Rail volume growth in 2023 could still benefit railcar manufacturers and lessors because of the pent-up demand for rail service, GATX executives said during an earnings call to discuss second-quarter 2022 financial results.
“We really feel like there is a lot of freight on the sidelines right now that wants to go by rail, and we feel that ultimately railroad service is holding that back,” Paul Titterton, president of GATX Rail North America, said Thursday. “So, in past situations where we had poor railroad velocity, absolutely, we would see a decline in demand for railcars. “We think there’s enough freight on the sidelines, and we hear this from our shipper customers [so much] that we think an improvement in rail service would really just result in more freight on the network and would continue to underpin strong railcar demand.”
GATX is also seeing customers with tight car supply and not “a lot of pockets of weakness right now,” according to Bob Lyons, GATX president and CEO. Instead, there is a net shrinkage in the North American railcar fleet amid a high level of retirements and higher scrap prices.
As a result of this market environment, GATX has been able to raise leasing rates and extend leasing terms, according to executives.
“Our strategy doesn’t change,” Lyons said. “We are a long-term lessor, full-service provider. We expect to earn a return on our assets and we’ll price accordingly. So, no dramatic shift in our strategic thinking.”
Second-quarter 2022 financial results
GATX posted net income of $2.6 million, or 7 cents per diluted share, for Q2 of 2022, compared with net income of $5.5 million, or 15 center per diluted share, for Q2 of 2021.
The difference between the two results is due in part to net negative impacts of $35.9 million, or $1 per diluted share, from tax adjustments and other items. The most significant of those was an impairment charge associated with GATX’s planned sale of its five remaining marine vessels, the company said.
Fleet utilization for GATX’s North American segment stood at 99.4% at the end of the quarter, while its renewal success rate was 87.7%, which reflects continued strong demand for the majority of car types within GATX’s fleet, according to Shari Hellerman, GATX head of investor relations.
“For the eighth quarter in a row, absolute lease rates increased from the prior quarter,” Hellerman said. “We’re seeing increasing opportunities to lock in attractive lease rates on extended terms and will focus on pursuing this objective.”
Fleet utilization for GATX’s European segment came in at a “historic high” of 99.9%, with demand for railcars serving a variety of end markets remaining elevated, Hellerman said.
“Year-to-date investment volume was nearly $685 million, and we continue to take delivery of new railcars to meet customer demand worldwide,” Lyons said in a news release. “Based on current strength in the global rail markets and a robust secondary market for railcars, we are increasing our 2022 full-year earnings expectations to be in the range of $5.60 to $6.00 per diluted share, excluding any impact from tax adjustments and other Items.”