Jennifer McManus - IR Brian Kenney - President and CEO Tom Ellman - EVP and President of Rail North America Bob Lyons - EVP and CFO.

Allison Poliniak-Cusic - Wells Fargo Justin Long - Stephens Matt Elkott - Cowen Matthew Brooklier - Buckingham Research Mike Baudendistel - Stifel Justin Bergner - Gabelli & Company Willard Milby - Seaport Global Steven O'Hara - Sidoti and Company Bascome Majors - Susquehanna DeForest Hinman - Walthausen & Company.

Good day, and welcome to the GATX Third Quarter Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Jennifer McManus. Please go ahead..

Good morning, everyone, and thank you for joining GATX’s 2018 third quarter earnings call. I’m joined today by Brian Kenney, President and CEO; and Tom Ellman, Executive Vice President and CFO. 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 discussed in GATX’s Form 10-K for 2017. GATX assumes no obligation to update or revise any forward-looking statement to reflect subsequent events or circumstances.

Earlier today, GATX reported 2018 third quarter net income of $47 million or $1.22 per diluted share. This compares to 2017 third quarter net income of $49 million or $1.25 per diluted share. Year-to-date 2018 we reported net income of $162.1 million or $4.21 per diluted share.

This compares to $159.9 million or $4.04 per diluted share for the same period in 2017. 2018 year-to-date results include a net negative impact of $5.8 million or $0.15 per diluted share, attributed to cost associated with the closure of a railcar maintenance facility in Germany.

2017 year-to-date results included a net gain of approximately $1.1 million or $0.03 per diluted share, associated with the planned exit of a majority of Portfolio Management’s marine investments. These items are detailed on page 12 of our earnings release. Now, I will briefly address each segment.

Our third quarter results are reflective of a continued improving operating environment in Rail North America. Certain rail industry metrics are favorable for lessors relative to 2017, including rail road, car loads and velocity. Rail North America’s fleet utilization increased to 99.2% and our renewal success rate was 82.9% during the quarter.

The renewal rate change of GATX's Lease Price Index was negative 11.5%, with an average renewal term of 33 months. Revenue pressure continues. However, we did see quarter-to-quarter sequential improvement in absolute lease rates across most type car types in our fleets.

As indicated in the earnings release, this improving environment has resulted in lower railcar maintenance expense in 2018 than we originally have anticipated, especially for mandatory tank qualifications, as customers are holding on to and utilizing their cars.

While this is a benefit in 2018, we expect this will result in higher maintenance expense in 2019 as this work has only been deferred not eliminated. We continue to successfully place cars from our committed supply orders with a diverse customer base.

We have already placed over 7,700 railcars from our 2014 Trinity supply agreement and scheduled deliveries with customers have been placed through July 19, meaning our earliest available scheduled delivery is in August 2019.

Additionally, we have placed 450 railcars from our 2018 ARI supply agreement and our earliest available scheduled delivery under this agreement is in the first quarter of 2020.

The secondary market remains active, Rail North America’s remarketing income was approximately $7.2 million during the quarter, bringing total remarketing income for the year to $61.7 million, which is slightly above our full year expectations.

While we are always active in the market, we expect any activity in the fourth quarter to be modest in size. Within Rail International, the European railcar leasing market continues to experience gradual improvement across the chemical, petroleum and freight markets.

GATX Rail Europe is seeing steady demand across the fleet, with utilization increasing to 98.4%. Rail International’s investment volume was approximately $40 million during the third quarter, with over a third of this due to investments in India. We are still on track to double our fleet count in India by the end of the year.

Portfolio Management’s results were primarily driven by the strong performance of Rolls-Royce & Partners Finance Affiliates. Our RPS results were driven by both higher operating performance and remarketing activity in 2018.

Year-to-date segment profit in Portfolio Management is down from 2017, primarily due to the $8.4 million residual sharing fee earned in the second quarter of 2017. American Steamship Company continues to perform well with 10 vessels currently deployed.

Higher water levels and increased demand for iron ore has more than offset the initial delays ASC experienced earlier in the season. Finally, GATX repurchased nearly 150,000 shares for approximately $12 million during the quarter. Year-to-date, we have repurchased over 500,000 shares for $37 million.

At the end of the quarter, approximately $213 million remains available under the aggregate $250 million repurchase authorization. So, those were the prepared remarks. So, I’ll hand it over to the operator and we can open it up for Q&A..

Thank you. [Operator Instructions] The first question will come from Allison Poliniak with Wells Fargo. Please go ahead..

Hi, guys. Good morning.

On the 2019 maintenance expense, is there any way to help quantify what you expect to get pushed into 2019 for us?.

Hi, Allison, it's Brian. No not at this point, we’re trying to get as many cars in before the end of the year as we can. So, we’ll have an update for you obviously at the end of the fourth quarter. But it really is much lower than we expect it coming into the year and the reduction it’s both tank qualification work, which has not yet materialized.

As Jennifer said, they are really reluctant to send in their cars. We are looking at a market where car loadings are increasing velocity and the rail roads are slowing in trucking is untenable right now. So, customers are really reluctant to give up their cars into an increasingly busy maintenance network.

So, we anticipate getting a lot of this backlog in, in the fourth quarter, but where we sit today we’re not going to get all of them that are due, we can just tell that’s not going to happen, they’re not going to get in, in time.

So, what happens with our commercial teams and eventually legal teams who work with the customers to get them in, and at some point if these cars are not received by GATX, they will be embargoed and unable to load and that’s when you see them flood into our maintenance facilities.

So, we’re trying to get as many as we can before the end of 2018, but we can tell you right now it’s not going to happen as far as what is due. So, that’s why we can already see an increased maintenance expense coming in 2019..

Understood. And then you talked sequentially improving lease rates, obviously your term is still pretty low.

Could you give us some perspective in terms of where we are relative to say maybe the average lease rate across your portfolio; I know it’s probably a little bit more difficult?.

Yes, I always get admonished internally about trying to get too generic with that, because they have such -- we have such a diversified fleet and it really does depend on car type.

But ignoring that for a minute, if you look sequentially quarter-over-quarter for absolute market lease rates probably declined a few percentage points for freight and that's really due to small cubes having a sizable decrease in the quarter.

But it increased pretty seriously for tank I think over 20%, 25% or more, absolute lease rate increase on average for tank cars just in the quarter. So we are seeing significant strength in the market. .

Great, thank you. .

Thank you for your question. [Operator Instructions] The next question will come from Justin Long with Stephens. Please go ahead. .

Thanks and good morning. So I wanted to start with a question on the guidance. Thinking about this quarter in the commentary it seems like in North America you've seen remarketing income and maintenance expense both outperform your expectations. So I was a little surprised that the full year guidance range didn't change.

Can you just help us think through that and the areas of the business where you might be seeing weaker than expected trends that are offsetting some of that upside?.

Yes, so this is Tom, and I'll address that. So as you mentioned, we continue to expect full year earnings to be in the $4.90 to $5.10 range. Some of the key drivers of the quarter-over-quarter decline in Q4 will be the lower remarketing income in Rail North America that we talked about.

The maintenance expense catching up from deferred maintenance that Brian just mentioned. At ASC, we have some incremental costs from putting an additional vessel into service and historically the fourth quarter is a more challenging operating environment and we expect that to continue to be the case.

It's also important to note that we will continue to see a drag from lease rates in Rail North America, even though the absolute lease rates are increasing as Brian said, they are still below for the most part expiring rates as evidenced by the negative LTI.

So we continue to see a drag on incremental renewals and we see the full quarter impact of the negative drag that we had on third quarter renewals going forward. So those are some of the reasons..

The only thing I want to add there, I know it's -- I know what you meant by outperformance of maintenance, but really from our perspective it's underperformance of maintenance in 2018. We'd really like to get those cars in this year because they are due. So we're not we're not celebrating the fact we couldn't get them in.

It's actually not a good thing. It's just deferring maintenance into a subsequent year. .

That makes sense, that's all really helpful. And maybe to ask the earlier question in different way, do you know the -- or do you have a number on the total dollar amount of maintenance expense that has been deferred year-to-date. I know you're -- it's tough to predict when this will actually be deferred or materialized in 2019.

But what was the total dollar amount that was deferred?.

Yes, don't know yet because cars are coming in now in the fourth quarter more than they were earlier in the year. But the problem is they start coming in now to the mid-November it's too late to turn those cars further in the year because not just our maintenance network, the industry's maintenance network is getting increasingly busy.

So generally a 200 cars that are due, tank cars that are due for tank qualifications in a given year spillover into the next year and you work with the customers to get those in as soon as possible otherwise they won’t be able to load them. We see that going up multiple times in 2019, but I can't tell you how much just yet.

And to give you an indication that tank qual by the time it goes to the maintenance network and attracts all the other work that that may be due on that car you may have to do on that car for other reasons. It could be well over $10,000 per maintenance event. So it's a sizable number, I just don't know the exact amount yet..

Okay. And then maybe secondly, I wanted to ask about the rollout of the PSR operating model. Obviously it's becoming more broad based across the U.S. with UP’s announcement in September. Do you have any thoughts around how that announcement and this operational change could impact your business and just the broader railcar leasing market as well..

So other railroads have implemented PSR in the past and they have generally speaking shut some cars. So it's reasonable to assume that UP will look to do this -- will look to reduce the size of their fleet. Having said that, we don't know the exact manner in which the UP will implement PSR.

So it's difficult to make the accurate predictions regarding any changes to their railcar needs. As with all customers, we spent a lot of effort optimizing our fleet exposure with them to achieve an attractive risk return balance. We have a strong relationship with the UP and we're comfortable with our exploration profile.

A great example is boxcars, which is a car-type that historically has been exposed to PSR implementation. The vast majority of our boxcars have a long lease terms and don't start expiring for another five years. And even when they do expire, most of them are near the end of their useful life even if returned.

As it relates to UP, we think our biggest risk is other lessors getting cars returned and GATX having to compete against those idle cars in the market.

And I would say that that general theme that last item is the thing that we're most concerned about generally with PSR is knowing exactly how railroads will implement it and how we might have to compete with additional railcars in the market..

Okay, that's helpful. I'll leave it at that. I appreciate the time. .

Thank you for the question. The next question will come from Matt Elkott with Cowen. Please go ahead. .

Good morning. Thank you. Tom, you mentioned that despite the sequential improvements we've seen over the last few quarters and spot lease rates renewals continue to be a drag. If we can -- if this spot lease rate continues into 2019 and through 2019.

Can we expect that drag to turn into a tailwind in 2019?.

Yes, so basically you're asking about when the LTI will turn positive. And that's an extremely difficult thing to answer, because it's a constantly moving target with additional renewals coming online. That will be something that we will update you on at the January earnings call.

It's difficult to get too far ahead of that, but at this point it's difficult not to see continuing rate pressure in that regard in 2019. .

Got it.

But you still believe in the sustainability of the lease rates on a spot basis for the foreseeable future?.

Yes, I mean, particularly as it relates to tank cars, we've now seen several quarters in a row of positive incremental lease rates. And we would expect that to continue. .

Got it. And speaking of tank cars, I'd love to hear your thoughts on the turn tightness in the DOT-117 supply. And if you can -- if you are able to tell us how many of those cars you guys have in your fleet and if you plan to add more? And whether you would add newly built DOT-117Js or you would also consider adding retrofitted ones. .

Yes, so I'll start at the end of that and I'll work my way towards the beginning. And if I missed any of it let me know. So we are adding DOT-117 cars to the fleet, newly built cars. And Jennifer, I'll have that number..

We have about 2,100 right now in our fleet..

As it relates to retrofit, we do not intend -- and we've said this before, we do not intend to retrofit any legacy 30,000 gallon cars. What we have done is and we'll continue to do is retrofit of the CPC-1232 jacketed car, which as you know is the very inexpensive just a couple of thousand dollars to modify that car.

As far as what's going on in the market. The order information just came out this morning, and there were on a net basis, a net 10,000 tank car orders. We expect that a significant portion of those are tank cars for the Canadian crude market. And we'd expect that to continue. As far as how we will invest and how we'll look at that market.

Just like we've said in the past regarding this, we will invest in a measured way being careful not to get overexposed to a car type, which ultimately will probably be oversupplied as pipelines will ultimately come in and because it's the most efficient way to move that commodity.

The length of time it will take is difficult to predict, but on the scale of railcar leasing investments it's short enough that we will not get overexposed in that area. .

Got it, that's very helpful, Tom. I just have one quick follow-up, I understand about you guys resisting the temptation to go in, in a big way on the DOT-117s, but are there conversion opportunities to ethanol because the ethanol fleet has to be replaced with DOT-117s I believe in 2023.

So even if crude by rail, Canadian crude by rail is somewhat of a stopgap measure until more pipe comes online.

Are there conversion, can you modify at least a certain variety of the DOT-117s to ethanol? And if that's the case, will that be the type of DOT-117 you would be investing in?.

Yes and I don't want to get too much into the weeds on this, but the -- we have and we’ll continue to do some investment in DOT-117s for ethanol. The particular car that serves Canadian crude and the car that serves ethanol it's not configured the same way.

So that that particular move doesn't -- conversion doesn't really work, but certainly opportunities to place non-jacketed cars in ethanol is attractive to us..

Yes, Matt, I’d also added to that cars that are -- the 117 that are going into Canadian crude in our fleet anyway are 25-5 [ph] they are aligned and they do carry other commodities. So it's different than the legacy 30s what everybody invested in years ago. .

Got it. Great, thank you very much. .

Thank you for the question. The next question will come from that Matt Brooklier with Buckingham Research. Please go ahead. .

Hey, thanks and good morning. So just wanted to dig a little bit deeper in terms of your commentary on lease rate improvement on the tank car side of things.

I'm assuming a big portion of that is flammable service cars, but could you maybe talk to the non-flammable service tanks in your fleet or from a market perspective that we're also seeing improvement there? Or is it right now it's all kind of coming from the flammable services side of things?.

Yes, let me press that by saying when I said tank increased over 25% on average in the quarter, I was excluding legacy 30s as an example. So that's not an investable car type obviously it's on its way out. So broad improvement across the tank car market and probably the best performer were all time would be the high pressure car in the quarter..

Okay. And then, could you -- you talk to some weakness on the small cube covered hopper side of things, specifically what's happening in the sand market.

Do you mind giving us an update in terms of what GATX's exposures is currently?.

Yes, Bob, 2% of our fleet is in sand service. We've talked about this before within the move from the Northern white sand to the Texas brown sand. This has been coming and it's impacting the industry in a significant way already and we'll continue to grow, which is why we kept our exposure fairly modest and what we do have is termed up pretty well..

Okay. And just last question here on the tax rate that was up in the quarter, I think a little bit ahead of our expectations and I think your original guidance.

Maybe you could just talk to some of the components of what drove the tax rate up in the quarter, and how should we thinking about fourth quarter?.

Yes. So last year, our effective tax rate was 38.4%. We expect it to be a 25.1%, which is a little bit different percentage than the Tax Act. And those differences are primarily influenced by our mix of domestic to international business..

Okay.

And then rough guidance on where we think the tax rate falls for fourth quarter?.

So for the full year with a 25.1% that's probably about the best guidance we can give for the fourth quarter..

Okay. Appreciate the time..

Thank you for your question. The next question will come from Mike Baudendistel with Stifel..

Thank you. Just wanted to ask you, is there anything to read into your average lease renewal term only being 33 months? I get to some of that is just lease rates are back to where you'd like to see.

But if there is anything in terms of just mix of the types of railcars that were renewed during the quarter being a little bit on the weaker side?.

Yes. So one of the things we've talked about in the past is it's difficult to read too much into any single quarter. Overall, as we mentioned earlier, most car types are still below their long-term averages, so we’re still generally trying to go short.

What everybody saw I'm sure is the decline from second quarter to third quarter, but if you go back three quarters before that they were all kind of in the low to mid-30s. The 41 last quarter was the high one and that was really driven by a couple of unique transactions that for commercial reasons were at long terms.

The term has pretty much -- with the exception of those couple of unique transactions the term has been pretty consistent overtime. There are a couple car types where rates are good enough that we’re starting to try to push the term, but at this point it’s not broad enough across the fleet that you’ve seen an increase in that number..

Got it, that makes sense.

And then just also wanted to ask you on the longer term agreement you signed with ARI, just any additional details you can give and sort of why now, why use ARI and is there anything in the agreement that it seems like it looks similar to 20 year agreement in a lot of ways, but is there anything that’s significantly different there in terms of just the price for the cars change with market conditions any of those things?.

Yes, so we definitely thought it was the right point in the cycle to pursue supply agreement as you know we did two of them, we did the one in May with Trinity and then the one in August with ARI. Part of our strategy of supplier diversification and they’re high quality builders with a great catalog and great capability.

As far as the specifics of the agreements, can’t disclose a lot of details there what we can tell you is that they are both costs plus agreements. The Trinity agreement is 4,800 cars over four years, the ARI agreement has 450 in 2019 and then 1,800 cars a year from 2020 through 2023.

As Jennifer has already mentioned those 450 cars in 2019 have already been placed..

Got it, thank you..

Thank you. [Operator Instructions] we’ll take our next question from Justin Bergner with Gabelli & Company. Please go ahead..

Good morning, Tom, and good morning, Brian..

Good morning..

First question just relates to ARII, in light of the transaction announced yesterday, I was curious if you had any comments on that.

And just given that the price was pretty high how does that sort of effect your capital allocation going forward in terms of repurchases versus adding to the lease fleet?.

That’s a multi-part question, I’ll take the valuation part of that. Really that’s a manufacturer, Justin it’s relatively small from a lessor perspective, so it’s definitely not the same thing. I think it went out of two times books so look like a good price for them.

As far as the other half of that Tom you want to?.

Yes, so earlier in the year we provided guidance that our stock buyback was targeted to be in the $100 million range. As I think everybody knows we were blacked out for Q2 and a portion of Q3 due to negotiations of our two supply agreements. We are back in the market and we will try to reach that $100 million goal by year end..

Okay, thank you.

Just a quick follow-up clarification another question the tax rate guide, how does that compare to your earlier tax rate guide? And just any rough estimate as to what the long-term tax rate is as you look out into 2019 and beyond?.

So Justin, I would say for 2018 our guide was the effective rate was 25% for the year and that hasn’t changed. .

Okay.

And is safe to sort of assume a similar rate looking out to next year?.

Well as the U.S. -- assuming the U.S. business continues to recover let’s say at a higher tax rate, so you can stay. We don’t quite know yet, but directionally it should go up overtime. .

Yes, and we would provide that guidance in our Q4 call for the 2019 tax rate..

Okay, great. With respect to portfolio management it looked like the income from affiliates was down year-on-year as well as quarter-on-quarter, but you mentioned in the press release you’re very pleased with the Rolls-Royce joint venture performance.

So just any comments on how to true-up the decline versus the positive commentary?.

So Justin, first, I would say year-over-year share of affiliates’ income is up so it’s $38 million to $47 million for the year. Just so we're clear on that..

That’s year-to-date. .

Quarter-over-quarter. That’s year-to-date, right. .

Okay. .

Okay. Q3 last year versus Q3 this year, we've had higher incomes from operations, but in the quarter this year we had lower remarketing income. So generally overall this is performing extremely well. It was just as we said in the past with Rail North -- is very similar to Rail North America with remarketing income that it’s lumpy.

And so that's what we're seeing in Q3 this year..

Okay. Thank you, I’ll hop back in the queue. .

Thank you. The next question will come from Willard Milby with Seaport Global. .

Hey, good morning everybody. Looking at the North American fleet and I don't know if I'm reading too much into this, but the non-boxcar fleet growing over the last two quarters is this -- could this mark the bottom I guess if we are all being a net disposer of railcars.

Do you think the market conditions are right for you to kind of grow that fleet and tagging on to that.

As you look at the open market for pools of railcars to potentially acquire, what evaluations look like now versus maybe a year ago and are those valuations attractive for fleet additions?.

Yes, I can take that. I mean, that's why we placed the two orders this year we do intend to grow the fleet going forward. As far as the secondary market, we haven't seen any slowdown there at all pricing is still very strong and that's why our activity has been so high over the last two years.

In a situation where the markets have been oversupplied and lease rates were still relatively weak compared to historical levels. But prices in the secondary market have hung in there and are still very healthy. And as far as what would cause it to slowdown, I mean, traditionally access to cheap capital has been the historical governor on that.

So if credit tightens rates increase you might see a pullback. But so far it's quite healthy. And so I would think that you would continue to see -- as long as it's healthy you'll continue to see us generate remarketing income. .

Okay. So I guess the recent orders with Trinity and American Rail those will be net additions rather than strictly, I guess replacements kind of I'm just curious about the multi-year trend that you have been in disposer of railcars for the most part, if that's starting to flip..

Yes. So between the two orders when they get going it will be about 3,000 cars a year. We typically scrap somewhere around 2,500. So it's a small net addition of where we really look to add is additional spot new car business and additional fleet acquisition business above and beyond that.

And as Brian mentioned, certainly have been interested in pursuing that on the fleet acquisition side over the last couple of years. It's just been challenging as the valuation so that we've seen in the market.

Historically, when we hit it down market those have been great buying opportunities, but there has been so much capital seeking yield this time around that it's been harder to do that..

Thanks for the color on that. And if I could go back to maintenance maybe harping too much on this, but it sounds like you're trying to get as many cars as you can through the maintenance network here in Q4.

Do you have a sense of what the step up in cost might be from Q3, if things go your way and you get the cars that you're planning?.

Kind of depends on how many cars we get and we are seeing more cars come in it will definitely trend up in the fourth quarter. Unfortunately it sounds like I'm avoiding the answer, but the answer is that we really don't know how many we can get through in the fourth quarter and how many will spill over into next year.

Other than it's going to be a lot more than recent years..

Okay, all right. Well I appreciate the color and thanks for the time. .

Thank you for the question. The next question will come from Steven O'Hara with Sidoti and Company. Please go ahead. .

Hi, good morning. .

Good morning. .

I was just curious about -- good morning. Just on the -- I mean, it looks like the sequentially lease revenue in North America I think it was a first uptick you've seen since I think 2015. And I'm just wondering I mean it seems like your lease rates you are pretty positive.

Is it more of that or is it more kind of the maybe the addition of cars in the fleet.

And I mean is there a how do you think about you know fourth quarter on a sequential basis, I mean, assuming kind of a stable market from here have we kind of hit the inflection point of maybe declining lease revenue on that within North America?.

Yes. So, the actual numbers for lease revenue in North America were down for the quarter, but the thrust to your question the list was provided primarily by having more cars. The downward pressure was the lease rates, because despite the sequential improvement that Brian talked about, it’s still lower than the expiring lease rates.

So, rates are still a net negative on the lease revenue..

Okay. And then just maybe on the maintenance piece again. When you say you’re trying to get cars in, you’re getting more cars in in the fourth quarter.

Are these cars coming in because customers aren’t as concerned with demand at the current time or is it just a slower time period or is it you’ve going to have to call them in because you’ve got a -- there is a contract where you guys have to get it done by a certain period of time and you can’t do that if you don’t start doing that?.

I mean, it’s absolutely right in the size of the car. So, if it’s tank qualification it’s due this year and generally they don’t like what happens when it spills into the next year.

Because as I said earlier, the commercial team works -- obviously is working right now to get them in, eventually that turns over to the legal department and eventually over to the AAR if it’s late and into next year. So, they want to avoid that as well, so that’s why we’re going to see a higher load in the fourth quarter.

It’s just that a lot of the cars coming in now they’re not going to get turned and sent out this year. So, what I can say with certainty is it’s going to be much higher in the first quarter because of what’s spilling over.

I just have not been able to -- we don’t know yet how much higher it’s going to be in the fourth quarter and how many are going to spillover. So, they are required to get them in before the end of the year..

Okay. And then maybe just lastly on the -- last call -- maybe not last call, but prior to that you guys have been fairly vocal about level of backlog and things like that, I know you guys have added to that somewhat.

But are you comfortable with the level of backlog today given -- I mean obviously lower would be better, but are you more comfortable today than you were maybe six months ago? I mean, it looks like it ticked up in 2Q there is not a read for 3Q yet?.

Yes. So, one of the things we look at in addition to the numbers of cars in the backlog is the amount of time.

And for most car types now, you’re looking at something approaching a year, somewhere between 9 months and 12 months to get a new car and that is a large reason for the incremental increase in tank car lease rates that Brian talked about is that alternatives is a little harder to come by.

To your direct question on the size of the backlog, it’s still well above any other trough that we’ve seen. So, we still think there is room for the backlog to come down in a full recovery scenario, but we are being helped by that length of time to get a new car increase in a little bit..

Okay, all right. Thank you very much..

Thank you for the question. The next question will come from Bascome Majors with Susquehanna. Please go ahead..

Yes, thanks for taking my question.

I know we’re not into 2019 yet, but do you guys have a sense of how you might be incentivizing your sales force differently in 2019 versus 2018?.

Yes. So, the sales incentive plan is something we look at every year and is tweaked a bit for where we are in the market. We’re in the process of going through that right now. Certainly, as we hit inflection points, we become more interested in taking lease rates up and lengthening lease term.

As I mentioned, for most of the car types in the fleet we’re not at that length and lease term point yet, we’ll see when we get there..

But it’s a great question, one we haven’t had before. I mean of these few years it’s been all about utilization and early renewals and things like that trying to keep that fleet utilized. So, once what Tom says, once we start to incentivize rate and term that’s a really good sign. Not quite there yet, but hopefully we’ll get there next year..

All right. So, getting there, but not quite there yet. I appreciate the color there guys. And just one more real high level for me here.

I mean it feels like a lot has changed since your last earnings call at least in the marketplace, I mean, your primary suppliers laid out a strategy that could have them investing billions of dollars and growing their own lease fleet. I mean, just this week we heard your other key suppliers changing hands to PE ownership.

Your hardest competitor may or may not be up for sale in some capacity. With all of these changes, it feels like if certain things happen, this could be more significant than incremental to the industry.

How do you guys think strategically about this market and sort of the competitive landscape perhaps been different two to three years down the road versus today? And what opportunities or risks as that create for your business model and strategy?.

I mean, it's a good question but honestly it's more of the same. Trinity has been an aggressive lessor for a long time prior to the split, so that's nothing new. And yes, it's change -- ARI is changing hands, but you must remember that there was another lease fleet car the ARL that was heavily supplied by ARI. Ikan just had inter-shipments in both.

So this is nothing new for us competing against lessors who also supply us for manufacturing side. So there is really not a dramatic change there. What's more concerning to us is somebody really changes in their behavior and gets extremely aggressive. And like I said, Trinity has been aggressive, an aggressive lessor for a long time. .

So you haven't seen the captive manufacturing finance models become more or less aggressive in the last few quarters versus the last couple of years. .

No, I mean, as Brian pointed out it's been aggressive and it has been that way for a while. So can't really point to a more recent change in what we face out there as we try to place cars..

Thank you for the color..

Thank you for the question. The next question will come from the DeForest Hinman with Walthausen & Company. Please go ahead. .

Hi, couple of questions on the remarketing activity. Any areas of strength that you would call out where demand has been strong..

No, it’s just across the board, I mean, most of our remarketing is in freight cars because there is a limited number of tank car buyers. But I'd say it's pretty healthy across the board for good customer credits especially with longer lease terms..

Okay. And earlier you mentioned generally scrapping our own 2,500 cars a year. We're not really at that pace this year.

Steel prices have been up, should we expect a lot of scrapping activity in the fourth quarter or is there just going to be lighter year on scrapping side?.

The way the scrapping decisions are made is it's not a targeted amount. We're not looking at scrap to certain amount of cars. What happens is car comes into the shop and we look at what the projected costs to repair the car is and what it's likely to earn over its remaining life versus the cash flow as we get from scarping the car.

So naturally it tend to get more scrapping activity in a higher scrap environment. The 2,500 is more of a multiyear average. It's not something that we target year-to-year.

As far as how many we've scrapped?.

Yes….

We've scrapped less through the third quarter than we did last year, but at about a 20% average higher price. So the gains are higher this year by a few million even though we scrapped a lower number of cars..

Okay. And just as more of a high level question, you've talked about third party capital for a long period of time and now we're starting to see rates moving up generally that's kind of a good thing for us.

But has there been any discussions internally or even at the Board level about thoughts about when does that money go elsewhere and look at a different asset class.

Have we had any thoughts or discussions on that?.

Yes, we discuss it all the time, because we think that's been one of the things that's driven oversupply I should say and the market has been in this third party money without really a direct relationship with the shipper customer.

As far as it’s exiting, I mean when you talk to them, one of the reasons they've entered the market is they talk about stable asset class and all that.

But really it's been because of the yield it's been described to maybe the yield in the railcar market has been higher when they've been able to achieve in their traditional financial -- especially in the banking investments of near to zero yield.

So that's what driven them into the market as far as them getting out you would higher interest rates, underperformance of the fleet. Because I do think a lot of these investments that were made were at too higher price and then not necessarily the best car types.

So generally, what happens is as interest rates increase, and fleets underperform people start to exit. So, really haven't seen a lot of exiting just yet other than perhaps element getting out of the majority of their lease fleet. But I don't know the reason that was like I think they stayed they just want to concentrate on their core business.

So I think there's a number of reasons people get in and out. But as far as what we've heard, it's been more of the yield and our business is higher than the alternative that was traditionally available. So we'll see what drives them out overtime. Traditionally as I said it's been when their fleet underperforms or interest rates go up..

Okay, thank you. .

Thank you. The next question will come from Justin Bergner with Gabelli & Company. .

Thanks for my follow-up question here.

With respect to the tank car qualifications or the periods that that car is in the shop for service long enough, given the tightness in the market to actually have a positive effect sort of on the lease rates that you're seeing sequentially in third quarter and into the fourth quarter?.

Yes, it really isn't. So just first of all, what happens when the cars in the shop, it experiences rental abatement, so it's a draw on total revenue for us. But as far as the number of cars in a shop getting TQ [ph] at a given time, it's not enough to drive market lease rate..

Okay, great. And then just a question on your overall comments about the market and the tightening nature of the market, I think you mentioned demand railcar velocity and a tight truck market.

Maybe if you could just sort of expound a little on each of those and which of those factors is the most significant to the tightening in the leasing market that we're seeing now?.

Yes, so I would say it's actually the truck and the railroad performance has been more impactful to-date than the uptick in demand. Uptick in demand on the bed of already tightness to the railroad supply and the trucking shortage is certainly a help and help accelerate things in the third quarter here.

But more meaningful and impactful, I think are those first two. And in particular, those are what are driving the difficulty in getting the cars in for maintenance that Brian has talked about a few times..

Yes, on the demand side it’s the Canadian crude that's really driven a lot of demand for tank cars. And as we've said repeatedly over the years there isn’t ending out there for that and I think it's one of those pipelines come online just in the next couple of years. Like [indiscernible] line 3, I guess Trans Mountain pipeline.

You got Keystone XL out there. So when that happens that's why we've been very careful investing in crude..

Thanks for follow-up. .

Thank you for the question. The next question will come from Willard Milby with Seaport Global. Please go ahead. .

Thanks for the follow-up. And maybe this gets taken offline. I don't know if he might have this data in front of you. But we're going to small data on industry wide tank car recertification levels. And I think 2018 the value I had was about 49,000 cars industry wide stepping down to about 40,000 in 2019 and half of that in 2020.

Does that sound accurate is 2018 the peak for tank car research? And is 2019 just kind of a -- maybe a minor step down from those levels?.

As far as what is due in a given year 2019 and 2018 are pretty similar, it then trends up for us over from there. So it all depends on when a certain tank car owner purchased what their purchasing pattern was 10 or 15 years ago. So for us 2019 and 2018 are pretty similar and then it starts to take-off after that scheduled..

Okay, thanks for the follow-up..

Thank you for the question. There are no further questions at this time. I'd like to turn the conference back over to Jennifer McManus for closing remarks..

I'd like to thank everyone for their participation on the call this morning. Please contact me with any follow up questions. Thank you..

Thank you, ladies and gentlemen. This concludes today's call. You disconnect your lives. Have a great day..