GATX third-quarter net profit increases on international businesses

GATX’s (NYSE: GATX) net profit rose 6% in the third quarter despite revenue declines for its North American rail segment.

Net income was $47.9 million in the third quarter of 2020 for the railcar lessor, compared with $45.1 million in the third quarter of 2019. Net income from continuing operations was $48.2 million, or $1.36 in diluted earnings per share, in the third quarter, compared with $37.2 million, or $1.03 in diluted earnings per share, in the third quarter of 2019.

The difference between the two quarters is that the third quarter of 2019 includes revenue from the American Steamship Company, which GATX sold in the second quarter of this year.

GATX’s Rail North American segment’s third-quarter profit was $56.1 million, compared with $60.9 million a year ago. The 8% decline was attributable to lower lease revenue, which was partially offset by higher gains on asset dispositions, GATX said.

Fleet utilization excluding boxcars was 98.2% in the third quarter, compared with 98.7% a year ago. Over 118,100 railcars are part of GATX’s North American fleet, including 14,750 boxcars.

“Despite continued challenges in our markets, GATX performed well in the third quarter,” said GATX President and CEO Brian A. Kenney. “Rail North America’s fleet utilization remained high at 98.2% and our renewal success rate was 58.1% during the quarter. While absolute lease rates were flat to slightly higher for most car types compared to the second quarter, the North American railcar leasing market remains negatively affected by a persistent oversupply of railcars and weakness in certain markets — exacerbated by COVID-19’s economic impact.”

Other segments see increase in profit year-over-year

But despite lower revenue for GATX’s North American rail segment, the company’s other segments posted gains in the third quarter.

Profit for GATX’s international rail segment was $24 million in the third quarter, compared with $19.9 million a year ago, while the company’s portfolio management program affiliated with Rolls-Royce and Partners Finance rose to $44.3 million in revenue compared with $10.7 million in the third quarter of 2019.

“Rail International continues to perform well. GATX Rail Europe’s fleet utilization remained high at 98.2% and renewal lease rates for most car types increased slightly versus the expiring rates. GATX Rail India’s fleet utilization is 100% and its fleet growth trajectory is resuming absent further COVID-19 disruptions,” Kenney said.

He continued, “In Portfolio Management, our Rolls-Royce and Partners Finance affiliates benefited from a large gain on a transaction involving the refinancing and sale of a group of aircraft spare engines. RRPF operations remain challenged by the severe drop in demand for global air travel, particularly on international and other long-haul routes.”

Kenney concluded, “The global economic recovery remains tenuous due to a potential COVID-19 resurgence. In light of this uncertainty, we remain focused on keeping our employees safe, continuing our excellent commercial and operational execution and pursuing attractively priced growth opportunities for our shareholders.”

Lease rates could take several quarters to increase ‘meaningfully’

The oversupply of idle railcars and lower rail volumes are putting pressure on North American lease rates, according to GATX Chief Financial Officer Tom Ellman. Although car loadings rose by 11% between the second and third quarters, they are still 12% lower than the third quarter of 2019.

But some “positive” signs could bode well for the leasing market, including a decline in the net North American fleet for two consecutive quarters and a 75,000-car drop in the number of idle cars in storage, Ellman said. Scrapping activity is also increasing, he said.

“There are still too many idle cars in the industry. So even though we saw flat to marginally improving lease rates in the quarter, we still have a long way to go to get back to those long-term averages,” Ellman said. “So absent an unanticipated demand catalyst, like we saw with crude oil in the last up market, we anticipate it will probably take several quarters before the supply correction mechanisms can meaningfully increase lease rates.”

GATX’s renewal success rate was 58.1% in the third quarter, compared with 70% in the first and second quarters, due partly to the bankruptcy of frac sand company Covia.

However, half of the railcars returned to GATX overall were immediately remarketed to other customers, Ellman said.

Meanwhile, maintenance expenses have remained flat, at $76.7 million in the third quarter of 2020 compared with $76.2 million in the third quarter of 2019, as GATX relied more on its own repair shops for repairs instead of using third-party companies.

GATX also decided to scrap older cars instead of maintain them in situations in which it made sense, according to Kenney.

“There have been some cases in 2020, where the market is weak enough that we’ve made that economic decision to scrap older cars, when customers return them…rather than incur maintenance expense to prepare the cars for our new customers,” Kenney said.