GATX Corporation

Thank you for standing by. My name is Janine and I will be your conference operator for today. At this time, I would like to welcome everyone to the GATX 2024 fourth quarter earnings call. All lines have been placed on mute to prevent any background noise. After today's presentation, there will be an opportunity to ask questions. To ask a question, press star followed by the number one on your touchtone phone. And to withdraw your question, Please press star followed by the number one again. I will now turn the call over to Ms. Sherry. Head of Admission Relations. Please go ahead.

Thank you, Janine. Good morning, and thank you for joining GATX's fourth quarter and 2024 year-end earnings conference call. I'm joined today by Bob Lyons, President and Chief Executive Officer. Tom Ellman, Executive Vice President and Chief Financial Officer. and Paul Titterton, Executive Vice President and President of Rail North America. As a reminder, some of the information you'll hear during our discussion today will consist of forward-looking statements. Actual results or trends could differ materially from those statements or forecasts. For more information, please refer to the risk factors included in our earnings release and those discussed in GATX's Form 10-K for 2023 and our other filings for the SEC. GATX assumes no obligation to update or revise any forelooking statements to reflect subsequent events or circumstances. I'll provide a quick overview of our 2024 fourth quarter and full year results. And then I'll turn it over to Bob for additional commentary on 2024, as well as our outlook for 2025. After that, we'll open the call up for questions. Earlier today, GATX reported 2024 fourth quarter net income of $76.5 million or $2.10 per diluted share. This compares to 2023 fourth quarter net income of $66 million or $1.81 per diluted share. The 2024 and 2023 fourth quarter results include net positive impacts of $0.17 per diluted share and $0.07 per diluted share, respectively, from tax adjustments and other items. For the full year 2024, GATX reported net income of $284.2 million, or $7.78 per dilute share. This compares to net income of $259.2 million, or $7.12 per dilute share in 2023. The 2024 full year results include a net negative impact of 11 cents per diluted share from tax adjustments and other items. The 2023 full year results include a net positive impact of 5 cents per diluted share from tax adjustments and other items. These items are detailed in the supplemental information pages of earnings release. For the second year in a row, Full year investment volume was over $1.6 billion, as we continue to find attractive opportunities to invest in our businesses globally. It should also be noted that RRPF, our Engine Leasing Joint Venture, invested over $900 million, as we continue to grow the asset base and platform. Lastly, as we noted in the earnings release, we expect 2025 earnings to be in the range of $8.30 to $8.70 per diluted share, which will mark another exceptional year of performance for GATX. With that quick overview, I will now turn the call over to Bob.

Thank you, Sherry, and thank you all for joining the call today. I'll provide some brief comments on 2024, and then we'll look ahead to the coming year. I'd like to open my comments first by thanking all the employees of GATX those here in Chicago and around the world, for their outstanding effort and contributions this past year. We're fortunate to have an experienced team across the board, and while each year they do face new challenges, they find opportunities to put capital to work at very attractive returns. One of the key performance measures we look at is our safety record. I usually mention this at the year-end call, but I should probably do so more often given its importance to us. Our financial results are of no matter unless our employees are safe, and that's all employees, but very important for those who work on the shop floor in an industrial environment. By all safety measures, 2024 was an outstanding year, and we'll continue to strive for better. We had record production in our maintenance facilities this past year, and we coupled that with record-level safety achievements at our shops in North America and Europe. So thank you to all the employees who made that happen. Regarding 2024 results, we came into the year expecting EPS in the 730 to 770 range. We exceeded the high end of that range with the results announced today. Importantly, as Sherry mentioned, we identified and closed on investment opportunities that'll continue to strengthen our global platform and position us really well for the years ahead. Rail North America's results were the main driver to our better than expected EPS results in 2024. We came into the year expecting segment profit at Rail North America to be up between $10 and $20 million, and we more than doubled the high end of that range. Part of that was on the revenue line, as we had more cars on lease than planned throughout the year. And we did this while essentially holding net maintenance right in line with the expectations we had coming into the year. But for those who followed us throughout the year, you know the largest driver to the outperformance of Rail North America was remarketing income. Based on the portfolio management plan we had entering the year, we expected remarketing income to come in somewhere between 90 and 100 million. As it turned out, Demand for GATX assets and the value we derived from those sales exceeded our expectations, and we had $120 million in remarketing income. I'm encouraged by the fact that despite higher interest rates, secondary market participants continue to value GATX offerings very highly. I think this is a testament to the diversity of the asset types that we sell, the quality of the customers and the underlying cash flows, the strength of the lease rates, and the terms and conditions embedded in our leases. Not all sales portfolios are equal. Our commercial team does an outstanding job of writing business every year that gives us the option to hold these rail cars in our portfolio long term, or if our portfolio optimization strategy dictates, to sell. And I think the demand for our assets in recent years, despite that rising rate environment, speaks volumes about our portfolio and supports the confidence I have in our ability to continue our track record of success in the secondary market. There are a number of other commercial achievements that I'd like to mention that set GATX up very well for the years ahead, and we'll stay focused at Rail North America for a moment. Our renewal success remained outstanding in the mid 80% levels, indicating that existing customers are keen to retain GATX assets they currently have on lease. Lease rates also remain at attractive levels, and the LPI came in at 26.7 in the fourth quarter. So therefore, we're renewing cars at higher rates with quality customers for longer term, and that's allowing us to embed very high-quality cash flow into the portfolio, which will pay benefit for years to come. In addition to Rail North America's outstanding performance, I was also very pleased with the achievements at Rail International and engine leasing during the year. Both GATX Rail Europe and GATX India achieved fleet milestones this past year, as we surpassed 30,000 wagons and 10,000 wagons, respectively. While hitting a wagon count milestone is a positive, it's only a cause for celebration if you do it the right way. and that's by adding assets that earn an attractive risk-adjusted return. We're doing so in both markets. Our international teams will continue to diversify their fleets and customer bases while adding assets in a disciplined manner. Before moving on to 2025, I want to comment on overall investment volumes. Looking back a couple years, in 2023, we exceeded $1.6 billion of investment volume, and we came into this past year indicating we would be around the same level. And indeed, that's where 2024 played out. We invested over $1.6 billion with an additional $900 million invested at Rolls-Royce Partners, our engine leasing joint venture. It's important to note that we do not develop an investment budget at the corporate level and then push it down to the business units. We do the opposite. We go bottoms up with the business units determining what works for them and what opportunities are present in a given year in their respective markets. The corporate team then serves as that extra check to ensure we're earning the right return on those investments. Looking at 2025, At Rail North America, we expect a very similar operating environment as we experienced this past year. There are two things I want to note. First, as you know, many of you know, overall carload traffic in North America has been relatively flat, and it's been that way for a number of years. We expect that to be the case again in 2025. I mention this because it's important for everyone to know that we are planning on flat carload growth. If we get any lift above that, That's welcome. That'd be great. But it's important to know our results are not predicated on this. And second, we've been experiencing and talking about this being a supply led recovery, and that continues to hold true. The rail car builders in North America are being very disciplined about matching their output to meet market demand. And that's a very good thing. Furthermore, given the age of the North American fleet and stable demand from scrappers, temporary imbalances, and particular card types are being quickly addressed via scrapping, and that's bringing supply and demand back into balance. So those general themes we expect to continue into 2025 and beyond. Addressing some of the key commercial terms that we talk about frequently at Rail North America, we expect similar performance in the year ahead as we saw last year. Utilization in the range of 99% plus, We expect the LPI to be in the mid to high 20% range, and we expect renewal success above 80%. With these data points in mind and factoring in additions to the fleet, we expect lease revenue at Rail North America to increase approximately $75 million in 2025. Offsetting some of this revenue lift, our tank car compliance activity increases modestly in the year ahead. Therefore, we expect net maintenance to increase approximately $10 million in 2025. Also, we anticipate the higher interest rate environment that we've been operating in will continue this year, and our interest expense will rise accordingly. Also, with a larger asset base comes increased depreciation, and these two factors combined, the ownership costs of interest and depreciation, we expect to increase approximately $40 million. The last key variable around Rail North America's segment profit, and as those of you who have followed us for a long time know, it's the most variable of our items, is remarketing income. However, given the demand and the depth and breadth of buyers we experienced in recent years and their stated appetite for GATX assets, we expect another robust year in the secondary market. As a result, We see remarketing income coming in in the range of 100 to 110 million in 2025, another very healthy year. As for Rail North America's investment volume, 2024 was a record year with over $1 billion in capital put to work. That was truly an exceptional year. In addition to our programmatic investments through our supply agreement, We identified new car spot opportunities and secondary market opportunities at an unusually high pace. Visibility into these same opportunities in 2025 is less clear right now, so we're currently expecting investments in the range of $800 million at Rail North America, which will mark another very strong year. Taking all these factors into consideration, We see rail North America segment profit up slightly in 2025 with the high end of that range being plus 20 million at rail international. Talk about Europe. First, the economic environment remains a challenge, particularly in the region's largest economy, Germany. This impacts our customers directly as it did last year. So growth can be a challenge. However, the GATX Rail Europe team has done an excellent job investing and building the business, and we'll see profit growth in this market. The same in India, although there we have the benefit of economic tailwinds, with most economists forecasting GDP in India at 6% or higher for the year ahead. Taken together, we expect rail international segment profit to increase by 5 to 15 million in 2025. At GATX Engine Leasing, the market environment remains very favorable. Not only is global air travel continuing to rise, the long-term fundamental trends in this market are positive. Consider that despite periodic shocks to air travel, such as 9-11, the global financial crisis, the pandemic, and various regional conflicts, air travel and the demand for aircraft and engines has shown tremendous resilience. Rolls-Royce, our partner in RRPF, is posting very strong operating and financial results, and their business has strengthened materially. As we mentioned, in 2024, RRPF invested $900 million for its own account, bringing its total asset base to over $4.7 billion. Additionally, GATX grew its direct engine leasing portfolio in 2024 to over $900 million. Given the outlook for our engine investments, we expect the engine leasing segment profit to increase by 20 to 30 million in 2025. Regarding SG&A, we are working very hard to hold the line on costs despite inflationary pressures. In 2025, our goal is to hold that increase to a modest level over 2024, something in the $5 million range. But I want to be clear. That's going to be difficult to do. But we are hyper-focused on it, and we're all paying attention to cost controls. We want to run our business as efficiently as we can. For total investment across GATX, I noted that Rail North America will be in the $800 million range. And flowing this through to GATX Consolidated, we expect 2025 full-year investment volume to be in the range of $1.4 billion. That would mark another outstanding year. Putting all these factors together, we expect EPS in the range of $8.30 to $8.70 per diluted share, which would mark another record year of EPS at GATX. In closing, I'd like to thank our customers around the world. We provide assets that are critical to your operations, and we take that responsibility and the trust you place in us very seriously. We'll continue working very hard on your behalf. And lastly, several of our largest shareholders have been with GATX for 10 plus years, and in some cases, multiple decades. I want to thank them and all of our shareholders for your support. We will remain focused on investing in a disciplined manner, growing our global franchise, and generating attractive risk-adjusted returns for you. So with that, let's go to questions.