Railcar lessors, equipment makers see healthy market demand despite headwinds

Although headwinds such as a potential economic recession, high inflation rates and international geopolitical tensions are putting pressure on the market for railcars and rail equipment, companies remain upbeat on near-term prospects because of pent-up demand as well as public and private greening initiatives, according to executives’ comments during earnings calls over the past two weeks.

Here are five themes that came up consistently for rail equipment manufacturers and railcar lessors during those reports:

1. A recession might come, but we’re ready

The companies are confident they can handle a downturn in the economy, given the railroads’ efforts to improve network velocity and a broader belief that there will still be market demand for rail (see theme No. 2).

“While there is a lot of uncertainty in the economy, we believe our business and the industry are resilient to a minor recession. They are underpinned by the significant improvement in the balance of supply and demand of railcars over the past two years,” said Trinity Industries President and CEO Jean Savage in prepared remarks during her company’s third-quarter 2022 earnings call on Oct. 25. “In short, our view of our business is relatively unchanged in the last quarter.”

For Trinity (NYSE: TRN), utilization for the lease fleet in Q3 was 97.9%, “showing that demand remains high and available supply remains limited.”

“While rail traffic is still impacted by labor shortages and service issues, we are starting to see some easing,” Savage said. “Rail traffic is still below pre-pandemic levels, but we continue to see improvements in railroad headcounts and believe this is a needed step to support better rail service. There is no quick solution, but we are in full support of increased efficiency and service in the rail industry.”

Although industry figures show the number of railcars in storage increased slightly over the summer after steadily falling for 23 months, that figure could drop again as tank cars get ready for the winter heating season and hoppers prepare for the fall harvest, Savage said.

“As we look at the possibility of going into a mild recession, the markets that are closer to the consumer and the consumer spending are probably the most at risk — and that’s going to be automotive and then some of the products that are going to move by intermodal,” she said in response to a question about which railcars could be more under pressure during a potential recession.

“If you’re looking at the chemical market, the North America [market] has strong performance there, [which is] probably going to insulate that somewhat. And energy and agriculture typically move independent of what’s going on with the economy, [so] that leaves construction. So, you will see some pressure from the housing market going down, but the infrastructure bill that was passed [by the U.S. Congress] should give us some movement or support there, especially when it comes to things like aggregates or asphalt.”

Trinity’s net income for the third quarter of 2022 was $29.2 million, or 34 cents in adjusted diluted earnings per share, compared with $21.6 million, or 18 cents, in Q3 2021.

2. Shippers still want to ship via rail

The lessors and equipment manufacturers say customers have told them they are willing to ship more via rail, provided that service continues to improve. So, even if a recession occurs, the rail market should find some support from that pent-up demand.

“We do continue to believe that if rail performance improves, that there are some loads that the industry will move that they’re not moving right now because of some of the challenges with the rail network,” said Paul Titterton, president of GATX’s Rail North America division. “We continue to see shippers wanting to move more by rail, but they need to see the service improve before they can do that. I think it’s important to note that we continue to see a significant difference between the new car and the existing car markets. Customers clearly feel that they need to maintain their fleet size. So they’re very reluctant to return cars. This fact, combined with a tight supply situation, has resulted in strong existing car pricing. …

“This dichotomy between the new and existing car market has persisted this quarter and, if anything, it might even be a bit more pronounced because of the macroeconomic uncertainty.”

Furthermore, customers are also looking to improve their environmental profile, which can benefit rail because the railroads can carry more freight than trucks at lower emission rates, the companies said.

“Where we see the real opportunity long term is as the railroads become more fluid, we have a number of shippers that want to do even more, some of it for ESG [environmental, social and and governance] compliance reasons, some of them just because it’s still the best mode of transportation,” said Greenbrier Chief Commercial Officer Brian Comstock on his company’s quarterly earnings call on Oct. 27.

Fleet utilization at GATX’s Rail North America and Rail International divisions were above 99% in the third quarter. GATX also decided in the quarter to exit its rail business in Russia, which resulted in an impairment charge of $10.8 million.

GATX’s (NYSE: GATX) reported Oct. 25 a third-quarter 2021 net income of $29.1 million, or 81 cents per diluted share, compared with net income of $40.1 million, or $1.11, in Q3 2021.

3. Railcar scrapping still factors into US demand

Railcar scrapping activity increased in recent months due to the attractive pricing for steel recycling. That activity hasn’t completely abated yet, according to railcar manufacturer Greenbrier.

As a result, scrapped cars are expected to exceed new railcar deliveries for a third consecutive year and provide support to railcar utilization rates in 2023, said Greenbrier President and CEO Lorie Tekorius in prepared remarks during the company’s fiscal fourth-quarter earnings call on Oct. 27.

“The combination of a shrinking fleet and decreased railcars and storage increases railcar utilization and adds pressure on fleet availability in North America,” Tekorius said. “These dynamics have contributed to a continued strong North American leasing market.”

Said Comstock: “There’s a lot of scrapping going on as people have seen over the last couple of years [due to] high scrap prices and an aging fleet, particularly when you think about boxcars in the old, 70-ton plate-C boxcar fleet and the gondola fleet. They [will] continue to have very high attrition rates over the next four years to five years. So, that tailwind will continue.”

Other factors, such as low-water levels on the Mississippi River, also could potentially impact Greenbrier in its new fiscal quarter.

“One of the big phenomena that’s going on right now is the low-river levels on the Mississippi River, which is putting a lot of strain on grain type of assets,” Comstock said. “But it’s a really broad base across all groups.

Greenbrier is also seeing tightness across all the sectors it serves.

“I’d say probably the area where it’s still not as robust as it has been in the years is on the tank side, but that’s really because we don’t have any big catalyst like a big ethanol build-out or crude by rail build-out,” Comstock said. “You are servicing the general market at this stage with chemicals and upstream and downstream products. But it truly has and truly remains very broad based across multiple commodities.”

On a sequential basis, Greenbrier’s fiscal fourth quarter 2022 net income was $20.2 million, or 60 cents per diluted earnings per share, compared with fiscal Q3 2022 net income of $3.1 million, or 9 cents. GATX’s fiscal year ended Aug. 31.

The company said it received new railcar orders totalling 4,800 units, valued at $620 million, in Q4. Greenbrier also delivered 5,800 units during the quarter. Its railcar backlog at the end of the quarter was 29,000 units with an estimated value of $3.5 billion.

“Our outlook for Greenbrier’s business is broadly optimistic for fiscal 2023 despite uncertain macroeconomic conditions,” Tekorius said in a news release. “Our backlog of nearly 30,000 units, valued at $3.5 billion, coupled with our strong liquidity position, provides visibility and an opportunity to drive higher performance, building on the momentum in our business. We expect railcar-utilization levels to remain high as scrapping continues to outpace new deliveries, contributing to a strong North American leasing market for originations and lease renewals.”

4. Conflict in Ukraine weighs on European markets

Greenbrier, GATX and Wabtec operate in Europe, as well as other global markets. The European market for railcars and rail equipment is finding support for environmental regulations, although the conflict in Ukraine is affecting the supply chains there.

“As we look across the globe, we know the economy faces headwinds from the Russian invasion of Ukraine,” Tekorius said. “With winter approaching, escalating energy prices, together with record inflation levels and rising interest rates, present an unprecedented set of conditions. Economic forecasts predict recession in Europe. We are focused on managing our operations on the continent through current and future challenges. We are realistic and responsive to the economic conditions in Europe.

“Yet there is still a sense of relative optimism in the rail freight sector. Traffic volumes are holding up well, and rail freight is playing an increasingly important role in the transportation of critical goods in response to the invasion of Ukraine.

“Europe’s wagon supply chain has largely recovered from the disruption caused by the war, albeit with higher prices in most areas. Railcar delivery projections for the next few years are strong and back to prewar levels. Our work with our customers has brought more certainty to our production costs, and our sales pipeline and backlog are growing again as new order inquiries remain stable.”

GATX President and CEO Bob Lyons expressed confidence about customers taking advantage of incentives for green transport options in Europe.

“I’m very optimistic [about] the European market, given the fact that there is a concerted push to move more product from truck to rail,” Lyons said. “The green deal is very real in Europe. The environmental benefits of rail are apparent, and they’re being pursued pretty aggressively in Europe — so very optimistic on that front.

“That said, the manufacturing footprint in Europe is far smaller than it is here in North America. And so it is, at this point in time, pretty strained. The challenge I would say is not necessarily finding the next car opportunity [or] the next new car opportunity. It’s making sure we can get delivery on a timely basis. And with the supply chain situations pretty strained in Europe, that’s become more challenging.”

5. Global demand strong despite economic, geopolitical concerns

The challenges railcar manufacturers might find in Europe and Russia — Wabtec also lost its business in Russia — can be counterbalanced somewhat by sales and activity elsewhere across the globe.

In the third quarter, Wabtec signed a $600 million memorandum of understanding with railway operators in Kazakhstan, and it recently signed two deals in Australia to deliver locomotives. The company also closed on an order for new locomotives in Africa and is having discussions in Asia on developing projects.

“It’s early certainly to provide guidance in ’23, but we continue to see this strong demand across the business,” said Wabtec President and CEO Rafael Santana during his company’s third-quarter 2022 earnings call Tuesday. “When we think about the pipeline of deals, we have relevant opportunities across geographies. We have progressed with the pipeline of opportunities both in North America and then internationally.

“We’re continuing to see a strong pipeline of opportunities out there. I did mention that strength is really playing out across various geographies and, in many ways, across the business. It’s all about really driving convertibility into that. … It’s all about converting that pipeline of opportunities, and we are certainly in a stronger position to be driving profitability into 2023 than we were a year ago.”

Customer activity in North America continues to prop up those markets, Santana said.

“We continue to see significant opportunities and demand for new locomotives and modernizations as our customers invest in their aging fleets and place a greater focus on reliability, productivity and fuel efficiency,” he said. “When it comes to the North American railcar build, demand for railcars is increasing from what we believe were trough levels in 2021. Railcars in storage are below pre-COVID levels, with about 17% of the North American railcar fleet in storage.”

Wabtec (NYSE: WAB) reported third-quarter 2022 earnings per diluted share of 88 cents, which is 27.5% higher than Q3 2021. Adjusted earnings per diluted share was $1.22, up 7% year over year.

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