GATX
#Great.
Okay.
So this is Tom <UNK>.
I'll take those 2 questions.
First starting with the LPI and the lease rates.
As noted in the opening comments, sequentially, lease rates have been pretty stable for the past couple of quarters.
And going forward, we would expect lease rates to be in a similar range.
The one car type that has performed better than expectations from a lease rate perspective is the small cube covered hopper that carries a variety of commodities, but what's driving the strength is sand.
So as far as sequential lease rates going forward, expectations that would be similar to what we've seen so far this year would be appropriate.
As far as the boxcar fleet goes, you did see a decline utilization in the quarter.
That was driven almost totally by the returns from CSX as part of their precision railroading strategy.
And we received over 800 boxcars back from CSX.
The good news is that action, that freight still has to move.
So we have already seen significant inquiries and activity in that fleet, and we expect that utilization to rebound starting next quarter.
So the markets held up particularly well.
Given the continued interest in rail assets, the low yield environment that a lot of the buyers are living in, we continue to see pretty good, broad-based demand for the packages we're putting into the market.
We will, as we usually do, go to market with another pool of cars, probably in the late third quarter, in the fourth quarter.
The timing of that remains unknown and really the demand for that and the interest in it, I can't predict right now.
So we'll see how it plays out as we get towards the end of the year.
But so far, what we've seen is there has been pretty good, continued good interest and I'd say broad-based for many of the car types we're putting in the market.
Well, I think we're always in the market looking to buy railcars.
And it's been pretty competitive for sure.
We did buy some cars in the secondary market in second quarter and a smaller lot.
But there's definitely continued competition.
There's continued interest in the asset class.
And it's made it difficult, particularly on some of the bigger portfolios.
Yes, I can add to that.
It's more challenging this time than the last downturn in 2009 and 2010.
Obviously, that was driven by the Great Recession.
And the capital markets were in disarray and people were having a tough time getting financing and they just weren't showing up at these sales.
Completely different situation this time.
This is a rail-driven downturn from the oversupply.
General economy's fine, access to financing is there.
So everything's a lot more competitive.
And the fleets that have been offered for sale over the last 6 to 8 months, you see just a lot more competition for them.
So it is different this time.
I wanted to touch back on the new equipment pricing question, pricing being more competitive to buyers this time around than the previous downturn.
Can you guys give us any type of quantification.
I mean, from your angle, the overall equipment pricing, is it down percentage-wise 20% now than in the previous downturn.
Or any type of quantification on how equipment pricing fell to buyers in this downturn versus the previous one in '08, '09.
Well, you said new equipment, what we're really talking about is existing fleets offered for sale and equipment in the secondary market.
We were talking about used equipment in that comment.
As far as new equipment, Tom can you.
Got it.
And then just go back to the ---+ I had a follow-up on the average lease term question from earlier.
The uptick by 3 months, I guess, after 3 quarters ---+ consecutive quarters of 29 months, is that uptick associated specifically with the unique situation that you described.
I think it was frac sand cars maybe.
Got it.
And if I remember it correctly, I think at the end of the last quarter you guys had less than 3,000 of those small cube covered hoppers in your fleet.
Is that correct.
And has that number changed.
Yes, I'll start and I'll let others chime in if they want to.
That's a very difficult question to answer, exactly when that happens.
But the simplest answer is supply and demand need to come back into balance.
Given enough time, fleet attrition alone would solve that problem.
But in order for it to happen more quickly, you need something to happen on one of those 2 sides.
On the supply side, something that could help would be an increase in the price of scrap, which makes it relatively more likely that marginal cars come out of service.
On the demand side, obviously, you would need some sort of catalyst.
We've seen it in a small way, a small portion of the fleet with the small cube covered hoppers, but nothing more broad-based.
And that's something you need to see.
The other thing you'd need to see is market participants would have to refrain from actions which would make the supply situation worse.
Specifically, when looking at investments, you have to make sure that investing in these long-lived assets is accompanied by long-term demand for those same assets.
In other words, avoid chasing the hot market, like you saw in some of the energy segments.
Well, I don't think it's changed from what I said at the beginning of the year which is, we don't see it happening in 2017, highly unlikely.
2018 will be tough as well.
It could, depending on some of these factors.
The other thing to remember about our LPI, not only should you not look at it quarter-to-quarter because it's an index with constant weightings and sometimes certain transactions can drive that index.
So you need to look at it over a longer term.
But the other thing we're working against as far as the LPI is the expiring rate is getting higher as we march forward in time due to what we did during the upturn.
So that's why we don't focus so much on LPI quarter-to-quarter.
And we're not high-fiving each other because it went from 30 to 20 in the second quarter.
<UNK>, I'll work backwards on that.
The long-term growth in segment profit within Portfolio Management is going to come on the share of affiliate line.
That's the investment in Rolls-Royce.
<UNK>er term, that is the primary driver of Portfolio Management.
And on that front, through the first half of the year, Rolls-Royce has had an excellent year.
And I'm very encouraged by the amount of investment volume that we've seen and will see at Rolls-Royce this year in that JV.
We came into the year expecting probably $180 million to $200 million of new investment volume there.
We'll probably do more, like somewhere in the range of $250 million.
But as I think about that segment longer term, the line to focus on is the share of affiliates' pretax income.
That will be the big driver.
Marine operating revenue and marine operating expenses, they will not generate substantial segment profit contribution longer term.
And the other residual assets in that portfolio, we continue to sell down as we did in the second quarter.
As far as the run rate goes, second quarter would be a relatively good barometer, but also note that we had a pretty sizable residual sharing fee within Portfolio Management of $8.7 million in the second quarter.
That will not repeat.
That was a residual share out of the managed portfolio.
There's not a lot left there.
So as you think about the business going forward, I wouldn't anticipate contributions of that magnitude.
So really just focus in on the JV line.
You mentioned earlier that you're receiving some boxcars back from CSX.
And just wanted to see if you could comment on any other impacts you're seeing from CSX.
I listened to their call yesterday.
It sounded like they were going to take out about 60,000 railcars out of their inventory, about 900 locomotives.
And just wanted to see if you think that's going to have a big impact on the leasing environment.
Okay.
Good.
And just also wanted to ask you, you mentioned that the small cube covered hoppers are stronger than some of the other car types.
But is there any difference at this point in terms of leasing supply and demand between just freight cars and tank cars.
I think in the last couple of conference calls you talked about freight cars maybe being a little bit more favorable.
No.
Yes, I'm sorry, it's LPI, that's the part I missed.
So what's going on, as we mentioned in the opening comments, it's just a couple of transactions.
And I can't get into the unique circumstances of each one.
But essentially, the unifying factor is that there was something about the asset itself that made it difficult to replace with a different type of asset.
So there was a unique ability to get price.
And because of the way the LPI works, a few transactions get applied to the car types in question and you see a bump caused by a relatively small number of transactions.
But the underlying issue is just that the asset was unique for the need of the customer.
And the other issue that we can't be so exact, not trying to evade the question is, we're doing a lot of short-term renewals, as Tom said, because the market is weak.
So that will start to influence that expiring rate next year.
So if we do a tremendous amount of short-term renewals in coal and next year the coal rate goes up a little bit, you could see a change in the LPI that we didn't anticipate at this point.
So things change over time depending on how you're renewing your leases today.
We're not factoring in any significant sales in the second half of the year.
With the last couple of years, that's been the case, but it moves around.
As you can tell, this year, it's been more front-end loaded because the market has been ---+ the demand has been there and we've capitalized on it.
Yes.
On the Marine operating income.
Yes.
There's 2 factors that work there when you look at 2017 versus 2016: one, is remember in 2016, we sold 5 vessels, our chemical parcel tanker vessels that we had owned for years.
We sold those throughout 2016.
So some of that drop in revenue that you see '16 to '17 is just the absence of those vessels.
All we have left is 5 LPG/LNG vessels.
They've also seen some revenue contraction this year just given some challenges in their marketplace.
But good year or challenged year, they're not going to be a significant contributor to segment profit at Portfolio Management.
And we continue to weigh the best long-term alternatives for us in those vessels.
Well, our growth outlook within the joint venture is very attractive in terms if you look out over the next 10, 15, 20 years and the expected growth in global aviation, the number of aircraft on order and just the pure mathematical number of spares that have to sit behind all of those installed engines over the next number of years that, that will be significant growth, as you note.
Our portfolio is primarily focused on Rolls engines, almost entirely on Rolls engines, although we're not averse to buying engines in the secondary market outside the Rolls family.
But even there, really good diversification across the XWBs, the Trent 700s.
We still have a very sizable portfolio of V2500s serving the A320 market.
So we think there's substantial opportunity there long term.
The portfolio today is about $3.2 billion in total assets, just over 400 engines.
And that started as a joint venture back in 1998 with a $300 million portfolio in total.
It's 10x that size today.
In terms of the flat, I guess, lease rates sequentially, I guess, now for a couple of quarters in a row in tank and freight.
I mean, that seems like a sort of perhaps unusual phenomenon just to see sort of sequential flatness for a couple quarters running.
I think you sort of talked about what's constraining the rates from going up in terms of the excess supply.
What's constraining the rates from going down.
Yes.
So the key factor there is the supply-demand situation has been fairly consistent over time.
So the overhang hasn't come down enough as we mentioned to take the rates up.
But the alternatives for the customers that need to move the commodities, lease rates at this level are still better than their next best alternative, so they hang in that level.
Okay.
That makes sense.
And what would the next best alternative usually be.
Usually, it'd be leasing the car from somebody else.
Okay.
And I want to clarify one comment you made earlier about customer switching.
It might have come at me a bit fast, but in terms of switching either between freight and tank or among freight cars, could you maybe just run it by again sort of how the customers are switching.
Sure.
What I was referring to specifically is cars in the backlog, new car backlog.
So a customer had ordered some small cube covered hoppers in anticipation of demand.
When the sand market weakened they didn't need those cars, so they go work with the builders and either try to defer that order or build another car type in its place.
From a builder perspective, switching from a sand car to another freight car type, another non-tank car is much easier than switching from a sand car to a tank car.
So you saw some switching in things like grain.
You didn't see switching to things like tank cars.
Okay.
That makes sense.
So switching between or from tank cars to freight cars is not one of the factors that's sort of helping the tank car market stay stable.
It's sort of staying stable without any benefit from switching in the order book.
Correct.
Okay.
And then just quickly questions on some other areas, the international profit, Rail International improved year-on-year.
And it seemed to be at pretty good levels.
Is there anything that sort of stood out there.
Should we expect sort of a higher sustained level going forward.
Well, the real issue in Rail International still in the quarter, I think income was up $3 million, $3.5 million, and the year-to-date, $4.5 million, $5 million.
Really the quarterly improvement is driven by lower maintenance expense.
As I indicated coming into the year, 2017 is a lighter year from a scheduled tank revision perspective, less under frame revision.
They're also experiencing lower wheelset costs, both refurbishment and purchase of wheelsets from 2016.
So maintenance is really what's driving the positive story year-over-year.
Revenue is higher, but it was essentially offset by the stronger dollar in the first quarter of 2017.
So we are still placing new cars, revenues going up in euros, but we do have the drag of a tougher FX comparison in the first quarter.
Okay.
Got it.
And then just finally, the $10.5 million net gain on asset disposition in Portfolio Management driven by the residual sharing income, is that sort of an amount that's in line with what you expected when you gave your earnings guidance the earlier part of the year.
Yes.
Very much so, yes.
It won't be anything on the magnitude we saw on the first half of the year.
That's for sure.
We still, we came into the year expecting Rail North America to be somewhere in the range of $35 million to $40 million.
We're at $32 million through the first 6 months.
And our expectation, as Jen pointed out in the opening comments, still in the $35 million to $40 million range for the year.
Again, when you try to call the LPI, particularly for a quarter, that level of precision just isn't there.
I would say that the second half of the year and the year in total, our expectations have not materially changed.
Yes.
And we said in the range of down 30%.
So there is some band around that.
Yes.
So as far as in the near term, we continue to see strong sand demand.
The more interesting question for the car type is what happens on the supply side.
So what you've seen a couple times now is an increase in demand, a lot of cars get built and then too many get built.
But the industry gets saved because they keep figuring out a way to put more sand into the individual well.
So certainly, the industry will respond.
The question is, to what degree and do we see another overbuild.
Yes.
So from a carman perspective, you never want to say nothing.
But one of the things that really helps is that the alternative for a customer to switch is ---+ it's expensive.
It costs money to return one set of cars or change mode or do whatever you might have to.
And at lease rates at this level with the oversupply that we've seen, it's ---+ to the degree that people could do something different, I think largely it's happened.
Of course, in pockets for an individual car type anything can happen, but this level given the oversupply we've seen is pretty low.
