GATX CORP Q3 FY2024 earnings call

• Rail North America: High fleet utilization, strong demand for car types, favorable lease rate environment, active in secondary market and acquiring railcars.
• Rail International: Europe and India operations performing well, receiving new cars.
• Engine Leasing: Joint venture and wholly-owned portfolio doing well, significant investment volume.

Rail North America: Fleet utilization was 99.3% at the end of the quarter, renewal success rate was 82% in the quarter. Renewal rate change of GATX's lease price index was positive 26.6% for the quarter with an average renewal term of 59 months. Strong demand for majority car types, absolute lease rates high historically. Secondary market robust with remarketing income over $43 million in the third quarter, year-to-date over $96 million. Year-to-date investment volume over $955 million. Rail International: GATX Rail Europe and GATX Rail India performed well, renewal lease rates up versus expiring rates, received nearly 900 new cars in Europe and India in the third quarter, year-to-date investment volume over $190 million. Engine Leasing: Joint ventures with Rolls-Royce and wholly-owned aircraft engines portfolio performing well. RRPF year-to-date investment volume approx $500 million, GATX added 4 aircraft engines to wholly-owned portfolio in the quarter, year-to-date direct-to-engine investment volume over $166 million

Reflecting current market conditions and year-to-date performance, GATX updated its 2024 full-year earnings guidance to a range of $7.50 to $7.70 per diluted share excluding tax adjustments and other items, primarily driven by remarketing gains at Rail North America

Forward-looking statements may differ materially from actual results; refer to risk factors in the earnings release and GATX's SEC filings

Q: Good morning and thanks for taking my questions. The guidance increase at the low end there. I realize it is not massive, but could you walk us back to how you define the year originally, breaking it down by some items and let us know maybe what puts and takes there have been in your original outlook that led to that nine months later? Thank you.

A: Yes. Bascome, this is Tom. If you go back and take a look at the January earnings call transcript, you will see where Bob kind of walked through segment by segment and then went into some more detail in various areas about how we saw the year coming out. And if you compare that to what you actually see for the third quarter in almost every area, it is going to be right on. The one area that is a little bit different is the remarketing gains at Rail North America that Shari alluded to. And that really is the key driver for taking up the low-end of the guidance range. The rest of Rail North America, whether you look at revenue, net maintenance, interest cost those are all on a year-to-date basis, very similar with that guidance we laid out. Same with Rail International, same with the Engine Leasing business. So really, the area of variance comes down to that one piece.

Q: Good morning. Could you comment on sequential lease rates?

A: Sure. As we've noted in recent quarters, in general, the rates have flattened out, albeit at very high levels. And the pricing environment overall remains very favorable, high utilization, high renewal success rate. 2Q to 3Q, we did see a very small downtick in absolute lease rates like very low-single digits. And I'd say, in my view that's not unexpected to see some small movement, either positive or negative and in an environment where rates have generally leveled off at high levels. Yes, I would also add, we touched on this a little bit previously, but a key positive catalyst right now impacting the lease pricing environment is the supply side of the railcar sector. Pricing is in a good place, partly due to the positive dynamics at work in the supply side. We are not seeing significant overbuilding or speculative orders. And those points have really been at the center of what has caused major rate swings in the past. And also with the supply side stable, when we have seen some degree of oversupply in a particular car type, it self-corrects pretty quickly through scrapping. So overall, we're very encouraged by where we are at in the rate environment.

Q: As it relates to RRPF, when all is said and done for the year, do you expect continuing asset sales in the joint venture to kind of get you back to the historical mix of operating versus disposition earnings for that JV?

A: Yes. So Justin, over time, you can certainly calculate an average. But if you look at the individual years, it can vary quite a bit year-to-year. But what you've seen year-to-date it is probably a fair guess to be -- it will be closer to that 50-50 by the time we are done for the year than the two-thirds, one-third we are at now, but calling the exact amount is hard. Just like at Rail North America, the timing of when those transactions occur, it is hard to get overly precise.

Q: How far are you through repricing the North American fleet at -- call it, '22 or later levels? And just high level, I know you haven't gotten through your budgeting period yet, but any puts and takes, as we think about sending expectations for 2025? Thank you.

A: Yes. Bascome, it is Bob. It is about half roughly, that is renewed at -- since the pricing environment shifted to the positive side in 2022. So about half to go. And with regards to 2025, we'll come back, obviously, in the beginning of January with a full outline and segment by segment run through on some of the key line items. So we will do that again for you in January. But in general, I'd say, we are very encouraged by the environment we are in right now. The pricing environment, lease pricing environment in Rail North America remains in a real good spot. And as long as we don't see any irrational behavior on the supply side, we would expect that to continue. And if you look at GATX overall roughly 55%, 60% of our total segment profit is in North America and the balance is in international markets. So our international businesses continue to grow, and we like the position we are in, in all of those and the recovery in Engine Leasing has been more dramatic than probably anybody anticipated just a few years ago. But it is a testament to our team at RRPF and the folks at Rolls-Royce, who have partnered with us. We partner with them, and they've done an excellent job managing that portfolio. So we feel good about that as well.