Macro uncertainties loom for rail equipment manufacturers
How to maintain business amid uncertain macroeconomic conditions was one of the prevalent themes weaving through this week’s earnings calls of rail car manufacturers and lessors and rail equipment manufacturers.
But while high inflation and uncertainty about consumer sentiment are big concerns domestically, companies said they saw the growth in their international footprints last quarter.
“We did think long and hard as we were giving our guidance around deliveries and revenue, acknowledging that there might be a little bit of swallowing hard on what’s going on,” Greenbrier President and CEO Lorie Tekorius said during Greenbrier’s earnings call Wednesday to discuss the company’s fiscal fourth-quarter results. “We and others in this space are being very disciplined about how we think about production — not just dialing up production so that we can put a big flash number out there and then see 12 or 18 months from now production needing to be dialed back.”
Greenbrier adjusts production lines to accommodate refurbishments
Greenbrier is well aware of the cyclical nature of rail car production and purchasing, and so the objective is determining what should be the right pace for producing cars, instead of “just trying to crank the dial up to juice out a bunch of deliveries for a particular period,” Tekorius said. This means that Greenbrier keeps assessing its footprint to ensure it is investing accordingly and in areas where the company can generate returns.
That said, “our outlook remains positive. We expect North America and Europe to continue to see strong demand across rail car types underpinning both new bills and lease renewals,” Tekorius said in prepared remarks. “We have excellent near-term visibility for fiscal 2024 and are focused on maximizing our platform’s potential as we progress towards our multiyear targets. We’re confident in the long-term strategy we presented at the investor day because it’s focused on the things we can control and not reliant on an overly optimistic demand scenario.”
One way that Greenbrier has sought to respond to customer needs amid current market conditions is to adapt its rail car production lines to accommodate large rail car refurbishment programs, Tekorius said, noting that while this business isn’t included in Greenbrier’s figure for new rail car deliveries, the service is actually accretive to earnings. The refurbishments and conversions also benefit the environment through the reuse or recycling of components such as wheels, axles and brakes.
Greenbrier has also decided to convert line space previously dedicated to new rail car production toward its in-sourcing initiative to fabricate primary parts and sub-assemblies in-house. The first phase of that program was completed in the most recent quarter, according to Tekorius. Greenbrier expects to reach its cost savings targets of $50 million to $55 million in fiscal year 2025.
“Part of our DNA is solving our customers’ problems, and our customers don’t always need a new rail car,” Greenbrier CFO Adrian Downes said. “Sometimes they need a large number of cars refurbished, converted, and this is where we step in and we work with our long-term core customers and take care of it from that perspective versus just trying to jam new cars down their throat.”
A bright spot for Greenbrier has been its presence outside of the U.S. and Canada. International orders accounted for nearly 20% of rail car orders in Greenbrier’s fiscal fourth quarter. Greenbrier also launched a leasing and syndication business in Europe, according to Brian Comstock, Greenbrier’s chief commercial and leasing officer.
Comstock said Greenbrier secured new rail car orders of 15,300 units worth nearly $1.9 billion by the end of its fiscal fourth quarter, reflecting demand for most rail car types except intermodal.
“The pipeline continues to be very strong despite some of the other rhetoric about recession. The recession really is around intermodal,” Comstock said.
Greenbrier (NYSE: GBX) reported net income of $29.7 million, or 92 cents per diluted share, for its fiscal Q4, compared with $34 million, or $1.02 per diluted share, in the same period last year. Greenbrier’s fiscal fourth quarter ended on Aug. 31.
The rail car manufacturer and lessor saw a fleet utilization rate of 98% in the quarter for a 13,400-unit fleet, and it received new rail car orders for 15,300 units valued at $1.9 billion. Its rail car backlog was 30,900 units with an estimated value of $3.8 billion.
GATX works on finding upsides amid the downsides
Meanwhile, macroeconomic and geopolitical uncertainties can be a constant worry for Bob Lyons, president and CEO of rail car lessor and manufacturer GATX.
“What keeps me awake at night is the bigger macro factors that are outside of GATX’s control. And we’ve seen a number of those in the last couple of years, whether it’s the pandemic, the war in Ukraine, kind of the unpredictable macro things are what keep me awake at night,” Lyons said.
“But I guess what allows me to go back to sleep at night is we’ve been through those for 125 years, and we have the business in a really, really stable, strong foundation right now that we can respond and accordingly, whatever macro challenges are thrown our way,” Lyons continued.
Despite macro concerns, GATX executives said during the company’s third-quarter 2023 earnings call earlier this week that the North American fleet utilization rate remains high — at 99.3% at the end of the third quarter. And even if customers decide to return their cars, GATX can find another place for that rail car, according to Tom Ellman, GATX CFO.
“A nonrenewal does not necessarily mean a non-utilized car. … The utilization remained very, very high, which means that any car that for whatever reason is not being renewed is being quickly put back to work,” Ellman said during GATX’s third-quarter earnings call on Tuesday.
Lyons said there are times, “especially in this type of rate environment, where certain customers may say no. And given the diversity of our fleet and our commercial capabilities, we’re comfortable taking a car back and putting it on lease with the next customer. So that would obviously impact your renewal success rate. But in the end, any renewal success rate up in the ZIP code of where we’re at today is really, really strong.”
Furthermore, periods of high inflation aren’t necessarily a headwind either, according to Ellman. If a customer decides not to pursue purchasing a rail car at this time because of higher interest rates, that customer may still continue leasing instead.
“On a new investment where you have the ability to decide to invest or not to invest, obviously, higher interest rates makes your threshold a little bit higher for total investment and a little bit more challenging to invest in that kind of environment,” Ellman said. “It’s important to note though that overall dynamic is helpful because if it makes that new car more expensive, it makes the alternative of renewing an existing car more attractive and that’s really the primary benefit that you get.”
Net income for GATX (NYSE: GATX) was $52.5 million, or $1.44 per diluted share, for the third quarter of 2023, compared with $29.1 million, or 81 cents per diluted share, for the third quarter of 2022.
GATX described the rail car leasing market in North America as “robust,” with fleet utilization for GATX’s Rail North America segment at 99.3% at the end of third quarter, compared with 99.3% at the end of the second quarter and 99.6% for the third quarter of 2022.
The segment reported profit of $66.1 million, compared with $64.3 million in the same period last year.
GATX’s Rail International segment saw a combined total of over 1,400 newly built rail cars to fleets in Europe and India, and the company said it is experiencing higher renewal lease rates compared with expiring rates for the majority of car types.
GATX’s Rail International reported $28.2 million in third-quarter segment profit, compared with $14.5 million a year ago.
Wabtec focuses on business wins abroad
As Wabtec navigates through domestic market softness, the rail equipment manufacturer and technology provider is eyeing opportunities abroad, according to President and CEO Rafael Santana.
“North America carloads continue to be down in the quarter, which resulted in locomotive parkings up slightly from last quarter’s levels,” Santana said in prepared remarks during Wabtec’s third-quarter 2023 earnings call on Wednesday. “Yet we continue to see significant opportunities across the globe in demand for new locomotives, modernizations and digital solutions as our customers invest in solutions that continue to drive reliability, productivity, safety and fuel efficiency.”
He later said, “Internationally, activity is strong across core markets, such as Latin America, Australia, South Africa and Kazakhstan, [where] significant investments to expand and upgrade infrastructure are supporting a substantial international order pipeline.”
In Wabtec’s domestic business, North American rail car builds industrywide still continue to “show growth,” with about 45,000 cars to be delivered in 2023, Santana said.
In the third quarter, Wabtec’s (NYSE: WAB) sales rose 22.5% year over year (y/y) to $2.5 billion, “driven by strong performance” from Wabtec’s freight and transit segments, the company said.
Third-quarter 2023 earnings per diluted share using generally accepted accounting principles was $1.33, up 51.1% y/y. Adjusted earnings per diluted share were $1.70, up 39.3%.
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