Good day, and welcome to the GATX 2020 Fourth Quarter Earnings Conference Call. Today's conference is being recorded.At this time, I would like to turn the conference over to the Director of Investor Relations, Shari Hellerman. Please go ahead.

Thanks, Ryan. Good morning, everyone. And thank you for joining GATX's fourth quarter and 2020 year end earnings call. I'm joined today by Brian Kenney, President and CEO; Tom Ellman, Executive Vice President and CFO; Bob Lyons, Executive Vice President and President of Rail North America; and Gokce Tezel, Executive Vice President and President of Rail International. 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 included in our release and those discussed in GATX's 2019 Form 10-K and 2020 Form 10-Q. GATX assumes no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances. I'll provide a quick overview of our 2020 fourth quarter and full year results, and then Brian will provide additional comments on 2020 as well as our outlook for 2021. After that, we'll open the call up for questions. Earlier today, GATX reported 2020 fourth quarter net income from continuing operations of $17.8 million or $0.50 per diluted share. This compares to 2019 fourth quarter net income from continuing operations of $42.1 million or $1.18 per diluted share. For the full year 2020, GATX reported net income from continuing operations of $150.2 million or $4.24 per diluted share. This compares to net income from continuing operations of $180.8 million or $4.97 per diluted share in 2019. The 2020 full year results include a net negative impact of $12.3 million or $0.35 per diluted share related to the elimination of a previously announced tax rate reduction in the United Kingdom. The 2019 full year results include a net deferred tax benefit of $2.8 million or $0.08 per diluted share related to an inactive tax rate reduction in Alberta, Canada. These items are detailed on Page 13 of our earnings release. In 2020, investment volume was $1.06 billion, which reflects higher year-over-year investment in Rail North America as well as our acquisition of Trifleet, the fourth largest global tank container lessor. And as noted in our earnings release, we currently expect 2021 earnings to be in the range of $4 to $4.30 per diluted share. With that, I will now turn the call over to Brian.

Okay. Thanks, Shari. Good morning, everyone. Thanks for calling in. As always, I'll give you the brief color on our recent performance but more importantly, some more detail behind the 2021 guidance. So let's go ahead and dive in here.As Shari said and as you saw in the press release, on a normalized basis and looking at continuing operations, we earned $4.59 per diluted share. You might remember that we suspended earnings guidance at the end of the first quarter of 2020, along with most others due to COVID. You might also remember we sold our American Steamship business in May. So I realize that trying to analyze our 2020 financial performance versus that original guidance that we put out last January is pretty difficult. It's also difficult for me to tell you with a high degree of accuracy what the financial impact of COVID-19 was on GATX. But I can't talk qualitatively about it and I think I need to because it's still having an impact today. So as far as that goes around North America, COVID showed its impact really in three areas. You remember that entering 2020, the North American railcar leasing market was already in a weakened position, that was due to the dramatic oversupply of railcars. But as the pandemic set in and North American railcar loadings fell to levels really beneath the bottom of what we saw in the 2008 to '10 recession, we did see a further negative impact on what were already low lease rates.So it also had a temporary chilling effect on the secondary market. It also created inefficiencies in our maintenance network due to the frequent openings and closings of our facilities in an effort to keep the employees safe. Moving to Rail International, in Europe and India, other than…

[Operator Instructions] We'll take our first question today, and that is from Allison Poliniak with Wells Fargo.

Just turning to the overcapacity issue, it's something clearly you've been dealing with for a couple of years now. But as you look across your fleet, are you starting to at least see a little tightening in certain verticals? And if so, kind of where they would be that would give you a little bit more optimism that, that lease rate could maybe increase a little bit more there?

There are certain pockets right now where we are seeing some increased demand and maybe some green shoots, as Brian had referenced in his opening comments. But broadly speaking, not enough to really lift overall lease rates and to provide a lot of momentum on that front. I think customers still realize the leverage is more in their favor than ours these days in terms of lease rates.And the other issue that you touched on is the manufacturing capacity. The footprint is still too large. In North America, we can still turn out too many more cars than are needed. So to the extent a customer had a sizable order, they still have the option of talking directly with one of the manufacturers and probably getting a fairly good response, and they can use that to their advantage. So we need more tightening for sure.

And then I guess that goes in line with lease rates, some improvement sequentially. Could you maybe discuss, I would say, broadly just there is sort of your normalized lease rate that you have, and I know it's hard by car because there's so many different car types. How far offset, I guess, whatever you perceived to be normal do you feel we are today?

Still pretty substantially, if you look at kind of what we would view as our normalized rate for either tank or freight, probably in the 25%, 30% plus range normalized for tank and maybe even more on freight. That said, sequentially, third quarter to fourth quarter, we did see some nominal improvement in both tank and freight, kind of mid single digit type improvement quarter-to-quarter. So that's encouraging, it's a start.

And we'll move on to our next question, and that is from Justin Long with Stephens.

Maybe to build a little bit on that last question. I think for 2021, you said you expect a gradual recovery in lease rates. Could you quantify the increase that you're expecting relative to where we sit today that's baked into the guidance? And then on the remarketing in North America, I know, Brian, you said it should be up significantly. But I was wondering if you could help us with the order of magnitude there for 2021. Thanks.

So if we're looking at, first of all, the first question regarding lease rates, and we think about what's baked into the budget for 2020 -- or the forecast for 2021 that we've provided. On the LPI, we're looking at a range of negative 5% to negative 15%, somewhere in that ZIP code. The average expiring rate does come down in 2021 versus 2020. And we're expecting the average renewal rate to move up versus where we were in 2020. So the combination of those two factors will put us in that negative 5% to negative 15% range versus the negative 23.5% we experienced in 2020.If we look at remarketing, as Brian mentioned in his opening comments, we expect lease revenue to be down somewhere in the range of $35 million to $45 million. And that's a combination of the current rate environment, the utilization challenges, the full effect of all the cars that were renewed at low rates in 2020. They have a full year effect in 2021. So if you think about revenue being down in that range, remarketing would be up basically in the same range, $35 million, $40 million and as Brian mentioned in his comments, those two essentially kind of offset each other, driving relatively flat segment profit at Rail North America in 2021.

And one other quick one on the guidance and then I had one last question. It doesn't sound like buybacks are getting factored in, but I just wanted to ask on that as well.

As you know, we have $150 million remaining on our current authorization from the Board. We did not buy back any stock in 2020 after purchasing $150 million in 2019. We originally paused on our stock buyback because of the uncertainty around the COVID, but we decided not to resume the program when market stabilized because we anticipated investment opportunities across the market and in adjacent markets. We've discussed some of those opportunities today, including the Trifleet acquisition and the direct investment in aircraft spare engines. We continue to believe that there will be further opportunities for investment. So we'll be thoughtful about reinitiating the buyback program. So we'll kind of take that as it comes.

But could you clarify if that's something that's getting baked into the 2021 guidance or would any buybacks be upside to the range you gave?

So the real key there is it's definitely included in that range that the $4 to $4.30 that Brian provided. The magnitude of it is not that material.

And maybe to just close, Brian, a question for you on just the investment opportunities. It seems like there's a pretty sizable opportunity set out there in various different areas, and we've seen that with a couple of the announcements that you've made here recently. Where are you seeing the most attractive opportunities right now just from a valuation perspective and in terms of driving long term value for shareholders?

Yes, I think it's reflected in the two investments we recently made with direct investment in spare engines, the Trifleet acquisition. In general, Rail International is offering more investment opportunities that meet our return criteria than Rail North America right now. I think they're there in Rail North America but to a large extent, Justin, it's like beating your head against the wall, I think there are owners that want to get out of the business, but they haven't come to grips with the value of their fleet. And so we'll still work on it, but you haven't seen that stuff move. And we, as you know, are not going to overpay. So Bob and I are constantly working on this, but people aren't there yet.

We'll move on to our next question, and that is from Matt Elkott with Cowen.

Just a quick question on the guidance. The $0.10 dilution from the acquisition is reflected in your guidance, right?

That's correct.

And then my next question, maybe a follow-up on the net gains on asset dispositions, I think the number for 2020 is $41.7 million. That number, is it the same adjusted for ASC divestiture or is it different?

Well, I think if you're looking at the remarketing income component, the key thing to look at, Matt, is the Rail North America column because that's how we're comparing '20 to '21.

Yes, any gain or loss on the sale of ASC as in discontinued operations.

Yes.

But your remarketing income in 2020 must have been the lowest in at least the last five or six years. Is that correct?

That's correct, and that's a reflection of the fact that given all of the uncertainty in the marketplace and all the challenges in 2020, we were really cautious about going to market with packages. As you know, we do that quite frequently. We didn't in 2020. And even as things began to improve a little bit in the back part of the year, we were still a little bit cautious about going out to market. Keep in mind that you don't go to market and generate gains the next day. Things take time. We are in the market now with some packages, and we're seeing renewed interest, for sure, among the investor base for growing and adding assets again. So that gives us some confidence in that number coming into 2021.

And Bob and Brian as well, a bigger picture question. The number of railcars in storage has declined from, I think, 526,000 in July to just over 400,000 in January. And the manufacturing backlog is now down to below 35,000. Are you surprised that lease rates have not reacted more quickly than they did? And what do you think needs to happen? What's the number of cars and storage to go down to for lease rates to start reacting more favorably?

First of all, not surprised that it hasn't had a bigger impact on lease rates, that's still a substantial number of cars and storage. The most recent data was just over 400,000 cars, as you noted, that's 25% of the North American fleet. And you would historically see that number more in the 12% to 15% range before you'd really start to get meaningful momentum on that lease rate number or at least heading in that direction more aggressively.The orders in the fourth quarter, from our perspective, that's encouraging, just over 3,000 cars ordered, really just a handful, a couple of hundred on the tank side. So you have the backlog now down to 35,000. But again, keep in mind, the market essentially built it well in excess of replacement levels for about 10 years. So it takes some time for that to turn around.

Yes, that's also the macro view you're looking at. And the micro view is our competitors' fleets still have very low utilization. So it's one thing about cars that haven't moved in 60 or 90 days. It's another thing when your competitors' fleets, they're really trying hard to put these back to work. Ours is at 98%. It's not going to get better until you start to see utilization improve, if it can, at those fleets.

One other factor I’d mention, Matt, that gives me some optimism here coming into the year is the fact that scrap rates have moved up so sharply here in the last two months. One thing we need to have happened and we've said this for the last couple of years is that we need more cars to scrap out of the fleet. Scrap rates have finally moved and they've moved pretty sharply here in the last two months. So we're optimistic that competitors will finally start scrapping out some of that old idle equipment. We'll do the same to the extent it makes the right -- it's the right economic decision for GATX, we'll scrap some cars out, more than an ordinary course and we're hopeful that the industry does the same.

And Bob, within that 409,000 or just over 400,000 cars in storage, isn't there a certain population that shouldn't really be affecting the lease rate dynamic? Because I mean, there might be 40,000 or 50,000 or 60,000 frac sand cars that are brand new, but the headwinds are very well documented on those, and they shouldn't be affecting the rest of the fleet. And I would imagine there's a good number of outdated tank cars in that fleet that won't come back into service regardless of any type of market dynamic. I mean is there any way to gauge what the real relevant number of cars and storage is?

Well, I would agree with you, and I would say that's why I didn't say the number needs to go to zero from 25%. And if it goes to that 12% to 15% range, I think you'll see some real improvement in lease rates. There is some baseload of cars that's always going to fall into that category because of the way the calculation is done, first of all, it's cars that have not had loaded move in the last 60 days. And second of all, yes, there is some portion of that fleet that's just obsolete. It's not going to come back to work and the owners of those cars haven't come to the conclusion yet or face their day of reckoning that those cars are not going to come back, and they're not scrapping them out. So they stay in the idle count. Hopefully, with scrap rates moving up, some of that equation changes.

And Matt, if you're looking for a leading indicator, as Bob pointed out, it's really hard to call the right number on those idle cars in storage. A thing you can take a look at is the length of time to get a new car, that is still pretty short. And when that starts to lengthen that will be your indicator that for more and more of those car types, that ready alternative is not available out of anyone's fleet and that's when you'll start to see some more pronounced improvement in the lease rate.

And Bob mentioned that the order number was very low in Q4. Do you guys have any kind of a theory on that whether some of it might have been affected by all the political and pandemic uncertainty, and we may actually see opportunistic buying because pricing is still pretty low by some major assorting including your sales…

I would say, I don't think there is any political element to it. I think there's a realization that there's a lot of excess capacity in the marketplace today that some investments that people have made over the course of the last few years have not turned out the way they anticipated, which gives people pause on ordering. So I think it's more market elements that drove that number down to where it is, and we certainly were not disappointed to see the order number down where it's at.

Other people were. Thanks so much, appreciate it.

Sure. Yes, I got to take the long view, Matt, right?

That’s right.

And we'll move on to our next question, and that is from Bascome Majors with Susquehanna.

I wanted to go back to scrapping given the incremental focus on that with rates at multiyear as high, at least, for scrap steel. Do you guys have a good sense in your supply demand models of what North American railcar scrapping capacity could be if it were running full tilt? And any sense of however you measure it where we might be running relative to that?

Yes, I can't give you a number specifically in terms of -- it's probably up in the 25,000, 30,000 car range somewhere in that category. But you raised a very good point, which is just because scrap rates moved up sharply here in the last couple of months doesn't mean everybody can rush to the door and scrap cars. It takes time. They have to be staged. Oftentimes, you're cleaned, shipped to the scrappers and they have to have the capacity to deal with it. They don't get to ramp up immediately to handle that. So it will take some time for that to work its way through the system.

And perhaps the other side of high steel prices and with all the focus on scrapping and the supply response. I mean, historically, high steel prices have led to high railcar prices and by definition or higher lease rates on existing railcars. And I realize you kind of maybe tangentially addressed that earlier with the fact that lead times are still quite low at manufacturers. But are you feeling any inflation in steel prices helping you in your ability to command better lease rates or is it really just an oversupply issue and the rest of this is somewhat circular with that?

Well, there is certainly a correlation there, Bascome, but I would say we're in the very early stage of that right now. But if scrap rates continue to be as high as they are, steel prices in general continue to be high or move higher, yes, it will work its way into car costs for sure and that has to be recovered through lease rate.

Last one for me. Any thoughts on any more than normal rebalancing of the North American rail portfolio via the acquisitions or dispositions this year? Thank you.

Are you talking about the balance between tank and freight?

Either between that or even within maybe some more narrow categorizations that you guys use?

Well, there are definitely some categories of car types that we're most attracted to right now. For obvious reasons, I won't divulge what those are sitting here today on a broad call like this. But there are definitely pockets of car types that we are very attracted to, where we think there's excellent investment opportunities. And we're well positioned, very well positioned to take advantage of those, and we'll do so. But in terms of a significant change in the portfolio composition, I wouldn't look for anything on that magnitude.

And we will move on to our next question, and that is from Justin Bergner with G. Research.

I wanted to start off on the issue of your fleet size and composition in North America. You referred to your fleet plan beginning the call, it seems like the dispositions that you're anticipating could semi materially reduce the size of your North American fleet. Are you committed to keeping your North American fleet the same size or if market conditions are right for dispositions, would you consider allowing it to size down somewhat materially?

Well, having scale in the business matters. So we do pay attention to that. But in reality, we're trying to generate the best risk adjusted return we can off the portfolio, not have the most cars. I think others in the industry who have pursued that strategy have probably regretted it. So we are being, as we always will be, extremely selective about what we're buying and selling.So keep in mind, even if for example we scrapped or sold 3,000, 4,000, 5,000 cars in 2021, under our committed supply agreements we're taking delivery of 3,000 cars. And we're always in the secondary market buying cars. So the net fleet reduction would not be that substantial.

With respect to the scale issues, is it assumed that you'll lose the maintenance opportunity when you sell a car or is there the opportunity to maintain third party maintenance?

We, at this point, are not pursuing third-party maintenance. We prefer, for obvious reasons, to have our capacity available to maintain our cars.

With respect to the lease rates, it came at me a bit quick. Did you say lease rates were up sequentially mid single digit in the fourth quarter or was it low single-digit versus the third quarter?

Well, around 4%, 5%.

And then my last question relates to the direct investment opportunity. This $120 million outlay, was this actually purchasing engines from or purchasing leases from the JV and should we expect additional outlays of this size in the coming quarters or years?

So this type of investment, as alluded to in the press release and in Brian's opening comments, is attractive investment that this is the right time in the market and we'll certainly look for additional opportunities to pursue that type of investment with Rolls-Royce, the Rolls-Royce JV as the manager of that investment.

But were the cars actually sold from the JV or are you picking up sort of leases in the external market, or I don’t know if you're at your liberty to say it?

Yes, it's really a question of looking at both of those avenues.

[Operator Instructions] We'll move on to our next question, and that is from Steve O'Hara with Sidoti Capital.

Could you talk about maybe the multiple on the Trifleet acquisition and then what types of returns are typically seen in that market, and then maybe how that compares to kind a -- I'm not as familiar with that market, but I mean, maybe you can compare it to the kind of high touch, high knowledge base needed in the railcar market versus other kind of pure cost of capital markets?

We don't look at EBITDA multiples, especially for leasing businesses. We utilize the discount cash flow methodology to evaluate the investment opportunities. When we apply that methodology and assumptions, Trifleet acquisition generates an attractive long term returns for GATX shareholders.And then if you look at how do we compare those returns and just, let's say, compared to Rail Europe, the lease rate factors are definitely higher than our European railcar leasing business. But when we look at the risk adjusted basis, I think we'll need some more time to have first hand experience before I answer that question. But overall, our return projections suggest that returns to be comparable or slightly better than railcar leasing business in Europe. And then I think the question that you asked about what gets the return to a full service component. Trifleet does not provide directly maintenance services but it does provide services in the form of technical advice. So they do that on maintenance, repairs, they do that on asset modifications and then they also look into technical specification for new orders. So there's a highly complex fleet management that required because these 10 containers are located all around the world. There are also local as well as global regulations. So Trifleet definitely helps with compliance aspect as well. So while it's not a full service lease product, definitely technical capabilities and customer service creates a role in this business model. And then finally, lower cost of capital definitely helps, which we think will bring to the picture and accelerate this growth.

And just moving on to -- going back to the RRPF or the engine direct investment. Can you just talk about the makeup of the engines? I know the RRPF portfolio, I think, is kind of heavily weighted to wide body passenger aircraft. And I mean, can you talk about maybe is there a different tech in terms of looking at aircraft types and passenger versus cargo, things like that within the direct investment?

Yes. So all the engines that we invested in are part of the Trent XWB Family, which power various configurations of the Airbus A350. All the engines are relatively new and they're on long term leases.

And then can you just remind me, does the RRPF report kind of real time, or is there a delay in a quarter or something like that like some JVs?

So the RRPF JV reports on a real-time basis. But just to clarify, this investment that you just asked about is outside of the JV, but it will show up in the same segment in the portfolio management segment.

[Operator Instructions] And at this time, there are no further questions. So I'll turn the conference back over to Shari Hellerman for any closing comments.

I'd like to thank everyone for their participation on the call today. Please reach out to me with any follow up questions. Thank you.

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