GATX Corporation

Good day, everyone, and welcome to the GATX 2020 Fourth Quarter Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Director of Investor Relations, Sherry Hellerman. Please go ahead.

Thank you, Ryan. Good morning, everyone, and thank you for joining GATX's Fourth Quarter and 2020 Year-End Earnings Conference Call. I'm joined today by Brian Kenney, President and CEO, Tom Ellman. Executive Vice President and CFO. Bob Lyons, Executive Vice President and President of REL North America. And Gautrey Cazale, Executive Vice President and President of REL International. 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 2019 Form 10-K and 2020 Form 10-Q. 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 fourth quarter and four-year results, and then Brian will provide additional comments on 2020, as well as our outlook for 2021. After that, we'll open the call up for questions. Earlier today, GATX reported 2020 fourth quarter net income from continuing operations of 17.8 million, or 50 cents per diluted share. This compares to 2019 fourth quarter net income from continuing operations of 42.1 million, or $1.18 per diluted share. For the full year 2020, GATX reported net income from continuing operations of 150.2 million or 424 per diluted share. This compares to net income from continuing operations of 180.8 million or 497 per diluted share in 2019. The 2020 four-year results include a net negative impact of 12.3 million or 35 cents per diluted share related to the elimination of a previously announced tax rate reduction in the United Kingdom. The 2019 four-year results include a net deferred tax benefit of 2.8 million, or 8 cents per diluted share, related to an inactive tax rate reduction in Alberta, Canada. These items are detailed on page 13 of our earnings release. In 2020, investment volume was $1.06 billion. which reflects higher year-over-year investment in Rail North America, as well as our acquisition of Tri-Fleet, the fourth largest global tank container lessor. And as noted in earnings release, we currently expect 2021 earnings to be in the range of $4 to $4.30 per diluted share. With that, I will now turn the call over to Brian.

Okay, thanks, Sherry. Good morning, everyone. Thanks for calling in. As always, I'll give you the brief color on our recent performance, but more importantly, some more detail behind the 2021 guidance. So let's go ahead and dive in here. As Sherry said, and as you saw in the press release, on a normalized basis and looking at continuing operations, we earned $459 per diluted share. You might remember that we suspended earnings guidance at the end of the first quarter of 2020, along with most others due to COVID-19. You might also remember we sold our American Steamship business in May, so I realize that trying to analyze our 2020 financial performance versus that original guidance that we put out last January is pretty difficult. It's also difficult for me to tell you with a high degree of accuracy what the financial impact of COVID-19 was on GATX, but I can't talk qualitatively about it, and I think I need to because it's still having an impact today. So, as far as that goes in rail North America, COVID showed its impact really in three areas. You remember that entering 2020, the North American rail car leasing market was already in a weakened position. That was due to the dramatic oversupply of rail cars. But as the pandemic set in and North American rail car loadings fell to levels really beneath the bottom of what we saw in the 2008 to 2010 recession, we did see a further negative impact on what were already low lease rates. So, It also had a temporary chilling effect on the secondary market. It also created inefficiencies in our maintenance network due to the frequent openings and closings of our facilities in an effort to keep the employees safe. Moving to rail international in Europe and India, other than that secondary impact on foreign exchange rates, COVID resulted in delayed investment in both businesses, and that was due to the shutdowns and delays at the rail car manufacturers. And, of course, COVID had its most profound effect on our aircraft spare engine leasing partnership with Rolls-Royce. That was obviously due to the dramatic decline in airline traffic around the world. So given that extremely negative environment, I think GHX's employees handled the challenges extraordinarily well. So, for instance, we maintain our global rail car fleet utilization between 98% and 100%, depending on the jurisdiction. As an essential industry in North America, our maintenance employees showed up for work continuously from day one. It helped us realize the cost savings of more fully utilizing our own network. Our international rail businesses have resumed their growth plans. And even in our RPF, that joint venture is handling the wave of customer relief requests very efficiently. And that team is now identifying new engine investment opportunities as well. And lastly, speaking of new investments, at the end of 2020, You saw that we closed on GHX's first adjacent acquisition in memory, actually, with the purchase of TriFleet. That's the world's fourth largest tank container, let's say. And that's a company that we believe GHX will bring a lot of value to in the coming years. So looking at it, as we enter 2021, we have a strong balance sheet. We've got great access to capital. And we're executing our strategy of investing in a down market at attractive prices. So let's turn to that 2021 outlook. And I'll say that our guidance assumes a gradual easing of COVID as we move through the year. And despite the start of the rollout of the vaccines, that easing assumption looks pretty aggressive as we sit here today. So let me give you an example. COVID infections and secondary exposures of workers in our North American maintenance network peaked at the end of last year's with the highest levels yet, and they continue at a very high level, and that obviously reduces our capacity in our own networks. I'm sure you're aware of the COVID lockdowns in Europe. For instance, Germany and Austria, where we're headquartered, have recently extended their restrictions. They both say they see hard times ahead. And obviously, global air travel remains about 50% of its pre-COVID level. So while we're assuming that it gets slowly better as we move through the year, I'd say the possibility of COVID-related volatility in the outlook remains high. Specifically by the segments, let's turn to Rail North America's 2021 outlook. So towards the end of the year, in the fourth quarter, we started to see very early signs of a recovery. So examples, absolute lease rates were flat to slightly higher for the second consecutive quarter for many car types. Car loadings have steadily increased off the second quarter low we saw in 2020. In the fourth quarter, certain market segments actually showed higher quarter-over-quarter car loading compared to the fourth quarter of 2019. So despite those facts, Industry oversupply continues, and although we see similar lease renewal success and probably higher absolute lease rates versus 2020, we still think renewal rates will be below expiring rates as we move through 2021. So there's also some risk of fleet utilization. The market's extremely competitive right now, and that's really due to the significantly lower utilization in our competitors' fleets. So the net effect of all that is we expect lease revenue to decline in 2021 in the range of $35 to $45 million at Rail North America. So let's talk about net maintenance expense for a minute. I'll acknowledge that we've had difficulty in predicting it accurately recently. That's actually been a good news story as we've outperformed our expectations during the last two years by aggressively moving more work from those third-party facilities into our own network and realizing the associated cost savings. So We do expect more of the same performance as we move through 2021, but the COVID-related disruptions we're currently seeing are hampering those efforts. So at this point, it's a little difficult. We estimate maintenance spending will be within $10 million in either direction compared to our 2020 expense. And probably the last major factor to discuss for Real North America is asset disposition income. As I said, secondary market issues. at the beginning of the second quarter a little bit, but investor appetite and inquiries picked up late in the year. We're expecting that improvement trying to continue as we move through 2021. There's some strong demand for the assets that we are taking to market. We've also seen scrap steel prices increase significantly since the beginning of December. So we'll continue to optimize our fleet in 2021 through scrapping and the sale of rail cars in the secondary markets. And thus, we expect that asset disposition income overall could be up significantly in 2021, given our current fleet plans. But again, we're going to act economically as we always do. So, our disposition plans could change with additional market volatility caused by COVID or other sources. So, the net effect of all these factors is that we expect the negative lease revenue variance will be offset by higher disposition gains and continued cost control. And that drives our expectation that 2021 segment profit at Rail North America will be essentially flat with 2020. Again, volatility in the market will determine whether it ends up up or down. Moving to international rail, let's start with GATX Rail Europe. As I've discussed over the last two years, the European rail market pre-COVID was extremely attractive, arguably more so than I've seen since we entered the market in the early 1990s. So, We expect that favorable European market again in 2021. We've invested more into that market over the last two years. We're going to do it again in 2021. We currently anticipate adding more than 1,300 new cars at attractive rates. So we also continue to realize small renewal rate increases in the existing fleet. We expect that to continue in 2021. So that new investment, the strong performance on the existing fleet, and hopefully less of that negative exchange rate movement we saw last year, is expected to result in an increase in rail's Europe segment profit of at least $15 million in 2021. At Rail India, although their 2020 fleet growth was constrained by manufacturing shutdown due to COVID, the rail manufacturers have been back up and running for some time now, and we do anticipate significant growth in that Indian fleet this year. In fact, we're currently expecting to add over 1,000 cars to our fleet in 2021. So they also continue to diversify their car types, their product mix. And I think their growth is expected to increase their segment profit in the range of $2 to $4 million in 2021. So combined with GRE, that means expected segment profit growth for Rail International in total is expected to be as much as $20 million this year. So let's move to portfolio management. As I said earlier, the RRPF joint venture, that's that partnership with Rolls-Royce, was hit hard by the reduction in global air travel. And there's no forecast that we know of. that foresees a full recovery of air travel in 2021. So, you can expect that joint venture to be dealing with a severe impact on its customers through at least this year. We also expect lower remarketing income in 2021. You might remember 2020 was actually a big year for remarketing at RFPS, but that was due to that gain we highlighted in the third quarter that involved a large refinancing and sale of a group of aircraft spare engines. As we said, that's unlikely to reoccur. So, We expect our share of 2021 profit at this JV to be down 40 million or more from last year. However, we do expect the lower segment profit at RRPF to be partially offset by spare engine investment that's made directly by GATX in 2021. So we mentioned the initial investment of this type in the earnings release. Let me expand on that for a minute. The RRPF joint venture has generally been self-funding and has been that way for several years. For instance, they were able to invest over $900 million in both 2018 and 2019 with little support from the partners. But due to the depressed market conditions in the airline sector and the resulting extremely high funding costs for aviation-related companies, RRPF is somewhat constrained in its ability to invest at the same elevated level it was pre-COVID. But as is typical in a down market, they are identifying very attractive investment opportunities. So to take advantage of these opportunities, as well as be as helpful as we can to our partner who has other uses for its capital, we will invest directly in spare engine leasing transactions that we see as particularly attractive. So just in the past few days, we invested almost $120 million for a group of engines on long-term release to two of the strongest airlines at very attractive prices. and we do see more opportunities for this type of investment, and we'll keep you informed of this program as we move through 2021. So the net effect of portfolio management, we have reduced profit coming from the joint venture, new income coming from our direct investment, and segment profit is expected to decrease about $30 million or more in 2021. So moving on to that recent tri-fleet acquisition. Now, of course, we foresee the acquisition will be accretive, but in 2021, we actually expect it to be dilutive. by about 10 cents per share. And that first year dilution is primarily due to the accounting treatment for purchase price holdbacks and retention agreements that we structured into this transaction. And GAAP accounting requires that those payments be expensed as SG&A in 2021 if they are earned. So after 2021, we expect Tri-Fleet to be accretive going forward. And speaking of that SG&A, we reduced that expense by about 5% in 2020, That was general expense control, lower incentive compensation expense due to our 2020 results. And moving to 2021, we anticipate an increase of over $20 million in SG&A. Now, that sounds like a big increase, but over half of that $20 million increase, in fact, $11 million of it comes from the increase from the addition of tri-fleet. And half of that tri-fleet increase is due to those transaction-related expenses that I just mentioned. Again, those will not reoccur. So, Apart from the tri-fleet increase, the remainder of the increase from 2020 is spending associated with our assumption that business gradually returns to normal, and there's also increased growth-related headcount and IT spending at Rail International. The last component to mention is the tax rate. It's projected to be about a point or so lower than in 2020, and that's due to a higher percentage of our income coming from non-U.S. entities. So the net of all this is our expectation that an income in 2021 will be down in that $10 to $25 million range from last year. That leads us to our guidance of $4 to $4.30 per diluted share, and albeit with a lot more uncertainty than prior year's guidance. I do want to pause for a moment, as I always do, to remind you that 2021 marks our 103rd consecutive year of paying a dividend, and that's a track record that few companies can match. The GA Tech's board actually meets tomorrow, and then we'll discuss our 2020 plans for the dividend. So, obviously, we'll announce the decision at that time. I'd say the board certainly understands the importance of the dividend, and I think our century-long streak is a great example of our record of success and our commitment to the shareholders. So, I'll close by saying, again, GA Tech's employees did an outstanding job in 2020 executing our plan. And I'm confident any investments that we're making right now in these difficult markets will prove to be rewarding ones for our shareholders going forward. So with that, operator, let's please open it up to questions.