Letter From the Chairman
GATX had another record year in 2016, producing earnings per diluted share of $6.29, earning a return on equity of 19.6 percent, paying more than $67 million in dividends, repurchasing more than $120 million of common stock, and investing nearly $621 million in our businesses around the globe. This performance was especially impressive given that we were operating in an industry experiencing reduced railcar loadings, improved railroad efficiency, and declining industry lease rates for the second consecutive year. We positioned ourselves well in the prior strong market to enable us to perform so well in this tougher environment. I congratulate the employees of GATX on their outstanding achievements, but now let’s look ahead.
Economic value in any business is created by growing the amount of capital deployed and earning an attractive risk-adjusted return on that capital. At GATX, we operate in an extremely cyclical railcar leasing market, deploying assets with economic lives of 35 to 50 years or more. Thus, creating economic value requires us to emphasize asset growth and asset return at different points in the cycle, while making these decisions with a very long-term view that matches the lives of our assets. So what are our strategies for growth and return?
Our growth strategies vary across our different markets.
Our strategy to earn an attractive return on our capital employed is consistent across our businesses. In strong markets, we focus our team on aggressively capturing rising lease rates. Equally important, we attempt to increase the length of our lease terms to lock in those attractive rates for as long as possible. We also monitor rising asset prices in strong markets, and we are quick to sell railcars if we think the economics of a sale are more attractive than continuing to own and operate the asset.
Like any business, GATX faces myriad challenges, from increasing regulation to volatile emerging markets to changing employee demographics. Given our strategy, the largest challenge we currently face is the growth of competitors with lower costs of capital, especially those in the banking business, who seem determined to aggressively grow their railcar fleets at high prices despite the questionable economics these actions produce. This trend could make it harder for GATX to compete for opportunities to acquire existing railcar fleets, especially if this behavior continues as the market weakens. Our strategy to deal with these competitors is two-fold. First, we will continue to win commercially against these competitors through our superior service, experience, and customer relationships – and we will seize every opportunity to displace them from customers. It is one thing to purchase a railcar; it is another to keep that railcar attractively deployed over its long economic life. Second, we may partner with other long-term investors with lower costs of capital that are interested in investing in the railcar leasing business with a company like GATX. We will find creative ways to grow our capital employed, but we will not lose sight of the need to earn an attractive return.
GATX has an extraordinary Board of Directors, with diverse leadership experience in rail, finance, steel, operations, emerging markets, customer viewpoints – among other capabilities essential to GATX’s business. They regularly review and frequently challenge our strategy, including a more intense, multi-day annual review of the strategic issues most important to GATX. They understand and endorse our current strategic approach. They will not hesitate to take action if they believe our strategy is not sound. I believe our shareholders should take comfort in the diligence of our Board.
Before I close, I have to discuss the employees of GATX. They are a phenomenal group of knowledgeable and dedicated employees, deeply passionate about our business and the communities in which they live. They are also changing quickly – nearly 50 percent of GATX employees have been hired since 2010. They are more comfortable with new technology, which I view as critical to our future success. GATX has invested heavily in new systems over the last few years, and most of these systems are geared toward improving the quality of service and information for our customers. To continue to be successful with our customers, we need to keep these employees engaged. We will do so by constantly offering them opportunities to learn, by allowing them to make a positive impact on GATX, and by supporting them in their efforts to give back to their communities.
GATX has been a successful railcar leasing company for almost 120 years. But we realize that this is no guarantee of future success. We promise to our shareholders that while we will always adapt and change to stay ahead of changing market conditions, two key philosophies will never change. First, we will always have a long-term focus on investing that matches the long lives of our assets; second, when we do not honestly believe that we can earn an attractive risk-adjusted return on capital, we will return that excess capital to its owners. I am confident that the employees of GATX will continue delivering superior returns.
Brian A. Kenney
Chairman, President and Chief Executive Officer