NORTHEAST ASSOCIATION OF RAIL SHIPPERS (NEARS) APRIL 2018
Forward-Looking Statements Statements in this Presentation not based on historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and, accordingly, involve known and unknown risks and uncertainties that are difficult to predict and could cause our actual results, performance, or achievements to differ materially from those discussed. These statements include statements as to our future expectations, beliefs, plans, strategies, objectives, events, conditions, financial performance, prospects, or future events. In some cases, forward-looking statements can be identified by the use of words such as may, could, expect, intend, plan, seek, anticipate, believe, estimate, predict, potential, continue, likely, will, would, and similar words and phrases. Forward-looking statements are necessarily based on estimates and assumptions that, while considered reasonable by us and our management, are inherently uncertain. Accordingly, you should not place undue reliance on forward-looking statements, which speak only as of the date they are made, and are not guarantees of future performance. We do not undertake any obligation to publicly update or revise these forward-looking statements. The following factors, in addition to those discussed in our other filings with the SEC, including our Form 10- K for the year ended December 31, 2017 and subsequent reports on Form 10-Q, could cause actual results to differ materially from our current expectations expressed in forward-looking statements: exposure to damages, fines, criminal and civil penalties, and reputational harm arising from a negative outcome in litigation, including claims arising from an accident involving our railcars inability to maintain our assets on lease at satisfactory rates due to oversupply of railcars in the market or other changes in supply and demand a significant decline in customer demand for our railcars or other assets or services, including as a result of: weak macroeconomic conditions weak market conditions in our customers' businesses declines in harvest or production volumes adverse changes in the price of, or demand for, commodities changes in railroad operations or efficiency changes in supply chains availability of pipelines, trucks, and other alternative modes of transportation other operational or commercial needs or decisions of our customers higher costs associated with increased railcar assignments following non-renewal of leases, customer defaults, and compliance maintenance programs or other maintenance initiatives events having an adverse impact on assets, customers, or regions where we have a concentrated investment exposure financial and operational risks associated with long-term railcar purchase commitments operational and financial risks related to our affiliate investments, including the Rolls-Royce & Partners Finance joint ventures the impact of changes to the Internal Revenue Code as a result of the Tax Cuts and Jobs Act of 2017 and uncertainty as to how this legislation will be interpreted and applied. fluctuations in foreign exchange rates failure to successfully negotiate collective bargaining agreements with the unions representing a substantial portion of our employees asset impairment charges we may be required to recognize deterioration of conditions in the capital markets, reductions in our credit ratings, or increases in our financing costs competitive factors in our primary markets, including competitors with a significantly lower cost of capital than GATX risks related to international operations and expansion into new geographic markets changes in, or failure to comply with, laws, rules, and regulations inability to obtain cost-effective insurance environmental remediation costs inadequate allowances to cover credit losses in our portfolio inability to maintain and secure our information technology infrastructure from cybersecurity threats and related disruption of our business reduced opportunities to generate asset remarketing income 2
Agenda About GATX Industry Overview The Railcar Cycle Outlook for 2018 What Should Railcar Users Do? 3
120 GATX Rail North America Overview
GATX s 120-Year History 1919 Initiated quarterly dividend 1936 Began rail investment in Canada 1973 Acquired American Steamship Company (ASC) 1898 Established as railcar lessor with 28 railcars 1994 Began rail investment in Europe & Mexico 1996 Began locomotive investment 1998 Formed Rolls-Royce Partners and Finance (RRPF) Affiliates 2012 & 2013 Began rail investments in India and Russia 2018 $7.9 billion* in assets and more than 144,000 wholly-owned railcars worldwide *Assets on- and off-balance sheet as of 12/31/2017 5
GATX Rail North America Overview 2017 OVERVIEW INDUSTRIES SERVED UTILIZATION * WHOLLY OWNED FLEET COUNT 120,000+ CAR TYPE COUNT 160+ AVERAGE FLEET AGE 20 Years LOCOMOTIVE COUNT 600+ NUMBER OF CUSTOMERS ~900 COUNTRIES OF OPERATIONS US, Canada, & Mexico As of 12/31/2017 12% 7% 17% 11% 27% Chemicals 26% Refiners & Other Petroleum 17% Railroads & Other Transports 26% 27% 12% Food & Agriculture 7% Mining, Minerals & Aggregates 11% Other 100% 98% 96% 94% 92% 90% 88% 86% 94% 90% *Excludes boxcar fleet Based on 2017 Rail North America Revenue As of 12/31/2017 99% 99% 96% 98% 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 6
Core GATX Service Competencies GATX has built a strong market position by focusing on full-service leasing in North America and Europe. MAINTENANCE ENGINEERING TRAINING TECHNOLOGY REGULATORY Customers rely on GATX to manage the complex process of maintaining railcars Extensive maintenance network: more than 30 maintenance locations in North America and Europe In 2017, GATX performed an aggregate of over 60,000 maintenance events in its owned and third-party maintenance network in North America and Europe GATX s engineering team consists of mechanical, structural, and chemical engineers GATX s engineers tailor railcar solutions to meet customers needs, taking into consideration commodity carried, location, and layout of facilities Develop railcar modification programs GATX provides important training to customers and first responders GATX offers training at its headquarters, at customer sites, and through its TankTrainer mobile classroom MyGATXRail.com provides real-time fleet management capability and maintenance data to customers Shop Portal provides GATX personnel with state-of-the-art technology for car inspection, maintenance instructions and reporting in real-time from the shop floor As a full-service railcar lessor, GATX takes an active leadership role in the complex regulatory landscape GATX leads several industry groups and agencies in North America and Europe As of 12/31/2017 7
NORTH AMERICAN RAILCAR MARKET
North America Industry Railcar Ownership RAILROADS (19%) Ownership of railcars has been declining LESSORS (53%) Shift from railroad- and shipper- owned railcars to lessor market share NORTH AMERICAN FLEET BY CAR TYPE Virtually no tank car ownership due to complexities and regulations Focus of capital investment on infrastructure Lessors dominate the tank car segment due to complex services and compliance requirements 8% 8% 4% 33% 19% 18% 53% 25% SHIPPERS (18%) 10% TTX (10%) 22% Shipper market share has been relatively constant since 2008 at ~18% Alternative focus of capital on core business versus railcar investments Fleet is predominantly focused on intermodal, flat cars, and boxcars Overall market share has remained steady since 2008 at ~10% of the North American fleet 33% Covered Hopper 22% Open Top 25% Tank 8% Flat 8% Boxcar 4% Intermodal Approximately 1.6 million railcars UMLER as of January 2018 9
North America Lessor Market Share LESSOR TANK CARS Approximately 408,000 tank cars in North America 80% of tank cars are owned by lessors, with the balance owned by shippers GATX is the second largest tank car lessor 6% NORTH AMERICAN LEASING SHARE 21% 15% 16% 9% 8% NORTH AMERICAN TANK CAR LEASING SHARE 11% 19% LESSOR FREIGHT CARS Approximately 1.2 million freight cars in North America Ownership is more balanced across owner types than tank 44% lessors, 25% railroads, 18% shippers, and 13% TTX UMLER as of January 2018 13% 12% 15% GATX 16% Union Tank Car 17% Wells Fargo 12% Trinity 17% Based on more than 854,000 lessor-owned railcars 13% CIT 6% SMBC 21% Other 16% 19% GATX 37% Union Tank Car 16% Trinity 37% Based on approximately 326,000 lessor-owned tank cars 9% CIT 8% SMBC 11% Other 10
120 THE RAILCAR CYCLE
The Railcar Cycle: Is It Different This Time? 160,000 140,000 120,000 INDUSTRY BACKLOGS 2001 / 2009: railcar downturn coincides with macro downturn 2017: railcar downturn paired with continued economic expansion 6.0% 5.0% 4.0% 3.0% 100,000 2.0% 80,000 1.0% 60,000 0.0% 40,000-1.0% -2.0% 20,000-3.0% - 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017-4.0% 12 Railway Supply Institute (backlog); FRED (GDP growth) Tank Freight Annual GDP Growth (%) - Not Seasonally Adjusted
Disconnect Between Railcar & Macro Cycles Cheap liquidity driving investments 16.0% 10-Year Treasury Rate Remains Near Historic Lows 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% FRED (10-Year Treasury Constant Maturity Rate) 13
Disconnect Between Railcar & Macro Cycles (Cont d) Risk tolerance continues to climb 45.0 40.0 42.1 Shiller PE 35.0 32.9 30.0 25.0 20.0 15.0 16.9 10.0 5.0 0.0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 YTD Source: Robert Shiller (http://www.econ.yale.edu/~shiller/data.htm - Mar '18 S&P 500 Price = 3/8/2018 close) 14 *S&P 500 P/E 10: Also popularly referred to as Shiller PE Ratio or CAPE Ratio (Cyclically Adjusted Price to Earnings). Defined as a 10 year trailing average S&P 500 PE ratio.
Disconnect Between Railcar & Macro Cycles (Cont d) Investors sitting on increasingly higher levels of cash 15
Disconnect Between Railcar & Macro Cycles (Cont d) Despite negative carload growth, the NA fleet has grown for 6 consecutive years Adding roughly 9K cars in 2017 Carloads vs Fleet Size 1,640 1,620 1,618 20,500 20,000 Year End NA Fleet Size (000's) 1,600 1,580 1,560 1,540 1,520 1,500 1,480 1,460 1,494 19,500 19,000 18,500 18,000 17,500 17,000 NA Annual Carloads (000's) 1,440 16,500 16 1,420 2011 2012 2013 2014 2015 2016 2017 Year End NA Fleet Size (000's) NA Carloads (000's) Sources: UMLER (as of 1/1/2018) - Year End Fleet Sizes defined as January 1 of following year; AAR (Carloads) 16,000
Disconnect Between Railcar & Macro Cycles (Cont d) Divergence of macro and railcar market performance created a unique scenario Lease Rates Fell Car Values Rose Soft Landing for new entrants who bet wrong 17
120 2018: GREEN SHOOTS?
Carloads Improve in 2017 Carloads reverse downward trend in 2017 (+ 4.3% vs. 2016) 2,500 Quarterly Commodity Carload Traffic, North America (000s) 2,000 1,500 1,000 500-1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 AAR All Other Coal & Coke Sand, Stone, Minerals, & Related Products Grain Petroleum Products 19
New Car Market Rationalizing Deliveries trending down (-28% vs 2016) 4Q17 ramp-up driven by covered hoppers Quarterly Deliveries 25,000 2015 2016 2017 20,000 15,000 10,000 5,000-1Q15 4Q15 1Q16 4Q16 1Q17 4Q17 Railway Supply Institute Freight Deliveries Tank Deliveries 20
Energy Markets Growing Canadian Crude Canadian crude oil production is on the rise as new oil sands projects come online Tight pipeline capacity has led to a resurgence in Canadian crude by rail Canadian Crude by Rail Exports February May August November February May August November February May August November February May August November February May August November February May August November 200,000 180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 - Thousand Barrels per Day 2012 2013 2014 2015 2016 2017 Source: Canadian Association of Petroleum Producers (left); Canada National Energy Board (right) 21
Mexican Energy Market Liberalization Falling crude and refined product production has led to increased demand for refined product imports Thousand Barrels per Day 3,000 2,500 2,000 1,500 1,000 500 0 Mexico Production of Crude Oil & Refined Products 2012 2013 2014 2015 2016 2017 Thousand Barrels per Day 1,000 900 800 700 600 500 400 300 200 100 0 Mexico Refined Product Imports 2012 2013 2014 2015 2016 2017 Crude Oil Production Refined Product Production Source: PEMEX 22
Mexican Energy Market Liberalization (cont d) Historically, US exports of refined products to Mexico traveled via marine vessel and inland via pipeline Pipelines are now at capacity requiring transport of refined products via rail Y/Y Change 100% 80% 60% 40% 20% 0% -20% Kansas City Southern de Mexico - Weekly Petroleum Products Carloads -40% 500 1/3/2015 1/3/2016 1/3/2017 1/3/2018 Y/Y % Chg KCSM Carloads (4 wk avg) 1,300 1,200 1,100 1,000 900 800 700 600 Carloads Source: Kansas City Southern 23
Trucking More Constrained Robust freight demand combined with labor tightness, capacity constraints, and ELD Mandate sends truckload rates higher 24
120 SIGNS OF UNCERTAINTY
YTD Growth Off To Uncertain Start 2,500-1.4% North American Carloads YTD (000 s -- through 14 weeks) 2,000 1,500-0.5% 1,000 500 + 4.4% - 3.3% + 3.1% - All Other Coal & Coke Sand, Stone, Minerals, & Related Products Grain Petroleum Products AAR 2017 YTD 2018 YTD 26
Macro Climate Becomes More Volatile Macro uncertainty looms (Powell continues trend with 1Q18 hike) In part driven by Fed s dual mandate Fed has signaled rising interest rates as they seek to ward off inflation FOMC s Target Federal Funds Rate 27 Source: Federal Reserve Board Photo Credit: Hilary Fung/NPR
Public Policy Uncertainty Infrastructure - Prospects of Infrastructure Bill? - More Highway Spending? Regulation - Push for Deregulation - Trade Policy (NAFTA s fate?) Leadership Voids - Delayed Appointments at DOT & STB Environment - Impact of administration policy approach unclear 28
Longevity of Energy-Related Carload Growth? New pipelines expected to come on by 2020, alleviating Canadian crude capacity constraints 6,000 Western Canadian Production vs Pipeline Takeaway Capacity (Based on Total Stated Pipeline Capacity) Thousand Barrels per Day 5,000 4,000 3,000 2,000 1,000 0 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Existing Capacity Enbridge Line 3 Expansion KM Trans Mountain Expansion Keystone XL Pipeline Western Canada Oil Production Source: Canadian Association of Petroleum Producers 29
Evolving Railroad Operations 28 Longer, less frequent trains Focus on operating ratio Service changes and line sales RR Velo YTD Thru 14-weeks (2015-2018) 27 26 25 24 23 22 21 Velocity tracking 2015 lows 20 Wk1 Wk2 Wk3 Wk4 Wk5 Wk6 Wk7 Wk8 Wk9 Wk10 Wk11 Wk12 Wk13 Wk14 RPM (excludes CSX after week 31 of 2017) 2015 2016 2017 2018 30
Technology advancements in trucking Tesla announces production of an electric semi Planned release in 2019 Fuel-saving and emissions-slashing truck platooning technology advancing rapidly Technology expected to drive significant reductions in trucking costs Infrastructure, labor, and other challenges still need to be addressed Railroads will have to develop a response plan 31
120 WHAT SHOULD RAILCAR USERS DO IN 2018?
Key steps for railcar users in 2018 Prepare for Uncertainty & Mitigate Risks Longer turn times Rising lease rates Declining railcar supply Take Advantage of Arbitrages Pay attention to markets where existing cars may be advantaged 33
Key steps for railcar users (continued) Choose Suppliers Carefully If rates rise and liquidity dries up, which lessors are committed for the long haul? Re-Examine Old Assumptions If trucking capacity limited, are their lanes that can re-convert to carload? What about transloading? 34
Conclusion 2018 railcar market will be difficult to predict Tightening is occurring in some sectors Market shifts will be harder to time Macro environment offers significant uncertainty Shippers have gotten too comfortable with an oversupplied railcar market Tank car supply is clearly declining Freightcar supply showing signs of rationalizing Better to have and not need than to need and not have 35