The crisis between Ukraine and Russia is unlikely to have an impact on railcar lessor GATX’s North American business, however, the company’s European arm is experiencing some operational impact, officials said during GATX’s first-quarter results call on Wednesday.
While GATX’s international segment profit is unlikely to be impacted, the company is operationally vulnerable. According to CFO Thomas Ellman, GATX (NYSE: GATX) is the leading railcar lessor in Poland. It also has a major railcar facility in Poland, with a number of staff based there, he added. Many employees are also volunteering to help with refugee operations, and GATX is providing financial support to individuals who have taken in some migrants, according to Ellman.
“First and foremost, this is a horrific humanitarian disaster.” “Trying to make a positive out of this is not how we think at GATX,” Ellman said on the earnings call. “The impact on each of our businesses varies, but our approach is the same: we stand by our commitments, we’ll work constructively with all of our constituents, we prioritize our employees’ safety and well-being, and we’ll navigate this turmoil the same way we’ve navigated a number of crises over the past 120 years.”
GATX also operates a minor railcar leasing company in Russia, with three customers and 380 railcars. The company has spent a total of $20 million in the Russian business, and officials stated on Wednesday’s call that it is still operational and customers are paying their rentals. GATX also abides by sanctions and counter-sanctions.
Aside from the turmoil in Ukraine, rising steel prices are influencing GATX’s outlook of the leasing and manufacturing markets for railcars. According to executives, higher steel costs are hurting railcar manufacturing expenses as well as scrapping prices. Steel price increases can help improve leasing rates.
However, some clients are unwilling to add cars at increased lease rates, thus they are delaying the purchase of new vehicles. According to executives, this can restrict fresh spot opportunities.
However, whether railcar supply and demand are balanced or uneven is the ultimate driver of leasing rates in North America. According to executives, the supply-demand balance differs per car type.
Furthermore, while rail volumes in the United States are declining year over year, the lease cycle is driven more by supply than demand, according to Ellman. The number of railcars in storage has been steadily decreasing on a monthly basis, which favors railcar lessors and manufacturers.
Brian Kenney, GATX’s CEO for the past 17 years, was the last to speak on the company’s results call on Wednesday. GATX executive vice president and president of its Rail North America division, Bo Lyons, will take over on Friday.
“It’s been intriguing, challenging, and honestly, entertaining to engage with all of GATX’s shareholders and analysts over the years, and I do hope you believe I was honest and straightforward in my discussions with you,” Kenney said during the conference call.
GATX financial performance for the first quarter of 2022
GATX’s net profit for the first quarter of 2022 was $75.8 million, or $2.10 per diluted share, compared to $36.5 million, or $1.02 per diluted share, in the same period last year. Year on year, net income increased by 108 percent.
“Conditions continue to improve across our worldwide railcar leasing markets, despite increased economic uncertainty as a result of the Ukraine conflict,” Kenney said in a statement.
The first quarter of 2022 results included an $11.5 million, or 32 cents per diluted share, negative impact from a net impairment charge for aviation spare engines in Russia at the Rolls-Royce and Partners Finance affiliates. GATX also reported a net positive impact of $3 million, or 8 cents per diluted share, from an adopted tax rate reduction in Austria.
GATX’s North American business experienced a “strong” fleet utilization rate of 99.3 percent, compared to 99.2 percent in the fourth quarter of 2021 and 97.8 percent in the first quarter of 2021.
GATX also had an 80 percent lease renewal rate in the first quarter of 2022: “As the number of idle railcars in the sector continues to fall,” Kenney said, “the pace of lease rate increases from the prior quarter quickened for most car types.”
GATX’s North America segment had $223.7 million in revenue, compared to $224.6 million in the first quarter of 2021. In the first quarter of 2022, segment profit was $120.4 million, up from $65.7 million the previous year, due to higher profits on asset dispositions.
GATX’s foreign division earned $24.9 million in segment profit as more railcars were leased, compared to $21.8 million in the first quarter of 2021.
“Rail International continues to perform well as demand for railcars remains robust in Europe and India.” “Fleet utilization was at or above 99 percent, and renewal lease rates for most automobile types continued to rise compared to expiring rates,” Kenney added.
