Q2 2021 Greenbrier Companies Inc Earnings Call
Pardon me, ladies and gentlemen, the Greenbrier companies call will be beginning shortly so please continue to hold down the Greenbrier companies call will begin shortly so please continue to stay on the line.
[music].
Hello, and welcome to the Greenbrier companies second quarter of fiscal 2021 earnings Conference call. Following today's presentation, we will conduct a question and answer session.
Each analyst should limit themselves to only two questions until that time, all lines will be in a listen only mode at the request of the Greenbrier companies. This conference call is being recorded for instant replay purposes. At this time I would like to turn the conference over to Mr. Justin Roberts, Vice President and Treasurer. Mr. Roberts you may begin.
Jim.
Thank you Eileen.
Good morning, everyone and welcome to our second quarter of fiscal 2021 conference call.
On today's call I'm joined by Greenbrier, Chairman and CEO Bill Furman Lorie.
Laurie to Korea, President and CEO, and Adrian Downes, Senior Vice President and CFO.
I will provide an update on greenbrier its performance and our near term priorities.
Following our introductory remarks, we will open up the call for questions and.
In addition to the press release issued this morning additional financial information on key metrics can be found on slide presentation posted today 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 995.
Throughout our discussion today, we will describe some of the important factors that could cause greenbrier as actual results and 2021 and beyond to differ materially from those expressed in any forward looking statement made by or on behalf of Greenbrier and with that I will hand, the call over to bill.
Thank you Justin and good morning, everyone.
Greenbrier adhere to disciplined management program throughout this year on the pandemic now I know we said this in our news release this morning, but it's worth repeating our simple core strategy. Since March 2020 has been number one to maintain a strong liquidity base and balance sheet number.
Two to safer safely operate our factories, while generating cash reducing costs and adjusting to reduced demand for our products and services that reduction in rig demand was clearly shown in this quarter's results.
Number three is to prepare for economic recover recovery and forward momentum in our markets. We believe we're now solidly in this recovery phase.
We believe that our Q2 just completed in February will be the most challenging quarter of our fiscal year, particularly affected by very bad weather in North America.
There's good reason to be optimistic as vaccines expand in the United States.
Vaccinations will bolster already accelerating infection and mortality rates and low Americans turning the corner on the pandemic of glass.
Globally, we are prepared for the pandemic to take a longer course toward resolution Sadly, we learned last week that Greenbrier lost to more employees, our sixth and seventh lost to COVID-19.
Nearly all this 58 with the assistance of the plant manager at our February Inc.
India facility, where she worked for 32 years.
We also lost Louie Martinez, aged 43, Louise maintenance manager in our top scholar.
On a factory and so scholar state of Mexico.
David Scott on Mexico, EBIT with Greenbrier since December 2017.
He will survive by his.
Weiss on for children Ages, $19 17 11 five.
We mourn the loss.
Marella Lewis.
We're extending support on premise family and your colleagues who worked with him.
Our results on the second quarter reflects the current temporary difficulties on the operating environment.
Clearly in North America, but also in Europe and Brazil.
And I emphasize temporary in addition to lower production levels related to the market downturn.
And as earlier mentioned severe weather conditions in fact, our second quarter results in North America.
On a much more positive note revenue aggregate gross margin and EBITDA all improved sequentially month by month during the quarter.
Indicating positive momentum.
Our order pipeline of inquiries took a big jump in.
In March we completed our GBS joint venture post quarter, which Steve Menzies and funded the first $100 million tranche of railcars from a newly established $300 million non recourse credit line.
I would wish for this business.
Our financial results were also positively impacted by tax benefits related to the creation of the GBS leasing joint venture and additional capitalization on railcars interest Greenbrier leasing fleet in our second fiscal quarter Adrian Downes, our CFO will touch on this on a few minutes.
Finally post quarter and almost all in the month of March we received orders for another 1700 railcars with an approximate value of 190 million on top of the 3800 railcars orders received during the quarter worth $440 million all five.
<unk> thousand 500, cars' worth about $630 million in the space.
Four.
Or more.
In recent weeks North American rail traffic grew.
And year over year comparisons, including double digit increases in grain and intermodal loadings on the added traffic has driven year to date rail velocity down by nearly 6% compared to the same period in 'twenty.
20, or about two miles an hour.
Slowing rail velocity as all of you know impacts cars in storage and demand for new railcars.
Consider that about 148000 cars have been taken out of storage in North America.
Since the peak storage levels of last year.
Storage statistics have fallen now to 378000 units well below what we believe to be the frictional level of storage 400000 cars.
At that point, new cars need to be built.
With returns of cars to service higher scrap pricing and tax benefits for construction of new more efficient and environmentally friendly equipment. We expect this trend to continue.
Throughout the course of the pandemic, we've been laser focused on maintaining our strong liquidity position, we ended the quarter with over $700 million of liquidity, including.
Nearly $600 million of cash another $115 million of available borrowing capacity, we expect to add another $100 million shortly.
Now, let's talk about.
For a moment about our plan for recovery.
Vital to our ongoing success is the ability to rapidly align production capacity and execution with our forward view of the market.
We began to reduce capacity prior to the onset of the pandemic as our industry was already entering a weaker period due to.
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COVID-19 compelled us to take a serious.
Further actions to protect the enterprise and to ensure greenbrier attained its strongest possible financial position.
We have maintained long term profitability over the years by prioritizing our manufacturing flexibility.
And refusing to allow our unique manufacturing platform to become a mere commodity.
Refinement of our go to market strategy, adding GB ex leasing to our successful formula of direct sales syndications and partnerships with operating lessors will reinforce our recovery.
We reactivated the number of North American production lines in March in several of our production lines are already booked well into or through fiscal 2022.
The inquiry rate for new manufacturing business has picked up dramatically. We expect the continued high rate of commercial activity to continue April may and beyond.
Consistent with our earlier forecast, but the second half of calendar 2021 would be the time of a V shape.
Recovery.
Forecast for rail traffic fundamentals in North America support Greenbrier outlet that we are entering a period.
Periods of sustained and expanding.
Railcar demand.
FTR associates projects that total rail traffic will grow by 5% year over year in 2021, and intermodal traffic will grow by six 4%.
In North America, the latest U S economic indicators reflect growing optimism.
The consensus forecast for GT GDP growth has been revised upwards to four 7% and three 6% for 2021 and 2022, respectively.
Both bank of America, and Goldman Sachs are even more bullish on closer to 7% for 2021.
In February the purchasing managers index reached its highest level since February 2018.
At the same time, however supply chain disruptions that have been evident for months persist with congestion on west coast Port parts and these continue to weigh on the North American traffic flows.
Strong consumer demand manufacturing gross growth and fed policy on low interest rates, along with low cost funding available globally. We will continue to spur economic recovery from the COVID-19 crisis.
Federal stimulus spending in the U S is an extraordinary levels.
Also a federal infrastructure Bill will provide additional.
On stimulus for sustained growth into 2022.
And probably be on other bills on the work.
And the works of passion enhance U S job growth and further incent the construction of more efficient environmentally friendly railcars.
In Europe, the large U EU recovery and resiliency facility will begin to impact the EU economy, and money remains plentiful and cheap.
A wave of pent up consumer and investment demand is expected to materialize, although vaccine rollout has been slower than in America.
In the meantime rail freight has continued to perform well through the latest rounds of Lockdowns and restrictions order rates have picked up dramatically in the EU.
Policy and congestion in the environment is attempting to shift transportation from truck to rail, which is three to four times more fuel efficient and produces less congestion and better and better air quality in the cities.
Freight traffic has actually grown over pre crisis levels and some countries.
In the U K rail may turn out to be one of the few beneficiaries of Brexit as trade flows of rerouted to accommodate new circumstances.
Longer term broad.
Broad scale economic European reforms to address climate change are ushering in an era of modal shift from free for free from polluting congested road travel to efficient higher speed rail service.
This will drive significant growth in railcar demand in the years to come above and beyond replacement demand growth.
And the fleets in EU countries, our aging many cars are already well past.
The time for replacement.
Finally in Brazil. The continued impact of COVID-19 has left the country's health system in a very weak condition.
Greenbrier Maxion continues to operate well in a stressful environment.
Demand for its products is strong.
Earlier, we rightsize this business and it has a strong and profitable backlog.
About 30% of our present backlog is in Europe and Brazil.
We expect <unk> from both regions.
Our approach globally continues on course to emphasize safe operations are of all of our facilities under essential industry status. We continue to plan for robust liquidity and ongoing cost containment.
And to execute on the growing number of orders we expect.
While maintaining pricing discipline and control of cost, especially on steel and components.
Entering the second half of our fiscal year, Greenbrier enjoys an industry, leading manufacturing leasing and services franchise.
On three continents, and we've achieved scale.
Our business outlook is significantly improving which will bring advantages from that scale.
Despite the lingering uncertainty created by COVID-19, the one thing I am certain about is that our franchise will benefit strongly from all the things I've mentioned in these remarks today.
Meanwhile, we will continue to preserve our strong liquidity position make prudent business decisions about deployment of capital grow our market opportunities manage our manufacturing capacity judiciously judiciously.
We will do all of this.
At all times respect for our customers for our work force and through diversity and environmentally sound policies.
Our team continues to work hard to accomplish these goals and to maintain focus is better days draw closer.
As the Covid show on Society melts away now over to you Laurie.
Thank you Bill and good morning, everyone.
I too am proud of how Greenbrier employees responded in our second quarter, we expected it to be a challenging operating quarter, but the extreme winter weather that impacted every location in North America added an additional test.
I was impressed with their creativity and commitment shown to ensure operations continued as seamlessly as possible.
Over the last several quarters Greenbrier has balanced right sizing, our global footprint and production capacity with maintaining our ability to respond quickly as the recovery begins.
The first six months of the fiscal year were painful, but we're seeing improved demand in each of our markets and we've recently restarted several production lines in North America.
Place to flex our manufacturing footprint as conditions evolve.
As you heard from Bill we remain focused on executing our COVID-19 protocols by focusing on employee safety and maintaining our liquidity to ensure we're prepared for the emerging economic recovery.
Regarding the second quarter activity Greenbrier delivered 2100 units in the quarter, including 400 units in Brazil.
We received orders for 3800 units in the quarter valued at approximately $440 million Inc.
International order activity accounted for nearly half of the orders in the quarter.
And the average sales price in backlog increased sequentially, reflecting a more favorable mix of railcars.
Our book to Bill ratio of one eight times resulted in a growing a growing backlog to 24900 units valued at $2 5 billion.
Our global manufacturing performance was not indicative of its true value.
While a positive gross margin was achieved.
Operational execution was tremendous and a challenging environment.
Bear with me, while I throw some numbers at you.
Compared to Q1.
Our deliveries in Q2 were down 37%.
And that followed a 45% decline from Q4 to Q1.
And then further if you were to do a year over year comparison, you guys like all these year over year comparisons of Q2 manufacturing revenue was down 59% on 54% lower deliveries.
With such a steep decline in revenue and production, it's effectively impossible to quickly cost cut your way to profitability.
It was more a matter of weathering the short term pain for the longer term goal of responding effectively to increasing activity.
Over the next six months the manufacturing team will be focused on increasing production rates quickly and efficiently, while maintaining employee safety quality and customer satisfaction.
Volume in our wheels, and parts business improved sequentially, although still well below normal winter level.
Volume and mix of work continued to lag in our repair business. Although we are seeing some early signs of increased activity and improved efficiency as we right size those operation.
We are well positioned shops that serve our customer base and an efficient and safe manner and our network is prepared for the return of more normalized activity levels later in the calendar 2021.
Our leasing and services team continues to navigate the downturn well with fleet utilization improving sequentially. During a time when approximately 25% of the total North American railcar fleet in storage.
Greenbrier is capital markets team had a relatively quiet quarter, but the 100 unit syndicated.
This lower volume is reflected of the lower production rates in the prior two quarters and the types of railcars being produced.
As you can see in the press release, we produced 800 railcars onto the balance sheet in the second quarter.
And we expect syndication activity to increase meaningfully in the second half of fiscal 2021.
Our management services group added another 38000, new railcars under management during the quarter, bringing total railcars under management to 445000 or about 26% on the North American fleet.
After quarter end, we finalize the formation of GBS leasing the joint venture is an exciting development for us and an opportunistic deployment of our capital.
The JV achieved several important goals for Greenbrier.
From a commercial standpoint, it's a strong complement to our integrated business model of railcar manufacturing and services that further enhances our distribution strategies to direct customers operating lessors industrial shippers and syndication partners.
We expect the joint venture will help Greenbrier continued to grow its diversified customer portfolio with a focus on industrial ship, our customers and small batch production to leverage long standing customer relationships and capabilities gained through the acquisition of the manufacturing unit right.
We have realized significant cost synergies following that U S manufacturing acquisition and we expect that this joint venture will result in meaningful commercial synergies.
Financially GBS leasing delivers clear benefits over the long term it reduces our exposure to the new railcar order and delivery cycle by creating a new annuity stream of tax advantaged cash flow and sound portfolio practices, including asset diversity.
Staggered lease terms and debt maturities.
Adrian will discuss the tax benefits shortly.
GBS leasing will acquire approximately $200 million.
Railcars per annum free.
Greenbrier with the initial portfolio identified from leased railcars on our balance sheet or in backlog.
The joint venture will be Levered about three to one debt to equity through an initial $300 million traditional non recourse warehouse facility of which we've drawn on the first $100 million and it will transition to a more traditional asset backed securities financing as time progresses.
GBS leasing will be consolidated in our financial statements and we plan to provide additional supplemental information to illustrate the performance and benefits of this exciting new venture.
Looking ahead I'm optimistic about a recovery in calendar 2021 that will primarily benefit our fiscal 2022.
And while the first six months of 'twenty, one were difficult we still expect gross margin in the low double digit to high single digit range and we'll continue controlling costs to improve financial performance.
Greenbrier remains healthy with strong liquidity and no near term debt maturity we have.
<unk> leadership position in our core markets in North America, Europe, and Brazil, and see early signs of recovery in each geography.
And you can see that particularly with what Bill mentioned, our recent orders for 1700 railcar units and just the first month of our Q3.
The decisive actions we've taken over the last 12 months have physician Greenbrier to exit the pandemic economy, a stronger and leaner organization.
And now Adrian will provide commentary on the quarterly results.
Thank you Lori and good morning, everyone quarterly financial information is available in the press release and supplemental slides on our website.
During the quarter Greenbrier continued managing for near term stability, while positioning for a strong recovery.
Obviously depend on Mick has had a major impact on our revenue on delivery levels.
Nonetheless, we were able to achieve positive margins in each segment as a result of our flexible manufacturing footprint and aggressive cost reductions.
Reduced deliveries and revenue its a power driver of bottom line performance, even on the face of dramatic reductions in payroll overhead and SG&A.
Performance did improve each month within the quarter and we exited the quarter with positive momentum increasing production rates to build sequential momentum in Q3 and Q4 a.
A few quarterly items I've mentioned include revenue of $296 million.
Book to Bill of one eight times made up of deliveries of 2100 units, including 400 units from Brazil and orders of 3800 new units.
Aggregate gross margin of 6%.
Selling and administrative expense of $43 million flat sequentially, and 20% lower than Q2 of fiscal 2020.
Net loss attributable to Greenbrier was $9 1 million or a loss of 28 per share.
EBITDA was negative $1 million.
The effective tax rate in the quarter was a benefit of 62% due to net operating losses and tax benefits from accelerated depreciation associated with capital investment in our leasing assets.
These deductions will be carried back to earlier high tax years under the cares Act, resulting in a 16 million on tax benefit in the quarter and cash tax refunds to be received in fiscal 2022.
We also on cards to $5 million of incremental pretax costs, specifically related to COVID-19 employee and facility safety.
These costs will continue for the foreseeable future.
Moving to liquidity, we have continued managing for near term balance sheet strength and are positioned for recovery.
Including borrowing capacity of $115 million Greenbrier as liquidity remains healthy at $708 million plus another approximately 100 million of initiatives in process.
Cash in the quarter ended at $593 million, reflecting $48 million of inventory purchasing to support higher production levels, beginning in Q3, and a $44 million increase in lease railcars for syndication.
Historically tax receivables have been included in the accounts receivable line on our balance sheet, but to improve transparency. We separated this activity in the quarter to provide a more accurate picture of operating receivables as well as the future tax refunds I just mentioned.
Capital expenditures net of equipment sales in the quarter was $9 $2 million leasing and services capital spending is expected to be about $90 million in 2021 with about 42% of that already occurring in the first half of the year.
This capital spending includes <unk> leasing, which began operations in Q3 and approximately $130 million of leased railcar assets were transferred into the JV at that point, including some assets, which were already on our balance sheet at the beginning of the year.
An additional approximately $70 million of assets will be newly built are transferred later this year.
Manufacturing and wheels repair <unk> parts capital expenditures are still expected to be about $35 million for the year with spending focused on safety and required maintenance.
We continue to have healthy cushions in our debt covenants and while we have no significant debt maturities until late calendar 2023 in calendar 2024, we are proactively evaluating opportunities to extend maturities and capitalize on the low interest rate environment.
Greenbrier Board of directors remains committed to balanced capital deployment on.
<unk> of share repurchases remains in effect through January 2023, and today, we're announcing a dividend of <unk> 27 per share or 28th consecutive dividend.
Since the start of our program the growth of our dividend represents a compound annual rate of nine point of 9%.
And now we will open it up for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing on the key.
So we try your question. Please press Star then two.
Our first question today will come from Matt Alcott with Cowen.
Good morning, Thank you very much for taking my question.
Your guidance I think the net profitability in fiscal 'twenty one is still.
Euro plausible.
We certainly thought that last quarter when the question was asked.
Depending on the cadence of the recovery in the last two quarters.
We still believe.
To be true would you like to comment further on that.
I agree with you Bill I think it's.
Certainly the second quarter was a lot more difficult than we anticipated.
With COVID-19 continuing longer than I think than anyone had ever hoped as well as the severe weather. So we're doing everything that we can too.
<unk> advantage of the momentum we see in our markets.
Okay.
And Laura can you give us on ideal.
On what kind of a step.
The step up in deliveries, we can expect in the third and fourth fiscal quarters.
Well I'd say, it's definitely going to be a nice step up from what we saw in this quarter probably more in line with what you saw in the first quarter and then ramping up further in the fourth quarter on some of it there'll be dependent as I stated, we do expect syndication activity to pick up in the fourth.
<unk> are in the second half.
But sometimes the timing of our customers' ability to close it doesn't all it's perfectly coincide with our fiscal quarter or year end. So that's where there's a little bit of a play but yes, we do expect to see.
Nice step up in third quarter, and a further step up in the fourth quarter.
Okay.
And just maybe one more kind of a higher picture question.
You know based on some of the assumptions some of the macro and rail traffic assumptions that are pretty consensus on sum of which.
Bill talked about earlier.
<unk>.
Would we could we expect <unk> 22, or 2023 to be your peak earnings year at mid cycle.
Oh, you had to qualify within this cycle certainly we don't expect that to be our peak.
Sure.
I think that day.
I don't want to get into active phrase like this is that these are extraordinary times.
<unk>.
But.
The stimulus and the other.
Economic policy Thats going on today is caused.
Particularly Goldman Sachs to be very bullish on the economy through 2023 entered into 2024 other.
You can look at consensus estimates, but.
Some of the really smart.
People are looking at the math with the amount of.
Money available the amount of stimulus coming in in North America, particularly and then in Europe, you've got these extraordinary.
On policies being made that will.
A big.
Boost for a long time, I remind everybody and on right.
Saying that this is going to occur but.
2000, 1918 pandemic. If you look at history gave rise to the Roaring twenties and part of it was spending but part of it was relief consumers loosened up.
It's really hard to navigate the future Bill I really expect that we'll be looking for 24 months.
Very strong economic.
Activity in North America Europe.
And in South America.
Got it.
Bill you mentioned rail traffic being up it's true it's up 3% year to date.
After two years on decline, but if you ex out intermodal it's down 4%.
If you ex out the intermodal and grain stone seven per cent.
Can you talk a bit maybe about what these.
Trends it means for your guidance. The fact that it's mainly in intermodal on grain recovery, so far and if it continues to be so what does that mean for all other car types.
Well I think that if you look at other isolated car types there.
It's a little tricky because there's at least 20 different guidance on car types.
And as we've said many many times of railcars and on our railcars on a railcar, but there has been growth.
Chemicals smaller lot sizes.
Agricultural products boxcars.
And.
And a number of other other car types that we that we track we make almost all cars made anywhere in the world with the exception of coal cars, which.
So curiously have seen some recovery in the storage statistics.
But I think that.
It's more broad based on your the traffic trailing traffic statistics might suggest keep in mind that there has been a damper also on.
Traffic due to the weather conditions and so on the other activities going on if you look at some other indicators Cowen and company just put out a very interesting.
Report on dry van and.
Other truck rates because.
Those have gone up on the spot market, 40%, it's just a booming transportation market somewhat dampened by weather and supply chain congestion and by the way getting back to your earlier question.
When we have weather delays, we try to recuperate. So we shouldnt have much of the delays from inbound freight affect edition and deliveries.
It will come popping into the third quarter and I'd, just like to add one thing.
I do think part of what's keeping some of the loading down are not showing as much growth is the railroad's ability to operate in a growing market with P. S. R. I have no doubt that the railroads will figure out how to decongest.
Just some of the parts and get moving I am certain that they don't like to see their loading staying flat or down in certain areas because they can't get the equipment. There. So I expect that to get worked out in the near term and to start seeing more of those numbers loadings improve across the commodities.
Got it thanks for the insight Lorie and Bill.
By the way on our next conference call, we're going to have one of them they are cheap.
Chief commercial officer join Us.
To give more insight into our markets and we'll put a little more depth into that kind of question.
And do some preparation for that that call. It's good for you to meet some of the <unk>.
Emerging leaders in the company I think.
Our next question will come from Justin long with Stephens.
Thanks, and good morning, So wanted to start with just a clarification on the first question around full year expectations for EPS to breakeven are you assuming a <unk> loss of 28, when you make that comment or a loss of <unk>.
Seven when you exclude debt the tax benefit.
So I'll just answer the question, we're using the GAAP EPS of 28 cents.
Okay. Thanks, just wanted to <unk>.
Verify that and then well let me go ahead, yeah, I've I've learned a lot from from Bill I can't just answer the question and move on and Theres a lot more to that we are not disregarding that tax benefit because it is part of the strategy of why we're focused on.
Growing our leasing business and keeping that on our balance sheet, because there is tremendous benefit from.
From the tax.
Tax regulations that allow us to take these benefits. So we don't see that as extraordinary or one time that part of how we will continue to operate going forward.
Okay that makes sense and wanted to ask about manufacturing gross margin I know you gave or reiterated the consolidated gross margin guidance for the full year, but any color you can provide on your expectations for manufacturing gross margins in the back half of the year.
I think consistent with.
Answering matts question about deliveries, we would expect it to step up a bit in the third quarter and then further in the fourth quarter as you can appreciate.
Well our manufacturing team is great at operating efficiently, it's a bit easier when you have a little bit more volume going through those facilities to absorb.
Some of the overhead that you can't shed, particularly quickly when you have such a big drop in production.
Great and last just quick one and then I'll hop.
Hop back in the queue, but on the orders in March could you share what the split was between North American and international orders for that 1700 number you provided.
Most of those were in North America.
Okay. Okay.
And.
A little bit of a dribble of that 700 came into.
Came into the first week of April, but just a small sliver of it.
Okay, Great. That's helpful. I appreciate the time thank.
Thank you thanks for coverage.
Our next question comes from basket on their majors with Susquehanna.
Hi, guys. Thanks for taking on.
Hey, Bill how are you doing.
Taking my questions here great.
I wanted to go back to kind of maybe extend on Justin's last question. There can you give us.
Maybe a better flavor of the kind of demand that you're seeing in the marketplace.
What's driving these higher inquiry levels and in what looks like.
On a much better trend at least in the last couple of months on firm orders.
Are you seeing leasing companies look to get.
In hopes that the cycle is turning some of this from your JV new car orders.
Yeah, I've spot spot steel prices impacted some of the more kind of near term needs. Just any of these themes that you could unpack for us and help us understand what your customers are feeling would be really helpful. Thank you. Okay, let's try to take that question apart just a little bit on the.
I wouldn't say that the order activity is influenced by our leasing.
The company at all and left.
Adjusted or Lori and correct me if I'm.
If I'm wrong Directionally there.
Not yet.
One very interesting order.
That is.
We had quite a number of boxcars in this.
In this order cycle counting these 1700 units, we just talked about we're running boxcars and Mexico. We received attack on order. So that we have a very long run now.
Our downhole factory in Mexico for boxcars, and some insulated including in that.
Would be insulated boxcars for.
True, including mechanical refrigerated services.
So there is a.
Baked goods struck base there is a big replacement demand in that segment.
That is looming aging boxcar fleet.
So we're expecting to see that trend continuing we haven't received any intermodal orders which is.
At this stage in the cycle.
A rising cycle, because we're not really in the cycle, yet we're gonna be shaped recovery.
We haven't seen any intermodal that's going to be a big pop when it comes in it's going to have to come.
At some point and it's usually very sudden.
When it when it happens.
Again, some chemicals and other tank cars and Justin on what else am I missing it's actually some general purpose also so you got a gondola you do have different sizes of covered hoppers.
And again tank cars as well so it is a very broad based on diversified.
Yeah again, the traffic statistics, they're very important to look at them.
They've been erratic over the last year or so of growth from a low base doesn't mean, a lot but the momentum.
I'm looking mostly at the momentum from on.
The demand side from fiscal policy and cheaper money. These tax the tax benefits are really a driver for everybody to invest in rolling stock price.
Scrap prices are going to continue to erode that storage number down which is very.
Very meaningful statistic.
Bill can I add two things on to that I think bathroom, we would say that that the customer orders that we've experienced over the last four months have been customers who have firm needs.
And it's not really someone trying to kind of get ahead of a.
Our recovery.
As a shipper who's got capacity coming online, it's someone who's got ripped.
Replacement needs in their fleet and then I would also just want to underlying because I have received this question a couple of times already.
There are we are not treating the orders or backlog activity differently than how we have in the past so.
We only include firm orders for external parties, we are not including any order activity that does not have a third party lease attached and since we own 90% of the GBS leasing JV, we consider that as a.
Affiliated or subsidiary company from that perspective.
On everything that goes into that fleet has leases attached and the high quality and staggered maturities as Lori mentioned earlier.
Yes.
I hope that gives you some flavor no no. Thanks for that clarification I think there maybe there was some confusion about whether speculative orders could show up with this new structure and thank you for firmly clarifying that.
Policy has not changed.
And you answered my second question, which was about was intermodal included in there. It sounds like that that order has not happened yet, but can you comment on the inquiry levels I mean, that's historically, a pretty concentrated customer market place as that broadening out.
Is that something that you think happens this year just anything you can give us on your expectations for that Mark just kind of a general we use a system.
Anything over a 1000 cars or a certain dollar quantity because cars can customer and amounts.
We do a very disciplined on white paper and review.
Market intelligence the.
Customers need other cars are being built competitively. So we've been doing an average of two of those a week.
Over the last month some of those have been inquiries that haven't.
Settle down yet into orders some have been awarded and we received.
A fair amount of those that have been awarded so the activity level by itself, we're tracking probably.
Certainly much more than many more than 10000 inquiries for cars 10000 cars or more that's a debt.
Right. It's been it's probably 15 closer to 15 is higher than it's been since 2018 lastly.
Lastly, let me go back to your question on backlog one of the things that always somebody typically asks you are curious about what are we doing them on steel prices well, we're indexing they've doubled in the last number of months and that's not just spot there's a.
This is indicative of that.
Kind of incipient demand that's out there we expect those to fall back a little bit, but we're not speculating on steel we passed on some big orders in Europe that required multiyear commitments for fixture.
Fixed steel prices happy very happy we didn't take any of those orders. So we're using indexing and the quality of the margin is built into the backlog is good.
Okay.
Thank you I'll pass it on Linux.
Okay.
Our next question will come from Allison <unk> with Wells Fargo.
Hi, good morning.
Good morning Allison.
Can you just talk a little bit about the margin just trying to unpack and I know under absorbed churn within manufacturing and I'm speaking with lean manufacturing is a huge part of that but you also mentioned weather and it sounds like there was some production line start up costs.
Where the weather and any way to quantify what those whether it may be production line cost startups would've been or is that not as meaningful there.
Yeah Allison this is Justin I would say that.
We aren't really ready to quantify that explicitly but with regards to the weather. We lost four effectively every facility in North America, so that would be wheels repair on parts and manufacturing.
Anywhere from a few days to a week too.
More than a week of downtime. So you kind of think about what that does to not just a manufacturing facility from a throughput and overhead absorption perspective, but you are talking millions of dollars. Ultimately so it's one of those things where this is.
Not it is a part of life and it is a part of running a business and.
Hats off to our manufacturing and wheels repair on parts team and all of the employees who are able to.
Execute well in very trying circumstances, but it was definitely a headwind for us and some of the startup costs definitely occurred towards the end of February but we will see some of that more in March and April as we are.
Ramping up activity a little more aggressively.
GAAP important things at <unk>.
It did affect our overhead absorption dramatically. It was just it was on the outgoing cars, we couldnt ship, we couldnt get inbound freight to have parts were.
And at Mt.
In that regard should I had multiple number of effects on each of the factories as Justin points out.
We hope to recuperate that in the coming quarters.
Got it and then it sounds like line the line startups that'd be sort of that near term headwind as we kind of start to ramp up production should we assume that sort of the lessons in Q4 does that start to accelerate you know based on the expectation that you know that there's sort of a V shape recovery behind it any thoughts there.
I would say that as Justin said, we'll see a little bit on that.
Saw a little bit of it at the end of February and see a little bit more in March but our manufacturing team has done a good job of bringing those lines back up as well as just transitioning from car type to car types. So I wouldn't expect there to be a big spike in.
<unk>, bringing additional lines on there will be some headwind, but not a big Spike let me, let me add some granularity there in our facilities, we have had the benefit of a fairly.
Smoothed production.
And so we don't have any line startups, they would be more affected.
<unk> system as they haven't been fully absorbed in the Greenbrier manufacturing system, yet in Mexico. We have worked for years to have a flexible manufacturing system.
And we've used some very innovative techniques.
That bring the startup costs.
Down dramatically from historical levels.
So we believe that.
As long as we don't take too many orders and try to do too much too soon.
We will be.
Buying on the startup cost and we don't expect to have a lot of capex involved without it would be mostly working capital consumption of cash which would pay off.
As the revenue comes in.
Got it and then just last question for me the wheels repair <unk> parts, how should we think of that through the balance of the year. So it should be assumed that just sequentially improve with sort of traffic in just activity going on in the rails any thoughts there.
I think that's a fair assumption on we are starting to see some pick up of volume in our repair shops as cars are pulled out of storage and as loadings improve and I would expect that to continue as we progress through the year steady improvement a housing yoga, who is in charge of that now as Lorie to Korea. She she is running both of that.
Unit and our rapidly growing Greenbrier management services business with 445000 cars under management.
<unk> them together to make new synergies and that units should really shine in 2022 right.
Sir.
That's great. Thanks, so much.
Our next question will come from Ken <unk> with Bank of America.
Great. Thanks, Good morning, great to see the building book to bills and also offer my condolences built to the U N. The team on the loss of your employees.
It just really highlights the situation, we're all dealing with.
So can we talk about the <unk> just on that last question from Alison talk about the pace of bringing some of the shuttered facilities back on not just the lines you would talked about closing your facilities in Mexico are what is operating now and what have you brought back on line or are working to bring back on line.
Alright, principally the facilities in Mexico, and North America and to optimize our production in Europe, we're in great shape in Brazil, Laurie Alejandro Centurion, Brian Comstock, who went down there and the size of that facility. We have a very good backlog now on some momentum, although Brazil's economic woes are well known.
The sector, we're in should be doing very well.
He is running.
So it's mainly our Mexican facilities, our Gunderson facility is running only marine right now and we are deliberating about what kind of rail footprint we may.
Want to have there, it's a higher cost facility.
Alright.
I don't see us, bringing back rail there I'm very soon so.
Our our Hidalgo plant in state of REO sales AGA, we operate in three states plus Scala and the city of Slough scholar.
Cash and stadiums for scholar, we operate until Doggo share kwela in Hidalgo that factory at almost spin down to just a bare bones minimum with only one line.
Running and we're having to bring that one back. We're also under utilized at our giemsa joint venture facility largely due to the demand in tank cars. So the two areas Lascala has been fairly.
Consistently maintain so those two facilities are the ones, where the impact will come on it.
And our.
Tank car facilities, we also started a new venture to make.
On.
Over the road.
Trailers.
Containers for the Mexican market out of that facility and we expect some promise from that.
But that's.
That's kind of where we see the activity.
Coming back.
Thanks.
And then Lori I guess, just a quick clarification on on the.
I think baskin was kind of hitting on the Isps of the backlog right. So you've got if I take the.
The whole backlog was 115000 net 1700, new add on dropdown to 100000 can we presume that that's more mix of your car types. Since you don't you never give those details but is that just a mix of shifting car types is there anything that stands out amongst that.
You're spot on it is mix we've looked at that a couple of different ways just to make certain that we're understanding that it is.
The value of the cars as Bill mentioned, we had some nice opportunities and boxcars those tend to be higher price cars. Because there is just more steel theres more componentry.
But I would just say overall, it's a mix of cars and to Bill's point.
We do have steel pricing index, so to the extent that steel pricing moves up down left or right.
On our focuses on maintaining our margin dollars margin percentage is always fantastic, but we really do focus on maintaining those margin dollars when we think about.
Steel pricing and indexing plus.
Plus contribution to overhead which is important our pricing our pricing is maintaining.
Pretty well and for this.
Part of our recovery from an absolute extraordinary event the pandemic.
I think that the recoveries looking to us like a V shape.
Perfect and then Adrian really interesting stuff on the on the New segment, maybe can you talk about the tax impact of leasing on your thoughts on on.
How we should think about tax rate effective tax rate near term long term.
Yes, I would say we've seen a very nice benefit in the quarter from from that investment and with the cares Act. We are able to take back those tax benefits to earlier years, where we were paying taxes at 35% for federal purposes versus the 21% today.
So that's a nice benefit on an ongoing basis.
Yeah that accelerated depreciation your guess on investing in leasing it's very good because it reduces the effective net investments that youre, making to build out portfolio set us.
Cash tax benefits are.
Very meaningful in the long term as well.
So is there a right youre throwing out in terms of your thoughts on where that stands going forward.
I would say.
We will not see a benefit.
To the extent, we did in Q2, but you will still see.
Youll incremental benefit from that cares act on from those tax advantaged investments into Q3 and Q4 so.
We will have a favorable tax rate in Q3, Q4, but I'm not trying out a particular rate at this point.
Okay.
And then all of that same vein.
Maybe bill or Lori there was no EPS guide and this quarter on like what we've seen from you in the past any any thoughts on why your thoughts on getting back to that that four to five dollar peak you mentioned Laurie it's not peak yet so maybe your thoughts on on that overall.
We're not even thinking about Pete now.
On peaking is way on the distance.
If the question is around guidance.
Again this is such a fluid environment, we really want to focus on.
Getting our business back running more effectively taking advantage and being prepared as the economy improves and as we see them.
Order activity pick up volumes pick up on the other parts of our business.
We'll take into consideration.
What are the metrics that we're looking at and how would the pace at which we're looking at that long term to figure out what is the right sort of guidance to provide in the future.
Okay.
I appreciate it thanks, a lot by the nature of the times on the nature of the times, we've got a lot of lumpy.
Activities that we want to get through this year.
I think once we have a more stable revenue base I think the biggest business. This quarter really was the precipitous decline in revenue, we don't expect that.
To continue in fact.
Sure.
Now moving back up that revenue curve.
But as I said, we will we hope to restore normalcy.
Prosperity here, we've got a great franchise and.
Now the springtime of share or people are past Easter and are more optimistic.
I think that we're going to.
I need to see a really good run for some time.
The United States into the future, there's a lot of things, we can't control, but those things we can control, we feel pretty comfortable about them right now.
And our last question today will come from Steve Barger with Keybanc.
Hey, Thanks for getting me in.
Great to hear about improving conditions, if I look back at FY <unk> through FY 'twenty Greenbrier averaged about 22000 deliveries per year do you think 22 can get back there or is that more like a 23 thing in your mind.
Well I think all things are possible.
You know that that would be a pretty.
Steep increase as Bill has talked about we want to make certain that we are mindful of how we accelerate production focusing on employee safety and making certain that we're making a quality product and keeping our customers happy. So we're not going to am up delivery just to try to beat on.
Number I would say, we're going to run our facilities more in line with what we believe what we can do what satisfies demand and what meets our customers needs.
Yeah that makes a lot of sense and just as you look forward to that time as you're as you're ramping given the cost and efficiency actions you've taken what do you think consolidated on incremental operating margin looks like.
For the next up cycle.
Hey, Steve It's all right I'll take a shot at that I think will kind of think about.
Gross margin and then.
We can kind of talk operating margin later, but ultimately we do see that.
And some type of a mid cycle, we're going to be upper teens to low twenties is what we're working towards and then you layer in the reduced G&A costs that we've of the G&A costs, we've taken out of the system. So.
I think if you look at our kind of all time peaks were on the low twenty's.
For manufacturing and effectively.
Influences aggregate margins, we would definitely be working to get there and see a path to potentially exceed that.
I think in the near term well maybe not in the next few quarters, but.
We do see a path to that.
And so as you as you ramp that I appreciate that detail on as you ramp up do you think this SG&A and 170 <unk> hundred $75 million range is sustainable or is there some variable SG&A, that's going to come back with with volume increases.
There probably be there'll probably be some variable SG&A that comes back as you know travel starts again, but I would say that.
Being in the work remote no travel for a period of now 13 months I think that has maybe reset the bar as to what sort of meetings and activities will occur on again being very mindful of lot of our customers, they're not meeting yet theyre not going back to their offices. So I think.
Some of that will allow that.
There'll be less variable SG&A coming back and I would've thought yeah. In fact, we're as being modest she has initiated several initiatives that are.
We will look to reducing our long term G&A footprint.
The use of offices of our office sharing.
People.
Can be very productive working off site and working remotely, particularly in the area of Needless travel we're going to be doing some interesting things over the next 18 months as I'm sure.
Programs.
Uh huh.
Show some some real fruit. So I think everyone's think rethinking this some of our customers actually closer offices virtually.
Going to a virtual footprint, we're not there yet, but we're not we're not.
We are really really hard looking at this and we're gonna be watching we're gonna be watching total shareholder return.
We're very focused on.
Our new ideal program for diversity and inclusion we have to make these programs.
Profitable web business for profit and we want to do so.
With equity and fairness to everyone associated with the company. So we're really looking hard at the bottom line on capital expenditures cash and constraining. These costs as we go forward, we don't expect to have that because those cost suddenly just repair because they're back.
Well, that's that's a really good segue to my last question Youre at the bottom of the cycle plus or minus balance sheet is in good shape. Lori you said you said you're focused on an orderly production ramp if that goes really well. What's next could you build the lease fleet faster or is there any M&A you're looking at I'm, just trying to get a sense for Cabot.
Deployment priorities over the next call it four to six quarters.
I think it's steady as we go we are looking at leasing we have other venues where leasing could be applied.
Internationally.
With a capital.
Light footprint.
Syndication model has worked very very well, we have some refinements in that non.
Not an awful lot.
Of.
New capital projects, however, unless we were to expand leasing a moment on leasing it said.
It would be practically.
Ridiculous of Greenbrier didn't take a stronger step into leasing.
We have not leveraged our leasing portfolio in the past like.
Other companies do.
We have a best of one to one debt equity ratio, we haven't leveraged.
We use it a lot further syndication model the leasing fleet I mean, so with this new.
Arrangement, we can generate the equity required from.
Tax and other cash benefits to create a very strong portfolio that creates a revenue stream over time, it's actually very cash positive.
We'd be foolish not to take advantage of that and expanded judiciously again, we want to do it at a pace that doesn't over tax our resources, where we are very pleased to have.
An industry veteran added to the team and Steve Menzies and someone who has.
Run larger manufacturing.
And leasing operations than ours, so we expect some growth, possibly growth and other foreign jurisdictions.
But at a manageable scale and I'd just add in debt now that we're managing over 25% of the North American fleet through our Greenbrier management services operation, obviously that puts us interfacing.
On.
With a very very broad base of customers. So how can we with our integrated business model continue to service those customers. So it may not be any sort of M&A, but there are definitely things that we should be able to leverage as we have that sort of half.
Window to our customers and their needs how can we serve them differently, how can we serve them better and create value for both our customers and ourselves.
Well, that's a really good point and Youre doing a lot of great work to create these alliances.
You don't have to acquire a business to create value for it and to create value for yourselves. If you are like minded and you have a common goal. So these alliances and this has been something that Greenbrier has built over the years has been a key too.
Some of the opportunities we're looking at in the future great Great point.
Thanks for the time. Thank you for the time, thanks for the question of day everybody.
This will conclude our question and answer session and I would like to turn the call back over to Mr. Justin Roberts for any closing remarks.
Thank you very much for your time and attention today, we hope you have a great rest of your Tuesday, and if you have any follow up questions. Please reach out to me or through our Investor Relations E Mail address thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.