GATX Corporation

We're about to begin. Good day and welcome to the GATX 2021 fourth quarter conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Ms. Sherry Hilleman, Director of Investor Relations. Please go ahead.

Thank you, Jen. Good morning, everyone, and thank you for joining GATX's fourth quarter and 2021 year-end earnings conference call. I'm joined today by Brian Kenney. President and CEO, Tom Ellman, Executive Vice President and CFO, and Bob Lyons, Executive Vice President and President of Real North America. Please note that some of the information you'll hear during our discussion today will consist of four 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 release. and those discussed in GATX's 2020 Form 10-K and 2021 Form 10-Q. GATX assumes no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances. I'll provide a quick overview of our 2021 fourth quarter and four-year results, and then Brian will provide additional comments on 2021 as well as our outlook for 2022. After that, we'll open the call up for questions. Earlier today, GATS reported 2021 fourth quarter net income from continuing operations of $61 million, or $1.69 per diluted share. This compares to 2020 fourth quarter net income from continuing operations of $17.8 million, or 50 cents per diluted share. The 2021 fourth quarter results include a net positive impact of $4 million or $0.11 per diluted share related to tax adjustments and other items. For the full year 2021, GATX reported net income from continuing operations of $143.1 million or $3.98 per diluted share. This compares to net income from continuing operations of $150.2 million or $4.24 per diluted share in 2020. The 2021 and 2020 full-year results include net negative impacts of $1.08 per diluted share and $0.35 per diluted share, respectively, associated with various tax adjustments and other items. These items are detailed on page 13 of our earnings release. Total 2021 investment volume was $1.1 billion as we continue to find attractive opportunities to invest in our businesses across the globe. Additionally, in 2021, GATX, we purchased about 131,000 shares for approximately $13 million. As of December 31st, 2021, we have approximately $137 million remaining under our existing repurchase authorization. Lastly, as noted in the earnings release, we currently expect 2022 earnings to be in the range of $5.50 to $5.80 per doula share. With that, I will now turn the call over to Brian.

Yeah, thanks, Sherry. Good morning, everyone. As Sherry said, I'll give you some brief color on our 2021 performance, but more importantly, get to some more detail underpinning our 2022 guidance. So let me get started. Sherry gave you the numbers, so I won't repeat them here, but I will say that we increasingly outperformed our expectations as we moved through the year. That was especially true at REL North America. As you saw in the press release, absolute lease rates have increased now for six consecutive quarters. And that drove our lease pricing index to be virtually flat in the quarter at negative 0.7%. But I'll give you more on where we think lease pricing is going in 2022 in just a minute. So the pricing strength was driven by solid demand, was driven by our diversified fleet composition, and was driven by excellent execution by our commercial team. As the year progressed, they took more risk. They pushed lease rates harder, and they succeeded. And they enjoyed high lease renewal success, which drove lower fleet churn than we expected coming into the year. And combined with lower railroad repairs and our ongoing efforts to drive more repairs into our own network, we thus experienced much lower maintenance costs than we originally expected. The last factor to talk about for 2021 in Rail North America was high asset values. Not only did the rail cars that we sold in the secondary market realize the values that we originally planned, But continued high scrap prices also drove scrap gains through 2021 as well. So it was a very strong year for Rail North America versus our expectations, and the team really did take advantage of an improving market. Turning to International Rail, we expected a significant increase in profitability in 2021, and they delivered. They increased their segment profit by over $21 million from 2020. That was about a 25% increase. That performance was driven by continuing strong underlying markets and increasing earnings from the significant investments that we've made over the last few years. In addition, they didn't have to deal with the foreign exchange headwinds that they dealt with in 2020. Within portfolio management, profit on our Rolls-Royce and Partners Finance joint ventures was down $40 million from the prior year, but that was just as we anticipated, and that JV continues to operate in a difficult market for long-haul air travel. And the drop in segment profit was driven by much lower asset remarketing gains relative to the prior year. Concerning our acquisition of TriFleet, our tank container leasing business, they too outperformed our expectations. The worldwide tank container market strengthened throughout the year. As you might remember, we originally expected TriFleet to be 10 cents dilutive to earnings in 2021, and that was due to the accounting associated with purchase price holdbacks and retention agreements in connection with the acquisition. But Tri-Fleet actually ended up 2021 being slightly accretive. So in summary, 2021 showed very strong financial performance versus our expectations, really across our businesses. Before I close the discussion on 2021, I want to point out, as Sherry indicated, we invested over a billion dollars again in 2021. About $360 million of that total was for railcar deliveries that we were obligated to take coming into the year. That's from our committed supply agreements in Real North America. But that means we were able to close over $770 million of other attractive investment opportunities in 2021 with our customers. And that was accomplished despite asset prices steadily increasing throughout the year. And from my perspective, that's extraordinary performance by the team. As I said in the last earnings call, it's getting tough to economically justify speculative investment due to the extremely high asset prices present in today's market. So to close that level of investment in 2021, our team had to secure the customers in advance. They had to have them commit to higher lease rates, and in many cases, longer lease terms, all in order to amortize that increase in asset costs. And their success in doing so is why these investments will be attractive financially to us despite the higher costs. So it points to a couple of things. But the success is a sign that not only does our team have strong customer relationships, it's also a sign that there's good demand for our new assets across our market. So a really good job by the team to secure that level of investment and still maintain our investment discipline. So let me turn to the 2022 outlook. I'll start by saying that we enjoy a strong balance sheet, excellent access to capital, continued favorable market conditions in our growing international rail businesses. And for the first time in years, the market for our largest business, Rail North America, seems to have turned the corner and has recovered to the point that the GHX fleet can experience some pricing leverage. So some detail on that point. As you know, Rail North America has been operating in a market with an oversupply situation for years, really since the crude by rail boom collapsed in early 2015. Over the last two years, you've heard us say that this market is gradually recovering. and that was due to natural industry fleet attrition, so spurred by the combination of reduced rail car manufacturing output combined with the scrapping of older cars. So for a fleet as well constructed and as well diversified as the GATX fleet, we think that market conditions have recovered to the point that we expect to see, on average, positive lease rate changes upon renewal in 2022. In fact, we currently expect our lease price index to show a positive 5% to 15% change this year. So that's a noteworthy development, as the last time we saw a positive change in the Lease Pricing Index for a full year was in 2015. We also anticipate continued high renewal success, slightly lower utilization this year, with a net effect of all these factors being that we expect a small revenue increase for Rail North America versus the last year. Looking at net maintenance expense, it's been a good news story. We've outperformed our expectations for this the last three years. In 2021, we continue to aggressively move more work from third-party facilities into our own network, and thus we realize lower than expected costs. But with over 90% of our tank car and covered hopper maintenance events now being performed in our own network, further efficiency gains from that strategy will slow in 2022. And with the labor disruptions we're currently seeing from COVID waves and the inflationary pressures on material costs, we currently expect we'll be doing well to have net maintenance expense be relatively flat in 2022. The last factor I want to discuss for Rail North America is asset disposition income. The secondary market for rail car sales in 2021 was very strong, as we said, and as expected, we realized much higher gains on asset dispositions versus the prior year. And asset prices remain high, and investor appetite is strong, and that's due to the widespread access to low-cost capital. And high scrap steel prices will expect another strong year for asset gains in real North America. In fact, I'd say we anticipate a level similar to or somewhat higher than 2021 as we continue to optimize our fleet. So, as always, if the secondary market changes, we'll change our disposition plans and we'll act economically. So the net effect of all this is that we expect 2022 segment profit at rail North America to be up in the $15 to $25 million range from 2021. Let me move to international rail, and I'll start with GHX Rail Europe. As we've discussed in recent years, the European rail wagon leasing market remains as robust as we've seen since we entered the market in the early 1990s. And we expect that favorable market to continue and we're investing more into that market and in 2022 we anticipate adding more than 1400 wagons at attractive lease rates. All while continuing to realize small renewal rate increases on the existing fleet so that combination of new investment and strong performance on the existing fleet is expected to result in an increase in real Europe's profit of four to $6 million in 2022. In Rail India, their 2021 fleet growth, as you know, was curtailed yet again by a manufacturing shutdown due to another COVID wave in the spring of last year. That risk obviously still remains, but absent another COVID shutdown, we anticipate significant growth in our Indian fleet this year, currently expecting to add over 1,200 wagons to our fleet in 2022. They also continue to diversify their car types, their customer mix, And their growth is expected to increase their profit in the range of $3 to $5 million this year. So combined with GHX Rail Europe, that means the expected segment profit growth for Rail International in total is expected to be in that $7 to $11 million range in 2022. So portfolio management, as I said earlier, the RRPF joint venture, that's our partnership with Rolls-Royce, continues to be hampered by the reduction in long-haul global air travel. Honestly, we've given up trying to estimate the timing with full recovery of air travel because it appears to be so dependent on the ebbs and flows of the pandemic. But we strongly believe in the ultimate recovery of that market. So in the meantime, we'll continue to focus on improving the JV's performance and finding attractive investment opportunities, such as the $350 million in direct engine investment that GA Tech's made in 2021. So in 2022, we expect lower segment profit of $5 to $7 million in portfolio management, and that's due primarily to lower asset remarketing activity at RRPS. And lastly, at Tri-Fleet, as I said, the tank container leasing market improved throughout 2021. It remains strong as we enter 2022. We did increase Tri-Fleet's investment in that business due to the strong market combined with GHX's more efficient access to low-cost capital. And I also think we're just starting to realize the customer synergies we anticipated before we purchased that business. And we currently expect trifly profit to increase in the $2 to $3 million range in 2022. Quickly, SG&A and other corporate costs. We are experiencing the same cost pressures that everyone is experiencing these days related to employee wage inflation, but also due to some growth-related headcount at Rental International. But that should be offset by some 2021 corporate costs that won't occur again this year. So right now we expect the SG&A and corporate costs will be essentially flat in 2022. The last item is our tax rate. It's projected to be a point or two lower this year due to some tax adjustments in 2021 that should not reoccur this year. The net effect of the increase in segment profit, flat SG&A and corporate costs, and a slightly lower tax rate, and the assumption of resumed share repurchase in 2022, results in our expectation that earnings per share will be in the range of 550 to 580 per diluted share this year. Again, all of this assumes no significant COVID-related disruptions again in 2022. I want to close by reminding you that, as always, 2022 will mark our 104th consecutive year of paying a dividend. a track record that very few can match. The GHX board meets this Friday. They will discuss our 2022 plan for the dividend. So we'll announce that decision at that time. Obviously, the board understands the importance of the dividend, and I think our century-long streak is a great example of our long-term record of success and commitment to our shareholders. So once again, I want to stress that GHX employees executed our plan very well yet again in 2021. And I'm really confident that between the investments we are making and the expectation that our largest business will see positive revenue trends for the first time in over six years, that will continue to reward our shareholders' confidence in us for years to come. So that's all I had. Operator, you can open it up to questions.