Gatx Corp (GATX) Q3 2025 Earnings Call Transcript

Thank you for standing by. My name is Greg, and I will be your conference operator today. At this time, I would like to welcome everyone to today's GATX Corporation 2025 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. If you'd like to ask a question during this time, simply press star, followed by the number one on your telephone keypad. Once again, star one. And if you'd like to withdraw your question, simply press star one again. Thank you. I would now like to turn the call over to Sherry Hellerman, Head of Investor Relations. Sherry?

Thank you, Greg. Good morning, and thank you for joining GATX's 2025 third quarter earnings 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 2024 and our other filings for the SEC. GATX assumes no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances. Earlier today, GATX reported 2025 third-quarter net income of $82.2 million or $2.25 per doula This compares to 2024 third quarter net income of $89 million or $2.43 per doula-to-share. The 2025 third quarter results include a net positive impact of $5.3 million or $0.15 per doula-to-share from tax adjustments and other items. The 2024 third quarter results include a net negative impact of $2.5 million or $0.07 cents per dollar-to-share from tax adjustments and other items. Year-to-date 2025, net income was $236.3 million or $6.46 per dollar-to-share. This compares to $207.7 million or $5.68 per dollar-to-share for the same period in 2024. The 2025 year-to-date results include a net positive impact of $5.3 million or $0.15 per doula to share from tax adjustments and other items. The 2024 year-to-date results include a net negative impact of $9.9 million or $0.27 per doula to share from tax adjustments and other items. These items are detailed in the Supplemental Information section of our earnings release. I'll briefly address each of our business segments. After that, we'll open the call up for questions. In North America, demand for our existing fleet remains stable. GATX Rail North America's fleet utilization remained high at 98.9% at quarter end, and our renewal success rate reached 87.1%. Our commercial team continues to successfully increase renewal lease rates while extending lease terms. The renewal rate change of GATX's Lease Price Index was positive 22.8% for the quarter, and the average renewal term was 60 months. While tariff and macro uncertainties have affected customers who use the most economically sensitive car types, demand for the large majority of car types in our fleet is holding up well. An encouraging sign in the North American market is the continued strength of the secondary market. As we offer select packages for sale, we're seeing very strong demand for GATX assets from a diverse and deep buyer pool. We generated over $60 million in remarketing income during the quarter, bringing the year-to-date total to approximately $81 million. And we expect that we'll finish the year with a strong fourth quarter. Regarding the pending acquisition of Wells Fargo's rail operating lease assets, we continue expect closing to occur in the first quarter of 2026 or sooner. Turning to Rail International, GATX Rail Europe's fleet utilization was 93.7 percent at the end of the quarter, reflecting ongoing market challenges in Europe. Despite these conditions, we continue to renew leases for many car types at rates higher than those of expiring leases, demonstrating the market's resilience. In September, we announced an agreement to acquire approximately 6,000 rail cars from DB Cargo, a major European rail freight operator, through a sale-lease-backed transaction. Closing is expected by the end of 2025, subject to customary regulatory approvals. In India, rail freight volume remains robust, and demand for rail cars is very strong despite trade uncertainty. During the quarter, GATX Rail India took delivery of 600 new cars and placed them with customers. Fleet utilization was maintained at 100 percent at quarter end. Engine leasing performed very well this quarter, driven by continued high demand for aircraft spare engines. This demand is manifesting itself in high utilization, attractive lease rates, and opportunities to sell engines at compelling valuations. At the same time, we identified attractive opportunities to increase our direct investment in aircraft spare engines, acquiring seven additional engines for $147.1 million during the quarter. The RFP of affiliates also continued to expand their portfolios, with total investment already exceeding $1 billion year-to-date. Finally, as we noted in the earnings release, we continue to expect 2025 full-year earnings guidance to be in the range of $8.50 to $8.90 per doula's share. This guidance excludes any impact from tax adjustments or other items and also excludes any impact from the Wells Fargo transaction. And those are our prepared remarks.

I'll hand it back to the operator so we can open it up for Q&A. thanks sherry and at this time i would like to remind everyone in order to ask a question press star and the number one on your telephone keypad once again star one and we will pause just a moment to compile the q a roster all right it looks like our first question today comes from the line of ben moore with citigroup ben please go ahead yes hi good morning thanks for taking our question.

To get to your midpoint of your guide, you would need 4Q EPS at $2.39 versus consensus at $2.25. Can you discuss how you plan to close that gap on both revenue and margin drivers, please?

Sure. Good morning, Ben. Thanks for your question. This is Bob. I'll take that one. So, as indicated, you know, the full year, just to kind of take a step back, has largely played out as we anticipated certainly some puts and takes on various line items which is not unusual but the overall results in the overall environment are very consistent with what we thought coming into the year and we would expect that to continue into the fourth quarter as Sherry noted in her opening comments we have a very strong pipeline of ports of assets that we have for sale in the secondary market we're seeing really strong demand so we would expect really solid remarketing income in the fourth quarter um and that will be largely the the biggest driver in

q4 uh relative to q3 great i appreciate that maybe just as a follow-up on the remarketing you mentioned um the uh looking into the next couple of years longer term uh would you still expect sort of elevated remarketing levels at the roughly $100 to $110 million through 2027, maybe kind of driven by inflation from the U.S. administration's policies and also more freight car mix from your Brookfield JV versus the roughly $50 million level that we saw back in the pre-COVID levels?

Yeah, well, it's a bit difficult to predict many years out into the future. But based on everything we're seeing today, there's no reason to believe or no reason for us to feel that the secondary market is going to adjust materially downward. Demand is really strong and very encouraged by just the sheer number of buyers and their appetite for the assets that GATX has on lease. So we see a really positive market and environment for remarketing income in the years ahead. I think also supporting that is what we've talked about frequently over the last couple of years, the supply side thesis that new car supply and capacity, manufacturing capacity in North America is more in line with true underlying demand for new cars. So as investors and current competitors in this market look for ways to grow and to build their fleets, the secondary market becomes a very, very good alternative, and we're seeing Really appreciate the time and insights.

Thank you.

Thanks, Ben. And our next question comes from the line of Bascom Majors with Susquehanna. Bascom, please go ahead.

Thanks for taking our questions here. To the GATX and Wells Fargo deal, you've talked about that being modestly accretive in the first full year. When we go through the pro forma historic financials you filed recently, it's indicating some modest dilution on a look back adjusted for financing and other items. Can you help us square where we get to accretion under your ownership versus this historic look back and where those just wouldn't add up similarly to what you're seeing on a go-forward basis?

So, Bascom, first of all, it's important to know what we issued. So, that 8K is looking at what happened if the transaction for income statement purposes closed in 1-1-2024. And then for balance sheet purposes, closed June 30th, 2025. So obviously, it didn't close either of those dates. The other thing that it does is it takes the actual results of both companies and then kind of puts them together. So two things it does not do is it doesn't make allowances for the fact that the combined SG&A of the two companies is going to be a bigger number than what the SG&A would be for GATX on a consolidated basis. The other thing it ignores is any kind of management fee. And there's a variety of other items just because of the nature of how those statements come together that don't find their way in.

But those are two big things that would would take you from the dilutive numbers that you saw in that those reportings versus the modestly accretive numbers that we've talked about several times yeah and Baskin I would just add to Tom's two key points you know there's no SG&A synergy in there that's an easy one you can pick right off the financial statement that's that was filed with the AK you can see what the SG&A is for Wells Fargo rail and then for the combined entity and there's no benefit given to synergies. There's no management fee. We haven't broken that out yet. When the transaction closes and we provide guidance going forward, we'll give you some more clarity on the management fee, but that's not an immaterial number and that's not reflected in the financial numbers. And then nor is any other type of synergy that GATX may generate from the combined entities. So it's really just a financial roll-up, not a snapshot of the go-forward scenario.

Thank you for that. And to the DB deal in Europe, any thoughts on whether that will be needle-moving in next year from a financial standpoint, or is that really more of a long-term investment in growing the European fleet? Thank you.

Yep, it's Bob again. It's more of a long-term, you know, like from an accretion dilution standpoint, it's not material one way or the other in the year, the first year of ownership. It is a longer-term investment, but one that we're very excited about. To be able to do a transaction like this, it starts out as a net lease, likely will convert over time to full-service leases as those initial leases roll over. Also likely to convert at some level to full-service leases versus the net, as mentioned. And so, you know, the DB, I think, is a very good example of what we're seeing begin to form in Europe. They have a fleet of 70,000 wagons themselves. Like other railroads in Europe, DB is looking for ways to enhance their cash flow. They don't necessarily need to own all of their rolling stock. And so we think there may be opportunities elsewhere across Europe for similar type transactions, and we're certainly out in the marketplace looking for those opportunities as well.

And lastly, you've already commented on the secondary market in North American Rail and really seeing no need or driver for that to change from the favorable situation it's been in for the last couple of years. Can you speak a little bit to the sequential performance in lease rates? Certainly, the LPI is still very positive. She had a slight pick down in utilization in North America. LPI is a little lower than it was in recent quarters. I mean, is there any sequential, just gradual weakening going along? And, you know, any thoughts on just the market here and now versus six, nine, 12 months ago? Thank you.

Sure, Bascom. This is Paul, and I'll be happy to take that one. So, you know, what I would say, overall, despite all the macro uncertainty, the North American rail car market is holding up pretty well. And so, you know, when we look across the fleet, in general, lease rates remain at healthy levels, and that continues to be the case. We've seen sequentially, quarter over quarter, you know, rates across most car types flat to perhaps down very, very slightly. But in general, you know, Bob alluded to the sort of supply-led market thesis that we've had for quite some time that has really proven itself out. And I think that's where this period of macro uncertainty from a least-rate standpoint is really quite different from past periods. If you think about, for example, the lead-up to the Great Recession or the lead-up to the COVID recession, and I'm not comparing necessarily this period to those periods, but those were periods where we started to see macro uncertainty and there was a very large negative market response from a least-rate standpoint. we really don't see that here and again that's really because the market hasn't been overbuilt and so fleets remain fairly highly utilized and so again a little bit of quarter to quarter deterioration but overall across the fleet for the most part rates holding up well and i i'll add to that baston too i think you know paul can elaborate on this but one of the additional drivers to that we're seeing scrap rates are holding up really well and with the market largely

in balance. Any temporary imbalance in a specific car type appears to be rectifying itself very quickly from a scrapping standpoint. So supply and demand are not getting out of balance for any extended period of time in any car type.

Thank you all.

Thank you, Bascom. And our next question comes from the line of Andrzej Tomczyk with Goldman Sachs. Andrzej, please go ahead.

Hey, everybody. Thanks for taking my questions. I just wanted to touch a little bit about on the maintenance expense within North America. I know that jumped up a little bit sequentially and we've been talking about increasing maintenance expenses in North America. So I'm just curious on a go forward basis, is that sort of a good dollar level to sort of be at in terms of North American maintenance or should we continue to expect increases from here there? Thanks.

So this is Paul speaking. I'll just contextualize it before I get directly to your question. So, you know, fundamentally, as you know, over the last really five to seven years, we've made tremendous investments in our owned maintenance capability, and that's because we have a very substantial marginal cost advantage working cars in our own network versus in the contract network. And really that's been borne out over time. This year, from a mixed standpoint, you know, we do a great deal of work to try to forecast the mix of work coming into our facilities. This was a mix that really filled up our shops than we had forecast, and as a result, we had to put more work into the contract network, which is more expensive. You know, we're not going to guide for 26 yet because, obviously, traditionally with GATX, we don't do that until the next earnings call. So I can't really comment specifically on 26. But what I can say is over the long run, we are on track with our objective of continuing to put more work into our own shops and control our costs. And we remain of the view that we can achieve that going forward.

Understood. And just maybe a little bit on the combined nature of the Wells Fargo deal as we move forward, if that goes through.

I know you mentioned the SG&A synergies, the management fees as well, but should we be thinking of longer term synergies on other line items like maintenance as well I'll I'll take that one Andre thank you for the question yes is the short answer to that question there will be synergies in other line items as well maintenance is one area that we have talked about a little bit more publicly because Wells Fargo as a bank is not allowed to own maintenance facilities directly they do all of their work through third-party shops as Paul mentioned we are at full capacity in our shops today so when this transaction closes the it's not an immediate opportunity to bring work on those cars into the GATX shops we'll continue using the third-party network that Wells has effectively established over the years but longer term absolutely we will look for opportunities to bring more of that work in-house at GATX.

Understood. Appreciate the context. Maybe just shifting a little bit to the spare engine leasing side of the business. It seemed like a good strong quarter there again. I'm just curious if you could share the breakout between the gains and the core EBIT this quarter and maybe how you expect to trend into your end?

Sure. So for the quarter, the operating income was about 85% of the total and the remarketing was about 15%. So year to date, we're at about three quarters, one quarter. Much like Paul's commentary about 2026, we usually don't try to get too specific on individual quarters because it's challenging, particularly given the lumpy nature of the way remarketing comes in, whether it's aircraft engines or rail cars. But the three quarters, one quarter is a little higher on the operating income side than we've historically been. So if history is a guideline, you would see a little bit more on the gain side, on the remarketing, but there's no guarantee of that.

Understood. And lastly, for me, I did notice that the renewal success rate in North America jumped up to 87% from 84% last quarter and 82% last year. I'm just curious, like, sequentially, if that increases anything to read into relative to the certainty around tariffs. Is there any increased certainty from your customers, and is that leading to increased renewal success rates? Thanks.

I would say I wouldn't so much characterize that as driven by increased certainty by our customers, but much more just, as we mentioned earlier, the fleet overall remains fairly tight. And obviously, it's in our interest and the customer's interest to renew. It reduces costs for both of us to the extent that demand is still there. So in a relatively tight fleet, as long as lessor and lessie are acting rationally and we price to the market, we should have a very high renewal success rate. But I wouldn't necessarily read into that number or anything from a macro.

Appreciate it.

All right. Thank you for the questions. And our next question comes from the line of Brendan McCarthy with Sudoki. Brendan, please go ahead.

Good morning, everyone. Thanks for taking my questions here. I wanted to circle back to a point on the supply side dynamics. I think you mentioned the market remains in balance, really supported by some of the higher scrapping rates. I guess, do you see any room or capacity for new car builds just stemming from any different economic variables that may shift in the future, such as a lower interest rate environment?

You know, fundamentally, I would say the answer is no. We don't foresee a big uptick in builds absent some spike in demand that we can't predict. You know, what I will say is it's not just a question of financing costs. The builders have really rationalized capacity right now. And so, you know, if we think back to the crude boom, which is the last big boom in rail car production, you know, the builders were producing an 80,000 car a year clip. They couldn't ramp up to anything close to that number right now without our Herculean efforts. So, you know, fundamentally, I think the supply side has right-sized quite a bit. And so it's unlikely to have a hugely material impact on new car production.

Got it. That's helpful. And really absent any, you know, factors, you know, driving, you know, overbuilding on the car build side, I guess, do you see, you know, any reason why lease rates can't continue to remain above the 20 percent threshold?

Well, eventually, you know, you will work your way through that pool of cars that were priced at much lower rates. So over the longer term, you will get to a point where you're renewing more cars, more and more cars that are put on it, you know, today's market rate. But we're still a ways off from that.

That makes sense. And do you have any idea of, I guess, how far along in the future that may be, whether it be, you know, two, three years or perhaps longer?

Yeah, we're – Tom, go ahead.

Yeah, so as Paul mentioned earlier, we'll give more guidance next quarter, but order of magnitude, we're probably about halfway through.

Okay, I wanted to transition to the engine leasing business, really strong quarter there. are you seeing any hesitancy from customers on the engine leasing side or anything within Rolls Royce affiliates just resulting from uncertainty around tariffs or anything like that?

So again, the short answer is no. The recovery post-COVID in aviation has been great, and we continue to see very high demand for the engines and and don't expect any changes there of course tariffs or general macroeconomic activity certainly we'll keep an eye on that for possible signs of what it might do to demand but to date in in in the near term here we expect that business to continue to be very strong and we've been encouraged by the investment volume and opportunities that we've seen, particularly within the joint venture itself, our RPF, the team there,

we came into the year expecting around $800 million, roughly, in total investment volume. And through the third quarter, we've already gone north, just north of a billion. So they're having an outstanding year in terms of putting capital to work at really attractive returns.

Great. That's helpful. And then on the internal portfolio, GEL looks like, I believe I saw seven engines were purchased in the quarter. Is there anything to comment on related to the purchasing pattern there? I know there were no engines purchased in the first half of the year. Was there any outsides read through there for this quarter?

No, nothing in particular. What I will comment on, I think it might be helpful to kind of take a look back. when we first started doing direct investments in engines it was during the depths of the COVID downturn and at that point in time Rolls-Royce's financial results were pretty stressed and the capital markets in general were really in a state of flux and there was not a lot of capital flowing into aerospace whether it be aircraft in terms of airframes or engine so that presented GATX with a really unique opportunity to step in and buy engines directly, support Rolls-Royce in doing so, and invest in some very attractive assets for GATX for the long term. We now have over a billion of direct investment in engines, and they will pay dividends for years to come. We also knew at the same time that Rolls-Royce's financial performance would strengthen, their credit profile would strengthen and more capital would flow back in to aerospace investments as it always does it's it's the epitome of capital flowing in and out depending on cycles but it certainly has flowed back in and roles we knew would always look at their most effective way to sell engines whether it be into the jv or gatx directly the fact of the matter is they have a lot more options available to them today um we knew that and so um i think our investments going forward will be directly will be much more opportunistic than they are programmatic

understood i appreciate the detail that's all for me yeah all right thank you brendan and our next question comes from the line of justin bergner with gabelli funds justin please go ahead good morning bob good morning tom good morning sherry morning morning a few questions here um i just wanted to make sure i heard correctly on the mix of operating and remarketing income within the rolls royce jv i it seems like the you know jv income stepped up from 33 million in one q then dipped to 22 in 2Q and 53 million in 3Q. But I think you indicated that the share of remarketing income was less than the year to date.

Yeah, Justin, that's correct. And part of the reason for that is one of the items that we called out was the insurance recovery. What that insurance recovery is is back in 2022 we had an impairment for at JV for some engines that were in Russia as you know as the Russia-Ukrainian conflict got going and we did not anticipate being able to get those engines out and there were some uncertainty about what would happen from an insurance standpoint. As it turned out, this year we had a recovery of insurance proceeds, and that shows up in the operating income line. So that's part of the reason for that relatively higher number in Q3.

Okay, that's helpful. I see an 8.2 million adjustment net of taxes for the affiliate income. Does that correspond to the 55 million or do I need to grow set up to be pre-tax? if I'm going to...

So, yeah, I'm not totally sure where you're getting the 55, but that is a after-tax number.

And that relates to the insurance, directly to the insurance proceed that Tom just mentioned. So, we normalized for that.

Oh, sorry. It was 53.4, but the 8.2 is apples to apples on a tax basis with the 53.4. I need to gross it up to 53.4.

Where specifically, Justin, are you picking up the 53.4 number? I just want to make sure we're looking also apples to apples.

If I'm reading correctly, share of affiliates pre-tax earnings, 53.4.

Yeah, Justin, that's the pre-tax number for the share of affiliates earnings from RRPS. So that includes the, sorry, that's the third quarter. Yeah. And so that includes the insurance proceeds that Tom was alluding to, so you would need to use the pre-tax number to adjust for that 53.4 figure.

Okay. I think I – do I – is there a pre-tax number given I think I only see the post-tax number of 8.2?

Yes. It is. It's in the engine leasing section of the earnings release. It is $10.9 million pre-tax and then $8.2 million after-tax.

Oh, thank you. Sorry about that confusion. With respect to your guidance for the year then, should I maybe infer that within the unchanged guidance, your engine leasing view is somewhat stronger, your gains on dispositions may be slightly stronger, and, you know, Rail North America X gains in Rail International a touch lower?

Yeah, so, Justin, when we took up guidance in 2Q, we mentioned that it was primarily because of the outperformance in the engine business. If you look at where both Rail International and Rail North America are relative to the guidance we gained at the beginning of the year. They're kind of both within the range, but at the lower end of that range. So that was the case when we took guidance up, and that's the case where we are right now. So really unchanged quarter.

Great. Thank you. One or two more, if I may. It looks like the gain per car on asset dispositions in real North America was a lot lower this quarter. Or is that simply related to the mix of cars you sold? Or should I read anything into it about the strength of pricing in the secondary market?

It's really the mix of cars, Justin, which changes quarter to quarter. It's not just the cars, but the underlying lease is also a big driver of the value ascribed to any particular car in the secondary market. so you know if you're selling cars with a class one railroad with a 10-year release stream attached to it the secondary market's going to really value that highly so it's given the volume of cars we sell in a given year it moves all over the map gotcha and then just lastly to clarify the increased maintenance expense was that purely due to kind of volume of maintenance

events and the need to outsource, or was there anything in terms of operational execution in your own facilities that may have also weighed on the margin?

It's really just volume and mix. Fundamentally, as Bob said, we have filled up our network with work, and that is, of course, on the heels of the substantial investment and increased capacity we've had over the last few years, and whatever is left over that we can't fill has to go into the contract network.

Gotcha. Was there any kind of lumpy nature of tank car requalifications this quarter? Not noticeably so, no. Thank you so much for all the questions.

Thank you. Thanks, Justin. Hey, it looks like we have a follow-up question from Bascom Majors at Susquehanna. Bascom, please go ahead.

Thanks, everyone. Just one more for me. As we get into next year, it sounds like you don't expect a lot of changes in the North American rail cyclical backdrop. But, I mean, you are taking on a lot of new cars and customers via the JV and your management of that. Is there anything to tweak on the sales incentives to really drive the outcomes you want to maximize value in the next year or two compared to this year?

Yeah, that's a really good question, Baskin, because we do adjust our sales incentive plan in North American Rail every year. And there are various toggles we use to kind of drive the performance and the outcomes that we want. So we, of course, will be taking a very hard look at that here. We always do it in the fourth quarter as we set the plan for the year ahead. And assuming we close on the wells transaction you know as expected that'll give us a really good you know new footprint in which to set those goals for the for the sales team but yeah there will be some adjustments made it's you know a 2x size fleet essentially more opportunities bigger customer opportunities so we'll drive the sales force accordingly. It's a really good question.

Thank you.

All right. Thanks, Bascom. And it looks like there are no further questions, so I will now turn the call back over to Sherry Hellerman for closing remarks. Sherry?

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

Thanks, Sherry. And again, ladies and gentlemen, that concludes today's call. Thank Thank you for joining and you may now disconnect.