Conference Transcript - GATX 2026-06-09

Chris, Analyst — Company Representative

Okay, great. Thank you very much. Good afternoon. We're going to go ahead and get back started on the transportation and transportation-related track this afternoon. We are very pleased to be joined by GATX. We have Tom Elman, the Chief Financial Officer. Thank you very much for joining us. First off, always appreciate your attendance at the conference. So maybe the best way to do it is to maybe, let's start with a bit of a brief snapshot of kind of the key businesses. There's a few of them and kind of how they contribute to the earnings power and sort of the growth profile of the company. And then we can kind of dig into each one of those. I think that'd be a great way to start.

Tom Ellman, CFO

That's great, Chris. And thank you. Thank you for having me. The conference has been great. So GATX started in 1898 as a rail car leasing company in North America. And that is still the biggest part of our business. GATX has a little over 200,000 rail cars in North America, represents about 70% of our total netbook value. Those cars are leased primarily to shippers on a full service lease basis, which primarily means maintenance is included. That business, again, is the core. We compete on service and GATX does about 85% of our maintenance in our own facilities. The next biggest part of our business is our rail international business and that, together with the third leg of the stool, our aircraft engine leasing business, each represents about half of the remaining NBV. the European business is half of the rail international business one one part of that we have a total of thirty six thousand cars in Europe largely those operate in a similar fashion to the way they do in North America full service lease basis we also have an Indian business about twelve thousand cars in India those cars are all leased on a net lease basis. By law all the maintenance in India has to be done by the Indian railways. And then as I mentioned the other part of our business is our aircraft engine leasing business. We started that in 1998 as a part of a joint venture with Rolls-Royce. Engine leasing may seem very different from a railcar leasing but both long-lived essential use assets with a heavy service component and where you really compete on deep asset knowledge so so in a lot of ways it really is similar the expertise in that business primarily provided by our partner Rolls-Royce the engine we have about 460 engines in the joint venture and those are all managed by seconded Rolls-Royce employees. In 2021, we also for the first time invested in engines for our own account. Those engines are all managed by the Rolls-Royce joint venture. So don't want to use all our time on the overview, but there's a little summary.

Chris, Analyst — Company Representative

That's helpful. So let's dig into the biggest business. Let's dig into the rail North America. I think that's a good way to kick things off. So how would you characterize the current macro environment i don't know if you think about it as more of a headwind or a tailwind we've obviously gotten some mixed dynamics coming from our you know broader transportation coverage and i guess within that context what are you hearing from customers in terms of sentiment

Tom Ellman, CFO

and behavior yeah so uh rail car leasing in north america is a cyclical business and that cyclicality is primarily driven by the supply side of the business if you look at the key demand statistic in rail car leasing, it's rail car loadings. And if you look at a broad mix of all the car types that make up GATX's fleet, and GATX has nearly 200 different rail car types, the loadings that go into those rail cars have essentially been in a very narrow band for the last couple decades. You saw a little dip in that demand during the Great Recession and a little dip in that demand during COVID but otherwise it's been in this very very narrow band so the cyclicality is on the supply side what historically happens is the industry in good times tends to overbuild and then that excess supply has to be worked out and and what what has happened historically is during the last upcycle the industry had the capacity had the ability to build about 80,000 cars replacement demand is only about 35,000 so tremendous ability to over build should that should should that be desired in in the current environment the capacity is closer to 50,000 cars. So still an ability to overproduce but not nearly what it once was. And that is helping what the current upcycle that we're in to really extend and continue. It's really a supply-driven recovery across the vast majority of the car types in the fleet. Supply and demand are in balance and customers are in a position where they really need to hold on to the rail cars they have so across the board we've seen strong lease rates for going on four years now this key statistic that we use in at GATX is the lease price index it compares the new car lease rate to the expiring lease rate and our guidance for this year is we think that will be between the upper teens and low 20s so nearly a 20% increase in lease rates for For the first quarter, that was 22%. We're continuing to see customers very interested in renewing the cars they have. There's a lot of uncertainty in the world right now, and one of the ways that customers are dealing with that are to really hold on to the cars they have. There is a little contrast with new cars because the same uncertainty leading them to be reluctant to give up a car also causes a little bit of reluctance to add to the fleet to grow the fleet so when there are new car opportunities they tend to be a little bit more competitively bid but in a in a typical year we will renew about 20 000 rail cars the new cars that come into the fleet are a much smaller total 20 or less than the existing cars that renew so that's

Chris, Analyst — Company Representative

pretty good trade-off and then i guess maybe in the context of that the the fleet utilization in north america we talked a little bit about release rates and and the lease price index

Tom Ellman, CFO

but how do you think about fleet utilization so uh geotex's utilization uh for the first quarter was 98 it's typically been between uh 98 and 99 at the end of 2025 our utilization was 99 On January 1st we purchased the Wells Fargo rail operating lease portfolio. GATX had had a little over a hundred thousand cars, Wells Fargo rail had a little over a hundred thousand cars so it essentially doubled the size of the fleet. Wells Fargo rails utilization was 97% so that 99 and that 97 are what averaged to the 98 and we expect utilization to continue to be strong

Chris, Analyst — Company Representative

through the year and then speaking of the the Wells Fargo rail assets I guess how is that progressing are there in any notable surprises as you've gone through that integration process probably the biggest surprise was that

Tom Ellman, CFO

there haven't been any surprises it's been um it's gone really well so we closed that transaction on New Year's Day January 1st this year and we're able to integrate all the systems all the computer records all the key information get that done on that very first day we this was an asset acquisition so we purchased the assets it was not a company acquisition but we did hire about 45 former Wells Fargo rail employees and have them all joined up been integrated. That process has gone well. Our customers have been extremely receptive. GATX really is a high level service provider. Our average contract size is less than 50 cars. We really try to focus on being a high service provider and being able to provide any kind of expertise that the local transportation departments might not have. So very happy to get that high level of service on an additional group of cars so i'm really going well great and then i guess

Chris, Analyst — Company Representative

you know investors have focused on the synergies of the acquisition i don't know if you can give an update in the magnitude timing the sources of those synergies do you think there's any sort of you know misperceptions or things that you we should be thinking about in the context of those

Tom Ellman, CFO

synergies so when we announced the transaction we told people to anticipate that the transaction would be mildly accretive in the first year and more so after that. And on our earnings call in February, we quantified what we meant by mildly accretive. And that was specifically that it would contribute between 20 and 30 cents of EPS. Just for scale, our guidance for full year 26 is between $9.50 and $10.10. So that gives you some idea of what we meant by mildly accretive. The sources of that additional accretion is primarily just the rail cars coming into the fleet. This was a good fleet, well run, and bringing it into GHX ownership, we continued to enjoy the benefits of what that prior management team had done. In addition, there are a couple different areas of synergy. One, I mentioned we hired about 45 people. So from an SG&A perspective, it's less than the two companies previously. There's also some opportunities on the maintenance side. So over the long term, we will do more of that work in the GATX-owned facilities. GATX can do the work particularly on an incremental basis much more economically than if it's with a third party provider. But it will take some time to do that. Today our shops are full so there is some expansion of the GATX facilities in terms of track and repair position that have to happen until we can really enjoy the benefits of that incremental maintenance but in advance of that because we have our own shops that does put us in a good position to negotiate with third-party providers if a third-party provider tells you that a repair cost X we know what it cost in our own facility and it really puts you in a position to to get the best deal so that that's a source the other source that I would say is the diversity of our fleet and the depth of our customer relationships. GATX again with an average rider size of less than 50 cars, we're dealing with customers in pretty much every car type, every commodity. One great example of that is a challenging car type overall right now is what's called a small cube covered hopper. A lot of people will refer to that as a sand car and the reason they refer to it as a sand car is because that is the major commodity that goes in that car type and sand primarily was in demand or is in demand for hydraulic fracturing but that same car type also covers cement, it also covers roofing granules, it covers a variety of other commodities and we can remarket those into those areas that not all the other leasing companies can and that allows us to command lease rates and utilization a little bit higher than you might other places so those are a couple sources of that synergy and then I guess

Chris, Analyst — Company Representative

maybe just speaking about renewal activities you know I think it's pretty strong success rates around 80% or so how sustainable do you think and then in the longer lease terms how do you sustainable do you think the pricing

Tom Ellman, CFO

environment is right now so the current pricing environment should be should be quite sustainable certainly through the remainder of this year and and that really is because supply and demand are in balance and there's no overhang of additional cars coming into the market new car backlogs are long enough that the alternative of getting a new car is not as attractive as renewing the one you have so that that renewal success percentage should stay high and we should be able to continue to renew at rates similar to what we did in the first quarter with that the 22% LPI that we saw really the the the key thing to take a look at is because demand shocks really have to be extraordinary again going back to the Great Recession, going back to COVID, it's really that supply side. And as long as there aren't excess cars produced that are not needed, the supply demand dynamic should stay strong and rates should stay high.

Chris, Analyst — Company Representative

So I guess the acquisition really expanded the fleet and the customer base, as you know, to kind of double the size of the fleet. So how does your approach to portfolio optimization change? I guess, how do you think about asset sales? Are you going to rotate through this larger fleet over time?

Tom Ellman, CFO

Yes. So the approach is actually quite similar. When GATX makes an investment, that investment is made using a discounted cash flow analysis. So we've been in the business over 100 years. We have a good idea of what it costs to maintain the car. We have a good idea of what lease rates it's going to earn over time. And we take those projected cash flows, discount them back, compare it to the price of the new car, and that's what allows you to decide whether or not to make an investment. But we don't actually hold them all through the end of their life. The major reasons that we would sell a car are for portfolio balancing purposes. We really take pride in having the most diverse fleet in the industry, not being overexposed any one car type, any one customer, any one commodity, or even an expiration year that's particularly big. So with our legacy fleet, with the bigger fleet, we're gonna look at the same kinds of things. What this does is it gives you a broader array of car types to take a look at, and also to look at situations where maybe we think the market has it wrong, where the expected cash flow over its remaining life is not as high as what you could sell it for today, and then we'll make those decisions to sell out early.

Chris, Analyst — Company Representative

I guess, how should investors think about normalized remarketing income through the Is that, you know, I guess, particularly given strength in the secondary market, I guess, how do we think about that?

Tom Ellman, CFO

Yeah, so remarketing income is definitionally lumpy. It's hard to predict exactly how long it'll take individual deals to close. You have to do things like car inspections, negotiate contracts. So you can't always tell exactly when it'll happen, but it's, it's a really strong and enduring part of the portfolio. So over the last 10 years, we've averaged about $80 million a year in gains on asset sales. and even during 2020 the first year of kovat when most activity stopped there was 40 million dollars a gain the last four years have all been over 100 million and we've provided guidance for this year that we expected I would expect around 200 million of gain on sales of assets but 130 million of which will come from the legacy portfolio and about 70 million of which come from the joint venture that we have with Brookfield that acquired the Wells Fargo rail

Chris, Analyst — Company Representative

portfolio okay that's helpful and maybe let's let's move on to the the international piece of the rail business I guess in Europe demand has remained steady despite some of the macro headlines that we've been seeing in particular more recently what are you seeing in terms of customer behavior fleet planning and any renewal trend updates yeah so one of the things you

Tom Ellman, CFO

mentioned is that that business has been strong despite some of the macro challenges. And part of that is the that supply demand dynamic that I talk about is pretty powerful in Europe because the production capacity and the and the replacement demand are about the same. So even during COVID you saw flat lease rates and so that that dynamic that old cars coming out can are about the same numbers new cars coming in provides a lot of stability additionally Europe is a little bit ahead in North America and trying to take traffic off the road and put it on the rails and and some of the investments of governments in doing that provides another source of demand so so we really expect the situation to remain to remain strong there and one piece of evidence of that is in 2025 we purchased about 6,000 rail cars from DB cargo a rail freight operator in Germany and there should be other opportunities to do this kind of thing and that will be will be definitely interested in pursuing as governments have looked for their rail freight operators to be profitable on their own One way they can do that is by selling rolling stock that they can source a different way. So we'll look for additional opportunities there as well as through the core business.

Chris, Analyst — Company Representative

Any way to size sort of what the opportunity there is that's similar to the DB cargo sales and any way to think about from a geographical perspective within Europe?

Tom Ellman, CFO

Yep. So certainly throughout Europe, there's examples of that. And that acquisition of those 6,000 cars is just one of many. So I think the size of individual transactions probably will be in that range or even a little smaller, but there should be multiple opportunities.

Chris, Analyst — Company Representative

And that can happen across the continent. Okay, helpful. India, that continues to operate at about 100% utilization. So what are the key drivers of keeping it tight like that? I mean, I guess what are the drivers of the tightness and what do we think happens from here? A hundred percent is a little hard to get above. So how do we think about that?

Tom Ellman, CFO

So so GATX was the first independent leasing company to operate in India. We worked with the Indian Railways and the Indian government to develop the private leasing scheme that started in 2020. We're still the only materially large leasing company there. and it took us about about five six years to get to a thousand cars and we've been adding a thousand two thousand cars a year since and are up to 12,000 cars over 12,000 cars the the demand for the core cement infrastructure steel commodities is quite high and really the the limiter on growth is the amount of production that we can get all wherever it is in the world production is sourced locally or close to locally North America it's primarily Mexico Europe it's primarily Eastern Europe in India it's it's in India the nearest place with relatively low labor costs but there's only so much they can produce and the Indian railways continues to need a lot of cars so that's the big the big inhibitor to growing even more. But from a demand perspective, we expect it to stay strong and utilization to stay near that 100% level. So if you're to sort of compare and contrast the Europe

Chris, Analyst — Company Representative

opportunity to the India opportunity, it sounds like maybe Europe has got a few more types of shots on goal for you guys to grow relative to what maybe is a little bit more constrained in

Tom Ellman, CFO

India. Is that fair? So it's definitely a more mature market. So for instance, there is no secondary market there's no like somebody else you would buy rail cars from in India but the demand the demand prospects are so strong in India that that really I would say I wouldn't I wouldn't differentiate them as one over the other I think they're both quite strong it's just different

Chris, Analyst — Company Representative

things driving it okay all right that's helpful and then I guess maybe thinking about the leasing business as you noted before so you get the the rail car business then we can move on to engine leasing. So I guess we can talk a little bit about demand for spare engines. That's been strong. There's supply constraints, maintenance delays. We hear a lot from the OEMs. There's obviously some headlines between large airlines and some of the engine makers. I guess, can you give us a little bit of an update of sort of what you're seeing in terms of airline behavior, shop visit, fleet utilization, just kind of the land of the engine leasing business? Yeah, so the engine

Tom Ellman, CFO

leasing business has been in a strong position, particularly coming out of COVID. If you look at current rates of production for airframes, for aircraft, at the pace they're going, it's something like a 14-year backlog. And most of the engine types, the manufacturers recommend having somewhere between 10 and 15% spare engines for every engine on wing. So there's an incredible known buildup of demand for that that product going forward. Air passenger miles double every 15 years or so. The percent of engines that are leased when we started back in 1998 it was probably around 10 percent. Today it's probably around 50 percent. So the growing market, growing percent of leasing has really led to a great dynamic. Obviously the world right now is a pretty unsettled place and and you know there there are challenges with jet fuel prices and that might have impacts on very well will have impacts on airlines the majority of the fleet that we have is why engines that support wide-body long-haul traffic and also latest generation aircraft so particularly in in a fuel-constrained environment. The most modern engines are the ones that are most likely to be used. So we feel very good about how the business is positioned. Of course, just the situation of the world bears watching. But so far, it continues to be a very resilient business. And on the topic of resiliency, if you look at that business had the ultimate test of resiliency with COVID. Air passenger miles briefly went to zero. And that business still performed well. One of our beliefs was it would be incredibly resilient because when an airline had to decide what they're going to spend their limited money on, the engines are way up there. Because the way they work, you take an engine that needs maintenance off wing, you put the spare on and that can cause a cascading if you don't have those spares that we thought and airlines proved that's really what they're going to be most most concerned with and and that the covid test really showed that so how do you think about you i think you touched

Chris, Analyst — Company Representative

on this briefly a bit let's expand a bit on it in terms of capacity reductions globally around the around the airline space, is there a rough rule of thumb that we can say, hey, for every one point of capacity reduction, there's some sort of impact on utilization or spare demand or anything like

Tom Ellman, CFO

that? I guess I'm kind of curious how you think about that. Yeah, no, it's a great question. And I'm thrilled that we haven't really tested the answer because the utilization of our fleet has been so consistently high regardless of that situation okay and then can you

Chris, Analyst — Company Representative

just remind us like sort of what the portfolio looks like in terms of how much you have and kind of like how the the engines are broken down the

Tom Ellman, CFO

manufacturer so so um first of all we have JV engines and we have the wholly owned engines so there's about 460 engines in the joint venture and about 46 engines that GATX wholly owns. In both cases, the vast majority of them are on latest generation wide body aircraft and they all basically serve the market in one of two ways. On the one hand, we have engines that are leased to an airline to serve as their spare as they needed then we also have non dedicated spare engines which primarily for us they support the Rolls-Royce total care program so Rolls-Royce will offer a maintenance services a spare on demand and will will provide that to the airline when they're doing maintenance and one of the ways they source that is either to the ga techs uh wholly owned engines or from the joint venture okay and then you know the

Chris, Analyst — Company Representative

returns in this business can be or the results can be lumpy given you know the timing sort of the engine sales themselves so i guess how do we think about underlying sort of steady state earnings power of the business you know the stability of the segment how do we think about that compared to what is obviously a very stable stable sort of broader you know portfolio yeah so

Tom Ellman, CFO

So the good news is, whether you're talking about the aircraft engines or the rail car leasing business, the timing is very lumpy. But the underlying certainty that that secondary market or that remarketing event will be there is quite resilient and quite strong. so if you look at the Rolls-Royce joint venture for instance over the last several years about two-thirds of our earnings have been through earnings from operations and about one-third has have been from remarketing events in a given quarter those numbers could be very different okay but but over time that That two-thirds, one-third continues to show up, and so part of that is because it's a little different the way we operate that business versus the rail cars. The rail cars, the original intention is to hold them cradle to grave, but we might not do that. We might sell them out for the various reasons I talked about. our engine portfolio we tend to more proactively sell out of and when the engine gets to that tail end of its life that's not really the business we're

Chris, Analyst — Company Representative

in yeah so how does this grow over time how does this fit into the growth

Tom Ellman, CFO

portfolio over time so um we're gonna continue to invest in engines either through the joint venture or on our own so in 2025 the joint venture invested 1.4 billion and engines those are self-funded so GATX did not need to contribute to make that 1.4 billion happen that's at the at the JV level so our share our proportionate share of that would be 700 million for this year we've announced that we expect about another billion so our share about 500 million we we are not targeting today adding additional engines to our wholly owned business if the opportunity comes up we're very very interested that business over the last few years has been between about a hundred and fifty million and two hundred and fifty million in investment each year the genesis of that investment was at a time where the in in 2021 where that the the market in general and Rolls-Royce in particular had other demands on their capital. GATX is a counter cyclical investor, put ourselves in a position to be able to invest in that market. To put it mildly, the situation has changed. Rolls Royce is doing incredibly well, and probably won't be looking for that avenue to the extent that they had previously. But where there's opportunities, we're certainly interested. Is the billion this year also self-funded yes yes um uh so over the course of the joint venture um going all the way back to 1998 we've taken dividends out we've put investments in the dividends have exceeded the um money that's put in so and the business has grown from about 250 million to you know our share of assets is is close to it's over uh for the jv as a whole is over 5 billion okay that's helpful and so you've

Chris, Analyst — Company Representative

given us a little bit of a glimpse of how you think about putting capital to work in that business. But I guess if we zoom out a little bit and think about your various businesses, how do you think about that capital allocation into the various businesses, the rails in the US, international engine leasing?

Tom Ellman, CFO

Yeah, so we like all those businesses. And one of the key features of the Wells Fargo rail acquisition was the way we funded it. So it was $4.2 billion acquisition and the equity piece of that, We contributed 30 percent. Brookfield, our partner, contributed 70 percent. So the equity check that we wrote on January 1st was $385 million. We have options to buy the rest of it over the next 10 years. So if we exercise all those options, we would own the entire portfolio in 10 years. Most of those options, other than the first one, are for 7% of the business, 10% of Brookfield shares. The first one is for half of that 3.5%, and that will cost $66 million. So take the 385 plus the 66, you're at about $450 million, very manageable in the context of the investments we've done over time. And going forward, double that 66. It's super manageable. So we can continue to invest in India, continue to invest in Europe, pursue other opportunities in rail North America. So we didn't want to have to make the choice you're talking about. And that was a key reason for structuring the purchase the way we did, because there's great opportunities in all those

Chris, Analyst — Company Representative

segments. Yeah. Okay. It's always good when you have lots of shots on goal, lots of targets to be thinking about okay maybe to wrap up here I'm kind of curious how do you think about sort of variability within the guidance range so you have guidance out there which is always very helpful for us to kind of take a look at so how do you think about sort of upside and downside considering the fact that these businesses are a little bit steadier than a lot of the other ones that we

Tom Ellman, CFO

look at yeah and and that's a great point so so for the North American rail business for instance historically 100,000 cars in the fleet in in a typical year you'd have about 20,000 that expire which means you have 80,000 that don't and that does provide quite a bit of stability quite a bit of predictability so what that means is the source of variability on the guidance number the number one thing is always those remarketing events not so much are they gonna happen or not there's a lot of visibility into that but what will that timing be and and you can't always call that perfectly and sometimes it happens quicker than you think sometimes it takes a little longer and that's

Chris, Analyst — Company Representative

generally the the biggest needle mover okay I guess maybe just as we think about rates and the environment where we might be in anything we should be thinking about I guess that would be the last question anything from like an interest rate perspective I think we did a little poll this morning and I think now the consensus is for a hike towards the end of the year versus cuts so how

Tom Ellman, CFO

are you thinking about that so it looks like I have a minute 17 seconds so I'm to give us that question. Yeah. So what I will tell you is that the high level soundbite is that anything that makes the cost of a new rail car go up is generally good for GATX. Whether it's interest rates, whether it's inflation, whether it's cost of steel, because yes, it will make that incremental investment a little more challenging. But the now 200,000 cars, they all become worth more. So any kind of cost pressure on an operating lease asset that retains utility

Chris, Analyst — Company Representative

is generally a pretty good thing. Yeah, makes sense. All right, Tom, thank you so much. It was great to have you at the conference. Appreciate your comments. All right. Thank you. Thanks,