GATX Corporation

Good day, everyone. Welcome to today's GATX 2021st Quarter Conference Call. Today's conference is being recorded. At this time, I'd like to turn things over to Ms. Sherry Hellerman, Director of Investor Relations. Please go ahead.

Thanks, Kellyanne. Good morning, everyone, and thank you for joining GATX's 2021st 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 release and those discussed in GATX's Form 10-K for 2019. 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 2020 first quarter results and then I'll turn it over to Brian for additional commentary on the COVID-19 pandemic and GATX's decision to suspend guidance. After that, we'll open the call up for questions. Earlier today, GATX reported 2020 first quarter net income of $46.3 million or $1.31 per diluted share. This compares to 2019 first quarter net income of $41.5 million or $1.12 per dilute share. Now I'll briefly address each segment. Well North America's first quarter results are consistent with our expectations coming into the year. Despite continuing weak market conditions, Well North America's fleet utilization remained high at 99% at the end of the quarter, and the renewal success rate was 74.6%. The current lease rate environment remains challenging. During the quarter, the renewal rate change of GATX's lease price index was negative 11.6%, with an average renewal term of 31 months. We continue to successfully place new railcars from our committed supply agreements with a diverse customer base. We've placed all 8,950 railcars from our 2014 Trinity supply agreements and nearly 1,300 railcars from our 2018 Trinity supply agreements. Additionally, we've placed over 3,100 rail cars from our 2018 Greenbrier Supply Agreement. All supply agreement deliveries for 2020 have been placed. Our earliest available scheduled delivery under our supply agreements is in the first quarter of 2021. Capitalizing on an active secondary market for rail cars, Rail North America generated first quarter remarketing income of $27 million. Within Rail International, the European rail car leasing market remained stable, evidenced by GATX Rail Europe fleet utilization of 98.5% at quarter end. Rail International's investment volume was over $69 million during the first quarter, as GATX Rail Europe and GATX Rail India continue to expand and diversify their fleet. Portfolio management results in the quarter were primarily driven by the solid performance of the Rolls-Royce and Partners finance affiliates. despite the unprecedented disruption to commercial air travel in the latter part of the quarter. American Steamship Company, or ASC, started its selling season in late March and is currently operating seven vessels. As noted in the earnings release, the sale of ASC is expected to close in the second quarter this year. With that, I will now turn the call over to Brian.

Thanks, Sherry. So I'll take this opportunity to talk about our response to COVID-19 crisis, how I think we're faring thus far, and I'll end with why we decided to suspend our annual 2020 earnings guidance. So I should start by saying that this management team has worked together for a long time. A number of us have worked together during the last two crises that materially impacted our business. So The first was the aftermath of 9-11, and back then we owned a large aircraft leasing business, and the second was obviously the Great Recession. The point is we emerged from both those crises in good condition. In fact, I think we emerged from the Great Recession in stronger condition than when we entered, and that was because of the acquisitions of troubled rail portfolios that we were able to execute during that time. So early in the onset of this COVID-19 crisis, we deployed tactics in our rail business that we use in every economic crisis. And the first one is to lock down our liquidity and access to capital. So fortunately, we're always focused on that subject. So we entered this situation in very strong position. In fact, as of today, GHX is sitting on over a billion dollars of cash and unused credit lines. We have no scheduled debt maturities remaining in 2020. And as you know, the debt capital markets have recently improved dramatically. So our ability to access capital is currently outstanding. The second tactic, we get out in front of the customer relief requests that we invariably receive when the economy declines sharply. And we have to develop a specific game plan for how we handle these customer requests. And again, we enter this crisis in a pretty strong position from both the rail customer relationship and credit perspectives. as well as from the asset allocation perspective. A couple of stats. We have over 1,000 customers in our worldwide rail business. And if you look at the top 50 customers worldwide, two-thirds are investment-grade rated, and none of them were on our credit watch list entering this crisis. Same in asset allocation. If you look at that, we have a very well-diversified fleet, as you know, from a car type and commodity perspective, much more diversified than our competitors. So our strategy for handling these customer requests has been proven over time, and we want to be helpful to our customers, especially our best ones, obviously, but we only provide financial relief if GATX ends up in a neutral position or actually receives a net benefit, and that could be commercially or economically. So an example would be providing immediate lease rate relief to a customer in exchange for a higher payment later in the lease. or perhaps in exchange for the customer agreeing to a lease term extension on another car type at an attractive rate. So that strategy worked very well during the Great Recession, and we're in the middle of deploying it now. The third tactic we implement in a crisis is searching for opportunities to acquire assets at attractive valuations, and that often materializes in a distressed rail market. As you might know, we were very successful in that regard during the Great Recession. We added about 18,000 attractively priced cars. I added over a billion dollars into our own and managed fleet back then. In the past couple of years, I've been pretty vocal on these calls about new entrants into the rail car leasing market that may be regretting their decision and looking to exit as the market got more difficult, and it got more difficult prior to this crisis. we are in constant touch with the market to let people know we're interested in being helpful in that regard. So those are the three elements of our usual strategy in an economic crisis. I would say the difference between the usual crisis and the current COVID-19 situation is we need to prioritize a different tactic above the other three, and that's protecting the health of our employees. So as you know, safety is always the number one priority at JTX, and our safety record is one of the reasons we've moved aggressively moved repair volume into our own maintenance network over the last few years. But it's just never been as difficult to ensure the health of our employees, obviously, as it is right now. So fortunately, rail has been deemed an essential industry. We're still operating. Our office employees are working well remotely. In the maintenance network, it's remained functioning thus far during the COVID-19 crisis. We have closed a number of maintenance facilities for short periods of time. That's more in an abundance of caution if we thought there was a potential infection or somebody had contact with somebody infected. We're exceeding all the CDC guidelines for protecting our employees. We're doing health checks, obviously social distancing, separating shifts, regularly disinfecting our facilities. We send people home on paid leave if they feel sick or have been exposed outside of work to an individual who's positive. So We've been really fortunate thus far in that we only have three GHX employees across the globe who have tested positive for COVID-19, and I'm really happy to report that all three have recovered and they're back to work today. So we know this could change in a hurry. We need to remain vigilant. We're definitely learning as we go, not taking the success for granted. I do want to publicly recognize our rail car maintenance employees, both shop management and the employees on the floor. They've really kept our business running with their commitment, their hard work, and their safety and their dedication to safety. They've really been outstanding. So that describes how we're responding to the COVID-19 crisis thus far in our rail business, and it's been challenging, but the challenge has been way more severe for those serving the global aviation industry, and that's also true for our RPF, so our 50% joint venture with Rolls-Royce in the spare aircraft or spare engine leasing business. So as many of you know, The performance of that joint venture has really been remarkable over the last 22 years from both a growth and profitability perspective. But there's been a dramatic reduction in worldwide air travel, and that has reduced engine demand. And so RRPF is also dealing with an increasing number of lease modification requests from their airline customers. So similar to the tactics we're using in rail, RRPF is trying to assist their customers on a case-by-case basis. as well as working to maintain strong liquidity during this unprecedented disruption to air travel. As Sherry indicated and has indicated in our earnings release, COVID-19 did not have a direct negative impact on our financial results in the first quarter. And as far as today, I believe we're currently functioning very well given the severity of this crisis. Our worldwide rail car fleet utilization remains extremely high. Customers largely continue to renew their rail car leases. We're actually placing new health car deliveries. For example, we've placed all our 2020 new car deliveries in North America and India. We have excellent liquidity and access to capital, as I said. The sale of American Steamship is on track for May. And customer lease modification requests thus far are pretty manageable. So we're optimistic also that investment opportunities will materialize across our businesses. So, so far, so good. But having said that, You know, the excellent customer base, the assets, the contracted revenue can only insulate us for so long. So the longer the global economy is shut down, obviously the more material the effect will be on GHX's businesses. You know, a prolonged shutdown will eventually decrease that customer renewal success, fleet utilization, revenue. Hopefully we'll have the opposite effect on investment opportunities, but it also could increase our maintenance expense if cars enter the network to prepare them for placement to the next customer. So... Since no one yet has that answer as to when COVID-19 subsides and the economy gets restarted in earnest, we just can't estimate how material it will be on the metrics I mentioned or really on the financial performance of Rolls-Royce and partners. So we've decided to spend our 2020 earnings guidance for the time being, but we will revisit that decision next quarter, and perhaps the picture will become clear enough to give you an estimate of where 2020 earnings will show up by that time. So taking a step back, rail remains an essential industry. It's generally the greenest and lowest cost method of moving freight long distances. It's vital to the world economy, and it's going to be instrumental to the eventual economic recovery. So I remain confident in GHS's full-service leasing business model, and especially our employees' ability to execute in a manner that will enable us to come out of this COVID-19 crisis in an even stronger competitive position. So that's where we are today. Let's go to Q&A, operator.