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GATX Corp
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Good day, and welcome to the GATX First Quarter Conference Call. Today’s conference is being recorded.
At this time, I would like to turn the conference over to Jennifer McManus. Please go ahead.
Good morning, everyone, and thank you for joining GATX’s 2018 first quarter earnings call. I’m joined today by Brian Kenney, President and CEO; Bob Lyons, Executive Vice President and CFO; and Tom Ellman, 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 statements. Actual results or trends could differ materially from statements or forecasts. For more information, please refer to the risk factors discussed in GATX’s Form 10-K for 2017. GATX assumes no obligation to update or revise any forward-looking statements to reflect subsequent events or circumstances.
Before I get into the numbers and provide brief commentary on the quarter, I'd like to remind everyone that our Annual Shareholders Meeting will be held on Monday, April 30. It will be in Downtown Chicago at The Northern Trust Building which is at the corner of LaSalle in Monroe. The meeting begins at 12:00 PM Central Time and slides from Brian Kenney's presentation will be posted to our website at www.gatx.com.
Earlier today, GATX reported 2018 first quarter net income of $76.3 million or $1.98 per diluted share. This compares to 2017 first quarter net income of $57.5 million or a $1.44 per diluted share.
Now I'll briefly address each segment. Rail North America's fleet utilization remains stable at 98.2% at the end of the first quarter and our renewal success rate was 76.7%. During the quarter, the renewal rate changed of GATX’s lease price index was negative of 11.6% with an average renewal term of 34 months.
As indicated in the earnings release, the sequential improvement in the LPI is a result of quarterly volatility which is not uncommon. We still anticipate the 2018 annual change to be at least negative 25% as the current leasing environment remains challenging.
We continue to successfully replace cars from our committed supply order with nearly [900] railcars placed from our 2014 agreement. We have already placed scheduled deliveries of customers through the end of 2018.
The secondary market for railcars in North America remains robust. Rail North America's remarketing income was approximately $50 million during the quarter representing the vast majority of our expected remarketing activity for 2018.
Within Rail International, the European tank car leasing market remained stable. GATX Rail Europe is seeing steady demand across the fleet with utilization of 96.7%. Rail International’s investment volume was approximately $29.5 million during the first quarter most of which was at GRE, but we also saw increased investment in India.
American Steamship Company's sailing season started in late March and we are off to a good start on the Great Lake. We still anticipate 10 vessels in service in 2018.
Portfolio management results were driven primarily by the solid performance of the Rolls-Royce and Partners Finance affiliates. Our spare aircraft engine fleet utilization remains strong and our diversified engine mix continues to grow.
GATX was active under our share repurchase authorization during the quarter, buying back nearly 366,000 shares for a total of approximately $25 million.
Those are the prepared remarks. So now, I’ll hand it over to the operator, so we can open up for Q&A.
[Operator Instructions] The first question will come from Prashant Rao with Citigroup. Please go ahead with your question.
Thanks for taking the question. I guess the first one which you guys probably expected and then we're getting a lot of questions for investors on is the LPI movement. And so I just wanted to maybe get a little bit more color on how you would caution us into reading too much into that and maybe, also can maybe contrast everything what you're seeing actually market lease rates right now, I think we've indicated in the last call Brian that you know we're starting to see things moving slowly in the right direction, but very low single digit, so maybe a little bit more color there would be helpful too? Thanks.
So I'll start this time and I'll start with the LPI. So you're right the LPI came in at negative 11.6% for the quarter and something we always caution people on is not to read too much into the LPI for a single quarter. In this particular case, the LPI relative improvement was driven by a relatively small number of transactions that had an especially low expiring rate.
And we'll talk about market lease rates next but the market lease rates were pretty flat quarter-to-quarter maybe up as little as about 5%. But the expiring rate of certain transactions was low. So it made the change old lease rate to new lease rate a little bit smaller than it has been in prior quarters.
So again I wouldn't read much into that negative 11.6%, the much more relevant fact is what's going on with lease rates quarter-to-quarter which is barely above flat.
And I just to add that's exactly right tank and favorable to up low-single digits in the quarter versus the last quarter. Now they're up significantly year-over-year but remember they’re coming off extreme lows last year and a lot of that was driven by flammable cars coming off extreme lows.
So although they're improving slowly it's still well below what we think of as the long run average rate that produces an attractive return for our investment model. So there's still too many existing idle cars, still too many new cars delivering. If you look at how low they are compared to what we would term a long-term average rate - and let's exclude coal because we don't think there's really going to be a systematic recovery there, both tank and freight are probably down 25% from where they need to be long-term.
That doesn't mean we won't order cars or invest into an environment like this, but it means rates do have to increase by that amount for that investment to be attractive over its life. Maybe that's an obvious point but still too low.
The next question will come from Allison Poliniak with Wells Fargo. Please go ahead.
So just following on that, I think that sound 25%, that's half of a normalized rate that you would say or is that historical high to …
If you look at historical high, which was in this last up-cycle they're down 50% or more for most car types but yes can't read too much into that because those were incredible highs historically unprecedented and you know we locked them in for a very long-term.
So I wouldn't really worry too much about off the highs. Of the long run average rate is once again what we think the rate needs to be over the life of a car for it to be an attractive investment. So that's where I'm saying they still need to move up about 25% from today’s level.
The next question will come from Justin Long with Stephens. Please go ahead.
I wanted to ask about the about the stabilization that we have seen in the North American market over the last year or so, these kind of flat to slightly up rates. How much of this would you attribute to slower train speeds than the rail network, and some of the congestion that we've seen. I just wanted to get your big picture view on how much of this cautious optimism on the market is a function of these operational demand drivers versus more fundamental demand drivers in certain end markets?
So rules of thumb are dangerous, but I'll give you a rule of thumb. The rule of thumb is 1 mile per hour for train speeds translates into about 50,000 cars. Now that varies by car type. So if you look at the relative improvement in cars that haven't moved within 60 days over the last quarter, that can all be explained by decreased railroad operating metrics.
So if you look at what's going on with loadings, loadings have been up very, very modestly the past few quarters, but a piece of that is what's been going on with coal which is Brian said earlier, really doesn't translate to overall operating performance because whether the car is moving or not, it's at a very low lease rate.
So the metrics as far as cars being used almost totally explained by railroad operating metrics.
The way it wrap up this discussion on lease rates, yes, rates have to move up for an investment to be attractive over its life, but that can happen really quickly. And the best example is just over last year on small keep covered hoppers, were they were well below the 25% level that they needed to increase. And it got there in the space of two quarters.
So once there is that demand catalyst, things can move in a hurry. We just haven't seen a demand catalyst or widespread demand catalyst for the fleet.
The next question will come from Bascome Majors with Susquehanna. Please go ahead.
I wanted to drill down a little more detail on your broad based commentary about lease rates being in 25% below where they need to be for real re-investable returns from your perspective. I know you guys have very kind of micro buildup of this metric. I think you do internal measures of 100-plus car types of what your long run equilibrium was.
Other than the fracs and cars you mentioned earlier are there other green shoots where you're seeing you know some car types you know move into the re-investible range or is it really pretty broad base everything with very few exceptions as well below where it needs to be?
Before I let Tom go on that once again it doesn't stop me necessarily from investing, all I'm saying its rates will need. We are investing say, but rates need to move up for those investments and we think they will slowly for those investments to be worthwhile over the life of the car, but go ahead, Tom.
So as you point out every situation we talk about varies by car type and you did - you already mentioned small cube covered hoppers as a positive story in terms of lease rate right now. Couple of other ones are cars that move steel either covered coil gons and move finished steel or mill gons and move scrap steel. Those are both performing particularly well right now.
Centerbeams which have been struggling for quite some time have recently improved and rates are going up there. And even within the core tank and covered hopper fleet there's a lot of variability. We spend a lot of time talking about energy related tank cars which are struggling, but the non-energy related tank cars, I would describe them as holding their own. They're still below re-investable levels, but the rates are relatively better.
And so basically, if it's a tanker covered hopper with the notable exception of small cubes which are doing well, if it's related to energy, it struggle in, and if it's not related to energy, it's doing a little bit better.
And I appreciate that detail. And as we look forward, you talked - you've been pretty candid over the last couple of hours about, how quickly it can change. When do we get to the point in the cycle, where it starts to make sense not necessarily for yourselves, you have a multi-year order in place. But when we see that sort of early cycle investment in speculative new car positions from the operating list were more broadly?
It's like I'm struggling to get this point across, it doesn't mean you don't invest, because we do think rates are underway with a very slow recovery. So it doesn't necessarily preclude you from investing.
We focus more on when to invest about when we can get the best deal from a manufacturer in terms of car cost and margin. And usually that's done when the market is depressed like it is today.
The next question will come from Matt Brooklier with Buckingham Research. Please go ahead.
So just a question on, the asset dispositions in the quarter, what are your expectations within the North American business with respect to further sales through the year and I think you implied that, there could be more, but, then again you did a big number in first quarter. So just trying to get a feel for what maybe the rest of the year looks like.
So we came into the year back in January and said we would be in $50 million maybe a little north of that range for North American remarketing income. That's where we ended up for the quarter. That's a combination of obviously the sales package that we had out during the quarter plus some carryover of 2017 transactions that closed this year.
So we'll continue to gauge the market for opportunities and while we don't anticipate any major sales there could be some activity during the balance of the year, but nothing significant planned at this point in time. We have a process that we adhere to which is built around fleet optimization and generating the maximum long-term return for our shareholders.
So because of that the vast, vast majority of cars that we have in our fleet we want to continue to own and will own long-term. So we don't have an abundance of cars lying around just candidates for sale.
That said, you know we'll continue to test the market and check our valuations verse hold value and we'll see how the balance of the year plays out but nothing major planned at this point.
And then just any color on the types of cars that you sold if you are overweight a certain car type in terms of the activity in first quarter. That would be helpful?
We really don't get into a lot of detail and historically have not about what types of cars we’re selling. That's not something we're usually tipping our hand with, with the market. So I would say just to keep in mind you know half the fleet is tank and half is freight.
Typically sales occur out of the freight side of that equation and that was certainly the case over the course in the first quarter, but getting into specifics, it’s not something we're going to get into too much detail given our thought around fleet optimization and what may come later.
This is the time?
Yes.
[Operator Instructions] The next question will come from Matt Elkott with Cowen. Please go ahead.
This question maybe for Bob. So you had a revenue decline in the quarter, which was expected, but I think operating expenses increased a bit as well. Bob, can you give us some color on what caused that and where you see the margin outlook going forward sort of for the remainder of the year?
Well first of all from you know we don't really think in terms of a margin perspective here. So with regards to an operating margin that's not a concept that we - not a metric that we use here internally.
From a revenue perspective, yeah the North American lease revenue was down about 3.5% quarter-over-quarter Q1 2018 versus Q1 2017, that's right in line with what we said it would be likely for the year. For the full year basis, we thought it would we'd be down in that 3% to 4% range. So that did play out in the first quarter.
And as far as operating expenses if you could give me a little bit more bit more color on which line item?
I was working on a year-over-year basis and I would say one of the things that I noticed was that maintenance was up from 1Q 2017, depreciation was up but I think that's you would understand that maybe maintenance.
Yes. And actually the North American rail maintenance line was only up less than a $1 million Q1, 2017 versus Q1, 2018. The bigger items, the depreciation line item obviously the fleet's a little bit larger today from a netbook value standpoint than it was a year ago.
So your depreciation number is going to run a little bit higher, that's, that's really, if we look at total expenses off the income statement for Rail North America actually we're almost exactly the same last year as they were this year. Rail International numbers were up a little bit. Some of that driver more than anything else on the expense line was that correct.
And just one quick question, when you guys to be able to share with us, how many cars you came off leased and were renewed in the quarter?
Well I would be ratable over that, we came into the year with about 13,900 cars scheduled for renewal. There's really no seasonality to that. It occurs pretty evenly during the course of the quarter. So you can divide that number by four and get real close to where we were in the quarter and renewal success rate was solid for the quarter for sure, it just a little north of 76%. So again very strong commercial execution by Tom and his team.
And maybe just little one quick larger picture question, we're talking about very modest sequential increases in lease rates so far. It's becoming somewhat hard to understand, why it's not improving at a higher rate. I mean we've had this rail recovery for over a year now. Freight markets in general are very robust. Rail Service has been suffering for the last couple of quarters.
The macro environment has been very strong. I understand that backlog is still solid, and the build is still solid. But I would have thought that we’d see a more pronounced improvement at least on a sequential basis to spot lease rates. Any theory that you guys have as to why that that hasn't happened yet?
Actually we can go beyond theory. What it all comes down to is how many – what availability there is for alternatives for shippers and there's two sources of availability that are keeping lease rates low. The most important of which is competitor idle cars. So for virtually every opportunity that comes up, somebody other than GATX has cars available. At our utilization, our cars are deployed, but there are cars available in the market.
Secondly, new car alternatives exist. The backlog continues to be long and largely unplaced. Additionally, someone can get a new car in a short period of time. For the vast majority of car types, delivery is still available in 2018.
So when there is alternatives available to renewing the car, it keeps the lease rate down. Now, fortunately because of some of the measures that you note, the customers who have cars need them. So as long as we price to market, we can keep the car placed.
So you see it’s a good renewal percentages and we can keep the car utilized. You see the good utilization, but you have to price to market which keeps that lease rates stumblingly down.
And I'd pile on by saying railcar manufacturers aggressively are trying to sell cars on the down market. Obviously, but that behavior is often to the detriment of lessors and that's the case even when the manufacturers have a captive lease fleet.
So that's hard for us to understand. So that behavior is present in the market today. It holds down lease rates and ironically I think it further depresses the base of the railcars, the manufacturers are trying to sell. So what you don't see in this industry is railcar manufacturers perhaps being cognizant of the aftermarket values of their assets with the same discipline you see in other manufacturing industries like aircraft or the construction industry. And that's certain lease rates.
You think that may be a function of lack of another round of consolidation and I mean you mentioned the airline industry, there is one airline or two airline manufacturers or three. We have the railcar industry, there is seven railcar manufacturers in North America. I guess another round of consolidation could be helpful?
I encourage you to get on those calls so and…
I'll try to make that comment on the manufacturer of...
I think you may have dialed into the wrong call.
The next question will come from Mike Baudendistel with Stifel. Please go ahead.
I wanted to ask you on the rail International segment, I mean it sounds like in that segment that’s there will be an area where the leasing market is above investible levels and maybe you can just talk about the opportunity you see there either from rising lease rates or from adding cars into the fleet?
Sure I'm glad you asked that because for - really for the last 10 years GATX really had performed very well and the market hasn’t been very good. As you know it’s an all tank car fleet over there and petroleum or mineral as they called us, is our biggest sector with about 60% of the fleet. So when the price of oil went down in 2015 to a further struggle there with our refiner customers.
Lease rates went down, there’s a lot of idle cars in the industry although not ours but that all changed about halfway through last year in the third quarter. Obviously the price of oil has gone to a more reasonable level but we started to see more customer inquiries, more projects, more requests for additional cars.
And remember through all this, diesel and gasoline consumption in the main European markets have continued to increase. So GRE has been doing very well in that market. They placed all their new deliveries, the cars that were returned to either scrapped market and many in Eastern Europe where we have a very strong presence.
They had a very high renewal success rate in petroleum fleet in the quarter of 87% I think. So it is a more favorable market on the petroleum side and GATX Rail Europe. It hasn't really resulted in increase in lease rates for the same reasons as Tom is talking about, there are competitors with idle cars but absolute rates actually did creep up in the quarter just renewal rates were relatively flat. But there are other segments, LPG, same story. They have about 17% of their fleet in LPG, somewhat tighter petroleum prices of course but that's been a great market for us.
Once again fleet renewals, additional cars, new LPG sources. They introduced a new car over the last year that's been very well received. GRE, a 119 cubic meter car, which is the largest and lightest in the market, great reception to that. And their utilization in the LPG fleet is 98%, so we're starting to see that get better as well.
But the biggest surprise has been their chemical fleet. That's always been a tougher fleet for them, it had utilization lower than petroleum and LBG, and that’s changed recently as well. The European chemistry industry has shown finally some growth in 2017 and that start to roll through our fleet.
Utilization was almost 98% in the quarter that’s the highest I've seen it. And absolute rates and renewal rates were both up in the low single digits. So we're definitely seeing a better market in Europe and as far as the investment side, we had dialed that back to last two years from what it was. But you will see increased investment in 2018 at GATX Rail Europe, probably in the 1,000 car plus over €100 million range.
And just to add to that on that last point, in 2017, Mike, we did about €80 million of investment volume at GATX Rail Europe and this year, as Brian said, north of €100 million is the expectation. So a nice up there and reflective of all the comments Brian made.
The next question will come from Justin Bergner with Gabelli & Company. Please go ahead.
And I guess first question would be, in the comment on guidance saying that the year is progressing as we expected, is there anything that's not progressing as expected that you would highlight positive or negative?
I really wanted. I think what we sat around collectively and work through the quarter and the numbers and where they all played out for the quarter there were no real surprises in there up or down.
Yes, that's through the first quarter, the thing we didn't anticipate of course is steel tariffs and the impact that might have on our business in 2018, which is hard to tell. But obviously we have a few billion pounds of steel rolling around and higher steel prices generally are good for the value of that fleet. So we'll see how it rolls out.
My second question was actually on steel prices and you mentioned sort of the steel value of your fleet of the higher steel prices at a point where you think it could help bring more rationality to market by encouraging scrappage of some of these excess rail cars or are we not there yet?
So the short answer is we're not there yet. The trend is in the right direction. You know steel is up. And as each car comes into the shop a decision is made what do you - what are the cash flows if you scrap versus what are the cash flows if you continue to run it.
So as any increase in steel helps on the margin, but the large scale scrapping that would have to occur to help get supply and demand back into balance you'd need to see steel prices higher and for longer.
Is there like a scrap price that you think of as sort of a threshold?
Not really. The highest it ever got was I think 500 I mean more in the mid-threes, so somewhere between there would be helpful.
And we had been in the low-twos at one point. So as time set in any direction up it's helpful.
And the last question was on the Rolls-Royce JV. Was it mainly I mean there's another quarter good performance was that due to remarketing income within the JV or was it non-remarketing drivers?
It was actually both, Justin. So I would say of the increase year-over-year 2018 Q1 to 2017 Q1 it was about evenly split between some increased remarketing activity, but also operationally a nice improvement too with continued high utilization, some uptick in lease rates, and just better performance overall in the portfolio So is evenly split.
The next question will come from Willard Milby with Seaport Global Securities. Please go ahead.
Actually, if I could stay on the JV and the utilization. Obviously, the FDA ordering some engine inspections for the type that was on that Southwest fleet, I just didn't know if you all had off on top of your head your exposure to that engine type and whether or not you think that will impact the business positively or negatively. I know, it's been a real short notice since this has occurred. But, any kind of comments you might have there.
Well, we don't have any exposure to that engine type. So no risk at all to the portfolio there. And given the type of fleet that Southwest operates, we don't see an uptick in demand from our portfolio for engines to swap in. Again, very early stages to determine what happened there and obviously, a tragic situation, but no real impact on our portfolio.
And if I could switch back to railcars, on the boxcar front, obviously a lot more of those cars come out of stores in the last couple of months and so your utilization step up here sequentially. I was curious on your thought on market drivers there. Is it really the congestion driving that up or are you seeing fundamental – increased fundamental usage of that car, market driven usage of that car. Do you think that could get back to that 96%, 97% utilization in the short-term.
So the majority of it is driven much more by congestion and railroad operating issues. Demand has kind of held in there, but I would put much more of it on the operating side. So it's really hard to say at least for 2018, we would expect to at least be able to continue at the levels we've seen. It's hard to say if utilization could tick up from there.
And but, yes, an important thing to note on that too is utilization only tells part of the story for boxcars, but half of our fleet are on firm fixed leases like every other car type, but about half of them earn on a per diem basis, so you earn money as they’re being used. And we've seen significant improvement in that part of the business for exactly that reason, the cars are out there running more often than they had been previously.
[Operator Instructions] We have a follow up question from Prashant Rao with Citigroup. Please go ahead.
Sort of wanted to get your sense of on the energy side on the flammable car side, we've been hearing about bottleneck congestion in the shale patch out of the Permian and more non-pipe transportation being used. We know there's some - there's a need for rail transportation demand for Canadian heavies.
So it seems like there's more incremental demand drivers for rail traffic on the petroleum side. Just curious if you're seeing that read through even on an inquiry level on the flammable cars and is that maybe incrementally helping the lease rate pickup you were talking about or is it too early right now?
That's a great individual example of the general topic that we talked about earlier in terms of underlying demand versus what's available in the market. You're absolutely correct, particularly in Canada that there's been more activity.
There is two problems. One, there is idle cars available to meet that demand. And then two, there is the additional problem of the railroad congestion there where the CN and CP are having a difficult time moving all the cars and need to be moved in Canada already.
And there's also, we're hearing some challenges between the shippers and the railroad on what kind of length of contract they might want to have. Nobody knows how long the rail move up there will last. So there is – on the railroad side, a desire to get a little bit of term out of that. And so that creates a struggle.
In the Permian, there is not a lot of railroad infrastructure to immediately meet the demand, there is some, and we've seen some inquiries in that area. But it comes back to – there is, there's cars we’re able to meet it. So unfortunately in either case, do I think you're going to see the activity translate into a material move on lease rates.
And then I just got a very quick follow-up unrelated to that income, some of us have been impressed by how affiliates income has outperformed our expectations and granted that, some of it could be mismodeling as well. But I just wanted to get a sense of you know how strong this run rate in the total affiliates income is, and what might be some upside drivers there or maybe or on the flip side anything that you would caution in reading increased strengths on that line item?
And again that that's almost - it’s entirely driven by Rolls-Royce, the share of affiliate line. So in 2017, we had our share of $58 million of pretax income from Rolls-Royce and our guidance really coming into this year were that we felt we would be back in that same range this year. I wouldn't and haven't deviated from that, but we still think that's a good, a good number to go with.
We had a little bit on a run rate basis higher than that in Q1. But again as I mentioned previously we did have some remarketing activity in the first quarter and if that doesn't occur evenly throughout each of the quarter, so as of now I still think that, that total share of affiliate income will be in that same range we were in last year which is a very strong return and very good performance.
The next question is a follow up from Justin Long with Stephens. Please go ahead.
Thanks for taking the follow-up. I wanted to ask about the outlook for the LPI longer term if we assume that North American lease rates hit what's baked into the guidance for this year and we think about the comp from the expiring rates next year. Do you think there's a chance that the LPI inflects positively in 2019?
Well we haven't commented about 2019 other than indicating previously that after 2018 the average expiring rate is similar to where it was in 2017 maybe up a little bit. And then after 2018 it begins to gradually come down a little bit.
So the hurdle gets a little bit easier to clear. I don't want to comment too early on where we think LPI will be for 2019 or 2020 but it's still a pretty challenge lease rate environment out there as Tom has indicated. So the challenges that we see despite this gradual improvement will certainly continue in terms of the lease rate front.
And then maybe to follow-up on some of the commentary earlier on the railcar manufacturers, I'm curious what you're seeing in terms of new railcar pricing in the market today, have the trends on new car pricing been similar to what you're seeing on lease rates just kind of flat to slightly up environment or has the new car pricing been more competitive than that?
So the majority of cars that we're taking are part of long-term supply agreements. And so I wouldn't say that we have enough detail to comment on general terms across the market since most of ours is coming through supply agreements with terms that were negotiated in a different environment.
Yes, then in Europe, I think we took less than 100 cars in the quarter, so it's not a good data set. But with the price of steel, I'd be surprised if we're not seeing an increase for instance in Europe as we go through the year.
[Operator Instructions] The next question will come from Brian Hogan with William Blair. Please go ahead.
Just a few questions, one, your efforts in India and Russia, can you give us little update, I know still early there, but.
So in India things are going very well. Really happy with the performance of the business in 2017. The fleet is now over 1,100 cars and actually there is a clear path towards doubling that size of that fleet in 2018 and that's what the existing customer orders, the fleets are 100% utilized.
Importantly they diversified their fleet away from just container rigs in 2017 not taking delivery of steel car, auto carriers and they continue to auto carriers and they continue to try to diversify their fleet. They have a great relationship with their customers and the Indian Railways is obviously very important. And as I said, the committed pipeline is large.
So we're seeing, finally seeing real growth in that fleet in 2017, I think it'll be even more in 2018. So it's really looking much better in India after a period of years.
And how are the returns compare to say Europe or the U.S.?
So that's a great question. Obviously, lease rate factors are way higher and our hurdle rate is dramatically higher for investment in emerging market. So it looks much more profitable on a per car basis. But I wouldn't say on a risk adjusted basis, it's necessarily that much better. I mean, in other words if you're going to invest there you should require high return and we're getting it
Right. And then Russia, any update there?
Russia, at the end of the year was a very small fleet, it was 170 cars in less than $5 million. We do have a lot more slated for delivery in 2018, but obviously with all the news out of there, we're going to be very careful about how we proceed in that market.
Basically in Russia what I'll say is if you can't - if you're going to be in Russia and you can't do business with Russian customers, it's going to be very difficult to make a business out of it. So obviously we're going in there with our eyes open.
American Steamship, I'm getting into the longer term [indiscernible] taking market share. I guess can you describe that environment to American Steamship, what you are seeing there competitively and the opportunity there?
It’s a competitive market. Traditionally we’ve had 40% of the market, but that was, I should say of that capacity, but a lot of that capacity was idle, there was lot of idle vessels. We sold a lot of those, we've scrapped a few. We now have about 30% of the market, 12 vessels, importantly 6,000 footers which is the best vessel that have on the Great Lakes.
But right now, like I said about 30% of market, tonnage in 2018, we anticipate we're going into the year assuming it's going to be lower the sailing season is just getting underway. We have nine vessels out there eventually 10 will be deployed.
Like I said, we expect coming into the year that tonnage will be a little lower in iron ore and limestone. But as I said earlier one of the things we didn't anticipate coming into the year obviously was steel tariffs and perhaps the effect on steel prices.
One of the ways that could benefit GATX’s at ASC primarily through spot tonnage opportunities that may arise at the price of steel goes up. Every year we seem to get spot tonnage of opportunities that we don't anticipate, largely over the last couple of years that's been for export volume through the sea way. But if the price of steel goes up significantly in the U.S. then they start producing more, the Great Lakes manufacturers then ASC could see a benefit in terms of further tonnage.
And then last question, your ROE in 2016 was return on tangible equity is just to say, it was 19% last year, 13% kind of in line with I believe your longer term target and in your low teens if you will. Your midpoint of your guidance range this year is kind of around 10-ish%. I guess and you're talking about the lease rates being down 25% below the long term average and obviously the long life assets. But I guess, what are you doing strategically with your capital to get ROE, maybe back up to the low teens over time, how to get there?
I mean it's a great question, and it's one, obviously we spent a lot of time on. So I do think over time, we’re talking about, where our lease rates are and where they need to be long-term.
As we said, we think they'll get there, it’s just going to get there in a very slow fashion unless there's a demand catalyst that we don't currently foresee. But we know that we never foresee the big demand catalysts.
We didn't see the price of oil going to $100, we didn't see ethanol taking off 10 years ago. So it's not surprising that we don't see the demand catalyst, but we think it'll get back, if the market always comes back to equilibrium.
Yes we've seen a lot of investment that we don't agree with into an already oversupplied market in the last couple of years. But our view is that we'll turn out poorly for people and once they realize that those fleets are likely to be exited, that's what's happened historically, they won't attract investment anymore, they won't attract financing anymore.
So we do think the market will correct in North America. It doesn't mean we're not going to invest in North America, we'll just continue to do it in a very disciplined manner as we are today and invest in other opportunities where the risk return makes sense to us.
Great example in North America was the boxcar investment we made a couple of years ago, which was an asset type that was you know I would say depressed at that time with a very low utilization, but we saw that thing bottoming out and get and improving and sure enough that has.
So you have to be disciplined in your investment, you have to get creative in your investment and that's what we'll continue to do in North America as lease rates recover.
In the meantime, we'll continue to invest as we have the last few years in better risk adjusted opportunities. So Rail Europe, we talked about that getting better, Rail India starting to take off. Bob talked about Rolls-Royce, those are a couple of great examples.
And in the end, I think that capital allocation strategy will get ROE back up, and if it doesn't and we don't have opportunity to invest we will return it to our shareholders like we always have.
And at that point I would just note that in addition to doing since 2007 roughly $8 billion of investment in our North American Rail, European Rail markets we’ve also repurchased as of the end of this quarter basically $1 billion of our own stock over 22 million shares, while keeping the balance sheet in a really good shape and growing our net book value in our primary rail markets.
The next question is a follow-up from Willard Milby with Seaport Global Securities. Please go ahead.
I just wanted to touch back on the LPI one more time. Should we kind of expect this increase in volatility? I guess, we'll call it in the LPI for the next maybe year or two. Seems to me that we should be getting increased number of these cars that already had these low lease rates with these shorter terms that you may be booked in late 2015, early 2016 combined with the high lease rates that are coming off from early 2014 and early 2015. I was just kind of curious your thoughts on maybe the volatility that's metric as we look out for the next year or two?
Well, we still think it will be down in the 25% range this year. When Bob mentioned earlier, he's not trying to be evasive. We honestly don't know, we know what's scheduled to come off lease and we know the expiring rate on that. But the issue is when the market is in the condition is now we do a lot of short-term leases, so month-by-month we're changing that expiring rate for 2019.
So we don't have good visibility until we're almost at the end of the year of what it will be like. So and the other thing I want to point out, it's almost counterintuitive, but if we invest or excuse me, if we were new very short-term and bring that expiring rate down and it gets to be a better statistic next year, that isn't necessarily a great indicator of where the business is, right, because if all I'm doing is renewing very low rate leases in a positive fashion that's, that's not necessarily great either.
So I think we've probably put too much stock in the LPI, it was originally intended is just an indication of where the market's going. But when the market is depressed and it's volatile as it is they can lead to quarters like you just saw, which isn't indicative of where the market is in general, and that's the risk going forward.
So a long answer too, yes, we think it could be volatile over the next year or two years. And until demand solidifies and increases and gets more normalized, I think you'll continue to see that volatility.
And I would just add, I don't know how many folks are still left on the call, but as we try to stress the people in none of the metrics that we provide should be taken in isolation or received too much focus on any given quarter.
And to Brian's point, I think when we look out over the course of the next year, probably the data point that's just - it gets into the mix too is the nominal improvement or trend in rates quarter-to-quarter, really have a bigger impact on how we think about the business than LPI. LPI is simply an output.
I was just thinking along the lines of maybe an under or overreaction either to the positive or negative side, when people see maybe 11 this quarter could be just throwing out numbers, negative 40, next quarter depending on what exactly is renewing quarter-over-quarter, but really shouldn't look that short term based on that one metric when assessing the whole business?
And in assessing the whole business in this kind of market, I’d get away from the LPI on a quarterly basis for sure and start talking as I did get a lot of questions about you still think rates are 25% below where they need to be long term. That's a more meaningful statement by us than the quarterly LPI.
Thank you. There are no further questions at this time. I'll turn the call back over to Jennifer McManus for closing remarks.
Thank you everyone for your participation on the call this morning. Please contact me with any follow-up questions. Thank you.
Thank you, ladies and gentlemen. This concludes today's event. You may now disconnect your lines. Have a great day.