GATX Corporation

Good day, and welcome to the GATX 2020 Third Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to the Director of Investor Relations, Sherry Hillerman. Ms. Hillerman, please begin.

Thanks, Casey. Good morning, everyone, and thank you for joining GATX's 2020 Third Quarter Earnings Call. I'm joined today by Brian Kenney, President and CEO of and Tom Ellman, Executive Vice President and CFO. Please note that some of the information you'll hear during our discussion today will consist of forelooking statements. Action results or trends could differ materially from those statements or forecasts. For more information, please refer to the risk factors included in our release and those discussed in GATX's 2019 Form 10-K and its 10Qs for 2020. GATX assumes no obligation to update or revise any forelooking statements to reflect subsequent events or circumstances. I'll quickly recap our third quarter financial performance and then hand it over to Brian for a short discussion on Rail North America's maintenance operations, as well as the Rolls-Royce and Partners Finance Affiliates results. Earlier today, GATX reported 2020 third quarter net income from continuing operations of $48.2 million, or $1.36 per diluted share. This compares to 2019 third quarter net income from continuing operations of $37.2 million, or $1.03 per diluted share. Year-to-date 2020 net income from continuing operations was $132.4 million, or $374 per diluted share. This compares to $138.7 million or $3.79 per diluted share for the same period in 2019. The 2020 third quarter and year-to-date results include a net negative impact of $12.3 million or $0.35 per diluted share related to the elimination of a previously announced tax rate reduction in the United Kingdom. The 2019 year-to-date results include a net deferred tax benefit 2.8 million or 7 cents per diluted share related to an inactive tax rate reduction in Alberta, Canada. These items are detailed on page 14 of our earnings release. In the second quarter of 2020, GATX completed the sale of American Steamship Company. Accordingly, this business segment is reported as discontinued operations and prior periods have been recast to conform to the current presentation. Now I'll briefly address each segment. At Rail North America, our fleet utilization remained high at 98.2% and renewal success rate was 58.1%. Although absolute lease rates for most car types were flat to slightly higher compared to the second quarter, we expect lease rates to remain under pressure given a continued oversupply of rail cars in the market and carload volumes relative to 2019. Third quarter renewal rate change of GATX's lease price index was negative 29.4%, reflective of the ongoing challenges in the marketplace relative to the strength of the expiring lease rate that generally commenced at the height of the market six to seven years ago. The average renewal term associated with the LPI is 29 months. As noted in the earnings release, despite higher fleet churn as a result of lower renewal success in the quarter, Our maintenance cost performance was better than expected, which Brian will address further in his remarks. We continue to successfully place new railcars from our committed supply agreements with a diverse customer base. We have placed all 8,950 railcars from our 2014 Trinity Supply Agreement and over 1,670 railcars from our 2018 Trinity Supply Agreement. Additionally, we have placed over 3,470 rail cars from our 2018 Greenbrier supply agreement. Our earliest available scheduled delivery under our supply agreement is in the second quarter of 2021. Remarketing income at Rail North America was $7.9 million for the quarter and $39.4 million year-to-date. Within Rail International, Both GATX Rail Europe and GATX Rail India saw steady demand for rail cars during the quarter. GATX Rail Europe maintained high fleet utilization at 98.2%. The lease rate environment in Europe remained supportive of small increases in renewal lease rates for most car types. GATX Rail India grew its fleet to over 4,000 rail cars while maintaining utilization at 100%. Rail International's third quarter investment volume was approximately $45 million. Turning to portfolio management, results were primarily driven by a transaction at the Rolls-Royce and Partners finance affiliate involving the refinancing and sale of a group of aircraft spare engines, which Brian will also cover in his remarks. So with that, I'd like to turn the call over to Brian.

Great. Thanks, Sherry. Good morning, everyone. As Sherry said, I want to provide some color on two items that have had a large positive effect on our earnings in 2020. And then we can go ahead and open up the line for your questions. So the first one concerns Rail North America's net maintenance expense. And coming into 2020, we expected net maintenance to trend higher by about $8 million to $13 million. That's a 5% to 7% increase versus 2019. The main driver of the increase was the commercial churn that we expected in the North American rail fleet, given the ongoing weakness in the market, and this was pre-COVID. By commercial churn, we mean a lower renewal success percentage on expiring leases. That resulted in more cars being assigned to new customers to keep the fleet utilized, and traditionally that has meant more maintenance expense as expired cars often enter our maintenance network to prepare them for new customers and or new service. So as predicted, we have seen the higher commercial churn as we move through 2020. And this churn has been exacerbated, obviously, by the fallout from COVID-19. In fact, if you look in the third quarter, our renewal success was 58.1%. That's a full 17 percentage points lower than a year ago. However, year-to-date, net maintenance expense has remained flat to 2019. So there's a number of reasons for this favorable performance, most of them good. One of them perhaps a little counterintuitive, but let me touch on those relevant reasons. So the first one, as we move through 2020, we continue to become more successful at increasing the amount of repairs done in our own network versus the third-party shops. So you've heard us talk about this before. We have this goal of moving as much maintenance work as is practical into our own shops. That's where we believe the safety, the cost, the quality, and the delivery metrics are all superior. So as an example of the progress we've made, if you look at the third quarter alone, we set up 96% of our tank car work and close to 90% of all of our cars to run through the OWN network. So that steadily increasing volume has to drive down our unit repair costs in the OWN network. We're going to continue to push on this initiative. The second one is increasing the efficiency of our internal processes and our systems, actually. And they continue to improve our ability to make sure that the type of work done on similar cars is consistent across the network. And when we can charge for that work, that we consistently bill and collect the proper amount. Now, I've alluded to this before. These initiatives have been driving down our costs for the last year or two. Obviously, we'll reach a plateau when we ever achieve complete uniformity across the network, but we're not quite there yet. Third, a little unpredictable, as always, are railroad repairs. They are lower than anticipated. coming into 2020, but it appears that the railroad's attention and manpower appears to be directed to other areas. So, the expense is down year over year. And lastly, on the maintenance side, and as I said, perhaps a big counterintuitive is the fact that sometimes the commercial churn in the fleet can cause maintenance expense to decrease versus expectations. So, actually contradicting what I just said a little earlier, but there have been some cases in 2020 where the market is weak enough that we've had an We've made that economic decision to scrap older cars when customers return them at lease end, rather than incur maintenance expenses to prepare the cars for a new customer. So why do we do that? We simply did not see a lease, a new lease, being profitable enough to provide a return on an investment in maintenance. So this is most common on the older cars, and especially our boxcar fleet, which, as you know, is quite old relative to the rest of our fleet. So, for example, coming into the year, we plan on maintenance expense to be incurred on target older boxcars because we anticipated being able to sign and track new leases. Instead, the market weakened further due to COVID, and we ended up scrapping the cars when they came off lease. So that reduced maintenance expense versus expectations in 2020, but there's a downside to that in that it removes planned boxcar earnings from future years. So that's probably the best example of where reduced maintenance expense can be a little misleading. But nevertheless, I'm really encouraged by our maintenance performance, and I think that lower spending trend will continue in the fourth quarter and actually beyond. The second topic I wanted to quickly touch on is the large gain on sale at RRPF. That's that spare engine leasing partnership with Rolls-Royce. We highlighted it in the press release, as Sherry said. Now, we frequently realize residual gains in this business, but it's been in a variety of forms. So older engines have been torn down and profitably sold for parts. Excess maintenance reserves have been released at the end of leases and taken income, and we have sold engines on lease to third parties in the past. So similar to North American Rail, you can manage customer exposure, equipment exposure, renewal schedule exposure. You can optimize all that in the secondary market for engines. It's quite liquid. The gain in the current quarter, though, was both large and unique, and I wanted to explain what it was and not let it mask otherwise difficult operating environment in that business. So As we've said in the past, at RRPF, the portfolio consists both of engines that are leased directly to airline customers around the world, but also engines that are leased back to Rolls-Royce, generally so Rolls can use them in support of their total care program. In this particular instance, there was a large group of engines leased to Rolls-Royce where approximately $300 million of debt was coming due for refinancing in 2020 and 2021. So obviously refinancing rates have increased pretty dramatically for air-related businesses, So in this case, it made sense to restructure the current lease to Rolls-Royce into a new long-term lease, sell many of these engines with the leases attached to third-party investors, and then use the proceeds to pay down the vast majority of the related debt rather than refinancing it at higher credit spreads. So once again, that addressed a number of goals for the JV. We reduced refinancing risk, we reduced some equipment risk, even lowered our exposure to Rolls-Royce from the JV. But the value realized on the sale generated a gain of 68 cents per diluted share in the quarter, and it was actually an outstanding value, probably more reflective of a pre-COVID environment. So I wanted to call it out because a similar transaction on the engines, at least a roll, is unlikely to happen in the near future. But it does reflect the value embedded in the engine portfolio longer term. So I hope that helps explain two of these standout items in the third quarter earnings. Operator, we can go ahead and open it up to questions now.

Thank you. If you would like to ask a question, you may press star 1 on your telephone keypad. If you are using a speakerphone, please ensure your mute function is turned off to allow your signal to reach your equipment. If at any point you would like to remove yourself from the queue, you may press star 2. Again, please press star 1 now to ask a question. We will pause for a moment while everyone the opportunity to queue for questions. We will take our first question from Allison Polunak of Wells Fargo.

Hi, guys. Good morning. Brian, I just want to go to your comment on moving the maintenance work into your own shops. I know it's something that GATX has been working on fairly successfully. But as you look at the environment today, just trying to understand the dynamics, is that partly a function of the industry utilization of those cars that's giving you a little bit more I guess, flexibility to bring them into house versus out in the field? Or is this, you know, I guess, is that irrelevant at this point? Just any thoughts there?

No, I think it's been an initiative of ours. You know, going back years, it was about 50-50 between the third-party network and the OWN network. It just made more sense to us to leverage our investment, existing investment, and made the facilities and bring as much as we could in. Historically, the vast majority of tank has been done in the OWN network. Now we're doing a larger percentage of all repairs in the owned network. So I think, no, it's more our initiative to move repairs in to the owned. And, you know, we do believe the safety, quality, and delivery cost is all better, and obviously we drive down our costs. I will say one of the things that actually increased maintenance expense over what we expected this year, there's a lot of ins and outs, but we did move a little more work into the contract network earlier in the year than we planned on just to diversify it. that work in case we had a COVID outbreak that was severe enough to close down a facility for an extended period of time. So actually we could have done more internally if we hadn't done that conscious decision, but it is absolutely an initiative of ours.

And Allison, just to add to that, actually the environment makes it more challenging to get the cars in because of the churn that Brian talked about. So you actually have more cars that need to get done.

Got it. Interesting. Okay. And then just, I know one quarter doesn't make a trend, but the renewal success rate dropped a little bit from last quarter. Was that just based on what cars were coming in or, you know, something else going on there?

Yep. So it certainly is reflective of a challenging environment, but there is one item to call out there. So as you noted, the renewal success percentage was 58%, and it had been 70% in each of the first two quarters. Part of that was driven by the Covey of bankruptcy. So we expect ultimately to get about 500 cars back due to that, and that will have to remarket due to that bankruptcy. They've probably gotten around 300 back year to date. Without that, that renewal success percentage would have been more in the low to mid-60s, which isn't too far off from long-term averages, but it's certainly below the last couple years, which have been in the low 80s. It's important to note that about half the cars that we got back were immediately remarketed to other customers. The quarterly renewal success can move around quarter to quarter, as you noted, because it can be influenced by a couple of larger contracts. However, in general, I would expect that the long-term average renewal success percent, which is sort of in the 65% to 70% range, will probably be a better guide going forward than the 80% we've been at the last couple of years.

Got it. Thank you. That was helpful.

Thank you. And we will take our next question from Matt Elcott of Cohen.

Good morning. Thank you. I wanted to make sure I understand the JV transaction. Brian, I think, did you say that all of the engines that were sold were Rolls Royce engines, or did they include a certain percentage that was third-party customers? I know half the third-party customers, I think you mentioned on the last call, were on payment deferrals because of the current environment. So I'm just wondering if there were any third-party customers, and if so, if any of those were the ones that are on payment deferrals.

No, they were all Rolls-Royce engines, and they were all leased to Rolls-Royce from the JV.

Matt, I just want to be sure you understand. Everything in the large transaction that Brian talked about was unleased to Rolls-Royce. There were other remarketing and residual realization activity that were different sources.

Got it. And did you guys... give the number of engines that were actually involved in this transaction, just trying to gauge the future impact on earnings?

No, we did not provide that.

Can you help us try to gauge what the impact on earnings could be going forward from the sale?

Yeah, that's... That's not something we have right now. Let us look into it and see what we can provide.

Got it. Thank you. And then another question on the on Rail North America. First of all, do you guys have a similar number of renewals coming up in 2021 to 2020? And if so, and if lease rates keep making you know, modest sequential improvements like they did in 3Q, could we actually see a revenue per active car in North America, you know, hold steady next year or even improve slightly?

Yeah, Matt, you know that we generally provide that information at our first quarter earnings call for the fourth quarter earnings call for the following year. But in general, directionally, Given what we've been doing with lease terms recently, it's fair to say we'll probably have more expirations, more renewal opportunities next year than we did this year. And likewise, directionally, the expiring rate challenge probably will be a little bit easier next year than this year.

That's helpful, Tom. And then just one last one. I'd love to get your thoughts on the sustainability of the sequential industry fleet utilization improvement. I think we've seen three consecutive improvements over the last three months. So, you know, how much of that do you think is attributable to intermodal versus grain or other things and what it means to you guys?

Yeah. So coming into the year, we anticipated a slow and gradual recovery as far as lease rates go. And although car loadings were up 11% versus Q2, they were still down 12% versus Q3 2019. However, on the supply side, we are seeing some builders retrench, and we are seeing some scrapping activity increase. In fact, the net North American fleet declined slightly per the most recent UNLUR data for the second straight quarter. And the industry metrics on idle cars and storage declined by 75,000 cars. So those are all positive signs. However, there's still too many idle cars in the industry. So even though we saw a flat to marginally improving lease rates in the quarter, we still have a long way to go to get back to those long-term averages. So absent an unanticipated demand catalyst like we saw with crude oil in the last market, we anticipate it will probably take several quarters before the supply correction mechanisms can meaningfully increase lease rates.

So several quarters of, you know, rail traffic improvements, rail traffic going in the right direction, decelerating and then growing potentially next year?

Yeah, so again, it's hopefully the beginning of a trend, but it's early innings, so we'll have to see how that develops.

Great. Thanks very much.

Thank you. And we will take our next question from Justin Long of Stevens.

Thanks, and good morning. Brian, some of the comments you provided earlier around maintenance were helpful. I wanted to see if we could get a little bit more color on what you're expecting going forward for North American maintenance expense. I think you said that some of the improvements should be sustainable into the fourth quarter and going forward. Does that mean that maintenance expense can remain kind of flattish sequentially next quarter and into next year, or is there a little bit more color you can provide around that order of magnitude?

Yeah, our expectation is flattened down that trend continually for the short term, but I don't want to project too far out because so much of it is dependent on commercial success, but looking to next quarter, I would think about this trend continuing to

Okay, that's helpful. And then next year, just with some of the tank car recertification work that could be coming up in 2021, do you think something kind of flattish for maintenance expenses is possible relative to 2020, or is there a ballpark you can give us on that?

Well, we'll give it to you in January, but I will say we've pulled forward a lot of that compliance work on tank certification into last year and this year. So we've evened out that workflow more. So I don't expect a big increase, and I would hope this trend continues.

Okay. That's helpful. And, you know, following up on the gain in RRPS, you know, Tom, you mentioned there was some other kind of remarketing and residual gain in the quarter. Could you provide what that number was? And then I don't know if you have the pre-tax number for the larger game, but that would be helpful as well as we kind of put together those different pieces.

Yeah, so I do have that. So maybe what I'll give you, Justin, is both the year-to-date and third-quarter numbers, which hopefully will be helpful. So year-to-date for the JV is, Income from operations that were recognized on that line item were about $30 million, and gains were about $63 million, which, add them together, you get the 93 that you see there. For the third quarter, gains in operations were 10. Operations earnings was 10, and the gains was 37. Those are all pre-tax, so for a total of 47. So of that 37 in gains, about $32 million related to the item that Brian talked about being the 24 after tax. So relatively modest across everything else. And just to come back to Matt's question, probably no reason we can't tell you that it was 18 engines that were sold.

Okay. And on those 18 engines, anything that we should consider in terms of like a disproportionate impact on revenue or if we look at those engines as a percentage of the total engine portfolio, is that a good way to kind of ballpark the impact going forward?

Yeah, that probably won't work too well because, as Brian noted, they were older engines that were – it was good to rebalance the portfolio with those. So I would not say they're a representative cross-section. Okay.

All right, very helpful. And last question I had was on the acquisition pipeline. Obviously, we've seen some extreme volatility in both directions in the economy and rail volumes, et cetera. But As the market has started to bounce back here in the third quarter, have you seen more acquisition targets come to market? And maybe you could speak to the valuation multiples on deals if you're seeing a pickup.

No, we really haven't seen anything significant, so there's not much to talk about there. I still think there's opportunities for consolidation. I don't want to be a broken record, but there's just too many investments made by new players and aggressive players that are economically underwater. So I still think it will come, but there's really been nothing significant. I mean, you haven't seen anything change in probably since our element transaction. So really nothing to report there.

Okay. I'll leave it at that. I appreciate the time.

Thank you. We will take our next question from Vasco Majors of Susquehanna.

Yeah, going back to the roles, JV, can you give us an update on perhaps the percent of revenue that's being deferred right now? Just trying to think of the delta between revenue recognized and cash flow and if that has shifted any in the last two, three, four months.

Yep, so customer deferral requests have really continued to slow, and the numbers are similar to what we've talked about previously. To date, about half of the JV's airline customers have requested deferrals. The JV is selectively granting those deferrals on a case-by-case basis. The requests, again, as a reminder, are typically three to six months rent deferral. Some have been as long as 12 months. And then as far as a percent of revenue, the requests represent a little over 10% of annual revenue. Thank you.

And does this outcome with, you know, perhaps older engines that were closer to end of life but a fairly significant gain for just 18 of them, does this give you some confidence that you can share with us that, you know, impairment issues are perhaps overblown by some investors in that portfolio as you look to year-end testing?

Yeah, so what I can tell you is there's been no material impairment so far this year. The JV's impairment analysis consists of cash flow analysis for each end-type and independent appraisals. As you know, the accounting rules require impairment to be taken whenever the testing indicates impairment.

Yeah, a little color around that transaction. Now, that started very early in the year. I think the values were So there's no question airline and engine values have come down. We still think we're strong long term, but I don't know if that transaction is immediately repeatable at those values.

Thank you for the candid color there. There's two more on North American Rail. you talked a little bit about having more renewal opportunities next year and hopefully with a more moderate expiring rate to comp against. Can you just give us a little finer detail on the cadence of the expiring rate in your portfolios that sits today with understanding on our end that that may change depending on transactions, et cetera?

Yeah, to a degree, Beth, you answered your own question. The challenge for us On providing that too far in advance as it does change, which is why we went with – we'll provide the directional guidance that we would expect it to be higher than this year, but it's really hard to say that as transactions are constantly being done.

Meaning your expiring rate next year will be higher than the rate this year.

Yeah, I'm sorry. I thought you were talking about the number of expirations. No.

I was actually asking about both. So any color you could give them.

Okay. Yeah. And so opposite directions. We expect more expirations, more renewal opportunities next year than this year because of the short lease term. But as we get further and further away from the up market, we expect the comparator rate, the rate it's expiring off of, to be lower next year than this year.

Thank you. Last one, back to M&A, you know, focused on North America, but maybe not exclusive to it if you have some different comments for another region. But understanding that, I guess it sounds like from your earlier response to the M&A question that the motivated sellers really aren't showing up yet, and it's understandable some of the reasons why. Can you help us understand maybe your process? Like, you know, when you're kicking the tires on one of these deals, like financially, what is your objective? Is it to, you know, how much can this improve our ROE? You know, is it an earnings accretion estimate? Just, you know, if we could get maybe a peek into your process and what a quote-unquote good deal will do for your financials, I think that would help us understand kind of where you guys' heads are. Thank you.

I mean, that could be a disappointing answer. Really, accounting earnings is the last thing we look at. We have a different risk-adjusted rate of return required for every geography, every business, not every car type, but every business. So we'll run through our projections, and we'll totally focus on shareholder value added. We express that. At GHX, we look at it as what we call ROI, so it's a return based on original investment. County earnings fall out, honestly. We're not going to let that stop us from doing an economically accretive transaction. And the reason I say that, it's important to note that any kind of young portfolio of rail car leases generally is not very accretive from a county perspective early in the life. So you just can't focus on that. But it materializes over time. So yes, there's nothing really to report in North America. I think there are, you need a motivated seller, right? I can't make somebody sell. We can certainly make our interest known, and I think the market knows about our interest in acquiring portfolios at attractive prices. But I think people have to come to grips with the value of their fleets, especially the way some of them are composed in this industry. In Europe, it's a little different story. I think most of the growth, I don't think, most of the growth has been organic. I'm a little disappointed over the last few years that we haven't seen portfolio acquisition opportunities in Europe. They just haven't materialized in a couple of years. There is a couple of things, though. Right now, the European team is working to develop a more liquid secondary market in Europe, similar to one in North America. It just hasn't been there to date. We did a small fleet car acquisition earlier in the year, but that market is going to take some time to develop. The second possibility in Europe is the market for years, but just in the last few days there's been stories in the press saying that the SNCF board has made a decision to sell all or part of Amoeba. So we should know in the near future if that's a possibility or not. So looking at North America and Europe, that's the only thing being talked about right now.

Thank you very much.

Thank you. And we will take our next question from Justin Bergner of GE Research.

Hi, good morning, Brian. Good morning, Tom.

Morning.

Morning. To start off, I guess, before Rolls announced their major set of transactions to raise equity in debt capital, one might have expected that GATX could have been a source of liquidity for them somehow through changing ownership or other sort of financial transaction to the JV, is that a possibility for GATX going forward to, you know, increase its exposure to the RRPF JV and help provide roles liquidity in the process? Or is that sort of now no longer relevant given roles announced transactions?

Justin did $2 billion from $1 billion. They did the rights offering. I think it's all part of that. I think it's a $5 billion plan to raise liquidity. So it seems like they've gotten through that. At least the market has responded positively to it. So, you know, given its long history of impressive growth and profitability and with the robust outlook for growth post-COVID and engines, I look forward to continuing to invest in this business, but for right now, I'm focused on being the best partner I can to Rolls-Royce. So I wouldn't rule it out, but honestly, right now, given engine values, I think that's unlikely that Rolls would want to exit that investment because I think long-term, it's got a very attractive outlook. So I'm just focused on being the best partner I can.

Okay, understood. That makes sense. Moving on to the topic of the maintenance expense, I think you said that the overall maintenance was done 90% through your own shops this quarter. Just big picture, what changed over the last few years that has made the economics inherently more favorable to bring in-house maintenance? non-tank car maintenance when beforehand it was outsourced. Was this always an opportunity, just took a while to do it, or was there something that changed in sort of the economics to make this a better opportunity in-house?

Yeah, Justin, it wasn't so much a change in economics because doing the incremental car in your own shop is always a better thing than than spending all that money externally for an outside party. But we've put some investment into our shops so that they can handle more capacity. Done things like putting track down for storage and movement of the cars, increasing our cleaning and finishing capabilities. So we've put some money into the shops to be able to increase their capacity to take on cars.

Okay, and that 90% number, that's obviously extraordinarily high if I heard it correctly. Is that sort of a sustainable benchmark or is that enhanced by just the weak operating utilization environment for the major rails?

Yeah, so again, our target has for a while been to go from the 75% or so of tank and specialty freight maintenance up to that 90% number. So that certainly remains our target. And as we mentioned, I wouldn't characterize the environment that we've been in as particularly easy to get cars into the shop because we talked about the fact that when the renewal success percentage is lower, You see a little more churn in the fleet. More cars have to visit the facilities. And then, you know, there also have been some challenges related to COVID where occasionally we had to close the shop for a day or two to do some deep cleaning or other activities like that. So it really is, this has been a challenging environment to get cars through.

Yeah, I should pile on there and say that's something we haven't talked about is I think around quarantine and a variety of other things we've done around COVID, I mean, we estimate $3 to $5 million of expense this year. So it really does put into perspective how impressive the maintenance performance is year-to-date to do all this in the face of COVID.

Got it. Yeah, good job there. Just to wrap up two quick ones, did you repurchase shares this quarter? If so, how much? And then secondly, did Have you set long-term goals on sort of the desired size of your India fleet? And if so, you know, are you willing to share with investors at this point?

So we did not purchase any shares this quarter. We still have $150 million on our existing authorization, and I'll turn it over to Brian for India.

Yeah, on India, we had very little growth. year. But, you know, to the extent that COVID doesn't create a major shutdown, it could end up just being a blip in their growth for the next, you know, for the last and ongoing 12 to 18 months. But longer term, still got the same growth prospects. It was a great market coming into COVID. Hopefully it should be a great market coming out. So looking out four to five years, there's no reason that we couldn't, for instance, double the size of

Great. Thank you for taking my question.

Thank you. We will now take a question from Barry Haynes of Sage Asset Management.

Thanks very much. I had two questions. One is you mentioned that the rate on expiring leases next year should be lower than what we saw this year. Since that's kind of a known number, can you give us a little bit more help on magnitude of that? And I had one other one.

Yeah, so unfortunately we really can't because, again, the mix of cars coming off is constantly changing as we do things like have remarketing activity. Some of the cars that go into the shop, you have the scrap versus repair decision. There's just a lot of things that make it hard to quantify that. So we really need to just stick with the directional guidance.

Okay, thanks. And then the other question, just following up on the fact that lease rates were flat sequentially, so maybe the market's stabilizing some. But if we were to look at by car type of your major car types in terms of the van versus what's in storage, what are the car types that were maybe just a little less in storage and you might see rates firm a little sooner versus... Which are the car types where you kind of have to slog through a bunch of supply and storage first before you get that improvement? Thanks.

Yep. So relative to last quarter, the car type that saw the greatest increase were probably grain cars. Expectation of a good harvest. And so that really was the car type that I would call out for versus last quarter. When you want to talk about versus sort of long-term norms, the car types that have performed the best throughout have been general service tank car types that are not serving the energy market.

Okay, thanks.

Thank you. We will take our last question from Steve O'Hara of Sudodian Company.

Hi, good morning. Thanks for fitting me in. Great. Hello. Yeah, you can hear me? We can hear you.

Okay, good. Yeah, so just on the sale of the engines, did you see what the dollar value of the sale was?

We did not.

And do you have that by any chance?

I don't have it in front of me.

Okay. And I think there – so you said that there was 18 engines sold and there's approximately 478 in the portfolio. Is that correct? Correct. Prior to that. Okay. Okay. Yep. All right. And then just on the – maybe just, you know, if you look at remarketing gains and things like that that have happened and where – maybe rail car values are now versus, you know, several years ago. Has there been any, you know, I mean, is there, you know, I think, you know, going forward, do you see your ability to generate those gains maybe, you know, somewhat suppressed versus, you know, prior time periods? I mean, I think if I look back, you know, at some point you were doing, you know, kind of north of a, you know, almost 100 million in 2015. That was obviously a very strong year, but, you know, 2018, I think it was 73 million. I mean, is that, you know, we more likely in the, you know, this neighborhood now in the maybe 50 to 60 range, do you think? Or, you know, just given what the market's doing, how do you think about that?

Yeah, so as you know from following us for a while, the gains on asset sales are, really can move around quite a bit quarter to quarter and year to year. And it's really hard to say what they'll be for any given time period. As you know, the way that we look at cars that we identify for that is really a portfolio management activity where we're looking for car types that we might be a little long on either because of where we think the market's going or the expiration profile or just the car type or the credit. So that's really how we identify cars that we're going to put into a sales package and calling exactly how that gain will move over time is pretty imprecise.

Okay. It's so opportunistic. I mean, the best example would be we sold, I don't know how many, but a lot of small cube covered hoppers back a few years ago before the current crisis. The ability to do that disappeared pretty quickly. But it's very opportunistic on our part, once again, to manage customer exposure, commodity exposure, equipment exposure. So a lot of that can change in a hurry and how receptive the market is to that.

Okay. That's helpful. And then just on the – what was it? Sorry. Within – On the Real North America side, you know, I think you said, you know, lease rates are, you know, up sequentially. But did you kind of talk about where they were versus kind of the lease rate maybe, you know, kind of coming into the year kind of in average terms or year over year?

Yeah. So versus a year ago, most tank car types – are probably down around um oh 25 or so uh freight cars have been challenged longer so they're so they're down less because they've been in a challenging environment longer they're probably down around most car types around 10 okay all right thanks um and then if there was any um you know within the uh the sale um of the engines at rolls uh at the jv um was there any

dividend paid on the any cash proceeds or was that reinvested or how was that dealt with?

Yeah, the cash from them was used to pay down the associated debt.

Okay. Okay. So there's no kind of leftover cash after that.

Correct.

Okay. All right.

Nope. That's it for me. Thank you.

Thank you. And we do have a follow-up question from Justin Long of Stevens.

Thanks for taking the follow-up. Tom, just had a couple things I wanted to clear up on the model going forward. For SG&A, do you feel like the third quarter is a good run rate for fourth quarter and beyond? And then also wanted to get any thoughts you had around the tax rate going forward.

Yep. So as far as SG&A goes, You know, we came into the year expecting it to be around $180 million if you account for the ASC sale. Through three quarters, we're at 126. So if you look at it on a run rate basis, we would finish around $10 to $15 million below that original expectation. And I think that's probably a reasonable way to think about it. Of course, you know, there's things that can make that move around a bit, but that's probably... reasonable way to look at it. As far as the effective tax rate, we would expect that to end the year somewhere around 29, 30%.

Okay, thanks. I'll leave it at that. I appreciate the time.

Thank you. And we have one other follow-up question from Justin Bergner of G Research.

Thanks again. I just wanted to make sure I heard you that industry participants, from your understanding, are moving to sort of scrapping more cars because it looks like GATX didn't scrap any of its cars in the third quarter or year to date based on line item zero. Maybe just any additional comments there?

Yeah. First of all, as far as GATX, on the last page of the press release, we provide the information on the cars we scrapped in the quarter, which were 623 cars this quarter. As far as the industry goes, what we would anticipate is with a little higher scrap price, and scrap prices are up over the last couple months. They're around 245 now, which is pretty close to the long-term average. They had been more in the 200 range. As those go up, when people like us make our scrap versus repair decisions, it makes it relatively more likely you're going to scrap when you compare those proceeds to what you can get from repairing the car. So our expectation would be, in general, if scrap prices stay where they are or increase, you would see a little more scrapping activity in the industry.

Okay, that makes sense. It was just that... It's just that you didn't generate any gains from that activity, but you still scrapped a good number of cars.

Correct. We scrapped a little over 600. Okay. Thank you.

Thank you.

Stakers, at this time we have no further questions.

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

Thank you, ladies and gentlemen. This concludes today's presentation. You may now disconnect.