The market for freight railcars is showing signs of improvement but data for railcar orders, deliveries and backlogs still reflects current market softness.
Railcar orders rose by 80% to 6,227 railcars in the first quarter of 2021 from the fourth quarter of 2020, although orders are still below pre-pandemic levels, according to the Railway Supply Institute (RSI).
In comparison to Q1 orders, the quarterly average for 2019 was about 9,300 railcars, RSI said. RSI’s American Railcar Institute Committee releases the data.
Deliveries were flat to lower in the first quarter, down 3.5% to 5,996 railcars, while the backlog has “remained static,” at 34,829. The fourth-quarter 2020 backlog of 34,598 was the lowest backlog point since 2010, RSI said.
RSI’s comments about market conditions are reflected in the observations of the railcar lessors and rail equipment manufacturers below.
‘Slow and steady’ market improvements: GATX
Spot lease rates for railcars in the North American market have shown small improvements for the last three quarters, reflecting a “slow and steady” market environment, according to GATX (NYSE: GATX) Chief Financial Officer Thomas A. Ellman during his company’s first-quarter 2021 earnings call on April 20.
But lease rates are still below long-term averages, with lease rates for non-energy-related tank cars down by 15% to 25%, while non-energy-related freight cars have lease rates “down a bit more than that,” Ellman said.
The railcar lessor has been seeking ways to grow its asset base in North America. For instance, GATX’s commercial team since the start of the year has placed over 1,000 additional railcars outside of supply agreements, and these railcars will be delivered by mid-2022. The company also “capitalized on a healthy secondary market” and generated remarketing income from railcar sales of approximately $16.4 million in the first quarter.
Fleet utilization at GATX at the end of the first quarter fell to 97.8% from 98.1% for the fourth quarter of 2020 and 99% for the first quarter of 2020. GATX’s renewal success rate was 77.7% for the first quarter.
When asked how efforts by Canadian railways CN (NYSE: CNI) and Canadian Pacific (NYSE: CP) to acquire Kansas City Southern (NYSE: KSU) would affect GATX, Ellman said mergers could have a long-term benefit on the rail industry, although the impact felt from a Kansas City Southern (KCS) merger would be minimal.
“Our exposure to any fleet consolidation concerns as a result of a merger are very small. I think between CP and KCS we have less than 900 cars on lease to the two of them combined. With CN, it’s probably also less than 900 to them directly. So it’s just not a material equipment exposure for GATX,” Ellman said.
He continued, “But any merger that has a potential to create new rail traffic and potential new car demand is obviously going to be a good thing for a diversified lessor such as GATX. So we’ll see what deal goes through, whether it goes through and which one and we’ll have to wait to see if that actually happens, but [it’s] potentially a good thing for car demand.”
GATX’s net income from continuing operations was $36.5 million, or $1.02 per diluted share, for the first quarter of 2021, compared with net income from continuing operations of $47.2 million, or $1.33 per diluted share, in the first quarter of 2020.
Positive carload and storage trends point to improving market: Trinity
The rail market is still “soft,” but railcar lessor and equipment manufacturer Trinity Industries (NYSE: TRN) is seeing signs of recovery, although the COVID-19 pandemic remains the largest headwind, said Trinity Industries President and CEO Jean Savage during Trinity’s first-quarter earnings call on April 22.
Trinity’s customers are growing confident amid increasing vaccination levels and government stimulus programs, Savage said. And their level of confidence impacts how they decide on lease renewals, fleet expansions and asset replacement, she said.
Furthermore, U.S. railcars have been coming out of storage for nine months in a row, and industry utilization is returning to pre-pandemic levels and trending around the five-year industry average, Savage said.
“We see positive carload and storage trends for railcar types representing over 50% of the North American fleet. Previously, fleet serving the agriculture and consumer product markets were presenting the most opportunity based on improving carloads,” Savage said. “With early signs of a recovery in the industrial economy, high steel prices and increasing steel mill utilization as well as potential infrastructure bill, we are also seeing positive benefits on railcars within the construction and metals markets.”
Although Trinity declined to offer many details on what different car types are seeing more market interest, generally speaking “the slack has tightened on the freight car side,” specifically for covered hoppers for grain and agricultural products, while there is less tightening for energy-related tank cars, Trinity Chief Financial Officer Eric Marchetto said.
Trinity is in the midst of a three-year strategic plan to improve the company’s financial performance, according to Savage.
Included in the strategic plan are efforts to increase the percentage of maintenance and compliance events that are handled internally within its shops, Savage said. Trinity is also seeking to install automation throughout the company’s rail operations to lower cost structure. Trinity sold several idle facilities in the first quarter and could take similar measures over the next couple of years as a way to “clean up” the company’s operational footprint and reduce costs.
In the first quarter, Trinity grappled with a market environment that saw challenging pricing options and declining volumes because of lower order volumes in 2020, according to Savage. Two significant weather events also affected Trinity in the first quarter, she said.
“We believe the railcar market is early in its recovery from the pandemic-related headwinds of 2020. However, our first-quarter financials continue to show the impact of lower demand and pricing pressure in the market over the past year,” Savage said.
Trinity’s lease fleet utilization was at 94.5% in the first quarter of 2021 and the fourth quarter of 2020. Railcar deliveries totaled 1,895 for the first quarter of 2021 and 2,235 for the fourth quarter of 2020, while railcar orders totaled 1,410 in the first quarter of 2021 versus 1,170 in the fourth quarter of 2020.
First-quarter revenue was down 35% to $399 million, which was “within our expectations but … not where we like it to be,” Savage said.
Net income was $3.3 million, or 3 cents per diluted share, in the first quarter of 2021, compared with $161.7 million, or $1.33 per diluted share, in the first quarter of 2020.
Global and North American markets primed for recovery: Wabtec
Wabtec (NYSE: WAB) is eyeing improving markets worldwide for its freight market and passenger transit products, with more revenue growth weighted toward the second half of 2021, according to Wabtec President and CEO Rafael Santana.
“We are seeing continued signs of recovery happening across the global freight and transit rail markets,” Santana said in an April 29 release. “Freight volumes and equipment utilization are gradually improving, demand for freight aftermarket services is increasing and sustainable investment in global transit remains strong. These directional trends, along with our backlog, strong cash flow and order pipeline, position Wabtec to deliver profitable long-term growth.”
Although Wabtec is continuing “to work through the trough in the OEM North American market,” in which order activity for locomotives is stagnant, there are a number of positive economic indicators, according to Santana. These include a sequential quarterly improvement in freight volumes and recovery in agricultural, intermodal and industrial markets, he said during his company’s first-quarter 2021 earnings call last week.
“Locomotive parkings, after peaking to a record high in 2020, are improving as a result of the increased freight traffic and demand is stemming from weather disruptions during the quarter,” Santana said. “We expect demand for reliability and productivity to improve as railroads continue to recover. This will put us in a position of strength across our freight portfolio.”
Although the industry is not yet back yet to pre-COVID levels in terms of how many locomotives in North America are parked, the trend overall is heading in a “positive” direction, Santana said. The global fleet also shows a positive trend toward more locomotives getting utilized, he said.
“The momentum is positive. We’re going to continue to watch that closely here, especially as we go into the second half of the year. And we’re especially pleased with the performance we are having with customers in terms of reliability and availability, which ultimately is really the differentiator for us to winning more share of wallet, so positive,” Santana said.
Meanwhile, Wabtec sees “a stronger order pipeline internationally” amid improving market conditions for mining, a passenger transport sector that is starting to recover and a longer-term interest in infrastructure spending for green initiatives.
However, the company is watching how the COVID-19 pandemic plays out in India and Europe, Santana said.
Wabtec’s total sales were $1.8 billion in the first quarter, driven largely by international freight markets, services and transit but offset by continued weakness in the North American OEM market, Santana said.
Santana said Wabtec is pleased with its acquisition of Nordco, which it says should benefit the company financially in 2021.
“We really like this business and its leading-edge technologies. It opens up significant opportunities to expand domestically and internationally in the growing maintenance waste segment while driving long-term profitable growth,” Santana said. “Integration activities are already under way, and we expect this strategic acquisition to be accretive to earnings, cash flow and return on invested capital in 2021.”
Wabtec reported net income of $112.4 million, or 59 cents per diluted share, in the first quarter of 2021, compared with net income of $111.6 million, or 58 cents per diluted share, in the first quarter of 2020.