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.

Thank you. At this time, if you do have a question, please signal us by pressing star 1. Again, that will be star 1 for questions. We'll hear first today from Allison Polniak with Wells Fargo.

Hi, guys. Good morning. Thanks for the color on the Rolls-Royce JV, and obviously we're still quite in the midst of this, but some of the more drastic concerns is that the profit of that JV will go to zero. You know, any color that you can provide that can help us, I guess, gauge the performance in that in the near term or why it won't get there? Sure.

Yep. Allison, this is Tom. And first of all, one thing to remind everybody of as far as the Rolls-Royce joint venture is half of the revenue, the lease revenue from the joint venture, is back to Rolls-Royce for use in their own preventative maintenance program. And, of course, Rolls-Royce is an investment-grade credit. The other half goes to a variety of airline customers that obviously have a variety of credit profiles. As you would expect, given what's going on in global aviation, that business has received deferral requests from customers. But these deferral requests typically ask for somewhere between three and six months' rent deferral, and they're to be paid back within one year. Nobody knows exactly how long the COVID crisis will last and what the shape of the recovery will be, but it's important to note that when prior crises have occurred, the global airline industry eventually recovered and got back to its growth trajectory of passenger miles doubling every 15 years. Similar to our rail business, our PF's contracts do not allow for cancellations. When they get a restructuring request, they look at them on a case-by-case basis, taking full advantage of the contractual rights and looking for opportunities to enhance the customer relationship without loss of economic value.

Thanks. That's helpful. And then on the rail side in North American Europe, how should we think about maintenance expense in this environment? Are people accelerating some of the larger overhauls? Are we sort of pushing it aside just given a lack of utilization? Any color around that?

Sure. I'll start with North America and then let Brian comment on international. So the big difference when you get into a more challenging commercial environment for maintenance is looking at that renewal success percentage. When the renewal success percentage goes down, you tend to see a little bit more maintenance because cars often have to visit a shop before going from one customer to another customer. And in the quarter, we saw the renewal success percentage get down to 75%. Again, it's hard to say what that number will do going forward. For context, in the Great Recession, it got as low as the mid-50s. The good news is one of the things that we've seen so far, even through the month and a half or so of the COVID crisis, is that customers are continuing to renew cars at relatively high rates. But that's the piece that you'd look for as far as change in maintenance is that renewal success percentage depending on that.

Yeah, it would be the same story in Europe. And probably the thing to add there is we only have, I think, now less than 1,800 cars up for renewal in Europe for the remainder of the year. So not as exposed, but generally it's the same equation.

Yeah, and just to add the same number for North America, it's about 13,500 remaining for the rest of the year.

Great. Thanks so much. I'll pass it along.

We'll hear next from Justin Long with Stevens.

Thanks, and good morning. So I was wondering if you could provide some color on the sequential trends and lease rates maybe for both tank and freight and maybe some color quarter to date as well, just given how quickly the macro environment is changing.

Sure. So market lease rates, as you know, vary by car type, so we always have to be careful not to overgeneralize. Having said that, lease rates for most tank car types vary are down about 10% to 25% since the start of the year, most of that coming in the last month or so. Lease rates for most freight car types, which had been more challenging coming into the COVID crisis, are down materially less, anywhere between about flat and 10% since the start of the quarter. As you would expect, lease rates are moving downward because of COVID. It's too early to tell how low they might go. As North American scrapping activity continues, it should help move the supply and demand equation back into balance a little bit more. We entered oversupplied more so in freight than in non-energy tank, and that's one of the things we might look for as the COVID situation continues.

Thanks, Tom. That's helpful. And as we think about the tank side of the equation, is there a way to look back at the last recession and say where tank car lease rates are today versus that prior drop and any structural reason why we should or shouldn't get back to that low and a downturn?

Yeah, Justin, looking at the absolute lease rates between then and now probably isn't very instructive. But what I would say is if you look at where they are versus those long-term averages, the place that tank car lease rates are today versus then, they're probably a little bit higher still today, but it wouldn't, in order to, on a proportional basis, be in the same place, it wouldn't take that much more of a decline.

Okay, helpful. And on remarketing income, I know that's something that's already pretty challenging to model in a normal environment. But are there any kind of high-level thoughts you could share on remarketing for both the rail business and the Rolls-Royce JV this year? I mean, is the assumption that we go close to zero in the near term, or do you think we can have some contribution in the quarters ahead?

Yeah, so first of all, in the rail business, the first quarter was a good quarter for remarketing activity, and there's been very little activity since the COVID crisis began. We really are taking a wait-and-see attitude as far as what will happen going forward, We certainly would expect at some point that market will come back. People will continue to trade assets in the secondary market, but there has been a bit of a pause. Just like activity in general, when the COVID crisis began, people were just adjusting to working from home, you know, the mechanics of being in a different environment. But the last couple weeks, you're starting to see more regular activity occur, and I would anticipate ultimately the same kind of thing would happen on the railcar side. As far as on the Rolls-Royce side, we would expect to continue to see remarketing activity going forward. Those, particularly the RRPF engines, are on long-term leases, and that type of activity you would expect to continue.

Okay, and lastly, on the RRPS business, is there a way to kind of look back at the last recession and share what you saw in terms of the downside in that business, and is that a decent proxy to be thinking about for this downturn as well?

Yeah, so the hard thing to say is how long it will last. So if you compare this to the Great Recession, you certainly saw a decrease in air traffic activity. And we certainly are seeing that now, air traffic down considerably. As far as what it will mean compared to the Great Recession, it's really just too early to tell.

Yeah, there was no concern about the business model back during the Great Recession, and you see all kinds of people talking about has it changed permanently in the aviation industry. So, you know, airlines might be requiring massive spacing passengers out now, but is that economically viable in the long term? I don't think so. So it really depends on how quickly the public regains confidence and doesn't think they're risking their health when they climb on an airplane. So, If it causes a long-term disruption or reduction in air travel, then obviously you need less spare engines. But, you know, the other view is there's a huge pent-up demand for air travel building, and once this crisis is over, people will develop amnesia and come back. And honestly, it's just too early to tell how quickly that's going to happen.

Understood. It's complicated, but I appreciate the time this morning. Thank you.

We'll hear next from Vasco Majors with Susquehanna.

Thanks for taking my questions here. I was curious with the decision to suspend guidance, if you could maybe frame the highest dollar impacts with the widest range of uncertainty for the business as a whole. I don't know if it's big news in aviation, or news in lease rates, or even the remarketing just not coming back to levels you thought. But if you could just kind of think about the levels of materiality that had the biggest ranges of bottom line outcomes around them, that would be helpful. Thank you.

Well, as always, the biggest upside and downside to guidance is that the utilization of your lease fleet by far, and I would add over the last few years, we've had very high remarketing gains, so obviously that's That's a factor too. So I would say those are the two biggest ups and downs in our guidance.

And if we think about where you're better positioned than others and where that may create some opportunity, can you talk about some of the stress you expect to see some of your peers in any of your business feel a little tougher than GATX and maybe some of the opportunity that could create for you guys, like you said earlier, to emerge stronger than you entered this?

Yeah, so the biggest, and I should let Tom expand on this, but the biggest difference is we're not as weighted in the energy sector in North America.

Go ahead. Yeah, and Brian hit it on the head, is the diversity of our fleet really provides a lot of protection. For example, if you look at our total crude oil exposure, it's only 1,500 cars, well under 2% of the fleet. If you look at cars in sand service, we have about 2,300 cars in that service. in both cases very low exploration profiles over the next couple of years as well, under 100 cars in sand and in crude oil. I'm sorry, in crude oil under 100 cars and sand under 300. Our competitors are going to be often much more weighted in car types that really were strong in the energy boom. Most recently, crude oil and sand. And that is going to cause some pressure on those fleets. As Brian mentioned, in the Great Recession, we certainly had the opportunity to acquire some cars from people who decided to exit the industry. We'll be looking for opportunities like that going forward.

Now, in Europe, it's a little different. In Europe, it's a little different story in that, you know, first of all, it's almost the vast majority is tank cars, and we do have over half the fleet in the mineral oil market or petroleum market. But we've been through the oil price drops before in Europe. I mean, certainly not to the extent of a collapse to zero and as suddenly as recently, but from June 14 to the end of the year and really for a couple of years, price dropped from $113 down to the mid-20s, and it was pretty low for a while. And if you look at GRE's utilization back then, it dropped a point. So it's been an extremely stable business over time. There's really a couple of factors that drive that. It doesn't carry any crude, really. It's very little. It's all in refined products. And there's been a shortage of cars in Europe. I had said on other calls, I don't remember a more positive rail market in Europe than entering this crisis. So there's a shortage of cars, and people tend to hang on to them. Obviously, the longer this lasts, it's going to be under pressure, but right now Europe's doing pretty well.

Thank you for that answer in both regions. If I could just ask one more before passing it on. You gave some color about the kind of deferral type requests you're getting from airlines. Could you... Pass that over to the kind of deferral requests and the markets and terms you're hearing in rail. I think that would be helpful. Thank you.

Sure. So, you know, we're receiving lease modification requests across the geographies, really, but it's very minor to this point. So if you look at Rail North America, I think we received about 30, 35 requests. You know, that's in a customer base of over 850 requests. And generally people are asking for extension of lease, you know, payment terms, maybe a reduced lease rate. So far we've granted just a handful of those requests, and it's really an insignificant amount of revenue at this point. And Rail International, like GHX Rail Europe, I think they've received requests from around 20 customers. As you would expect, the majority of those customers seeking relief are mineral customers. Once again, the same kind of requests, rate reduction, temporary rent holidays or deferrals. They've also granted less than 10 requests, and, again, the cash revenue affected is minimal. And in India, they've received less than 10 requests. I'm not aware of them granting any yet, but they're likely to. So, so far, I would say the effect's been minor, but you've got to caveat all that by saying we're less than two months into this thing, and the longer it lasts, the more likely we are to receive lease modification requests. And it could become significant, but so far it's relatively minor and manageable.

Thank you for your time.

And from Cowan, we'll hear next from Matt Elcott.

Thank you, Laura. Good morning. Just a quick follow-up on the last question. You did mention the renewal success rate is a good gauge of how things will unfold. Can you give us a sense of the direction and magnitude that that metric has taken so far this quarter?

Matt, I just want to be sure I heard you correctly because you were breaking up a little. Were you asking about what renewal success has done so far this quarter?

Yes.

As I mentioned, we continue to renew successfully at a pretty high rate. Those numbers are still coming in, but I would say even since the COVID crisis began, we're north of 60%, which if you look historically, it's a pretty good number. Over a long term, we kind of generally average between two-thirds and three-quarters of the cars going on renewal. And importantly, the ones that are not being renewed are going back out with customers. We're continuing to maintain that very high utilization rate. And a related question you didn't ask is just what has happened to utilization over time? And since this current management team has been in place, which is going back to 2005, we've never had a year where the utilization dropped by more than 2%. It dropped by 2% in the Great Recession. The year after it came back by 1.4%. And, again, we're entering this at 99% utilization. So, as Brian said, it's very early, but if you want to look for some of the encouraging signs, cars are getting renewed, and we're doing a good job of placing the ones that are not renewed.

Got it. It's very helpful. I hope my line is better now. But on the investment opportunities, I think you said that, you know, in a downturn, you guys typically – look for potential investment opportunities, given the renewed focus on liquidity and where we are in the economy, do you have an internal limit to what size opportunities you would consider in the foreseeable future, or are you flexible to pull the trigger on some potentially sizable investment opportunities if they're compelling enough?

Yeah, it's a good question. We don't have any limit on what we look at. If the opportunity was right, we'd go out and raise the capital we need, and I think there's plenty of that. So I think it's going to be very rough for competitors. Well, it's very rough for everybody, but particularly rough if you have a very focused fleet in the energy sector during this downturn, like a lot do in North America. Some of these people were struggling before this even started, so would this be the impetus for them to try to get out? I don't know. It was last time in the Great Recession. We'll see about this time, and for the right opportunity, we'll do what we need to raise the capital.

Got it. And then, does this whole crisis, does it change at all your longer-term strategic investment priorities? I think you were pretty happy with how things looked in India and in Europe, and I think you were you had been planning to ramp up your investment there. And then you may have also been looking at some non-rail car, additional non-rail car investments. Does the current crisis change any of those strategic, you know, objectives?

No, not really. I don't think there's any impact on our rail business model. You know, as I said in my opening, it's an essential industry. It's operating. It's probably very important to the recovery of You know, whether COVID-19 changes any national or global trade patterns or affects certain types of cars or customers, it's too early to tell. But I believe our full-service real-farm leasing business model is as important as ever during this crisis. So, no, I think we still invest like we have before when the right opportunity comes up.

Great. Thanks, Brian. Thanks, Tom.

We'll hear next from Steve O'Hara with Sedodian Company.

Hi. Good morning. Thanks, Steve. Good morning. I'm just curious, going back to our PF, can you just talk about the, you know, in general, the exposure to cargo versus passenger airlines? And then maybe, you know, if, you know, is there a good way to think about, you know, you know, the number of spares that are needed for, you know, a global capacity of X or something like that. I mean, if you listen to some of the U.S. airlines, obviously, you know, demand hasn't come back very quickly. And I'm just wondering if there's a way to think about, you know, what the need for spares might be, you know, if we assume, you know, capacity is, you know, maybe 10%, you know, off of what it, you know, was kind of expected to be this year, next year or something like that. Thank you.

Yep. So the Rolls-Royce aircraft spare engines serve the passenger market, so on your first question. As far as the way spares work, depending on aircraft type, the recommendation is to have between 8% and 15% of the engines on wing available as spares. As far as what that's likely to look like and when, the total demand for spares will be the same as it was pre-COVID. It's just too early to make that prediction at this point in time. Again, ultimately, we expect the demand to be there as air traffic recovers, but it's a question of how long it takes. But, again, the amount of spares – is between 8% and 15% of the engines on Wink.

Yeah, and I'd say most engine types were in balance, I'd say, in the market, so I don't think you need to do any algebra there. If it was a 10% reduction in engines required, you could probably assume the same thing. The interesting part about this, at least early in this downturn, is you have some airlines reaching out for sale-leaseback opportunities, but you have to be careful about that because if it's just for liquidity... You don't want to just extend credit. So the opportunities for investment have not gone away.

I'd just say we're going to have to be more careful about how we think about it. Yeah, and just following up on that, it's worth noting that since we began the joint venture in 1998, at that time airlines leased about 10% of their spares. Today that number is closer to 50%. And to Brian's point, that trend would be expected to continue and may even accelerate.

Okay. That's helpful. That makes sense. And then, you know, when you talk about the energy sector and, you know, potential deals there, I guess – I mean, do you think the fact that, you know, the credit markets are operating, you know, seem to be operating pretty well, you guys, your portfolio performance has been pretty good, it sounds like. Does that lead you to, you know, worry that deals may not become as available? And then, you know, if you look at, you know, would you be willing to kind of overweight one sector or, you know, are you looking to, you know, continue to kind of maintain a balanced portfolio? Yeah. Thank you.

Yeah, so as far as rail cars coming available, we would expect that they would. What we would always primarily be interested in is maintaining a diverse mix of cars overall. On a given transaction, you know, we certainly have some flexibility to pursue what becomes available. What will often happen, though, And what happened back in the Great Recession is even if a few car types are what's leading to the pressure on a given portfolio, that doesn't necessarily mean that those are the car types that will be sold. And there's certainly an opportunity in situations like that to pick up attractive car types.

Okay. Thank you very much.

Good morning, Brian.

Good morning, Tom. Good morning. I wanted to start off by asking about the ASC transaction. The expected time to close, is that primarily for, you know, regulatory approval at this point? Are there any outs? And how will you think about deploying those cash proceeds for what activity or activities?

Yeah, sure. We actually received regulatory approval just about two weeks ago, so there's no obstacle there, and we're on schedule for a close in the next couple of weeks. As far as the use of proceeds, immediately it will be used for debt pay down or avoidance of debt, but obviously in the longer term it gets redeployed to your other businesses.

Okay. That's helpful. Moving on to portfolio management, the Rolls-Royce joint venture. The question was asked about the profitability of that joint venture in 2020, but perhaps could you talk about the cash needs? Will there be increased needs relative to prior years to put cash into that business, or to the extent the cash flows are negative, is that something that the debt markets can take care of?

Yep, so the key cash need for that business has been it's been a high-growth business the past couple of years. The JV has invested nearly a billion or around a billion dollars a year each of the past two years. The cash needs beyond that are on an operating basis are relatively more modest. First of all, on the CapEx side, unlike our rail business that has committed supply agreements, The joint venture does not work that way. Those are spot transactions. It's a relatively low number of employees. The leases are net leases, so the operating cash demands are relatively modest. What will flex is the CapEx opportunities. Coming into this year, we expected that this would be another year where there would be around a billion dollars of CapEx opportunities. it's safe to say that the opportunities will be less, but exactly how much is too early to tell.

Okay. Thank you for that clarity. And then maybe lastly, just as it relates to the quarter just completed, it seemed like there was a meaningful charge in Rail International 5.5... Sorry, I'm just trying to find the number here.

Yeah, it's about $5 million, Justin. I know what you're talking about. So our international segment recognized about a $5 million loss caused by the weakening of the Polish lobby.

Okay, that's pretty straightforward. And that would be non-cash or cash?

That's non-cash.

Okay. Okay. All right, thank you.

From Sage Asset Management, we'll hear next from Barry Hames.

Thanks very much. Appreciate all the color in the call. I had one follow-up on the energy market. You talked about your exposure being relatively low, but could you talk a little bit more in terms of within the tank car market in North America in terms of what percent of that is is energy broadly defined where, you know, beyond crude, we're talking about refined products, ethanol, et cetera. And then those CAR types within PANCARS, you know, how many of them are just relegated in effect to carrying energy products versus can some of those go over to carry chemicals or other non-energy types of liquids? Thanks so much.

Sure. So a lot to that question, so I'll parse it out a little bit. So first of all, for cars and ethanol service, we have about 2,800 cars in ethanol service, so relatively modest amount, less than 3% of the fleet. And again, I've been providing some statistics on expirations. About 700 of those expire before the end of 2021, so pretty manageable exposure there. Our petroleum products are mostly refined petroleum products. Between crude and refined petroleum products, it's a little over 20% of our portfolio. Those refined products continue to see pretty steady demand. And as far as what the cars can carry, it varies by car type. But the vast majority of cars carrying refined petroleum products can carry a wide variety of products. And in many cases, in addition to being able to carry the car type, in addition to being able to carry petroleum, can carry a variety of chemical products as well. So there's a lot of ability and flexibility in that non-crude part of the portfolio to chase demand in a variety of areas.

Right, and then again, you've been greatly given your own exposure, but if you had to take a shot at what percent of the North America tank car market is energy broadly defined, what might that be? Any rough feel?

You know, I don't want to, and I have the number in front of me, so I don't want to get it wrong, but what I would say is the majority of the growth in tank cars in the past few years has been energy market-related for the industry, not for JATX.

Thanks so much. Appreciate the help.

We'll hear now from Mario Cabelli with Cabelli & Company.

Hey. I've just been grazing on a lot, so I may repeat what was discussed, but such is life. In the past, we've talked about you raising funds pools of capital from third parties, for example, this negative carry in the Japanese market, and they like infrastructure, and then you economically buy someone's fleet and manage it, but no capital on your part. What stage in this cycle does that become more interesting, and are you already having discussions along those lines?

A great question, and the answer is yes, and I think there's a considerable amount of capital involved that we're in contact with that is searching for opportunities in this down market. So, yeah, I mean, we've talked about it in the past, and I would say to the extent a sizable opportunity comes up, that's a real possibility, Mario.

Thank you. I'm going to carry on. Thank you. Keep calm and do it.

And at this time, I would like to turn things back to management for any closing remarks.

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.

That does conclude today's conference. Again, thank you all for joining us today.