GATX Corporation (GATX) Earnings Call Transcript & Summary

Hello, and welcome to the Annual Meeting of Shareholders of GATX Corporation. [Operator Instructions] It is now my pleasure to turn today's meeting over to Brian Kenney, Chairman, President and CEO of GATX. Mr. Kenney, the floor is yours.

Thank you, operator, and good morning, everyone. My name is Brian Kenney. I'm the Chairman and Chief Executive Officer of GATX, and welcome to our 2021 annual meeting of shareholders. Due to the public health impact of COVID-19 and to protect the health and well-being of our employees and shareholders, we are conducting this meeting solely in a virtual format as a live webcast. Links to the proxy statement and our 2020 annual report to shareholders are provided on the screen. We hope this virtual meeting will maximize the participation of our shareholders regardless of your location. In addition to myself, joining today's virtual meeting are the other current members of our Board of Directors, Diane Aigotti, Anne Arvia, James Ream, Adam Stanley, David Sutherland, Stephen Wilson and Paul Yovovich. I would also like to take a moment to recognize Ernst Häberli, who's retiring as a GATX Director and not standing for election this year. Ernst made many valuable contributions during his 14-year tenure as a GATX director, and all of us will miss his insight and counsel. Also in attendance today are Dan Hoffenkamp and [ Huang Lee ] representatives of our independent registered accountants, Ernst & Young; and from Computershare, the inspector of election, Ruth Brunette. Now I'd like to turn the meeting over to Deb Golden, our General Counsel and Corporate Secretary, who will discuss the conduct of today's meeting. Deb?

Thank you, Brian, and good morning, all. We will conduct this meeting in accordance with the bylaws of GATX Corporation and the rules of conduct, which were posted on our meeting website today. All shareholders of record on February 26, 2021, are entitled to vote at the meeting, and I have been advised that a quorum for the conduct of business is present. Shareholders who wish to vote at this meeting may do so now or at any time until we declare the polls closed by using the Cast Your Vote link on the meeting website. Any shareholder who has already voted and does not wish to change their vote need not take any further action. Questions may be submitted now by clicking on the dialogue box at the top of the screening. If you submitted a question prior to the start of the annual meeting, there is no need to submit it again. Nonshareholder guests will not be permitted to submit questions. We will now proceed with the formal business of the meeting. There are 3 items of business to be considered by GATX shareholders. The first item of business is the election of the 8 nominees named in the proxy statement to serve on the Board of Directors until the next annual meeting of Shareholders or until their successors are elected and duly qualified. The second item is to approve the compensation of the company's named executive officers. This proposal is a nonbinding shareholder advisory vote. The third item is a proposal to ratify the audit committee's appointment of Ernst & Young LLP as the company's independent registered public accounting firm for 2021. The company recommends that shareholders vote for each of the Director nominees named in the company's proxy statement and for Proposals 2 and 3. Voting will now be conducted on the 3 items of business presented. If you have already voted by proxy or by Internet or telephone, you do not need to vote at this meeting unless you want to change your vote. [Voting]

I now declare the polls closed and return the meeting to Mr. Kenney.

Okay. Thanks, Deb. So I want to take just the next few minutes to update you on the current state of our various markets. And I'll discuss the business imperatives that we're focusing on as we move through 2021. So let's get started. As most of you know, coming into the COVID pandemic, the North American railcar leasing market was already in a weakened state. That was due to persistent supply of railcars during the last few years. The economic fallout from the pandemic then drove railcar loadings to below the level we saw in 2009 during the Great recession, and that further drove lease rates down. The good news is that the rail market has since climbed off that bottom we saw in the middle of 2020. And railcar loadings in the first quarter, although they're still down 2.1% versus the first quarter of 2020 they're showing some signs of strength, at least in certain markets, intermodal and Boxcar markets being good examples. On the other side of the spectrum, energy-related carloads, so coal, frac sand, petroleum, continue to weigh -- negatively weigh on comparisons versus 2020. Also, railroad service has suffered both due to the extreme weather throughout the Southern U.S. as well as the fallout from precision scheduled railroading that has really reduced the ability of railroads to respond to a significant increase in traffic. Despite all these conflicting indicators, lease rates have gradually come off the bottom we experienced in the middle of last year. So to summarize Rail North America, the recovery is so far playing out like we thought, which is absent a demand catalyst, that we do not anticipate right now, we should see a slow climb out of the industry oversupply situation. Manufacturers have reduced production capacity, new car orders are lower. You're starting to see some industry fleet attrition. And as all this continues, supply and demand will naturally come back into balance as it has historically. Now it's hard to predict the timing of when the industry gets back into balance, but we're confident that we'll get there. Moving to Rail International. Both our European and Indian railcar leasing businesses were operating in a much stronger market coming into the pandemic, at least relative to North America. For instance, in Europe, there is currently tremendous political support for moving freight traffic from overcrowded and noisy highways to rail as part of the European Green deal. Now the EU's aim is to eliminate 90% of carbon emissions from transport, and they're actually shooting to move 75% of freight from road to rail over the very long term. And importantly, they're backing this talk up with billions of dollars, billions of euros, I should say, in rail infrastructure investment. Also adding to the favorable leasing market conditions in Europe are very long manufacturing backlogs at the railcar manufacturers that helps drive our existing fleet utilization higher and our lease rates higher as well as the continuation of the replacement cycle in Europe. The industry fleet in Europe, especially on the tank wagon side is considerably older and we have taken advantage of that fact to invest in newer, higher capacity wagons and deploy them in replacement of the older wagons that are currently being scrapped. In India, one of the reasons we entered that market back in 2008 was to take advantage of the faster growth economy and that's still the case. In fact, the projected growth rate in Indian GDP is 10% to 12% for the upcoming fiscal year. And so far in 2021, freight rail traffic in India has recovered very quickly off the bottom experienced in the second quarter last year, especially in the container market, which is important to GATX because that is our largest segment. The counterpoint, of course, to all these positive fundamentals internationally is the fact that COVID infections are surging in Europe. And especially over the last few weeks in India, lockdowns are in place. We'll have to monitor where this goes because if it doesn't abate, the improvements in growth we've seen internationally could be sidetracked in 2021 or at least until these governments make progress against the rising tide of infections. Moving on. Speaking of COVID impact. The business where it affected GATX the most was RRPS. That's our aircraft spare engine leasing joint venture with Rolls-Royce. As you probably know, global airline passenger volume is still down dramatically, 75% from where it was in 2019, and traffic volume is down 90% in international markets that's due to continuing travel restrictions, and that's more impactful to our joint venture due to our primary focus on leasing wide-body engines. Despite those market conditions, the RRPF team has done a great job managing their airline customers who are seeking financial relief, and they are effectively dealing with the engines that are being returned off lease. RRPF does remain profitable in 2021, and they have excellent liquidity. And they're actually identifying new and attractive investment opportunities, which I'll talk about in a minute. So our perspective is, although we don't know the timing of a recovery in the airline market, we're confident it will come just as airline revenue passenger miles have recovered so many times historically after major world events. And lastly, our acquisition of Trifleet, the industry's fourth largest tank container leasing business is going very well in the first few months. The tank container leasing market is stable. We're experiencing strong new investment volume. We're already pursuing those customer synergies that we thought would be there for Trifleet once they were owned by GATX. And the integration of this business into the GATX team is proceeding nicely. So now I'll touch on the priorities in 2021 given the conditions in our underlying markets. As is always the case for GATX, in a down market, we try to prioritize significant asset investment, and that's due to the attractive opportunities that often become available in such markets. And we're executing on this priority. So the best example is the $350 million of direct GATX investment in aircraft spare engines that we made in the first quarter. These engines were acquired at advantaged prices. They're on long-term lease at attractive rates to the strongest airlines in the world, and these investments are projected to provide an excellent return to our shareholders. We're also excited about our recent entry into the tank container leasing market through the acquisition of Trifleet, and lastly, we also had some customer commitments for significant railcar investments around North America outside of our normal supply agreements. Now as COVID subsides and rail markets, especially in North America, continue to improve, we need to shift our focus from protecting fleet utilization to pushing lease rates higher, especially important in Rail North America as market rates have been well below long-term averages and below the levels where we can earn an attractive return. But the fact that we're even considering this for some car types is recent and good news. Our fleet utilization across our global rail businesses is consistently higher than our competitors. And that's due in part to the superior composition of our fleet. But it's also due to the excellent service we provide as part of our leases. So to maintain this advantage, we are continuously trying to increase the quality as well as the number of services we provide. These efforts currently range from trying to convince the Indian railways to allow us to provide wagon maintenance, to optimize our maintenance networks, to improve service in certain geographic areas of both Europe and North America, to introducing railcar telematics, a relevant data analysis to our customers around the world. So these efforts will become more important in the coming years, and we're trying to continue to lead the way. Admittedly, a huge challenge over the last year has been managing our people. Sorry. Things getting away from me there. Sorry. So we've done a good job to date, keeping them safe and productive, but it's been extremely difficult during the pandemic to manage a global workforce when a large percentage of the people literally went 100% remote overnight. And keeping them engaged and focused on their own career development is critical. And honestly, we're still finding our way through this dilemma. Also, the rail industry is not known for its diversity. So we're developing new methods and new metrics to improve and track our success in developing a more diverse culture. I plan on spending time at this meeting next year to show you the results of those actions that we are currently taking. And lastly, obviously, we are always focused on shareholder return. Our track record of enhancing that return through dividends and share repurchase is excellent, having returned $1.7 billion to shareholders over the last 12 years. Balancing that return of capital against the investment in our core business is always a challenge, especially in a market where, as I said earlier, there are a lot of attractive investment opportunities, including an investment in our own shares. So we will continue to weigh both options, try to get that correct balance, and I'm confident we'll get the equation right for our shareholders. As you can see on this next slide, we've done that for the last 16-plus years, and this management team has been in place for that long. So we're proud of this record, but I want everyone to realize that we don't take it for granted. We are looking to the future, and we're determined to repeat or hopefully exceed this outperformance in the coming years as well. So that's all I had this morning. I do want to quickly thank the GATX team and the GATX Board for their performance and support over the last year. Thank you all for hanging in there, and that's all I had this morning. So Deb, back to you. Do you have the report of the inspector of election?

Yes. The inspector has tabulated the votes, and her preliminary report indicates that each of the Director nominees named in the company's proxy statement has been elected. The nonbinding advisory resolution approving the compensation of the company's named executive officers has been approved, and the appointment of Ernst & Young as the company's independent registered public accounting firm for 2021 has been ratified. The final report of the inspector of election will be filed with the minutes of this meeting. I will turn the meeting back to Mr. Kenney.

Okay. Do we have any questions from shareholders?

There are no questions.

Okay. Thanks, Lis. So we have no questions. So that concludes our annual meeting. In closing, I'd like to thank everyone for adapting to this virtual format, and we hope to see you in person next year. Thanks again. That adjourns the meeting.

This concludes the meeting. You may now disconnect.