GATX 4Q20: ‘Some Initial Recovery Signs’

Written by Marybeth Luczak, Executive Editor
“Despite difficult market conditions at Rail North America, outstanding efforts by our commercial team enabled us to maintain fleet utilization above 98% throughout the year,” GATX President and CEO Brian A. Kenney said during a quarterly earnings announcement.

“Despite difficult market conditions at Rail North America, outstanding efforts by our commercial team enabled us to maintain fleet utilization above 98% throughout the year,” GATX President and CEO Brian A. Kenney said during a quarterly earnings announcement.

Chicago-based GATX Corp. has reported fourth-quarter 2020 net income from continuing operations of $17.8 million, or $0.50 per diluted share, compared with fourth-quarter 2019’s $42.1 million, or $1.18 per diluted share. For full-year 2020, net income from continuing operations was $150.2 million, or $4.24 per diluted share, vs. the prior year’s $180.8 million or $4.97 per diluted share.

The railcar lessor noted that 2020 results included “a net negative impact of $12.3 million or $0.35 per diluted share, related to the elimination of a previously announced tax rate reduction in the United Kingdom,” and 2019 results included “a net deferred tax benefit of $2.8 million or $0.08 per diluted share, related to an enacted tax rate reduction in Alberta, Canada.”

Additionally, due to the sale completion of American Steamship Co. (ASC) in second-quarter 2020, “this segment is reported as discontinued operations and prior periods have been recast to conform to the current presentation,” the company reported.

Following are more details, by the GATX business unit.

Rail North America

GATX reported a segment profit of $49.5 million in fourth-quarter 2020, vs. $61.1 million in fourth-quarter 2019, “primarily due to lower gains on asset dispositions in the quarter.”

For full-year 2020, segment profit was $227.6 million, compared with $276.2 million in 2019, which was “primarily the result of lower lease revenue and lower gains on asset dispositions, partially offset by lower maintenance expense,” the company said.

The wholly owned fleet comprised about 118,100 cars, including more than 14,300 boxcars, as of Dec. 31. The following fleet statistics and performance discussion exclude the boxcar fleet:

• Fleet utilization was 98.1% at the end of the fourth quarter, compared with 98.2% at the end of the prior quarter and 99.3% at the end of 2019, GATX said.

• During fourth-quarter 2020, the GATX Lease Price Index (LPI) was negative 22.6%. This compares with negative 29.4% in the prior quarter and negative 9.1% in fourth-quarter 2019. The average lease renewal term for railcars included in the LPI during the fourth quarter was 34 months, compared with 29 months in the prior quarter and 37 months in fourth-quarter 2019. The fourth-quarter renewal success rate was 77.0%, vs. 58.1% in the prior quarter and 84.0% in fourth-quarter 2019, according to the company.

• For full-year 2020, the renewal lease rate change of the LPI was negative 23.5% and the average renewal term was 31 months, vs. negative 3.9% and 39 months in 2019. The renewal success rate for 2020 was 70.8%, compared with 82.2% in 2019. Total investment volume was $642.0 million in 2020, according to the company.

“Despite difficult market conditions at Rail North America, outstanding efforts by our commercial team enabled us to maintain fleet utilization above 98% throughout the year,” GATX President and CEO Brian A. Kenney said. “Persistent industry-wide railcar overcapacity combined with the economic impacts of COVID-19 put significant pressure on lease rates. However, absolute lease rates for most car types stabilized or modestly improved in the second half of the year. Notably, our maintenance cost performance was better than our original expectations coming into 2020, as the efficiencies gained from aggressively moving work from third-party shops into our owned maintenance facilities more than offset COVID-19 related expenses necessary to ensure workplace safety.”

Rail International

For fourth-quarter 2020, segment profit was $25.6 million, compared with fourth-quarter 2019’s $22.9 million. This result “was predominately driven by more railcars on lease,” GATX reported.

Full-year segment profit was $83.5 million in 2020, vs. $78.9 million in 2019. This was “primarily driven by more railcars on lease, partly offset by foreign exchange impacts,” according to the company.

As of Dec. 31, 2020, GATX Rail Europe’s (GRE) fleet comprised about 26,350 cars and utilization was 98.1%, compared with 98.2% at the end of the prior quarter and 99.3% at the end of 2019.

“Despite the pandemic, demand for railcars remained stable in Europe and India,” Kenney said. “Rail International maintained high fleet utilization, experienced increases in renewal lease rates, and grew and further diversified its railcar fleets. Nevertheless, COVID-19 adversely affected the pace of new railcar investments in both Europe and India.”

Portfolio Management

GATX reported a segment loss of $5.7 million in fourth-quarter 2020, compared with a segment profit of $27.5 million in fourth-quarter 2019. This lower segment profit “was primarily driven by the performance at the Rolls-Royce and Partners Finance (RRPF) affiliates,” GATX said.

Full-year 2020 segment profit was $77.4 million, compared with $62.4 million in 2019. “The increase in year-to-date segment profit was primarily due to higher marine operating revenue, while a large gain at RRPF from a transaction involving the refinancing and sale of a group of aircraft spare engines in the third quarter also supported higher 2020 segment profit,” the company noted.

Discontinued Operations

The ASC business segment is accounted for as discontinued operations; the final gain on the sale, net of taxes, was $3.3 million, according to GATX.

“Our 2020 full-year investment volume was over $1.0 billion, up significantly from 2019,” Kenney said. “We continue to execute our strategy of capitalizing on difficult market conditions to invest in attractively priced, long-lived, service-intensive transportation assets. Our acquisition of Trifleet, the world’s fourth largest tank container leasing business, further expands and diversifies our asset base. Also, in January 2021, we invested approximately $120 million for the acquisition of Rolls-Royce aircraft spare engines that are on long-term leases to strong airline customers. Investments of this nature provide GATX with promising growth opportunities and reflect our confidence in the future of the aircraft spare engine leasing business. RRPF will continue to invest at the joint venture level while also managing these direct investments for GATX.”

2021 Outlook

GATX President and
CEO Brian A. Kenney

“While we see some initial signs of recovery in North America railcar leasing, absent an unforeseen demand catalyst, fleet utilization and lease rates are expected to remain under pressure from an ongoing market oversupply of railcars,” Kenney said. “However, we expect lower lease revenue to be offset by higher asset disposition gains and cost control, leading to essentially flat segment profit at Rail North America in 2021. Rail International is expected to produce higher profitability in 2021 due to continued strong demand for new and existing railcars in Europe and India. At Portfolio Management, we project significantly lower 2021 segment profit as RRPF expects to realize lower gains from asset sales and continued pressure on its customer base due to the severe reduction in global air travel. Considering all these factors, we currently expect 2021 earnings to be in the range of $4.00 to $4.30 per diluted share.”

More details can be found through GATX Investor Relations.

Cowen Insight: ‘Impressive Performance; Guidance Is Back’

Matt Elkott, Cowen and Company OEM Transportation Analyst

“The big EPS miss ($0.50 vs Cowen $0.86 and Consensus $0.89) would represent a ~$0.10 beat to our estimate if we were to adjust our sale gains and affiliate income down to the actual results,” reported Cowen and Company OEM Transportation Analyst Matt Elkott. “Revenue, EBIT, LPI, average lease term, and utilization were better than our projections. The 2021 guidance midpoint is in line with our estimate and modestly above the Street.”

Cowen’s Key Takeaways:

• “EPS of $0.50 missed our and consensus estimates of $0.86 and $0.89, respectively. But gains on asset sales and income from affiliates were well below our assumptions. Revenue of $304.9MM exceeded our $292.6MM estimate. Within this, lease revenue was $274.2MM, above our forecast of $264.5MM. Operating income of $73.6MM also beat our $67.4MM estimate.

Source: Cowen and Company estimates, Thomson Reuters, GATX

• “Utilization remained strong at 98.1%, compared to our estimate of 97.9%. In 3Q20, utilization was 98.2%. The average lease term was 34 months, above our estimate of 31 months. LPI was negative 22.6%, compared to our estimate of negative 29.0% and negative 29.4% in 3Q20.

• “The company provided new 2021 EPS guidance in the range of $4.00-$4.30. The $4.15 midpoint is in line with our estimate and above consensus of $4.12.

• “We see the share underperformance in early Thursday trading as not being fully warranted.

• “Management Commentary: Management noted that although they see some initial signs of recovery in North America railcar leasing, absent an unforeseen demand catalyst, fleet utilization and lease rates are expected to remain under pressure from an ongoing market oversupply of railcars. The company expects lower lease revenue to be offset by higher asset disposition gains and cost control, leading to essentially flat segment profit at Rail North America in 2021. Management also noted that Rail International is expected to produce higher profitability in 2021 due to continued strong demand for new and existing railcars in Europe and India. The company projects significantly lower 2021 segment profit as RRPF expects to realize lower gains from asset sales and continued pressure on its customer base due to the severe reduction in global air travel.”

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