Despite posting company-wide financials in the second quarter of 2021 that dropped significantly from the prior-year period, GATX Corp. said it remains optimistic, as indicated by strong improvements in its two rail business units.
In 2Q21, GATX Corp posted net income from continuing operations of $5.5 million, or $0.15 per diluted share, compared to $37.0 million, or $1.05 per diluted share in 2Q21, an 85% drop. Net income from continuing operations for the first six months of 2021 was $42.0 million or $1.17 per diluted share, compared to $84.2 million or $2.38 per diluted share in the prior-year period, a 50% fall. The 2021 second-quarter and year-to-date results include a net negative impact of $39.7 million or $1.10 per diluted share related to an enacted tax rate increase in the United Kingdom and a net negative impact of $3.4 million or $0.09 per diluted share attributed to debt extinguishment costs associated with an early redemption.
Net income from discontinued operations in the second-quarter and year-to-date periods of 2021 was zero, compared to $2.3 million or $0.06 per diluted share in the second quarter of 2020 and $1.4 million or $0.04 per diluted share for the first six months of 2020.
“We continued to see improvement in Rail North America’s operating environment in the second quarter, as rail carloads increased and industry cars in storage decreased from last quarter and the prior year,” said President and CEO Brian A. Kenney. “GATX’s fleet utilization increased to 98.5% at quarter end, and our renewal success rate was 77.5%. Absolute lease rates across the majority of our fleet increased for the fourth quarter in a row, and we continue to operate more efficiently in our maintenance network. We expect these favorable trends to remain for the rest of this year.
“As expected, Rail International performed well, and we are progressing against our goal of growing and diversifying our fleet in Europe. Second-quarter fleet utilization at GATX Rail Europe remained high at 98.4%, and renewal lease rates continue to be higher than expiring rates for most car types. Underlying demand for our railcars remains strong in Europe and India. However, fleet growth at Rail India during the quarter was constrained by COVID-19-related manufacturing disruptions. In the Portfolio Management segment, Rolls-Royce and Partners Finance affiliates’ operations remain challenged as demand for long-haul passenger flights continues to be hampered by COVID-19 travel restrictions.
“We are encouraged by the continuing recovery in the North American railcar leasing market and our other segments are performing in line with our expectations. Therefore, we are increasing our 2021 full-year earnings estimate to $4.30 to $4.50 per diluted share, from our previous guidance of $4.00 to $4.30 per diluted share. This guidance excludes any impact from Tax Adjustments and Other Items.”
RAIL NORTH AMERICA
Rail North America reported segment profit of $77.6 million in the 2Q21, compared to $50.0 million in 2Q20, a 35% gain. Higher segment profit was primarily a result of higher gains on asset dispositions, “reflective of a robust secondary market for railcar sales.” Year to date, Rail North America reported segment profit of $143.3 million, compared to $122.0 million in the same period of 2020, a 17% improvement. The increase in year-to-date 2021 results was predominantly driven by higher gains on asset dispositions and lower maintenance expense, partially offset by lower revenue.
As of June 30, 2021, Rail North America’s wholly owned fleet was comprised of approximately 114,800 cars, including approximately 12,700 boxcars. Fleet utilization was 98.5% at the end of 2Q21, compared to 97.8% at the end of the prior quarter and 98.7% at the end of the 2Q20. During the 2Q21, the renewal lease rate change of the GATX Lease Price Index (LPI) was –6.7%. This compares to –18.1% in the prior quarter and –28.0% in the second quarter of 2020. The average lease renewal term for all cars included in the LPI during the second quarter was 29 months, compared to 30 months in the prior quarter and 31 months in the second quarter of 2020. Rail North America’s investment volume during the second quarter was $106.4 million.
Rail International’s segment profit was $27.3 million in 2Q21, compared to $20.0 million in 2Q20, a 24% increase. Year-to-date 2021, Rail International reported segment profit of $49.1 million, compared to $33.9 million for 2Q20, a 31% gain. Results in the comparative periods were favorably impacted by more railcars on lease and by changes in foreign currency exchange rates.
As of June 30, 2021, GATX Rail Europe’s fleet consisted of approximately 26,700 cars. Utilization was 98.4%, compared to 98.2% at the end of the prior quarter and 98.4% at the end of 2Q20.
THE COWEN INSIGHT: ‘REVENUE AND EPS BEAT; GUIDANCE RAISED; MARKET IMPROVING’
GATX’S Revenue and EPS topped our and consensus expectations driven by asset sales, continued lease rate improvement and solid international market conditions, noted Cowen and Company freight transportation equipment analyst Matt Elkott. “Our new guidance midpoint is $4.40, up from $4.15.”
“The company provided updated 2021 EPS guidance in the range of $4.30-$4.50, up from the prior guidance of $4.00-$4.30,” Elkott said. “The new guidance midpoint of $4.40 is above our and the consensus estimate of $4.20. Asset sales, which we view as part of core operations, can be choppy and unpredictable, affecting the earnings cadence, so we would not view potentially lighter earnings in 2H21 negatively. Additionally, the strong asset sales in 2Q21 do not preclude the same from happening in 3Q or 4Q, although the company’s updated guidance does not appear to reflect similar asset sales in the coming quarters, making further earnings upside possible.
“EPS from continuing operations was $1.35, handily beating our and consensus estimates of $1.01 and $1.03. Revenue was $317.1MM, above our and Street estimates of$301.7MM and $309.2MM, respectively. Utilization remained strong, improving to 98.5%, from 97.8% in 1Q21, and exceeding our estimate of 98.2%. The average lease term was 29 months, just below the first quarter’s 30 months and short of our estimate of 34 months. LPI was –6.7%, significantly better than negative –18.1% in 1Q21 and better than our estimate of –14.0%.”