Q4 2019 Earnings Call
Please standby for today's conference it will be getting momentarily again, please standby. Thank you.
[laughter].
Standby for today's conference it will begin momentarily. Thank you.
Today's call will begin momentarily. Thank you.
Hello, and welcome to the Green buyer company's fourth quarter fiscal year 2019 earnings conference call. Following today's presentation.
The question and answer session each analyst should limit themselves to only two questions until that time, all mines will be on the listen only mode.
At the request at Greenbrier companies. This conference call is being recorded for instant replay purposes.
At this time I turn the call for true ups, and Robert Vice President Treasurer, Mr., Robert She may be cancer.
Thank you Shirley good morning, everyone and welcome to our fourth quarter fiscal 2019 conference call.
Today's call I'm joined by Greenbriers, Chairman and CEO Bill Fermin.
Lorie, Tekorius, President and Chief operating Officer, and Adrian Downs, Senior Vice President and Chief Financial Officer.
They will discuss the results for fourth quarter. The full year 2019, and then provide an outlook for Greenbriers fiscal 2020.
Following our introductory remarks, well open up the call for questions.
In addition to the press release issued this morning, which include supplemental data additional financial financial information and key metrics can be found in a slide presentation posted on the IR section of our website.
Matters discussed on today's conference call include forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
Throughout our discussion today, we will describe some of the important factors that could cause Greenberg actual results in 2020 and beyond to differ materially from those expressed any forward looking statements made by are on behalf of Green Briar and now. This is the lawyers are happy Bill would you. Please take it away.
Sure Jason Good morning, everybody.
Today, we're pleased to report the Green bar ended its fiscal 2019 with positive momentum.
And we enter 2020 way they saw an increase in backlog and railcar order activity.
I will do the numbers just a little later, but fourth quarter deliveries and earnings met the expectations. We provided last quarter. The A.R.I. investment is progressing well.
And we are very happy to join.
With our new colleagues.
Facilities in Arkansas, Missouri, and Texas, which gives us geographic striking distance throughout the eastern United States in Canada.
The completion of the our acquisition continues greenbriers pursuit of growth at scale.
It's really does matter.
Our act acquisition added more than 10000 railcars to our backlog.
Our new railcar backlog of 30300 units today Leach the U.S. North American industry.
Backlog also reflects or a proactive response to market conditions.
For example, we removed all small cube covered covered hoppers for Sam service from our backlog.
We did that voluntarily.
3500 railcars. These are not order cancellations. The truth is the market does not need these cars right now.
Our customers know that and we've taken the initiative with our customers.
To help with this problem in a win win mode. It will benefit them and it will benefit us so our backlog is quake.
A solid and we have.
Very good visibility through our fiscal 2020.
Scales brand, new strategic customer relationships in North America and worldwide.
We're delighted to welcome important new customers for me Ri prominent among those Gx Corporation, a leader in railcar leasing not only in North America, but in Europe , as well as India in Russia.
We'll work hard to serve them and all of our customers.
Sure I also brings us a diverse mix of talent along with increased engineering design and capabilities. As a result of increased scale. We are the dominant provider railcars in our core North American market.
Well, we also enjoy better than a 50% market share in Europe and market share exceeding 70% in Brazil.
The most obvious results of greater scale is at Greenbrier surpassed the 3 billion dollar threshold of total revenue for the first time and 2019.
For adding a arise so we're in a trajectory normalized at 3.5 billion.
Only five years ago into 14.
And in 2012, the numbers hovered under an app.
2 billion, so up 1.5 billion dollar revenue increase on the topline.
It doesn't take long to do the math without the synergies realized that scale.
There are books, you read about it or written about it will be effective.
Greenbriers growth and substance in the future.
Green bars advancing on a four part strategy as we have earlier announced first reinforcing our north American market.
Our strong rebound within our core North American manufacturing operation during the second half of the core of the fiscal 2019 demonstrates execution here.
Although performance will continue to be volatile quarter to quarter given the industry conditions. We are currently yet.
Next we are leveraging leveraging our international operations for greater stability in 2020.
With recent leadership changes.
And so on it.
The third and fourth elements are best in development of the talent pipeline and continued continuing to grow the business at a larger scale.
Talent investment is manifest across our entire organization, including with to the people here with me now in this room actually three Adrian Downs was appointed Chief Financial Officer in June Lori to core EPS was promoted to president and CEO COO I am sorry, COO in August she is running operating units, including our.
Air business.
Which is greatly improved under her leadership, even since she was appointed to that task.
Additionally, we completed a range of key promotions in manufacturing, our largest and most profitable business units in September .
And of course, the our ideal has brought us excellent talent in greater scale in our core markets. Our treasurer. Justin Roberts is also advancing and has done a very good job.
They are I acquisition aligns with three of our four pillars within the Green bar strategy.
It's great to acquire company with the history and pedigree of Eri.
As a reminder, built a great company. We currently employed to have as CEO successors in our company, including John O'brien, who was most recently CEO before the acquisition.
We have been energized by meeting with and being led our new colleagues.
There are many major advantages of this deal, which we've talked about before.
And I won't go into them today.
But the complementary effects of these operations through integration geographic reach.
Hi parallel.
Capabilities that enhance our own capabilities in Mexico, Mexico.
In a broader product mix are among them.
Previously we identify good challenges in our Brazilian.
European other operations remedial actions, we deployed in Europe in Brazil are taking hold and I reversing as.
Are the other areas that we identified last year, we expect a significant swing.
In.
The effects on our bottom line from those changes.
We are getting traction in those markets as we expected.
Gail cannot be achieved simply on a piece of paper it has to be done through the sweat hard work.
Those in the field and naturally there missteps, along the way, but we're not dismayed by those when they occur we simply fix them.
Our repair operations include.
A very large and good business in parts and wheels operations and this unit has improved dramatically over the past year due to lorries leadership along with return.
The economic the economy and the economic conditions in which we're operating.
Our sound in America.
I think as possible for us to continue to talk ourselves into a fungus fundaments seem to be inclined to do but the basic domestic economy is south.
Sorry, stochastic shocks, even though the effects of PS are in trade.
I have affected have been manifest in loadings on the rail network and proved velocity.
Much can be change if the trade.
Uncertainties are removed.
Year over year industry loadings have declined.
And.
The projections for orders.
This coming year and.
And deliveries are below.
Trailing years. However, there is still strong and in this type of environment Greenbrier has always succeed and because image.
Many techniques that uses and its integrated business model that offers.
Value to customers.
Yes.
I'd like to stress that the fundamental of our business are strong and improving.
2020 will be a Europe execution for Green bar.
And we were up to the task.
Greenbrier has been entirely transformers enterprise over the past decade.
And in the past five years.
Since the last time, the economy fell into a recession a much worse worst one that can be than probably can be imagine today.
We are more nimble and adaptable.
We've moved aggressive and lead on compensation policies to ensure higher hi shareholder alignment.
Greenbriers executive executive compensation practices includes stock ownership.
Retention for stock guidelines, along with a significant portion major portion of pay being well defined and pay for performance metrics.
2020, we will focus on digesting our growth.
And on improving shareholder value.
We will focus on operating cash flow.
Capital allocation and execution and integration of our growing business.
Finally, I'd like to shift gears for just a moment.
And I'd like to take a moment.
To recognize a buying competitor.
Trinity Industries.
But more importantly.
I'd like to recognize the Wallace family.
Trinity's founder.
Ray Wallace, who has an inspiration.
For so many of us in railcar manufacturing.
In Q, including me my partner Allen James.
In Greenbriers early history.
And who along with his son in the current CEO , Tim Wallace will be I understand parting soon.
In other recent leaders such as Steve Menzies through the company's history.
Led Trinity to greatness.
Under the influence of this family and talented passionate and powered executives.
Trinity grew to be the railcar leader in an industry leader in many areas.
Now it has been split up.
And.
We are watching the vagaries of activists intervention in the pursuit of sure shareholder value in the short run by outsiders, knowing and insensitive to the demand of such a business.
We hope well for those other constituents of share.
Trinity.
And including its shareholders.
Its customers.
Its employees.
It's franchise.
We have always responded aggressively and competitively.
So have today.
I want to leave you with the stock.
At this industry is a part of the total transportation network it cannot be run.
Quarter to quarter or month to month profits.
Something has to remain that will allow the freight network the transfer transportation network.
To move goods.
I wish Trinity, well and I wish the walls family well in closing thank you.
Thank you Bill.
Good morning, everyone.
Now before Adrian addresses the financial details of the quarter I'll briefly provide some details on our operating performance.
In the fourth quarter, we delivered a record 7300 railcar units and received orders for 4900 units valued at over $500 million.
Orders for the quarter were for a broad range of railcar types or primarily driven by North American tank car demand an activity in Europe and Brazil.
Our backlog as of our fiscal year end totaled 30300 units with an estimated value of $3.3 billion.
This backlog reflects 10600 units from the Eri acquisition, the Bill referenced closing in late July as well as the removal of those 3500 small cube covered hoppers for San service.
We do not have any more sand cars in our backlog.
Taking proactive steps to solidify our backlog is just one example of how Greenberg able to respond quickly in a changing markets.
Our fourth quarter featured many accomplishments again, we closed on the Eri acquisition purchase price was about 418 million.
We achieved record revenue 914 million and going back to those statistics that bill was referencing I think there were some years that maybe that was our revenue for the entire year, so quite an accomplishment and increase in scale for green Briar over the last several years.
Our aggregate gross margins in the quarter increased by over 200 basis points.
Reflecting continued strong manufacturing performance and lease syndication activity.
In three of the four areas challenged earlier in the year, Europe , Gunderson, and Brazil saw improvement in Q4 with Europe generating a pre tax profit.
Progress on improving our repair networks profitability has been slower than we would like but the momentum and financial results are improving and we remain committed to continuing the trend.
North American manufacturing produced another strong performance this quarter and continues to demonstrate its ability to rapidly respond to shifting demand trends.
Deliveries for the quarter and 2019 set a record driving strong margin performance.
More importantly through.
Throughout the year, the manufacturing team successfully executing and aggressive tank car production increase across multiple lines, while safely training hundreds of new employees.
The addition of the talented employees at Eri manufacturing facilities makes green bar more nimble in addressing a range of customer needs.
We've only owned these facilities for about 90 day, but we're pleased with the progress estimate on the integration of the operational and commercial team.
Integration work will continue through 2020.
We're excited about the strength in town of the team that came with the assets and expect the operation to be accretive in 2020.
Our European operations continue to improve their performance under the leadership of William Glenn and Martin Graham.
These improvements are occurring across the entire business and together they are successfully creating culture focused on safety quality and profitability.
And while the macro global economy continues to face headwinds the European market is demonstrating several.
Demonstrating stable demand levels and most of our production capacity it filled for 2020.
The wheels and parts operations were positive contributors in the quarter.
Seasonally the wheels business is weaker sequentially after winter weather and spring restocking activity, but the management team offset lower volumes by improving operating efficiencies.
And our parts business continues to perform well as current demand is advantageous to our product portfolio.
Since you're gaining control of our legacy our 12 legacy repair locations in August 2019, 2018, thirdly locations have been close based on a review of the market being served and the ability to be profitable.
As part of the network optimization, we continue to focus on the safe work environment for our employees and how we can best serve our customers and improve the profitability in the remaining locations.
More positive trend is expected as we move through 2020.
Leasing activity in the quarter was at more normalized level with no externally sourced railcar syndication activity. It's also meant that leasing gross margin percentage returned to its more common 45% to 50% range in the quarter.
Leasing capital markets team, which manages syndication transaction had the strongest quarter four years.
Syndications of 1800 internally produced railcars.
The group's indicated a total of 4800 railcars and all of 2019, another multi year high.
Our Green Bar management services, or Gms group, our proprietary railcar management provider added over 6000 railcars under management in the quarter as well as more than 23000 railcars and all 2019.
Subsequent to the ended the quarter, we added another large customer which will result in another 30000 railcars under management during 2020.
As a result of that recent agreement.
About 104 railcars in North America will be managed by one or more of Gms a suite of services.
In Brazil, the demand environment, it slowly improving as progress occurs on the concession renewal process at the governmental level.
We started to build a backlog and expect improved operating performance in 2020.
Beyond the operating highlights for the quarter here some insight into how we're approaching fiscal 2020.
As you know headwind seem to be gathering globally with several macroeconomic warning signs managing through these types of environments are part of running a cyclical company and our why flexibility is one of the hallmark of the manufacturing footprint that Greenberg built over the last several years.
One of the significant changes in our manufacturing business is a change in our overall cost structure.
Not only have we decreased the overall cost structure, but we've lowered our fixed cost substantially shifting our overhead structure to being more variable than ever before this will allow us to reduce cost quickly and efficiently given the modern moderating demand environment.
Our focus in the near term is on Rightsizing production capacity on certain general purpose freight car lines in our North American manufacturing operation.
I do think capex and increasing cash flow.
2019 was a year with many moving parts coupled with completing the largest acquisition in our history.
We also issued green bars inaugural SG report in August , which has been well received by investors employees and communities in which we operate.
Fiscal 20 brings a different set of opportunities and challenges.
We must successfully integrate the eri operations response to lower demand for railcars in North America with all of this occurred and global economic and geopolitical uncertainty.
Our management team is confident in the long term strategy, we've developed with our board of directors.
And as a result of the talent development activity. Phil mentioned, we firmly believe we've assembled and are investing in the right team.
Thank you on this vision.
Andrew I'll turn it over to you. Thank you Laurie and good morning, everyone quarterly and fiscal year financials are available in the press release and supplemental slides on our website.
I'll hit the high points and speak to fiscal year 2020 guidance.
Highlights for the fourth quarter include revenue growth of 7% sequentially the $914 million.
Second successive.
Record quarter, driven by record deliveries of 7300 units.
At the same time, we improved aggregate gross margin by 220 basis points to 14.6% helped by these deliveries on strong syndication activity.
Manufacturing gross margin grew 120 basis points sequentially.
Net earnings attributable to Green Briar of 35 million are one dollar and six cents per share include approximately 8 million net of tax are 25 cents per share of costs related to the Eri acquisition.
Excluding these costs adjusted net earnings attributable to Green Briar, our 43 million or $1.31 cents per share inline with our guidance.
Adjusted EBITDA in Q4 was 109 million, our 12% of revenue.
New railcar backlog of 30300 units valued at $3.3 billion.
Internationally management in Europe returned the business to pretax profitability delivering nearly 1000 units in Q4.
For fiscal year, 2019 revenue exceeded $3 billion and new milestone.
Greenbrier had a strong second topic 2019, generating 125 million of operating cash flow, while completing the acquisition of areas manufacturing business that bill and Lori spoke to.
Adjusted EBITDA totaled 291 million, representing 9.6% of revenue, excluding a noncash goodwill impairment in Q3, and Eri acquisition expenses.
Ending 2019, our balance sheet remains strong with 330 million in cash and 640 million and available liquidity, even after the acquisition, providing a solid foundation for continued growth into business over the long term.
We expect to generate strong cash flow of between 150 million and 200 million and 2020 and to continue to de lever from last year's acquisition.
Our use of capital is based on patient execution of strategies designed to yield long term shareholder value.
Today, we announced a 25 cents per share quarterly dividend, our 22nd consecutive quarterly dividend currently our annual dividend yield as.
3.1%.
Moving to guidance based on current business trends and the macroeconomic backdrop to bill spoke to we expect Greenbriers fiscal year 2020 to reflect deliveries of 26000 to 28000 units, which include approximately 2000 units from Greenbrier Maxion in Brazil.
Revenue to be approximately $3.5 billion.
Diluted EPS of $2.60 to $3 per share excluding approximately 20 to 25 million of integration and acquisition related expenses from the Eri acquisition.
Included in our guidance for the assets, we acquired our synergies of approximately 15 million, primarily driven by procurement savings and vertical integration, we still expect to generate approximately 30 million of synergies on a run rate basis by year two.
Earnings accretion of up to 20% on deliveries between 4000 4500 units in fiscal 2008 and around 500 million of revenue.
We won't regularly provide updates on the business activity of the acquired manufacturing assets, except for synergies and integration and acquisition related costs.
These assets are being integrated into our North American business I want to be treated like any other facility from a disclosure perspective.
Further for 2020, we expect strong operating cash flow as I mentioned before of between 150 and $200 million depreciation and amortization is expected to be a 110 million, reflecting the full year impact of the acquisition.
We expect gionee to be between 230, and 235 million, excluding any integration or acquisition related costs, although as a percent of revenue as fast with 2019.
While the majority of the increase is driven by the acquisition Greenbrier continues to invest to strengthen and develop the next generation of leaders.
Gains on sale will moderate to 15% 20 million on proceeds of 95 million.
And that's expected as we finish rebalancing our lease fleet.
Interest expense is expected to be approximately 45 million.
Our consolidated tax rate for 2020 is expected to be 27% our rate typically fluctuate due to geographic diversity of earnings and other discrete items.
We expect unconsolidated affiliates to breakeven with potential to contribute modestly.
Earnings attributable to non controlling interest is expected to be approximately 55 to 60 million.
Capital expenditures are expected to total approximately $140 million as we continue investing in the lease fleet and enhancing our facilities.
And with sales out of our lease fleet net capital expenditures are expected to be approximately $45 million down from 73.002 million 19.
These amounts include approximately 30 million of investments and the Eri assets.
As we disclosed in the original transaction announcements back in April of 2019 about 30 million of the anticipated 430 million purchase price included reimbursement for capital projects underway.
Since we were able to close the transaction quickly about 20 million of those projects will now occur on the Green Briar ownership and that's why 2020, rather than being paid as part of the purchase price.
I am proud of our continuing pursuit of generating long term shareholder returns regardless of macroeconomic conditions outside of our control.
Look forward to 2020, I will now open it up for questions operator.
Thank you we will now begin the question and answer session. If you would like to ask a question. Please press star one.
Prompted to record your name to us to all your question you May Press Star to begin press Star one to ask a question and one moment for our first question.
First question comes from Justin Long, Steven You May ask your question.
Thanks, and good morning.
So maybe to start with the guidance and some of the numbers you just walk through I was wondering if you could give us some color on the quarterly cadence of production that you're expecting in fiscal 20, and maybe that cadence of EPS as well and then one other question on the guidance that was I was.
Wondering what you're assuming for production in Europe . This year. Thanks.
[laughter].
Justin This is Bob Justin this is Justin.
And I would say that from a cadence perspective, where we are moving back to a little bit more of a normalized area for green Briar, where we are going to be back half weighted but probably more weighted towards 40% in the first half of the year and 60% in the back half of the year.
Deliveries are probably weighted similarly at this point and with regards to your question regarding Europe , It's probably around 4500 to 5000 cars are delivered in fiscal 2020 of the expectation.
And we can kind of getting a little more granularity.
Later, if you need to.
Okay, great and maybe to follow up on the Eri commentary.
I just wanted to be clear on the accretion expectations. There I know you talked about 20%.
Plus accretion is that something that you're expecting to see in fiscal 20, and I'm just wondering like looking at the math it looks about like 50 to 60 cents EPS accretion just curious if thats the right ballpark, we should be thinking about.
And just in this as Lori good morning, Yes, I do think that is about the right ballpark. We are talking about wondering about 20% accretion off of 2019 effort to 87.
Okay, Great I'll leave it at that thanks for the time.
Thank you.
Thank you and his question comes to Matt.
Alan you May ask your question.
Good morning. Thank you can you just talking about some of the underlying assumptions behind guidance as far as a.
Rail traffic in North America.
Some macro assumptions, both in North America and international margins.
Yes, so kind of big picture. So we have about roughly 70% of our expected deliveries are in backlog at this point and so from that perspective.
We are assuming necessarily a heavy lift in the back half of the year.
I would say Europe is in a much.
They actually have effectively all of their their deliveries are in backlog at this point. So some of our open spaces down in Brazil, and in certain car types and so and that's primarily in the back half of the year. So we are not expecting a significant improvement in the overall.
Tropic environments, we're not expecting a significant uptick in orders, we expect orders are going to kind of being that.
Replacement level area, and we will take kind of what we would say as our fair share of that activity.
And I was just add maybe to the replacement comment we do continue to see strong demand for tank cars as well as plastic pellets, which is possibly it more growth oriented than just replacement, but yes, I would say overall the market is more so we're placements.
I'd say, we're much more bullish than others on that and there are other isolated pockets just pick one boxcars and aging boxcar fleet something actually give there.
Especially in some of these international markets quite a lot of replacement demand.
And that would be true in North America as well.
We've also had a history of achieving stronger market share in this type of climate and.
We.
We have with 30000 railcars and 26 up 27000 orders Weve.
Improved our market share.
Post acquisition.
So we feel fairly confident.
We will have adequate stability.
In the demand flow to Green Briar.
Great that's very helpful color and.
Andrew and I know you gave some some more a line item guidance just now.
But maybe you can help me understand this without without having.
I have the time to go through all the numbers your delivery guidance for 2020.
Higher than 2019 revenue guidance from the higher but EPS is lower if we go by the midpoint of the guidance versus the 296 and 29 team I'm going with a 296, because you had an item and the second quarter.
So it's to 96 rather than to 87.
Did I Miss any margin guidance gross margin guidance that you give.
Yeah, I think one way of looking at as as we have a a tailwind with the acquisition of Eri and.
Well, we pick up from that we also have a tailwind from the improved performance and Europe , Brazil repair.
Some of the other issues that we had in 2019, where we are on a much better trend.
Then we have some headwinds in our.
Putins around interest we've got higher interest as results of that debt from the acquisition. We've got moderation of the gains on sale, we had a pretty high level of those in 2019.
Over 40 million and our expectation for 2020 is more than 15 to 20 million range and non controlling interests.
Is significantly higher as we are.
We've got a much higher proportion of tanks and our mix and.
Thats at our 50 50 joint venture so only 50% of those earnings falls to the bottom line.
So I think when you put all those piece parts together.
It'll it'll make a lot more sense in terms of.
Our results.
Or 19 versus our guidance for 2020.
Got it and just one final question the lease fleet utilization decreased by 400 basis points.
Can you give any color.
I think it is just.
Sent them certain cars came back some of it as a timing piece and then I.
I think as we've talked about before it does not take much to move the needle ultimately on that part of it so.
It's more we don't necessarily see anything ultimately concerning but there is definitely some pressure in that area.
Great. Thank you very much.
Thank you and his question comes from Bascome majors with Susquehanna. Your line is open you may ask your question good morning listened and rely on for Baskin. Thanks for taking my question.
You guys have grown your manufacturing platform considerably since the last real downturn in the North American railcar railcar market.
Adding scale and diversity across both geographies in car types, along with what feels like a pretty big structural improvement to your manufacturing margins.
But the same time, you've also added quite a bit of overhead to support that larger footprint. So if the downturn in your core North American railcar market is deeper than you're expecting or than it's been days expected. How should we think about your ability to rationalize costs any comments really on breakeven railcar production level.
Those are margins are just a high level view.
You guys think your current book of business would perform in that full on North American railcar assumption would be helpful. Thanks.
Good morning, Andrea. Thank you that's quite a fulsome question. Yes, we are pleased with the expansion that we've made.
And our footprint.
That.
We've also at the same time that we've been expanding our footprint, we really haven't focusing on our cost and shifting more of our manufacturing cost structure away from fixed cost to variable. So we've got a very experienced management team here at Green Briar, we've been through some ups and downs and we believe that we understand how.
So to pull the levers that we need to as we need to possibly rationalize production line and reduce those costs in line with.
The overall demand so.
I think from most of the railcar builders in the North American industry. This is something that were.
Quite used to on a regular basis it doesn't seem that we ever quite kit and stay at that perfectly sweet spot, where you can just run your production line steadily throughout asked several quarters much less a couple of years. So.
Our commercial team does a great job, making certain that we've got sufficient orders. We've got a fantastic backlog that we also look beyond where that backlog is and think about what are the right production rate to be sustaining a.
A good headcount level at our production facilities and to be efficient when it comes to cost.
Just another element I'd add on clash don't overlook the degree to which.
Compensation across the board is based on performance our budgets are targets when change calmness, if it's negative we have a major reduction.
Capability and automatically.
In overhead costs just relating to compensation.
Dozens of employees they recognize this.
We recognize it it's a big reserve.
And cushion against.
Economic downturn.
Naturally we don't hope for a huge economic downturn.
We see no reason for it other than to talk ourselves into it or some major war or something.
What's good for of course.
Great. Thank you I'll leave it at one.
Thank you and his question comes from Allison Poliniak with Wells Fargo, Let me answer your question.
Hi, guys good morning.
Turning Allison.
Talking about intermodal I mean, obviously greenbrier has a very any they've strengthened in that specific market. Just your thoughts international domestic bank the impact to PSR. Obviously, you that marketplace. These near term challenges I just want to understand how you guys are looking at that.
Bob very succinctly on PS are I wish we see most of that effect.
Hi.
Being over I think the railroads recognize they have to be very careful or they're going to get re regulated shippers are very unhappy they might lose shippers, but the effects of that have not been as great as the effects of trade.
Frankly speaking I entered an election year.
If.
The trade situation doesn't improve many people would be very surprised.
However, who knows about that but thats dampening industry loading is a lot more in case of intermodal.
It goes right to the heart of.
International imports drives a lot of in intermodal in addition to domestic containerization, so that market isn't.
Isn't looking as great, but we have been gravitating away from all of that.
We still are a strong with a strong market share and intermodal.
But that's not where we're expecting.
Demand to be in the next year and all that's baked in our numbers.
That's great and then just turning to Europe , you, obviously had production filled parent.
Upcoming fiscal 2000.
Obviously need some employee maumee operation.
We estimate they should be running ads.
Your peak operational performance by the end of the areas, there's still significant work to be done there just any thoughts.
Well I Wouldnt want to set a peak for that I think that that management team continues to strive to weigh that they can improve andrews and improve and their efficiencies and effectiveness across their Romanian and Polish operation. So I do expect the cadence to improve as we.
Over our physical 20.
But.
I think that they would say that theyre going to have continued growth opportunities assuming that the market supports it into 2021 and beyond.
And look at we stumbled in previous management, the New management has produced a substantial swing.
From losses to profitability.
And as sequentially looking very good.
That in itself is a big lift for the 2020 numbers, but we do expect it to improve secondly in Europe . One of the thing is the beyond the economy that people aren't really recognizing is that lease rates are much stronger over there. So.
Some of our U.S. customers are over there I think they're smart to be over there.
And the Green movement.
Trying to reduce hydrocarbons as really taught brought momentum. So there's a lot more the European Union is attempting to push under rail plus there's a lot of older cars have to be replaced so having a strong position in Europe , having a strong market share and being a leading.
Supplier there is a very powerful upside.
For the next two to three years.
Five years, probably.
Great. Thank you.
Thank you and next question comes from Ken Hoexter with Bank of America. Your line is open you may ask your question.
Hey, good morning, fill Laurie Adrian and Justin.
Just real quick clarification, you formally did not include Brazil, and deliveries I guess because it wasn't consolidated is there's no change to that or anything changed on that.
No. It's not consolidated so I guess part of the they deliver delivery guidance, yes, it's about 2000 units of that 26 to 28000.
Okay and before it wasn't part of the guidance.
Hi, there or it was.
It was it was included in our.
Public guidance and reporting from for deliveries and backlog.
Okay.
Sorry, just want to clarify that.
The given the PS got agent you kind of started to address this before when you hit all the different parts, but maybe you can just kind of talk about that is there anything significantly different on the margins. When you think about manufacturing as well as the other segments.
That you're kind of calling out in your outlook or or where you highlighting all the other things because the margin shouldn't be too two different than than where we're kind of these run rates.
Yes, the margins should the.
Pretty much in line to slightly up.
2020 versus 2019, all in for manufacturing, including the new operations.
So we shouldn't look at the outlook that you PS being flat to down as a call out that margins are going to be.
Impacted either through lower pay us piece or or something of that elk.
No. Okay. That's helpful really is I mean, one of the things that and I know that at times as can be a frustration and we do know that our model.
Others might be consider complicated for those of US who are in green marriages.
Seems normal, but we do have probably a significant a disproportionate amount of tank cars that are being built in fiscal 20.
And Jim are north of Northern Mexico Operation is a 50 50 joint venture. So while we expect them to continue to have good gross margins at age range was saying earlier thats only 50% of that flows through to the bottom line EPS.
No I fully understand thank you look for that and then my guess my last one just on the different product is there.
Now that you've merged the the assets to get or I guess, you've just started with 90 days.
Is there a different product mix that we need to get used to at American railcar versus what you're doing I'd add.
Green Briar and then you know is there any plant facility integration or any anything of that.
Size scale and on the next stage of integrating the assets.
I would say not initially one of the things that we're doing as we think about integrating these operations as we are having our engineers spend time with the former Eri engineers really evaluating the product designs that they have built and we have built thinking about it not only from a manufacturing perspective, but also our custom.
Immerse perspective, I would expect us to have some rationalization of car types as we move through the year, but clearly we have customers who have ordered certain cars that we wouldn't want to make adjustments to that but we don't.
We don't see.
Any significant shifts in the kinds of cars that are going to be built at those Arkansas facilities. The one item.
Which is a big fleet of where our synergies will come from as air I had invested significantly in vertical integration. So really evaluating those support facilities to see what sort of capacity, we can make adjustments to to support our legacy facilities with that.
Integration as part of our synergy and integration activities.
Just.
Looking at it a little bigger picture the air REIT portfolio and its geographic mix are really the prices here because they have a very good plastic pellet car they have a different customer base.
By their customer base is quite loyal.
And we intend to fulfill every responsibility that they have made to those customers.
It's a good leasing product.
By the pressure differential car some of the more boutique.
Tank cars they have historically built.
All bring a lot of richness to the Greenbrier portfolio. So it's not one size fits all and Lori has done a very good job on the integration along with the manufacturing and commercial team not to try to just imprint greenbriers overlay on the Ri model and we're not going to.
Do that we are going to integrate it and we're going to get a lot of supply change synergies.
Just because we have larger scale and we're buying a lot more stuff.
Great appreciate it thanks guys.
Thank you Ken.
Thank you next question comes to Matt a clear with Buckingham Research you May ask your question.
Hey, Thanks, and good morning.
Wanted to circle back to the commentary on non tank cars.
Could you talk about the tank cars that you have a backlog better are scheduled for delivery in fiscal 2020.
What are the end markets.
That's what I'm getting at is I'm trying to get a sense for if you have a meaningful amount of flammable service cars and things like currently currently in the backlog.
So I would say Matt that we have.
Just kind of the normal variety of commodities you. So I wouldn't fit disproportionate to anyone thing, but you do have flammable you do have foodservice you do have petrochemical it it really is a.
True variety across a variety of that normal commodities in the tank cars I think you probably see a lot of demand that being able to get production space. It was maybe pushed aside during the heavy demand for crude cars.
Coming back.
Got it okay. That's the that's helpful. And then when we think about the $15 million of.
Targeted synergies in fiscal 2020 kind of broke out where those are going to come from some sums coming coming from the procurement side and then I think there's some anticipated benefits from you know incrementals vertical integration can you talk to the timing.
Of the of those the synergy realization as it is a more front end loaded as a more backend loaded maybe just provide a little bit more color there.
I would say that as its some of it is relatively stable, although it's probably weighted towards the back three quarters of the year I mean, if you think that were really.
Starting with September October November still working to get our feet under us from a basic blocking and tackling perspective, but.
There is definitely some that is actually already occurring.
Got it okay.
Okay. Appreciate the time.
Thanks, Matt.
Thank you and our final question comes from Steve Barker with Keybanc capital markets you May ask your question.
Hi, Laurie I want to make sure I understand the commentary around having lower fixed costs and bill use the compensation lever as an example, but you also said a rise more vertically integrated so can you just talk more specifically about the big things that you have changed the reduced fixed costs and what big things you see that are opportunities for change going forward.
Sure I would say one of the biggest changes that we've made in fixed costs as we stabilized some of our production lines. It allows us to reduce.
Some of our indirect labor and overhead just managing those line. So that it is labor oriented but is also looking at how are we managing.
Some of the cost that were not associated with directly building. The railcars and then we've had other things that are more around the procurement side and being more optimizing how we're fine who were buying from and timing of when that hence the shop floor and Steve. This is just in just a couple a little more color on that also we.
The changes we've made in the footprint over the last call. It five years or so we've been able to lay out our facilities because many of these are new lines at new facilities. It's allowed us to lay these out more efficiently and effectively with quicker changeovers more effective changeovers and versus some of our older facilities that were.
Not necessarily originally built with the intention of producing railcars and so.
You take all of these together and you see a very substantial shifting kind of our overhead structure with were used to be predominantly fixed and now it's predominantly variable.
But I guess I'm just looking at the income statement, where does that really come through because SGN. A is about the same level is it was four or five years ago gross margins I know move around a lot with mix, but where has that really comes through in terms of the results that you see and again, what what's the next step for that as you think about the integration of they are I.
I think where do you see it come through as in the gross margin line.
And again, we've been expanding our product mix within you know shifting car types that we're building depending on market demand across these different periods that have been able to continue either maintain or improved gross margin and not being driven by these cost reductions and Johnson was referring to again we.
We expect that there will be further opportunities there a lot of the vertical integration the utilization of that within your legacy Green bar facilities that will flow through on the gross margin line as well. So these are the offsets to.
A more.
Modest North American market is that we expect to be able to reduce those kinds of cost and maintain our gross margin.
Got it and sorry, if I missed this but did you talk about the expected margins for refurbished parts enough for 20, just given trends that we've seen in traffic and cars in storage and how you see that progressing.
We didnt give explicit guidance on our segment gross margins, we do expect improvements in those areas. So I think that will be the direction that island that I would lead you. We intend to just focus on aggregate gross margin from a guidance perspective. So for 2019 were 12.1, we.
That too.
And those low to mid teens definitely go in June 2020.
Okay, and then one last one just capital allocation halfway 20 is the first priority debt reduction is the board happy with the current dividend level any other acquisitions or divestitures that you foresee to kind of.
Optimize the portfolio.
Our dividend yield of course fluctuate with stock price, but we're focused on dividends and.
But at the dividend yield as high as foreign App.
Depending on the stock price, we intend to maintain a dividend and.
We have the capital to a growing dividend modestly over time so were.
Probably dedicated to a good dividend policy in strong balance sheet.
We are in a period of integration digestion from one level.
Of.
Revenue to another.
2 billion, two three and a half billion is quite a bridge.
We want that to be sustainable.
And we want it to be profitable and we want to produce positive operating cash flow so that we.
We'll have that capital.
Two distributed to shareholders.
So I I prefer not to answer it anywhere other within that thank you.
Okay. Thanks.
Thank you Dave.
Thank you everyone have a great rest of year Friday, and if you have any follow ups. Please reach out to me just in Roberts out at GPRS Dotcom have a great day.
Thank you that does conclude today's conference. We thank you for your participation at this time you may disconnect your lines.