Q2 2022 Greenbrier Companies Inc Earnings Call
[music].
Hello, and welcome to the Greenbrier companies second quarter of fiscal 2022 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.
Thank you Chuck.
Good morning, everyone and welcome to the call today I'm joined by Bill Furman Greenbrier as executive Chairman Laurie to Korea's <unk>, CEO and President, Brian Comstock Executive Vice President and Chief commercial and leasing officer, and Adrian Downes, Senior Vice President and CFO .
And our update on Greenbrier is performance and our outlook for fiscal 2022, we will open up the call for questions.
In addition to the press release issued this morning additional financial information and metrics can be found in the 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 $19 95.
Our discussion today, we will describe some of the important factors that could cause greenbrier as actual results and 2022 and beyond to differ materially from those expressed in any forward looking statements made by or on behalf of Greenbrier.
And with that I'm going to hand, it over to Mr. Farmer.
Thank you Justin and good morning, everybody.
This past month has been an eventful time in the world and at Greenbrier.
<unk> assumed the role of Greenbrier CEO .
Last week, our board of directors appointed Lori is our newest director.
As we begin today's call I wanted to first congratulate lorie under new physicians at Greenbrier.
I'm very proud of <unk> development in Greenbrier.
We've managed this very important transition.
I am pleased that I now serve as executive chairman through the remainder of our fiscal year and as a board member and Investor.
Thousand 24.
We've always appointment we've expanded our board's gender diversity for.
Of our 11 directors are female.
Further three of the directors identifies peoples card.
I am confident that diverse representation at all levels of Greenbrier leads to better overall business performance.
Brian is still a factor in our operations as you will hear today, but things are getting much better.
Those impacts will begin to add the war in Ukraine has impacted economies everywhere we operate.
We are witnessing Andrew tragedy, and I pray for Swift.
The conflict.
All of the human suffering.
While we were creating challenges for everybody in the near term.
It also provides opportunities for major shifts in freight corridors and transportation modes.
Enhanced Greenbrier business as the world enters a reorder state.
History demonstrates the animal rule of railroads.
To support civilian lives and economies.
And a heightened manner during wartime.
The current war in Europe has created direct pressure on the availability and cost of commodities ranging from minerals to food fertilizer crude oil as well as.
Our natural gas.
Railroads and railway suppliers will help meet the challenge of keeping civilian life and economies functioning during the crisis.
The commodity markets are traditionally leading indicators for expansion and rail freight.
Most commodity shipped by rail our experienced experiencing upward pricing pressure from demand constraints.
Due to either sanctions on Russia or reduced production from Russia and in Ukraine.
We expect rising global commodity prices and shifting trade patterns to elevate railcar demand in North America and Brazil.
And elsewhere in the world.
Already changing energy policies in North America, and Western Europe are creating opportunities for rail transport of oil.
<unk> and other products the.
The impact will be similar in fertilizers and other items needed to produce food.
Finally, the rising cost of diesel creates a distinct opportunity for modal shift from road to rail.
<unk> is one of the most sustainable and fuel efficient modes.
Surface transportation.
Yes freight railroads with diesel electric power generation are three to four times more fuel efficient and trucks.
Thinking about that for just a moment one kind of freight can be moved by rail.
Those 500 miles per gallon of fuel.
Additionally, moving freight by train instead of trucks reduces greenhouse gas emissions by up to 75% per ton travel and reduces congestion and wear and tear on bridges and highways as.
As more ships to rail in many cases, this will induce longer rental car dwell times and lower railroad velocity and turn railroad congestion causes the need for more railcars to meet railroad service more efficient notwithstanding the increase in demand we expect in major commodities like fertilizer.
Foodstuffs and other products.
We recognize the role and responsibility our industry must play in times of crisis.
And as the geopolitical landscape shifts occur.
The cruel irony in this war in Ukraine is that there will be ultimately beneficiaries.
While we can't choose the exogenous factors that affect our business.
Almost always have to be ready to meet the challenges and opportunities that come with them.
<unk> proven ability to thrive on adversity and seize opportunities I'm sure. This legacy will continue for years to come under Lori's leadership with that I'll hand, the call over to Laurie.
Our strong performance during the quarter.
Thank you Bill and good morning, everyone.
Before I discuss our results for the quarter I'd like to express my gratitude to bill and the rest of the Greenbrier for any opportunity to serve as CEO .
We have an outstanding team of Greenbrier, who work hard and smart everyday.
While it's difficult to predict the specific opportunities or challenges that may arise I know the Greenbrier team has the experience.
And capacity to make the most of any situation.
On increasing shareholder value.
Greenbrier posted strong results, despite the corner and while not all of our operating segments performed as expected.
<unk> is highly diverse and in the aggregate performed very well.
In the quarter, we delivered 4800 railcar units, 17% increase from the prior quarter driven by our core North American market.
Our lease fleet utilization increased to 98% and our leasing team generated robust cash proceeds and gain through regular lease fleet optimization and monetization transaction.
Our leasing business is operating ahead of our expectations as they achieve growth at scale.
Our strong quarterly performance was achieved as a comicon variant of COVID-19 with peak levels in the United States.
The offering in February Charles.
Long time employee in our maintenance services group halfway through that program.
Childhood survived by Exxon and four of this year.
Within the market doses for their lawn.
Further we experienced significant absenteeism in the quarter as approximately 12% of our workforce contracted the hiring.
Recently, the infection rates have declined and we are hopeful the worst of the pandemic is now behind us.
Our manufacturing gross margin percentage was below our expectations in the quarter impacted by supply chain and labor issues.
Our global sourcing team continues to do an exceptional job of mitigating severe disruptions to support increasing production rates and <unk>.
Simultaneously minimizing production delays.
We have avoided any line shutdowns across our network due to material availability.
Additional expenses were incurred in connection with sourcing materials and expediting delivery.
Operating momentum is increasing and we expect improved performance in the coming quarter due to improved pricing and overhead absorption on higher production.
In Europe , the situations fluid the period, leading up to and the subsequent more in Ukraine have created a highly disruptive environment for many European manufacturers.
Our operations have been impacted by rapidly rising energy call and now finished steel and components and our supply chain.
Ukraine, and Russia are among the biggest suppliers of iron ore finished deal and we hope that the European line in Logan.
As Bill mentioned railroads are integral to supporting the economy. During wertheim, our management team is working together with our customers and suppliers to maintain production and ensure the best outcome for all parties.
Our maintenance service business continued to be impacted by higher material costs and labor shortages during the quarter with the <unk>, having an outsized impact on the network with a smaller workforce.
We are beginning to see improving financial results from the action plan implemented to mitigate these headwinds in Q1.
We expect to sustain our momentum in the second half of the year as we remain focused on executing our plan are also looking for additional opportunities to reduce cost and improve margins.
Our leasing and management services group had another strong quarter, driven by increased fleet utilization and regular asset optimization and monetization transaction.
Our own fleet has grown by over 25% from the end of fiscal 2021 to around 11000 units.
And in addition to managing our lease fleet are management services. Our Gms group continues to provide creative railcar solution for over 25% of the North American rail freight rail.
Rail freight.
Within D&S.
Launching an initiative to read about the service platform used to manage equipment and data.
One of the goals of this important initiative.
To ensure a scalable support for our leasing and syndication business as well as our external customers as we continue to execute on our leasing strategy.
Looking ahead, we see strong operating momentum continuing throughout fiscal 2020 , two and beyond we've been able to maintain our market leading position through disciplined execution and by maintaining our strong liquidity position.
These are hallmarks of our management teams plan and starting with engine and they continue to service up to serve us well.
There is no doubt that the market backdrop will remain dynamic.
With the war in Europe .
Inflation.
<unk> issues and a continuing human impact of the pandemic will persist for some time.
We are managing the business accordingly, and maintain our optimistic market outlook.
We expect our operating metrics continue to improve as we move through the next several quarters and beyond.
As we said before the market recovery will follow a three line and there will be challenges along the way on.
We're managing our business to get ahead of these challenges wherever we can to continue to provide solutions to our customers and ultimately deliver value to our shareholders.
As I said before our leadership team has the experience knowledge and tenacity to make the most of any situation.
And with that I'll hand, the call over to Brian Comstock to provide an update on current railcar demand environment and our leasing company.
Thanks Laurie.
Good morning, everyone.
Greenbrier secured new railcar orders of 8500 units valued at $930 million.
With the holders of 4800 units in the quarter the book to Bill increased to one eight times.
Orders through the first half of the year are already over 85%.
Fiscal 2021 activity.
New railcar backlog of 32100 units has a market value of $3 6 billion.
And provides multiyear visibility.
This is wayne buyers largest backlog in six years.
Historically, when our backlog reaches a level. It includes several multiyear orders.
In this case there are a few multi year orders, which illustrates the strength of the overall demand environment.
From an operations perspective, this means that a greater portion of our backlog is scheduled to enter production in the short term.
And translate to revenue sooner.
Also as production space becomes more valuable we expect multiyear orders to follow and pricing to continue improvement.
As a reminder, our new railcar backlog does not reflect 3200 units valued at $180 million that are part of Greenbrier refurbishment program.
Because of the large scale and nature of this activity.
This work occurs at our manufacturing facility.
That absorbs production capacity, while contributing to overhead absorption.
Our refurbishment program is an important part of ensuring rail remains the most environmentally friendly motive surface transport.
I am excited about this growing partnership with our customers to sustainably repurpose North America's aging railcar fleet.
Turning to leasing fleet utilization ended the quarter at 98%.
<unk> pricing and <unk> continued to improve sequentially and we are seeing strong demand for new and used equipment.
As part of our enhanced leasing strategy Gtx leasing closed our inaugural asset.
Securitization by using 320 by issuing $323 million in investment grade rated loans with a blended coupon.
Two 9%.
Anticipated repayment date of January 2029.
Our capital markets team executed well this quarter in syndicated 1400 units.
The highest level of activity in nearly two years.
Syndication is an important source of liquidity and profitability.
And we expect to continue strong syndication activity in the second half of the year.
As always you know syndication and asset disposition, our important activities for leasing that will continue well into the future.
Looking ahead I remain optimistic about the momentum that has been building, especially in light of the strong demand environment in North America.
Greenbrier is well positioned for a period of strong growth.
I believe the combination of market forces.
<unk> of our August and management and experienced management team to capitalize on them will deliver results. In this early phase of this railcar cycle, which is substantially better than we've seen in previous cycles.
With that I'll turn it over to Adrian to provide more color on our Q2 financial performance.
Thank you, Brian and good morning, everyone.
Quarterly financial information is available in the press release and supplemental slides on our website.
Today I'll discuss highlights from the quarter and we're also affirming guidance for fiscal year 2022.
Second quarter highlights include revenue of 683 million deliveries of 4800 units, which includes about 100 units from our unconsolidated joint venture in Brazil.
I won't get gross margins of 8% reflects continued effects from ramping of new railcar production the impact of the omicron, there and mitigation of supply chain labor shortages.
And then additional warranty accrual for certain older railcars.
Selling and administrative expense of about $55 million as higher sequentially, reflecting increased employee related costs consulting travel and legal expense from higher levels of business activity.
Gain on disposition of equipment was $25 items.
This activity was part of our ongoing optimization and monetization of our leasing portfolio.
Non controlling interests provides a benefit of $1 6 million, primarily resulting from the impact of line changeovers and production ramping at our Mexico joint venture.
This improved sequentially and we expect our Mexican JV to be profitable in the second half of the year.
Net earnings attributable to Greenbrier of approximately 13 million or <unk> 38 cents per diluted share.
And EBITDA of about $52 million or 76% of revenue.
And this quarter, we recognized $2 1 million of gross costs, specifically related to COVID-19 employee and facility safety. This.
This expense increased almost 75% sequentially.
Our highest level in the last 12 months.
Liquidity increased to $804 million at the end of Q2, consisting of cash of $587 million and available borrowings of $217 million.
Because of the strength of our balance sheet, we are well positioned to navigate any market dynamics, we expect to receive a large portion of our $106 million tax receivable in fiscal Q4, reflecting delays in processing with the IRS. This refund would be in addition to Greenbrier has available cash and borrowing capacity.
And in the quarter and shortly after the quarter Greenbrier entered additional interest rate swaps to base long term floating rate that for the next several years, reducing the risk of increasing interest expense and a rising interest rate environment.
At the end of second quarter effectively all of our outstanding leasing debt was at fixed interest rates and approximately 90% of our core breast non leasing long term das perspective.
Together, we are executing on over $2 billion of new and refinanced borrowing facilities over the past year and pending the avs lease financing completed in Q. So this emissions Greenberg bode well as we move forward.
31 claimed by the board of directors declared a dividend of <unk> 27 per share or 32nd consecutive dividend.
Based on yesterday's closing price our annual dividend represents a dividend yield of approximately two 3%.
Since reinstating the dividend in 2014, <unk> returned nearly $380 million capital to shareholders.
<unk> and share repurchases.
Based on current business trends and production schedules, we're affirming Greenberg fiscal year 2022 outlook to reflect the following.
Deliveries of 17500 to 19500 units, which includes approximately 1500 units from Greenbrier Maxion in Brazil.
As a reminder, in fiscal 2022, approximately 1400 units are expected to be built and capitalize into our lease fleets.
Our non contracted and the delivery guidance provided.
Consider our railcar delivered when it leaves screened by balance sheet and is owned by an external third party.
Settlement events of expense guidance is unchanged and expected to be approximately $200 million to $210 million.
Gross capital expenditures of approximately $275 million and leasing and management services $55 million of manufacturing and $10 million in maintenance services.
Net of proceeds from equipment sales of $150 million leasing Capex is expected to be 125 volume.
Gross margin percent is expected to increase sequentially in Q3, or Q4, but Q4 margins between low double digits and low teens.
To close I will add that I shared a view expressed by my colleagues earlier, specifically Greenbrier will successfully navigate the challenges we faced in the second half of the fiscal year.
As highest in more than half a decade ample liquidity and a strong balance sheet makes it possible.
Lingering effects of a multiyear pandemic and the impact of the war on <unk> global supply chain, we're better positioned than at any point in time to achieve our ambitious goals 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 youre using a speakerphone please pick up your handset before pressing the keys and to withdraw your question. Please press Star then two and at this time, we will pause momentarily to assemble our roster.
Okay.
And the first question will come from Justin long with Stephens. Please go ahead.
Thanks, I wanted to start with a question on manufacturing gross margins and I was curious if you could give any color on how that metric is progressing on a monthly basis.
Even into the month of March if that's possible I am guessing you started.
The quarter at a lower point than where youre running right now so I just wanted to get a sense for that ramp and then any updated thoughts specifically around manufacturing gross margins in the back half. Thanks.
Sure Justin Good morning, this is Lori.
I would say that we're on.
Interesting to think about now we're going from quarterly projections to monthly projections.
Sure.
We are seeing continued momentum.
Some months as we build on the momentum that we've achieved in manufacturing as we work through older order, we bring our workforce back they get into steady groove I was building at higher rates. So.
We are seeing that progressing and we expect that to continue through the year, yes.
Yes, Justin this is Brian as well I would just add to what Lori said is also keep in mind that Q2 was.
What's kind of a period, where most of our ramp ups were in process as well. So a lot of those we just visited the plant last week with some of our board members and a lot of those ramp ups are now.
Well under way and so the efficiencies should kick in as well.
Okay got it and secondly, maybe just a quick one for Adrian curious what youre expecting for gains on sale in the back half given the.
We just saw in the second quarter, and then Lori I know you're new to the to the role we're about a month and but would love to get your thoughts on strategic priority for the business. There are a lot of moving pieces with the geopolitical events with questions about the freight cycle.
Or are you thinking about the best company specific opportunities for Greenbrier going forward.
It's a great question, we've been talking a lot about that Justin as Bill mentioned in his remarks.
While no one would wish for war certainly the things that are going on in the Ukraine and Russia.
We're going to be tremendous opportunities for our transportation of bulk commodities by rail and.
That's going to not only be beneficial we believe in Europe , but also in North America, we were fortunate enough to be with a bunch of shippers a few weeks ago talking to them exactly about what they're transporting and how they're dealing with the situation.
While it's difficult to predict exactly how those transportation lanes are going to change.
<unk> seems to come back to it should improve transport of goods on the rail so that's going to be a.
<unk> is going to be grains is going to be crushed rock is going to be on petroleum products. Its across the board that we're going to see that sort of pickup and while the railroads themselves can be very efficient sometimes these increases in traffic. It takes a little bit of time for them to catch up.
10-Q drive demand for more railcars so.
Okay.
There are good things that can come out of war and we believe that our industry is one that will benefit.
And I'll turn it over to Adrian to answering your first question sorry for jumping in.
Thanks for the question, we're not going to give specific guidance on gains on sale will be.
Looking at that based on the markets.
So I think it's a little early to tell.
Okay fair enough I'll leave it at that I appreciate the time.
The next question will come from Bosco <unk> majors with Susquehanna. Please go ahead.
Yes, Adrian you talked about getting the margins up in the fourth quarter to low double digit slash low teens range can you clarify if that was a consolidated Karen.
Or manufacturing count and if that was consolidated what's the manufacturing assumption that something like that thanks.
Yes, I was talking about consolidated margins.
As you might imagine we would expect strong improvement in manufacturing to drive that.
Okay.
Going back to the January call and some of the intra quarter.
I believe you said that you think the business objects to the upper teens and maybe even back into the Twenty's over time at least in the manufacturing margin could you talk a little bit about <unk>.
We still have line of sight into that and what needs to happen to unlock the potential that we see.
<unk> I'll take that because I think I'm. The one that was saying that because I think I was being.
<unk>.
Really trying to look forward, if we see sustained demand.
At $50 55000 railcars per year basis here in North America, if we were able to enjoy that part of sustained demand. We would expect our manufacturing margins to get that right. Now I think it's a little bit too early to say exactly when that might occur, but I know based on what I've seen out of our manufacturing operations as well as our other business.
Unit that is definitely achievable.
Yes, I would say this is brook.
Just chime in as well as one of the.
Key metrics that we really look at it as well aside from margin percentage margin percentages is important for everybody knows but at the end of the day, it's really about margin dollars per day, and so as we think about the additional volume that we are going through the facilities.
And the margin dollars that will be creating.
That's really what we're focused on right now.
And we see substantial increase in the margin dollars coming out of the operating units.
Thank you.
The next question will come from Allison <unk> with Wells Fargo. Please go ahead.
Hey, guys good morning.
Just wanted to go back to your omicron, it sounds like a pretty significant headwind for you guys with 12% of your workforce out I guess, one can you quantify the impact to margin that you think came from that and I would say along with that you had.
Talked about I think reaching 21 mine.
Running and by Q3 did that delay any of those startups for you guys. Thanks.
And this adjustment Thats a great question, so Adrian spoke to direct costs that we incurred of about $2 $1 million in there.
Those are what are readily measurable are identifiable.
Underlying.
As you illustrated the underlying impact of the ramp up is very hard to identify it definitely impacted our plans and our ability to bring people back effectively and it did slow things down modestly but.
It's really challenging to figure out.
Based on what we're thinking and how much is driven by just normal ramping activity versus people in and out and when you think about.
15% to 1700 employees out in kind of a four to six week period.
It's a pretty material impact in the quarter.
Understood understood and then are you guys at the 'twenty one now line startup airlines going at this point as we're into.
Q3, or little less and still getting some impact from those costs.
We are actually north of that at this point, it's still have.
All of the lines are active that we have brought back and then it's a matter of continuing to increase the rates.
Got it.
Yes.
Just interject something Allison I think Brian can speak to the operating momentum in the numbers of cars per day.
Lori said, we were just down in our facilities in Mexico around two <unk>.
The volume is drop is going to drive margin.
And you can talk anecdotally at least about the newer cars, it's increasing every quarter.
As Jonathan said, we're north of 20 wells at this point, we have all of the transitions are well underway and we see that we'll be increasing production somewhere in the neighborhood of between 90 to 110 cars per day.
Yes.
Bold strides here this quarter.
Great and then last question for me any color on <unk>.
<unk> of backlog that is expected to produce for the balance of the year orders were strong I'm assuming are they sort of this year production or are they getting pushed into 2003 for you guys.
Yes, we have we have this year's production as full as Bryan again.
We are working well into our fiscal 2023 at this point.
Don't have those figures in front of me, but.
We are in the backlog.
We will continue our momentum into Q1, Q2, and we're easing even targeting customers of our production in <unk>.
23 and 24.
Great. Thank you.
The next question will come from Matt Alcott with Cowen. Please go ahead.
Okay. Good.
Thanks, guys.
My question is on the kind of order momentum passed the second fiscal quarter.
Can you maybe talk about how things have been in March and so far in April .
And can we expect this.
Our level of order that you had in the second quarter to continue for the next few quarters.
Yes. This is Bryan again.
At the end of the day the pipeline continues to be very very strong order activity is still robust.
Seen good activity already this quarter kind of on the lines of what we've seen over the last three quarters and so we don't see anything that has stopped momentum at this stage in fact, if anything we're seeing maybe more and more reaction to customers about being able to get immediate.
Space So.
So that is propelling us to get to get their orders.
In Q.
And Brian the customers that are trying to get immediate space what types of cars are they looking for.
And as <unk> said this I think the last couple of calls and I maintain it is extremely diverse it is everything from cars to DDG cars to commodities, all sorts to upstream and downstream chemicals. It is.
Truly a very very diverse pipeline and demand.
Got it.
I guess, that's got to have this diverse diversity into the order book, but I guess, maybe the flip side of that.
Is that going to be one of the reasons why you may not be able to achieve.
Optimal gross margins is because historically all cycles have been driven by one or two types of cars and then you can adjust your production production lines to that and now you have to do more shifting and you have to have.
Does that involve more cost that would limit the gross margin potential.
I think that's a good question and a good observation Matt it is.
Prior peaks, our prior periods, where we were focused on a particular car type. So for example, crude by rail allowed us to really concentrate production in a certain way.
While having a broader base demand will be a blending of gross margins across a variety of car types.
I was talking about we are focused on margin dollars further percentages.
And.
Across the time since we've had since we were in the crude by rail.
Improved our manufacturing production processes that I still think would allow us to achieve higher margins that we've achieved in the past when we've had.
Yes.
Alright, Thanks Bill.
I just like to add something on the manufacturing side, we really have.
Streamlining our processes the acquisition of <unk> was very useful.
Sharing best practices in North America, with our Mexican operation.
And.
The length of the runs on each of these specialty car types, we have a luxury of the plant capacity to build long runs of similar card types Lastly.
On that score we have created the ability to reduce changeovers between.
Materially different car types on a single line down to just a few days, which used to take weeks. So I don't see that myself and the manufacturing side of the business.
Which I continue to be deeply involved with.
Obviously that is.
On a big impediment to.
Bigger margins.
Drives margins as you know Matt.
More volume you have through our facilities the better you can be but we're capable of dealing with smaller quantities quite efficiently at this point after the last five years of improvement.
Okay.
Got it thanks, Bill and just one final question for you our loyal or Brian .
The auto racks can you tell us if you have a material number of those in your backlog.
Any kind of risk because of the chip shortage and then the flip side of that question and when we eventually do have a pent up production site cycle for autos does the industry have enough auto racks to handle a potential surge in.
Auto production once the chip for the Jesus.
Yes. This is Brian I would say, it's a great question and something I'm really personally focused on.
Answer. The first question is we don't have a significant number of motto and backlog relative to our total backlog we do have.
Auto.
In backlog however, the chip shortage, so really shouldn't impact any of those orders as well as just the momentum in that industry.
With velocity, where it is today with the railroads the auto rack fleet. The bi level fleet in particular is oversubscribed at this point, so they're already short assets without the chip dynamic.
Yourself.
Once the chip dynamics solve itself and Oems start to ramp up production there is going to be some fairly sizable demand for auto production.
I believe there is enough capacity in the industry to fulfill that demand and that need but there is also the shift to the high band market as well, which will also put pressure on our railroads and on manufacturing. So I see this as a good long term sustainable opportunity.
Or or our industry quite frankly.
And it's really good that it's been delayed.
Brian just one clarification when you say there is enough capacity industry unit manufacturing any factoring capacity I know you really put a lot of personal attention into this and it's going to be a big market I think that I agree with.
Got it so Brian I guess, you do think that there will be a need for new builds.
Its not that Theres. Many there is enough capacity within the existing assets.
Correct.
Demand for more adults with <unk>.
Or is it going to be short and then it's the diversity also.
The kind of.
Vehicles that might be put into the entities.
Seeing none.
Not just us, but our railroad customers and shipper customers are seeing this.
Inevitably going to come.
Okay.
Great. Thank you very much.
The next question will come from Kenn Hoekstra with Bank of America. Please go ahead.
Hey, Greg good morning, everyone.
Just maybe a follow up on a question before you talked about the gains and Adrian you said not forecasting, but I guess does the growth of leasing mean the gains on sale becomes an ongoing entity or is that was that one time related to this quarter.
Clarification, there and then.
My question would be congrats on the backlog, but thinking about the cycle and you've talked a lot about the different levels and diverse demand.
Any thoughts on the consumer here, obviously, that's been a big issue recently is there any.
Intermodal or thoughts in terms of demand or switching from intermodal to other cars given the presumption that the consumer may slow any initial thoughts on that or is it still too early for that.
Well I'll take the first one which is we really see gains on sale as being a normal ongoing part of being in the leasing business and we've had gains on sale every year to look way way back in time so.
What we saw here was a little high for one quarter, but over.
Over the course of the year and over the course of.
<unk> of our business. This is just very normal activity.
Just to emphasize the fact that we do have a cost advantaged lease fleet. So we can look at the market and design.
When is the right time when is the right opportunity for us to enter into some of these transactions, but it is something you should see on a regular basis.
And then Rick.
Regarding the other question I do think Brian we are seeing a lot of shifts we're expecting a shift in demand for more intermodal as opposed to less intermodal combined with the expectation that whether it's automotive or other bulk commodities.
That's the accuracy the mowry.
The reason you haven't seen a big shift in intermodal or a portion of intermodal is because of the bottlenecks and constraints. They continue to have that all of the quarters between chassis and takeaway capacity as.
As the railroads resolve the velocity issues, which there's a lot of announced programs on that and as the courts get more fluid and that is the chassis manufacturers catch up on production Youre going to see those bottlenecks go away when those bottlenecks go away youre going to see more truck to rail conversions, which is going to drive more.
Long term sustainable intermodal growth.
Great and then and then you mentioned kind of the.
Laura you mentioned kind of.
Sometimes you can benefit out of a war in terms of increasing demand what about the.
Some of your Poland production.
Where are your customers are they in Russia, Ukraine do you have exposure to parts and you've talked a bit about the supply chain before can you talk about your exposure there.
Sure.
Most of our customers are western European customers and no customers in Russia.
Our in Ukraine.
Our impact to supply chain with the bulk of iron ore and steel coming out of those.
Areas, Russia, and Ukraine, but our global sourcing teams are very engaged and are determining areas, where we can source commodities or the appropriate component and other areas. So that's one of the benefits of having such a strong global sourcing team.
So we're not seeing any pullback right now is it is a fluid situation.
We're focused on maintaining our production, making certain that we've got the right inventory on the ground to build the wagons and satisfy our.
<unk>.
Great Congrats on the CEO role and thanks for the time.
Thanks, Ken.
The next question will come from Steve Barger with Keybanc capital markets. Please go ahead.
Thanks, Good morning.
Sure.
Just so I understand the consolidated margin progression in the back half I think you said sequential improvements in <unk> and <unk> with <unk> between low double digit low teen rate, so 11%, 12% probably should we think that <unk> is more high single digits or does that get to low double digit as well.
Although double digits.
So both quarters Thats great.
And Steve just with students Justin just to be clear, we do expect to see progression in Q4 from Q3.
Understood. Okay, so a sequential step up there.
Just another question on your European operations, just given current events relative to.
The location of Poland, and Romania versus Ukraine can you update us on the situation on the ground in terms of operating costs for electricity and natural gas.
Issues with parts availability and same question on labor like just how much disruption is going on there and can you remind us what percentage of your deliveries are expected to come from Europe .
I'm going to take the first part of that Bill Herman.
Steve Thanks for.
You're always being on these calls we appreciate your questions.
Europe by in Romania, and Poland.
Both countries are adjacent to Ukraine, but in both cases theyre adjacent to parts of the cranes that are not directly affected by the war.
And the.
To the west.
And very very.
Very safe and.
So the location is important there is an effect on customers from.
The more and the increased costs associated with certain.
Key components and steel.
Thus far we plan to pass those costs on and we haven't seen refusals at this point as most of our customers have contracts themselves in the shipping side that require the delivery capacity.
Going back to an earlier point none of the traffic.
Freight and Western Europe .
None of it.
FX, our business is east west into Ukraine or in Russia.
Russia. So there is no trade.
Effects there.
The major effects are going to be in fluids and fertilizers.
Because between Ukraine, and Russia, they produce something like 2025% of the fertilizer in the world and there are 25 countries.
<unk>.
Buying Russia and Ukraine.
Our half of there.
And grain production.
It is a fluid situation and it is dynamic.
But both Romania, and all of them are NATO countries, we do not expect to see any.
Pollution of the war across borders at least at this stage.
Part of the question could you repeat the second part of the question.
Wondering what percentage of the deliveries were coming from from.
From Europe for the guidance this year.
It's about kind of around 20%.
Okay.
And I think the window, just opened or will soon open to transact the remaining part of Astra that you don't own.
How likely is it deal or can you just tell us how youre thinking about that given the longer term dynamics that you are talking about.
From rail prospects.
Okay.
Let me deal with that also Orient.
Very close to the situation with our partner.
Our partner owns 25% of.
Greenbrier Astra rail consolidated.
We're actually expecting this to remain a stable partnership relationship.
There are certain advantages of having partners.
International jurisdictions German partner is very very.
<unk> asset to US right now so we're not intending to change in the ownership structure.
In the near future.
Got it and then I'll just sneak one last one in loan to value on the lease fleet went to 80% from 65% a year and I know thats not a huge difference in terms of dollars. While the lease fleet is small, but just philosophically what do you see as the right target range for leverage.
Well keep in mind that.
A large part of this leverage, especially now that we are in the.
We've done this asset backed securities a very successful issuance with fixed rate and with nonrecourse debt.
While it is on our balance sheet, we have certain insulating factors.
<unk> 2000, <unk> ratio for a leasing company is.
Standard is.
Something like 75% to 80%, 85% leverage so it's well within the range and as we're constantly monetizing now what you guys are calling assets for sale.
Asset sales were.
Constantly monetizing the suite is growing diversifying and the leverages appropriate to the quality of this portfolio and the maturity ladders and diversification.
That's all very important as you know in managing a leasing company.
Right Okay.
Okay, great. Thank you.
This concludes our question and answer session I would like to turn the conference back over to Mr. Justin Roberts for any closing remarks. Please go ahead Sir.
Thank you very much for your time and attention today. If you have any questions. Please reach out to Investor relations at <unk> Dot com have a great day. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
Yes.
Yes.
Okay.
Okay.
Thank you Matt.
Thank you.
[music].