Despite macroeconomic and geopolitical uncertainties domestically and abroad, executives with rail car manufacturer and lessor GATX are confident that the rail car market will hold up well in 2023.
“The war in Ukraine continues on, interest rates and inflation remain at elevated levels and global supply chain issues, while they may not be as acute as they were over the last 12 months, [are] still an issue. And in North America and Europe, there is economic uncertainty. Will we lapse into a recession?” said GATX President and CEO Robert C. Lyons during GATX’s fourth-quarter 2022 earnings call last week.
“I mention this because that adds variability to the assumptions I have outlined. But to be perfectly clear, we feel very good about the position we are in regardless of how these macro factors play out,” Lyons continued.
GATX expects some positive financial metrics in 2023. It estimates its earnings per share for the year to be between $6.50 and $6.90 per diluted share, which would follow a 20% growth in EPS in 2022. The company also anticipates lease revenue of between $30 million and $45 million for 2023.
A strong secondary market and continued demand for GATX’s assets should help support the rail manufacturer’s North American business in 2023, while demand for wagons and efforts to increase lease rates could help GATX’s international business, according to Lyons. The secondary market is where railroad customers might seek to trade rail cars, such as grain hoppers, in order to have more rail cars available to ship products.
However, the company also sees inflationary pressure and more railroad repairs that could increase net maintenance expenses by $5 million to $10 million in 2023, Lyons said.
“We are not economists. We don’t play the bottom market. We don’t try to predict where interest rates will go because we’ll certainly be wrong. But they are going to be higher in 2023. And we will feel more of that impact” in GATX’s North America business, Lyons said.
Even if the railroads are able to improve network velocity over the course of the year, that will not hinder GATX’s outlook for rail car demand because shippers are still seeking to use rail despite the macroeconomic uncertainties.
“The railroads obviously are trying to hire … [and] improve service right now. We’re certainly not in a position to predict on behalf of the railroads what’s going to happen with velocity. We do continue to have the view though that there is … freight that is not moving right now that could move in the network if service were improved,” said Paul Titterton, GATX Rail North America president.
“So when we look out and look at the possibility of improved velocity, improved network fluidity, we don’t necessarily see that as a downside as we might have seen in the past because we think there’s freight that wants to be on rail that will move on to rail once the service is available to take it. I would describe us as more optimistic in the face of potentially improving velocity than we might have seen in other cycles.”
4th-quarter financial results
GATX outlined several factors that boosted earnings in 2022. Its North American and portfolio management segments performed better than planned, according to Lyons, with strong secondary market activity and a favorable lease rate environment for existing rail cars.
“Customers were very focused on retaining [and] holding onto the cars they had in their existing fleet. Therefore, lease rates increased throughout the year and lease revenue came in stronger than planned,” Lyons said.
However, GATX’s international segment grappled with significant market impact due to the war in Ukraine disrupting GATX’s supply chain and delaying rail car deliveries to Europe and India, Lyons said.
The company reported net income of $48.4 million, or $1.36 per diluted share, in the fourth quarter of 2022, compared with $61 million, or $1.69 per diluted share, in the fourth quarter of 2021.
GATX’s Rail North America posted $83.5 million in profit in the fourth quarter of 2022, compared with $75.6 million in the fourth quarter of 2021, amid higher lease revenue and remarketing income.
The North American segment wholly owned fleet was approximately 109,600 rail cars, including more than 8,600 boxcars, as of Dec. 31.
Fleet utilization minus the boxcar fleet was 99.5% at the end of the fourth quarter, compared with 99.6% sequentially and 99.2% at the end of the fourth quarter of 2021.
GATX’s Rail International reported segment profit of $18.2 million in the fourth quarter of 2022, compared with $28.9 million in the fourth quarter of 2021. GATX also incurred impairment charges of $3.8 million in the fourth quarter and $14.6 million for 2022 because of GATX’s decision to exit its rail business in Russia.
GATX’s international segment has a rail car fleet of over 28,000 cars, with utilization at 99.3% for the quarter, compared with 99.4% sequentially and 98.7% at the end of the fourth quarter of 2021.
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