Q3 2022 Greenbrier Companies Inc Earnings Call
[music].
Hello, and welcome to the Green Brier Company third quarter fiscal 2022 earnings conference call.
Following today's presentation, we will conduct a question and answer session.
Well that should limit themselves to only two questions until that time, all lines will be in a listen only mode.
At the request of Greenbrier companies. This conference call is being recorded for replay purposes.
At this time I would like to turn the Congress to Mr. Justin Roberts, Vice President of corporate Finance.
Mr. Roberts you may begin.
Thank you Sarah.
Good morning, everyone and welcome to our conference call today, I'm joined by Bill Furman Greenbrier 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 .
Following 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 a 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 1995.
Throughout 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 will hand, the call over to Mr. Furman.
Thank you Justin.
I've had the pleasure of parts.
<unk> in every quarterly earnings call since Greenbrier became a public company in 1994.
Our IPO occurred almost exactly 28 years ago in July of 2014 to be exact.
Today is my final earnings call.
After turning over to the management of the company to a new CEO Lloyd Carney.
We are pleased about all of that.
I'll briefly operation comments in Greenbrier.
And where I believe the company has been and where we're heading under.
Hi, Laurie.
Our team.
My partner Alan James.
Starting to Greenbrier and 1981.
We wanted to create a company with Sunday grow beyond our own skills and influence.
And yet it was a remarkable journey for both of us and for Greenbrier we.
We purchased Greenbrier leasing 1981 from commercial metals company for $4 million.
It was located in Huntington West, Virginia at the time and owned 358 railcars, many of which were used to Goodyear tire <unk> rubber company.
We entered manufacturing with a single facility in Portland, Oregon.
1985.
Today manufacturing operates on four continents 12 locations.
It is our largest business unit.
Rising over 80% of our total revenues.
For the trailing 12 months.
Railcar leasing and management services is our second largest core business.
With assets of nearly $700 million.
Since our IPO in 1990 for Greenbrier has annual revenues increased from $321 million.
During its first full fiscal year to close to $3 billion at the end of this year.
When we concluded fiscal 1994.
Our backlog was approximately 3000 units with a value of $150 million.
Today, our backlog is nearly $3 31000 units with a value of $3 6 billion.
At the time of our IPO, we manage approximately 36000 railcars.
Moving up from the 358, we began with.
Today, we manage over 430000 railcars more than 25% of the entire.
North American fleet.
We started with an employee base.
10 people now.
We employ.
15000 employees, serving global markets worldwide.
So today Greenbrier has grown to be the leading freight transportation manufacturer supplier service provider with a global reach that positions <unk> for continued growth.
Our ability to adapt and seek continuous improvement has led to growth and scale.
Is the legacy when I know the current management team at Greenbrier respects.
To create helped to create this growth.
And I know that this will continue.
Moving to Korea, who's been part of Greenbrier for 25 years.
Highly skilled.
Making good businesses better.
He's had very serious operating experience and has a commercial.
Background.
And a good strong team in both areas as well.
Laurie will continue to drive innovation at Greenbrier.
She will improve its ROIC C and its CSR.
I expect here in the board expects to expand our leasing and services business.
Which generate stable cash flows to offset the cyclicality new railcar demand.
In closing I'd like to say I feel really shoot enjoyed a lengthy timber tenure at Greenbrier.
Extended careers, leading publicly traded companies today are exceedingly rare.
I, Thank our board of directors and our shareholders for their confidence in me throughout.
And mostly on grateful for the personal relationships I've made that so many men and women who helped build greenbrier.
Been a unique honor to have worked with so many talented and dedicated people at all levels of our business.
And beyond the walls of Greenbrier I appreciate all those I've worked with at probably working with in the communities where we operate.
This includes our joint venture partners, our customers our suppliers advisers bankers equity analysts members of Congress and others in the U S government and other governments all over the world.
All of these are valued relationships that enhanced our business.
And they also enriched my life in countless ways.
To all of you on today's call I want to thank you for our association I'm grateful for the opportunity to represent Greenbrier heater day in other settings.
With some wistfulness, but not regret I leave my time as a Greenbrier executive officer with a sense of accomplishment.
Certainly.
There is unfinished business.
But I know that not all business can never be finished.
Going forward my role will be in the boardroom, helping Laurie and her team grow Greenbrier for generations to come.
It won't be on the board for generations to come only for.
2023.
But as a fellow investor I look forward to listening to these calls along with you in future quarters.
This is there is no doubt in my mind that you'll be hearing great things Laurie and from Greenbrier as we move ahead.
Thank you Laura overview.
Thank you Bill and good morning, everyone. I appreciate you joining us today for a review of our operating results.
And our perspective on market conditions.
Before I discuss the quarter I'd like to thank the men and women of Greenbrier, who work hard to serve the rail freight industry everywhere, we operate I am proud to lead such a fine group, it's integral to the movement of a central commodities and provides the foundation for Greenbrier to address our customers' needs.
Through innovative equipment and services.
And now turning to the quarter I am pleased that Greenbrier delivered solid operating results.
Our integrated business model is clearly demonstrated by the meaningful impact of our leasing platform, including strong syndication activity during a quarter that was characterized by a rapidly changing macroeconomic landscape.
Likewise, our maintenance services business continued to gain momentum.
The dilutive impact.
Pass throughs of input cost escalation and reduced production in Europe to the impacts from the Warren Ukraine were a headwind to margin.
And despite these headwinds our aggregate gross margins trended at $21 5 million or 39%.
<unk> as we move through the second half of our fiscal year.
In our core North American market railcar production increased this required a workforce expansion of all of our 1500 people while successfully contending with a balance on supply chain.
Overall, the manufacturing leadership team performed well.
The sequential margin improvement of $19 million or 91% during one of the more complicated production ramps in our history.
In Europe , the war triggered a slowdown in production and a pause in order activity after securing orders for 'twenty 300 railcars in the first half of our fiscal year.
Europe's economy has re calibrating to the reality of the continuing conflict with the impact being felt across the value chain.
Pricing and availability of critical materials, such as scale have improved.
Vietnam at Supreme Court level and customers are returning to the market.
And maintenance services strong volumes led to improved profitability.
We continue to gain momentum as the action plan, we implemented to increase efficiencies and a repair facility improves our adult.
Across the economy, uncertainties regarding inflation interest rate.
Commodity prices and supply chain issues have raised recession fears.
At the same time unemployment is low wages are rising and consumer still holds meaningful savings accrued over the pandemic.
It's times like these when the strength and significant experience of our leadership team and the flexibility of our business model produced strong steady results.
As we enter the final quarter of our fiscal year.
Encouraged by our momentum and invigorated to finish the year strong.
We believe the current challenges in the North American rail system like network congestion.
There is that opportunity for our business in the months ahead.
Strong customer inquiries and ship our outlook are encouraging indicators of future order activity and leasing performance.
Our backlog is diversified amongst a variety of railcar types and extends well into calendar 2023.
And finally, I am confident in our team's ability to execute in any type of market condition.
And with that I'll turn it over to Brian to discuss railcar demand environment and our leasing activity. Thanks, Laurie and good morning, everyone.
And Q3, Greenbrier secured new railcar orders of 5000 units valued at $670 million.
With deliveries of 5200 units in the quarter, our book to Bill ratio was nearly one.
We maintain our market leading position in North America.
At the end of calendar Q1 orders for Greenbrier comprised 48% of the total North American industry backlog.
Our diversified backlog currently stands at nearly 31000 units with a total value of $3 6 billion.
Customer inquiries remain high and we see ongoing industry investment from all categories of customers.
According to FTR associates, new railcar deliveries are expected to be 42050, 3000 units in 2022 and 2023, respectively.
Total railcars in storage are approximately 286000 units levels last seen in 2018.
Grab cars are expected to exceed new railcar deliveries for the third consecutive year, causing the north American fleet to shrink.
The combination of a shrinking fleet and decreased railcars in storage increases railcar utilization and adds pressure on fleet availability in North America.
As a reminder, our new railcar backlog does not include 3100 units valued at more than $220 million that are part of Greenbrier railcar refurbishment program.
Our refurbishment program is an important part of ensuring rail remains the most environmentally friendly mode of surface transport.
Importantly, we continue to operate in a strong north American leasing market for new originations and lease renewals.
This validates the significant expansion of our lease fleet over the last 18 months.
Our leasing team continues to perform ahead of expectations as we scale. This business with an old fleet totaling 11800 railcars at the end of the quarter.
Lease pricing on renewals has increased into the double digits in fiscal 2022.
Our fleet utilization remained strong at 98%.
We are very focused on protecting our economics through our lease agreements by hedging our debt balances.
The factor for inflation and rising interest rates during the quarter, we fixed our remaining leasing term debt through its maturity date of August 2027.
Syndication activity in Q3 totaled 800 units.
Maintaining our strong activity this year with our partners.
As a reminder, syndication revenue as the additional revenue in excess of what is derived from our new railcar sale that is created from the sale of a new railcar with a lease attached bigger.
Beginning in Q1 of fiscal 2022, we started to demonstrate our enhanced leasing strategy and our financial reporting by moving syndication revenue from manufacturing to our leasing segment.
This aligns revenue dollars with the syndication activities performed by our capital markets group, who work in leasing.
This change also reflects our commitment to monitor overall margin dollars and percentages by segment.
Of Greenbrier has consolidated margin is of course, our end goal.
Greenbrier as management team is experienced in our business model is flexible.
We are energized and optimistic about our ability to serve our customers and performed well in our markets.
This leaves us well positioned to successfully navigate these next two stages of recovery from the pandemic and the prevailing forces at work and the economy at any particular time.
Adrian will now speak to the highlights in the third quarter.
Thank you, Brian and good morning, everyone. Today, I will discuss highlights from our third quarter I'd like to remind our listeners today that quarterly financial information is available in the press release and supplemental slides on our website.
I will provide additional color at the close of my remarks, as we are refining fiscal year 2022 guidance today.
Items of note in the third quarter include aggregate gross margins of nine 6% reflects higher deliveries and improved operating efficiencies in manufacturing and maintenance services.
Headwinds in Europe as a result of the war in Ukraine and pass through of input cost Escalations, partially offset the improved efficiencies by approximately 200 basis points.
As a reminder, the pass through of input cost Escalations increased our revenues safeguard our gross margin dollars, but are dilutive to gross margin percent.
Selling and administrative expense of about $57 million as higher sequentially, reflecting increased employee related costs consulting and travel expense from increased business activity.
Interest expense of about $15 million as a result of higher borrowings and increases in interest rates on our floating rate revolving facilities.
In the quarter. We also recognized $1 1 million of gross costs, specifically related to COVID-19 employee and facility safety. This is approximately 47% lower than Q2 in line with reduced impact from Covid.
Yes.
Greenbrier is liquidity of $535 million at the end of Q3 consisted of cash of $450 million and available borrowings of 85 million.
The sequential reduction reflects increased working capital and increase in lease railcars held for syndication and reduced borrowing capacity, resulting from the sale of legacy <unk> assets in Q2.
In Q4, we expect liquidity will grow due to higher levels of cash from improved operating results stabilized.
Stabilization of working capital and increased borrowing capacity, resulting from more railcars placed in our balance sheet during Q3.
Our weighted average maturity is about five years with an average interest rate below 4%.
Because of the strength of our balance sheet, we are confident in our ability to navigate the volatility of the current market.
As highlighted in prior quarters, we expect to receive a large portion of our $106 million tax receivable in fiscal Q4. However, this could occur later due to processing delays at the IRS.
This refund is in addition to Greenbrier has available cash and borrowing capacity.
Today, we announced that Greenbrier as board of directors declared a dividend of <unk> 27 per share our 30 <unk> consecutive dividend.
Based on Friday's closing price our annual dividend represents a dividend yield of approximately three 3%.
Since reinstating the dividend in 2014, Greenbrier has returned over $385 million of capital to shareholders through dividends and share repurchases.
Based on current business trends and production and production schedules, we are adjusting greenbrier as fiscal year 2022 outlook to reflect the following.
We are increasing the low end of our deliveries guidance.
Our updated fiscal year 2022 deliveries guidance is 18500 to 19500, DNS, which includes approximately 1500 units from Greenbrier Maxion in Brazil.
As a reminder, in fiscal 2022, approximately 1700 units are expected to be built and capitalized into our lease fleet.
This is an increase of about 300 units from our prior guidance and is reflected in the modestly higher leasing capital expenditure guidance for the year.
These units are not reflected in the delivery guidance provided.
As a reminder, we consider our railcar delivered when it needs Greenbrier as balance sheet and is owned by an external third party.
Selling and administrative expenses are expected to be approximately $210 million to $215 million for the year.
Gross capital expenditures of approximately $310 million in leasing and management services $50 million in manufacturing and $10 million in maintenance services.
Net of proceeds from equipment sales of $155 million leasing capex is expected to be $155 million.
Gross margin percent is expected to increase sequentially in Q4 with margins expected to be between low double digits and low teens.
Before we head into the Q&A portion of the call I would like to reiterate a few of the key takeaways.
<unk> supported by our robust backlog, which provides strong earnings visibility anchor.
Anchored by an agile and experienced management team Greenbrier will continue to successfully navigate the challenges we have faced during our fiscal year our.
Our liquidity and balance sheet strength protects our business during volatile times and positions us to be opportunistic when the right opportunities present themselves.
As we look to strongly finish our current fiscal year, we are well positioned to drive shareholder value.
Entering fiscal 2023.
Now we will open it up for questions Sarah.
We will now begin the question and answer session.
Quick question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing Mickey.
To withdraw your question. Please press Star then two please.
Please limit yourself to one question and one follow up.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Justin Long with Stephens. Please go ahead.
Thanks, Good morning, and Bill since this is the last call just wanted to say congratulations again on a great run.
Thank you. Thank you very much enjoyed working with you.
Same here.
Adrian maybe to just follow up on the comment you made about fourth quarter gross margins on a consolidated basis being in that low double digit to low teens range can you provide a little bit more color on the manufacturing gross margins that youre, assuming in the fourth quarter within that guidance.
And maybe speak to that difference youre seeing in North American gross margin versus European gross margins right now given some of the disruptions you referenced.
Yes, as you might imagine.
North American gross margins are quite a bit higher than Europe .
That that would continue into Q4 and as you might expect with that level of increase in consolidated margins and would be driven primarily by improvement in North America and manufacturing margins as well so you would.
Yes look to see manufacturing margins.
In the double digits as well.
Okay, that's helpful and.
In terms of order activity I know you talked about European activity for new railcars picking back up but I just wanted to be clear are you seeing orders from Europe quarter to date and overall as you think about order activity quarter to date, how would you say that it's tracking relative to that.
5000 orders that you just posted in fiscal second quarter.
Hey, Jonathan this is Brian .
I'll take that so so I'll start with North America. So in North America that cadence continues to be very similar to what we've seen over the last couple of quarters, we haven't seen any appreciable.
Slowdown at this stage and things.
We're off to a pretty good start here in the quarter for Europe .
Things are settled then and there is a bit of normalcy as much as there can be in Europe , we're starting to see customers come back to the table and we have begin to secure orders again, so I'll.
It started to stabilize a little bit over there as well.
Okay helpful. I'll leave it there I appreciate the time.
Our next question comes from Matt Alcott with Cowen. Please go ahead.
Good morning, Thank you and I want to reiterate.
Congratulations.
To build on the accomplishments over the last.
Few decades here.
Great working with you all the time.
Staying on the Europe front did you guys mentioned, how many deliveries you had in Europe in the quarter and how many.
Deliveries in the fourth quarter.
We did not explicitly get into that I would say that there were less than 1000 cars delivered in fiscal Q3.
We would expect something similar in fiscal Q4.
This is a pretty significant step down from where we were at pre war from.
Expectations perspective.
Okay got it.
So we should expect that barring an unexpected.
The macro and geopolitical.
Development should we expect that to ramp up to normal levels next year.
I think thats the plan and Thats what were working towards at this point, we have seen that I would reiterate it is a fluid environment and.
Some important negotiation with customers to get completed but at the end of the day, that's what we see but it is a very challenging environment over there where everybody is.
Basically are experiencing pain.
Yes, understood and Justin and Brian probably.
Yes.
The mix of orders changed in North America.
The recovery so far in the last two years has been driven mostly by freight cars, but.
But it seems like the tank car market on the leasing side at least slightly a bit in recent months. So.
Should we expect.
That essentially hit manufacture orders.
And then the other way I would like to see if the order mix has changed has the mix of buyers changed more in favor of shippers and railroads as opposed to lessors because it seems to me like if you are a lessor.
Returned by dynamics floor.
Additions to the fleet.
Don't seem super compelling right now given.
Equipment costs and interest rate interest rate has gone up.
Yes. So this is Brian Matt.
All good questions.
So we have been seeing this year and I think we'll continue to see that the predominant buyers in the marketplace of shippers.
A lot of our leasing activity that we're originating is going directly to shippers as well as we're seeing more product.
Being purchased by shippers as well as far as the mix question goes we're continuing to see that pretty much the same diverse.
Mix of the product, it's everything from boxcars to covered Hopper cars.
There is still a nice tank car undertone thats been keeping us very busy.
And a number of other car types as well.
Okay. So.
No that's very helpful, but I'm back on the shipper versus lessor side, I guess, we really haven't seen much.
<unk> orders by lessors.
Do you think it will take for that to change I mean, many of our stores are looking at utilization rates.
In the 90, some in the high nineties.
Yes.
I'd say, if youre asking about yes go ahead, yes, I think you were at that inflection point now I think as commodity prices began to moderate which we're seeing.
Rolled coil.
<unk> is still standing pretty strong, but hot rolled coil is coming down we're seeing signs of the scrap surcharges are starting to ease a bit and so.
And you do have.
Operating lessors that have an investment appetite that had been sitting on the sidelines. So I think we're basically hitting that inflection point now a little bit of moderation in commodities will bring them back as you said very high utilization rates that are shrinking fleet is putting a lot of pressure on demand.
Great. Thank you very much.
Your next question comes from Allison Pollinia with Wells Fargo. Please go ahead.
Hi, good morning, and Bill Congrats myself to you.
Raft Greenbrier in good hands with Lori and team there so best of luck.
I just wanted to go back I think Laurie it was your comment on rail congestion.
Certainly it's been a benefit to cars and one of the concerns out there is as congestion starts to ease maybe that starts to lease in the supply network up a little bit just any thoughts on how youre viewing that as they're strong enough underlying demand to continue this path on new car interest here.
The short answer is yes, I do think so I think as the congestion eases, that's going to allow a lot of.
It's to really put their focus back on shipping commodities via the rail where maybe they've pulled back a little bit during the supply chain difficulties with some of the congestion.
Rail transportation is the most efficient and Scott.
The lowest carbon footprint. So there is a lot of desire to move more product via the rail the railroads themselves just need to sort through that congestion issue, which you know I think we're all reading in the papers that it's impacting all of US right. It has to deal with labor shortages.
Timing of things it just takes a little bit to get this all worked out I do know that the railroads are very focused on figuring out how they can sort through that so all that being said I think that will be.
Continuing demand.
May not be kind of going to some of the high.
Driving up peaks and dropping back down.
And congestion.
It's one of those things that as we all know it cuts two ways right.
As we.
Incur a bunch of congestion it can increase cost or it could cut costs. So that's I think it's going to be an area, where we continue to see demand.
That's great. Thanks, and then just leasing.
I might have missed this but you know obviously double digit I think you mentioned renewed lease rates.
So where are we with <unk> are you starting to see that extend in terms of the terms of the leases at this point or are we still early stages. There just any color.
No. It's a good question Alex it hasn't Brian .
<unk> seen now for the past few quarters.
Really extended terms on a lot of these transactions and quite frankly, we're pushing extended terms, given where interest rates and things are so.
Yes, I would say that terms quite frankly are.
Much more extended than they've been in quite some time.
Great. Thank you.
Yeah.
Our next question comes from Braskem majors with Susquehanna. Please go ahead.
So going back to the customer questions from earlier can you talk a little bit about the syndication channel.
Your core customers their ferring and what their response has been to an environment of higher asset prices and higher interest rates.
Yes, the syndication channel first off has been very liquid and we continue to have great partners working in that aspect as it relates to higher equipment costs and interest rates at the end of the day.
We always have to have those conversations but.
The people that we.
Transact with our.
They understand what's going on they understand what's happening in the interest rate world. They see it on their mortgages they see it in the everyday world and so they can translate that into the additional costs expected.
We have not seen any.
Any failure to get to pass through any of those cost at this point.
And if I could just add one thing I mean with the rise in interest rates to rise in asset prices. There is also a rise in lease rates and so our syndication partners are generating.
Stronger lease returns as well and it's also bringing up the value of existing fleets right. So we're talking we're very focused around but right now what's being produced right now but.
As some of these partners have larger fleets, they're seeing as renewals come up we're also seeing that benefit in the renewals of some of their existing fleet.
To that point.
Have historically at least in recent years shown some level.
Seasonality with the syndication cadence and it's typically been a bit heavier in the fourth quarter, it's hard to tease that specifically out of the guidance. The way. It said, but are you seeing that is there anything that would keep that typical or at least recently typical <unk> to <unk> bridge of higher deliveries a little more muted. This time just trying to dig through.
Thank you.
Sure and I think that.
It's a matter of seasoning some of the assets that are on our balance sheet is also a matter of when those cars are being built in our manufacturing facilities. As we mentioned earlier, we have been ramping up.
Excuse me ramping up production.
So from a sequential basis, you may see a little bit more but that's not because we're just holding it for the fourth quarter or something like that it's just related to our levels of production and the timing of when some of our partners would like to take this asset.
Thank you for that.
As we look into next year, obviously, there is not.
Not a lot of incentive to get Super precise given the uncertainties globally and a lot of different regions and businesses that you operate in but.
As we think about the run rates into 2023 can you give us a little color on a few things you have visibility into whether it's the backlog that's scheduled for fiscal 'twenty three delivery.
SG&A.
Reversals in.
Some of that working capital build just anything we can think about to kind of book in the range of outcomes in our models would be really helpful. Thank you.
Sure I'll give a little bit of color there as I think everyone has mentioned in our prepared remarks, we do feel.
Very comforted by the large backlog that we have it allows us to have production schedules that go out well into calendar 2023 to give us an idea of how we'll be able to build we are being mindful to not again have a large run up and then be having to.
Pull back on our workforce, having a steady workforce, having steady production is one of those things that helps us to drive more efficiency through the manufacturing process.
When it comes to SG&A and even some of the manufacturing.
Well as our other businesses.
I'll know that inflation is here, we're having those impacts, particularly within our workforce since we're very mindful of making certain that we are paying attention to.
Retaining the talent that we have that will require some additional <unk>.
Employee related cost.
Interest rates have gone up I think the team has done a great job of locking in with hedging.
At lower rates than.
What you might see in todays market, but they are definitely higher than what we've had historically.
So I think overall as I think about our fiscal 2023, I should say, while we're not going to be giving explicit guidance.
We do see kind of maybe what might be a little bit of a nice suite.
Steady ramp up and staying at some sort of a steady basis, which would be.
Think something the entire.
Manufacturing throughput enjoy them across our.
Our industry.
So it sounds like.
I'm sorry go ahead.
You mentioned working capital as well so.
Our working capital tends to lead into the higher production rates so as our.
As we finish our ramp up.
We should see some efficiencies in our working capital and as we see some commodity prices moderating or declining.
Again, we would expect that to be favorable to our working capital and drive cash as that produces next year. So a lot of uncertainty there, obviously, but I think with what we see today, we would expect to see some improvements there. Thanks.
Thanks.
Thank you all.
Our next question comes from Ken <unk> with Bank of America. Please go ahead.
Great Hi, good morning.
And Bill I'll Echo the congrats on forming a great company and.
And the job you've done and it must have been a great stay at the Greenbrier Hotel.
Have the named stick all these years.
Maybe I'll go I don't know if its.
Lori or Adrian but on the margins impacted by 200 basis points, you mentioned on supply chain and gross margin pressure, maybe talk a bit about where I think you were targeting maybe.
Maybe low teens into the third quarter and certainly into next quarter, maybe talk about what where did it miss internally to get there was that supply chain cost was that other cost was that the pricing not keeping pace with the inflation costs, maybe just talk us through some of the cost side there.
Hey, Ken This is Jeff and just clarify I think last quarter, we spoke to kind of low double digit to low teens in Q3 into Q4.
If youre going to take the nine 6% consolidated and add back the 200 that gets you into kind of 11, 5%, which.
Gets us into that low double digit range. So I think we ultimately.
We felt like we accomplished quite a bit and did what we guided to last quarter.
Just what they are there is definitely some headwinds out there, especially from the Escalations in European activity.
And Fortunately, we do see that there is enough upside and.
Efficiencies that were gaining in north American manufacturing that will keep further improvement in Q4 and going forward.
Okay and then on the.
It sounds like the lease fleet climbed a little bit on the balance sheet versus the total bill you lifted the bottom end of your build range kept the top end.
So it looks like you've kept more on the balance sheet, despite what's going on in Europe . So.
If we've got.
Book to Bill that fell down to one point.
Least utilization falling maybe just give your view on.
It sounds like you've already talked a lot about the congestion at the railroads and obviously increased demand what is your feeling on the state of the market now.
I would say our feeling on the state of the market is.
Cautiously optimistic and we are seeing a lot of things that when you get deeper beyond just the headlines that you see we see demand by a number of shippers to add equipment to the rail to be able to ship more product via the rails.
Are seeing.
That sort of.
Steady encouraging improvement and on lease fleet utilization I don't think we had a drop off I think we stayed steady at 98% utilization and I think that is just another indicator that the market is using all the equipment that they can that's out there at once.
There is a bit better fluidity on the rails, you're likely going to see.
More equipment being brought in the other thing that goes on as you've got some equipment, that's probably aged out is inefficient and so as it's possible that will probably continue to get scrapped and moved into more efficient rail.
Rail equipment, that's one of the things that we enjoy working with a lot of our customer partners on is innovation on designs of railcars that are improved technology.
Ken This is Brian on the lease fleet utilization I just wanted to hit on one point with our fleet size of 11800 cars. It doesn't take many cars too to change a percentage or two in a lot of those leases are transitioning from one lease to another theyre not theyre not necessarily its storage is.
They are going from one customer to another and they have to go through shop and get repaired. So when you look at 98%, we really feel like we're as close to a 100% as we could be just given the dynamics of how leasing works.
And Kessel maybe to add.
When you talk about increasing the low end of our deliveries guidance and deliveries are sales to third parties. So that the additional investments in our lease fleet that we talked about on whats gone onto our balance sheet is separate from those deliveries.
So it's not right.
Yeah right.
No I know Thats why was it seemed like an encouraging statement, if you're lifting the bottom end and putting more into into the into.
And to the lease fleet.
So just maybe to follow up on that if I can it seems like you've talked about pricing keeping pace with inflation as.
As you pass through.
Typically we've seen.
You talked about earlier the values in a rising rate environment on your fleet value.
In the eighties, you had maybe it's more of a field question, but you had the tax benefits that encouraged investment whats what's the environment. Like today is this is this just more.
Kind of just straight demand is there any encouragement.
Rising rate environment, where you see a focus more on.
Subscribing for assets.
This is Brian .
And the demand is really demand driven.
We're not seeing.
People come again necessarily for the investment although the investments are good and our syndication partners are happy with the returns, but the orders that we're seeing are for either expansions.
Or replacement cars.
The fleet contracted it is demand driven.
Alright, I appreciate the time everything thank you.
Yeah.
Again, if you'd like to ask a question. Please press Star then one our next question comes from Steve Barger with Keybanc capital markets. Please go ahead.
Hey, good morning, everyone and Bill Congratulations to you I Hope you have a great next chapter.
Thank you very much.
You bet several of you kind of mentioned the chaotic macro environment a lot of questions have been directed that way you all still sound cautiously optimistic and I think Brian said inquiry activity is still good. So just ask the question directly are your customers talking about recession or expressing fears that their own business is set to decline.
I think everybody has got an eye on that finish line and everybody is being smart about what they do our customers.
Arent necessarily focus on recession as much as they are focused on trying to get their product to market.
As you know the truck market is pretty congested there had been issues. The rail velocity is congested and so theres still a lot of supply chain constrictions.
That's really what people are focused on is how do we get our product to market and how do we grow share on rail and unfortunately as Larry said earlier in her comments, it's being restricted at this point.
Right.
Well with the inflationary pressures that you've talked about new car pricing is higher have you booked cars so far in <unk>.
Yes.
Great and Adrian or Justin going back to the margin conversation or maybe more importantly, gross profit per car I hear you on feeling like you accomplished a lot this quarter given the challenges, but I think it's fair to say that year to date manufacturing results have been.
Falling short of how we and probably you were thinking about it at the start of the year can you just be more specific on what drives that improvement going forward.
Yeah, I think I'll start and then Adrian can correct me, where I'm wrong or fill in any gaps.
I think a big piece is one I would say, yes, it's been a challenging year and I think more challenging than when we started six months ago or even I'm, sorry, probably closer to 10 months ago.
A production ramp of this size and magnitude is challenging in and of itself but.
Then when you layer in the challenges of the supply chain and.
Delta and omicron variance in the first six months of the year.
Really created a very very chaotic challenging environment now what we see going forward and what we've started to experience in Q3 is.
The actual efficiencies start to manifest as you're increasing your production your absorb more overhead and youre, reaching those.
Stabilized production rates that allows more profit to fall through to the.
Margin and therefore bottom line.
We're seeing that manifest in and then especially down in Mexico, where much of the ramp is occurring you see.
Substantially improvements each quarter sequentially and into the fourth quarter.
But we see it you don't necessarily see those specific facilities, but you will see that flow through on the margin side.
Got it.
I know that orders have been kind of lower volume higher mix, which has its own challenges as well.
That.
Are those line changeover issues more behind you as well and I think that pricing was supposed to get better is that starting to flow through.
Before Brian Johnson, I would say, yes, I mean, I think as we looked at this fiscal year earlier on we expected adjustments at some of the ramping to occur a little bit sooner than what it actually occurred because of things like supply chain.
<unk> and the impact on bringing back of work for US I think our manufacturing team has done an amazing job at bringing back that workforce. It just took us a little bit longer to get that traction.
So yes.
Yes, no I agree.
Yes.
We're a little bit behind on the ramp ups, but the ramp ups are nearly behind us pricing continues to improve.
Thanks.
Yeah, and I think the Crazy thing is.
We're pleased that in our contracts, we do have the pass throughs cost Escalations, which does.
As Adrian said very tried to be very clear about this which it drives an increase in revenue.
But it is a headwind to margin percentage because our focus is our focus is on margin percentage. It's also focused on margin dollars. So we're keeping those margin dollars neutral, but math just re creates a headwind to margin percentage.
No.
I understand that.
You look at the revenue per car this quarter and the gross profit per car and you're still kind of trailing where.
Historically you have been.
Fair enough and I think Europe was a big piece of that as well when you look at the manufacturing margins.
Understood. Thanks.
This concludes our question and answer session I would like to turn the call back over to Mr. Justin Roberts for any closing remarks.
I just wanted to say thank you very much for your time and attention today. If you have any follow up questions. Please reach out to me at either Justin Roberts at <unk> Dot com or through our Investor Relations E Mail and with that I Hope everybody has a great July have a great day. Thank you. Thanks, everyone.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.