The conflict between Ukraine and Russia isn’t likely to affect the North American business of railcar lessor GATX, although the company’s European arm is seeing some operational impact, executives said during GATX’s first-quarter earnings call on Wednesday.
While GATX’s profit from its international segment is unlikely to be affected, the company is exposed operationally. GATX (NYSE: GATX) is the leading railcar lessor in Poland, according to CFO Thomas Ellman. It also has a large railcar facility in Poland, and a number of employees are based in Warsaw, he said. Many employees are also volunteering to assist in refugee efforts, and GATX is providing financial assistance to those who have taken in some refugees, Ellman added.
“This is first and foremost a terrible humanitarian crisis. To try and spin a positive out of this is not the way we think at GATX,” Ellman told investors on the earnings call. “The impact on each of our businesses vary, but the approach is the same: We stand by our commitments, we’ll work constructively with all of our constituents, we put our employees’ safety and well-being first, and we’ll navigate this turmoil the same way we have a number of crises during our 120-plus years.”
GATX also has a small railcar leasing business in Russia consisting of three customers and 380 railcars. The company has invested $20 million total in the business in Russia, and executives said on Wednesday’s call that the business is still operating and customers are paying their leases. GATX is also complying with sanctions and counter-sanctions.
Besides the conflict in Ukraine, rising steel costs are factoring into how GATX is viewing the leasing and manufacturing markets for railcars. Higher steel costs are affecting railcar manufacturing costs as well as scrapping prices, executives said. Elevated steel prices can also support lease rates.
But some customers are not willing to add cars at higher lease rates, and so they’re holding off on new cars. This in turn can reduce new spot opportunities, executives said.
However, the ultimate driver of lease rates in North America is whether railcar supply and demand is balanced or imbalanced. The balance between supply and demand also varies by car type, executives stated.
Furthermore, although U.S. rail volumes are trending lower year-over-year, the leasing cycle is driven more by the supply of railcars than demand for railcars, Ellman said. The number of railcars in storage on a monthly basis has been falling consistently, which benefits railcar lessors and manufacturers.
Wednesday’s earnings call was the last for Brian Kenney, who is retiring after serving as GATX’s CEO for 17 years. Bo Lyons, a GATX executive vice president and president of its Rail North America division, will succeed him on Friday.
“It’s been interesting and challenging and honestly, it’s been fun to work with all of GATX’s shareholders and analysts over the years, and I do hope you feel I was honest and transparent in my communications with you,” Kenney told investors on the call.
GATX Q1 2022 financial results
GATX’s net profit for the first quarter of 2022 totaled $75.8 million, or $2.10 per diluted share, compared with $36.5 million, or $1.02 per diluted share, for the first quarter of 2021. Net income grew 108% year-over-year.
“Conditions continue to strengthen across our global railcar leasing markets despite increased economic uncertainty due to the war in Ukraine,” Kenney said in a release.
Results from the first quarter of 2022 included a negative impact of $11.5 million, or 32 cents per diluted share, due to a net impairment charge for aircraft spare engines in Russia at the Rolls-Royce and Partners Finance affiliates. There was also a net positive impact of $3 million, or 8 cents per diluted share, related to an enacted tax rate reduction in Austria, GATX said.
GATX’s North America division saw a “high” fleet utilization rate of 99.3%, compared to a rate of 99.2% for the fourth quarter of 2021 and 97.8% for the first quarter of 2021.
GATX also experienced a lease renewal rate of 80% in the first quarter of 2022: “As the number of idle railcars in the industry continues to decline, the pace of lease rate increases from the prior quarter accelerated for most car types,” Kenney said.
Revenue from GATX’s North America division was $223.7 million, compared with $224.6 million in the first quarter of 2021. Segment profit was $120.4 million versus $65.7 million a year ago amid higher gains on asset dispositions in the first quarter of 2022.
GATX’s international division saw segment profit of $24.9 million amid more railcars being on lease, compared with $21.8 million in the first quarter of 2021.
“Rail International continues to perform well as demand for railcars in Europe and India remains strong. Fleet utilization was at 99% or above and renewal lease rates for most car types continued to increase versus the expiring rates,” Kenney said.