Updates article with comments from GATX leadership
The direction of the U.S. economy is still “very uncertain,” although some indicators have been showing a slowdown in recent weeks, the head of a major rail equipment lessor and manufacturer said today.
“I say it all the time, I don’t have that crystal ball and I’m a pretty lousy economist, but we do track what our customers are saying and how they’re acting. You can see that demand is still good and it’s reflected in our extremely high fleet utilization, but I will say in the last quarter or so, it’s starting to feel like it’s losing some steam,” said GATX’s (NYSE: GATX) Chief Executive Officer Brian Hancock during his company’s third-quarter earnings call on October 22.
Hancock pointed to lower U.S. railcar loadings every quarter year-over-year, as well as to some slowness that’s starting to creep into U.S. steel production.
He also said the backlog for tank car orders remains flat instead of increasing, due in part because people are still hesitant to make long-term decisions. “Until that turns around, it’s hard to be bullish on the economy,” Hancock said.
Despite whatever economic uncertainties lie ahead, GATX leaders said the company’s expectations for 2019 have largely been in line with what’s happened so far. Factors such as the deployment of precision scheduled railroading and uncertainty over U.S.-China trade relations were some of the anticipated issues, with the tank car market being stronger than expected and the freight car market being weaker than expected, according to Tom Ellman, GATX’s chief financial officer.
Spot lease rates for most tank cars are up by 15% to 20% from a year ago and they’re flat sequentially, Ellman said. Freight railcars spot rates are down 5% to 10% from the second quarter and 20% from the third quarter of 2018, although there is a lot of variability depending on the type of freight car, he said, with demand lower for center beams and small cube covered hoppers for lumber and frac sand, respectively.
“The macro trends are pretty consistent with what we’ve seen so far this year,” said Tom Ellman, GATX’s chief financial officer.
Third-quarter net profits fell 4% to $45.1 million, or $1.25/diluted share, from $47 million, or $1.22/diluted share, in the third quarter of 2018.
“For the third consecutive quarter, North American railroad car loadings decreased and railroad velocity increased relative to 2018. Despite these negative indicators for the railcar leasing market, GATX’s fleet is generally performing as we expected coming into 2019,” said Brian A. Kenney, president and chief executive officer of GATX.
Profit for GATX’s North American segment also slipped in the third quarter, falling 10.7% to $60.9 million.
GATX’s fleet utilization in the third quarter in North America was 99.2%, which the company said was “very high” and the result of its diversified fleet. That utilization rate is flat with the third quarter of 2018 and down slightly from 99.5% in the second quarter of 2019.
The company’s Lease Price Index (LPI) was down by -7.7% in the third quarter, and the average renewal term was 40 months. GATX defines its Lease Price Index as “an internally generated business indicator that measures lease rate pricing on renewals” for its North American railcar fleet, excluding boxcars. It’s a weighted-average lease renewal rate for a group of railcars representative of GATX’s rail fleet for North America.
In comparison, the LPI for the second quarter was -2.8%, while the LPI for the third quarter of 2018 was -11.5%.
As of the end of the third quarter, GATX’s North American rail fleet consisted of approximately 119,000 railcars, including approximately 16,000 boxcars.
Overall company revenue in the third quarter was $360.7 million, up 3.1% from the same period in 2018. But overall expenses rose about 3.1% over the same period to $273.5 million.
GATX is a major railcar lessor and manufacturer, with operations in North America, Europe and India.