Christopher LaHurd - Investor Relations. Brian Kenny - Chairman of the Board, President and Chief Executive Officer Robert Lyons - Chief Financial Officer and Executive Vice President.

Prashant Rao - Citi Allison Poliniak - Wells Fargo Matt Elkott - Cowen & Company Justin Long - Stephens Michael Baudendistel - Stifel Nicolaus James Bardowski - Axiom Capital Justin Bergner - Gabelli & Company Brian Hogan - William Blair.

Good day and welcome to the GATX First Quarter Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Mr. Chris LaHurd. Please go ahead, sir..

Thank you. Good morning everyone and thank you for listening to our 2017 First Quarter Earnings Conference Call. With me today are Brian Kenny, President and CEO, and Bob Lyons, Executive Vice President and CFO. As always, 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 our forecast. For more information, please refer to the risk factors discussed in GATX’s Form 10-K for 2016. GATX assumes no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances.

Before I get into the numbers and provide brief commentary on the quarter, I’d like to remind everyone that our Annual Shareholders Meeting will be held on May 5th. It will be in downtown Chicago at the Northern Trust Building, which is at the corner of La Salle and Monroe.

The meeting begins at 9:00 AM Central Time and slides from Brian Kenny’s presentation will be posted to our website at www.gatx.com. Earlier today, GATX reported 2017 first quarter net income of $57.5 million or $1.44 per diluted share. This compares to 2016 first quarter net income of $69.3 million or $1.66 per diluted share.

2016 first-quarter results included a net gain of approximately $1.5 million, or $0.04 per diluted share, from the exited Portfolio Management’s marine investments. I’ll very briefly address each segment and then we’ll open it up for Q&A.

Rail North America’s fleet utilization increased to 99.1% at the end of the first quarter and our renewal success rate was 72.4%. During the quarter, the renewal rate change of GATX’s Lease Price Index decreased by 32.6% with an average renewal term of 29 months.

Generally speaking, market lease rates for both tank cars and freight cars were flat sequentially, so first quarter 2017 compared to fourth quarter 2016. As we indicated in our earnings release, certain rail industry metrics have stabilized.

However, rail car oversupply, a sizable manufacturing backlog, and low fleet utilization among some competitors continue to constrain our ability to increase lease rates. Switching over to the service side of Rail North America, over the last few years, GATX has invested heavily into the services we offer to our customers.

These investments have been successful further differentiating GATX from our competitors, which has most recently been proven by our ability to displace competitors’ railcars across car types and industries. The secondary market for railcars in North America remains robust.

Rail North America’s remarketing income was approximately $21 million during the quarter. Within Rail International, the European tank car leasing market remains stable. GATX Rail Europe is seeing steady demand across the fleet with utilization at 95% and Rail International’s investment volume was approximately $18 million during the quarter.

American Steamship Company’s sailing season started in late March, and we are off to a good start on the Great Lakes. As anticipated coming into 2017, all ten vessels are in service. Portfolio management’s results were driven primarily by solid performance of the Rolls-Royce and Partners Finance affiliates.

GATX was active under our share repurchase authorization during the quarter buying back nearly 425,700 shares for a total of approximately $25 million. Those are the prepared remarks and I’ll hand it over to the operator, so we can start Q&A. .

[Operator Instructions] And we’ll take our first question from Prashant Rao with Citi..

Good morning guys. Thanks for taking the question. I wanted to start just kind of broadly, we’ve seen some strong demand on rail volumes in particular pockets and kind of stands out there. And we are hearing about rates improving year-over-year and then sequentially across car types we are seeing some stability.

I wanted to ask broadly in the market, where else are you may be seeing some strength in demand that might be a precursor to lease rate improvement, and sort of related to that, the correlation across lease rates, how this did compare in this recovery versus past cycle?.

Sure, I can take that. It’s Brian. So, first of all, I would disagree with you. I’d say it’s not widespread at this point small cube with one of the bright spots in the corner, maybe the only bright spot in the corner from a pricing perspective.

So, although sequentially rates were – absolute rates were flat in the quarter versus the fourth quarter, if you look versus the year ago, especially on the tank car side, rates are down over 34% on average and pretty flat on freight year-over-year.

So outside of small cube is where you definitely saw an increase in utilization in the industry and increases in lease rates, the rest of it is just bumping along at this point in time. So we are not seeing strength. We are still seeing a ton of idle cars out there.

We are seeing low utilization in competitors’ fleets and until some of that excess capacity is soaked up, we will not see pricing increases. So our initial forecast coming into 2017, I would say, still holds. As far as the last downturn, I’d say most car types are still near or below the low point of lease rates experienced in the last downturn.

That’s especially true for tank cars. Once again, the exceptions there are small cube covered hoppers and probably grains. .

All right. Thank you. I appreciate. Maybe and I should have maybe specified – I was speaking sequentially, not year-over-year in terms of the improvement.

Speaking about the guidance, the reiteration 440 to 460, I think the elements you’ve provided us, it’s fair to expecting sequential earnings decline this year, but given the – how strong the quarter was, do you think the cadence of that might be a little bit more pronounced in terms of the deceleration or how should we be thinking about that?.

Sure, Prashant, it’s Bob Lyons. The first quarter obviously was strong. A big driver of that was the remarketing income that we posted in North American Rails, just over $20 million. We are still anticipating for the full year that our remarketing income on that front will be in the $35 million to $40 million range.

So we got more of that in the first quarter front-end loaded.

So if you look at earnings throughout the course of the year, and the progression was to remove remarketing from the equation for a second, because as you know that can be pretty lumpy, we would expect that quarter-to-quarter earnings would decrease slightly throughout the course of the year. .

Okay. That’s very helpful. Thanks for the time guys. I’ll turn it over..

And we’ll take our next question from Allison Poliniak with Wells Fargo. .

Hi guys, good morning. .

Good morning..

Just touching on the competitive environment, obviously, the lease rate environment is fairly competitive and you relative to history, but obviously there has been an influx of financial players into this market, is there some rationality going on? Can you maybe touch how some of those new competitors are impacting that or is it just indifferent at this point?.

As far as new competitors, they are not really – if you talk to our sales people, they are not worried about competing against anybody in the market including the new competitors.

And as far as whether competitors are rational or irrational, I’d say they are acting pretty rational, they are extremely aggressive on every new car opportunity, on every existing car opportunity, but that’s not unexpected given the oversupply in the market. So I wouldn’t characterize competitor behavior as being irrational.

What was irrational was when they placed their new car orders, especially in terms of car types and the volume of those cars, that was irrational, but what they are doing now is pretty rational, and the new money coming into the market hasn’t really affected the competitive nature once those fleets are invested in. .

That’s great. And then just tucking on the remarketing income, obviously you are keeping to your guidance of $35 million to $40 million.

Are you seeing sort of a slowdown in the interest in those assets? Too early to tell, maybe comment a little bit on that, as well as placing?.

No, not necessarily a slowdown in the interest. We had roughly $46 million last year in remarketing. Another year, this year, $35 million to $40 million given the overall competitive – or the overall challenges in the marketplace it’s still quite strong. We are seeing good interest again from a number of different buyers.

But I would say the buyer probably isn’t as deep or as aggressive as it was a couple of years ago, but that’s still in the $35 million to $40 million range, is a very solid year..

Great.

And then just lastly, obviously, from an industrial standpoint, a lot of interest – we are seeing a broader recovery, I would say in that, as you stand today, I mean, are you feeling more comfortable? I understand lease rates aren’t really moving at, but are you more comfortable that we are at the bottom here and we could be at an inflection at some point later this year potentially?.

Well, inflection point from pricing is unlikely to happen, so we work through that backlog and if you look at specifically our earnings guidance, we are already sitting there at 99% utilization, and I am saying it’s going to be very hard to get pricing power until that idle fleet has been worked through in the industry.

So, yes, you could see an inflection point, but it really wouldn’t impact our earnings and what’s going to need for that inflection point to happen, we’ve had a couple of quarters where car loadings have been up sequentially year-over-year. You see railroad velocity decreasing. All that’s good stuff.

It just needs to hang in there and should show a positive trend for a number of quarters and then you’ll see that excess vital inventory start to come down. But as far as impact on our earnings in 2017 unlikely until that backlog is worked through..

Great. Thank you. .

And we’ll take our next question from Matt Elkott with Cowen & Company..

Good morning. Thank you for taking my question. Speaking of the backlog guys, I know that you have about 2000 to 3000 frac sand cars in your fleet if I am not mistaken that are fully – and I think there are over 15,000 frac sand cars in the OEM backlog.

So I was wondering, do you guys have any small cube covered hoppers on order with the OEMs? And if so those – this strong recovery in frac sand demand warrants pulling forward delivery dates and if you don’t have any on order, are you considering adding to your current fleet?.

We don’t have any on order that I know of, certainly nothing material. I am not sure about the number you threw out for what’s in the backlog, assuming that factor. We are hearing some – probably more described as rumors about those being pulled forward. Certainly, small cube covered hopper market has definitely increased in the first quarter.

What you are seeing is drill rigs increasing and you are seeing profit intensity per rig increasing dramatically. So way more sand being used in each well and there is a lot of forecast out there that is saying that frac sand could exceed the record 2014 levels in 2017. So, that’s why you saw lease rates almost double in the quarter.

That’s why you see near 100% utilization in the industry. We have a much longer-term view on the small cube covered hopper. In fact, most of our small cube covered hoppers are in other commodities in addition to frac sand.

So this recent increase in demand and increase in utilization doesn’t really change our long-term view of the car and it wouldn’t cause us to do anything different strategically as far as ordering. .

All right, even though, there is – it seems like the demand for cements as well has been on the rise, so you would think that, frac sand coupled with cements, and an overall improvement in the industrial markets, still you don’t necessarily – or not tempted necessarily to materially add to your fleet at this point?.

Well, we consider, we always look at it, but you have to realize that there are a lot of – so what happened was there is a big backlog in the industry all designated for the energy boom. That collapsed, people started repurposing their orders, so we have to see what happens here with this backlog over the next year or so.

If a lot of that gets repurposed back into sand, I don’t know what will happen with this recovery. So, of course, we watch it, it’s just that we’re careful about investing in the trend..

Got it. That’s very helpful. And just one more quick question. I believe you guys on the fourth quarter call, you noted that utilization could decline a bit in 2017.

Do you still expect that? And also, given the sequential improvement in utilization, I was wondering if you would have seen a modest improvement in the rates had utilizations remained flat from the fourth quarter?.

Yes, so, utilization did tick up in the quarter, not a lot and not unexpected. Really, we’ve talked about the couple points drop potentially in utilization in our fleet in 2017, it was in reference, as a fact, we had a lot of coal cars coming up for renewal in 2017. That does happen later in the year.

So we are not backing off, but we still may see a slight decline in utilization. Having said that, you are right, we did see, I guess, we had a slight uptick in the quarter, it went a little better on a couple of renewals than we thought.

That could be the first order effect of rail velocity decreasing and car loads increasing but once again we are 99% utilized. There is not much more room to go and there is too many idle cars in the industry, and utilization is too low at our competitors to really push pricing at this point except for cars like small cubes. .

Got it. Thank you very much. .

Yes, and just a follow-up on that, I point you too to the LPI, that’s a negative 32.6%. That’s a pretty good reflection of how challenging it remains on the pricing front..

It was a modest deceleration from the fourth quarter though, as far as the decline..

Sure, but it’s actually, we came into the year expecting the LPI to be down about 30% on a full year basis. So, it’s right in that area and again, pretty good reflection of the pressure – continued pressure..

Yes, and the fact that the absolute lease rates are relatively flat over the last couple of quarters. That’s essentially where we baked into our guidance coming into 2017. So, that was not unexpected..

So, you would – given, you expect the LPI to be down 30% or so in 2017.

I don’t remember the exact time, but I thought you said 30% or more?.

Yes. .

Okay. Got it. And then, I was just looking at the historical average renewal terms that you guys had over the past ten years or so. I don’t know if there is any significance to this probably not much, but this is the third consecutive quarter where you’ve had a decade long lows in average renewal terms.

And I was just looking back at history of ten years, I don’t see any three consecutive quarters where you had an average term that’s first the same average lease term and second, a cycle low? That’s correct..

Yes, that’s correct. .

Do you foresee changes to the – when can we expect that term number to start picking up?.

You can expect the term to start to pick up as we see rates start to pick up and become incented to lock those rates in for longer time. Right now, as I said, as most of those rates especially on tank cars, especially on energy-related tank cars are very low, even compared to the last downturn, we are just incented to stay short..

Got it. Great, thank you very much guys, I appreciate it..

Sure..

And we will take our next question from Justin Long with Stephens. .

Thanks and good morning. So, I think last quarter you talked about around 15,000 cars this year coming up for renewal.

Is that still a good number to use? And is there any color you can provide on how many of those cars are tanks versus non-tanks?.

Justin, coming into the year, we said approximately 15,100 cars with lease expiration across 2017. And you can assume that those cars expire ratably. So, we are a quarter of a way through that number. As far as tank versus freight, I’d say, coming into the year, there is probably a little bit more on the freight side than tank.

I mean, the fleet overall is 50/50 mix, but more freight than tank and also the coal car element there is important to keep in mind because we are staying very short on coal given the very depressed rates. So we will see more of those cars than in a normal environment. .

Okay, great. That’s helpful. And you mentioned it earlier, but some of the leading indicators are starting to get better for railcar demand, but I believe last quarter you talked about it probably taking multiple years before the market gets back to equilibrium.

Is that still your view today?.

I said it was unlikely to happen in 2017, still believe that to be the case, correct..

Okay.

Do you think there is potential that we get to that equilibrium in 2018 if the current trends hold?.

Sure, potentially, but we need these current trends to pick up and hold..

Got it. And then, one quickly on the guidance.

So, I know the EPS range was reiterated for 2017, but were there any components within that guidance that have changed meaningfully relative to your expectations at the start of the year?.

Justin, no, not really, the first quarter very much played out as we had expected. And the outlook for the balance of the year, we still feel very comfortable with what we laid out back in January. No notable trends or contributors occurred in the first quarter. .

Okay, and maybe I’ll sneak one last one in. I know you’ve been paying close attention to some of the railcar fleets that could come to market at some point and we’ve had some come to market recently, but I was curious when you look at that list of potential buying opportunities.

Could you speak to the percentage of fleets that have a meaningful amount of exposure to the energy market? And correct me, if I am wrong, but is the strategy still to avoid any opportunity as it relates to M&A that has a meaningful amount of energy-related exposure?.

Got to be careful about commenting on any individual situation, of course. You could say that at the right price, any car works, but am I thrilled about taking on dramatically more energy or legacy energy exposure? No. .

Okay. And in terms of … sorry..

That’s all the help you are going to get there..

Okay. Fair enough. I’ll leave it at that. I appreciate the time..

Thank you..

[Operator Instructions] We will take our next question from Mike Baudendistel with Stifel..

Thank you and good morning. Wanted to ask you, you had in your press release you said you did displaced some of your competitors’ equipment that caused the utilization to tick up a little bit.

Are you just doing through offering a little bit more attractive lease rates than your competitors are or just anything else that’s helping you to win some of that business?.

No, it’s just, were we keeping utilization so high, I mean, we are the price leader both on the way up and the way down. So we don’t use – lose a deal so with a lease rate, but honestly we offer superior customer service, so often we don’t have to offer the lowest lease rate.

We have great long customer relationships and our cars tend us deck in general and more importantly, our utilization – high utilization is due to the fact that we’ve invested wisely in terms of car types, commodity, and lease term. And that’s really what drives the utilization more than anything else versus our competitors..

Okay. And then, just also want to ask you on the railcar sales.

That was like on a per car basis that was higher in the more recent quarter, just to speak on the gains you are realizing per car, I mean, is there any same thing specific in terms of mix or is that sort of a trend that should continue?.

That number can bounce around in terms of the gain per car pretty materially quarter-to-quarter and compared to the fourth quarter, it’s up dramatically compared to the first quarter of 2016, it’s not. So it really does come down to the mix of the cars and the carrying value, the age, the term that they are on.

So there a lot of different factors that play into that and there is no notable trend there..

Okay. And we’ve heard some of the companies that you have clearly some international interest in buying railcars and taking ownership interest of railcars.

I mean, is that’s something that you are experiencing as well?.

Well, our European platform obviously is very important to us as is our growing presence in India and we like those markets long-term for sure that continue to be good areas, particularly in Europe to put capital to work. So, no change in strategy there for us at all..

Okay.

And is there has been any change in the industry dynamics for GATX Rail Europe with Greenbrier making investments there and potential for consolidation there that you see?.

No. No, I mean, Europe continues, as you know, our fleet is over 60% dedicated to the trillion market and that’s been unsettled market for a couple of years. They are doing great to keep utilization high, but in terms of their manufacturing situation, or their investment philosophy, no, it’s irrelevant, their entry into the market..

Okay. Thank you. That’s all I had..

And we will take our next question from Gordon Johnson with Axiom Capital. .

Hey guys, this is James Bardowski in for Gordon. Thank you for taking my questions. I just have a couple of them. You had a pretty, relative to last quarter, pretty decent rebound in your order rate.

Can you just give a little color on what’s driving this?.

Yes, if you pull that apart a little, it is better than we expected. We said, last year, we were in the mid 60s as far as a real success percentage. We said we expect that to slide a little bit especially because of all the coal cars coming up for renewal.

You are right, we did do better than expected in the first quarter and that variance is due to higher freight car renewal success than we expected and actually it was just a couple of large transactions where we did better than expected that drove that metric higher.

If you look at the tank car side, that was still in the low 60s right where we predicted it. So, a little bit of an unusual spec there just from a couple of transactions and we really haven’t changed our outlook for the year. .

Okay. On the new coal cars, clearly freights have been on the rise, fairly decently and then you also mentioned that you have a lot of renewals for those types of cars coming up this year.

What’s your exposure as I guess the specific as you can get and what’s your exposure to hold and of the roughly 15,000 cars coming up, can you tell us how many cars hold on?.

Sure, so, our total coal car fleet is about 6300 cars. Lease expirations on coal cars is about 3400 cars. And those all predominantly are coming in the back half of the year. .

Yes, the other thing I’d point out too is, we talked a little bit about this at year end, those won’t be regardless really what happens to the rates on those cars that are not a big driver to our overall 2017 financial performance, because the lease rates on those cars that are coming up for renewal, those 3000 are already very low, extremely low.

And so, they won’t be a big driver to any type of revenue variance even if there is continued pressure on what have you on those cars in 2017. .

[Operator Instructions] We’ll take our next question from Justin Bergner. .

Good morning and thanks for taking my question. .

Good morning..

Good morning..

So, Brian and Bob, my first question is, with respect to velocity in the system, has anything changed from your view sort of three months ago with respect to how velocity is going to trend over the course of 2017? I know you made some earlier comments, but just to clarify..

We don’t assume a big improvement, by improvement, I mean, reduction in velocity, an improvement as far as the less order goes would be a reduction in velocity. We didn’t assume a lot coming into the year there. It got a little better year-over-year.

So, once again, if that continues, that will be a very good thing for the leasing industry as far as how it will impact our results of 2017 not very much as more if it’s a sustained decrease that will help future years..

Okay. Second question is, with respect to your Rolls-Royce JV, I mean, the Affiliate earnings seems pretty good this quarter.

Was there anything you can sort of point to as is that just sort of a positive blip or is that reflective of improved performance leasing rates, what have you?.

Yes, it was more driven by the number of engines on lease and the rates on those. We did see a little bit of a tick in our RPS contribution quarter-over-quarter. I think one thing to note, first quarter 2016 versus first quarter of 2017 for Rolls-Royce neither of those quarters really had any gains from the sale of engines.

So as the year progresses, we will have some of those that we would expect the quarterly numbers from our RPS actually to tick up a little bit. But overall, they had a very good quarter, also a very good quarter at Rolls-Royce from an investment perspective. We saw a lot of opportunities to invest in that new engine.

And so we are continuing to grow that portfolio. .

Okay.

Just thinking about the whole business, were there any parts of the business that particularly positively surprised you in the first quarter? I know you are keeping sort of your guidance unchanged in the components therein, but just relative to your expectations of the quarter?.

No, it was largely right on target..

Okay. And then the final question I had is, in your segment breakout, the other interest income of $3.2 million, what does that relate to? It seems a much larger number than last year.

I was just curious if that was a function of higher rates or what’s going on there?.

No, it actually has to do with total interest expense overall as more the important number to look at. The other – kind of where it lays out by segment really is an allocation process. So that’s a little bit of excess interest that didn’t get allocated to the segment. That sits within that other column.

But it’s a small amount and really the number to look at is the overall interest expense..

Okay, so outside of the force again on the rest of the portfolio management disposition there was nothing sort of unusual one-time in that quarter?.

Correct. .

Okay, thanks for taking my questions..

All right, thank you..

And we will take our next question from Brian Hogan with William Blair..

Good morning. .

Good morning..

My question is actually on your ROE. Last year it was in the high teens, this quarter it was as well. But your guidance, based on my calculations it looks like an ROE of low double-digits.

And I guess, what are ROEs on your current assets that you are putting on? I assume it’s much lower than that and where does ROE go from here and what is your - kind of your target ROE over time?.

Target ROE over time is that low teens, once it get into the low teens, we think that is attractive to our shareholders. The last couple of years at the peak of the market it’s much higher than that as expected. It is trending down to the extent that we put the paddle down on acquisitions or purchasing cars at lower prices in a difficult market.

You’ll see ROE continuing to decrease even more, would that’s fine for me over the short-term, I really look at it over the long-term and over the long-term anything in the low teens is an excellent return at GATX. .

All right. Thanks for the color. .

And it appears there are no further questions at this time. Mr. Chris LaHurd, I’d like to turn the conference back to you for any additional or closing remarks. .

I just like to thank everyone for their participation on the call and please feel free to contact me later today. Thank you..

This concludes today’s call. Thank you for your participation. You may now disconnect..