Good morning. My name is Colby and I'll be your conference operator today. At this time, I would like to welcome everyone to the GATX 2022 Third Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator instructions] Thank you.

I will now turn the call over to the Head of Investor Relations, Shari Hellerman..

Thank you, Colby. Good morning and thank you for joining GATX's 2022 third quarter earnings call. I'm joined today by Bob Lyons, 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 statement.

Actual results or trends could defer materially from those statements or forecasts. For more information, please refer to the risk factors included in our earnings release and those discussed in GATX's Form 10-K for 2021 and in our other filings with the SEC.

GATX assumes no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances. Earlier today, GATX reported 2022 third quarter net income of $29.1 million or $0.81 per diluted share. This compares to 2021 third quarter net income of $40.1 million or a $1.11 per diluted share.

The 2022 third quarter results include an impairment charge of $10.8 million or $0.30 per diluted share associated with our decision to exit the rail business in Russia. Year-to-date, 2022 net income with $107.5 million or $2.99 per diluted share. This compares to $82.1 million or $2.28 per diluted share for the same period in 2021.

The 2022 year-to-date results include net negative impact of $55.2 million or a $1.54 per diluted share from tax adjustments and other items. The 2021 year-to-date results include a net negative impact of $43.1 million or a $1.20 per diluted share from tax adjustments and other items. These items are detailed on Page 13 of our earnings release.

And now I'll briefly address each segment. Rail North America's fleet utilization was 99.6% at quarter end, and a renewal success rate was 87.2%, reflective of the continued strong demand for rail cars across our fleet. Once again, we saw sequential improvement and absolute lease rate during the third quarter.

The renewal rate change of GATX's lease price index was positive 37.5% with an average renewal term of 33 months. We continue to successfully place new rail cards from our committed supply agreements with a diverse customer base. We've placed over 4,000 rail cards from our 2018 Trinity supply agreement.

Additionally, we've placed all 7,650 rail cars from our 2018 Greenbrier Supply Agreement. Our earliest available scheduled delivery under our supply agreements is in the second quarter of 2023. Earlier this month, we announced a new multi-year agreement to purchase 15,000 newly built cars, the largest committed rail car order in our history.

We are pleased to have the new agreement in place as these new cars will continue to strengthen our competitive position. The secondary market for rail cars in North America remains active. Rail North America's marketing income was $9 million in the quarter and $76.7 million year-to-date.

Turning to Rail International, the rail car leasing markets in Europe and India remain very strong and fleet utilization was above 99% at quarter end. Furthermore, GATX Rail Europe continues to experience increases in renewal lease rates versus the expiring rate.

In Portfolio Management, the Rolls-Royce and partners finance affiliates, is performing as expected in an uncertain environment. As borders reopened this year, global passenger air traffic has improved, but remains below 2019 levels. We continue to identify opportunities to make attractive in investments in today's environment.

Total investment volume across our businesses was $203.4 million in the quarter and $887.9 million year-to-date, primarily focused on rail assets globally.

As noted in the earnings release, reflecting strong operating performance today and our outlook for the remainder of the year, we expect 2022 full year earnings to be in the upper end of the previously announced guidance range of $5.60 to $6 per diluted share, excluding any impact from tax adjustments and other items. Those are our prepared remarks.

I'll hand it back to Colby, so we can open it up for Q&A..

[Operator instructions] Your first question comes from the line of Allison Poliniak from Wells Fargo. Your line is open..

Hi, good morning. Just want to revisit some comments, I know just going back, sorry. Fluidity, certainly could impact the need for cars. I think your prior comments alluded to the fact that there was still a lot of demand that you felt that could support rail car interest, should fluidity start to come back.

The economic environment is changing pretty rapidly it seems. Just, are you still comfortable with that thought? Any changes there? Just would love some thoughts there. Thanks..

Yeah. So couple different things embedded in your question. First of all, we do continue to believe that if rail performance improves that there are some loads that the industry will move that they're not moving right now because of some of the challenges with the rail network.

We continue to see shippers wanting to move more by rail, but they need to see the service improve before they can do that. Also embedded in there is kind of customer sentiment about what's going on in the market, and I think it's important to note that we continue to see a significant difference between the new car and the existing car markets.

Customers clearly feel that they need to maintain their fleet size. So they're very reluctant to return cars. This fact combined with a tight supply situation has resulted in strong existing car pricing.

The number of industry idle cars in storage is down around 17%, but I want to contract that with the new car market customers are also generally reluctant to increase their fleet size.

For the past couple quarters, we've noted that the new car market has been more competitor as builders and lessors aggressively compete for those limited new car opportunities.

This dichotomy between the new and existing car market has persisted this quarter and if anything, it might even be a bit more pronounced because of the macroeconomic uncertainty that you mentioned..

Allison, it's Bob I'd also add to Tom's comments too, that there was a market study out very recently that indicated of those customers shipping by rail over 60% said they would ship more. It's a fluidity and service levels would improve. So we feel very comfortable that that kind of pent up demand or potential demand is still there..

Great. Great color. Thanks. and then I guess in line with that, I know term is a weighted -- a weighted and average number; really hasn't moved. Are customers pushing back a little bit more just given the uncertainty out there in terms of term, is it just due to a specific car types out there? Just any color there would be great..

Yeah, so from a goal perspective, one of the things we've been talking about is with the rate improvement, we're really looking to, at least in certain car types where the lease rates are strong. Start pushing that term out a little bit. I'm sure you're referring to the fact that the LPI term for the quarter was 33 months.

As you know, this is weighted based on total fleet size. As you would expect, some of the shorter lease terms in this group included energy related cars that carry commodities like coal, ethanol and LPG.

If you look at the average renewal term for all Q3 renewal activity, just waited on the total activity in the quarter, that number would be 49 months. So we are on an activity basis seeing some success taking that term up..

Great. Thanks so much. I'll pass it along..

Your next question comes from the line of Matt Elkott from Cowen. Your line is open..

Good morning. Thank you.

My question is on the secondary market, given how strong it's been for a long time, is it safe to assume that valuations, especially with interest rates rising, valuations would start to moderate next year?.

Yeah, so Matt, as you mentioned, the secondary market really has held up despite the rising interest rates and we expect it to remain strong for the foreseeable future. In almost any interest rate or economic environment, the impact of inflation over time and the straight line nature of depreciation results in economic values that exceed NBB.

This is evidenced by the fact if you look at Rail North America over the last decade, the lowest year we had in terms of gain on sales was the $39 million. Having said that, this year is going to be a record year for a marketing income. We mentioned that we expected it to exceed last year's total of $80 million.

Our decisions are always made by optimizing fleet considerations and economic considerations, and we'll continue to do that going forward. But as far as interest in cars with leases attached, it remains very strong..

Yeah, Matt adding to that, we're in the market all the time both on the buy and sell side. So that frequency gives us a lot of visibility into other bidders demand, what the appetite level is, And it remains very healthy at this point in time.

Now, looking into 2023, we would expect, given what we're seeing here in the fourth quarter for that to continue. But as you well know, it's a pretty uncertain macro environment. So we'll update everybody on that when we get into the end of the fourth quarter..

Got it. And then, given the big agreement, you guys just signed the supply agreement for 15,000 cars.

First of all, can you talk about how much of this is for replacement and how much is it for growth? And since you have this big agreement locked in now, does it kind of free you up a little bit more to do more sales rather than investments in the secondary market going forward given the strengths continues even if it moderates a little bit?.

Sure. The size of the agreement is very similar in terms of the number of cars we'll take delivery up on an annual basis to the one we've had in place for the last five plus years.

And if you think about what we scrap in a given year, anywhere between 2,000 and 3,000 cars a year, sometimes a little bit more, if the scrap environment warranted, you can look at the agreement that we have in places, our base load, our base need and keeping the fleet essentially at the size it's at today, it's to your, use your term, it is more of a replacement order.

That said, we have a lot of flexibility inside the order in terms of what car types will take delivery of. So the mix of the fleet can change over time. We'll be opportunistic on that front. And I would say, we have full flexibility to continue to order on top of that and would expect to more in the spot market meeting customer demand.

There will be deliveries in excess of 3,000 cars a year that are embedded in this order..

That makes sense.

And then Bob, my next question was going to be, I'm so sorry if I missed it, but did you guys quantify the absolute release rate improvement in the third quarter?.

We did not, but I can do that. So this quarter marked the ninth consecutive quarter of increasing lease rates. The increase this quarter versus last quarter was fairly modest less than 5% with no real material difference between tank cars and freight cars..

And that percentage change is something you would expect as we continue to get longer, in each quarter progresses because the bar is, the denominator is getting, is rising each quarter..

Okay. So the actual real strength of the market really hasn't changed much, but we're the comp gets difficult because I think last quarter you got mid to high team, I believe is some remember correctly..

Yeah. One thing we always caution against is over-emphasizing a single quarter. To put it in context versus a year ago, most tank car types are up between about 15% and 25%, and most freight car types are up between about 30% and 70%. So you're seeing a lot of strength.

It's just as Bob mentioned and just to repeat, it just as you look at a single quarter, as you continue to have that level of success over a nine-quarter period each time the increment is you're starting from a higher base..

Got it.

And Tom, is there a way to gauge like how much of these absolute rate improvements quarter-over-quarter are tied to just the broader inflation in the market versus dynamics specific to the rail car industry?.

Well, as we've said before, with regards to the recovery we've seen here over the course of the last few years or last year 18 months, it's been more of a supply side driven improvement. And again, this kind of gets to the point that Tom referenced with regards to the bifurcation between the existing car market and the new car market.

So there definitely is an inflation impact there. We're still optimistic based on the dynamics right now, which really point to customers holding on to their existing cars. That's obviously come through not only in our utilization, but our very high renewal success rate and the lease rate improvement that we've seen.

They're compelled to hold on to those assets. We don't see that changing anytime soon, especially given the replacement cost of going out and buying new assets in this environment. So we think we're in a very good position to continue to capitalize on that..

Great. Thanks Bob. Thanks Tom..

Your next question comes from the line of Bascome Majors from Susquehanna. Your line is open..

Thanks for taking the questions. You've talked about the enduring strength in the secondary rail car market in North America.

Can you parse that out between how some of the interested parties of Fay [ph] behavior seems to be evolving or frankly not in the books that you put out and how people seem to be bidding and what the quality and depth of those bids looks like? And, by parties, I don't know if it's financial buyers versus operating really lessors is it really any way you want to slice that up between the people who participate in these auctions? Thanks..

Yeah, Bascome, it's Bob. The depth of the market continues to be pretty solid and I'm speaking here from the standpoint of a seller in the secondary market, and as I mentioned, we're active on both sides, but as a seller, what we're seeing is the depth of the market continues to be pretty strong.

A lot of different buyers interested in the different pools of assets or lease transactions that we have in the marketplace and what we're seeing is the fact that if you have a longer term quality asset on a good lease with a good credit, you'll get ample significant interest in from the secondary market, from the buyers there.

And it's a little bit more difficult to kind of slice them up between the financial players or other operating lessors, but we don't see a lot of new entrants, but those that are in the market today and have been for a long period of time continue to have an interest in adding assets..

And thank you for that.

And, maybe on another market participant thought, can you talk about the quality or the implied returns and the competition from the captive OEM lessors? Just curious if you're seeing the leases put in the market by some of the builders, evolve this cycle versus prior cycles and has that changed any way and in the way that you operate in the market? Thank you..

It hasn't really changed over cycles. And I'm not going to speak specifically to any one OEM's activity in the marketplace. What I will say is, in any transaction, the larger it is, the more likely the OEMs are going to be actively pursuing that particular transaction, if it's a new car deal.

If it's a 500 or a 1,000 car order or a 1,500 car order, that's going to garner quite a bit of interest from the OEMs. GTX has built its business for decades on more singles and doubles than that type of home run transaction.

Not that we don't pursue those, and not that we don't get them from time to time, but our bread and butter is the 100, 200, 300 car type order where you can see very attractive returns and you have to have the infrastructure and the commercial and the sales team in place to be able to identify those deals.

We have that and that's continue -- will continue to be our focal point going forward..

Last one from me, as you into next year, any preliminary thoughts on prioritizing lease rate or term and how that's evolving into the market? Thank you..

Well, given the macro environment we're in and the volatility we seem to face globally, it's one of the most unpredictable environments that I think most of us around here have ever experienced. I think we'll save that one for the fourth quarter and provide more color on that as we get into 2023..

Yeah. And only thing I'd add is like always whatever we do is going to be on a car type by car type basis for ease, we talked globally on these calls, but the way we manage the fleet is what's going on in each of those individual markets..

Your next question comes from the line of Justin Long from Stephens. Your line is open..

Thanks and good morning. Going back to the lease rate discussion, obviously there was a lot of volatility and rates on the way down and then volatility on the way up.

Could you just help us understand where absolute lease rates are today versus normalized levels, and then as we move into next year, any commentary you could share on what the comp from an LPI perspective looks like?.

Yep. So let me at least start on that. So compared to long term averages, most tank car types are up between about 10% and 20% versus those long term averages. Most freight car types are hovering right around the long term average, maybe a little above or a little below.

For both tank and freight cars, the energy related car types are still well below long term averages. And then in terms of next year, we always give guidance on both earnings and pricing, the LPI on our fourth quarter earnings call..

Okay. Understood, and maybe looking at the guidance this year, you said you feel more comfortable at the high end of the range now.

Any color you can provide on what changed within your assumptions to drive that more optimistic commentary?.

Sure. Justin, it's Bob and obviously with about roughly 10 weeks to go in the year, most things are fairly well baked at this point.

The one thing and the year in general has played out largely the way we anticipated that it would, despite a lot of macro events that I already referenced, whether it be the war in Europe or economic volatility, rising interest rates, inflation, etcetera. In general, the market has performed very much the way we thought it would coming into the year.

The one variable has been on the remarketing side, and so is based on transactions that we have currently underway and expect to close by the end of the year. That has been the driver to the uptick and the guidance..

Got it. And last quick one from me. I know you took the impairment related to Russia, but anything you can share on this segment, profit impact from Russia. What we've seen historically there is we model out that rail international segment going forward.

And maybe you could just touch on your European business as well and how you think about a stress test of that business in a mild recession scenario?.

So, Justin, I'll start with Russia and then I'll let Bob comment on the rail Europe business. So as you know that that Russian business pretty small part of the total and on a segment profit basis, it represents less than one half of 1%..

And with regards to the European business and the potential impact of a recession there, what we have seen historically, and I think most people or we try to stress the fact that in the European market, the lease rate structure is very different, where we tend to see pretty material swings and lease rates as you've already referenced, 10%, 20%, 30% up down in the North American market, the European market is much more stable.

We're talking about single digit type up or down and a lot of times low single digit up or down despite the economic environment. So it becomes much more of a focus on keeping assets utilized in our team there has done a very good job of that and has the fleet at record high utilization today..

Great. Thanks so much for the time..

[Operator instructions] Your next question comes from the line of Justin Bergner from Gabelli Funds. Your line is open..

Good morning, Bob. Good morning, Tom. Good morning Sherry..

Morning Justin..

A couple quick questions and then one or two substantive questions.

On the quick side, did you repurchase any shares in the quarter?.

Oh, we did. So share repurchase for the quarter was about $5 million..

Great, thank you.

And then on the scrappage side, with steel prices having come down and with GATX and other market participants having scrapped a more material amount of cars in the last 12 months, would you expect to be at the low end or even below the low end of that 2,000 to 3,000 range as you look out sort of on an annualized basis over the next couple quarters?.

Yeah, Justin, we'd expect the total year to be up pretty average, not materially above or below what we normally do, which is around 2,500 cars a year..

Okay, great. And then you mentioned, I think that the first car available for placement was the fourth quarter of 2023 or the end of 2023, so about a year out.

Is that a longer timeframe than normal for your first available placements?.

Yeah, Justin, just to clarify it was the second quarter of 2023..

Oh, apologies..

Yeah, And Justin, generally speaking, we're placing cars out six months or more..

Great. So you're in kind of a normal placement cadence there? Okay. Yeah. And then lastly, a big picture question.

If there was a big secondary market port, like, so I guess if there was a big portfolio that was to come into the secondary market, would GATX consider it? What would you consider be the puts and the takes in evaluating an asset like that?.

Well, we're always interested and unsettled times, volatile times tend to bring some of those opportunities to the market, and GATX has always -- has a history of doing a pretty solid job of capitalizing on those when they come.

I think Tom and I have both been here long enough, Paul Titon, who runs their North American rail business to remember 2008 and 2009 when the world was entirely upside down, I think we were one of the few buyers of big portfolios of rail cars at that time.

Not that I'm hoping for a 2008 or 2009 repeat, I'm not, but if there is unsettled times, we absolutely would have an interest. And the puts and takes always come down to the quality of the portfolio. Not all portfolios are created equally. We do an extremely deep dive when we look at portfolios, literally car type by car type, lease by lease.

And that will be a very big driver to our interest level as will evaluation. So we don't -- we're not compelled to overpay. I think we have a reputation in the marketplace is not overpaying. We have a great infrastructure here that's very scalable and we want to add assets to it over time. But we don't have to buy anything.

We don't have to buy anybody's customer list or team or infrastructure, etcetera. It comes down to the quality of the assets in the portfolio and evaluation that we believe we can pay and generate an attractive return for the shareholder. That's the story at the end of the day..

Great, thank you..

Your next question comes from the line of Bascome Majors from Susquehanna. Your line is open..

Thanks for taking my follow up. So I wanted to follow up on the Europe comments from earlier.

Can you talk about the customer appetite to either grow their fleets or replace older cars with new cars in that environment, just given the economic uncertainty and to the extent that there is some appetite for new cars, with the general supply situation and cost of goods is, are the OEMs able to meet your demand there customer demand where it's needed? Thank you..

Yeah, well, overall demand, I'm very optimistic on the European market given the fact that there is a concerted push to move more product from truck to rail. The green deal is very real in Europe. The environmental benefits of rail are apparent and they're being pretty -- being pursued pretty aggressively in Europe. So very optimistic on that front.

That said, the manufacturing footprint in Europe is far smaller than it is here in North America. And so it is at this point in time, it's pretty strained. The challenge I would say is not necessarily finding the next car opportunity, the next new car opportunity. It's making sure we can get delivery on a timely basis.

And with the supply chain situations pretty strain in Europe, that's become more challenging. We came into the year expecting about 1400 new wagons to come into the fleet in Europe. Will come in a little shy of that, not because of demand, but because it's supply chain.

And so we'll be analyzing all of that closely as we put our expectations out for 2023, but the demand side in Europe is very strong..

There are no further questions at this time. I will now turn the call back over to the Head of Investor Relations, Shari Hellerman 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..

This concludes today's conference call. You may now disconnect..