Good day, ladies, and gentlemen, and welcome to the GATX 2022 First Quarter Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Shari Hellerman, Director of Investor Relations. Please go ahead.

Thank you, Kit (ph). Good morning, everyone. And thank you for joining GATX's 2022 first quarter earnings call. I'm joined today by Brian Kenney, President and CEO, Tom Ellman, Executive Vice President and CFO, and Bob Lyons, Executive Vice President and President of Rail North America. We begin our call this morning with an overview of our first quarter results, followed by prepared remarks by Brian and Bob. Afterwards, we'll open the call up for questions. Before we begin, please note that some of the information you'll hear during our discussion today will consists 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 earnings release. 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. Today, GATX reported 2022 first-quarter net income of $75.8 million or $2.10 per diluted share. This compares to 2021, first quarter net income of $36.5 million or a $1.02 per diluted share. 2022 first quarter results include a net negative impact of $11.5 million or $0.32 per diluted share, which represents GATX's share of a net impairment charge at the Rolls-Royce & Partners Finance affiliates associated with aircraft spare engines in Russia. Also included in the quarter was a net positive impact of $3 million or $0.08 per diluted share related to an enacted tax rate reduction in Austria. These items are detailed on Page 10 of our earnings release. Our first quarter results reflect strong demand for rail cars across our global rail businesses. At Rail North America, fleet utilization remained high at 99.3% and our renewal success rate was 80%. We have…

Thanks, Shari. As a lot of know, last December I announced my retirement as the CEO of GATX after 17 years. And that's effective at our 2022 annual shareholders meeting. And as Shari said, that's in two days. So that makes this my 91st and last earnings call. And I do want to say it's been interesting and challenging and honestly, it's been fun to work with all of GATX’s shareholders and analysts over the years, and I do hope you feel as though I was honest and transparent in my communications with you. It's been even more of a pleasure to work with the extraordinary employees of GATX over the last 26 years. They are without a doubt the best team in the industry, and I want to say they're led by an equally strong senior leadership team in Tom Ellman, Deb Golden, Kim Nero, Gokce Tezel, and Paul Titterton. And as the head of that team, the new CEO of GATX, Bob Lyons. Bob and I have worked together at GATX for over 25 years and I can tell you he's more than ready for this job. So, without further delay, let me hand it over to the incoming, CEO. Bob?

Thank you, Brian. Good morning, everyone. And I'd be remiss if I didn't at least take a moment and thank Brian for his leadership during the past 17 years and for his service to GATX for 25 plus years. As Brian noted, this is his 91st and final earnings conference call at GATX. And during that time, he set a very high bar for honesty and direct answers, and I think many of you know that, appreciate it. That carried over in the way he led this company with a clear and direct strategic vision all centered around disciplined capital deployment. There were many of us here at GATX, who took those lessons to heart, we're eager to carry them forward. Thank you, Brian. During today's Q&A, we'll likely get a number of questions regarding the impact that the war on Ukraine is having on our various businesses. And rather than try to address each one of those as they came, I thought it'd be helpful to give you a summary upfront. So, bear with me while I do that. To start, our thoughts and prayers go out to all of the -- all of those -- the millions of people who've been impacted by the war. As we consider the impact on our business, our thought process is pretty simple. This is first and foremost, a terrible humanitarian crisis. To try and spin a positive out of this is not the way we think at GATX. The impacts on our each -- on each of our businesses vary, but our approach is the same. We stand by our commitments; we'll work constructively with all of our constituents. We put our employee safety and well-being first and we'll navigate this turmoil the same way we have a number of crises…

Thank you. [Operator Instructions]. We'll take our first question from Justin Long with Stevens, please go ahead.

Thanks, and good morning. And Brian congrats again, it's been great working with you. Last quarter, you provided some specific line item guidance by segment that support your 2022 outlook. I know the EPS range didn't change, but were there any of those underlying assumptions that moved materially, or would you say the trends so far this year are tracking relatively aligned -- in line across all the different businesses?

Hey Justin, this is Tom. For the first quarter, everything was very much in line with our expectations for each of the segments. We expected to see a continuing strengthening in the Rail North American market. And indeed, we've seen that. Similarly, in both Europe and India, those markets have been strong, and they've continued to be so. We continue to face a lot of uncertainty with the Rolls-Royce JV as global air travel, which is so dependent on the global recovery from the pandemic continues. And then you have the additional challenges of predicting how the Russia Ukraine conflict will impact air travel. However, for the first quarter, that also was in line with our expectations. So, as you go segment by segment, there is really nothing that changed materially for our full-year expectations, which is why we've made no change to full-year guidance.

Okay. That's helpful to clarify. And as we think about the elevated level of North American remarketing in the first quarter and the implied drop-off in remarketing over the rest of the year, does that in any way reflect an outlook for softer demand in the secondary market or is this purely a function of timing around what you had available to sell in the first quarter and the level of demand you saw?

Justin, it's Bob. The secondary market remains incredibly strong and we expect to continue to see that through the balance of the year. And as we indicated coming into the year, we thought the majority of the remarketing income would occur in the first half of the year solely due to the schedule of what we had available on the market, and that was reflected in the first quarter. So even on the smaller sales and packages we have in the marketplace, we're continuing to see an ample number of buyers, a very good demand for the underlying assets. So that will continue -- assuming there's no capital market disruption, our expectation is that will continue through the balance of the year.

Okay. And I guess last quick one, you've referenced a sequential improvement in absolute lease rates and an acceleration there. Is there a way you could quantify that?

Sure. I think you recall last quarter, Justin, in Q4 versus Q3 2021 on a total basis, we were in the high single-digit range in terms of sequential lease rate increase. This quarter, it's in the mid-to-high teens with the freight car side of the business seeing the highest demand. So, a little bit higher on freight carriers, a little bit lower than that on tank. But in the mid-to-high teens, Q4 to Q1 of 2022. So very good upward trend.

Great to hear. I'll leave it at that. I appreciate the time.

We'll take our next question from Bascome Majors with Susquehanna, please go ahead.

Yeah, thanks for taking my questions. Just to follow-up on that last piece. Can you talk about where you are versus the long term trend line on some of your major car types just -- if that is inflecting in any way, in the way you've spoken about in the past, that would be helpful. Thanks.

Sure. Well, it definitely varies across car types. Even though we've seen the biggest uptick in rates in freight over the course of the last few quarters I would say in general we're still seeing some of those rates below the long term, what we would determine and view to be the long-term equilibrium rate. Tanks, there or above. In many cases, particularly for more general service tank cars. The power of the fleet we have is that with over 160 different car types, we can really target the specific categories where we're seeing the best demand and the best dynamics, and we'll continue to do that. So, there are investment opportunities out there. For sure we had very significant investment volume in the first quarter, but it will be very targeted.

Thank you for that. And shifting back to Europe, if I recall about half of that fleet is involved in mineral oil, which is a variety of refined products in crude and maybe 20% in LPG. When you talk to your customers, given the change in potential energy landscape in Europe, where does that create long-term opportunities and risks for the capital you have deployed there?

It's Brian, so I can take that. It's -- there is a whole shift we've made over the last few years to invest more on the freight side and that's a lot to do with the green movement in Europe, and them trying to being carbon neutral by 2050 and favoring those car types. But there are continuing opportunities as you point out in mineral oil and LPG, and even in the petrochemical side where a big part of our fleets, and we're seeing tremendous demand. We've seen tremendous demand for the last two years on that fleet. And there's a number of reasons for that, which we've talked about over the last two years. And as far as additional demand from the war in Ukraine, it's probably having an impact on demand. It's hard to quantify how much since the market has been so strong anyway over the last two years. And again, even if you could identify that demand, as Bob alluded to in his opening, you'd be careful how you respond to it. So, you help your best customers. You avoid short-term opportunities and trying to capitalize on a tragic situation. So really, I'd say what we're trying to do right now is assess how trade flows may be changing. And that's -- that assessment is happening in real time and how sustainable those changes may be of the flows in Europe. And remember, these are 40-year assets and you have to think very long term where you put them. So, I would say, with the changes you're seeing in Europe right now, we're just assessing where this might be going and how sustainable it is.

Thank you for that early comment on a complex situation. Just last one on the buyback. I mean, you've talked about being selective on capital deployment into real assets. I mean, your own stock is also at the higher end of its historic valuation like maybe assets that you invest in. Can you talk about how to balance investment in equipment versus investment in your own stock versus maybe just being opportunistic and saving dry powder for an environment that may be more fruitful for a long-term investment in a year? Thanks

Great. Bascome, just put some numbers around some of it. We still have $128 million remaining on our authorization from the Board as of the end of the quarter. Our capital allocation framework calls for us to prioritize attractive investment opportunities while ensuring a solid investment-grade rating and maintaining access to attractively priced capital. And then we return any excess capital to the shareholders. So, we've done that consistently via the dividend and more recently via stock buyback. We did complete about $9 million of stock repurchase during the quarter. More significant stock repurchase always remains an option if it becomes more challenging to identify investment opportunities that provide an appropriate risk-adjusted return, and we'll continue to have those discussions with our Board of Directors as we do each quarter.

Thank you. We'll take our next question from Matt Elkott with Cowen. Please go ahead.

Good morning. Thank you. And, Brian, congratulations again on the accomplishments that you've had at GATX and upcoming retirement. And, Bob, congratulations on the new role, looking forward to working with you in the new capacity. I was hoping you guys would talk about how you perfect the balance between taken advantage of a very strong secondary market without risking having your core and lease revenues being challenged in the long term, especially as -- I guess if you would have to maintain a similar lease revenue level, you would have to tap into the secondary market or newly manufactured railcars, which are also very elevated. So just wondering how you make those decisions, and if we could expect the activity to subside significantly in the back half of the year based on your guidance?

Sure Matt, it's Bob. To begin with we always look at what we're potentially going to sell in any given year from the standpoint of the overall portfolio and portfolio optimization. So, there are various reasons we target particular cars for sale. They're all quality assets usually on lease to very quality customers. But we look at the value of holding those versus what the value maybe in the secondary market and how they fit in the construct of GATX 's overall portfolio. So, there's no particular target by quarter or anything in that regard. We're looking at what's the best value for the GATX shareholder long term, whether it's to hold those assets continue to release some, own them over -- own and release them over time or is the market willing to pay a price that exceeds what we view as our hold value? So it's -- there's a mathematical element to it as which probably won't surprise you given how we [Indiscernible] how we thank here in terms of return and how we look at the value of assets and then there's a commercial aspect. Our sales force is involved and also looking at the portfolio and making a determination on what the best candidates for sale maybe. So that process won't change based on what's going on in the secondary market.

Got it. And I know you got your EPS guidance unchanged. But given how strong the secondary market has been and the big transaction in the first quarter, do you think there's upside to your original guidance for remarketing income?

Well, I've been doing this a long time as Brian and Tom have as well. And I think if I look back over the course of the last 20 years, there's probably maybe one or two rare instances where GATX read guidance in the first quarter. We typically like to get a much better sense for the fundamentals and the lay of the land as we go through the first half of the year. So, we'll do that assessment here as we go through the second quarter. But I'm very encouraged by the trends we've seen in the first quarter and the performance we posted today.

Got it. That's very helpful. And then I had a quick question on average terms. Can you talk a little bit more about why they've been stubbornly low despite the, I mean, you doubled the percentage improvement in spot lease rates on a quarterly basis in the quarter, but average terms have not really risen that much. I mean, I know we're nowhere near the crude-by-rail era, but average terms rose to above 60 months during that phase.

Yes. And I wouldn't read too much into the average term right now at this point, Matt. That number can get skewed by a few renewals. What I will tell you is we are in very targeted instances, stretching term. We are now at a point in time where in certain car types, the market lease rates are at a level that we think it makes sense to lock in long-term and we've been successful in doing that. But that one number that's provided can get a little bit skewed by a small number of transactions.

Okay. So, there are opportunities to -- we should expect opportunities to increase the term of leases to take advantage of the current improving lease rate environment?

Yes. And we do that analysis literally on a weekly basis. So we're making new termination in various car types of where we think we should be on the term spectrum and over the course of the last three, really six months, we've seen more and more instances where it makes sense to go out longer and we've been successful in doing that.

And just one last question, Bob. I was hoping you guys would talk a bit on -- remind us of your exposure to the different types of rail traffic. Because rail traffic as a whole is down still. But coal, chemicals, and things like stone, sand, and gravel are very strong. While most other groups are -- including intermodal, are also stubbornly weak so far. So, what does the current rail traffic outlook mean for you from the perspective of your fleet?

Matt, the real key as you know from watching this along is that intersection of that supply and demand. And if you look at the idle cars in storage, it continues to come down. So, at a macro level, that's why you're seeing the improvement that Bob has been talking about in terms of lease rates. If you go commodity by commodity, you're really are going to see the same thing for most commodities. The exception continues to be some of the energy markets where there's still some excess supply with our competitors. As you look at our utilization, we're fully utilized. But that's why commodity by commodity, you have to look at that intersection of the two rather than just the loadings in isolation. And if you look historically, you'll see that what really drives the cycle is that supply side is much more than the demand side.

That makes sense and much of the rail weakness is inter-modal, which is almost half the rail traffic and I believe you guys, your inter-modal exposure is fairly limited; is that correct?

Yes, Matt, we have a little over 3,000 cars.

Got it. Thank you, Shari. Thanks, Tom. thanks, Bob. Thanks, Brian. Appreciate it.

Thank you.

We'll take our next question from Allison Poliniak with Wells Fargo. Please go ahead.

Hey, guys. Good morning, and congrats, Brian, as well in your next phase. I just wanted to take that last question a little further. I know one thing, I think you guys had just mentioned, supply certainly being important, the rail velocity obviously being challenged as well. How -- what is your view on that at this point? Should we see a little volatility as that velocity hopefully improves over time with some of that imbalance kind of shifting again? Just any thoughts there?

Sure, Allison, and I think for sure you couldn't see some of that volatility definitely in times a low velocity like this. Historically, you might have thought people -- customers might push to solve that with more railcars, but we're seeing less of that these days. And actually, given the situation in the marketplace, you've seen some customers looking for some alternatives off the rail which could come back and would likely come back if there was more fluidity in the market.

Great, that's helpful. And then I just want to touch on maintenance. I think, Bob and you had mentioned, you felt okay with the component side of it, was there any we've been hearing a lot within the manufacturing and so forth about Omicron disruptions in terms of operations. Just any volatility there that maybe would smooth out for you for the year. Are you have to catch up on in terms the maintenance on that side?

I think from a first quarter perspective, our net maintenance numbers came in right in line with what we had anticipated, maybe even a little bit below. But yes, we have seen even in our own network, we did see a few more challenges with regards to COVID, work outages during the first quarter, and nothing that disrupted overall operations. But we're certainly hearing that whether it's from the Class 1 railroads or some of the third-party maintenance providers. So, it's an issue for sure, but one we've certainly been able to navigate. And the fact that with our tank and specialty freight cars, we do the vast majority of over 90% of that work in-house these days, we have much better control over that and are not as dependent on any other third-party.

Great. Thank you. I'll pass it on.

We'll take our next question from Marla Backer with Sidoti. Please go ahead.

Thank you. So given the current situation, can you remind us of how you see your fleet competitively positioned after spending $1 billion to expand it per annum over the past couple of years. How do you see your fleet in terms of size, average age, and diversification relative to what's available right now?

Well, I continue -- I have always felt and continue to believe we have the best fleets in North America. It's one that's highly diversified, not skewed by any one particular car type or commodity, spread quite heavily across a very high-quality customer base on long-term lease, and that fleet has been built over decades. It's not just one where investment over the course of the last two or three years, dramatically alters how we think about the fleet or the structure of the fleet. This is a fleet you can't replicate. You can't flip the switch and get the diversification that we have in our fleet today. so, from an average age standpoint, you're not going to see that change dramatically. We tend to -- we -- every year we scrap some cars out, we're adding new cars to the fleet. And given the scale, it's hard to -- the scale of our fleet, it's hard to move that number too dramatically, but there's no pockets in this market that I look at and feel like we have gaps nor are we over-weighted. So, I think our fleet is in an outstanding position.

Okay. Thank you. And then in your prepared remarks, when you were commenting on the geopolitical situation, you specifically mentioned some obvious markets, Poland, for instance. Are you seeing any kind of change as this war persists? Are you seeing any kind of widening radius regarding changing patterns as a result of what's going on?

I can take that. It's Brian. Yes, we are, but we just don't know how permanent and sustainable they are. So, for instance -- and some of that started before the war with embargoes on, gas imports from Russia especially through Belarus and other things. So, we're seeing changing flows, but we don't know how long that will last. As I said, we're in real-time assessment as we speak right now. I will say overall demand is very strong in Europe for all our commodities and all our cars.

Okay. Thanks very much.

We'll take our next question from Justin Bergner with Gabelli Funds. Please go ahead.

Good morning and congratulations, Brian on a great career at GATX and welcome to the CEO role, Bob.

Thank you.

My first question just relates to the remarketing gains on sale. What would have to happen at this point for you to sell meaningfully more cars than you envisioned, when you trip delivered your annual guidance three months ago.

Well I think that -- we're always out testing the market, so if we saw any developments among the buyer universe there where the level of aggressive purchasing ratcheted up materially from where it's at today, we went into the year expecting it. They have a pretty good environment to sell. It has been. But if it ratcheted up dramatically from here, we would reassess if there were other cars in our portfolio that made sense to sell.

Okay, great. That's helpful. Secondly, you were commenting in the prepared remarks about the spot market dynamics. Maybe if you could just provide a little bit more color there. Were you speaking mainly about the inability to get additional cars to provide additional leases on sort of a spot basis, or was it another set of drivers you were trying to speak to?

Sure, yes. Thank you. Jonathan, it's not so much the supply side we can get access to cars for sure. It's the cost of the car and the related lease rate that we would require to buy the car at today's price and put it out on lease. And so, our customers are very sophisticated. They've been in their businesses for a long time, they run their fleets quite efficiently. And so, they are also looking at, okay, if it's a car prices up 30% or 40% versus it was a year ago, I have to pay that relevant lease rate for GATX to make that investment and make it economical. And maybe I'll hold off. And that's why we've seen such high demand for the installed base of rail cars. One of the reasons -- the alternative to the installed base is buying new. And those costs are pretty high right now. So just the volume there our stock market opportunities, but the volume of those is dialed back a little bit.

Okay. Excellent. And then lastly, outside of rail cars, are you seeing any new additional investment opportunities, whether it's direct engines or for Trifleet or other areas or is it pretty expensive still across most asset classes?

Yeah. Well, I'd say in Trifleet gave -- they've seen similar trends with regards to new asset prices. Cost for tank containers are up materially from where they were a year or 18 months ago. But we're -- we had a good quarter there from the standpoint of investment. We're continuing to see very good demand there so very encouraged by the early returns from our ownership of that business. But again, we have to remain very, very focused on making sure we're getting an attractive return and we're not taking undue residual risk with the heightened prices. And as far as the aircraft engine side, yes, I would say we did the direct engines at the beginning of last year. We continue to look for some opportunities there as well. Very much like the asset class long term but also have to be mindful of how much of that volume we do in this current environment, and so we are absolutely continuing to look.

Great. Thank you. And best of luck on the CEO role.

Thank you, Justin. Appreciate it.

[Operation Instruction] We'll take our next question from Justin Long with Stephens.

Thanks for taking the follow-up. At the beginning of the year, you talked about the LPI being in a range of 5% to 15%, but just reflecting back on the comment earlier about the acceleration you're seeing in lease rates to start the year. Is that still the right range for the LPI?

Yes. Where we sit right now, Justin, we're still thinking in that plus 5% to plus 15% range. We were right in there in the first quarter. And as Tom mentioned in his comments earlier, a lot of the trends we saw in the first quarter, we fortunately anticipated and already had baked into some of that -- some of our thinking around that guidance. So, we'll update you on that in the second quarter but as of right now, that's still an appropriate range.

Okay. And last one from me, obviously there's been a lot that's changed from a macro perspective to start the year including the conflict in Russia and Ukraine. When you just take a step back, could you update us on your thoughts around the multi-year trajectory for the railcar leasing Markets in both North America and Europe, and how you're thinking about those two cycles longer-term?

Sure. Well, let's start in Europe because I think consistent with what we've seen over the course of the last few years, the dynamics there remain quite attractive. We've been able to generate relative to North America consistently, more attractive return on investment in Europe opportunities than in North America. We think that will continue to be the case. We think as well that the continued push in Europe and the green initiative in terms of moving more product from truck-to-rail with a very cohesive effort in Europe compared to here in North America will be beneficial to us into the cycle in Europe longer-term. So, I'm very encouraged and very excited about what we'll be able to do with the outstanding platform we already have in place there. And in North America, a little bit more difficult to predict in terms of what the cycle holds. But what's playing out right now, as you know, it was a very long run of negative LPI, negative lease rate environment over the course of a six- or seven-year period. It is turned and we're going to be aggressively trying to make sure that we take full advantage of that opportunity that we're working with our customers to stretch term where appropriate. And as far as the new order cycle and new spot opportunities, we can analyze those real term -- real time, but the trends are positive.

Okay. Thanks again for the time.

Yes. Thank you.

At this time, we have no one else in the queue. I would like to turn the conference back to Shari Hellerman for any additional or closing remarks.

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

Ladies and gentlemen. This concludes today's conference. We appreciate your participation. You may now disconnect.