GATX Corporation

Good day and welcome to the GATX 2021 Second Quarter Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Sherry Hellerman, Director of Investor Relations. Please go ahead.

Thanks, Nick. Good morning, everyone, and thank you for joining GATX's 2021 Second Quarter Earnings Call. I'm joined today by Brian Kenney, President and CEO, Tom Ellman, Executive Vice President and CFO, and Paul Titterton, Senior Vice President and Chief Operating Officer of Rail North America. Please note that some of the information you'll hear during our discussion today will consist of four 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. I'll provide a quick overview of our 2021 second quarter and year-to-date results, and then I'll turn it over to Brian for additional comments on our performance and our decision to raise guidance. Following Brian's comments, we'll open the call up for questions. Earlier today, GATX reported 2021 second quarter net income from continuing operations of $5.5 million, or $0.15 per diluted share. This compares to 2020 second quarter net income from continuing operations of $37 million, or $1.05 per diluted share. Year-to-date 2021, we reported net income from continuing operations of $42 million, or $1.17 per diluted share. This compares to $84.2 million, or $2.38 per diluted share, for the same period in 2020. The 2021 second quarter and year-to-date results include a net negative impact of $39.7 million, or $1.10 per diluted share, related to an enacted tax rate increase in the United Kingdom, and a net negative impact of $3.4 million, or $0.09 per diluted share, related to debt extinguishment costs associated with an early redemption. Both adjustments are non-cash events. These items are detailed on page 13 of our earnings release. And as noted in the release, we are raising our 2021 full-year earnings guidance to a range of $430 to $450 per dealer to share. With that, I will now turn the call over to Brian.

Yeah, thanks, Sherry. I'll spend a minute or two explaining why we raised our EPS guidance, even though business conditions really haven't changed significantly from our expectations coming into the year. So, first of all, it's the outlook for Rail North America that's driving the projected outperformance. Our other business segments are performing largely as we expected, but I'll get to those in a minute. Within Rail North America, we originally said we expect relatively flat segment profit in 2021 compared to last year. And the rationale was that we expected revenue to decrease by $35 to $45 million because lease renewal rates would still be lower than expiry rates in 2021. And that's come to pass. We also said there was a small risk to utilization due to the hyper-competitive market that's been created by the significantly lower utilization in our competitors' fleets. Another prediction was that maintenance expense would be up or down in that $5 to $10 million range, depending on our ability to continue the recent operating improvements we've realized. And that remarketing income would be substantially higher in 2021 as we continue to optimize the fleet in a strong secondary market, and we expected higher scrap prices in 2021. So looking at our actual results in the first half, as well as the current operating environment, it's pretty consistent with those original expectations of that slow market recovery. So the reasons for the higher guidance is that we now expect most of the items I just described to be at the positive end of the ranges we provided. So, for instance, looking at revenue, both utilization and lease rates are at the higher end of the range we predicted internally, but they're not significantly higher by any means. Maintenance expense, we have operated safely and efficiently through the first half. And we now expect spending to be at the lower end of the range we provided. And by the way, as Sherry indicated, Paul Titterton, who's our Chief Operating Officer of Rail North America, he has responsibility for Rail Maintenance Network as well as the fleet. He's on the call and can answer any questions you may have about that progress. And then the last two factors, our expectation of increased rail car sales in the secondary market is right on target. And as I said, we did expect to realize higher scrap prices in 2021, but frankly, we had no idea they would go as high as $475 per ton, and that's what we've seen recently. So, thus, you can see that it's difficult to pinpoint any one factor that's driving the improved performance. So, I would characterize it as a slightly better market in rail North America than we anticipated across the board. and strong commercial and operating performance on our part. And so the net result is that we now expect segment profit at Rail North America to not be flat, but to increase more than $20 million relative to last year. Quickly touching on the other businesses, GHX Rail International is meeting our expectations of significantly higher segment profit in 2021. The COVID resurgence in India has slowed them down somewhat, but in general, Rail International is operating in favorable markets They're seeing strong investment opportunities. At RRPF, our aircraft spare engine leasing joint venture, they are operating as we expected in an extremely difficult market for international wide-body air travel. Our expectation was that segment profit would be down $40 million or more from 2020. And for now, we're sticking with that estimate, although I will say their performance is the most uncertain component of our guidance. and will likely remain that way until we start to see a recovery in international air travel. And then lastly, the early returns on our tri-fleet acquisition have been extremely favorable. Tank container prices, utilization, and lease rates are all increasing. That obviously helps the performance of the existing fleet. We're also seeing strong investment opportunities there as well, and we now anticipate the acquisition will perform a little bit better than we originally anticipated coming into the year. That's the rationale behind the increase in guidance. So, operator, let's go ahead and open it up to questions.