At this time, I'd like to welcome everyone to the GATX 2022 Fourth Quarter and Full Year Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator instructions] Thank you. Shari Hellerman, Head of Investor Relations, you may begin.

Thank you, Chris. Good morning, everyone, and thank you for joining GATX's fourth quarter and 2022 year-end earnings conference call. I'm joined today by Bob Lyons, President and CEO; Tom Ellman, Executive Vice President and CFO; and Paul Titterton, Executive Vice President and President of Rail North America. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statement. Actual results or trends could defer 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 2021 and in our other filings with the SEC. 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 2022 fourth quarter and full year results. And then I'll turn it over to Bob for additional commentary on 2022, as well as our outlook for 2023. After that, we'll open the call up for questions. Earlier today, GATX reported 2022 fourth quarter net income of $48.4 million or $1.36 per diluted share. This compares to 2021 fourth quarter net income of $61 million or $1.69 per diluted share. The 2022 fourth quarter results include a net negative impact from tax adjustments and other items, of $0.18 per diluted share. The 2021 fourth quarter results include a net positive impact from tax adjustments and other items of $0.11 per diluted share. For the full year 2022, GATX reported net income of $155.9 million or $4.35 per diluted share. This compares to net income of $143.1 million or $3.98 per diluted share in 2021. The 2022 and 2021 full year results include net negative impact from tax adjustments and other items of $1.72 per diluted share and $1.08 per diluted share, respectively. Details related to tax adjustments and other items can be found on page 13 of our earnings release. As noted in the release, we currently expect 2023 earnings to be in the range of $6.50 per diluted share to $6.90 per diluted share. With that, I will now turn the call over to Bob.

Thank you, Shari, and thank you all for joining the call today. I'll provide some brief comments on 2022 performance versus the outlook we had coming into the year, and then try to provide some additional color on the 2023 guidance we gave in this morning's press release. Before jumping in, I want to thank our employees for their continued focus and the effort they've put forth over the past year. Across GATX and all of our businesses, Rail North America, GATX Rail Europe, GATX Rail India, Trifleet, and our engine leasing business and partnership with Rolls-Royce, everyone performed at a very high level. I fully expect we'll carry that momentum into 2023, all with the goal of continuing to generate attractive risk-adjusted returns for our shareholders. So, let's start by looking back first at 2022, and I'll try to do so briefly. We outperformed our initial expectations for two key reasons. One, Rail North America performed better than planned. And two, Portfolio Management did the same. So, let's look a little bit more specifically at each one of those. At Rail North America, in the middle of the year -- in the middle of 2022, we updated our earnings guidance based on strong secondary market activity. That continued in the back-half of the year, so for the full year we came in higher than planned. We took full advantage of the opportunity to continue to optimize our fleet. Second, the lease rate environment for existing railcars was very favorable. There were a host of factors that led to this. But one of the key things was, is that customers were very focused on retaining holding on to the cars they had in their existing fleet. Therefore, lease rates increased throughout the year and lease revenue came in stronger than…

Thank you. [Operator Instructions] Our first question is from Justin Long with Stephens. Your line is open.

Thanks and good morning.

Good morning.

I wanted to start with the question on the trend you're seeing in absolute lease rates. It sounds like you saw another increase sequentially in the fourth quarter. But I was wondering if you could quantify that. And then on the guidance for the LPI to increase more than it did in 2022, what's the underlying assumption for how lease rates trend sequentially from here just on a quarter-to-quarter basis going forward?

So, this is Paul speaking. We're going to bifurcate that; I'll take the first part, and Tom will take the second part of your question. So, with respect to absolute rates when we think about sequential improvement from the previous quarter, broadly speaking, for both tank and freight cars, we're seeing sequential improvement in the low teens. That's going to vary by car type, but certainly substantial sequential improvement in lease rates.

So then, for the LTI, going forward, we would expect to see a level similar to what we've seen through the course of this year, where, quarter-to-quarter, it varies, but a steady drumbeat of the increasing lease rates.

Okay, very helpful. And then, I wanted to ask about RRPF as well, just because the contribution went up pretty significantly in the fourth quarter relative to the third quarter. When you look at that $25 million contribution is there a way to help us understand how much of that is recurring earnings versus remarketing income, and then any thoughts on remarketing expectations specific to RRPF this year?

Yes, Justin, so you've been following us a long time and know that that remarketing piece, just like it does in the rail business, can move around quite a bit quarter-to-quarter. So, first of all, just to give you the numbers, for the fourth quarter the operating piece was about $12 million and the remarketing piece was about $13 million. That going forward, Bob mentioned in his opening comments, that we expect increasing contribution on segment profit. And we will see that on both sides. Again, calling the exact timing and magnitude of the remarketing is something that's pretty challenging.

Okay, and just, lastly, to clarify on that Portfolio Management guidance for 2023. You talked about a $10 million to $15 million increase in segment profit. I know you've got the incremental contribution from the engine investments that will be wholly owned. So, does that imply that RRPF is relatively flat year-over-year?

No, it doesn't. So, that contribution is -- in Portfolio Management is in total, and you would expect to see about somewhere in the order of two-thirds one-third RRPF contribution to GEL contribution.

Great. Very helpful. Thanks so much for the time.

The next question is from Matt Elkott with Cowen. Your line is open.

Good morning and thank you. I had a question on the average term. In the past, when you had -- you've had a strong upcycle, I think they've gotten as high as 70 months, and although that was all the way back in 3Q '07. Can you just give us some color on why the average terms have not moved up as much as one would think in such a strong environment?

Yes, Matt, the LPI term for the quarter was about 34 months. And as you noted, it's been in the low-30s all year. Last quarter, we noted that the LPI term is starting to get pretty disconnected from the actual renewal term on a fleet-wide basis. So, last quarter, we gave you that number, we provided that average renewal term for all quarterly renewal activity. And for Q3 that was 49 months. For the fourth quarter, it's 61 months. And for the full-year, it's 52 months. As is the case with all of our statistics, we caution against an over-reliance on any single quarter. So, I would focus much more on that 52-month year-to-date number much more so than the quarterly number I provided. As we look forward, we would expect, directionally, that term to increase in 2023.

That's very helpful, Tom. And then as you guys are expecting another strong year of secondary market activity, any insights on where you see your leased fleet -- can you maintain the same size of fleet, I guess, as you take advantage of a very strong secondary market? And will that come using your existing supply agreements in manufacturing because I would imagine it's very challenging to add in the secondary market given how strong it is?

Yes, so this is Paul. I'll start, and I think Bob may chime in as well here. But, yes, I mean, at the end of the day, first of all, we're economic animals. So, we are going to invest and divest based on what the economics tell us. And so, we'll buy when we can generate a positive NPV from buying, and we'll sell when we can get a higher price than our hold value. So with that having been said, we are conscious of the benefits of scale in our business, and we believe we can maintain those benefits of scale. And I'll add actually that within in the secondary markets, we are seeing some increasing ability for us to be successful while sticking to our investment discipline. And so, I'm cautiously optimistic that we're going to see more success in the secondary markets. Certainly, the indications are that we're seeing that right now.

Yes, Matt, and just to add to Paul's comment too, I've been encouraged actually on both sides of the secondary market as 2022 unfolded. And we're seeing, I think, similar trends here in the early part of 2023 for opportunities to sell, but also to be a little bit more successful in our bidding activity on the buy side.

Is this -- are these encouraging signs for potential acquisitions in the secondary market coming from larger fleets, Bob and Paul, or smaller privately held fleets?

It can be either. And given our activity and our presence in the market, we see portfolios and we see the -- kind of the offering packages from both, the big and the small sellers. So, it's both. And we've seen, I would say, that the success rate has also been driven by the fact that we've seen some offerings of assets that are of particular interest to GATX in where we have a set view and a very, potentially, unique view on trends over the longer-term. So, we've been able to ferret out some pretty good buying opportunities.

Got it. Bob, are you surprised that secondary market valuations have held up so strongly despite the interest rate increases?

Well, at a high level, I'd say yes because, I guess I wake up being pessimistic. But you would think with rising interest rates that that would somehow eventually kind of lead into less activity in the secondary market, but we haven't seen it. And currently, investors, clearly they're still searching for hard assets with a very good yield attached. And we have high-quality assets with high-quality customers on long-term lease, very strong high-quality cash flow. And so, there's still a robust market for those.

And I'll just add too. This is Paul speaking again. We've been very successful recently attaching more cash flows to those assets in our portfolio. We've used this strong market to originate attractive leases which will allow us to sort of restock the portfolio of potential sale, going forward. So, that's one of the benefits of a strengthening market like this is it allows you to continue to reload your potential future secondary market offerings.

Got it. Thank you, Paul. Thanks, Bob, Tom, and Shari.

Thank you.

Thank you.

The next question is from Allison Poliniak with Wells Fargo. Your line is open.

Hi, good morning. Just want to go to that algorithm that you guys have historically provided in terms of rail velocity and cars needed online. I know you were -- sort of come up broken last year, but as we sort of entered this year how are you viewing that? We could be in a situation of, I would think accelerating velocity, potentially, and freight coming down the other side of it. So, would just love your perspective on that, if that's a risk as we look out to the back half? Thanks.

So, I think, with respect to velocity -- this is Paul speaking again. First of all, what I want to say is it's going to be difficult to predict railroad velocity. And so, the railroads obviously are trying to hire, they're trying to improve service right now. We're certainly not in a position to predict on behalf of the railroads what's going to happen with velocity. We do continue to have the view though that there is -- we refer to as freight on the sidelines, freight that is not moving right now that could move in the network if service were improved. So, when we look out and look at the possibility of improved velocity, improved network fluidity, we don't necessarily see that as a downside as we might have seen in the past because we think there's freight that wants to be on rail that will move on to rail once the service is available to take it. So, I would describe us as more optimistic in the face of potentially improving velocity than we might have seen in other cycles.

Yes, and Allison, I'll add to that too, Paul's comment there that, as we've said historically, better -- higher velocity and more opportunities for the railroads is not something that we fear. We want our customers choosing rail as their mode of choice. And so we don't want a situation where customers are frustrated because they can't move product by rail and look elsewhere. So, we feel much better and, as Paul said, more optimistic about the fact that if they do improve velocity we know, from talking with customers, there's product there ready to go on rail.

Great. That's helpful. And then just a question on boxcars, it seems like there's been a structural decline in terms of a lot of scrappage not necessarily surprising, but just want to understand how you view that period, I see you investing, but maybe not at the level of the scrappage rate. Is there a size that maybe you're too large right now, just any thoughts on that fleet overall?

No, actually I would say quite the opposite. We've been investing in boxcars, as has the industry. We're not alone in that. We're going through a cycle because there were a huge number of boxcars built in the 1970's, really up through 1981, and those are scrapping out. So, what we're seeing here is the ageing out of the fleet, and then the replacement investment in higher-capacity newer cars to address that. And we think that that replacement demand is attractive. We also think that, to the extent, we see more modal shift to rail, particularly ESG-driven modal shift in the future from companies that want to reduce their carbon footprint, the boxcar could really be a beneficiary of that. So, I would say right now, for us, the boxcar portfolio has been a good portfolio for us. And we're hoping and expecting it continues to be a good portfolio for us.

Perfect. Thank you.

The next question is from Bascome Majors with Susquehanna. Your line is open.

Looking at the portfolio, can you talk a little bit about where lease rates are versus your assessments with the long-term average?

So, we are finally in a position now where we can report that for most of the portfolio -- for the significant majority of the portfolio, lease rates are now generally over their long-term averages. It's higher for certain car types, lower for other car types. And I would say right now, slightly higher across the board for tank than it is for freight. But in both cases, we are generally at least a bit over our long-term averages across the portfolio.

And as you look forward and think about positioning the portfolio, can you talk a little bit high-level about your priority of rate versus term this year, and where you're really pushing harder?

So, we are, as we are in all rising rate environments, particularly when rates get above our long-term averages, we are going to work with our customers to incentivize them to choose longer-term leases. And so, this is a playbook that we've repeated in every upcycle. And we're going to continue to push on that now.

And lastly, it certainly sounds, at least with the tone, that you're more enthusiastic about investing acquisitively in North American rail assets today than you have been in your recent quarter. Can you talk a little bit -- I mean, are we right in that assessment? And regardless of whether we are or not, just anything that you can share about what has changed or where opportunities have resumed in sales, and how assets are being kind of shaken out of where they were or valuations are being changed? And anything to just give us a little bit of more color on that would be helpful? Thanks.

Sure, Bascome. I -- what I would say is, up or down market, GATX is always interested in adding assets to the portfolio, particularly rolling stock. We've done so in up markets, we've done so in down markets. It comes down to us to the attractiveness of the underlying asset and the economic return we can earn. And so, the diversified fleet that we have, there's no asset out there we're not familiar with. And absolutely, we want to continue, that the portfolio is very -- the franchise is very scalable. Platform is very scalable, we want to add asset. But we certainly won't chase them. We'll be -- continue to be very disciplined and selective. But yes, we're always -- there probably isn't many portfolios or many assets that change hands out there that we don't get a look at. And we buy when it makes sense and checks all the right boxes for us.

I mean -- but to follow up, it certainly seems like your enthusiasm on something happening sooner rather than later is different than it has been in recent quarters. I'm just trying to understand if there are new assets that have presented themselves or if valuations are coming down broadly across the board, and really just trying to square that with your enthusiasm for continuing to generate quite a bit of remarketing income in the North American rail business? Thanks.

Well, I don't think our view has changed materially over the course of the last few quarters or last few years for that matter. There's often more portfolios talked about than actually come to market. That proves through up or down markets. Would be an interested buyer? Always. Are we going to be extremely disciplined? Always. I think the earlier -- the comment earlier on this call really referred to smaller opportunities that we've seen, one-off asset-type acquisitions that we've been able to execute because we like a particular asset. But as far as bigger portfolios are concerned, I don't really have any other comment to add on that. Would we be interested? Of course, but have no insight or thought on anything taking place in the market.

Thank you both.

Yes, thank you.

[Operator Instructions] The next question is from Justin Bergner with Gabelli Funds. Your line is open.

Good morning, Bob. Good morning, Tom. Good morning, Shari.

Good morning.

Paul is offended, Justin, that you left him out.

Oh, good morning, Paul. I haven't met you in person. Yes, but good morning as well.

Good morning, Justin.

First question would just be on some of the market dynamic, so, you talked about, I think, sequential low double-digit lease rates in tank and freight which would -- have been acceleration from my guess, the 5% or less last quarter. So, what's going on to drive that acceleration from your vantage point?

So, it's really more of the same phenomenon we've talked about in recent calls, which is to say you have an existing railcar market that is relatively tight, and that's been driven by a fair bit of scrappage. It's been driven by relatively low velocity on the part of the railroads. And it's been driven by the fact that, thanks to high new car prices and labor availability, the new car production that we're seeing is not consistent with past upswings in the market. So, you have less new capacity coming in, you've had older capacity going out, and you've had relatively low velocity, coupled with what we think is a continued relatively robust underlying demand to move freight by rail. So, it's really all of those things that have created tightness in the fleet and that have allowed us to increase prices.

Got you. All right. So the new car production constraints are maybe not something that whereas highlighted before that are part of the equation, I guess?

Yes, that is correct. I mean, if you look back to the crude boom, you had an industry that produced new cars at a rate of up to 80,000 a year. And at current production levels, the industry is going to be nowhere near that level. So, that's one of the key differences in this market.

Okay, that's helpful. And then the scrappage rate, I guess, at least on your book, so about 500 cars per quarter. That's still a healthy scrappage rate. And I assume it's reflective of what's going on industry-wide. Is that sort of a reasonable run rate going forward or are we going to sort of go below normal scrappage given how many cars were scrapped in 2021?

Given the size of our fleet, Justin, that's a pretty reasonable number on a quarterly basis in our annualized -- just based on the eight cars that will be aging out of the fleet naturally, that’s about the right number.

Okay. And then just a couple of nuanced questions, what is the marketable security account on your balance sheet the $148.5 million -- or the short-term investment number related to the $148.5 million?

Yes, Justin, those are treasury.

Okay. And on the tax rate you mentioned sort of a similar going forward in that 25%-ish range, so, nothing unusual there. Is there anything as it relates to your ability to I guess postpone cash taxes, it gets harder as it accelerated depreciation comes down?

Yes, Justin, we don’t anticipate anything materially changing as far as our cash taxes and our ability to utilize our investment.

Okay, great. And then lastly, just -- you mentioned the breakdown of the increase in expected segment profit in Portfolio Management between RRPF. And I guess, the non-JV part of the book and you just sort of clarify that? I think I missed that. And then, is this direct investment -- are you seeing more opportunity there, or is this more of a one-off?

Yes. So, the direct investment originally was the engines that we purchased a couple of years ago. And then, we added to it this quarter with an additional $150 million of investment. And the combination of those two is what we are referring to with GATX equipment leasing, which is the wholly-owned aircraft engines.

And, Justin, we’ll continue to look for opportunities there as well to kind of methodically, systematically add to that portfolio. We like the asset a lot. It’s been a great return, managed by our joint venture partnership. Those are a very good fit for what GATX does well. So, with our partner managing, it’s a good equation. So, yes, we will continue to look for opportunities there.

Okay. You said two-thirds of the increase in Portfolio Management profit is likely to come from the JV and one-third outside the JV?

Correct.

Okay, got it. Thank you.

Thank you.

We have no further questions at this time. I’ll turn it over to Shari Hellerman for any closing comments.

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

This concludes today's conference call. You may now disconnect. Thank you.