Q2 2025 The Greenbrier Companies Inc Earnings Call
Hello, and welcome to the Greenbrier Companies Second Quarter 2025 earnings conference call.
Following today's presentation, we will conduct a question and answer session 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
Speaker Change: At this time, I would like to turn the conference over to Mr. Justin Roberts, Vice President of Financial Operations, the Americas. Mr. Roberts, you may begin.
Thank you, Nick.
Justin Roberts: Good afternoon everyone and welcome to our second quarter fiscal 2025 conference call.
Speaker Change: Today, I am joined by Lorie Tekorius, Greenbrier CEO and President Brian Comstock, Executive Vice President and President of the Americas, and Michael Donfris, Senior Vice President
Speaker Change: Following our update on Greenbrier's Q2 performance and our outlook for the remainder of fiscal 25, we will open up the call for questions. Our earnings release and supplemental slide presentation can be found on the IR section in our website.
Speaker Change: Matters discussed on today's conference call include forward-looking statements within the meeting of the Private Security's Litigation Reform Act of 1995.
Speaker Change: Throughout our discussion today, we will describe some of the important factors that could cause Greenbrier's actual results in 2025 and beyond to differ materially from those expressed in any forward-looking statement made by Aram B. Hatham Greenbrier.
Speaker Change: We will refer to recurring revenue throughout our comments today. Recurring revenue is defined as leasing and fleet management revenue, excluding the impact of syndication activity.
Speaker Change: And before I end the call over to Lorie, I wanted to provide some perspective.
Speaker Change: Last week marked my 19th anniversary with Greenbrier and it always causes me to reflect on the journey that Greenbrier has been on over my time here.
Speaker Change: It's remarkable to me that we are near record-setting EPS levels in what has been at best an OK rail car market the last few years versus the head of years of 70 to 80,000 car builds in 2014 and 15.
Speaker Change: To me, this underlines the strength, creativity, and experience of this team.
Speaker Change: What's even more impressive is that we aren't done yet. We remain relentlessly focused on controlling what we can control, which is improving operating efficiency, reducing costs, and ultimately creating shareholder value.
Lorie: With that, I'll hand the call over to Lorie. Thank you, Justin, and congratulations on your anniversary.
Good afternoon everyone, thank you for joining us today.
Lorie: First, I want to emphasize Greenbrier's strong performance in our second quarter ended February 28, 2025.
Lorie: This reflects our continued focus on operating efficiency as further demonstrated by our impressive aggregate growth margin of 18.2%. This was our sixth consecutive quarter delivering aggregate growth margins at or above the mid-teens target we established two years ago.
Lorie: Second, is important to mention that our North American operations are U.S. and C.A. conflient.
Lorie: It's a bit of an understatement to say that the macroeconomic landscape has been noisy and dominated by fluctuating rhetoric and actions on trade policies and tariffs.
Lorie: But to be clear, our products have not been the target of proposed or enacted tariffs.
Lorie: However, Terrace are, in fact, in the cost of our inputs, predominantly steel, and comforts and structural changes in how our customers operate.
Lorie: In fact, we've raised our full-year aggregate growth margin guidance as well as our guidance for operating margin despite lowering our delivery and revenue guidance We've raised our full-year aggregate growth margin. We've raised our full-year aggregate growth margin
Lorie: We are working collaboratively with our customers and business partners to strategize and provide solutions for their to our freight rail transport requirements.
For Now, Real Cardualization Remains Study
Lorie: It's important to reiterate that Greenbrier has a very long history and is operated through a variety of macro backdrops.
Lorie: We have an experienced and agile team and will flex our manufacturing capacity as necessary to rapidly respond to changes in demand while maximizing our operating efficiency.
Lorie: Building on the Capacity Racialization Initiative began in 2023, we've been reviewing our production capacity and footprint in urine.
Lorie: An outcome of this analysis will be the rationalization of one facility in Romania.
Lorie: We are aware that this is a consequential decision that impacts our employees, customers and the community.
Lorie: However, this is part of our long-term strategy in Europe which will reduce costs and improve our competitive position.
Lorie: This also means we'll experience reduced deliveries from our European facilities in the second half of fiscal 2025.
Lorie: Over the longer term, our aggregate production capacity will remain the same or higher as we continue to invest in the remaining locations.
Lorie: Our global new rail car backlog remains robust at over 20,000 units, which provides excellent visibility for managing our production lines and volume, and it gives us a reliable revenue outlook.
Lorie: We expect a slight reduction in aggregate growth margin during the back half of this fiscal year, but we expect your remains solidly in the mid-teens as we leverage the operating efficiencies gained over the last two years.
Lorie: Our team is laser focused on delivering strong performance and operating efficiency gains through the hard work and dedication that has historically enabled Greenbrier to achieve an uncertain
Lorie: I want to acknowledge the amazing progress being made on our Insourcing Initiatives in Mexico.
Lorie: I visited our team last week and was able to see firsthand the incredible work that will provide benefits and various demand environments.
I remain extremely optimistic about our future.
Lorie: Our leasing and fleet management operation continues to take a disciplined approach to growing our lease fleet, which provides predictable revenue and cash flow across market conditions.
Lorie: This demonstrates the continued confidence of our board and leadership in our long-term strategy affirming our commitment to return value to our shareholders while investing in the business.
Lorie: And with that, I'll turn the call over to Brian to discuss our operating activities in greater detail.
Brian: Thanks, Lorie, and good afternoon. In Q2, we delivered 5,500 new rail cars in a healthy manufacturing gross margin of 13.6%. While our mix had a similar profile to Q1 margins.
Brian: We're modestly lower due to production changes and the costs associated with closing a facility in Europe . I am pleased with the focus and performance of the manufacturing business over the last several quarters.
Brian: The Leasing Team continues to perform well. The size of Greenbrier's lease fleet was effectively unchanged from the prior porter, reflecting the timing of additions to the fleet as well as the discipline nature of our approach.
Brian: Our intention to invest up to 300 million annually on a net basis remains unchanged, provided that the rail car fleet additions meet our return criteria.
Brian: Recurring revenue reached 157 million over the last four quarters, representing 39% growth from our starting point just two years ago.
Brian: Customers are holding on to least rail cars, and lease renewals and rate increases continue
Brian: We entered the scope 2025 with about 10% of our leases up for renewal and successfully renewed more than half of those in the first two quarters.
Brian: Given the ongoing strength in the leasing market, we are confident that we will successfully renew or remarket the balance of these units.
Brian: We expect leasing fundamentals to remain strong this year because of limited equipment supply and dolder production discipline.
Brian: We syndicated 800 units in the quarter, generating good liquidity and margins, and we expect syndication activity to accelerate in the back half of the year.
Brian: The timing of syndication activity is primarily tied to customer delivery requirements and production scheduling.
Brian: Turning to the new rail car market, Greenbrier secured orders of 3,100 units worth nearly 400 million in the quarter.
Brian: Our pipeline remains robust, but inquiries have been slow to translate into orders as customers have been waiting clarity on U.S. trade policy.
Brian: With some clarity now established, we are talking with customers about the real equipment needs in this environment.
Brian: Railcar users and owners are experiencing a range of impacts from negligible to significant.
Brian: As we manage through this transition, Greenbrier is doing what we have always done in uncertain times.
Listening.
Brian: We are actively listening to our customers, our suppliers, and everyone in the value chain. Greenbrier's history demonstrates that when we listen to our business partners and work collaboratively to accommodate their needs, we emerge stronger.
Brian: In the meantime, our global backlog remains strong at 20,400 units.
Brian: with an estimated value of 2.6 billion, providing significant revenue visibility and allowing us to manage our production rates and lines efficiently.
Brian: The maintenance market is expected to remain solid this year and next.
Brian: Programmatic Railcar Restoration Activity that isn't included in our backlog will become a more meaningful contributor to our results over the next two years as the industry faces peak tankart recall vacations.
Brian: In fiscal 2025, we will perform these activities on several thousand units and expect requalifications to continue at a healthy pace for the next few years.
Brian: These activities are not just accretive to Greenbrier, they allow us to utilize our capacity
Brian: Real-car restoration and requalification work can be performed at either our manufacturing facilities or our maintenance locations depending on various factors.
Brian: I would also highlight that the average age of the North American fleet is over 20 years the highest level in a decade.
Brian: In Europe , the change in U.S. foreign policy has galvanized European leaders to commit to a significant expansion in defense and infrastructure spending.
Brian: We remain confident in the medium and long-term prospects for the European Economic Recovery and the freight rail industry that will be needed to support it.
Brian: In Brazil, we observed an increase in demand that aligns with our expectations, as customers finalize infrastructure investments and transition to purchasing row cars.
Brian: Brazil stands to benefit from U.S. tariff activity as trading routes are reordered and we expect benefits to the freight rail sector.
Brian: Additionally, the Brazilian government has increased the import tax from 11.2% to 30%.
Brian: for all rail cars produced outside of Brazil, creating a significant barrier of entry of foreign products.
Speaker Change: Overall, we expect an average short-term market weakness and deliver strong performance, as Greenbrier continues to successfully implement its strategic plan.
Speaker Change: And with that, I'll hand the call over to Michael. Thank you, Brian . I will cover our second quarter financial highlights and key drivers as well as update the fiscal year 2025 guidance.
Speaker Change: As Justin mentioned, you can find our earnings release and supplemental slides on our website.
Speaker Change: I'm pleased with our financial results in the second quarter as we delivered strong performance and continue to focus on our operating efficiency.
Speaker Change: We've made meaningful improvements across the business and have been building on our operating momentum.
Speaker Change: On a year-over-year basis, 2nd quarter core operating earnings and net income have grown 42% and 68% respectively, reflecting the strength and successful execution of our strategic plan. Greenbrier remains in a strong financial position
Speaker Change: Revenue in the quarter of 762 million was in line with our expectations. Deliveries of 5,500 new rail cars reflect sequential decreases in North America and Europe , resulting from the timing of syndication activities and production changes.
Speaker Change: We expect deliveries to remain at this level with the midpoint of our guidance averaging around 5,500 units per quarter during the second half of the year.
Speaker Change: With a favorable product mix, a continued focus on maximizing operating efficiency while growing our leasing business, aggregate growth margin remained strong at 18.2%. These improvements were partially upset by $2 million impact related to our European footprint rationalization.
Operating income reached nearly $84 million for 11% of revenue.
Speaker Change: Although it was reduced by over 6 million in European footprint rationalization costs,
Speaker Change: Our tax rate of 32% was higher than anticipated due to discrete items related to the Mexican
Speaker Change: Excluding the impact of European facility rationalization costs, core deluded EPS was $1.69. It's worth noting that deluded EPS this quarter also includes approximately 900,000 shares related to our 2028 convertible debt.
Speaker Change: Our average share price exceeded the 55 strike price, causing additional shares to be included in the diluted share count, an impact of four cents per share.
Speaker Change: And finally, we generated core EBITDA of $124 million or 16.3% of revenue.
Speaker Change: For the 12 months ending February 20th, 2025, our return on invested capital, ROIC, was 12.4% marking a 120 basis point sequential increase.
Speaker Change: and within our 2026 target range of 10 to 14 percent that was announced two years ago. The continuing improvement in our OAC reflects the enhanced operating and capital efficiency generated by the execution of our better together strategy.
Speaker Change: Moving on to our balance sheet, Greenbrier's liquidity grew $203 million from our previous quarter to over $750 million.
Speaker Change: This consisted of 264 million in cash and 488 million in available borrowing capacity.
Speaker Change: We generated approximately 94 million in operating cash flow for the quarter driven by strong operating performance and working capital efficiencies.
Speaker Change: As we look towards the remainder of the fiscal year, we expect liquidity to continue to increase driven by strong operating results, working capital efficiency, and increased borrowing capacity.
Speaker Change: Switching to capital allocation, we remain disciplined and committed to returning capital to shareholders to a combination of dividends and share buybacks.
Speaker Change: Additionally, we have a hundred million remaining in our Sherry Purchase Authorization. We remain committed to creating long-term shareholder value and will continue to utilize this capacity opportunistically and within a framework of our broader capital allocation strategy.
Finally, we are updating our guidance for fiscal 2025.
Speaker Change: We are raising aggregate gross margin per cent 100 basis points to the range of 17 to 17.5% from the 16 to 16.5%.
Initially provided.
Speaker Change: We are also raising operating margin percent, 100 basis points, to a range of 10.2 to 10.7% from original range of 9.2 to 9.7%
Speaker Change: New Rail-Card Delivery Gunns is narrowed to a range of 21,500 units to 23,500 units.
Speaker Change: Revenue is expected to be between $3.15 billion to $3.35 billion.
Speaker Change: The revenue and delivery adjustments are primarily result of our facility rationalization in Europe and production changes in North America.
Investments in manufacturing are expected at $120 million.
Speaker Change: Gross investment in leasing has been reduced to 300 million and partially offset by proceeds of equipment sales of 60 million.
Speaker Change: Updated guidance reflects better visibility into a mix and disposition of our production plan for the second half of fiscal 2025.
Speaker Change: In conclusion, I'm very pleased with our second quarter results as we continue to execute our strategy, control what we can control, drive operating efficiencies, and balance our capital allocation, ensuring value creation for our shareholders.
Speaker Change: Our outlook for fiscal 2025 remains positive and unconfident in our ability to continue executing our strategy. Now, we'll open it up for questions.
Speaker Change: I'll now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star and then two.
Ken Hoekstra: And your first question today will come from Ken Hoexter with Bank of America. Please go ahead.
Ken Hoekstra: Hey, good afternoon, Brian , Michael and Lorie, and Justin Congrats on 19 years.
Ken Hoekstra: Is that shift down to 5,000 units in the back after the year quarterly? Is that just due to decreased demand? I just want to understand what the message on the lower the units increase the margin opportunity is.
Speaker Change: Sure, Ken, and sorry if that was a little bit confusing. So there will be a short-term impact on our deliveries out of Europe , which is reducing our expectation for the second half of 2025.
Speaker Change: We are also adjusting some of our production rates or aligns here in North America based on as we manage our backlog and collaborate with our customers on when they need deliveries. And so that's another adjustment to the second half delivery expectation.
Speaker Change: That said, as you mentioned, we are increasing our aggregate gross margin and our operating margin expectations, so this is part of what our focus has been is to drive more through to the bottom line in a variety of markets.
Speaker Change: Wonderful. I mean, great job. I mean, you've definitely talked about the outsourcing and executing on that.
Speaker Change: So I guess just maybe switching over to the leasing for a second. Um, can you talk about the, well, on the production? Any, is there, I think you opened up with comments about the, the tires? Is there something we should expect in terms of? [inaudible]
Speaker Change: I know it's a full pass-through in terms of if you're shifting from Europe to Mexico, I guess is there any impact on tariffs and then any impact on the falling rates on the returns for leasing?
Speaker Change: So I'll let Brian speak to kind of what he's seeing from a pricing perspective or a leasing. We are not shifting anything, so our European facilities.
Speaker Change: Produced equipment primarily for the Western European market, which are not transferring anything from Europe over to North America.
Speaker Change: When I think about North America and I think about the terrorists...
Speaker Change: Just to reinforce, we are not subject to tariffs because we're U.S. MCA compliant, but certainly the uncertainty in the market is being a headwind to demand around for some of our customers, particularly as I think through how this might impact.
Speaker Change: Traffic Patterns. As you mentioned, we've navigated escalations and tariffs in the past and our contracts do include pass-through language. That said, we'll continue to work with our customers to navigate and mitigate any impacts from tariffs.
Speaker Change: Yeah, Kennell, I'll jump in and address the leasing second, but I do I just want it.
Speaker Change: Head off with Lorie just said is at the end of the day we don't expect really any negative tariff implication on any of the pricing in the backlog. Obviously, we're going to work with our customers to the extent it makes sense, but we have plenty of tools in the tool we can add that protect us from the downside.
Speaker Change: On the leasing, there's an interesting opportunity as interest rates fall and as we watch spreads, we will react accordingly but keep in mind that all of our debt on our leasing fleet is fixed.
Speaker Change: at this point. So that provides kind of a floor, but we do have some options, some call options where we could take advantage of the market should it present itself.
As far as rates themselves go
Speaker Change: We have seen kind of a leveling at very high levels. We don't see any retraction at this point. I think you see that from a lot of the other leasing companies as well, that lease rates and discipline around lease rates are holding, are holding quite well, in fact.
Speaker Change: I don't want to dominate, but just a quick follow up there. You mentioned the pricing on the
Speaker Change: The new build is holding steady. I just want to understand because the average sell price just looking at the 400 and the 3.1 billion in backlog.
Speaker Change: It seems to be a, I'm sorry, 3100 new cars at it would be about 129,000 ASP per car, which would be down 6% sequentially. So you're saying that that is just solely mix and not anything on price.
Ken Hoekstra: Yeah, it truly is, Ken. You know, you saw a big buildup of auto as auto was coming out of COVID. That has kind of retracted with some of this tariff discussion. But what's happened is we've seen a shift.
Ken Hoekstra: really, too, a lot of the domestic tech products. So we've seen a lot of...
orders and inquiries around coiled steel cars, Godolas for scrap.
Ken Hoekstra: Pipe Cars for All in Pipe for the Drill Initiative that's going on in the U.S. pet your chemical tanks, really tanks of all description. So you're kind of moving from, you know, that big auto car kind of into more of your tank car guns.
and Hoppers.
Very awful. Appreciate the clarity. Thanks, guys.
Next turn.
Ken Hoekstra: And your next question today will come from Harrison Bauer with Susquehanna, please go ahead.
Harrison Bower: Great. Thanks for taking my questions today. You're working capital investment in lease rail cars held for syndication rows each of the last two quarters. How are your customers in the syndication channel reacting to this uncertain environment and how much visibility do you have into syndication sales over the next few quarters?
Speaker Change: Yeah, so I'll take first part and I don't Michael or worry if you guys want to jump in. It's Brian Harrison.
Speaker Change: So the syndication market continues to be very robust and liquid.
Speaker Change: We've got a number of transactions that are teed up, one of which was delayed by about two weeks is all only because of some of their funding on the back end, but we have plenty of partners in place that are still wanting these good, long-lived.
Good Return Assets [inaudible]
Speaker Change: You said exactly what I was going to say, Brian , I mean, our investors, our syndication partners, they look at these asses, these are already the 50-year-lined assets and they're coming with...
Speaker Change: A lease that is long-term in nature as well. So they look past anything that might be happening in the current environment.
Justin Roberts: And the only thing I would add Harrison, thanks to Harrison, this is Justin Rokwick, is it also comes down to timing of when we actually build the cars.
Speaker Change: Thank you for the color there and maybe on the secondary market, you know, more broadly and how that's behaving, anything specific on the price of lease attached cars, market depths and liquidity that would be helpful. Thank you.
Speaker Change: Yeah, you know, the secondary market can be very strong. I think I addressed in my opening remarks that we had about 10% of our fleet. We've got 55% of that renewed already.
Speaker Change: and everything that we're looking at right now in the queue, we've got good strong renewal interest.
Speaker Change: Rates are holding well. We're not seeing much degradation at all, so I feel very confident. And again, you think about it, the fleet is really compressed over the last few years since COVID.
Speaker Change: I think we're done a couple hundred thousand cars from the national total. We're under a million and we used to be over 1.1 to 1.2 million cars that I think were around 900,000. So the fleets really tight.
Speaker Change: is my point and it's getting older so it's I think it boasts well for both new originations as well as renewals on the existing fleet.
Thank you all for the time today.
Thank you, Harrison.
Speaker Change: Can your next question come welcome from Ken Hoexter with Bank of America with a follow-up? Please go ahead.
Speaker Change: Hey, yeah, just thanks. Just want to squeeze a follow up. And in the release, you kind of lowered catbacks. Can you maybe talk a little bit about what's being pulled out?
Speaker Change: Yeah, yeah, I can. This is Michael. You know, we've got better visibility to the back half of the year. It's really just, you know, having having a good idea of what our production schedule looks like and what we're going to do from a syndication standpoint. So I wouldn't read anything into that. We're still, you know, very, very much investing in the leasing and continue to kind of move forward with that. [inaudible]
Speaker Change: Okay, so the least leads days at the 300, and so it's just pulling out of manufacturing.
Speaker Change: We are pulling back a little bit on what we're investing in the lately fiscal year, but again, that's timing associated with when cars are being produced and when they get capitalized onto the balance sheet. Our stated goal is up to 300 million, so it may vary depending on the environment and what the mix looks like.
Speaker Change: In the portfolio that we have on our balance sheet is Brian has said many times we're taking a very disciplined approach, making certain that we're not getting overweight in any particular car type or with any particular customer or commodity that we're exposed to.
All right, great. Thanks for the carers.
Yes
Speaker Change: It includes our question and answer session. I would like to turn the conference back over to Mr. Justin Roberts for any closing remarks.
Justin Roberts: Thank you very much for your time today. If you have any follow up questions, please email investor relations at gbrx.com. Thanks and have a good evening.
Justin Roberts: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.