Hello, and welcome to the GATX 2023 Fourth Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I will now turn the conference over to Shari Hellerman, Head of Investor Relations. Please go ahead.

Thank you, Sarah. Good morning, and thank you for joining GATX's fourth quarter and 2023 year-end earnings conference call. I'm joined today by Bob Lyons, President and Chief Executive Officer; Tom Ellman, Executive Vice President and Chief Financial Officer, and Paul Titterton, Executive Vice President and President of Rail North America. As a reminder, 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 earnings release and those discussed in GATX's Form 10-K for 2022 and in our other filings for the SEC. 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 2023 fourth quarter and full year results. And then I'll turn it over to Bob for additional commentary on 2023, as well as our outlook for 2024. After that, we'll open the call up for questions. Earlier today, GATX reported 2023 fourth quarter net income of $66 million or $1.81 per diluted share. This compares to 2022 fourth quarter net income of $48.4 million or $1.36 per diluted share. The 2023 fourth quarter results include a net positive impact from tax adjustments and other items of $0.07 per diluted share. The 2022 fourth quarter results include a net negative impact from tax adjustments and other items of $0.18 per diluted share. For the full year 2023, GATX reported net income of $259.2 million or $7.12 per diluted share. This compares to net income of $155.9 million or $4.35 per diluted share in 2022. The 2023 full year results include a net positive impact from tax adjustments and other items of $0.05 per diluted share. The 2022 full year results include a net negative impact from tax adjustments and other items of $1.72 per diluted share. These items are detailed in the supplemental information section of our earnings release. In 2023, total investment volume was over $1.6 billion as we increased investment in Rail North America, Rail International, and our wholly-owned engine portfolio. In the coming year, leases for approximately 19,400 tank and freight cars and approximately 1,900 boxcars in North America are scheduled to be renewed. These renewal levels are similar to those we've had in recent years. Lastly, as noted in the release, we expect 2024 earnings to be in the range of $7.30 to $7.70 per diluted share. With that, I will now turn the call over to Bob.

Thank you, Shari, and thank you all for joining the call today. For those of you that follow us closely, we are generally very brief in our opening remarks. But given that we're at year end, we thought it would be helpful to spend a little bit more time. So I appreciate you bearing with me as we go through some of the details. I'm going to provide some brief comments on 2023 performance versus the outlook we had coming into the year, and then I'll add some additional color to the 2024 guidance that was included in today's press release. But before diving in, first, I want to thank our employees for their focus and their effort this past year. In particular, our employees who work in our maintenance network and who work in our shops, both in North America and Europe. Once again, they did an outstanding job in the face of very high demand for shop services. And I'm very pleased that our safety record in the shops in 2023 was excellent. Our shop management and the employees continue to strive for efficiency while focusing on safety, and that's what matters most. So a thank you to all of our employees on the shop floor who really make this company tick. Looking more broadly at our business segment performances, I'm pleased with the contribution across the board, whether it was Rail North America, Rail Europe, India, our engine leasing activities, or Trifleet, everyone performed at a very high level this past year. And I fully anticipate continuing this momentum through 2024. Our broad goals at GATX remain unchanged and they're very straightforward, operate safely, grow our global businesses in a disciplined manner, be a good corporate citizen, be good stewards of our shareholders' capital, and generate an…

Thank you. [Operator Instructions] Your first question comes from the line of Justin Long with Stephens. Your line is open.

Thanks, and good morning.

Good morning.

Maybe to start, I was wondering if you could share the absolute lease rate trend sequentially that you saw in the fourth quarter. And when we think about the LPI guidance to be in that 30% range. What does that assume for how lease rates will trend over the course of the year on a sequential basis?

Sure. I'll take that. This is Paul Titterton. Thanks for the question. And what I would say broadly to start is, lease rate performance in North America has been quite strong for quite some time right now. We are seeing an absolute sense, a relatively flat environment versus the prior quarter, but as indicated by the LPI base, relative to expiring rates, we are expecting continued positive performance. And so overall, we would say, in an absolute sense, the leasing market for most car types in North America remains quite strong.

Got it. Thanks. And maybe one on the RRPF contribution in the fourth quarter. There was a pretty significant step-up sequentially. I was wondering if you could break out that fourth quarter contribution between remarketing and just the core operating results. And maybe you could talk about those two buckets progressing in 2024 in terms of what you're baking into the guidance there.

Yeah. Hi, Justin. This is Tom. So what I would tell you is that for the fourth quarter, it was about 60% operating income, about 40% remarketing. As you know, having followed us for a long time, it's really difficult to predict exactly how that remarketing piece will move over the course of any given year. But something in the range that we saw for the full year, which was about 55% operating income and 45% remarketing, wouldn't be unreasonable.

Okay. Understood. I'll leave it there. Thanks for the time, and congrats on the results.

Thank you.

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

Good morning. Thank you. I was wondering, if you can talk about the additions to the fleet in 2024. Do you see the best opportunities in the secondary market or in the new car market?

So, this is Paul, I'll take that again. And what I would say right now is, overall, we've seen higher quality investment opportunities in a variety of areas within Rail North America. There is certainly have been opportunities in secondary markets and syndications that we've taken advantage of, but I will also say, in the primary market, in our originations of new car leases, we're also seeing pretty attractive opportunities. So really from an investment standpoint in North America, the -- there are quality opportunities both in primary originations and secondary markets and syndications

Got it. Good to know. And then one question on India. You guys were basically started this market for privately held freight car lessors in India. Can you give us an update on the competitive landscape right now? Are you still the biggest operator there? Do you see interest from potential new entrants as the growth prospects proves to be strong and sustainable?

Sure, Matt. It's Bob. We are far and away the largest private owner of railcars in India. There are some other competitors that periodically appear, but they don't have anything of size in terms of fleet or from what we see a significant foothold in the marketplace. The one area we would compete, so I don't want to give you the impression that it's just unfettered prospects because there is -- our customers have alternatives and one of those would be bank financing or owning the assets outright themselves. These are big, formidable, large entities so they can buy as well just like here in North America. But from a leasing standpoint, we are far and away the largest, and I think generally, recognized as the leader and certainly recognized by the Indian Railway as the most advanced in the market.

Okay. So it's more of a question of the how much traction the business model you guys introduced into the market gets versus other ways of acquiring assets. That's good to know. So -- and I think you mentioned the -- just a quick clarification, you mentioned over 10,000 cars at the end of 2024, you think your Indian fleet will be?

Yes. If we meet our investment targets for this year, that would be the expectation.

What about the overall fleet globally in Europe and in the U.S., do you expect that to grow as well at the end of '24?

India, we would expect for sure because it continues to be such a growing market, and in fact, in certain car types, the Indian Railway has pretty sizable orders and to expand its own fleet. The issue really in India is not so much as the growth there, it's the ability to get the wagons and to continue to diversify into different car types and different customers. The growth pool, based on the prospects today, is there. The European market is a little bit more, I would say, akin to North America in terms of maturity. So we wouldn't anticipate any -- and are certainly not banking on any significant growth in the overall fleet in Europe.

Got it. Thank you very much, Bob. Thanks, everyone.

Your next question comes from the line of Allison Poliniak with Wells Fargo. Your line is open.

Hi. Good morning.

Good morning.

Maybe starting bigger picture, utilization -- this is focused on Rail North America, utilization is really high. The rails improving service, really focused on trying to capture growth. Would just love to get your perspective. I guess, one, what's -- do you think the market -- the equipment market's investing enough at this point, just given where utilization is for that potential inflection? And then two, I guess, how would -- how is GATX sort of managing that potential dynamic? Just any thoughts there. Thanks.

Sure. So it's a good question, Allison. This is Paul. I'll take that. So what I would say right now is investment continues at a kind of slightly above replacement pace in North America overall. So with core carloads, as we measure them, maybe low-single-digit percentage year-over-year. That's an investment pace that should be adequate to keep pace with demand in the context of somewhat improving service. And I will say, indeed, we hear from our customers that service is improving and the metrics of dwell time and velocity that are reported would bear that out. So with modest growth, modest service improvements and a modest level of investment, that speaks to a pretty balanced market. One of the nice things about the market that we see right now, frankly, is unlike past tight railcar markets, we haven't seen that enormous build wave. If we look back at the ethanol boom or the crude boom, we saw build years where the industry would produce upwards of 80,000 cars and then there would be a huge hangover after that excess production. This tight market, we're seeing industry-wide production in North America top out in the 40s. And so that speaks to, I think, a much more balanced, much more disciplined market, which should be good for all participants.

Got it. Thank you. That's helpful. And then on other revenue in North America -- Rail North America. Bob, I know you mentioned sort of the speed to get sort of those cards back on lease and so forth. Should we expect that to be elevated again in '24? Like, how should we be thinking that? Sorry if I missed any commentary there.

Are you speaking specifically to the other revenue line item?

Yeah. The other revenue, sorry. Yeah.

Yeah. We're not anticipating any significant growth, any abnormal growth in that line item in 2024. It should grow right along in line with lease revenue.

Yeah. And Allison, just to put some perspective on that, really what you need to do is look at that in conjunction with the maintenance line. So really, I'd guide you to Bob's comments on net maintenance being somewhere between flat and up $10 million.

Yeah. The biggest component of other revenue is essentially repairs build back to the customer.

Got it. Thank you.

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

Thanks for taking my questions. Going back to your thoughts on the North American secondary market and a very high level of P&L from that historically, but a little down from where you were last week. Can you talk a little bit, maybe qualitatively, about the depth of the market, the buyers, and just anecdotally how that feels today versus how it's felt over the last couple of years? And then maybe a little more precisely, just any thoughts on how that profit assumption correlates to your plan to sell fewer railcars or is it really just the gains on individual units coming down a little bit from where they were in the last few quarters? Thank you.

Sure. So this is Paul. I'll take that. And yeah, I mean, bottom line for the secondary market is it has been robust and it continues to be robust. We continue to see a large number of participants on the buy side, a lot of depth. And whenever we see packages, whether it's our own packages or other packages in the market, the response has continued to be robust, and we anticipate that robustness continuing. To the second part of your question, really for us, we're trying to make good portfolio decisions. And so ultimately, we're really looking at the economics of the transaction more than we are the accounting gains. We're really trying to optimize the portfolio either from a credit or asset or market or term standpoint. And really, we're using those -- the sales in the secondary markets to balance out that portfolio and ensure we've got a diverse and attractive portfolio along all of the dimensions that I just mentioned.

Yeah, Bascome. I'd add, we did come into this year, I think, into 2023, that is, feeling within a rising interest rate environment that the secondary market condition was probably more uncertain. But it remained really strong throughout the entire year, continues to be strong. And I think it speaks to the quality of the underlying asset. Railcars have proven over time to be great stores of value and very good assets to hold long-term. So even with interest rates up, where we thought, well, maybe the buyer universe would shrink a little bit, still there, still great depth, still a lot of activity.

I appreciate the responses on both of those. I believe you mentioned that you expected to put a similar amount of capital to work this year from where you sit today as you did last year, which was like $1.6 billion, $1.7 billion, a fairly large number. Can you talk about -- a little more about the opportunities you see? I think it was maybe 60% of that went to North America, 20%, 25% International, and the rest and some of your other businesses. Does your opportunity set in where you see investments this year look a lot different than what we've seen over the last 12 to 18 months?

Yeah. It's not a lot different, Bascome. In fact, it's pretty similar to what we saw this year, whether it would be at, within GATX Engine Leasing, that's within Portfolio Management. We invested about $267 million this past year for 10 engines. We're anticipating being right in that same range. And based on the outlook we have for Rail North America and internationally, those markets should be very similar to where we were last year. Rail North America was north of $970 million. Maybe it's not right on top of that number, but it's certainly in that neighborhood. And then GRE -- our GATX Rail Europe and India were both about, combined, about $400 million. We're looking at about the same again this year.

Yeah. And Bascome, I'll just remind you of Bob's comments of some of the challenges of getting the assets, particularly in India. That's one of the things that causes us to have a little uncertainty on exactly how much we can do.

Lastly on that, do you see any more assets where you could start to build a platform and maybe invest in assets related to what you've done before, but aren't markets you're currently in, or do we expect it to look a lot more like it has looked per your earlier comments?

Well, our focus on long-lived widely used assets with a service component where you need intense asset knowledge to succeed will not change. We see pretty much every M&A opportunity out there remotely related to the leasing world. But you have to pass those four criteria because that's what works for GATX. That's where we generate the best return for our shareholders. We did add Trifleet, the largest -- one of the larger tank container lessors in the world a few years ago to the portfolio. That asset meets all of those criteria. It's a good platform that's scalable, but we continue to integrate that into our operations overall. But we pass on far more than we pursue, and that will not change. That discipline won't change. And with $1.6 billion investment volume this past year and a similar outlook for 2024, there's a lot of opportunity for us right in the markets we're in today.

Thank you for the time.

Yeah.

Your next question comes from the line of Justin Bergner with Gabelli Funds. Your line is open.

Good morning, Bob, Tom, Paul, and Shari.

Good morning.

Good morning.

Good morning.

First question relates to the secondary market. On the one hand, you're indicating the secondary market is strong and pricing is strong. On the other hand, you're seeing a lot of opportunities to put money to work. So can you sort of reconcile those two aspects of the market?

Yeah. I mean, really for us, it comes down to portfolio management. As I said earlier, we're using the secondary market to optimize our portfolio. And at the same time, the fact that we're able to generate attractive, both economic and book gains in the secondary market, doesn't change the fact that there is also high-quality investment available to us on the buy side. And so really for us, every decision we make, whether it's to sell into the secondary market or to originate in the primary market or buy in the secondary market, we're making that on the basis of deploying and harvesting our shareholders' capital in the optimal way possible. And so in the current market right now, on the sell side, we are certainly seeing lots of attractive opportunities where the market is valuing certain parts of our portfolio on the buy side higher than we value it on the hold side. At the same time, we're seeing tremendous opportunity to put capital to work where there are attractive returns available. So that's really the mindset we have. We're constantly looking at ways to optimally deploy and harvest our shareholder capital on the buy side and the sell side.

Hey, Justin. And also, I would remind you that we have the most diversified fleet in the industry. And something we've talked about before is the car types we're selling or not, the car types we're buying.

Okay. Got it. So is it -- are you buying a very balanced set of car types and selling more specific set of car types or are they both very tailored to specific?

Yeah. I would say, they're both very tailored to specific. And keep in mind, too, when we're in the market on the sell side, we're typically selling in very small lots. We don't sell 2,000 cars at a time or 1,000 cars at a time. It tends to be 50 or 100. And so it's very, very targeted, very specific. And with a fleet our size, we can do that. And with the diversity we have, we can do that. We can really pick and choose. Likewise, on the buy side, we don't have to buy anything. That's always a good position. I always like being in that position. We don't have to buy anything. We don't need anybody's customer base or platform or anything else. What we're looking for is a very targeted asset type. And we're seeing -- we saw some of those opportunities last year. And we think we'll continue to see some of those this year. And I'll let Paul add anything to that he wants.

Yeah. And I will just say, too, I mean, that's really the advantage of having such a liquid secondary market and so many participants within the North American secondary market is you're going to have different participants that have different appetites for different assets. A great example is assets trending towards end-of-life where there may be smaller lessors that specialize in those assets where we may decide we're going to be in harvest mode there and some of those buyers may offer us very attractive pricing. We will then reinvest the proceeds in modern, either new or nearly new assets, that fit our long-term portfolio approach. And that's just one example of the many ways we think about buying and selling.

Got it. Thank you for that. On the Rolls-Royce joint venture, how does the 55% operating income versus 45% remarketing income mix that you saw this -- or in 2023 and expect to see in 2024 compared to longer-term?

Yeah. So Justin, it clearly moves around just because of how much that remarketing piece can change year-to-year, but at least the most recent history, it was similar in 2022.

Yeah. The other thing I would remind folks of is that remarketing activity or asset sales activity on the engine leasing side is very different than remarketing activity at North American Rail, where we're selling lots of different types of assets and a lower starting net book value. Engines are expensive assets. So one or two sales in a given year, three sales, what have you, in a given quarter, has a much bigger impact than kind of the steady drumbeat of sales we do at Rail North America.

Great. Thank you. Just if I could get one more in. Do you expect the maintenance level in 2024 to be above normalized levels, assuming it was also above normalized levels in 2023?

What we expect for Rail North American net maintenance expense in 2024 is either flat to up $10 million is what we have already baked into our guidance for the year, which is a little bit of an elevated level of regulatory compliance. That should pare back in years ahead. But this year, 2024 and likely '25, we're kind of in this range of regulatory activity.

Great. Thank you for taking my questions.

Your next question comes from the line of Brendan McCarthy with Sidoti. Your line is open.

Good morning, everybody, and thanks for taking my questions.

Good morning.

Good morning.

Good morning.

Just wondering, first off, if you can touch on the lower income tax expense and what drove that in the fourth quarter of '23.

Yeah. So one of the things that can be a little challenging is to take out the normalizing items from the effective tax rate. So if you look at where we were in 2022, we were just below 26% if you look at the normalized tax rate, including share of affiliates. We expected to be around the same level in 2023, and indeed we were almost identical. So '22, '23, and our expectations for '23 were all almost exactly the same. We talked about some of the other normalizing events in the past, but in this quarter, there were two items which are worth your attention and can help you explain that difference. During the year, there were a number of states that enacted statutory tax reductions, which hit the impact of reducing our deferred taxes by about $3 million. Also, on an annual basis, we evaluate the realizability of our state net operating losses and the associated valuation losses. This year's analysis resulted in a tax benefit of $2.3 million. So that $5.3 million tax benefit you have to work in and that'll explain the vast majority of your fourth quarter difference.

And the estimate for 2024 incorporates the tax level at a similar -- an effective tax rate, normalized basis, similar to 2023.

Yeah. So we expect it to be another year in that 26% range.

Thank you.

Great. That's helpful. Thank you. And then secondly, I know you mentioned the higher debt level kind of being a function of the investment volume. Just kind of wondering if you could touch on the weighted average rate on your debt and what are your assumptions for the interest rate environment heading into 2024 in general?

Yeah. So in general, what I would tell you is, the environment that we're seeing right now is our general expectation for what we see going forward. Over time, just like we do on the asset side, we really look to take advantage of the cycle. And we had many, many years of strong debt markets. And over the past decade, we took our average debt rate from over 8% -- I'm sorry, over 6% to under 4%. And we'll look to continue to take advantage where we can going forward. But for specifically 2024, I would expect our guidance anticipates similar levels to today.

Got it. Okay. And then kind of switching gears to the Portfolio Management segment. What percentage through the post-COVID global recovery in international air travel, would you say, we're at, at this point, I guess, as of the end of 2023?

So it's let Bob add additional color if he'd like, but my short answer is that we're recovered.

Yeah. Domestic is actually a little bit above where we were pre-pandemic and international was just below.

Okay.

And I would also add, in the depths of the pandemic, on a best-case scenario, you would say that recovery would be in 2025, late 2024. So the air travel has recovered well ahead of that plan.

Okay. And I know you mentioned Portfolio Management segment profit potentially up $5 million to $15 million. What are the assumptions in the wholly owned GEL portfolio? My guess is -- I think there's 29 engines in the portfolio as of end of '23. What are your assumptions for acquisition activity going forward?

Similar to what we did this past year, in 2023, we acquired 10 engines for $267 million. We have forecast a similar investment level and a similar number of engines for 2024.

Got it. Okay. And then one more for me, just looking at the investment volume in Rail North America, I think there were a little over 1,600 cars added, which is a nice uptick from the past two quarters. Just wondering if you can comment on that. And what can we think about looking forward to demand in 2024?

So the investments that we've made in the quarter and for the year include both secondary market acquisitions as well as, of course, our ongoing supply agreement purchases from our multi-year supply agreement. And what I would say is, we are continuing to see additional investment in 2024 in both of those areas.

Okay. That's all from me. Thank you.

Thank you.

There are no further questions at this time. I will turn the call back to Shari Hellerman.

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. We thank you for joining. You may now disconnect your lines.