“Heavy” scrap rates of older railcars in the U.S., coupled with global mandates supporting the use of freight rail over competing and carbon-intensive transportation modes, could bode well for railcar manufacturer Greenbrier in 2023 and beyond.
Industry projections forecast that around 60,000 railcars will be built in 2023 as new railcars not only replace the scrapped cars but are also built in response to market conditions, executives with the Lake Oswego, Oregon-based company told investors when discussing Greenbrier’s results for the first quarter of 2022 on Friday.
Greenbrier’s internal analysis, which garners feedback from customers and outreach programs, also makes Greenbrier (NYSE: GBX) “feel very confident” that there will be demand for railcars of all types in 2023 and 2024.
“As the chip situation resolves itself, as the supply chain starts to become more fluid, you’re going to see more and more pressure and demand on the railroads to ship more and more product,” said Brian Comstock, Greenbrier’s chief commercial and leasing officer. “So, 60,000 right now is the industry’s best guess, but you could see that [need for new railcars] extend beyond 2023 as well as demand comes on, as we think it will.”
The longer-term trend to utilize sustainable freight transportation should also benefit Greenbrier, executives said.
“Rail freight is the most sustainable form of transportation. And as the world continues to focus on carbon neutrality, zero-emission goals, things like that, we continue to believe that there will be a medium- to long-term growth in the fleet because there has to be a shifting of modal transportation. And that’s not baked into anyone’s numbers or forecasts or anything at this point,” said Justin Roberts, vice president of corporate finance and treasurer. “So, we continue to believe that what we see for the next few years is great and it’s going to be a great market.”
Added Greenbrier CEO Bill Furman, “That’s especially true in our second largest market, which is in Europe, where we have significant industry momentum to move to net carbon zero goals much earlier and … government mandates are really pushing this. So, we see a much stronger demand environment over there.”
In the short term, Greenbrier pointed to market and economic tailwinds that would support its financial outlook in 2022, including a “strong order book,” fewer railcars being idled in North America and industrywide fleet utilization growing to nearly 80%.
“We are now ramping up 21 active production lines in North America and approximately eight internationally. Importantly, we are harnessing our flexible manufacturing footprint to extract more production from each line,” Furman said in prepared remarks.
Furman noted that although the omicron variant of COVID-19 has become more widespread globally, Greenbrier’s operations haven’t been significantly hit. The company is adhering to local health authority requirements at its manufacturing sites in the U.S. and Europe, he said.
“As a result of well-established safety protocols, our operations have not been significantly impacted at present by the rising cases globally and in North America, but we are closely tracking the rapid community spread of this variant and we’re taking all appropriate precautions,” Furman said.
As Greenbrier anticipates responding to market demand for more sustainable transport, the company announced in December its contributions to greening the U.S. fleet.
Greenbrier is partnering with Norfolk Southern (NYSE: NSC) and U.S. Steel (NYSE: X) to produce a more sustainably-made gondola. It also joined RailPulse, which Greenbrier describes as a “a coalition of forward-thinking railcar owners, builders and operators which together will facilitate and accelerate the adoption of GPS and other telematics technology across the North American freight rail network.” Other members of the coalition include NS, railcar lessors GATX (NYSE: GATX) and TrinirtyRail (NYSE: TRN), short line operator Genesee & Wyoming and transportation services provider Watco.
First-quarter 2022 financial results
In Greenbrier’s fiscal year first quarter ending Nov. 30, 2021, net profit fell sequentially amid lower operating earnings, which in turn reflected operating inefficiencies, fewer deliveries and labor shortages, according to the company.
Adjusted net earnings were $10.8 million, or 32 cents per diluted share, in the first quarter of 2022, compared with $33 million, or 98 cents per diluted share, in the fourth quarter of 2021.
Revenue was $550.7 million in the fir st quarter of 2022, compared with $599.1 million in the fourth quarter of 2021, as the company’s deliveries were down by 10%. The timing of syndication activity also contributed to lower revenues, according to Greenbrier.
Overall gross margin was 8.6% in the first quarter of 2022, compared with 16.4% in the fourth quarter of 2021, amid labor shortages and operating inefficiencies within the company’s maintenance services division, competitive new railcar pricing and inefficiencies in ramping up production, Greenbrier said.
The gross margin of Greenbrier’s manufacturing segment was down from 11% in the fourth quarter to 6.8% in the first quarter on “competitive core pricing from the pandemic trough, production ramping inefficiencies and line changeovers,” the company said. Meanwhile, the gross margin of Greenbrier’s maintenance services division went from 4% to 1.7% on “labor shortages impacting volumes and operating efficiencies.”
At the end of the first quarter, Greenbrier’s order backlog was worth $3 billion, the highest level in three years. The company also received orders to rebody 1,400 units as part of its railcar refurbishment program.
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