?

Thomas A. Ellman -- Executive Vice President and Chief Financial Officer

We're proceeding as expected there as well.

Justin Bergner -- G. Research -- Analyst

Okay. And last one, just any broader comments on how inflation could affect the lease fleet in terms of asset value of the installed base, what that means for rates? Does this slow down your desire to buy cars on the spot market or anything else that comes to mind?

Thomas A. Ellman -- Executive Vice President and Chief Financial Officer

No, I mean, in general higher inflation is good for hard asset owners like GATX. It's historically been our front.

Justin Bergner -- G. Research -- Analyst

Understood, thanks.

Operator

Our next question comes from Steve O'Hara with Sidoti and Company.

Steve O'Hara -- Sidoti and Company -- Analyst

Hi, thanks for taking the follow-up. Just looking at the renewal term, I think it was 30 months in the quarter, it seems like it's been fairly low for a while. What's a typical -- how do you think about a typical cycle in terms of how long that last where you guys typically keep that term short versus kind of push it? I mean, it seems like it's been like that for a while. I mean, obviously that wouldn't necessarily mean it would have to pick up eventually or soon, but I'm just kind of curious how you think about it?

Thomas A. Ellman -- Executive Vice President and Chief Financial Officer

Yeah, so as you point out, the term is relatively short and at the short end of what we see historically. During the stronger parts of the cycle, you'll see that number up over five years. And it really has to follow, first, increasing utilization in the industry, which is followed by increasing lease rates and then the last one is, you start to see that term extend a bit.

So calling the number of years that it stays relatively short is just another way of calling the length of the cycle. And as indicated our expectation coming into the year was, we continue to see that slow and steady improvement in lease rates. That continues to be our expectation, but given how far we are from historical averages, I wouldn't expect a big change in that term over the course of this year. We'll see, as the recovery continues, how that eventually lengthens.

Steve O'Hara -- Sidoti and Company -- Analyst

Okay, thank you very much.

Operator

Thank you. At this time we have no further questioners. So I will turn it back to our speakers for closing comments.

Shari Hellerman -- Director of Investor Relations

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. [Operator Closing Remarks]

Duration: 30 minutes

Call participants:

Shari Hellerman -- Director of Investor Relations

Thomas A. Ellman -- Executive Vice President and Chief Financial Officer

Brian A. Kenny -- Chairman, Presient and Chief Executive Officer

Allison Poliniak -- Wells Fargo -- Analyst

Justin Long -- Stephens -- Analyst

Steve O'Hara -- Sidoti and Company -- Analyst

Justin Bergner -- G. Research -- Analyst

Justin Bergner -- G. Research -- Analyst

Matt Elkott -- Cowen -- Analyst

Steve Barger -- KeyBanc Capital Markets -- Analyst

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